Who Decides Whether An Agreement Has Been Reached?

In a contract dispute, can a party claim that the contract did not reflect his actual intention? 

Two useful tests, the subjective and the objective tests to determine whether or not an enforceable contract has been concluded and whether the contract reflects the parties' intention.

1. The Subjective Test

To determine the existence and scope of an agreement, the subjective test attempts to ascertain the actual intention of the contracting parties, whereas an objective test also known as the "Reasonable Man's" test, examines what an objective bystander would have interpreted the intentions of the parties.

'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 other 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.'.. Blackburn J in Smith v. Hughes (1871) LR 6 QB 597.

Although this judgment seem to establish the objective test as the preferred method to determine the existence of a contract, it should not be assumed that the subjective intentions of the parties are irrelevant.

In many cases the subjective intentions of the parties will coincide with the interpretation of the "Reasonable Man" test. There are two situations in which the objective test is either displaced or modified by the subjective intentions of the parties.

Mistake Was Known By A Party

The first arises where the offeror knows that the offeree is suffering from a mistake as to the terms of the offer. A case in point is Hartog v. Colin and Shields [1939] 3 All ER 566, the defendants entered into a contract to sell 3,000 Argentinian hare skins to the claimants. However by mistake they offered them for sale at 10c per pound instead of 10c per piece. When they discovered their mistake, the defendants refused to deliver the skins. The claimants brought an action in respect of the defendant's non-delivery of the skins. It was held they were not entitled to succeed because the negotiations had proceeded upon the basis that the skins were to be sold at a price per piece and that, as there were three pieces to the pound, the claimants could not reasonably have thought that the defendant's offer matched their true intention. The claimants were thereby prevented from snatching a bargain which they knew was not intended by the defendants.

However, the objective test could also explain the outcome of the case on the basis that the reasonable person in the position of the claimants would have known that the offer made by the defendants did not reflect their true intention.

Party Is At Fault

The second situation in which the subjective intentions of the parties are relevant is where the offeree is at fault in failing to note that the offeror has made a mistake. In the case of Scriven Bros v. Hindley [1913] 3 KB 564, an auctioneer acting for the claimants put up for sales lots of hemp and tow. The auction catalogue implied that the lots were the same when, in fact, the second lot only contained tow, which was considerably cheaper than hemp. The defendants bid for the lot, thinking it was hemp when in fact it was tow. The auctioneer did not realize that the defendants had misunderstood what was being auctioned and thought they had overvalued the tow. When the defendants discovered their mistake, they refused to pay the price and so the claimants sued them for the price. It was held that no contract of the tow had been concluded because the auctioneer intended to sell tow and the defendants intended to purchase hemp and the defendants' mistake had been induced by the carelessness of the the claimants in preparing the auction catalog.

Once again, the objective test can be used on the basis that the reasonable person in the position of the defendants would have been misled by the auction catalog, the claimants were not entitled to enforce their version of the contract against the defendants.

The General Rule

It is important to understand that, as a general rule, the subjective understandings of the parties will not generally prevail over their objectively ascertained intention. As Lord Normand stated in Mathieson Gee (Ayrshire) Ltd v. Quigley 1952 SC (HL) 38:

"... when the parties to a litigation put forward what they say is a concluded contract and ask the Court to construe it, it is competent for the Court to find that there was in fact no contract and nothing to be construed."

The existence or non-existence of a contract is ultimately a question for the court which will generally be decided by the application of an objective test.

2. The Objective Test

There are three different interpretations of the objective test which can be applied by the courts, ie:

a. Detached Objectivity - what interpretation would a person watching the behaviour of the contracting parties place upon their words and actions or the "fly on the wall" approach.

b.Defendant Objectivity - to interpret the words as they were reasonably understood by the defendant/ promisee. This approach finds the greatest support in case law

c. Claimant Objectivity - standard of the reasonable person in the shoes of the person making the offer. This approach finds little judicial support.

