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FORMATION OF A CONTRACT

Contracts act 2010 section 10(1) Agreement that amounts to a


contract

A contract is an agreement made with the free consent of parties


with capacity to contract, for a lawful consideration and with a
lawful object, with the intention to be legally bound.

There are five basic requirements that need to be satisfied in


order to make a
contract:
An agreement between the parties (which is usually shown by
the fact that
one has made an offer and the other has accepted it).
An intention to be legally bound by that agreement (often
called intent to
create legal relations).
Certainty as to the terms of the agreement.
Capacity to contract.
Consideration provided by each of the parties – put simply, this
means that
there must be some kind of exchange between the parties. If I say
I will give you
my car, and you simply agree to have it, I have voluntarily made
you a promise
(often called a gratuitous promise), which you cannot enforce in
law if I
change my mind. If, however, I promise to hand over my car and
you promise
to pay me a sum of money in return, we have each provided
consideration.

These are the rules of formation of contract.


A contract is only formed in law where the following can be
shown to exist:
■ an agreement – which is based on mutuality between the
parties – the so-called
consensus ad idem
■ consideration – which means that both sides are bound to give
something to each
other – the quid pro quo or proof that a bargain exists, and
■ intention – it must be the intention of both parties to be legally
bound by the
terms of the agreement that they have reached.

Other factors affecting formation include:


form – the way the contract is created (e.g. sales of land can only
be made in the form of a deed). Form is an issue with speciality
contracts but not with simple contracts;
capacity – the ability of one party to enter a contract and of the
other party to enforce it (e.g. to protect minors);
privity of contract and the rights of third parties – generally a
contract is only enforceable by or against a party to it, subject to
exceptions, and certain third party rights are now protected in
the Contracts
(Rights of Third Parties) Act 1999.

Unilateral and bilateral contracts

In order to understand the law on offer and acceptance, you need


to understand the concepts of unilateral and bilateral contracts.

Most contracts are bilateral. This means that each party takes on
an obligation, usually by promising the other something – for
example, Ann promises to sell something
and Ben to buy it. (Although contracts where there are mutual
obligations are always called bilateral, there may in fact be more
than two parties to such a contract.)
By contrast, a unilateral contract arises where only one party
assumes an obligation under the contract. Examples might be
promising to give your mother £50 if she gives up smoking for a
year, or to pay a £100 reward to anyone who finds your lost
purse, or, as the court suggested in Great Northern Railway Co v
Witham (1873), to pay someone £100 to walk from London to
York.
What makes these situations unilateral contracts is that only one
party has assumed an obligation
– you are obliged to pay your mother if she gives up smoking, but
she has not promised in turn to give up smoking. Similarly, you
are obliged to pay the reward to anyone who finds your purse,
but nobody need actually have undertaken to do so.
A common example of a unilateral contract is that between
estate agents and people trying to sell their houses – the seller
promises to pay a specified percentage of the house price to the
estate agent if the house is sold, but the estate agent is not
required to promise in return to sell the house, or even to try to
do so.

A contractual agreement is said to exist when a valid offer is


followed by a valid acceptance
1.OFFER &ACCEPTANCE

.1 Character of an offer
An offer has been described as an unconditional statement of a
person’s intention to be bound by the terms of the offer made
and thus the intention to contract with the other person.
Hence an offer is an expression of willingness to be bound by
certain terms.
The person making an offer is called the offeror, and the person
to whom the offer is made is called the offeree
Treitel – Definition of offer
‘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’.

.1.1 Offers can be addressed to the general public and are


accepted when the offer is acted upon by a member of
the general public.
Advertisements for unilateral contracts are generally
treated as offers.

Key case: Carlill v Carbolic Smoke Ball Co (1893)


the defendants were the manufacturers of ‘smokeballs’ which
they claimed could prevent flu. They published advertisements
stating that if anyone used their smokeballs for a specified time
and still caught flu, they would pay that person £100, and that to
prove they were serious about the claim, they had deposited
£1,000 with their bankers.
Mrs. Carlill bought and used a smokeball, but nevertheless ended
up with flu. She therefore claimed the £100, which the company
refused to pay. They argued that their
advertisement could not give rise to a contract, since it was
impossible to make a contract with the whole world, and that
therefore they were not legally bound to pay the money. This
argument was rejected by the court, which held that the
advertisement did constitute an offer to the world at large,
which became a contract when it was accepted by Mrs. Carlill
using the smokeball and getting flu. She was therefore entitled to
the £100.

