1 - Offer and acceptance

Give an overview of offer and acceptance.

Please see attached.

What are the four elements required to form a legally binding contract?

Offer and acceptance are two of the four elements required to form a legally binding contract. The other elements are consideration and the intention to create legal relations, and are considered later in this book (see chapter 2 and chapter 3). In order to form a binding contract, the offeror must make an offer, which is accepted by the offeree.

Exam warning: although there are usually four elements required to form a legally binding contract, be sure that when a question is asking you to focus on offer and acceptance that you focus on these elements, rather than the intention to create legal relations and consideration.

What is the objective test?

The courts generally use an objective test to determine the existence of a binding agremeent between the parties. This means that the courts consider how the interaction between the parties look to a reasonable person.

The objective test: the objective test is the test used by the courts to determine whether an agreement has been formed. The courts analyse the interaction between the parties from the point of view of a reasonable person.

What is the subjective test?

In some specified circumstances, the courts apply a subjective test instead of an objective test to determine the existence of an agreement. The subjective test is applied where the offeree knew, or ought to have known, that the offeror has made a mistake. For example, where the offeree knows that the offeror does not intend the terms of the offer to be those that hte natural meaning of the words would suggest. It is important to remember this excepition to the general rule because if it can be shown that the offeree knew, or ought to have known, that the offeror is mistaken, the offeror is not bound by the terms of the contract. Note that this exception only applies if the mistake relates to a term of the contracct (such as the price) rather than a collateral matter (such as the colour of an item).

What is an offer?

For the SQE1 assessment, you must be able to determine whether a communication from a person is an offer or an invitation to treat. Only an offer can be accepted to form a legally binding contract.

Offer: an offer is communication from a person in which that person agrees to be legally bound to contract with another party (the offeree) on specified terms if the offeree accepts.

Define offeror.

Offeror: the person who makes the offer is the offeror.

Define invitation to treat.

Invitation to treat: an invitation to treat is a communication that a person would like to negotiate or discuss the terms on which goods may be sold, or services may be provided, that will lead to contract at a later date.

Which words may identify an invitation to treat?

Specific words used in communications help us determine whether a communication is an offer or an invitation to treat. For example, the words ‘may be prepared to sell’ are unlikely to be viewed as an offer. This is because the phrase ‘may be prepared to sell’ is conditional, and does not oblige the statement-maker to sell if the other party replies ‘yes’. In other words, it is not a firm commitment from the statement-maker. This conditional nature is a key element of an invitation to treat.

Specific situations discused next.

What are specific situations of invitations to treat?

Examples of invitation to treat

Specific situation: general rule: explanation

• Advertisements

  • Invitation to treat

    • The general rule is that advertisements are invitations to treat. The person who reads the advertisement should make an offer that the advertiser can accept or reject.

    • The logic for this approach is that if an advertisement is treated as an offer, a person could accept it to form a legally binding contract. This would oblige the advertiser to supply the advertised goods to whoever accepted the offer, or face a claim for breach of contract. Classifying advertisements as invitations to treat reflects business common sense by allowing the supplier to decide whether to make a legally binding contract with the parties who wishes to buy the goods in an advertisement. The same principle applies to wine lists and other lists of goods from which a customer can make an order.

    • Note the exception to the general rule that applies to certain advertisements that are unilateral offers. See identifying an offer.

• DIsplay of goods

  • Invitation to treat

    • Goods on display in a shop are an invitation to treat, not an offer. The offer is made by the customer who wishes to buy them, and the shopkeeper can accept or reject this offer.

• Websites

  • Invitation to treat

    • Generally, a website through which goods can be bought is an invitation to treat. It is the order made by the person wishing to buy through the website that is the offer.

• Auction sales

  • Invitation to treat

    • An auctioneer’s request for bids at an auction is an invitation to treat, even when it refers to lots being ‘offered for sale’. The same rule applies to an advertisement that an auction is being held. A bidder’s offer is accepted by the auctioneer when the auctioneer taps the hammer down. But note the exception in respect of auctions ‘without reserve’. See identifying an offer.

