Understanding Contract Formation: Objective vs. Subjective Test in Commercial Law

1. COMMERCIAL LAW 12011/2012 ACADEMIC YEAR LECTURE 1UGBS, 23RD AUG 2011 Rowland Atta-Kesson Esq.

2. OUTLINE • DEFINITION OF CONTRACTS • Ascertaining agreement • Bargain • CLASSIFICATION OF CONTRACTS • Voidable, void and unenforceable • Executed and executory • Specialty and simple • FORMATION OF CONTRACT • Offer • Acceptance

3. DEFINITITION OF CONTRACT • Treitel (1995) The Law of Contract • Contract is: • An agreement giving rise to obligations which are enforced or recognized by law. • The factor which distinguishes contractual from other legal obligations is that they are based on the agreement of the contracting parties. • Anson, Principles of the Law of Contract • Contract is: • A legally binding agreement made btn 2 or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others

4. What is common to the 2 definitions? • The answer is AGREEMENT • Now, the question is; • At what point does agreement actually materializes? • This answer = objective≠ subjective

5. ASCERTAINING AGREEMENT • What is the objective test? • THE LEONIDAS D, per Lord Goff • “if one party O so acts that his conduct, objectively considered, constitutes an offer, and the other party A, believing that the conduct of O represents his actual intention, accepts O’s offer, then a contract will come into existence, and on those facts it will make no difference if O did not in fact intend to make an offer…”

6. THE LEONIDAS D case teaches us that agreement is not a mental state but an act and can therefore be inferred from conduct. • The objective test = • parties are not judged by what they actually had in mind • but by objective meanings of their words and conduct. • The subjective test= • Ascertaining the intentions of the .parties from their actual state of mind.

7. But should we insist on the objective test where A knows of O’s intention or where A would suffer hardship? • The answer is NO. • where A knows that O’s actual state of mind was not in accordance with the objective appearance created by O’s conduct, the objective test will not apply. • Moreover the objective test will not apply when the results would be to cause hardship to the other party. • E.g. where the apparent acceptance of party is based on mistake which has been induced by the negligent acts of the other. • The case in support of this principle is GOLDEN BEAR

8. HOW THE OBJECTIVE TEST APPLIES • In applying the objective test the court considers what the parties said or did and • how it would have been understood by a reasonable objective bystander and • impute that intention to the parties rather than seeking to establish what is the actual state of mind of the parties.

9. In SMITH v. HUGHES, Blackburn J. stated that; • “if whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into a contract with him, the man thus conducting would be equally be bound as if he intended to agree to the other party’s terms”.

10. In SMITH v. HUGHES, • the defendant, a racehorse owner, wished to purchase a quantity of oats. • A sample of the oats was inspected and the defendant agreed to purchase the whole amount. • When the oats were delivered it was discovered they were ‘green’, that is, that season’s oats. • The defendant refused to pay for them, saying he thought he was buying ‘old’ or the last season’s oats. • When sued for the price the defendant argued that the contract was void for mistake. • The court held that on an objective test basis there was a valid contract. • On a finding of fact the seller had not misrepresented the oats as being old nor was there any suggestion that there was a term of the contract to this effect. The purchaser could not establish mistake on the basis of the fact that he had been careless and as a result misled himself as to the nature of the oats

11. SCRIVEN BROS & CO. v. HINDLEY & CO. • the defendants wanted to buy hemp, sold by plaintiffs at auction sale. • 2 lots were put up 4 sale from the same ship; • One lot = hemp and another = tow, • Identification marks on the bales were precisely the same. • Closer examination could revealed the distinction, • the defendants, inspected 1st lot and saw hemp, • They mistakenly thought the 2nd lot = also hemp. • The auction catalogue itself did not reveal the distinction and so the defendants paid a high price for 2nd lot , which they thought was hemp. • They would have paid a lower price for it, if they had knew it was tow • At the time of the sale, the auctioneer realized that the defendants had made a mistake, about the market value of the tow rather than as to the nature of the lot per se. • The defendants refused to pay, alleging mutual mistake. • On applying the objective test the court found that one could not state with any degree of certainty which commodity formed the basis of the contract since it was clear that a reasonable person would have been misled as the nature of each lot. • The contract was thus held to be void for mistake.

