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How is an Agreement Defined?

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In most cases, an agreement is created when the terms of an offer by one party are mirrored by unequivocal acceptance by a second party. When looking for evidence that parties to a contract have reached an agreement however, it is important to remember that the courts do not normally consider what the parties subjectively think they have agreed to. Instead, the courts look for what is known as the 'phenomenon' of agreement–the appearance of agreement as viewed from the perspective of the objective observer. For this reason, many of the leading cases in this field involve one or more of the parties to a contract believing that they have not agreed to enter into a binding agreement, yet the courts have held that their words and conduct objectively indicate that they did agree to be bound, and therefore a valid contract has been formed.

The Objective Test

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Whether an offer has been made, or it has been accepted, is therefore decided by asking what a reasonable person would have thought was intended. The key case to understand this is Smith v Hughes.[1] In this case, a trainer of racehorses, Hughes, contracted with Smith, a dealer of oats, to buy oats to feed his horses. Hughes needed 'old' oats rather than 'new' oats, as only old oats would be suitable for the horses. Smith provided a sample of the oats to Hughes who then agreed to place an order for oats. Upon delivery, Hughes discovered that the oats were new rather than old and refused to pay for them. Smith then sued Hughes for breach of contract.

The court held that Hughes' conduct was indicative to a reasonable outside observer that he did intend to buy oats which matched the sample provided. Since there was no finding that Smith had in any way misrepresented the quality of the oats, there was a binding contract and Hughes was bound to pay for them.

“If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into a contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.” per Blackburn J at p 607

Offers are different from "invitations to treat", which cannot be simply accepted by the other party. For example, the display of goods in a shop, even with a price tag, is an invitation to treat,[2] so that an offer is only made when a customer takes a product to the counter and the shopkeeper can decide whether to accept the offer. Similarly, and as a very general rule, an advertisement,[3] the invitation to bid at an auction with a reserve price,[4] or the invitation to submit a tender bid are not considered offers. On the other hand, a person inviting tenders may fall under a duty to consider the submissions if they arrive before the deadline, so the bidder (even though there is no contract) could sue for damages if their bid is never considered.[5] An auctioneer who publicises an auction as being without a reserve price falls under a duty to accept the highest bid.[6] An automated vending machine constitutes a standing offer,[7] and a court may construe an advertisement, or something on display like a deckchair, to be a serious offer if a customer would be led to believe they were accepting its terms by performing an action.[8] Statute imposes criminal penalties for businesses that engage in misleading advertising, or not selling products at the prices they display in store,[9] or unlawfully discriminating against customers on grounds of race, gender, sexuality, disability, belief or age.[10] The Principles of European Contract Law article 2:201 suggests that most EU member states count a proposal to supply any good or service by a professional as an offer.

"Read the advertisement how you will, and twist it about as you will," said Lindley LJ of the Smoke Ball advert, "here is a distinct promise expressed in language which is perfectly unmistakable".

Once an offer is made, the general rule is the offeree must communicate her acceptance in order to have a binding agreement.[11] Notification of acceptance must actually reach a point where the offeror could reasonably be expected to know, although if the recipient is at fault, for instance, by not putting enough ink in their fax machine for a message arriving in office hours to be printed, the recipient will still be bound.[12] This goes for all methods of communication, whether oral, by phone, through telex, fax or email,[13] except for the post. Acceptance by letter takes place when the letter is put in the postbox. The postal exception is a product of history,[14] and does not exist in most countries.[15] It only exists in English law so long as it is reasonable to use the post for a reply (e.g. not in response to an email), and its operation would not create manifest inconvenience and absurdity (e.g. the letter goes missing).[16] In all cases it is possible for the negotiating parties to stipulate a prescribed mode of acceptance.[17] It is not possible for an offeror to impose an obligation on the offeree to reject the offer without her consent.[18] However, it is clear that people can accept through silence, firstly, by demonstrating through their conduct that they accept. In Brogden v Metropolitan Railway Company,[19] although the Metropolitan Railway Company had never returned a letter from Mr Brogden formalising a long term supply arrangement for Mr Brogden's coal, they had conducted themselves for two years as if it were in effect, and Mr Brogden was bound. Secondly, the offeror may waive the need for communication of acceptance, either expressly, or implicitly, as in Carlill v Carbolic Smoke Ball Company.[20] Here a quack medicine company advertised its "smoke ball", stating that if a customer found it did not cure them of the flu after using it thrice daily for two weeks, they would get £100. After noting the advertisement was serious enough to be an offer, not mere puff or an invitation to treat, the Court of Appeal held the accepting party only needed to use the smokeball as prescribed to get the £100. Although the general rule was to require communication of acceptance, the advertisement had tacitly waived the need for Mrs Carlill, or anyone else, to report her acceptance first. In other cases, such as where a reward is advertised for information, the only requirement of the English courts appears to be knowledge of the offer.[21] Where someone makes such a unilateral offer, they fall under a duty to not revoke it once someone has begun to act on the offer.[22] Otherwise an offer may always be revoked before it is accepted. The general rule is that revocation must be communicated, even if by post,[23] although if the offerree hears about the withdrawal from a third party, this is as good as a withdrawal from the offeror himself.[24] Finally, an offer can be "killed off" if, rather than a mere inquiry for information,[25] someone makes a counter offer. So in Hyde v Wrench,[26] when Wrench offered to sell his farm for £1000, and Hyde replied that he would buy it for £950 and Wrench refused, Hyde could not then change his mind and accept the original £1000 offer.

