CONTRACT LAW PT 2

FORMATION OF A CONTRACT: ACCEPTANCE

1. Cheshire, Fifoot and Furmston’s, Law of Contract (15th Ed.).

2. Anson’s Law of Contract (28th Ed.).

3. Hodgin R.W., Law of Contract in East Africa.

4. Peel E., Treitel: The Law of Contract (12th Ed.)

5. Richard Stone., The Modern Law of Contract (8th Ed.)

Note: Students should read the relevant chapters in the above texts where these notes have been

derived from. These notes are NOT a substitute for reading contract law textbooks and the cases.

The second stage of discovering whether an agreement has been reached is to look for an acceptance

which matches the offer which has been made. Acceptance is a final and unqualified expression of

assent to the terms of an offer.

The discussion of acceptance will be under four heads: a) Battle of forms, b) Fact of acceptance, c)

Communication of acceptance and d) Prescribed method of acceptance.

a) BATTLE OF FORMS

It arises, for instance, where two companies are in negotiation, and as part of their

negotiations, they send each other standard contract forms whose general terms and

conditions are contradictory. For example, a firm may offer to buy goods from another on a

form which contains or refers to its standard conditions of trade. The seller ‘accepts’ the

offer by a confirmation on a form which contains or refers to its (the seller’s) standard

conditions of trade. If the two sets of forms are incompatible, is there a contract? If there is,

which conditions prevail?

There are three main possibilities:

•The contract is made on the terms of the party whose form was put forward first-

the ‘first shot’ approach, that is, giving deference to the party who puts its form

forward first;

•The contract is made on the terms of the party whose form was put forward last-

the ‘last shot’ approach; that is, giving deference to the party who puts its form

forward last in the exchange between the parties.

•There is no contract at all, because the parties are not in agreement, and there is no

matching offer and acceptance.

The ‘last shot’ approach is the traditional view as well as the established principle thus is the

one commercial courts frequently use. It treats the existence of a contract and the terms to

which the agreement is subject as a single process to be determined once and for all by the

rules of offer and acceptance. This may mean that where conflicting communications are

exchanged, each is a counter-offer so that if a contract results at all (e.g. from an acceptance

by conduct) it shall be on the terms of the final document in the series leading to the

conclusion of the contract. This traditional analysis was adopted in British Road Services v

Arthur Crutchley & Co. Ltd [1967] 2 All E.R. 785 where the claimants delivered, under a

long established course of dealing between the parties, a consignment of whisky to the

defendants for storage in their warehouse. The driver handed the defendants a delivery not

purporting to incorporate the claimants’ “conditions of carriage”. The note was stamped by

the defendants: “Received under [the defendants’] conditions”. It was held that this

amounted to a counter-offer which the claimants had accepted by handing over the goods,

and the contract therefore incorporated the defendants’ and not the claimants’ conditions.

The defendants therefore threw the last shot in the battle of forms. It should however be

noted that the fact that the parties had previous dealings was relevant. Had it been otherwise,

it would have been argued that the claimant’s driver may not have had authority to act on the defendant’s contractual obligations.

The ‘last shot’ approach was also followed by the Court of Appeal in Butler Machine Tool

Co. Ltd v Ex-Cell-O Corporation (England) Ltd [1979] 1 WLR 401 which is considered

as the leading case on the battle of the forms. In the said case, the buyers wished to purchase

a machine for their business. On 23 May, the sellers offered to sell them one for £75,535,

with delivery in 10 months. The offer incorporated the sellers’ standard terms, which were said to prevail over any terms in the buyers’ order. It also contained a price variation clause,

allowing the sellers to increase the price in certain situations. The buyers responded with an

order on 27 May. This order incorporated the buyers’ terms, which did not include a price

variation clause. However, it contained a tear-off acknowledgement slip, stating: ‘We accept

your order in the Terms and Conditions stated therein.’ The sellers signed and returned this

acknowledgement, together with a covering letter, stating that the buyer’s order had been

entered into in accordance with the sellers’ original offer of 23 May. There were no further

relevant communications. When the sellers delivered the machine, they tried to enforce the

price variation clause, but the buyers insisted that they were only obliged to pay £75,535.

The trial judge found the additional sum to be recoverable on the basis that the parties had

reached agreement subject to the emphatic stipulation that the sellers’ terms were to prevail-

he took a broad approach to the question of agreement. The Court of Appeal reversed the

decision. The Court of Appeal judges found a contract by the traditional ‘offer/counter-

offer’ analysis and unanimously held that the buyers’ terms should prevail. The sellers’

original offer of 23 May was met with a counter-offer form of the buyer’s which on the basis

of Hyde v Wrench, destroyed the sellers’ original offer. By completing and returning the

acknowledgement slip, the sellers were accepting the counter-offer. The buyers fired the last

shot in the battle of forms hence won the battle. The seller’s accompanying letter did not

prevail (though it was the ‘last shot’ in the series) because the reference in it to the original

offer was not made for the purpose of reiterating all the terms of that offer, but only for the

purpose of identifying the subject matter of the contract; it was therefore not a counter

offer. It should be noted that, the sellers could have turned their final communication into a

counter-offer by explicitly referring to it, that is, reiterate the subject matter of the original

offer as well as all its other terms. Thereafter, unless and until the counter-offer is accepted,

there would be no contract, even though the buyer and sellers firmly believe that a contract

has been made.

Majority of the judges in the Court of Appeal in the above case favoured the traditional

approach set out by Lord Langdale MR in Hyde v Wrench. Lord Denning, although

arriving at the same decision as the other judges, preferred a more radical approach. He stated that the traditional analysis of offer, acceptance, counter-offer etc was out of date.

Hence the better way was to examine the documents passing between the parties as a whole

and attempt to garner from them or from the parties’ conduct whether agreement has been

reached on the material points, even though there might be differences in the forms and the

printed conditions.

He pointed out that in:

“…most cases when there is a ‘battle of forms’, there is a contract as soon as

the last of the forms is sent and received without objection being taken to

it…On some cases, however, the battle is won by the man who gets the blow

in first. If he offers to sell at a named price on the terms and conditions stated

on the back and the buyer orders the goods purporting to accept the offer on

an order form with his own terms and conditions on the back, then, if the

difference is so material that it would affect the price, the buyer ought not to

be allowed to take advantage of the difference unless he draws it specifically

to the attention of the seller. There yet other cases where the battle depends

on the shots fired on both sides. There is a concluded contract but the forms

vary. The terms and conditions of both parties are to be construed together.

If they can be reconciled so as to give a harmonious result, all well and good.

If the differences are irreconcilable, so that they are mutually contradictory,

then the conflicting terms may have to be scrapped and replaced with a

reasonable implication.”

In light of the above, Lord Denning in Butler Machine Tool Co. Ltd v Ex-Cell-O

Corporation (England) Ltd considered the documents as a whole, and as a matter of

construction and decided that the seller’s acknowledgement by tear-off slip was the decisive

document as it made it clear that the contract was on the buyers’ terms, not the sellers’.

Lord Denning’s approach attempts to treat contract formation as a two stage process. That

is; (1) Have the parties reached agreement? (2) If so, what are the terms?). This is unlike the

traditional approach which treats the existence of a contract and the terms to which the

agreement is subject as a single process to be determined once and for all by the rules of

offer and acceptance. Therefore, in order to avoid loosing the “battle of the forms” in the

traditional approach, a party must strive to fire the last shot. This however does not assure

the party that it shall be the winner as the other party might counter-offer. The only real certainty that can be achieved is a stalemate which is not a satisfactory state of affairs as the court may find that there is no contract at all. Such a conclusion would be acceptable where the contract is purely executory with no or only limited performance having taken place. On the other hand, it could be very inconvenient in executed contracts where, as in the Butler case, an expensive custom-made machine has been produced and delivered.

Lord Denning’s approach reflects the current business practice where business people incur

expenditure once they believe there is an agreement. In such a case, it tries to find a contract

to exist and thereafter attempt to impose terms and conditions on the parties so as to avoid

the inconvenience discussed above of using the traditional approach. International

conventions seem to use the said approach. For example Article 19 of the Vienna

Convention on International Sale of Goods 1; Article 2:208 and 2:209 of the Principles of

European Contract Law2; and Article 2:207 of the United States Uniform Commercial Code.

