Topic 5: Contract Law Formation

Introduction to the Law of Contract

What is a contract?
 A contract is a promise or set of promises which the law will enforce.
 Contractual promises are enforceable  contract gives you legal rights to take action to recover
for any loss you’ve suffered if someone has failed to keep their promise to you.
 A contract is the basis of most commercial relationships
 Contract law is concerned with principles for the formation, performance, interpretation &
breach of contracts

Functions of the Law of Contract

 Promotes certainty
 Facilitates planning
 To establish value for goods and services through bargaining mechanisms
 Formal dispute resolution service
 Allocates risk  these are allocated in advance between the parties

COVID-19 and its Impact on the Law of Contract

 Impact of viruses is known to law of contract
 In 1889–1890, a pandemic, ‘Russian ‘flu’, killed 1 million people worldwide of 1.5 billion – it is
amongst the deadliest pandemics in history.
- See Carlill v Carbolic Smokeball [1893] 1 QB 256: Ad for ‘flu cure – case considered
fundamental principles of contract law
 COVID-19 lockdowns & rules impacted contract performance & contract law
-Rights of termination for breach
-Doctrine of frustration

Evolution of the Law of Contract

 Developed in context of industrial capitalism in 19 th century
 Reflected free market, individualism of the day
 ‘…men of full age and competent understanding shall have utmost liberty in contracting …’ per
Jessel MR
 Courts ensured the sanctity of the contract by strictly enforcing the terms (except where no
genuine consent)
 Mass production of 20th century  difference in bargaining power between consumers &
manufacturers
-Changed this strict view of contract law

The contract process

 Discuss and negotiate (to buy/sell)
 Make statements (verbal or in writing)
 Agree on terms
 Form a contract
-What if a dispute arises?
Sources of contract law
 Traditionally general law (cases)
 Impacted by equitable principles generally, including following ‘equitable doctrines and
importantly equitable remedies.
 Impacted by legislation, eg
-Australian Consumer Law,
-Corporations Act 2001 (Cth),

Types of contracts:

Number of parties
-Unilateral – one party ‘to all the world’ inviting performance (eg reward cases)
-Bilateral – two parties, both with mutual obligations
-Multilateral – more than two parties, all with obligations

Form:
 Simple Contracts: written; oral; part-written & part-oral
-Need all elements of a contract, including consideration ($$) to be valid
 Formal Contracts (‘Deeds’): satisfy formality requirements
-No need for ‘consideration’ (mutual promises)
-Deeds required for:
• unilateral contracts
• where statute requires eg title deed
What is a deed?
– written document that shows the terms of the agreement, made between the parties eg
deed of settlement, will
– No consideration needed
– Formalities must be followed

When is a written contract required?

 Simple verbal contract will be legally valid.

 But good commercial practice, because:
-to avoid disputes later
-If in writing – court presumes it is entire contract & will not allow oral evidence to change or
contradict written doc (‘parole evidence rule - PER’)

Example: you enrol in a health club, and the salesperson tells you that the contract can be
cancelled. You later decide you would like to cancel, but the written contract provides that
it is non-cancellable. The oral promises of the salesperson are generally non-enforceable.
Exceptions to PER: oral evidence allowed if there is clearly ambiguity or uncertainty in the
document

Role of Equity: to prevent unfairness

Regent v Millett (1976)
Facts: Regent verbally agreed that Millett could have property if they paid mortgage and did repairs but
Regent later refused to transfer the property. (Contracts for land must be in writing)
Issue: Can the contract be enforced even though formalities (ie should have been in writing) incomplete?
Held:
Millett could claim part-performance (doctrine of equity) because they had carried out their part of the
contract, so contract enforceable

Objectivity of Contract
Forrest v Australian Securities and Investment Commission [2012] HCA 39:
‘Regardless of the subjective intention of the parties, the question of whether the parties had made
contracts of the kinds described was to be determined by taking an objective view of the agreements’

 What does this statement mean?

 What is the difference between subjective and objective intention?
 Why do courts not regard subjective intention as the most important?

Element 1: Intention to Form Legal Relations (‘ICLR’)

Elements Required to form a Contract

1. Intention to create a legal relationship (ICLR)

– Usually inferred in commercial relationships;
– but not family/social relationships
2. Consideration
- promises need to be mutual, from each party to the other
- Not required for formal contracts such as deeds
3. Mutual agreement
– offer & acceptance
– Or conduct
4. Real & genuine consent - avoid mistakes, misrepresentations
5. Legal capacity of all parties & legal ‘objects’ (purpose)
– mental state, minors, not-yet-registered companies
6. Is the contract legal / illegal?

