Contracts arise in almost every aspect of day-to-day life, including in business, in employing professionals and in purchasing products and services. Having the right contract in place greatly reduces the risk of disagreements and misunderstandings arising. If disputes do occur, then a robust contract will help resolve matters without the need for lengthy legal proceedings.
We take a look at offer and acceptance, the foundation of contract law.
Summary
This article includes the following:
- What is a contract?
- What is an offer in contract law?
- What is acceptance in contract law?
- Requirements for a valid offer and acceptance
- Counteroffers vs acceptance
- Termination of offer
- Practical business application
- Contract disputes
- FAQ
What is a Contract?
A contract is a legally binding agreement between two but sometimes more parties. While it is recommended that the agreement be put in writing, a contract can be made verbally.
There are five points which must be satisfied for a contract to be made:
- An offer made by one party
- Acceptance by the other party
- Consideration, which can be payment or an agreement to do something or not to do something
- The intention of both parties is to be legally bound by the agreement
- Capacity to enter into a legally binding contract, ie, the individual is mentally able to understand the contract, is usually aged 18 or over or is a company or other legal entity
If all of these essential elements are fulfilled, then a contract exists.
What is an Offer in Contract Law?
The offer to enter into a contract can be to do something or not to do something. To be valid, the offer must:
- Be capable of being accepted, ie, the other party understands that it is a proposal that the offeror intends to be bound by if it is accepted
- Be capable of being accepted without the need for anything else to take place
An offer can be made to an individual, a body, several people or, as in the case of Carlill v Carbolic Smoke Ball Co [1893], to the whole world. In the case of Carlill, an advertisement was held to be an offer to everyone. The advertisement offered the sum of £100 to anyone who contracted influenza while using a Carbolic Smoke Ball as directed. The court required the defendant to pay £100 to the claimant, who had contracted influenza.
Conversely, when an item is for sale in a shop, this is an invitation to treat, and not an offer. The contract is not made until the item is purchased at the till.
The case of Fisher v Bell [1961], putting a flick knife for sale in a shop window, did not constitute an offer; it was only an invitation to treat.
An offer must also be more than mere negotiation. In the case of Gibson v Manchester City Council [1979], the council decided to sell houses to tenants. Mr Gibson was told that the council ‘may be prepared to sell’, but that Mr Gibson would have to ‘make a formal application to buy.’
Following the elections, a new council was formed, which discontinued the policy of selling council houses. Mr Gibson claimed breach of contract.
The House of Lords held that the council’s letter was an invitation to treat and not an offer. The words ‘may be prepared to sell’ were fatal to construing the correspondence as an offer.
What is Acceptance in Contract Law?
Acceptance of the offer needs to be communicated to the offeror for the contract to come into existence. This can be done verbally or by conduct. For example, if the party in receipt of the offer starts work based on the terms of the offer and the offeror allows this work to continue, the courts may find that acceptance is implied.
The acceptance must also match the terms of the offer. If the terms are changed, this is a counteroffer, and a contract is not formed unless the other party accepts the counteroffer.
The terms of the agreement need to be certain. This means that where terms are vague or ambiguous, the court may decide not to enforce a contract.
In the case of Entores Ltd v Miles Far East Corp [1955], it was noted that a contract comes into force as soon as communication of acceptance is received and in the place where the communication is received. In this case, a contract was formed when a telex was received in London.
This contrasts with an earlier case of Adams v Lindsell [1818], where the court established the postal acceptance rule, stating that acceptance occurs the moment a letter of acceptance is put into the postal system.
In the case of Felthouse v Bindley [1862], the court found that an obligation cannot be imposed on the other party to reject their offer. Mr Felthouse wanted to purchase a horse from his nephew. Following discussions with his nephew, Mr Felthouse wrote saying, ‘If I hear no more about him, I consider the horse mine at £30.15s.’
The horse was auctioned by mistake by Mr Bindley. Mr Felthouse attempted to show that he had entered into a valid contract with his nephew to purchase the animal. The court stated that acceptance must be clearly communicated, and silence did not amount to this. While the nephew sent a letter to his uncle two days after the sale expressing interest in accepting the offer, the sale had already taken place, meaning the nephew no longer owned the horse and could not enter into a contract to sell it.
A contract is unilateral if the offer is in exchange for a specific act by the other party. Once the offeree carries out this action, the contract becomes binding and the offeror must fulfil their part of the contract.
In the case of Errington v Errington [1952], a man purchased a house for his son and daughter-in-law to live in. He told them that the deposit was a wedding gift and promised them that if they paid the mortgage, he would transfer the house to them.
The house remained in the father’s name, and after his death, his wife inherited it. The son left the property and went to live with his mother. The daughter-in-law continued to live in the property and paid the mortgage. The mother tried to obtain possession of the property from her daughter-in-law.
The court held that the father’s promise was a unilateral contract. When the couple paid the mortgage, they completed the contract. The daughter-in-law was entitled to remain in the house.
In some cases, acceptance may occur because of the conduct of one party. In Brogden v Metropolitan Railway [1877], Brogden supplied coal to the railway for many years on an informal basis, with no written contract. The railway drafted a contract and sent it to Brogden for him to review. He made some amendments and returned it to the railway. The railway filed the document but did not tell Brogden that they accepted the terms. However, business continued between them, with Brogden supplying coal and the railway paying him for it.
The House of Lords found that there was a valid contract. The amendments equated to a counteroffer, and by continuing to accept coal and pay the price stated in the contract, performance of the contract took place. As no objections were raised, the conduct meant a binding contract existed.
