Agreement and Contractual Intention PDF

1 Agreement and Contractual Intention LEARNING OUTCOMES When you have completed this chapter, you should be able to: explain and discuss the rules governing offer and acceptance and contractual certainty; explain and apply the...

1 Agreement and Contractual Intention LEARNING OUTCOMES When you have completed this chapter, you should be able to: explain and discuss the rules governing offer and acceptance and contractual certainty; explain and apply the presumptions governing contractual intention; use a structured approach to identify legal, factual and practical issues involved in contract formation problems and to advise a client on the options. For a binding contract there must be agreement, consideration (ie something given in exchange for the other party’s promise) and an intention that the agreement should have legal consequences. For the moment we are going to be focusing on agreement (which manifests itself in terms of offer and acceptance) and contractual intention. We shall be looking at consideration in Chapter 2. 1.1 Agreement (offer and acceptance) In order for parties to reach an agreement, one party must make an offer (ie a definite promise to be bound by specified terms) which is accepted by the other. So the first thing you really need to know is what is meant by an ‘offer’ in the eyes of the law. Professor Treitel has defined 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’ (Treitel, The Law of Contract, 13th edn, p 8). The person who makes the offer is called the offeror and the person to whom the offer is made is called the offeree. The ‘expression’ referred to in the definition may take many different forms, eg a letter, newspaper advertisement, email and even conduct, as long as it communicates the basis on which the offeror is prepared to contract. The ‘intention’ referred to in the definition does not necessarily mean the offeror’s actual intention. The courts adopt what is primarily an ‘objective’ approach to deciding whether there was agreement between the parties (Smith v Hughes (1871) LR 6 QB 597). Clearly, they cannot discover as a matter of fact what was going on in the minds of the parties at the time of the alleged agreement. Nor are they prepared simply to accept what the parties themselves say was their intention at that time (which would be a ‘subjective’ approach). Instead, the courts look at what was said and done between the parties, from 1 Contract the point of view of a ‘reasonable person’, and try to decide what a reasonable person would have thought was going on. Example Faheem had been advised by a motorcycle dealer to ask at least £6,000 for his motorcycle. Faheem texted John offering to sell it to him for £5,000. On reading the text message, John immediately telephoned Faheem and agreed to pay £5,000 for the motorcycle. Faheem told him that he would not accept less than £6,000 for the motorcycle. He said he was sorry if the price stated in the text message was not £6,000, but that it must have been an error, which he had not noticed. Although Faheem in fact intended to sell the motorcycle for £6,000, the price mentioned in his text message was £5,000. Assuming that this communication was the only one between the parties regarding the price, a reasonable person would assume that £5,000 was the intended asking price. Also, as far as we can determine, John believed that Faheem was making an offer to sell the motorcycle for £5,000. Faheem would be bound to sell the motorcycle to John for £5,000. In Allied Marine Transport v Vale do Rio Doce Navegacao SA (The Leonidas) 1 WLR 925, Goff LJ approved the following statement of the law relating to the making of an offer: If the offeror so acts that his conduct, objectively considered, constitutes an offer, and the offeree, believing that the conduct of the offeror represents his actual intention, accepts the offer, then a contract will come into existence. Note from the quotation that, although the test is predominantly an objective one, the offeree must believe that the offeror actually intended to make an offer. This introduces a subjective element to what is otherwise an objective test of intention. Finally, Treitel’s definition of an offer refers to ‘the person to whom it is addressed’. This may be one person, a class of persons or even the whole world. The point is that you can only accept an offer that was addressed to you. 1.2 Offer or invitation to treat? 1.2.1 Distinction between an offer and an invitation to treat An offer must be distinguished from an invitation to treat. Imagine I said to you: ‘I am thinking of selling my car. I have been told that £7,000 would be a realistic asking price. Would you be interested in buying it?’ Do you think that would amount to an offer to sell you my car? Is it a definite promise to be bound by specified terms? This would not amount to an offer as I have only said that I am ‘thinking’ of selling my car, and the price is only a potential asking price. I have not committed myself to selling you the car at a specific price. The legal terminology for such preliminary statements is ‘invitation to treat’. The statements are simply inviting negotiation and so the buyer could not by agreeing to pay £7,000 for the car create a binding contract. Compare this invitation to treat with an offer, eg ‘I will sell you my car for £7,000’. The distinction between an offer and an invitation to treat is important, but not always easy to draw. 2  Agreement and Contractual Intention 1.2.2 Self-​service and shop window displays One area of difficulty arises in relation to goods on display in a shop, either in the window or on the shelves of a supermarket or other self-​service shop. Such goods are commonly referred to as being ‘on offer’ and may well be labelled ‘special offer’, but in terms of contract law are they ‘offers’ or simply invitations to treat? Goods on display in supermarkets and self-​service shops are generally regarded as invitations to treat and not offers. The authority for this general principle is the case of Pharmaceutical Society of Great Britain v Boots Cash Chemists 1 QB 401, CA. If goods on display were held to be an offer then a customer might be regarded as accepting that offer as soon as the customer selected the goods and put them in the trolley or basket. If that was the case the contract would be made at that point, and the customer would be unable to change their mind and put the goods back. The customer would be bound to buy or be in breach of contract. The customer offers to buy the goods when the customer presents them at the payment point, and acceptance takes place when the shop takes payment for the goods (Pharmaceutical Society of Great Britain v Boots Cash Chemists). In Fisher v Bell 1 QB 394, the defendant was charged with offering for sale a flick knife contrary to s 1(1) of the Restriction of Offensive Weapons Act 1959. The defendant had displayed the knife in a shop window, labelled ‘Ejector knife -​4s’ (4s (ie 4 shillings) was the price of the knife). In Fisher v Bell the court held that the display of the knife was simply an invitation to treat and acquitted the defendant of the charge. So we have seen that goods on display (either in a shop window or on the shelves of a supermarket) are normally just an invitation to treat. The offer to buy is made by the customer and acceptance takes place at the payment point. It is only then that a binding contract is concluded. A display of goods may amount to an offer in very limited circumstances where there is a clear intention to be bound (eg a display of goods in a special sale). 1.2.3 Advertisements In this section we are going to consider the effect of advertisements, menus, promotional material and the like. Are they offers or invitations to treat? Generally, they are regarded as invitations to treat. An authority for this is the case of Partridge v Crittenden 1 WLR 1204. Here the defendant was charged with ‘offering for sale’ a live wild bird contrary to s 6(1) of the Protection of Birds Act 1954. The defendant had placed the following advertisement in a periodical: ‘Bramblefinch cocks, bramblefinch hens 25s each’ (25s (ie 25 shillings) was the price of the birds). The court held that the defendant was not guilty of the offence, as the advertisement was simply an invitation to treat (ie inviting the public to offer to buy a bird at 25s). If such advertisements were offers, it would mean that anyone asking for the advertised goods would be accepting, in which case it would be a problem if the advertiser had run out of stock. However, an advertisement of a reward has traditionally been treated as an offer as there is an intention to be bound as soon as the information is given (Williams v Carwardine (1833) 5 C & P 566). We shall look at this case later in this chapter. There is a policy reason behind this approach to rewards. Treating the advertisement of a reward as an offer means that the money has to be paid once the offer is accepted by the supply of the information. No negotiation is involved. This should encourage people who have information to come forward. Advertisements of reward, then, are offers, but other types of advertisement will usually be invitations to treat. However, if there are special circumstances which show an intention to be bound, an advert may amount to an offer –​an offer of a unilateral contract. 3 Contract Most contracts are bilateral (ie a promise in return for a promise), but with unilateral contracts only one party is making a promise (eg a promise to pay a reward); hence they are said to be unilateral. No one is bound to do the specified act. This is why unilateral contracts are sometimes referred to as ‘If’ contracts: ‘If you do X, I promise to do Y.’ The distinction between unilateral and bilateral contracts is particularly important in relation to ‘acceptance’ and ‘consideration’ (which we will cover at 1.4 below and in Chapter 2 respectively). The formation of a unilateral contract can be demonstrated in the famous case of Carlill v Carbolic Smoke Ball Company 1 QB 256 (CA). In order to guarantee the effectiveness of the smoke ball remedy, the company offered a reward of £100 to anyone who used the remedy and contracted flu. The company also confirmed that it had deposited £1,000 in a bank account ready to make any payments under its promise, showing great confidence in the smoke ball and further tempting customers to buy one (see Figure 1.1). Figure 1.1 Carbolic Smoke Ball offer Once aware of the offer, Mrs Carlill accepted it when she purchased the smoke ball, completed the prescribed course and then contracted flu. She sued for the £100 and the court held that the company’s promise to pay £100 was an offer of a unilateral contract, ie a promise in return for the specified act that Mrs Carlill had performed. Carlill therefore is authority for the proposition that an advertisement can constitute an offer to ‘the world’ (that is anyone who learns of it). Offer or invitation to treat –​summary An offer is a definite promise to be bound by specified terms and must be distinguished from an invitation to treat where there is no such intention to be bound. Goods displayed in shop windows and inside shops will normally be invitations to treat (Fisher v Bell and Pharmaceutical Society of Great Britain v Boots Cash Chemists). However, a display may amount to an offer in very limited circumstances where there is a clear intention to be bound, eg a display of goods in a special sale. An advertisement will normally be an invitation to treat (Partridge v Crittenden) but in exceptional cases may be an offer of a unilateral contract if there is a clear intention to be bound –​see, for example, Carlill v Carbolic Smoke Ball. Advertisements of reward will normally be offers of unilateral contracts (Williams v Carwardine). 4  Agreement and Contractual Intention 1.2.4 Auctions If you attend an auction, at what point do you think a sale is concluded? When is an ‘offer’ accepted? A contract for the sale of goods concluded at an auction is regarded by the law as a particular situation to which special rules apply. According to s 57(2) of the Sale of Goods Act 1979, a sale by auction is complete on the fall of the auctioneer’s hammer, in which case that is the acceptance. The bids are offers which can be withdrawn at any time before acceptance. When the auctioneer calls for bids, the auctioneer is therefore inviting offers, and as such the call for bids is an invitation to treat. If the auctioneer accepts a bid by the fall of the hammer, a contract of sale is formed between the bidder and the owner of the goods. The auctioneer acts as the agent of the owner in order to form the contract. Section 57(3) of the 1979 Act refers to a ‘reserve price’. This is a price agreed between the auctioneer and the seller as being the lowest price which the auctioneer may accept for the lot; in other words, if the bidding does not reach the reserve price, the lot will be withdrawn from the sale. Most substantial lots will have a reserve price. Occasionally, however, auction lots will not have a reserve price and the auction sale may be advertised as being ‘without reserve’. In Barry v Davies (t/​a Heathcote Ball & Co) 1 WLR 1962, CA, two machines being sold at an auction were advertised by the auctioneer as being ‘sold without reserve’; in other words they would be sold to whoever made the highest bid (however much that might be). Mr Barry made the highest bid for the machines, but the auctioneer did not accept it as he knew he could get a much higher price for them elsewhere. Mr Barry successfully sued the auctioneer for breach of contract; more specifically for breach of a unilateral contract. Why unilateral? Only one party had made a promise, namely the auctioneer. He had promised to sell the machines to whoever might make the highest bid. Why would it have been pointless for Mr Barry to sue the owner of the machines? The auctioneer had not accepted his bid and so there was no contract of sale with the owner. At an auction, a contract of sale arises only when a bid is accepted on the fall of the auctioneer’s hammer (Sale of Goods Act 1979, s 57(2)) and here that had not happened. The measure of Mr Barry’s damages was the difference between the amount of his bid (£400) and the total value of the machines (£28,000) ie £27,600. That sum represented his loss of expectation: he had expected to buy the machines for £400 but it would cost Mr Barry another £27,600 to buy similar machines elsewhere. The amount the auctioneer sold the machines for elsewhere was irrelevant. We will consider damages in detail in Chapter 4. Auctions –​summary An auctioneer’s request for bids is an invitation to treat. The bid is an offer which the auctioneer may accept or reject (Sale of Goods Act 1979, s 57(2)). If the auctioneer accepts a bid then, as the auctioneer is acting as agent for the owner, a bilateral contract is formed between the owner and the bidder. If the auctioneer refuses to accept a bid then there cannot be a contract between owner and bidder. However, if the auction is without reserve, the highest bidder may be able to bring an action against the auctioneer. If an auction is advertised ‘without reserve’, there is an offer of a unilateral contract by the auctioneer (ie a promise to accept the highest bid) which is accepted by the highest bidder. If the auctioneer refuses to accept the bid, the highest bidder will have a claim in damages against the auctioneer (Barry v Davies) but will not have a claim against the owner. 5 Contract 1.2.5 Tenders Many businesses outsource functions (such as cleaning) on the basis that it is more commercially viable to pay outside contractors to do the work rather than employees. When businesses decide to outsource a function, they will invite a number of contractors to submit written tenders for the job. Generally, such requests for tenders will be invitations to treat and the tenders will be the offers, which may, or may not, be accepted by the business which has invited them. There may be situations, however, where an invitation to tender does constitute an offer. In Harvela Investments Ltd v Royal Trust Company of Canada Ltd AC 207, HL, two parties (the claimant and the second defendant) were invited to tender (ie put in an offer) for the first defendant’s shares in a company. They were each sent identical telexes stating, ‘We confirm that if any offer made by you is the highest offer received by us we bind ourselves to accept such offer …’. The House of Lords held that the telexes were offers of a unilateral contract to sell to the highest bidder, which would be followed by a bilateral contract for the sale of the shares. So, depending on the circumstances, an invitation for tenders may give rise to a unilateral contract. This was the issue faced by the Court of Appeal in Blackpool & Fylde Aero Club Ltd v Blackpool Borough Council 1 WLR 1195, CA. The Aero Club had been granted a number of concessions to operate pleasure flights from Blackpool airport. When the last concession was nearing expiry, the council sent invitations to tender to the claimant and six other interested parties. The invitation said that the tenders had to be received not later than noon on 17 March 1983. The Aero Club posted its tender in the Town Hall letter box at 11am on 17 March. The letter box was supposed to be emptied at noon each day, but due to an oversight was not emptied at noon on 17 March. Consequently, the claimant’s tender was recorded as late and not considered. The Aero Club sued for breach of an implied promise that a tender, returned on time, would at least be considered. On the grounds that tenders had been invited from a small number of selected parties connected with the airport and that the invitation had laid down ‘a clear, orderly and familiar procedure’, tenderers obviously would assume that if they submitted a conforming tender they had a right to have it considered. On that basis, the court held that there was an implied promise to that effect which the Club had accepted by submitting a conforming tender. As the council had not considered the Club’s tender, it was liable to the Club in damages for loss of opportunity. We will be looking at damages in Chapter 4. Note that in Blackpool & Fylde Aero Club, the council had entered into a bilateral contract with the person whose tender had been accepted, but also had a separate implied unilateral contract with Blackpool & Fylde Aero Club. However, the decision is a controversial one, and it is not clear exactly when the court will imply that there has been an offer to consider all tenders. In the Blackpool & Fylde Aero Club case, the court emphasised that tenders had been invited from a small number of parties connected with the airport, a ‘clear, orderly and familiar procedure’ had been laid down, and the tenderers would obviously assume that if they submitted a tender which complied with this procedure, the tender would be considered. It is not clear how the case would have been decided if one of these factors had been absent, or whether there were other factors which influenced the decision, eg the Club was the existing holder of the concession and so had even more reason for feeling their tender should be considered. 