The Travails of Teaching ‘Offer’ and ‘Acceptance’ in Contract Law

[Shivprasad Swaminathan is Professor at Jindal Global Law School where he teaches Jurisprudence and Contract law]

A Heuristic Nightmare

For a discipline that has been variously described as ‘showing itself in a mask’ (as Jeremy Bentham put it) or full of ‘chameleon-hued’ expressions (as Wesley Hohfeld put it), the law holds no dearth of labyrinths and traps for the unsuspecting student. Yet few, if any, are trickier to navigate than ‘formation’ in contract law. To the onlooker, nothing could seem simpler than ‘offer’ and ‘acceptance’ coming together to form an ‘agreement’.  In the abstract, the analysis of contract formation in terms of ‘offer’ and ‘acceptance’ has an elegant simplicity about it, which is confirmed by the many quotidian hypotheticals typically used to illustrate them. Student textbooks start out with dibbly dobblies settling, seemingly without breaking a sweat, that basic notion of ‘meeting of minds’ or consensus ad idem in a wide variety of settings from hailing a taxi to dining at a restaurant.

Law students in India might be particularly vulnerable to being in the thrall of this idyllic picture of offer and acceptance. For one, the Indian Contract Act treats ‘offer’ and ‘acceptance’ as the basis of an agreement and the rest of the statute is built upon its edifice—and there seems to be an unarticulated presupposition among Indian textbook writers that something this foundational must be too straightforward to require any critical inquiry. For another, many an Indian law student has, even before setting foot in a contract class, already internalized rather poorly done hornbooks (culled out second or third hand from textbooks) as a part of entrance examinations to law school which misleadingly portray these doctrines in the form of ‘rules’ from which one can logically ‘deduce’ answers in bloodless abstraction. Indian law students typically come into their first contract class with the warped idea that what they are going to engage in contract class is a ‘science of deduction’ from rules they already are somewhat familiar with. It takes some doing to convince them that neither did Sherlock Holmes do deduction (it was ‘induction’ instead) nor does contract law (offer and acceptance included) involve anything remotely close to it (common law reasoning as Gerald Postema reminds us, is neither inductive nor deductive).

Move from the elementary hypotheticals to actual cases and things start looking more than just a little out of joint, though the textbooks do their best to camouflage this—especially Indian textbooks. The neat geometry of the hypotheticals soon gives way to all the messiness of a pig’s feeding trough. Some cases have been made to stand for propositions they do not remotely support—the best example being Lalman v Gauri Datt (1913) 40 ALJ 489 (offer for reward to trace missing nephew claimed by uncle’s servant). As I have argued elsewhere, the decision turned on lack of consideration (pre-existing duty rule) not absence of an agreement. Another case from which a number of imaginary propositions relating to ‘offer’ and ‘acceptance’ are pressed out by textbooks and hornbooks is Felthouse v Bindley (1862) 142 ER 1037: that the offeree’s silence cannot amount to acceptance; or that acceptance has to be communicated to the offer, not another person (see Avtar Singh, Contract and Specific Relief 10th ed. p.29). This was a case where there were talks between an uncle to buy a horse from the nephew. After some back and forth, the uncle wrote offering a final price to the nephew, adding that he’ll take the deal as complete if he hears nothing further. The nephew was happy to sell the horse to the uncle and said as much to an auctioneer who was engaged to sell some belongings of the nephew. Due to an oversight, the auctioneer sold the horse and uncle sued the auctioneer for the tort of conversion.  Felthouse v Bindley turned on fact that there was no delivery or part payment as required by the Section IV of the Statute of Frauds, 1677 without which the auctioneer could not have been sued by the uncle [C.J. Miller, ‘Felthouse v Bindley Revisited’ (1972) 35 Modern Law Review 489, 491). Keating J even hints that if it were the uncle suing the nephew for the horse, matters would have been different. In fact, in the circumstances of the case, it would be surprising if a court did not find an agreement between the uncle and nephew.

Even cases which are not so grossly misunderstood, are far from well understood. The reasoning in this area of law is typically artificial, contrived and ‘backwards’ (Atiyah’s Introduction to the Law of Contract 6th ed. pp.40-41). Rather than deductively applying the definitions of ‘offer’ and ‘acceptance’ to real world scenarios, courts seem to be deciding cases first by deliberating upon a host of considerations specific to the domain in which the case arises—and seem to stick the labels ‘offer’ and ‘acceptance’ on to the fruits of these deliberations afterwards. The point of deliberations seems to be to determine the apt or reasonable threshold at which to find parties in a binding agreement. And it hardly requires a legal theorist to warn that no amount of brooding on the definitions of offer and acceptance or consensus ad idem can settle this.

