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Formation of Contracts 1 Pre-contractual Negotiations
If negotiations are aborted, one may seek restitution of value for services and goods in the law of unjust enrichment: British Steel Corporation v Cleveland Bridge and Engineering
The British Steel point applies only where no contract is formed. However, the "subject to contract" bar may be waived expressly or impliedly by contracting parties, thereby giving rise to contractual rights.
An inference of an implied waiver can arise where there has been significant performance and the negotiations have eliminated all points of difference: RTS Flexible Systems Ltd v
Molkerei Alois Muller GmbH (2010). Facts: RTS agreed to install machinery in Müller's dairy products factory. The parties had initially contemplated (indicated by a 'subject to contract' formula meaning that no contract exists) that they would only enter a contract by formally signing it, following satisfactory negotiations. A dispute arose over whether there was a contract. Verdict (Lord Clarke): a contract arose. British Steel was distinguished
"because here all the terms which the parties treated as essential were agreed and the parties were performing the contract without a formal contract being signed or exchanged, whereas
[in the British Steel case] the parties were still negotiating terms which they regarded as essential".
2 Offer and acceptance
A contract is normally formed by the exchange of an offer and acceptance: Gibson v
Manchester City Council
Invitations to treat
Definition: An offer is a clear expression of an unequivocal willingness to be bound by the offeree's acceptance and almost always has to be successfully communicated by the offeror to the offeree.
Distinct from: an invitation to treat, which is a preliminary communication not intended to be open to acceptance.
Crest Nicholson v Akaria: whether a communication contains an offer is determined using the objective principle, considering all the circumstances within which the alleged offeree receives the putative offer. The question is if the offeree, having the knowledge of the relevant circumstances which he had, and acting reasonably, would have understood that the offerer was making a proposal which he intended to be bound in the event of an unequivocal acceptance i.
Advertisements are an invitation to treat
Apply the cases below analogously
Grainger v Gough (1896)
Facts: Price lists for wine were circulated by a wine merchant.
Verdict: Only an invitation to treat. If the circulation of the lists constituted an offer,
this creates the risk that the seller is unable to carry out all the incoming contractual obligations to supply wine due to limited stocks.
Partridge v Crittenden (1968)
Facts: D put out an advertisement containing the words "Bramblefinch cocks,
Bramblefinch hens, 25s. each" but without the words "offer for sale".
Verdict: The advertisement constituted an invitation to treat and not an offer to sell due to the absence of the words "offer for sale". T
However, if the advertisement advertises a unilateral contract—containing a clear-cut expression of willingness to be bound—an offer can be found.
Carlil v Carbolic Smoke Ball Co (1893)
Facts: D advertised that they would pay £100 to anyone who contracted influenza despite using their "smoke ball". They also stipulated that the device had to be used in a certain way and said that £1000 had been deposited in a bank, ready to be paid out.
P used the smoke ball but contracted influenza, and sued D for the £100.
Verdict: An advertisement containing an unequivocal offer of a reward can be construed as a true offer, not a mere invitation to treat, provided also that there is an intent to create legal relations. The advertisement was intended to spur readers into action and was therefore intended to create a unilateral contract.
ii. Goods on display (even with price tag on it) is invitation to treat: Pharmaceutical
Society v Boots (1953)
Termination of an offer
There are various ways in which an offer may be terminated.
i. Counter-offer Definition: A clear presentation by the offeree of an alternative set of terms, or the alteration of a significant term. Andrews: a material `push-back' or categorical revision. Note: this is distinct from a tentative or exploratory request for clarification, a "mere inquiry", whereby the original offer still stands. The difference is between one of 'asking nicely' and 'stating categorically (alternative terms)'.
Stevenson, Jacques & Co v McLean (1880), per Lush J at 349
`[T]he form of the [claimant's] telegram is one of inquiry. It is not "I offer forty for delivery over two months," which would have likened the case to Hyde v Wrench (1840)
… The words are, "Please wire whether you would accept forty for delivery over two months, or, if not, the longest limit you would give." There is nothing specific by way of offer or rejection, but a mere inquiry, which should have been answered and not treated as a rejection of the offer.'
Where the counter-offeree (that is, the original offeror) rejects the counter-offer, the original offer is no longer available for acceptance, in the absence of objective and explicit indication by the counter-offeree otherwise.
Hyde v Wrench (1840)
Facts: A offered in writing to sell to B a farm for £1000. B counter-offered £950,
which was rejected by A. B then wrote and purportedly accepted A's original offer,
but A contested whether B had the right to revert to the original offer. B sued.
