Contract Law 2018-19 1. Introduction, Offer and Acceptance PDF

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Contract Law LW 1130/1131 – 2018/19 Leicester Law School

Contract Law Lecture Handout: Topic 1: Contract Formation: Offer and Acceptance Should you need any of our course materials in another format, please speak to the Module Convenor. Note that Contract Law has more than one module code. Handouts apply to all

Topic 1: Offer and Acceptance: Syllabus and Learning Outcomes From your lectures and independent study you should be able to:  Demonstrate an understanding of the function that “offer” and “acceptance” perform in the Law of Contract;  Show an understanding of the need for contractual intention when there is an offer and acceptance, and explain and apply the rules in Carlill v Carbolic Smoke Ball Ltd [1893] 1 QB 256 and Blue v Ashley [2017] EWHC 1928.  Explain the difference between an offer, a response to a request for information, and an invitation to treat, and apply the principles in Harvey v Facey [1893] AC 55; Partridge v Crittenden [1968] 1 WLR 1204; Leftkowicz v Great Minneapolis Surplus Stores Inc 86 NW 2d 689 (1957); Fisher v Bell [1961] 1 QB 394; Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401, to identify and explain the legal consequences of any particular communication in a factual scenario.  Explain the various responses to an offer and their differing legal consequences: Rejection, counter-offer (Hyde v Wrench (1840) 3 Beav 334), and acceptance, and to be able to identify, when presented with a problem, the nature and effect of particular communications made in response to an offer, citing appropriate authority.  Explain that a contract cannot come into being without an “acceptance” of the offer; explain what amounts to an “acceptance” and apply the definition.  Show clear appreciation that acceptance must be communicated to the offeror before a contract can be formed between the parties (Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256), and to understand that the relevant rule to apply depends on the type of communication: Entores Ltd v Miles Far East Corporation [1955] 2 QB 327; Adams v Lindsell (1818) 1 B & Ald 681.  To understand and be able to apply the principles that relate to revocation of an offer: Dickinson v Dodds (1876) 2 Ch D 463.  Understand how to distinguish between unilateral and bilateral contracts.  Explain clearly the concept of consensus ad idem and to know the rules by which the courts determine whether the parties have reached agreement: Smith v Hughes (1871) LR 6 QB 597. 1

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Create critical arguments about the law of offer and acceptance on the basis of whether the law conforms with certain basic policies and principles of Contract Law: See APPENDIX 1.

1. INTRODUCTION Everybody enters into contracts at some point. The Law of Contract comprises:    

How contracts are formed: Contract Formation. A contract may be void or voidable due to a vitiating factor, e.g. Mistake, Misrepresentation. We have to know the contents of a contract: Terms, incorporation, unfair terms, statutory and consumer protection against unfair terms etc. Performance and breach of contract, termination for breach, cancellation through frustration, remedies for breach of contract.

Formation of Contract: The requirements for a valid contract Topic 1. Offer and acceptance; including contractual intention and consensus ad idem (“meeting of the minds”). Topic 2. Consideration incl. Promissory Estoppel.

LECTURE CASE STUDY 1: How many contracts have been formed in this situation? Jason is the owner of two cars, one red and one blue. He decides to sell both cars. On one Saturday in January, he places an advert in the Leicester Daily Newspaper giving details about both cars and stating: FOR SALE: red car: £1,000. FOR SALE: blue car: £2,000. Jason then gives his email address for further information. Adam emails Jason on the following Monday saying “I am very interested in buying your red car. Would you be prepared to accept £900 for it?” Jason replies that he would not accept £900, but would accept £950. The following day, Adam decides to buy the car at this price. Experiencing problems with his emails, he writes a letter to Jason, saying that he will buy the car for £950. Unaware of Jason’s address, he sends it to the office of the Leicester Daily Newspaper, marking it for the attention of Jason. Jason never receives the letter. Brian emails Jason on Wednesday saying “I would like to buy the red car that you advertised for £1,000”. Jason replies by email saying “OK: I’m glad to hear it”. However, Jason then immediately sends another email saying that the car is no longer available, having now changed his mind altogether about selling the red car at so low a price. Corina wants to buy the blue car. She emails Jason saying: “I will buy your car for £1,500. Thinking that Corina was referring to the red car, Jason replied and agreed. Both Adam and Brian claim to have contracts to buy the red car. Corina now claims to be entitled to buy the blue car for £1,500. 2

Advise Jason.

