Chapter 2: The making of contracts (1) offer and acceptance

Chapter 2

The making of contracts (1) offer and acceptance

Essential reading for Chapters 2 to 7
It is strongly recommended that you should buy your own copy of:
McKendrick, E. Contract Law. (Basingstoke: Macmillan, 2000) fourth edition [ISBN 0 3337 9427 3].

for everyday use as the foundation text to be read, re-read and thoroughly digested. You should also buy a casebook; the one we recommend is:
Poole, J. Casebook on Contract Law. (London: Blackstone, 2001) fth edition [ISBN 1 8417 4217 1].

Because these books are not intended to be as comprehensive in their coverage of the materials as the traditional University undergraduate texts for law, you will need to refer from time to time to the more advanced texts mentioned below.

Further reading
The more detailed textbook currently considered to be best suited to the needs of external students is:
Furmston, M.P. Cheshire, Fifoot and Furmstons Law of Contract. (London: Butterworths, 2001) 14th edition [ISBN 0 4069 3058 9].

You may also wish to consult a more detailed casebook. Here the choice lies between:
Beale, H.G., W.D. Bishop and M.P. Furmston Contract: Cases and Materials. (London: Butterworths, 2001) fourth edition [ISBN 0 4069 2404 X]. Smith J.C. Smith and Thomas: a Casebook on Contract. (Sweet & Maxwell, 2000) 11th edition [ISBN 0 4217 1690 8].

Smith and Thomas is a traditional casebook concentrating on purely legal materials. The other takes a wider, some would say a more adventurous, approach and seek to make the student aware of the wider context in which legal issues arise. The authors Beale, Bishop and Furmston are particularly interested in economic considerations and how the law works in practice. Our advice would be to use Beale, Bishop and Furmston in the rst case, with the others in reserve, but it is important that you resort to the book which you nd easiest to read. It is not suggested that you must purchase the books mentioned under Further reading: they should be available for reference in your college or other libraries. Other books
Treitel Law of Contract. (Sweet & Maxwell/Stevens & Sons, 1999) 10th edition [ISBN 0 4216 3460 X]. This is a very detailed and comprehensive account of the law which may be referred to on occasion for elaboration of difcult or controversial points.

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Introduction to the common law

Beatson Ansons Law of Contract (Oxford University Press 2002) 28th edition [ISBN 0 1987 6576 2]. This is a very clear and comprehensive account of the modern law of contract which deals well with difcult points.

At the other end of the scale, many shorter books have been published in recent years aimed at the student market. If you are using McKendrick and Poole, you will generally not nd that there is much benet to be gained from these other works. However, for the particular purpose of practising the art of writing examination answers, you may nd it helpful to have:
Brown and Chandler Law of Contract in Blackstones Law Questions and Answers Series (London: Blackstone, 1996) third edition [ISBN 1 84174 0990 3]: but do not be misled into thinking that this will provide you with model answers which can be learnt by heart and reproduced from memory in the examination. Every examination question requires a specic answer and pre-packaged answers do not serve the purpose.

General remarks
The law of contract is concerned with the enforcement of promises. The defendant is alleged to be under a liability to the plaintiff because he promised to do something and has not done it, or has not done it properly. The relationship between the law of contract and tort will be discussed later in the context of Chapter 8. The consensus theory of contract and objective interpretation Formerly writers and courts placed much emphasis on the need for a meeting of minds or consensus ad idem for the making of contracts. This reliance on actual intention was an expression of laissez-faire1 philosophies and a belief in unfettered freedom of contract. This subjective approach to the making of contracts has now largely been abandoned, though its inuence can still be detected in certain rules. In general, what matters today is not what meaning a party actually intended to convey by his words or conduct, but what meaning a reasonable person in the other partys position would have understood him to be conveying. This is known as the process of objective interpretation. Hartog v Colin and Shields (1939) Centrovincial Estates v Merchant Investors (1983).

Laissez-faire: the theory of government abstention from interference in the workings of the market or courts.