• Tenders (requestes for quotes, and bids)

  • Invitation to treat

    • The person making the requests for quotes (typically this is the person who organises the tender) can decide whether to accept the bid (offers) that he receives

    • But note the exception to the general rule in respect of tenders that promise to accept the most competitive bid amounts; and promise to consider bids that conform to the tender conditions. Such tenders are unilateral offers. See identifying an offer.

Exam warning: when you identify a clue in the question, for example an advertisement, and the general rule is that an advertisement is an invitation to treat, make sure that you stress-test your initial conclusion and check whether an exception to the general rule applies, which could change your answer.

Revision tip: when analysing scenarios, try putting yourself in their shoes. If you were to tell someone that you may be selling your dog, would you expect someone who responded with the words yes I will buy it to have formed a legally binding contract that obliges you to sell your dog to them? The answer is no.

What are the wrods that indicate an offer?

Words, and the intention of the person who makes the communication, help the courts (and us!) to identify whether a communication is an offer or an invitation to treat. Which criteria do the courts use to identify an offer?

• The first key requirement of an offer is that the communication must be precise enough, with no further details to be agreed, so that the person to whom it is addressed can answer ‘Yes’ to form a binding contract

• The second requirement is that the person making the communication must have the intention to be bound. The courts decide whether such intention exists through an objective analysis of the words used in the communication.

The case of Storer v Manchester City Council [1974] 1 WLR 1403 is a good example of an offer. Manchester City Council sent Storer an agreement for sale and asked him to sign the agreement and return it to the council if he accepted the offer to buy. The court held that this language was certain, and showed a clear intention to be bound if the offeree signed the agreement and returned it, so it was an offer.

Further examples of offers provided next.

What are some examples of offers?

Examples of offers

Specific situation: general rule: explanation

• Unilateral advertisements

  • Offer

    • Unilateral advertisements are an exception to the general rule that advertisements are invitations to treat. An example of an unilateral advertisement is where an offeror makes a promise in exchange for the offeree performing an act, for example, a promise in exchange for the offeree performing an act, for example, a promise of a reward for the person who finds a lost cat. The offeree is not obliged to perform the act, but if the offeree performs the act and finds the lost cat, he will have accepted the offer and will be entitled to the rewards that was offered. Another example of a unilateral advertisement would be The Best Insurance Company advertising free holiday insurance to a person who books a holiday with a company in its network. Such an advertisement would be a unilateral offer of free holiday insurance that can be accepted by any person who performs the specified act (in this case, booking the hoiliday with a network company of The Best Insurance Company).

• Auctions ‘without reserve’

  • Offer

    • Auctions ‘without reserve’ are categorised as unilateral offers. In other words, they are a promise to sell the goods being auctioned to the highest bidder in the auction.

• Tenders to accept the most competitive bid, and to consider tenders that conform to the bid conditions

  • Offer

    • Tenders to accept the most competitive bid are treated as unilateral offers that are accepted by the party who submits the most competitive bid to form a legally binding contract. In addition, a tender that promises to consider bids that conform to the tender conditions is a unilateral offer that is accepted by any person who submits a bid that confirms to the tender conditions to form a legally binding contract.

• Automatic vending machines

  • Offer

    • Goods displayed or offered by vending machines are offers. A person who puts money in the vending machine, or pays by card, accepts the offer being made to form a legally binding contract.

What are bilateral and unilateral offers?

It is critical that you are able to identify the difference between bilateral offers and unilateral offers. In a bilateral offer scenario, an offer (or promise) is exchanged for an offer (or promise). For example, Olga promises to pay £10 for a book in exchange for Bogdan agreeing to sell Olga the book for £10. By contract, in a unilateral offer scenario, Bogdan may offer to sell the book to the first person who brings him £10. Olga is not obliged to bring Bogdan £10, but if she chooses to bring Bogdan £10 and this is the first person to do so, Bogdan will be bound to sell the book to Olga. Make sure you understand these important terms.

