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Offer and Acceptance: How contracts are formed.

May 17, 2012

Part 1 – Making offers that can be refused…  

This post is the first of a two-part series exploring the requirements for the formation of a valid contract.   Our blogs have already looked at how some terms in contracts may be implied in order to try and fill in gaps that the parties haven’t addressed. However, once the terms are settled, how and when does the actual binding contract come into existence?   Well, a binding contract is only formed when an offer is accepted.  

The idea of an offer may seem obvious (especially if you’re Don Corleone). But at law, it must be specific, complete, capable of acceptance and made with the intention of the ‘offerer’ being bound by it. This means there must be some terms attached to the offer (however basic) and an intention that no further bargaining or negotiating is going to take place.  

“So, a bit like seeing something for sale in a shop window or shelf,” I hear some of you say. Well, not exactly.      

In this instance the law interprets the shop owner to be indicating that they may be prepared to enter into a contract with you to sell, for example, that pair of jeans you’ve had your eye on. This is termed an “invitation to treat” and this comes before the “offer”.  

The offer is actually made by you (the prospective buyer), when you tell the shop owner that you’d like to buy the jeans. The basic terms are in place. The item is a pair of jeans, you know the price and the payment terms/method. The shop owner then “accepts” your offer by taking your money and giving you the jeans.      

This can be particularly helpful for online retailers, where items are sometimes mistakenly put up for sale at bargain prices. With online communities often scouring the internet for good deals to post back on their websites, an obligation to honour orders at the mistaken price has the potential to be very costly for online retailers. However, viewing items on a website page is like seeing them in the shop window. It’s an invitation to treat and an order placed on a website is likely to be akin to telling the shop owner that you would like to buy the jeans. It’s an offer to buy, which is subject to a retailer accepting it.   Given this, the terms and conditions for the sale of goods or services (such as an online retailer’s Ts and Cs) should be very clear on when and how the binding contract is formed. Who makes the offer? When is it accepted? Can one side (i.e. the retailer) refuse the offer, and for what reasons (if any)?  

To sum up, all businesses need to pay attention to offer/acceptance in their terms and conditions and contracts. If you’re not careful, someone just might make you an offer you actually can’t refuse…