Offer and acceptance

Offer and acceptance are elements required for the formation of a legally binding contract: the expression of an offer to contract on certain terms by one person (the "offeror") to another person (the "offeree"), and an indication by the offeree of its acceptance of those terms. The other elements traditionally required for a legally binding contract are (i) consideration and (ii) an intention to be legally bound.

Offer and acceptance analysis is a traditional approach in contract law. The offer and acceptance formula, developed in the 19th century, identifies a moment of formation when the parties are of one mind. This classical approach to contract formation has been weakened by developments in the law of estoppel, misleading conduct, misrepresentation and unjust enrichment.

Offer

Treitel defines an offer as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed", the "offeree".^[1] An offer is a statement of the terms on which the offeror is willing to be bound. It is the present contractual intent to be bound by a contract with definite and certain terms communicated to the offeree.

The expression of an offer may take different forms, such as a letter, newspaper advertisement, fax, email and even conduct, as long as it communicates the basis on which the offeror is prepared to contract.

Whether the two parties have reached agreement on the terms or whether a valid offer has been made is an issue which is determined by the courts using criteria known as 'the objective test' which was explained in the leading English case of Smith v. Hughes.^[2][3] In Smith v. Hughes, the court emphasised that the important thing in determining whether there has been a valid offer is not the party's own (subjective) intentions, but how a reasonable person would view the situation.

Unless the offer included the key terms of the contract, it cannot be the basis of a binding contract. For example, as a minimum requirement for sale of goods contracts, a valid offer must include at least the following 4 terms: Delivery date, price, terms of payment that includes the date of payment and detail description of the item on offer including a fair description of the condition or type of service. Unless the minimum requirements are met, an offer of sale is not classified by the courts as a legal offer but is instead seen as an advertisement.

Unilateral contract

A unilateral contract is created when someone offers to do something "in return for" the performance of the act stipulated in the off^[4] In this regard, acceptance does not have to be communicated and can be accepted through conduct by performing the act.^[5] Nonetheless, the person performing the act must do it in reliance on the offer.^[6]

A unilateral contract can be contrasted with a bilateral contract, where there is an exchange of promises between two parties. For example, when (A) promises to sell her car and (B) promises to buy the car.

The formation of a unilateral contract can be demonstrated in Carlill v Carbolic Smoke Ball Co.^[5] In order to guarantee the effectiveness of the Smoke Ball remedy, the company offered a reward of 100 pounds to anyone who used the remedy and contracted the flu. Once aware of the offer, Carlill accepted the offer when he purchased the Smoke Ball remedy and completed the prescribed course. Upon contracting the flu, he became eligible for the reward. Therefore, the company's offer to pay 100 pounds "in return for" the use of the Smoke Ball remedy and guarantee not to contract the flu was performed by Carlill.

Invitations to treat

An invitation to treat is not an offer, but an indication of a person's willingness to negotiate a contract. It's a pre-offer communication. In Harvey v. Facey,^[7] an indication by the owner of property that he or she might be interested in selling at a certain price, for example, has been regarded as an invitation to treat. Similarly in Gibson v Manchester City Council^[8] the words "may be prepared to sell" were held to be a notification of price and therefore not a distinct offer, though in another case concerning the same change of policy (Manchester City Council underwent a change of political control and stopped the sale of council houses to their tenants) Storer v. Manchester City Council,^[9] the court held that an agreement was completed by the tenant's signing and returning the agreement to purchase, as the language of the agreement had been sufficiently explicit and the signature on behalf of the council a mere formality to be completed. Statements of invitation are only intended to solicit offers from people and are not intended to result in any immediate binding obligation. The courts have tended to take a consistent approach to the identification of invitations to treat, as compared with offer and acceptance, in common transactions. The display of goods for sale, whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an invitation to treat and not an offer.^[10][11]