12. Advantages of the objective test • It is impossible to ascertain the actual state of mind of the parties. • For instance in 1714 Friar C.J. said that even the devil does not know what is in the mind of a person. • It ensures certainty of contractual transactions. SMITH v. HUGHES

13. Applicable Situation 1 • If a reasonable observer of the promisor’s conduct would have supposed that the promisee did suppose that the promisor was making a particular promise, then the promisor would be bound by that promise even if it turns out that he intended something else. TAMPLIN v. JAMES,

14. Applicable Situation 2 • If words used are capable of two different but equally reasonable interpretations and the parties equally misunderstood each other with neither party intending to mislead the other, the court would hold that there is no contract because there is no correspondence of offer and acceptance. RAFFLES v. WICHELHAUS • There is yet no contract even if the ambiguity was caused by one of the parties. FALCK v. WILLIAMS.

15. Applicable Situation 3 • Where one party is misled by the conduct of the other into misunderstanding the nature of the offer, the party whose conduct misled the other cannot enforce the contract in the sense in which he intended it. SCRIVEN BROS & CO. v. HINDLEY & CO.

16. Applicable Situation 4 • Where the offeree knows that the offer as stated does not contain the real intention of the offeror but seeks to take advantage of the error, the law will not allow the offeree to enforce the contract in that mistaken sense. HARTOG v. COLIN AND SHIELDS • Note: by the objective test • the courts are not concerned about one party’s unilateral undisclosed and private misconceptions about the quality of the subject matter of the contract as long as such misconception was not caused by the other party’s words or conduct. SMITH v. HUGHES

17. Applicable Situation 5 • Where the parties are agreed on the same terms with respect to the same subject matter, they would be bound by the contract they have made even if they harboured in their minds some mistaken acceptance about the quality of the subject matter. FREDERICK E. ROSE (LONDON) LTD v. WILLIAM H PIM JNR & CO., LTD.

18. BARGAIN • From the definitions, we ALSO see that; • there must be an agreement , and • there must also be the presence of a bargain • If not, any promise could give rise to a binding obligation. • But a promise is not binding unless it is either made • under seal (specialty contract) or • supported by consideration. (simple contract) • Anson’s definition, indicates that there must be a degree of quid pro quo to establish the contract • This means each party must ‘buy’ the promise of the other party

19. To illustrate this point, let’s take the ff e.g. • “I promise to give you GH¢500 if you promise to give me your car”. • NOW let’s sum up on this point. • In simple contracts, one must establish the existence of a BARGAIN • A bare promise such as “I promise to give you GH¢500” is not enforceable, being simply a bare promise or nudumpactum. • Another factor is INTENTION to enter into legal relationship

20. CLASSIFICATION OF K • Void, Voidable and Unenforceable Contracts • A voidcontract • has no binding effect at all and in reality the expression is a contradiction terms. • A voidable contract • is binding but one party has the right, at his option, to set it aside. • An unenforceablecontract • is valid in all respects except that it cannot be enforced in a court of law by one or both of the parties should the other refuse to carry out his obligations under it. • E.g. contracts of guarantee are unenforceable unless evidenced in writing.

21. Executed and Executory contracts • A contract is said to be executed • when one or both of the parties have done all that the contract requires. • A contract is said to be executory • when the obligations of one or both of the parties remain to be carried out. • For example, if A and B agree to exchange A’s Mercedes Benz for B’s BMW and do it immediately, the possession of the goods and the right to the goods are transferred together and the contract is executed. • If they agree to exchange the following week the right to the goods is transferred but not the possession and the contract is executory. • Thus an executed contract conveys a chose in possession, while an executory contract conveys a chose in action.

