#7426 - Introduction To Offer And Acceptance - Contract Law

Week 1- Introduction to Offer and acceptance

Chapter 1 and 2 and pages 45-53.

What is a contract?

• An agreement or set of promises that the law will enforce.

• They are designed to facilitate the freedom of the parties to create their own private bargains.

• In the 19^th century, the will theory said that a contract represents an expression of the will of the contracting parties and should be respected and enforced by the courts.

• Charles Fried invented the promise theory. A contract is based on moral principles and people keep the promise because they have created a convention for the other person to rely on. Something must be given in exchange for the promise.

• Randy Barnett invented consent theory. Contracts are based on an underlying system of legal entitlements. This specifies the boundaries people may operate in and minimises conflicting claims because the contract can be legally enforced.

What are the functions of contract law?

• To create freedom of contract and to discourage state intervention.

• To contain opportunistic behaviour so the party who is regretting the deal cannot get out of it.

• Reducing transaction costs. Default rules save the parties the expense of drafting provisions to deal with contingencies.

• Filling in gaps in incomplete contracts.

• Discouraging inefficient exchanges.

• Having consequences in a dispute.

Problems?

• Judges are forced to make value judgments.

• It does not distribute resources fairly between the parties. It only looks at whether the exchange is efficient.

• It encourages self interest.

• It allows parties to decide what is in their best interests but some parties are unable to do this effectively.

When is a contract made?

• When there is an offer and acceptance the individuals become ad idem (of one mind) and this creates binding obligations.

• There must be an intention to create legal obligations.

What is an offer?

• An expression of willingness to enter into a contract on certain terms.

• Would a reasonable person (objective test) in the position of the offeree believe that an offer has been made? The intention is decided objectively and not subjectively.

What is a unilateral contract?

• The offeree accepts the offer by performing his or her side of the bargain.

What is an invitation to treat?

• Different from an offer. It is an invitation to others to make offers or enter into negotiations. For example shop sales.

When is a contract created in an auction?

• Usually is an invitation to treat. The auctioneer invites offers from the crowd. A bidder can withdraw their bid before it is accepted. The auctioneer doesn’t have to sell to the highest bidder.

• When an auction is held “without reserve”, the auctioneer must sell to the highest bidder.

What is a tender process?

• Each interested party needs to submit a bid without knowing what the other bid that have been made are. It is an invitation to treat and each tender constitutes an offer.

When in a ticket case does a contract become formed between the parties?

• The problem is when and not whether a contract is formed.

• The issue of a ticket is an offer which can be accepted or rejected by the passenger after they have had reasonable time to consider the conditions of the ticket.

• It is accepted by conduct and until then an airline for example will not have an enforceable agreement with you.

Cases

Offer

Page 38

Gibson v Manchester City Council (1979)

Facts:

• The Conservative party introduced a scheme allowing renting tenants to purchase their housing at a discount and with a mortgage provided by them.

• Gibson corresponded to the council. He negotiated a price for his house and filled out a formal application.

• The Labour party came into power and only promised to resolve the scheme for those who had binding contracts.

Remedy sought:

• Gibson wants the right to purchase his house under the agreed conditions.

Prior proceedings:

• Gibson won at the County Court.

• Gibson won at the Court of Appeal.

  • Lord Denning reasoned that there was a contract. He looked at the correspondence as a whole to find the true construction. Tenants were led to believe that they had an agreement when they filled out the formal application. The council was receiving money, this was consideration.

• The Council is appealing to the House of Lords.

Legal issue:

• Is the correspondence between Gibson and the council enough to show that they had a contract to sell the house to him under the conditions?

Outcome:

• Appeal allowed.

Legal reasoning:

• Lord Diplock overruled Lord Denning. He reasoned that there was not a contract. The letter the council wrote stated “may be prepared to sell”. It is an invitation to accept the offer and to make a formal application. There is discretion and this prevents a contract. Gibson did not accept the offer when he filled out the formal application because there was no contractual offer available to accept.

Ratio decidendi:

• A contract can only exist if there is no doubt that an offer exists for the sale of a house.

Unilateral contracts

Page 41

Carlill v Carbolic Smoke Ball Company (1893)

Facts:

• The Company put an advertisement in the Gazette.

• They promised 100 pounds to anyone who caught influenza after using the smoke ball three times daily for two weeks.

• 1000 pounds was deposited in the bank as a sign of sincerity.

• Carlill followed the procedures and contracted influenza. The company refused to give her the award, saying it was a puff promise.

Remedy sought:

• Carlill wants 100 pounds.

Prior proceedings:

• Case was heard in the Court of Appeal by Lindley LJ and Bowen LJ.

Arguments:

• Company argued that the language was too vague to show intention to create legal obligations. Also that an offer cannot be made to the whole world and there was no consideration (nadum pactum) because the company received no benefit.

• Carlill argued that the serious intention was shown by the 1000 pound deposit in the bank “showing our sincerity”.

Legal Issue:

• Is an advertisement promising an award to anyone who fulfils the requirements a binding contract?

Outcome:

• Carlill won. Appeal dismissed.

Legal reasoning:

• Lindley LJ reasoned that there was a distinct promise expressed in unmistakable language. It was not a puff promise because of the 1000 pound deposit used to show the Company’s sincerity in the matter. Anyone who performs the condition accepts the offer. Acceptance does not need to precede performance because it was a continuing offer. The fact that a “reasonable time” is an uncertain term is not an issue for the plaintiff because no matter what time frame is used, the plaintiff would have done it in time. The Company received the benefit of increasing confidence in the public to use the ball and this produced a beneficial sale. There was a distinct inconvenience for Carlill in having to use the ball as directed. The Company has to perform its promise and it is their own fault that they left themselves open to a great many actions.

• Bowen LJ reasoned that the advertisement is an offer made to the public to make people use the smoke ball. Anyone that followed the directions and contracted the influenza would be entitled to the reward. A person is not expected to notify the Company of his acceptance to the offer before he performs the condition. No notification is needed. The inconvenience of Carlill is enough to create consideration and the Company received a promotion of their sales.

Ratio decidendi:

• An offer made to the world is a binding contract if the commiting party follows the requirements and due consideration can be proved.

• No prior notification is needed. Acceptance occurs through conduct.

When does the sale of a ticket become a contract?

Page 45

MacRobertson Miller Airline Services v Commissioner of State Taxation (1975)

Facts:

• A person who purchases a ticket on a flight of...