Which type of contract involves an exchange of consideration between two parties?

Unilateral offer – A contract in which only one party makes an express promise, or undertakes a performance without first securing a reciprocal agreement from the other party.

In a unilateral, or one-sided, contract, one party, known as the offeror, makes a promise in exchange for an act (or abstention from acting) by another party, known as the offeree. If the offeree acts on the offeror’s promise, the offeror is legally obligated to fulfill the contract, but an offeree cannot be forced to act (or not act), because no return promise has been made to the offeror. After an offeree has performed, only one enforceable promise exists, that of the offeror.

A unilateral contract differs from a Bilateral Contract, in which the parties exchange mutual promises. Bilateral contracts are commonly used in business transactions; a sale of goods is a type of bilateral contract.

Reward offers are usually unilateral contracts. The offeror (the party offering the reward) cannot impel anyone to fulfill the reward offer. An offeree can sue for breach of contract, however, if the offeror does not provide the reward after the offeree has fulfilled the contract’s requirements.

Carlill v. Carbolic Smoke Ball Co.

Parties:

Plaintiff: Carlill

Defendant: Carbolic Smoke Ball Co.

Facts:

Defendants advertised their balls curing for cold, that they would pay for any person 100l who contracted to use the ball three times daily for two weeks according to the printed directions and defendant also added a passage that “1000l is deposited with the Alliance Bank, shewing our sincerity in the matter”. Plaintiff relied on it but it didn’t work as what the defendant said. Judgment for plaintiff and defendant appealed.

Issue:

Whether plaintiff’s performance can be an acceptance?

Reasoning:

The court reckons that “1000l is deposited with the Alliance Bank, shewing our sincerity in the matter” embodied that defendant did make a promise.

Precedent shows that the performance of the conditions is the acceptance of the offer.

Although a general proposition is that an acceptance should be notified by the offeree to the offeror, in this case, there is an exception. This offer is a continuing offer and they are open to the observation that the notification of the acceptance need not precede the performance. From the nature of this transaction, defendant does not expect and does not require notice of the acceptance apart from notice of the performance.

Holding:

Judgment is for plaintiff.

An agreement formed by an exchange of a promise in which the promise of one party is consideration supporting the promise of the other party.

A bilateral contract is distinguishable from a unilateral contract, a promise made by one party in exchange for the performance of some act by the other party. The party to a unilateral contract whose performance is sought is not obligated to act, but if he or she does, the party that made the promise is bound to comply with the terms of the agreement. In a bilateral contract both parties are bound by their exchange of promises.

Both parties to a bilateral contract make promises. With respect to the promise in issue, the party making the promise is the promisor and the other party is the promisee. The legal detriment incurred by the promisee consists of a different promise by him or her to do something or refrain from doing something that he or she was not previously legally obligated to do or to refrain from doing. This legal detriment constitutes consideration, the cause, motive, or benefit that induces one to enter into a contract. Consideration is an essential component of a contract.

Traditionally, courts have distinguished between unilateral and bilateral contracts by determining whether one or both parties provided consideration and at what point they provided the consideration. Bilateral contracts were said to bind both parties the minute the parties exchange promises, as each promise is deemed sufficient consideration in itself. Unilateral contracts are said to bind only the promisor and do not bind the promisee unless the promisee accepts by performing the obligations specified in the promisor’s offer. Until the promisee performs, he or she has provided no consideration under the law.

For example, if someone offered to drive you to work on Mondays and Tuesdays in exchange for your promise to return the favor on Wednesdays and Thursdays, a bilateral contract would be formed binding both of you once you provided consideration by accepting those terms. But if that same person offered to pay you $10 each day you drove him to work, a unilateral contract would be formed, binding only upon the promisor until you provided consideration by driving him to work on a particular day.

Modern courts have de-emphasized the distinction between unilateral and bilateral contracts. These courts have found that an offer may be accepted either by a promise to perform or by actual performance. An increasing number of courts have concluded that the traditional distinction between unilateral and bilateral contracts fails to significantly advance legal analysis in a growing number of cases where performance is provided over an extended period of time.

