5 Agreement: Offer and Acceptance
Learning objectives
On completion of this Chapter, you should be able to:
- Explain why it is important to establish at the outset whether the parties have reached an agreement
- Explain what an agreement is
- List and explain the rules relating to an offer
- List and explain the rules relating to acceptance
- Explain the operation of the postal rule
- Explain the rules relating to e-commerce.
Key terms
Here are some terms you will encounter in this Chapter, which will help you to better understand this chapter:
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- Acceptance: an unqualified assent given in response to an offer, which creates an agreement.
- Agreement: one of the requirements for the creation of a contract, normally consisting of an ‘offer’ and an ‘acceptance’, which may arise expressly or be inferred from conduct, between two or more people.
- Contract: an agreement containing promises made between two or more parties, with the intention of creating certain rights and obligations, which is enforceable in a court of law.
- Counter-offer: an offer made in response to an offer which implies rejection and terminates the original offer.
- e-contract: a contract created electronically in the course of e-commerce, generally by email or SMS.
- Formal contract or deed: a contract that has been signed, sealed and delivered, and does not require consideration.
- Objective test: a test that asks whether the words or conduct of the parties would lead a reasonable person to believe, on the balance of probabilities, that legal relations were intended – that is, whether they intended to create a contract.
- Offer: a communication amounting to a promise to do (or not do) something.
- Offeree: the one to whom an offer is made.
- Offeror: the one who makes the offer.
- Promisee: the person who is receiving, or the recipient of, the promise.
- Promisor: the person undertaking the promise.
- Simple contract: a contract that is made orally or in writing (or both) involving an agreement between parties with the intention of creating legally enforceable obligations and which requires consideration to be valid.
- Rejection: occurs where the party to whom the offer was made (the offeree) tells the party making the offer (the offeror) that they are not accepting the offer, which terminates it.
- Revocation: occurs where the offeror withdraws an offer, which then terminates it.
- Termination: bringing the contract to an end before it is fully performed.
Introduction
In this chapter we are going to begin by looking at what the law requires to be established for the creation of a simple contract: the agreement. The agreement is based on two elements: offer and acceptance and each must meet certain criteria if there is to be an agreement. Unless the parties agree, a contract cannot come into existence.
Step 1: Agreement between the parties
To find out whether there is a simple contract look at the facts to see whether you can identify whether there has been an offer by one party and an acceptance by the other to form an agreement. If there is an agreement, that will form the basis for a simple contract. Or to put it another way, no agreement, no contract.
What constitutes a contractual agreement?
The agreement goes to the heart of a contract because, unless the parties agree, a contract cannot come into existence.
So, what is an agreement? It is the culmination of a negotiating process between the parties. Today, negotiations are often done electronically with the exchange of internet files and the use of electronic communication tools such as Skype, Zoom, Team and other voice-over IP programs.
But just note that it is not the negotiating process that creates legal rights and obligations but, rather, the end of that process—the contract of which the agreement is a part (the other parts being intention and consideration).
To determine whether an agreement exists, a traditional starting point has been to consider three components:
- there is a minimum of two parties (but note that there can be more than two parties, which is known as a multipartite agreement)
- there is an offer; and
- there is an acceptance.
But that is not the end of the story because in addition to the three components mentioned above there must be:
- an exact correlation between the two sides of the agreement—what is known as a consensus ad idem—that is, the parties must have exactly the same thing in mind
- an offer by one party (offeror) to be bound on certain terms; and
- an unqualified acceptance (not limited or restricted in any way) to that offer communicated by the other party (offeree) to the offeror
Business tip
If the parties haven’t reached an agreement, that is the end of the story. Where the parties do appear to have reached an agreement, the following considerations should still be noted:
- Generally, only what is agreed between the parties during the offer and acceptance stages can become part of the contract. Terms the parties have not agreed on or have forgotten to include in the contract are not considered part of the contract. Such terms may require a new contract or result in expensive litigation to try to determine what it was that the parties agreed to.
- Changes cannot be made unilaterally – that is, by one party. Variations, alterations or additions must be agreed to by both parties.
- The terms and conditions that make up the agreement create legally enforceable rights and obligations, and if they are not carried out—that is, they are broken—then the matter may finish up in court.
Is there agreement between the parties? How do you determine an agreement?
Traditionally, the courts have said that an agreement is reached when the conduct of the parties can be characterised in terms of an ‘offer’ by one party (offeror) and an ‘acceptance’ by another (offeree). This technique is certainly important in determining the time, place and content of the agreement, and it is a useful tool in most cases, but it is not the only available means of contract formation because there are cases where it is not easy to locate an offer or acceptance.
The courts have not abandoned the traditional approach of using offer and acceptance to determine agreement. It is just that in some cases the traditional approach is not helpful in determining whether the parties have reached an agreement. As McHugh AJA, in the Australian case of Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11 at 110, suggested that ‘contracts may be inferred from the acts and conduct of parties as well as or in the absence of their words’. The question is whether the facts, when viewed as a whole and objectively considering the surrounding circumstances, show that, from the point of view of reasonable persons on both sides, a concluded agreement has been reached. That may not be easy, particularly if the contracting parties have used qualifying words in their agreement such as ‘the purchaser intends to acquire…’ or ‘the proposed agreement will provide that …’. The words in italics would suggest that an agreement had not been reached if you think about the meaning of those words.
If the parties have not reached agreement on terms that they regard as essential for a binding agreement, there can be no binding agreement. But this doesn’t consider the extent to which the courts are prepared to go to hold that a contract exists in a commercial transaction, if the essential or critical terms have been agreed on. Even a series of emails may be enough to create a contract.
How do the courts approach commercial or business transactions?
