1.1 How an Agreement Comes Into Existence
1.2 When is an Offer not an Offer?
1.3 Agreements too Vague to Bind
1.4 Agreements Concluded on a Handshake
1.5
Inducing Breach of Contract
1.6 Justifiable Breach of Contract
1.7 An Agreement not to Compete
1.1 How an Agreement Comes
into Existence
I offer to sell you, for $35,000 cash,
one IBM-compatible Don Quixote computer, complete with monitor, scanner,
keyboard, laser printer, and appropriate software. On Tuesday you accept. A binding agreement comes into existence at
the moment of acceptance. I can sue you
for payment and you can sue me for delivery.
But if I withdraw the offer while you
are still thinking about it, and then you accept, there is no binding
agreement.
Now consider this situation. I make my offer and you say, “I offer to buy
this same computer. I will pay the
$35,000 which you want, but will do so in four equal monthly installments.”
This is a counter-offer. The moment you make it, my original offer to
sell for cash falls away. This means
that if I refuse to sell on your terms, and you then say that you accept my
original cash offer, no agreement comes into existence. This is because my original offer is no
longer available for acceptance.
Contrast this situation with another
very similar one. This time you do not
make a counter-offer. Instead, you
simply ask me for information. “I am interested,”
you say, “but please tell me if you would still be prepared to allow me to pay
in four monthly installments.”
This request for further information
does not destroy my offer. If I refuse
to sell on your terms, you can still accept my original offer to sell for cash,
and as soon as you do so, there is a binding agreement.
Sometimes it happens that an offeree accepts, but does so subject to a condition. For example, you might say, “Yes, I will take
it at $35,000, provided that my systems engineer gives his approval.”
That is exactly the same as making a
counter-offer. What you are really doing
is this. You are putting aside my offer
and you are making one of your own.
Yours is similar to mine, but it has an entirely new term in it.
Therefore, when you give me your
conditional acceptance, my original offer falls away. An agreement to come into existence only
comes into existence if you accept my offer unconditionally.
1.2 When is an Offer not an
Offer?
If I offer to sell you my Don Quixote
computer for $3,000 and you accept, a binding agreement of purchase and sale
comes into existence.
What if I put that same computer up
for auction? The auctioneer stands with
his hammer held high in the air, ready to strike.
"What am I bid for this rare and
valuable Ming Dynasty Don Quixote marvel of engineering? Three thousand dollars? Anybody?"
You leap up and shout "I'll take
it for three thousand dollars!"
But there is another little man
sitting next to you, an eager little man with beady little eyes and a bald
little head. He says "Four
thousand," and the woman behind him, she with the long thin neck, shouts
"Five!"
Can you insist that the computer is
yours despite the higher bids? You could
argue that the auctioneer offered to sell the computer for $3,000, you
accepted, there is a binding agreement of purchase and sale, and so he is no
longer free to sell to anyone else.
But the auctioneer did not intend to
sell to the person who accepted his opening offer and everyone at the auction
ought to have known this. He was only
trying to get the ball rolling. He was
not offering to sell computer; rather, he was asking for offers, or in the
language of the law, he was issuing "an invitation to treat." And so when you bid $3,000, it was you
who was making the offer, and the auctioneer was free to accept or reject
it. He would normally accept the highest
offer by banging down his hammer.
What if have a large self-service
store and the computer is there on the shelf with a price tag on it? You lug it to the cashier and give him the
full three thousand dollars plus tax and I dash across the shop and say
"No-no, you can't have that, it's my favourite
computer and I have promised it to my grandson." Can you insist that the computer is yours?
Here, too, the answer is no. By putting the computer on the shelf with its
price tag, I am only inviting you to make me an offer. And once you have made it, I have no
obligation to accept.
This kind of situation arises in many
different forms. The more complicated
the transaction, the more likely it is that an offer is regarded as no more
than an "invitation to treat” - an invitation, in effect, to start
bargaining or to enter into negotiations.
1.3 Agreements too Vague to
Bind
A binding legal agreement comes into
existence when two people reach full agreement.
I offer to sell you my Empress of Bandings china tea set for $75,000
Canadian and you accept. Because we have
reached full agreement on this matter, we have a binding agreement of purchase
and sale which will be enforced by a court of law.
What if we simply agree that I am to
sell you this tea set but we do not fix a price? Because we have left out an essential element
of a contract of purchase and sale, our agreement, although clearly reached, is
not legally binding.
The agreement as to price must be
clear. If you are in
It is not necessary for us to agree on
actual figures. It is enough if we
decide on how they can be ascertained.
So we can say that the price will be, not $75,000, but an amount to be
fixed by our friend Lady Constance Keeble, or
whatever price appeared in the latest Christie's Catalogue. Of course, if it should turn out that there
is no appropriate entry in the Christie's Catalogue, or that Lady Constance has
disappeared on a boar-hunting expedition in
Now consider the situation where I
have two Empress of Blandings
tea sets, one with the coat-of-arms of Lord Emsworth
engraved on each piece, one without.