Bilateral offer: a bilateral offer is an offer or promise in exchange for an offer or promise

Unilateral offer: a unilateral offer is an offer in exchange for a specified act, made either to a specific person, or to a wider group of persons, including to the public.

What was the decision in Carlill?

Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256 CA - the Court of Appeal held that the claimant was entitled to the £100 on the grounds that the advertisement was a unilateral offer that the claimant had accepted by the act of buying the medical product and using it in the prescribed way to form a legally binding contract.

Can a person accept an offer if he does not know about it?

In order to be effective, an offer must be communicated to the offeree (a person cannot accept an offer if he does not know about it). So a person who finds a lost cat and returns it to its owner will only be able to claim any reward offered for the lost cat if the person knew about the offer when he returned the lost cat.

Define acceptance.

Once you have identified an offer, you must be able to determine whether there has been an acceptance of the offer. The ‘mirror-image’ rule is a helpful principle to apply to work out whether an offer has been accepted. If the response from the offeree is not the mirror image of the offer, for example, because the offeree has introduced a new term, then it is not a valid acceptance.

Acceptance: an acceptance is the complete agreement to the terms of the offer.

Define mirror-image rule.

Mirror-image rule: the mirror-image rule means that an acceptance must be exactly the same as the offer to which it relates.

Can acceptance be made through conduct?

Note that acceptance can be made through words or by conduct (what the offeree does). Conduct is a key issue because it means that where a person who receives an offer does not communicate a response in writing or orally but nonetheless starts to perform his obligations in accordance with the terms of the offer, this performance will amount to acceptance of the offer by conduct.

What happened in Brogden?

A sent a draft contract to B. B fills in the name of the arbitrator who will resolve any disputes that arise, marked the draft as approved and sent it back to A. A receives the draft and put it in a file. Both A and B starts to perform their respective obligations under the terms of the draft contract. Has a contract been concluded between A and B?

The answer is yes. This example is based on the scenario in Brogden v Metropolitan Railway Co (1876-1877) LR2 App CA 666 HL. The House of Lords held that Party B made a counter-offer to Party A by filling in the name of the arbitrator and sending him the contract. The fact that Party A started to perform his obligations after receiving the contract was held to mean that Party A had accepted Party B’s offer by conduct to form a legally binding contract.

What is a counter-offer?

An attempt by the offeree to introduce new terms when responding to an offer is a counter-offer. A counter-offer terminates an offer so that the offeree can no longer accept it. But the new counter-offer can be accepted by the person to whom it is addressed to form a binding contract. See also the termination of an offer.

Counter-offer: a counter-offer is a response to an offer that introduces new terms to what is offered. A counter-offer is not an acceptance, and destroys the original offer, which can no longer be accepted by the person who makes the counter-offer.

What is the difference between a counter-offer and a request for flexibility in payment terms?

It is important to distinguish between a counter-offer, and a request for flexibility in payment terms. An example of a request for flexibility in payment terms is where the offeree asks whether he could pay for the goods or services offered over a period of time or in instalments. Such communications are not counter-offers, so they do not terminate the offer. SQE1 assessment questions may test a candidate’s ability to distinguish between the effects of counter-offers and requests for flexibility in payment terms.

Request for flexibility in payment terms: a request for flexibility of payment terms is a response to an offer that enquires whether the amount required for the offered goods can be paid in instalments or later than set out in the offer, and leaves the original offer open for acceptance.

What is the ‘battle of the forms’?

When parties send each other their own standard terms of business with the aim of persuading the other party to use the first party’s standard terms, this is often called the battle of the forms.

The general rule in respect of the battle of the forms is that ‘the last shot’ prevails. This means that the last set of terms business sent by one party to the other party before the other party starts to perform his obligations will apply to the contract.

Does the offeree need to know about the offer?

If the offeree performs an act that would normally qualify as an acceptance of the offer, the act will only constitute acceptance of the offer if the offeree knows about the offer. Provided the offeree knows about the offer, their motive in performing the act that constitutes acceptance is irrelevant. For example, where an offer is made to give a £100 reward to any person who provides specified information about a crime, a person who provides such information about the crime will be entitled to the reward, provided he knows about it, even if his motive in finding the information is not to receive the reward, but something different, like clearing his conscience.