All these instruments try to find a contract wherever possible.

The problems of inconsistent standard terms being exchanged by business parties has been

considered further in two recent cases. The decisions show the High Court sticking to a

traditional approach.

In Balmoral Group Ltd v Borealis (UK) Ltd [2006] 2 CLC 220 there were dealings

between the parties over a number of years under which goods were supplied. The purchaser

would send an order which made reference to its terms and conditions ‘in poor typescript’

(as the court put it) at the bottom of the order. The order would be confirmed by the

supplier by telephone. The supplier would then send an invoice on which its own terms and conditions were set out. The purchaser’s representative would sign these invoices and

approve them for payment. The High Court held that, although initially the contract would

not have incorporated the supplier’s terms and conditions, by the time that the dispute arose

the supplier was entitled to assume that the purchaser had agreed to contract on the

supplier’s terms and conditions, no objection having ever been raised to these. In effect, the

purchaser’s signature on, and payment of, the invoices indicated an acceptance of the

supplier’s terms.

In Sterling Hydraulics Ltd v Dichtomatik Ltd [2007] 1 Lloyd’s Rep , the purchaser

faxed an order to the supplier, stating that it was "subject to the terms and conditions as set

out below' and overleaf". The terms were set out on the second page of the fax. The supplier

faxed an acknowledgment, which stated at the bottom of the second page "Delivery based

on our General Terms of Sale." These "terms of sale" were not set out in the fax. The goods

were delivered by the supplier and accepted by the purchaser. They then turned out to be

unsatisfactory and a dispute arose as to whose terms governed the contract. The supplier

argued that its faxed acknowledgment was a counter-offer, which was accepted by the

purchaser taking delivery. The purchaser argued that the acknowledgment was an

acceptance, so that the purchaser’s terms governed the contract. The High Court held that

the words contained on the acknowledgment were insufficient to indicate that it was

intended to be a counter-offer and to displace the purchaser's terms and conditions. The

judge felt that the same conclusion would be come to by applying either the traditional offer

and acceptance analysis, or the approach suggested by Lord Denning in the Butler case. The

contract was therefore made on the purchaser's terms.

It should be noted that the above discussion is about the effect of the exchange of standard

contract forms between negotiating parties that contain different terms, before a contract is

formed. Submission of such forms after a contract has been formed will not affect the

existence of a contract and the terms of the form will not form part of the contract unless

they are accepted expressly or by conduct as variations of the contract already in existence

between the parties.

 b) FACT OF ACCEPTANCE

i)Acceptance can be by conduct

In unilateral contracts, acceptance will always be by conduct e.g. the Carlill V Carbolic

Smoke Ball case.

In bilateral contracts acceptance can be signified by the conduct of the parties so that

there would be no need for a verbal or written indication of acceptance. The conduct in

question must be clearly referable to the offerFor example, in Brogden v Metropolitan

Railway [1877] 2 App Cas 666 Brogden had supplied the railway company with coal

for some years without a formal agreement. They decided to formalise their

arrangements and so the railway company sent Brogden a draft agreement for the supply

of certain quantity of coal per week from 1 January 1872, at £1 per ton. Brogden entered

certain details, including the name of an arbitrator, signed it, wrote “approved” on it and

returned it to the company (this constituted a counter-offer). The railway company’s

manager, however, simply put the signed agreement in a drawer. There was no

communication of acceptance by the railway company. Coal was ordered and delivered

on the terms specified in the contract for a period of time, until there was a dispute

between the parties. Brogden denied that there was any binding contract. It was held

that by inserting the name of an arbitrator, Brogden had rejected the offer and made a

counter-offer. There was an ‘external manifestation of acceptance’ of the counter-offer

when the railway company commenced a course of dealings referable to the contractual

document, in that coal was ordered and delivered. This hence constituted acceptance by

conduct of Brogden’s counter-offer.

Similarly, in Roberts v Hayward [1828] 3 C. & P. 432 a tenant accepted his landlord’s

offer of a new tenancy at an increased rent by simply staying on the premises. It was

held that he had accepted the landlord’s offer and that the landlord waived notice of

acceptance.

In Rust v Abbey Life Insurance Co. [1979] 2 Lloyd’s Rep 334 Rust applied to the

defendants for issue of a property bond. A bond was issued to her on the defendants’

usual policy of insurance. After seven months and following serious adverse movements

in property values, she sought to reject the bond and recover her payment on the

grounds that there was no contract as she did not accept the defendants’ offer. It was held that she was bound since her application was an offer which had been accepted by

issue of the policy. But it was further held that even if the policy constituted a counter-

offer, the counter-offer had been accepted by “the conduct of the plaintiff in doing and

saying nothing for seven months…”

ii) Acceptance must be unqualified

A communication may fail to be an acceptance because it attempts to vary the terms of

the offer. Such a reply would be a counter-offer as discussed earlier.

The requirement that an acceptance must be unqualified does not; however mean that

there must be precise verbal correspondence between offer and acceptance. For example,

if a reply adds some provisions by way of indulgence to the offeror for example one

requesting if they can buy the goods on credit instead of cash would be an acceptance.

This was the position in the case of Stevenson, Jacques & Co. v Mc Lean and

Society of Lloyds v Twinn [2000].

iii)Acceptance must be unconditional

For an acceptance to be effective, it must be an acceptance of the offer in its terms

without any conditions. This means that no contract will be concluded if one party

purports to accept an offer but makes their acceptance conditional upon some event,

such as receiving advice from a third party.

Conditional acceptances are very common in land transactions. It is usual for offer and

acceptances relating to land to be made “subject to contract” or “ subject to a formal

contract to be drawn up by our advocate” so as to give the purchaser some time to have

the property surveyed; obtain a mortgage; carry out a search etc. This means that the

seller and the purchaser will not be bound until a formal contract has been drawn up

and executed by the parties.

In Melina de Ellis v Stotzky 16 EACA 65 Melina paid a deposit amounting to 10% of

the selling price for the purchase of Stotzky’s house under an agreement which was

expressed to be ‘subject to execution of agreement of sale’. It was held that the phrase

prevented the earlier agreement from being a valid contract, even though a deposit had

been paid.

In Chillingworth v Esche [1924] 1 Ch 97, the plaintiffs agreed to purchase the

defendant’s nursery for £4,800 ‘subject to a proper contract to be prepared by the

vendor’s solicitors’. The purchasers then refused to sign a contract prepared by the

solicitors and executed by the vendor and failed to complete the transaction. It was held

in this case that consent was conditional upon a ‘proper contract’ being signed and the

plaintiffs could therefore recover their deposit.

In Regalian Properties plc v London Dockland Corpn [1995] 1 All ER 1005, the

plaintiff’s offer to build a residential development was accepted by the defendant subject

to contract. There were long delays for various reasons and, two years later, after a sharp

decrease in land prices, the defendant abandoned the project. The plaintiff had incurred

costs amounting to £3 million in relation to the proposed development. The said costs

represented mainly fees paid to professional firms in respect to the proposed

development. The plaintiffs brought an action claiming the said amount. The court

rejected the claim and stated that the dealings between the two parties had been ‘subject

to contract’ only, and that the defendant had not led the plaintiff to believe that such

costs would be paid for. Judge Rattee stated (at page 1024) that in this situation the

parties should understand ‘that pending the conclusion of a binding contract any costs

incurred by [the plaintiff] in preparation for the intended contract will be incurred at his

own risk in the sense that [the plaintiff] will have no recompense for these costs if no

contract results’.

In exceptional cases, the court have displaced the meaning of the word “subject to

contract” and found that there is a legally binding contract. This is done so as to mitigate

the strictness of the requirement of exchange of formal contract. For example, in

Alpenstow Ltd v Regalian Properties Plc [1985] 2 All E.R. 545 a document

containing the words ‘subject to contract’ laid down an elaborate timetable, imposed a

duty on the purchaser to approve the draft contract (subject only to reasonable

amendments) and required him then to exchange contracts. The court inferred that the

parties intended to be legally bound when executing the original document, even though

it was expressed to be ‘subject to contract’. Thus the court took the words ‘subject to

contract’ to merely mean that the parties had not yet settled all the details of the

transaction and recognised the intention of the parties to be bound.