Suppose you promise to pay someone $500.00 to paint your house. The promise sounds like an offer to enter a unilateral contract that binds only you until the promisee accepts by painting your house. But what constitutes lawful “performance” under these circumstances? The act of beginning to paint your house or completely finishing the job to your satisfaction?

Most courts would rule that the act of beginning performance under these circumstances converts a unilateral contract into a bilateral contract, requiring both parties to fulfill the obligations contemplated by the contract. However, other courts would analyze the facts of each case so as not to frustrate the reasonable expectations of the parties. In neither of these cases are the legal rights of the parties ultimately determined by the courts by applying the concepts of unilateral and bilateral contracts.

In still other jurisdictions, courts have simply expressed a preference for interpreting contracts as creating bilateral obligations in all cases where there is no clear evidence that a unilateral contract was intended. The rule has been stated that in case of doubt an offer will be presumed to invite the formation of a bilateral contract by a promise to perform what the offer requests, rather than the formation of a unilateral contract commencing at the time of actual performance. The bottom line across most jurisdictions is that as courts have been confronted by a growing variety of fact patterns involving complicated contract disputes, courts have shifted from rigidly applying the concepts of unilateral and bilateral contracts to a more ad hoc approach.

Mutuality of obligation must exist in an enforceable bilateral contract, and this involves the concept of reciprocity. A cannot enforce B’s promise unless A’s promise entails a legal detriment, and B can enforce A’s promise only if B’s promise involves a legal detriment.

If a minor enters a bilateral contract with an adult that is unenforceable due to the minor’s age, the adult party cannot assert absence of mutuality as a defense if the minor sues to enforce the contract. This principle applies to any situation where the law grants a particular party a privilege to avoid a contract because of his or her status.

Read more: Bilateral Contract http://law.jrank.org/pages/4745/Bilateral-Contract.html#ixzz0YeIBqeSa

Fisher v Bell [1961] is a case concerning the requirements of offer and acceptance in the formation of a contract. The case established that, where goods are displayed in a shop together with a price label, such display is treated as an invitation to treat by the seller, and not an offer. The offer is instead made when the customer presents the item to the cashier together with payment. Acceptance occurs at the point the cashier takes payment.

The Defendant displayed a flick knife in the window of his shop next to a ticket bearing the words “Ejector knife – 4s.” Under the Restriction of Offensive Weapons Act 1959, section 1(1), it was illegal to manufacture, sell, hire, or offer for sale or hire, or lend to any other person, amongst other things, any knife “which has a blade which opens automatically by hand pressure applied to a button, spring or other device in or attached to the handle of the knife”. On 14 December 1959, the Claimant, a chief inspector of police force, brought forward information against the Defendant alleging the Defendant has contravened section 1(1) by offering the flick knife for sale.

Judgment:

High Court

At first instance, the Prosecutor submitted that the Defendant has displayed the knife and ticket in the window with the object of attracting a buyer, and that this constituted an offer of sale sufficient to create a criminal liability under section 1(1) of the Act. The Defendant submitted that this was not sufficient to constitute an offer. The judges at first instance found that displaying the knife was merely an invitation to treat, not an offer, and thus no liability arose. The Prosecutor appealed the judges’ decision.

Court Of Appeal

The court upheld that, although the display of a knife in a window might at first appear to “lay people” to be an offer inviting people to buy it, and that it would be “nonsense to say that [it] was not offering it for sale”, whether an item is offered for the purpose of the statute in question must be construed in the context of the general law of the country. He stated that the general law of the country clearly established that merely displaying an item constituted an invitation to treat. He also read the statute on an exclusive construction (inclusio unius exclusio alterius est), noting that other legislation prohibiting the sale of weapons referred to “offering or exposing for sale” (emphasis added). The lack of the words exposing for sale in the Restriction of Offensive Weapons Act 1959 suggested that only a true offer would be prohibited by the Act. The court dismissed the appeal.

