Module 2: The nature of a contract: offer and acceptance

Introduction: what is a contract?

A contract is an agreement made between two or more persons which is intended to be enforceable at law, and
is constituted by the acceptance by one party of an offer made to him or her by the other party to do or abstain
from doing some act.
This definition includes:
an agreement between at least two persons constituted by offer and acceptance
an intention to create legal relations; that is, the agreement should be enforceable at law and
the agreement requires the party making the offer to do or abstain from doing some act. The doing or
abstaining from doing some act is called consideration.

Objectives
On completion of this module you should be able to:
discuss contracts from an economics viewpoint
outline the classical model of contract law
define the term contract
list the stipulations for offer and acceptance
analyse simple cases to determine if a contract exists.

Readings
Textbooks

Turner & Trone 2013

Chs 2 & 3

Davenport & Parker 2012

Chs 2 & 3

The economics and classical model of contract law

The economics of contracts
Since this course is taken as part of a postgraduate business degree, some brief introductory comments about the
economic foundations of contracts and the classical model of contract law would seem necessary. Contracts of
the kind familiar to lawyers in both common law and civil law systems, presuppose:
the existence of private property, capitalism and a decentralised (free market) economy that operates on a
market and price system;
that all individuals and legal entities recognised by the law have substantially unrestricted freedom of
contract to enter into whatever arrangements or agreements they consider to be beneficial or convenient;
and
that there is an effective, efficient, honest and impartial judicial system administered by the state available
to arbitrate on any disputes that might arise between contracting parties and to enforce the mutual promises
that they freely entered into.
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Thus as Hollingsworth and Boyer (1997, p. 6) elaborate:

All capitalist economies involve a matrix of interdependent exchange relationships, or transactions that occur
among individual actors and organizations, either individually or collectively, in order to develop, produce,
and distribute goods or services. Transactions occur among a wide variety of interdependent actors, including
producers and suppliers of raw materials, researchers, manufacturers, labour and many others, who must routinely
solve various problems such as raising capital, determining the quantity of output, setting wages and other terms
of employment, standardizing products, establishing prices, communicating information about product quality to
consumers. At a rather general level, economic coordination or governance is the process by which these problems
are managed among various actors.

There are basically six mechanisms or modes of economic coordination, each with its own logic and specific
failuresits own rules, its own procedures for enforcing compliance, its own norms and ideologies which
help reduce the costs of enforcement (Hollingsworth and Boyer 1997, p. 14). They are: markets, communities,
networks, associations, private hierarchies (companies) and the state. In capitalist economies, the market is the
dominant coordinating mechanism in which the quintessential or archetypal transaction is contractual.
For us, the classic market occurs when transacting parties engage in decentralised, arms-length bargaining, the
parties are generally informally organised, and remain autonomous, each actor presses his/her own interests
vigorously, and contracting is relatively comprehensive. Actors then specify preferences and prices through
contracts that, when completed, are self-liquidating, and requires no further interaction among the transacting
parties. Moreover, the identities of the parties do not influence the terms of the exchange Basically, no durable
relation is observed among economic actors [although] this characterization of markets as coordinating
mechanism encompasses only a fraction of the transactions that occur in a capitalist economy.
(Hollingsworth and Boyer 1997, p. 7)

The organisational structure of markets is free entry and exit and bilateral or market place exchange, with
that voluntary spot exchange regulated by extensive contract rules legally enforced by the state (and with
regulations to maintain, well informed efficient markets), all of which is premised upon societal recognition of
the legitimacy of free markets and the norm of private property (Hollingsworth and Boyer 1997, p. 15).
Further, as Professor Amartya Senwinner of the 1998 Nobel Prize in economicsexplains in Development
as Freedom, the freedom to contract (especially of ones labour in employment) is not only vital for economic
efficiency (and development) it is an essential part of individual freedom-efficiencywhere to work, what to
produce and consume etc.
The labour market can be a liberator in many different contexts, and the basic freedom of transaction can be of
central importance, quite aside from whatever the market mechanism may or may not achieve in terms of incomes
or utilities or other results Individual freedom is quintessentially a social product, and there is a twoway
relation between (1) social arrangements to expand individual freedoms and (2) the use of individual freedoms not
only to improve the respective lives but also make the social arrangements more appropriate and effective.
(Sen 2000, pp. 31, 116)