Advertisements and the Riddles of Carlil v Carbolic Smoke Ball Company

Should advertisements be treated as offers such that they are ripe for acceptance—which would result in binding agreements? No amount of staring at the definition of offer or acceptance is likely to be of help in settling this issue. One must go about trying to figure out where the reasonable threshold for binding parties to an agreement in the case at hand lies. If Don advertises bottles of wines for sale (at fixed price per bottle), it would be unreasonable to saddle him with agreements with every possible person who orders. He may just not have enough bottles in stock. Hence it seems reasonable that Don should have the last word here, given that he alone knows the state of his stocks. The minds of the seller and buyer may have metaphysically met with respect to the bottles Don does have in stock—and there may be nothing open for negotiation—but this seems to be an unreasonable threshold to find an agreement.  But on different facts, the threshold maybe different. Where there is no worry of getting into an unwieldy number of agreements, this consideration will not apply. Consider, for instance, advertising a reward for a lost dog. It seems reasonable to consider this an offer because there is but one dog and there will never be a situation where one will be saddled with multiple acceptances and multiple agreements. These considerations underlie a host of leading cases in this area although the reasoning does not always make it transparent enough. It explains, for instance, why the decisions in Williams v Cawardine (1833) 5 Car & P 566 (reward for information about murderer claimed by a witness at the trial) and Spencer v Harding (1870) LR 5 CP 561 (advertisement to sell stock was held not to be like an offer for ‘reward’ unless there was intention to sell to ‘highest bidder’) turned out the way they did. In the latter, unlike the former, there could be multiple agreements.

These considerations should cast significantly different light on what is supposed to be the leading case on offer and acceptance—Carlil v Carbolic Smoke Ball Co [1893] 1 QB 256. The counsel for the Carbolic Smoke Ball Company (Herbert Asquith QC who later went on to become the British Prime Minister appeared in the lower court) astutely argued that unless the person consuming the smoke ball notified the company and the company accepted that person’s offer, there could be no binding agreement (Charles Dickens’s son Henry Dickens QC appeared for the claimant). To suppose otherwise would be to saddle the company with too many binding agreements and actions. This is a sound argument—one not easily dismissed. The decision in Carlil ultimately offers no real counter to this argument. Bowen LJ’s opinion concludes without any real justification that the advertisement in the case at hand is different from other advertisements [p.268]. Calling in aid Willes J’s reasoning in Spencer v Harding, Bowen LJ points out this case is just like an advertisement which offers to sell something to the ‘highest bidder’ [p.269] or a reward to find a lost dog [p.270].

However, the difference between the smoke ball advertisement and the ‘highest bidder’ or ‘dog reward’ advertisement couldn’t be any starker. Unlike the ‘dog reward’ or ‘highest bidder’ advertisements, here there could be a great many agreements and resultant actions. Lindley LJ acknowledges this in so many words in his opinion: ‘if they have been so unwary as to expose themselves to a great many actions, so much the worse for them’ (p.265). The already tenuous reasoning in Carlil is further muddled by the discussion on the doctrines of ‘intention to create legal relations’ and ‘unilateral contracts’ which are pressed in to service to buttress this plainly unargued for conclusion. Neither doctrine answers the threshold problem.

The decision against Carbolic Smoke Ball Co seems to have had more to do with an anxiety to come down on what was blatant quackery (then unregulated by statute). This was, therefore, a hard case which made bad law [A.W.B.Simpson, ‘Quackery and the Common Law’ (1985) 14 Journal of Legal Studies 345]. As it happens, the Carbolic Smoke Ball Co. went bankrupt after the decision only to return to business with an even more audacious offer of £200 to anyone who contracted influenza, except that this time they had to notify the company and consume the smoke ball under their supervision at their offices [Simpson ibid]. They were not sued again but, had they been, Carlil would not have helped to fasten liability against them. The only difference between the two cases is that while Carlil left the threshold problem for the court to resolve, the other negated it by prescribing an onerous acceptance procedure.

The fact that the most basic of offer and acceptance cases is so devilishly difficult to place doctrinally should give an indication of the sheer complexity of this seemingly straightforward area of law. As a result of Carlil, the reasoning in many offer and acceptance cases has got irredeemably muddled (Simpson ibid).  Consider the American case of Lefkowitz v Great Minneapolis Surplus Store (1957) 86 NW 2d 689 where a fur coat worth $100 was advertised for sale for $1 ‘first come first served’ at the store. Only one person could show up first at the store so as to be served—hence there is no worry of multiple agreements. However, Murphy J of the Minnesota Supreme Court reaches out to the doctrines of ‘intention to create legal relations’ and ‘unilateral contract’ and reasons that since the advertisement was ‘clear, definite, and explicit, and left nothing open for negotiation’ it was an offer. None of these ideas do any work here. Even Don’s advertised wine list has each of those attributes. What does the real work is the threshold question that has been snuffed out from the legal discourse thanks to status Carlil enjoys in legal pedagogy.