22. Specialty contracts • Specialty contracts are also called deeds. • A deed has certain characteristics which distinguish it from a simple contract: • (a) Merger. • If a simple contract is afterwards embodied in a deed made between the same parties, the simple contract merges into, or is swallowed up by the deed, for the deed is the superior document. • The deed is then the only contract between the parties. • But if the deed is only intended to cover part of the terms of the previous simple contract, there is no merger of that part of the simple contract not covered by the deed. • (b) Limitation of Actions. • The right of action under a specialty contract is barred unless it is brought within 12 years from the date when the cause of action arises on it, i.e. when the deed could first have been sued upon, which is in general when one party failed to carry out a duty under it.

23. (c) Consideration is not essential to support a deed, • though specific performance, which requires a party in default to actually carry out the contract as distinct from paying damages, will not be granted if the promise is gratuitous. • Simple contracts must be supported by consideration. • (d)Estoppel. • Statements made in a deed tend to be conclusive against the party making them, and although he might be able to prove there were not very true, the rule of evidence called ‘estoppel’ will prevent him from doing this by excluding the very evidence which would be needed. • In modern law, however, a deed does not operate as estoppel where one of the parties wishes to bring evidence to show fraud, duress, mistake, lack of capacity or illegality.

24. E.g. of specialty contracts = a lease of more than three years, • Section 2 of the Conveyancing Decree, 1973 (NRCD 175) gets rid of the requirement for sealing where a deed is entered into by an individual. • The signature of the individual making the deed must be witnessed and attested. • The attestation consists of a statement that the deed has been signed in the presence of a witness. • The section also provides that it must be clear on the surface that is intended to be a deed or conveyance. • For companies, • Under sections 140 and 144(1)(b) of the Companies Code, 1963 (Act 179): a company may continue to execute documents by putting its common seal on them, • sealing is not required where a person, duly authorized, signs a conveyance on behalf of a company registered under Act 179 (see also section 2 of the Contracts Act, 1960 (Act 25))

25. Simple contracts ≡ parol contracts. • Simple contracts ≤ • contracts not by deed, and for their enforcement they require consideration. • Simple contracts may be made • orally or • in writing, or • inferred from the conduct of the parties; • but no simple contract can exist which does not arise from a valid offer and a valid acceptance supported by consideration. • when these elements exist, the contract is valid in the absence of some defect such as lack of capacity of one of the parties, lack of reality of consent, or illegality or impossibility of performance.

26. FORMATION OF CONTRACT • Classical approach to formation of K: • OFFER + ACCEPTANCE = AGREEMENT • In other words, the essential validity of contract = ff: • There must be an offer and acceptance, which in effect is the agreement. • There must be an intention to create legal relations • There is a requirement of written formalities in some cases • There must be consideration (unless the agreement is by deed) • The parties must have capacity to contract • There must be genuineness of consent by the parities to the terms of the contract • The contract must not be contrary to public policy • In the absence of one or more of these essentials, the contract may be void, voidable, or unenforceable

27. OFFER • An offer is a statement or conduct indicating willingness to contract on terms stated or on terms which can reasonably be inferred from conduct. • An offer can be made to a particular individual or to a group or a class of persons or to the world at large. CARLILL v. CARBOLIC SMOKE BALL CO

28. In CARLILL v. CARBOLIC SMOKE BALL CO Bowen L.J. stated: • “Although the offer is made to the world, the contract is made with that limited portion of the public who come forward and perform the condition on the faith of the advertisement” • Also in CARLILL, the defendants contended that the plaintiff had not accepted their offer and therefore there was no consensus ad idem and thus no agreement. • This defence, which was rejected, exposes the fact that offers may arise in two forms, either bilateralor unilateral.

29. A bilateral offer arises • where one party promises to do something for a promise made by the offeree. • Both parties are agreeing to do something in return for some reciprocal promise from the other. • An example of such offer would be if A promises to sell his car in return for B promising to pay him GH¢50,000.00. • The vast majority of offers are of this type.

30. A unilateral offer occurs • where one party, the offeror, promises to pay for the act of another, that is, a conditional promise. • The acceptance of the offer takes place when the offeree performs the in act in question. • The offer here is said to be unilateral because only one party is making a promise. • The facts of the CARLILL case provide an obvious example of such an offer.