In their chapter, an economic theory of contract, Cooter and Ulen (2004, p. 195) state that, in general,
economic efficiency requires enforcing a promise if the promisor and promisee both wanted enforceability when
it was made. They then set outrelying on economic game theory to some extentsix main purposes of
contract law:
The first purpose of contract law is to enable people to cooperate by converting games with non-cooperative
solutions into games with cooperative solutions.
The second purpose of contract law is to encourage the efficient disclosure of information within the
contractual relationship.
The third purpose of contract law is to secure optimal commitment to performing.
The fourth purpose of contract law is to secure optimal reliance.

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 The fifth purpose of contract law is to minimise transaction costs of negotiating contracts by supplying
efficient default terms and regulations.
The sixth purpose of contract law is to foster enduring relationships, which solve the problem of cooperation
with less reliance on contracts. (pp. 198233)
And so overall, contracts can be understood in terms of cooperation and commitment, information, performance,
reliance and default rules and transaction costs governing short, medium and longer-term commercial relations.
... the enforceability of contracts enables the parties to cooperate, which typically involves two kinds of behaviour.
First, the promisor invests in performing ... Second the promisee invests in reliance upon the promise ... Investment
may take the form of money, time, effort or foregone opportunities. Reliance is a change in the promisees position
induced by the promise. The change in the promisees position increases the value of performance to the promisee
... However, the increase in the value of performance comes at a price. Reliance typically makes breach more
costly to the promisee ... Think of reliance on a promise as gamble that increases the gain from performance and
the loss from breach.
(Cooter & Ulen 2004, p. 206)

The following extracts from Professor Eric Brousseaus (2001, pp. 314) paper, Did the common law bias
the economics of contract and may it change? provide an insightful account of the analytical approach of the
Economics discipline concerning contracts, and emphasises the factwhich contract law students can easily
lose sight of in their focus on the maze of detailed rulesthat contracts are primarily economic, not legal
transactions and provide some normative, theoretical guidance for problem solving exercises. However, the
assumption in the economics approach that contract law is primarily concerned with efficient rules and solutions
does not always hold. Markets are not always free, parties do not invariably have equality of bargaining power
or are well informed as to their rights and best interests, contractual enforcement rights and remedies are not
always available nor damages/compensation a perfect substitute for contractual fulfilment. In other words, as
Atiyah (1986, Chapter 7) explains, free and voluntary exchanges as regulated by the common law of contract
are not always efficient, by intention or effect.
First, Brousseau (p. 3) stresses the economic coordinating role of contracts.
In the language of the economist, a contract is a bilateral agreement aimed at organizing a transaction by
designating mutual obligations, for both parties without constraints. A standard contract for the economist is
a complete contract concluded between two parties which is enforceable by a third party, acting in the capacity
of a benevolent and neutral arbitrator, The role of the third party is neither to determine that the contract is in
conformity with the legal framework, not to interpret the ambiguities in the contract, but to oblige the parties to
behave according to their commitments . In that sense, the contract is both the unique means of coordination
and the means to completely solve co-ordination problems. Obviously this modelization of a contract is far
removed from actual contractual practice . It is for instance obvious that judges have to interpret contracts in
Common Law countries.