1.3 Termination of offer What if an offeror changes their mind and wishes to withdraw their offer? For how long does an offer remain open for acceptance? What if the offeree does not fully agree to the terms of 6  Agreement and Contractual Intention the offer? These are just some of the issues that you will be looking at in this section, dealing with how, and when, an offer may be brought to an end. An offer may be terminated in the following ways: revocation (ie withdrawal) of the offer by the offeror; rejection by the offeree; lapse of time. 1.3.1 Revocation As a general rule, an offer can be withdrawn any time before acceptance. Once an offer has been accepted, however, it is irrevocable. What if an offeror promises to keep an offer open for a certain period of time? Can the offeror then change their mind and withdraw the offer? Sometimes people make offers and promise to keep them open for a certain period of time. For example, they may offer to sell something and say that the offer will remain open for a week. Routledge v Grant (1828) 4 Bing 653 is authority for the principle that such promises are not binding if they are gratuitous promises (in the sense that the offeree has not given or promised anything in return for the promise to keep the offer open). So, generally, a promise to keep an offer open is not binding. The offeror can revoke the offer within the specified time as long as it has not been accepted. However, there is an exception to this rule. In Mountford v Scott 1 All ER 198, the claimant paid £1 for the option to buy V’s house for £10,000. The option was exercisable within six months. V purported to revoke the offer. The claimant subsequently sought to exercise the option. The court held that the offer was irrevocable as the claimant had paid for the option (albeit a nominal amount). In paying £1, the claimant had given consideration for the offeror’s promise to leave the offer open for six months. We shall look at consideration in Chapter 2. 1.3.1.1 Revocation must be communicated to the offeree Notice of withdrawal of the offer must be given and must be communicated to the offeree to be effective. This was implicit in the decision in Byrne & Co v Van Tienhoven & Co (1880) 5 CPD 344, in which withdrawal of an offer by telegram was held to take effect only on receipt. According to Professor Treitel, however, there are some exceptions to this general rule that revocation must be communicated. For example, notice of withdrawal sent to the offeree’s last known address would be effective if they had moved without notifying the offeror. Similarly, a withdrawal which reaches the offeree may be effective if the offeree simply chooses not to read it (Treitel, The Law of Contract, 13th edn, p 43). At 1.2.3 above you considered the case of Carlill v Carbolic Smoke Ball. If you cannot remember the facts of the case, please re-​read them. If the Smoke Ball Company had decided to retract the offer it had made in the newspaper advertisements, how would you suggest that it should have gone about it, bearing in mind the general principle that revocation must be communicated? In other words, how could the company ensure that any person who had read its advertisements was notified that the offer had been withdrawn? Clearly it would be impossible to notify everyone who had read the advertisements. In the first place, how would the Smoke Ball Company know exactly who had seen the offer apart from regular subscribers to the newspapers? Surely the best the company could do to revoke the offer in these circumstances would be to publish a sufficiently prominent notice of withdrawal in the relevant newspapers, eg by a notice that was at least as prominent as the original advertisement and in the same section of the newspapers. 7 Contract This conclusion is confirmed by the decision in Shuey v United States (1875) 92 US 73. As Shuey is a US authority, it is not binding on an English court, but it seems reasonable that similar principles would be applied. Notice of revocation sent to a business You have seen that the general rule is that revocation must be communicated, and you have looked at some exceptions to this rule. There is one further issue to consider in relation to communication of revocation. Suppose a notice of revocation (eg by email) is sent to a business during normal office hours. When do you think it would be effective: when it arrives, or when it is actually read by a member of staff, or at some point in between? It would appear from the case of The Brimnes QB 929 that in this situation the notice will be effective on receipt where it is reasonable to expect a member of staff to be available to read a notice of revocation. The offeree cannot complain that they did not know of the notice if failure to read it was due to their oversight or oversight on the part of their staff. This case was not concerned with revocation of an offer but may be applied by the court by analogy. In The Brimnes, a telex arrived between 5.30pm and 6pm but was not read until the next day. The Court of Appeal decided that it was communicated on arrival. Megaw LJ said: … if a notice arrives at the address of the person to be notified, at such a time and by such a means of communication that it would in the normal course of business come to the attention of that person on its arrival, that person cannot rely on some failure of himself or his servants to act in a normal business-​like manner in respect of taking cognisance of the communication so as to postpone the effective time of the notice until some later time when it in fact came to his attention. Therefore, if a notice of revocation is sent to a business and arrives during normal office hours, it is likely to be effective at that point, even if not read until the next day. However, it all depends on what is reasonable, bearing in mind the particular context and the situation as a whole. So, apart from a few exceptions, the general rule is that revocation must be communicated. The next question for you to consider is whether it necessarily has to be communicated by the offeror. Is it enough if somebody else tells the offeree that the offer has been revoked? 1.3.1.2 Revocation may be communicated by a reliable third party Dickinson v Dodds (1876) 2 Ch D 463, CA is authority for the principle that revocation can be communicated by a reliable third party. Note that the third party need not have been authorised by the offeror to communicate notice of revocation, but must be objectively perceived as being reliable. In his judgment in Dickinson v Dodds, James LJ said: ‘In this case, beyond all question, the plaintiff knew that Dodds was no longer minded to sell the property to him as plainly and clearly as if Dodds had told him in so many words.’ The informant was known to Dickinson. Dickinson knew he could rely on what he had been told. 1.3.1.3 Revocation of offers of unilateral contracts Particular difficulty arises in relation to revocation of offers of unilateral contracts. As you saw at 1.2.3 above, a unilateral contract is formed when a promise is made in return for an act. As you have also seen, an offer can be withdrawn at any time before acceptance. The problem that arises in connection with unilateral contracts is concerned with when acceptance takes place. Is it when the promisee starts to perform, or is it on completion of the act? 8  Agreement and Contractual Intention Professor Treitel gives the example of someone offering to pay you £100 if you walk from London to York (Law of Contract, 13th edn, p 38). Do you accept this offer when you first embark on the walk, or when you actually arrive at York? The general view is that with unilateral contracts no obligations arise until the specified act is completed; in other words, acceptance only occurs when performance is complete. That being so, it would mean that the offer of £100 could be withdrawn at any time before you complete your walk to York. You could be just five miles away from York when you are told that the offer no longer stands and you would have no redress. It would be grossly unfair, and accordingly there are a number of judicial authorities which suggest that partial performance of a unilateral contract is sufficient to prevent revocation by the offeror. It has been suggested by McGovney (27 Harvard Law Review 644) that there are two offers in this situation. In addition to the express offer, there is an implied promise not to revoke if the specified act is started within a reasonable time. The acceptance and consideration for the implied promise is the commencement of the act. We shall look at consideration in detail in Chapter 2, but consideration is what a party does, or promises to do, in return for the other party’s promise. A case which involved the revocation of a unilateral offer is Errington v Errington and Woods 1 KB 290, CA. A father had bought a house in his own name and allowed his son and daughter-​in-​law to live in it. He promised them that if they paid the mortgage instalments, he would transfer the house to them. It was an offer of a unilateral contract as the couple did not promise to repay the mortgage; they simply did so (ie they performed the required act in reliance on the father’s promise). When the father died, his widow sought possession of the house. It was held that the father’s promise was irrevocable so long as the couple continued to pay the instalments. The reasons behind this conclusion are not absolutely clear, but at one point Denning LJ does refer to an implied promise not to dispossess the couple as long as they paid the mortgage instalments. Denning LJ said: ‘… the father expressly promised the couple that the property should belong to them as soon as the mortgage was paid, and impliedly promised that so long as they paid the instalments to the building society they should be allowed to remain in possession.’ The second way in which an offer may come to an end is if it is rejected by the offeree. We will consider this next. 1.3.2 Rejection by the offeree An offeree may reject an offer either expressly or impliedly. As you will see later in this chapter, an acceptance must match exactly the terms of an offer; otherwise there can be no contract. Consequently, where the response to an offer suggests something different, it will not be an acceptance but a ‘counter offer’ and as such an implied rejection of the original offer. In Hyde v Wrench (1840) 3 Beav 334, the defendant offered to sell a farm for £1,000. The claimant at first made a counter offer of £950, but two days later agreed to pay £1,000 and tried to accept the original offer. The defendant refused to complete the sale and the claimant sued. It was held that there was no contract since the offer to buy for £950 was an implied rejection of the original offer and as such had destroyed it. Consequently, it was no longer available to be accepted. What if the claimant in Hyde v Wrench had not put forward a different price but simply asked about possible methods of payment? Would that have been a counter offer? No, because by simply querying the method of payment, a prospective buyer is not impliedly saying ‘I do not want to buy at the stated price’, but simply making an inquiry, the reply to which may determine whether or not to accept. It is for this reason that a simple request for information 9 Contract does not affect the offer. It still stands and can be accepted. Authority for this principle is Stevenson Jacques and Co v McLean (1880) 5 QBD 346. 1.3.3 Lapse of time An offer may become incapable of acceptance through lapse of time. If the offer contains an express condition that it will lapse after a specified time, any acceptance received outside that time limit cannot create a contract. For example, if you look at the Specimen Standard Conditions of Sale in Reading 1 of the Appendix, you will see that clause 3 specifically states, ‘Any quotation given by the Seller is valid for 21 days only’ (ie it will lapse after that time). In all other cases, an offer will lapse after a reasonable time. What is a reasonable time depends on all the circumstances (eg how the offer was made and the subject matter of the offer). Thus, an offer to sell perishable goods would terminate after a short time. Termination of offer –​summary An offer may terminate in the following ways: (a) Revocation An offer can generally be revoked at any time before acceptance, even if the offeror has said they will leave it open for a specified period of time (Routledge v Grant). An exception to this is if the offeree has given (or promised) something to the offeror in return for keeping the offer open (Mountford v Scott). Revocation must be communicated to the offeree (Byrne v Van Tienhoven), although there are some exceptions. An offer made to the public at large may be revoked through the same channel as it was made, provided the revocation is given the same prominence (Shuey v United States). If a notice of revocation is received (eg an email) but not read until the following day, the court will have to decide when communication takes place, and this will depend on the reasonable expectation of the sender (The Brimnes). Revocation may be communicated by a reliable third party (Dickinson v Dodds). In the case of offers of a unilateral contract, it is likely that the offeror cannot revoke once the offeree has started to perform the act of acceptance (Errington v Errington and Woods). (b) Rejection by offeree If the offeree rejects the offer either expressly or by implication (eg by making a counter offer), the offer will terminate (Hyde v Wrench). A request for information will not have the effect of terminating an offer (Stevenson v McLean). (c) Lapse of time The offeror may specify that the offer will stay open only for a particular time. If not, the offer will terminate after a reasonable time. 1.4 Acceptance So far you have considered ‘offer’, which is the first constituent of agreement. An offer must be in a form whereby a simple assent to it is enough to lead to agreement. In many cases, therefore, it is enough if the person to whom the offer is made simply says, ‘Yes, I agree.’ In some situations, however, it may be more difficult to decide precisely if, and when, a matching offer and acceptance have been made. An acceptance must be a complete and unqualified acceptance of all of the terms of the offer. Also, the offeree must know of the offer in order to accept. An authority for this is the 10  Agreement and Contractual Intention Australian case of R v Clarke (1927) 40 CLR 227. The Australian Government had advertised an offer of reward for information leading to the arrest of certain murderers. Clarke saw the offer but subsequently gave the information only when he himself was suspected of the murders. By that time he had forgotten about the offer of a reward. In his judgment, Higgins J said: ‘There cannot be assent without knowledge of the offer; and ignorance of the offer is the same thing whether it is due to never hearing of it or forgetting it after hearing.’ Williams v Carwardine is another case which involved an offer of reward for information leading to the conviction of a murderer. The claimant knew of the reward, but in fact only provided the information because the claimant was dying and wanted to ease their conscience. The court held that this did not preclude a valid acceptance of the offer; the motive itself was irrelevant. Professor Treitel’s definition of acceptance is ‘a final and unqualified expression of assent to the terms of an offer’ (Treitel, The Law of Contract, 13th edn, p 17). So first and foremost, acceptance must be ‘unqualified’ in so far as it must correspond exactly with the terms of the offer. If the offeree suggests even slightly different terms in response to an offer, it cannot be an acceptance. It will be a counter offer and an implied rejection of the offer. A counter offer destroys the original offer, which cannot then be accepted (Hyde v Wrench). If the offeree responds to the offer by making an inquiry, this will not be an acceptance, but neither will it be a counter offer. It will be a request for further information, which does not destroy the original offer (Stevenson Jacques v McLean). Sometimes there may be clear acceptance followed by a request for information, in which case the acceptance will be valid. One situation where it may become vital to decide whether a particular communication is an acceptance or a counter offer is where there is a so-​called ‘battle of the forms’ between two businesses. Businesses generally want to contract on their own standard terms and conditions (Ts & Cs) rather than those of the other party. In an attempt to achieve this, they will attach their Ts & Cs to any document they submit to the other side (whether that be a quotation or, say, an order form). A so-​called battle of the forms may result, with both sides passing their own Ts & Cs to the other side for agreement. These can be seen as counter-​offer after counter-​offer. The parties battle it out and the prize is having your own terms prevail. In other words, the last shot wins. A case that illustrates this is Butler Machine Tool v Ex-​Cell-​O Corp 1 WLR 401. The claimant offered to sell machinery to the defendant. Delivery was to be in 10 months’ time, and the price was £75,000. The claimant sent the offer on its usual standard form. The form said that the claimant’s terms were to prevail over any terms on the defendant’s standard form. The claimant’s terms included a price variation clause which allowed the claimant to increase the price of the machinery to keep pace with inflation. The defendant sent back a form purporting to accept the claimant’s offer. The defendant’s form of acceptance, however, said that the price must be fixed at £75,000. The defendant’s form of acceptance asked the claimant to sign and return a tear-​off slip. This slip provided that the terms of the defendant should prevail. 11 Contract The claimant signed and returned the tear-​off slip. When the claimant delivered the machinery, it tried to invoke the price variation clause in its original offer and claimed an extra £2,800. The defendant refused to pay and the claimant sued. The Court found a contract on the defendant’s terms. The claimant made the initial offer. However, it was held that the defendant’s form of acceptance amounted to a counter offer. This had been accepted by the claimant returning the tear-​off acknowledgement slip which provided that the terms of the defendant were to prevail. Consequently, the defendant was not subject to the price variation clause and did not have to pay the extra £2,800. If you look at the Specimen Standard Conditions of Sale in Reading 1 of the Appendix, you will see that they include a prevail clause (clause 2.1). From what you have just read, you will appreciate that such a clause will not necessarily help to win the battle of the forms. In Butler Machine Tool it was of no use at all to the claimant. It was simply one of the claimant’s many terms that were impliedly rejected by submission of the defendant’s terms. The decision in Butler Machine Tool did little to resolve a true ‘battle of the forms’, such as might have arisen if there had been no acknowledgement slip, but simply an exchange of incompatible terms, followed by the delivery of the machine. In such a situation, delivery of the machine might be regarded as acceptance by conduct of the last set of standard terms to be proffered (Brogden v Metropolitan Railway Co (1877) LR2 App Cas 666, HL). It is for this reason that ‘the last shot’ will often win ‘the battle’ and explains why businesses persist in putting forward their own standard terms. By continuing to put them forward, there is more chance of them being the ‘last shot’, but, as shown by the recent case of TRW Ltd v Panasonic Industry Europe GmbH and another company EWHC (TCC), there is no guarantee the ‘last shot’ will necessarily win the battle. TRW v Panasonic concerned a purchase by an English-​based company, TRW, of electronic resistors from Panasonic (in Germany). Each party had supplied its own standard terms and conditions (Ts & Cs) as part of the negotiation of the sale/​purchase of resistors. Each set of Ts & Cs contained a term on jurisdiction. The TRW Ts & Cs provided that the English courts would have jurisdiction and the Panasonic Ts & Cs stated that the German courts would have jurisdiction. Panasonic supplied its Ts & Cs upon the proposed sale. TRW responded with a purchase order, along with its own Ts & Cs, which was effectively the ‘last shot’. But this does not tell the whole story. TRW and Panasonic had negotiated sales and purchases for quite a considerable amount of time (since around 1998, in fact). In 2011, TRW had signed Panasonic’s ‘customer file’ which confirmed that it had ‘received and acknowledged’ Panasonic’s Ts & Cs. Crucially, those Ts & Cs stated that German law would apply to the contract which would be subject to the jurisdiction of the courts in Hamburg. They also contained a provision to clearly disapply any terms that may be received in response to Panasonic’s general conditions, unless Panasonic agreed to such terms in writing. In 2020, TRW issued a claim (in the English courts) against Panasonic on the grounds that resistors that had been supplied as a result of the 2015/​2016 purchase were allegedly defective. Panasonic alleged that service of the claim was invalid as the German courts had exclusive jurisdiction over any claim; but TRW argued that as its Ts & Cs had been the ‘last shot’, they should prevail. 