Other languages have been adopted to indicate that any agreement is merely tentative

and not meant to be final. In such a case, it is up to the court to attempt to interpret the

intention of the parties from their negotiations, correspondence and other surrounding

circumstances of the case to establish whether they have made the operation of their

contract conditional upon the execution of a further document, in which case their

obligations will be suspended, or they have made an immediately binding agreement to

be later merged into a more formal contract. In Branca v Cobarro [1947] KB 854 a

vendor agreed to sell the lease and goodwill of his mushroom farm. The parties signed a

document which contained the terms of their agreement. The document concluded,

‘This is a provisional agreement until a fully legalised agreement drawn up by a solicitor

and embodying all the conditions herewith stated is signed.’ The purchaser sued for the

return of his deposit and the vendor contended that their agreement was a binding

contract despite the use of the expression ‘provisional’. The court held that there was a

binding contract as both parties were determined to be bound from the outset. The

parties realized that a formal document would be desirable but their intention was that

there should be no escape for either of them in the interim period between the

provisional agreement and the formal agreement. The court commented that the

decision would probably have been different if the parties had used the expression

‘tentative’ rather than ‘provisional’, though each case had to be decided on its own facts.

In Ghulum Kadir v British Overseas Engineering Co. (EA) Ltd [1957] EA 131 the

sale of steel bars was made subject to price fluctuations. The court held that there was a

binding contract. The intention of the parties was that there be a contract where any

price increase will be borne by the buyer.

In Tomlin v Standard Telephones and Cables Ltd [1969] 3 All ER 201 the claimant

was injured at work and claimed compensation from his employers, the defendants. The

claimant’s solicitors and the defendant’s insurers negotiated a settlement that liability

would be accepted at a 50% basis. The defendants argued that they were not bound by

the agreement because the correspondence relating to it was headed “without

prejudice”. The court held that there was a binding contract as the words “without

prejudice” mean without prejudice to the position of the writer of the letter if the terms

he proposes are not accepted. If the terms proposed in the letter are accepted, a complete contract is established.

Exceptions

Agreements for the sale of land by auction or by tender are not normally made ‘subject

to contract’. The intention of the parties in such cases is to enter into a binding contract

as soon as an offer to buy has been accepted. In Michael Richard Properties Ltd v St

Saviour’s Parish [1975] 3 All ER 416 the words ‘subject to contract’ were, by a clerical

error, typed on one of the contractual documents in a sale by tender. The words were

held to be meaningless, so that there was a binding contract.

c) COMMUNICATION OF ACCEPTANCE

i) The general rule and exceptions

The general rule is that acceptance must be communicated to the offeror. That is, there

must be an external manifestation of assent either by spoken word or by an act done by

the offeree or his authorized agent. The main reason for this is that hardship could be

caused to the offeror if he were bound without having knowledge of the acceptance.

An acceptance is said to be communicated when it is actually brought to the notice of

the offeror. Thus, in Entores v Miles Far East Corporation [1955] 2 QB 327 at 333

Lord Denning stated that if as the offeror he shouts ‘…an offer to a man across a

river or a courtyard but I do not hear his reply because it is drowned by an

aircraft flying overhead. There is no contract at that moment. If he wishes to

make a contract, he must wait till the aircraft is gone and then shout back his

acceptance so that I can hear what he says. Not until I have his answer am I

bound …’

Similarly, in Carlill v Carbolic Smoke Ball Co. Lindley L.J stated that

“Unquestionably, a general proposition, when an offer is made, it is necessary in

order to make a binding contract, not only that it should be accepted, but that

acceptance should be notified ”.

There are exceptions to the general rule which are:

a) Agent of offeror

An acceptance can be communicated to the agent of the offeror provided that such

agent has authority to receive the acceptance. In such a case, the acceptance will take

effect as soon as it is communicated to the said agent. Thus in companies, if a

Managing Director has authority to receive an acceptance on behalf of the company, the acceptance will take effect as soon as it is communicated to him. This should be

contrasted with a situation where the agent is only authorized to transit the

acceptance (e.g. a messenger in a company). In such a case, the acceptance will take

effect when the offeror receives it.

In Powell v Lee [1908] L.T. 284 six managers of a school wanted to appoint a

headmaster. The Plaintiff applied for the post and with two other candidates. The

managers passed a resolution on March 26 that the plaintiff should be appointed.

No directions were given authority by the meeting as to communicating the results

of the meeting to the plaintiff. One of the managers, Dismore, was however

requested to send a telegram to one of the other candidates, Parker, to inform him

that he was unsuccessful. On April 1, without any instructions to do so by the

managers as a body, Dismore sent the plaintiff a telegram informing him that he was

selected as the headmaster. On April 2 the managers held a meeting at which all

except Dismore were present and unanimously passed a resolution rescinding the

resolution of the previous meeting and appointing Parker as the headmaster. On

April 5, the plaintiff was informed by one of the managers, Lee, that Parker had

been appointed. He sued for breach of contract and loss of salary. It was held that

there must be notice of acceptance from the contracting party in some way, and the

mere fact that the managers did not authorize such a communication implies that

they meant to reserve the power to reconsider their decision. In light of the above,

the court decided that there was no contract.

b) Conduct of offeror

If an offeror fails to receive an acceptance through his own fault, he/she may be

prevented from claiming that the non-communication means they should not be

bound. In The Brimnes [1975] where an acceptance was sent by telex during

business hours but was simply not read by anyone in the offeror’s office, the offeror

was precluded from denying that he received the acceptance.

However, if an acceptance is sent outside of normal business hours, receipt is not

effective until the opening of business the next day. This was stated in the case of

Schelde Delta Shipping BV v Astarte Shipping Ltd (The Pamela) [1995] 2

Lloyd’s Rep. 249. The issue in this case was when the telex notice of intention to

withdraw the ship for nonpayment of hire, which was sent at 23:41 hours on Friday 2 December 1994, was received. It was held that the notice was not communicated

until the start, of the next business day i.e. Monday morning.

In Entores v Miles Far East Corporation the court stated that if the listener on

the telephone does not catch the words of acceptance, but nevertheless does not ask

for them to be repeated, he or she is prevented from claiming that he/she did not

receive the acceptance.

c) Waiver of communication

The offeror may expressly or impliedly waive the requirement of notification and

agree that an uncommunicated acceptance will suffice. This means that acceptance

may in certain circumstance be said to have been made even though it has not yet

come to the notice of the offeror.

In such a case, two things must be present:

i) An express or implied intimation from the offeror that a particular mode of

acceptance will suffice; and

ii)An overt act or conduct by the offeree which is evidence of an intention to

accept, and which conforms to the mode of acceptance indicated by the

offeror.

This was stated in Carlill v Carbolic Smoke Ball Co. by Bowen L.J : “…where a

person in an offer made by him to another person expressly or impliedly

intimates a particular method of acceptance as sufficient to make the bargain

binding, it is only necessary for the other person to whom such an offer is

made to follow the indicated mode of acceptance; and if the person making

the offer, expressly or impliedly intimates in his offer that it will be sufficient

to act on the proposal without communicating acceptance of it to himself,

performance of the condition is a sufficient acceptance without notification.”

Hence, where an offer indicates performance as a mode of acceptance so as to

create a unilateral contract, it would be impossible for the offeree to express

acceptance except by performance of the terms of the offer. A good example is an

advertisement for a reward discussed under “offer”.

c) Acceptance by post

Communication by telex, fax, email and telephone are normally instantaneous thus

the acceptor will know that his/her communication has not arrived at once and can

try again. In such a case, the general rule on communication applies. Hence,

communication will take effect at the place where acceptance is received not where

it is sent. Thus in Entores v Miles Far East Corporation the plaintiffs were a

company based in London who were dealing with the defendants, an American

company, with agents in Amsterdam. Both parties possessed telex equipment. The

plaintiffs offered to buy goods from the defendants’ agents using the telex

equipment. The agents accepted the offer also by telex. Subsequently a dispute arose

between the parties and the plaintiffs wished to serve a writ on the defendants

alleging breach of contract. This was only possible if the contract had in fact been

made in England and it was this question that arose before the court. The Court of

Appeal held that the parties were in the same position as they would have been if

they had been in each other’s presence. The consequence of this was that the

contract was entered into when the acceptance by the agents was received in

London by the plaintiffs, not when the telex was sent in Amsterdam, which would

have meant that the contract would be subject to Dutch law. Lord Denning

confirmed, obiter, that the same principle also applies to acceptances by telephone.