Inferences when Assessing ICLR

 Would a reasonable person objectively conclude that the parties intended their agreement to be
legally binding?
 Two Inferences:
-Parties who make social or domestic agreements DO NOT intend agreement to be
legally binding
-Parties involved in commercial agreements DO intend agreement to be legally binding
 These are not ‘set in stone’ – they form the starting point from which the court will decide
whether the parties had ICLR

Likely Inferences – Close family members

 In social and domestic agreements there is an inference against legal contractual obligations
-Balfour v Balfour [1919] - husband/wife in Sri Lanka – wife could not show parties intended agreement
to be sued upon
  The person who wishes to treat agreement as legally binding bears onus of showing otherwise
-Merritt v Merritt [1970] – separating spouses – wife could show

Element 1. Intention to Create Legal Relations (ICLR)

 Social & Family Relationships
-Invite friends to dinner
-Promise you will wash the dishes
- Take on a bet with a friend

 Business Relationships
-Rent a property
-Sell goods

 the court applies the “objective test”  Whether the reasonable bystander, after taking into
account all the circumstances of the case, thinks that the parties intended to be bound

Balfour v Balfour [1919] Merrit v Merrit [1970]

Facts: Husband was employed in Facts: Husband left wife and agreed to
Ceylon, lived there with wife. transfer property if she paid off the
Both returned to England on leave, mortgage. After she paid mortgage,
wife stayed in England due to he refused to transfer property. Wife
ill health. Husband promised to pay sued, claiming he breached contract,
£30 a month for when they but husband said ‘no ICLR’ because
Ashton
were apart. v Pratt
She[2015]
commenced divorce Wakeling
social v Ripley
context (1951)
(so not a contract).
Facts: Richardand
proceedings Pratt, a man of
claimed Facts: Ripley, elderly & wealthy man
‘exceptional
the £30 pm as wealth’ offered Ashton in
settlement. who lived
Issue: Wasinagreement
Sydney promised
to transfer
2003 the position of ‘mistress’ in relatives,
house whoMlived
to Mrs in England
intended to bethat if
legally
exchange
Issue: Wasfor $2.5m trust
husband for each of
contractually they came to live with him, he would
enforceable?
her
bound children
to payandthe$500 000 per year for
£30 pm? let them live rent free and leave them
her services. The agreement was his house
Held: upon
There washis death.
ICLR The was a
so there
never reduced
Held (Atkin CJ):to‘The
writing. He died
CL does not & WakelingsGoodwill
contract. agreed and movedhusband
between in. After
she suedagreements
regulate his estate tobetween
enforce the a while
and wifethe
hadparties
brokenquarrelled,
down, so itMrcould
verbal
spouses. promise.
Their agreements are not Ripley
be sold his
inferred theyhouse
did notandrely
excluded
on the
regulated with seals and sealing wax. Wakelings from his will.
honourable understandings. They sued for
Issue: Could she rebut
The consideration the inference
that really counts breach of contract.
of
fornothemICLRisinthat
social agreements?
natural love and
affection which counts for so little in
Held:
these No coldICLR. Conversation
courts washas
… the plaintiff ‘not Issue: Was agreement intended to be
cast in the language
not established of obligation’ and
any contract’. legally binding?
there was an absence of detail, as well
as key issues concerning the Held: It could be inferred from the
establishment of the trusts. circumstances that it was intended to
be legally binding. The consequences
Commercial Agreements for the Wakelings were serious
 Likely inference that intended
to be legally binding.
 This inference that parties
intended to create legal
relations is very strong: But
can be set aside for honour or
friendship if party can prove
this.
  Rose & Frank Co v JR Crompton & Bros Ltd 
- parties had dealings over many years
- “honour clause” – mutual trust & loyalty
- expressly stated agreement is not to be legally binding
- were therefore able to rebut inference of ICLR

Ermogenous v Greek Orthodox Community Facts:

E was Archbishop of Greek Orthodox Church in Australia for 23years. When his employment was
terminated, he claimed leave entitlements. Church denied liability claiming no enforceable contract
because agreement was religious and so no ICLR.

