Counter Offers and the Postal Rule - Research Paper Example

In order to be able to advise the parties in this matter it is necessary to examine the law in relation to counter offers and the postal rule. When addressing the issues surrounding the postal rule it will also be necessary to consider the way in which electronic communications are handled by the court in order to determine whether the acceptance would still be valid if the machine malfunctioned. in determining the effect of counter offers it will be particularly important to examine case law in this area in order to see how the courts have concluded that the parties are no longer in negotiation. In this case, this is essential, as it could be argued that the parties had not reached an agreement on the terms of the contract, as Golden Antiques has sent a communication to White Halls stating that any credit offered would be subject to the acceptance of a suitable guarantor being agreed. Although White Halls has produced a letter from Black Halls, who are prepared to act as guarantor, there is no obligation for Golden Antiques to accept them as guarantor. Before agreeing to Black Halls being guarantor for the credit, Golden Antiques are likely to want to check out the financial stability of Black Halls. It may be that Black Halls would not be in a position to make the payments if White Halls defaulted, which would mean that Golden Antiques would be justified in rejecting them as guarantor for the credit line. Having considered all of the above, it should then be possible to identify the legal positions of the parties and any recourse open to the parties in relation to the sale of the beds. In order for a contract to be fully constituted there has to be an offer1, an acceptance of that offer on agreed terms2 and then consideration paid for the product. Difficulties can arise where there is evidence that the parties are still in the process of negotiating the contract on the same terms. Such negotiations are regarded as counter offers, and the contract does not become valid until the parties agree on the terms and price of the items offered for sale. In the above, the communication from White Halls stating that they would buy the beds for £4,500 each is likely to be regarded as a counter offer, as the asking price for the beds is £5,000 each. In relation to the query with regard to whether credit is available, the courts will not necessarily consider this to be a counter offer as this could be regarded as a mere enquiry and not a rejection of the original offer3. If David had asked if the company was prepared to sell the beds for the lower price, this might not have been regarded as a counter offer but a mere enquiry. When determining whether there has been and agreement between the parties the court will examine the conduct and communication of the parties to see whether their actions amount to a rejection of the original offer or a counter offer for the item4. It has been stated that the offer of the lesser amount was rejected by Golden Antiques, and that credit would only be available if White Halls could provide a guarantor. Upon receipt of this David decides to accept the original terms and sends the acceptance back via fax along with the letter from the guarantor Black Halls. By doing this, David is effectively accepting the original offer, however, from the perspective of Golden Antiques, they would not be aware of David’s intention to accept the offer on the original terms until the communication has been received. In essence, Golden Antiques and White Halls are likely to be regarded as still in the negotiation process until the acceptance was communicated to Golden Antiques. Even if Golden Antiques had received the acceptance, either by fax or by post, they would be under no obligation to continue with the contract, as the agreement was subject to the guarantor being acceptable to Golden Antiques. Examining the communications between the parties, the courts would be likely to conclude that the faxing of the acceptance amounts to an agreement between the parties on the same terms5. However, the insertion of the clause concerning the acceptability of the guarantor by Golden Antiques could mean that despite the acceptance of the offer by White Halls, no agreement has been reached until Golden Antiques decide whether to accept Black Halls as a guarantor. If White Halls had accepted the original offer without asking for credit, then the contract would be valid from the date of the posting of the acceptance. The acceptance would also have been valid if White Halls had decided not to use a guarantor in order to secure credit for the goods, as they would have effectively have been accepting the offer on the original terms with no alteration. Under the ‘mirror image rule’ the offer has to be accepted exactly as it is made. If there are any modifications made to the acceptance this will be regarded as a counter offer and the original offer will be extinguished6. An offeror can revoke the offer before the acceptance has been communicated to the offeror7. The revocation is only valid if the revocation has been communicated directly to the offeree. Where there is evidence of ongoing negotiations between the parties, this is regarded as a ‘battle of the forms’. This was first raised in Butler Machine Tool Co Ltd v. Ex-Cell-O Corporation (England) Ltd [1979]8. In this case, the letter sent by Butler to Ex-Cello contained the standard contract terms of the company. Within the proposed contract was a price variation clause so that if the manufacturing costs increased before the goods were supplied to Ex-Cello, the additional cost would be passed to Ex-Cello. Ex-Cello asked for this clause to be removed, and that if they removed the clause they would proceed with the contract. The letter sent by Ex-Cello contained their own standard terms without the