In the case of commercial transactions, the courts will try to ensure that the expressed arrangements and expectations of the parties are carried out where they are satisfied that the parties have reached agreement. This is judged by objective standards, notwithstanding that the communications between the parties might have been uncertain and particular terms had still to be worked out. But in the great majority of cases the traditional approach of offer and acceptance will still suffice.
As far as agreement is concerned, note the following:
- Agreement is the result of negotiations by two or more persons of the substance of a contract. It may not necessarily be the contract.
- It is unusual for the parties to have discussed and agreed to every term of the agreement. In some cases, if the negotiations have been going on for some time, this may be true. However, in many commercial transactions there will only be broad agreement on the substance of the contract, with the details to be worked out later. It is the act of assent which gives rise to the agreement.
- In business today, many agreements are entered into based on standard form documentation. This consists of a set of pre-written, standard, non-negotiable provisions in the agreement between the parties and are commonly found in business transactions where there is high-volume distribution of goods and services between sellers and consumers – for example, consumer credit and insurance contracts, eBay user agreements and airline conditions of carriage. These type of ‘standard form’ agreements are usually drawn up in advance by the person putting the agreement forward (usually the party with the most bargaining power), with the other party offered the terms on a ‘take it or leave it’ basis. If there is an inequality in the bargaining power between the parties and this raises the question of not only ascertaining whether ‘agreement’ has been reached but, in some business transactions, whose terms will prevail.
- The term ‘agreement’ assumes that the parties are in an equal bargaining position. However, the reality is that in many consumer and commercial transactions, the inequality of bargaining power means that many contracts are not arrived at by ‘real’ agreement. The weaker party, who is often a consumer, either accepts the terms or goes without. It is only then where the pressure used by the stronger party is unconscionable that the courts may be prepared to set aside the contract (see Chapter 11, ‘Terms of the contract’).
- Even if the agreement is considered to be non-contractual, it may still result in a statutory breach of, for example, the Fairness of Transaction Act 1993.
Business tip
Agreement does not have to go into detail, if it can be said that a reasonable person would believe that an offer had been made and was accepted by the other party.
Can you have an agreement arising from conduct?
Mere participation will generally not on its own provide the basis of a contract between participants and organisers. But in the example of you entering the regatta above, there is evidence of intention to enter into a contract from the conduct of the parties. Signing the undertaking meant you accepted that you would be bound by the rules as a condition of participation—a multipartite transaction. The court looks at the conduct of the parties and the documents that governed entry into the competition.
Time for a break. But think about the questions below and how you would answer them. Write down your thoughts and add them to your notes:
- What problems, if any, can you see for consumers with the use of standard form contracts?
- What does the term ‘agreement’ mean to you? How often do you think you enter into an agreement and what it means legally?
PROBLEM:
FACTS: You and another athlete were both boxers competing for Olympic selection but only one could be selected. To be selected, you had to sign a Selection Agreement, an Athlete Nomination Form and a Team Membership Agreement. The documents, which used expressions such as ‘Agreement’ and ‘Form’, covered a number of matters, including an exclusion clause accepting that the Court of Arbitration for Sport (CAS) was the final court of appeal. You were initially nominated to represent PNG in boxing. The other competitor unsuccessfully appealed that decision to the Boxing Federation of PNG Appeal Tribunal, but then successfully appealed to the CAS. You then sought leave to appeal the CAS award and the matter was heard in the PNG Supreme Court.
ISSUE: Could you win? Did the Supreme Court have jurisdiction?
DECISION: ?
HINT: How carefully did you read the facts because they contain the answer?
What are the rules relating to offer?
In determining whether there is a valid offer or something else (for example, invitation to treat, inquiry or supply of information which cannot be accepted), there must be:
- an intention or willingness to be bound
- a firm promise or clearly stated offer; and
- communication of the offer (preferably in writing if the transaction is important to you, though it can be oral or by conduct and by you as the offeror or a person authorised to make the offer or communicate it (as in, your agent).
The following rules apply to offers generally:
- They may be made to one person, a group or to the world at large
- They may be kept open if supported by consideration (this is known as an option)
- All terms must be brought to the notice of the offeree and followed exactly
- They may be terminated.
What is the meaning of ‘offer’?
An offer is a clear expression of the terms under which a person like yourself is prepared to enter into a contract with another person and be bound by their acceptance of those terms. There is a definite intention to be bound. But note only an offer can be accepted and lead to agreement.
No particular form is required for the making or delivery of an offer. This can be contrasted with an acceptance, where the offeror may require the offeree to accept in a particular form or way (for example, by accepting in writing, only by mail or only by email).
The offer creates for the offeree (a person, a class of persons or the world at large to whom the offer is directed and who can accept the offer) the ability to subsequently create a contract if they unconditionally accept the terms of your offer (the offeror is the person making the offer) and all the other elements necessary to establish a contract can be satisfied.
What makes a statement an offer depends on what the parties had in mind (as in, the intention of the parties, which is considered in Chapter 6) at the time the statement was made.
In many disputes it will be impossible to determine what the parties were thinking, so the courts will rely on an ‘objective test of a reasonable person’. That is, would a reasonable person have thought that the offer you made was with the intention of being bound as soon as it was receive by the other party?
What the parties want to call the statement does not really matter. They may call it an ‘offer’, but in reality, it may indicate only a willingness to negotiate or be an indication of the price that a person may be prepared to sell at, while at this stage they don’t intend to be bound. In other words, there must be an explicit offer. For example, you send Jax an email saying ‘Will you sell me your property?’ and Jax replies ‘Lowest price K900,000’. This will be taken to be only a response to a request for information.
