We now embark on the journey of finding out what it is that sets apart contractual arrangements from other arrangements which do not attract legal consequences. Remember that the rules about contract formation were developed in the 19th century when there was a concern for certainty and a reasonable degree of precision so that business people knew where they stood in their entrepreneurial activities. Accordingly we will discover that the rules are precise but that the consequence of this is that it is often difficult to fit the precise model to what people actually do. For example the courts have had to struggle with common situations such as buying from a vending machine, using a car park with an automatic machine, buying an airline ticket and so forth. Analysing these situations in terms of offer and acceptance is sometimes very artificial. Nevertheless that is what the courts do.

The Essentials For Formation Of Contract

The requirements for formation of contract are agreement and consideration. There is sometimes said to be a third element, namely, intention to create legal relations. But this third element is rarely a problem and it is true to say that, if it is a separate element, it goes without saying in the vast majority of cases.

This apparently simple process raises a number of questions which we have to look at, such as: Was an offer made at all? Who makes an offer in certain types of transactions, for example, in auctions or tenders? Is a price list an offer? Is an advertisement an offer? Then it is also necessary to answer further questions about the act of acceptance, such as: does acceptance have to be communicated? Can you accept by silence? Can you accept by just getting on with the commercial task? and so forth.

The Process Of Reaching Agreement

The most conventional analysis was that of Stephen J. Traditionally the so-called "ticket cases", that is, cases in which there is a written document which is not signed by either party, have been analysed as follows: the person who provides the ticket makes an offer by proffering the ticket. The other person (the passenger in this case) then either accepts the ticket (and therefore the terms contained therein) or decides not to accept. The theory is that the person at least has some time to peruse the terms and then makes a decision whether to accept them. In practice, of course, no-one peruses the terms and no-one rejects the ticket. Instead they just put the ticket in their pocket. We will see later that in some ticket cases there is a possible argument that the person proffering the ticket must give reasonable notice of the terms in the ticket. But this is usually achieved by simply proffering the ticket. This was not an issue in this case. Adopting this analysis, Stephen J came to the conclusion that the ticket, being merely an offer, could not at the same time be an agreement or a memorandum of an agreement for stamp duty purposes.

The other judgments are quite different. Barwick CJ was mesmerised by the fact that the ticket contained a sweeping exemption clause which in effect prevented the ticket from being an offer at all. There was simply nothing to accept. The airline company was saying: we will carry you from A to B but we are not in any way obliged to do that. This cannot be the basis of contract. Optional performance is not what contract is all about. See p 42 "The exemption of the ticket in this case fully occupies the whole area of possible obligation..." Barwick, having come to this conclusion, then went on to give the ticket some rôle. He said that the ticket was a statement of terms which would govern the relationship between the parties if the airline in fact carried the passenger. He thought that an airline ticket was like a reward, something which the airline company could claim if they carried the passenger! It was, in other words, a unilateral contract. On this analysis the ticket itself could not be an agreement or a memorandum of agreement for stamp duty purposes.

The judgment of Jacobs J is extremely difficult to fathom. He gets caught up in the problem that often a ticket is bought not by the passenger but by the passenger's employer when the passenger is travelling on business. He starts off OK by presenting the conventional analysis of ticket cases, seen in the judgement of Stephen J, that is, that the ticket is an offer. But then he gets into an elaborate analysis where he tries to deal with the problem of the non-purchaser passenger and comes up with two contracts. Suffice it to say that Jacobs comes in the end to the same conclusion as the other judges concerning the question whether the ticket is an agreement or a memorandum of agreement. But as to the question of what Jacobs regards as happening in terms of offer and acceptance, his analysis remains a mystery.

Thus we see from these two cases that the supposedly precise rules of offer and acceptance are not so precise in practice and that great minds do not think alike about the application of these apparently simple rules.

Let us now turn to the question of what constitutes an offer.

Of course, you have some control over this power because you can withdraw an offer so long as it has not been accepted. We will look at this a little later. But so long as the offer continues, it merely has to be accepted by the other party to create a legally binding relationship.

As well as being the penultimate act leading to formation of contract, an offer also serves the purpose of stating the terms on which you are prepared to be bound.

Because an offer is so important, the courts have had to focus on what precisely constitutes an offer in various circumstances. We have already seen in the Gibson case that an offer must be definite, not tentative or qualified in some way. It is no good saying something like: "I might be prepared to sell my dog to you for $100." That is not an offer. Nor is it any good saying "I offer you this but I don't intend to be bound to anything if you accept." This was made clear by the judgment of Barwick CJ in the MacRobertson Miller Airline case.

So in any particular case it is necessary to examine what was said or written and see if it is capable in law of amounting to an offer. The basic test is: is it complete so that merely saying "I accept" is sufficient to constitute a contract? We will see later that the courts have struggled with the unavoidable fact that ordinary people, let alone lawyers, do not go around saying with great precision what they are offering nor do people say with great clarity "I accept". Instead, the likelihood is that one of the parties will be arguing that a contract was made arising out of a desultory or somewhat vague conversation or exchange of letters. The other party will be saying: "Huh! You thought we made a contract? You must be joking!" The courts have to sort this out and, in doing so, they apply the objective test: would a reasonable observer have concluded that an offer had been made?

We will now examine some rather specific situations where the courts have had to decide whether an offer has been made. For example, suppose you go into a shop and see a pair of German Zeiss binoculars displayed with a price tag of $100? This, to say the least, is very cheap for such binoculars. Can you say: "I'll have them. Here's my $100."? And what about advertisements? Are they offers? We have already seen that an advertisement can constitute an offer in the Carbolic Smoke Ball case. But is this the usual result? Let us look at some of the cases.

The court had to examine whether the mere display of goods on the shelf constitutes a mute offer. If it did, then the customer accepts by selecting the item from the shelf. If, on the other hand, the customer makes the offer, then the sale takes place at the cash register.

The court came to the common sense conclusion that the sale takes place at the cash register (so that Boots had not committed an offence). So, that means that the mere display of goods is not an offer. So, bad luck as far as the binoculars are concerned.

Why is this a common sense result? One reason that is put forward is that a customer may take an item from the shelf and then decide to put it back and select some other item. Another reason is that if, for example, there was display in the window but the shop had actually run out of that item, then the shop should not be forced to sell.

