CML – Carlill v. Carbolic Smoke Ball Co., [1893] 1 Q.B. 256 (C.A.): CB 106 |
Jurisdiction
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UK
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Facts
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Carbolic Smoke Ball Company promised a £100 reward to anyone who contracted influenza while using the carbolic smoke ball as directed, and gave a deposit of £1000 at the Alliance Bank “shewing our sincerity in the matter.” They advertised that nobody who had used the carbolic smoke ball during the last epidemic of influenza had contracted the disease. The plaintiff, on the faith of this advertisement, bought one of these balls and used it as directed, but got influenza. Trial judge held that she was entitled to the £100 as promised by the company. Defendants appealed.
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Issues
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Do the defendant's advertisement and the plaintiff's fulfilling of its conditions constitute an enforceable contract?
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Holding
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Yes Carlill.
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Reasoning
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Lindley:
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The language in the advertisement is unmistakable, and there is a distinct promise made to pay £100 in certain events. £1000 had allegedly been deposited with the Alliance Bank to guarantee sincerity in the matter, according to the advertisement.
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The promise made in the advertisement is an offer, made to anyone who performs the conditions; anyone who performs the conditions accepts the offer.
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Performance of the conditions does not necessarily have to precede notification of acceptance, because the offer was never revoked, and by the language used in the advertisement, the person making the offer did not expect and did not require notice.
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All of the elements of a binding contract are found (offer, acceptance, and consideration), despite the vagueness of the language regarding the use of the ball, and the element of consideration which is present in the sales generated by this advertisement – the defendants have benefited from making this promise.
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There is detriment to the plaintiff in using the smoke ball.
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There is a difference between an offer to negotiate, which is not an expression of an intention to be legally bound, and an offer to be legally liable – this is an expression of an intention to be legally bound, and thus constitutes a valid offer, which becomes a contract the moment the offeree performs the conditions necessary for acceptance.
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Ratio
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An advertisement can be considered a serious offer if a reasonable person would take it as such. A binding unilateral contract is formed when the offeree completes the performance required by the offeror. Detriment incurred by the offeree is sufficient consideration to uphold an agreement.
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Comments
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This form of contract was used by the court to protect Carlill from false or exaggeratory advertising (quack medicine was a huge problem at the time).
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Questions raised in Carlill:
Intention to create legal relations
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Process of Contract Formation: Offer and Acceptance
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Doctrine of Consideration
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“Mere puff”?
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Serious promise?
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Intention to be legally bound?
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Offer
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Can be made to the public (world)
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Can be made under a condition
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Can be revoked before acceptance
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Must be “certain” (what would a reasonable bystander consider a serious offer?)
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Acceptance
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Can be either a counter-promise, or, in the case of unilateral contracts, acceptance by performance
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OR
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Formation of Contract
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First step is to focus on “offer”and “acceptance”and the “intention to create legal relations”
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Remember that the question
“Is there an intention to create legal relations?”
can also be phrased as
“Is there an offer that expresses the willingness to be legally bound?”
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It is rather doubtful whether there is need for a distinct doctrinal category (see Atiyah/Smith, Law of Contract)
Common Law: Offer defined
“An offer is the expression of willingness to contract on specified terms, made with the intention that it is to become binding as soon as it is accepted by the person to whom it is addressed.
“Under the objective test of agreement, an apparent intention to be bound may suffice: i.e. the alleged offeror may be bound if his words or conduct are such as to induce a reasonable person to believe that he intends to be bound, even though in fact he has no such intention.”
G.H. Treitel, The Law of Contract
Willingness to be legally bound
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Assumption against an intention to be legally bound:
Social and domestic arrangements
“In respect of these promises each house is a domain into which the King’s writ does not seek to run, and to which his officers do not seek to be admitted.” – Balfour v. Balfour [1912]
but:
“Nevertheless, family arrangements do have legal consequences …” – Hardwick v. Johnson [1978]
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Assumption in favour of an intention to be legally bound:
Business transactions
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These presumptions are rebuttable
CML – John D.R. Leonard v Pepsico, inc. United States District Court, Southern District of New York 88 F.Supp.2d 116 (S.D.N.Y. 1999), aff’d 210 F.3d 88 (2d Cir. 2000): CB 135 |
Jurisdiction
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New York (USA)
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Facts
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Plaintiff seeking specific performance on alleged offer of Harrier Jet, featured in defendant’s television advertising campaign. Television commercial advertised “Pepsi Stuff” catalog, featuring several items from the catalog, and concluding with a Harrier Jet for 7,000,000 Pepsi points. Plaintiff considered this an offer, obtained a “Pepsi Stuff” catalog, found that there was no Harrier Jet included in the items featured in the catalog, and raised money ($700,008.50) to purchase the Pepsi points he needed to claim the Harrier Jet. Defendant seeking summary judgment (no cause of action).
