Legal Briefing

Court of Appeal re-affirms the test for offer and acceptance

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Corporate and commercial | 01 February 2011

In the recent case of Crest Nicholson (Londinium) Ltd v Akaria Investments Ltd [2010], the Court of Appeal was once again tasked with confirming the proper test for offer and acceptance.

This article will provide an overview of the rules of offer and acceptance, in addition to a brief review of Crest Nicholson, and key points arising for practitioners and their clients. 


LEGAL PRINCIPLES RELATING TO OFFER AND ACCEPTANCE

  • The traditional view is that a contract is formed when an offer is made by one party (A) and is accepted by another party (B), along with the intention to create legal relations and consideration.
  • An offer is defined as ‘an expression of willingness to contract on specified terms made with the intention (actual or apparent) that it is to become binding as soon as it is accepted by the person to whom it is addressed’ (Chitty on Contracts, thirteenth edition, chapter 2-003).
  • If all the parties have, to all outward appearances, agreed the same terms on the same subject matter, an apparent intention to be bound may suffice (an objective test).
  • An acceptance is a ‘final and unqualified expression of assent to the terms of an offer’, which is analysed objectively (Chitty on Contracts, chapter 2-027).
  • Whether the offeror is bound by acceptance of the offer depends on the state of mind of the offeree, which is not wholly objective.
  • When the agreement is subject to lengthy negotiations, or apparent negotiations occur after an agreement has taken place, it can be difficult to pinpoint when the offer has been made and accepted. In these situations the court looks at the whole course of correspondence between the parties to decide if the same terms have been agreed (Kennedy v Lee [1817]. In the case of apparent post-contractual negotiations, the court will again analyse the course of correspondence to see when and whether an unequivocal acceptance has been made. If an acceptance has taken place, then a contract will stand regardless of the further negotiations, unless these made some attempt to rescind the contract (Perry v Suffields Ltd [1916]).
  • In contrast, the correct test when interpreting a contract is a question of what a reasonable person, having all the background knowledge that would have been available to the parties, would have understood them to be using the language in the contract to mean (Chartbrook Ltd v Persimmon Homes Ltd & ors [2009]).

CREST NICHOLSON

First instance

In Crest Nicholson, the court was required to construe the provisions of a commercial property development agreement concerning the payment of profit payments. The question was whether a letter sent by Crest to Akaria contained an offer capable of acceptance, thus enabling the formation of a contract that in turn would determine the correct basis for calculation of the profit payments.

The judge took the view that the letter had to be construed in the context of the position of the person who was writing it and the person to whom it was written. The judge was persuaded that personnel with the experience and knowledge of the offeree and offeror of the relevant development and markets would have realised that the letter was an offer to agree certain points that had not been part of any agreement between the parties, including the basis for the profit calculation. Consequently, the judge granted a declaration that the letter constituted an offer to fix the basis on which the profit payments were to be calculated and was, accordingly, capable of acceptance by Akaria.

Court of Appeal

The Court of Appeal found that the first instance judge had erred in their method of determining the formation of the contract.

Delivering the judgment, Sir John Chadwick stated that there was a clear distinction between the test the court should apply when called on to interpret the meaning of an existing contract, and that to be applied to determine whether a binding contact had been formed:

‘In the former case the question is “what did the parties intend by the words used in the agreement which they made”: in the latter, the questions are (i) “was there a proposal (or ‘offer’) made by one party [A] which was capable of being accepted by the other [B]” and, if so, (ii) “was that proposal accepted by [B] …. In determining the first of those questions …. the correct approach is to ask whether a person in the position of B (having the knowledge of the relevant circumstances which B had), acting reasonably, would understand that A was making a proposal to which he intended to be bound in the event of an unequivocal acceptance”.’

Crest appealed the first instance decision. The court found that the letter did not contain an invitation to agree to matters that had not previously been agreed. It found that the relevant part of the letter containing the information that was asserted to be a new offer would not have been understood by the informed recipient, acting reasonably, to be a valid offer, because there was an obvious mistake in the letter.

The rationale behind this part of the decision in Crest Nicholson included the fact that previous documents and agreements had carefully defined certain key words used in the purported offer letter, such that the way the words were used in the letter would have been interpreted by anyone familiar with the transactional history to be an obvious mistake. The terms were therefore not interchangeable for the purposes of the letter, and the substitution of one for the other could not have been intended by the writer, or understood by the reasonable recipient, to make up an offer capable of acceptance.

COMMENT

Crest Nicholson provides a recent example of the court’s continued endorsement of a common sense approach to determination of formation of contracts, and the distinct tests that will apply to the question of formation and interpretation.

This decision further emphasises the necessity for parties to exercise caution when corresponding on matters that amount to an agreement of terms. Some key points to consider are set out below:

  • parties should consider drawing up a simple agreement to reflect agreed terms or variations, rather than to relying on exchanges of correspondence;
  • parties must be clear and unequivocal when varying contract terms (including expressly stating that other terms remain unaffected); and
  • any suspected mistakes or ambiguities during negotiation should be brought to the attention of the other party as soon as possible, to avoid uncertainty and the potential for dispute at a later stage.