1.1.2 The terms of the offer must be certain


If the words of the offer are too vague then the parties might not
really know what they are contracting for and should not then be
bound.
Key case: Guthing v Lynn (1831)
When a horse was purchased a promise to pay £5 more ‘if the
horse is lucky’ could not be an offer. It was too vague.

1.1.3 The offer must be communicated to the offeree


It is impossible to accept something of which you have no
knowledge.
Key case: Taylor v Laird (1856) 25 LJ Ex 329
The claimant captained the defendant’s ship. He then decided to
give up the captaincy but worked his passage back home as a
crew member. He then tried to claim wages but failed. The court
held that, since the ship owner was unaware of the claimant’s
decision to quit as captain and had received no offer to work in
an alternative capacity, there was no contract. A person can only
accept an offer that has been communicated to him.

1.1.4: It is possible to withdraw an offer, at any time before the


offer is accepted
Key case: Routledge v Grant (1828) 4 Bing 653
The defendant offered his house for sale, the offer to remain
open for six weeks only. He then took the house off the market
before this period ended and was sued. The court held that
withdrawal of an offer is lawful any time up to acceptance. Since
there had been no acceptance he acted lawfully.

1.1.5: The offeror must communicate the withdrawal of the offer


to the offeree
Key case: Byrne v Van Tienhoven (1880) 5 CPD 344
Concerning: communication of revocation
On 1 October, a letter offering to sell tinplates was posted from
Van Tienhoven in Cardiff
to Byrne in New York.
On 8 October, the offerors changed their minds and posted a
letter of revocation
withdrawing the offer made by letter on 1 October.
On 11 October, Byrne received the letter offering to sell (from 1
October) and accepted by
telegram.
On 15 October, Byrne confirmed the acceptance (from 11
October) by letter.
On 20 October, Byrne received the letter of 8 October
withdrawing the offer.
Legal principle
The offer of 1 October had not been withdrawn at the time that it
was accepted and
therefore, the contract was formed on acceptance on 11 October.
This was so despite the
lack of agreement between the parties.

1.1.6: Communication of withdrawal of the offer can be by a


reliable third party
It need not be done personally but the third party must be a
reliable source of information.
Key case: Dickinson v Dodds (1876) 2 Ch D 463
Dodds offered to sell houses to Dickinson, the offer to remain
open until 9.00 am on 12 June. Dickinson intended to accept the
offer but did not do so at once. Berry, a mutual acquaintance,
then told Dickinson that Dodds had withdrawn the offer and
Dickinson sent an acceptance, but when it was received the
house was already sold. Dickinson
claimed unlawful revocation and breach of contract. The court
held that revocation must be communicated any time before
acceptance but this can be through a reliable
third party – as Berry was shown to be. The offer was validly
withdrawn.

1.1.7: A unilateral offer cannot be withdrawn while the offeree is


performing
In a unilateral contract the offeree actually accepts by
performing his/her side of the bargain (as in Carlill). It would
clearly be unfair to prevent this once the other party had begun.
Key case: Errington v Errington & Woods [1952]1 KB 290
A father bought and mortgaged a house in his own name for his
son and daughter-in-law to live in, promising that, when they
had paid off the mortgage, he would transfer legal title to them.
The father later died and other family members sought
possession but failed. The court held that the father’s promise
could not be withdrawn while the couple kept up the mortgage
repayments, after which the house would be legally theirs. There
was a unilateral contract where acceptance and performance
were one and the same.

.2 Distinguishing between Offer and Invitation to Treat

Some kinds of transaction involve a preliminary stage in which


one party invites the other to make an offer. This stage is called
an invitation to treat.
.2.1 Examples of invitation to treat
a) Goods displayed on shelves in a self-service shop.
These are not an offer that is then accepted when the customer
picks the goods from the shelves. They are an invitation to treat
an invitation to the buyer to make an offer to buy. This is done by
the customer taking them to the cash desk where the contract is
formed when the sale is agreed.
The rule preserves the freedom of contract of the shopkeeper and
sensibly allows the shopkeeper to accept or refuse a sale. This
might be particularly important where a child selects alcohol
from shelves in an off license and tries to buy it.