2. OFFER AND ACCEPTANCE: The Offer For a contract to have been formed, there must be (amongst other factors) an offer and an acceptance. We need to know the legal requirements of an offer and of an acceptance, so that we can apply them to a problem question (such as the “Jason’s Cars” one) to determine whether a contract has been formed.

i) An “offer” When we are analysing the facts of a legal problem, we look at the communications between the parties to determine their legal effect. The words must convey a very precise meaning to be an “offer”. Here is the definition of an “offer”: “An offer is an expression, by words or conduct, of a willingness to be bound by specified terms as soon as there is acceptance by the person to whom the offer is made”: EG Chitty on Contracts (32nd ed., 2015), cited Blue v Ashley (below), para.52. There must be sufficient certainty of terms and the discussion/communication must show an intention to be bound by the terms of the offer. Note the importance of intention/willingness to be bound: “Contractual Intention”. Let’s explore this idea further: Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256, Court of Appeal  

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CSBC issued an advert for its Smoke Ball. It promised that if anyone bought the smoke ball and used it 3x a day for two weeks, as directed, and they still caught the flu, then the Company would pay them £100. The advert also stated that, in order to show its sincerity, the Company had deposited £1,000 with the Alliance Bank, Regent Street. Mrs Carlill bought a Smoke Ball, used it in accordance with directions, and caught flu. The Company argued that the advert did not show sufficiently serious intent to be bound by the statement and could not be taken to be an offer at all. Court of Appeal held: Although this advert in different facts might just be seen as advertising blurb, this particular one demonstrated a serious intention to be bound. Therefore, the statement made in the advert was a binding promise as soon as Mrs Carlill followed instructions. How was this conclusion reached? 3

REASONING:  The contractual intention was found in the fact that the terms of the offer were clear and very specific (if Mrs C used the smoke ball as directed and still caught flu whilst she was using it, then she could claim £100 – no ambiguity there).  It showed serious contractual intent when the company said they had deposited the money with their bank to be used for the “reward”.   

Adverts in magazines etc not normally interpreted as contractual offers. Note the difference between bilateral and unilateral contracts. In LECTURE CASE STUDY: According to this law, who do you think makes the first offer in the Jason/Adam scenario? What do you think Jason’s intentions are when he places the advertisement?

Harvey v Facey [1893] AC 552 PC You must be able to distinguish a contractual offer from the response to a request for information. A request for information and a response do not have legal effect. A series of telegrams between the parties had given rise to a dispute as to whether there was a contract for Facey to sell land (Bumper Hall Pen) to Harvey.

Requesting information only

HARVEY: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price”.

Only a response to request – no details, or terms, or intent to be bound to sell.

FACEY: “Lowest price… £900”.

Because there was no offer, this could not be HARVEY: Replied “agreeing” to buy Bumper Hall Pen. an acceptance.

Why was there no contract here? Facey had not made an offer here that showed a serious intention to be bound to sell the land to H for £900. He was only responding to a request for further information. Therefore, because Facey had made no offer, Harvey’s final response “agreeing” to buy could not be a legal acceptance. There was not legal offer for him to accept. 4

No offer and acceptance = NO CONTRACT. BTW: If any offer had been made, it was Harvey’s final communication saying that he would buy the land for £900. But because there were no further communications between the parties, it had not been “accepted”. Blue v Ashley [2017] EWHC 1928       