The above decision was confirmed in Brinkibon Ltd v Stahag Stahl GmbH[

1983] 2 A.C. 34 where the buyers, an English company, by a telex sent from

London to Vienna, accepted the terms of sale offered by the sellers, an Australian

company. The buyers issued a writ claiming damages for breach of contract. The

court held that the service of the writ should be set aside because the contract was

made in Vienna thus the court has no jurisdiction.

The Entores v Miles Far East Corporation case addressed the question of what

happens when there are problems with the communication. Lord Denning stated

that in instantaneous communications it is generally up to the person sending the

communication to ensure that his or her message gets through. This is because, the

sender will in most cases be aware if there is a problem. If, however, the

recipient/offeror was clearly responsible for failure to communicate, he/she will be

bound:

“… if the listener on the telephone does not catch the words of acceptance,

but nevertheless does not trouble to ask for them to be repeated: or the ink on

the tele-printer fails at the receiving end, but the clerk does not ask for the

message to be repeated: so that the man who sends as acceptance reasonably

believes that his message has been received. The offeror in such

circumstances is clearly bound, because he will be estopped from saying that

he did not receive the message of acceptance.”

With personal and telephone conversation, both the sender and the receiver will

immediately know if the communication has failed. This is likely to follow with

other types of instantaneous communications such as telex and fax where the

message could be received in an office were those working near the machine will

notice if there has been a failed attempt to send a message and therefore try to

communicate with the sender. However, what happens if the fax of telex is sent

outside office hours, the recipient does not notice that an attempt to communicate

has been made, or the relevant machine is not located in an area where a

malfunction will be noticed quickly? Similarly, in the case of email the intended

recipient may have no immediate indication of a failed attempt to communicate and

the sender may receive a failed delivery message later. This shows that the

categorization of these types of communication as closely analogous to personal

conversation tends to break down. They are “instantaneous” in the sense that the

message is received at the recipient’s premises almost immediately, but otherwise are

more akin to postal communications than personal or telephone conversations.

Some doubt as to whether the offer and acceptance analysis applied in Entores v

Miles Far East Corporation is appropriate was raised in Apple Corps Ltd v

Apple Computer, Inc. [2004] EWHC 768. A contract was formed after a long

period of negotiations through transatlantic telephone call. The question was

whether the contract was made in England or the United States. The judge took the

view that using traditional ‘offer and acceptance’ analysis might well be ‘extremely

forced’ and introduce a ‘highly random element’:” The offer and acceptance may

well depend on who speaks first and who speaks second, which is likely to be

largely a matter of chance in closing an agreement of this sort. It is very arguably a much more satisfactory analysis to say that the contract was made

in both places at the same time.” Therefore the issue of what law was to govern

the contract could not be determined by answering the question ‘where was the

contract made?’ other rules on jurisdiction will have to be used to determine this

issue.

It should be noted that the judge did not reach his decision on the above basis only

hence his views cannot be said to be definitively part of the ratio decidendi. However,

it helps to illustrate that issues of contract formation need to be decided practically ,

and what will work in practice, as much as the application of strict legal rules.

With regard to acceptances sent by post, the general rule that acceptance must be

communicated is overturned since the rule is that acceptance takes effect when the

letter of acceptance is posted (postal rule). The postal rule is confined to

communications through the post, telegrams and probably also tele-messages.

Various reason for the rule have been suggested, for example,; first, communication

by post is slow; secondly, it is easier to prove that a letter has been posted than to

prove that it has been received or brought to the attention of the offeror; thirdly, the

post office is the common agent of both parties and communication to this agent

immediately completes the contract.

A letter is posted when it is in the control of the Post Office or of its employees

authorized to receive letters. Thus in Re London and Northern Bank, Ex p.

Jones [1900] 1 Ch. 220 a letter of acceptance was handed to a postman who was

only authorized to deliver. It was held that it did not amount to posting.

The postal rule was laid down in Adams v Lindsell [1818] 1 B. & Ald. 681 where

the defendants offered on 2 September to sell wool to the claimants and asked for a

reply "in course of post", the letter did not reach the claimants until the evening of 5

September. That evening the claimants posted a letter accepting the offer, which

was delivered on 9 September. If the original offer had been correctly addressed the

defendants could have expected a reply on 7 September, but not having received

such a reply on 8 September they sold the wool to a third party. The court held that

the offer had been accepted as soon as the letter of acceptance had been posted and the contract was formed at that time, even though the letter might never have been received by the offeror.

The offeror bears the risk of the letter of acceptance being delayed or lost as well as

error in transmission of a telegraphed acceptance, that is, garbled message. This is

justified on the ground that when an offeror decides to start negotiations by post he

takes the risk of delay and accidents on the post. This was affirmed by the Court of

Appeal in Household Fire & Carriage Accident Insurance Co. Ltd. v Grant

[1879] 4 Ex. D. 216. In the aforesaid case the defendant applied for shares in the

claimant company. The company accepted the offer by posting a letter of allotment

to the defendant. The letter never reached the defendant and the claimant company

then went into liquidation. The liquidator sued for the balance owed by the

defendant on the shares. The defendant contended that he was not bound to pay

since his offer to buy the shares had never been accepted. It was held that the

contract had been entered into when the letter of allotment had been posted by the

claimants hence he was liable as a shareholder.

The offeror can however protect himself by expressly stipulating that he is not to be

bound until actual receipt of the acceptance. Other language may, of course, be

used, provided the intention is clear. This was illustrated in Holwell Securities Ltd

v Hughes [1974] 1 W.L.R 155 the defendant granted the plaintiff an option to

purchase certain property on October 19, 1971. The agreement provided: "the said

option shall be exercisable by notice in writing to the intending vendor [defendant]

at any time within six months from the date hereof.” On April 14 1972, the

plaintiffs wrote to the defendant’s solicitor purporting to exercise the option. A

copy of the notice properly addressed was posted to the defendants but failed to

arrive. The plaintiffs sought specific performance on the option agreement. It was

held that there was no contract as the terms of the offer on their true construction

required the acceptance to be actually communicated to the offeror, even though on

the face of things the offer did not expressly provide for how the acceptance had to

take effect.

However, if the delay or loss is due to the fault of the offeree, for example, if an

acceptance is wrongly addressed or insufficiently stamped, it would take effect if and

when it is received by the offeror. In Getride-Import-Gesellschaft MBH SA Compania Industrial Commercial y Maritima [1953] 2 All E.R. 223 a procedure

providing for an appeal against the award of an arbitrator contained a rule similar to

the postal rule in contract, i.e. that notice of appeal was deemed to have arrived

within 24 hours of it being posted. A misaddressed notice was posted and arrived

outside the time limit for appealing. The rule was held not to apply in such a case.

Where the offeror gives the offeree a wrong address , Treitel suggests that the better

rule would be to say that a misdirected acceptance takes effect, if at all, at the time

least favourable to the party responsible for the misdirection.

Revocation of posted acceptance

Can an offeree withdraw his acceptance, after it has been posted, by a later

communication which reaches the offeror before the acceptance? There is no clear

authority in English law, but a strict application of the postal rule would not permit

such a withdrawal. It is argued to be a logical and fair conclusion since once an

acceptance has been posted the offeror can no longer withdraw his offer thus the

offeree should likewise be held to his acceptances. This is because to allow a letter

of acceptance to be withdrawn would give the offeree the best of both worlds. This

means that he can speculate at the expense of the offeror. For example, he could

post his acceptance early in the morning of a working day and if the market moved

against him, revoke the acceptance the same afternoon. This view has been

supported in the New Zealand case of Wenckheim v Arndt 1 JR [1873] where the

defendant, a young lady, received an offer of marriage from the claimant. The

defendant posted a letter of acceptance but before the acceptance arrived, the

defendant’s mother sent a telegram purporting to cancel the agreement. Though the

decision was more on agency i.e. the mother’s lack of authority to countermand the

daughter’s acceptance, it was nevertheless held that retraction was not possible.

