Two types of contract
One of the systemic problems afflicting contract textbooks is their failure to acknowledge that English law recognise two different types of contract: bilateral contracts (which arise when two people reach an agreement under which they promise to do things for each other) and unilateral contracts (which arise when someone makes a promise to another with the object and result of inducing that other to act in a particular way). Of course, the textbooks acknowledge the existence of these different types of contract, but when it comes to describing how contracts are made, they fail to follow through. Instead of first setting out the rules governing the formation of bilateral contracts, and then setting out the rules governing the formation of unilateral contracts, they attempt to come up with one set of rules that – they claim – govern the formation of all contracts, whether they are bilateral or unilateral in nature. These rules are known as the rules on ‘offer and acceptance’.
Offer and acceptance: bilateral contracts
The language of ‘offer and acceptance’ – and the idea underlying those rules, that contracts are based on agreement – is perfectly suited for the formation of bilateral contracts. After all, bilateral contracts are agreements (under which the parties to the agreement promise to do things for each other). The ‘offer and acceptance’ rules that govern the formation of bilateral contracts are as follows:
(I) If A approaches B with an ‘offer’ (a proposal that they enter into an agreement under which A promises to do something for B and B promises to do something for A), A is free to withdraw that offer (by notifying B that he is withdrawing the offer) at any point up until it is accepted by B.
(II) If B rejects A’s offer (either outright, or by making a counter-proposal of his own), then that kills off A’s offer and it cannot be subsequently accepted by B unless the offer is renewed by A.
(III) B will only be held to have accepted A’s offer if he informs A that he is accepting A’s offer (unless the postal rule applies, in which case posting a letter of acceptance will count as a valid acceptance).
These rules are perfectly designed: (1) to let A and B know what they have to do to enter into a legally binding agreement; and (2) to allow us (and them) to determine with relative certainty when they have entered into a legally binding agreement.
Offer and acceptance: unilateral contracts
Problems arise, however, when we turn to the rules governing the formation of unilateral contracts. Contract textbook writers are committed to the idea that we can use the language of ‘offer and acceptance’ to describe what goes on when two people enter into a unilateral contract. Now – making a unilateral contract has two stages:
(1) A makes a promise to B, with the object of inducing B to do x.
(2) B is induced by A’s promise to do x.
If (1) and (2) occur, then A will be (normally) bound by his promise to B. We say that there exists a ‘unilateral’ contract between A and B in this situation because A is bound by his promise to B, but B does not have any obligations to A.
Now – in order to adapt the language of ‘offer and acceptance’ to the formation of unilateral contracts, the textbook writers are forced to say that (1) is an ‘offer’ and (2) is an ‘acceptance’ of the offer made in (1). So – when A promises B ‘I promise to pay you £1,000 if you mend my car’, A is making an ‘offer’ to B. And when B is induced by A’s promise to mend A’s car, B ‘accepts’ A’s ‘offer’. At that point a contract arises, where A is bound by his promise to pay B £1,000.
But see what complications arise if we apply rules (I), (II) and (III) above – which apply perfectly in bilateral contract situations – to the formation of unilateral contracts.
(1) The rule (I) that A is free to withdraw his offer (by notifying B) up until the point when it is validly accepted by B creates the potential for injustice where A has promised to pay B £1,000 if B mends his car, and B has started work on A’s car but has not yet got to the point where she can claim to have mended A’s car. If B has spent three days working on A’s car but has not yet mended it, and A can then go to her and say ‘Forget it – I’ll have someone else look at it’, that three days work will be wasted. In order to avoid this problem, the courts qualify the rules on ‘offer and acceptance’ as they apply to unilateral contracts to say that if A makes a promise to B with the object of inducing B to do x, and B has begun to do x, then A cannot withdraw his ‘offer’ and must wait to see whether B actually does do x (in which case, A will be bound by his promise): Errington v Errington (1952). A qualification to this qualification then has to be made to accommodate the case where B has consciously taken the risk that A will withdraw his promise at any point up until the point where B has finished doing whatever it is that A wanted to induce B to do by making his promise. For example, if A promises B, an estate agent, ‘I will pay you 2% commission if you find someone to buy my house’, and then B goes about trying to find a buyer, he consciously takes the risk that A will be able at any moment to say ‘Forget it – I’ll get someone else to sell my house’ and so B’s busying himself trying to find a buyer will not mean that A is not allowed to withdraw his ‘offer’ to B: Luxor (Eastbourne) v Cooper (1941).