The holding of a public auction will also usually be regarded as an invitation to treat. Auctions are, however, a special case generally. The rule is that the bidder is making an offer to buy and the auctioneer accepts this in whatever manner is customary, usually the fall of the hammer.^[12][13] A bidder may withdraw his or her bid at any time before the fall of the hammer, but any bid in any event lapses as an offer on the making of a higher bid, so that if a higher bid is made, then withdrawn before the fall of the hammer, the auctioneer cannot then purport to accept the previous highest bid. If an auction is without reserve then, whilst there is no contract of sale between the owner of the goods and the highest bidder (because the placing of goods in the auction is an invitation to treat), there is a collateral contract between the auctioneer and the highest bidder that the auction will be held without reserve (i.e., that the highest bid, however low, will be accepted).^[14] The U.S. Uniform Commercial Code provides that in an auction without reserve the goods may not be withdrawn once they have been put up.^[15]

Revocation of offer

An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree (although not necessarily by the offeror,^[16]). If the offer was made to the entire world, such as in Carlill's case,^[5] the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an option (see also option contract), or if it is a "firm offer" in which case it is irrevocable for the period specified by the offeror.

If the offer is one that leads to a unilateral contract, the offer generally cannot be revoked once the offeree has begun performance.

Acceptance

A promise or act on the part of an offeree indicating a willingness to be bound by the terms and conditions contained in an offer. Also, the acknowledgment of the drawee that binds the drawee to the terms of a draft.

Test of acceptance

For the acceptance, the essential requirement is that the parties had each from a subjective perspective engaged in conduct manifesting their assent. Under this meeting of the minds theory of contract, a party could resist a claim of breach by proving that he had not intended to be bound by the agreement, only if it appeared subjectively that he had so intended. This is unsatisfactory, as one party has no way to know another's undisclosed intentions. One party can only act upon what the other party reveals objectively (Lucy V Zehmer, 196 Va 493 84 S.E. 2d 516) to be his intent. Hence, an actual meeting of the minds is not required. Indeed, it has been argued that the "meeting of the minds" idea is entirely a modern error: 19th century judges spoke of "consensus ad idem" which modern teachers have wrongly translated as "meeting of minds" but actually means "agreement to the [same] thing".^[17]

The requirement of an objective perspective is important in cases where a party claims that an offer was not accepted and seeks to take advantage of the performance of the other party. Here, we can apply the test of whether a reasonable bystander (a "fly on the wall") would have perceived that the party has impliedly accepted the offer by conduct.

Rules of acceptance

Communication of acceptance

There are several rules dealing with the communication of acceptance:

• The acceptance must be communicated.^[18][19] Theisger LJ said in Household Fire and Carraige that "an acceptance which remains in the breast of the acceptor without being actually and by legal implication communicated to the offeror, is no binding acceptance".^[20] Prior to acceptance, an offer may be withdrawn.
• As acceptance must be communicated, the offeror cannot include an Acceptance by Silence clause. This was affirmed in Felthouse v Bindley,^[21] here an uncle made an offer to buy his nephews horse, saying that if he didn't hear anything else he would "consider the horse mine". This did not stand up in court, and it was decided there could not be acceptance by silence.
• An exception exists in the case of unilateral contracts, in which the offeror makes an offer to the world which can be accepted by some act. A classic instance of this is the case of Carlill v. Carbolic Smoke Ball Co. [1893] 2 Q.B. 484 in which an offer was made to pay £100 to anyone who having bought the offeror's product and used it in accordance with the instructions nonetheless contracted influenza. The plaintiff who was Mrs Carlill bought the smoke ball and used it according to the instructions but she contracted influenza.She sued the Carbolic Smoke Ball Co. for £100.The court held that the inconvenience she went through by performing the act amounted to acceptance and therefore ordered £100 to be given to Mrs.Carlill. Her actions accepted the offer - there was no need to communicate acceptance. Typical cases of unilateral offers are advertisements of rewards (e.g., for the return of a lost dog).
• An offer can only be accepted by the offeree, that is, the person to whom the offer is made.
• An offeree is not usually bound if another person accepts the offer on their behalf without his authorisation, the exceptions to which are found in the law of agency, where an agent may have apparent or ostensible authority, or the usual authority of an agent in the particular market, even if the principal did not realise what the extent of this authority was, and someone on whose behalf an offer has been purportedly accepted may also ratify the contract within a reasonable time, binding both parties: see agent (law).
• It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance (called waiver of communication - which is generally implied in unilateral contracts).^[22]
• If the offer specifies a method of acceptance (such as by post or fax), acceptance must be by a method that is no less effective from the offeror's point of view than the method specified. The exact method prescribed may have to be used in some cases but probably only where the offeror has used very explicit words such as "by registered post, and by that method only".^[23]
• However, acceptance may be inferred from conduct.^[24][25]

