Great debates in contract law – the formation of contract law

are two major debates surrounding the formation of contract law. Adapting content from Jonathan Morgan’s book Great Debates in Contract Law (Palgrave, 2nd edn, 2015), AllAboutLaw.co.uk are going to delve into

  • Last updated 09-Nov-2015 16:15:27
  • By Sofia Gymer, Editor, AllAboutLaw.co.uk

There are two major debates surrounding the formation of contract law. Adapting content from Jonathan Morgan’s book Great Debates in Contract Law (Palgrave, 2nd edn, 2015), AllAboutLaw.co.uk are going to delve into the first debate where we discuss the strengths and weaknesses of subjective and objective approaches, and 'mistakes' in contracts.

Does the law regarding offer and acceptance respect the parties’ intentions?

A contract involves voluntarily undertaking legal obligations.

On a theoretical level, a contract (outlining and ensuring the ‘objective principle’ of the parties) will be formed by the ‘subjective intentions’ of one or both parties converging.

In contrast, on a technical doctrinal level, the law regarding offer and acceptance can in some instances undermine or defeat the ‘true intentions’ of either party.

So the question is, by not legally recognising the ‘true intentions’ on a subject, does the law fail to respect the voluntariness principle?

A subjective or objective approach?

Subjective:

Classically, a contract is said to be a “meeting of minds” – consensus ad idem in Latin. French jurist Pothier therefore theorised that contractual obligations stem from the mutual assent of the parties.

However, although basing the liability on the parties’ minds (intentions) is a good idea in theory, it is very problematic in practice. Therefore, English law has not made any real attempt to follow this model.

Thoughts are impossible to prove and furthermore a party may not have considered all aspects of the contract.

As David Ibbetson writes in A Historical Introduction to the Law of Obligations, ‘what appeared to be a perfect agreement concealed a more ragged mixture of things on which the parties agreed, and things to which one or both of them had given no thought.’

Objective:

To avoid the problems that come with a subjective approach, common law has committed itself to an objective theory of contract formation.

This denies any strength to any ‘secret reservations’ that the parties might have.

As Holmes explains, ‘the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs – not on the two parties having meant the same thing, but on their having said the same thing.’

This sentiment was reiterated by Blackburn J in Smith vs. Hughes, when he said:

“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 party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.”

The argument for an objective approach is that it protects the position of the other party, who can only interpret the outward display of agreement/disagreement and has no way of knowing what intentions or reservations are held in the other persons mind.

Adam Smith argues that an apparent promise creates the ‘same degree of dependency’ as a genuine promise. Thus, the interpretation of the actions must always be that which would be assigned by any reasonable person in the position to whom they were addressed.

Within the objective approach, you should also explore:

  • Howarth’s argument for the ‘fly on the wall’ approach
  • Chen-Wishart and the complexity of the ‘reasonable observer approach’
  • Hartog v Colin & Shields
  • Scriven v Hindley
  • The complications surrounding estoppel
  • Centrovincial Estates v Merchant Investors Assurance
  • Tamplin v James

In conclusion, the objective approach is a necessity in common law. As Morgan the author of Great Debates in Contract Law writes, ‘to communicate we must use a language, which in turn relies on shared social conventions. In the absence of linguistic conventions, one cannot make a sound and mean anything.'

When we do use language, we cannot coherently claim that it has some subjective meaning special to ourselves, different from its general objective meaning in the ‘language game’ necessary for communication. On this view, there is no choice but to assign meaning objectively, when considering the formation and the meaning of contracts.’ (p.7)

Mistakes

Many contract textbooks have a separate chapter for mistakes. As an exponent of the will theory, the idea that agreement is based on true intentions, Pothier describes a mistake as ‘the greatest defect that can occur in a contract.’

However, critics such as C.J. Slade argue there should be no separate doctrine of ‘mistake’ in English law and that the only question can be whether ‘offer and acceptance on their true interpretation are found to be divergent.’

There are many types of mistake that clearly don’t invalidate a contract. For example, that of a friend buying a wedding gift, who then finds out the engagement has been broken.

As Collins observes, mistakes like these cannot be allowed to govern or they would provide ‘an open-ended excuse to avoid any transaction which turns out to be unpalatable.’

For this reason only unilateral mistakes avoid the obligations of a contract, i.e. in cases of misrepresentation. In this case, even innocent misrepresentation justifies recession of the contract.

However, there is a stark difference between misrepresentation and failure to disclose information. The case of Smith v Hughes embodies the spirit of caveat emptor (‘let the buyer beware’) and demonstrates that a contract will only be terminated on the grounds that the one party can point to a misleading statement by the other.

Offer and acceptance

English law (usually) insists on an offer, followed by unconditional acceptance.

Whether this contract stands depends on the intentions of the parties (which would be recognised by someone making an objective interpretation of their words and behaviour).

Collins describes the rules’ purpose as being ‘to determine the moment at which both parties can rely upon the existence of a binding contract.’

For an easy explanation of what offer and acceptance means in contract law take a look at our article ‘Contract law – offer and acceptance’

For more information on the debates surrounding offer and acceptance read more from Jonathan Morgan’s Great Debates in Contract Law (Palgrave, 2nd edn, 2015)

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