|Part of the common law series|
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|Rights of third parties|
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Offer and acceptance are generally recognised as essential requirements for the formation of a contract, and analysis of their operation is a traditional approach in contract law. 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 modified by developments in the law of estoppel, misleading conduct, misrepresentation, unjust enrichment, and power of acceptance.
Treitel defines an offer as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed", the "offeree". An offer is a statement of the terms on which the offeror is willing to be bound. It is the present contractual intent to be bound by a contract with definite and certain terms communicated to the offeree.
The expression of an offer may take different forms and which form is acceptable varies by jurisdiction. Offers may be presented in a letter, newspaper advertisement, fax, email verbally or even conduct, as long as it communicates the basis on which the offeror is prepared to contract.
Whether the two parties have reached agreement on the terms or whether a valid offer has been made is an issue which is determined by the applicable law. In certain jurisdictions, courts use criteria known as 'the objective test' which was explained in the leading English case of Smith v. Hughes. In Smith v. Hughes, the court emphasised that the important thing in determining whether there has been a valid offer is not the party's own (subjective) intentions, but how a reasonable person would view the situation. The objective test is largely superseded in the UK since the introduction of the Brussels Regime in combination with the Rome I Regulation.
An offer can only be the basis of a binding contract if it contains the key terms of the contract. For example, as a minimum requirement for sale of goods contracts, a valid offer must include at least the following 4 terms: Delivery date, price, terms of payment that includes the date of payment and detail description of the item on offer including a fair description of the condition or type of service. Unless the minimum requirements are met, an offer of sale is not classified by the courts as a legal offer but is instead seen as an advertisement. Under Dutch law an advertisement is in most cases an invitation to make an offer, rather than an offer.
A unilateral contract is created when someone offers to do something "in return for" the performance of the act stipulated in the offer. In this regard, acceptance does not have to be communicated and can be accepted through conduct by performing the act. Nonetheless, the person performing the act must do it in reliance on the offer.
A unilateral contract can be contrasted with a bilateral contract, where there is an exchange of promises between two parties. For example, when (A) promises to sell her car and (B) promises to buy the car.
The formation of a unilateral contract can be demonstrated in the English case Carlill v Carbolic Smoke Ball Co. In order to guarantee the effectiveness of the Smoke Ball remedy, the company offered a reward of 100 pounds to anyone who used the remedy and contracted the flu. Once aware of the offer, Carlill accepted the offer when she purchased the Smoke Ball remedy and completed the prescribed course. Upon contracting the flu, she became eligible for the reward. Therefore, the company's offer to pay 100 pounds "in return for" the use of the Smoke Ball remedy and guarantee not to contract the flu was performed by Carlill.
An invitation to treat is not an offer, but an indication of a person's willingness to negotiate a contract. It's a pre-offer communication. In the UK case 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. Similarly in the English case Gibson v Manchester City Council the words "may be prepared to sell" were held to be a notification of price and therefore not a distinct offer, though in another case concerning the same change of policy (Manchester City Council underwent a change of political control and stopped the sale of council houses to their tenants) Storer v. Manchester City Council, the court held that an agreement was completed by the tenant's signing and returning the agreement to purchase, as the language of the agreement had been sufficiently explicit and the signature on behalf of the council a mere formality to be completed. Statements of invitation are only intended to solicit offers from people and are not intended to result in any immediate binding obligation. The courts have tended to take a consistent approach to the identification of invitations to treat, as compared with offer and acceptance, in common transactions. 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. Auctions are, however, a special case generally. The rule is that the bidder is making an offer to buy and the auctioneer accepts this in whatever manner is customary, usually the fall of the hammer. A bidder may withdraw his or her bid at any time before the fall of the hammer, but any bid in any event lapses as an offer on the making of a higher bid, so that if a higher bid is made, then withdrawn before the fall of the hammer, the auctioneer cannot then purport to accept the previous highest bid. If an auction is without reserve then, whilst there is no contract of sale between the owner of the goods and the highest bidder (because the placing of goods in the auction is an invitation to treat), there is a collateral contract between the auctioneer and the highest bidder that the auction will be held without reserve (i.e., that the highest bid, however low, will be accepted). The U.S. Uniform Commercial Code provides that in an auction without reserve the goods may not be withdrawn once they have been put up.
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), or if it is a "firm offer" in which case it is irrevocable for the period specified by the offeror.
If the offer is one that leads to a unilateral contract, the offer generally cannot be revoked once the offeree has begun performance.
Unaccepted offers to purchase are generally not recognised by courts for the purpose of proving the value of the proposed purchase. In the US case of Sharp v. United States (1903), a New Jersey landowner, Sharp, argued that the value of his land which had been taken by the government for fortification and defence purposes had been underestimated, and he sought to put forward examples of "different offers he had received to purchase the property for hotel, residential, or amusement purposes, or for a ferry, or a railroad terminal, or to lease the property for hotel purposes". The trial court (the District Court of New Jersey), the Court of Appeals for the Third Circuit and the Supreme Court all affirmed that such evidence was to be rejected, citing evidence from a number of previous cases  which had established the same principle. Offers to purchase are considered to suffer "inherent unreliability for this purpose".
A promise or act on the part of an offeree indicating a willingness to be bound by the terms and conditions contained in an offer. Also, the acknowledgment of the drawee that binds the drawee to the terms of a draft.
