1.01  For any law student undertaking a course in contract law, the first substantive topic studied is that of contract formation. There is a certain logic to this because many other topics in a contract law course, such as construction, performance, breach, and damages, depend on there being a contract in existence. The topic is also a nice introduction into contract law reasoning with many of the famous and entertaining cases contained in it. It is also considered by many students to be the easier part of the course seemingly made up of a lot of easy to understand rules that need to be applied to the facts of a case. It would then come as a surprise to many to learn that perhaps the most litigated area of contract law is that of formation. In particular, the formation issue that takes up most of the courts’ time is that of agreement.

1.02  For a contract to exist a number of requirements must be made out. The parties must come to an agreement, they must intend to contract, the agreement must be supported by valuable consideration, and any formalities, such as the need for the contract to be evidenced in writing, must be satisfied. The principal concern of this book is with the requirement of agreement. As noted above, this issue takes up most of the courts’ time in formation disputes. However, given that that issue is closely connected to the requirement of an intention to contract, this too is discussed in this book. In this second edition we have also added a short chapter on consideration. The approach taken in the book is to look at the topic of contract formation from the perspective of principle. The rules governing the formation of contracts are not difficult rules to state. However, they are difficult to apply, and this, together with a failure to involve lawyers early on in any transaction, may be the basis for so much litigation in this area. It is difficult to provide comprehensive legal advice on any given set of facts and so both sides will tend to feel that they have a good case. This is perhaps a natural consequence when an issue largely depends on the intention of the parties.

1.03  Because our approach is one of principle, we have not attempted to cite all the judgments that are handed down each year on this topic. Most of those judgments are not, nor will ever be, reported, and there appears little point in a doctrinal driven work to give endless examples (p. 2) of a principle in practice when the issue before the court depends on the facts of each case.¹ Moreover, such a text would be out of date within a few hours of publication. This is particularly so in a text that attempts to look at as many jurisdictions as this one. In addition, given the amount of unreported cases now available online, any lawyer who has a formation issue coming across his or her desk can log into an electronic database and find a case with similar facts in a very short period of time. Of course, reasoning through facts is not the best approach to legal research, and such research will usually result in finding an unreported decision of a single judge that may or may not be in line with the leading cases and may be overruled at any time.

1.04  The approach to this text is to start with the leading decisions on a topic to discover a principle of contract formation and how that principle operates, which is then followed by examples which we believe apply the principle in the way the highest authority has explained it.

1.05  This is principally a work on English law for English practitioners. For that reason it is necessary to discuss the leading English authorities. However, the practising English commercial lawyer is well versed in the classic English cases, and to provide a different perspective from that found in most standard contract texts we have included a lot of cases from other jurisdictions. We were able to do this because the principles of contract formation are remarkably similar across many borders. When they are different they provide interesting contrasts. Very often a perceived difference can be accommodated under current common law principles should the need to change arise. In addition to comparative case law content, we also discuss approaches to formation issues under the Restatement (2d) Contracts, the Uniform Commercial Code, the Unidroit Principles of International Commercial Contracts 2010, the Principles of European Contract Law, and the Draft Common Frame of Reference.

1.06  For the most part, as the principles of formation are common throughout the jurisdictions discussed in the text, we have not dealt with the law in each of these jurisdictions separately but have taken the liberty of using what we think are good case examples of a particular principle in operation from any of those jurisdictions. Separate treatment is given where there is some difference of approach.

1.07  Throughout the law of contract is the guiding principle of the objective theory of contract.² That theory has particular emphasis in the area of contract formation and is discussed in more detail in the text in those areas where it is relevant. In general terms, whether or not the parties have agreed to enter into a contract is determined on an objective basis.³ This was confirmed (p. 3) by the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG⁴ where Lord Clarke giving the judgment of the Court said: ‘Whether there is a binding contract … depends not upon [the parties’] subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations.’⁵ However, the objective theory of contract is not a form of detached ‘fly on the wall’ objectivity. The focus of the theory is that of a reasonable person in the position of the parties.⁶ Often this is expressed as a quest for the presumed intention of the parties. As noted by others, this approach is one of commercial convenience; a purely subjective approach to contract formation is not workable.⁷

1.08  The objective theory dictates that when determining whether or not a statement made by a person was intended to form the basis of a contract, it is construed by reference to a reasonable person in the position of the party to whom the statement is directed. Thus, when trying to determine whether a statement was intended to be an offer, it is construed by reference to a reasonable person in the position of the offeree.