Key case; Pharmaceutical Society of GB v Boots Cash Chemists


Ltd (1953)
Boots altered one of their shops to self-service.
Under s18 Pharmacy and Poisons Act 1933 a registered
pharmacist was required to be present at the sale of certain drugs
and poisons. It was important to know where the contract was
formed. Court held that the contract was formed when goods
were presented at the cash desk where a pharmacist was present,
not when taken from the shelf.

b) Goods on display in a shop window


Again, there is no offer, only a display of the goods that the
customer might go into the shop and offer to buy.

Key case: Fisher v Bell (1961)


A prosecution under the Offensive Weapons Act 1959 failed due
to bad drafting of the Act. The offence was to offer for sale
prohibited weapons. The shopkeeper displaying a flick knife in
the window was not offering it for sale. It was a mere invitation
to treat.

c) Goods or services advertised in a newspaper or


magazine
Here, a contract will not be formed until the person seeing the
advertisement has made an offer to buy, which has then been
accepted.

Key case: Partridge v Crittenden (1968)


A prosecution for ‘offering for sale’ a wild bird under the
Protection of Birds Act 1954 failed.The advertisement
(‘Bramblefinch cocks, bramblefinch hens, 25s each’) was not an
offer but an invitation to treat.

d) An invitation to council tenants to buy their property

key case: Gibson v Manchester City Council


In Gibson v Manchester City Council (1979) a council tenant was
interested in buying his
house. He completed an application form and received a letter
from the Council stating that it ‘may be prepared to sell the
house to you’ for £2,180. Mr Gibson initially queried the
purchase price, pointing out that the path to the house was in a
bad condition. The Council refused to change the price, saying
that the price had been fixed taking into account the condition of
the property. Mr Gibson then wrote on 18 March 1971 asking the
Council to ‘carry on with the purchase as per my application’.
Following a change in political control of the Council in May
1971, it decided to stop selling Council houses to tenants, and Mr
Gibson was informed that the Council would not proceed with
the sale of the house. Mr Gibson brought legal proceedings
claiming that the letter he had received stating the purchase
price was an offer which he had accepted on 18 March 1971. The
House of Lords, however, ruled that the Council had not made an
offer; the letter giving the purchase price was merely one step in
the negotiations for a contract and amounted only to an
invitation to treat. Its purpose was simply to invite the making of
a ‘formal application’, amounting to an offer, from the tenant.

e) A mere statement of price


The mere fact that a party has indicated a price which (s)he
would find acceptable does not make it an offer.
Key case: Harvey v Facey [1893] AC 552
Harvey wanted to buy Facey’s farm and sent a telegram: ‘Will
you sell me Bumper Hall? Telegraph lowest price.’ Facey’s
telegram replied ‘Lowest price acceptable £900’.
Harvey argued that he had then accepted this and sued when the
farm was sold to another person. His action failed. The court held
that the statement was merely a statement of price and was not
an offer open to acceptance.

f) Lots at an auction
The rule in fact derives from auctions. The lot is the invitation to
make a bid. Bidding is an offer to buy, and the acceptance is the
fall of the auctioneer’s hammer at which point the contract is
formed. The contract is formed between the highest bidder and
the owner of the goods. The auctioneer is merely acting on behalf
of the owner of the goods.The consequence of this is that there is
an absolute entitlement to withdraw any lot prior to the fall of
the auctioneer’s hammer. This is no more than an example of the
rule that an offer can be withdrawn any time prior to acceptance
Key case: Harris v Nickerson (1873) LR 8 QB 286
The claimant attended an auction hoping to buy some furniture
that was advertised in the auction catalogue. The auctioneer
withdrew the items from sale and the claimant
sued unsuccessfully for the cost of travel and lodgings.
The court held that the presence of the goods in the catalogue
was no more than an invitation to treat, and that there was no
contract since this could only be formed on the fall of the
auctioneer’s hammer.
Key case: British Car Auctions v Wright (1972)
A prosecution for offering to sell an unroadworthy vehicle failed.
At the auction there was no offer to sell, only an invitation to bid.

