Fundamental Elements of a Contract

When advising a party to the finer points of law (in relation to contract) it is imperative to examine and analyse the fundamental elements of a contract. A legally binding contract cannot exist without the following:

Offer

– Must be capable of acceptance

– Must be specific and comprehensive

Acceptance

External manifestation of assent to terms proposed by offeror

Must be an exercise of choice

Can be made by words or conduct

Intention – to create legal relations

Social and domestic agreements = no presumption

Commercial agreements = presumption

Subject matter and not parties define social/domestic agreements as opposed to commercial agreements

Consideration

Benefit and detriment to both parties

Capacity

Alcoholics

Mentally ill

Minors

Throughout this assignment these key elements of contract shall be examined, however in general, a methodical, three-stage process has been adopted for this assignment and includes:

Identifying issues of law

Applying the relevant legal materials to the question

Critical evaluation of the relevant issues/argument

Andrea made a specific and comprehensive offer to Charles offering to sell him a case of a classic New Zealand Cabernet Sauvignon. Andrea communicated her offer to Charles via fax. Charles proceeded to reply to the offer via telephone. Andrea did not prescribe a specific method of acceptance therefore Charles’ response via telephone was an acceptable means. Like a fax, the telephone is also a form of instantaneous communication. However, confirmation of acceptance is vocal rather than written. Owing to the fact that a delivery of wine was being unloaded at the time Andrea failed to hear Charles’ communication of acceptance via telephone and this is where a contentious point of law arises.

To analyse the finer points of law in this case it is imperative to refer to the appropriate case law. The leading authority on this point of law is demonstrated in Entores ltd v Miles Far East Corp [1] where Lord Denning states, “In all the instances I have taken so far, the man who sends the message of acceptance knows that it has not been received or he has reason to know it. So he must repeat it… But if there should be a case where the offeror without any fault on his part does not receive the message of acceptance – yet the sender of it reasonably believes it has got home when it has not – then I think there is no contract… the contract is only complete when the acceptance is received by the offeror: and the contract is made at the place where the acceptance is received.” [2]

Following Lord Denning’s ratio, Charles reasonably believed that his communication of acceptance had been received. Charles had no reason to believe otherwise unless it was made known to him by Andrea (which it was not). However Andrea did not hear Charles’ acceptance due to the noise associated with the delivery and failed to ask Charles to repeat the sentence. The most important factor here is that it was through no fault of her own that she failed to hear the acceptance as it is has been established that it was due to the delivery of the wine. It is this factor, and this factor alone, that excuses her of liability. Andrea did not receive the communication of acceptance and according to Lord Denning’s ratio there was no contract as a result. Of course, if there was no contract then Andrea cannot be in breach of contract and cannot be held liable to compensate Charles. However if Charles had waited for a clear and definite acknowledgement of his acceptance (via telephone) from Andrea then she would be held liable if she then sold the case of wine to another party.

The rules of instantaneous communication differ to that of the postal rule and acceptance communicated via conduct, as evident in Carlill v Carbolic Smoke Ball Co [3] . When communicating acceptance via instantaneous communication to the offeror, the offeree should wait for a definite, unambiguous acknowledgement of their acceptance to avoid frustration and disappointment.

On the 2nd of January 2006, Andrea provided Dipesh with a written offer to purchase her stock of Australian Shiraz for the sum of £6 500. Andrea did not stipulate any method of acceptance but did state that the offer would expire at 12 noon on the 10th of January 2006. As no specific method of acceptance was prescribed, Dipesh communicated his acceptance via post on the 6th of January. It has been established in Henthorn v Fraser [4] that, “It is reasonable to use the post where the parties live at a distance from each other.” [5] As Dipesh was based in Leicester and Andrea in London this was an appropriate means to communicate his acceptance.