Counter-offers and correspondence

The "mirror image rule" states that if you are to accept an offer, you must accept an offer exactly, without modifications; if you change the offer in any way, this is a counter-offer that kills the original offer and the original offer cannot be accepted at a future time.^[26]

However, a mere request for information about the terms of the offer is not a counter-offer and leaves the offer intact.^[27] It may be possible to draft an enquiry such that it adds to the terms of the contract while keeping the original offer alive.

Under the Uniform Commercial Code (UCC) Sec. 2-207(1), A definite expression of acceptance or a written confirmation of an informal agreement may constitute a valid acceptance even if it states terms additional to or different from the offer or informal agreement. The additional or different terms are treated as proposals for addition into the contract under UCC Sec. 2-207(2). Between merchants, such terms become part of the contract unless:

• a) the offer expressly limits acceptance to the terms of the offer,
• b) material alteration of the contract results,
• c) notification of objection to the additional/different terms are given in a reasonable time after notice of them is received.

Material is defined as anything that may cause undue hardship/surprise, or is a significant element of the contract.

If there is no contract under 2-207(1), then under UCC Sec. 2-207(3), conduct by the parties that recognize there is a contract may be sufficient to establish a contract. The terms for this contract include only those that the parties agree on and the rest via gap fillers.

Battle of the forms

Often when two companies deal with each other in the course of business, they will use standard form contracts. Often these standard forms contain terms which conflict (e.g. both parties include a liability waiver in their form). The 'battle of the forms' refers to the resulting legal dispute arising where both parties accept that a legally binding contract exists, but disagree about whose standard terms apply. Such disputes may be resolved by reference to the 'last document rule', i.e. whichever business sent the last document, or 'fired the last shot' (often the seller's delivery note) is held to have issued the final offer and the buyer's organisation is held to have accepted the offer by signing the delivery note or simply accepting and using the delivered goods.

In U.S. law, this principle is referred to as the last shot rule.

Under English law, the question was raised in Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd,^[28] as to which of the standard form contracts prevailed in the transaction. Lord Denning MR preferred the view that the documents were to be considered as a whole, and the important factor was finding the decisive document; on the other hand, Lawton and Bridge LJJ preferred traditional offer-acceptance analysis, and considered that the last counter-offer prior to the beginning of performance voided all preceding offers. The absence of any additional counter-offer or refusal by the other party is understood as an implied acceptance.

In Leicester Circuits Ltd. v. Coates Brothers plc (2002) and GHSP Incorporated v AB Electronic Ltd (2010) the English High Court has found that companies may have not agreed on any terms, and so the 'last document rule' may not apply. In the GHSP case, there was no situation where one company could have been said to have accepted the other's standard terms, as they remained in unresolved dispute. The court held that neither party's terms applied and therefore the contract was governed by the implied terms of the UK Sale of Goods Act 1979.

Postal Rule

As a rule of convenience, if the offer is accepted by post, the contract comes into existence at the moment that the acceptance was posted.^[29] This rule only applies when, impliedly or explicitly, the parties have post in contemplation as a means of acceptance.^[30] It excludes contracts involving land, letters incorrectly addressed and instantaneous modes of communication. The relevance of this early 19th century rule to modern conditions, when many quicker means of communication are available has been questioned, but the rule remains good law for the time being.

Knowledge of the offer

In Australian law, there is a requirement that an acceptance is made in reliance or pursuance of an offer.^[6]

Rejection of an offer or lapse of time

An offer can be terminated on the grounds of rejection by the offeree, that is if the offeree does not accept the terms of the offer or makes a counter-offer as referred to above.

Also, upon making an offer, an offeror may include the period in which the offer will be available. If the offeree fails to accept the offer within this specific period, then the offer will be deemed as terminated.