1.2.3. Situations which are not invitation to treat


Sometimes, in situations that we would normally associate with
invitation to treat, the
circumstances involved or the nature of the words used mean
that there has in fact been an offer rather than an invitation to
treat. These include:

(i) Advertisements involving a unilateral offer


If the advertisement indicates a course of action in return for
which the advertiser makes a promise to pay, then (s)he is bound
by this promise.
Key case Carlill v The Carbolic Smoke Ball Co. Ltd (1893)

(ii) A statement of price where an offer is also intended


A mere statement of price is not binding, but if other factors
indicate that an offer is included in the statement then it will be
binding if it is accepted.
Key case: Biggs v Boyd Gibbins (1971)
In response to the offer of a lower price the claimant wrote ‘For a
quick sale I will accept
£26,000’. The defendant replied ‘I accept your offer’. The
claimant then wrote ‘I thank you for accepting my price of
£26,000. My wife and I are both pleased that you are purchasing
the property’. His first letter was an offer that the defendant had
accepted.

(iii) Competitive tendering


Normally, an invitation to tender for the supply of goods or
services is no more than an invitation to treat. For instance, a
company wants its office painted. It invites tenders and various
decorators will respond with different prices for the work. The
company is free to choose any of the decorators, not necessarily
the cheapest. If, however, the company has in its advertisement
agreed that the work will go to the tender with the lowest price,
then it is bound to give the work to the bidder with the lowest
price.
Key case: Harvela Investments Ltd v Royal Trust Co. of Canada
Ltd (1986)
The Trust Company wanted to sell a large quantity of land that it
owned, in a single transaction. To achieve this it had invited
tenders from two interested parties for the purchase of all of the
land. It indicated to both prospective purchasers that the sale of
the land would go to the party making the higher bid. The party
making the lower bid had tendered a price of $2,100,000 but had
also included in the bid an alternative bid of $101,000 in excess
of any other offer (a so-called ‘referential bid’). The Trust
Company accepted this referential bid and Harvela, the party
that in fact had made the higher bid, found out and then sued the
Trust Company successfully. It was for the court to determine
whether the invitation to tender was, as would usually be the
case in tenders, only an invitation to treat. It also needed to
decide which of the bids was in fact the higher. In answer to the
first issue, the court held that the wording of the invitation to
tender made it an offer that could only be accepted by the
highest bidder. In answer to the second question, the court held
that the referential bid could not be accepted as binding in law.
As the court explained, if both parties had entered such a bid
then no contract could emerge from the tender since each
referential bid in turn would be higher than the other one, which
in turn would invoke the other referential bid, and so on without
end. The contract in those circumstances could never be
complete and the court could not accept the referential bid as a
valid bid.

There may also be an obligation on the party inviting tenders to


consider all tenders regardless of whether a tender is accepted.
Key case: Blackpool and Fylde Aero Club Ltd v Blackpool
Borough Council (1990)
For many years, the aero club had held the concession to run
pleasure flights from the council’s airport. When the concession
was due for renewal the council put it out to competitive tender,
and invited tenders from other parties. All tenders were to be
submitted in unmarked envelopes in a particular box by 12 noon
on a specific date. The council stated that it would not be bound
to accept any bid. The club placed its bid in the box at 11.00 a.m.
but by accident the box was not emptied after this time and its
bid was not therefore considered. The concession was given to
another group, R.R. Helicopters. When the council later
discovered its mistake it at first decided to repeat the exercise
but was threatened with legal action by R.R. Helicopters. The
club claimed breach of a contract to consider all tenders
delivered by the due time. Its claim was upheld. The court felt
that there was an implied undertaking to operate by the rules
that it had set, even though the invitation to tender for the
concession was only an invitation to treat.

(iv) Auctions advertised as ‘without reserve’


Traditionally, an auction might take two forms. The first
includes a ‘reserve price’(a minimum price acceptable to the
seller) and in this case no sale can take place, and thus no
contract is formed, unless the bidders reach this reserve price.
See McManus v Fortescue (1907). In the case of an auction held
by reserve then there is only one possible outcome: the goods
will become the property of the highest bona fide bidder. It has,
however, been held obiter, that no contract of sale can
materialize between the owner of the goods and the highest
bidder where the auctioneer refuses the sale or for any reason
fails to accept the bid of the highest bona fide bidder. In this
instance it was said that a collateral contract is created between
the highest bona fide bidder and the auctioneer himself, so that
the auctioneer may then be sued for breach of
contract. See Warlow v Harrison (1859). This point has been
examined more recently.

