Offer and Acceptance Analysis Formula

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

Offer

The nature of an offer

An offer is an expression of willingness to contract on certain terms, made with the the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed, the “offeree” [G.H. Tretel, The Law of Contract, 10th edn, p.8].

The “expression” referred to in the definition may take different forms, such as a letter, newspaper, fax, email and even conduct, as long as it it communicates the basis on which the offeror is prepared to contract.

The “intention” referred to in the definition is objectively judged by the courts. The English case of Smith v. Hughes (1871) LR 6 QB 597 emphasises that the important thing is not a party’s real intentions but how a reasonable person would view the situation. This is due mainly to common sense as each party would not wish to breach his side of the contract if it would make him or her culpable to damages, it would especially be contrary to the principle of certainty and clarity in commercial contract and the topic of mistake and how it affect the contract.

The classical principles are illustrated in the well-known case of Carlill v. Carbolic Smoke Ball Company.

Unilateral contract

The contract in Carlill v. Carbolic Smoke Ball Co was of a kind known as a unilateral contract, one in which the offeree accepts the offer by performing his or her side of the bargain. It can be contrasted with a bilateral contract, where there is an exchange of promises between two parties. In Australian Woollen Mills Pty Ltd v. The Commonwealth (1954), the High Court of Australia held that, for a unilateral contract to arise, the promise must be made “in return for” the doing of the act. The court distinguished between a unilateral contract from a conditional gift. The case is generally seen to demonstrate the connection between the requirements of offer and acceptance, consideration and intention to create legal relations.

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Invitations to treat

An invitation to treat is not an offer, but an indication of a person’s willingness to negotiate a contract. In Harvey v Facey, an indication by the owner of property that he or she might be interested in selling at a certain price, for example, has been regarded as an invitation to treat. The courts have tended to take a consistent approach to the identification of invitiations to treat, as compared with offer and acceptance, in common transacions. The display of goods for sale, whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an invitation to treat and not an offer. The holding of a public auction will also usually be regarded as an invitation to treat.

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Revocation of offer

An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror. If the offer was made to the entire world, such as in Carlill’s case, the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an option (see also option contract).

If the offer is a unilateral offer, unless there was an ancillary contract entered into that guaranteed that the main contract would not be withdrawn, the contract may be revoked at any time: see Mobil Oil Australia Ltd v. Wellcome International Pty Ltd (1998) 81 FCR 475.

Acceptance

Test of acceptance

Acceptance is a final and unqualified expression of assent to the terms of an offer [G.H. Treitel, The Law of Contract, 10th edn, p.16]. It is no defense to an action based on a contract for the defendant to claim that he never intended to be bound by the agreement if under all the circumstances it is shown at trial that his conduct was such that it communicated to the other party or parties that the defendant had in fact agreed. Signing of a contract is one way a party may show his assent. Alternatively, an offer consisting of a promise to pay someone if the latter performs certain acts which the latter would not otherwise do (such as paint a house) may be accepted by the requested conduct instead of a promise to do the act. The performance of the requested act indicates objectively the party’s assent to the terms of the offer.

The essential requirement is that there be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent. This manifestation of assent theory of contract formation may be contrasted with older theories, in which it was sometimes argued that a contract required the parties to have a true meeting of the minds between the parties. Under the “meeting of the minds” theory of contract, a party could resist a claim of breach by proving that although it may have appeared objectively that he intended to be bound by the agreement, he had never truly intended to be bound. This is unsatisfactory, as the other parties have no means of knowing their counterparts’ undisclosed intentions or understandings. They can only act upon what a party reveals objectively to be his intent. Hence, an actual meeting of the minds is not required.

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

Rules of acceptance

Communication of acceptance

There are several rules dealing with the communication of acceptance:

* The acceptance must be communicated: Depending on the construction of the contract, the acceptance may not have to come until the notification of the performance of the conditions in the offer as in Carlill’s case, but nonetheless the acceptance must be communicated. Prior to acceptance, an offer may be withdrawn.

* An offer can only be accepted by the offeree, that is, the person to whom the offer is made.

* An offer is not bound if another person accepts the offer on his behalf without his authorisation: see agent (law).

* It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance.

* If the offer specifies a method of acceptance (such as by post or fax), you must accept it using a method that is no less effective than the method specified.

* Silence cannot be construed as acceptance: see Felthouse v. Bindley (1862) 142 ER 1037.

Correspondence with offer

The “mirror image rule” states that if you are to accept an offer, you must accept an offer exactly, without modifications; if you change the offer in any way, this is a counter-offer that kills the original offer. However, a mere request for information is not a counter-offer. It may be possible to draft an enquiry such that is adds to the terms of the contract while keeping the original offer alive.

Battle of the forms

Often when two companies deal with each other in the course of business, they will use standard form contracts. In Butler Machine Tool Co Ltd v. Ex-Cell-O Corporation (England) Ltd [1979] WLR 401, the question was raised as to which of the standard form contracts prevailed in the transaction. Denning MR preferred the view that the documents were to be considered as a whole, and the important factor was finding the decisive document; on the other hand, Lawton and Bridge LJJ preferred traditional offer-acceptance analysis, and considered that the last counter-offer killed all preceding offers.

Postal acceptance rule

As a rule of convenience, if the offer is accepted by post, the contract comes into existence at the moment that the acceptance was posted. This rule only applies when, impliedly or explicitly, the parties have in contemplation post as a means of acceptance. It excludes contracts involving land, letters incorrectly addressed and instantaneous modes of communication.

Knowledge of the offer

In Australian law, there is a requirement that an acceptance is made in reliance or persuance of an offer: see R v. Clarke.

Rejection, death or lapse of time

If the offeree rejects the offer, the offer has been killed and cannot be accepted at a further date. The offer also cannot be accepted after the time period specified in the offer, or if no time was specified, after a reasonable period of time. If the offeror dies, the offeree may accept only if the acceptance is done without the knowledge of the death; conversely, the estate of a deceased offeree may not accept an offer.

Formation

A contract will be formed (assuming the other requirements are met) when the parties give objective manifestation of an intent to form the contract. Of course, the assent must be given to terms of the agreement. Usually this involves the making by one party of an offer to be bound upon certain terms, and the other parties’ acceptance of the offer on the same terms. The acceptance of an offer may be either a statement of agreement, or, if the offer invites acceptance in this way, a performance of an act requested in the terms of the offer. For instance, if one tells a neighbor kid that if the kid mows the offeror’s lawn, the offeror will pay $20.00, and the kid does mow the lawn, the act of mowing constitutes the manifestation of the kid’s assent. For a contract based on offer and acceptance to be enforced, the terms must be capable of determination in a way that it is clear that the parties assent was given to the same terms. The terms, like the manifestation of assent itself, are determined objectively. They may be written, or sometimes oral, although some kinds of contracts require a writing as evidence of the agreement to be enforced. For information on the written requirements of contracts, see the main contract article.

Criticisms

Criticisms of offer-acceptance analysis lie in that this tool was created by legal academics and can be rather arbitrary at time, and bears little resemblance to how lay-people perceive the formation of a contract. !^LVyt