Problems with the Offer and Acceptance Model

It is evident in classical English contract law that an agreement is established by identifying an offer with its corresponding acceptance.[1] Over time, this traditional approach has been criticized on the basis of which it is uncommercial within practise and is too rigid. This is essay will set out to explain the current law on the rules of offer and acceptance within contract law. Arguments for and against the effectiveness of this approach will be discussed but nevertheless this essay will support the stance that the offer and acceptance model to some extent is inflexible and inapplicable.

A contract is an agreement giving rise to obligations which are enforced by law.[2] The fundamental elements of an enforceable contract is that the parties reach an agreement through offer and acceptance, provide consideration and intend to create legal relations. A contract will cease to exist if one of these elements is missing. In order to decide if there is an agreement between contracting parties, the courts have traditionally analysed these negotiations using the offer and acceptance model. The requirements of an offer and acceptance will be examined below.

The general rule of an offer is an expression of willingness to contract on specified terms made with the intention that it is to become legally binding once accepted by the person whom the offer is addressed to (per Treital).[3]  There must be an offer from one party (known as the offeror) which is then accepted by the other party (offeree). There are three basic requirements of an offer.

Firstly, an offer must be clear and certain. Applying the judicial precedent of Gibson v Manchester City Council[4], an agreement will exist when there is a clear offer mirrored by a clear acceptance. In this case, the council had enforced a policy of selling houses to tenants. The claimant was a tenant and applied for details of the price of the council house he was renting and the mortgage terms. The treasurer had replied to the claimant stating that the council ‘may be prepared to sell the house’ and invited him to complete an application form. Gibson completed this form however the council had changed its policy on the sale of council houses. The issue presented was whether there was a contract of sale between the claimant and Manchester city council. The House of Lords concluded there was no offer as the language used by the treasurer in the document evidently demonstrated that council did not intend to make a binding promise, but rather to invite Gibson to make an offer to buy. The terms ‘maybe prepared’ lacked sufficient certainty therefore an offer was not made. This case can be distinguished with Storer v Manchester City Council[5] in which there was evidence of a binding contract where there was a clear and certain offer and acceptance.

Secondly, an offer must be addressed to the offeree and can be communicated orally, in writing or implied from conduct. In Taylor v Laird[6], the offeree must have knowledge of the offer for it to be valid.

Furthermore, an intention to enter into a legal relationship must be demonstrated as the parties must intend for their agreement to be legally binding as held in the case of Parker v Clark.[7]

Moving on, the rules relating to what does not constitute to an offer will be discussed. Within a contract, an offer must be distinguished from an invitation to treat (ITT). An invitation to treat is the first step in negotiations which may lead to the conclusion of a contract however this does not amount to an offer. A case to demonstrate this rule is Partridge v Crittenden[8] in which advertisements are invitations to treat.

An exception to this rule of advertisements is subjected to unilateral offers. This offer is made to the world at large as opposed to one specific party without the need for further negotiations and requires the offeree to perform a specific act.[9] A unilateral contract is formed when an individual offers to do a particular act in return for the performance of the act specified in the offer.[10] This suggests that acceptance does not have to be communicated and can be accepted by the performance of the act. A unilateral contract can be demonstrated in Carlil v Carbonic Smoke Ball Company[11]. Carbonic Smoke Ball company intended to test the effectiveness of the smoke ball remedy. The company advertised that they would offer a £100 reward to any individual who used the remedy and contracted the flu. The claimant once made aware of the offer accepted this when she purchased the remedy and followed the instructions. Upon contracting the flu, the claimant became eligible for the reward. The company’s offer to pay £100 in return for the use of the remedy was performed.

In regards to the end of a contract, an offer remains open until it is terminated. There are various ways a contract can be terminated for instance an offer can be revoked before acceptance takes place applying Payne v Cave[12].  An offer may also come to an end by lapse of set or reasonable time using the case law of Ramsgate Victoria hotel v Montefiore.[13] The case of Hyde v Wrench[14] presented the issue of counter offers. Where an offeree responds to an offer in which they make a different offer in known as a counter offer. The effect of this counter offer destroys the original offer so that it is no longer open for the offeree to accept.

Now that the rules of an offer have been established, the following stage is a corresponding acceptance which results in a binding agreement.

An acceptance can be defined as the final expression of assent to the terms of the offer and must be made in response to that offer.[15] A requirement of an acceptance is that it must be a mirror image to the terms specified by the offeror.[16] Therefore, an acceptance must correspond with the terms of the offer. This is known as the ‘mirror image rule’.