If it is clear in the circumstances that a party intends their words or conduct to constitute an offer, then the courts will be prepared to construe it as such. An example of where an advertisement was considered to be an offer rather than one inviting offers (called ‘an invitation to treat’) was Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (‘Carlill v Carbolic Smoke Ball Co’). The court found that the words used in the company’s advertising were sufficiently specific to show to a reasonable person that it intended to be bound.
Reflection question
Case
Read the case of Carlill v Carbolic Smoke Ball Co and see if you agree with the result?
Look at a copy of the advertisement to help you decide whether you have a problem with the advertisement.
Having read the court’s decision, consider the following questions:
- who were the parties (the plaintiff and defendant)?
- Briefly summarise the facts.
- What were the issues before the court?
- Why did the court find the advertising could be construed as an offer?
- Just as a matter of interest, would you sue if you had bought a product that the seller guaranteed would work and it didn’t?
Similarly, the use of words such as ‘rain check’ or phrases such as ‘until stocks run out’ or ‘one per customer’ suggests that the offeror intended the offer to be promissory rather than a calling for offers.
Business tip
Look carefully at the words and/or conduct you use if you are the party making the offer (the offeror). Are they promissory or not? Could they amount to an offer? The question you must ask is whether from the language used or the actions of the parties, was there an intention or willingness to be bound?
What is the importance of communication?
How you as the offeror wants to communicate or make your offer is entirely up to you, but only you (or your authorised) agent can communicate the offer. How else would the other party know that you were intending to make an offer if you didn’t tell them?
In the English case of Powell v Lee (1908) 99 LT 284, Powell applied for the position of headmaster of a school and the board of the school passed a resolution appointing him. The board didn’t immediately notify Powell of its decision, but a member of the board privately told him his offer of employment had been accepted. The board subsequently rescinded its decision and appointed another person. In this case the court held that there was no contract between Powell and the board as the resolution was not conveyed by anyone with authority.
Communication can be in:
- writing (including via the internet or text message)
- orally; or
- by conduct.
Regardless of the method chosen, it is vital to the formation of a contract that the offeror indicates an intention or a willingness to be bound by the offer, otherwise it will be seen as an invitation to commence negotiations, or the soliciting of an offer.
Business tip
Put the offer in writing if it is important
If the proposed contract is important, then put the offer in writing for the purposes of certainty and reducing potential exposure to expensive litigation. The terms of the offer must be clear enough for the offeree to be able to decide whether to accept or reject your offer, and should include at least the following:
- Identify who the parties are
- Identify the subject matter, and quantity if it is goods
- Consideration (usually in dollars) to be paid (how, when, and where)
- time of performance method of acceptance; and
- Method of performance.
Is an invitation to treat an offer?
An invitation to treat is not an offer. It is an invitation to a party to make an offer and cannot be accepted by you if you are the other party. The party making the invitation to treat does not intend to be bound. It is an expression of a willingness to start the offer and acceptance process, which in time may produce an offer and acceptance but until that point is reached, it cannot form a legally binding contract.
Even the use of the word ‘offer’ may not be enough to demonstrate an intention to be bound. In these circumstances, it is the party who responds to the invitation who will be the party making the offer.
Invitations to treat are a part of everyday life more often than you think. Instances generally considered to be invitations to treat include:
- auctions
- the advertisement of tenders
- goods placed on shop shelves and in shop windows
- goods/services advertised in catalogues or newspapers, or on radio, television or the internet; and
- price lists, circulars and catalogues.
For the purposes of commercial reality and commercial practicality, the courts have accepted that goods on display in a shop or supermarket, advertisements or price lists circulars and catalogues are to be treated as invitations to treat unless there is something to clearly indicate otherwise, such as a sign making it clear that the goods on display are on ‘sale’ or a ‘one-off price’. Imagine if the goods on the shelves were treated as offers. If you took them off the shelves wouldn’t that constitute your acceptance? Returning them could then amount to a breach of contract!
Are self-serve situations invitations to treat?
Not all self-serve situations can be considered invitations to treat. Automatic vending machines, such as drink, confectionery and ticket dispensing machines, as well as self-serve petrol stations, are not considered to be invitations to treat. The reason is found in commercial reality and practicality: How would you return the goods?
What about advertising of goods or services in the media or online?
Generally, the advertising of goods or services in newspapers, on the radio, television or the internet, as well as price lists, circulars and catalogues should be regarded as invitations to treat. Generally, there is no indication of intention to be bound on the part of the advertiser. But you need to read the advertisement carefully to determine whether it is an offer or an invitation to treat.
However, while advertisements are generally regarded as invitations to treat, it is always possible for the advertiser to make it clear in the advertisement that they intend to be legally bound as Carlill v Carbolic Smoke Ball Co (an English case) illustrated above. In the case the court considered that the wording of the advertisement was such that it could only considered as an offer to the world at large because the company was guaranteeing to pay £100 to anyone who contracted influenza after purchasing the advertiser’s smoke ball, and it had deposited £1000 into the bank as an indication of its sincerity.
For online retailers of goods and services, generally the prices online are an invitation to treat. If you shop online, where do you stand when a mistake arises? To avoid problems arising with customers over pricing mistakes, the retailer’s terms and conditions must clearly outline that it is generally the customer who makes the offer and the retailer who accepts or declines that offer.
Note that a statement is not an offer if it expressly provides that the person making it must perform some further act before they are bound – for example, paying a deposit or signing it. The offer must be unconditional or else it will be an invitation to treat.
Are auctions invitations to treat?
An advertisement for an auction is not an offer to hold it but an invitation to treat – that is, it is inviting people to come along and make offers or bids. If you go to an auction and it is cancelled, you have no remedy against the auctioneer as you have no contract with them. The advertisement of the auction was not a guarantee that it would be held but simply a declaration of intention or an invitation to treat.
