What constitutes Formation of an Agreement? #2

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Indian contract formation of agreement


Carlill v. Carbolic Smoke Ball Co 1891-4  All ER 127
Case judgement

Case facts

  • The Carbolic Smoke Ball company advertised in daily that they would pay 100 to anybody who contracts influenza after using their smoke balls 3 times a day for 2 weeks.
  • They also mentioned they had deposited 1000 in the bank to showcase their genuineness and sincerity.
  • The plaintiff, Carlill believing in the accuracy of the statements in the advertisement purchased the smoke balls and used them as prescribed for 2 weeks yet caught influenza.
  • When they approached the company to ask for 100 as a reward, the company denied them the reward
  • Subsequently, they filed a case.

Contentions put forth by the Carbolic Smoke Ball co

    - it is not a binding contract as
    - vague offer as it does not specify to whom it is made and for what time limit
    - that there is no consideration 
    - they had no intention of creating a contract
    - acceptance of the offer was never notified

Legal arguments as the basis of adjudication

Express offer/proposal - an express promise to pay 100 for certain events specifiedIntention to contract - A deposit of 1000 is proof of their sincerity to pay 100 in this matter in case the smoke ball fails to protect when used as per instructions

Who is the promisor/offeror - Carbolic Smoke Ball Co.

Who is the promise/offeree? - To anyone who performs the condition in the advertisement

Communication of the offer - general offer made through mass media advertisement

Acceptance of the offer - whoever performs the condition of Smokeball use accepts the offer

Consideration - the below 2 items constitute ample considerations for the same

- the advertisers get a a direct advantage in terms of sales which is a consideration

- furthermore, there is a distinct inconvenience in consuming the smoke balls 3 times a day at the request of the defendants


The notification of the acceptance need not precede the performance. It is a continuing offer.
Williams v. Carwardine [(1883) 4 B. & Ad. 621]
Brogden v. Metropolitan Rail. Co. [(1877) 2 AC 666]
Spencer v. Harding [(1870) L.R. 5 CP 561]
Harris v. Nickerson [(1873) L.R. 8 Q.B. 286]

Pharmaceutical Society of Great Britain v. Boots Cash Chemist
(Southern) Ltd. (1952) 2 All ER Rep. 456
  • The defendant carries a business of self-service shop of pharmacy
  • The plaintiff picks a bottle from the shelf of the shop to buy it but the defendant refuses to sell it
Core questions
- Who is making the offer and to whom?
- To whom is the offer being made?
- When is the acceptance of the offer made and therefore an agreement formed?

"The question for decision is whether the sale is completed before or after the intending
purchaser has paid his money, passed the scrutiny of the pharmacist, and left the shop, or, in
other words, whether the offer out of which the contract arises is an offer of the purchaser or
an offer from the seller."

Arguments
  • The plaintiff: sues contending that the display of goods with price attached is an offer to sell and picking up a good is an acceptance of that offer
  • The defendant contends that the display of goods is a mere Invitation to an offer and not an offer to sell, it is the customer who makes an offer to buy to the defendant who has the right to refuse or decline such an offer
Legal adjudication
  • mere fact that a shopkeeper exposes goods indicating that he is willing to trade, does not amount to an offer to sell
  • offer is an offer to buy not an offer to sell

  • Proposal: An offer to buy is made by the customer
  • seller may accept or reject the offer by the proposer (customer)
  • Acceptance and consequently the formation of an agreement to sell goods in consideration of the purchase price is only completed after the seller confirms and agrees to sell the item for the stated price
Balfour vs Balfour (already covered separately in a previous post) [Post link here]
they are not contracts because the parties did not intend that they should be
attended by legal consequences, the wife has not established any contract 

 

Lalman Shukla v. Gauri Datt (1913) XL ALJR 489
        
Case facts: 
  • The defendant's nephew absconded from his house.
  • The defendant sent his munim to Haridwar in search of the boy and money given for travel expenses to the munim
  • Later defendant issued handbills offering a reward of 501 to anyone who found the boy
  • The munim found the boy and was given 2 sovereigns and 20 rupees on his return
  • After six months, when he was dismissed by the defendant he raised a suit claiming 499 as the amount due to him as a reward offered by the defendant
Arguments
  • Plaintiff contends privity of contract was unnecessary and neither knowledge nor motive was essential
  • The defendant contends that there was no contract at all
    • there was no acceptance of the offer
    • plaintiff was already under an obligation to perform his duty as such, was not entitled to recover
Legal adjudication
  • The court held in favour of the defendants, dismissing the plaintiff's appeal as
    • the plaintiff was already under the obligation to search for the boy as the defendant's servant before the reward was offered
    • performance of "search of the boy" can't be regarded as a consideration for the defendant's promise
    • there can be no acceptance of an offer unless there is knowledge of the offer, the hand-bill was published after the munim had already left, he had already left in search of the boy