Does acceptance of a bilateral offer need to be communicated to the offeror?

Forms of acceptance for bilateral offers.

In this section, we look at the impact of the offeror’s requirements as to how acceptance should be communicated. The legal position in respect of bilateral offers is different from the position for unilateral offers (see Forms of acceptance for unilateral offers)

The general rule is that an acceptance of a bilateral offer must be communicated to the offeror to create a legally binding contract (the receipt rule).

Receipt rule: the rule that an offeror must actually receives an acceptance for the acceptance to be valid.

The requirement for communication of acceptance underpins the rule that silence cannot amount to acceptance. So if an offeror tells an offeree that he will assume that his offer has been accepted if he does not hear from him, this has no legal effect. In other words, if the offeree does not respond to such a communication from the offeror, it will not form a legally binding contract.

There are two main issues to consider as regards the form of acceptance:

• If the offeror has specified or implied that acceptance must be in a specific form, for example, in person, then the acceptance must be communicated as specified.

• If the offeror has not made it very clear that acceptance must only be made in a specified form, then the offeree can use another form for acceptance, provided it is no slower. For example, if the offeror has required acceptance to be made by a telephone, acceptance by a personal visit would be a sufficient alternative, provided it was not significantly slower.

The postal acceptance rule (considered next) is an important exception to this rule that an acceptance of a bilateral contract must be communicated to be effective.

What is the postal acceptance rule?

If the interaction between the offeror and the offeree makes it clear that the post might be used by the offeree to communicate acceptance, the postal acceptance rule will apply. The postal acceptance rule provides that the offeree’s acceptance is effective to form a legally binding contract as soon as the acceptance is posted. So even if the offeror never receives the acceptance, he is still bound by the contract that was formed when the acceptance was posted.

For such a powerful rule to apply, certain requiremenets need to be satisfied, including the requirement that the letter of acceptance be properly addressed, and posted through a post office or a Royal Mail postbox. The postal acceptance rule does not apply to letters that are handed to the postperson or sent through a courier company. The paries are free to exclude the postal acceptance rule, for example, by the offeror stating that an acceptance must not be sent by post, and by specifying an alternative means of communication.

What are the rules for communications outside of post?

When the postal acceptance rule does not apply, the position on communication of acceptance is as set out below.

Communicating acceptance outside the postal acceptance rule.

Means of communication: general position

• Instantaneous media, including the telephone, fax and telex.

  • This general position is that the receipt rule applies, which means that the offeror must receive an acceptance for it to be communicated. As a general rule, the offeree is responsible for ensuring that the offeror has received the acceptance. In respect of acceptances by telephone, the offeror and the offeree are treated as if they were interacting face to face. So if the offeror does not hear or udnerstand the acceptance, it will not have been communicated. In respect of fax, if the offeror is aware that the acceptance is being sent but does not receive it or or it is unreadable when it is received, the offeror must ask the offeree to re-send the acceptance.

• Instantaneous media sent during office hours

  • If the acceptance is communicated to a business during office hours, acceptance is held to be communicated at the time when acceptance is usually received by the fax.

• Instantaneous media sent outside office hours

  • If the acceptance is sent outside ‘ordinary business hours’, it will be deemed to be received at the start of the following working day.

• Acceptance by email

  • The general position is that the receipt rule applies.

• Acceptance through a website

  • Unless the parties are businesses and agree otherwise, the order and acknowledgment of receipt of orders will be deemed to be received when the parties to whom they are addressed are able to access them.

Revision tip: ensure you understand the two main rules in respect of the acceptance of bilateral offers

• Firstly, communications of acceptance are deemed received by the offeror when they are actually received. But note how the rule is varied when acceptances are sent out of office hours.

• Secondly, the postal acceptance rule provides that the acceptance is effective to create a legally binding contract when it is properly posted.

What are the forms of acceptance for unilateral offers?