So, that is the general position. If something falls short of being an offer it is called, somewhat quaintly, an invitation to treat.

What about cases where the shop really goes to some trouble to lure the customers in with promises of "special offers"? First, the actual language used is not conclusive. The courts, as we have seen, apply the objective test so that it may be quite reasonable to conclude that a "special offer" was not really an offer at all. However, there has been the odd case where the courts have been prepared to take the seller at his or her word and hold that an extravagant "offer" is truly an offer. For example bait advertising designed to lure the customers in, such as a "limited offer to the first 10 customers", might be construed as an offer.

In HPH pp 55-6 some of these issues are discussed, in particular the impact of the Trade Practices Act on the display of goods. You can read this for yourselves.

Advertisements are generally regarded as invitations to treat. So, too, with catalogues and price lists. They are analogous to displaying goods in a shop with a price tag on them. But, just as there may be exceptional cases in which a court is prepared to find that a shop display is an offer, so, too, an advertisement could also be seen as an offer. This was what happened in the famous

The case raised a number of fundamental points about formation of contract. They are dealt with in logical order in the judgments of Lindley and Bowen LLJ.

Was a promise made?

Only Lindley LJ deals with this issue on p 37. For a contract to be made there must be a promise or a set of promises. It was argued that no promise was made here. The argument that was used was that what was said in the advertisement was a "mere puff", an appropriate expression in the circumstances. In modern day language, it was argued that this was mere sales talk and not to be taken seriously. Lindley LJ dismissed this argument in short order. The wording of the advertisement was in very definite language which, objectively, meant only one thing. The company was guaranteeing to pay the money and it had deposited some money at the Alliance bank to show that it was being serious.

To whom was the offer made?

It was then argued that you cannot make an offer to the world. Alternatively, the alleged contract was not made with anyone in particular. Both Lindley and Bowen did not accept this argument, saying that this type of offer could be made to the world but then only a limited number of people would accept such an offer by doing what was required in the advertisement, namely, using the smoke ball 3 times a day for 2 weeks. Bowen on p 40 made the point that this was not like other advertisement cases which do not amount to offers but instead amount to invitations to treat. See "It is not like..." Reward type offers ripen into contract when someone responds and does what is requested in the reward advertisement.

Acceptance was not communicated

It was then argued that an acceptance of an offer must be communicated. This is the general rule but the judges were able to overcome this difficulty by saying that the person who makes the offer may expressly or impliedly dispense with the need for notification of acceptance. It is obvious that in the case of a reward-type offer it is not necessary for all those people who intend to respond to notify that they are responding. Bowen makes this point when he talks about a reward for finding a lost dog (p 41 middle). It is obviously not necessary to send a letter saying "I am looking for your dog." Instead performance of the requested act amounts both to acceptance and to notification of acceptance, that is, the person who offered the reward finds out about acceptance when the claimant arrives with the dog or whatever.

Uncertainty

Another argument that was tried was that the advertisement was too vague. This is an area of the law which we will deal with. It was said that there were so many possible interpretations of the advertisement that it was too uncertain to constitute a contract. The approach of courts to this problem is to apply the objective test: how would a reasonable person have construed the advertisement? Although there were a number of different meanings which could be placed on the advertisement (see Lindley on p 38) and although the judges did not entirely agree as to what was the correct meaning (see Bowen on 40 middle para), Mrs Carlill had made out her case whichever meaning was chosen. She had contracted influenza whilst using the smoke ball. That was sufficient.

Consideration

Finally, both judges discussed whether or not Mrs C had provided consideration for the company's promise. The advertisement specified that the promisee should use the smoke ball 3 times a day for 2 weeks. It was argued that using the smoke ball was no benefit to the company because it was only interested in selling its product and that had occurred already. Both judges rejected this argument and said that there were two ways of finding a consideration. Firstly, Mrs C's using the smoke ball was a benefit to the company because it had an interest in people not just buying its product but using it as well. The more use, the more sales. Secondly, it was argued by the judges that using the smoke ball was a detriment to Mrs C in the sense that she put herself out by sticking to the regime specified in the advertisement. Either a benefit to the defendant or a detriment to the plaintiff is sufficient. Look at the quotation from Selwyn's Nisi Prius cited by Tindal CJ in Laythoarp v Bryant (p 41 "Any act of the plaintiff...")

So, what role did contracting influenza play in this contract? Clearly Mrs C could not have got her money if she had not contracted influenza. Was this part of the consideration? It seems odd that consideration could be something which is beyond anyone's control. The answer is that getting influenza was an essential condition which had to be fulfilled but it was not a consideration.
 

Contractual intention negatived

What we turn to now is a further exploration of what constitutes an offer. In particular, we examine the ways in which the courts may come to the conclusion that no offer was intended which, of course, means that there is no contract. We have seen examples of this already. The Gibson case is one such example. The letter that was sent was expressed in such a way that it was clear, at least to the House of Lords, that there was no offer. Remember the italicised words in the letter.

Barwick's judgment in MacRobertson Miller is another example. Remember that the exclusion clause in the ticket had the effect of rendering what might otherwise have been an offer not an offer. A contract cannot be based on an optional "obligation". It is a contradiction in terms.

It is possible to make sure that an offer cannot be converted into a contract by the act of acceptance. Suppose for example you are negotiating by letter and you want to make absolutely sure that a letter sent by you will not be construed as an offer. The usual circumstance where this occurs is when the parties contemplate that their agreement will be embodied in a fully written contract. The way to do this is to include the words "subject to contract" in the letter. The High Court had occasion to analyse the effect of thesewords in

So, was there a contract? The parties had signed a document which in fact contained all the requirements of a validly enforceable agreement, that is, it clearly stated who were the parties, the property to be sold was properly described and the price was stated. However, the document also contained the words set out in the headnote on p 23

The expression "subject to contract" is used in every day dealings between lawyers and it is safe to assume that its meaning is so well-known that there is no doubt at all that it achieves its intended effect, namely, to ensure that no contract comes into existence until a formal contract is signed.