However, the Scots case of Dunmore (Countess) v Alexander [1830] 9 Sh (Ct of

Sess) 190 supports the view that the offeree may be allowed to withdraw. In this

case, Alexander, through X, made an offer to Dunmore to enter her service. On

November 5 Dunmore posted a letter to X accepting the offer. X forwarded the

letter to Alexander. On November 6 Dunmore posted a second letter to X

canceling the first letter. X forwarded this letter to X by express. Alexander received

both letters simultaneously. The majority of the court held that X was Alexander’s agent only to transit, the acceptance and withdrawal were received simultaneously hence there was no contract.

It has been suggested that the offeror should take the risk. This opinion follows the

basic principle in Adams v Lindsell that it is the offeror who chooses the medium

of negotiation hence must accept the inconveniences and accidents of his choice.

This therefore means that he should assume the risk of a letter being overtaken by a

speedier means of communication. He can however protect himself by stipulating

that he is not bound till the acceptance reaches him, or that the offeree is to be

bound as soon as he posts the letter.

It has also been suggested the purpose of the postal rule is to provide a benefit to

the acceptor so that the acceptor could proceed on the basis that a contract had

been made hence promoting business efficiency. However, if the offeror is unaware

of the acceptance, there cannot be any harm in allowing the acceptor to withdraw.

The offeror cannot in any way have acted on the acceptance and can therefore

suffer no harm from its retraction. There is no point of forcing people to go

through with a contract, when one party no longer wishes to proceed and the other

party is unaware of the fact that there is a contract at all.

A court faced with this issue being discussed above would be free to decide it

without any clear guidance from authority. The answer that is given will depend on

which of the possibilities outlined above is more attractive. Most likely the court’s

decision will be influenced by what the court sees as the best way to achieve justice

between the parties.

d) Acceptance by private courier

Recently, there has been a growth of private courier service, which might also be

used to deliver communications creating a contract. There is no authority as to

whether the postal rule applies in this case. However, there are two possible

arguments. One, that the postal rule applies as the acceptor gives the letter to a

private courier, and thereby puts the acceptance out of his or her control. It would

not be conducive to business efficiency if the acceptor has to wait for notification of

receipt of acceptance before being able to take any action on the contract.

Therefore, acceptance should take effect as soon as it is given to the courier.

Two, that the postal rule does not apply because if the acceptor wants to proceed

quickly on the basis of a contract where he has given the letter to the courier,

he/she can telephone to confirm receipt. If the need is even greater, the acceptance

can be faxed or emailed to the offeror, with a request for confirmation by

telephone, fax or email as soon as it arrives.

If the second argument were accepted, it would mean that the postal rule needs to

be reviewed.

e) Acceptance by silence

Silence cannot amount to acceptance in bilateral contacts. Thus an offeree who does

nothing on receipt of an offer which states that it may be accepted by silence is not

bound. That is to say, an offeror cannot impose contractual liability on the offeree

by proclaiming that silence shall be deemed consent.

In Felthouse v Bindley [1862] 11 CBNS 869, the claimant's nephew, John, was

about to sell some farming stock and the claimant wanted to buy a horse. The

claimant offered £30 15s for the animal and wrote as follows: "If I hear no more

about him, I consider the horse mine at that price". The nephew did not reply but

intimated to the auctioneer (the defendant) who was going to sell his stock that the

horse was to be kept out of the sale. The defendant by mistake sold the horse in the

auction. The claimant sued the defendant for conversion. The question arose as to

whether the uncle had made a binding contract for the purchase of the horse. It was

held that he had not done so, because the nephew never communicated his

intention to accept his uncle’s offer. It is true that he had taken an action (removing

the horse from the auction) which objectively could be taken to have indicated his

intention to accept, but because his uncle knew nothing of this at that time; it was

not effective to complete the contract.

Thus if a publisher, without previous order, sends a magazine to a prospective

customer with a letter saying ‘if you do not return the magazine by a certain date, I

shall presume that you have bought it’ he cannot demand payment or sue for breach

of contract.

It has been suggested that in some circumstances, acceptance can be presumed from

silence. For instance,:

Where the offeree has indicated that an offer is to be taken as accepted if he

does not indicate to the contrary, by an ascertainable time. This is because

he makes an undertaking to speak if he does not want an agreement to be

concluded thus should be bound by his silence if the said undertaking is

relied upon as well as where it would be inequitable to permit retraction of

the promise. This was stated obiter by Peter Gibson LJ in Re Selectmove

Ltd [1995] 2 All ER 531

“ Where the offeree himself indicates that an offer is to be taken

as accepted if he does not indicate to the contrary by an

ascertainable time, he is undertaking to speak if he does not want

an agreement to be concluded. I see no reason in principle why

that should not be an exceptional circumstance such that the

offer can be accepted by silence.”

Where offeree expressly stipulates that silence will amount to acceptance,

he will be bound by his silence.

Where offeror has expressly stated in his offer that silence would be

regarded as acceptance.

Where there is a course of dealing between the parties. In such a case, the

offeror may infer that silence amounts to acceptance.

By virtue of the custom of the trade or business in question.

Where an offeror, to the offeree’s knowledge acts in accordance with his

offer in reliance on the belief that his offer had been accepted by silence.

Treitel suggests that in such a situation the best solution would be to make

the offeree restore the benefit rather than to hold him to an obligation to

perform his part of the contract to which he had never agreed.

For revision purposes, suppose that the nephew in Felthouse v Bindley had

withheld the horse from the sale and delivered it to his uncle who then refused to

take it. It has been suggested that in such a case, the uncle should be held to be

bound. This is because; the uncle’s offer is accepted by the nephew’s conduct in delivering the horse. That is, it is treated as an offer of a unilateral contract or a

unilateral promise to enter into a bilateral contract of sale of the horse to be made

by delivering the horse. On this analysis, the uncle would be bound to take the horse

if delivered, but would still be able to revoke at any time before delivery.

TIME OF ACCEPTANCE

With regards to letters sent by post, it is clear from the above discussion that the

time of acceptance is as soon as the letter is out of the hands of the acceptor.

With regards to fax and telex, Entores v Miles Far East Corporation case requires

it to have arrived at the offeror’s address. However, in Brinkibon Ltd v Stahag

Stahl [1983] Lord Wilberforce stated that:

“No universal rule can cover all such cases: they must be resolved by

reference to the intentions of the parties, by sound business practice and in

some cases by a judgment where the risks should lie.”

The above statement by Lord Wilberforce hence implies that several other

possibilities are feasible. That is, there could be variations according to the type of

communication system being used. Faxes and telex could be treated the same way.

However, an acceptance sent by email to an electronic ‘mail box’ which may only be

checked once or twice a day, may be said to have been communicated once the

expected time for checking has passed. The same approach may be used for

acceptances left on a telephone answering machine, that is, the message should only

be regarded as communicated once a reasonable time has elapsed to allow it to be

heard by the offeror.

The effect of the above is that the acceptance may be treated as effective although

the offeror may be unaware of it (as is the case under the postal rule). In Adams v

Lindsell it was stated that the offeror can specify and insist on a particular mode of

acceptance. If actual communication is required, it should be spelt out in the offer.

If this is not done, the acceptor must be allowed to proceed on the basis that the

acceptance will be read at a time which would reasonably be expected in the normal

course of events.

CONFUSING COMMUNICATIONS

It may happen in the sending of telegrams or tele-messages that the message

received does not reflect the original message. An example of such a situation arose

in Henkel v Pape [1870] LR 6 Ex 7 where the defendant wrote to the claimants

stating that he could "fix an order" for 50 rifles at 34 shillings each. The claimants

replied that they could not sell for less than 35 shillings. The defendant then

telegraphed "send three rifles", but when the telegram arrived it read "send the

rifles". The claimants sent the defendant 50 rifles. It was held that the defendant was

obliged to buy only three. It is clear from this that the acceptance is valid in the

form in which it is sent and not in the form in which it is received.

PRESCRIBED METHOD OF ACCEPTANCE

An offeror may prescribe a method of acceptance for example, that the acceptance

is sent by post, by email or that it is sent to a particular place. The offeror will not be

bound unless acceptance is made in that way. In Eliason v Henshaw [1819] 4

Wheat. 225 Eliason offered to buy flour from Henshaw requesting that an answer

should be sent to him at Harper’s Ferry by the wagon which brought the offer.