Has Agreement Been Reached?

The Battle of The Forms

A useful example of the approach which the courts adopt in deciding whether or not the parties have reached  agreement can be seen in the case of Butler v. Ex-Cell-O Corporation (England) Ltd [1979] 1 WLR 401.The sellers, Butler, offered to sell  machine tool to the buyers, the offer being made on Butler's standard terms of business, which included, inter alia, a price variation clause. The buyers sent an order for the machine tool, which, in turn, was on their own standard terms of business, which made no provision for a price variation clause and stated that the price of the machine tool was to be fixed. The buyers' order form contained a tear-off acknowledgement slip, which stated that 'we [the seller] accept your order on the terms and condition stated thereon'. The sellers signed and returned this slip to the buyers, together with a letter stating that they were carrying out the order on the terms of their original offer. After constructing the machine tool, but before delivering it, the sellers sought to invoke the price variation clause contained in their original offer and claimed the additional sum of $2,892. The buyers refused to pay this increase in price claiming they were not contractually bound to do so. The sellers accordingly sued the buyers for $2892 in damages. The Court of Appeal held that they were not entitled to recover the sum claimed because a contract had been concluded on the buyer's terms which did not include the price variation clause. Although the Court of Appeal was unanimous in holding that a contract had been concluded on the buyers' terms. the court was divided in its reasoning.

The majority, Lawton and Bridge LJ used the traditional 'mirror image' rule of contractual formation, i.e the court must be able to find in the documents which passed between the parties a clear an unequivocal offer which is matched or 'mirrored' by an equally clear and unequivocal acceptance. A purported acceptance which does not accept all the terms of the original offer is not in fact a true acceptance at all but is a counter-offer which 'kills off' the original offer and amounts to a new offer which can in turn be accepted by the other party. Thus, it was held that the buyers' order could not be construed as an acceptance of the sellers' offer and therefore amounted to a counter-offer. They held that this counter-offer was accepted by the sellers when they signed the tear-off acknowledgement on the buyers' order form. The letter accompanying the the acknowledgement slip was held to not to be an attempt to reintroduce the terms of the sellers' original offer and so was not a counter-offer, but was simply a means of identifying the order for the machine tool.

The advantages of this 'traditional' approach:
1. provides degree of certainty as to whether or not a contract has been concluded.
2.can be applied to every type of contract

Criticisms:
1. excessively rigid - all or nothing result - it is either the terms of the buyer or the terms of the seller which govern the relationship of the parties; the court cannot pick and choose between respective sets of terms and conditions or seek to find an acceptable compromise
2. encourages businesses to seek the 'last shot' and places the party in receipt of the last communication in a very difficult position. However, the onus will generally be on the buyer, as Leggatt LJ observed in Hitchins (Hatfield) Ltd v. H Butterworth Ltd 1998, "if express terms are to govern a contract of sale, a buyer would expect to buy goods upon the seller's terms, unless supplanted by the buyers' own'.

The minority, Lord Denning, rejected the traditional mirror image approach, holding it to be 'out of date' and said 'better way is to look at all the documents passing between the parties and glean from them, or from the conduct of the parties, whether they have reached agreement on all material points, even thought there may be differences between the forms and conditions printed on the back of them.'

He also held that even where the terms used by the parties were mutually contradictory, it was possible for a court to 'scrap' the terms and replace them by a 'reasonable implication'. The signing of the tear-off acknowledgement by the sellers was the 'decisive document', which made it clear that the contract was concluded on the buyers' terms.

This suggests a 2 stage approach :-
1. decide whether a contract has been concluded
2. decide what are the terms of the contract.

However, English law remains wedded to the traditional approach as confirmed by Lord Diplock in Gibson v. Manchester City Council [1979] 1 WLR 294, where he said that although there may be certain 'exceptional' cases which do not 'fit easily into the normal analysis of a contract as being constituted by offer and acceptance', these cases were very much the exception and they have not displaced the traditional rule.