Formation of a Contract: Offer, Acceptance

The formation of a contract is not always as straight forward as it seems. Sometimes one party may allege that a contract exists and it turns out that no valid contract exists. In the same way a party may also believe that a contract does not exist when one exists. It is for this reason that it is important to consider what constitutes the proper formation of a contract. Offer, acceptance and consideration are elements of a valid contract. An intention to enter into legal relations may also be considered as the fourth element, although this is not something that parties to a contract consciously contemplate while entering a contract. Niki Tobi, J.C.A., as he then was, added a fifth element in Orient Bank v. Bilante Intl. which is the capacity to contract. All five elements are expected to be present for contracts to be valid after they have been formed. The elements shall be observed subsequently, starting with offer and acceptance.

Offer

Very often, what one party regards as an offer is not seen as an offer by the other party. This was present in David Ejinyi v. Amusa Adio, where David and Amusa were joint owners of a landed property. Amusa brought a third party whom he claimed bought the property for 1,400 naira and he gave David 700 naira as his own share. Amusa subsequently claimed to have returned the 1,400 naira purchase price to the third party and therefore repurchased it for himself. David challenged his ownership in a court and the court held that Amusa had not established the fact that David agreed to sell his interest in the property to him.

In another case which is the case of Olaopa v. Obafemi Awolowo University, the university had some landed property which it wanted to put to commercial use. The appellant, an architect, was invited to a meeting at which the development of the property for various commercial purposes was discussed. On this basis, the appellant prepared designs and sketch drawings which he forwarded to the university, and was followed up by a bill. He sued the University when it refused to pay and both the trial court and the Court of Appeal held that there had been no offer.

It is important to know what constitutes an offer. An offer is a definite undertaking or promise made by one party with the intention that it shall become binding on the party making it as soon as it is accepted by the party to whom it is addressed. An offer should be definite, leaving no room for doubt as to the terms. The offeror makes an offer to the offeree and there should be no doubt as to the terms which are being offered. There is no limit to the number of people an offer may be made to as stated in Carbolic Smoke Ball Co. v. Carlill. Bowen, L.J. stated that an offer may be made to the whole world and anybody interested could step forward and create a contract by accepting the offer.

An offer may either be express or it may be implied. If a bus stops at a bus stop, it is an implied offer to pick up passengers which may be accepted by anyone if they get in the bus. The offer may also be express if the offeror tells the offeree the terms of the offer. In Nigerian National Supply Company v. Agricor Incorporations of USA, the respondents had been involved in negotiations with the Presidential Task Force on Rice. The NNSC took up an offer to the PTFR and paid for the consignment of rice which was delivered to the NNSC. When liability arose out of the contract, the NNSC tried to reply on the fact that the offer had not been made to it. The court held that the offer had been made and accepted impliedly. It is also possible that an offer would be accepted by conduct instead of expressly as in Brodgen v. Metropolitan Railway Co. and Major Oni v. Communications Associates.

While offers may either be express or implied, not every prospective opportunity at making a contract should be taken to be an offer. Sometimes it is only an invitation to treat and this should not be taken as an offer that is to be accepted. Instead, it may be referred to as an offer to receive offers.

Invitation to Treat

As already stated, an invitation to treat is an offer to receive offers. An invitation to treat is merely a preliminary move in the making of a contract. A person making an offer cannot revoke the offer once it has been accepted and is therefore contractually bound while in the case of an invitation to treat, there are no obligations. In Berliet Nig. Ltd. V. Francis, the respondent who was the branch manager of the appellant company in Benin received a letter from the managing director in Lagos that in line with company policy, 10% of the shares should be owned by workers. The respondent paid for shares which were never allotted to him and he sued the company for specific performance. The Court of Appeal, in reversing the decision of the High Court, held that the letter from the managing director was only an invitation to treat and his payment was the offer which was rejected. Invitation to treat may be in different forms which shall now be observed.