(2) The rule (II) that a rejection of an offer will kill off the offer seems not to apply straightforwardly in a unilateral contract situation. (There is no authority on this, but what follows seems to be correct.) Suppose that A posts up advertisements in the local paper that say, ‘Fruit pickers needed for this weekend. Turn up to my farm, work for 5 hours picking fruit, and you will be paid £75.’ B sees A after seeing the advertisement and says to A, ‘You can stuff your fruit picking! I wouldn’t be seen dead working on your farm.’ But later on B thinks better of it, and turns up to work on A’s farm (entering the farm unnoticed among a group of other fruitpickers) and does 5 hours’ fruit-picking. When he goes to collect his £75, could A say, ‘Sorry – you rejected my offer, so you couldn’t accept it later on by working for five hours on my farm’? I don’t think so. A crucial feature of this situation is that it is not important to A to know whether or not B is going to pick fruit on his farm. A wouldn’t mind if B told him ‘No’ initially but then later on turns up to work. But in some situations, it will be quite important that A knows where he stands, and a ‘No’ may have the effect of ensuring that A is not bound by a promise that he has made with the object of inducing B to do x, even if B later changes his mind and does x. For example, if A says to B, ‘If you mend my car, I will pay you £1,000’, and B says ‘No – I’m too busy’, I don’t think B could sue for the £1,000 if he later on secretly goes round to A’s house and mends the car. The reason is that A may have responded to B’s ‘No’ by entering into a bilateral contract with someone else (under which C promises to do his best to mend A’s car, and A promises to pay him £1,000 if he does so) on which he could now be sued. So B’s ‘No’ in this case will terminate A’s ‘offer’ to B. But this will not always be the case with unilateral contracts.
(3) The rule (III) that an offer will only be validly accepted if the offeree has told the offeror that he has accepted the offer (Felthouse v Bindley (1863)) does not usually apply to unilateral contracts. The classic case is Carlill v Carbolic Smoke Ball Co (1893). In that case the promise was – ‘If you catch influenza using our smoke ball, we will pay you £100.’ The promise was (obviously) not made with the object of inducing people to catch the flu, but to induce people to buy the defendants’ smoke ball. (So this was a unilateral contract situation where the promise was conditional (‘If you do x, then I will do y for you’) but the condition on the promise was (unusually) not the thing the promisee was trying to induce the promisee to do. What the promisor was trying to get the promisee to do did not appear on the face of the promise.) Mrs Carlill bought the smoke ball in reliance on this promise, and that was enough to make the defendants’ promise binding on them. So if Mrs Carlill did catch influenza using the smoke ball – as she did – they would have to pay her £100. What is important, for our purposes right now, is that the mere act of buying the smoke ball brought a unilateral contract into existence between Mrs Carlill and the defendants. Mrs Carlill did not have to tell the defendants that she had bought the smoke ball – thereby ‘accepting’ their ‘offer’ – in order to bring the unilateral contract into existence. Things would be different, of course, if A’s promise was made with the object of inducing B to tell him something, or to contact A in some way. In such a case, a unilateral contract could not come into existence if B did not get in touch with A in the way A wanted. For example, suppose A said to B, ‘I will pay you £10,000 if you supply me with evidence that my wife is having an affair’. If B then gets some photos of A’s wife in a compromising position and posts them to A but then the photos get lost in the post, A will not have to pay B £10,000 – the promise to pay that sum was made with the object of getting B to supply him with evidence of his wife’s infidelity, and B has not done that.
Life would be much simpler if the textbook writers abandoned the idea that the formation of unilateral contracts can be described through the language of ‘offer and acceptance’. But the idea is now too deeply entrenched for it now to be abandoned – and you will be expected to use such language in the contract exam, whether you are dealing with a bilateral or unilateral contract situation. However, if you are dealing with a unilateral contract situation, bear in mind that the rules on ‘offer and acceptance’ are radically modified in that sort of context, and don’t apply rules (I), (II) and (III) – in their unqualified form, as they apply to the formation of bilateral contracts – unthinkingly.
