Tuesday, 4 September 2012


Agreements enforceable by law are contracts

Who will ensure that the agreements are honoured? Certainly not the disputing parties themselves. It has to be somebody beyond and above them, who can force them to fulfill their respective obligations. And that is the state, the governing mechanism of the society. More specifically, it is the courts, which decide disputes on contracts.

We have an expectation from people that they will do what they have agreed to do. If they do not fulfill their agreements, agreements would be meaningless. There will be chaos in all spheres of social and economic life. In fact, the human society, with all its complex transactions, has survived because people have, one way or the other, fulfilled what they have agreed to do. For the very survival of the human society, it is necessary to ensure that the agreements are honoured.

The Contract Law is mostly Commonsense.

Formation of agreements

An agreement is about meeting of two minds. This can be formed when one party makes an offer and the other accepts it. An offer or proposal can be accepted or rejected. If the offer is rejected, that is the end of it. However, if an offer is accepted, an agreement is formed.

Offer and acceptance can be express (spoken or written in words) or implied in gestures, body language, actions, commissions and omissions.

Contracts formed through spoken or implied offers and/or acceptances, are as valid as contracts formed through a written offer and acceptance

The founding principle for the formation of agreements is the meeting of minds (consensus ad idem), offer and acceptance is only a modality.


Section 2(a) of the Indian Contract Act, 1872 defines the term "Proposal" as when one person signifies to another his willingness to do or to abstain from doing something with a view to obtaining the assent of the other to such an act or abstinence, he is said to make a proposal. The person making the 'proposal' or 'offer' is called the 'promisor' or 'offeror', the person to whom the offer is made is called the 'offeree'.

An offer is an expression to contract without further negotiations. It requires only acceptance from the other party to form a contract.
·       Offer must be communicated to the offeree. [Lalman Shukla v Gauri Datta (1913)] It is the duty of the offeror to communicate all the terms of the offer to the offeree. Actual communication of such terms may not be required.
·       Offer constitutes a willingness to do some act or abstinence.
·       Offer must be made to some other person. Offer can be made to a particular person. Offer can be made to a group of persons. Offer can be made to the whole world (such offers can be Continuing Offers or Offers of Reward for Information). [Carlill v Carbolic Smoke Ball Co (1893)]
·       Offer may be expressed or implied.
·       Offer must be made with a view to obtaining the assent of the other and should not be an expression of intention or enquiry. [Harris v Nickerson (1872) & Harvey v Facey (1893)]
·       Offer may be conditional.
·        The terms of the offer must be certain.
·       An offer must not thrust the burden of acceptance on the offeree. [Felthouse v Bindley (1862)]

Revocation of Offer
·       An offer can be revoked.
·       It may come to an end due to lapse of time.
·       It may be revoked when the acceptor fails to fulfil the condition precedent to acceptance.
·       It may be revoked by the death or insanity of the proposer.
·       A long silence implies rejection of an offer.

·       Internet is only a medium for communication. The content of the communication decides whether it is an invitation to offer or an offer.
·       Advertisements can be offers or invitations to offer depending upon the intended communication.
·       Ordinarily, displays in shop windows, product catalogues and price lists are invitations to offer. [Fisher v Bell (1961)]
·       Ordinarily, in a self-service store, the customer offers.
·       Ordinarily, in auctions and tenders, the bidders offer.
·       Choice of words used to express an offer will not decide whether a communication is an offer or not. The essence of the communication is important for this purpose.

1.     Lalman Shukla v Gauri Datta (1913)
‘It is the duty of the offeror to communicate all the terms of the offer to the offeree. Actual communication may not be required.’
Defendant’s nephew absconded from home. He sent his servant in search of the boy. When the servant had left, the defendant by handbills offered to pay Rs.501 to anybody discovering the boy. The servant came to know of this offer only when he had already traced the missing child. He, however, brought an action to recover the reward. But his action failed.