Secondly, (at pp. 910) he discusses the critical role that contracts have in managing uncertainty in decentralised
economic activities.
. In the absence of uncertainty, contracts would have no purpose. Economics of contracts as a whole is based on
the fact that contracts are commitments aimed at solving problems generated by uncertainty. There are two types of
uncertainties in an economic exchange. First, the precise features of the goods or services are unknown by (at least
one of) the parties. In the absence of a mechanism providing the economic agents with complete and free information
on the features of the good or services transacted, there will be risks of error or fraud. Second, since most exchanges
do not occur instantaneously [i.e. they have a future or executory element] the incentives for both parties evolve
between the time they reach agreement and the time the transaction is completed. Since agents are self-interested and
rational uncertainty generates potential mistrust between the contracting parties. Each economic agent may fear
to be a victim of the opportunistic behaviour of the other not delivering ex post what was promised ex-ante. And this
can result in unequal incentives Two types of remedies to this problem of incentives raised by uncertainty can be
imagined: institutional [the general law and third party, judicial enforcement] and contractual

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Thirdly, while contracts are bilateral commitments, their efficiency and enforcement depend on the availability
of third party arbitration (p. 10):
The credibility of a contract is heavily dependent upon the means of enforcement by the parties. Whereas a
contract is usually a bilateral commitment, the guarantee of its enforcement in the last resort is almost always
ensured by the intervention of a third party. Without this third partythat can be a judge, a private arbitrator, or
the institutional frameworkcontracts would need to be completely self-enforceable, ensuring, both parties of the
possibility to invoke a guarantee which makes preferable continuation of performance as opposed to breach . A
third party is therefore essential to ensure that the parties observe their commitments, even when enforcement of an
initial commitment is against the interest of at least one of the contracting parties [and since the verification of
contracts depends on contract formation, two conclusions follow]
First, it can be stated that contract formation depends upon the institutional framework which is adopted. More
precisely: constructive, efficient contracts are those which provide for continuing supervision by the parties
[since a complete contract cannot usually be predefined, in which case] the optimal contract will incorporate
renegotiation terms that incite at least one of the parties to optimally invest because he will be able ex-post to
adjust the level of exchange (i.e. effective terms of the exchange) in the light of the current situation taking
into account the investments of the two parties. One of the parties could however be the victim of this ability to
adjust the level of exchange, As a protection, a default option guaranteeing a minimum level of exchange needs
to be implemented Second, leading on from the above, is a question of the institutional framework. In other
terms, the ability of the parties to implement an efficient default option [the minimum guaranteed level of contract
performance] is dependent upon two criteria of the judge responsible for contract enforcement in the last resort: his
attitude towards renegotiation and his supervisory capability.

Brousseaus fourth point is that contracts are typically devices for managing bilateral exchanges over timethe
self-liquidating instantaneous spot exchange discussed above being the easiest to manageand need to deal in
an optimal manner with changing circumstances and interests of the parties (pp. 1011):
Contracts need to be understood as being the vehicle for framing future ex-post renegotiations in order to minimise exante contracting costs together with expost enforcement and decision costs The above two sections reinforce
the idea that contracts should above all be regarded as the structure for solving problems raised by uncertainties as
to the quality of the goods to be exchanged and future situations which will arise. Contracts need to set out credible
obligations which incite both parties to optimally invest in the transaction process. This calls for a judicious mix
of flexibility and rigidity. Contractual obligations have to be flexible in order to incite the parties to ex post honour
their undertakings, sure in the knowledge they will be able to adapt them as unanticipated situations arise. But at the
same time the obligations need to be rigid in order to guarantee a minimum amount of exchange that will protect the
investments of (at least one of) the parties. Concurrently the contracting capabilities of the parties are significantly
conditioned by the attitude and the capabilities of the enforcement institutions. Optimally they should authorise
expost renegotiations and contractual completeness, while forbidding renegotiation of the default option

And finally, Brousseau (2001, pp. 1213) re-emphasises the point that contracts are problem solving
commitment devices designed to address uncertainty in a world where complete contracting is scarcely
possible, or even desirable since information is an expensive commodity:
. economics nevertheless underlines the inescapable fact that contracts are essential to overcome problems resulting
from uncertainty in a world of imperfect institutions And also, contracts need to be incomplete and partly renegotiable. Incomplete contracting is an effective method for achieving efficiency and for ensuring performance
where future events are either (too) costly to forecast or impossible to foresee. Non-negotiable default options are the
sole means to guarantee to the parties a minimum level of return in their investment in the transaction.