      Offer by the defendant: To pay Rs 501 to anyone who finds the boy

      Missing elements of a contract/agreement

      Lack of consideration:
      - The plaintiff had already accepted to search the boy irrespective of the hand-bill as part of his duty, as he was in service of the defendant. 
      A search for the boy was not exclusive to the offer but performed as part of his duty.

      No acceptance of the offer, as there is no knowledge of it
      There can be no acceptance of an offer, one doesn't have knowledge.
      The munim had already left to search for the boy. The offer was made later. 
      He would have searched for the boy irrespective of the reward, as he was bound by his duty as an employee.
Bhagwandas Goverdhandas Kedia v. M/s. Girdharilal
Parshottamdas & Co., AIR 1966 SC 54

Harvey v. Facey (1893) AC 552 / The Bumper Hall Pen case
Case facts
1. The case is about property negotiation taking place between the appellant Harvey and the respondent L M Facey
2. The following telegram exchange happens between the appellant and respondent, while the respondent is on a train from Kingston to Porus:

Telegram from appellant: Will you sell us a Bumper Hall Pen?
Reply from a respondent: ‘Lowest price for Bumper Hall Pen £900’
Telegram from appellant: 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

Question:
Whether there is an acceptance of the offer, whether it is a binding contract?

Legal Adjudication
Held in favour of respondent L M Facey as
- mere statement of the lowest price at which the vendor would sell contains no implied offer to contract to sell at the price to the persons making the enquiry

Acceptance and assent to the proposal are absent
It is a mere offer to buy not ratified or agreed to by the seller, there is no agreement formed therefore no contract

Deconstructing the telegrams in terms of the formation of an agreement
  • Enquiry, not a proposal: willingness to sell the Bumper Hall pen
  • Reply from a respondent: precise response about the lowest price, not an acceptance to sell at that price, no willingness to sell proven
  • Telegram from appellant: it is an offer to buy the pen for 900, which must be accepted before it becomes a contract

Felthouse v.Bindley (1862) 11 CB 86
Case facts
  • The case is about the trade negotiation of a horse between the nephew (owner/defendant) and the uncle (plaintiff)
  • Based on the conversation, the uncle thought he purchased the horse at 30 whereas the nephew thought he sold it at 31.5. there was clearly no complete bargain
  • the nephew wrote back to his uncle, stating that the price at which is agreed to sell was 31.5 no less than that
  • the uncle stated that he was willing to split the difference and pay .15 more. He also imposes a condition that if he hears nothing more from him, he will consider the horse to be his at 30.15
  • the horse was put on an auction and a case was subsequently filed against the nephew

Held that 
  • There was no contract/formation of an agreement bw the nephew and the uncle 
  • therefore in favour 
  • there had been no bargain to pass the property in the horse to the plaintiff, and therefore that he had no right to complain of the sale
uncle had no right to impose the sale of the horse at 30.15 on the nephew


A proposal was made but there was no acceptance of the proposal therefore no binding agreement was formed



