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Contract formation: What constitutes acceptance?

Contract Document Print publication

24/11/2016

Contract formation can be contentious

When, if at all, have the parties formed a contract, and on what terms?

A contract is formed when all of the key elements are present: offer; acceptance; consideration (that is, money or money’s worth); intention to create legal relations; and certainty of terms. You might think that the point at which a contract has been formed is easy therefore to establish.  However, this is a common source of dispute.  One particular area of contention is often whether a response to an offer constitutes an acceptance or a counter-offer.  This can be crucial because, for example, it can determine on whose terms a business deal proceeds, or on what terms a dispute is settled.

The latter scenario was the basis of a recent case, Gibbs v Lakeside Developments Ltd [1].  Party A made a settlement offer of a certain sum to Party B, specifying that payment was to be made by a certain date.  Party B responded in an e-mail which stated “[Party B] accepts your offer.”  Party B’s e-mail also attached a proposed draft order to formally document the settlement, but the draft order specified a later date for payment.  A dispute arose as to whether Party A’s settlement offer had been accepted, or whether Party B’s response was a counter-offer.

Offer and acceptance and ‘the battle of the forms’

Going back to legal basics, an offer is a promise by one party to enter into a contract on certain terms. It must contain all off the basic terms of the agreement and evidence an intention that no further bargaining is to take place. Acceptance is final and unqualified assent to an offer which must correspond exactly with the offer, with no variation of the terms.  If, as in this case, a purported acceptance does not match the terms of the offer, then no contract is formed and, instead, a counter-offer is made.

A common upshot in the commercial context is the so-called battle of the forms. This is where, during business-to-business negotiations, each party wants its own standard terms and conditions to govern the contract and so one party offers to contract on its terms and the other purports to accept but attempts to impose its own terms.  This often means that the last set of terms despatched before performance (sometimes referred to as the ‘last shot fired’) will prevail. However in these scenarios it can be difficult to ascertain the exact point at which a contract comes into being, and therefore which terms apply.

Legal decision

In the Gibbs case the High Court held that the reference in Party B’s attached draft order to a later date for payment meant that Party A’s offer had not been accepted.  The court did not agree with Party B’s argument that the e-mail statement constituted unequivocal, complete acceptance and that the attached draft order was merely a proposed form of document, which could be varied or rectified, to record the agreed settlement.

As an aside, the court considered the earlier case of Pagnan SPA v Feed Products Ltd [2], which stated that where there is a chain of correspondence or documentation from which you have to conclude the point at, and the terms upon, which a contract was formed, you have to consider the correspondence as a whole.  Contrary to an earlier High Court decision [3], the judge in Gibbs held that that can involve an assessment of whether subsequent correspondence and conduct supports your conclusion.

Practical advice

The advice for commercial parties is clear:

  • Whether you are entering a new business arrangement or negotiating resolution of a dispute, take particular care if terms appear elsewhere, whether that be on the reverse of a form; on a website; in an attachment to an e-mail; in a separate draft contract or other form of document; or elsewhere within promotional material or pre-contractual correspondence.
  • Timing is everything. Governing terms will be those prevailing at the time the contract is created. Whilst a court can review all relevant correspondence and conduct, after-the-event attempts to rely on after-the-event statement, terms printed on invoices or other post-contract documents have been unsuccessful.
  • If you are making an offer, make sure that it clearly and comprehensively sets out all of the key terms that are important to you.
  • If you wish to accept an offer, make sure that you are entirely happy with all of the terms proposed and that you clearly communicate your unequivocal and unqualified agreement.
  • Beware inadvertent acceptance. Remember that, with some limited exceptions, a contract does not need to be written or indeed in any particular form. A contract can be made orally (face-to-face or via some communication medium such as the telephone); it can be implied from the conduct of the parties; and it can be made via email, or by clicking a button on a website, provided the key elements are present.  It is therefore possible to accept another’s terms simply by failing to object to them or to assert your own [4].
  • Finally, note that even once a contract has been formed, post-contract conduct or correspondence can alter or vary governing contractual terms. Again, be careful to be consistent in the practice you adopt so that, whatever happens, you end up with the deal you expect.

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[1] [2016] EWHC 2203
[2] [1987] 2 Lloyd’s Rep 601
[3] Newbury v Sun Microsystems [2013] EWHC 2180 (QB0
[4] See our earlier briefing for more information and advice.

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