Reflection of Commercial Parties' Intention by the Doctrine of Offer and Acceptance - Essay Example

The very existence of a commercial contract and the terms contained in that agreement which will be legally enforceable are based on the doctrine of offer and acceptance. Evaluate whether this formulaic approach to contract can truly reflect the intention of commercial parties. The law of contract stipulates three fundamental requirements for the formation of a legally enforceable contract; namely; offer, acceptance and consideration. However a central issue of contention in contractual litigation is the degree to which the rigid legal concepts of offer and acceptance can be reconciled with the implied notion that contracts reflect the actual intention of the contractual parties, particularly in commercial contracts and contemporary contracting methods1. This issue has often arisen in misrepresentation claims and breach of contract claims disputing pre-contractual negotiations, which are often viewed as by commercial parties as evidence of contractual intention2. However, the intention indicated in pre-contractual negotiations can pose problems if not accounted for in the body of the signed contract itself. The problem of intention is further compounded by the general judicial presumption of the sanctity of contract particularly in commercial contract cases3. The focus of this paper is to critically evaluate whether the doctrine of offer and acceptance can truly reflect the intention of contracting parties particularly in commercial contracts. This is particularly evident with regard to the contemporary methods of communication and the evolution of business transactions in the 19th century however required the reshaping of existing offer and acceptance rules to ensure a reasonable degree of precision and certainty in contractual negotiations4. This led to the introduction of the postal rule, which in general terms stipulates that contractual acceptance becomes effective once posted rather than when it is received by the offeror5. The overriding purpose of the rule was to create certainty in contractual transactions, however the current methods of communication such as internet, fax and telephone has rendered the postal rule a difficult model to apply in practice. However, the reality of commercial contracting has led commentators to question whether the entrenched rule of acceptance and the postal rule can validly represent contractual intention, particularly with the increasing use of email in contractual negotiations6. For example, Capps suggests that “given the advances in communication systems since the postal rule was created, concluding that the postal rule does not apply to email would seem sensible”7. It is submitted that the postal rule undermines the general principle that acceptance must be communicated to the offeror as it provides that acceptance is contractually binding once posted, even prior to the offeror having knowledge of such acceptance8. Moreover, in Household Fire and Carriage Accident Insurance Co v Grant9, Lord Thesiger asserted that “there is no doubt that the implication of a complete, final and absolutely binding contract being formed, as soon as the acceptance of an offer is posted may in some cases lead to inconvenience and hardship.10” However, the postal rule is applicable even in the event of the letter being lost in the post and is intended to protect the offeree’s reasonable belief that a binding contract was created when the acceptance was dispatched and remove inherent uncertainty in contract formation stage11. Nevertheless, the continuous development of technological communication methods often utilised in contemporary business transactions has created ambiguity in situations involving contractual negotiations by email, fax and telephone. The law’s response has been to create a distinction between “instantaneous” methods of communication12. The leading decision in this area is the Court of Appeal decision in Entores Ltd v Miles Far East Corporation13, which considered the applicability of the postal rule when communication is made by other means. It was held that the use of telex in contract formation along with any “instantaneous” method of communication should be likened to the parties negotiating in each other’s presence. On this somewhat artificial rationale, the Court of Appeal considered Telex and telephone to be a direct method of communication and therefore instantaneous. As such, communication had to be received by the offeror and the postal rule was not applicable. Whilst arguably reaching a sensible approach from a practical business perspective, the rationale is slightly skewed in creating an analogy to a live negotiation process. However, technological advances have clearly redefined the manner in which telex systems operate and as the Entores decision was addressing telex directly, it is arguable that the decision is obsolete14. Alternatively, in the leading case of Brinkibon Limited v Stahl und Stahlwarenhandelsgesellschaft mbH15 the House of Lords specified a framework of guidelines, which is utilised to determine the applicability of the postal rule to any form of communication16. In this case, contractual negotiations involved various forms of communication devices and the court applied the general rule that a contract is concluded when acceptance is communicated by the offeree to the offeror. However, in cases involving instantaneous communication methods, the House of Lords asserted the general presumption that the contract would be made when and where the acceptance was received. From a practical perspective in context of emails, the judicial rationale in Brinkibon is clearly a sensible approach and reflects the reality of contemporary business transactions. For example, whilst emails are instantaneous, they do not go directly to destination and are transmitted through a host akin to letters sent via the post office. The problem of email communication and the postal rule is determining at what stage a receipt has been acknowledged17. There is clearly ambiguity as to whether it is received in the contractual sense at the point of being received by ISP, or the point of being delivered to recipient’s mailbox or alternatively, at the point that it is read by the recipient. Delays in transmission of email messages, incorrect addresses and other identifiable factors can impede receipt18. Therefore, the applicability of the Brinkibon rationale suggests that