Key case: Barry v Heathcote Ball & Co. (Commercial Auctions)


Ltd (2000)
Here, in an auction advertised as ‘without reserve’, the
auctioneer withdrew two lots, machinery worth £14,251, from
the auction. In doing so he refused bids of £200 for each machine
made by the claimant and which were the highest bids. The
auctioneer then sold them on privately at £750 each. The
claimant bidder sued, arguing that the highest bid rule should
apply. The court, approving Warlow v Harrison, accepted the
existence of a collateral contract between the bidder and the
auctioneer and awarded the claimant £27,600 damages.

Automated machines
posed an interesting question for the court in Thornton v Shoe
Lane Parking [1971] 2 QB 163. The court ruled that the
operation of an automatic machine is considered an offer. The
reasoning behind this was mainly based on the inability of the
machine to negotiate with the customer and they cannot reject a
customer.

An interesting debate can be had about exactly when acceptance


occurs. It may be contended that the acceptance is made once an
individual inserts the coins and chooses an option. Acceptance is
not at the point of the insertion of coins because the customer
can still choose to cancel and get their coins returned. However,
if there is no coin return option, acceptance would likely be held
to be on insertion of payment.

2.3. Termination of offer


An offer can be terminated in a number of ways:
● It can be accepted, in which case there is a contract. (or indeed
it could be refused or met with a counter-offer, in which case
there is no contract).
● It can be properly withdrawn, as we have seen above.
● The time for acceptance can lapse.
● A reasonable time can have lapsed. (It would be rare that an
offer could stay open indefinitely.)

Other than this an offer can end in one of three ways:


a) By passage of time:
because the time set for acceptance has passed;
because a ‘reasonable time’ has passed – it would be unfair to
expect an offeror to indefinitely keep open an offer for sale of
perishable goods. What is a ‘reasonable time’ is thus a question of
fact in each case (Ramsgate Victoria Hotel v Montefi ore
(1866)).
Key case: Ramsgate Victoria Hotel Co Ltd v Montefi ore (1866)
LR 1 Ex 109
Montefiore had offered to buy shares in June but the company
only issued the shares in
November. It was held that his offer to buy had lapsed. The court
recognised that no offer could stay open indefinitely and that
after a reasonable time an offer would lapse. In the case of a
transaction where the value of the goods or services could
change rapidly, as in the case here, then a reasonable time is
likely to be short.

b) By failing to comply with a condition precedent (Financings v


Stimson (1962)) (e.g. an offer of employment made subject to
production of a satisfactory reference or medical report).
Key case: Financings Ltd v Stimson [1962] 3 All ER 386
This involved an agreement for the purchase of a car under a hire
purchase agreement. A
condition implied by law into such agreements was that the car
would remain in the same condition from the time of the offer
up to the point of acceptance. The car was actually stolen from
the car showroom before the contract was concluded. As a result,
the court held that the purchaser was not bound by his
agreement to buy it.

c) Because of the death of either party.


If the offeror dies and the offeree knows of this, it is unlikely
that (s)he would be able to accept and bind the estate of the
offeror to a contract.
If the offeree, however, accepts an offer in ignorance of the death
of the offeror then a contract may be formed (Bradbury v Morgan
(1862)).
If the offeree dies then it is unlikely that the executors or
administrators of the estate can accept on his/her behalf
(Reynolds v Atherton (1921)).

2.4 Acceptance
2.4.1 The role of acceptance in agreement
1 A contract is not formed until an offer is accepted.
2 An agreement occurs when a ‘valid’ acceptance follows a ‘valid’
offer, and the contract is formed immediately on acceptance.
3 It is vital to establish that the response to the offer is in fact an
acceptance and is properly communicated to the offeror.
4 However, not all negotiations are easily identifiable as offer
and acceptance,
particularly negotiations in a commercial context.

