LECTURE 2

Agreement: Part 1 – Offer

At the end of this lecture, students should understand:

1. The various classifications of contracts;

2. The elements required for the formation of a contract;
3. The nature of an offer and the circumstances in which an offer is made; and
4. Where there are blurred lines – contract or no contract? and
5. What constitutes the termination of an offer.

1. Types of contract

Unilateral contract - Offeror makes a promise in exchange for some act (say, payment of
money for a service):
 The offeror is bound when the act is performed, but the offeree cannot be forced to act.
o For example, if you have lost your dog and you place an advertisement in the
newspaper or online offering a $100 reward to the person who returns your
missing dog. By offering the reward, you're offering a unilateral contract – that
is - you promise to pay should anyone fulfil the obligation of returning your
dog. You're the only person who is bound by this contract as no one in the
general public is forced to find your dog.
o Another example is an insurance contract – the insurance company promises it
will pay the insured person a specific amount of money in the event some
particular thing happens – for example, your house burning down. If your house
doesn’t burn down, the insurance company is not obligated to pay you any
money!

Bilateral contract - two parties exchange promises to do things:

 Both parties can be forced to act:
o For example – you enter into a bilateral contract every time you make a purchase
at a store or pay for treatment received by doctor.

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 2. Elements

There are 4 essential elements that are necessary for the formation of a contract:

a) Agreement;
b) Consideration;
c) Certainty; and
d) Intention to create legal relations.

3. Offer

Offer and Acceptance

 If there is a dispute as to the existence of an agreement, the Courts traditionally apply

the rules of offer and acceptance.
 Must look to the negotiations between the parties and seeks to establish whether one of
them has made an offer to the other and whether that offer is then accepted by the others.
 Nowadays, in most situations, whether an agreement exists will not be an issue. This
is because usually, when people enter into agreements, they have their lawyers execute
a detailed document, which in and of itself is evidence of the existence of an agreement.
 The rules of offer and acceptance need to be applied in situations where there have been
negotiations between X and Y, but communications between the two have led to one
of them claiming that an agreement has been reached and the other disputing the
existence of any such agreement. In this situation, you need to go through the
communications between the 2 parties to search for evidence of an offer, followed by
an acceptance of that offer. Unless both an offer and acceptance are found to have
occurred, there is no agreement.
 Principles of offer and acceptance help us determine:
o When a contract was entered into - important if there are time limits on
performance.
o Where a contract was entered into - important if there is a dispute as to which
jurisdiction governs a contract.
 Whether an agreement has been entered into is determined objectively:

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 o It has nothing to do with what was in the minds of the parties, rather, it is about
whether it would appear to a reasonable person in the position of the offeree
that an offer was intended, and that a binding agreement would be entered into
upon acceptance.
o So it doesn’t matter at all whether the offeror in fact intended to make an offer,
the Court will determine the offeror’s intention objectively by looking to the
surrounding facts and circumstances.

Offer or invitation to treat?

If X says to Y ‘I am selling my car for $2,000’, X’s communication could be interpreted as

either:
 X is offering his pen for sale to Y and Y need only accept the offer to create a binding
agreement;
 X is inviting Y to offer to buy his pen, should he wish to do so. X may then accept Y’s
offer and create a binding agreement. Alternatively, X may reject Y’s offer and choose
to sell to someone else or not at all.

There are therefore two possible routes to an agreement:

(1) Offer + Acceptance = Agreement
(2) Invitation + Offer + Acceptance = Agreement

Plus alternatives which result in no agreement, i.e.

(3) offer + rejection = no agreement
(4) invitation + offer + rejection = no agreement

If the facts were changed so that X said ‘I’m offering you this particular pen for $2, you have
half an hour to accept’ or ‘This pen is yours for $2 if you want it’ then the analysis would be
much easier. X has almost certainly made an offer to Y rather than an invitation to treat.
Unfortunately people often do not express themselves as clearly as this in everyday life.

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Gibson v Manchester City Council

Facts:
 The Council made a decision to allow tenants of the council housing to buy their
properties at a discounted rate. The council sent a letter to the tenants which stated that
it “may be prepared” to sell the premises that the tenant was leasing from the council.
 The letter stipulated the price and terms and conditions upon which a sale would take
place. The letter then invited the tenant “to make a formal application to buy” by
completing the enclosed application form.
 A new Council was appointed and it resolved that it did not want to continue with this
scheme. It only continued with the parties with whom the previous council had already
entered into contracts with.
 Gibson said the Council should be bound to sell him the property at the discounted rate.
 Therefore, the Court had to determine whether a contract was in existence.
 At first instance, the Court applied the typical offer/acceptance analysis and found that
a contract existed. The Council appealed to the Court of Appeal and the appeal was
dismissed so the case went all the way up to the House of Lords.

