Offer and acceptance in contract law

Certainty in offer and acceptance

For a contract to be valid in law, the parties must:

  • have reached an agreement (offer and acceptance);
  • intend to be bound legally;
  • have provided valuable consideration.

An offer should be distinguished from an ‘invitation to treat’. This would include goods on display in a shop, which are not offers but invitations to potential buyers to make an offer. The buyer offers to buy the goods and the seller can decide whether to accept the offer. This rule also applies to most adverts, though the courts have held that some adverts can amount to an offer (Carlill v Carbolic Smoke Ball Co (1893)).

For acceptance to be valid the following conditions must be met:

  • Acceptance must be communicated to the seller: the buyer must receive the acceptance to be effective (Entorres v Miles Far East (1955)); silence will not suffice (Felthouse v Bindley (1862)); acceptance can be made through conduct (Butler Machine Tool v Ex-cell-o Corporation (1979)).
  • The terms of the acceptance must exactly match the terms of the offer: if the terms are not the same, this will actually be a counter offer and no contract will have arisen (Hyde v Wrench (1840)).
  • The agreement must be certain (see below).

Consideration is something of legal value which is given in exchange for something else. It can be anything of value (eg, money, property, or a service), which each party to a legally binding contract must agree to exchange if the contract is to be valid. In Currie v Misa (1875), Lush J referred to consideration as consisting of a detriment to the promisee or a benefit to the promisor. He described it as: ‘…some right, interest, profit or benefit accruing to one party, or some forebearance, detriment, loss or responsibility given, suffered or undertaken by the other.’

Certainty of agreement

Even though the parties may have appeared to make an agreement by the exchange of a matching offer and acceptance, the courts may refuse to enforce it if there appears to be uncertainty about what has been agreed, or if some important aspect of the agreement is left open to be decided later.

In Scammell v Ouston (1941), for example, the parties had agreed to the supply of a lorry on ‘hire purchase terms’. The House of Lords held that in the absence of any other evidence of the details of the hire purchase agreement this was too vague to be enforceable, and there was therefore no contract.

This does not necessarily mean that all details of a contract must be finally settled in advance. It is not uncommon, for example, in relation to contracts for the supply of services for the precise amount to be paid to be left unspecified at the time of the agreement. This approach now has statutory force by virtue of s 15 of the Supply of Goods and Services Act 1982, which states that:

  1. Where…the consideration for a service is not determined by the contract, left to be determined in a manner agreed by the contract or determined by the course of dealing between the parties, there is an implied term that the party contracting will pay a reasonable charge.
  2. What is a reasonable charge is a question of fact.

The same rule also operates in relation to goods by virtue of the similar provision contained in s 8(2) and (3) of the Sale of Goods Act 1979.

Meaningless phrases

The decision in Scammell v Ouston (1941) appears to open the door to an unscrupulous party to include some meaningless phrase in an agreement, which would then allow him to escape from the contract if he wished on the basis of uncertainty.

To have such an effect, however, the phrase must relate to some significant aspect of the contract. If it can be deleted and still leave a perfectly workable agreement, the courts will ignore it. This was the position in Nicolene v Simmonds (1953), where the contractual documentation contained the statement ‘we are in agreement that the usual conditions of acceptance apply’. Since there were no ‘usual conditions,’ it was held that this was simply a meaningless phrase, which could be ignored. There was nothing left open which needed to be determined.

Incomplete agreements

If an agreement leaves undecided, and undeterminable, some important aspect of the contract, then the courts will not enforce it. This can arise where clear words are used, but the meaning of which there is no dispute, but which do not settle some significant part of the contractual terms.

In May and Butcher v R (1929), for example, the agreement provided that the price, and the date of payment, under a contract of sale, was to be ‘agreed upon from time to time’. The House of Lords held that there was no contract in this case. The parties had not left the price open, they had specifically stated that they would agree in the future. The contract contained an arbitration clause, but the House of Lords considered that this was only meant to be used in the event of disputes, and could not be the means of determining basic obligations.

Mechanism for resolving disputes

The contract will not be regarded as incomplete if it provides a mechanism for resolving an aspect which has been left uncertain. In relation to the price, the courts will often be prepared to give effect to an agreement where property is to be valued by an independent valuer, or where the price is to be determined by reference to the prevailing market price. In such situations, the contract provides a mechanism by which the uncertainty can be resolved.

In Sudbook Trading Estate v Eggleton (1983), the price for the exercise of an option to purchase was to be determined by two valuers, one to be nominated by each party. One party refused to appoint a valuer, and claimed the agreement was therefore void for uncertainty. The House of Lords held that the contract was not uncertain as it provided a clear mechanism to determine the price. The mechanism was not, however, itself an essential term of the contract. It was simply a way of establishing a ‘fair’ price. If the mechanism failed, the court could substitute its own means of determining a ‘fair’ price.