Issue: Could ICLR be inferred from circumstances that employment of archbishop intended to be
legally binding?

Held: High Court said it was wrong to make an assumption of no ICLR because it was a matter
concerning a minister of religion. The existence of ICLR is judged on the basis of relevant facts.

Element 2: Consideration
Rule 1: Consideration must exist for a simple contract to be enforceable
Consideration  “price” of the promise to do something

A promise  a commitment to do or not do something

A promisor  the person who a person who makes a promise
A promisee  the person to whom a promise is made

No consideration needed for a deed but formalities must be followed. Consideration is requirement for
simple contracts

What is consideration?
Currie v Misa [1875]:
Lush J:
‘Consideration for a particular promise exists where some  right, interest, profit or benefit accrues (or
will accrue) to the promisor as a direct result of some forbearance, detriment, loss or responsibility that
has been given, suffered or undertaken by the promisee.’

Hamer v Sidway (1891)

 Consideration may be forbearance (ie not doing something)
 5000 dollars not to drink, swear or smoke
 Promise was sufficient consideration in exchange for $$
Rule 2: Past Consideration is not good consideration
Roscorla v Thomas
Facts: R bought horse from T. After contract was completed ($$ paid & horse handed over) R asked T to
give assurances about horse’s condition. These were later found to be untrue
Issue: Does a promise after formation of agreement require fresh (new) consideration or can the past
price be used?
Held: Promises re horse’s condition were not supported by consideration as made after contract was
completed

Anderson v Glass (1868)

Facts: G promised employee A an increase in wages to be paid in future but backdated for work
completed before promise was made.
Issue: Will work completed previously be good consideration for a new promise?
Held: A promise to increase wages retrospectively is unenforceable in contract since the employee’s
consideration (work done) is in the past.

Rule 3: Consideration must come from the promisee

Dunlop Pneumatic Tyres v Selfridge [1915]
Facts: Dunlop (‘Dun’) sold tyres to dealer Dew. Dun contracted with Dew to ensure retailers buying from
Dew would sell at a set price. Dew supplied tyres to Selfridge (‘S’) who sold the tyres at a different price.
Dun sued S for breach of contract.
Issue: Was S part of the contract btw Dun & Dew to sell the tyres at a fixed price? If so, then breach of
contract.
Held: There was a contract between:
- Dun and Dew
- S and Dew
Thus no contract btw Dun & S  Dun could not force S to sell at set price.

Rule 4: Consideration must be real

White v Bluett
Facts: Son loaned money by dad. Son signed promissory note (IOU) in favour of dad. Son harassed dad
for making him sign note. Dad said he would forgive payment of debt if son would stop harassment. Dad
died and executor used the note to sue for repayment of the loan.
Issue: Was contract (forgiveness of debt) invalid due to insubstantial ‘illusory’ consideration (ie ceasing
the harassment)?
Held: Undertaking to cease harassment is too nebulous and vague, son had to pay back dad’s estate.

Rule 5: Consideration can be nominal

Thomas v Thomas
Facts:  On the day of his death, husband had said in front of witnesses that wife was to have house for
life. After death, the executor agreed to convey a life interest "in consideration of John's desires" - if she
paid £1 pa rent and kept house in good repair. Later the executor refused to complete the conveyance.
Issue: Was promise unenforceable due to insubstantial
‘consideration (ie £1 pa rent and kept house in good repair)?
Held: Provision for payment and the obligation to repair is sufficient
consideration for a contract. The moral feeling which motivated the
arrangement is not relevant.
Rule 6: Existing legal obligation is not good consideration
Stilk v Myrick (1809) –
Facts: Plaintiff contracted to work as one of 11 sailors. During the voyage 2 deserted; captain promised
the rest that they should receive the wages of the deserters if they worked the ship back to London –
captain then refused to pay extra wages.
Legal Issue: Can the performance of an existing contractual duty be good consideration in exchange for a
promise?
Held: Not legally enforceable because crew were already contractually obliged to bring the ship home ie
they had an existing legal obligation

Reasoning of Stilk v Myrick (1809)

(1) Not enforceable agreement because there was no consideration given by the plaintiff for the promise
to pay.
(2) The remaining crew were already bound to work the vessel back to London. The desertions were
merely an emergency of the voyage and the rest of the crew remained bound by the terms of the
original contract to bring the ship back to London.