The Valkyrie II, sunk by the aptly named The Satanita, had to be paid for because of a tacit contract of the racers.

While the model of an offer mirroring acceptance makes sense to analyse almost all agreements, it does not fit in some cases. In The Satanita[27] the rules of a yacht race stipulated that the yachtsmen would be liable, beyond limits set in statute, to pay for all damage to other boats. The Court of Appeal held that there was a contract to pay arising from the rules of the competition between The Satanita's owner and the owner of Valkyrie II, which he sank, even though there was no clear offer mirrored by a clear acceptance between the parties at any point. Along with a number of other critics,[28] in a series of cases Lord Denning MR proposed that English law ought to abandon its rigid attachment to offer and acceptance in favour of a broader rule, that the parties need to be in substantial agreement on the material points in the contract. In Butler Machine Tool Co Ltd v Ex-Cell-O Corp Ltd[29] this would have meant that during a "battle of forms" two parties were construed as having material agreement on the buyer's standard terms, and excluding a price variation clause, although the other court members reached the same view on ordinary analysis. In Gibson v Manchester CC[30] he would have come to a different result to the House of Lords, by allowing Mr Gibson to buy his house from the council, even though the council's letter stated it "should not be regarded as a firm offer". This approach would potentially give greater discretion to a court to do what appears appropriate at the time, without being tied to what the parties may have subjectively intended, particularly where those intentions obviously conflicted.

In a number of instances, the courts avoid enforcement of contracts where, although there is a formal offer and acceptance, little objective agreement exists otherwise. In Hartog v Colin & Shields,[31] where the seller of some Argentine hare skins quoted his prices far below what previous negotiations had suggested, the buyer could not enforce the agreement because any reasonable person would have known the offer was not serious, but a mistake.[32] Moreover, if two parties think they reach an agreement, but their offer and acceptance concerns two entirely different things, the court will not enforce a contract. In Raffles v Wichelhaus,[33] Raffles thought he was selling cotton aboard one ship called The Peerless, which would arrive from Bombay in Liverpool in December, but Wichelhaus thought he was buying cotton aboard another ship called The Peerless that would arrive in September. The court held there was never consensus ad idem (Latin: "agreement to the [same] thing"). Where agreements totally fail, but one party has performed work at another's request, relying on the idea that there will be a contract, that party may make a claim for the value of the work done, or quantum meruit.[34] Such a restitution claim allows recovery for the expense the claimant goes to, but will not cover her expectation of potential profits, because there is no agreement to be enforced.

Learning note
When answering a problem question dealing with agreements, it is useful to think about and make notes on the following points:
  • What are the states of mind of the parties? Although the courts take an objective approach to determining whether an offer has been made and accepted, if the party making the offer believes that it has been accepted, then it may be more likely than not that the objective test has been passed. If the offeree's state of mind is that the offer has not been accepted, then the objective test is not likely to have been passed. Most legal problems will occur when the offeree has not formed an opinion either way. In this case, the offeree may or may not be bound, depending on what a court finds commercially more logical.