2.4.2 The basic rules of acceptance


1 A valid acceptance is an intention to be bound by the terms of
the offer,
so, it must:
be unequivocal and unconditional; and
correspond exactly with the terms of the offer – the
‘mirror image’
rule.
2 An attempt to vary the terms of the offer is a counter offer,
which is a
rejection of the offer that is no longer open to acceptance (Hyde v
Wrench (1840)).

Key case: Hyde v Wrench [1840] 49 ER 132


The defendant offered to sell his farm to the claimant for £1,000
who instead offered the lower price of £950. When the
defendant rejected this price, the claimant tried to accept the
original price and claimed breach of contract when the sale did
not occur. The court held that the counter offer was a rejection of
the original offer, meaning that it was no longer open to
acceptance.

3 A rejection of an ancillary subject may still be a counter offer,


although
the main terms are accepted (Jones v Daniel (1894)).
4 However, a mere enquiry that does not seek to vary the terms
of the
offer is not a counter offer (Stevenson v McLean (1880)).

Key case: Stevenson v McLean (1880) 5 QBD 346


The defendant offered to sell iron to the claimant, who in his
reply wanted to know if delivery could be staggered over two
months. On receiving no reply, the claimant then sent a letter of
acceptance and sued successfully when the iron was sold to
another party. The court held that the claimant’s initial response
was not a counter offer and thus a rejection of the offer; it was
merely an enquiry about details, so that the offer was still open
to acceptance. The claimant had done this and so a contract
was formed which was breached.

5 If arrangements continue after a counter offer is made then it


is the
terms of the counter offer that are included in the contract
(Davies & Co
v William Old (1969)).
6 But the courts will not allow a party to benefit from both the
counter
offer and the original offer (Pars Technology v City Link
Transport
Holdings Ltd (1999)).

Key case: Pars Technology Ltd v City Link Transport Holdings


Ltd [1999] EWCA Civ 1822
In a dispute over an earlier agreement, the parties negotiated a
settlement under which the defendant offered to pay £13,500
plus a refund of carriage charges of £7.50 plus
VAT. The claimant then accepted by letter. The defendant argued
that the acceptance was invalid because the claimant’s letter
stated that VAT should be paid on the whole
amount and therefore was a counter offer. The court held that
the whole correspondence between the parties should be
considered in deciding if there was a contract. It held that the
claimant had clearly accepted the defendant’s offer in its letter
and a binding contract resulted from the defendant’s offer. The
defendant could not escape its own clearly accepted obligations
just because the claimant restated them in a contrary way.

7 This may not result if the parties are not interested in ancillary
terms
and have overlooked the discrepancy in terms (Brogden v
Metropolitan
Railway Co (1877)).
Key case: Brogden v Metropolitan Railway Co (1877) 2 App Cas
666
The parties had a long-standing informal arrangement for
supply of coal. They then decided to make it formal and a draft
contract was sent to Brogden by the Railway
Company. Brogden inserted the name of an arbitrator into a
section left blank for that purpose, signed it and returned it. The
Railway Company secretary signed it without looking at it.
Brogden continued to supply coal and was paid for deliveries.
After some conflict over other matters Brogden tried to avoid his
obligations, arguing that there was no contract because of a
counter offer by the Railway Company, which then sued. The
court accepted that technically the insertion of the arbitrator’s
name was a counter offer, but held that this had no real effect as
coal was still supplied and paid for. The parties had accepted the
counter offer as part of the agreement and the contract was
valid.

2.3.4 Communication of the acceptance


1 There is no contract unless acceptance is communicated.
An acceptance does not usually take effect until it is
communicated to the offeror. As Lord Denning explained in
Entores Ltd v Miles Far East Corporation (1955), if A shouts an
offer to B across a river but, just as B yells back an acceptance, a
noisy aircraft flies over, preventing A from hearing B’s reply, no
contract has been made. A must be able to hear B’s acceptance
before it can take effect. The same would apply if the contract
was made by telephone, and A failed to catch what B said because
of interference on the line; there is no contract until A knows
that B is accepting the offer. The principal reason for this rule is
that, without it, people might be bound by a contract without
knowing that their offer had been accepted, which could
obviously create difficulties in all kinds of situations.
Where parties negotiate face to face, communication of the
acceptance is unlikely to be a problem; any difficulties tend to
arise where the parties are communicating at a distance, for
example by post, telephone, telegram, telex, fax or messenger.
1 Only a genuine offeree can accept the offer, so an offer made
without authority cannot be accepted (Powell v Lee (1908)).
2 It follows that silence cannot amount to an acceptance
(Felthouse v Bindley (1863)). Legal Principle: Merely
remaining silent cannot amount to an acceptance, unless it
is absolutely clear that acceptance was intended.