12  Agreement and Contractual Intention The court sided with Panasonic. The court relied upon the provision in Panasonic’s Ts & Cs that prohibited any contrary terms applying, unless specifically confirmed in writing, and the fact of TRW having signed the ‘customer file’ in 2011 meant that Panasonic’s Ts & Cs would apply to subsequent orders placed by TRW, notwithstanding what terms TRW may elect to send with such orders. The court considered that if signing the Panasonic ‘customer file’ did not mean that Panasonic’s Ts & Cs were incorporated, then obtaining the buyer’s signature would have been a pointless exercise. It was therefore appropriate to put weight on this positive act, and the court found that the ‘first shot’ won the battle and that the ‘last shot’ missed its target. You will be considering incorporation of Ts & Cs by signature in detail in Chapter 3. 1.4.1 Certainty and completeness Even though the parties may appear to have made an agreement by exchange of a corresponding offer and acceptance, the courts may refuse to enforce it if there appears to be uncertainty about what has been agreed, or if some important matter is still left to be determined. Whether, or not, parties have reached complete agreement in relation to all the material terms of a deal is generally judged objectively, but the facts have to be judged in context, eg: (a) whether the parties are in the same trade; (b) trade usage; (c) whether the agreement has been acted on for any length of time; and (d) whether there is an objective mechanism for resolving any uncertainty such as an arbitration clause. Examples (a) You go to a car dealership and say you are interested in buying a particular car priced at £10,500. You agree to buy it on ‘hire purchase terms’. In the absence of any other details of the hire purchase agreement (eg duration, number and amount of repayments), it would be too vague to be a contract (Scammell v Ouston AC 251 (HL)). (b) An agreement to buy ‘timber of fair specification’. This may seem vague, but in Hillas v Arcos (1932) 147 LT 503 the court held that there was a binding contract on the particular facts. The parties had dealt with each other in the past; they were well acquainted with the timber trade; and the contract had been partly performed. In other words, as far as the parties themselves were concerned, there was no uncertainty. (c) An agreement between a petrol company and filling station to supply petrol at the market price prevailing at the date of delivery. Although the exact price has not been agreed, if the agreement provides a mechanism by which the uncertainty can be resolved there would be a binding contract. (d) A ‘provisional agreement’ is drawn up and is to operate until a fully legalised agreement drawn up by a solicitor and embodying the conditions of the provisional agreement is signed. The fact that a formalised agreement has yet to be drawn up is irrelevant. Generally, contracts do not have to be in any particular form, and clearly the parties are in agreement and so there would be a contract. 13 Contract 1.4.2 Communication of acceptance The general rule is that acceptance must be communicated (Entores Ltd v Miles Far East Corp 2 QB 327) and communicated either by the offeree or its duly authorised agent (Powell v Lee (1908) 99 LT 284). (This is in stark contrast to notice of withdrawal of an offer, which if you recall, can be through a reliable third party (Dickinson v Dodds).) It is possible for the offeror to waive the need for communication of acceptance in certain situations. For example, if there is an offer of a unilateral contract, the offeror is generally taken to have impliedly waived the need for communication. As we saw earlier, a unilateral contract is formed where the offeror makes a promise in return for an act. In this case, the performance of the act will amount to acceptance. The case of Carlill v Carbolic Smoke Ball Co QB 256, CA provides a good example of this. You considered the Carlill case at 1.2.3 above. If you do not remember the facts of that case, please remind yourself of them. The Court of Appeal decided that using the smoke ball in the prescribed manner was the act of acceptance and that the company had waived the need for communication. It would not be reasonable to expect everyone who bought one of the smoke balls and started to use it to contact the company. However, although performance of an act specified by the offeror may amount to acceptance, the offeror cannot impose a contract on the offeree by stipulating that the offeree’s silence (ie doing nothing) will amount to acceptance. Suppose, for example, that the offeror says that unless they hear from the offeree by the end of the week, the offeree will be deemed to have accepted the offer. It would be unfair on the offeree if they had to go to the trouble of contacting the offeror in order to reject the offer. The leading case on this point is Felthouse v Bindley (1862) 11 CB NS 869. The facts of the case were as follows. An uncle offered to buy his nephew’s horse for £30.15s. He said, ‘If I hear no more about him I shall consider the horse mine at £30.15s.’ The nephew did not reply. He had previously arranged for the horse to be sold by auction, and so now instructed the auctioneer to withdraw the horse from the sale. The auctioneer, however, sold the horse by mistake and the question before the court was whether there had been a contract between the uncle and the nephew for the sale of the horse. If so, the uncle would be entitled to sue the auctioneer in the tort of conversion (on the basis that the auctioneer had sold something that rightfully belonged to the uncle). The court held that there was no contract between the uncle and nephew. The court said that the uncle had no right to impose upon his nephew a sale of his horse unless the nephew wrote to him to reject the offer. Although it was clear that the nephew in his own mind intended his uncle to have the horse, he had not communicated this intention to his uncle or done anything to bind himself. For these reasons, there was no contract for the sale of the horse. Why do you think the court has been criticised for applying the general rule, that mere silence is not consent, to the facts of Felthouse v Bindley? Remember that the rule is supposed to exist to protect an unwilling offeree from the need to reject offers. The approach adopted by the court has been criticised because the nephew was not an unwilling offeree who needed the protection of the rule that mere silence is not consent. He 14  Agreement and Contractual Intention was quite happy to sell the horse to his uncle. Also, he had demonstrated that he accepted his uncle’s offer by telling the auctioneer not to include the horse in the sale. Although the decision in Felthouse v Bindley has been criticised, the case is still good law as it has not been overruled. However, it is not clear how Felthouse v Bindley would be applied if an offeree asked the court to uphold a contract on the basis that the offeree’s silence constituted acceptance of an offer. For example, imagine in Felthouse v Bindley that the nephew had in fact withdrawn the horse from the sale and then the uncle had refused to pay for it. Would it not have been unreasonable for the uncle to deny the existence of a contract based on the nephew’s (offeree’s) silence? The rule that silence is not acceptance of an offer exists to protect an unwilling offeree. If the offeree has been led to believe by the offeror that silence is acceptance and the offeree has acted on that belief, surely it would be reasonable for the courts to uphold a contract. Furthermore, in Re Selectmove Ltd 1 WLR 474, the Court of Appeal saw no reason in principle why offerees should not bind themselves by silence (eg by saying something like ‘If you don’t hear from me, assume I accept your offer’). 1.4.3 Acceptance by post The general rule is that acceptance must be communicated (Entores v Miles Far East Corp). An exception is the postal rule, which may apply where a letter of acceptance is posted. 