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Mr Blue was a specialist in investment banking and corporate finance. He worked for Mr Ashley’s company, Sports Direct, in the capacity of giving company strategic advice. Mr Blue suggested it would be a good idea for Mr Ashley to meet a couple of other specialists, with the aim of persuading them to work on behalf of Sports Direct. With this aim in mind, Mr Ashley, Mr Blue and these others got together in a local public house: The Horse and Groom. January 2013. After a good deal of drinking, the parties discussed Sports Direct’s share price and the price it might reach. The current share price was £4. The group said that Mr Blue should be offered an incentive to work on the company’s image and growth. Then followed jokey banter about what incentive Mr Blue should be paid, along the following lines: Ashley – If the shares go up to £8, I’ll be so wealthy it won’t matter – how about £10million? Others – should really be £20million; Ashley: let’s split the difference and call it £15million if price gets to £8 in the next three years. – no contractual intention Not a serious conversation, but Mr Blue took it seriously. 25th February 2014: Sports Direct’s share price hit £8. Mr Ashley did not make the payment, and did not recall making any promise to pay £15million. Mr Blue resigned because of a lack of clarity with his position with the company and sued for £15million. Leggatt J held that there was no contract: Mr Ashley was not required to make the £15million payment. “They all thought it was a joke. The fact that Mr Blue has since convinced himself that the offer was a serious one, and that a legally binding agreement was made, shows only that the human capacity for wishful thinking knows few bounds:” Per Leggatt J, para.142.

Why was there no contract here? Mr Blue’s claim failed on the point of contractual intention. Before an offer and the agreement resulting from acceptance can amount to a valid contract, the parties must intent to create legally enforceable rights. Mr Ashley did not make a serious offer in that pub meeting on 24 January 2013 that expressed a willingness to be bound. How was this conclusion reached? REASONING

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The purpose of the occasion was not for Mr Ashley to make a contract with Mr Blue, but to meet the others. Although it is possible for contracts to be formed in social occasions (see MacInnes v Gross [2017] EWHC 46), the pub/drinking context and jokey banter, all suggested that there was no serious intent to be bound on the part of Mr Ashley. The terms were too vague and did not specify what Mr Blue had to do in terms of work involved and there were no performance measurement standards: How long did the share price have to stay above £8? The amount of £15million was fixed arbitrarily and casually – no business person could be expected to act this way. It was obviously a joke. No serious intention There was no commercial sense to the offer – far too high for the work involved. Mr Blue could not be expected to bring about such a change in the share price. A reasonable business person would have confirmed the arrangement, e.g. in writing.1 LECTURE QUESTION: What was the difference(s) between Blue v Ashley and Carlill v Carbolic Smoke Ball Co?

ii) An offer must be distinguished from an “invitation to treat” A communication might be an invitation to treat, i.e. something not definite enough to be an offer, but only an opening gambit in negotiations or willingness to receive offers. EXAMPLE: Advert: “Car for Sale: offers around £10,000”. This might be seen as an “opening gambit” or invitation to make an offer, rather than a contractually binding offer in itself. An invitation to treat is not an offer so it cannot be “accepted”. EXAMPLE: Advert: “Car for Sale: offers around £10,000”: Mat responds: “I’ll buy the car for £10,000”. No contract. Mat’s response is not an acceptance because there was no offer – only an invitation to treat. (Although Mat may be taken as making an offer that the advertiser could accept). No legal consequences a) Adverts to the public are usually invitations to treat The law generally presumes that a statement made in an advert is an invitation to treat.2 This presumption can be dislodged if there is sufficient indication that it is an offer, as in the Carbolic Smoke Ball case (above). Partridge v Crittenden [1968] 1 WLR 1204: 

Advert in magazine for sale of birds: Held to be an invitation to treat.

1 Word-of-mouth contracts are permissible. However, there may be no contemporaneous written record and evidence may be based on memory. This is an important point that was brought out in Blue v Ashley. However, you are not required to deal with questions of evidence in this module. 2 It is “presumed”: A presumption is a “starting point” of the law. It can be displaced. 6

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In theory, had it been construed as an offer, there could have been large numbers of people “accepting”: i.e. it would have been commercially unworkable. How is the following case different?

Lefkowitz v Great Minneapolis Surplus Store Inc. (1957) 251 Minn. 188, 86 N.W.2d 689 (Supreme Court of Minnesota)  

Advert: “3 fur coats for $1 each: first come – first served”. This was an offer. The terms were certain and potential acceptances (i.e. contracts) were limited to the first three customers.

b) Displays in a shop – generally held to be invitations to treat Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd. [1952] 2 QB 795. When was a contract formed in a chemists shop?   