The classical model of contract law

In Chapters 12 of Essays on Contract, Professor Patrick Atiyah (1986) surveys the modern role of contract
law, distinguishes contracts or exchange oriented situations from other types, patterns and families of cooperative activities and provides an account of the classical model of contract law with its five characteristics
that for the last 100200 years has provided lawyers in common law countries with the conceptual and
analytical framework governing the law of obligations. Whilst legislative intervention has undermined and
supplemented aspects of the classical model, it still underpins and accounts for most contract case law. Although

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Atiyah ultimately argues that the classic model of contract now operates across a quite narrow area of market
operations so that it is questionable whether it is a paradigm, even of voluntarily incurred obligations.
However, since the mid-1980s, considerable deregulation of labour, industrial, consumer, financial, international
and investment markets has occurred, the scope of public sector activities has shrunk considerably, and a whole
host of centrally controlled economies (e.g., the former USSR and the eastern bloc) have abandoned socialism
in favour of variants of western-style free market capitalism. As a result the scope of minimally regulated free
market economy transactions has expanded substantiallyall based on freedom of contract. In other words,
the classical model of contract, now applies to a much wider area of market operations than in the mid-1980s
and many more categories and aspects of voluntarily incurred obligations. Accordingly, news of its death as
announced by Professor Atiyah waswith the benefit of hindsightgreatly exaggerated! Its five characteristics
are: discrete, two party, commercial, executory and exchange,
Within this framework, the fundamental distinction has been between obligations which are voluntarily assumed,
and obligations which are imposed by law. The former constitute the law of contract, the latter fall within the
purview of the law of tort Contractual obligations came to be treated as being almost exclusively about
promises, agreements, intentions, acts of will. The function of the law came to be seen as that of merely giving
effect to the private autonomy of contracting parties to make their own legal arrangements. It is of course well
known that the private autonomy, this extreme freedom of contract, came to be abused by parties with greater
bargaining power, and has been curtailed in a variety of ways, both by legislative activity and by the judges
themselves There is no doubt that this model has been of astonishing power. For a hundred years it has had
no serious rival. Today many lawyers would want to qualify it, or modify it in a variety of respects Even in
transactions among businessmen, many lawyers would want to qualify it . [nevertheless] . this is the paradigm
model of contract which we have inherited from nineteenth-century lawyers.
(Atiyah 1986, pp. 1113)

He then conveniently provides an example or model of the typical contract and then outlines four assumptions of
the classical model and typical contract. Incidentally, Atiyah observes that while commercial transactions are the
type of contract that lawyers would see most, an empirical survey would likely suggest that, the ordinary house
purchase-mortgage transaction was the one dealt with in greatest numbers by the legal profession (1986, p. 18).
If we were asked today to indulge in the fashionable exercise of constructing a model of a typical contract, I
suspect that most common lawyers would come up with something like this. A typical contract is first, a bilateral
executory agreement. It consists of an exchange of promises; the exchange is deliberately carried through by
the process of offer and acceptance, with the intention of creating a binding deal. When the offer is accepted,
the agreement is consummated, and a contract comes into existence before anything is done by the parties. No
performance is required, no benefit to be rendered, no act of detrimental reliance is needed to create the obligation.
The contract is binding because the parties intend to be bound; it is their will or intention that creates the liability.
It is true that the law has this technical requirement known as the doctrine of consideration, but, except in rare and
exceptional cases, mutual promises are consideration for each other When the contract is made, it binds each
party to performance, or in default, to a liability to pay damages in lieu. Prima facie these damages will represent
the value of the innocent party's disappointed expectations. The plaintiff may, therefore, bring suit on a wholly
executory contract, for example, because the defendant has attempted to cancel his offer or acceptance, or to
withdraw from the contract, and may recover damages for his disappointed expectations distributive sense.
(Atiyah 1986, pp. 1112)

Whilst the four underlying presuppositions which the classical model of contract law implicitly relies upon are:
first, that contract law is fundamentally about what parties intend, and not about what they actually do
the classical model is thus concerned with executory arrangements, with forward-looking planning (p. 13)
second, that a contract is a thing, which has some kind of objective existence prior to any performance or
any act of the parties A contract is a thing which is made, is broken, is discharged (p. 14)