Other cases

Essentials of a valid offer/proposal;
  1.  expression of willingness to do/abstain from doing to obtain other's assent
  2.  intention to contract, regard must be made to the totality of the circumstances in which parties contract, not merely the formalities of offer and acceptance
    • Upton Rural il vs Powell (1942) 1 All ER 220 (fire brigade service fee case) 
    • Ramji Daya wala & Sons v Invest Import (1981) 1 SCC 80 
    • Haji Mohd Ishaaq vs Mohd Iqbal (1978) 2 SCC 493
      (non-repudiation of certain terms despite objection being raised can be regarded as implied
      acceptance thereof)
  3. certainty of offer
  4. communication of offer
    • Comm of proposal complete when it comes to the knowledge of the person to whom it is made Ex: A makes the proposal to B. comm is complete when B receives the proposal say that email/mail etc.
    • Laxman Shukla vs Gauri Datt (1913) 11 All L.J. 489
    • Williams v Carwadine (1833) 2 LJB 101 (knowledge of the offer is essential, not the motive)
    • R v Clarke (1927) 40 CLR 227
    • Harbhajan Lal vs Harcharan Lal (AIR 1925 All 539) (when terms of general offer are substantially complied it is an acceptance of the offer)
    • Cross-offers, Tinn vs Hoffman & Co (1873) 29 LT - no completed agreement 
    • Offer and invitation to treat (offer) Ex: catalogue of books by a bookseller, products showcased by a vendor in his shop at certain price tags, ads for bids/tenders, 
    • Harris vs Nickerson (1873) L.R. 8 QB 226 offer can be withdrawn before it is accepted
    • Invitation to treat - inducement of special discount/bankers catalogue of charges or co-inviting applications for a job
    • Grainger & Sons v Gough (1896) AC 325 (HL) transmission of a price list does not amount to an offer to supply an unlimited quantity of wine at the price mentioned
    • Bank of India vs OP Swarankar (AIR 2003 SC 858) contract of employment is governed by the contract act, held that announcement of voluntary retirement is not an Offer. Employee offers to retire, and the said offer can be withdrawn before acceptance
    • Ghaziabad Dev Authority vs UOI (AIR 2000 SC 2003) - The brochure for plots is a mere invitation to offer, some offers to buy plots become agreements upon acceptance
    • Mcpherson vs Appana (AIR 1951 sc 184) - A mere statement of the lowest price is not an implied contract to sell at that price
    • Byomkesh v Nani Gopal AIR 1987 Cal 92 - when a proposer asks for a higher price and an advance with acceptance, the acceptance of the advance amounts to a contract, even if the letter of acceptance comes back refused

Essentials of a valid acceptance

1 communication of acceptance
2 acceptance is absolute and unqualified 

  •  Acceptance can be expressed or implied
    • Brogden vs Metropolitan Railway Co. (1877) 2 AC 666 - mere mental determination is not enough, but acts performed that evidence agreement complete a contract
    • Re Selectmove Ltd 1995 1 WLR - acceptance by silence is sufficient when it's the offeree who suggests silence would be sufficient
  • When is communication not necessary?
    • general offers (unilateral offers), acceptance is by conduct (Sec 8)
    • Hindustan Co-operative Insurance Society vs Shyam Sunder (AIR 1952 Cal 691) - cashing of a cheque by the insurance co. is an acceptance of the proposal without any formal acceptance
    • Carlill vs Carbolic Smokeball - performance of the conditions in the offer necessary, not its notification or intimation about the acceptance
  • Communication with the offeror himself
    • Felthouse vs Bindley (1863) 7LT 835
    • Vishvesardas Gokuldas vs BK Narayan Singh (1996) 1 SCC 547
  • Communication by the acceptor himself
    • Powell vs Lee 1908 24 TLR 606 - for a contract to be made, the decision must be communicated to the acceptor to the offerer itself (from the manager accepting his application to the job applicant himself)
  • Mode of communication
    • duty is cast on the offeror to reject any acceptance within a reasonable time, and failure to do so concludes in a contract
    • mere departure from the manner prescribed does not invalidate acceptance
    • Surendra Nath vs Kedar Nath AIR 1936 Cal 87 (Sec 7 was not violated, the acceptance was signified through an agent sent to communicate acceptance in person instead of in writing
  • When contracts conclude
    1. Acceptance by Post
      • Sec 4 - 
        • communication of acceptance against the proposer complete when put in the course of transmission, to be out of the power of the acceptor and as against the acceptor when it comes to the knowledge of the proposes - rule based on commercial expediency
      • Adams vs Lindsell (1818) 106 ER 250 - The proposer becomes bound by the proposer the moment it is put in transmission by the acceptor, thus binding contract for
      • Household Fire Insurance Co. v Grant (1879) - share application made, the letter was posted but never arrived, held a contract was made when the letter of acceptance was posted
      • ONGC vs Modern Construction (AIR 1998 Guj 46) if accepted by telegram the contract concludes the moment the telegram is despatched, the place of contract is where the telegram starts its journey
    2. Acceptance by telephone /telex (direct instantaneous communication)
      • a contract when accepted by telephone is deemed to be made at the time and place where acceptance is received or heard
      • Brinki Bon Ltd vs Stahag Stahi (1982) ALL ER