General principles of contracts; (part 3) consensus (offer and acceptance) (continued)

As previously discussed in the second part of the series, there are certain requirements that need to be fulfilled in order for the parties to the agreement to reach consensus. Primarily, there should be a valid offer and acceptance. The offer and acceptance needs to clear, complete and certain; the offer and acceptance can be express or tacit; must be made with the intention of creating binding legal relations; and the offer can be made to a person or group of persons. In this article, we continue to look at the remaining requirements;

v) the offer and acceptance must be communicated (telephone, post, e-mail, etc.)

The offer must be communicated by the offeror to the offeree, and the acceptance must be communicated by the offeree to the offeror, who must learn of the offeree's acceptance. This is the fundamental rule of consensus ad idem, because it is the only way it can be said that the parties' minds have truly met. This is, in some types of contracts (e.g. contracts through the post) called the "information theory" and should be seen as the general rule (but as you will see later, there are exceptions).

Verbal contracts

We have already seen that the information theory (or the rule of consensus ad idem) applies to verbal contracts. When I am sitting in a pub with you and offer you a gig as backing vocalist with my band on Friday night, there is no contract until you, the offeree, hear my offer and express your acceptance and I, as the offeror, hear and understand your acceptance. Simple - the general rule of consensus ad idem (or the "information theory") applies. If you do accept, but I do not hear your acceptance, there is no consensus ad idem, therefore no contract.

Telephonic contracts

Let's now move on to the telephone. The telephone is a device that artificially puts the parties in each other's presence (the fancy legal term for this is "inter praesentes"). So the same principles should apply as where the parties are in fact in the same room. Let's say Bheki, a singer in Port Elizabeth, telephones Billy, a sound engineer in Johannesburg, and offers him R10,000 to provide sound for Bheki's upcoming Johannesburg gig. Billy speaks his acceptance into the telephone, and Bheki hears it.

When and where does the contract come into existence? Now, think this through carefully, and think consensus ad idem... The contract comes into existence in Port Elizabeth, because that is where the offeror, Bheki, hears the acceptance of the offeree, Billy. It doesn't matter that Billy spoke his words in Johannesburg - the offeror learned of the offeree's acceptance in Port Elizabeth. This is important because it tells us when the contract came into existence, and it also tells us where (this is very important when deciding which court will hear the breach of contract case, i.e. in this case, the Port Elizabeth Court).

So, thus far, it's all about the meeting of the minds. But are there any exceptions to the rule? (Just about every legal rule has its exceptions). Let's have a look at contracts concluded through the post:

Postal contracts

Let us presume that Drew, in Johannesburg, sends a letter to Don, in Cape Town, offering Don his services as a recording engineer for R80,000 (knowing that Don is about to record a new album). The letter is sent by Drew on 1 June. It is received in Don's postbox on 3 June. On 4 June, Don clears his postbox, and on 5 June he reads the letter. On 6 June, Don writes a letter accepting Drew's offer, which he posts on 8 June. The letter of acceptance arrives on Drew's postbox on 10 June, and Drew opens and reads it on 11 June. When and where has a binding contract been concluded? Well, based on what you've read about consensus ad idem up until now, you would think that the contract comes into existence on 11 June, in Johannesburg, when Drew reads Don's letter of acceptance (because only then has there been a true meeting of the minds).

But contracts through the post were the subject of a decades long debate in our law, which led to an exception being made to the general rule. The reason for this was that in the days when post was the most common form of communication over a distance, many contract cases ended up in court because letters of offer or acceptance would get lost before they reached their intended recipients, often there were delays, and other postal problems would occur. So the courts had to deal with many postal contract cases, and the matter of postal contracts was hotly debated. There were four theories as to what the law should be in contracts through the post: the information theory, the expedition theory, the reception theory and the declaration theory.

I) the information theory was simply the consensus ad idem rule: i.e. that the contract only comes into existence when the offeror (in our case Drew in Johannesburg) reads the letter of acceptance;

II) the declaration theory stated that the contract comes into existence when the offeree declares his intent to be bound by the contract (in our case, this would be on 6 June in Cape Town, when Don writes his letter of acceptance). This theory was not very popular and did not receive much support, since it would comprise an exception to the consensus ad idem rule, and because it didn't have much logic to back it up (which it would need, if an exception were to be made to the consensus rule);

III) the Reception theory stated that the contract comes into existence when the offeree's letter of acceptance is received at the offeror's address. In our example, this would be on 10 June in Johannesburg, when Don's letter gets to Drew's postbox. Whether Drew opens it or not, would be irrelevant according to this theory. The theory is not completely without merit, because it was Drew who initiated the use of post, therefore Drew should bare the responsibility of checking his post, and Don should be secure in the knowledge that he has a contract, having done everything required of him.

But the theory has less logic than the expedition theory, since it does not deal with the situation where the letter gets lost (and the fact that the offeree should be able to rely, in that case, on the fact that he has a contract once he has done everything required of him to accept). So the reception theory, while not ridiculous, was not accepted by our law for postal contracts;

IV) the expedition theory suggested that the contract comes into existence when and where the offeree posts his letter of acceptance (in our example, on 8 June in Cape Town when Don posts his letter of acceptance). The lawyers proposing the expedition theory justified it with the following argument: where the offeror has authorised the use of post (either expressly or impliedly by using the postal system to make his offer), it is he who should bare the risk. In other words, the offeree, once he has done everything he can to accept the offer using the mode authorised by the offeror (i.e. once he has posted his letter of acceptance) should be protected. The risk inherent in concluding a contract by post is placed on the offeror because he chose it as a mode of communication.

