Thursday, 6 May 2010

Contractual agreement - offer and acceptance

Contractual agreement - offer and acceptance


Contractual agreement has traditionally been analysed in terms of offer and acceptance. One party, the offeror, makes an offer which once accepted by another party, the offeree, creates a binding contract. Key concepts that you need to familiarise yourself with in relation to offer and acceptance include the distinction between an offer and an invitation to treat - you need to be able to identify specific examples of where an offer or an invitation to treat exists. Also it is important to know the difference between bilateral and unilateral contracts. The case of Carlill v Carbolic Smoke ball co. is the leading case in both these areas so it worth concentrating your efforts in obtaining a good understanding of this case.


In order to amount to an offer it must be shown that the offeror had the intention to be bound:

Harvey v Facey [1893] UKPC 1

Carlill v Carbolic Smoke Ball co [1893] 1 QB 256

Invitation to treat

An offer needs to be distinguished from an invitation to treat. Whereas an offer will lead to a binding contract on acceptance, an invitation to treat can not be accepted it is merely an invitation for offers.

Goods on display in shops

Goods on display in shops are generally not offers but an invitation to treat. The customer makes an offer to purchase the goods. The trader will decide whether to accept the offer:

Pharmaceutical Society of Great Britain v Boots [1953] 1 QB 401

Fisher v Bell [1961] 1 QB 394


Advertisements are also generally invitations to treat:

Partridge v Critenden (1968) 2 All ER 425

However, in some instances an advert can amount to an offer:

Carlill v Carbolic Smoke Ball co [1893] 1 QB 256

Contract by Tender

The request for tenders represents an invitation to treat and each tender submitted amounts to an offer unless the request specifies that it will accept the lowest or highest tender or other condition. If the request contains such a condition this will amount to an offer of a unilateral contract where acceptance takes place on performing the condition:

Spencer v. Harding Law Rep. 5 C. P. 561


Where an auction takes place with reserve, each bid is an offer which is then accepted by the auctioneer. Where the auction takes place without reserve, the auctioneer makes a unilateral offer which is accepted by the placing of the highest bid:

Heathcote Ball v Barry [2000] EWCA Civ 235


The machine represents the offer, the acceptance is inserting the money:

Thornton v Shoe Lane Parking [1971] 2 WLR 585

Termination of offers

An offer may be terminated by:

1. Death of offeror or offeree

2. Lapse of time

An offer will terminate after a reasonable lapse of time. What amounts to a reasonable period will depend on the circumstances.

Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Ex 109

3. Revocation

An offeror may revoke an offer at any time before acceptance takes place:

Dickinson v Dodds (1876) 2 Ch. D. 463

This may not apply in unilateral offers where acceptance requires full performance:

Errington v Errington Wood [1952] 1 KB 290

Dahlia v Four Millbank [1978] Ch 231

4. Counter offer

A counter offer is where an offeree responds to an offer by making an offer on different terms. This has the affect of destroying the original offer so that it is no longer open for the offeree to accept.

Hyde v Wrench (1840) 49 ER 132


Once valid acceptance takes place a binding contract is formed. It is therefore important to know what constitutes a valid acceptance in order to establish if the parties are bound by the agreement. There are three main rules relating to acceptance:

1. The acceptance must be communicated to the offeree.
2. The terms of the acceptance must exactly match the terms of the offer.
3. The agreement must be certain.