Auctions: An auctioneer’s request for bids is not an offer, but instead is an invitation to treat. The bids are the offers and the acceptance is when the hammer falls as established in Payne v. Cave. This common law position is further supported by statutes like section 58(2) of the Sale of Goods Act 1893 which is applicable in all northern and eastern states. An advertisement to hold an auction does not bind the advertiser to hold the auction as in Harris v. Nickerson, and the auctioneer may choose to not accept bids if the auction is held. If, however, the auctioneer chooses to accept bids, he is under a compulsion to accept the highest bid and go through with the transaction once the hammer has fallen as stated in Adebaje v. Conde. The auctioneer may make reserve prices on items that are to be auctioned, although if such is not communicated to the bidder then it shall have no effect. In Felthouse v. Bindley, the bidder got the horse he bade for at an auction even though there was a reserve price which was never stated during the auction on the horse. Referential bids are not allowed in auctions. A person may not say that they are willing to pay a particular sum more than whoever the highest bidder is and this has been established in Harvela Investments Ltd. v. Royal Trust Company of Canada. If every bidder makes a referential bid, then it would defeat the whole purpose of the auction.

Display of goods in shelves in a shop, supermarket, self-service shop, etc.: In these sort of situations, it has been held that the display of such goods constitutes an invitation to treat and the purchaser of the items makes the offer. This viewpoint is supported by cases like Pharmaceuticals Society of Great Britain v. Boots Cash Chemists and Lasky v. Economy Grocery Store.

An advertisement of goods in a catalogue: This does not constitute an offer, but instead an invitation to treat and the authority for this can be found in Granger & Son v. Gough.

Invitation to tender: An invitation to tender is an invitation for offers from interested parties, and is not in itself an offer. It is merely an offer to receive offers and this can be seen in Spencer v. Harding. In an invitation to tender, the highest or lowest bid may be rejected without any legal consequence.

Buses, taxis, trains, etc.: This has been a source of great controversy as it has been a struggle to find a formula for identifying the point offer and acceptance in these scenarios. The problem is further compounded by the fact that the offer and acceptance in such cases are implied. Let’s take for example the case of a bus. Is the offer made when the passenger waits at the bus stop and is there acceptance when the bus stops? Is the offer made when the bus stops and the acceptance when the passenger gets on the bus? It would have to be determined by the facts and circumstances of each case. The point of offer and acceptance would be when it becomes impossible for the parties to go back on their actions. In the bus scenario, they cannot go back once the passenger gets in the bus, and definitely not after the bus begins moving. The point of offer would there have to be when the bus stops while the point of acceptance is when the passenger gets in.

Acceptance

Acceptance is the unequivocal assent to the terms of an offer. Acceptance may either be by the passing of documents, by spoken words, or by conduct. Acceptance by conduct would only be admitted when it is clear from the conduct of the parties that there is an agreement with the terms of the contract. While it has been stated that the passing of documents, spoken words and conduct may constitute acceptance, silence does not constitute acceptance. In Felthouse v. Bindley, the plaintiff made a written offer to his nephew to buy his nephew’s horse and he stated that he would assume his nephew accepted if he got no reply. The court held that such a contract was not binding as acceptance should be manifested outwardly and not just in the mind of the offeree. Therefore, acceptance must be communicated to be valid. There are several situations which may seem like acceptance, but upon closer inspection turn out to not be acceptance. Some of the forms shall now be observed.

Counter-offer: It has been stated that for an acceptance to be valid, there must be an unequivocal assent to the terms of an offer. What is being accepted should be a mirror image of what was offered, with not the slightest change in the terms. If there is a change in the terms, it stops being acceptance and becomes a counter-offer. The effect of this is that the previous offer has been rejected and a new offer given. In Hyde v. Wrench, Wrench offered to sell an estate to Hyde for 1,000 pounds. Hyde instead said he wanted to buy the house for 950 pounds. Days later, Hyde purported to accept the original offer of 1,000 pounds which was rejected by Wrench. He brought an action for specific performance in court and the court held that the previous offer had been canceled when Hyde made a new offer and Wrench was entitled to reject that new offer. Other cases that support this include Major General George Innih (RTD) & Ors. v. Ferudo Agro and Consortium Ltd. and Chief T.O.S. Benson v. Nigerian Agip Oil Co. Ltd.