Here, too, we have clearly reached an agreement but, since it is not
clear which tea set I am selling, it is too vague to be binding.
By contrast, our agreement is fully
enforceable if we say that I will sell you whichever one of my two tea sets
lady
Whether the wording of our agreement
is too vague or not must be judged in the light of all the circumstances
surrounding it. If we are both in
As a general rule, a court will lean
in favour of finding that an agreement is
enforceable. It is only in cases of very
pronounced vagueness that a court will refuse to enforce it.
1.4 Agreements Concluded on a Handshake
I sell electric motors. I look through your factory and I say that my
motor is ideal for your needs, it will run
trouble-free for two years doing heavy-duty work. You are impressed by my dynamic, outgoing
personality, we shake hands, and you pay me fifteen thousand dollars for the
motor. Two months later it burns
out. You phone me, distraught, because
you are now unable to meet your production deadlines, and I say, “You idiot! How could you use a little motor like that in
a factory like yours?” There is no doubt
that you have a strong legal remedy against me.
What it is will depend on various nuances of your case. You will certainly get damages, and you might
possibly also get your money back.
Now consider the identical case, but
with a twist to it. I sell you the same
motor, in the same circumstances, giving you the same assurances, but shortly
after you have paid me, I give you a receipt. Printed on the back in neat
little grey letters which blend artistically into the background are a set of
“Conditions of Contract.” One ominous
clause provides: “The buyer does not rely on any warranties or
representations whatsoever made by the seller regarding the merchandise sold.” Two months later when the motor burns out I smile
serenely and point to the ominous clause.
Your case against me is strong.
At the time when our deal was struck you never suspected that I was
imposing these “Conditions of Contract” on you, and it was too late for me to
do so by the time I gave you the receipt.
Finally, take the same case again,
except that after I have given you my assurances I ask you to sign these same
“Conditions of Contract.” You sign the
document immediately without reading it.
Here, too, you have a strong case against me, and that is because it
would be sharp practice for me to hide behind a clause which I know you have
not read. I had no reason to think that
you were consenting to it. I should have
drawn your attention to it when I saw you signing the document without reading
it.
There is a clear principle underlying
these cases. The parties to a contract
are bound only to what they both agree to and to nothing beyond that. If we shake hands on a deal, you do not
thereby agree to be bound by my “Conditions of Sale” which I later show
you. If you sign a document without
reading it, you agree to be bound only by what you might reasonably expect to
find there. If you shake my hand or sign
my document because you rely on something I have told you, you do not agree to
a contract which does not contain that assurance.
1.5 Inducing Breach of
Contract
When two people conclude an agreement,
the law protects their agreement against interference by others. Consider some examples.
Dragon Plastics manufacture plastic
pellets which their customers use to make a variety of plastic
commodities. They have a contract with
you to supply a hundred boxes of pellets every week. You use the pellets to make vinyl
tablecloths.
I also manufacture vinyl tablecloths
but I get my pellets from less reliable sources. I go to Dragon and say, “Forget about that
miserable contract of yours. I’ll take
your whole output at twice the price.”
If Dragon stops supplying you, you can
sue them for damages for breach of contract.
Moreover, you can also sue me for damages, because I have induced the
breach.
What if I did not know about any
agreement between the two of you? I
simply said to Dragon, “Forget about looking for the other orders. I’ll take
your whole output at twice whatever you are charging other customers.”
If this tempted Dragon to stop
supplying you, I have induced the breach, but I have not done so deliberately, and therefore you have no claim against me.
Now take a more difficult case.
Remarks made both by dragon and by you have led me to suspect that probably the
two of you have an agreement. I suspect,
but I do not know, but my suspicion is based on very good grounds. Nevertheless, I go to Dragon and invite them
to sell me their whole output.
In this case I did not know there was
an agreement, and therefore you cannot say that I induced the breach
deliberately. However, I was reckless,
and you can therefore claim damage from me.
But there may be light at the end of my
tunnel. If your contract can be
terminated on notice, I can say to Dragon with impunity, “Give notice. And then, when the notice period ends, sell
your whole stock to me.”
Now I am not persuading them to breach
your contract. On the contrary, I am persuading them to give notice which they
are fully entitled to give in terms of that very contract. You may feel aggrieved, but I will not have
to pay you damages for inducing any breach of contract.
1.6 Justifiable Breach of
Contract
You repair machines. I manufacture plastic bags. I am an excellent client of yours. We have a two-year agreement which requires
you to repair my machines promptly, and they are always breaking down. However, I am a slow payer and now owe you
eighteen thousand dollars.