1.09  To some extent, the approach to finding intention is purely objective as the available evidence is what the parties said or did.⁸ It is generally not possible to put to the parties a direct question as to what their intention was. Nevertheless, the subjective beliefs of the parties are relevant.⁹ Although the law is not concerned with the subjective belief of a person making a statement, it may be concerned with the subjective beliefs of the person to whom it is addressed. A useful starting point is a simple example. Assume it is alleged by B that A made an offer to B which B accepted and that A wishes to argue that his or her statement to B was not an offer. The starting point is to ask whether a reasonable person in the position of B would have construed the statement as an offer? If the answer to that is ‘yes’, then one turns to the subjective beliefs of B. If there is evidence that B did not believe that A was making an offer, then the court will take cognizance of that and rule that there was no offer.¹⁰

(p. 4) 1.10  The relevance of the subjective state of mind of the parties as set out in the above paragraph is well accepted. It is a negative formulation of the relevance of subjective belief. In the example, the statement by A will be an offer if a reasonable person in the position of B would construe it as an offer, unless B is aware that A did not intend to make an offer. There is no doubt that, in practice, this is the principal situation where the issue of subjective belief arises, that is, where one party wishes to contest the existence of a contract by showing that the other party was aware that the first party had no intention to contract. Nevertheless, there has been a long debate as to whether this represents a full statement of the relevance of subjective belief or whether it is necessary for B, in the example, to hold the positive belief that A was making an offer. It is suggested that this latter positive formulation reflects the need for a consensus—the requirement that each party intends to contract on the same terms as the other party—and an intention to contract. It also sets the limits on the concept of consensus, it is one sided, the law is not concerned with the subjective belief of the person making a statement. Thus, in Smith v Hughes,¹¹ Blackburn J said:¹²

1.11  Similarly, in Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal,¹³ Lord Diplock said:¹⁴

1.12  In the same case Lord Brightman stated:¹⁵

To entitle the sellers to rely on abandonment, they must show that the buyers so conducted themselves as to entitle the sellers to assume, and that the sellers did assume, that the contract was agreed to be abandoned sub silentio.

1.13  These statements are not meant to suggest that for a contract to exist there is a need for B, in our example, to prove that he or she held a positive belief that A intended to make an offer. (p. 5) If there is no evidence led by A to the contrary, that belief will be presumed. This presumption is very important to contract formation. For example, assume A in London agrees to pay £100 to the first person who runs from Cambridge to London. Next, assume B runs from Cambridge to London and is the first person to do so after publication of the offer. That fact alone is not sufficient to bring about a contract. Nevertheless, the law is such that so long as B had knowledge of the offer and carries out the act of acceptance there is a presumption that B arrived in London in reliance on the offer. However, it is open to A to show that B did the act without intending to accept the offer.

1.14  In addition, a party will be estopped from giving evidence as to their own state of mind in order to resile from a contract. For example, assume the situation is that A makes an offer to B which is accepted by B in circumstances where a reasonable person in the position of A would construe B’s statement as an acceptance. It is not possible for A to seek to resile from the contract by attempting to lead evidence that he or she did not subjectively believe B was accepting. A has acted in a way that a reasonable person ‘B’ would interpret as suggesting an intention to contract and is estopped from resiling from that position, unless A can prove that B did not rely or could not have relied on the representation implied from A’s conduct because B knew that, in fact, A did not intend to contract.¹⁶ Thus in Smith v Hughes,¹⁷ Blackburn J said:¹⁸

1.15  This concept of ‘estoppel’ pervades contract formation and prevents a person leading evidence of their state of mind even though such subjective intent may form part of contract formation theory at some level. It follows that, in the result, the positive formulation of the relevance of subjective beliefs will not in practice produce different results from the negative formulation.

1.16  There is yet another debate concerning the subjective beliefs of the parties. As noted above, the relevance of these subjective beliefs is well accepted, but there has been a long debate as to whether they operate as an exception to the objective theory of contract and effectively render the theory a fiction or whether they are captured by it. For many, as noted above, the objective theory is a theory of convenience and ‘applies only where serious inconvenience would be caused by allowing a party to rely on his “real intention”’.¹⁹ However, for others, because the objective theory operates by reference to a reasonable person in the position of the parties, that reasonable person must take on the characteristics of the parties including their background and knowledge and this brings within the objective theory those subjective beliefs to the extent that they are relevant and admissible.²⁰ It is suggested that the correct (p. 6) perspective must ultimately flow from what the institution of contract represents. A contract consists of voluntarily assumed obligations. It follows that a search to determine if a contract exists must be a search for the intention of the parties.²¹ This is why one requirement of contract formation is an intention to contract. It also follows that the approach to the issue of formation cannot be a detached objectivity because that would result in courts making contracts for parties rather than insisting parties voluntarily agree to enter into contracts. The issue for practice becomes one of determining the most reliable evidence of the intention of the parties. That is resolved by an objective approach from the position of the parties.

