The formation of a contract is primarily based upon the existence of an agreement between the parties. Generally speaking, an agreement is reached when one party makes an offer, which is accepted by another party. This article examines the legal concepts of offer and acceptance in contract law, and how these principles work together to help create a legally enforceable agreement.
Formation of a contract
A contract is an agreement that gives rise to rights and obligations enforceable by law. One of the first issues to consider when a contractual dispute arises is often whether or not there is a valid contract capable of being enforced.
A valid contract is made up of the following essential ingredients: offer, acceptance, consideration and contractual intention. The concept of contractual intention refers to the intention of the parties to create legal relations, ie; to enter into a binding agreement, whereas consideration refers to the price that one party pays for the promise of the other.
For the formation of a contract, however, there must first be offer and acceptance, such that the parties can be said to have reached a legally binding agreement. So what exactly constitutes an offer capable of acceptance?
Offer contract law
In contract law, an offer is an expression of willingness to contract on a specified set of terms. An offer may be made expressly, either orally or in writing, or by conduct. It can be addressed to a single person, to a specified group of persons or to the world at large.
An offer is essentially a proposal made with the intention that, if accepted by the person to whom it is addressed (the offeree), the person making the offer (the offeror) intends to be contractually bound by it.
Whether the offer is made with the requisite intention is assessed objectively. Accordingly, the offeror will be bound if his words or conduct are such as to induce a reasonable person to believe that he intends to be bound, even if in fact he has no such intention.
Distinguishing an offer from an invitation to treat
It is important here to draw a distinction between an offer and an invitation to treat, the latter being a communication by which a party is itself invited to make an offer and is not intended to be contractually binding.
The distinction between an offer and an invitation to treat depends primarily on the intention of the party making the statement. Accordingly, a statement will not be an offer if it makes clear that the offeror is not bound by the offeree’s acceptance. Common examples of invitations to treat include advertisements or displays of goods that customers can select in a self-service context.
In the well known case of Carlill v Carbolic Smoke Ball Company (1893) the defendant company advertised that if its’ carbolic smoke ball failed to cure influenza, buyers would receive a reward of £100.
When sued by Mrs Carlill, the Smoke Ball Company argued that the advert was not to be construed as a legally binding offer, it was merely an invitation to treat or rather, a mere puff lacking true intent.
The Court of Appeal held that the advertisement was in fact an offer, where an intention to be bound could be inferred from the adverts own claim to sincerity in which it stated that £1,000 had been deposited in the company’s bank account.
How offers can be withdrawn
The general rule is that an offer can be withdrawn at any time before it is accepted. To be effective in law, the offeree must be informed that the offer no longer stands, although such communication need not come from the offeror, but rather can be made by a reliable third party.
An offer may also come to an end through lapse of time or the occurrence of a condition. With lapse of time cases, where no timeframe is specified for the acceptance of an offer, the offer will remain open for a reasonable period. What constitutes a reasonable period depends on all the circumstances. If, on the other hand, the offer stipulates a time limit within which acceptance must occur, the offer will cease to be open for acceptance once that time limit has expired.
If an offer expressly provides that it is to determine on the happening of a prescribed condition or particular event, it cannot be accepted once that condition or event has been satisfied. Similarly, an offer may be construed as being subject to an implied condition, for example, an offer made at auction ceases when a higher bid is made.
Acceptance contract law
A contract will only be capable of being enforced if an offer has been accepted and an agreement reached between the parties. In contract law, acceptance is an unqualified expression of agreement to all the terms set out in the offer.
A mere acknowledgement of receipt of the offer or a request for further information in relation to its terms, will not generally be sufficient to constitute acceptance.
The terms in which the offer is made and accepted must also correspond. Accordingly, if a response to an offer seeks to vary a term or introduce a new term, it will not constitute an acceptance, but rather a counter-offer. A counter-offer has the effect of extinguishing the original offer, which the original offeror can either accept or reject.
How offers can be accepted
The general rule is that an acceptance has no legal effect until it is communicated in some way to the offeror. This means that the acceptance must be brought to the attention of the offeror. Acceptance can take effect by words or by conduct.
An offer that prescribes the mode of acceptance can generally only be accepted in that way. That said, an offeror is not permitted to stipulate that silence amounts to acceptance. An offeree who does nothing in response to an offer is not generally bound by its terms, not least because it would be unfair to impose on an offeree the inconvenience of rejecting an offer they had no wish to accept.
The ‘postal rule’ stipulates that a postal acceptance takes effect when the letter of acceptance is posted. However, this rule only applies if it is reasonable to use the post, for example, if the offer itself was made by post.
The postal rule is one of convenience, in particular to govern a situation where an offer is withdrawn by post, but the letter communicating the withdrawal does not reach the offeree before the offer is accepted by post. In these circumstances, the offeree’s posted acceptance prevails. The rule also applies where acceptance is lost or delayed in the post. Save except where the loss or delay is attributable to the offeree’s own error which, for example, causes the acceptance to be misdirected, a posted acceptance is effective even if it never reaches the offeror.
For an in-depth look at offer and acceptance
The law relating to offer and acceptance can be complex. This article provides only an overview of some of the legal principles involved. For detailed guidance on this topic, students should refer to specific texts or analysis on the subject, with reference to all recent and leading case law.
The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.