Finding the intention of the parties You will soon discover that, in spite of the disappearance of the subjective approach to the making of contracts, the law frequently uses the intention of the parties as a test for resolving difculties. It is most important to appreciate that this does not refer to the parties actual intentions (which may well have been conicting) but to the proper inference from the facts as a whole. You should image that the courts infer intention from the outside (like a y sitting on the wall) watching events and inferring intention from statements and actions. When deciding what is the proper inference, a judge has considerable room for manoeuvre and is in reality reaching a conclusion based upon experience, tempered by the justice of the case as much as upon any inference in the strict sense. In commercial situations the expectations of the parties tend to follow a relatively xed pattern which helps the courts draw the necessary inferences. For an instructive illustration of this process in action see the judgment of Denning LJ in: Oscar Chess v Williams (1957)

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Chapter 2: The making of contracts (1) offer and acceptance

where the court had to decide whether a warranty was intended. Note that Lord Denning denes the test by reference to an intelligent bystander, but it is clear that it is the courts responsibility to draw the inference and that the intelligent bystander is merely an alias for the judge. Most promises are made as part of bilateral agreements (i.e. agreements between two parties which involve undertakings, i.e. promises, on both sides) so that, for practical purposes, the question, Has the defendant promised? usually becomes, Have the parties reached agreement? This question could, in each case, be answered as a matter of impression based on the facts. In practice, by the development of the rules of offer and acceptance, the courts have developed a set of criteria by which to answer the question, Has agreement been reached? These rules can best be understood by taking them in simple stages and by remembering always that it is not the subjective intentions of the parties which determine the legal effect of their words or actions but the objective inference by the courts of these intentions. Nowhere is this more crucial than in relation to the very rst question, namely: What is an offer?

The offer
Essential reading
McKendrick, E. Contract Law. (Basingstoke: Macmillan, 2000) fourth edition [ISBN 0 3337 9427 3] 2642. Poole, J. Casebook on Contract Law. (London: Blackstone, 2001) fth edition [ISBN 1 8417 4217 1] 2439.

Further reading
Furmston, M.P. Cheshire, Fifoot and Furmstons Law of Contract. (London: Butterworths, 2001) 14th edition [ISBN 0 4069 3058 9] 3037.

There can be no acceptance, and therefore no agreement, unless there was an offer in the rst place. An offer exists whenever the objective inference from the offerors words or conduct is that she intends to commit herself legally, without further negotiation, to the terms she is proposing if the offeree says Yes. See: Gibson v Manchester City Council (1979): note the rm rejection by the House of Lords of the Court of Appeals unorthodox approach to offer and acceptance.

In some situations the analysis may be rather articial but is used nevertheless because it provides a basis for a just decision. See for example: Clarke v Dunraven (1897) where the courts inferred a number of different contacts..

For a recent example of a contract made by conduct which the court did not nd necessary to analyse precisely into offer and acceptance, see: G. Percy Trentham Ltd v Archital Luxfer Ltd (1993): after full performance it was implausible to argue that there was no evidence of a contract ever having been concluded. Inland Revenue Commissioners v Fry (2001) the cashing of a cheque was held not to have amounted to acceptance of a compromise offer by the taxpayer.

By making an offer, the offeror is surrendering the initiative to the offeree: he is leaving it to the offeree to decide whether there is to be a contract or not. In a number of situations, however, the courts have concluded that general expressions of

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Introduction to the common law

willingness to do business should not pass the initiative to the other party, saying that the defendant was merely supplying information or making an invitation to treat. See on the former: Harvey v Facey (1893) Clifton v Palumbo (1944)

but contrast: Bigg v Boyd Gibbins (1971).

With regard to invitations to treat, see the cases on shop window displays, self-service shops, catalogues and advertisements, namely: Partridge v Crittenden (1968) Fisher v Bell (1961) Pharmaceutical Society of GB v Boots (1953) Grainger v Gough (1896) Harris v Nickerson (1873).

In all these cases the court is being asked to balance one partys expectations, such as those of the customer who thinks he will obtain goods as displayed in the shop window, against the need of the other party (who has raised those expectations) for protection against unreasonable demands. You could usefully ask yourself whether the courts have not been too reluctant to draw the inference of an offer in some of these cases. Note, however, the courts readiness to infer an offer in certain categories of advertisement: the advertisement of rewards and (very exceptionally) other offers to all the world: Carlill v Carbolic Smoke Ball (1893) Wilkie v London Passenger Transport Board (1947).