Held:
 That there may be certain types of contract which don’t fit easily into the normal
analysis of a contract as being constituted by an offer and acceptance. Where there has
being an exchange of correspondence between parties including subsequent replies
other than the initial contact, this is one of these odd types of contract.
 In these circumstances, the correspondence has to be examined closely to test the true
meaning of the words in the correspondence – does it reflect an intention by the Council
to be immediately bound by the acceptance?
 Here – the Court found that the words used in the letter - “may be prepared” to sell and
“to make a formal application to buy” amounted to nothing more than a letter setting
out financial terms on which the Council MAY be prepared to CONSIDER a sale and
purchase in due course.
 Accordingly, it could not be shown that the council exhibited an intention to be bound
to sell on the receipt of Mr. Gibson’s application form.

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 4. Blurred Lines

a) Promotional materials / advertisements – unilateral contracts?

Carlill v Carbolic Smoke Ball Co [1893] 1QB 256

Facts:
 The Carbolic Smoke Ball Co. made a product called the “smoke ball”. It claimed to be
a cure for influenza and a number of other diseases, in the context of the 1889–1890 flu
pandemic.
 The Company published advertisements in the Pall Mall Gazette and other newspapers
on November 13, 1891, claiming that it would pay £100 to anyone who got sick with
influenza after using its product according to the instructions provided with it.
 The advertisement also stipulated that £1,000 was deposited with the Alliance Bank, to
show their sincerity in the matter.
 Mrs. Carlill saw the advertisement, bought one of the balls and used it three times daily
for nearly two months until she contracted the flu on 17 January 1892.
 She claimed £100 from the Carbolic Smoke Ball Company.
 There was a dispute as to whether there was a contract between herself and the
Company. The Company says the advertisement was “mere puff” and not at all serious.

Issues:
 Whether there was an offer;
 Whether it had been accepted;
 Whether the terms and conditions were too ambiguous; and
 Whether there was any consideration.

Held:
 There WAS an agreement and the Defendant had to pay the reward.
 The necessary will or intention to make the advertisement an offer rather than “a mere
puff” was to be found in the fact that the company had set up a special bank account to
meet possible claims as a sign of its sincerity in the matter.

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  On the issue of whether there was acceptance, although acceptance usually has to be
communicated to the offeror, it was found that these sorts of cases were an exception.
The nature of these sorts of advertisements shows an indication on the part of the offeror
that acceptance need not be communicated – rather, the performance of the condition
is sufficient acceptance without notification. That is, when Mrs. Carlill bought the ball
and followed the instructions – once she had completed those tasks, she had accepted
the offer.
 In respect of the issue of the ambiguity of terms – in spite of the fact that the instructions
didn’t articulate the exact times of day that the ball had to be used, or how long the
effect of the ball would be, the instructions were sufficiently clear.
 Regarding consideration – if the public has confidence in the ball and people decide to
use it, that is beneficial to the company, and that is enough to constitute consideration.

What do we need to take away from this case?

 It is quite possible to make an offer to the world.
 In unilateral contracts there is no requirement that the offeree communicates an
intention to accept, since acceptance is through performance.
 The offerors would have value in people using their products even if they had not been
purchased by them directly.

b) Display of Goods / Shop Sales – Invitations to Treat

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) [1953] 1 QB 401

Facts:
 Section 18 of the Pharmacy and Poisons Act 1933 (UK) stipulated that certain drugs
could only be sold to members of the public if the sale was “effected by or under the
supervision of, a registered pharmacist.”
 Boots Cash Chemists operated a self-service pharmacy. When one of its customers
selected to purchase drugs covered by the legislation, they proceeded to a checkout
desk where a registered pharmacist handled the transaction. The registered pharmacist
was also authorised by the pharmacy to prevent any person from removing any drugs
from the premises.

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  The Pharmaceutical Society brought an action against Boots Cash Chemists claiming
that this method of selling the drugs breached s 18.

Held:
 In determining whether the legislation was breached, the Court of Appeal focused on
whether the display of drugs was an offer or an invitation to treat. The Court ruled that
the display was an invitation to treat, with the consequence that the customer made an
offer at the time he or she presented at the checkout counter as willing to buy the
relevant drugs.
 A registered pharmacist then accepted the offer.
 In such circumstances, the contract was entered into under the supervision of a
registered pharmacist and thus there was compliance with the legislation.