Death of offeror

Generally death (or incapacity) of the offeror terminates the offer. This does not apply to option contracts.

The offer cannot be accepted if the offeree knows of the death of the offeror.^[31] In cases where the offeree accepts in ignorance of the death, the contract may still be valid, although this proposition depends on the nature of the offer. If the contract involves some characteristic personal to the offeror, the offer is destroyed by the death.

Death of offeree

An offer is rendered invalid upon the death of the offeree.^[32]

Time of contract formation

A contract will be formed (assuming the other requirements for a legally binding contract are met) when the parties give objective manifestation of an intent to form the contract.

Because offer and acceptance are necessarily intertwined, in California, offer and acceptance are analyzed together as subelements of a single element, known either as consent of the parties or mutual assent.^[33]

Discussions on offer and acceptance

The attempt by the courts to analyse all contracts in terms of offer and acceptance has been the subject of some criticism.^[34] In New Zealand Shipping Co Ltd v. A M Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154 Lord Wilberforce have said

"It is only the precise analysis of this complex of relations into the classical offer and acceptance, with identifiable consideration, that seems to present difficulty, but this same difficulty exists in many situations of daily life, e.g. sales at action; supermarket purchases; boarding an omnibus; purchasing a train ticket; tenders for the supply of goods; offers of reward; acceptance by post; warranties of authority by agents; manufacturers; guarantees; gratuitous bailments; bankers' commercial credits. These are all examples which show that English law, having committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance and consideration."

Subsequently, Lord Denning has expressed his view in Gibson v. Manchester City Council [1978] 1 WLR 520, 523. Lord Denning stated that

"To my mind it is a mistake to think that all contracts can be analysed into the form of offer and acceptance. I know in some textbooks it has been the custom to do so; but, as I understand the law, there is no need to look for a strict offer and acceptance. You should look at the correspondence as a whole and at the conduct of the parties and see therefrom whether the parties have come to an agreement on everything that was material. If by their correspondence and their conduct you can see an agreement on all material terms, which was intended thenceforward to be binding, then there is a binding contract in law even though all the formalities have not been gone through."

When the case was appealed to the House of Lords, Lord Diplock said in [1974] 1 WLR 294, 297

"My Lords, there may be certain types of contract, though I think they are exceptional, which do not fit easily into the normal analysis of a contract as being constituted by offer and acceptance; but a contract alleged to have been made by an exchange of correspondence between the parties in which the successive communications other than the first are in reply to one another is not one of these. I can see no reason in the instant case for departing from the conventional approach of looking at the handful of documents relied on as constituting the contract sued on and seeing whether on their true construction there is to be found in them a contractual offer by the council to sell the house to Mr Gibson and an acceptance of that offer by Mr Gibson. I venture to think that it was by departing from this conventional approach that the majority of the Court of Appeal was led into error."

These discussions all point to the fact that not all formation of contracts can be neatly analysed by using offer and acceptance.

Under the Principles of European Contract Law, Article 2:101 provides that:

"A contract is concluded if:

a) the parties intend to be legally bound, and

b) they reach a sufficient agreement

without any further requirement"

In addition Article 2:211 provided that

"The rules in this Section apply with appropriate adaptations even though the process of conclusion of a contract cannot be analysed into offer and acceptance."

The case below considers the exception of offer and acceptance in English law.

Exception for offer and acceptance

Contracts can also be formed without offer and acceptance. The Satanita is one of the cases that cannot be analysed by offer and acceptance.

The case is about a yacht competition. There are certain rules in the competition. One of the rule is that the rule breakers are liable for all consequential loss. Lord Dunraven entered into the competition with the defendant owner of The Satanita. The Satanita crashed Lord Dunraven's yacht and sunk it.

The Court of Appeal held that there was a contract for the owner of The Satanita to pay Lord Dunraven's loss. None of the lords said how the contract was formed in terms of offer and acceptance.

See also

• 1911 Encyclopædia Britannica definition of Acceptance
• Bataille des conditions générales (The Battle of the Forms in France)
• Harris v Nickerson
• Implied in fact contract
• Last shot rule
• Proposal (business)

References