When an auction is held with a reserve, as in, where the auction has a minimum sale price, it is only when the hammer falls that a contract is formed. If that were not the case, every time a higher bid was made there would be a breach of contract. Up until the hammer falls, which formally signifies acceptance, the auctioneer can choose whether to accept a bid or even indicate that a bid previously accepted is no longer valid. Where the auction is held without a reserve, the auctioneer makes a unilateral offer which is accepted by the person submitting the highest bid.
The vendor can withdraw the property from sale at any time before a bid has been accepted and, likewise, a bidder can withdraw any offer they have made up until the hammer falls. Remember, acceptance occurs on the ‘fall’ of the auctioneer’s hammer, and the auctioneer then becomes the agent for the buyer.
What is the effect of a request for information?
Distinguish a counter-offer from a mere request for further information. The latter does not destroy the offer. If there is not a firm promise, there is not a rejection of the original offer by the counter-offer.
A party who supplies information that has been requested is not intending to be bound by that response and, as a result, it is not usually viewed as an offer. For example, you see a car parked in the street and you approach the owner and ask if the car is for sale. They say, ‘Lowest cash price is K$42,500’ and you reply, ‘I agree. That is a fair price.’ You have a problem as your initial enquiry is not an offer. The court will treat the owner’s response as nothing more than an indication of the minimum price they might sell the vehicle for. Your response is not acceptance but an offer to buy (you are the offeror) and it is up to the owner (who is the offeree) to accept or reject your offer. There is no contract.
The person providing the information can, of course, include words in their response which make it clear that an offer is intended – for example, by saying, ‘I am prepared to sell my car to you for K$12,500. Please confirm your acceptance by return mail.’
What is the effect of a statement of intention?
Generally, a statement of intention is nothing more than a declaration by a party that they are prepared to buy, sell or trade. There is usually no intention that their statements or actions are to be legally binding, although in each case the statements must be viewed in context.
What is the effect of words such as ‘subject to contract’?
It is possible to negate the effects of intention in an offer by including in any documents a proviso that states the agreement is ‘subject to contract’, or ‘not valid until signed’ or some similar requirement. But be careful because the court will make an objective assessment of what the parties intended, taking into account the subject matter of the agreement, the status of the parties to it, the relationship between them and other surrounding circumstances, and whether a reasonable person would have concluded that a binding contract had been made.
Some rules about offers: When does an offer become effective?
Common sense would suggest that an offer is not effective until it is brought to the notice of the person to whom it is directed. Knowledge of the offer by the offeree is paramount. If the facts show that if a person has acted in ignorance of an offer, or that they didn’t do the act with the intention of accepting the offer, there will be no acceptance and therefore no contract.
Who you make an offer to is up to you, but it can be:
- a particular person, in which case only that person can accept or reject it
- a group of people, in which case any person within that group may accept or reject it; or
- the whole world (frequently by way of advertisement), where any person who is aware of the offer may accept it by complying with the terms of the offer.
In Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 above, remember the Smoke Ball Company published advertisements in newspapers during an influenza epidemic claiming that anyone who used its ‘smoke balls’ according to its instructions would not catch influenza. If they did after using the company’s smoke balls, they would receive £100.
The advertisement was an offer made to all the world. Acceptance took place when a person came forward and, in reliance of the advertisement, performed the necessary conditions (which Mrs Carlill did by her performance of the conditions contained in the advertisement).
Carlill’s case is an example of a unilateral contract – that is, a contract constituted by an offer of a promise for an act, rather than the usual exchange of promises. There is only one promisor, and acceptance is by performance. This can be compared with a bilateral contract where there are mutual promises between the two parties.
What is an option?
The purpose of an option is usually to give the offeree time to consider whether they do in fact wish to buy the item under consideration, or to raise the necessary finance. In such a case, an option will arise if you as the offeror promises to keep the offer open for a specified period.
An option will be unenforceable unless it is supported by the offeree’s consideration. Once consideration is given, the court is not concerned about the amount of the consideration (its adequacy) as long as it exists and has some value.
Where there is an option in an agreement, if the parties have made no provision as to the time during which the option must be exercised, the implication is that the option will be executed in reasonable time—a question of fact depending on the circumstances in each case. For example, 16 months to exercise a clause in a partnership agreement to acquire the share of a deceased partner was not reasonable, even though the agreement did not specify a time limit to exercise the share option.
Business tip
Options and return of the consideration
The use of an option supported by consideration by an offeree can prevent you as the offeror from revoking your offer for a specified period. It also means that you have also agreed not to sell the item to anyone other than the offeree within that period. However, you should specify in the option contract whether the offeree will recover the deposit money they may have given you if the option is not exercised. If you sell the item on which a deposit has been paid in the option period, then that would amount to a breach of contract and the offeree could sue you for damages.
Do any terms have to be followed exactly?
Any terms or conditions specified by you as the offeror must be met by the offeree in accepting the offer, such as ‘reply by email only’. The key word is ‘only’, as it suggests that you have a particular reason in mind for wanting a reply in this fashion. Any terms or conditions should be brought to the notice of the offeree as they set out the parameters on which you are prepared to be bound. Words like ‘only’ (which means solely or exclusively), must be exactly followed if there is to be a valid acceptance.
Business tip
Notice of terms
If you are making the offer, make it clear what the terms and conditions of the offer are. If a dispute arises, the question for the courts to consider will be whether the parties have, in fact, ever reached an agreement. This is always a question of fact to be decided objectively based on whether a reasonable person would have concluded that an offer had been made.
How can an offer be terminated?