->performing a duty you are already bound to perform is not good consideration for any promise they
make to you.
->Public interest: prevents contractual blackmail – where a party threatens not to perform his
contractual obligations unless he gets more consideration than was originally agreed to.

Rule 6: Existing duty under law

Duty under law Collins v Godfrey:
Facts:C received a subpoena (order to appear in court). Therefore, had to by law.
G promised to pay C if he appeared in court.
Issue: Could C sue for payment?
HELD: No right to sue as already under legal obligation to appear in court.

Summary: General rules about consideration

1. It is required for simple contracts not deeds
2. Forbearance is good consideration
3. Must not be illusory
4. It does not have to be “market value” but must be of some value can be positive or negative ie
adequate
5. It must go from promise (but can go to 3rd party).
6. It must be clear ie terms of promise or dollar amount
7. It must be legal ie a promise to steal or kill is not
8. It cannot refer to past consideration
9. Giving up a right can be consideration

Rule in Pinnel’s Case (1602) & Foakes v Beer

Consider situation where:
-A debt is owed
-Creditor agrees to accept a lesser payment in full satisfaction of the debt
-Promises debtor no to sue for rest
-Can creditor change her mind because no consideration for promise??
Pinnel’s Case (1602)
Facts: Pinnel sued Cole, in an action of debt, for the sum of £8 10s. Cole, argued he had, at Pinnel's
request, tendered £5 2s 2d before the debt was due, and the plaintiff Pinnel had accepted this in full
satisfaction for the debt
Issue: Could a part payment extinguish the debt since no consideration was provided for forgiveness of
debt?
Held: ‘payment of a lesser sum in satisfaction of a greater, cannot be any satisfaction for the whole,
because it appears to the Judges that by no possibility, a lesser sum can be a satisfaction to the plaintiff
for a greater sum: but the gift of a horse, hawk, or robe, etc. in satisfaction is good’

Consideration & Discharge of Obligation

Foakes v Beer
Facts: Foakes owed Beer £2,000. They agreed to payment plan where Foakes would pay £500
immediately & £150 every 6 months until he had paid in full. After Foakes paid off the entire £2,000 in
this way, Beer claimed she was entitled to interest.
Issue: Was agreement invalid due to lack of consideration? Is partial payment of a debt sufficient
consideration for the original contract between Foakes and Beer?
Held: NO:Part-payment of existing debt cannot be consideration for a contract to vary debt amount: F
had to pay B the interest

The part payment rule: Exceptions to the rule in Pinnel’s Case

A debtor will have provided sufficient consideration for the creditor’s promise to waive the balance of
the debt if:
1. the debtor makes the part payment earlier, or
2. the debtor gives extra consideration such as an additional service, or
3. the part payment is made by a 3rd party, or
4. the agreement is in the form of a deed
5. Promissory estoppel – equitable rule that prevents unjust departure from an assumption of fact that
you know other party is relying upon.
6. Modern approach – the practical benefit test: has a detriment been avoided?

Promissory estoppel (‘PE’)

 Role of equity: principles & doctrines to soften harsh or unfair consequences from a rigid
application of common law rules
 PE is a rule of equity that prevents an unjust departure by a person from an assumption of fact
that they have caused the other party to adopt
 The party creating the deception is prevented from going back to the true state of facts

Central London Property Trust Ltd v High Trees House Ltd [1947]
Facts: HTH leased a block of flats in London from CLPT. During the blitz of London, many of HTH’s sub-
tenants moved out, so HTH could not pay rent. CLPT agreed to reduce rent for duration of war (but no
consideration paid by HTH). However, people began to return to London in 1940, so CLPT said it wanted
original rent
Issue: Could CLPT go back on its promise to reduce the rent?
Held: CLPT could not claim war time arrears. Promissory estoppel (‘PE’) prevented (‘estopped’) CLPT
from going back on its promise.
Walton Stores v Maher (1988)
Facts: W agreed M would demolish an existing building and erect a new one, which W would occupy.
They agreed on terms and rent. W sent a draft lease to M. M informed W that demolition had started
and it was therefore important to conclude the lease quickly. W started to have reservations about the
lease and instructed its solicitors to 'go slow'. Later, when 40% of building work was completed, W
informed M it did not wish to proceed. M brought action to enforce the agreement.