Conditional acceptance- acceptance “subject to contract” and a “provisional” acceptance: It has been stated that a valid acceptance must be an unequivocal assent to the terms of an offer, and so what is accepted should be a mirror image of the offer. An acceptance with a condition cannot therefore be regarded as a valid acceptance until such a condition is fulfilled. One common form of this is an agreement “subject to contract”. Such an agreement is not binding until there has been a formation of a contract. The use of the term signifies the intention of the party to not be legally bound. Even though there was uncertainty as to the use of the term because of the judgment in Law v. Jones, it has now been established that a contract created subject to contract is not legally binding until a contract has been created and the rule in Law v. Jones was overruled in Tiverton Estates Ltd. v. Wearwell Ltd. This was the case in Winn v. Bull where the defendant agreed to take a lease “subject to the preparation and approval of a formal contract.” It was held by the court that it was not binding. Nigerian courts have also followed this precedent in cases like Maja Junior v. U.A.C and U.B.A. v. Tejumola & Sons Ltd. The term “subject to contract” may be conveyed in a different set of words as it was in Odufunade v. Ososami where the defendant said “I will like to confirm my tentative agreement without engagement…” and it made the contract not binding. The use of the term “provisional” agreement has also created a bit of confusion. In Branca v. Cobarro, the contract was held to be binding since the conduct of both parties showed that it was their intentions that they should be bound by the contract. It has been argued by some that a provisional agreement has the opposite effect of an agreement made subject to contract, making the agreement binding where subject to contract makes it not binding. This led to the judgment in the much criticized case of Att. Gen. of the Federation v. Awojoodu where the contract was held to be binding because of the use of the word “provisional” even though the contract expressly stated that the defendant was not under any obligation if he did not sign the agreement, which he did not. In the interest of justice, the meaning of a provisional acceptance can only be decided based on the context in which it is used.

Cross offers: A cross offer occurs when two parties send identical offers to each other before any of the parties receives the offer of the other party. The offer is said to “cross” en route. Supposing A has been in talks with B to buy his house, and then A sends an offer to B to buy the house for ten million naira while B simultaneously sends an offer to sell his house to A for ten million naira without any of the parties knowing of the other offer, then that is a cross offer. It has been stated that an offer must be accepted to be binding and two offers cannot be taken to be an offer and an acceptance. Therefore, a cross offer is not binding and this was demonstrated in Tinn v. Hoffman & Co.

Acceptance in ignorance of offer: The question with this is whether it is possible to accept an offer which a person does not know exists. The straight forward answer is no, although this caused a lot of confusion for a while. This is more common with unilateral contracts like reward cases where a person does something with no idea of the reward, and then later try to claim the reward. There are contradictory judgments on this and while it was held to be possible to accept an offer in ignorance of it in Gibbons v. Proctor, it was held otherwise in Fitch v. Snedaker. It is now the settled position of the law that a person cannot accept an offer in ignorance of that offer. There was also a conflict over whether a person can accept a reward offer when that was not the motive of the action. It was held in R. v. Clarke that a person cannot accept a reward offer if the reward was not the motive for their actions. However, the case of Williams v. Cowardine shows that the motive or intention is irrelevant once there is knowledge of the offer.

Acceptance of tenders: It has already been stated that an invitation of tenders is not an offer and the offer is made by all who accept the invitation. A distinction has been made between a request for the supply of a number of goods and the mere possibility of such a request. If the Nigerian Army advertises to accept tenders for the supply of 1,000 boots within a month, then the offer is made by the supplier which is accepted by the Nigerian army once the request is made. If, on the other hand, the Nigerian Army only says it may require 10,000 boots within a month, there shall be a standing offer from the supplier which would create a contract every time a request is made. In Great Northern Railway v. Witham it was held that the supplier was held bound to honour every order made by the plaintiff company whilst the agreement was in force.

Communication of Acceptance

Silence does not constitute acceptance, and so acceptance must be communicated to be valid. The communication must be in such a way that it is outward and therefore can be objectively determined. In certain circumstances, the need for communication of acceptance may be waived expressly or impliedly. An example is in reward cases, where any interested person does not need to inform the offeror of acceptance and supplying the information necessary is the acceptance. In Carlill v. Carbolic Smoke Ball Co. the defendant tried to rely on the lack of communication of acceptance and it was stated by the court that communication was not required based on the surrounding circumstances and simply buying the smoke ball was sufficient acceptance.