Offer and acceptance analysis is a traditional approach in contract law used to determine whether an agreement exists between two parties. As a contract is an agreement, an offer is an indication by one person (the “offeror”) to another (the “offeree”) of the offeror’s willingness to enter into a contract on certain terms without further negotiations. A contract is said to come into existence when acceptance of an offer (agreement to the terms in it) has been communicated to the offeror by the offeree.

The offer and acceptance formula, developed in the 19th century, identifies a moment of formation when the parties are of one mind. This classical approach to contract formation has been weakened by developments in the law of estoppel, misleading conduct, misrepresentation and unjust enrichment.

Offer

Treitel defines an offer as “an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed”, the “offeree”. An offer is a statement of the terms on which the offeror is willing to be bound.

The “expression” referred to in the definition may take different forms, such as a letter, newspaper, fax, email and even conduct, as long as it communicates the basis on which the offeror is prepared to contract.

Whether two parties have an agreement or a valid offer is an issue which is determined by the court using the Objective test (Smith v. Hughes). Therefore the “intention” referred to in the definition is objectively judged by the courts. In the English case of Smith v. Hughes the court emphasised that the important thing is not a party’s real intentions but how a reasonable person would view the situation. This is due mainly to common sense as each party would not wish to breach his side of the contract if it would make him or her culpable to damages, it would especially be contrary to the principle of certainty and clarity in commercial contract and the topic of mistake and how it affects the contract.

Unilateral Contract

The contract in Carlill v. Carbolic Smoke Ball Co was of a kind known as a unilateral contract, one in which the offeree accepts the offer by performing his or her side of the bargain. It can be contrasted with a bilateral contract, where there is an exchange of promises between two parties. In Australian Woollen Mills Pty Ltd v. The Commonwealth (1954), the High Court of Australia held that, for a unilateral contract to arise, the promise must be made “in return for” the doing of the act. The court distinguished between a unilateral contract and a conditional gift. The case is generally seen to demonstrate the connection between the requirements of offer and acceptance, consideration and intention to create legal relations.

Invitations To Treat

An invitation to treat is not an offer, but an indication of a person’s willingness to negotiate a contract. In Harvey v. Facey, an indication by the owner of property that he or she might be interested in selling at a certain price, for example, has been regarded as an invitation to treat. Similarly in Gibson v Manchester City Council the words “may be prepared to sell” were held to be a notification of price and therefore not a distinct offer, though in another case concerning the same change of policy (Manchester City Council underwent a change of political control and stopped the sale of council houses to their tenants) Storer v. Manchester City Council, the court held that an agreement was completed by the tenant’s signing and returning the agreement to purchase, as the language of the agreement had been sufficiently explicit and the signature on behalf of the council a mere formality to be completed.

The courts have tended to take a consistent approach to the identification of invitations to treat, as compared with offer and acceptance, in common transactions. The display of goods for sale, whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an invitation to treat and not an offer.

The holding of a public auction will also usually be regarded as an invitation to treat. Auctions are, however, a special case generally. The rule is that the bidder is making an offer to buy and the auctioneer accepts this in whatever manner is customary, usually the fall of the hammer. A bidder may withdraw his or her bid at any time before the fall of the hammer, but any bid in any event lapses as an offer on the making of a higher bid, so that if a higher bid is made, then withdrawn before the fall of the hammer, the auctioneer cannot then purport to accept the previous highest bid. If an auction is without reserve then whilst there is no contract of sale between the owner of the goods and the highest bidder (because the placing of goods in the auction is an invitation to treat) there is a collateral contract between the auctioneer and the highest bidder that the auction will be held without reserve (i.e., that the highest bid, however low, will be accepted). The U.S. Uniform Commercial Code provides that in an auction without reserve the goods may not be withdrawn once they have been put up.

Revocation Of Offer

An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror. If the offer was made to the entire world, such as in Carlill’s case, the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an option (see also option contract).

