Formation of Contract (1) – Offer

Essential Elements of a Legally Binding Contract

For a contract to be legally binding under English law, three essential elements must be present: agreement (comprising offer and acceptance), contractual intention, and consideration. The absence of any one of these elements will ordinarily prevent a contract from coming into existence.

Agreement

Agreement is formed when one party makes an offer and the other party accepts it on the same terms. The moment acceptance is communicated, a legally binding agreement comes into existence, provided the other elements are also satisfied.

Contractual Intention

Both parties must intend their agreement to create legal relations. The courts apply an objective test to determine whether this intention is present, and they distinguish between domestic or social arrangements (where such intention is generally presumed to be absent) and commercial arrangements (where it is generally presumed to exist).

Consideration

Consideration is the element that makes a promise enforceable. Each party must provide something of value in exchange for the other's promise. Consideration need not be adequate, but it must be sufficient — that is, it must be recognised by law as having some value.

Offer

Definition of an Offer

An offer is an expression of willingness to contract on specified terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed. As Professor Treitel explains, an offer is a statement by which the offeror invites the offeree to enter into a contract on the terms of the offer. More precisely, an offer must constitute a definite promise to be bound by specified terms — it must be clear, certain, and complete, leaving nothing further to be negotiated by the offeror.

An offer may be made to a specific individual, to a class of persons, or to the world at large. In the latter case, any person who fulfils the conditions of the offer may accept it.

The Objective Test

English courts determine whether a statement constitutes an offer by applying the objective test: the question is not what the party making the statement subjectively intended, but rather what a reasonable person in the position of the offeree would have understood the statement to mean. This principle was affirmed in Smith v Hughes [1871], where the court held that the parties' intentions must be judged by their outward expressions, not their inner thoughts. The same objective approach was applied in Allied Marine Transport v Vale do Rio Doce Navegacao [1985].

Invitation to Treat

An invitation to treat is a preliminary statement by which a party invites others to make offers, which that party may then accept or reject. It is not itself an offer and therefore cannot be accepted so as to form a binding contract. The distinction between an offer and an invitation to treat is of considerable practical importance, and the courts have developed clear rules in a number of recurring situations.

Goods Displayed in Shop Windows

Goods displayed in a shop window do not constitute an offer; they are merely an invitation to treat. The leading authority is Fisher v Bell [1961], where a shopkeeper who displayed a flick knife in his window with a price tag was charged with offering the knife for sale contrary to statute. The Divisional Court held that the display was not an offer but an invitation to treat, and accordingly the shopkeeper had not committed the offence charged. The court applied established contract law principles to reach this conclusion.

Self-Service Shops

The same principle applies in self-service retail environments. In Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953], the Court of Appeal held that the display of pharmaceutical products on a supermarket shelf constitutes an invitation to treat, not an offer. The customer's act of selecting goods and presenting them at the till amounts to an offer to purchase, which the retailer may then accept or reject. This analysis means that the pharmacist stationed at the till was able to supervise the completion of the sale, which was the critical consideration for the court.

Advertisements

Advertisements are generally treated as invitations to treat rather than offers. In Partridge v Crittenden [1968], the defendant placed an advertisement in a magazine offering bramblefinch hens for sale. He was charged with unlawfully offering for sale a protected wild bird contrary to the relevant legislation. The court held that the advertisement was an invitation to treat and not an offer, so no offence had been committed.

Reward Advertisements

An important exception to the general rule concerning advertisements arises where the advertisement contains a clear and definite promise with an intention to be bound. In such cases, the advertisement may constitute an offer capable of acceptance. The clearest illustration is Carlill v Carbolic Smoke Ball Company [1893], in which the defendant company advertised that it would pay £100 to any person who contracted influenza after using its smoke ball product as directed. The Court of Appeal held that this advertisement was an offer to the world at large, capable of acceptance by any person who performed the specified conditions. The company's deposit of £1,000 in a bank account demonstrated a serious intention to be bound.

