Point of law

Dr Jon Broome and Rob Horne explain what every project manager needs to know about offer and acceptance, and look at the common legal pitfalls.

Whether entering a multimillion-pound contract to deliver a substantial project or buying some off-the-shelf components, a project manager increasingly cannot avoid having to advise on and deal with the formation of contracts. 

Entering a contract with ‘eyes wide open’ is essential to ensure neither you nor your client is exposed.

While there are six criteria that have to be satisfied for parties to enter into a contract, this article will focus on the two that tend to generate the most problems: offer and acceptance. 

The fundamentals of offer and acceptance are:

• An ‘offer’ is a promise made by the offeror to be bound by a contract if the offeree accepts it.
• The offer must be sufficiently clear and contain, either directly or by reference to standard documents, the basic terms of the agreement: what is to be supplied, by when and for how much.
• The offer can be revoked – or ‘withdrawn’ in plainer English – any time before acceptance, but otherwise stands for a ‘reasonable’ period of time.
• The acceptance takes effect from the time it is communicated. 
• The offeree has to accept the offer in its entirety and unconditionally. They cannot pick and choose the bits they like. 
•  A counter-offer revokes the previous offer, so that the previous offer no longer exists.
• The offer matures into a legally enforceable contract once the offeree accepts it (and when other formalities not discussed here are met). 
• It is not quite as simple as this, however. There are a number of pitfalls to avoid.

Pitfall 1: The offeror and/or offeree do not have the legal capacity to negotiate and/or enter into a contract on their organisation’s behalf

If you are negotiating a contract on an organisation’s behalf, you are holding yourself out as having authority to do so. If you are an employee and you exceed the authority given to you, then, by either inadvertently entering into a contract on behalf of your employer (see pitfall seven), or entering into it on unfavourable terms, you could end up in disciplinary proceedings. If you are an external consultant, you or the consultant organisation you work for could be sued for the same reasons.

Key lesson: Be clear about your authority to negotiate and enter into a contract on behalf of the organisation you represent. Do not exceed it. 

When it gets to signing the contract, if the other person or persons that you are negotiating with do not have the authority to enter into a contract, then, for the offer you are making to be accepted, they will have to refer it to someone else – another department or their boss, for example. At a minimum, this can cause delay. It could result in a significant waste of time as the contract is renegotiated with the person who does have the authority. It is therefore always a good idea to set out the ground rules for concluding the contract early in the negotiation process.

Key lesson: Ask whomever you are negotiating with (or whoever is intending to sign the contract) to confirm their capacity to negotiate on an organisation’s behalf, and to explain the internal procedures before a contract is signed. Even company directors may not always have sufficient authority for substantial contracts, so a board resolution delegating authority to a particular director or, slightly more unusually (except in an international context), a power of attorney, may be required.

Key lesson: If you have the authority to negotiate, but not enter into, a contract, mark every communication ‘subject to contract’. This indicates that you do not intend to create a legally binding obligation until a formal contract has been entered into, usually in writing and signed by both parties. Even if you have the authority to enter into a contract, it is still a very good idea to do this. However, the words ‘subject to contract’ are not a magic get-out-of-jail-free card, either. If, in fact, a full agreement has been reached, then a court may well find that a contract has been concluded.

 

Pitfall 2: Details are missing or vague, but there is still a contract, and hence liabilities and obligations

If details are missing from an offer, you may assume that it is not a complete offer, or that a term of the contract does not apply – ie you do not have to do something or are not liable for something that is only vaguely outlined or not agreed in the contract.

In Drake & Scull Engineering Ltd v Higgs & Hill Northern Ltd (1994), all terms had been agreed except for labour rates for additional or changed works. The rates originally put forward by Drake & Scull had been rejected, pre-contract, as being too high, but agreement was never reached on what they should be. 

Higgs & Hill argued that there was no contract as a result. The courts decided otherwise, and that Drake & Scull were entitled to a ‘reasonable sum’ for the labour involved. There are other similar court cases in which something unwanted but foreseeable happened – such as a change or late delivery. With no procedure or basis for agreement stated in the contract, a big argument results.

Key lesson: Think through the ‘what ifs’ and make sure that the contract is clear enough on what happens for those that are most likely and have the highest impact – ie apply risk management to the contract. When thinking about whether you have sufficient content, it is worth considering a very simple contract, say for the purchase of a chocolate bar in a supermarket. What terms, conditions and requirements are necessary there? Yes, a contract for part of a project is more complicated, but though there is a way of working out time for completion, price and even quality, these details not being present will not necessarily prevent acceptance occurring.

Pitfall 3: Your offer is accepted after you have forgotten about it

An offer lapses after a ‘reasonable’ period of time. This can be after you have forgotten about it and the world, including your organisation, has moved on. For example, you have won other new business and do not have the capacity to deliver the contract, or the cost of your raw materials has increased, so you cannot fulfil the contract profitably. But what is a ‘reasonable’ period of time?

