Abstract

http://ssrn.com/abstract=902120
 
 

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Rationalizing Drennan: On Irrevocable Offers, Bid Shopping and Binding Range


Ofer Grosskopf


Tel-Aviv University Faculty of Law

Barak Medina


Hebrew University of Jerusalem - Faculty of Law

May 13, 2006


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.

Number of Pages in PDF File: 35

Keywords: irrevocable offers, bid shopping, binding range, option contracts, termination fees

JEL Classification: D23, D44, D49, K12

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Date posted: May 16, 2006  

Suggested Citation

Grosskopf, Ofer and Medina, Barak, Rationalizing Drennan: On Irrevocable Offers, Bid Shopping and Binding Range (May 13, 2006). Available at SSRN: http://ssrn.com/abstract=902120 or http://dx.doi.org/10.2139/ssrn.902120

Contact Information

Ofer Grosskopf
Tel-Aviv University Faculty of Law ( email )
Ramat Aviv
Tel Aviv 69978, IL
Israel
Barak Medina (Contact Author)
Hebrew University of Jerusalem - Faculty of Law ( email )
Mount Scopus, 91905
Israel

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