Reward advertisements more generally are treated as offers rather than invitations to treat. In Williams v Carwardine [1833], a reward offered for information leading to the conviction of a murderer was held to be an offer capable of acceptance by any person who provided the relevant information.

Bilateral and Unilateral Contracts

Bilateral Contracts

A bilateral contract is one in which both parties exchange promises. One party promises to do something, and the other party promises to do something in return. As soon as the mutual promises are exchanged, both parties are immediately bound by their respective obligations. This is the most common form of contract encountered in everyday commercial life.

Unilateral Contracts

A unilateral contract arises where one party makes a promise in return for the performance of an act by the other party. The promise is communicated unilaterally — that is, it is open to the world at large, or to a defined class of persons, to accept by performing the stipulated act. The offeror is not bound until the act is performed, but once it is, the offeror becomes obliged to fulfil the promise. The offer of a reward, as in Williams v Carwardine [1833] and Carlill v Carbolic Smoke Ball Company [1893], is the paradigmatic example of a unilateral offer.

Auctions

Offer and Invitation to Treat at Auction

At a conventional auction, the auctioneer's request for bids is an invitation to treat, not an offer. Each bid made by a member of the audience constitutes an offer, which the auctioneer may accept or reject. When the auctioneer accepts a bid — traditionally by the fall of the hammer — a bilateral contract is immediately formed between the highest bidder and the owner of the goods, with the auctioneer acting as the owner's agent. This position is confirmed by s 57(2) Sale of Goods Act 1979, which provides that a sale by auction is complete when the auctioneer announces its completion by the fall of the hammer or in any other customary manner.

Auctions Without Reserve

Where an auction is advertised as being "without reserve", a more complex analysis applies. In such cases, the auctioneer's promise to sell to the highest bidder without imposing any reserve price amounts to an offer of a unilateral contract, which is accepted by each person who places a bid. If the auctioneer then refuses to accept the highest bid and withdraws the lot, the auctioneer is in breach of that unilateral contract and may be liable in damages to the highest bidder.

This principle was confirmed by the Court of Appeal in Barry v Davies [2001]. The auctioneer had withdrawn two machines from an auction advertised without reserve, refusing to accept bids that were considerably below the market value of the goods. The court held that the auctioneer was liable to the highest bidder in damages, because the "without reserve" advertisement constituted a unilateral offer that had been accepted by the placing of bids, and the refusal to sell was a breach of that offer.

Tenders

Requests for Tenders as Invitations to Treat

Where a party invites tenders for a contract — for example, inviting firms to submit a price for completing a construction project — that invitation is generally treated as an invitation to treat rather than an offer. Each tender submitted in response constitutes an offer, which the inviting party may accept or reject. The inviting party is under no obligation to accept the lowest, or indeed any, tender. This was confirmed in Harvela Investments v Royal Trust Canada [1986], where the House of Lords considered the legal effect of an invitation to submit sealed bids.

Invitations for Tenders and Unilateral Contracts

In certain circumstances, an invitation for tenders may itself give rise to a unilateral contract. Where the invitation contains a clear promise that all conforming tenders will be considered, that promise may be treated as a unilateral offer, accepted by the act of submitting a conforming tender in time. If the inviting party fails to consider a conforming tender, it may be in breach of that collateral unilateral contract and liable in damages.

This principle was established in Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990]. The council invited tenders for the right to operate pleasure flights from a local airport, and its invitation stipulated that tenders submitted by a specified deadline would be considered. The claimant submitted its tender in time, but the council failed to open and consider it due to an administrative error, instead awarding the contract to another party. The Court of Appeal held that by issuing the invitation on those terms, the council had implicitly promised that any conforming tender would be considered. That promise constituted a unilateral offer, which the claimant accepted by submitting a valid tender. The council's failure to consider the tender was therefore a breach of contract, for which it was liable in damages.