Key lesson: Always state how long your offer is open for acceptance; specifically, state the day upon which it will lapse.

Pitfall 4: Acceptance happens when it is communicated, but a revocation only becomes effective once it is received

It is a quirk of English law that an acceptance, if posted, takes effect at the moment of posting, as long as post was a valid and appropriate method of communication. 

However, both an offer and a revocation need to be actually received before they are effective. The defining case on this is Byrne & Co v Leon Van Tienhoven & Co (1880), in which Van Tienhoven – based in Cardiff – offered to sell 1,000 tin plates to Byrne on 1 October and sent its offer by post. Byrne – based in New York, US – received it on 11 October and immediately telegraphed its acceptance. Meanwhile, Van Tienhoven revoked its offer on 8 October, again by post. Because Byrne had not received the revocation by the time it accepted the offer on 11 October, a contract was formed on this date.

Key lesson: If you want to revoke an offer, always do your utmost to ensure that a revocation is actually received. If done verbally, make a note of it in a diary and follow up in writing. If by post, ensure that it is sent via recorded delivery. If by email, tick the box on Outlook that records whether it was received by the other organisation’s server.

Pitfall 5: You cannot pick and choose which parts of the offer you accept. You either accept an offer in its entirety or not at all

If you say, ‘I like these aspects of your offer, but not these’, but then either forget to resolve the differences or continue to negotiate, you might inadvertently enter into the contract including the terms you do not like.

Key lesson: Be a good project manager and keep an issues log for areas of the contract that are unresolved. Ensure they are resolved before you enter into the contract, and keep up the use of ‘subject to contract’ until everything in the log is closed out.

Pitfall 6: You make a counter-offer to what is a very good offer

By making a counter-offer, you are revoking the original offer. That means if they do not accept your counter-offer, you cannot go back in time and accept the previous good offer. Making a counter-offer is different to asking a question or seeking clarification. 

Key lesson: Don’t be too greedy. If the other party makes you a good offer, you may want to accept, even if there is a possibility of a better deal – because, otherwise, you could end up with a worse deal.

Key lesson: Be careful how you phrase your communications when discussing terms of a contract. If you are having a wall built, and receive a tender, you can say, ‘Is that brick work or block work?’ as a clarification, which keeps the original offer alive. However, if you say, ‘I want it to be brick work, not block work’, that would be a counter-proposal if the offer had been based on block work.

Pitfall 7: You do not need to have a signed document to enter into a contract. Don’t be the loser in the ‘battle of the forms’

If both parties start acting as if the contract is in place, then there is a contract in place by conduct. This pitfall often comes about when, in construction for instance, a contractor wants to get started on site and the employer wants work to start, so they just get on with it, waiting for the paperwork to ‘catch up’.

A variation on this, related to pitfall six, is that the last bit of documentation that was sent over becomes the offer that, by action, is accepted. This is known as the ‘battle of the forms’. However, no one is quite sure when both parties started acting as if a contract was in place and hence which ‘documentation’ is the contract. The situation is further complicated – typically in more complex procurements – when different parts of the contract documentation have been sent backwards and forwards for clarification and amendment.

Key lesson: As action-oriented people, project managers want progress. But be very careful about starting to act as if a contract is in place when none is signed, especially when there has been much back and forth of contract documentation. Keep using the words ‘subject to contract’.

Key lesson: For more complex procurements, where there has been a lot of back and forth, ensure the final terms have an ‘entire agreement’ clause. This helps ensure that only referenced documents are part of the contract. You then need to reference all the final agreed documents.

Key Points

• Make sure you have the authority to negotiate and/or enter into a contract on your client organisations’ behalf. Understand what authority the person you are negotiating with has.
• Mark all correspondence as ‘subject to contract’ until you are happy to enter the contract.
• Apply risk management techniques to the more likely and higher-impact scenarios. To avoid future disputes, make sure the contract covers the ‘what ifs’.
• Phrase clarifications as questions rather than counter-offers.
• Always state the date on which your offer will expire.
• Ensure a revocation of an offer - or ‘withdrawal’ in plain English - is received.
• As contractual issues are identified, log them and ensure that they are resolved before you enter into a contract.
• A counter-offer revokes a previous offer.
• Beware of the ‘battle of the forms’ and do not inadvertently, by conduct, enter into a contract on the other party’s terms.
• Include an ‘entire agreement’ clause in the terms, and reference all the latest agreed documents.

 

Dr Jon Broome is a trained civil engineer and chair of the APM Contracts and Procurement Specific Interest Group. Rob Horne is a partner in the engineering and construction and dispute resolution teams at Simmons & Simmons.