References

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  1. ↑ See Smith v Hughes (1871) LR 6 QB 597, per Blackburn J.
  2. ↑ See Pharmaceutical Society v Boots Cash Chemists [1953] EWCA Civ 6, which examined whether a criminal statute should be interpreted as creating liability for a shopkeeper.
  3. ↑ Partridge v Crittenden [1968] 1 WLR 1204
  4. ↑ See s.57(2) Sale of Goods Act 1979
  5. ↑ See Blackpool and Fylde Aero Club v Blackpool BC [1990] EWCA Civ 13
  6. ↑ See Barry v Davies [2000] EWCA Civ 235, and the old case Payne v Cave (1789) 3 TR 148.
  7. ↑ e.g. Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163
  8. ↑ See Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1; Chapelton v Barry Urban District Council [1940] 1 KB 532.
  9. ↑ See the Consumer Protection from Unfair Trading Regulations 2008 rr 5, 8–18 (SI 2008/1277). This is secondary legislation, passed under the Trade Descriptions Act 1968.
  10. ↑ See the Equality Act 2010. See also Constantine v Imperial Hotels Ltd [1944] KB 693 and Lefkowitz v Great Minneapolis Surplus Stores, 86 NW 2d 689 (1957)
  11. ↑ Entores Ltd v Miles Far East Corporation [1955] EWCA Civ 3
  12. ↑ See also, The Brimnes [1974] EWCA Civ 15
  13. ↑ The general rule was confirmed in Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34. See also, S Hill, 'Flogging a Dead Horse – The Postal Acceptance Rule and Email' (2001) 17 Journal of Contract Law 151, arguing that email is the same as telex and fax.
  14. ↑ See Adams v Lindsell [1818] EWHC KB J59 and S Gardner, "Trashing with Trollope: A Deconstruction of the Postal Rules in Contract" (1992) 12 Oxford Journal of Legal Studies 170. Historically a post officer was the agent of the recipient of letter, who would often pay for receiving it. Giving a letter to the postman or putting it in the postbox was construed as communicating acceptance at the time of posting.
  15. ↑ See the Principles of European Contract Law art 2:205. Common law countries mostly inherited the same rule from England, and it found its way into the United Nations Convention on Contracts for the International Sale of Goods arts 16(1) and 18(2)
  16. ↑ See Henthorn v Fraser [1892] 2 Ch 27 and Holwell Securities Ltd v Hughes [1974] 1 WLR 155. See also Bramwell LJ's dissenting judgment in The Household Fire and Carriage Accident Insurance Company (Limited) v Grant (1878–79) LR 4 Ex D 216.
  17. ↑ nb Manchester Diocesan Council for Education v Commercial and General Investments Ltd [1969] 3 All ER 1593, holding a prescribed mode need not necessarily mean it is the only mode of acceptance.
  18. ↑ See Felthouse v Bindley
  19. ↑ (1877) 2 AC 666
  20. ↑ [1893] 2 QB 256
  21. ↑ See Williams v Carwardine [1833] EWHC KB J44 and Gibbons v Proctor (1891) 64 LT 594. The Australia case, R v Clarke (1927) 40 CLR 227 opined that reliance on the offer is also necessary, however this appears to go further than what English law requires. See P Mitchell and J Phillips, 'The Contractual Nexus: Is Reliance Essential?' (2002) 22(1) Oxford Journal of Legal Studies 115
  22. ↑ See Errington v Errington [1952] 1 KB 290 and Daulia Ltd v Four Millbank Nominees Ltd [1978] Ch 231
  23. ↑ Byrne v Van Tienhoven (1880) 5 CPD 344
  24. ↑ Dickinson v Dodds (1876) 2 Ch D 463
  25. ↑ Stevenson, Jacques & Co v McLean (1880) 5 QBD 346
  26. ↑ (1840) 3 Beav 334
  27. ↑ The Satanita [1897] AC 59
  28. ↑ e.g. Lord Wilberforce in The Eurymedon [1975] AC 154, "English law, having committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the market slots of offer, acceptance and consideration."
  29. ↑ [1977] EWCA Civ 9
  30. ↑ [1979] UKHL 6
  31. ↑ [1939] 3 All ER 566
  32. ↑ cf Smith v Hughes (1871) LR 6 QB 597, where it was held that even though an oats dealer knew that a racehorse trainer was making a mistake about the kind of oats he was buying, the dealer had no obligation to inform him otherwise and the trainer was bound to his agreement.
  33. ↑ [1864] EWHC Exch J19
  34. ↑ See British Steel Corp v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504
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