The moment of acceptance is another area over which dispute has arisen. This is easy to decide when the contract is made orally or when both the offeror and the offeree are in the same location. It however causes confusion when the offeror and the offeree are in different states and acceptance is communicated through a letter or post. Does acceptance happen when the offeree thinks to accept the offer, when it is written, or when the offeror takes notice of the offer. It has been decided in cases like Entores v. Miles Far East Corporation and Anon Lodge Ltd. v. Mercantile Bank that acceptance occurs once the offerer has been notified. If it is orally, it occurs when he hears it. If it is through a letter, it occurs when the letter is read by the offeror.

An offeror may or may not prescribe a method of acceptance. Where there is the specification of a method of acceptance, it brings up the question of if strict compliance is compulsory. It has been accepted that any mode that is either as fast as, or faster than, the mode of acceptance prescribed is valid. Thus in Tinn v. Hoffman & Co., Honeyman, J. stated in his dissenting judgment that even though there was a prescription of acceptance by post, any means not later than the prescribed one is still valid. This position was followed by the court in Manchester Diocesan Council of Education v. Commercial and General Investments Ltd. However, where a law states that the method prescribed by the offeror should be complied with, then non-compliance shall make the acceptance invalid. In Orient Bank v. Bilante Intl. there was a violation of section 109(1), Contract Law, Chapter 30, Laws of Anambra State which states that where an offeror prescribes a method by which acceptance of his offer is to be communicated to him, that method shall be adopted by the offeree and acceptance which fails to comply with such requirement shall be ineffective. If the alternative mode of acceptance is for any reason slower than the mode prescribed, then the party that prescribed such shall be entitled to reject the acceptance as in Eliason v. Henshaw. It was also stated in Manchester Diocesan Council of Education v. Commercial and General Investments Ltd. that only the party that prescribes with the mode of acceptance can reject acceptance that does not conform with it.

Where there is no prescribed mode of acceptance, then acceptance would depend on the circumstances of each case. An oral offer probably demands an oral acceptance, an offer through fax, e-mail and telegram would require a prompt reciprocation for acceptance. Acceptance would be when it has been received by the offeror with the only exception being acceptance by post.

The normal view is that acceptance begins when the offeror receives the communicated acceptance. Acceptance by post is an exception to this general rule and acceptance is believed to be when the letter has been posted. This rule was first laid down by Lord Ellensborough in 1818 in the case of Adams v. Lindsell. By a letter dated September 2, 1817, the defendants offered to sell a quantity of wool to the plaintiffs and required a reply by post. The defendants misdirected their letter and it did not reach the plaintiffs until the evening of September 5. That same night, the plaintiffs posted a letter of acceptance which reached the defendants on September 9 when it would have reached the defendants two days earlier if the letter containing the offer had been properly directed. On September 8, having received no reply from the plaintiffs, the defendants sold the wool to another person. When the plaintiffs sued for a breach of contract, the defendants argued that there was no acceptance until the letter was received by the defendants. The court held that acceptance took force once the letter was posted.

It was stated in Adams v. Lindsell that the reason for the commencement of acceptance upon posting is because if acceptance took effect when the letter was received, then there would be an infinite loop of both parties sending letters to inform the other of the receipt of the last letters. This is not a very strong reason as the offeror only has to act on the acceptance just as the offeree acts with the believe that the acceptance shall be received, thus making the infinite sending of letters needless. More concrete reasons for this position include the fact that any other rule would lead to unnecessary delay, the rule is the most convenient and the offeror is free to stipulate in the offer that the acceptance shall not take effect until it is communicated.

There are exceptions to the rule in Adams v. Lindsell, situations in which the acceptance shall not commence once the letter is posted.

1. Where the terms of the contract states expressly or implicitly that acceptance must reach the offeror as in Holwell Securities Ltd. v. Hughes.
2. Where the application of the rule would create inconvenience or absurdity. For example, a stockbroker who is holding shares for a client should not be liable for failing to sell in a falling market in accordance with a letter which was posted but was never received.
3. The rule does not apply where the letter of acceptance is wrongly addressed or inadequately stamped.
4. The rule shall also not apply if the letter of acceptance was not properly posted.

