Offer and Acceptance
For a contract to be legally binding there needs to be 4 ingredients: 1. Offer
3. Intention to create legal relations
Building on this, in order to prove that a contract is legally binding 5 things need to be proven: 1. That an agreement has been reached. This is usually done by demonstrating that one of the parties has made an offer which the other accepted. 2. The agreement has been expressed in a form that is sufficiently certain for the court to enforce. 3. That the agreement is supported by consideration. (Possibly not needed if there is estoppel). 4. That the contract is only valid if it was entered into in a particular form e.g. writing. 5. That the parties had intent to create legal relations. This is presumed for commercial transactions, but in the case of domestic and social agreement, the starting point is that the parties do not intend to be legally bound.
The offer and acceptance constitute the agreement. But how is this ascertained, by an objective or subjective test? The courts need to ascertain whether there has been an agreement, so they look to the intentions of the two parties. This might not have been explicitly expressed and therefore we look at what can be inferred from the actions of the parties.
Agreement: Objective or Subjective?
We are not concerned with the subjective intentions of the parties; rather we look at what a reasonable man might do. As was said in Smith v Hughes (1871) LR 6 QB 597: “if whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that the other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s term.”
Additionally, John Cartwright (Unequal Bargaining, 1991, p.5) “The test whether there has been correspondence between offer and acceptance is not subjective, but objective. Therefore, it is not simply a question of whether both parties actually understood that there would be a contract and that it would contain a particular set of terms. There may still be a contract if, objectively tested, the parties can be said to have agreed (even though they in fact did not agree).”
The reason why the objective test is used in English courts is because, as Lord Steyn, writing extra-judicially (Contract Law: Fulfilling the Reasonable Expectations of Honest Men (1997) 113 LQR 433): “The commercial advantage of the English Approach is that it promotes certainty and predictability in the resolution of contractual disputes. And, as a matter of principle, it is not unfair to impute to contracting parties the intention that in the vent of a dispute a neutral judge should decide the case applying an objective standard of reasonableness.” Professor Friedmann (The Objective Principle and Mistake and Involuntariness in Contract and Restitution (2003) 119 LQR 68,69) says in a similar vein that the objective theory is “generally limited to protecting the performance interest of the party who acquired in good faith the other party’s promise while being unaware that the promise is in accord with the genuine will of the party who made it”.
An agreement may be made:
* in writing; or
* by word of mouth (orally); or
* by inference from the conduct of the parties and the circumstances of the case; or * by any combination of the above modes
Bilateral and Unilateral Contracts:
* Bilateral: This is the most common form of contract. Parties make each other a promise to do something; for example, selling an item in exchange for payment. * Unilateral: Where one party makes an offer which calls for an act to be performed by one or more other parties. Examples are: calling for lost item to be returned for a reward, or...