We turn now to another case where the effect of a document used by the parties was far less clear than in Masters v Cameron. I refer to

If you examine the document, it seems pretty clear that it does not constitute a final agreement between the parties. It is called "TERMS OF AGREEMENT" which, by itself, does not indicate one way or the other whether it was intended to be a contract. But there are a number of features which would tend to indicate that this was not a contract, for example, "The purchaser intends to acquire..."; "The aircraft owners will warrant..." (cl 2); "This proposed agreement..." (cl 3); "Payment of $50,000 on settlement of the proposed agreement..." (cl 4(a)); and cl 8 which referred to an annexed form of contract and contemplated additional terms and conditions. The annexed form of contract had not been filled in.

On the other hand, Cl 4(b) contemplated further agreement about payment of the balance of the purchase price. This might imply that this is an existing agreement.

After this document was signed the parties exchanged various draft agreements but, in the end, the buyer pulled out saying there was no contract.

The trial judge, Yeldham J came to the conclusion that this document did not constitute a binding contractual agreement. The plaintiff vendor argued that Yeldham was wrong on two counts:

Another fundamental issue raised by Mahoney's analysis is the so-called parol evidence rule or "extrinsic evidence" rule as he calls it on p 30. We will look more closely at this rule later in the course, but what it says is that extrinsic evidence, that is, evidence outside the written contract itself will not be looked at to add to, vary or contradict a written term. But this rule is riddled with exceptions. Mahoney JA says that the rule does not affect the use of extrinsic evidence to ascertain the initial contractual intention of the parties. In short, the parol evidence rule is about the contents of a written contract and does not affect the enquiry about formation of contract. See p 31 "The basis of the rule..." As McHugh JA put it on p 32, evidence is admissible to prove that there was no intention to contract when to outward appearances the parties have made a contract. It would be odd if it was not equally possible to show by evidence that there was an intention to contract when to outward appearances that intention is not very clear (as in this case if one only looks at the document).

Both Mahoney and McHugh JJA concluded that evidence of conversations which took place at the time when the document was signed showed that the parties, particularly Easter who later denied that there was a contract, were keen to "wrap the deal up".

Hope JA considered that extrinsic evidence was not admissible but came to the conclusion that the document by itself indicated an intention to be bound. This was a strange conclusion, given the uncertainties of the "Terms of Agreement".

Suffice it to say that the courts must sort out and pronounce on vague behaviour of the parties to commercial arrangements and often the strict rules of offer and acceptance are not much help. Very often the enquiry is very specific to the particular facts. It is often very difficult to predict which way a court will jump in this sort of case.

The next case raises the same issues of whether there was an intention to contract in a somewhat different setting. The case is

The High Court embarked on an elaborate analysis of the fundamentals of contract formation. Indeed, this analysis is often cited as being authoritative about offer, acceptance and consideration. The analysis starts on p 50. The language used is not all that clear, particular the resort to Latin in the use of the expression quid pro quo - see "Between the statement..." top p 50. They then give an example: the statement by A that he would pay B £1000 on his arrival in Sydney. By itself this is not sufficient to amount to a contractual promise. What is essential is that the offer be made to induce B to act in a certain way and that B did in fact respond to that offer. And so, if more evidence is adduced to show that B had no intention of going to Sydney, that it was vitally important to A that B go to Sydney and so forth, then there is sufficient evidence of contract.

As the Court points out this type of analysis is about consideration. Has there been an exchange? They also look at the rules of offer and acceptance (2nd last para p 50). "It is of the essence..." The reference to "the principle laid down in Freeman v Cooke" is to the objective test.

Again, the Court examines the notion of a request, express or implied, which may constitute an offer (last para p 50). This is an essential element of every true offer. The Court then examines some favourite old cases, such as Carlill and Shadwell. The conclusion the Court reached was that there was no request - no offer made by the Commonwealth which could ripen into contract. The trouble with all this is that it all depends on how you look at it. The fact is that the Commonwealth was keen to induce companies like AWM to buy Australian wool and that in this sense there was an implied request and an inducement The interpretation of what went on in terms of the formal rules of offer and acceptance is somewhat artificial. The analysis seems to miss the point.

Yet, the point is that there is a gut feeling that the result of the High Court's analysis is right, namely, that there should be no contract in this case. So why is the reasoning unsatisfactory? The answer is that one can go straight to the essential point by asking: is it appropriate to pin the label of contract on a scheme of this kind? Should the government in running schemes of this sort be treated just like an ordinary commercial player? The answer to this is fairly clearly No. And the law of contract does have a appropriate analysis to deal with this kind of problem. It is called intention to create legal relation. I have mentioned this briefly and pointed out that it meets the type of case where the process of agreement and even consideration could be identified in a particular relationship but it is simply not right to call it a contract. Usually this kind of argument is applied to family arrangements. But it can also be applied to government schemes or handouts. In such schemes there is no intention to create legal relations.

The Privy Council came to the same conclusion as the High Court but did so on a much simpler basis. See p 52 where they say that this is simply an administrative arrangement and not a contract. The Privy Council specifically criticized the High Court's analysis in terms of request and so forth.

The result in Australian Woollen Mills is of some importance because there are many instances of governments handing out money to achieve certain policy outcomes. For example, legal aid money is handed out to community law centres. Is this a contract? There is often an elaborate signed agreement with many conditions which the recipient of the money has to agree to. Yet it is not a contract. That means that neither side has any contractual remedies.

This traditional analysis means that there is no legal relationship prior to the fall of the hammer (or selection of tenderer). Consequently it is difficult to argue that some kind of legally enforceable obligation can arise during the conduct or a tender or auction. For example, if an auction is announced in an advertisement that it will take place at the Acme Auction Rooms on Saturday the 25th March, is the auctioneer obliged to conduct the auction as advertised? Could someone who has travelled 500 km to attend the auction recover his or her expenses which have been wasted because the auction was cancelled? The traditional answer to this that there is no remedy. The advertisement is merely an invitation to treat.

That is the traditional answer. It is a feature of the modern law of contract that the traditional position is open to challenge in some way or another. It might, for example, be possible to argue that an advertisement for an auction which does not take place is misleading conduct which is in breach of the Trade Practice Act s 52. We will come to that later.

Another issue which arises in connection with auctions is whether an auction advertised to be "without reserve" has to be conducted in that way. In other words, if it is announced that it is "without reserve", meaning that the goods or whatever will be sold to the highest bidder however poor the price is, is the auctioneer legally obliged to sell or can he or she withhold the hammer? Again, the traditional analysis is that there is nothing to make the "without reserve" promise binding. This has been a controversial issue for many years and the story is told on pp 56-7 of HPH.

