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What every Project Manager should know about offer and acceptance: common pitfalls of the ignorant & how to avoid them.
A blog from Jon Broome, co-authored with Rob Horne.
Whether entering a multi-million pound contract to deliver a substantial project or buying some off the shelf components, a person involved in projects is increasingly having to be involved in negotiating and entering into contracts. This blog - originally published in a slightly shorter version in 'Project' (1) - identifies the common legal pitfalls and how to avoid them, so that you enter a contract with your ‘eyes wide open’ as opposed to in ignorance, leaving you and your client with a big hole to get out of.
The law of Offer and Acceptance … and other criteria which make a contract enforceable.
While there are six criteria that have to be satisfied for parties to enter into a contract, this article will focus on two – Offer and Acceptance - which tend to generate the most problems.
Some fundamentals of Offer and Acceptance :
1. An ‘Offer’ is a promise made by the offeror to be bound by a contract if the offeree accepts it.
2. The Offer must be sufficiently clear and certain containing, 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. Where further negotiation is needed it is unlikely that the certainty requirement will have been met.
3. The Offer can be revoked – or withdrawn in plainer English - anytime before acceptance, but otherwise stands for a ‘reasonable’ period of time.
4. The Acceptance takes effect from the time it is communicated.
5. The offeree has to accept the Offer in its entirety and unconditionally. They cannot pick and choose the bits they like.
6. A counter-offer revokes the previous Offer so that the previous Offer no longer exists.
7. The Offer matures into a legally enforceable contract once the Offeree accepts it (and other formalities not discussed here have been met).
Simple? Not quite. Below are some pitfalls - numbered to relate to each of the points above – and the key lessons on how to avoid them.
The offeror &/or offeree do not have the legal capacity to negotiate &/or enter into a contract on their organisations 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 No. 7) or entering 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.
Lesson 1A : Be clear about your authority to negotiate and enter a contract on behalf of the organisation you represent. Do not exceed it.
If the other person or persons you are negotiating with do not have the authority to enter into a contract, then when it gets to signing the contract, they will have to refer it to someone else – another department or their boss etc. – for the offer you are making to be accepted. At a minimum, this can cause delay. It could result in a significant waste of your time as the contract is re-negotiated with the person who does have authority. It is therefore always a good idea to set out the ground rules for concluding the contract early in the negotiation process.
Lesson 1B : Ask whomever you are negotiating with (or who 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.
Lesson 1C : 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 to avoid Pitfall No. 7. However, the words ‘Subject to Contract’ are not a magic get out of jail free card. If, in fact, a full agreement has in fact been reached then a court may well find that a contract has been concluded.
Lesson 1D : Ensure an 'Invitation to Treat' is not, in fact, an Offer.
An 'Invitation to treat” is a request to make an offer. In a project environment, the Invitation to Tender is, legally, most likely an invitation to treat. It is important to distinguish an invitation from an offer because an invitation cannot be accepted. Rather than Rob saying "will you build me a wall for £500 ?"(offer) and Jon saying "yes" (acceptance), Rob needs to saying something like "could you tender for building my wall ?" (invitation), Jon says "yes, it will be £500" (offer) and then Rob saying "great, build it" (acceptance).
Lesson 1E : Offers do not have to be made to a specific individual, they can be made to the world at large, often referred to as unilateral offers. The question of authority then switches somewhat to meeting the acceptance criteria within the offer. The degree of certainty and completeness will distinguish whether something is an invitation or a unilateral offer. So be wary of making unilateral offers - which you may well intend to be Invitations to Treat - to the world which anyone could accept.
Pitfall No. 2:
Details are missing or vague for ‘what-ifs’, but there is still a contract and hence liabilities and obligations.
Because details are missing from an Offer you assume that it is not a complete Offer or that a term of the contract does not apply i.e. 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 Limited , 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 where something unwanted, but foreseeable – change or late delivery – happened. With no procedure or basis for agreement stated in the contract, a big argument results.
Lesson 2 : Think through the ‘what-if’s’ and make sure the contract is clear enough on what happens for the most likely and highest impact ones. I.e. 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 / works is more complicated but there is a way of working out time for completion, price and even quality they will not necessarily prevent acceptance occurring if they are not present.
Note : in the same edition of 'Project', there was a good article on how lawyers apply risk management techniques (2).
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 have increased so you cannot fulfil the contract profitably. But what is a ‘reasonable’ period of time ? So …
Lesson 3 : Always state how long your offer is open for acceptance. More precisely, state the day when it will lapse.
Pitfall No.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 Tien Hoven & Co from 1880 where Van Tien Hoven – based in Cardiff, UK - offered to sell 1,000 tin plates to Byrne on 1st October and sent their offer by post. Byrne - based in New York, USA - received it on 11th October and immediately telegraphed their acceptance. Meanwhile, Van Tien Hoven revoked their offer on 8th October, again by post. Because Byrne had not received the revocation by the time they accepted the offer on the 11th, a contract was formed on this date.
Lesson 4 : 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 recorded delivery. If by email, tick the box on Outlook which records whether it was received by the other organisation’s server as well as the individual.
Pitfall No. 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 – see also Pitfall No. 6.
Lesson 5 : Be a good project manager and keep an issues log for areas of the contract which remain 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 No. 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.
Lesson 6A : 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 you could end up with a worse deal.
Lesson 6B : 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 No. 7:
You do not have to have a signed document to enter into a contract. Do not 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 in construction, for instance, when 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 No. 6 is that the last bit of documentation which was sent over becomes the offer which, by conduct, 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.
Lesson 7A : As action orientated people, project management types 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 numerous to and fro’ing of contract documentation. Keep using the words ‘subject to contract’.
Lesson 7B : For more complex procurements where there has been a lot of to and fro’ing of numerous documents ensure the final terms have an ‘entire agreement’ clause in it. This helps ensure only referenced documents are part of the contract. You then need to reference all the final agreed documents.
Summary of Key Lessons
1A. Make sure you have the authority to negotiate &/or enter into a contract on your client organisations behalf.
1B. Understand what authority the person you are negotiating with has.
1C. Mark all correspondence with ‘Subject to Contract’ until you are happy to enter the contract.
1D. Ensure an 'Invitation to Treat' is not, in fact, an Offer.
1E. Be wary of making unilateral offers to the world which anyone could accept.
2. Apply risk management techniques to the more likely and higher impact scenarios. To avoid future disputes, make sure the contract covers the ‘what-ifs’.
3. Always state the date when your offer will expire.
4. Ensure a revocation of an offer – or withdrawal in plain English – is received.
5. As contractual issues are identified, log them and ensure that they are resolved before you enter into contract.
6A. Be aware that a counter-offer revokes a previous offer.
6B. Phrase clarifications as questions rather than counter-offers.
7A. Beware of the ‘battle of the forms’ and do not inadvertently, by conduct, enter into a contract on the other parties terms.
7B. Include an ‘Entire Agreement’ clause in the terms and reference all the latest agreed documents.
Rob Horne is a partner is Osborn Clarke. He can contacted on +44 207 105 7671 / +44 774 760 1984 or at email@example.com.
This blog has also be posted on Jon's LinkedIn Profile where more people seem to view and comment on Jon's articles.
(1) Broome J C & Horne R, Point of Law, pages 56-58, Project Magazine, Issue 287, Summer 2016 .
(2) Jakubowski P, Parks A, & Roberts R, Risky Business : How legal professionals are using project risk management techniques to improve their approach to due diligence, pages 64-65, Project Magazine, Issue 287, Summer 2016 .