If the offer is one that leads to a unilateral contract, then unless there was an ancillary contract entered into that guaranteed that the main contract would not be withdrawn, the contract may be revoked at any time:

Acceptance

Test Of Acceptance

Acceptance is a final and unqualified expression of assent to the terms of an offer. It is no defense to an action based on a contract for the defendant to claim that he had not intended to be bound by the agreement, if his conduct demonstrated that he had. The essential requirement is that the parties had each from an objective perspective engaged in conduct manifesting their assent. This manifestation of assent theory of contract formation may be contrasted with older theories in which a contract required the parties to have a true “meeting of the minds” of the parties. Under the meeting of the minds theory of contract, a party could resist a claim of breach by proving that he had not intended to be bound by the agreement, even if it appeared objectively that he had so intended. This is unsatisfactory, as one party has no way to know another’s undisclosed intentions. One party can only act upon what the other party reveals objectively to be his intent. Hence, an actual meeting of the minds is not required. Indeed, it has been argued that the “meeting of the minds” idea is entirely a modern error: 19th century judges spoke of “consensus ad idem” which modern teachers have wrongly translated as “meeting of minds” but actually means “agreement to the [same] thing”.

The requirement of an objective perspective is important in cases where a party claims that an offer was not accepted and seeks to take advantage of the performance of the other party. Here, we can apply the test of whether a reasonable bystander (a “fly on the wall”) would have perceived that the party has impliedly accepted the offer by conduct.

Rules Of Acceptance

Communication Of Acceptance

There are several rules dealing with the communication of acceptance:

• The acceptance must be communicated: see Powell v. Lee (1908) 99 L.T. 284; Robophone Facilities Ltd v. Blank [1966] 3 All E.R. 128. Prior to acceptance, an offer may be withdrawn.
• An exception exists in the case of unilateral contracts, in which the offeror makes an offer to the world which can be accepted by some act. A classic instance of this is the case of Carlill v. Carbolic Smoke Ball Co. [1892] 2 Q.B. 484 in which an offer was made to pay £100 to anyone who having bought the offeror’s product and used it in accordance with the instructions nonetheless contracted influenza. The plaintiff did so and the court ordered payment of the £100. Her actions accepted the offer – there was no need to communicate acceptance. Typical cases of unilateral offers are advertisements of rewards (e.g., for the return of a lost dog).
• An offer can only be accepted by the offeree, that is, the person to whom the offer is made.
• An offeree is not usually bound if another person accepts the offer on his behalf without his authorisation, the exceptions to which are found in the law of agency, where an agent may have apparent or ostensible authority, or the usual authority of an agent in the particular market, even if the principal did not realise what the extent of this authority was, and someone on whose behalf an offer has been purportedly accepted it may also ratify the contract within a reasonable time, binding both parties: see agent (law).
• It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance (called waiver of communication – which is generally implied in unilateral contracts): see also Re Selectmove Ltd [1994] BCC 349.
• If the offer specifies a method of acceptance (such as by post or fax), acceptance must be by a method that is no less effective from the offeror’s point of view than the method specified. The exact method prescribed may have to be used in some cases but probably only where the offeror has used very explicit words such as “by registered post, and by that method only”: see Yates Building Co. Ltd v. R.J. Pulleyn & Sons (York) Ltd (1975) 119 Sol. Jo. 370.
• Silence cannot be construed as acceptance: see Felthouse v. Bindley (1862) 142 ER 1037.
• However, acceptance may be inferred from conduct, see, e.g.: Brogden v. Metropolitan Railway Co. (1877) 2 App. Cas. 666; Rust v. Abbey Life Assurance Co. Ltd [1979] 2 Lloyd’s Rep. 334; Saint John Tugboat Co. v. Irving Refinery Ltd (1964) 46 DLR (2d) 1; Wettern Electric Ltd v. Welsh Development Agency [1983] Q.B. 796.

Correspondence With Offer

The “mirror image rule” states that if you are to accept an offer, you must accept an offer exactly, without modifications; if you change the offer in any way, this is a counter-offer that kills the original offer: Hyde v. Wrench (1840) 3 Beav 334. However, a mere request for information is not a counter-offer: Stevenson v. McLean (1880) 5 Q.B.D. 346. It may be possible to draft an enquiry such that it adds to the terms of the contract while keeping the original offer alive.