2.     Carlill v Carbolic Smoke Ball Co (1893)
It is an English contract law decision by the Court of Appeal, which held an advertisement containing certain terms to get a reward constituted a binding unilateral offer that could be accepted by anyone who performed its terms.
The Carbolic Smoke Ball Co. made a product called the "smoke ball" and claimed it to be a cure for influenza and a number of other diseases. (The 1889–1890 flu pandemic was estimated to have killed 1 million people. The smoke ball was a rubber ball with a tube attached. It was filled with carbolic acid (or phenol). The tube would be inserted into a user's nose and squeezed at the bottom to release the vapours. The nose would run, ostensibly flushing out viral infections.
The Company published advertisements in the Pall Mall Gazette and other newspapers on November 13, 1891, claiming that it would pay £100 to anyone who got sick with influenza after using its product according to the instructions provided with it.
£100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza colds, or any disease caused by taking cold, after having used the ball three times daily for two weeks, according to the printed directions supplied with each ball.
£1000 is deposited with the Alliance Bank, Regent Street, showing our sincerity in the matter.
During the last epidemic of influenza many thousand carbolic smoke balls were sold as preventives against this disease, and in no ascertained case was the disease contracted by those using the carbolic smoke ball.
One carbolic smoke ball will last a family several months, making it the cheapest remedy in the world at the price, 10s. post free. The ball can be refilled at a cost of 5s. Address: “Carbolic Smoke Ball Company”, 27, Princes Street, Hanover Square, London.”
Mrs. Louisa Elizabeth Carlill saw the advertisement, bought one of the balls and used it three times daily for nearly two months until she contracted the flu on 17 January 1892. She claimed £100 from the Carbolic Smoke Ball Company. They ignored two letters from her husband, a solicitor. On a third request for her reward, they replied with an anonymous letter that if it is used properly the company had complete confidence in the smoke ball's efficacy, but "to protect themselves against all fraudulent claims", they would need her to come to their office to use the ball each day and be checked by the secretary. Mrs. Carlill brought a claim to court. The barristers representing her argued that the advertisement and her reliance on it was a contract between the company and her, so the company ought to pay. The company argued it was not a serious contract.

3.     Felthouse v Bindley (1862)
It is the leading English contract law case on the rule that one cannot impose an obligation on another to reject one's offer. This is sometimes misleadingly expressed as a rule that "silence cannot amount to acceptance".
Paul Felthouse was a builder who lived in London. He wanted to buy a horse from his nephew, John Felthouse. After a letter from the nephew concerning a discussion about buying the horse, the uncle replied saying,
"If I hear no more about him, I consider the horse mine at £30.15s."

The nephew did not reply. He was busy at auctions on his farm in Tamworth. He told the man running the auctions, William Bindley, not to sell the horse. But by accident, Bindley did. Uncle Felthouse then sued Bindley in the tort of conversion - using someone else's property inconsistently with their rights. But for the Uncle to show the horse was his property, he had to show there was a valid contract. Bindley argued there was not, since the nephew had never communicated his acceptance of the uncle's offer.
Note: Later the case has been rethought, because it appeared that on the facts, acceptance was communicated by conduct.

4.     Harris v Nickerson (1872)
The case established that an advertisement that goods will be put up for auction does not constitute an offer to any person that the goods will actually be put up, and that the advertiser is therefore free to withdraw the goods from the auction at any time prior to the auction.
The defendant was an auctioneer who had advertised in the London papers that he would sell certain brewing materials, plant, and office furniture by auction at Bury St. Edmunds over a period of three specified days. The plaintiff was a commission broker in London, who attended the sale on the final day (on which it had been advertised that the office furniture, which he had commission to purchase, would be sold). However, on that day, the defendant withdrew all the lots of furniture.
The claimant sought to recover his expenses and the time which he had wasted in attending the auction from the defendant, arguing that the withdrawal of the lots was a breach of contract which had been formed by the offer made by the defendant in the advertisement, and accepted by the claimant in attending the auction.

5.     Harvey v Facey (1893)
Its importance in case law is that it defined the difference between an offer and supply of information. The Privy Council held that indication of lowest acceptable price does not constitute an offer to sell. Rather, it is considered an offer to treat (i.e., to enter into negotiations).
The case involved negotiations over a property in Jamaica. The defendant, Mr LM Facey, had been carrying on negotiations with the Mayor and Council of Kingston to sell a piece of property to Kingston City. On 7 October 1891, Facey was traveling on a train between Kingston and Porus and the appellant, Harvey, who wanted the property to be sold to him rather than to the City, sent Facey a telegram. It said, "Will you sell us Bumper Hall Pen? Telegraph lowest cash price-answer paid". Facey replied on the same day: "Lowest price for Bumper Hall Pen £900." Harvey then replied in the following words. "We agree to buy Bumper Hall Pen for the sum of nine hundred pounds asked by you. Please send us your title deed in order that we may get early possession."
Facey, however refused to sell at that price, at which Harvey sued. Harvey succeeded his action at trial, but Facey appealed to the Court of Appeal, which reversed the trial court decision. The appellants obtained leave from the Supreme Court of Judicature of Jamaica to appeal to the Queen in Council (i.e. the Privy Council). The Privy Council reversed the Supreme Court's opinion, reinstating the trial court's decision and stating the reason for its action.
The Privy Council advised that no contract existed between the two parties. The first telegram was simply a request for information, so at no stage did the defendant make a definite offer that could be accepted.

