Offer & Acceptance – Business Law Sample Questions and Answers

Alan is a tenant of a home unit owned by Bill. Ten days ago Alan received a letter from Bill in which Bill stated that he (Bill) was ‘interested in selling’ his flat and asking Alan to ‘let him know’ if he (Alan) was willing to buy the home unit for the price of $450,000. Three days later Alan posted a letter to Bill in which he agreed to buy the home unit for the price set out in Bill’s letter. After receiving Alan’s letter, Bill telephoned Alan and told him that he had decided that he did not want sell the home unit.

Alan seeks your advice as to whether he has a contract with Bill for the sale of the home unit.

ANSWER

Introduction
For a contract to arise in the circumstances of the question, one of the parties has to make and offer which is duly accepted by the other. If there is an offer followed by an acceptance there will be a contract between the parties.

Issue
The issue raised by the question is whether Bill’s letter constitutes an offer. If it does, Alan’s reply is an acceptance of the offer, with the consequence that a contract exists between the parties. However, if Bill’s letter is only an invitation to treat, no contract exists between the parties because Alan’s reply will not be the acceptance of an offer. In fact, Alan’s reply would constitute the making of an offer to purchase the unit from Bill, and it is clear that Bill rejected that offer, given that he told Alan that he had decided not to sell the unit.

The Law
An offer has been defined as follows:
An offer is a statement of the terms upon which the offeror is prepared to be bound if acceptance is communicated while the offer remains alive.[1]
The American Restatement (2d) Contracts defines an offer as follows:
An offer is the manifestation of willingness to enter into a bargain, so as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

The critical aspect of the definition of an offer is the will or intent of the offeror to be bound in contract by the terms of the offer. A statement that lacks such will or intent is not an offer. Such a statement will often be what is termed an invitation to treat. An invitation to treat has been defined as ‘a request to others to make offers or to engage in negotiations with a sale in mind’.[2] On other occasions the statement may simply be the supply of information, as was the case in Harvey v Facey.[3]

Application of the Law to the Facts of the Problem
The significant fact in the problem is the statement in Bill’s letter that he is ‘interested in selling’ his unit. This raises the question of whether the letter displays the will or intent to bound in contract by the terms otherwise stated in his letter.

In Gibson v Manchester City Council,[4] the House of Lords was faced with a case whose facts were essentially identical to those in this problem. In that case the wording of the owner’s letter to the prospective buyer stated that the owner ‘may be prepared’ to sell the property to the prospective purchaser. The House of Lords ruled that the letter was not an offer, but rather, an invitation to treat. Lord Diplock observed that the relevant words in the owner’s letter were crucial in coming to the conclusion that the letter was ‘but a step in the negotiations for a contract which … never reached fruition’.[5]

Although the wording in Bill’s letter is different to that in Gibson’s case, it is suggested that the result is the same in both cases. In saying that he was ‘interested in selling’ his unit, Bill did not display a will or intention to be bound in contract. Bill’s letter is not a firm indication that he would sell the unit to Alan. It effectively means that he is contemplating whether or not to sell, and as such is merely an invitation to treat. It is only following receipt of Alan’s reply, which is in fact an offer by Alan to purchase Bill’s unit, that Bill unequivocally decides whether or not he wants to sell his unit. His telephone call to Alan is a clear statement of his decision not to sell, and thus amount to a rejection of the offer.

Conclusion
On the basis of the meaning of the words in Bill’s letter, as informed by the guiding authority of Gibson’s case, Bill’s letter is not an offer. This means that Alan’s reply is an offer. This offer has been rejected. The advice to Alan is that there is no contract between himself and Bill

[1] Nielsen v Dysart Timbers Limited [2009] NZSC 43 at [25].
[2] J W Carter, E Peden & G J Tolhurst, Contract Law in Australia, 5th Ed, LexisNexis Butterworths, Sydney, 2007, p 42.
[3] [1893] AC 552.
[4] [1979] 1 All ER 972.
[5] Gibson v Manchester City Council [1979] 1 All ER 972, at 974.

Adopted from Sydney.edu.au