The strongest support comes from the House of Lords case

The case involved two separate issues: first is a referential bid a valid bid? (See the bid of Sir Leonard Outerbridge which, if valid was bound to win.) The second issue was whether the promise contained in the telex was legally binding. This is an almost identical issue to the "without reserve" question.

The referential bid. This issue is not dealt with in the extract in the casebook. The trial judge said that it was not a valid bid. The Court of Appeal did not agree. In the House of Lords it was held that a referential bid is not a proper bid. The seller wants fixed price bids; a referential bid does not meet this description.

The promise to sell to the highest bidder. Lord Diplock treats this as a unilateral contract.. However, he does not say specifically how it works. He does say that the contract was made when the invitation to bid was received by each bidder. But this is not satisfactory because the bidder has not done anything in return. He treats the submitting of a tender which turns out to be the higher one as the fulfilment of a condition - a bit like Mrs Carlill getting influenza.

Lord Diplock 's analysis seems to be somewhat over complicated. It is of course not helped by the use of a favourite word of his, namely, "synallagmatic". There is a story which goes with this word. Lord Diplock first used it in the Hong Kong Fir case (see HPH p 513). In a later case he admitted that he had been accused of "gratuitous philological exhibitionism" in employing the word. Yet he was unrepentant and continued to use it, as we see here.

The word simply means "bilateral" and he uses it in contradistinction to unilateral or "if" contracts, as he calls them.

Anyway, the analysis which preserves the theory that the bidder makes an offer and, at the same time, gives force to a promise which is about the conduct of the competition, such as "without reserve" in auction cases and a promise to sell to the highest bidder in fixed bid cases, is that the promise is an offer of a unilateral type which invites a certain response (usually to put in a complying bid). Once the bidder has responded appropriately, then there is a contractual obligation on the part of the seller to sell to the highest bidder. The unilateral contract is, in effect, a contract to make a contract. You will see in some of the books that it is said that there is no such thing as a contract to make a contract - see eg Masters v Cameron HPH p 25 (3rd para). But this is not so. Harvela is an example. So is the first category outlined by the High Court in Masters v Cameron itself.

The significance of the Harvela decision is large. It has particular implications for tendering, the most common way in which governments make important purchases. On the traditional analysis the process or conduct of a tender is not governed by any legal obligations. This is because, again, there is no contract until a particular tender has been accepted, each tender being an offer. However, it is quite possible to argue that there is a contract - a mini contract - before the main contract. This mini contract governs the way in which the tender is conducted. So, if the government announces a tender and stipulates the terms of the tender, for example, it will be conducted in such and such a way, late tenders will not be accepted, the criteria for selection are spelt out, etc. - are all these stipulations legally binding? I have argued that they could be on the basis of a preliminary contract.

This argument is given some support by

The Council in the Blackpool case was in breach when it failed to consider the plaintiff's tender at all. The question of damages did not have to be considered by the Court but, at the very least, a tenderer who has wrongfully been excluded from the contest could seek damages to cover the wasted costs of preparing the tender. This was not an issue in this case because it was a very simple tender which had been prepared on a number of previous occasions.

Depending on the nature of the promise which is the subject of a claim, the preliminary contract may be with only one bidder (for example a promise to award the contract to the highest bidder) or the contract may be with each complying bidder (for example a promise to give proper consideration to complying bids). In more complex tenders there may be a contract with each tenderer governing a number of matters to do with the conduct of the tendering process.

Not only are obligations placed on the body seeking the tender but also obligations can be placed on the tenderer too. For example, it is frequently said in the tender terms that the tenderer cannot withdraw a tender for 60 days after tenders have been opened. This obligation cannot on the traditional analysis be enforced. But it can be enforced on the basis of a two-contract analysis.

The idea of a preliminary contract arising in the tendering process has now been applied in Australia. See

Hughes Aircraft Systems International Inc v Airservices Australia (1997) FCR 151; (1997) 146 ALR 1

In that case it was held that there was a preliminary "process" contract governing the conduct of a tender and that there had been several breaches of this "process" contract.The facts of Hughes are complex and I will simplify them to the essential points relevant for our purposes. Airservices Australia, a government body (formerly the Civil Aviation Authority) sought tenders for the supply of an air traffic system. Hughes was one of two tenderers and was unsuccessful in its bid. Int he course of the tender process, Airservices provided confidential information about Hughes's bid to Hughes's rival and did not follow its own processes for evaluating the tenders. Further, Airservices allowed Hughes's rival tenderer to change its tender offer after time had run out.

It was held by Finn J that the tender process was governed by a process contract, the detailed express terms of which were set out in the Request for Tender documents. More groundbreaking was Finn J's conclusion that the terms of this process contract included an implied term that Airservices had a duty to conduct the tender in good faith and engage in fair dealing with the parties when perfoming the process contract. Such a duty existed, that is, was to be implied, in the performance of all contracts. Further, it could also be implied as an incident of government agencies' contracts, given that they are public bodies disposing of public funds. Finn J held that Airservices had breached this duty (as well as specific express terms of teh rpocess contract) and was liable to Hughes for damages.
 
 

This arrangement is convenient but it provides no security to either party. The supplier can withdraw the offer at any time. Of course it does not do this because it is keen to get government business. The government, for its part, is not obliged to order from that supplier and can go elsewhere if it chooses. All this is borne out by

The discussion by Brett LJ as to the way in which a standing offer actually works is a bit odd because he talks of unilateral contract. That is, the supplier, Witham, promises that if an order comes in, he will fulfil it. But an acceptance of an order is more naturally a bilateral contract because in this particular situation the purchaser's acceptance of a particular order is not the doing of a requested act but the promising to do certain things in the future. So, an order comes in for 5 tons of iron. W replies "I will dispatch a consignment immediately." This is a bilateral contract involving future obligations on both sides (eg delivery by supplier and payment by purchaser, etc). In short a standing offer may be such as to lead to a unilateral contract or a bilateral contract, depending on the particular circumstances.

We will see that an acceptance must be in response to an offer - in other words you cannot accept if you did not know of the offer. This rule does not sit very easily with the objective test which is supposed not to look into the minds of the parties.

