Law of Offer and Acceptance in Contract Formation

Introduction to Contract Formation

Contracts underpin almost every aspect of modern life. From buying groceries to signing employment agreements, contracts create legal rights and obligations. In English law, a contract forms when two or more parties agree on specific terms and intend those terms to be legally binding.

The process of forming a contract involves several key elements: offer, acceptance, consideration, and intention to create legal relations. This essay explores the rules governing offer and acceptance, their distinction from related concepts, and their practical application in contract law.

The Nature of the Law of Offer

Defining an Offer

An offer is a clear statement by one party, the offeror, indicating a willingness to enter into a contract on specific terms. The offeror must intend that, upon acceptance by the other party, the offer will create binding obligations. The classic definition, as outlined in contract law, describes 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.

Communication of Offers

The law requires that an offer must be communicated to the offeree. Until the offeree receives the offer, no contract can arise. This principle is illustrated in Taylor v Laird (1856), where the court held that a party cannot accept an offer of which they are unaware. Communication can take many forms, including spoken words, written documents, emails, websites, or even conduct. However, the offeree must actually receive the offer for it to be effective.

Offers Versus Invitations to Treat

Understanding Invitations to Treat

A crucial distinction exists between an offer and an invitation to treat. An invitation to treat is not an offer but an invitation to others to make offers. It is a preliminary communication, expressing a willingness to negotiate but not to be immediately bound. For example, a shop displaying goods with price tags is not making an offer to sell but inviting customers to make offers to buy.

Case Law on Invitations to Treat

The case of Harvey v Facey (1893) demonstrates this distinction. The court held that a statement of the lowest price at which a seller might be willing to sell does not constitute an offer. Similarly, in Pharmaceutical Society of Great Britain v Boots Cash Chemists Ltd (1953), the display of goods in a shop was held to be an invitation to treat. The offer occurs when the customer presents the goods at the till, and the shop may accept or reject this offer.

Auctions and Advertisements

Auctions and advertisements usually constitute invitations to treat. In British Car Auctions v Wright (1972), the court found that the auctioneer’s call for bids was an invitation to treat, while each bid was an offer. Acceptance occurs at the fall of the hammer. Advertisements, as seen in Partridge v Crittenden (1968), are generally invitations to treat. However, if an advertisement contains a clear promise to pay for a specific act, it may be a unilateral offer, as in Carlill v Carbolic Smoke Ball Company (1893).

Types of Offers: Unilateral and Bilateral

Bilateral Offers

Most contracts are bilateral. In a bilateral contract, both parties exchange promises. For example, a seller promises to deliver goods, and a buyer promises to pay for them. Each promise serves as consideration for the other.

Unilateral Offers

A unilateral offer involves one party promising to do something in return for the performance of a specific act by another. The offeror is only bound when the offeree completes the required act. The famous case of Carlill v Carbolic Smoke Ball Company (1893) illustrates this concept. The company promised to pay £100 to anyone who used their product as instructed and still contracted influenza.

Mrs Carlill fulfilled the conditions and claimed the reward. The court held that the advertisement constituted a unilateral offer to the world, which Mrs Carlill accepted by performing the act.

Law of Acceptance: Creating Legal Relations

Defining Acceptance

Acceptance is the final and unqualified agreement to all the terms of the offer. It must mirror the offer exactly; any variation constitutes a counter-offer rather than acceptance. The offeree must communicate acceptance to the offeror, using the method specified or implied by the offer.

Communication of Acceptance: General Rule

The general rule is that acceptance must be communicated to the offeror. Silence does not amount to acceptance. This rule is established in Felthouse v Bindley (1862), where the court held that an offeror cannot impose a contract by stating that silence will constitute acceptance.

Acceptance by Conduct

Acceptance can occur through conduct. In Brogden v Metropolitan Railway Co (1877), the parties acted in accordance with the terms of a draft agreement, and the court held that their conduct amounted to acceptance.

Prescribed and Implied Methods

If the offeror prescribes a particular method of acceptance, the offeree must use that method. If the offeree uses a different method, no contract arises unless the offeror waives the requirement. In Eliason v Henshaw (1819), the court held that using a different method than specified invalidated the acceptance. If no method is specified, the offeree should use a reasonable and equally speedy method.

The Postal Rule

Exceptions to the Communication Rule

The postal rule is an exception to the general rule that acceptance must be communicated. Under the postal rule, acceptance is complete when the letter is posted, not when it is received. This rule applies only if it is reasonable to use the post and the offeror has not excluded it.