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 the third, concerns the function of the court in the enforcement of contracts. I take it as axiomatic that, in
principle, the judicial process is designed to serve either of two important social ends. The first is, by the
threat of penalties or the promise of rewards, to encourage the citizenry to comply with socially desired
standards of behaviour. And the second is to provide machinery for the settlement of disputes by peaceful
and fair means. Now the classical model of contract, with its emphasis on intentional conduct and future
planning, presupposes that the first of the two goals is the primary function of the courts in dealing with
contractual litigation. The purpose of contract law is to encourage people to pay their debts, keep their
promises, and generally be truthful in their dealings with each other. The enforcement of contracts, like
protection of property and the punishment of crime, is thus perceived as important primary for its deterrent
or hortatory [urging, admonishing] functions (pp. 1415); and
fourth, that there is indeed one model, that is possible and useful to think still in terms of general principles
of contract We know of course that most contracts fall into particular categories which have their own
rules and qualifications derogating from the general rule But none of this has shaken the power of the
classical model of contract. This model is without doubt, based on an economic model, that of the free
market. (p. 16)

The background to contract law

For an agreement to be valid and enforceable there must be:
(a) offer and acceptance, except in the case of a contract by deed
(b) an intention to create legal relations
(c) consideration
(d) capacity to contract
(e) genuine consent of the parties.
A contract may fall into one of four categories:
1. It may be valid and enforceable by both parties.
2. It may be valid but unenforceable because certain legal requirements have not been observed.
3. It may be voidable, that is, although it is apparently valid, it contains some vitiating element which may be

taken advantage of by one or both of the parties. Voidable contracts are good until they are repudiated by the
party having the right to rescind.

4. A contract may be or become void by reason of mistake or illegality. In such cases there is no contract

abinitio (from the beginning).

Offer and acceptance

Every simple contract springs from the acceptance of an offer
Every simple contract consists of an offer made by one person and accepted by another. In order to constitute a
valid contract there must be a definite offer by one person, and the acceptance of that offer by the other person.
The person making the offer is the offeror, and the person to whom the offer is made is the offeree. If and
when the offer has been accepted, then the offeror becomes the promisor and the offeree the promisee.
The offer must be intended to create and be capable of creating legal relations

Invitations to treat and statements of intention

An offer must be distinguished from negotiations prior to the making of an offer: Harvey v Facey [1893] AC 552.
In the course of negotiations for the sale of a property (known as Bumper Hall Pen) H telegraphed F : Will you
sell us Bumper Hall Pen? Telegraph lowest cash price, answer paid. F replied by telegram : Lowest price for
Bumper Hall Pen, 900.

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H then telegraphed : We agree to buy Bumper Hall Pen for the sum of nine hundred pounds asked by you.
Please send us your title deed in order that we may get early possession.
The question for the court was whether Fs reply constituted an offer which became a contract when Hs
acceptance was received.
Held: there had been an invitation to treat only, with an offer in Hs second telegraph message, which had never
been accepted by F, hence no contract.
Statements of intention are not an offer: Harris v Nickerson (1873) LR 8 QB 286.
An auctioneer advertised that a sale would take place on a certain day. The plaintiff travelled to the sale which
was cancelled. He argued that the defendant was contractually bound to hold the sale and that he should
therefore be indemnified in respect of the expenses he had incurred in travelling to the sale.
Held: that the advertisement was a declaration of intention, not an offer.
A display of goods in a self-service store is an invitation to treat, not an offer. When the customer takes the
items to the check-out counter, it is the customer making the offer to purchase: Pharmaceutical Society of Great
Britain v Boots Cash Chemists (Southern) Ltd [1953] All ER 482.
The Pharmacy and Poisons Act 1933 (UK) prohibited the sale of any listed poison unless it was supervised by a
registered pharmacist. Boots Ltd displayed goods (including listed poisons) on self-service shelves. Customers
selected from the items on display and took them to the check-out where the sale was supervised by a registered
pharmacist. It was alleged that the display of goods was an offer by Boots, and that a contract was complete
when the customer accepted the offer by selecting the item. Hence the sale, it was alleged, was not under the
direct supervision of a registered pharmacist.
Held: that the display was merely an invitation to treat, not an offer. Somervell LJ said (at 484) the contract is
not completed until, the customer, having indicated the articles which he needs, the shopkeeper, or someone on
his behalf, accepts that offer.

