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Contract Agreement Formation

By Edited Nov 13, 2013 0 0

Was the contract borne of an offer or did it amount to something less is usually the question that is asked to determined whether a contract was formed.

You may ask, what then is an offer?
An Offer is the proposal of terms with intention to be legally bound
You should look for an expression of a commitment to be bound, or conference of the power to bind as opposed to a request or supply of information

Another way is to ask:
Has the particular negotiation reached the point of a binding contract making reversal impossible?

If you intend to argue for something less, look to see if it is an invitation to treat.

The General Rule:
Displays and adverts are not offers but invitation to treat; Pharmaceutical society of GB v Boots Cash Chemists (1953), Fisher v Bell
In those cases, the customer makes the offer upon arriving at the counter, and the shop accepts
(rationale; it is only common sense for shops to run out of stock and naturally can't sell to everyone)

Is there an exception to the rule where offer takes place at point of advertisement or display?
Yes there is, in the cases of Chapelton, as well as Carlil

In Auctions:
Usually, the bid is the offer, hammer is acceptance

Exception: When it is advertised to be without reserve, consideration and acceptance is provided by bidder on bid, a "2 contract" analysis forces the auctioneer into sale
This removes the right of the auctioneer to revoke

Letter of intentions:
Here you need to look at Gibson v Man CC
where if it is such the case where it is expressly stated that the letter not be 'regarded as a firm offer of mortgage' and that 'council may be prepared to sell the house'
It cannot be taken to be a contract formed and made. Also, as in British Steel Corp v. Cleveland Bridge & Engineering Co Ltd
Letter of intent on its own is not a contract

Helpful guide: Is the offer unilateral or bilateral?
It is unilateral if only one party makes an express promise (usually a reward)
Significance: it changes what (i) constitutes valid acceptance and (ii) when offers are irrevocable or revocable
can be used to push contracts onto
(i) acceptance on satisfaction of condition, acceptance need not be communicated Carlil v carbolic smoke ball
point of acceptance at completed performance, however the offeree is not bound/obliged to perform
(ii) revocation cannot be made upon inducement of reliance; i.e. once offeree has begun on performance, offerer is unable to revoke Errington v Errington *

Tenders and 2-contract Analysis
General rule of the thumb:
(i) invitation to tender = invitation to treat
(ii) offer is made by persons submitting tenders
(iii) acceptance is made when inviter of tenders accepts one of (ii)

However, where there are other issues, two contract analysis has been invoked to ensure fairness and justice
So as to protect the party, there is an imposition of a 2nd offer; one of a unilateral contract that is then enforceable

Extraneous terms as has been surfaced by cases
Harvela* : accept highest complying offer
Blackpool* : Consider any conforming tender (with respect to method of submission)

Often, one party will argue that their tender was mere invitation, while the other would attest on a 2 contract analysis that another contract has been made.
Courts will often tilt between either positions considering policy concerns and will try to strike a balance between freedom to contract and freedom from contract,
ensuring sufficient room to manoeuvre and freedom to negotiate, although they would acknowledge that it is unfair for a party to induce reliance and subsequently pull out.

Now that the offer is settled, we move on towards...

Issue part 2: Has there been effective communication?
The Requirement: Has it been brought to the attention of the designate recipient? (within reason)
And if not, Whose Fault is it?

Two Way Instantaneous Communications e.g. telephone, face to face

A contract is formed immediately upon attention Brinkibon Ltd v Stahag Stahl (1983)

Fault is determinative by who should have detected and rectified the comms failure?

If it is the Offeror, the Offeree's acceptance is effective
If it is the Offeree, the Offeree's acceptance is ineffective

Examples were provided (paraphrased) by Denning in Entores v Miles Far East Corp (1955) and further affirmed by Brinkibon

If a face-to-face oral acceptance is drowned out by a noisy aircraft flying overhead, the offeree must repeat his acceptance once the aircraft has passed
If the telephone goes dead before the acceptance is complete, the offeree must telephone back to complete the acceptance
If the offeror does not catch the clear and audible words of an acceptance or the printer receiving a telex runs out of ink but the offeror does not bother to ask for the message to be repeated, it is the offeror's own fault that he did
not get the acceptance and he will be bound

When neither side is blameworthy, for e.g. massive hardware failure of telecommunications cables carrying internet traffic, then we must go by the rule of requirement of actual communication of acceptance where it favors the offeror
Lord Denning: if 'the offeror without any fault on his part does not receive the message of acceptance-yet the sender of it reasonably believes it has got home when it has not-then I think there is no contract'

One Way Instantaneous communication. For e.g. email, fax, facebook, twitter

A contract is formed (acceptance takes place) when a reasonable offeror would access the message, as circumstances provide
e.g. telex sent to a place of business during ordinary business hours, communication has been effective, even if unread Tenax SS Co Ltd v The Brimnes (1975)
The inverse is also thus implied

The fault and responsibility is determinative on which party is better placed to avoid the risk of a failure of communications
In the default setting where neither party is at fault, the risk lies with offeree
Where offeror has control of mode of communication, such as an answer phone, the risk should then be his to bear

As for a revocation of offer:
Revocation can take place any time before acceptance, so long as it has been communicated effectively (with exceptions however)
Used to argue that there is no contract because it has been revoked
Receipt upon reason Tenax SS Co Ltd v The Brimnes (1975)
Offer by advertisment revoked by new advertisment even if offerees do not see it Shuey v US (1875)
Also effective even by unauthorised third party, although weak, offeror must show offeree's doubt of information is unreasonable, a reliable third party would be an easier case

You can also check out another infobarrel article on contract creation and management.

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