Transaction Types and Sliding Scales

Let’s revisit that seemingly easiest of all dibbly dobblies. Should display of goods be treated as offer? It might seem that the answer is obvious enough—that display of goods should not be an offer. But, here again, the answer is not obvious. Everything depends on the layout of the display and what is a reasonable threshold to find an agreement between parties, given the layout. In a conventional supermarket, it would surely be unreasonable to find a binding agreement the moment a customer puts an object into the shopping cart. One would want to allow the customer the liberty of choosing not to eventually buy everything that goes into the cart. It is this determination of threshold which lies behind labelling the display as ‘invitation to offer’ and emptying the shopping cart at the till as an ‘offer’. Now must this necessarily follow for all displays wherever they might be? Consider the case of a self-service petrol pump where one pays by credit card or cash after filling. Petrol once in the tank cannot be returned. This means the reasonable threshold of finding an agreement is the act of filling. This would lead us to classify the self-service petrol pump as an instance of offer and filling as an acceptance. These questions turn on matters of ‘substantial justice’ which formalists who believe in precise rules to determine offer and acceptance dismiss as ‘irrelevant’ (Langdell had famously said this in his Summary of the Law of Contracts (1880) pp.20-21).

  Numerous intuitions about what constitutes a reasonable threshold for finding a contract seem to be doing all the real work here and formalist scholarship has done a poor job of teasing out these intuitions. One of these intuitions is a transaction type threshold for finding a contract. At one end of the scale are routine, low-value transactions repeated mindlessly on a daily basis (like boarding a bus) and relational contracts (even if of high value). Courts tend to find contracts more easily here and are more likely to find parties in a contract by implication. At the other end of the scale are discrete high value transactions such as sale of real properties—where the final word is given to the seller. This sliding scale means that many of the so-called leading cases such as Harvey v Facey [1893] AC 552(sale of real property) and Gibson v Manchester City Council [1979] 1 WLR 294 (sale of council house) are at best representative of one end of the sliding scale. It is simply no good to take cases of property as a paradigm for formation because here the threshold for finding a contract is unduly cranked up. At the other end of the scale (taxis and buses for example) one can walk into contracts with relative ease.

Why are ‘Offer’ and ‘Acceptance’ so Tricky After All?

Categories of ‘offer’ and ‘acceptance’ were not known to the English common law of contract until the 19th century. There was, in fact, no ‘contract law’ as we now know it, but rather a form of action called assumpsit (literally, undertaking) which was joined in the hip to tort (so much for taxonomies that draw a clean line between tort and contract). The paradigm cause of assumpsit for which an action lay was a parole promise. As Brian Simpson’s illuminating study has shown us, the doctrine of ‘offer’ and ‘acceptance’ were imported from the civil law tradition and ‘superimposed’ upon the old English law. They performed some of the very functions earlier performed by consideration (for assumpsit) and ‘some new ones generated principally by the problem of written contracts by correspondence’ [A.W.B. Simpson, ‘Innovation in Nineteenth Century Contract Law’ (1975) 91 LQR 247,258]. To the civil law, the terms ‘offer’ and ‘acceptance’ were foundational. Under the ‘will theory’ these were concepts meant to ascertain when minds met [David Ibbetson, A Historical Introduction to the Law of Obligations 220-244]. The first English case in which this imported category was used was one which decided where a contract by correspondence was concluded: Adam v Lindsell (1818) 106 ER 250 [the drafters of the Indian Contract Act did not intend to follow the so-called ‘postal rule’ in Adam v Lindsell, nevertheless judicial interpretations ended up embracing it as discussed in another blog post here]. Although Payne v Cave (1789) 100 ER 502 is often cited as the first recorded use of ‘offer’ and ‘acceptance’ in English law, as Simpson points out, this seems to be more of a retrospective projection of the civilian rubric on the common law. A cursory reading of the case shows that the threshold for finding a binding agreement in an auction sale was thought to be the time the hammer struck since Lord Kenyon reasoned that someone could outbid the bidder before then. It is not the application of some rules of offer and acceptance that did the work here—but domain specific considerations of auction. It might be noted parenthetically that Payne v Cave is also the case Langdell happened to inaugurate his contract law courses with (‘Mr. Fox, will you please state the facts of Payne v Cave’, were Langdell’s first words spoken in a Harvard classroom, the story goes).

One of the consequences of the superimposition of these terms on English law was that the courts continued to use the old common law techniques to reach results which they merely expressed in terms of offer and acceptance. As a consequence, this is an area of the law that cannot be understood as a straightforward application of rules. While this is to a large extent true for all of contract law and one of the primary reasons for the failure of nineteenth century contract law treatises which tried to systematize all of the common law in an area, it is especially true of those areas of law which borrowed concepts that were entirely alien to English law: ‘formation’ and ‘mistake’ are two notable examples (See S. Swaminathan ‘Mos Geometricus and the Common Law Mind: Interrogating Contract Theory’ 82 (2019) Modern Law Review 49). Cast an eye on cases under the category of ‘mistake’, and formation will start looking very orderly in comparison. The Indian Contract Act, 1872 has been modelled after the will theory. Understandably, ‘offer’ and ‘acceptance’ are at the foundation of the architecture of the Act. Those foundations, however, as we have seen here, are not all that they are made out to be.

Shivprasad Swaminathan

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