clause. Butler returned the tear off slip attached to the letter from Ex-Cello but reasserted that the deal was to be on their terms and not on Ex- Cello’s terms. Although Ex-Cello did not respond to this Butler went on to supply the machinery relying on the price variation clause which Ex-Cello refused to pay. This resulted in Butler suing Ex-Cello for the outstanding amount. Lord Denning MR, in this case, concluded that the formation of the contract should be determined by finding the decisive document amongst the communications between the parties. Lawton and Bridge LJJ were of the opinion that the last counter-offer should be the deciding factor. The generally accepted format is for the court to examine all the communications between the parties to ascertain if there has ever been an agreement between the parties on the same terms9. Generally speaking the court will take the view that where there are continual counter offers the final document in the series will be evidence of when the contract is fully created10. In this particular case, the insertion of the credit option, could lead a judge to conclude that there has been no definitive agreement between the parties, as Golden Antiques might not accept Black Halls as a guarantor. If the court does decide that the acceptance is not a counter offer, and therefore should be regarded as valid, it will then be necessary to address the problem with regard to the communication not having been received by Golden Antiques. Difficulties arise, in this case, as the fax machine was not functioning correctly and the postal communication of the acceptance was delayed by a postal strike. In order to determine the effects of the above on the validity of the contract it is necessary to examine the postal rule. The postal rule first became recognised in Adams v Lindsell11 where the court was asked to decide when a contract is deemed to have been formed if acceptance is communicated by post. In this case, the defendants had written to the plaintiffs offering to sell some wool fleeces to them. The letter stated that a response was required by post. The letter was accidentally misdirected by the defendants resulting in the plaintiffs not receiving the letter until after the deadline. The acceptance was posted back to the defendants the same day but not received until after the defendants had subsequently sold the wool to a different customer. It was the contention of the defendants that there was no contract between the plaintiff and the defendant until they had actually received the reply from the plaintiff. The court recognised that there can be difficulties with the use of the postal system since the post may be subject to delay which means that the parties are not simultaneously aware of the communications. In Adams the court stated “Where the circumstances are such that it must have been within the contemplation of the parties that, according to the ordinary usages of mankind, the post might be used as a means of communicating the acceptance of an offer, the acceptance is complete as soon as it is posted12”. Applying this to the above, it would mean that the acceptance of David by post on the due date would be a valid acceptance of the offer13. This is regardless of the fact that the letter did not reach Golden Antiques until two days after the deadline for acceptance. In situations where the communication of the acceptance has been by fax or by email, the court will generally treat such communications as though the acceptance has been communicated by the telephone. The courts generally take the view that electronic communications are ‘substantially instantaneous as a two-way communication.’ Under Article 15 of the United Nations Convention on the International Sales of Goods (UNICTRAL) an electronic communication is deemed to be sent so long as the communication is properly addressed to the recipient. This has been extended to include messages left on answer phones and fax machines, even if the offeror does not receive the message due to a fault with the equipment. Applying this to the present situation, this would mean that the contract between White Halls and Golden Antiques might be regarded by the court as valid. If the beds had not been sold to Roger, the court could have ordered specific performance of the contract, which would have meant that Golden Antiques would have to supply the beds to White Halls. Where specific performance cannot be ordered the aggrieved party would have to seek a resolution through damages for loss of chance. In terms of goods that have been sold to another party the injured party would make a claim for loss of chance, as they would not have suffered a direct financial loss from the non-performance of the contract. The aim of awarding damages is generally to put the parties in the position that they would have been in had the contract not been entered into. The courts are keen to point out that the aim of damages is not to punish the defendant but to compensate the plaintiff for the loss. In the scenario above White Halls might be able to claim damages for reliance interest14 as well as any consequential losses or non-pecuniary losses15. When considering whether damages can be awarded the court will consider the remoteness of the claim. This was considered in McRae v Commonwealth Disposals Committee (1951)16 in which the plaintiff had bought salvage rights to an oil tanker that did not exist. The Commission attempted to avoid liability on the grounds of common mistake as to the existence of the oil tanker. The courts awarded damages for reliance based on wasted expenses. A claim for loss of profits was dismissed on the grounds that such a claim was merely speculative. In this case, the court found it difficult to calculate the damages as any profit that might have been received by the defendant was purely hypothetical as the