Furthermore, an acceptance must be made by the offeree as held in Boulton v Jones[17] and must communicated to the offeror applying Entores v Miles Far Eastern Corporation.[18] This acceptance must be also being in response to an offer.[19]

Finally, an acceptance must be communicated to the offeror in which the case Fenthouse v Bindley[20] concluded that silence cannot amount to an acceptance.

However, there are exceptions to this rule of the communication of acceptance.

The first exception relates to unilateral offers. Within this type of offer, it is not necessary for the claimant to tell the offeror that they have accepted. Referring back to the case of Carlil v Carbonic Smoke Ball[21], acceptance occurs once the other party has performed. The claimant was not bound to state she was accepting as she had performed by purchasing the smoke ball and contracting the flu.

Another exception is the ‘Postal Rule’. The case Adams v Lindsell[22] established the postal rule in which its application will be valid when both parties agree that the use of post will be a form of communication. This rule states that where a letter is correctly addressed and stamped, acceptance will take place once the letter is placed in the post box.

Now that the rules of both offer and acceptance are established, the efficiency of the offer and acceptance model will be evaluated.

According to McKendrick, the courts have come under criticism due to their attempt to analyse all contracts using offer and acceptance.[23] The traditional approach of identifying agreements implies that all contracts require an offer and acceptance. However, in some cases this has been inflexible and as a result, the courts either find an offer and acceptance using the long process of  ‘reasoning backwards’[24] (the court enforces the contract and then look for offer and acceptance from the conduct of parties) or use external evidence to find the existence of an agreement by ignoring the traditional approach.

Firstly, the traditional approach of offer and acceptance is inflexible because it ignores the reality of a potential situation by expressing that there has not been an agreement due to technical reasons.[25]

Lord Wilberforce’s view in New Zealand Shipping Co[26] [1975] AC 154 is that the traditional approach is ‘often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance and consideration’. This implies that not all facts of the contract are able to fit into the offer and acceptance model.

Lord Denning used this statement to support his view of identifying an agreement using a different approach besides the traditional method in Butler Machine Tool Co. ltd v Ex-cell-o Corporation[27]. Here Denning suggested that in order to identify an agreement, the circumstances as a whole, for instance the documents and conduct of the parties should be taken into account. He stated ‘In many cases…traditional…offer, counter-offer, rejection, acceptance and so forth… [are] out of date…[it is] better… to look at all the documents passing between the parties.” This perspective indicates that evidence beyond the offer and acceptance model should be taken into consideration when analyzing contracts in order to establish an agreement between the parties.

Denning further applied this same perspective in Gibson[28] in which he directed the court to “look at the correspondence as a whole and at the conduct of the parties and see there from whether the parties have come to an agreement on everything that was material”. Denning’s suggestion of a more flexible approach offers the opportunity of making sensible decisions as contrasted with the traditional approach.

In both instances, the final judgement was to remain the normal analysis of the traditional approach though where an offer and acceptance cannot be applied to a contract, Denning’s approach could be used as Lord Diplock at p. 297 acknowledged that there are some exceptions which do not fit into the normal analysis of offer and acceptance.

Secondly, the offer and acceptance model may not be applicable to every fact situation within a contract.

In the course of business, companies dealing with one another will use the standard of form contracts[29] as demonstrated in Butler Machine Tool Co Ltd.[30]

In similar cases where there is a ‘battle of forms’ an offer and acceptance may not be applicable because it could be artificial and impossible to look for a matching offer and acceptance due to prolonged negotiations over the terms. It can be argued that in such complicated cases, the only solution is to conclude that the parties have an agreement but not through and an offer and acceptance.[31]

Despite the flaws and inefficiency of the offer and acceptance model at times, this approach still remains to be the dominant authority as many contracts are susceptible to this analysis.[32] Some may debate that the traditional method has some benefit as the model provides a degree of certainty to both parties as each person understands they will not be contractually bound until there is an offer and acceptance.

Parties are able to rely on previous case law precedents in order to recognise and distinguish between and offer and invitation to treat or identify an acceptance instead of a counter offer.[33] Therefore, the traditional approach can be considered to be necessary.

