Rationalizing Drennan: On Irrevocable Offers, Bid Shopping and Binding Range
35 Pages Posted: 16 May 2006
Date Written: May 13, 2006
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.
Keywords: irrevocable offers, bid shopping, binding range, option contracts, termination fees
JEL Classification: D23, D44, D49, K12
Suggested Citation: Suggested Citation