We will also see that there are very precise rules about how the acceptance must correspond with the offer - in other words there cannot be any discrepancy between what is offered and what is accepted. This is sometimes characterised as the "mirror" model of offer and acceptance. It, again, assumes that people go around like robots which, of course, does not reflect what people actually do. It is a very inconvenient rule in the case of what is called "the battle of the forms", that is, when one business, for example, sends an order on its own form with its own terms and the other business replies with its supply docket or invoice which has its own terms which do not correspond to the other business's terms.

We will also see that acceptance must generally be communicated. This is a matter of common sense but we have already seen that communication is not absolutely essential. It is not necessary in the case of unilateral contracts. Some curious old rules emerge form the cases on the issue of communication, particularly the postal rule which deals with communication of acceptance by post.

Let us start with the first issue.

Perhaps what underlies this case is revealed by what Isaacs ACJ has to say on p 65-6 "He has, in my opinion, neither a legal nor a moral claim to the reward." The judges were not going to countenance a lowlife like Clarke, who hobnobs with murderers, getting what at the time was a very substantial reward. In coming to this conclusion, the court is getting very close to investigating motives. This is quite contrary to the way in which contract issues of this kind are normally dealt with. Isaacs himself discusses the difference between motive and intention when dealing with the old case of Williams v Cawardine. What happened in that case was that a woman who gave information which led to the conviction of a murderer was able to claim the reward. She gave the information "to ease her conscience and in hopes of forgiveness hereafter". Her motives were not questioned in that case as Clarke's motives were in the present case. Isaacs was not happy about the decision in Williams v Cawardine.

The other judges came to the same conclusion as Isaacs ACJ.

Although R v Clarke has its unsatisfactory aspects, it is undoubtedly regarded as good authority for the proposition that an acceptance must be made in response to and because of the offer. In a case where it is shown that the person who supposedly accepted did not know of the offer, the application of this principle is quite clear. In a case where the person who supposedly accepted did know of the offer, the question is much more difficult. Suppose Clarke had mixed motives. Is it appropriate to try and ascertain motives at all? Shouldn't there be a presumption that if someone apparently has accepted, then that is an acceptance unless shown to be otherwise? In other words the onus of proof would be on the person who asserts that apparent acceptance was not real acceptance. There is some authority to support this idea. See Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (The "New York Star") HPH 277 at page 284 (2nd para) where Mason and Jacobs JJ say "...proof of performance of the conditions to an offer by a person who knows of its existence will in general constitute prima facie evidence of acceptance of the offer." Mason and Jacobs cite a passage from the judgment of Starke J in R v Clarke - see HPH pp 67-8. But, of course, Starke J found that the presumption was displaced in this case by looking at the evidence of the circumstances in which Clarke provided the information.

One somewhat strange principle which has stood for a long time is that once the original offer has been effectively rejected by the other person making a counter-offer, then it is said that the original offer is dead and cannot subsequently be accepted. This is a bit strange because one would have thought that if the offeree has decided that, after all, he or she is prepared to accept the original offer then there should be a contract. But, No - that is not what the cases have decided. This business of the original offer being killed by a counter-offer is illustrated by one of the current tutorial problems.

It is, of course, possible for the original offeror whose offer has been killed to revive it by saying that he or she is still prepared to do business on those terms.

An illustration of the offer, counter-offer, etc analysis is provided by

So the first issue was: what was in fact offered by L? The answer to this was that L offered to buy 6,500 shares. When L received B's purported acceptance, that is, B purported to accept what it perceived to be the offer to buy 24,000, L replied that its offer was to purchase only 6,500 shares but that it would treat B's so-called acceptance as an acceptance to sell 6,500 shares. There was then further correspondence between the parties about the mix up.

B argued that either there was a contract for 24,000; or that there was a contract to buy 6,500 shares. As to the arguments justifying the contract for 6,500 shares, B argued two possible bases (these were its second and third arguments referred to in the judgment on pp 69-70). One was that when L said that it would treat B's so-called acceptance as in fact an acceptance to sell 6,500, a contract came into being at that stage. The alternative argument was that the subsequent correspondence created a contract to buy and sell 6,500 shares. So let us see how the majority judges (Barwick CJ, Kitto and Windeyer JJ) analysed these events.

First the alleged contract to buy and sell 24,000 shares. What happened in terms of offer and acceptance? We have already seen that the court decided that there was no offer by L to buy 24,000 shares from B. So what was B's so-called "acceptance"? It was a counter-offer, that is, an offer by B to sell 24,000 shares to L. See p 70 2nd para "Since, as we believe, there was no such offer which the appellant [B] was entitled to accept, the letter could have no effect in law save as itself tendering an offer, namely, to sell to the respondent [24,000 shares]".

What happened to this counter-offer? Remember L then said that it would treat this so-called acceptance as an acceptance to sell 6,500 shares. What was this? It was another counter-offer because, of course, it did not accept B's counter-offer to sell 24,000 shares. See p 70 half-way down "This was a clear rejection of the appellants [B's] offer to sell..."

So, at this stage there is no contract to buy and sell the 24,000 shares. But there is on the table an offer by L to buy 6,500 shares.

The court then looked at the subsequent correspondence and decided that in the course of that correspondence there was agreement to buy and sell 6,500 shares.

The dissenting judge McTiernan J concluded that the correspondence never resulted in agreement so that there was never a contract concluded.

The mirror model for dealing with negotiations leading to a contract does cause some difficulty if it is applied absolutely precisely. That is, if there is the slightest discrepancy between the offer and the purported acceptance, then a court can come to the conclusion that there is no contract. However, there is a particularly important device or argument which can be used to avoid what might be a very inconvenient result in circumstances where the parties have got on with it and proceeded on the assumption that there is a contract. This is what is called acceptance by conduct. We will see a number of examples of this. Its importance is that, when one or both parties have started to perform the contract, a court can come to the sensible conclusion that there is a contract even though the strict rules of offer and acceptance may not have been satisfied.

The difficulty of the mirror analysis is shown by what has come to be called

Lord Denning MR analysed the documents and the exchanges between the parties. The first shot in the battle was fired by the sellers who sent their quotation dated 23 May (see bottom p 72 and top p 73). This document contained a clause which attempted to make sure that their terms would prevail and, of course, also included the price variation clause. The next shot was the buyers' order form dated 27 May (see 2nd para p 73) "Please supply on terms and conditions as below and overleaf." Lord Denning notes the discrepancies between the two forms. The buyer's form had a tear-off slip which was to be filled in by the seller. The sellers received the buyer's form with the tear-off slip and duly filled in the slip and sent it back on 5 June. In doing this they did mention their original quotation "...in accordance with our...quotation of 23 May..." but they also filled in the acknowledgment of the buyer's order in the tear-off slip.