Options
An option which is not given by deed or supported by valuable consideration may be withdrawn at any time
without rendering the person giving the option liable to damages. If the option is given by deed or is supported
by consideration, then the person giving the option cannot withdraw it until expiry of the term of the option:
Goldsbrough Mort & Co Ltd v Quinn (1910) 10 CLR 674.
An offer may be made to a particular person or persons or to the general public but no contract can
arise until there has been an acceptance by ascertained person or persons
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. Here the respondents who manufactured the Carbolic
Smoke Ball advertised that they would pay 100 to any person who contracted influenza after using one of
their smoke balls. The appellant, who had used a smoke ball and contracted influenza, sued for the 100. The
company argued, inter alia (amongst other things), that the advertisement was a puff and was not intended to
lead to contractual relations and that an offer must be made to determinate persons before it could be accepted.
Both these contentions were rejected. Bowen LJ stated at 268:
It was also said that the contract is made with all the worldthat is, with everybody; and that you cannot contract
with everybody. It is not a contract made with all the world. There is the fallacy of the argument. It is an offer made
to all the world; and why should not an offer be made to all the world.

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An offer is made when it is brought to the knowledge of the offeree

The offeree must have knowledge of the offer before he or she can, by acceptance, make a contract. For
example, where a person offers a reward if information is provided, can a person giving the information
(without knowledge of the offer) claim there is a contract?
A United States case: Fitch v Snedaker (1868) 38 NY 248 confirms that the reward cannot be claimed in such
cases. There is no contract.
The Australian case R v Clarke (1927) 40 CLR 227 followed the American decision. Here Clarke claimed
a reward of 1000 promised by the West Australian government for the arrest and conviction of certain
murderers. Although Clarke had seen the advertisement of the reward he had forgotten about it when he gave the
information to save his own skin. Higgins J stated at 241:
Clarke had seen the offer, indeed; but it was not present to his mindhe had forgotten it, and gave no
consideration to it, in his intense excitement as to his own danger.

What of the situation where an offer appears to be accepted but not all the details are communicated to the
offeree? In Olley v Marlborough Court Ltd [1949] 1 All ER127, Olley sued Marlborough Court for the value of
articles stolen from her hotel room in her absence.
The defendant contended that Mrs Olley was bound by the terms of a notice exhibited in her room by which
the liability of Marlborough Court was restricted. Because MrsOlley had not seen the notice until after she had
been accepted as a guest, its terms were not part of the contract with the defendant, and accordingly were not
binding upon her.
A different result was made on the facts in Harvey v Ascot Dry Cleaning Co Ltd [1953] NZLR 549. Harvey
left a suit with Ascot for dry-cleaning. He was handed a printed docket which was folded in two and which
he placed in his pocket unread. The docket had printed on it in large print Condition of Contract. Please read
carefully. One of the conditions limited the liability of Ascot to ten times the charge for the work done. The suit
was lost. Harvey claimed the full value of the suit.
Held: the folding of the docket was immaterial and as Ascot had done all it could to reasonably bring the
conditions to Harveys attention the latter was bound by them.
No contractual rights are created until acceptance. Prior to acceptance an offer may be revoked or it
may lapse

Revocation of offer
Revocation to be effective must be communicated to the offeree prior to acceptance: Byrne & Co v Van
Tienhoven & Co (1880) 5 CPD 344.
The defendant carried on business at Cardiff and the plaintiffs at New York. The defendants posted an offer on
October 1 1879 which was received by the plaintiffs on October 11. They accepted by telegram of October 11
and by letter dated October 15. On October 8 the defendants, by letter, revoked their offer and this letter reached
New York on October 20.
Held: that a contract was complete when the acceptance was telegraphed on October11 and that as the
revocation took effect at a later date it was ineffective.