1.4.3.1 The postal rule The issue was considered in Adams v Lindsell (1818) 1 B & Ald 681, and the rule that comes from that case is that, subject to certain limitations (see below), a letter of acceptance which is posted is complete on posting and the contract will be formed at that point. This is known as the postal rule. In Household Fire and Carriage Accident Insurance Co (Ltd) v Grant (1879) 4 Ex D 216, CA, the acceptance was posted, but never arrived. The Court of Appeal (by majority) decided that the postal rule applied and the acceptance was valid on posting. It was irrelevant that the letter had somehow got lost in the post. Thesiger LJ said: There is no doubt that the implication of a complete, final, and absolutely binding contract being formed as soon as the acceptance of an offer is posted, may in some cases lead to inconvenience and hardship. But such there must be at times in every view of the law. … At the same time I am not prepared to admit that the implication in question will lead to any great or general inconvenience or hardship. An offeror, if he chooses, may always make the formation of the contract which he proposes dependent upon the actual communication to himself of the acceptance. If he trusts to the post he trusts to a means of communication which, as a rule, does not fail, and if no answer to his offer is received by him, and the matter is of importance to him, he can make inquiries of the person to whom his offer was addressed. On the other hand, if the contract is not finally concluded, except in the event of the acceptance actually reaching the offeror, the door would be opened to the perpetration of much fraud, and putting aside this consideration, considerable delay in commercial transactions, in which despatch is, as a rule, of the greatest consequence, would be occasioned; for the acceptor would never be entirely safe in acting upon his acceptance until he had received notice that his letter of acceptance had reached its destination. 15 Contract 1.4.3.2 Limitations to the postal rule (ie conditions for the postal rule to apply) As mentioned above, the postal rule is subject to a number of limitations: (a) It only applies to acceptances, and not to any other type of communication which may pass between potential contracting parties (eg the postal rule does not apply to a letter revoking an offer). (b) It only applies where it was reasonable for the acceptance to be sent by post (eg the offer was sent by post, and/​or there is no express or implied need for a prompt response). It would clearly be unreasonable to use the post in the event of a postal strike. (c) The letter must be properly stamped, addressed and posted. (d) The rule can always be excluded by the offeror, either expressly or by implication. In the case of Holwell Securities Ltd v Hughes 1 WLR 155, CA the defendant granted the claimant an option to buy a house expressed as being ‘exercisable by notice in writing to [the defendant]’. The claimant wrote to the defendant purporting to exercise the option but the letter never arrived. If the postal rule applied, there would have been a binding contract at the time of posting (irrespective of the fact the notice did not arrive (Household Fire and Carriage Accident Insurance v Grant)); whereas if the postal rule did not apply, there would be no contract, as acceptance had not been communicated (Entores v Miles Far East Corp Ltd). Thinking back to the limitations on the postal rule, the post was clearly a reasonable method of acceptance, as notice had to be in writing and there was no urgency. But even assuming that the notice had been properly addressed and posted etc, the offer said ‘notice in writing to [the defendant]’, and the court held that by using the word ‘notice’, the offeror had impliedly excluded the postal rule. So whilst it might have been appropriate to accept by post, the acceptance actually had to arrive with the defendant to be effective. The postal rule did not apply. So the rule does not have to be excluded expressly. It may be excluded by implication if the words used in the offer indicate that the offeror wants the acceptance to actually reach the offeror. For example, the offeror has said something like ‘I need to know whether, or not, you accept by the end of the week’ or ‘You must tell me before the end of this month’. By saying ‘need to know’ or ‘tell me’, the offeror may be regarded as having given the impression that the acceptance must be communicated to be valid. Therefore, if the acceptance was sent by post, it would not be valid when posted, but only when it reached the offeror (and it must reach the offeror by the stipulated deadline). It is important to remember that exclusion of the postal rule itself does not necessarily exclude use of the post as a means of acceptance. It simply means that if the post is used to communicate acceptance, the letter will not be an effective acceptance unless and until it is received. If the offeror wants to make sure that the postal rule will not operate then the offeror should make this clear in the offer, but otherwise exclusion of the postal rule may be implied. 1.4.3.3 Retraction of a postal acceptance A final matter for consideration in relation to postal acceptance is the possibility of retraction. If the postal rule applies, and acceptance is deemed to be effective on posting, can the sender then change their mind and retract the acceptance before it comes to the attention of the offeror? One possible argument is to say that as the purpose of the postal rule is to benefit the acceptor, the rule should not be applied in any way that disadvantages them. So, if the offeror is unaware of the acceptance, why should the acceptor be prevented from retracting? Being in ignorance of the acceptance, the offeror cannot in any way have acted on it, and so cannot suffer from its withdrawal. Another possible view is that to allow retraction would be too favourable to the acceptor. The postal rule benefits the acceptor by giving them the certainty of knowing that there is a contract as soon as the acceptance is posted. It is 16  Agreement and Contractual Intention then too late for the offeror to revoke the offer, and so why should the acceptor be able to withdraw acceptance? It seems to give the acceptor the best of both worlds as the acceptor could speculate at the expense of the offeror, and some would regard that as being grossly unfair to the offeror. There is no English authority on retracting a postal acceptance when the postal rule applies. Such authority as there is leaves the position uncertain, so a lawyer could argue either way. If the postal rule does not apply, retraction of an acceptance is clearly possible unless and until the acceptance is actually communicated, because until that point there will not be a binding contract (Entores v Miles Far East Corp). 1.4.4 Acceptance by electronic communication Nowadays, contracts are much more likely to be made by electronic communication, such as email, than by the post. If one of these methods is used for acceptance, when is it effective? A case which involved communication by telex is Entores v Miles Far East Corp 2 QB 327, CA. The claimant was a company based in London and was dealing with the defendant, an American company, through agents in Amsterdam. The claimant telexed the defendant’s agents offering to buy goods. The agents accepted the offer by telex. Later a dispute arose and the claimant wanted to sue the defendant for breach of contract. To do this it was essential to know where the contract had been made: Amsterdam or London? The Court of Appeal held that the parties were effectively in the same position as if they had been in each other’s presence, and accordingly acceptance took place in London where it was received. Entores Ltd v Miles Far East Corp is authority for the fact that for an acceptance to be effective it must have been communicated, but when exactly will it be communicated? When it would be reasonable to expect the recipient to have read it, or when it is actually read by the recipient? Entores Ltd v Miles Far East Corp was concerned with the place and not the time of communication. It provides no direct authority on the issue of exactly when a telexed acceptance takes effect. Clearly the postal rule does not apply as Entores v Miles Far East Corp requires the acceptance to have arrived. At 1.3.1.1 above, you considered this issue in the context of revocation of an offer. You saw that a notice telexed during normal office hours, but not read until the next day, may be effective on receipt (The Brimnes). By analogy, therefore, a telexed acceptance will be effective when it would be reasonable to expect the recipient to have read it, even if it is not read until a later time. With instantaneous methods of communication (such as email), there are bound to be occasions when the email is not read as soon as it arrives. This situation was also considered in the case of Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelgesellschaft GmbH 2 AC 34, where Lord Wilberforce said: ‘No universal rule can cover such cases; they must be resolved by reference to the intentions of the parties, by sound business practice and in some cases by a judgment where the risks should lie.’ Acceptance –​summary Acceptance is an unqualified expression of assent to the terms of an offer. The offeree cannot accept if the offer has come to an end by revocation, rejection or lapse of time. An acceptance should be distinguished from: (a) a counter offer. If the offeree introduces a new provision, it will be a counter offer which acts as an implied rejection of the offer (Hyde v Wrench); and 17 Contract (b) a request for information (Stevenson v McLean). A request for information does not destroy the original offer, which can still be accepted. Note: Sometimes there may be a clear acceptance followed by a request for information, in which case the acceptance will be valid. Acceptance must be communicated (Entores v Miles Far East Corp). Silence will not normally amount to acceptance (Felthouse v Bindley). The postal rule is an exception to the general rule that acceptance must be communicated. Provided certain conditions are satisfied, a letter of acceptance will be binding when it is posted (Adams v Lindsell). For the postal rule to apply, it must be reasonable to use the post as a means of communication, the letter must be properly posted, and the offeror must not have excluded the rule either expressly or by implication (Holwell v Hughes). In offers of a unilateral contract, the offeror will be deemed to have waived their right to have acceptance communicated, and in these cases the offeree’s conduct will amount to acceptance, eg Carlill v Carbolic Smokeball Co. If an acceptance is received (eg in an email) but not read until the following day, comments made by the court in The Brimnes and the Brinkibon cases may help to determine when communication takes place. You have now studied both offer and acceptance, which together constitute ‘agreement’. At 1.5, you will study contractual intention, but before moving on, attempt the following activity to test yourself on what you have learned so far in terms of the agreement aspect of a contract. ACTIVITY 1 Offer and acceptance PART 1 –​Offer Please tick the appropriate box to say whether the statement is true or false and make a note of the name of any relevant case. If you think the statement is false, please make a note of the reason for your answer. Statement True False/​reason 1. A person makes an offer if they intend to be bound as soon as it is accepted. 