Although Dipesh’s acceptance reached Andrea at her home address on the 9th of January 2006, the postal rule applies, and therefore, “A letter of acceptance takes effect whenever it is posted, provided that it was reasonable for the offeree to have used the post.” [6] This doctrine was initially established in Adams v Lindsell [7] . As it has already been established that it was reasonable for Dipesh to use the post, his acceptance actually took effect on the 6th of January 2006. In the mean time however, Andrea posted a letter of revocation on the 3rd of January 2006. This letter of revocation reached Dipesh on the 7th of January, a day after he sent his letter of acceptance. This is where a contentious point of law arises. Can the revocation of an offer take effect after the acceptance has been sent by post?

It is submitted that, “An offer can be withdrawn by the offeror at any time before it has been accepted. However to withdraw an offer the notice of withdrawal must actually be brought to the attention of the offeree.” [8] As a result the postal rule does not apply here. Therefore, although Andrea sent her revocation on the 3rd of January, it did not reach Dipesh until the 7th of January, and consequently was not effective until this time. Dipesh however, had already accepted the offer by posting his letter of acceptance on the 6th of January. Therefore Andrea’s letter of revocation is irrelevant and there would have been a legally binding contract between the parties on the 6th of January 2006. Andrea’s communication of revocation is a breach of contract.

This point of law is demonstrated in Byrne & Co v Van Tienhoven & Co [9] . In this case, “The defendants sent the claimants an offer on 1 October. This offer was received by the claimants on 11 October and they sent off an immediate acceptance. However, in the mean time, the defendants had sent, on 8 October, a letter revoking their offer, which reached the claimants on 20 October. It was held that a contract was concluded between the parties” [10] . As revocation can only take effect when it is brought to the attention of the offeree the defendant’s withdrawal could not take effect until 20 October. However by that time a contract had already been formed and therefore the revocation was ineffective.

The legal reasoning behind this decision and this principal of law is debatable. Lindley J stated that, “No person who had received an offer by post and had accepted it would know his position until he had waited such a time as to be quite sure that a letter withdrawing the offer had not been posted before his acceptance of it.” [11] Evidently this would cause great uncertainty if revocation of an offer was allowed after an acceptance had been posted.

As acceptance takes place when it is posted by the offeree and not when it is received by the offeror, and revocation takes effect when it is received by the offeree and not posted by the offeror, it may be argued that there is an inconsistency in the law which needs to be rectified. “It is submitted that the better approach would be to abolish the general rule and replace it with the normal rule that acceptance takes place when the acceptance is received by the offeror, subject to the qualification that the offeror cannot revoke the offer once the acceptance has been posted.” [12]

Andrea made an offer via email (instantaneous communication) to sell Elena, An immaculate bottle of Chateau d’Yquem. It was stated by Andrea that the acceptance was to be received within 48 hours. As Andrea did not stipulate any particular method of acceptance, Elena sent her acceptance by post. Where acceptance is sent by post the postal rule applies, and therefore, “A letter of acceptance takes effect whenever it is posted, provided that it was reasonable for the offeree to have used the post.” [13] It is questionable whether it was reasonable for Elena to send her acceptance via non-instantaneous communication to an offer that was sent by instantaneous communication. In Holwell Securities Ltd v Hughes [14] it was suggested “That the postal rule ought not to apply where it would lead to manifest inconvenience and absurdity”. [15] However as Elena’s letter was correctly addressed and stamped first class, the letter of acceptance should have reached Andrea within the required 48 hours.

Due to the postal strike the letter of acceptance did not reach Andrea until 72 hours after the receipt of the offer. However, “English law is presently committed to the view that a contract is concluded on the posting of the letter of acceptance even where it gets lost in the post, although Professor Treitel has argued (2003) that, where the reason for the loss of the letter is that it has been incorrectly addressed by the offeree, then the acceptance should not take place on posting because, while the offeror may take the risk of delay or loss in the post, he does not take the further risk of carelessness by the offeree.” [16]