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Lapse of offer
An offer lapses:
on the death of the offeree prior to acceptance
on the death of the offeror prior to acceptance
by reason of the passage of time since the making of the offer.
Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex ch 109. Nearly six months elapsed between the
date of applying for shares in a company and notification that shares had been allotted. The defendant was held
to be justified in refusing to take the shares. The period that had elapsed was unreasonable and his allotment had
lapsed prior to notification of allotment.

Acceptance of tenders
A tender may be revoked at any time prior to acceptance of the tender: Great Northern Railway Co v Witham
(1873) LR 9 CP 16.
Witham tendered for the supply of stores to the company in the following terms : Iundertake to supply the
Company for 12 months with such quantities of ... as the Company may order from time to time. This tender
was accepted and orders were lodged with and satisfied by Witham. Finally an order was lodged which Witham
refused to meet.
Held: that the tender was a standing offer which became the basis of a series of separate contracts as orders were
lodged. Witham could not, therefore, refuse to supply the goods actually ordered although he could revoke his
offer for the future once he had satisfied orders actually lodged.
Acceptance must be communicated to the offeror
A decision by the offeree to accept an offer does not bind the offeror; in addition, the offeror must be advised
of the acceptance either expressly or by conduct: Felthouse v Bindley (1862) 11 CB (NS) 869. Felthouse wrote
to his nephew offering to buy his horse and said ... if I hear no more about him I shall consider the horse is
mine at 30-15-0. The nephew did not reply and instructed Bindley, an auctioneer, to sell his stock but not the
horse which had been sold to Felthouse. Bindley sold the horse by mistake. In an action against Bindley for
conversion it was held that there had been no contract between the nephew and uncle because there had been
no communication of the acceptance of Felthouses offer. The offeror cannot cast on the offeree the burden of
communicating his refusal.
Acceptance must be communicated only by the offeree or his authorised agent, otherwise there is no contract
: Powell v Lee (1908) 99 LT 284. Powell had applied for the position of headmaster of a school. The board of
managers resolved to appoint him. One of the managers, without authority, notified Powell of his appointment.
The appointment was rescinded by a later resolution.
Held: there was no contract with Powell because there had not been acceptance by an authorised person.
If the offeror prescribes the manner of acceptance, acceptance must be communicated in that way
Eliason v Henshaw (1819) 4 Wheaton 225.
Eliason offered to buy flour from Henshaw and asked that an answer be sent by the wagon which brought the
offer. Henshaw sent his acceptance by post, believing that it would be quicker. The acceptance arrived after the
wagon returned, by which time Eliason had purchased his flour elsewhere.

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Held: Eliason could refuse to buy from Henshaw. The United States Supreme Court said:
It is an undeniable principle of the law of contract, that an offer of a bargain by one person to another imposes no
obligation upon the former, until it is accepted by the latter according to the terms in which the offer was made.
Any qualification of or departure from those terms invalidates the offer unless the same be agreed to by the person
who made it.

Acceptance by post
Where an offer is made by post, an acceptance by post is clearly indicated by the offeror. The acceptance is
complete and the contract made when the letter is posted by the offeree: Adams v Lindsell (1818) 1B & Ald 681.
Lindsell wrote to Adams on September 2 1817 offering to sell wool and requiring an answer in course of post.
This letter was misdirected and did not reach Adams until September 5. An acceptance was posted that day
and reached Adams on September 9. Had the letter from Lindsell been correctly addressed, a reply could have
reached him on September7. On September 8 the wool was sold to a third party.
Held: the contract was made when Adamss acceptance was posted on September5. Adams had adopted the
manner prescribed by the offeror who was bound to treat as valid an acceptance communicated in that way.

