Contract 1 – Tutorial 2: Offer and Acceptance

McKendrick Text and Materials, pp.21-38 & Chapter 3.

Agreement: Objective or Subjective?

UK law has decided to take an objective approach when considering whether or not two parties have reached an agreement. The courts will not adopt the view of a neutral and reasonable person. Even in cases where one party seems to have taken up an offer that was not intended to be an offer, the law continues to adopt the objective approach.

In order to prove that a legally binding contract has been created a number of things must be proved:

- That the parties have reached an agreement (offer and acceptance)- That the agreement has been expressed in certain terms that are enforceable by the courts- That the agreement is supported by consideration (exception: promissory estoppel) - That the agreement has been entered into in the appropriate form (e.g. in writing)- That there is an intention to create legal relations

A lot of contract law is based upon perceptions of the intentions of the parties. In trying to decide what these intentions are, the courts look at outward objective manifestations of these intentions, rather than trying to ascertain the actual, subjective state of mind of each party.

Issues raised by adopting an objective approach:

- Why does the law not place more emphasis on the subjective state of mind of each of the parties as the law of contract concerns promises voluntarily made?

o Because this promotes certainty and predictability. With this method we can also avoid the difficulties of trying to ascertain what a party was thinking at a certain point in time.

- What is the scope of this objective approach? Do we adopt the objective position of the promisor, promisee or a neutral third party?

- Does the adoption of the objective approach mean that subjective views are completely irrelevant?

o When it is apparent that one party has sought to take an unfair advantage by snapping up an offer, which was not intended by the other party do the courts adopt a more subjective approach? This is discussed below in Smith v. Hughes (1871) LR 6 QB 597

The Objective Theory Illustrated

Smith v. Hughes (1871) LR 6 QB 597

The oats case. A farmer offers to sell oats to a racehorse owner. They agree on a price, but after the oats are delivered the defendant refuses to pay as he claims that he wanted old oats and the farmer has given him new oats.

This is going to take too long, therefore just read and then answer discussion questions:

Discussion

1. Do you think that, if an offeror promises to keep an offer open for a stated period, then that offeror should be held to that promise and not allowed to retract the offer within that period? Is it possible for an offeror to incur liability pending the acceptance of the offer?

The general rule is that an offer may be revoked at any time before it has been accepted. In the case of Dickinson v Dodds (1876) 2 Ch D 463, James LJ ruled that the promise to keep an offer open for a certain period may be withdrawn at any point up to the acceptance. As there is no consideration for the promise to keep the offer open, then it is not binding. James states that the offer must remain open until the time of acceptance for a contract to be formed, therefore the offeror cannot incur liability if they withdraw their offer before an acceptance is made. James also adds that the withdrawal must not be made expressly. I agree with this judgment. ‘Dickinson is therefore regarded as authority for the proposition that a promise to keep an offer open for a particular period of time is not binding unless the oferee has provided consideration to keep that offer open.’This seems logical in line with UK law, however it does make things less certain. A promise to keep an offer open for a certain period of time is now almost completely redundant as without consideration it means nothing. Does the law regarding such offers take into account promissory estoppel?

2. What is the postal rule of acceptance? Does it have any merit? Does it apply in respect of contracts concluded over the internet? How do the rules of offer and acceptance apply in the case of internet contracts? How far do you think the rules of Offer & Acceptance are adequate for regulating transactions in a modern, technologically developed society?

- The postal rule states that an acceptance becomes effective as soon as the letter of acceptance is posted. There are exceptions to the rule.

- It has some merit: If this rule did not exist then it may be that no contract would ever be completed by post (this point has less impact now than it did in the 19 th century, due to technological advances). The post office is a common agent to both parties and therefore upon communication to them, it is in effect a communication to the other party. It is easier to prove that a letter has been posted than to prove it has been received. However, each of these arguments has fairly strong counter-arguments.