1. Communication

The general rule is that the offeror must receive the acceptance before it is effective:

Entorres v Miles Far East [1955] 2 QB 327

Silence will not amount to acceptance:

Felthouse v Bindley [1862] EWHC CP J35

Acceptance can be through conduct:

Brogden v. Metropolitan Railway Co. (1877) 2 App. Cas. 666

Butler Machine Tool v Ex-cell-o Corporation [1979] 1 WLR 401

The postal rule

Where it is agreed that the parties will use the post as a means of communication the postal rule will apply. The postal rule states that where a letter is properly addressed and stamped the acceptance takes place when the letter is placed in the post box:

Adams v Lindsell (1818) 106 ER 250

It is relatively easy for the parties to exclude the postal rule:

Holwell Securities v Hughes [1974] 1 WLR 155

2. The terms of the acceptance must exactly match the terms of the offer.

If the terms differ this will amount to a counter offer and no contract will exist:

Hyde v Wrench (1840) 49 ER 132

3. The agreement must be certain

When viewed objectively it must be possible to determine exactly what the parties have agreed to. Compare the following two cases:

Scammell & Nephew v. Ouston [1941] AC 251

Sudbrook Trading Estate v. Eggleton [1983] AC AC 444

Sudbrook Trading Estate v. Eggleton [1983] AC AC 444

Sudbrook Trading Estate v Eggleton [1983] AC AC 444 House of Lords

A lease gave the tenant an option to purchase the freehold of the property at a price to be agreed by two surveyors one appointed by the tenant and one appointed by the landlord. The tenant sought to exercise the option but the landlord refused to appoint a surveyor. The landlord claimed that the clause was too vague to be enforceable as it did not specify a price.


The clause was not too vague to be enforceable as it put in place a mechanism to ascertain the price.

Scammell & Nephew v. Ouston [1941] AC 251

Scammell and Nephew v Ouston [1941] AC 251
The parties entered an agreement whereby Scammell were to supply a van for £286 on HP terms over 2 years and Ouston was to trade in his old van for £100. There was then some disagreement and Scammel refused to supply the van.

There was no certainty as to the terms of the agreement. Whilst there was agreement on the price there was nothing in relation to the HP terms stating whether it would be weekly or monthly instalments or how much the instalments would be.

Hyde v Wrench (1840) 49 ER 132

Wrench offered to sell his farm in Luddenham to Hyde for £1200, an offer which Hyde declined. On 6 June 1840 Wrench wrote to Hyde's agent offering to sell the farm for £1000, stating that it was the final offer and that he would not alter from it.Hyde offered £950, and after examining the offer Wrench refused to accept, and informed Hyde of this on 27 June.On the 29th Hyde agreed to buy the farm for £1000 without any additional agreement from Wrench, and after Wrench refused to sell the farm to him he sued for breach of contract.

Lord Langdale's judgement read:
Under the circumstances stated in this bill, I think there exists no valid binding contract between the parties for the purchase of this property. The defendant offered to sell it for £1000, and if that had been at once unconditionally accepted there would undoubtedly have been a perfect binding contract; instead of that, the plaintiff made an offer of his own, to purchase the property for £950, and he thereby rejected the offer previously made by the defendant. I think that it was not afterwards competent for him to revive the proposal of the defendant, by tendering an acceptance of it; and that, therefore, there exists no obligation of any sort between the parties.

There was no contract. Where a counter offer is made this destroys the original offer so that it is no longer open to the offeree to accept.

Holwell Securities v Hughes [1974] 1 WLR 155

Hughes, in an agreement dated 19 Oct 1971 granted Holwell an option to purchase premises. The agreement said that the option could be exercised by notice in writing addressed to the vendor at any time within 6 months from that date. It was accepted that Holwell posted a letter to Hughes on 14 April 1972 but this was not received. Holwell sought specific performance. The action was dismissed at trial.

HELD Lawton LJ.

It is a truism of the law relating to options that the grantee must comply strictly with the conditions stated for its exercise. The document was carefully drafted and should be strictly construed. The wording is familiar to conveyancers and should be construed in the way they would use such words. "Notice in writing" should be contrasted with "agreed in writing" and "required in writing". The word "notice" comes from the Latin word "to know" and the Oxford Dictionary suggests it means intimation or warning.

Now notice in writing to the vendor meant that he was to be fixed with this information - but he never was because it never got to him. The Plaintiffs were unable to do what the agreement said they were to do, and fix the vendor with the knowledge of the exercise of the option. If this construction of the option is correct, there is no room to apply the postal rule.