Henshaw sent a reply accepting the offer by post to Georgetown, thinking that his

reply shall reach faster by that mode. His letter, however, reached Eliason some time

after the wagon had arrived. Assuming that Henshaw was not interested, Eliason

bought flour elsewhere. It was held that there was no contract as Eliason had

specified a mode of acceptance with which Henshaw had failed to comply.

It should be noted that it is open for the offeror, having prescribed a method of

acceptance, to waive the right to insist on that method. Thus the offeror would be

bound if he acquiesces to the different mode of acceptance. Buckley J in

Manchester Diocesan Council for Education v Commercial & General

Investments Ltd [1970] 1 WLR 241 (ChD) stated that “…if the other party

communicates his acceptance in some other way, the offeror may by conduct

or otherwise waive his right to insist on the prescribed method of

acceptance…”

Conversely, the offeror would be bound if the purported ineffective acceptance

(because it did not comply with the stipulated method) is regarded as a counter-offer and if that counter-offer is then accepted by the counter-offeree by conduct or

otherwise.

Moreover, if the words fix the time of acceptance not the manner of accepting, an

alternative mode would suffice.

Exception

The offeror usually has an objective in mind when prescribing a method of

acceptance. For instance: if he wants a quick response, or if it will prevent disputes

from arising as to the terms of the agreement thus, the stipulations as to the mode

of acceptance are put in for his own benefit.

If the alternative method of

acceptance accomplishes the offeror’s objective for prescribing a method of

acceptance just as well as, or better than, the prescribed method the offeror will be

bound. For the exception to apply, therefore, the court will first establish what

object the offeror had in view and thereafter ascertain whether the alternative

method meets the objective. In Tinn v Hoffmann [1873] 29 L.T. 271 it was stated

that if the offeree was requested to reply by “return of post” then any method which

would arrive no later than return of post would suffice. This is because “return of

post” may simply mean “reply quickly” not that the reply must be exclusively by

post thus a reply by telegram or by verbal message or by any means not later than a

letter written and sent by return of post would suffice.

An offeror may, however, make a particular mode of acceptance mandatory so that

no contract would result if a different method is used. In such a case, it is important

for the offeror to make it clear that no other method would do. Thus in Yates

Building Co. Ltd v Pulleyn & Sons (York) Ltd [1975] 119 Sol. Jo. 370 the

defendants granted the plaintiffs an option to buy building plots for £18,900

‘exercisable by notice in writing…between 6 April and 6 May 1973…to be sent by

registered or recorded delivery post’ to the defendants or their solicitors. The option

was exercised by a letter of 30 April 1973 sent by ordinary post, but the defendants

refused to accept it as valid acceptance. It was held that as the method was not

clearly stated as mandatory, any acceptance which was communicated to the offeror

by any other no less advantageous method would conclude the contract. The

provision was for the benefit of the plaintiffs and they could waive the requirement

and take the risk of ordinary post.

In some situations, stipulations as to the mode of acceptance are usually intended

for the protection and benefit of the offeree as opposed to the offeror, as discussed

above. Such situations exist, for example, where an offer is to be made on a

document provided to the offeror and drafted by the offeree for instance in hire

purchase and tendering situations. In Manchester Diocesan Council for

Education v Commercial & General Investments Ltd condition 4 of a request

for tenders stated that a person whose tender was accepted would be informed by

letter sent to him at the address given in the tender. On 15th September 1964, the

plaintiff wrote to the defendant company’s surveyor stating that the sale to the

company had been approved, but it was not until 7 January 1965 that the plaintiff’s

solicitors wrote to the defendant company at the address given in the tender giving

formal notification of acceptance of its offer. It was alleged that the offer in the

tender had lapsed so that it was necessary to decide when the contract had been

concluded. The court held that in accordance with the terms of the tender it was

open for the plaintiff to conclude a contract by acceptance actually communicated

to the defendant in any way thus the letter of 15 September constituted such an

acceptance. In this case, the plaintiffs introduced the prescribed method for their

own protection and could be waived by them provided the defendants were not

prejudiced

CERTAINTY

The parties may have complied with the rules of offer and acceptance but if the

terms upon which they have contracted are too vague or uncertain or they have left

important issues for further agreement, there may be no contract. The courts will

not accept an agreement as being a contract unless it can be shown that both parties

were in agreement as to the terms.

In Sands v Mutual Benefits Ltd [1971] EA 156 the plaintiffs sued the defendants

for ejectment from a dwelling house which the defendants held on a three year

lease. The defendants argued that there was no option clause in the lease which they

had exercised. Part of the clause read “at such rent as may be mutually agreed”. The

court held that such a phrase was too uncertain to be enforced.

Where the parties have not embarked on performance, a transaction may be

declared void if the terms are not reasonably certain even though there is offer and acceptance. For example, in Scammell v Ouston [1941] AC 251, Ouston wished to

acquire from Scammell a new van on hire purchase terms. After a considerable

correspondence, Ouston gave a written order for a particular type of van, which

included the words “This order is given on the understanding that the balance of

purchase price can be had on hire purchase terms over a period of two years”.

Scammell accepted the order in general terms. The hire purchase terms were never

specifically determined. The evidence provided in court established that there was a

wide variety of hire purchase agreements and there was nothing to indicate which of

them the parties preferred. Scammell later refused to provide the van and Ouston

sued for damages for non-delivery. Scammell pleaded that no contract was

concluded. The House of Lords accepted this view on the grounds; first, that the

language used was so vague and unintelligible thus so incapable of any definite or

precise meaning and because of this, they are unable to attribute to the parties any

particular contractual intention. Second, the parties never in intention or appearance

reached an agreement. They never got beyond negotiations as they accepted there

should be a hire purchase agreement but never agreed what the terms should be.

Similarly, in King’s Motors (Oxford) Ltd v Lax [1970] 21 P. & C.R. 507 a lease

contained an option that, provided certain conditions were satisfied, the landlords

would grant a further term “at such rental as may be agreed upon between the

parties hereto in writing”. The court held that the contract giving the option was

void for uncertainty-the rent was a necessary term and it had not been agreed upon.

Previous transactions, custom and trade usage

They can be used to resolve apparent vagueness. For example in Hillas & Co. Ltd

v Arcos Ltd [1932] 38 Com Cas 23 the terms were ascertained from previous

transactions between the same parties and the custom of the particular trade. In the

said case there was an agreement in writing for the supply of Russian softwood

timber ‘of fair specification’ during 1930, together with an option to buy more wood

the following year. The option clause did not specify the kind or size of timber

required, nor the ports to which it had to be shipped or indeed the manner of

shipment. The suppliers argued that the option clause was not binding and the fact

of the absent factors was evidence that it was only to provide a basis for future

negotiation and agreement. It was held that as the 1930 agreement had been

expressed in a similar way and had been complied with, the option thus showed a sufficient intention to be bound and could create a binding obligation. With regard

to the omissions the court held that these could be resolved by reference to the

previous dealings between the parties and the trade usage of the timber trade.

Similarly, in Jupiter General Insurance Co. v Kasanda Cotton Co. [1966] 1 ALR

Comm 292 X insured his cash in transit with Y and Co. the premium depended on

the amount of cash insured. As it was not possible for X to guess the amount when

the policy was taken out, the premium was paid at the end of the year. When X

made a claim against Y & Co., they argued that there was no valid policy because no

premium had been paid and there was no way at that date of knowing how much it

would finally b. the Court of Appeal rejected that defense as that was the way the

two parties did business in the past. The contract would be worked out the same

way as it had been in earlier years.

Reasonableness

The courts may sometimes clarify vague terms by relying on the principle of

reasonableness. For example, in the Hillas & Co. Ltd v Acros case, the phrase “of

fair specification” was held phrase “of fair specification” to mean timber distributed

over kinds, qualities and sizes in fair proportions having regard to the season’s

output. If the parties fail to agree the court could ascertain the said vague phrase by

applying the standard of reasonableness.

The same principle applies to standard expressed in the agreement such as “market

value” or “open market value”. With regards to price in transactions for the sale of

goods or the supply of services, Section 10 of the Sale of Goods Act Cap 31 of the

Laws of Kenya gives direction. It states:

“ (1) The price in a contract of sale may be fixed by the contract, or may be

left to be fixed in a manner thereby agreed, or may be determined by the

course of dealing between the parties.