Key case: Felthouse v Bindley


In Felthouse v Bindley (1862) an uncle and his nephew had
talked about the possible sale of the nephew’s horse to the uncle,
but there had been some confusion about the price. The uncle
subsequently wrote to the nephew, offering to pay £30 and 15
shillings and saying, ‘If I hear no more about him, I consider the
horse mine at that price.’ The nephew was on the point of selling
off some of his property in an auction. He did not reply to the
uncle’s letter, but did tell the auctioneer to keep the horse out of
the sale. The auctioneer forgot to do this, and the horse was sold.
It was held that there was no contract between the uncle and the
nephew. The court felt that the nephew’s conduct in trying to
keep the horse out of the sale did not necessarily imply that he
intended to accept his uncle’s offer – even though the nephew
actually wrote afterwards to apologise for the mistake – and so it
was not clear that his silence in response to the offer was
intended to constitute acceptance. This can be criticised in that it
is hard to see how there could have been clearer evidence that
the nephew did actually intend to sell, but, on the other hand,
there are many situations in which it would be undesirable and
confusing for silence to amount to acceptance.

Acceptance can be construed from the conduct of the parties


(Brogden v Metropolitan Railway Co (1877)).
but only if it can be objectively demonstrated to have been the
intention of the offeree (Day Morris Associates v Voyce (2003)).
4 In some situation’s communication can be waived (e.g.
unilateral contracts or customary conduct between parties).
5 Generally, acceptance can be in any form, but if a specific
method of acceptance is known to be required then acceptance
must be in that form to be valid (Compagnie de Commerce et
Commissions S.A.R.L. v Parkinson Stove Co (1953)).
6 Acceptance of a unilateral offer need not be communicated,
because performance is the same as acceptance (Carlill v Carbolic
Smoke Ball Co (1893)).

Postal rule
7 In one situation the acceptance takes place before the offeror
receives notification of it – this is the ‘postal rule’.
a) Where use of the post is the normal, anticipated method
of acceptance, the acceptance is valid and the contract
formed when the letter is posted, not when it is received
by the offeror (Adams v Lindsell (1818)).
Key case: Adams v Lindsell
The postal rule was laid down in Adams v Lindsell (1818). On 2
September 1817, the defendants wrote to the claimants, who
processed wool, offering to sell them a quantity of sheep fleeces,
and stating that they required an answer ‘in course of post’.
Unfortunately, the defendants did not address the letter
correctly, and as a result it did not reach the claimants until the
evening of 5 September. The claimants posted their acceptance
the same evening, and it reached the defendants on 9 September.
It appeared that if the original letter had been correctly
addressed, the defendants could have expected a reply ‘in course
of post’ by 7 September. That date came and went, and they had
heard nothing from the claimants, so on 8 September they sold
the wool to a third party. The issue in the case was whether a
contract had been made before the sale to the third party on 8
September. The court held that a contract was concluded as soon
as the acceptance was posted, so that the defendants were bound
from the evening of 5 September, and had therefore breached the
contract by selling the wool to the third party. (Under current
law there would have been a contract even without the postal
rule, because the revocation of the offer could only take effect if
it was communicated to the offeree – selling the wool to a third
party without notifying the claimants would not amount to
revocation. However, in 1818 the rules on revocation were not
fully developed, so the court may well have considered that the
sale was sufficient to revoke
the offer, which was why an effective acceptance would have to
take place before 8 September.)
Legal Principle: An acceptance by post takes effect when it is
posted, rather than when it is communicated.

