Contract Formation

Introduction

Contract formation sets out when agreements become legally binding. For law students and trainees preparing for the SQE, it pays to know the elements the courts look for and how day-to-day conduct can amount to agreement. This guide explains the core elements—offer, acceptance, consideration, and intention to create legal relations—alongside how offers can end and where unilateral contracts fit in. You’ll find clear principles, leading cases, and practical steps you can use in exams and in practice.

What You'll Learn

• What amounts to a valid offer and how it differs from an invitation to treat
• How acceptance works, including the postal rule and instantaneous communications
• The effect of counter-offers, the “last shot” rule, and acceptance by conduct
• What counts as valid consideration, including “practical benefit” and limits on part-payment of debt
• Presumptions about intention to create legal relations in commercial and domestic settings
• How and when offers may be revoked, lapse, or be accepted through performance in unilateral contracts
• Practical drafting and transactional tips to avoid disputes

Core Concepts

Offer and Invitation to Treat

An offer is a clear, certain statement showing willingness to be bound if accepted on its stated terms. It must be communicated to the offeree and include essential terms such as the subject matter and price. An offer can be made to one person, a group, or the world at large, as in the reward advertisement in Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256, which showed a genuine intent to be bound.

By contrast, many statements are only invitations to treat—encouragements to make offers rather than binding offers themselves. Common examples include goods on display in a shop or in a catalogue. In Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953) 1 QB 401, the display of goods was not an offer; the customer made the offer at the till, and the shop could accept or refuse.

Key points:

• Offers must be sufficiently certain and complete.
• Ads are usually invitations to treat, unless worded as unilateral offers with clear intent to be bound (as in Carlill).
• Quotations or price lists usually invite offers, not create them.

Acceptance and Communication

Acceptance is a final and unqualified assent to the terms of the offer. It must “mirror” the offer; any variation is not acceptance.

Communication rules:

• General rule: acceptance must be communicated to the offeror.
• Postal rule: acceptance is effective when posted, not when received (Adams v Lindsell (1818) 1 B & Ald 681), unless the offer excludes this method or the postal rule would be inappropriate.
• Instantaneous communications (telex, phone, most emails): acceptance is effective when received (Entores v Miles Far East Co (1955) 2 QB 327; Brinkibon v Stahag Stahl (1983) 2 AC 34).
• Silence is not acceptance (Felthouse v Bindley (1862) EWHC CP J35).

Changing terms:

• A counter-offer kills the original offer (Hyde v Wrench (1840) EWHC Ch J90).
• In a “battle of forms”, the “last shot” whose terms are assented to or acted upon usually prevails (Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd (1979) 1 WLR 401).
• Acceptance can be by conduct where the parties act as if they are bound on identified terms (Brogden v Metropolitan Railway Co (1877) 2 App Cas 666). A strict offer required by the court was emphasised in Gibson v Manchester City Council (1979) 1 WLR 294.

Practical notes:

• Requests for information do not amount to counter-offers.
• Specify how acceptance must be communicated to avoid arguments.
• Consider stating that acceptance is only effective on receipt.

Consideration and Contract Variations

Consideration is the price for which a promise is bought. It can be a benefit to the promisor or a detriment to the promisee. It need not be adequate, but it must be sufficient in law (Thomas v Thomas (1842) 2 QB 851).

Limits and developments:

• Past consideration is not good consideration; the act must be done in return for the promise.
• Performance of an existing contractual duty owed to the promisor, without more, is not good consideration for a variation (Stilk v Myrick (1809) 170 ER 1168).
• However, if the promisor gains a practical benefit and there is no duress or fraud, a promise to pay more can be supported (Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991) 1 QB 1).
• Part-payment of a debt does not discharge the whole debt without fresh consideration (Pinnel’s Case (1602) 5 Co Rep 117a; Foakes v Beer (1884) 9 App Cas 605). An additional element—such as early payment at the creditor’s request, payment at a different place, or third-party consideration—may suffice.

Drafting and practice:

• If no consideration is available for a variation, use a deed to record the promise.
• Keep written records of any agreed variations and specify consideration if relying on Williams v Roffey.

Intention to Create Legal Relations

The parties must intend to be legally bound. The law uses presumptions:

• Commercial agreements: presumed to be intended to be legally binding, unless clearly stated otherwise (Esso Petroleum Co Ltd v Commissioners of Customs & Excise (1976) 1 WLR 1).
• “Honour clauses” can rebut intention, as in Rose & Frank Co v JR Crompton & Bros Ltd (1925) AC 445.
• Domestic or social arrangements: presumed not intended to be legally binding (Balfour v Balfour (1919) 2 KB 571), unless the arrangement is formal or clearly contractual (compare Jones v Padavatton (1969) 1 WLR 325, where the presumption was not displaced).

Good practice:

• Use “subject to contract” to signal no intention until a formal document is signed.
• Conversely, remove such wording when you want a binding agreement.

Terminating Offers and Unilateral Contracts

Offers can end in several ways before acceptance:

• Revocation: effective once communicated to the offeree; notice from a reliable third party can suffice (Byrne v Van Tienhoven (1880) 5 CPD 344; Dickinson v Dodds (1876) 2 Ch D 463).
• Lapse of time: offers expire after a stated period or a reasonable time.
• Counter-offer: replaces the original offer (Hyde v Wrench).
• Death: may end an offer where personal performance is required or for certain unilateral offers.