Items were displayed on the shelves of the shop. It was argued that this is an “offer”. However, it wasn’t. The display is only an invitation to treat. When the customer presented the item at the till, this was the “offer”. Cashier could have refused sale at this point. Offer was “accepted” when the cashier rung through the sale. See also Fisher v Bell [1961] 1 QB 3943

Putting it all together: LECTURE CASE STUDY 1: Jason’s Cars    

Remember that Jason put an advert in the Leicester Daily Newspaper, advertising his two cars, one red one blue, for sale in January. What is the advert? Who has made the first “offer” in Adam’s scenario? What is Brian’s first communication: “I would like to buy the red car for £1,000”?

And so where do we go from here? What are the various legal responses that can be made to an offer and when does a contract come into being?

3. RESPONSES TO AN OFFER: Rejection, Counter-Offer, Acceptance - acceptance is the only one that can result in a contract

3 Note that there are other situations dealing with the distinction between an offer and an invitation to treat (which we will not cover in lectures) that are considered further in Taylor & Taylor, Contract Law: Transactions by machines, auctions, and tenders. 7

i) Rejection: An offer is “dead” if rejected. It can no longer be accepted. EXAMPLE: A-B: “I offer to sell you my car for £1,000.” B-A: “No thank you”. The offer is now DEAD and cannot be accepted by B saying “actually… I’ve changed my mind”. Legal consequence – it kills the offer so that you can’t change your mind ii) Counter-offer (no but…) Taylor, p.29: “The offeree changes the terms of the offer and bounces it back for the offeror to accept.” The legal effect of a counter-offer is the same as rejection: It kills the offer and it cannot therefore be accepted later. Hyde v Wrench (1840) 3 Beav 334; 49 ER 132   

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W offered to sell his farm to H for £1,000. H responded to this offer by offering to pay £950. The question was whether this counter-offer rejected the original offer, i.e. could the offeree still “have his cake and eat it” – make a counter-offer but still reserve his ability to accept the original offer? (Taylor). HELD: A counter-offer kills the original offer and it cannot later be accepted. In LECTURE CASE STUDY 1: Jason’s cars, do you think that Jason’s response to Adam’s first offer is an acceptance or a counter-offer? If the latter, describe its legal effect.

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A counter-offer should be distinguished from a mere request for information, which does not kill the original offer. The offeree can still accept it. EXAMPLE: A-B: “I offer to sell you my car for £1,000”: B-A: “Does that include the Satnav?” This is not a counter-offer.

iii) Acceptance Once there is an acceptance of an offer, there is a contract (assuming the other elements, e.g. consideration, are present). ACCEPTANCE = an absolute, unconditional and unequivocal assent to the terms of the offer. Acceptance must be a “mirror image” of the offer. EXAMPLE: A-B: “I offer to sell you my car for £1000”. B-A: “Fine: You’ll have my cheque for this amount in the morning”. LECTURE CASE STUDY: Did Jason “accept” Brian’s offer for the red car? 8

Acceptance and the Battle of the Forms: Whose terms and conditions prevail? Offer, counter offer and acceptance in a commercial arrangement Businesses like to contract on their own terms. They agree on the price and goods, but each says the agreement is subject to their own terms and conditions. Which ones prevail? Butler Machine Tool Co. Ltd. v Ex-Cell-O Corporation [1979] 1 WLR 401  Seller: offered to sell a machine tool, on their standard terms and conditions (which included a price variation clause).  Buyer: said they accepted on their standard terms and conditions (which did not contain a price variation clause).  The buyers sent a form with their Terms and Conditions, which included a tear-off slip for the sellers to return which stated “we accept the buyer’s order on their Terms and Conditions”.  Seller returned the tear-off slip.  HELD: The majority held that the seller made an offer; the buyers: a counteroffer. The seller’s accepted this by returning the tear-off slip. iv) Communication of the acceptance In order to make a binding contract it is necessary for acceptance to be notified to the offeror: Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256, per Lindley LJ. (Although exceptionally the offeror may waive the notification requirement.) The courts have developed rules to determine whether an acceptance has been communicated. This depends on the mode of communication used: 1. Instantaneous communication. 2. Non-instantaneous communication. 1. Instantaneous communication: Acceptance occurs at the point it is received by the offeror. Entores Ltd. v Miles Far East Corporation [1955] 2 QB 327    

RULE: Communication of acceptance takes place at the time it is received. In face-to-face situations, it will usually be clear if the offeror has received the acceptance. If it was the offeror’s fault that he did not hear the words of...