The application of this general rule is demonstrated in Household Fire Insurance v Grant [17] , where it was held that the “Acceptance was complete when the letter of allotment was posted and it was irrelevant that it never arrived.” [18] Alderson B. in Stocken v Collin [19] stated, “If the doctrine that the post office is only the agent for the delivery of the notice were correct no one could safely avail himself of that mode of transmission. But if the post office be such common agent, then it seems to me to follow that, as soon as the letter of acceptance is delivered to the post office, the contract is made as complete and final and absolutely binding as if the acceptor had put his letter into the hands of a messenger sent by the offeror himself as his agent to deliver the offer and receive the acceptance.” [20] Using this case as a governing authority it is therefore irrelevant that Elena’s acceptance did not arrive until 72 hours after the receipt of Andrea’s offer as a contract was formed the minute Elena posted her letter. As Andrea sold the wine to someone else (although after the elapse of 48 hours) she was in breach of contract and would be liable to pay damages or compensate Elena by some other means.

As the acceptance by post did not reach Andrea within the required 48 hours she would have believed that her offer had lapsed and that she was well within her rights to sell the wine to another party. This is where the postal rule appears to be flawed as it puts the offeror at a major disadvantage. The average man would reasonably assume that after 48 hours their offer could and would be withdrawn. Andrea would not have known that a contract was formed from the moment Elena’s letter of acceptance was posted and not when or even if it reached her. Andrea could have avoided this dilemma by stating in her offer that acceptance must reach the offeror before the elapse of 48 hours, or better still, specifying a specific time, for example, acceptance must reach the offeror by 4pm Friday. In doing this Andrea would escape liability and prevent the offeree from posting his/her acceptance five minutes before the required deadline. Alternatively Andrea could request that the acceptance be communicated via instantaneous communication and therefore the postal rule would not apply.

Andrea attends an annual auction to buy one particular crate of vintage Champagne listed in the auction catalogue as lot 27. When the auctioneer reaches lot 27, he announces that it has been withdrawn from sale. The contentious element in this case is whether or not it was legal for the auctioneer to withdraw lot 27 from auction sale after having already advertised it in the auction catalogue.

Auction sales are a common event and consequently are governed by specific laws. It is submitted that, “The general rule is that an auctioneer, by inviting bids to be made, makes an invitation to treat,” [21] and that, “The advertisement of an auction sale is generally only an invitation to treat.” [22] If an advertisement of an auction sale is only an invitation to treat then essentially it is a request to make an offer for the goods on auction and is not an offer capable of acceptance, and therefore does not amount to a contract. It is essential to differentiate between an offer and an invitation to treat in order to understand and assess Andrea’s situation. An offer must be specific and comprehensive and as stated above must be capable of acceptance. Therefore it is fair to conclude on these grounds that the auctioneer cannot be held liable for withdrawing lot 27 from the auction after it had been advertised as it was an invitation to treat and not an offer.

This conclusion is backed by the decision in Harris v Nickerson [23] , where, “The defendant auctioneer advertised that lots including certain office furniture would be sold by him at Bury St Edmunds on specific days. The plaintiff had a commission to buy this furniture and travelled from London for the sale. However, the lots were withdrawn from sale. The plaintiff brought an action against the defendant to recover for his loss of time and expenses. Held: he had no such right of action. The advertisement was only an invitation to treat and did not amount to a promise that all the articles advertised would be put up for sale.” [24]

The facts in Harris v Nickerson are almost identical to Andrea’s scenario. Therefore following this authority it clear that Andrea can neither force the auction house to sell lot 27 nor can she force the auction house or seller to reimburse her for her travel expenses. The advertisement of lot 27 was an invitation to treat and “Did not amount to a promise that all the articles advertised would be put up for sale.” [25]

It is submitted that, “An auctioneer, by inviting bids to me made, makes an invitation to treat (except where the auction is to take place without a reserve price).” [26] If the advertisement of lot 27 included the words ‘without reserve’ then this would amount to a unilateral offer and the auctioneer would be liable to pay damages for withdrawing the goods from sale. This is demonstrated in Warlow v Harrison [27] , where, “The auctioneer would be liable in damages for breach of his promise that there would be no reserve.” [28]