Walton Stores v Maher (1988): 6 Reqs of PE

Held: M could rely on promissory estoppel where:
1. Promisor makes a promise
2. Promisor creates or encourages an assumption that a K will come into existence or a promise will be
performed
3. Promisee relies on this to his/her detriment;
4. Promisor knows that promise is relying on the promise
5. Promisee will suffer a detriment
6. It is unconscionable, having regard to the promisor's conduct, for the promisor to ignore the
promise.
 These are the six elements of estoppel

Equity intervenes because it would be unconscionable conduct on W’s part to ignore the assumption.
 Enforceable contract – W was estopped from denying the existence of contract, even though it was not
completed (by signing)

Extra elements which made conduct unconscionable:

(1) the element of urgency;
(2) M executed and forwarded draft and assumed that execution by W was formality

 Waltons’ inaction in the circumstances constituted clear encouragement for Maher to continue.
 As a result, Waltons was estopped from retreating from its implied promise to complete.

Element 3: Mutual Agreement

Agreement = Offer + Acceptance

 ‘agreement’ == offer + acceptance of the offer.

 May require analysis of language & conduct
 ‘agreement’ == meeting of minds where one party makes an offer and another party accepts the
offer
  Mirror Image Rule  the offer must be accepted on the exact terms of the offer, otherwise
there is no agreement.

Valid Offers
-Must have sufficient precision to eliminate the need for further negotiation
-Creates a power of acceptance in the offeree that only her acceptance is necessary to make a binding
contract
-If it is not an offer, it could be:
>Mere puff
>Invitation to treat
>Statement supplying information

Offer or invitation to treat (‘trade’)?

Fisher v Bell [1961]
Facts: Shop keeper had flick-knife displayed in window with price tag. He was charged with offering for
sale of an offensive weapon
Issue: Was the window display an offer or an invitation to treat?
Held: Display of goods is an invitation to treat (‘I2T’), not an offer

Pharmaceutical Society (GB) v Boots Cash Chemists

Facts: Customers selected prescription drugs from shelf. Rules said only pharmacist could supervise sale
of medicine.
Issue: Was display of goods on shelf an offer that could be accepted or merely an invitation to treat?
Held: An offer is made by customer when customer presents item at register and acceptance when
vendor accepts the money, so Boots did not commit an offence.

Online Offers: Smythe v Thomas (2007) NSWLR 537

Facts: Seller listed an aircraft for sale on ebay under its terms and conditions with disclosed reserve of
$150, 000. The buyer satisfied the terms and conditions, but the seller refused to sell
Issue: Was the online listing a valid offer or I2T only?
Held: Yes, there was offer and acceptance within the auction framework

Application:Zane runs a hairdressing salon. In the window of the salon is a sign that says:
Wash, cut and blow dry for $55
-Zane, however has recently increased the price to $70. Ben sees the sign and tells Zane “I would like
you to do my hair for the price in the window.

-Is Zane contractually bound to do Ben’s hair for $55?

Offer or Supply of Information?

Analysis: Not offer because supply of info
The fight for Bumper Hall Penn in Jamaica: Harvey v Facey [1893]

1. Harvey: ‘Will you sell us Bumper Hall Pen? Telegraph lowest price’.
2. Facey: Answer: ‘Price £900’.
3. (3) Harvey: ‘Agreed. Pls send title deeds.’ [No response.]
 Held by Privy Council (Appeal Court in England): No contract – because:
- (1) was request for info by Harvey, not offer.
- (2) was supply of info by Facey, not offer or acceptance.
- (3) was offer by Harvey (which Facey did not accept)

Offer or Mere Puff? - Carlill v Carbolic Smoke Ball Co [1893]

Remember the Russian flu pandemic of 1890s?
Facts:The Company made a "smoke ball“ and advertised it as a cure for flu. They said they would pay
£100 to anyone who got sick with influenza after using its product according to the instructions. Mrs
Carlill bought a smoke ball and used it as instructed until she contracted the flu. She claimed £100 from
the Company.
Issue: Mrs C argued that the ad was an offer that she had accepted (by conduct) when she bought the
smoke ball and used it as instructed. The company argued the ad was mere puff & so was not a serious
offer.
Held: The language of the add was precise and clearly detailed the means of acceptance, so it was an
offer to the world at large. This was a unilateral offer to the world which anybody could accept by
conduct.
Moreover, the company had deposited the money at a bank as a sign of sincerity & good faith
Thus there was a binding contract for £100 with Mrs Carlill, company had to pay.
Unilateral Offers
 If ad limits possible number of persons able to accept ‘offer’ (eg: limited to first 5 customers)
then can be an offer, not I2T
 Difficulty of making contracts with entire world
 Can be to individual or to world
 Language need not be important, eg catalogue advertisement with ‘offers’ will usually be
invitations to treat, not offers [‘treat’ means ‘trade’]
 This is a one-sided agreement because a promise to pay is exchanged for conduct or forbearance
of action