the contract will be concluded when the email is received and the offeror communicates receipt. As such, the Brinkibon decision clearly supports Capps’ view that the common law has adopted a sensible approach to the postal rule with regard to emails as it clearly encourages business certainty, which is vital in contractual relationships. However, the Brinkibon decision is clearly a guide framework and Lord Wilberforce in Brinkibon case asserted that “no universal rule can cover all such sound cases; they must be resolved by reference to the intentions of the parties, by the sound business practice and in some cases a judgment of where the risk should lie19. Clearly it is therefore better for the contractual parties to express their intentions regarding acceptance to circumvent the inherent uncertainties of the postal rule as the common law is unable to accommodate the pace of technological change and nuances of every method of communication. The Electronic Commerce Regulations 2002 provides some welcome clarification to the area of law by implementing express provision on when an electronic contract is deemed to come into force20. Whilst this is clearly a sensible approach, it is arguably limited to consumer contracts. Alternatively, the UNCITRAL Model Law provides assistance and indicates that the postal rule is outdated and undermines the intention of contracting parties in the e-commerce business paradigm21. However the Model Law has not been adopted by UK law. Therefore, whilst Capps’ comments are clearly supported by the business and legal need for certainty in contractual negotiation, there remains a degree of ambiguity regarding the point at which email receipts point to a concluded contract and the Brinkibon decision whilst welcome, was by no means a panacea to this complex area of law. Alternatively, particularly in business contracts it would be worth considering the entering into a standard form agreement similar to the Electronic Data Interchange Partner Agreement regarding electronic data interface communications22. The EDI Partner Agreement clarifies the issue and states that no contract will be binding until it has been received and thereby eliminates the inherent risk of the postal rule in instantaneous communication scenarios. Another problem in applying the traditional postal rule to the contractual doctrine of acceptance is the contractual status of continuous correspondence in effecting the contractual intention of the parties. Indeed, McKendrick highlights the fact that commercial contractual negotiations will often result in offers and counter offers being communicated23. In addressing this conundrum, the decision in Hyde v Wrench24 determined that any counter offer during negotiations will result in a termination of the original offer. In considering the “battle of the forms” dilemma for contractual negotiations, the judicial approach has been to implement a “last shot principle” in light of the decision in Butler Machine Tool Co –v- Ex Cell-O-Corp25. Effectively, this principle implements a presumption that the final offer that is validly accepted will regulate the conditions of the enforceable contract. However, whilst such principles are an attempt to maintain certainty, it can result in failing to adequately implement the parties’ intentions. Alternatively, if the negotiations remain too uncertain this can widen scope for judicial intervention, which again can undermine contractual intention and Kramer argues that this is perpetuated by the inconsistent approaches of the judiciary to try and second guess contractual intentions26. For example, in Nicolene v Simmonds27the courts ignored uncertainty in relation to what it considered to be subsidiary matters to the fundamental terms of contract. In contrast, the courts were willing to imply terms regarding fundamental issues in a contract. For example, in the case of British Steel Corporation v Cleveland Bridge and Engineering28, a dispute arose over the goods delivered before the final contract had been concluded and it was held that where one party confers a benefit on another in anticipation of a contract, which never arises, the innocent party is entitled to recover the value of the benefit. This is effectively utilising the notion of pre-contractual disclosure to impose contractual obligations. Additionally, in the case of Interfoto v Stiletto29, one of the contractual parties failed to point out a particularly onerous obligation in the hire contract. Lord Bingham found that the English rules required a “result not very different from the civil law principle of good faith30” and therefore refused to enforce the term. Additionally, the courts will use this good faith principle to assert terms particularly in cases involving partial or substantial performance as highlighted by the decision in Hillas v Arcos.31 The issue of performance and intention in commercial contracts has become particularly contentious in construction contracts in relation to letters of intent. Letters of intent are commonly utilised in the construction industry to cover pre-existing negotiations however difficulties arise when formal contracts are not entered into and work has been carried out by one party in reliance on the letter of intent32. This often becomes contentious particularly as such letters are often addressing the rights and obligations of parties with a view to entering into a long term contractual relationship. As such, it is common in the construction industry for negotiating parties to rely on the letter of intent to address long term delivery requirements and materials purchase orders33. However, ambiguity as to the contractual status of such letters of intent lends itself to dispute as to the extent of liabilities and obligations under the letter of intent. For example, in the British Steel case, the judge noted that in the majority of cases where work was undertaken pursuant to a letter of intent, it would not matter whether the contract did or did not come into existence. If the parties had acted on the letter of intent, the payments claim would be based on a quantum meruit basis under the law of restitution regardless of whether the claim was in contract34. However, the inherent difficulty with a letter of intent is where a party is seeking to claim damages for breach of contract and it is argued that no contract is entered into. Accordingly, the issue of whether a contract is in existence is vital. Moreover, if there is no contract, it