Requirements for Valid Offer and Acceptance
In summary, the requirements for a valid offer and acceptance of a contract are:
- The intention to create a legally binding agreement
- Certainty of terms
- Communication of acceptance
An offer can be withdrawn before acceptance, in which case the offeree is no longer entitled to accept the offer and create a contract. In the case of Dickinson v Dodds [1876], Mr Dodds offered his house to Mr Dickinson for £800, saying he would keep the offer open until Friday. On Thursday, Mr Dodds sold his house to a third party. He said that his withdrawal of the offer had been communicated to Mr Dickinson by a friend.
The court found that although Mr Dodds had made a promise to keep an offer open, he could withdraw the offer at any time before it was accepted. He had not received any deposit, and so he was not bound to keep the offer open. Communication of withdrawal of the offer via a friend was valid. Therefore, there was no binding contract.
Counteroffers vs Acceptance
A counteroffer, proposing different terms, destroys the original offer, meaning it cannot be accepted. In effect, a counteroffer is a rejection of the original offer. The counteroffer can be accepted, making a binding contract.
This is illustrated in the case of Hyde v Wrench [1840], in which Mr Wrench offered to sell his farm to Mr Hyde for £1,200. Mr Hyde declined the offer. Mr Wrench then offered the farm for £1,000, stating that this was his final offer. Mr Hyde responded with an offer of £950, which Mr Wrench refused, notifying Mr Hyde. Two days later, Mr Hyde stated that, in fact, he would buy the farm for £1,000. Mr Wrench refused to sell.
The court held that the counteroffer of £950 was a rejection of the offer of £1,000. The offer of £1,000 then ceased to be available to accept. Mr Hyde did not have a contract to buy. He could not revive the offer of £1,000.
A distinction is made between a counteroffer and a request for information. In the case of Stevenson v McLean [1880], an offer was made by McLean to sell iron to Stevenson. Stevenson replied by telegram, asking what payment terms he would accept. McLean did not reply and sold the iron to a third party.
Stevenson was not aware of this and sent a telegram accepting the offer. The court held that the offer still stood as Stevenson had only been asking for more information and not putting forward a counteroffer. The contract was binding, and Stevenson was entitled to buy the iron.
Termination of Offer
An offer can be terminated in several ways, including:
- Withdrawing the offer, which must be communicated to the offeree
- The offeree rejects the offer, which must be communicated to the offeror
- The making of a counteroffer
- By lapse of time, where the offer is stated to last for a set period, or otherwise, after a reasonable amount of time has passed
- Where an offer is conditional and the conditions can no longer be met, for example, in Financings Ltd v Stimson [1962], an offer relating to an undamaged car no longer existed after the car was damaged during its theft
- The death or incapacity of one of the parties
Practical Business Application
Common contract pitfalls include miscommunication, informal or unintentional offers sent by email, verbal agreements, and silence or failing to communicate a response clearly.
The best way to avoid legal difficulties when dealing with contracts is to ensure that the documents are bespoke and drafted by expert commercial solicitors.
A clearly written offer or a draft contract communicated as being a draft for negotiation will ensure that disagreements can be avoided at an early stage. A professionally drafted contract will also set you up for a strong ongoing relationship with the other party, ensuring everyone understands their obligations and that ambiguity is avoided.
Contract Disputes
There is a wide scope in contract law for disputes to arise. This could be in respect of a range of issues, including whether the terms of the contract have been breached, whether the contract is valid and whether the terms of the contract are fair.
Unfair contract terms are terms which cause a significant imbalance in the rights and obligations of each party in favour of a business seller or supplier.
Having a contract professionally drafted by a solicitor will give you the best chance of being able to rely on it in court.
Where a dispute arises, you are strongly advised to seek legal advice early on. Your solicitor will be able to take steps to try and resolve matters out of court and before the situation degenerates.
Contact Our Corporate and Commercial Solicitors
We routinely deal with contract disputes, and where necessary, we can negotiate on your behalf to find a solution. If this is not possible, you will usually be advised to try alternative dispute resolution, such as mediation or arbitration.
We can represent you during this process and prepare a robust case on your behalf, giving you the best chance of a satisfactory outcome.
Our corporate and commercial teams have a high level of expertise in contract negotiation and drafting, as well as dispute resolution. For more information on our services, see our dispute resolution and litigation page.
To discuss your contractual matters with our proficient lawyers, you can contact us via several channels. You may call us at 0330 173 3041, send us an email at info@witansolicitors.uk, or complete our contact form. We will engage with you and evaluate how we can assist. Our firm operates from offices situated in Birmingham, Northampton, and London.
FAQ
What is an offer in contract law in the UK?
An offer is a promise to do something if the party to which the offer is made agrees and provides something in exchange, such as money, goods or services. It must be communicated to the other party, and the terms must be clear and capable of being accepted.
What is acceptance in contract law in the UK?
Acceptance is agreement to a valid offer, and when it is communicated to the offeror, it forms a binding contract.
What is the difference between an offer and an invitation to treat?
An invitation to treat asks the other party to negotiate or allows other individuals to make offers. There is no intention to be legally bound until an offer is made and accepted.
The response to an invitation to treat is an offer, and the person who extended the invitation to treat then has the option of accepting the offer.
Can silence amount to acceptance?
Silence alone does not amount to acceptance, meaning communication is necessary. However, if silence is accompanied by conduct that amounts to accepting an offer or if previous dealings have allowed silence as acceptance, a contract may be formed.
What are the rules for acceptance under UK contract law?
Acceptance must be communicated and unqualified. If other terms are suggested, this is a counteroffer and cancels the original offer, which cannot subsequently be accepted. The person accepting the offer must do so within a reasonable time period or by any deadline expressed in the offer and must intend to enter into a binding contract.