At this stage Lord Denning says "No doubt a contract was then concluded." But on what terms? The 23 May quotation form was clearly an offer. The 27 May order form was clearly a counter-offer because of the discrepancies. He also makes the point that this was a rejection of the 23 May offer, citing Hyde v Wrench. Lord Denning then said that the 5 June letter which contained the filled in tear-off slip was an acceptance, even though it referred back to the original quotation of 23 May. The reference was simply to identify the machine, he said. See last para p 73.

Lord Denning considered the trial judge's approach which was to place emphasis on the original 23 May quotation which stated plainly that it would prevail over the buyer's terms and conditions. Lord Denning had much sympathy for the trial judge's approach and he (Lord Denning) expressed his support for a different approach from the traditional offer, counter-offer, etc approach. He argued that maybe the court should look at all the documents and attempt to draw some sort of synthesis from them. The trial judge believed that the first shot was decisive. Lord Denning in the end did not agree with the trial judge and, instead, thought that the last shot was decisive. This meant that the contract was on the buyers' terms and that there was no price variation clause. The other judges came to the same conclusion.

The problem of the battle of the forms is dealt with in the legislation which deals with international sales of goods (which are the subject of an international convention - the Vienna Convention.) In each jurisdiction in Australia there is legislation in the form set out on pp 76-7. What this legislation says is that if there is a discrepancy arising out of a battle of the forms, then it does not necessarily result in no contract so long as there is no material discrepancy. See Art 19(2). The problem with this is that it is sometimes difficult to work out what is a "material discrepancy".
 
 

Let us focus now on what is required in those majority of cases where communication of acceptance is essential. We see from the first case on the list that a failure to communicate will mean that there is no contract. The case is

I have mentioned that it is possible to accept by conduct. In this case an analogous principle might be applied, that is, the need for communication of acceptance might be dispensed with if the parties have simply got on with it. There would be a contract by conduct. Why was this not such a case? This issue is specifically dealt with right at the beginning of the judgment of Jacobs JA on p 81. This is not a case of contract by conduct because Knight returned the TV set reasonably promptly. Thus it could not be said that Knight must have known that the company had accepted. Jacobs JA goes on to state the usual rule about communication and points out that it is subject to exceptions. He mentions Carlill and he also acknowledges that it is possible for the offeror to displace the operation of the rule. He cites the well-known case of posted acceptance (which we will deal with shortly). It was argued by the barrister in this case that the relevant clause had effectively displaced the need for communication of acceptance but, as a matter of interpretation, this was not a valid argument. The words would have to be very clear before the usual rule could be said to be displaced.

The next case is

I have mentioned that the failure to communicate acceptance, as in Knight, may be overcome by subsequent conduct from which it can be inferred that there has been acceptance. Such a case was

The majority view in the High Court was that there was a contract. Although there was no communication of acceptance initially, C and T must have known that they were on the register when they received the first call on the share. They did not respond to this call but by doing nothing they certainly indicated that they did not object to being on the share register. They tacitly gave their consent to remaining on the register. Higgins J was a bit worried about the long delay between when their names were entered on the register and when the first call was made - some 3 years. It might have been possible to argue that their offer to buy a share had lapsed. But in order to take advantage of this argument C and T would have had to show that they promptly rejected the call when it came. This they did not do. The ultimate test in cases of this sort is to look at the dealings as a whole. Higgins J on p 84 comments that rigid formalism, that is, a strict application of the rules of offer and acceptance may not be appropriate in cases like this. Instead you look at the overall situation. See last para "The whole question is..."

The dissenting judge Starke J said that the offer by C and T lapsed because the company took so long to make the first call. After that there was simply no contract so that C and T's inertia did not indicate anything in particular.

The idea that communication of acceptance is generally essential has been applied very literally so that there is a supposed rule that silence cannot constitute acceptance. But this rule must be treated with some caution, as we shall see. The case which established the proposition that silence cannot constitute acceptance is

It seems pretty clear that the so-called rule in Felthouse v Bindley is OK when it is needed to protect someone from an attempt to impose a contract. It embodies an important basic notion about the institution of contract. Freedom of contract should also include the idea of freedom from contract.

Nevertheless, the rule in Felthouse v Bindley would not apply in other circumstances, particularly where the offeree has acted on the basis that there is a contract.

The question that is asked by the editors of the case book at the end of Felthouse v Bindley on p 89 possibly queries the decision in the case. This is because the nephew had accepted (at least mentally) and had communicated that to the auctioneer by telling him that the horse had been sold, even though he had not communicated acceptance to his uncle. As to the difference between this case and the Carbolic Smoke Ball case, silence does not constitute acceptance in a unilateral contract. But it may be that acceptance does not have to be communicated.

Mention has already been made of the very important principle that can solve a number of the kinds of problems which we have come across. That is acceptance by conduct. It may solve the problem of the battle of the forms. It may also provide a solution to vague or inconclusive exchanges between parties to a commercial venture. This is demonstrated by

A word about signature. We know that most contracts do not have to be in writing. They therefore do not have to be signed. Even if they are in writing, they do not necessarily have to be signed. I have mentioned the "ticket" cases when we discussed the MacRobertson Miller case. They are an illustration of a written contract which is not signed.

However, the law does recognise the significance of signature. The law reflects the popular belief about signature, namely, you don't sign unless you mean it. It has been said that signature is "irrefragable evidence of assent". Signature therefore constitutes a clear indication of acceptance when a written document is used. But does a lack of signature when there is a written document indicate that there is no assent? This was what was in issue in the Empirnall case.

The facts are set out for you. Machon Paull were architects who did some work for Empirnall even though the director, Eric Jury, did not sign the contract submitted by the architects. Empirnall made progress payments for the work. It is not very clear from the case book what the problem was between the parties. Why was there any disagreement? The report reveals that there was an important term in the written contract, namely, it gave Machon Paull a charge (a security interest) over land belonging to Empirnall to secure payment of Machon Paull's fees. Some $80,000 was still owing and this was not disputed but the problem was that Empirnall was in financial difficulties and the charge in the contract document would make all the difference to Machon Paull in the event of Empirnall going bust. So, Machon Paull wanted to establish that the terms of the written document governed the relationship between the parties.

