Existence and formation of a contract - Offer and acceptance

Learning Outcomes

This article explains how to identify when a communication constitutes a valid offer rather than an invitation to treat, applying the objective test to words and conduct in problem-style scenarios. It examines the requirement that an offeree has knowledge of an offer, particularly in unilateral reward situations, and clarifies how bilateral and unilateral structures affect the need to communicate acceptance. It outlines the mirror-image rule, distinguishing counter-offers from mere requests for information and from acceptance accompanied by collateral queries. It details the rules governing communication of acceptance, including the postal rule and its limits, receipt-based rules for instantaneous and electronic communications, and the impact of business hours and prescribed methods. It analyzes how and when offers terminate through revocation (including via a reliable third party), lapse of time, death, and commencement of performance under unilateral offers. It reviews how these principles are applied in auctions, tenders, vending machines, automated systems, and e-commerce transactions, and how a “battle of the forms” is resolved by focusing on the parties’ objective intentions and conduct.

SQE1 Syllabus

For SQE1, you are required to understand the existence and formation of a contract through the principles of offer and acceptance, with a focus on the following syllabus points:

• the distinction between an offer and an invitation to treat
• the requirements for a valid acceptance
• the effect of counter-offers and requests for information
• the communication of acceptance (including the postal rule and electronic communications)
• the revocation of offers (including in unilateral contracts)
• the difference between bilateral and unilateral contracts and their impact on acceptance

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is usually an offer rather than an invitation to treat?
   1. goods on a supermarket shelf
   2. a newspaper advertisement
   3. an auction without reserve
   4. an online product listing
2. If an offeree makes a counter-offer, what is the effect on the original offer?
   1. it remains open
   2. it is rejected
   3. it is suspended
   4. it is accepted
3. When does acceptance by post become effective under the postal rule?
   1. when posted
   2. when received
   3. when read
   4. when the offeror is notified

4. True or false? An offeror can always revoke a unilateral offer at any time, even after the offeree has started performance.

Introduction

A contract is formed when parties reach agreement through a process of offer and acceptance. The law applies an objective test: the courts assess how a reasonable person would understand the parties’ words and conduct, rather than the parties’ undisclosed intentions. The focus is on whether the communication shows a willingness to be legally bound on specific terms upon acceptance. The article explains how to identify valid offers and acceptances, the effect of counter-offers, and the requirements for communication (including the postal rule and rules for electronic methods). It also covers how offers end—by revocation, lapse of time, and operation of special rules for unilateral offers once performance has started—and how these principles apply in auctions, tenders, retail displays, and e-commerce.

Two preliminary points often overlooked in problem solving:

• An offer must be communicated to be effective; an offeree cannot accept an offer they do not know exists.
• Acceptance generally must be communicated, unless the offer or the context (for example, unilateral offers) indicates otherwise.

Offers and Invitations to Treat

A contract begins with an offer—an unambiguous statement by one party (the offeror) of a willingness to be legally bound on specific terms as soon as the other party (the offeree) accepts.

Key Term: offer
An expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed.

Not every statement is an offer. Many communications are invitations to treat—expressions that invite negotiations or the making of offers.

Key Term: invitation to treat
An indication that a party is willing to negotiate, but does not intend to be bound immediately.

The objective test guides the distinction. The question is how a reasonable person would understand the communication. Phrases such as “may be prepared to sell”, “subject to contract”, or a request for bids typically signal an invitation to treat, not an offer.

Common Examples

• Goods on display: Items on supermarket shelves or in shop windows are invitations to treat. The customer makes the offer at the checkout, and the shop accepts by processing the sale. This gives retailers flexibility (for example, to refuse sales of restricted goods) and avoids binding the retailer merely by displaying goods at a price.
• Advertisements: Most advertisements are invitations to treat. Treating an advertisement as an offer could unintentionally bind the advertiser to supply to every responder. Exceptions exist for clear unilateral reward offers (below).
• Auctions: An auctioneer’s request for bids is an invitation to treat. Each bid is an offer, accepted by the fall of the hammer. For an auction “without reserve”, the announcement is a unilateral offer to sell to the highest genuine bidder.
• Tenders: A general request for tenders is usually an invitation to treat; each tender is an offer the principal can accept. However, where the principal undertakes to consider compliant tenders or promises to accept the most competitive bid, that undertaking may itself be a unilateral offer. A compliant tender or the most competitive bid, as applicable, accepts that offer.
• Vending machines and similar automatic machines: The machine’s display and configuration generally amount to an offer; acceptance occurs when the user inserts payment and selects the product.

Certainty matters. An offer must be sufficiently definite so that a simple “yes” forms a binding contract. Formal words are not essential; courts look to substance and context.

Worked Example 1.1

A shop displays a laptop in its window with a price tag. Is this an offer or an invitation to treat?

