Existence and formation of a contract - Offer and acceptance

Learning Outcomes

After reading this article, you will be able to identify and explain the rules governing offer and acceptance in contract formation, distinguish between offers and invitations to treat, analyse the effect of counter-offers and requests for information, and apply the rules on communication of acceptance and revocation—including in electronic and unilateral contracts. You will be able to apply these principles to SQE1-style MCQs and practical scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the legal rules and principles relating to the existence and formation of a contract, with a particular focus on offer and acceptance. This includes recognising the difference between an offer and an invitation to treat, the requirements for valid acceptance, the effect of counter-offers, and the rules on communication and revocation. You should be able to apply these rules to both traditional and modern (e.g. electronic) contracting scenarios.

• 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. This article explains the rules for identifying valid offers and acceptances, the effect of counter-offers, and the requirements for communication. Understanding these principles is essential for answering SQE1 questions on contract formation, including scenarios involving electronic contracting and unilateral offers.

Offers and Invitations to Treat

A contract begins with an offer—a clear statement by one party (the offeror) of a willingness to be legally bound on specific terms, made with the intention that it will become binding as soon as it is accepted by the other party.

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—invitations to others to make offers or enter negotiations.

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

Common Examples

• Goods on display: Items on supermarket shelves or in shop windows are invitations to treat. The customer makes the offer by presenting the goods at the checkout, and the shop accepts by processing the sale.
• Advertisements: Most advertisements are invitations to treat, not offers. The advertiser is not bound to supply goods to everyone who responds.
• Auctions: An auctioneer’s request for bids is an invitation to treat. Each bid is an offer, accepted by the fall of the hammer. However, an auction "without reserve" is an offer to sell to the highest bidder.

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 do something in return for an 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 poster: "£100 for the return of my lost dog." Anyone who returns the dog accepts the offer by performing the act.

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 exactly match the terms of the offer. If the response changes the terms, it is a counter-offer, which rejects 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.

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. If each side insists on its own terms, the contract is usually formed on the "last shot"—the last set of terms sent and accepted by conduct.

Communication of Acceptance

Acceptance must generally be communicated to the offeror. Silence does not amount to acceptance.

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 acceptance is sent by post, it is effective when posted, not when received—provided it was reasonable to use the post and the offeror did not exclude the postal rule.

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

The postal rule does not apply to instantaneous communications (e.g. telephone, email). For these, acceptance is effective when received.

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 business resumes.

Revocation of Offers

An offer can be revoked (withdrawn) at any time before acceptance, but revocation must be communicated to the offeree.

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. If the offeror promises to keep the offer open for a period but the offeree gives no consideration, the offeror can still revoke the offer before acceptance.

Worked Example 1.5

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.

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, the offeror may be prevented from revoking the offer until the offeree has had a reasonable opportunity to complete the act.

Worked Example 1.6

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. In unilateral contracts, only one party makes a promise, accepted by performance.

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

Modern Contracting and E-Commerce

In online transactions, website listings are usually invitations to treat. The customer makes an offer by placing an order, which the seller accepts by confirming the order or dispatching goods. The rules on offer and acceptance apply, but the timing of acceptance and communication may be affected by the platform’s terms and the method of communication.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The difference between an offer and an invitation to treat
• The requirements for a valid acceptance and the effect of counter-offers
• The rules on communication of acceptance, including the postal rule and electronic communications
• The rules on revocation of offers, including in unilateral contracts
• The distinction between bilateral and unilateral contracts and their impact on acceptance
• How these principles apply to modern contracting scenarios, including e-commerce

Key Terms and Concepts

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