The NSW Court of Appeal had no difficulty at all in saying that the written contract was binding. You will see in the judgment of McHugh JA the familiar law about how silence cannot in general be acceptance. There must be an external manifestation of assent.

But, McHugh JA says in the second para of the extracted judgment, there may be circumstances where it is incumbent on the party who has received an offer to reject it explicitly or be bound. This is a major modification to the rule we saw in Felthouse v Bindley. See "Nevertheless, the silence of an offeree...to form a contract"

McHugh JA states the rule about acceptance in terms of being a question of fact. See 4th para p 90 "A more accurate statement...according to its terms." He then goes on to draw a parallel with the ticket cases where taking the ticket without objection is treated as acceptance.

The floundering barrister for Empirnall tried to draw some comfort from the fact that "Eric does not sign contracts" but this was turned around by McHugh JA who said this counts against him because Eric was not objecting to the terms of the contract so much as the method of acknowledging those terms. On any objective test, Empirnall had accepted those terms by its conduct in allowing the work to go ahead.

The extract does not include a reference to the old case of Brogden v Metropolitan Railway Co (1877) which is mentioned in your case book on p 38 in the Smoke Ball case and on p 74 in the Butler Machine Tool case. The NSW Court of Appeal also referred to that case which is the classic authority for the idea of acceptance by conduct.

I have already emphasised the significance of acceptance by conduct. It is a very useful argument to deal with situations where the parties have not conformed strictly to the requirements of offer and acceptance and where it is nevertheless clear that there is an existing commercial relationship. In such cases, it would not be helpful if a court were to say that there is no contract because the precise rules have not been followed. Instead, the court is able to say that there has been acceptance by conduct.

Acceptance by conduct can be a trap for unwary consumers who are sent unsolicited goods. Opening the package and using the goods could be construed as acceptance. However, this trick has been effectively foiled by the Trade Practices Act s 65 which allows the consumer to keep the goods if after 3 months the company has not reclaimed them, or sooner (1 month) if the consumer sends a notice to the company to come and collect them and the company does not respond.

Another way of getting around this kind of problem is for the court not to even talk about offer and acceptance but, instead, to stand back and apply the objective test in terms of "Would a reasonable bystander have concluded that, looking at the parties' behaviour overall, a contract had come into being?" This is the sort of approach used by the court in the Air Great Lakes case, in particular Mahoney JA on p 28 2nd last para of the casebook where he said: "The proper view is, in my opinion, that the existence of a contract is a consequence which the law imposes upon, or sees as a result of, what the parties have said and done." There is no mention of offer and acceptance in this passage. A similar approach is put forward by Higgins J in Farmers' Mercantile on p 84 last para.
 
 

Whether there was effective acceptance or not turned on what the offer document stated about the mode of acceptance. The terms are set out in the judgment of Menzies J on p 97. You can see that the offer documents did indeed make specific mention of posting the acceptance. Did this mean that posting the acceptance was the mandatory and only way in which the offer could be accepted? Menzies J and the other judges came to the conclusion that posting was not the mandatory mode of acceptance and that therefore there was no distinction between French's and Rudder's acceptances. Both had effectively accepted.

On a quite separate argument, the Court held that each was able to rescind the contracts they had made but this was nothing to do with formation and mode of acceptance.

In Cheshire & Fifoot's Law of Contract (7th Aus ed 1997) para [3.42] I have said that a court would be reluctant to come to the conclusion that a particular mode of acceptance was mandatory unless very clear words are used. The George Hudson case illustrates this proposition.

First, the offeror may revoke or withdraw the offer. But this is not possible if the offeror has, for a consideration, promised not to withdraw the offer for a certain time. This is called an option and we will have a look at some option cases.

Secondly, the offer may simply lapse, either because the offeror makes it clear that it will lapse after a certain time or because it has become stale.

Thirdly, it is possible to stipulate in the offer that it will come to an end if a certain event happens or does not happen.

Fourthly, the offer may lapse on the death of the offeror.

Finally, we have already seen that the offer may die if it is rejected by the offeree, for example when the offeree makes a counter-offer. Let us now turn to these various ways in which an offer may come to an end.

You will see in the course of Lindley's judgment that he sees the theoretical basis for the postal rule being that the post office has been designated the offeror's agent for the purpose of receiving an acceptance. So, on this theory, as soon as the letter is put into the hands of the post office, it has effectively been delivered to the offeror.

The next case is

A very different problem arises in connection with withdrawal of offer in unilateral contract cases. We have seen that it is possible to withdraw an offer at any time before acceptance. In a reward type of case - a unilateral contract - if we ask: when does acceptance take place? the answer is on completion of the requested act. So, if I say to you: "I will pay you $1000 if you swim across Lake Burley Griffin on July 1st", I can, according to the ordinary principles just outlined, withdraw my offer at any time before you have finished swimming. I will, therefore, be justified in going to the water's edge, armed with a megaphone, and, on seeing that you are probably going to make it across the lake, yell through the megaphone: "I withdraw my offer of $1000."

Now this has been a brain teaser for contract students for many years and a number of possible solutions have been suggested to get around what is generally accepted to be an unfair result. It has been suggested, for example, that the beginning of performance is the moment of acceptance, but this runs into problems about the nature of unilateral contract, namely, the offeree makes no commitment. If someone has begun to accept and there is therefore a contract, can they be sued for breach if they do not complete the task? A number of dicta over the years have expressed dissatisfaction with the proposition that the offeror of a reward can withdraw it after an offeree has started to do what was requested. An old New South Wales case called Abbott v Lance (mentioned on p 101) could be construed to say that once the person has started to do what was requested then the offer cannot be withdrawn. But the case is difficult to interpret. It was not until 1989, when a Full Court of the Supreme Court of Queensland faced the problem, that a definite solution was found. The case is

The case raised a number of other issues but we will confine our attention to the withdrawal of offer point.