Answer:
This is an invitation to treat. The display invites customers to make offers to buy the laptop.

Unilateral Offers

Some advertisements may be offers if they are clear, definite, and show an intention to be bound. This is common in unilateral contracts, where one party promises to pay or confer a benefit upon completion of a specified act by another.

Key Term: unilateral contract
A contract in which one party makes a promise in return for the performance of a specified act by another party.

A classic example is a reward: “£100 for the return of my lost dog.” Anyone who returns the dog accepts the offer by performing the act. An offeree must know of the offer before performing the act to claim under the contract.

Worked Example 1.2

A company advertises: “We will pay £100 to anyone who uses our product as directed and still catches flu.” Is this an offer?

Answer:
Yes. This is a unilateral offer, as it is clear, definite, and shows an intention to be bound.

Acceptance and Counter-Offers

Acceptance is a final and unqualified expression of assent to the terms of the offer.

Key Term: acceptance
An unqualified expression of agreement to the terms of an offer.

Acceptance must mirror the offer’s terms. If the response changes the terms, it is a counter-offer, not an acceptance; a counter-offer rejects and terminates the original offer.

Key Term: counter-offer
A response to an offer which introduces new terms, thereby rejecting the original offer.

A mere request for information does not reject the offer. For example, asking if payment could be made in instalments or over time is typically a request for information. In contrast, proposing a new price is a counter-offer.

Acceptance can be communicated by words or by conduct. Conduct (such as delivering goods in response to an order) can amount to acceptance if it objectively shows assent to the offer’s terms.

Worked Example 1.3

A offers to sell a car for £5,000. B replies, “Will you accept £4,500?” What is the effect?

Answer:
This is a counter-offer, which rejects the original offer. A is not obliged to sell for £5,000 unless A renews the offer.

The "Battle of the Forms"

In commercial transactions, parties often exchange standard terms. The traditional approach is that contracts are formed when an offer is met with acceptance, sometimes evidenced by conduct (e.g. delivery or payment). Where each side insists on its own standard terms and performance follows, courts often apply a “last shot” analysis (the last set of terms sent before performance may prevail). However, the outcome depends on a careful, objective assessment of the parties’ communications and conduct to determine when and on what terms a contract was formed. Clear “prevail” clauses, consistent practice, and how the parties performed help determine which terms govern.

Communication of Acceptance

Acceptance must generally be communicated to the offeror. Silence does not amount to acceptance, as it is inherently equivocal. The exception for unilateral offers (acceptance by performance) is discussed below.

Key Term: communication of acceptance
The requirement that acceptance must be brought to the attention of the offeror to be effective.

Worked Example 1.4

A writes to B: "If I hear no more from you, I will assume you accept." B does not reply. Is there a contract?

Answer:
No. Silence does not amount to acceptance.

The Postal Rule

Where it is reasonable to use the post for acceptance, acceptance is effective when posted, not when received—provided the letter is properly addressed and posted via the postal service. This rule does not apply to revocations and can be excluded if the offer specifies that acceptance must be received or gives a prescribed method that implies receipt is required (e.g. “notice in writing to [the offeror]”).

Key Term: postal rule
Acceptance by post is effective when the letter is properly posted, not when received by the offeror.

Important limits:

• It must be reasonable in the circumstances to use the post.
• The acceptance must be properly addressed and posted via a postal service (not handed to a courier or a delivery-only postman).
• The offeror can exclude the rule expressly or by clear implication (for example, by requiring “notice in writing” to the offeror).

The postal rule does not apply to instantaneous or near-instantaneous communications (telephone, telex, fax, most emails). For these, acceptance is effective when received.

Worked Example 1.5

A bank posts a loan offer stating, “If you wish to accept, we must receive your written acceptance by 5 pm on Friday.” The customer posts an acceptance at 4 pm on Friday. Is there a contract at 4 pm?

Answer:
No. The offer requires receipt by 5 pm, which excludes the postal rule. Acceptance is effective only when received by the bank by the deadline.

Electronic Communications

For emails and similar methods, acceptance is effective when received in the offeror’s inbox during business hours. If sent outside business hours, it is effective when office hours resume. Platform-specific rules may apply if parties have agreed to them (for example, terms stating that acceptance occurs only upon the seller’s dispatch of goods).

Worked Example 1.6

S sends an acceptance by email at 10:30 pm on Tuesday to a business that operates 9 am–5 pm. The email arrives immediately. When is acceptance effective?

Answer:
At the start of the next business day (Wednesday), when business hours resume and the acceptance is deemed received.

Revocation of Offers

An offer can be revoked at any time before acceptance, but revocation must be communicated to the offeree. The postal rule does not apply to revocations; revocation is effective when it is actually communicated (or when a reasonable means of communication used is received).