Let’s apply all this to a situation that often comes up in problem questions in the exam, but is often done very badly by students: the situation of a blind auction at a distance. Here is a typical version of the situation I am talking about:
A puts an advertisement in the newspaper: ‘I have a rare first edition of JK Rowling’s Harry Potter and the Philosopher’s Stone. I will sell it to the person who bids the highest price for it by midnight on December 1st.’
The problem question goes on to have various people making various types of bids for the book and has various things happening to those bids. And the question is whether A is bound to sell the book to anyone, and if so who.
The key to doing this problem question properly is to realise that we are dealing with a unilateral contract situation here. A is basically promising ‘If you are the highest bidder at midnight on December 1st, I will sell the book to you for the price you bid.’ And because we are dealing with a unilateral contract situation, we must be careful about what rules on ‘offer and acceptance’ we apply to this situation – we cannot unthinkingly apply the normal rules that would apply to the formation of bilateral contracts. Here are some points that you should bear in mind in analysing this problem question:
(1) The deadline makes it clear that a bid has to be received for it to count as a ‘winning’ bid. A wants to know at midnight on December 1st where he stands – he needs to know who he is supposed to sell the book to. He can only do this if it is only the bids he has received that can count as winning bids. So any bids that are lost in the post or otherwise not communicated (and not through A’s fault in failing to receive them) will not count as valid bids.
(2) Multiple bids, and bids made after rejecting A’s initial ‘offer’, are perfectly acceptable. The only thing that matters is whether you are the highest bidder by the deadline. If you put in a bid, and then thought better of it and put in a higher bid, then that that is fine. If you told A to stuff his offer, and then thought better of it and put in a bid, then that is fine.
(3) It is also acceptable to withdraw a bid that has already been made. As in (2), the only thing that matters is whether you are the highest bidder by the deadline. If you have made a bid before the deadline and then take it back, you are not the highest bidder by the deadline. The bid you made has been nullified by your subsequent act of withdrawing it.
(4) It is a difficult issue, what the position is if A withdraws his ‘offer’ (by placing another advertisement in the paper and notifying all current bidders at the time of withdrawal) before the deadline of midnight on December 1st. In order to deal with this issue, we need to ask – what was A trying to induce people to do by placing his initial advert in the paper? If the answer is ‘bid for the book’ then A cannot withdraw his offer if anyone has already made a bid for the book. There already exists a unilateral contract between A and anyone who has already bid for the book. A’s promise – ‘I will sell you the book if you are the highest bidder by midnight on December 1st’ – was made with the object of inducing people to bid for the book, and so if anyone is induced by A’s promise to bid for the book, a unilateral contract will then have come into existence under which A is bound to sell the book to that bidder if his bid turns out to be the highest bid by the midnight December 1st deadline. A cannot now get out of that contract by withdrawing his ‘offer’. The ‘offer’ has already been ‘accepted’. If, however, what A was trying to do by making his promise was to induce someone into becoming the highest bidder for the book by midnight December 1st, then his ‘offer’ has not yet been ‘accepted’. The deadline has not yet come, so we don’t know yet who the highest bidder is. But would Errington v Errington kick in to say that A cannot withdraw his ‘offer’ because people (i.e. anyone who has already bid for the book) have relied on that ‘offer’ by making a bid and it would as a result be unfair to withdraw that ‘offer’? I am not sure. It won’t have cost people who have already made a bid anything to make a bid. And while they might, in making a bid, have taken a risk that they will end up having to buy the Harry Potter book for their bid price, they could avoid that risk at any point up and until the deadline by withdrawing their bid (as in (3), above). So it’s not clear that it would be that unfair to them if A was allowed to withdraw his ‘offer’ before the deadline.
There are other complications attached to this kind of problem question – in particular, in relation to the issue of ‘referential bids’ – but they are dealt with in the contract textbooks and need not detain us here.