Anton posts a letter to Bernard offering to sell him a boat for £10,000 and requesting a reply by return of post. Discuss if, and when, a contract is formed between them in EACH of the following alternative situations:
(a) Bernard replies by return `I am willing to accept your offer, but I would need finance. Would you be prepared to arrange hire-purchase terms? ` After receiving this letter, Anton sells the boat to Celine.
In this scenario, there is no contract that is perfected between the parties. The reason behind this is that the law is clear when it requires acceptance by both of the parties. In order to understand why this is the situation, it is important to first discuss what a contract essentially means. A contract is essentially defined as a meeting of the minds between parties with regard to a particular subject and consideration (Keenan and Riches 2004). The most important part of every contract therefore is that there is a “meeting of the minds” or agreement (Keenan and Riches 2004).
People are generally free to stipulate as to any terms or conditions in a contract subject to certain limitations such as public policy, morals and public good (Keenan and Riches 2004). There is no fixed form for contracts as such may be oral or written (Keenan and Riches 2004). Given the complexity of the transactions at present, most contracts are in written form.
The law on contracts requires seven (7) crucial elements for its validity and enforceability; Agreement, consideration, intention, form, capacity, genuineness of consent, and legality (Keenan and Riches 2004). Under contract law, there must first be an agreement. This basically means that for a contract to be valid and enforceable there must be a clear acceptance of the terms of the contract by both of the parties involved (Keenan and Riches 2004). The acquiescence of one does not necessarily mean that a contract already exists.
The second element of a contract is the consideration (Keenan and Riches 2004). The element of consideration necessitates that each of the members of the contract (contracting parties) must comply with something on their part. Any unilateral act without a corresponding action or compensation from the other party to the contract does not always result in a binding contract between the parties (Keenan and Riches 2004). As such, it is essential that there be compensation or an act done by the other.
These two (2) elements are the main elements that must be considered in this situation (Keenan and Riches 2004). From the facts that are supplied, it is clear that there is an irregularity in the agreement as well as the consideration. The first element that is in question, which is the agreement, is irregular because there is no clear acceptance by one of the parties as to the terms of the contract.
The terms of Bernard indicating that “he (I) am willing to accept your offer, but I would need finance. Would you be prepared to arrange hire-purchase terms,” means that he is merely amenable to the terms of the contract but as such he has not signaled his unequivocal acceptance of the contract. There is also no written form of the contract. As such, the letter is only a continuing offer which is essentially understood as a counter offer on the part of the offeror. The reason for this is because there has been no acceptance by one of the parties.
The disagreement with regard to the terms of payment falls under the consideration portion of the contract. There has been a disagreement as to the method of payment and this is covered by the performance of the consideration part of the contract. There being no consideration that the party has agreed upon, there is no contract that exists between Bernard and Anton.
On the other hand, there is a valid contract of sale, as governed by the Sales of Goods Act of 1979, because of the presumed presence of all the necessary requisites that exist in the contract of sale between Anton and Celine (Keenan and Riches 2004). There is also no impediment on the part of Anton to sell to Celine because Bernard has not accepted the offer given to him. These are the only contracts that exist in this situation.
(b) Bernard accepts by return, but before Bernard’s letter reaches Anton, Bernard receives an email from Anton cancelling the offer.
As mentioned previously, a contract is essentially a legally binding agreement. In the words of Sir Frederick Pollock, “it is a set of promises that the law will enforce. (Keenan and Riches 2004)” At this point, it is also important to remember that not every promise or agreement is enforceable under the law. Depending on the nature of the promise or agreement, the law may require a specific form or may require the doing of certain acts in order to validate the contract (Keenan and Riches 2004).
Another important aspect of contracts lies in the genuineness of consent of the parties to a contract. Under the law, the perfection of the contract depends upon a meeting of the minds of the parties (Keenan and Riches 2004). This means that parties must both agree to the same terms contained in the contract. This is when the meeting of the minds occurs. If one of the parties has exhibited or manifested an agreement to the terms as such and the other party signifies that he has a similar agreement as well, then there will come into existence a valid contract between the parties.
In the situation that is provided, there is an actual response and acceptance to the terms of the contract by Bernard. The problem is that Anton had manifested his withdrawal of the offer even before Bernard was able to inform Anton of his acceptance. There are basically, two (2) trains of thought with regard to this problem. The first theory, which is the cognition theory, states that if the acceptance of an offer is communicated to the offeror before it is withdrawn, the reckoning date will be the time the letter is actually read or received by the offeror (Keenan and Riches 2004). This means that it is cognition that will decide if there is an acceptance that is binding to produce the meeting of the minds that the law requires.
The second theory is the manifestation theory (Keenan and Riches 2004). Under this legal theory, the acceptance by the party will be considered from the very moment that the acceptance was communicated (Keenan and Riches 2004). In the example of a letter, acceptance is considered from the moment that it is registered as mail and sent out. It is not dependent upon the reading of the offeror but instead upon the moment that the party manifested his acceptance by sending the letter (Keenan and Riches 2004).
Given the facts of this case, it is clear that the cognition theory must prevail. The law in this jurisdiction dictates that an offer may be rescinded any time before acceptance is actually communicated to the offeror. As such, Anton has the right to cancel the contract at any time before he receives a letter from Bernard which signifies an acceptance of his offer. Mere intention through the mailing of the letter does not constitute the acceptance that is binding and essential for the perfection of the contract under law. The contract could have been considered as perfected had Anton read and received the letter before he had communicated his withdrawal of the offer to Bernard.
(c) Bernard telephones Anton the following day accepting his offer.
In order to decide whether or not a contract exists in this example, it is important to first discuss forms of contracts. As previously mentioned, oral contracts are usually avoided by parties because of the difficulty of proving that an agreement does exist (Keenan and Riches 2004). While it may not be written, oral contracts are still binding under law and may be enforced against a party if it can be shown that such oral agreement does exist. Therefore, this contract can indeed turn into a valid and enforceable contract if the basic elements of a contract are contained (Keenan and Riches 2004). The validity of the contract is not based upon its being in written form. The only thing that is important is that the parties come to an agreement with regard to the service performed and the compensation for such service.
It is also important to mention another essential element of a contract which is the form of the contract. Under contract law, the terms of the contract are considered as law and binding upon the parties. The specification of a certain form can be required by the offeror as long as it does not contravene morals, public policy and law. The offeror, Anton, can therefore require that the acceptance or withdrawal of acceptance be done in such a form that he requires.
In this example, Anton clearly stated that the reply from Bernard should be in a return of post. The non-compliance by Bernard with this specific instruction means that Anton is duly justified in not validating the acceptance of Bernard because of the act of Bernard in not complying with the requirements provided by Anton.
When a specific form is designated for the reply, any other form of communication or acceptance does not give rise to a valid and enforceable contract unless the offeror ratifies such by accepting the communication (Keenan and Riches 2004). Unless Anton signifies his intent to accept the offer of Bernard, there is no obligation on Anton by virtue of law to comply with the terms of the contract as no contract arose in the first place.
Keenan, Denis and Riches, Sarah (2004) Business Law. 7th Edition
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