Key Term: revocation
Withdrawal of an offer by the offeror, effective only when communicated to the offeree.

Revocation can be communicated by a reliable third party. The offeror’s promise to keep an offer open does not prevent revocation unless supported by consideration (for example, an option contract).

Worked Example 1.7

A offers to sell land to B and promises to keep the offer open for a week. Before B accepts, A sells the land to C and B hears of this from a friend. Can B still accept?

Answer:
No. The offer has been revoked by communication from a reliable third party.

Offers may also terminate by lapse of time. If no period is specified, an offer lapses after a reasonable time, assessed in context (for example, perishable goods vs. longer-term assets). The death of an offeror may terminate an offer if the offeree knows of the death or the contract involves personal services; the position otherwise depends on the nature of the contract and the parties’ knowledge.

Worked Example 1.8

Two parties post identical offers to each other on the same day, unaware of one another’s letter (cross-offers). Is a contract formed?

Answer:
No. Cross-offers do not amount to matching offer and acceptance; each party’s letter is an offer, not an acceptance of the other.

Revocation of Unilateral Offers

For unilateral contracts, the general rule is that the offeror can revoke the offer at any time before acceptance. However, once the offeree has started performance of the act specified, the offeror is generally prevented from revoking the offer until the offeree has had a reasonable opportunity to complete performance. This reflects an implied obligation not to prevent completion once performance has begun.

Where a unilateral offer is made to the world at large (for example, in a newspaper), revocation should be communicated with the same notoriety as the original offer (for example, by publication in the same or an equivalent medium), so that persons likely to act on the offer are reasonably informed.

Worked Example 1.9

A offers £500 to anyone who walks from London to Oxford. B starts walking. Can A revoke the offer after B has started?

Answer:
Once B has started performance, A cannot revoke the offer if it would be unfair to do so before B has had a reasonable chance to complete the act.

Bilateral and Unilateral Contracts

Most contracts are bilateral—each party makes a promise to the other (for example, a seller promises to deliver goods and the buyer promises to pay the price).

Key Term: bilateral contract
A contract where both parties exchange promises to perform obligations.

In unilateral contracts, one party promises to do something if the other performs a specified act. Acceptance is by performance, and prior communication of acceptance is not required unless the offer demands notice after completion (for example, “claim your reward by notifying us”).

Modern Contracting and E-Commerce

In online transactions, website listings are usually invitations to treat. The customer makes an offer by placing an order. The seller then accepts by confirming acceptance under the platform’s rules—commonly by dispatching goods or sending a confirmation stating acceptance. Clear platform terms can control when acceptance occurs (for example, “order acceptance occurs upon dispatch”).

Acceptance in electronic contracting follows receipt-based principles: acceptance is effective when it reaches the offeror during business hours, unless the parties agree otherwise. Automated systems may also include “subject to contract” or “your order is an offer” notifications to clarify formation.

Worked Example 1.10

An auctioneer announces an auction “without reserve.” The highest bidder makes a genuine bid but the auctioneer refuses to sell. What is the legal effect?

Answer:
The “without reserve” announcement is a unilateral offer to sell to the highest genuine bidder, accepted by the highest bid. Refusal to sell amounts to breach of that undertaking.

Worked Example 1.11

X emails, “Will you accept payment in three monthly instalments?” Y’s original offer says “£10,000 on delivery.” Does X’s email terminate Y’s offer?

Answer:
No. This is a request for information about payment terms, not a counter-offer. Y’s original offer remains open for acceptance.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• How the objective test distinguishes offers from invitations to treat
• Why an offer must be communicated to be capable of acceptance
• The mirror-image rule and how to identify a counter-offer vs. a request for information
• The communication rules for acceptance: the postal rule and its limits; receipt-based rules for telephone, email, and similar methods (including business hours)
• The termination of offers by revocation (including via reliable third party), lapse of time, and special considerations where the offeror dies
• How unilateral reward offers are accepted and why revocation is limited once performance begins
• How auctions, tenders, vending machines, and e-commerce platforms implement offer and acceptance principles
• How acceptance by conduct and the parties’ intention can resolve “battle of the forms” situations
• Why cross-offers, silence, and acceptance without knowledge of an offer do not form contracts

Key Terms and Concepts

• offer
• invitation to treat
• unilateral contract
• acceptance
• counter-offer
• communication of acceptance
• postal rule
• revocation
• bilateral contract

Worked Example 1.12

A emails, “I accept your offer to sell the equipment at £8,000,” then immediately posts a letter saying “I do not wish to proceed.” The letter arrives first. Is there a contract?

Answer:
Yes. The acceptance by email is effective upon receipt; the later letter amounts to attempted withdrawal after acceptance and cannot undo formation.