tanker did not actually exist. Similarly in Chaplin v Hicks (1911)17 the court found the defendant to be in breach of contract as they had prevented the claimant from taking part in the contest. Damages were awarded for loss of chance. In this case, the claimant had been prevented from taking part in a beauty contest were the winners would be rewarded with a place in a chorus line. The loss of chance was assessed at 25% since there could be no guarantee that the claimant would have been one of the 12 winners if she had been allowed to enter. The court made the award on based on the statistical chances of the claimant winning, much in the way that one might have a chance of winning the lottery. By contrast in Allied Maples Group Ltd v. Simmons & Simmons [1995]18 the court stated that a loss of chance could only be compensated for if the plaintiff could show that they might have obtained a better deal if the solicitor had renegotiated the matter. In this case, the court of appeal held that if the claimant was able to prove on the balance of probabilities that they would have attempted to renegotiate with the third party and that there was a substantial chance of the negotiating succeeding in achieving a better deal, then an award for compensation could be calculated. Stuart-Smith LJ observed in this case that ‘the plaintiff’s loss depends on the hypothetical action of a third party, either in addition to action by the plaintiff… or independently of it.’ When determining the amount of compensation payable for loss of expectation based on the amount that the person might have expected to have made if the contract had been carried out. Generally when damages are awarded, the courts make an award so that the claimant is not out of pocket as a result of the contract. However, with claims for loss of expectation the claimant can often be a lot better off, as they have not actually sustained any financial loss as a result of the contract not having been performed. Having considered all of the above, it is possible to advise the parties with regard to their legal position. David from White Halls If the court determines that the acceptance did not amount to a counter offer he would be entitled to sue for damages for loss of chance. When calculating the amount to be awarded, the court would take into account the amount of profit that the beds could have been sold for if the claimant had been able to purchase them. The courts would have to determine the reasonable amount of property that the claimant might have been able to achieve. The effects of the counter offers between the parties might mean that the court would conclude that there had not been an agreement between the parties on the same terms. This might in particular apply if the court feel that the clause inserted in the counter offer by Golden Antiques that credit will be available if White Halls supply a guarantor that is acceptable to them allows Golden Antiques to reject the named guarantor. This would mean that the parties were still officially in negotiation over the terms of the contract, and therefore the acceptance would be regarded as invalid. Given that there has been no agreement in relation to the acceptance of the guarantor, it is likely that the court would conclude that there was no agreement between the parties. In relation to the communication of the acceptance, if the courts hold that an agreement had been reached by the parties on the same terms, the fact that neither communication had been received by Golden Antiques by the deadline time would be immaterial. This is because, under the postal rule, acceptance is deemed to have occurred from the date of the posting of the acceptance. Similarly, with the fax machine, a communication is deemed to be valid so long as it is properly addressed to the recipient, regardless of whether the recipient receives it or not. Golden Antiques It follows from the above, that, if the courts deem the acceptance to be valid, Golden Antiques would be liable to pay White Halls damages for the loss of chance. However, if the acceptance is not deemed to be valid, Golden Antiques would be entitled to sell the goods to anyone else, which would mean that the sale to Roger would be valid. Regardless of the above, specific performance of the contract between White Halls and Golden Antiques could not be ordered, as the goods had already been sold to Roger. If the beds had not been sold to Roger the courts could have ordered specific performance if they conclude that the acceptance by White Halls should be regarded as a valid contract. If Golden Antiques can convince the courts that the agreement would only be valid if they accepted Black Halls as the guarantor, the courts would be likely to determine that an agreement had not yet been reached. This would mean that Golden Antiques would have no obligation to sell the beds to White Halls. Roger Regardless of the outcome of the above, Roger would remain the legal owner of the beds. The courts could not order Golden Antiques to break the contract with Roger and sell the beds to White Halls, and so therefore the contract between Roger and Golden Antiques would remain valid. Bibliography Beale, HD, Bishop, WD, Furmston, MP, (1995), Contract Cases and Materials, 3rd Ed, Butterworths Bixby M.B., Beck-Dudley C., Cihon P.J. (2002), The Legal Environment of Business, Prentice Hall, New Jersey. Civil Litigation Study Manual, (2008), BPP Learning Media Dignam, A J., (2006), Company Law, 4th ed. Oxford University Press, London Elliott, C and Quinn, F, (2005) Contract Law, 5th Ed, Pearson Longman Goode, R M, (2004), Commercial Law , 3rd Edition, London, Penguin. Keenan, D and Riches, S, (2005), Business Law, 7th Ed, Longman Treitel, G H.(1999), Law of Contract, 10th Ed, Sweet & Maxwell Rose, FD, (2000), Statutes on Contract, Tort & Restitution, 10th Ed, Blackstone’s Read More