However, the offer and acceptance model has limitations as there are other methods in which contracts can be analysed. An exception to the model is the case of Clarke v Dunravan (The Satanita).[34] Both parties entered in a yacht race pursuant to Yacht Racing Association rules which provided that if a yacht was damaged due to negligence, the negligent party must pay the damages. Lord Dunraven’s yacht (the Valkyrie II) was damaged by Clarke’s yacht (the Satanita). The issue here was whether Dunraven had to pay pursuant to the YRA rules. By entering the race on the YRA terms the competitors entered into a contract with each other on those terms – consequently Dunraven had to pay.

This case is recognized for not fitting into the typical pattern of the offer and acceptance model that normal law uses to identify an agreement. The courts here focused on the intention of the parties since the case involves facts that do not fall into the general framework of the rules of offer and acceptance.[35] 

Another case that does not follow the traditional approach is the decision held in the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh [2010] UKSC 14, [2010] 1 WLR 753.[36]

The claimant RTS, a supplier of automated machines for the food industry had been asked to manufacture and deliver a machine for the defendant Muller. The judgment delivered on behalf of the court analyses the formation of a contract, and the terms in which it was made, without any reference to “offer and acceptance”. An agreement was reached by the parties in outline and sought to have the contract formalized but went ahead. They now disputed whether an agreement had been created and as to its terms if so.[37]

This flexible approach takes a broad view of the negotiations between the parties to determine whether in the view of a reasonable third party, if an agreement was reached. A binding agreement had been reached based on an objective assessment of the parties’ intentions. The “Müller” analysis depends on taking a broader view of the negotiations between the parties to determine whether in the view of a reason third party is an agreement is reached.[38]  

A final criticism to the offer and acceptance model is that it may not reflect the negotiations between the party in which an agreement may be established. This strict approach had been created by legal academics and can be further criticised because the model bears little resemblance to how lay people i.e. individuals that do not possess specialist knowledge perceive the formation of a contract. [39]

In conclusion, the traditional approach will certainly remain a fundamental part of contract law when establishing an agreement however this method is ineffective on the basis that is it uncommercial within practise and inapplicable to certain scenarios. There are other methods in identifying an agreement besides the traditional way.

Table of cases

UK Cases

Adams v Lindsell 1818 1 B & Ald 681

Australian Woollen Mills Pty. Ltd. v. The Commonwealth [1954] HCA 20; (1954) 92 CLR 424]

Boulton v Jones [1857] 27 LJ Ex 117

Butler Machine Tool v Ex-Cell-O Corporation [1979] 1 WLR 401

Clarke v Dunravan (The Satanita) [1897] AC 59

Entorres v Miles Far East [1955] 2 QB 327

Felthouse v Bindley [1862] EWHC CP J35

G Percy Trentham Ltd v Archital Luxfer [1993] 1 Lloyd’s Rep 25

Gibson v Manchester City Council [1979] UKHL 6

Hyde v Wrench [1840] 3 Beav 334

New Zealand Shipping v Satterthwaite [1975] AC 154

RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh [2010] UKSC 14, [2010] 1 WLR 753

Storer v Manchester City Council [1974] 1 WLR 1403

Taylor v Laird [1856] 25 LJ Ex 239.

Parker v Clark [1960] 1 WLR 286.

Partridge v Crittenden [1968] 1 WLR 1204.

Payne v Cave [1789] 3 TR 148

Bibliography

Chen-Wishart, M, Contract Law (2^nd edn, Oxford University Press 2008)

Clarke, J. ‘Clarke v Dunraven’ (Website 2010-2013) <http://www.australiancontractlaw.com/cases/clarke.html> accessed April 2017

Gilles, P, Business Law (12^th edn, The Federation Press 2004)

McKendrick, E, Contract Law Text, Cases and Material (Oxford University Press 2012)

Poole, J, Textbook on Contract Law (13^th edn, Oxford University Press 2016)

Stone, R, ‘Forming Contracts without Offer and Acceptance, Lord Denning and the

Harmonisation of English Contract Law’ [2012] 4 Web JCLI.

Swarb, ‘Rts Flexible Systems Ltd V Molkerei Alois Muller Gmbh And Company Kg (Uk Production): Sc 10 Mar 2010’ (Website n.d.) <http://swarb.co.uk/rts-flexible-systems-ltd-v-molkerei-alois-muller-gmbh-and-company-kg-uk-production-sc-10-mar-2010/> accessed 12 April 2017

Taylor D, Taylor R, Contract Law Directions (5edn, Oxford University Press)

The Law School Authority, ‘Contracts Law: Offer and Acceptance’ (Website 2012) <http://www.4lawschool.com/contracts101/offer.htm> accessed April 2017

Trans Legal ‘Unilateral Offer’ (Trans Legal, 2017) <https://www.translegal.com/legal-english-dictionary/unilateral-offer> Accessed 7 April 2017

Treital, GH. The Law of Contract (10th ed.)