- The postal rule does not apply to contracts concluded over the internet.There are issues surrounding the use of the internet and emails to conclude contracts that are as yet cloudy. One proposed principle is that the party that chooses the means of communication should bear the burden of any mishaps. As, email is far quicker than post, it may be more sensible to use the recipient rule rather than the postal rule. In the case regarding the telex, the postal rule did not apply. Example: [Entores v Miles Far Eastern Corporation] The contract is not valid until the acceptance has been received by the oferor. If the oferor doesn’t receive the information, the oferee must keep trying. The exception occurs when it is obvious to the oferor that there is a problem – in this case the onus shifts to the oferor to resolve the issue. This is now precedent. An email

acceptance becomes valid upon receipt, although the recipient does not have to have read it (this runs contrary to the ususal line that an acceptance must be ‘communicated’).

Read this: 2008 EWCA Civ 442 – Schweppe v. Harper esp paras 26-45

3. Is there a difference between silence and conduct when it comes to acceptance? If so, what is the significance of the distinction?

Yes. Silence can never amount to an acceptance whereas conduct can. An offeror cannot say: ‘We will assume that you have accepted the offer if we do not hear from you in the next seven days’. Conduct must be a positive action on the part of the oferee that shows a clear intention to accept the offer. The oferee may begin to fulfil the terms of the contract (as in Errington v Errington) or expressly accept it. Conduct is an accepted form of acceptance, silence is not.

4. What is a unilateral contract? How does it differ from a bilateral contract and how does it work? Could the Carbolic Smoke Ball Company have revoked its offer – if so, when and how?

- In a unilateral contract there is only one party making an offer. In unilateral contracts, the promisee is not required to make a counter promise, only to carry out an act in accordance with the promise made by the promisor. This is different from a bilateral contract, where two promises are required. In a bilateral contract there will be two parties, whereas a unilateral offer usually involves one party making an offer to the world at large.

- Carbolic Smoke Ball company could have revoked the offer, however there are limitations on this. Once another party has began to complete what has been asked by the offeror the offer can no longer be revoked. Once performance of the task has started it would be unfair if the offeror was allowed to then revoke the offer. i.e. once Carlyle bought the Carbolic Smoke Ball/Started to use it, this constituted the beginning of performing the task and therefore the offer cannot be revoked after this point. The payment does not have to be made until the performance has been completed, but the offer cannot be revoked, once performance has started. Case: Daulia ltd. V. Four Millbank Nominees Ltd (1978).

Problem:

Try to work out which legal issues are raised by the facts and then apply the relevant legal rules to them. There will be some areas of uncertainty because the information you have is limited and some because there is uncertainty about what the law is on the basis of the case law.On 2nd October Galvatron PLC sends identical letters to three local firms asking if they wish to buy an unused widget making machine that they have acquired. The letters state that “the best offer received by 9.30am on 10th October will secure the machine.”

The following day Prime PLC sends a fax saying: “Is it a 5XL model? If so we will offer $5000, if not, $3000.” Unfortunately due to a transmission fault, the final ‘0’ is missing so that the last figure appears to be $300. The machine is not a 5XL.

Optimus PLC sends a letter offering $2500 or $100 more than your highest offer you receive under $3500.

”Megatron PLC sends a telex on the evening of the 9th October offering $3500. The offer is received on Galvatron’s telex machine at 6pm on 9th October, but not read until 10.30am on 10th October.

Advise Galvatron whether it is obliged to sell the widget making machine and if so, to whom.

This is an invitation to tender from Galvatron PLC not an offer. The three responses from the local firms are each offers. However, Galvatron PLC has bound themselves to accept the highest offer received by a certain time.

Prime PLC: ‘The party who selects the means of communication should bear the consequences of any unexpected events’ As Prime PLC have chosen to submit their offer via fax (as each party has chosen a different method of communicating the offer) they have to bear the consequences and therefore their offer stands at £300.

Optimus PLC: Although in Harbella it can be seen that offering a certain amount of money above every other bid is too vague, if there is on a cap on this it may be considered an offer.