Somervell LJ noted that in relation to:

"an ordinary shop, although goods are displayed and it is intended that customers
should go and choose what they want, 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. Then the contract is completed…

…Were it otherwise, “once an article has been placed in the receptacle the customer
himself is bound and he would have no right without paying for the first article to
substitute an article which he saw later of the same kind and which he perhaps
preferred.”

c) Auctions

 It is well established that when an auctioneer puts up an item for sale, they are not
making an offer to sell to the highest bidder, but inviting offers from the bidder.
 By making a bid, the bidders are making an offer, which is accepted by the auctioneer
when the hammer falls.
o This is reinforced by the Sale of Goods Act 1923 (NSW), s 60.
 This means that the auctioneer does not have to accept the highest bid or any bid, unless
the auctioneer has stated that they will do so.

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  It also means that a bid can be retracted before the hammer falls.
 BUT, in the case of an auction without a reserve (one where an item will be sold
regardless of price), there is conflicting authority as
to what the position is:
o In AGC (Advances) Ltd v McWhirter (1977) 1 BPR 9454 it was held that the
general principle applies irrespective of whether the auction is with or without
reserve.
o However, the UK Court of Appeal has held otherwise in Barry v Davies [2001]
1 All ER 944, saying that the holding of the auction was the offer and that it was
accepted by the bid.

d) Tenders

 Tenders are a similar to auctions, but a key difference is that in most tenders, each
bidder makes only one bid, and with knowledge of the other tenderers.
 Once the tender is made, the invitor can choose to accept or reject the tender:
o Meudell v Harvella Investments v Mayor of Bendigo (1900) 26 VLR 158.
 The invitor can accept or reject any tender, but if they have said that they will accept
the best tender, they must do so and a contract arises with the best tenderer.
 An exception to this is process contracts. A process contract arises in certain
circumstances where an invitation to tender creates an offer and the tender is the
acceptance.

Blackpool and Fylde Aero Club v Blackpool BC [1990] 1 WLR 1195

Facts:
 The council, which owned an airport, called for tenders to operate pleasure flights from
the airport. Blackpool & Fylde Aero Club (the club) was the existing operator whose
contract was coming to an end. It was also one of the closed group of seven people
invited to tender for a new contract. The invitation to tender was detailed and specific
in the procedure for, and form of, the submission of tenders. The reason for this was
that the council wanted to ensure that the committee considering the tenders was not in
a position to know which tender had been submitted by which tenderer.

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  One of the clauses in the call for tenders stated that “no tender which is received after
the last date and time specified shall be admitted for consideration.” The club
submitted its tender on time and in accordance with the required procedure and form.
However, due to an administrative error by the council, the tender was not considered.
This meant that the club lost any chance of being the successful tenderer.
 The club sued the council for damages for breach of contract.
 The issue was whether the call for the tenders constituted an offer to consider them all?

Held:
 Generally, an invitation is no more than an offer to receive tenders. But in certain
circumstances it could give rise to a contractual obligation, either from:
o The express words used in the tender; and/or
o The circumstances surrounding the sending of the invitation.
 Both of the above applied in this case. The Court looked at the following:
o The Council approached a small, select group of tenderers.
o They were all connected with the airport.
o The plaintiff had held the concession for eight years and had won three previous
tenders.
o The Council was obliged to comply with its standing orders and owed a duty to
ratepayers to act prudently in managing its financial affairs.
o There was a clear intention on the part of both parties that all timely tenders
would be considered.
o Special envelopes were supplied to each tenderer to preserve anonymity.
 How would the ordinary person reading the tender document construe it?
o The Council might or might not accept any particular tender… but if it did
consider any tender that was submitted before the deadline, it would consider
all such tenders.
 Although contracts should not be lightly implied, Bingham LJ was satisfied here that
both parties intended to create contractual relations.
 Stocker LJ said that this was one of the fairly rare exception to the rule about tenders.

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 e) Ticket Cases

MacRobertson Miller Airline -v- Commissioner of State of Taxation (WA)

Facts:
 A passenger enquired about a flight and was informed that fares and seats were
available. He proceeded to pay the fare and was handed his ticket.
 The ticket had printed on it various terms and conditions including:
o that the airline reserved the right to cancel the flight and that the passenger
would be refunded the money without the airline being liable for anything
further; and
o that if the plane turned up but the passenger was not there, then they had
forfeited their fare and no refund was available.
 The pertinent issue was whether stamp duty should have been refunded also and to
consider this it needed to be determined whether there was a contract.

Held:
 The ticket did not report the terms of an agreement, but rather the terms of an offer
which was subsequently accepted by conduct.
 Barwick CJ considered the arrangement similar to a unilateral contract. The passenger
was making an offer which could be accepted by conduct. If the airline passenger was
not carried, the airline had no obligation other than to refund the fair. On that basis,
there were no contractual obligations until the airline provided the passenger with his
seat on the plane.
 Stephen J adopted the traditional ticket case approach – the ticket constituted an offer
by the airline, capable of acceptance or rejection by the passenger once the passenger
had a reasonable opportunity to read the conditions. The ticket recorded the terms of an
offer.
 Therefore, in this case, the lack of any obligation on the airline prevented the ticket
from being a contract.