Termination
Termination must be done before acceptance (except in the case of a ‘condition subsequent’; see ‘Lapse by failure of a condition’ later in this chapter) and can only be revived by the offeror if you are the offeror.
Revocation (cancellation, withdrawal)
For a revocation to be effective, the offeree must be made aware that the offer has been withdrawn before acceptance can take place. Generally, there is no required method or special form of language required for revocation to be effective, if it is communicated before acceptance takes place. What must be established is that:
- notice of revocation has been sent to the offeree; and
- the offeree has been made aware of the revocation before they have accepted the offer.
If you are the offeror, you can still withdraw the offer even if you said that it would remain open for a specified period, but this is provided that the offer was not given under seal or supported by consideration.
If the offeree had become aware of the revocation of your offer from a reliable source, which does not just have to be you, and it was therefore clear to the offeree that you no longer wished to proceed, the offer is validly revoked. Communication of the withdrawal to the offeree’s agent can be effective if it is within the agent’s actual or apparent authority to receive such a communication.
Note the method used to communicate the offer because, unless the offer states otherwise, acceptance should be communicated by the same or a faster method. Also note the date and time of receipt of the offer and if there is revocation of the offer, when was it received by the offeree (before or after acceptance by the offeree)?
Rejection or counter-offer
An offer may be terminated expressly by the offeree through their words or conduct. It may also be terminated by implication by a counter-offer, which also amounts to a rejection. A counter-offer is an express or implied rejection of the offeror’s original offer by the offeree – for example, the price for goods or services – and the introduction of a replacement offer. If you offer to sell your car to a potential buyer for K10,000 and they offer you K9000, which you reject, can the buyer then accept the original price of K10,000? The answer is ‘No’.
The effect of the counter-offer is to permanently revoke the earlier offer by you and to substitute a new one by the buyer in its place. Effectively, you, as the original offeror and the buyer, as the original offeree, have changed roles. You are now the offeree, and you have the choice of accepting or rejecting the ‘new’ offer. The only way that the original offer can be revived is if you choose to revive it. Otherwise, there is no agreement between you and the buyer.
It is necessary to distinguish between a counter-offer and a request for information. A request for information generally does not cause the offer to lapse as it is not considered a counter-offer. In the case of your car, if the potential buyer asks, ‘Does the car have a roadworthy certificate?’, your original offer still stands. The buyer (the offeree) has neither accepted nor rejected your offer, they have merely made a request for information.
Lapse of time
If you (as the offeror) specify a time during which the offer will remain open, it remains open only for that time. It may be withdrawn by you before that time by notifying the people to whom the offer was directed that the offer has been withdrawn, but this must occur before there has been an acceptance. Note that if the offer is made but there is an option to keep it open for a specified time that is supported by consideration, then the offer cannot lapse (or be withdrawn) until the expiry of that time.
Where no time limit is specified, the offer remains open for a reasonable time. What ‘reasonable’ means will depend on the circumstances of each particular case, but it includes the language used by the parties (including any stipulations contained in the offer or which might affect its acceptance) and the subject matter.
Is there a time factor that needs to be considered? An offer will be short-lived in the case of perishable goods or goods for which the price fluctuates quickly in the market (for example, oil, gold or even the currency market). In the case of land, providing that there is nothing in the offer to indicate a degree of urgency, the offer will remain open for a longer time but not indefinitely.
Business tip
Where no time has been specified for the acceptance of an offer, it must be accepted within a reasonable time. What constitutes a ‘reasonable time’ will depend on what the offer is for. In the case of perishables, for example, the offer will remain open for only a short time. But just note that if a person accepts an offer after it has lapsed, while the acceptance itself will not give rise to a binding contract, there is no reason why you, if you are the original offeror, couldn’t treat it as an offer and accept it.
Lapse by death of either party
The effect of death on the offer will depend on several factors, such as:
- the nature of the contract (for example, was it to be a contract of a personal nature? For example, to paint a portrait of your family); and
- the knowledge of the other party.
Death will terminate a contract only where it is for personal services. If there is no personal involvement of the offeror in the offer, the estate of the deceased offeror may be liable in contract.
If the offeree learns of your death (and you are the offeror) before acceptance of the offer, then a purported acceptance will be ineffective because the offer will have lapsed. But where the offeree is unaware of your death, it is possible that a valid acceptance can still bind your estate if the offer does not involve the personal involvement of the deceased offeror.
Lapse by failure of a condition
If an offer is made subject to a condition and this condition is not fulfilled, then the offer will lapse. For example, a clause or term in the offer stating ‘reply by email’ indicates a degree of urgency, and so acceptance by mail would not comply with the stipulation, thus causing the offer to lapse.
A condition precedent is a clause or term in the agreement stating that the agreement does not become a contract until the happening of a specified event. For example, a ‘subject to finance’ clause in an agreement, if not fulfilled, causes the offer to lapse.
A condition subsequent clause in a contract may cause the contract to terminate, if the parties have stated that the occurrence of a particular event will give the parties that right. Just note that here the contract is already in operation.
Reflection question
That is the end of the rules relating to offer. So, take a break but first have a look at the following questions and see if you can answer them for revision.
- Explain what an offer is
- List and explain the main rules relating to an offer
- Explain what is required for an offer to be validly accepted
- Explain why it is necessary to distinguish between an offer and an invitation to treat from the perspective of both a customer and a seller
- Under what circumstances will an apparent invitation to treat situation become an offer?
- Explain under what circumstances an offer can be terminated
- Explain the difference between a condition precedent and a condition subsequent and give an example of each in relation to the purchase of a car.
What are the rules relating to acceptance?
An acceptance converts the promise or promises of you as the offeror (represented by the offer) into an agreement. Before acceptance of the offer, neither party is bound to the agreement; after acceptance, both parties are bound.