For the acceptance, the essential requirement is that the parties had each from a subjective perspective engaged in conduct manifesting their assent. Under this meeting of the minds theory of contract, a party could resist a claim of breach by proving that he had not be intended to be bound by the agreement, only if it appeared subjectively that he had so intended. This is unsatisfactory, as one party has no way to know another's undisclosed intentions. One party can only act upon what the other party reveals objectively (Lucy V Zehmer, 196 Va 493 84 S.E. 2d 516) to be his intent. Hence, an actual meeting of the minds is not required. Indeed, it has been argued that the "meeting of the minds" idea is entirely a modern error: 19th century judges spoke of "consensus ad idem" which modern teachers have wrongly translated as "meeting of minds" but actually means "agreement to the [same] thing".
The requirement of an objective perspective is important in cases where a party claims that an offer was not accepted and seeks to take 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.
An acceptance must be an absolute and unqualified acceptance of all the terms of the offer: Sec.7(1). If there is any variation, even on an unimportant point, between the offer and the terms of its acceptance, there is no contract. An acceptance is only contractually valid if the proposal to which response is made is an offer capable of acceptance. In an Appeal Court ruling in 2020, Sir John Chadwick, judge, accepted the argument put by the appellant in the case, drawing:
a distinction between the court's task when seeking to ascertain the parties' intention under the terms of a contract which both accept has been made and the court's task when seeking to determine whether or not a contract has been made at all. In the former case the question is "what did the parties intend by the words used in the agreement which they made": in the latter, the questions are (i) "was there an [sic] proposal (or "offer") made by one party which was capable of being accepted by the other" and, if so, (ii) "was that proposal accepted by the party to whom it was made".
There are several rules dealing with the communication of acceptance:
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 and the original offer cannot be accepted at a future time.
However, a mere request for information about the terms of the offer is not a counter-offer and leaves the offer intact. It may be possible to draft an enquiry such that it adds to the terms of the contract while keeping the original offer alive.
Under the Uniform Commercial Code (UCC) Section. 2-207(1), a definite expression of acceptance or a written confirmation of an informal agreement may constitute a valid acceptance even if it states terms additional to or different from the offer or informal agreement. The additional or different terms are treated as proposals for addition into the contract under UCC Sec. 2-207(2). Between merchants, such terms become part of the contract unless:
Material is defined as anything that may cause undue hardship/surprise, or is a significant element of the contract.
If there is no contract under 2-207(1), then under UCC Sec. 2-207(3), conduct by the parties that recognize there is a contract may be sufficient to establish a contract. The terms for this contract include only those that the parties agree on and the rest via gap fillers.
Often when two companies deal with each other in the course of business, they will use standard form contracts. Often these standard forms contain terms which conflict (e.g. both parties include a liability waiver in their form). The 'battle of the forms' refers to the resulting legal dispute arising where both parties accept that a legally binding contract exists, but disagree about whose standard terms apply. Such disputes may be resolved by reference to the 'last document rule', i.e. whichever business sent the last document, or 'fired the last shot' (often the seller's delivery note) is held to have issued the final offer and the buyer's organisation is held to have accepted the offer by signing the delivery note or simply accepting and using the delivered goods.
In U.S. law, this principle is referred to as the last shot rule.
Under English law, the question was raised in Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd, as to which of the standard form contracts prevailed in the transaction. Lord 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 prior to the beginning of performance voided all preceding offers. The absence of any additional counter-offer or refusal by the other party is understood as an implied acceptance.
In Leicester Circuits Ltd. v. Coates Brothers plc (2002) and GHSP Incorporated v AB Electronic Ltd (2010) the English High Court has found that companies may have not agreed on any terms, and so the 'last document rule' may not apply. In the GHSP case, there was no situation where one company could have been said to have accepted the other's standard terms, as they remained in unresolved dispute. The court held that neither party's terms applied and therefore the contract was governed by the implied terms of the UK Sale of Goods Act 1979.
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 post in contemplation as a means of acceptance. It excludes contracts involving land, letters incorrectly addressed and instantaneous modes of communication. The relevance of this early 19th century rule to modern conditions, when many quicker means of communication are available has been questioned, but the rule remains good law for the time being.
In Australian law, there is a requirement that an acceptance is made in reliance or pursuance of an offer.
An offer can be terminated on the grounds of rejection by the offeree, that is if the offeree does not accept the terms of the offer or makes a counter-offer as referred to above.
Also, upon making an offer, an offeror may include the period in which the offer will be available. If the offeree fails to accept the offer within this specific period, then the offer will be deemed as terminated.
Generally death (or incapacity) of the offeror terminates the offer. This does not apply to option contracts, in which the there's a possibility in which the next of kin or an assigned friend of the offeror can take his or her place after death.
The offer cannot be accepted if the offeree knows of the death of the offeror. In cases where the offeree accepts in ignorance of the death, the contract may still be valid, although this proposition depends on the nature of the offer. If the contract involves some characteristic personal to the offeror, the offer is destroyed by the death.
A contract will be formed (assuming the other requirements for a legally binding contract are met) when the parties give objective manifestation of an intent to form the contract.
Because offer and acceptance are necessarily intertwined, in California (US), offer and acceptance are analyzed together as subelements of a single element, known either as consent of the parties or mutual assent.