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Issues
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Was the advertisement a valid offer?
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Holding
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No Pepsico.
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Reasoning
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Kimba J:
If the defendant’s advertisement was not a legally binding offer, there is no issue to be tried, and a summary judgment will be granted.
General rule: 2nd Restatement of Contracts (US): general rule of advertisement not constituting offer
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An advertisement does not constitute an offer, but merely a request to “consider and examine and negotiate” An invitation to complete an order form is not a binding offer. Filling out and returning an order form is not a binding offer either. There is no binding offer and acceptance until the recipient of the order form accepts the order form and cashes the cheque.
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Exception to general rule: in certain cases, an offer can be made by advertisement, but there must be specific language of invitation to take action without further communication, as in Lefkowitz v. Great Minneapolis Surplus Store, 251 Minn. 188, 86 N.W.2d, 691 (1957)
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In this case, the commercial is not a definite offer, because it referred to the catalog for details of the offer and did not include them in the commercial itself
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Even if a Harrier Jet had been listed in the catalog, without any words of limitation (e.g. "first come, first served") it would still be sufficiently indefinite not to constitute a definite offer
Plaintiff’s perception of the commercial as an offer does not meet the “reasonable person” standard.
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An obvious joke cannot be construed as a serious offer It is clear that the offer in the commercial was not serious because of the humorous nature of the commercial
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No reasonable person would have believed that a fighter jet worth $23 million dollars could be purchased for $700,000 worth of Pepsi points
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Ratio
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Where an advertisement lacks specific language to make it a definite invitation to action without further communication, or does not meet the “reasonable person” standard of a serious offer, it cannot be considered as a legally binding offer.
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Comments
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Advertisements are presumed not to be contracts because it would be too onerous on the merchant (i.e. running out of supplies, vulnerability) – the potential buyer is the one who is the offeror and the merchant is the offeree
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Distinguished from the Carbolic Smoke Case – no joke in the leaflet and the stipulation of 1000£ was a gesture of seriousness, also Pepsi’s “promise” was impossible to keep whereas the Carbolic reward had conditions that could be fulfilled
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CML – Kleinwort Benson Ltd. v. Malaysia Mining Corp. BHD., [1989] 1 All E.R. 785 (C.A.): CB 140 |
Jurisdiction
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UK
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Facts
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KB sued for £12,260,000 including interest, damages for breach of contract, and won at trial. Defendants appealed on the ground that there was no valid contract.
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MMC Metals (“Metals”) was a wholly-owned but indirect subsidiary of the appellants, and approached the respondents for a loan for Metals’ operation on the London Metals Exchange. The appellants provided a “comfort letter” as part of the loan agreement, the letter stating,
[A] We hereby confirm that we know and approve of these [banking and exchange] facilities [granted by respondents] and are aware of the fact that they have been granted to MMC Metals Limited because we control directly or indirectly MMC Metals Limited. [B] We confirm that we will not reduce our current financial interest in MMC Metals Limited until the above facilities have been repaid or until you have confirmed that you are prepared to continue the facilities with new shareholders. [C] It is our policy to ensure that the business of MMC Metals Limited is at all times in a position to meet its liabilities to you under the above arrangements.
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The respondents offered a lower rate of interest in exchange for a guarantee or a joint and several liability on the part of the appellants, but the appellants decided not to provide this and to pay a higher rate of interest for only providing a comfort letter.
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Metals went into liquidation and did not repay any of the money owed to the respondents, so the respondents went to the appellants for repayment, but were refused, which is the reason for this litigation.
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Issues
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Did the comfort letter express an intention to be legally bound?
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Holding
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No Malaysia Mining Corp.
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Reasoning
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Gibson:
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No explicit promise found in the language; moral rather than legal responsibility, moral responsibility not legally enforceable.
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“Confirm” is not a commitment, no future tense.
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KBL accepted a higher interest rate in exchange for a comfort letter rather than a contract – implies that negotiation has taken place and risk has been allocated.
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Ratio
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A comfort letter is not an expression of an intention to be legally bound. A contract is actionable only if legal recourse is desired (and indicated) by both parties.
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Comments
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Absence of explicit promise does not stop something from being regarded as a contract – custom has a role.
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Comfort letters a wide-ranging practice – exempts shareholders from some risk
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Legal sanction is only one kind of sanction – a business in default gets a bad reputation
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Judge may have considered who was in the best position to absorb the loss (MMC already in default)
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Advertisements -
Advertisements are invitations to treat, not offers (very onerous on merchants to makes sure supplies are there, etc.) thus more seen as “inviting you to be a customer”
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However, due to policy reasons – (consumer protection) advertisements that are deceptive, misleading, misrepresenting can be liable under administrative (rather than private law)
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Private law (i.e. Law of Contractual Obligations) requires offer and acceptance
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