‘I [BP0150849] declare that this piece of work contains [2363] words. I have read and fully understood the University Policy relating to Academic Misconduct as cited on the VLE.’

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[1] Richard Stone, ‘Forming Contracts without Offer and Acceptance, Lord Denning and the Harmonisation of English Contract Law’ [2012] 4 Web JCLI.

[2] Contract Law: Text, Cases, and Materials by Ewan McKendrick 4

[3] Treital, GH. The Law of Contract (10th ed.). p. 8.

[4] Gibson v Manchester City Council [1979] UKHL 6

[5] Storer v Manchester [1974] 1 WLR 1403

[6] Taylor v Laird [1856] 25 LJ Ex 239.

[7] Parker v Clark [1960] 1 WLR 286.

[8] Partridge v Crittenden 1968 1 WLR 1204.

[9] Trans Legal ‘Unilateral Offer’ (Trans Legal, 2017) <https://www.translegal.com/legal-english-dictionary/unilateral-offer> Accessed 7 April 2017

[10] Australian Woollen Mills Pty. Ltd. v. The Commonwealth [1954] HCA 20; (1954) 92 CLR 424]

[11] Carlil v Carbonic Smoke Ball and Company [1892] EWCA Civ 1

[12] Payne v Cave (1789) 3 TR 148

[13] Ramsgate Victoria Hotel v Montefoire (1866) LR 1 Ex 109.

[14] Hyde v Wrench 1840 3 Beav 334

[15] Jill Poole Textbook on contract law 28

[16] Hyde v Wrench 1840 3 Beav 334

[17] Boulton v Jones (1857) 27 LJ Ex 117

[18] Entorres v Miles Far East [1955] 2 QB 327

[19] R v Clarke (1927) 40 CLR 227

[20] Felthouse v Bindley [1862] EWHC CP J35

[21] Carlil v Carbonic Smoke Ball and Company [1892] EWCA Civ 1

[22] Adams v Lindsell 1818 1 B & Ald 681

[23] Ewan McKendrick (2012). Contract Law Text, Cases and Materials. Great Britain: Oxford University Press. p. 85

[24] G Percy Trentham Ltd v Archital Luxfer [1993] 1 Lloyd’s Rep 25

[25] Jill Poole Textbook on Contract Law 34

[26] New Zealand Shipping Co v A M Satterthwaite & Co Ltd, The Eurymedon [1975] AC 154

[27] Butler Machine Tool v Ex-Cell-O Corporation [1979] 1 WLR 401

[28] Gibson v Manchester City Council [1979] UKHL 6

[29] The Law School Authority, ‘Contracts Law: Offer and Acceptance’ (Website 2012) <http://www.4lawschool.com/contracts101/offer.htm> accessed April 2017

[30] Butler Machine Tool v Ex-Cell-O Corporation [1979] 1 WLR 401

[31] Taylor D, Taylor R, Contract Law Directions (5edn, Oxford University Press)

[32] Mindy Chen-Wishart, Contract Law (2edn, Oxford) 98

[33] Taylor D, Taylor R, Contract Law Directions (5edn, Oxford University Press) http://global.oup.com/uk/orc/law/contract/taylor_directions5e/student/guidance/ch02/

[34] Clarke v Dunravan (The Satanita) [1897] AC 59

[35] Julie Clarke, ‘Clarke v Dunraven’ (Website 2010-2013) <http://www.australiancontractlaw.com/cases/clarke.html> accessed

[36] RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh [2010] UKSC 14, [2010] 1 WLR 753

[37] Swarb, ‘RTS FLEXIBLE SYSTEMS LTD V MOLKEREI ALOIS MULLER GMBH AND COMPANY KG (UK PRODUCTION): SC 10 MAR 2010’ (Website n.d.) <http://swarb.co.uk/rts-flexible-systems-ltd-v-molkerei-alois-muller-gmbh-and-company-kg-uk-production-sc-10-mar-2010/> accessed 12 April 2017

[38] Richard Stone, ‘Forming Contracts without Offer and Acceptance, Lord Denning and the Harmonisation of English Contract Law’ [2012] 4 Web JCLI.

[39] The Law School Authority, ‘Contracts Law: Offer and Acceptance’ (Website 2012) <http://www.4lawschool.com/contracts101/offer.htm> accessed April 2017