Options and firm offers:

• An offeror may withdraw an offer even before the stated deadline unless bound by an option supported by consideration (Routledge v Grant (1828) 4 Bing 653).

Unilateral contracts:

• Acceptance occurs through performance. Once the offeree has started the act, there is an implied obligation not to revoke and to allow completion (Errington v Errington (1952) 1 KB 290; Daulia Ltd v Four Mill Bank Nominees Ltd (1978) Ch 231).

Key Examples or Case Studies

• Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256

  • A reward advertisement with deposit of money and definite terms was a true offer to the world. Performance (using the smoke ball as directed) constituted acceptance.

• Pharmaceutical Society v Boots (1953) 1 QB 401

  • Display of goods was an invitation to treat. The customer’s offer occurred at the till; the shop could accept or reject.

• Adams v Lindsell (1818) 1 B & Ald 681

  • Postal rule: acceptance effective on posting, even if receipt is delayed, unless the offer specifies otherwise.

• Entores v Miles Far East Co (1955) 2 QB 327; Brinkibon v Stahag Stahl (1983) 2 AC 34

  • For instantaneous communications, acceptance is effective when received. Consider office hours and risk allocation.

• Hyde v Wrench (1840) EWHC Ch J90; Butler Machine Tool (1979) 1 WLR 401

  • A counter-offer destroys the original offer. In a battle of forms, the “last shot” can prevail where the counter-terms are accepted or acted upon.

• Thomas v Thomas (1842) 2 QB 851; Stilk v Myrick (1809) 170 ER 1168; Williams v Roffey (1991) 1 QB 1

  • Consideration must be sufficient. A bare promise to do what you already must do is not enough, but a practical benefit may support a promise to pay more.

• Pinnel’s Case (1602) 5 Co Rep 117a; Foakes v Beer (1884) 9 App Cas 605

  • Part-payment alone does not settle the whole debt; look for fresh consideration or structure payment terms to add something extra.

• Esso Petroleum (1976) 1 WLR 1; Rose & Frank (1925) AC 445; Balfour v Balfour (1919) 2 KB 571

  • Commercial agreements presumed binding unless clearly excluded; domestic agreements presumed not binding unless the presumption is displaced.

• Byrne v Van Tienhoven (1880) 5 CPD 344; Dickinson v Dodds (1876) 2 Ch D 463; Errington (1952) 1 KB 290; Daulia (1978) Ch 231

  • Revocations must be communicated and can be via a reliable third party. Unilateral offers cannot be withdrawn once performance has begun.

Practical Applications

• Drafting offers

  • Use clear, certain terms. State expiry dates and any conditions.
  • If you do not want to be bound yet, label drafts “subject to contract”.

• Managing acceptance

  • Specify the method of acceptance and when it takes effect (e.g., “effective on receipt at [email address] during business hours”).
  • Exclude the postal rule if you do not want it to apply.
  • Acknowledge receipt of acceptances in time-sensitive deals.

• Avoiding the battle of forms

  • Respond expressly rejecting any inconsistent terms.
  • Issue an order acknowledgement with your terms and require written acceptance.
  • Seek a negotiated set of agreed terms rather than trading standard forms.

• Contract variations

  • Record variations in writing. Identify fresh consideration or use a deed if consideration is absent.
  • Watch for economic duress; it can taint any “practical benefit” argument.

• Debt settlements

  • If agreeing to accept less, build in extra consideration (earlier payment at your request, payment by a third party, payment at a different place).
  • Consider staged payments with clear consequences for default.

• Unilateral offers and rewards

  • Set out clear conditions and time limits. If withdrawing, use the same publicity as the offer where possible.
  • Recognise that starting performance may lock the offer open.

• Communication hygiene

  • Keep records of offers, acceptances, and revocations. Note dates and times.
  • Train teams not to accept by conduct inadvertently (e.g., supplying goods after receiving terms).

• Exam technique (SQE focus)

  • Identify: offer vs invitation to treat; acceptance; consideration; intention; termination.
  • Apply: cite the relevant authority concisely and explain outcome.
  • Conclude: state clearly whether a contract was formed and on which terms.

Summary Checklist

• Offer: clear, certain, communicated; distinguish from invitation to treat
• Acceptance: unqualified, mirrors the offer; communicated unless postal rule applies
• Postal rule vs instantaneous communications: know when each applies
• Counter-offers: original offer ends; last shot may govern
• Silence is not acceptance; acceptance by conduct can bind
• Consideration: sufficient (not necessarily adequate); no past consideration
• Existing duty rule and practical benefit (Williams v Roffey)
• Part-payment of debt: Foakes v Beer; look for additional consideration
• Intention: commercial presumption in; domestic presumption out; rebut where appropriate
• Termination: revocation (communicated), lapse, counter-offer, death where relevant
• Unilateral contracts: performance accepts; limits on revocation once performance begins
• Drafting tips: subject to contract; specify acceptance method; use deeds for no-consideration variations

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