Acceptance contains two elements:
- a willingness to take exactly what is offered; and
- an agreement to pay the ‘price’ required.
In brief
Rules as to acceptance
If there is to be agreement, the acceptance:
- must be made in reliance on the offer
- must be strictly in accordance with the terms of the offer
- must be communicated to the offeror orally, in writing or by conduct
- cannot be a cross-offer (discussed below)
- can be accepted only by the party to whom the offer was made
- must be absolute and unqualified; and
- once made, cannot be revoked without the assent of the offeror
Methods of acceptance
Once you have got the question of offer sorted in your mind, you now need to turn to the question of acceptance. Acceptance may be made:
- in writing
- orally
- by a combination of orally and in writing; or
- by conduct.
However, if acceptance is to occur, it must conform with any conditions that might be required by you as the offeror. Again, the courts use an objective test to determine whether an acceptance has taken place, as in, what would a reasonable person have thought or done? In this case, would a reasonable person have thought there was an acceptance of the offer?
Must acceptance be made in reliance on the offer?
The offeree must intend to accept your offer or there can be no agreement between the parties. Acceptance must clearly be made in response to, and because of, the offer.
Where you specify a special or particular method of acceptance, it must be followed exactly. So, if you are renting a unit, house, or business premises and the lease contains a term about punctual payment of rent, then failure to pay regularly and on time means there is little chance of the lease being renewed by the landlord because you are not carrying out one of the conditions prescribed in the lease agreement.
Where no method of acceptance is indicated, the custom of the trade or what is reasonable in the circumstances will be good acceptance. Thus, an offer by SMS suggests the need for a prompt reply, so any method equally as fast or faster will be effective.
Must acceptance be communicated to the offeror?
As a general rule, acceptance must be communicated, either by words or conduct, otherwise how will you know whether or not you are bound by your offer. In other words, some positive act on the part of the offeree indicating an intention to accept is required. Silence on its own on the part of the offeree is generally insufficient to create a contract, just as the imposition of an acceptance by you on the offeree is insufficient.
There are situations where silence can amount to acceptance which include:
- where the offeree has signed an agreement indicating continuing acceptance of delivery until further notification – for example, subscriptions to internet services or membership of a local gym debited on a monthly basis, where the offeree, by their conduct, has allowed work to go ahead and made progress payments and where you dispense with the requirement of communication, and acceptance is to be by performance of an act
- where there is a history of prior dealings between the parties
- where it is just and equitable – for example, where the conduct of the proposed tenant led the owner to believe that the tenant would lease the premises and the owner went ahead and undertook major demolition and construction work in that belief
- by conduct, where the parties by their actions show that they intend to be bound; and
- where the postal rule applies (see below).
Who can accept an offer?
Only the person or persons to whom the offer was directed, or their authorised agent, can accept the offer.
If someone else tries to accept the offer, that ‘acceptance’ is probably only at best an offer itself, which you, if you are the original offeror, are now the offeree, can accept or reject as they wish. Where the offer is made to the world at large, acceptance is by those members of the public who perform the conditions set out in the offer.
Can cross-offers give rise to a contract?
The fact that the offers are identical is irrelevant. Contract law demands an acceptance, and with cross-offers there is no acceptance. Going back to your offer to sell your car for K10,000 (above), if the potential buyer, in ignorance of your offer, makes you an identical offer of K10,000 for your car at the same time, then you have a cross-offer. There is not a contract, because the promise or offer being made on one side in ignorance of the offer on the other side cannot be construed as an acceptance of the other.
Does acceptance have to be absolute and unconditional?
A conditional assent is not an acceptance. For example, if a document contains a clause to the effect that it is ‘subject to a formal contract to be drawn up by our solicitors’, a contract does not come into existence until a formal document has been drawn up and accepted by the parties. The first document is merely a proposal to enter into a contract, a tentative agreement that may be disregarded by either party. Whether the parties have reached final agreement on the terms of their bargain is a question of fact in each case, and the basic test is always whether a reasonable person would regard themselves as being bound by what they said and did.
Reflection questions
Time for a break. While you are taking a break think about the following questions on the topic of acceptance. Take some notes as you read through them.
- Does acceptance have to be made strictly in accordance with the terms of the offer?
- Can anyone accept an offer even if it is made to them?
- Can silence ever amount to acceptance?
Can you create a contract by post?
Today, a great many business negotiations, and even shopping, are handled via the internet. In the case of business contracts, PDF files are often exchanged via emails by the negotiating parties, who use software programs to amend them. Negotiations are often handled by means of video-streaming services. Final versions of documents are agreed via emails and are often signed by way of an electronic signature.
In the case of online shopping, the buyer sends an offer by clicking on an icon or a button, which indicates agreement by acceptance of the terms and conditions (a ‘Clickwrap Agreement’). Part III of the Electronic Transactions Act 2021 sets out the rules on contracting by electronic communication.
The use of the post office as the primary medium for the exchange of promises is rapidly being replaced by technology such as electronic communication in the form of emails and text messages. It is foreseeable that the traditional role of the post office, as a delivery vehicle for letters, may become redundant in the not-too-distant future and that it will evolve into a parcel delivery service to meet the delivery needs of online businesses as it is doing in Australia. However, as that time has not quite come, it is still important for businesses to understand the rules relating to contracts by post.
Using the post office
Where the parties contemplate the use of the post as a medium of exchange of promises, the offeror must have contemplated and intended that the offer be accepted by the act of posting, in which case the rules as to the time of acceptance change. Thus:
- an offer made by letter is not effective until it is received by the offeree; and
- acceptance is effective as soon as it is posted.