(2) Where the price is not determined in accordance with the forgoing

provisions, the buyer must pay a reasonable price; and what is reasonable

price is a question of fact dependent on the circumstances of each particular

case.”

If the contract provides a mechanism for fixing the price, but it has not been

implemented, Section 10(2) of the Sale of Goods Act will not allow the implication

of a reasonable price. This is because the said clause only provides for silence as to

price not where parties will subsequently agree the price to be paid.

In May and Butcher Ltd v R [1934] 2 KB 17n (HL) the parties entered into a

contract under which the government were to sell ‘the whole of the tentage which

might become available in the UK for disposal up to 31 March 1923’. The relevant

terms were:

“(3) The prices or prices to be paid, and the date or dates on which payment is to be

made by the purchasers to the Commission for such old teenage shall be agreed

upon from time to time between the Commission and the purchasers as the

quantities of the said old teenage become available for disposal, and are offered to

the purchasers by the Commission…

(10) It is understood that all disputes with reference to or arising out of this

agreement will be submitted to arbitration in accordance with the provisions of the

Arbitration Act, 1889”.

The appellants argued that the agreement should be construed as an agreement to

sell at a fair or reasonable price, or alternatively at a price to be fixed under the

arbitration clause in the agreement. It was held that the transaction was void for

uncertainty. The court refused to resort to the Sale of Goods Act so as to imply a

term that the price should be a reasonable price because “…the Sale of Goods Act

provides for silence on the point and here there is no silence.”

In Ghulum Kadir v British Overseas Engineering Co. (E.A) Ltd [1957] EA 131

X agreed to buy steel bars from Y. The order stated that the price was subject to

fluctuation and increase in freight and insurance rates. The price went up 7% and X

agreed to this. It letter went up by another 4% and X’s agent confirmed the order. X

later withdrew the order claiming that the contract was too uncertain in its terms.

The court held that X knew that the market was in an uncertain state and the use of

the phrase ‘subject to fluctuation’ showed that he was willing to absorb any

increases that may legitimately arise. There was a formal contract.

Duty to resolve uncertainty

An agreement having a vague phrase may be binding because one party is under a

duty to resolve the uncertainty. In David T Boyd & Co v Louis Louca [1973] 1

Lloyd’s Rep. 209 where an agreement to sell goods provided for delivery “free on

board…good Danish port”. It was held that the agreement was not too vague: it

amounted to a contract under which the buyer was bound to select the port of

shipment.

Executed transactions

The Courts also consider what the parties have done to resolve the question of

vagueness, uncertainty or situations where the parties have left important issues for

further agreement. This is so especially where the said parties have acted upon an

apparent agreement for sometime without difficulties.

In G.Percy Trentham Ltd. V Archital Luxfer Ltd [1993] 1 Lloyd’s Rep. 25 at

p.27 judge Steyn L.J stated that where a transaction has been wholly or partially

performed it will be:

“…difficult to submit that the contract is void for vagueness or uncertainty.

Specifically, the fact that the transaction is executed makes it easier to imply

a term resolving any uncertainty, or, alternatively, it may make it possible to

treat a matter not finalized in negotiations as inessential.”

In Foley v Classique Coaches Ltd [1934] 2 KB 1 (CA) the defendants entered

into an agreement to purchase all their petrol requirements from the plaintiff ‘at a

price to be agreed by the parties in writing and from time to time’. There was also an

arbitration clause should disputes arise. After the defendants had purchased their

petrol from the plaintiff for three years, the defendant purported to repudiate the

agreement on the ground that there was no agreement in writing as to the price. It

was held that the parties obviously believed that they had a contract and they acted

for three years as if they had hence the agreement was valid and binding and if any

dispute should arise with regard to reasonable price, it should be determined by

arbitration.

In the above case, there was possible contractual analysis. In some cases, however,

no contractual analysis can be deciphered. In such cases, if the Court finds that there is any liability, it shall impose it in the form of a restitutionary obligation upon

the defendant to pay a reasonable price for work done or goods received. For

example, in British Steel Corporation v Cleveland Bridge and Engineering Co.

Ltd [1984] 1 All ER 504 the defendants entered into negotiations with the plaintiffs

for the plaintiffs to manufacture steel nodes. The defendants sent the plaintiffs a

letter of intent stating their intention to place an order for the steel nodes, and

proposed that the contract be on the defendants’ standard terms (providing for

unlimited liability of the plaintiffs in respect of consequential loss from late

delivery). The letter of intent requested the plaintiffs to commence work

immediately pending the execution of a formal contract. The plaintiffs refused to

contract on the on the proposed terms. Detailed negotiations continued, however,

no agreement was reached on the question of losses following later delivery.

Moreover, no formal contract was executed. In the meantime, the plaintiffs

manufactured the steel nodes as requested. All were delivered except one which was

delayed because of an industrial dispute. The defendants refused to pay and stated

that there was breach of a binding contract. The plaintiffs sued for the value of the

node, contending that there was no formal contract. The court held that since the

parties had not reached an agreement, it was hard to decide what the material terms

of the engagement were. Consequently, there was no formal contract. However,

since the defendants requested the plaintiffs to deliver the nodes, and had therefore

received a benefit at the expense of the plaintiffs, it would be unjust for them to

retain the benefit without compensating the plaintiffs for the reasonable value of the

nodes.

Meaningless phrases

The Courts normally try to give meaning to an apparent meaningless phrase. Even

when such efforts fail, the presence of such phrases does not necessarily vitiate the

entire agreement if they can be severed and ignored. This however depends on the

importance which the parties may be considered to have attached on the words. If it

was not intended to add anything to an otherwise complete agreement or relates to a

matter of relatively minor importance, it can be ignored. 4 If the parties intend the

phrase or word to govern some important aspects of their relationship, its vagueness

will vitiate the entire agreement. For instance, in Nicolene Ltd v Simmonds [1953] 1 QB 543, steel bar were bought on terms which were certain except for a clause

that the sale was subject to “the usual conditions of acceptance”. There being no

such usual conditions, it was held that the phrase was meaningless, but that this did

not vitiate the entire contract as the words were severable and could be ignored. 5

A self-contradictory clause can be treated in the same was as a meaningless clause.

In ERF Lovelock v Exportles [1968] 1 Lloyd’s Rep. 163, an arbitration clause

stated that arbitration of “any dispute” shall be in London and of “any other

dispute” in Moscow. The Court disregarded the clause and determined the dispute

itself. 6

Incomplete agreements

If an agreement leaves undecided, and undeterminable, some important aspect of

the contract, then the courts will not enforce it. For example, in May and Butcher v R where the agreement provided that the price and the date of payment was to be agreed upon from time to time, the House of Lords held that there was no contract.

In Harvey v Pratt [1965] 1 WLR 1025 an agreement for a lease failed to specify the

date on which the term was to commence. The court held that there was no

contract. 7 Similarly, in Bushwall Properties Ltd v Vortex Properties Ltd [1976] 1

WLR 591 Bushwall agreed to buy and Vortex agreed to sell for £500,000 some 50

acres of land for building development. Completion was to be in three stages: half

the purchase price was to be paid on a certain date; a further quarter a year later; and

the last quarter a year thereafter. The written agreement provided that “On the

occasion of each completion a proportionate part of the land shall be released

forthwith to [the purchasers].” Differences arose between the parties as to the effect

and proper construction of the agreement. The Court of Appeal held that the

agreement was “… unenforceable by reason of uncertainty; in other words, it was not an effective contract”.

Exceptions in incomplete agreements

1) An agreement for the sale of land containing only the barest essentials

may be regarded as complete if that was the clear intention of the parties That is, parties might leave some significant terms to be agreed later. This

will not invalidate the contract if the parties to the agreement intended to

be bound at once. This is so even if the parties fail to reach an agreement

on the significant terms that were left to be agreed later. However, if the

contract is unworkable or too uncertain without such agreement (on the

significant terms aforesaid) the contract will be declared invalid. 9 A good

example is the Foley v Classique Coaches Ltd case. The agreement in

this case was contained in a stamped document; it was believed by both

parties to be binding; both parties had acted on it for a number of years;

and it had an arbitration clause which was construed to apply “to any

failure to agree to the price”. While none of the said factors are in itself

conclusive, their cumulative effect shows an intention to be bound hence

the case can be distinguished from the May and Butcher v R case.