Electronic acceptance
These days of course communication is normally instantaneous so that where this is so by fax, telex, or
telephone the contract is complete when the acceptance is received. The place of contract is accordingly the
place where the acceptance is received : Entores Ltd v Myles Far East Corp [1955] 2 All ER 493. Here Entores
made an offer by telex to the agents of Myles in the Netherlands. This offer was accepted by a communication
to Entoress telex machine in London.
Held: the contract was complete upon receipt of the acceptance in London. London was accordingly the place
where the contract was made, not Amsterdam from which the acceptance had been sent.

Can an acceptance be recalled?

No. This is confirmed by the New Zealand case of Wenkheim v Arndt (1874) 1 JR 73. Here an acceptance of an
offer had been posted. Before this had been received a telegram was dispatched rejecting the offer. The telegram
arrived before the letter of acceptance.
Held: once the acceptance was posted the contract was complete.
Acceptance to be effective must be unconditional and correspond with the terms of the offer
Before a contract is made the parties must have agreed on the same terms. If, therefore, the offeree introduces
new terms into his or her purported acceptance of the offer, there is no contract unless the offeror accepts these
new terms.

Counter offer
A counter offer cannot be regarded as an acceptance as the person making the counter offer is introducing new
terms to which the original offeror may not agree. A counter offer is, therefore, a refusal of the original offer and
can only become the basis of a contract when the original offeror accepts the new terms: Hyde v Wrench (1840)
3Beav 334. Wrench offered to sell his property to Hyde for 1000. Hyde offered 950. This was refused. Hyde
later said he was prepared to pay 1000.
Held: there was no contract. Hyde had made a counter offer of 950. This was a rejection of the original offer.
The offer could not be revived by later acceptance.

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Offeree changes terms

In the case of acceptance but with additional and new terms introduced by the offeree, a contract is only
complete when the offeror accepts the new or additional terms: Jones v Daniel [1894] 2 Ch 332. Daniel offered
to buy Joness land for 1450. Jones accepted the offer and enclosed a contract for signature. The contract
however included a number of new terms to which Daniel had not agreed. He refused to sign the contract, and
an action for specific performance was brought against him.
Held: that there was no contract. Joness acceptance introduced new terms to which Daniel had not agreed.

Subject to ...
In some cases the parties may introduce such terms as subject to our solicitors approval, subject to a formal
agreement drawn up by our solicitors, subject to contract, or subject to finance. Is there a binding agreement
in such cases?
In most cases the parties will not be bound until a later written agreement is signed, or finance is arranged.
However each case depends upon construction of the terms. In Smith v Matheson [1945] NZLR 291 Smith and
Matheson drew up a short statement of the terms of an agreement for sale and purchase. Although no mention
was made of the fact in the agreement, it was intended that their solicitors should draw up a more formal
agreement. The court held that this did not prevent the agreement being enforced as a contract. The formal
document would merely have stated terms already agreed upon by the parties.
However, the High Court of Australia, in Masters v Cameron (1954) 91 CLR 353, decided that in the case of
contracts for the sale of land, if the parties decided that the actual details of agreement between the parties was
subject to the drawing up of a written agreement between the parties solicitors, then there was no contract until
the solicitors written agreement was signed by both parties.
If a condition relating to finance is not fulfilled and as long as the party seeking finance has taken all reasonable
steps to obtain finance but without success, then the contract is at an end. In Scott v Rania [1966] NZLR 527 the
New Zealand Court of Appeal treated the condition as to obtaining finance as a condition precedent, which, if
not fulfilled within the period specified, entitled the vendor to treat the contract as at an end of the expiration of
that expiration.

References
Atiyah, PS 1986, Essays on contract, Clarendon Press, Oxford.
Brousseau, E 2001, Did the common law bias the economics of contract and may it change?, viewed 29 January 2013,
http://www.brousseau.info/pdf/EBJAIContAnglo.pdf
Cooter, R & Ulen, T 2004, Law and economics, 4thedn, Pearson Addison Wesley, Boston.
Hollingsworth, JR & Boyer, R 1997, Coordination of economics actors and social systems of production in
J Hollingsworth & R Boyer (eds), Contemporary capitalism: the embeddedness of institutions, Cambridge
University Press, Cambridge.
Sen, A 2000, Development as freedom, Alfred A Knopf Inc, New York.

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