begs the question as to what sums the prejudiced party is entitled to under the restitution based quantum meruit principles. On the particular facts of the British Steel case, it was held that the letter of intent covered pre-contractual negotiations and as no terms had actually been agreed and therefore there was no binding contract on the parties. Therefore, the extent to which a contractor can rely on the letter of intent to enforce their rights will inherently be dependent on what terms are agreed to in the letter of intent itself. In the British Steel case for example, it was evident that issues pertaining to price, delivery dates and the applicable terms and conditions had not been agreed. As such, the Court concluded that there was simply an obligation upon Cleveland to pay a reasonable sum for such work as had been done pursuant to its request contained in the letter of intent. Therefore Cleveland was entitled to recover sums in respect of its performance on a quantum meruit basis. In considering the basis for recovery under the quantum meruit principle, Beatson argues that a fundamental justification for this is that “it is clear that a person who has rendered services requested, accepted or acquiesced in by the defendant is entitled to recompense whether or not the defendant gained from the services. Thus, recompense has been given in respect of plans prepared in anticipation of the conclusion of a contract by a developer but rendered useless when the landowner decided not to proceed35.” The fundamental of the restitution based method of recovery is analogous to the doctrine of estoppel. This is evidenced by the decision in William Lacey Limited v Davis36 where it was held that a quantum meruit claim could be made where the defendant had been led to believe that the project would proceed, encouraging him to produce detailed estimates. However, the general rule as extrapolated in the case of Turriff Construction Limited v Regalia Knitting Mills37 is that a letter of intent will be of no contractual effect. In the Turriff decision, it was asserted that a letter of intent is “no more than an expression in writing of a party’s intention to enter into a contract at a future date38. The underlying rationale for this approach is rooted in the freedom of contract principles and the fundamental principle of the requirement of agreement of contractual terms and intention to enter into contractual relations. For example, in the case of Courtney and Fairbarn Limited v Tolani Bros Hotels39, it was held that in the absence of agreement upon such a fundamental matter as price, it was impossible to say that a contract had been formed. The parties had only reached the stage of negotiation and that could not form the basis of a contract. If anything, from a commercial perspective the letter of intent is a useful tool in cementing commercial relations between the negotiating parties, however a balance has to be struck between contractual certainty and abuse of superior bargaining position leading to pre-contractual performance. Indeed, in the Courtney decision Lord Denning commented that “if the law does not recognise a contract to enter into a contract, when there is a fundamental term yet to be agreed, it seems to be me it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force”40. Another example is the decision in Sir Robert McAlpine Management Contractors Limited v London Demolition (UK) Limited41 it was held that the appointment of sub-contractors under a letter of intent could prevent a contract from coming into effect. If the letter of intent did not comply with the express contractual requirements this could then prevent the existence and enforcement of any contract. Morever, in Allridge (Builders) Limited v Grandactual42 it was held that failure to implement procedures on a particular standard form of contract would indicate that the acceptance of a letter of intent did not constitute a contract incorporating that form43. Nevertheless, outside the parameters of quantum meruit and restitution, there has been a gradual development of decisions supporting contractual or extra contractual obligations under letters of intent44. A prime example is Mitsui Babcock v John Brown45, which involved a contract for the construction of a power station. Accordingly, the extent to which a contractor can rely on a letter of intent to enforce contractual obligations will ultimately depend on the terms specified in the letter of intent, which necessarily requires a case by case approach. However, the concomitant result of this approach has been to perpetuate legal uncertainty by relying on prior contractual negotiations to determine subjective intention46. As a result, it is submitted that the central problem regarding the rigid contractual principles of offer and acceptance is the inability to adequately address changing practices in contractual negotiation and commercial realities. As a result, the courts are having to second guess the subjective intentions in commercial contracts to implement principles of fairness particularly in cases of part performance, resulting in legal uncertainty. BIBLIOGRAPHY John Adriaanse (2004). Construction Contract Law: The Essentials. Palgrave Macmillan. Beatson, J. (1991). The Use and Abuse of Unjust Enrichment. Oxford University Press at p.32 Capps, D. (2004). Electronic Mail and the postal rule. International Company and Commercial Law Review. Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. M. P. Furmston (2007) Cheshire, Fifoot & Furmston’s Law of Contract. 15th Edition Oxford University Press. Hahnkamper, W. Acceptance of an Offer in light of Electronic Communications. Journal of Law and Commerce Volume 25,147 Kramer, A. (2004). Implication in fact as an instance of contractual interpretation. Cambridge Law Journal, 384. E. McKendrick (2008). Contract Law: Text, Cases and Materials. 3rd Edition Oxford University Press. McMeel, G. (2003) Prior Negotiations and subsequent conduct – the next step for contractual interpretation? LQR 272. Linda Mulcahy & John Tillotson (2004). Contract Law in Perspective. Routledge Cavendish. Jill Poole (2006). Contract law. 8th Edition Oxford University Press. Dr B. Soyer, (2007). Reforming Pre-contractual duty of utmost good faith in insurance contracts- An economic perspective. Available at www.canlecon.org/submissions/docs/Soyer. Accessed February 2010. G H. Treitel (2007). The Law of Contract. 12th Revised Edition Sweet & Maxwell. Read More