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5) Termination of an Offer

a) Revocation

 An offer can be revoked at any time – unless it is an Option.

 An option is a conditional agreement or irrevocable offer.
o It is a promise to hold an offer open if consideration has been given in return
for that promise. There is an option holder and an option grantor. Under the
agreement, the option holder is entitled to enter into a contract with the option
grantor on specified terms, either at a specific time or within in a specific period.
The option holder is then free to choose whether or not to exercise that option
at that time or within that period.
 An offer, once made doesn’t last forever. It ends when:
o It is withdrawn by the offeror;
o It lapses - eg – if there is a term that the offer is only open for a week, or if it
dependent on some condition, or a changing of circumstances which alters the
making of the offer; or
o It is rejected.

Goldborough Mort & Co -v- Quinn (1910) CLR 674

 The option grantor gave the option holder an option to purchase certain land at a
specified price at any time within one week of the agreement in return for
consideration of five shillings paid to the grantor. The option holder paid the five
shillings within that week.
 The grantor's attempt to repudiate the offer was ineffective because the promise to keep
the option open was binding as there was consideration. The payment of the five
shillings entitled the option holder to accept the offer within the week, and once that
was done, the contract between the two came into existence.

SO:
 If consideration is given in exchange for a promise to keep an offer open, an option is
created.

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  If consideration is given in exchange for a promise to keep an offer open, that promise
is BINDING.

b) Withdrawal after commencement of performance

 The traditional rule is that you cannot revoke an offer after the offeree has begun to
perform (eg – with unilateral contracts).
 However, the Full Federal Court has held that in such situations, NO such universal
principle exists.

Mobil Oil Australia -v- Wellcome International Pty Ltd (1998) 81 FCR 475

Facts:
 Mobile Oil came up with a scheme for its franchisees. The scheme required the
franchisees to reach certain sales targets over a period of 6 years. If this was achieved,
the franchisees were to get an extension of their franchise agreements at no cost.
 The scheme was abandoned by new management before the time period was up.
 Franchisees alleged that the offer could not be revoked because there had been part
performance.

Held:
 No offer had been made.
 There was no universal principle that an offer cannot be revoked after performance has
commenced:
o In some cases, it might be appropriate to find an implied promise not to revoke
or an estoppel.
o However, this is not always the case. And in some cases the offeror can
legitimately withdraw the offer, particularly where the offeree’s performance
has resulted in some sort of benefit to it.
o The reason that there can be no universal principle is because the positions of
the offeree and offeror vary greatly from the case of one unilateral contract to
another. For example:

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  The offeror may or may not know that the offeree has commenced
performance;
 The offeree may or may not have an understanding that the offeror is at
liberty to revoke and that any incomplete performance of the act of
acceptance by the offeree will be at their own risk;
 The notion of ‘commencement of performance or the act of acceptance’
can be problematic and lead to injustice to the offeror - for example -
here, can performance of 90% in year one be commencement of
performance of six years performance?
 The act called for by the offer may be detrimental to the offeree, or of
some benefit to the offeree as well as to the offeror, such as in this case;
 Although the offeree is not obliged to perform, or to continue
performing the act of acceptance and is at liberty to cease performing at
any time, the offeror remains bound, perhaps over a lengthy period as in
the present case, to keep its offer open for completion of the act of
acceptance, without knowing whether the offeree will choose to
complete or not to complete the act;
 The circumstances of the particular case may or may not, by reference
to conventional criteria, suggest that the parties intended that the offeror
should not be at liberty to revoke once the offeree had performed the act
of acceptance to some extent.
 So what we can take away from this is that although it might generally be thought of as
unfair to revoke an offer after performance has begun, not every situation is so cut and
dry.

NEXT CLASS:

 We look at Acceptance.
 6 cases – group presentations.
 Questions to be answered:
a) Does acceptance always need to be communicated?

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b) What are the ways in which acceptance can be communicated? Can silence
amount to acceptance?

c) Where an offer has been rejected, is it still available for acceptance?

d) With respect to offer and acceptance, do we look to the objective or subjective

intention of the parties?

e) What is the legal effect of a counter-offer?

f) How does acceptance occur for a unilateral contract? Must there be an intention
to accept?

g) Can post-formation conduct be relevant to the question of whether a contract

was formed?

h) Does agreement always require offer and acceptance? If not, what is the test?

i) What is the postal acceptance rule and when does it apply?

j) How do the rules apply to electronic communications?

k) Who wins in a ‘battle of forms’? Are there different views?

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