Contract formation: what constitutes offer and acceptance?

In this article Michael Winder and Georgia Close in our Commercial team look at the importance of establishing written agreements and contracts.

Sometimes, either by accident or because of urgency, businesses will start working together before ‘the legals’ are sorted.  

Often businesses that have been in a long-standing commercial relationship without any contract documentation avoid raising the issue of negotiating a written contract in fear it may damage the existing relationship.

However, there are risks in proceeding without a clear contract, even in a long-standing relationship, and unfortunately these risks only come to light when an issue becomes contentious.

Whilst not always possible, it is best practice to wait until a formal written contract is in place before working together or investing any significant time or money. Without a written contract, there is a risk that the parties have differing or conflicting ideas on what the deal means.

There is also the risk that critical terms have not been dealt with sufficient certainty, meaning there could be a risk that an enforceable contract has not come into effect at all.

What is a Contract?

An agreement must have four essential components to give rise to a contract, namely: offer, acceptance, consideration, intention to create legal relations and certainty of terms. This article will focus on offer and acceptance, how this is implemented and factors to be aware of.

Offer & Acceptance

An offer is a promise by one party to enter into a contract on certain terms. It must be specific, complete, capable of acceptance and made with the intention of being bound by acceptance. An offer can be made to an individual, a group of persons, or even the whole world (all law students have to learn the 1893 case of Carlill v Carbolic Smoke Ball Co in which a gazette advertisement was deemed to constitute a contract offer).

Importantly, an offer cannot be an ‘invitation to treat’, which instead is an invitation to negotiate and therefore indicates no intention to be bound at that particular moment. An easy example of this is goods on a shop shelf, which are an invitation to treat, meaning the contract is only made at the till and before then the goods can be put back.

Acceptance is the final and unqualified assent to an offer, meaning there are no variations to the initial offer. Acceptance can be communicated in various ways, including orally, in writing, by conduct (provided it is clear the party acted with intent to accept the offer) and by email.

Offer and acceptance do not necessarily need to be two distinct elements i.e. there does not need to be a separate offer and acceptance. So long as the parties have reached an agreement (and the other essential elements of a contract have been established), a contract will be formed.

Battle of the Forms

A ‘battle of the forms’ arises when the parties enter into negotiations, but both seek to incorporate their own standard terms and conditions into the contract. This typically happens when one party makes an offer that incorporates their Ts&Cs and the other party purports to accept such an offer with a document that incorporates its own Ts&Cs. This is deemed a counteroffer, not acceptance. In such cases, it is necessary to ascertain which party’s terms and conditions have been incorporated into the contract.

As a general rule, the last set of terms despatched before unequivocal acceptance or performance of the contract will prevail. This is known as the ‘last shot fired’ in the battle of the forms. For example, if a supplier delivered a consignment of goods along with a delivery note and the customer accepted such consignment with a documented form of confirmation that stated they were accepted on their own Ts&Cs, this would amount to a counteroffer. Therefore, if the supplier continues to deliver the goods, this will indicate an acceptance of the counteroffer.

The case of TRW Ltd v Panasonic Industry Europe GmbH in 2021 has made reliance on the ‘last shot fired’ principle less certain by confirming that, in certain circumstances, the ‘first shot’ may prevail.

In this case, the buyer in 2011 had signed the ‘customer’s file’, which stated that the seller’s Ts&Cs were to exclusively apply to the entire business relationship between the parties unless different conditions, particularly the buyer’s purchase condition, have been expressly agreed in writing by the seller.

In 2015 and 2016, the buyer purchased the goods using its purchase order which incorporated its own Ts&Cs. The case primarily concerned which court had jurisdiction over the claim – the seller’s terms were to be governed by the German courts and the buyer’s terms by English courts.

The buyer of course sought to rely on the ‘last shot’ doctrine, however, it was exceptionally held that in signing the customer file, the buyer had acknowledged that the seller’s terms would govern all future supply contracts between the parties. Therefore, concluding that the German courts had jurisdiction.

Comments

Importantly, the TRW case indicates that parties cannot always rely on the ‘last shot’ doctrine and there are circumstances where the ‘first shot’ will prevail. It is always best practice to never ignore the other party’s terms and conditions and simply send across your own, and to check all communications (including email auto-signatures) for copies of standard terms to ensure you are not accidentally accepting a counteroffer.

There is a risk with standard terms, particularly in large organisations, that time and resource is invested in putting in place such terms and conditions of business but without appropriate training or procedures. Consequently, some staff are not aware of the terms or do not understand them or their importance and therefore agree either to another party’s terms or to different contractual terms and positions either verbally or by email.

Businesses should therefore ensure their staff are aware of any standard terms or positions which the business has adopted as well as the risks of either inadvertently creating a contract or carrying out business when no contract exists.

The Brabners Commercial Team can review your existing terms of business to ensure they are legally up-to-date and provide the best protection for your business or we can discuss the most appropriate form of contract documentation and draft such terms for you.

We can also provide training to your sales or procurement teams, so they understand the purpose of your standard terms and the risk associated with deviating from them.