It was argued that the parties must have contemplated the use of the post, and this is enough to bring in Henthorn. But that rule does not apply where the express terms of the offer specify that acceptance must reach the offeror. The public are now familiar with this exception to the general rule through their involvement with football coupons. Also, the rule does not apply if it would lead to manifest absurdity or inconvenience. This means that having regard to all the circumstances, including the subject matter being considered, the rule does not apply where the parties cannot have intended that there should be a binding agreement until the acceptance has been communicated to the other. In my view this principle applied here.

Adams v Lindsell [1818] EWHC KB J59

Adams v Lindsell [1818] EWHC KB J59, is an English contract case regarded as the first case towards the establishment of the "postal rule" for acceptance of an offer. Ordinarily, any form of acceptance must be communicated expressly to an offeror; however, it was found that where a letter of acceptance is posted, an offer is accepted as soon as the letter leaves the offeree's control.


The case involved two parties in the sale of wool. On 2 September, the defendants wrote to the plaintiffs offering to sell them certain fleeces of wool and requiring an answer in the course of post. The defendants, misdirected the letter so that the plaintiffs didn't receive it until 5 September.[1] The plaintiffs posted their acceptance on the same day but it was not received until 9 September. Meanwhile, on 8 September, the defendants, not having received an answer by 7 September as they had expected, sold the wool to someone else.

The defendants argued that there could not be a binding contract until the answer was actually received, and until then they were free to sell the wool to another buyer.


Law J said that if that was true it would be impossible to complete any contract through the post; if the defendants were not bound by their offer until the answer was received, then the plaintiffs would not be bound until they had received word that the defendants had received their acceptance, and this could go on indefinitely.[1] Instead it must be considered that the offerers were making the offer to the plaintiffs during every moment that the letter was in the post.[2]


This case in the first step towards establishing the postal acceptance rule (mailbox rule). It was not until 1892 in Henthorn v. Fraser [1892] 2 Ch 27 that the court determined the precise timing of the acceptance, that is the moment the letter of acceptance is posted. (See also Entores Ltd v Miles Far East Corporation [1955] 2 QB 327, CA).

Butler Machine Tool v Ex-cell-o Corporation [1979] 1 WLR 401


The Butler Machine Tool Company quoted a price for a machine with specific terms and conditions for purchase outlined on the back. These terms included a price variation clause which allowed the seller to increase the price if there was an increase in the manufacturing costs.

The purchaser sent back an order form outlining their own terms and conditions, which did not include a price variation clause. Attached to this order form was a tear off slip to be signed by the seller acknowledging their acceptance of the buyer’s terms.

The seller’s returned the signed slip but when the machine was delivered in November 1970 they claimed an additional £2,982 under the price variation clause. The buyer disputed this arguing there was no price variation clause in the final contract.

Appeal allowed.

1. The main legal issue was to determine the effect of a counter-offer on an original offer thereby establishing whether the seller (Butler Machine Tool Co) could rely on a price variation clause which was present in the standard form.

Here the last offer rule was said to prevail. This rule was developed in Hyde v Wrench (1840) 3 Beav 334; 49 ER 132 and states that the effect of a counter-offer is to kill the original offer.

This case is said to be an example of the “Battle of Forms”, a situation that
• Arises when both parties, for example a buyer and seller of goods exchange inconsistent standard forms during contract negotiations and reach an agreement without deciding whose standard forms should prevail.
• Standard Form Contract = a contract that is not individually negotiated by the parties but contains the same terms for all transactions of that type.
• In approaching this issue, the court suggested two methods; the conflict and the synthesis approaches.

The conflict approach required the court to determine which set of terms prevail. This was generally held to be the party who had the last say in the negotiation.

The synthesis approach required the court to build a contract from both sets of terms, including the terms common to both and those terms upon which the parties were agreed.

• Two questions
1. Has a contract been concluded at all?
2. If there is a contract, whose terms prevail?