This is dealt with on p 101. McPherson pointed out that this has been a much-debated question by writers of text books. He then drew on the old NSW case of Abbott v Lance the facts of which are described in his judgment. As I said earlier, the case is open to different possible interpretations but McPherson saw it as supporting the proposition that a unilateral offer cannot be withdrawn once the offeree has partly performed the requested act. See p 102 "It seems to me..." It would have been sufficient to state the rule in terms of proposition 2 alone, namely, that the offer becomes irrevocable once the other party has partly performed. It is like an option - an offer which cannot be withdrawn. The first proposition, namely, that there is acceptance when the offeree elects to do the relevant act or acts is more problematic. This is because, if acceptance takes place then, the promisor may be liable to pay before the requested act is done. It is not very clear what McPherson was saying here because he does end up by saying that C must pay the $200,000 "if and when Veivers succeeded in obtaining approval from the council..." McPherson does mention the possible problem about whether or not the offeror knows that the other party has started to perform. But this was not an issue in this case because C quite clearly knew that V had started to perform when he tried to withdraw the offer.

Another difficulty is what remedy may be available if the offer has been withdrawn and the offeree is thereby prevented from completing the requested act. Abbott v Lance shows us that the reward must then be paid in full. The option cases may also give some guidance to the answer to this question.

The issue has more recently been considered in the case of Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd (1998) 153 ALR 198, in which case the Full Federal Court suggested that an offer requiring acceptance by performance of a particular act could be revoked, but that such revocation could give rise to a claim for breach of an implied promise not to revoke. The importance of such an analysis is that the damages to which the offeree is entitled will be the loss of the
opportunity to obtain the contract, and not necessarily loss of the contract itself. This dsitinction will be critical where performance of the requested act by the
offeree would not necessarily lead to the offeree obtaining the contractual benefits.

Another issue arises in connection with reward offers. How can you withdraw a reward offer which has been made to the world at large? The answer given by a single United States case is: use the same mode of publicity as was used for the making of the reward offer. the case is

We need now to spend a little time examining options. There has for many years been a controversy about the nature of an option. The debate has been about two alternative views of what an option is. So far, we have assumed that it is an irrevocable offer. But there is an alternative view, namely, that it is a conditional contract. This second view - that it is a contract rather than merely an offer - needs to be explained a little further. Obviously, in one sense, every option is a contract because there is an exchange of consideration. In this sense the promise to keep the offer open, so long as it is supported by a consideration, is itself a mini contract prior to, and separate from, the main contract. On this, the first view, there are two contracts: the mini contract and then the main contract to sell a property or whatever.

But this is not what the second view is about. The alternative view has it that there is only one conditional contract, that is, the option agreement is itself the contract for the sale of the property (or whatever) but it is a conditional contract. It is a conditional contract in the following terms: "I offer to sell to you my property for $x, etc [here the terms of the sale are set out] on condition that within a certain time you confirm that the sale is going ahead." The other party agrees to this by signing (usually) and paying a nominal sum for the privilege of having the opt-out condition.

This second view of what an option is is a strange one. Usually a conditional contract requires the satisfying of the condition either by some external event happening (for example re-zoning of land) or by one or other of the parties taking steps to bring the event about (for example obtaining planning permission). In other words some positive condition must be satisfied. Once it is satisfied the contract goes ahead. But on the second view of an option, the event which takes place is

This neatly raised the question: can someone who has given an option revoke it? If they do, what remedy can the other party get? Is the other party confined to a remedy in damages, which would not be very much? Or can he/she seek an order for specific performance, that is, a court order to the vendor to go through with the sale?

The answers to these questions depends on how you analyse an option. If it is merely an offer, supposedly irrevocable, but nevertheless revoked, then one would think that there cannot be an acceptance. This would leave the purchaser with a right to damages for breach of the "mini" contract. If, on the other hand, an option is a contract, that is a contract for the property, then the court could order specific performance.

The High Court judges had different views about the nature of an option and what results flow from the different views. Griffith CJ saw it as a conditional contract for which the remedy of specific performance could be ordered. "I think that the true principle..." p 103 middle. O'Connor J said that it did not matter which analysis is used: the court can order specific performance anyway. Having canvassed both possibilities, he said "In my view it is of little moment..." (p 104 one-third down). Isaacs J preferred the irrevocable offer theory but then said that the revocation by Quinn was ineffective in law and therefore the offer could still be accepted. Yet, he went on to hold that specific performance would not be ordered. But he was referring to the first contract, namely, the promise to keep the offer open, when he said specific performance was not possible (p 105 bottom). He went on to hold (in the report - not in case book extract) that the second contract of sale should be specifically performed.

So, we see from this case that, although in theory one would think that the difference between the two theories of option should make a practical difference if the offeror withdraws the offer, in practice it made no difference which theory was applied. Either way, the court was prepared to order specific performance of the contract of sale.
 
 

1. The offer lapses because it is impliedly withdrawn by the offeror.

2. The offer lapses because it is impliedly rejected by the offeree.

Does it matter which theory is adopted? According to Buckley J it does make a difference. If the first theory is adopted, then the subsequent conduct of the parties cannot be looked to in order to ascertain the intention of the offeror on the question of how long the offer was supposed to be open for. The intention of the offeror has to be ascertained (objectively, of course) as at the time of making the offer. On the other hand, if the second theory is adopted - the offeree is taken to have rejected the offer - then the subsequent conduct of the parties, particularly the offeree's conduct, is relevant and can be examined to guide the court. Buckley J preferred the second theory.

We will return to the business of conditions. We have already seen an example in Masters v Cameron. You may recall that the offer in that case was "subject to contract" and the effect of these words was to suspend the possibility of contract until the condition, namely, the execution of a properly drawn up contract, was satisfied.

It seems to be accepted that if the offeror dies, then the offer lapses. This does not necessarily follow if the task or subject matter of the contract does not depend on the personality of the offeror. An example would be selling goods or real estate. Nevertheless, dicta in Dickinson v Dodds by Mellish LJ indicated that an offer could not be accepted if the offeree knew of the offeror's death. This may leave the door open to an effective acceptance if the offeree accepts in ignorance of the offeror's death.

If the offeree dies, can his or her estate accept the offer? There is, again, very little authority on this question. It is, again, assumed that an offer made to a person is made on the basis that that person will continue to survive and, if this proves to be wrong, then the offer cannot be accepted by his or her estate.

An option may be accepted by the estate of a dead grantee of the option: Carter v Hyde. Remember this was the case referred to in Laybutt.