If the letter is properly addressed, prepaid (it has a stamp) and put in a post box, a contract is formed at the place when and where the letter of acceptance is posted. The post office is your agent, and this means that communication to the post office is communication to you.
The courts have decided that you have indicated a willingness to accept the risks of the letter being lost, delayed or destroyed by using the post as your agent. You had the opportunity to specify, in your offer, any other form of communication to reduce these risks and you chose not to. By posting the acceptance, the offeree has done all that is required of them.
If revocation of the offer is to be effective, it must be received by the offeree before they post their letter of acceptance. How the offeree receives notification of the revocation of the offer is irrelevant as long as it is clear that you, as the offeror, has withdrawn the offer before acceptance has taken place.
What commonly occurs in business is that an offer is usually expressed in such a way as to exclude the operation of the postal rule by requiring actual communication of the acceptance – for example, by the offeror including a term in the offer stating ‘acceptance shall only be effective on receipt at this office’.
Business tip
In cases of contracts by post, there are three points to note:
- Read the letter of offer carefully. Does it exclude the operation of the postal rule? (Most contracts of insurance exclude the postal rule, so acceptance occurs on receipt, and even then, usually only on clearance of payment of the premium.)
- Revocation of an offer does not have to be by mail just because the offer was sent by mail. A reply by some other means that was just as fast or faster would be sufficient. What is important is that the offeree receives notice of the revocation before they can accept.
- Check with the post office how long delivery will take if acceptance is an important condition of agreement and the postal rules are to apply for acceptance. Priority letters take one to four business days from posting, depending on place of lodgement and destination locations, while regular letters can take four to six days.
If the delay is the fault of the offeree – for example, if the offeree has misaddressed the letter or failed to post it – then acceptance would occur on receipt (if the letter arrived at all).
Once the offeree has accepted the offer, the normal rules of contract law apply, and the agreement is binding on the parties unless they agree to release each other.
How does electronic offer and acceptance work?
Email, the internet and contract formation
The use of electronic means to complete business transactions, rather than the traditional method of doing business face to face and exchanging paper-based documents, is becoming commonplace. Global e-commerce sales now account for sales worth billions of dollars.
Broadly defined, e-commerce is business conducted by means of computer, the internet and other telecommunications links such as electronic data exchange (EDI). The Electronic Transactions Act 2021 provides a legal framework to support and encourage businesses and consumers to use e-commerce by providing that the law must treat electronic and paper-based commerce equally.
Online reference
The Electronic Transactions Act 2021 can be found online on the National Parliament of Papua New Guinea government website.
The main features of the electronic transaction’s legislation include the following:
- A transaction is not invalid because it took place wholly or partly electronically (s 9)
- A requirement to give information in writing can be satisfied if the person gives the information by means of an electronic communication (s 10)
- A requirement to produce a document in hard copy can be satisfied by producing the document in electronic form (ss 11, 12)
- A requirement to record information in writing, to retain a document in hard copy or to retain information that was the subject of an electronic communication can be satisfied by recording or retaining the information in electronic form (s 13)
- In relation to the time and place of dispatch and receipt of electronic communications ((s 15) provides that dispatch and receipt are at the originators and addressee’s places of business), unless the parties agree otherwise, the following rules apply:
- the time of dispatch of the electronic communication occurs when the communication leaves an information system under the control of the originator or, if it has not left the information system under the control of the originator, the time when it is received by the addressee (s 16(1) (2)); and
- the time of receipt of the electronic communication is the time when the electronic communication is capable of being retrieved by the addressee or, if no system is designated, when the electronic communication comes to the attention of the addressee (s 16(3)).
What is the formation of an electronic contract?
The formation of an e-contract is no different from the formation of a conventional contract. The uniform electronic transactions legislation attempts to clarify the rules on:
- the use of automated message systems for contract formation (s 6);
- the location of the parties (s 7); and
- updating the electronic signature provisions and default rules for:
- time of dispatch (s 16(1))
- time of receipt (ss 16(3), 17); and
- place of dispatch and place of receipt (s 16(6)).
If you access an online supplier, you will usually be considered to be an offeror who intends to buy a product or service and is generally assumed to be intending to contract. The agreement generally arises between the parties when you make the offer by clicking on the ‘Buy’, ‘I agree’ or ‘I accept’ button or icon. The offer is sent when you click on the ‘Send’ button. Acceptance occurs when the supplier communicates an acceptance, and this is received by you. To ensure unambiguous consent, most sellers will require you to change the default setting from ‘I do not agree’ to ‘I accept’ or ‘I agree’.
Having established that agreement and intention to contract are present (the latter can be implied because of the way the transaction is entered into), the final requirement for the creation of a simple contract – consideration – can be done electronically.
It is then necessary, as it is with a conventional contract, to determine whether the simple contract that has been created electronically is enforceable. This means consideration of three more factors: do the parties have legal capacity to enter into a contract, is there real agreement between the parties (called ‘consent’) and is the e-contract legal? Form is not an issue here.
A problem with e-contracts is legal capacity. You, as the buyer, are a minor and the goods or services are for necessaries (goods and services that are necessary to a minor, such as food and accommodation), then the contract will be binding. Whether it is enforceable will depend on what country the seller lives in whether it is worth his/her time in suing you. In other cases, involving the issue of capacity, such as buying ‘R’ rated products or services, the situation is more problematic.
Just as an aside, if each of the requirements is satisfied, a valid e-contract is created between the parties, but what have the parties agreed to? This is an issue about contractual terms (see chapter 11 ‘Construction of the Contract’). Often, clicking the ‘Buy’, ‘I agree’ or ‘I accept’ button will result in the terms set out in the website being incorporated into the contract. But this raises two further issues:
- What terms have been implied in the e-contract? This can be a real problem where the contract is for software, where there is an annual renewal charge and the seller imposes a term that states that the contract will renew automatically unless the buyer expressly notifies the seller they are not renewing.