2. The court applies a predominantly subjective test to decide whether a person has made an offer. 3. A self-​service display in a shop is usually an offer. 4. An advert in a newspaper is usually an invitation to treat. 5. An advertisement of a reward is generally regarded as an offer. 6. A bilateral contract is a promise in return for an act. 7. An offer can usually be revoked at any time before acceptance. 8. Revocation of an offer must be communicated by the offeror. 9. If you make a counter offer, you can still accept the offer which was made to you. 10. If you make a request for information, you can still accept the offer which was made to you. 18  Agreement and Contractual Intention COMMENT Statement True False/​reason 1. A person makes an offer if √ they intend to be bound as soon as it is accepted. 2. The court applies a √ The court applies a predominantly predominantly subjective test to objective test and asks whether a decide whether a person has reasonable person would regard the made an offer. statement as an offer (Smith v Hughes and The Leonidas). 3. A self-​service display in a √ A self-​service display is usually an shop is usually an offer. invitation to treat (Pharmaceutical Society of Great Britain v Boots Cash Chemists). 4. An advert in a newspaper is √ Partridge v usually an invitation to treat. Crittenden 5. An advertisement of a reward √ Williams v is generally regarded as an Carwardine; offer. R v Clarke 6. A bilateral contract is a √ A bilateral contract is where one party promise in return for an act. makes a promise in return for a promise from the other side. It is a unilateral contract where a promise is made in return for an act. 7. An offer can usually be √ Routledge v revoked at any time before Grant acceptance. 8. Revocation of an offer must √ Revocation must be communicated be communicated by the offeror. (Byrne v Van Tienhoven) but it can be communicated by a reliable third party (Dickinson v Dodds). 9. If you make a counter offer, √ A counter offer destroys the original offer you can still accept the offer (Hyde v Wrench). which was made to you. 10. If you make a request for √ Stevenson v information, you can still accept McLean the offer which was made to you. PART 2 –​Acceptance Please tick the appropriate box to indicate whether the statement is true or false and make a note of the name of any relevant case. If you think the statement is false, please make a note of the reason for your answer. Statement True False/​reason 1. Acceptance is an unqualified assent to the terms of the offer. 2. The general rule is that acceptance must be communicated and is effective when and where it is received. 3. Provided a letter of acceptance is posted, the postal rule will automatically apply. 19 Contract Statement True False/​reason 4. The postal rule may apply even if the letter of acceptance is lost or delayed in the post. 5. The postal rule cannot be excluded by the offeror. 6. You can accept an offer even if you do not know about the offer. 7. The offeree’s motive for accepting is irrelevant. 8. An attempt to introduce new terms is not acceptance but a counter offer. COMMENT Statement True False/​reason 1. Acceptance is an unqualified √ assent to the terms of the offer. 2. The general rule is √ Entores v Miles that acceptance must be Far East Corp communicated and is effective when and where it is received. 3. Provided a letter of acceptance √ The postal rule in Adams v Lindsell is posted, the postal rule will will only apply if it is reasonable to use automatically apply. the post; the postal rule has not been excluded by the offeror; and the letter has been properly posted. 4. The postal rule may apply even √ Household Fire if the letter of acceptance is lost and Carriage or delayed in the post. Accident Insurance v Grant 5. The postal rule cannot be √ Holwell Securities v Hughes: the excluded by the offeror. postal rule can be excluded either expressly or by implication, eg if the circumstances make it clear that the parties only intended acceptance to be effective when communicated. 6. You can accept an offer even if √ R v Clarke: you must know about the you do not know about the offer. offer when you accept. 7. The offeree’s motive for √ Williams v accepting is irrelevant. Carwardine 8. An attempt to introduce new √ Hyde v Wrench terms is not acceptance but a counter offer. 1.5 Intention to create legal relations In this final section of Chapter 1, you will be considering another essential element of a legally binding contract, namely the parties’ intention to create legal relations. (You will look at the other constituent of a legally enforceable contract (ie consideration) in Chapter 2.) For the courts to treat an agreement as binding, the parties themselves must have intended it to be legally enforceable (ie enforceable in the courts). One way to legally achieve this 20  Agreement and Contractual Intention would be through formal requirements, for example, for the law to insist that, to be legally enforceable, an agreement must be in writing and specifically state that it is intended to have legal effect. Generally, however, the English law of contract does not require formalities. Oral agreements are enforceable and no specific forms of words are required. Given that formalities are not usually required, how are those agreements which are intended to be legally binding to be distinguished from those which are not? As the evidence of the parties themselves is likely to be unreliable, as each party will have their own interests to serve, the courts have evolved another way of deciding the issue. With regard to intention to create legal relations, English contract law operates on the basis of rebuttable presumptions, which differ according to whether the agreement is to be regarded as ‘domestic’ or ‘commercial’. This means that the courts make certain presumptions about domestic agreements (ie agreements between family members and/​or friends) and commercial agreements. With commercial agreements, there is a very strong presumption that the parties intended their agreement to have legal consequences; whereas with domestic agreements (ie agreements reached between family members or friends), the presumption is that the parties did not intend to create legal relations. For example, if you agreed with your partner that you would clean the car if they would put out the recycling bins, neither of you would intend that agreement to have legal consequences if one of you did not do what you had agreed to do. But what if there was a lot of money at stake, eg a joint business adventure or the purchase of a property? Then the parties may well be taken as having intended to create legal relations. We will now look at these two categories in a bit more detail. 1.5.1 Domestic and social agreements For domestic and social agreements (eg an agreement between family members), the presumption is that there is no intention to create legal relations unless the facts show otherwise. The leading case in this category is Balfour v Balfour 2 KB 571, CA which involved an agreement made between a husband and wife. Atkin LJ commented that agreements between spouses ‘are not sued upon, not because the parties are reluctant to enforce their legal rights when the agreement is broken, but because the parties in the inception of the arrangement, never intended that they should be sued upon’. The policy reason in the judgment of Atkin LJ is the need to prevent the court being inundated with claims. He said: ‘All I can say is that the small courts of this country would have to be multiplied one hundredfold if these arrangements were held to result in legal obligations.’ If the couple had been separated, the likelihood is that they would have been bargaining at arm’s length. They would not have been prepared to rely on honourable understandings and accordingly would have intended the agreement to have legal effect. Authority for this proposition is Merritt v Merritt 1 WLR 1211, CA. The husband had left the wife and was living with another woman. He signed a written agreement to the effect that he would pay his wife £40 a month and, in consideration of her repaying the mortgage on the jointly owned matrimonial home, he would transfer it to her sole ownership. The couple clearly had not wanted to leave anything to chance. It was a formal agreement which they obviously intended to be legally binding. 1.5.2 Commercial agreements If the agreement is not a ‘domestic’ one, it will be regarded as ‘commercial’. Here there is a strong presumption the parties intended the agreement to be legally binding. Again, it is a rebuttable presumption, but whereas in relation to domestic agreements, the onus of rebutting the presumption is not heavy, the same cannot be said for commercial agreements. This is illustrated by the decision in Edwards v Skyways 1 WLR 349. 21 Contract An airline pilot was made redundant and as part of their redundancy package was offered and accepted a certain ‘ex gratia’ payment. The employer then refused to make the payment on the basis that there was no intention to be legally bound. The subject of the agreement obviously related to business matters, and accordingly there would be a presumption that the parties intended the agreement to be legally binding. As to what was meant by ‘ex gratia’, the judge said the words simply indicated that the employer did not admit any pre-​existing liability on its part to make the payment: ‘The words did not mean, to put it another way, that the promise, when accepted, should have no binding effect at law.’ Accordingly, it was held that the employer had not rebutted the presumption in order to establish there was in fact no intention to be bound. So in a commercial context, very clear words are needed to rebut the presumption of an intention to create legal relations. A case where the presumption was rebutted is Rose and Frank Co v Crompton Bros AC 445, HL, in which the agreement between the two companies included an ‘Honourable Pledge Clause’. The clause specifically stated that it was not entered into as a ‘formal or legal agreement’ but was only a definite expression and record of the intention of the parties. The parties ‘honourably pledged’ themselves to the agreement in the confidence ‘that it will be carried through by each of the … parties with mutual loyalty and friendly co-​operation’. The Court of Appeal regarded this as clear evidence that the parties did not intend the agreement to be legally binding, and this was accepted by the House of Lords. Intention to create legal relations –​summary In social and domestic situations, there is a presumption that the parties did not intend to create legal relations (Balfour v Balfour) which may be rebutted on the facts (eg if there is a lot of money at stake). Conversely, in a commercial context, there is a very strong presumption of contractual intention (Edwards v Skyways) which is difficult to rebut. You have now studied agreement (ie offer and acceptance) and contractual intention and should be in a position to attempt a problem question on formation –​see Activity 2 below. In Chapter 2 you will be introduced to the third essential constituent for a legally binding contract, ie consideration. ACTIVITY 2 Problem question on formation Please read the suggested structure for answering offer and acceptance questions which is set out below. Then using that structure, have a go at answering the short problem question. Offer and acceptance questions –​suggested structure 1. Identify who is seeking to show a contract exists and state the elements needed to form a contract. [Where there is more than one character then deal with each one separately and consider events in chronological order.] 2. Is a party making an offer or invitation to treat? Define offer and identify offer on the facts. 3. Has an offer been accepted? Define acceptance and apply to the facts. (a) Must be complete acceptance of all the terms –​you may sometimes need to consider whether there is a counter offer or request for information and discuss the effects of these. (b) General rule –​acceptance must be communicated. What does this mean? Does an exception apply, eg the postal rule? 22  Agreement and Contractual Intention 4. Has the offer been revoked? State and apply the rules relating to revocation. 5. Conclusion. NB This is a very basic structure –​sometimes an offer and acceptance question may involve other elements, eg contractual intention, which you will need to discuss. Question Recently Paul moved into a new house. He decided to have a conservatory built and on Monday 14 April he discussed his plans for the conservatory with John, who was in the building trade. John said he could do the work for £5,000 but that he needed to know for sure by 28 April. On 15 April Paul sent a letter to John saying that he would like him to build the conservatory for £5,000. He added that he hoped John would be able to complete the work by the beginning of June. Paul’s letter to John was delayed in the post and only arrived at John’s house on 28 April. In the meantime, on 18 April, Paul received a letter from John saying he was unable to do the building work. John is refusing to do the work. Advise Paul, explaining his legal position. COMMENT Paul and John If Paul wishes to take any action against John, he must first establish that a contract exists between them. For a contract, there must be agreement, contractual intention and consideration. As the problem is set in a commercial context, contractual intention will be presumed (Edwards v Skyways). The real issue here is whether or not the parties reached an agreement. Agreement There must be an offer by one party which is accepted by the other. If a person makes an offer then they intend to be bound straight away by an acceptance without further negotiation. If a person makes an invitation to treat, there is no such intention. The ‘acceptance’ of an invitation to treat will not result in a contract. Here John probably made an offer to do the work for £5,000 as it seems he intended to be bound without further negotiation. [If an invitation to treat –​then Paul would be making the offer on 15 April which John has not accepted.] Has Paul accepted John’s offer? Paul sent a letter of acceptance on 15 April. For an acceptance to be valid, there must be a clear acceptance of all the terms of the offer without qualification or addition. If Paul is adding a new term (ie the need to complete the work by the start of June), this will amount to a counter offer and will destroy the original offer –​Hyde v Wrench. If the letter is merely a request for information (ie asking if the work will be done by June), it will not destroy the offer but neither will it amount to an acceptance –​Stevenson v McLean. Here Paul does not seem to be adding a new term as he agreed the price and simply said 23 Contract that he hoped it would be finished by the beginning of June. He may be deemed to have accepted the offer and just queried the completion date. This is not just a request for information as in Stevenson v McLean because there seems to be prior acceptance which will take priority. Acceptance must be communicated and is usually only valid when it reaches the offeror –​ Entores v Miles Far East Corp. An exception is if the postal rule applies, when the acceptance will be valid when posted –​Adams v Lindsell. If this rule applies then the letter will be valid on posting even if it is lost or delayed in the post –​Household Fire and Carriage Accident Insurance v Grant. For the postal rule to apply, it must be reasonable to use the post as a method of communication –​this seems to be so here since John did not indicate he wanted a quick acceptance, and there is no mention of a postal strike or delays in the post. For the postal rule to apply, the letter must have been properly posted. Also, the offeror must not have excluded the rule, expressly or by implication –​Holwell Securities v Hughes. In the case of Holwell, the offeror said he wanted ‘notice in writing’. The Court of Appeal held that the word ‘notice’ indicated that the offeror wanted to receive the acceptance and that he had impliedly excluded the postal rule. Here John did say he needed to know for sure by 28 April, which suggests he wanted acceptance to actually reach him by then. The court may well treat this in the same way as the words ‘notice in writing to [the defendant]’ in Holwell and decide that the postal rule has been impliedly excluded. Also, it was said in Holwell that the rule should not apply if it would produce manifest absurdity and inconvenience. If the rule does apply, Paul’s acceptance would be valid on 15 April. If the court decides that John has excluded the rule, then Paul’s acceptance can only be valid when it is communicated. John has sent a letter revoking his offer, and we must now consider if this is a valid revocation. Revocation John has tried to revoke his offer. Any offer may be revoked at any time before acceptance –​even if the offeror (John) says he will keep the offer open (provided the offeree has not given consideration to keep the offer open) –​Routledge v Grant. However, it is not effective until communicated to the offeree –​Byrne v Van Tienhoven. If the postal rule applies, Paul’s letter of acceptance will be valid when posted on 15 April, which was before he received John’s revocation. In this case there will be a contract. If the postal rule does not apply, the revocation will be effective on 18 April and there will not be a contract. Conclusion It seems that the postal rule may have been excluded, and if so there is no contract. If the postal rule has not been excluded then there is a contract, and Paul should find out how much it will cost for someone else to do the work and, if for more than £5,000, he could sue John for damages for breach of contract for the difference. When assessing damages, the general aim of the court is to put the innocent party in the position they would have been if the contract had been properly performed. (You will be considering damages in detail in Chapter 4.) 24  Agreement and Contractual Intention SUMMARY If you are advising a client on a contractual issue (eg alleged breach of contract), you must be satisfied that there was a contract in the first place. For there to be a legally binding contract, there must be agreement (ie offer and acceptance), contractual intention and consideration. Without any one of these elements, it will not be possible to enforce a contract, for example by seeking damages for breach. In this first chapter you have studied what constitutes a valid offer and the various ways in which it can be accepted. You have seen the practical and commercial importance of being able to identify if, and when, parties have reached an agreement (eg in the context of auctions, tenders and the battle of the forms). You have also looked at the presumptions which govern contractual intention and how, and to what extent, they may be rebutted. Remember, in a commercial context it is very difficult to rebut the presumption that the parties did intend their agreement to have legal consequences. The process of step-​by-​step analysis is central to ‘thinking as a lawyer’. 25