Thus, once the offeree has posted his letter of acceptance, he should be able to relax, secure in the knowledge that he now has a binding contract, whether or not his letter of acceptance gets lost. This is essentially because it was not he, but the offeror, who chose to use post as a means of contracting. The expedition theory was accepted by our courts for contracts through the post as a means of contracting. The expedition theory was accepted by our courts for contracts through the post, and is therefore an exception to the consensus ad idem rule/information theory.

Please note, though, that unless the offeror has specifically prescribed an exclusive mode of acceptance, the offeree is normally free to use whatever means are considered appropriate for his acceptance. In other words, if the offer is sent by post, it would indicate that the offeror expects acceptance by post, and therefore he is bound by a posted acceptance, but acceptance by telephone to a posted offer would normally be perfectly valid. If the offeror does specify a particular mode of acceptance, then the offeree must adhere to this to form a binding contract. (This would come about if, in his offer, the offeror says "please post me your acceptance.")

So what would be the position if we changed the Drew/Don facts? Let's say that, after posting his acceptance letter on 8 June, Don then changes his mind, because he has found a better sound engineer than Drew, who is prepared to do the job for half price. So he immediately telephones Drew, well before the letter of acceptance gets to Drew, and tells him there is no deal and he should ignore the coming letter of acceptance. Is Don in breach of contract? The answer is no - we revert to the information theory.

The reason is that the expedition theory, as an exception to the general rule of consensus ad idem (or information), was only introduced to protect the offeree. On this new set of facts, the expedition theory does not protect the offeree - it works against him, therefore it should not apply. And even looking at it from the offeror's point of view, there is no problem with this - the offeror has made his offer, and the first response he receives to it is a telephone call rejecting it, therefore he has no disappointed expectation, and could not have placed reliance on the letter of acceptance, so he is not being prejudiced. It might be a little confusing to some, because this constitutes an exception to an exception to a general rule, but this happens often in law.

On-line contracts

I wish I could tell you with certainty that this part of our law is clear (i.e. that the information, expedition or reception theory categorically applies to on-line contracts). But regrettably, I cannot, since the matter has not yet been decided upon by South Africa's courts (most of our rules of offer and acceptance were formulated before the internet was even an idea). So a bit of debate is required here.

An online contract would be defined as a contract created wholly or in part through communications over computer networks, by e-mail, through web sites or via electronic data exchange. Because the law moves slowly, and this technology is relatively new (believe it or not, as far as the law is concerned, it is brand new), South African contract law has not yet fully defined the nature of such contracts. As we know, in South Africa, contracts can generally be concluded in writing or orally. There is therefore no reason why an on-line contract should not be binding in our law (despite the fact that the details of such contracts have not yet been clearly defined by our law). It appears certain that an electronically-concluded contract is just as effective as any oral or written contract.

The Electronic Communications and Transactions Act of 2002 (ECTA) does provide some light, in that it recognises that electronic transactions are written agreements. Thus, an agreement entered into electronically is entered into in writing, and is therefore binding, if it would otherwise be. (Section 12 states that 'a requirement in law that a document or information must be in writing is met if the document or information is in the form of a data message or is accessible in a manner usable for subsequent reference.')

But ECTA regrettably does not address the issue of when and where the contract comes into existence.

Just as paper contracts are generally nothing more than evidence of the contract, so too would an e-mail be nothing more than evidence. (The question as to whether contracts do have to be in writing and signed, e.g. copyright transfer, can take place by e-mail, is less clear, although ECTA does provide that e-mail is writing - just a more modern form of it). Proving the existence and terms of an online contract will, of course, be easier in court than proving the same for an oral contract, as it will be evidenced by electronic terms, which can be reduced to a tangible form. So I think there is no doubt that a contract can be concluded by e-mail. The question is when (and where) is the contract concluded?

Obviously, to constitute an offer, the offeree must know of the offer. Thus, where an e-mail offer is unread, there is no offer. But what of acceptance? When has an e-mail offer been accepted and therefore been made into a valid contract? Well, as we know, our starting point is always the Information Theory, because consensus ad idem is the general rule in our law. Where the parties are inter praesentes, or using an instrument like the telephone that artificially places them inter praesentes, the information theory applies. Where they are inter absentes, we know that an exception is made to the information theory in postal contracts, by applying the expedition theory.

The law is not clear on fax and telex. So what about e-mail? We have an authoritative case which says that where the parties are inter absentes, there must be a sufficient factual basis for reaching the conclusion that a contrary intention to the information theory prevails. (In postal contracts, where it is realised by the parties that the contract will be concluded inter absentes, there is a contrary indication as to the mode of acceptance, therefore an exception to the information theory applies. But the law has not yet gone so far in e-mail contracts).

in the next article, we wrap up the discussion on the requirements needed in order to form consensus.