What is an offer in contract law? Objective test, jokes and invitations to treat (UK)

What is an offer in contract law, what happens if someone makes an offer as a joke, and is an advertisement an offer? The short answer: an offer is something presented for acceptance with the intention of being legally bound, that intention is judged objectively, and adverts are usually not offers at all. This page is part one of my series on what makes a contract legally binding, and it deals with the first of the five elements: the offer.

What is an offer in contract law?

An offer is when someone presents something for acceptance and they have the intention of being legally bound by it. Both halves matter. Presenting something is not enough on its own; there has to be an intention that, if the other side says yes, a binding contract comes into being.

The intention of being legally bound is especially important because it is what differentiates a joke from a legally binding offer. If I say over a drink that I will sell you my car for a pound, nobody seriously expects that to be a contract. The words look like an offer, but the intention to be bound is missing.

The objective test: intention to be bound

How does a court decide whether that intention was there? The intention of being legally bound is an objective test, not a subjective test. The difference is this:

• Objective test. You take a step back, look at the situation as a third party and ask whether a reasonable person would see it as a legally binding offer.
• Subjective test. You look at the offeror, the person who made the offer, and take into account their own information, feelings and thoughts when deciding whether they meant to be bound.

English contract law uses the objective test. What the offeror privately thought or felt is not the deciding factor. What matters is how the situation would look to a reasonable person standing outside it.

Because the test is objective, a lot of the time we look at the offer from the perspective of the offeree, the person who received it. We ask whether a reasonable offeree would recognise this as an offer that is capable of being legally binding and that carries the intention to be legally binding. If a reasonable person in the offeree's shoes would have taken it seriously, the fact that the offeror later says "I was only joking" will not usually help them.

For business owners the practical point is simple. If you put a proposal to someone in terms that a reasonable person would take as serious, you should expect to be held to it if they accept. Be careful with casual proposals in emails and messages.

Is an advert an offer? Invitation to treat

Are advertisements typically recognised as offers? The short answer is no. Advertisements are typically recognised as invitations to treat.

The difference between an invitation to treat and an offer is that the offer, as we have seen, carries the intention of being legally bound. An invitation to treat is when you advertise something and ask others to come to you so that you can discuss business. It is an invitation to start a conversation, not a commitment to a deal. The practical difference is that an invitation to treat does not automatically create a legally binding contract when someone responds to it.

That is why a business that advertises a product at a particular price is not, in most cases, bound to sell it at that price to everyone who turns up. The customer's response to the advert is the offer. The business is then free to accept or decline it.

Supermarket example: offer at the checkout

The supermarket is a good illustration of how offer and acceptance actually work in everyday life, and it is the opposite of what most people assume.

When you go to a supermarket, a lot of the time it is you who is making the offer to the supermarket. The prices you see on the products displayed on the shelves are typically recognised as invitations to treat. The shop is saying "come and discuss business with us", not "we are bound to sell you this at this price".

The moment you pick up that product, take it to the checkout machine and scan it, you are offering to buy that product at that price from the supermarket. The supermarket accepts your offer by taking your money. At that point there is an offer, an acceptance, and a contract.

From offer to contract

An offer on its own is not a contract. For an offer to become a legally binding contract it needs to be properly accepted, and acceptance has its own rules about counter-offers, conduct, silence and the postal rule. I cover those in the next part of the series on acceptance in contract law. After that come consideration, intention to create legal relations and certainty of terms.

Next steps

If you are relying on something as an offer, ask the objective question first: would a reasonable person receiving it see it as a serious proposal that the other side intended to be bound by? If the answer is uncertain, or the arrangement matters to your business, put the offer in writing with clear terms and, where the value justifies it, have a commercial solicitor review it before anyone accepts.