Options
 offer is left open until “the end of the week to accept”.
 If the offeree provides some consideration to have the offer left open to them, then an option
has been created
 if the offer is withdrawn before the time stipulated then option contract breached

Routledge v Grant
Facts: Grant made an offer to Routledge to buy his house: “a definite answer from R is to be given within
6 weeks from the date of the offer”
Issue: Could G withdraw this offer during the 6-week period?
Held: G could withdraw his offer during the 6-week period despite the implied assurance that the offer
would remain open during this period. This was because no consideration ($$) was paid. Consideration
would have turned offer into option contract

Other examples
Vending Machines
 Vending machine = offer, accepted by insertion of payment (unless unable to do so = incapable
of acceptance)
Tenders
 call for tenders = usually invitation to treat
 Tender bid = usually an offer

Auctions
 Auctioneer’s call for bids = invitation to treat
 Bid at auction = offer (able to be accepted by ‘fall of auctioneer’s hammer)

Valid Offers - Summary

-Offer Mode: can be made verbally, post,
electronic means
-Clarity: Must be unambiguous
-Communicated: only effective when recipient is
aware
-Revocation: at any time before acceptance (if not
option)
-Can only be accepted by party to whom it is
made, called the ‘offeree’
-Acceptance Mode: Can only be in mode specified
by offeree

Possible responses to an offer:

 Reject it terminates it (ends offer
permanently)
 Make counter-offer (= new offer on new terms)  terminates original offer (Hyde v Wrench)
 Ask for more information or clarification before making a final decision whether to accept
(Stevenson, Jaques & Co v McLean)
o  no effect on offer but offer will lapse within a reasonable time, if not accepted before
lapse
 Do nothing  offer lapses after reasonable Acceptance Rule 1: Acceptance must be clear
time  Must be clear, unambiguous
 Accept the offer in its full terms  creates  Must be positive decision that leaves no doubt
a valid (simple) contract  Must be mirror image of the offer
 Death of offeror causes offer to lapse -(‘mirror image rule’)
 Counter-offer destroys original offer
How long does offer stay on foot (‘alive’)?  Rule of Masters v Cameron: if parties sign
preliminary agreement subject to some condition
there is no binding final agreement

Acceptance: Masters v Cameron

Facts:C&M signed a doc where C agreed to sell farm to M for £17 500.
-M paid a deposit of £1750.
-Doc: ‘This agreement is subject to the preparation of a formal contract of sale which shall be acceptable
to C’s solicitors on the above terms and conditions”
-Formal contract of sale was prepared but never signed.
Issue: Was agreement to sell farm a valid contract?
Held:-no enforceable contract, thus deposit returned to M.
 -Reason: agreement was not in final form, needed to be acceptable to C’s lawyers, & they had
power to alter terms of eventual contract quite considerably  no agreement

Court: ‘subject to contract’ could

mean:

1. the parties have reached final

agreement but want the
details set out in a more
precise form; [binding K]
2. The parties have reached
finality & do not intend to
alter their agreement, but
want to defer until formal
document; [binding K]
3. the parties do not intend to make a concluded bargain unless and until they sign a formal
contract (the situation in Masters v Cameron) [no binding K]

Acceptance Rule 2: Offeror’s requirements must be met

 Offeror’s exclusive method of acceptance must be used
 Offeror may accept by an alternative efficient method: Eliason v Henshaw
 Offeree can use same communication method as the offeror
 Acceptance is communicated only when received by the offeror

Adams v Lindsell

 Postal Acceptance Rule:

If parties know post will be used,
acceptance occurs when letter is
posted, not on delivery

Postal Rule:
 Presents potential difficulties as offeror is unaware of acceptance until acceptance is received
 The postal service acts as the agent for the offeror
 Offeror must make it known to offeree that the post is the acceptable method of communication
 If offeror sends by post it is implied that post is acceptable mode to accept
 Rule can be avoided by specifying conditions

