Contract Formation: 1. When is a counter-offer really an acceptance?

We are usually so busy “managing” the substantive clauses in business contracts that we forget to consider the procedural issues of contract formation: simply put, when does my contract come into existence?

As every law student learns, contracts are formed by way of an agreement on essential terms e.g. price, subject matter and (perhaps) delivery or performance dates. Generally, this means an offer to enter into a contract is accepted. Unless otherwise required by law or the parties, an offer and acceptance may be communicated orally (spoken), in writing or, by other means such as email etc. On the other hand, an offer or acceptance need not always be express; these elements may be implied, i.e. inferred from the actions of the parties, common practice, or the general circumstances. For example, §151 German Civil Code (BGB) states that an acceptance need not be communicated if such communication is not expected in customary practice. This allows for acceptance by conduct and, especially performance.

Any response to any offer which changes the terms of that offer or provides supplementary terms is, not an acceptance, but a counter-offer. This principle or so-called “Mirror Image Rule” is used in Common Law and is set out in Art. 19(1) of the Vienna Convention on Contracts for the International Sale of Goods (CISG) as well as §150(2) (BGB).
However, a major caveat to this principle of contract formation has been adopted by Article 19(2) (CISG):

1. A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer.
2. However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.
3. Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

This means that the terms of the offer and acceptance will be combined if they do not “materially” alter the terms of the original offer. Terms related to fundamental issues are defined in CISG, in a non-exclusive manner, as being those dealing with price, payment, quality, quantity, delivery etc.

Since UN Sales Law (CISG) is being used increasingly more widely in cross-border deals it may be a good move to set-out in advance in any offer (and not only in the contract document) whether or not UN Sales Law is to apply to any later contract. Otherwise you may have a binding contract sooner than you wish!