Note also the controversial decision in: Warlow v Harrison (1859) which conrmed the existence of a collateral contract in auction situations. The facts concerned the advertisement of an auction sale as being without reserve. Is this decision consistent with Harris v Nickerson? Warlow v Harrison was followed in Barry v Heathcote Ball & Co (Commercial Auctioneers) Ltd (2001) where an auctioneer who had put up goods as without reserve was held to have made a collateral contract with the highest bidder. The device of the collateral contract is relatively rare. It can take the form of, When you make me an offer I will promise not to take the item out of the sale. The existence of a collateral contract does not affect the ability to accept or reject the main offer. This was considered in Society of Lloyds v Twin (2000). See also: Harvela Investments v Royal Trust of Canada (1986) where the invitation to treat included a binding commitment to accept an offer which satised the stated conditions. Blackpool and Fylde Aero Club v Blackpool BC (1990) where damages were awarded for breach of an implied undertaking in the invitation to treat to consider all conforming tenders.

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Chapter 2: The making of contracts (1) offer and acceptance

Activities
1. How does an invitation to treat differ from an offer? 2. How were the facts of Carlill v Carbolic Smoke Ball different from the normal situation involving an advertisement? 3. How would an English court have decided the case of Lefkowitz v Great Minneapolis Surplus Stores? 4. Does a railway timetable constitute an offer?

Communication of the offer

Essential reading
McKendrick, E. Contract Law. (Basingstoke: Macmillan, 2000) fourth edition [ISBN 0 3337 9427 3] 3142. Poole, J. Casebook on Contract Law. (London: Blackstone, 2001) fth edition [ISBN 1 8417 4217 1] 1921.

Further reading
Furmston, M.P. Cheshire, Fifoot and Furmstons Law of Contract. (London: Butterworths, 2001) 14th edition [ISBN 0 4069 3058 9] 3340.

An offer is said to be ineffective, and thus incapable of acceptance, unless communicated to the offeree. The principal application of this rule is in reward cases, where the general view is that a reward cannot be claimed, even though the act for which the reward was offered has been performed, if the person performing the act was unaware at the time that a reward was being offered. See: R v Clarke (1927) Williams v Carwardine (1833).

Note also: Tinn v Hoffmann (1873) on cross-offers.

Activities
1. Was the decision in R v Clarke inuenced by the consensus theory of contract? Should it have been? 2. Do you think the decision might have been different if Clarke had been a poor but honest widow?

Acceptance
Essential reading
McKendrick, E. Contract Law. (Basingstoke: Macmillan, 1997) third edition [ISBN 0 3337 1980 8] 4253. Poole, J. Casebook on Contract. (London: Blackstone, 2001) fth edition [ISBN 1 8417 4217 1] 4059.

Further reading
Furmston, M.P. Cheshire, Fifoot and Furmstons Law of Contract. (London: Butterworths, 2001) 14th edition [ISBN 0 4069 3058 9] 4061.

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Introduction to the common law

Acceptance occurs when the offerees words or conduct give rise to the objective inference that the offeree assents to the offerors terms. When the offeree queries or seeks to change the terms, it may be held that the offeree has passed the initiative back to the offeror by making a counter-offer which destroys the original offer. Contrast: Hyde v Wrench (1840) Stevenson, Jacques v McLean (1880).

Note also: Butler Machine Tool v Excell-o (1979) adopting the last shot rule in the battle of forms.

Activities
1. A wrote to B offering 300 bags of cement at 10 per bag. B wrote in reply that he was very interested but needed to know: a. whether it was Premium Quality cement b. whether the price included delivery to his (Bs) yard. The following morning, soon after A read Bs letter, B heard a rumour that the price of cement was about to rise. He immediately sent a fax to A stating, Accept your price of 10 for Premium Quality. Assuming that the cement actually is Premium Quality, is there a contract? (If so, does the price include delivery?) 2. What is the position under the last shot rule if, after the exchange of forms, the seller fails to deliver the goods?

Communication of the acceptance

Essential reading
McKendrick, E. Contract Law. (Basingstoke: Macmillan, 2000) fourth edition [ISBN 0 3337 9427 3] 4251. Poole, J. Casebook on Contract Law. (London: Blackstone, 2001) fth edition [ISBN 1 8417 4217 1] 4860.

