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Tuesday, June 6, 2006

Rationalizing Drennan

One of former California Justice Roger Traynor's best-known contract law opinions is Drennan v. Star Paving Co, in which the former tax professor held that a subcontractor's bid created an irrevocable offer to the prime contractor when the prime uses it in its own bid, even without the prime's payment of an option fee and without any promise that the sub will get the contract.

Drennan has had its critics and its champions.  Two of the latter, Ofer Grosskopf (Tel Aviv) and Barak Medina (Hebrew-Jerusalem), take up the cudgels in Rationalizing Drennan: On Irrevocable Offers, Bid Shopping and Binding Range.  Here's the abstract:

Courts may imply that an offer is irrevocable, based on the offeree's reliance. For instance, following the landmark case of Drennan v. Star Paving Co. (1958), a subcontractor’s price offer is irrevocable once it has been relied upon by the general contractor in computing his overall bid. However, a rule of implied irrevocability raises two main difficulties. First, it seems unfair to commit the offeror but not the offeree. Second, from an ex-ante perspective, the implied irrevocability rule seems to deter parties from submitting low-priced, unqualified offers. These concerns had led several scholars to argue for the application of either contractual or doctrinal provisions, such as implying an early conditional contract or establishing option fees or termination fees. This paper challenges the above concerns and vindicates both the fairness and the efficiency of the implied irrevocability rule.

It is shown that whereas some restrictions on the offeree’s freedom to conduct bid shopping ex-post (i.e. after the uncertainties are resolved) are essential in order to allow him to receive viable price offers ex ante, these restrictions need not be absolute nor legally-enforced. Partial restrictions, in the form of a self-enforced “Binding Range,” may well suffice. The plausible existence of self-enforced “Binding Range” entails that offerors have incentives to submit irrevocable offers, based on their expectation to extract a profit from submitting the best preliminary offer. The paper characterizes the optimal size of the “Binding Range,” and explores what legal provisions should be applied if the self-enforced “Binding Range” is sub-optimal.

[Frank Snyder]

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