The rules for the acceptance of unilateral offers are different from the rules of acceptance of bilateral offers. The key difference is that the offeree accepts a unilateral offer by conduct and this acceptance does not need to be communicated to the offeror in order to form a legally binding contract.

Exam warning: make sure that you clearly identify whether a question on acceptance relates to a bilateral offer or a unilateral offer because the rules for acceptance of bilateral and unilateral offers are different. In addition, make sure that you identify whether it aims to test your knowledge of the receipt rule or the postal acceptance rule, and remember the limitations to the postal acceptance rule in respect of letters that are not properly addressed/not properly posted, or where the offeror has specified that they require actual notice of acceptance.

How can an offer be terminated?

The last topic that we consider in this chapter is the termination of an offer.

Once an offer has been terminated, it cannot be accpted. An offeror may wish to terminate an offer because of a change of circumstances. Or an offeree may wish to ask questions about the offer without terminating the offer, for example, by making a counter-offer (see counter-offers).

For your SQE1 assessment, you must be able to determine whether an offer has been terminated. In the sections below we consider the different ways offers can be terminated.

Can the offeror revoke the offer?

The offeror can revoke the offer.

An offeror is free to revoke an offer before it is accepted. However, if the offeror has agreed with the offeree to keep an offer open for a specific time, the offeror is bound to do so.

With bilateral offers, does revocation have to be communicated?

As regards bilateral offers, the revocation must be communicated to the offeree to be effective. It makes no difference whether it is the offeror or a third party who communicates the revocation to the offeree. The postal acceptance rule does not apply to the revocation of offers. Different rules apply to the revocation of unilateral offers.

With unilateral offers, does revocation have to be communicated?

Different rules apply to the revocation of unilateral offers. This is because there can be a lack of proximity between the offeror of a unilateral offer and the offeree. For example, where the ofer is made in a newspaper, the offeror may not know who has accepted his offer until such person makes himself known to him.

As a general rule, an offeror who makes a unilateral offer cannot revoke it once the offeree has started to perform the act specified in the offer. The offeror must let the offeree finish performing the specified act.

Communicating the revocation of unilateral offers: in contrast to the position in respect of bilateral offers, the offeror can efectively revoke a unilateral offer without such revocation actually being communicated to the offeree. All that is required is that the offeror must use the same means to revoke the offer as he used to make the offer in the first place. For example, if Leroy offers his laptop through a unilateral advertisement in the Evening Standard, and then decides to revoke his offer, he would need to advertise his revocation in the same publication, or in one that had the same readership. If Leroy were to try and revoke his offer by publication of an announcement in Hello Magazine, which has different readership from The Evening Standard, the revocation would not be effective.

What is the rule with counter-offers?

As we have noted above, a counter-offer does not amount to an acceptance and it terminates an offer.

Hyde v Wrench - Anna offered to sell land for £1,000. Paul offered £950 in response. When Anna refused to accept Paul’s £950, Paul said that he accepted Anne’s offer to buy the land for £1,000. Was Anne bound by Paul’s acceptance of her offer to sell the land for £1,000?

The answer is no. This scenario is based on the facts of Hyde v Wrench 49 ER 132. The court held that the offeree’s offer of £950 was a counter-offer that destroyed the offeror’s original offer. So there was no offer to be accepted by the offeree when he tried to accept the original offer to sell for £1,000.

What are the rules for termination of an offer through lapse of time?

An offer may be stated to be open for a specified period of time so that it will terminate on a set date. In other cases where no time frame is mentioned, if the offeree takes longer than reasonable to respond to the offer, the courts may hold that there was no offer open to accept because it had expired. There is no absolute rule as to what will constitute a reasonable time frame, it depends upon the subject matter of the contract.

What are the rules for the termination of an offer by the offeror making an new offer?

The termination of an offer by the offeror making a new offer.

Let us imagine that Nelson wants to sell his camera. First, he offers the camera to Bronwen for £100. But later the same day, Nelson finds out that his camera is worth £200. When Nelson sees Bronwen later that day, he tells her that his camera is worth more than £100 and he offers Bronwen his camera for £200. Nelson’s second offer will terminate his offer.