Further reading
Furmston, M.P. Cheshire, Fifoot and Furmstons Law of Contract. (London: Butterworths, 2001) 14th edition [ISBN 0 4069 3058 9] 5261.

Acceptance is not effective as a general rule unless communicated to the offeror but there are several important exceptions. See: Brogden v Metropolitan Railway (1877), acceptance by conduct Carlill v Carbolic Smoke Ball (1893).

In the latter case, communication of the acceptance may be said to be waived, because it would be unreasonable of the offeror to rely on the absence of a communication which would have been superuous or which no reasonable person would expect to be made. The offeror cannot, however, waive communication if that would be to the detriment of the offeree. See: Felthouse v Bindley (1862).

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Chapter 2: The making of contracts (1) offer and acceptance

Activities
1. What was the detriment to the offeree in Felthouse v Bindley? 2. Could an offeror use this case to avoid liability?

The most important exception relates to postal communication and is dealt with in the following section.

Postal communication
Essential reading
McKendrick, E. Contract Law. (Basingstoke: Macmillan, 2000) fourth edition [ISBN 0 3337 9427 3] 4751. Poole, J. Casebook on Contract Law. (London: Blackstone, 2001) fth edition [ISBN 1 8417 4217 1] 4954.

Further reading
Furmston, M.P. Cheshire, Fifoot and Furmstons Law of Contract. (London: Butterworths, 2001) 14th edition [ISBN 0 4069 3058 9] 5761.

When the parties communicate by letter, the interval of time between the posting of a letter and its receipt by the addressee and the possibility of a letters being delayed in the post or lost altogether gives rise to problems. Although maintaining the general principle that a letter is effective only if and when it arrives, in all other cases, the courts departed from this principle in the case of letters (or telegrams) of acceptance, see: Adams v Lindsell (1818) Household Fire Insurance v Grant (1879).

These decisions establish that acceptance is complete when posted, thus putting the risk of delay and loss on the offeror, at least in certain situations. Although often called a rule, the principle of these cases is really an exception to the general requirement of actual communication which will prevail where the circumstances or the terms of the offer show that it should, see: Holwell Securities v Hughes (1974).

Note also the courts refusal to extend the postal principle to acceptance by telex: Entores v Miles Far East Corp (1955) Brinkibon v Stahag Stahl (1982).

Activities
1. What reasons have been given by the courts for the postal acceptance rule? Are they convincing? 2. Is there such a fundamental difference in practice between communicating by telex and sending a telegram? 3. What rule do you think the courts would adopt for acceptance sent by fax or e-mail?

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Introduction to the common law

Method of acceptance
Essential reading
McKendrick, E. Contract Law. (Basingstoke: Macmillan, 2000) fourth edition [ISBN 0 3337 9426 3] 42. Poole, J. Casebook on Contract Law. (London: Blackstone, 2001) fth edition [ISBN 1 8417 4217 1] 4648.

Further reading
Furmston, M.P. Cheshire, Fifoot and Furmstons Law of Contract. (London: Butterworths, 2001) 14th edition [ISBN 0 4069 3058 9] 5455.

The offeror may state that the acceptance should be conveyed to him in a particular manner, but must the offeree comply with this instruction? See: Eliason v Henshaw (1819) Manchester Diocesan Council for Education v Commercial and General Investments (1970).

The required method for communicating acceptance may also be inferred from the manner of making the offer. See: Quenerduaine v Cole (1883).

Acceptance can sometimes be inferred from conduct, see: Brogden v Metropolitan Rly Co (1877) where coal was supplied to a railway company without the terms of the written agreement being xed. Though the conduct must point clearly to the existence of the contract, see: IRC v Fry (2001) where the cashing of a cheque by the IRC was held not to be acceptance by them of a compromise offer by the taxpayer. Activities
1. Where a method of acceptance has been prescribed by the offeror, may the offeree choose to use another (equally effective) method of communicating his acceptance? Whose interest should prevail? 2. Can an offer made by fax be accepted by letter?

Change of mind
Essential reading
McKendrick, E. Contract Law. (Basingstoke: Macmillan, 2000) fourth edition [ISBN 0 3337 9427 3] 5153. Poole, J. Casebook on Contract Law. (London: Blackstone, 2001) fth edition [ISBN 1 8417 4217 1] 4648.