Key Cases

Adams v Lindsell (1818) established the postal rule. For the rule to apply, the letter of acceptance must be properly addressed and stamped (Re London & Northern Bank, 1900). The letter must be placed in the control of the Post Office (Brinkibon v Stahag Stahl, 1983). The postal rule does not apply if it would cause inconvenience or absurdity (Holwell Securities v Hughes, 1974).

Instantaneous Methods of Communication

For methods such as telephone, fax, or email, acceptance is only effective when received by the offeror. In Entores v Miles Far East Corporation (1955), the court held that acceptance by telex was only effective when received by the offeror.

Counter-Offers and Requests for Information

A counter-offer rejects the original offer and puts forward new terms. The original offer cannot be accepted after a counter-offer unless the offeror renews it. In Hyde v Wrench (1840), the court held that a counter-offer destroys the original offer. A request for further information, however, does not amount to a counter-offer and leaves the original offer open.

Consideration: The Bargain Element

Definition and Importance

Consideration is what each party gives or promises to give in exchange for the other’s promise. It is a fundamental element of contract formation. Without consideration, a contract is not enforceable, except in certain circumstances, such as deeds.

Types of Consideration

Executory Consideration

Executory consideration involves promises to perform acts in the future. Both parties exchange promises, as in most bilateral contracts.

Executed Consideration

Executed consideration occurs when one party performs an act in return for a promise. This is common in unilateral contracts.

Past Consideration

Past consideration refers to an act done before the promise is made. The law does not recognise past consideration as valid. In Re McArdle (1951), the court held that a promise to pay for work already completed was unenforceable.

Rules of Consideration

Consideration Must Move from the Promisee

Only a person who has provided consideration can enforce a contract. In Tweddle v Atkinson (1861), the court held that a third party who had not provided consideration could not enforce the contract.

Consideration Must Not Be Past

The consideration must be given in return for the promise. If the act was performed before the promise, it is not valid consideration.

Adequacy and Sufficiency

The law does not require consideration to be adequate, only sufficient. The consideration must have some value in the eyes of the law, but it need not be equal to the value of the promise. In Chappell & Co v Nestle Co Ltd (1960), chocolate wrappers were held to be sufficient consideration.

Intention to Create Legal Relations

Social and Domestic Agreements

Not all agreements are intended to be legally binding. In social and domestic contexts, the law presumes that parties do not intend to create legal relations. For example, agreements between spouses or family members are presumed not to be enforceable. In Balfour v Balfour (1919), the court held that a husband’s promise to pay his wife an allowance was not legally binding.

Commercial Agreements

In commercial contexts, the law presumes that parties do intend to create legal relations. This presumption can be rebutted if the contract expressly states otherwise. In Rose & Frank Co v Crompton Bros Ltd (1925), the court found that a clause stating the agreement was not legally binding was effective.

Agreements Between Friends and Acquaintances

When parties are friends or neighbours, the courts examine the circumstances to determine whether there was an intention to create legal relations. If money changes hands, the court is more likely to find such intention, as in Simpkins v Pays (1955).

Advertisements and Gratuitous Promises

Advertisements generally do not create legal relations unless they are unilateral offers. Gratuitous promises, such as ex gratia payments, are not usually enforceable. In Edwards v Skyways (1969), the court held that a promise to pay an ex gratia payment was binding in a commercial context.

Application of Principles: A Practical Scenario

Analysing the Scenario

Suppose James repairs his neighbour’s car on Sundays or Mondays. We do not know what, if anything, James receives in return. For a contract to exist, there must be consideration. If Simone, the neighbour, does not promise anything in return, there is no consideration. Thus, no contract arises because only James performs an act, and we lack evidence of a reciprocal promise.

Intention in Social Contexts

James and Simone are neighbours. The law presumes that agreements between neighbours are social and not intended to be legally binding. Unless there is evidence of an intention to create legal relations, such as payment or a formal agreement, the law will not enforce the promise.

The Importance of Contract Law

Contract law plays a vital role in society. It provides a framework for people to make binding promises and resolve disputes. Without enforceable contracts, commerce would grind to a halt. People would hesitate to make promises or rely on others, stifling economic and social development. Contract law ensures that promises are kept, or that parties are compensated if they are broken.

Conclusion

The formation of a valid contract requires an offer, acceptance, consideration, and an intention to create legal relations. Each element has specific rules and exceptions. Offers must be clear and communicated. Acceptance must be unequivocal and communicated, except in cases where the postal rule applies.

Consideration must move from the promisee and must not be past. The parties must intend to create legal relations, except in social and domestic agreements. Understanding these rules is essential for anyone entering into agreements, whether in business or personal life. Contract law ensures that agreements are respected and provides remedies when promises are broken.

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