31. When does the general offer take effect to create a power of acceptance? • It must be communicated to the offeree. • Generally speaking the performance of an act in ignorance of the general offer normally does not constitute an acceptance • BUT in GIBBONS v. PROCTOR • a policeman was held entitled to recover a reward offered by handbills, for information given to the superintendent of information which led to arrest and conviction, although the policeman did not know of the handbills before he sent the information by his agents, or before the handbills reached the superintendent.

32. Once a person knows of a general offer, even if in performing the specific act, he had other motive apart from the offer, his performance will amount to an acceptance of the offer. WILLIAMS v. CARWARDINE • Cross-offers will not create a binding contract when persons make identical offers to each other simultaneously neither party knowing of the other’s offer at the time of making his own. TINN v. HOFFMAN

33. OFFER v INVITE TO TREAT • Elements of offer • willingness to contract and • made with definite intention to make a contract binding when accepted. • In this regard, the law distinguishes between contractual offer and invitation to treat. • Contractual offers are converted as soon as are accepted. • An invitation to treat is a statement of intention which is only meant to solicit or attract offers from other people and is not intended to result in any immediate binding obligations.

34. Distinction between offer & invite to treat = based on convenience or expedience for the ff commercial practices; • (a) tender notices, • (b) display of goods in a shop window with prices attached, • (c) advertisements of goods for sale, • (d) circulation of catalogue or price list and • (e) auction notices.

35. Tenders: • a notice which is stated that goods are sold by tender and inviting people to submit tender for their purchase is an invitation to treat and not an offer which is accepted when the person submits the highest tender. The tender which constitutes the offer may or may not be accepted by the seller. SPENCER v. HARDING

36. Exhibition of goods for sale: • A display of goods in a shop with prices marked is not an offer. It is merely an invitation to treat and it is for the customer to offer to buy the goods which offer the shopkeeper may or may not accept. FISHER v. BELL

37. Self-service; • A display of goods with prices marked on the shelf of a self-service shop is also in law an invitation to treat and not an offer at those prices. PHARMACEUTICAL SOCIETY OF GREAT BRITAIN v. BOOTS CASH CHEMISTS (SOUTHERN) LTD

38. Advertisements; • generally advertisements in newspapers etc declaring the availability of goods for sale are deemed in law an invitation to treat and not contractual offer. PARTRIDGE v. CRITTENDEN • Circulation of catalogues: • The same conclusion was reached in the case of GRAINGER & SON v. GOUGH where a price list was circulated by a wine merchant, though notice declaring that deck-chairs were for hire was held in CHAPELTON v. BARRY as amounting to an offer.

39. Auction sales: • An auction notice advertising sale is merely a statement of an intention to treat and in the absence of fraud an intending purchaser has no right to sue if the auction is cancelled or the items withdrawn. HARRIS v. NICKERSON • Where the goods are sold in lots, each lot put up at the auction sale constitute the subject matter of a separate contract of sale. The authority for this is Section 4(1)(a) of the SALE OF GOODS ACT, 1962 (ACT 137)

40. The auctioneer by putting up the goods and inviting bids makes an invitation to treat and not an offer. At the auction sale each bid submitted constitute an offer which the auctioneer may or may not accept. The authority for this point is PAYNE v. CAVE • The contract of sale is complete when the auctioneer announces his acceptance by the fall of the hammer or in any other customary manner. Section 4(1)(b) of ACT 137 • At any time before the auctioneer announces his acceptance, the bidder is entitled to withdraw or revoke his bid. Section 4(1)(c) of ACT 137

41. There are two kinds of auction sale; • (i) auction sale subject to reserve price and • (ii) auction sale without a reserve price • Auction sale with reserved price; • the vendor/seller or his agent is allowed to bid once only and openly at the beginning of the auction before any other bid is made. Section 4(1)(f) of ACT 137. • It has been held in MCMANUS v. FORTESCUE that the auctioneer in an action sale subject to a reserve price is not bound to sell the goods to the highest ‘bona fide’ bidder if his bid is below the notified reserved price and this is so even if the auctioneer accidentally knocks down the goods to him. • Section 17(7) of the AUCTION SALES LAW, 1989 (PNDCL230) is the Ghanaian authority on this point.