b) The rule applies where the letter of acceptance is received


after notice of revocation of the offer is sent (Henthorn v
Fraser (1892))
Key case: Henthorn v Fraser (1892) CA
The plaintiff (who could not write) was at the defendants’ office
in Liverpool on 7 July 1891 when they handed him an offer to
sell him certain houses. The plaintiff took the letter home to
Birkenhead. On 8 July, between 12.00 and 1.00 pm the
defendants posted to the plaintiff a withdrawal of their offer. At
3.50 pm, the plaintiff’s solicitor posted the plaintiff’s acceptance
of the offer. The defendants’ withdrawal arrived at 5.30 pm and
the plaintiff’s acceptance arrived at 8.30 pm. Held there was a
contract because acceptance was complete at the moment of its
posting, even though the offer was not made by post. Lord
Herschell and Kay LJ both rejected the idea that the postal rule
was based on implied authority from the offeror to the offeree to
treat the post office
as the offeror’s agent. Per Lord Herschell:
I should prefer to state the rule thus: where the circumstances
are such that it must have been within the contemplation of the
parties that, according to the ordinary usages of mankind, the
post might be used as a means of communicating the acceptance
of an offer, the acceptance is complete as soon as it is posted.
Lindley LJ did not comment on this aspect, but concurred with
the judgment of Lord Herschell. Q Is there any possible case
where Lord Herschell’s formulation of the
basis of the postal rule would give a different result from Lindley
J’s
formulation in Byrne & Co v Leon Van Tienhoven & Co (above)?

c) It can also apply even though the letter of acceptance is


never received (Household Fire Insurance Co v Grant
(1879)).
Key case: Household Fire Insurance v Grant (1879)
Grant made a written offer to purchase shares. Notification of
acceptance was posted but never received. When the company
went into liquidation, Grant’s claim that he was not a
shareholder and should not be liable for the value of the shares
failed. He had become a shareholder, even though unaware of it.

d) The postal rule can be excluded by the terms of the offer


itself (Holwell Securities v Hughes (1974)).
Key case: Holwell Securities v Hughes (1974)
An attempt to use the postal rule failed where the acceptance
was required to be ‘by notice in writing’. The fact that actual
notice was required meant that the postal rule did not apply.

8 The postal rule has limited application to modern


communications
technology.
Key case: In Entores Ltd v Miles Far East Corp. (1955),
offer and acceptance communicated by telex were valid because
the method was so instantaneous that the parties were deemed
to be dealing as if face-to-face,
even though they were in different countries.
To put it more clearly,
In Entores v Miles Far East Corporation (1955) the claimants
were a London company and the defendants were an American
corporation with agents in Amsterdam. Both the London
company and the defendants’ agents in Amsterdam had telex
machines, which allow users to type in a message, and have it
almost immediately received and printed out by the recipient’s
machine. The claimants in London telexed the defendants’
Amsterdam agents offering to buy goods from them, and the
agents accepted, again by telex. The court case arose when the
claimants alleged that the defendants had broken their contract
and wanted to bring an action against them. The rules of civil
litigation stated that they could only bring this action in England
if the contract had been
made in England. The Court of Appeal held that because telex
allows almost instant communication, the parties were in the
same position as if they had negotiated in each other’s presence
or over the telephone, so the postal rule did not apply and an
acceptance did not take effect until it had been received by the
claimants. Because the acceptance had been received in London,
the contract was deemed to have been made there, and so the
legal action could go ahead.

When an acceptance is made by an instant mode of


communication, such as telephone or telex, the postal rule does
not apply. In such cases the acceptor will usually know at once
that they have not managed to communicate with the offeror,
and will need to try again.
the reason is that such forms of communication are usually
instantaneous (Brinkibon v Stahag Stahl (1983)).
Key case: Brinkibon v Stahag Stahl (1983).
The facts here were similar, except that the offer was made by
telex from Vienna to London, and accepted by a telex from
London to Vienna. The House of Lords held that the contract was
therefore made in Vienna. In both cases the telex machines were
in the offices of the parties, and the messages were received
inside normal working hours.

In Brinkibon the House of Lords said that a telex message sent


outside working hours would not be considered instantaneous,
so the time and place in which the contract was completed
would be determined by the intentions of the parties, standard
business practice and, if possible, by analysing where the risk
should most fairly lie.

the time when these forms of communication are used may


cause problems in determining if a contract is made, as when a
fax is sent out of office hours.

Revision Acceptance
• What rules do you think courts should adopt for
communication by fax or email?
• What reasons have been given by the courts for the postal
acceptance rule?
• In what circumstances will the postal acceptance rules not
operate?
• When, if ever, can an offeror waive the need for
communication?