The case was first decided at Manchester county court in favour of Mr. Gibson. This verdict was affirmed by the majority of the Court of Appeal, where Lord Denning stated:
“You should look at the correspondence as a whole and at the conduct of the parties and see therefrom whether the parties have come to an agreement on everything that was material…”
The House of Lords took a different view and held that no binding contract had come into existence. Lord Diplock favoured the conventional approach of looking at the correspondence and seeing whether offer and acceptance can be found. He stated that the words “may be prepared to sell” clearly show no intention of the council to be bound. The judges agreed that the most that could be said about the council's letter of Feb 16th was that it represented part of the negotiations where the parties were feeling their way towards an agreement. It lacked the unequivocal nature of a true offer. This enforced the traditional view that there needs to be a clear offer, and acceptance is needed to create a binding contract despite Lord Denning’s attempt to weaken the dominance of offer and acceptance.
However there are some earlier cases where the courts decided that there was a contract, albeit it was difficult or even impossible to analyse the transaction in terms of offer and acceptance. The Satanita case is an example of a case where two parties to a contract assent to the terms put forward by a third party. In other words it demonstrates a situation where a third party is involved in the negotiating process and the offer and acceptance method does not work here, so the court had to adopt a different approach.
Clarke and Dunraven were both members of a yachting club. Each owner was required to sign the entry of his yacht undertaking to abide by the club’s rules, which included a liability for damages clause whereby members agreed to pay for damages which arose from collision during races. While manoeuvring for the start, the Satanita run into Valkyrie and sunk her. Dunraven, the owner of the latter sued Clarke the owner of the former for damages. The defendant paid into court the limited sum for which he was liable under the Merchant Shipping Act in the absence of a contract between him and the owner of Valkyrie. Dunraven argued that he was liable for all damages
The Court of Appeal raised two main questions: Was there a contract between these two yacht owners? And if so, was the contract to pay all damages without regard to the liability limitation section of the Merchant Shipping Act? The judges all agreed that by sailing under the rules of the Yacht Racing Association, the yacht owners not only entered into a contract between each member of the Yacht club and the club itself, but they also formed a contractual relationship with each other. By colliding with and sinking Dunraven’s yacht Valkyrie, the defendant breached rule 18, therefore he was legally responsible under the 24th rule to “pay all damages” and was “liable for all damages arising therefrom” under the 32nd rule. The Court of Appeal judges decided that rule 32 was the one applicable in this case and upon true construction of the wording, in particular the phrase “all damages” excluded the liability limitation provisions of the Merchant shipping Act.
The House of Lords affirmed the decision of the Court of Appeal and concluded that the owners were bound by the Association rule making the ‘Satanita’ liable “for all damages”. Lord Herschell stated:
“The effect of their entering for the race, and undertaking to be bound by these rules to the knowledge of each other, is sufficient, where those rules indicate a liability on the part of the one to the other, to create a contractual obligation to discharge that liability”.
In cases like Gibson it is not easy to determine when the preliminary negotiations end and a definite offer is made. All the correspondence must be thoroughly examined and the court must try to find out whether from the language used in the documents and from the actions of the parties, either party intended to make an offer capable of acceptance. It was concluded that the phrase ‘may be prepared to sell’ could not be regarded as an offer. Similarly in Satanita the court had to ascertain what the true intention of the parties was from the language they have used and came to a decision that the expression ‘to pay all damages’ does not mean damages limited by the Merchant Shipping Act.
The main difference between these two cases is that although in Satanita no offer and acceptance was found, a binding contract was concluded, while in Gibson it was obvious that without finding an offer and matching acceptance no contract was completed.
The approach adopted by Lord Denning in Gibson has been criticised in a sense that it does not provide sufficient guidance to the courts and legal advisers in determining whether or not an agreement has been reached. Therefore it seems that the courts prefer the long-established approach of seeking an offer and an acceptance of that offer, because it gives them certainty. On the other hand the traditional rule is not always applied rigidly by the courts. In The Eurymedon (1975) Lord Wilberforce argued that:
“English law, having committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the facts uneasily into the marked slots of offer, acceptance and consideration”.
In other words the courts have some discretion whether they need to identify the offer and the acceptance and therefore have also flexibility in applying the rules to particular case. Trentham v Archital Luxfer is one of post Gibson cases, where agreement was found to exist and was based on the conduct of both parties, regardless of the inability to analyse the performance in terms of offer and acceptance.
Even though the Satanita case is regarded as an exception to the general requirement of offer and acceptance for the formation of contract, I believe it would not be decided differently today. Even though in vast majority of cases the doctrine of offer and acceptance should be adhered to, the courts have the discretion, if necessary, to ignore the traditional approach and simply recognise the existence of an agreement by means of other external evidence provided this is sufficiently compelling.
(1467 words)
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BIBLIOGRAPHY
Beale, H.G., Bishop, W.D., Furmston, M.P., Contract: Cases & Materials, 4th edition, Oxford University Press, 2005
Mulcahy, L., Tillotson, J., Contract Law in Perspective, 4th edition, Cavendish Publishing, 2004
Poole, J., Casebook on Contract Law, 8th edition, Oxford University Press, 2006
Samuel, G., Understanding Contractual and Tortious Obligations, Law Matters Publishing, 2005
CASES CITED
Clarke v Earl of Dunraven (The Satanita) [1895] P. 248, [1897] AC 59
Gibson v. Manchester City Council [1979] 1 W.L.R. 294, 520
New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154 (PC)
Trentham (G Percy) Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep 25 (CA)
Mutual comprehension of the terms of the agreement (contract)
Gibson v Manchester City Council [1979] 1 W.L.R. 294
Gibson v Manchester City Council [1978] 1 W.L.R. 520
The Satanita [1895] P. 248
8l. (£) per ton on the registered tonnage of the Satanita
Section 54 of the Merchant Shipping Act 1862
Clarke v Earl of Dunraven [1897] AC 59
New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154 (PC)
Trentham (G Percy) Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep 25 (CA)