In Perry v Suffields Ltd [1916] 2 Ch. 187 an offer to sell a public house

with vacant possession for £7,000 was accepted without qualification.

The court took due regard of the clear intention of the parties to be

bound at once and held that there was a binding contract in spite of the

fact that many important issues such as the date of completion and

question on payment of deposit were left open. 10 Similarly, in Pagnan

SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep. 601 a buyer and a

seller of corn feed pellets had reached agreement on the “cardinal terms

of the deal: product, price, quantity, period of shipment, range of loading

ports and governing contract terms”. The court took due regard of the

clear intentions of the parties to be bound at once and held that the

agreement had contractual force even though the parties had not yet

reached agreement on a number of other important points such as the

loading port, the rate of loading and certain payments (other than the

price) which might become due under the contract. 11

2) If an agreement on the price is required for the continued operation of

the contract as opposed to the making of the contract. For instance, in

Mamidoil-jetoil Arab Petroleum Co SA v Okta Crude Oil Refinery AD [2001] 2 Lloyd’s Rep. 76 an agreement for the supply of services for

10 years fixed the fee to be paid only for the first two years. The court

held that the parties had intended to enter into a 10 years contract and

that a term was to be implied in that contact for payment of a reasonable

fee in those later years. 12

Collateral contracts

They must also satisfy the requirement of certainty. A collateral agreement is also

called a “lock-out” agreement. It generally takes the form of a unilateral contract

under which one party says “If you enter into contract X, I promise you Y”. The

consideration for the promise is entering into contract X. A typical example is a

transaction for the sale of a parcel of land. A vendor who has agreed to sell land

may either at the same time or subsequently undertake not to negotiate for the sale

of the land with a third party.

In Walford v Miles [1992] 2 AC 128 the parties had reached an agreement on the

basic terms of the sale of a business. This was ‘subject to contract’. The defendants,

the vendors, separately agreed that they would cease negotiations with anyone else.

Subsequently, however, they sold to a third party. The plaintiffs sought damages for

breach of a collateral contract not to negotiate with anyone else, which they also

contended implied a positive obligation on the defendants to negotiate in good faith

with them. The House of Lords held that there can be no ‘contract to negotiate’.

(This shall be discussed shortly). The issue of a positive obligation on the

defendants to negotiate was therefore ruled out. As regards the collateral agreement

not to negotiate with anyone else, the court held that it was unenforceable on

grounds of uncertainty because it was for an unspecified time.

In Pitt v PHH Asset Management [1993] 4 All ER 961 the parties were in

negotiations over the sale of a property, and the plaintiffs. The prospective

purchasers were concerned that the defendants would accept a higher offer from a

third party. An agreement was therefore concluded wherein in return for the

plaintiffs agreeing to exchange contacts within two weeks, the defendants agreed not

to consider any further offers within that period. The defendants however went ahead and sold the property to a third party at a higher price than that offered by the

plaintiffs. The Court of Appeal held that the collateral contract was sufficiently

specific as the seller/vendor promised not to negotiate with third parties for two

weeks hence it satisfied the requirement of certainty.

A right of pre-emption

It occurs when a landowner agrees to give the purchaser the right to buy his/her

parcel of land “at a price to be agreed” should the landowner wish to sell. This right

is not an offer but an undertaking to make an offer in certain specified future

circumstances. The agreement obliges the landowner to offer the land to the

purchaser at the price at which he is prepared to sell; and if the purchaser accepts

that offer, there is no uncertainty as to price. An agreement conferring such a right

will not be held to be void for uncertainty merely because it does not specify the

price.

A right of pre-emption should be distinguished from an option to purchase discussed

earlier in the class. An option has some characteristics of an offer as it can be a

contract of sale if the option is exercised by the purchaser. Thus an option to

purchase land must specify the price to ensure that it has effect.

Obligations distinguished from ‘machinery’

A contract will not be regarded as incomplete if it provides mechanism for resolving

an aspect that has been left uncertain. This can be by either specifying a criteria or a

machinery in the agreement.

a) Criteria specified in the agreement

An agreement may fail to specify matters such as price or quality but lay down

criteria for determining those matters. 13 For example, in Hillas & Co. Ltd v Acros

Ltd an option to buy timber was held binding even though it did not specify the

price because it provided for the price to be calculated by reference to an official

price list. 14 Similarly in Brown v Gould [1972] Ch. 53 an option to renew a lease

“at a rent to be fixed having regard to the market value of the premises” was held

binding as it provided a criterion (though not a very precise one) for resolving the

uncertainty. Another example is Gillatt v Sky Television Ltd [2000] 1 All ER  (Comm) 461 where an agreement provided for payment of a fixed percentage of

the “open market value” of shares in a private company. The court held that these

words did not provide a sufficiently precise criterion since there was more than one

formula for calculating the market value of shares in such a company.

b) Machinery specified in an agreement

The agreement may provide machinery for resolving an aspect which has been left

uncertain. For example, an agreement can provide that outstanding points will be

determined by arbitration, by the courts, or by valuation of a third party. Such an

agreement will not be held to be incomplete.

An agreement will not be held to be ineffective merely because the agreed

machinery fails to work. In Sudbrook Trading Estate v Eggleton [1982] 3 All

ER 1 the price for the exercise of an option to purchase was to be determined by

two valuers, one to be nominated by each party. One party refused to appoint a

valuer, and claimed that the agreement was therefore void for uncertainty. The

House of Lords held that the contract was not uncertain because it provided a clear

machinery by which the price was to be determined. Further, it stated that the

machinery was not, however, itself an essential term of the contract. It was simply a

way of establishing a fair price. If the machinery failed, then the court could

substitute its own means of determining what a fair price was. This case was relied

upon in Didymi Corp v Atlantic Lines and Navigation Co. Inc. where the

agreement contained a provision under which the hire under a charter of a ship

could in some circumstances be increased ‘equitably’ by an amount ‘to be mutually

agreed between the parties’. At first sight, this looks like an agreement to agree and

would be unenforceable. The court, however, following Sudbrook Trading Estate

v Eggleton ruled that the reference to “mutual agreement’ was simply part of the

‘essential machinery’ by which the hire was to be determined.

Contract to make a contract

It may refer to a number of different situations such as:

1. Agreement to execute formal agreement

Parties may agree to execute a formal agreement that incorporates terms that

they have already agreed upon. This does not deprive the original agreement

contractual force by making it void for uncertainty. For example, in Morton v

Morton [1942] 1 All ER 273 an agreement “to enter into a separation deed

containing the following clause” (of which a summary was given) was held to be

a binding contract.

2. Agreement to negotiate

It is not a contract because it is too uncertain to have any binding force. For

example it would be impossible to assess any loss caused because of a breach of

an obligation to negotiate. Thus in Walford v Miles the House of Lords

rejected the argument that a term should be implied requiring the vendors to

continue to negotiate in good faith with the purchasers for so long as the

vendors continued to desire to sell, since such a term was itself too uncertain to

be enforced. This case has been subjected to extensive criticism and there are

signs that the courts may be prepared to reconsider the preposition that an

agreement to negotiate in good faith is not binding. For example, in Petromec

Inc v Petroleo Brasileiro SA Petrobras [2005] EWCA Civ 891 the parties

expressly agreed to negotiate the “reasonable cost” of an upgrade to a vessel.

The court held that the express obligation was enforceable and stated that it

would be hard to declare unenforceable a clause which the parties have

deliberately and expressly entered.

3. Agreement to use “best” or “reasonable” endeavours

An express agreement to use best or reasonable endeavours to agree on the

terms of a contract is just like an agreement to negotiate hence it is not

enforceable. However, an agreement to use best endeavours in the performance

of a contract ( as opposed to formation of a contract) for example where an

existing contract between A and B requires A to use his best endeavours to

make a computer software system supplied to A work is enforceable.

4. Obligation to negotiate outstanding details

If the parties have reached agreement on all essential points so as to show that

they intend to be legally bound by the agreement but have left other points

open, the court may imply a term that they are to negotiate in good faith so as

to settle outstanding details which are to be incorporated in the formal

document setting out the full terms of the contract between them. An express

term to this effect may also be enforceable as was in the case of Petromec Inc

v Petroleo Brasileiro SA Petrobras.