Verdict: Unsuccessful. B could not revive A's original offer; by the time the counteroffer was rejected, the offer no longer exists.
Commentary: This rule provides for a) clarity in commercial dealings and b)
protection of the offeror against haggling; otherwise the offeree could offer lower prices while reserving the right to accept the original offer.
Note: Livingstone v Evans (1925): Canadian case where the original offeror replied to the counter-offer "cannot reduce price", which was held to represent an objective and explicit indication to reaffirm the original offer
Note: It is unclear when the original offer is terminated. This point of law is unsettled but it may be argued that B's counter-offer is equivalent to a rejection by B of the original offer, especially given that communicated rejection of an offer immediately terminates it (Grant v Bragg)
ii. Revocation of offer
The Brimnes: the offeror must make reasonable effort to bring the notification of revocation to the attention of the offeree. Andrews: Withdrawal of an offer is effective when an emailed, posted or faxed revocation
(the case involved a telex but this general principle may be derived) reaches the other party during ordinary business hours, even when it is not read. This is because the offeree would have had the reasonable opportunity to read it.
Mondial Shipping & Chartering v Astarte Shipping Ltd (1995): If a notice of revocation is sent outside business hours of the recipient, the time when the recipient's office reopened for business was the moment of receipt of notice.
Byrne v Van Tienhovan (1880): The offeror's revocation of the offer must be known to, or at least must have reached, the offeree before he posts the letter of acceptance. In other words,
the postal rule-that postal acceptances create binding contracts immediately-do not apply to revocations. Facts: D posted a letter to P offering tinplates for sale. P telegraphed acceptance on 11 October but on 8 October D had sent another letter withdrawing their offer, and refused to go through with the sale. Verdict: there was a contract. Because the postal rule does not apply to revocations, revocations are only valid upon reaching the offeree. In this case, the revocation arrived after acceptance, so it was not valid.
Indirect revocation: the offer may be revoked where the offeree has by chance acquired knowledge of the offeror's decision or conduct on the part of the offeror manifestly inconsistent with the offer remaining open for acceptance Dickinson v Dodds (1876).
Facts: D offered to sell a house to P and said that the offer would be left open until 9am,
Friday. On Thursday D sold the house to a third party without informing P, who found out anyway from a fourth party. P still handed over a letter of acceptance before the deadline.
Verdict: Unsuccessful. The offeree has by chance acquired knowledge of the offeror's decision or conduct on the part of the offeror manifestly inconsistent with the offer remaining open for acceptance.
iii. Lapse of time
An offer lapses, and so is incapable of being validly accepted, if it has not been accepted:
Before a fixed deadline for acceptance, should one be specified (Grant v Bragg)
Within a reasonable time, should there be no specified fixed deadline for acceptance
(Manchester Diocesan Council for Education v Commercial & General Investments
Cross-offers do not automatically lead to a binding contract, as there is no sequential offer and acceptance
Tinn v Hoffman & Co (1873) Facts: H wrote to T offering to sell iron. On the same day T wrote to H offering to buy iron on the same terms.
Verdict: No contract existed. Cross-offers indicate a bare coincidence of minds, but not a binding contract. There was no sequential offer and acceptance.
Commentary: Grove J observed that if X were to send Y an offer by letter and coincidentally Y sent an identical offer to X but X made a speedier communication cancelling the offer, it would be troublesome if the posting of the offers was regarding as having already created a contract.
ii. Need for awareness of offer:
The offeree must be aware of the offer (Gibbons v Proctor)
The offeree must have remembered it (R v Clarke)
The offeree need not be motivated to accept solely on the basis of the offer (Williams v Carwardine)
Williams v Carwardine (1833)
Facts: A dying woman gave information entitling her to a reward of which she was aware. She did so primarily to increase her chances of going to Heaven. The offeror claimed that the offeree was motivated by her moral/spiritual duty instead of the contractual obligations.
Verdict: It did not matter that she had been actuated by higher obligations, as factually she had been aware of the offer and did satisfy the offer, thus entitling her to the promised reward.
Entores v Miles Far East Corporation (1955): As a general rule, the offeree must take reasonable steps to bring his acceptance to the attention of the offeror. There is a general requirement that the offeror must receive notification of acceptance.
Y makes an offer to X, telling him also he will be on holiday for the next week. X sends a non-postal letter of acceptance the next day. There is prima facie no contract.
However, if Y makes an offer to X, and Y falls ill the next day unbeknownst to X, then if
X sends a non-postal letter of acceptance the next day, there is a contract.
Exceptions to general rule:
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