Suddenly you get an urgent
phone-call. “Come immediately,” I say,
“two machines are down. I absolutely
must deliver a big order this week.”
You tactfully mention the eighteen
thousand dollars.
“We’ll talk about that later,” I say,
“come now or I loose the order and customer as well.”
Your voice takes on the tone of
leftover bean soup on a snowy winter’s night: “My eighteen thousand dollars.”
I try your competitors. They cannot come this month. I rush to my bank manager. She says that, what with my account being so
overdrawn, the most she can give me by way of unsecured loan is five
dollars. I phone you again, beg, plead, throw myself on your mercy, but your tone remains that of
the bean soup aforesaid.
So I loose both the order and the
customer and sue you for damages.
You have clearly breached our
agreement. You were obliged to repair my machines and you refused. Unless you have an excuse, you must
compensate me for my loss.
There is an excuse. By not paying, I also beached the agreement. Usually, I cannot make you perform you
obligations if I have not performed mine.
However, part of the essence of this agreement is that I rely on you for
urgent help. I should not be forced to
find eighteen thousand dollars, suddenly and without warning, when my need for
that help arises.
So the question is, why did you not
give me adequate warning before the emergency? You could have said, long ago, “ Pay me, or I work no more.” But if you allowed my indebtedness to
increase over several months, while sending accounts without insisting on
payment, a court will not look favourably on your
sudden action in my time of need.
1.7 An Agreement not to Compete
It often happens that two parties,
when entering into a relationship with each other, will agree that one of them
is not to compete against the other.
Clauses such as this are often needed, for example, in partnership
agreements, shareholders' agreements, agreements between businesses to
co-operate in some aspects of their operations, employment agreements, agreements to use the services of an independent contractor,
and so on.
If its terms are too vague, or if the
restriction is too wide, a court might declare it to be invalid. If it contains an ambiguity, a court is likely
to interpret it in such a way as to make the restriction as small as
possible. Therefore, an agreement not to
compete must be drafted very carefully.
A good introduction to this area of
the law is by way of analysing a simple clause in
which a person agrees not to compete. Consider this clause: "Mr. X agrees that he will not make
contact with any client, previously unknown to him, other than in the
normal performance of his duties under this agreement."
Consider the situation
where a company called “the American Corporation” says that a corporation
called “PQR” is one of its clients doing business with it.
The general principle is
clear. If the American Corporation can
prove that PQR is its “client” and that PQR was not “previously known to Mr.
X,” then Mr. X cannot make contact with PQR.
However, clear though the
general principle may be, the details are not, as you will see from the
following analysis.
What must the American
Corporation prove to demonstrate that PQR is its “client”?
If the American
Corporation is actually carrying out work for PQR in terms of a contract, PQR
is clearly the American Corporation’s “client”. What if there is no current contract but
there have been contracts in the past?
If the last contract ended last week, and it is likely that there will
be a contract in the future, a court might well say that PQR is still the
American Corporation’s “client”. The
more contracts there were in the past, and the more frequent they were, the
more chance there is that a court would say that PQR is the American
Corporation’s “client” even though there is no current contract. It is obvious that there is much scope for
dispute as to whether or not PQR is a "client" or not.
What if the American
Corporation had never done business with PQR but was negotiating a big deal?
What if the American Corporation had never even negotiated with PQR but had
been carefully nursing the relationship, taking the directors and managers of
PQR for meals, taking them to ball games and to the opera, sending them bottles
of whisky over the festive season? It is
not at all clear what a court would say and arguments could be developed both
ways.
If the American Corporation succeeds in convincing a
court that PQR is its “client”, however this term is defined, it must still prove that PQR was
“previously unknown” to Mr. X.
What must the American
Corporation do to prove that PQR is “previously
unknown” to Mr. Smith? Begin by trying determine what is meant when
you say the opposite, that PQR would be “previously known” to Mr. X. If he he knew about
PQR simply because he had seen their adverts in the Yellow Pages, the American
Corporation would be shocked, because the effect would be that there would be
almost no one whom Mr. X could be stopped from approaching. A judge might look for other criteria, basing
himself on what the parties tell him about their businesses. Here, too, therefore, there is much scope for
dispute.
Summarising thus
far: once
the American Corporation proves that PQR is its client and PQR was “previously
known” to him, Mr. Smith cannot approach PQR in any way.
A judge would try to find
a reasonable interpretation of this clause.
However, it is not possible to predict exactly how would do so, and
different judges may well come to different conclusions.
From this analysis you will
see that if the American Corporation wants to be properly protected from
competition by Mr. Smith, they need to spend time with a lawyer, discussing the
nature of their business and the nature of what they fear from Mr. Smith, and
then getting the lawyer to prepare a clause which is carefully worded to suit
the situation. Similarly, Mr. Smith
would be unwise to simply sign an agreement containing any such clause without
first getting legal advice.