Electronic communications
 Legislation: Electronic Transactions Act (‘ETA’)
 Time of dispatch is when communication enters information system outside control of the
sender
 Time of receipt is when it enters recipient’s info system (unless contrary agreement): s 14(2)
 If recipient has not designated an info system, then time of receipt is when it come to attention
of addressee
 Website ads are invitations to treat & responders are making an offer, not accepting the offer
 If purchaser clicks “I agree” button & terms are clear then there is acceptance
Acceptance Rule 3: Acceptance must be given in reliance on offer
R v Clarke (1927)
Facts: Govt offered reward for info leading to arrest of person responsible for murdering two policemen.
Clarke was arrested & gave info that led to conviction of parties. The death penalty existed at the time
and Clarke was afraid he was a suspect.
Issue: Was Clarke’s ‘acceptance’ valid?
Held: No because Clarke gave info to clear himself, he had forgotten about the reward.

Acceptance Rule 4: Acceptance must be communicated

Felthouse v Bindley
Facts: F wrote to B (owner of horse): ‘If I don’t hear from you, I’ll consider the horse mine at that price”
Issue: Whether silence was valid acceptance (then a contract would have been created)
Held:
 B had not accepted A’s offer
 B’s silence did not constitute acceptance
 To be effective, acceptance needed to be
communicated to F.
Brogden v Metropolitan Railway Company (1887)
Facts: M sent B a draft contract. B completed, signed & returned it but M did not sign. Parties dealt with
each other on terms of the completed contract.
Issue: Can the conduct of M be implied as acceptance?
Held:
 Draft agreement was offer by M to B
 Completed contract was counter-offer to M by B
 There was implied acceptance by M because M acted according to the completed contract

Byrne v Van Tienhoven (1880)

Facts:
1 October: D posted a letter to P offering to sell tinplate.
8 October: D posted letter revoking the offer.
11 October: P telegraphed acceptance of the offer
15 October: P confirmed acceptance by letter.
20 October: P received D's letter of revocation.
Issue: At what time would the revocation have taken effect?
Held: Although acceptance takes effect from posting, revocation is only effective when communicated to
the offeree
 Withdrawal was thus ineffective and the contract completed on 11 Oct.
 Any other view would lead to great inconvenience. Nobody could act on an acceptance until a
further stage had been gone through of confirming that a revocation had not been sent to them
in the meantime.

Revocation of Acceptance
 Once an acceptance has been communicated to an offeror it cannot be withdrawn since a
contract has come into existence.
 Conversely until such time as acceptance is communicated to the offeror, it can be withdrawn or
revoked
Dickinson v Dodds(1876)
Facts: On 10 June Dodds offered to sell house to Dickinson, stating
‘this offer to remain open until 12 June". Dickinson decided to accept on 11 June but did not advise
Dodds. Later on the 11th Dickinson was told by a 3rd party that Dodds had sold to someone else.
Dickinson then tried to accept the offer but Dodds said ‘It is too late’.
Issue: Was the offer to sell binding on Dodds until 12 June, or had it been validly revoked
by the 3rd party (who was a reliable mutual friend)?
Held: All that is required to revoke is that the offeror in some way conveys (or communicates) that they
have changed their mind about the offer. Dickinson knew Dodds was no longer prepared to sell before
attempting to accept.
Ratio decidendi: Communication of offer’s withdrawal can be made by any reliable 3 rd party. Option
must have consideration to be binding.
Question: What should Dickinson have done to keep offer open?

Other acceptance principles

 Counteroffer destroys original offer and is instead a new offer: Hyde v Wrench
 Request for information is not a counteroffer: Stevenson, Jaques & Co v McLean

 Offer cannot be revoked in breach of an option contract: Routledge v Grant

Clarke v Earl of Dunraven & Mount-Earl [1897] AC 59 (The ‘Satanita’)

Facts: Two boats collided while competing in a competition (regatta) run by a yacht club. The boats had
agreed to be bound by the rules of the club whereby anyone who broke a rule had to be liable for all the
consequent damage
Issue: Could the parties be bound without actually making an agreement i.e. without going through the
process of offer and acceptance?
Held: Yes because they accepted the terms and conditions when they entered into the contract by
agreeing to take part in the regatta