6.     Fisher v Bell (1961)
The case established that, where goods are displayed in a shop together with a price label, such display is treated as an invitation to treat (to enter into negotiations) by the seller, and not an offer. The offer is instead made when the customer presents the item to the cashier together with payment. Acceptance occurs at the point the cashier takes payment
The Defendant displayed a flick knife in the window of his shop next to a ticket bearing the words "Ejector knife – 4s," (i.e. four shillings). Under the Restriction of Offensive Weapons Act 1959, section 1(1), it was illegal to manufacture, sell, hire, or offer for sale or hire, or lend to any other person, amongst other things, any knife "which has a blade which opens automatically by hand pressure applied to a button, spring or other device in or attached to the handle of the knife". On 14 December 1959, the Claimant, a chief inspector of police force, brought forward information against the Defendant alleging the Defendant has contravened section 1(1) by offering the flick knife for sale.

Unqualified Acceptance

When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise;

·       An offer should be accepted without changing its terms.
·       Changing the terms of the offer amounts to an implied rejection of the offer.
·       An acceptance changing the terms of an offer is a counter-offer.
·       Acceptance should be directed and communicated to the person making the offer.
·       Mental acceptance is no acceptance. [Felthouse v Bindley (1862)]
·       Silence can only imply rejection, not acceptance.
·       An offer can specify the modality of communication of acceptance.
·       It cannot be made in ignorance of the offer.
·       It must be given before the offer lapses.

Intention to create legal relations

The requirement of intention to create legal relations in contract law is aimed at sifting out cases which are not really appropriate for court action. Not every agreement leads to a binding contract which can be enforced through the courts. For example you may have an agreement to meet a friend at a restaurant. You may have a moral duty to honour that agreement but not a legal duty to do so. This is because in general the parties to such agreements do not intend to be legally bound and the law seeks to mirror the party's wishes. In order to determine which agreements are legally binding and have an intention to create legal relations, the law draws a distinction between social and domestic agreements and agreements made in a commercial context. [Balfour v Balfour (1919), Merritt v Merritt (1970) & Rose & Frank Co v JR Crompton & Bros Ltd (1924)]

1.     Balfour v Balfour (1919)
It is a leading English contract law case. It held that there is a rebuttable presumption against an intention to create a legally enforceable agreement when the agreement is domestic in nature.
Mr. Balfour was a civil engineer, and worked for the Government as the Director of Irrigation in Ceylon (now Sri Lanka). Mrs. Balfour was living with him. In 1915, they both came back to England during Mr. Balfour's leave. But Mrs. Balfour had developed rheumatic arthritis. Her doctor advised her to stay in England, because the Ceylon climate would be detrimental to her health. Mr. Balfour's boat was about to set sail, and he orally promised her £30 a month until she came back to Ceylon. They drifted apart, and Mr. Balfour wrote saying it was better that they remain apart. In March 1918, Mrs. Balfour sued him to keep up with the monthly £30 payments.

2.     Merritt v Merritt (1970)
It is an English contract law case, on the matter of creating legal relations. While under the principles laid out in Balfour v Balfour, domestic agreements between spouses are rarely legally enforceable, this principle was rebutted where two spouses who formed an agreement over their matrimonial home were not on good terms.
Mr. Merritt and his wife jointly owned a house. Mr. Merritt left to live with another woman. They made an agreement (signed) that Mr. Merritt would pay Mrs. Merritt a £40 monthly sum, and eventually transfer the house to her, if Mrs. Merritt kept up the monthly mortgage payments. When the mortgage was paid Mr. Merritt refused to transfer the house.

3.     Rose & Frank Co v JR Crompton & Bros Ltd (1924)
It is a leading decision on English contract law, regarding the intention to create legal relations in commercial arrangements.
Rose and Frank Co was the sole US distributor of JR Crompton's carbon paper products. In 1913, the parties signed a new document which included this clause:
This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts ..., but it is only a definite expression and record of the purpose and intention of the three parties concerned to which they each honourably pledge themselves with the fullest confidence, based upon past business with each other, that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation.

The relationship between the two parties broke down as JR Crompton refused to supply some of the orders of the plaintiff. Rose & Frank Co sued on enforcement of the agreement. Held that there was no binding and legally enforceable contract between the two companies as there was no intention to create legal relationship.

1 comment:

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