Revocation of Acceptance

Acceptance may generally be revoked before it gets to the offeror except where it is by post. The position is not so clear as regards acceptance by post. Logically, acceptance commences once the letter has been posted and an acceptance which is in force may not be revoked so an acceptance by post may not be revoked. Allowing the offeree to revoke such would be to give the offeree the best of both worlds. In Countess of Dunmore v. Alexander, a Scottish case, Alexander, through Lady Agnew, made an offer to the countess to enter her service. The countess, on November 5, wrote to Lady Agnew accepting the offer, and Lady Agnew forwarded the letter to Alexander. On November 6, the countess wrote another letter to Lady Agnew cancelling the acceptance and she forwarded this second letter by express mail. Alexander received both letters together. It was held that the acceptance had been validly withdrawn since the letter cancelling the acceptance did not arrive later than the letter of acceptance. The role of Lady Agnew as an intermediary and the fact that this is a Scottish case reduces the persuasive effect of this case.

Termination of an Offer

An offer may be terminated, i.e. come to an end before acceptance, in any of four ways which are by revocation, by lapse of time, by the death of the offeror or offeree, and by rejection.

Revocation: An offer may be revoked at any time before the offer is accepted. This is still possible even when the offeror promises to keep the offer open for a particular period of time and does not do this as long as such a promise is not supported by consideration. In Routledge v. Grant, the defendant offered to buy a house from the plaintiff and he gave the latter six weeks to accept. He revoked the offer after three weeks while the plaintiff purported to accept the offer at the end of six weeks. The court held that there was no contract and the contract had been validly revoked. The case would be different if the promise to keep the offer open is supported by consideration and the offeror would be unable to revoke the offer. This was the case in Mountford v. Scott where Scott granted Mountford an option to purchase his house and exercisable within six months, in return for a payment of 1 pound to him. The court held that the offer could not be revoked. Revocation must be communicated either indirectly as in Dickinson v. Dodds or directly as held in Byrne v. Van Tien Hoven.

The revocation of a unilateral contract is not as straightforward. It has been stated that acceptance of a unilateral contract is not necessary communicated and acceptance takes the form of performance. Therefore, the question is if a unilateral offer may be revoked after performance has begun, and if so, how soon after. There have been four schools of thought on the topic.

1. That there is no acceptance until performance is completed and revocation, therefore, is possible at any time before performance is complete.
2. That every unilateral contract has a sub-contract with the terms being that the offeror shall not revoke the offer once performance has commenced and the consideration for the promise is the commencement of performance by the offeree.
3. That where the offer is revoked after the offeree has begun performance, the offeree is entitled to a reward based on the level of performance.
4. That once performance commences, the offer has been accepted and may therefore not be revoked. The offeree is not entitled to the reward until performance is complete under this school of thought.

The view that would be adopted depends on the facts surrounding each case. The court would try to find out whether or not a promise to keep the offer open once performance begins was stated expressly or was implied as in Errington v. Errington.

Lapse of time: An offer may be terminated once there has been an appropriate lapse of time without acceptance. Where the offeror states the time period, then it shall be used. If not, a reasonable time period shall be concluded based on the circumstances of each case. The reasonable time period that shall be concluded by the court would depend on the facts and circumstances of each case. In Ramsgate v. Montifiore, an offer to buy shares had terminated through lapse of time after five months while in Loring v. City of Boston, an offer of reward for information leading to the arrest and conviction of arsonists published in a newspaper was held to have lapsed after a period of three years.

Death: An offeree who has notice of an offeror’s death cannot accept an offer which was made while he was alive. If, however, the offeree has no knowledge of the offeror’s death then the acceptance is valid if the terms of the contract may be performed by the offeror’s estate, e.g. the paying of a sum of money. It was in light of this that the offer did not lapse in Bradbury v. Morgan. When the contract requires the personal performance of the offeror, e.g. the writing of a book or singing of a song, the acceptance shall not be valid. With the death of the offeree, the offer lapses if the offeree dies without accepting it. This was the case in Kennedy v. Thomassen.

Rejection: An offer is terminated when it is rejected by the offeree. This rejection includes purported acceptance that varies the terms of the offer and counter-offers. Rejection does not terminate the offer until it has been communicated and so if an offeree changes his mind he may still accept and offer provided notice of the acceptance reaches the offeror before notice of the rejection.