- Was notice of the terms given before or after the contract was formed? For example, if the e-contract contains an exclusion clause, notice of such a clause after the contract has been formed is ineffective in common law jurisdictions. Notice must be brought to the attention of the buyer before the contract is made.
Business tip
Doing business by email or on the internet
To minimise problems with contract formation where the method of transaction is email or the internet, the person controlling the transaction should make it clear what is to be taken as an offer or what is required for an acceptance, and when electronic communications are to take effect.
If the parties do not intend to be bound until the final agreement, this should be clearly stated in your emails by including a statement along the following lines in each email: ‘No binding agreement is intended to be formed unless and until a formal contract has been executed’.
It is also useful, if the parties are in different jurisdictions, to include choices of jurisdiction and law clauses. In the event that a dispute should arise between you and the other party, by stating which jurisdiction and laws should deal with the matter if a dispute arises. It may be much cheaper and more beneficial to have the matter dealt with in PNG under PNG law.
Reflection questions
Your last break. While you are taking a break think about the following questions on the topic of acceptance. Take some notes as you read through the questions and you can add them to your revision notes.
- Could an offer sent by email be accepted by letter if the offeror had not specified a particular method of acceptance? Give reasons.
- Explain why the rules on acceptance should differ between contracts by post and contracts by instantaneous communication such as email.
- How can businesses that make offers over the internet protect themselves from the risk of loss associated with the rules of offer and acceptance?
PROBELM:
FACTS: La Forrest (the appellant who lived in Queensland) had brought an action against a number of parties for injuries she suffered in December 2022 when staying at a Casino Hotel in PNG. Correspondence ensued between the various parties about settlement, with email a common form of communication between the parties in the later stages of this matter. On 24th December 2023, La Forrest sent an email at 5.42 pm, referring to an offer of settlement made on 22 December 2023, to solicitors of two of the defendants, advising them that she was prepared to accept their offer. At 6.08 pm on the same day (22 December), the solicitors confirmed acceptance of the offer and indicated that they would prepare discharge papers on 5th January 2024. On the 6th January 2024 the defendants forwarded the discharge papers to La Forrest, who then found the terms unacceptable and declined to sign them.
ISSUE: Did La Forrest accept the offer? Was acceptance by email capable of creating contractual relations?
YOUR DECISION: What do you think would be the outcome? Why?
HINT: The times are important.
Key points
An understanding of the following points will help you to better revise material in this section on agreement.
- Why is it important to establish whether the parties have reached an agreement? The agreement goes to the heart of a contract because, unless the parties are in agreement, there isn’t a contract. Agreement represents the culmination of a negotiating process between the parties.
- What is an agreement in a traditional sense? Agreement arises when there has been an ‘offer’ by one party and an ‘acceptance’ by another.
- What other techniques may a court resort to in order to determine whether there is an agreement? The techniques that a court may resort to include assessing the conduct of the parties and a global approach looking at all of the correspondence between the parties, their acts and conduct, to see whether there was agreement on all important terms.
- What are the rules relating to offer? The rules relating to offer include: distinguishing an offer from an invitation to treat (preliminary communications between parties at the negotiation stage are not considered offers.
- communicating the offer by writing, orally or by conduct, and bringing it to the notice of the person to whom it is directed (doing something without knowing of the offer is not acceptance)
- determining to whom the offer is made: an individual, a group of people or the world at large (Carlill v Carbolic Smoke Ball Co)
- determining whether the offer has an option attached to keep it open for a specified period and whether that option is supported by consideration; and
- ascertaining whether all the terms of the offer have been brought to the notice of the offeree and followed exactly.
- What is the difference between an offer and an invitation to treat? An offer is characterised by an intention or willingness to be bound. An invitation to treat is only an expression of a willingness to start the offer and acceptance process, which in time may produce an offer and acceptance. Unlike an offer, if you are making an invitation to treat it means you do not intend at that point in time to be bound. You are inviting someone to make you an offer.
- What are the ways in which an offer may be terminated? An offer that has not been kept open by an option supported by consideration may be ended by revocation or withdrawal.
- rejection or counter-offer
- lapse of time
- lapse by death of either party; or
- lapse by failure of a condition.
- What are the rules relating to acceptance? If there is to be agreement, the following rules relating to acceptance must be considered:
- must be made in reliance on the offer—that is, the offeree must intend to accept the offer
- must be strictly in accordance with the terms of the offer
- must be communicated to the offeror orally, in writing or by conduct, otherwise the offeror will not know whether or not they are bound – silence on the part of the offeree is not enough, unless agreed to by the parties
- can be accepted only by the party to whom the offer was made or their authorised agent (Carlill v Carbolic Smoke Ball Co)
- cannot be a cross-offer, as each party is ignorant of the promise of the other and acceptance presupposes that there is an offer by one party and an acceptance by the other
- must be absolute and unqualified, or it may amount to either a counter-offer or a tentative agreement; and
- once made, cannot be revoked without assent of the offeror.
- How does the postal rule operate? Where the parties contemplate the use of the post to create a contract, the offer is effective only on receipt by the offeree, with acceptance occurring on posting by the offeree unless the offeror includes a term in the offer to the effect that ‘acceptance is only effective on receipt of notification of acceptance’. For revocation of the offer to be effective, the offeree must receive notice before they post their letter of acceptance.
- What rules apply to communication via the internet? Where the communication of acceptance is via the internet, the Electronic Transactions Act 2021 applies in place of the postal rules.