1.17  It is a general principle of contract formation that the parties must have reached an agreement. This has traditionally been expressed as a requirement that there be a consensus ad idem. As noted above, there are limits in the extent to which the common law requires a consensus.²² The objective theory of contract necessarily dictates that there is no absolute requirement of a subjective meeting of the minds.²³ As a general proposition, the requirement of an agreement necessitates that the parties agree the terms of bargain, that those terms be certain and complete, and that the bargain is informed by an intention to contract as well as an intention to immediately assume legal obligations.

1.18  This description of an agreement raises numerous issues in practice that are the subject matter of this text. For example, what is the impact of an agreement made ‘subject to contract’? What is the legal significance of an ‘agreement to agree’? It will be seen that modern courts are changing the way some of these issues are dealt with. For example, it has long been stressed that the courts should not be the destroyer of bargains but should seek to give effect to transactions entered into by commercial people: in short the courts should ‘oil the wheels of commerce’ and not ‘put a spanner in the works’.²⁴ On this basis courts have long sought to uphold contracts despite any difficulties that might arise.²⁵ But today that has been given new meaning whereby courts are emphasizing the need to give effect to the overall expectation of parties that there will be a contract even if in doing so that might contradict a term of the agreement.²⁶ At the same time the courts maintain the principle that they will not make a contract for the parties and this sets an upper limit on what a court can do.

1.19  The traditional method for discovering the existence of an agreement is that of offer and acceptance. Courts are quick to point out that offer and acceptance are merely tools that can (p. 7) be used to determine whether an agreement has been reached, they are not exhaustive and in many situations may be unworkable and inappropriate.²⁷ This is true, and the existence of many commercial agreements is proven by the execution of a formal contract with any formation issue going before a court being one of certainty and completeness. Moreover, it is possible to prove a contract by conduct without reference to offer and acceptance if all the essential elements of a contract are made out.²⁸ Such conduct must prove the parties intend to be bound by the agreed terms.²⁹ It is not enough that the conduct is consistent with there being a contract.³⁰ Despite this, any basic search of formation cases will show that the tools of offer and acceptance remain the primary method used to determine the existence of an agreement where there is no executed contract. Therefore, they are the subject of detailed discussion in this book.³¹

1.20  As a general statement, whether or not the parties intended to contract is an issue of fact and may be proven by reference to relevant extrinsic evidence which includes pre and post contract conduct.³² Despite this, there are many statements made in the cases to the effect that the issue is one of construction and involves a question of law.³³ Usually such statements are made where the alleged agreement is in writing.³⁴ These are dealt with in more detail in the text in the context in which they arise. However, a couple of introductory remarks can be made here.

1.21  The process of construction is concerned with the meaning and legal effect of the terms of a contract. Where there is a true issue of construction, this will impact on the evidence available. As a general rule access to prior negotiations in construing a contract is limited and access to post-contractual conduct prohibited.³⁵ On one level, this process of construction (p. 8) is distinct from determining the terms of a contract. However, it has been said that the less comprehensive an agreement is the more a court must draw inferences in order to determine the intention of the parties and here resort may be had to the words or conduct of the parties.³⁶ This represents a technique of identifying the terms of a contract by construction. Terms may be implied by construction, and so it is not entirely possible to distinguish between these processes; moreover, the identification of the terms of a contract is intimately tied to issues of contract formation. It follows that there will be aspects of formation that are dealt with as issues of construction.

1.22  Very often, where statements are made in the context of contract formation that the issue is one of construction, the court will nevertheless have regard to extrinsic evidence, which suggests that any reference to construction was not meant in a technical sense.³⁷ Nevertheless, some issues around contract formation are clearly issues of construction. For example, if a court is determining whether a term is void for uncertainty, that will be an issue of construction.³⁸ However, where the issue is whether or not the parties intended to contract, that is an issue of fact. Here the court can have regard to all the circumstances to determine whether the parties have entered into a contract. Thus, the whole of the communications between the parties must be looked at to determine whether there is an offer and acceptance.³⁹ As already noted, this process is related to the identification of the terms of a contract and extrinsic evidence is allowed to determine the terms of a contract.⁴⁰

1.23  Often issues of formation and construction can become blurred when the agreement is in writing, and many cases have referred to questions of formation as being questions of mixed law and fact.⁴¹ Thus, if on construction a term is found to be void, then whether or not it can be severed has been said to turn on construction;⁴² but, at the same time, whether or not the parties intended to contract if that term was found to be void goes to the intention to contract and is an issue of formation. A practical example of where both processes are relevant to contract formation would be the approach to a ‘subject to contract’ clause. When a court is confronted with such a provision it must decide whether the clause impacts on the formation of a contract or its performance. Such a clause may evidence a lack of an intention to contract. This is a question of fact. Once a decision on (p. 9) that issue is made, then, assuming there is an intention to contract, it is still necessary to construe the clause to determine whether the parties intended to immediately assume legal obligations or not, and if they did, whether performance is or is not suspended until execution. Nevertheless, extrinsic evidence will still be relevant in determining whether the condition has been waived.