Further reading
Furmston, M.P. Cheshire, Fifoot and Furmstons Law of Contract. (London: Butterworths, 2001) 14th edition [ISBN 0 4069 3058 9] 6267.

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Chapter 2: The making of contracts (1) offer and acceptance

In principle there is no legal commitment until a contract has been concluded by the acceptance of an offer and, up to that point, either party is free to change his mind and withdraw from the negotiations, see: Offord v Davies (1862) Routledge v Grant (1828).

Note how the requirement of actual communication is maintained in considering whether an offer has been revoked, see: Byrne v Leon van Tienhoven (1880).

Must the revocation be communicated by the offeror or merely to the offeree? See: Dickinson v Dodds (1876).

Note the special problems of withdrawal of an offer of a reward or other unilateral contract: Errington v Errington (1952) Daulia v Four Millbank Nominees (1978) Shuey v US (1875).

Different problems arise when it is the offeree who changes her mind: for example if, after posting a letter of acceptance, she informs the offeror by telephone, before the letter arrives, that she rejects the offer. Should the act of posting an acceptance prevail over the information actually conveyed to the offeror? In the absence of English cases the books refer to a number of cases from other jurisdictions see Dunmore v Alexander (1830: Scotland) and Wenkheim v Arndt (1873: New Zealand). However, when citing them, it is important to emphasise that they are not binding (and indeed some have very little persuasive authority) so that the question must be answered primarily as a matter of principle. Activities
1. Why can the offeror break his promise to keep the offer open for a stated time? 2. In a unilateral contract, when has the offeree started to perform the act (so as to prevent revocation by offeror)? Does the offeror need to know? 3. How can the offeror inform all potential claimants that the offer of a reward has been cancelled? 4. Will there be a contract if the offeree posts a letter rejecting the offer but then informs the offeror by telephone, before the letter arrives, that he accepts the offer?

Lapse of offer
Essential reading
Furmston, M.P. Cheshire, Fifoot and Furmstons Law of Contract. (London: Butterworths, 2001) 14th edition [ISBN 0 4069 3058 9] 6769.

The offeror may set a time limit for acceptance but, even without a limit, the offeree cannot let the offeror wait indenitely. The offeror is entitled to assume that acceptance will be made fairly promptly or not at all. However, because of the ease with which offers can be revoked, it is rarely necessary to resort to the principle of lapse, but see: Ramsgate Victoria Hotel v Monteore (1866).

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Introduction to the common law

Summary
Essential reading
McKendrick, E. Contract Law. (Basingstoke: Macmillan, 2000) fourth edition [ISBN 0 3337 9427 3] 5355.

The detailed rules of offer and acceptance provide a ready source of problems and difculties on which an examiner can draw, for example: Is a statement an offer or an invitation to treat? Is there a counter-offer or mere enquiry? Does a posted acceptance fall outside the postal rule? Was the offeror or offeree free to have second thoughts? When is a telephone call recorded on an answering machine actually received?

There are also several everyday transactions where the precise contractual analysis is not immediately apparent the motorist lling up with petrol (gas), the passenger riding on a bus, the tourist buying a ticket for the underground (subway) from a machine and so on. The fact that some of these problems are not covered by authority does not make them any less attractive to an examiner, indeed, the opposite might well be the case. The key to most problems of offer and acceptance is the idea that the law should give effect to actual communication wherever possible.

Learning outcomes
By the end of this chapter and the relevant reading, you should be able to: distinguish between an offer and an invitation to treat dene and apply the requirements for acceptance discuss the scope and effect of the postal rule for acceptance explain the effect of change of mind by either party.

Sample examination question

Cyril, a stamp dealer, had a rare Illyrian ve cent blue for sale. He wrote to Davina, a collector who specialises in Illyrian stamps, asking whether she would be interested in purchasing it. Davina wrote in reply, I am willing to pay 500 for the blue; I will consider it mine at that price unless I hear to the contrary from you and will collect it from your shop on Friday next week. Advise Davina as to the legal position: a. if Cyril disregarded Davinas letter and sold the stamp to Eric for 600 Note: in two-part questions such as this you must answer both parts unless instructed clearly that candidates are to answer either a or b.
2

b. if Cyril put the stamp on one side in an envelope marked Sold to Davina but 2 Davina decided that she no longer wished to buy it.

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