An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror: Dickinson v. Dodds (1876) 2 Ch.D. 463. If the offer was made to the entire world, such as in Carlill’s case, the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an option (see also option contract).

Battle Of The Forms

Often when two companies deal with each other in the course of business, they will use standard form contracts. Often these terms conflict (eg. both parties include a liability waiver in their form) and yet offer and acceptance are achieved forming a binding contract. The battle of the forms refers to the resulting legal dispute of these circumstances, wherein both parties recognize that an enforceable contract exists, however they are divided as to whose terms govern that contract.

Under English law, the question was raised in Butler Machine Tool Co Ltd v. Ex-Cell-O Corporation (England) Ltd [1979] WLR 401, as to which of the standard form contracts prevailed in the transaction. Lord Denning MR preferred the view that the documents were to be considered as a whole, and the important factor was finding the decisive document; on the other hand, Lawton and Bridge LJJ preferred traditional offer-acceptance analysis, and considered that the last counter-offer prior to the beginning of performance voided all preceding offers. The absence of any additional counter-offer or refusal by the other party is understood as an implied acceptance. In U.S. law, this principle is referred to as the last shot rule.

Under the Uniform Commercial Code (UCC) Sec. 2-207(1), A definite expression of acceptance or a written confirmation of an informal agreement may constitute a valid acceptance even if it states terms additional to or different from the offer or informal agreement. The additional or different terms are treated as proposals for addition into the contract under UCC Sec. 2-207(2). Between merchants, such terms become part of the contract unless:

• the offer expressly limits acceptance to the terms of the offer,
• material alteration of the contract results,
• notification of objection to the additional/different terms are given in a reasonable time after notice of them is received.

Material is defined as anything that may cause undue hardship/surprise, or is a significant element of the contract.

If there is no contract under 2-207(1), then under UCC Sec. 2-207(3), conduct by the parties that recognize there is a contract may be sufficient to establish a contract. The terms for this contract include only those that the parties agree on and the rest via gap fillers.

Postal Acceptance Rule

Main article: Mailbox rule

As a rule of convenience, if the offer is accepted by post, the contract comes into existence at the moment that the acceptance was posted (Adams v. Lindsell (1818) 106 ER 250). This rule only applies when, impliedly or explicitly, the parties have in contemplation post as a means of acceptance. It excludes contracts involving land, letters incorrectly addressed and instantaneous modes of communication. The relevance of this early 19th century rule to modern conditions, when many quicker means of communication are available has been questioned, but the rule remains for the time being. For a detailed academic discussion, see: S. Gardner, “Trashing with Trollope: A Deconstruction of the Postal Rules in Contract”

Knowledge Of The Offer

In Australian law, there is a requirement that an acceptance is made in reliance or pursuance of an offer: see R v. Clarke (1927) 40 C.L.R. 227.

Rejection, Death Or Lapse Of Time

An offer can be terminated on the grounds of rejection on the part of the offeree, that is if the offeree does not accept the terms of the offer.Also upon making an offer,an offeror may include as a condition to the contract the duration in which the offer will be available.If the offeree fails to accept the offer within this specific period then the offer will be deemed as terminated.

Death Of Offeror

Generally death (or incapacity) of the offeror terminates the offer. This does not apply to option contracts.

The offer cannot be accepted if the offeree knows of the death of the offeror. In cases where the offeree accepts in ignorance of the death, the contract may still be valid, although this proposition depends on the nature of the offer. If the contract involves some characteristic personal to the offeror, the offer is destroyed by the death…

Death Of Offeree

An offer is rendered invalid upon the death of the offeree: see Re Irvine.