42. Auction sale without a reserve price • Where there is no minimum price the law presumes that the seller is prepared to sell the goods to the person who submits the highest bid no matter what that price may be. • The general principle is that the highest ‘bona fide’ bidder is entitled to buy the goods at the price bid even if the auctioneer refuses to accept his bid or complete sale. Section 4(1)(d) of ACT 137. • Neither the seller nor his agent can bid at the auction sale. WARLOW v. HARRISON

43. COMMUNICATION OF OFFER • Offer cannot take effect until it as been received by the offeree TAYLOR v LAIRD • The timing of the communication of the offer can be of importance when determining the time within which it can be accepted by the offeree. • BUT if the offer specifies some date by which the offer must be accepted and that date has passed when the offer is received, the offeree is not able to accept the offer.

44. Similarly, it may be that there has been a very long delay in the transmission of the offer to the offerree, and in these circumstances it may well be the case, depending on the subject matter of the offer, that the offer has in fact lapsed, rendering it incapable of acceptance • The problem here is where the delay in the transmission of the offer is the fault of the offeror himself. ADAMS v LINDSELL

45. OFFER V REQUEST 4 INFO • HARVEY v. FACEY applt telegram read “will you sell us Bumper Hall Pen? Telegraph lowest cash price” respt reply read “lowest price for Bumper Hall pen, £900.” The applt then telgraphed, “we agree to buy Bumper Hall Pen for £900 asked by you. Please send us your title deeds in order that we may get early possession” • HELD; respt’s reply was not offer to sell but simply a statement as to the minimum price required should he decide to sell.

46. COMMUNICATION OF OFFER • Offer takes effect only when it has been received by offeree TAYLOR v LAIRD • Timing of the communication of the offer can be very important when determining the time within which the offeree has to accept • TAYLOR v LAIRD establishes the principle that acceptance can only take place when the offer has been received; however, if the offer specifies some date by which the offer must be accepted and that date has passed when the offer is received, then the offeree is to able to accept the offer. • Similarly, it may be that there has been a very long delay in the transmission of the offer to the offeree, , and in these circumstances it may well be the case, depending on the subject matter of the offer, that the offer has in fact lapsed, rendering it incapable of acceptance.

47. But in ADAMS v LINDSELL • Dffs offered to sell wool to the pffs. • The dffs’ letter of offer was wrongly addressed so that it reaced the pffs 2 days later thatn the dffs could, in nor circumstnace, have expected it to arrive. • Pff on receiving the letter immediately accepted the offer and it was held that they were entitled to do so, creating a binding contrat, despited the fact that the deffs had considered the offer lapses by the delay and sold the wool to a third party.

48. ACCEPTANCE • Treitel (1995) defines acceptance as • ‘a final unqualified expression of assent to all the terms of an offer’ • The objective test applies • 2 principles evolve from the definition • 1st , expression of intention to assent to the offer must be in response to the offer and match the terms of the offer precisely. • The acceptance must be unequivocal and unconditional • 2nd, mere acknowledgement of the offer is insufficient, there must be a communication of the acceptance to the offeror

49. In certain cases, there may be cross-offers e.g. when 2 identical offers cross in the post; X offers to buy Y’s car from him for GhC5000, while at the same time Y offers to sell his car to X for GhC5000. • In such a case, no contract exists, although the parties may be in some subjective agreement, there must be an objective outward indication of the agreement TINN v HOFFMAN

50. THE MODE OF ACCEPTANCE • Acceptance of the offer may be communicated either orally or in writing or inferred from conduct • Generally speaking the first two methods of accepting an offer present little difficulty; but difficulty arises where one attempts to infer acceptance by conduct as to the nature and precise moment of the inferred conduct. • The main difficulty concerning inferring acceptance from conduct usually arises where there have been protracted negotiations between the parties BROGDEN v METROPOLITAN RAILWAY CO • The act of acceptance must be completely performed for it to be valid, e.g. using smoke ball in particular manner and not just mere use • Very often, an offer may prescribe a particular mode of acceptance, in such a case conduct cannot amount to acceptance until the mode stipulated is complied with.