Counter Offers

If the offeree rejects the offer, the offer has been destroyed and cannot be accepted at a future time. A case illustrative of this is Hyde v. Wrench (1840) 49 E.R. 132, where in response to an offer to sell an estate at a certain price, the plaintiff made an offer to buy at a lower price. This offer was refused and subsequently, the plaintiffs sought to accept the initial offer. It was held that no contract was made as the initial offer did not exist at the time that the plaintiff tried to accept it, the offer having been terminated by the counter offer.

It should be noted that a mere inquiry (about terms of an offer) is not a counter offer and leaves the offer intact. The case Stevenson v. McLean (1880) 28 W.R. 916 is analogous to this situation.

Formation

A contract will be formed (assuming the other requirements are met) when the parties give objective manifestation of an intent to form the contract. Of course, the assent must be given to terms of the agreement. Usually this involves the making by one party of an offer to be bound upon certain terms, and the other parties’ acceptance of the offer on the same terms.

Because offer and acceptance are necessarily intertwined, in California, offer and acceptance are analyzed together as subelements of a single element, known either as consent of the parties or mutual assent.

Dickinson V Dodds (1876) 2 Ch D 463

On Wednesday, the 10th of June, 1874, the Defendant John Dodds signed and delivered to the Plaintiff, George Dickinson, a memorandum, of which contained the words:

I hereby agree to sell to Mr. George Dickinson the whole of the dwelling-houses, garden ground, stabling, and outbuildings thereto belonging, situate at Croft, belonging to me, for the sum of £800. As witness my hand this tenth day of June, 1874.

(Signed) John Dodds.

P.S.-This offer to be left over until Friday, 9 o’clock, a.m. 12th June, 1874.

The Plaintiff alleged that Dodds understood and intended that the Plaintiff should have until Friday 9 A.M. within which to determine whether he would or would not purchase, and that he should absolutely have until that time the refusal of the property at the price of £800, and that the Plaintiff in fact determined to accept the offer on the morning of Thursday, the 11th of June, but did not at once signify his acceptance to Dodds, believing that he had the power to accept it until 9 A.M. on the Friday.

In the afternoon of the Thursday the Plaintiff was informed by a Mr. Berry that Dodds had been offering or agreeing to sell the property to Thomas Allan, the other Defendant. Thereupon the Plaintiff, at about half-past seven in the evening, went to the house of Mrs. Burgess, the mother-in-law of Dodds, where he was then staying, and left with her a formal acceptance in writing of the offer to sell the property. According to the evidence of Mrs. Burgess this document never in fact reached Dodds, she having forgotten to give it to him.

On the following (Friday) morning, at about seven o’clock, Berry, who was acting as agent for Dickinson, found Dodds at the Darlington railway station, and handed to him a duplicate of the acceptance by Dickinson, and explained to Dodds its purport. He replied that it was too late, as he had sold the property. A few minutes later Dickinson himself found Dodds entering a railway carriage, and handed him another duplicate of the notice of acceptance, but Dodds declined to receive it, saying, “You are too late. I have sold the property.”

It appeared that on the day before, Thursday, the 11th of June, Dodds had signed a formal contract for the sale of the property to the Defendant Allan for £800, and had received from him a deposit of £40.

An action was brought that the Defendant Dodds might be decreed specifically to perform the contract of the 10th of June, 1874; that he might be restrained from conveying the property to Allan; that Allan might be restrained from taking any such conveyance; that, if any such conveyance had been or should be made, Allan might be declared a trustee of the property for, and might be directed to convey the property to, the Plaintiff; and for damages.

It was held that the words “I hereby agree to sell” were nothing but an offer, and only intended to be an offer. Unless both parties had then agreed there was no concluded agreement then made; it was in effect and substance only an offer to sell. The words “This offer is to be left over until Friday, 9 o’clock a.m. 12th June 1874.” were also held to show it was only an offer.

There was no consideration given for the undertaking or promise, to whatever extent it may be considered binding, to keep the property unsold until 9 o’clock on Friday morning at all. It was judged to be clear settled law, on one of the clearest principles of law, that this promise, being a mere nudum pactum, was not binding, and that at any moment before a complete acceptance by Dickinson of the offer, Dodds was as free as Dickinson himself.

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