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Contract Law Introduction

1. Legally binding offer?

What is this?

Offer

Invitation to treat
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Mere Puff

CASE STUDY: CARBOLIC SMOKE BALL COMPANY

(1893)

In the late 1800s it was quite common for businesses selling medical and
pharmaceutical products to make outlandish promises about these products.
There were no real restrictions on advertising, product or trading standards, so
retailers often promoted their products as ‘miracle cures’, capable of curing the
incurable. In the early 1890s one English firm, the Carbolic Smoke Ball Company,
advertised a device it claimed would “positively cure” a range of ailments,
including influenza. So confident was the company in making this claim that it
promised a reward of 100 pounds, payable to anyone who used its product in the
correct fashion but later contracted influenza. The Carbolic Smoke Ball
Company’s ad (see below) declared that £1,000 had been deposited at a London
bank as a sign of the company’s good faith in offering such a reward.

In late 1891 Mrs Louisa Carlill purchased one of the Carbolic Smoke Balls.
Following the instructions closely, Mrs Carlill used it three times daily for a
period of two months. At the end of this period she subsequently contracted
influenza. Represented by her husband, a qualified solicitor, Mrs Carlill
attempted to claim the £100 reward from the company. After the company
ignored three letters, Carlill initiated legal action against the Carbolic Smoke Ball
Company, claiming that it had breached a contract it had entered into in its
advertisement. The company’s lawyers, led by Herbert Asquith, a future prime
minister of England, argued that the advertisement was “mere puff” and its
conditions were so vague that it was not intended to be taken seriously.

The case progressed to the Court of Appeal. Since there had never been a case
with a similar set of facts, the three-judge bench instead had to develop a new
precedent. After deliberation, they unanimously found in favour of Carlill. They
concluded that a binding contract existed for several reasons. Firstly, although
the reward was promoted unilaterally (“an offer to the world”) it was still
legitimate. The only stated conditions were correct use of the Smoke Ball as per
the instructions, which Carlill complied with. Secondly, the advertisement
induced customers to buy the Smoke Balls, which involved an inconvenience to
the customer and a financial advantage to the company; this constituted an
exchange of promises. Thirdly, the company’s claim that £1,000 had been
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deposited as surety suggested that the offer of a reward, and therefore the
contract between the company and Carlill, was legitimate and binding.

The judgement set precedents in contract law that continue in both Britain and
Australia. It established that an offer of contract can be unilateral and does not
have to be made to a specific party. It also established that acceptance of such
offers does not require notification; once the party purchases the item and/or
meets the condition, the contract is active. And it established that such a
purchase is an example of consideration, and therefore legitimises the contract.
Carlill v. Carbolic Smoke Ball Company (1893) was a landmark case in protecting
the rights of consumers and defining the responsibilities of companies. It
continues to be cited in contractual and consumer disputes today.

2. Can you have a contract with a vending machine?

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 Is there a contract between the purchaser and the vending machine?

 How is the offer made, and is it made by the machine or the
purchaser?
 When the money is put in the coin slot, what stage of the contract
would this represent? (All basic contracts require offer,
consideration, and acceptance).
 What does the sign on this vending machine suggest? (When one
party in the contract does not uphold their side of the bargain, or
promise, then that is called Breach of Contract).

3. Invitation to treat

This clothing item is on sale. What is the original price? What is the sales price?

By how much has this item been reduced? What does “Up to” mean on the label?

If you took this item to the cashier at this point, would you make an offer or
would you make an acceptance?

What would your reaction be if the sales clerk said: “I’m sorry, but I am holding
this item for another customer because it is the last one in the store. I can’t sell it
to you.”
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4. Unilateral Contract

What is required to get the reward? Are there conditions?

 What are the requirements for a contract?

 What kinds of contract have we discussed?
 What does it mean to be legally bound by a promise?
 What is the difference between an invitation to treat and a mere
puff?
 When a contract is completed it can be said the contract has been
performed. How has the contract in the Carbolic Smoke Ball scenario
been performed?
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 How would it be performed when someone called Emily to tell her

the dog was found?
 What stopped the performance of the contract with the vending
machine?
 Why was there no contract when an attempt was made to purchase
the clothing item?
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5. Postal Rule

Deals with acceptance of an offer by mail. Research its validity in the modern
age.

The postal rule demonstrates that an offer can be accepted by posting the letter
of acceptance in the mail box WITHOUT the offeror knowing about it.

What problem can this lead to?

6. Communication

Offer is communicated to the offeree and accompanied by consideration and

intent to be legally bound by the promise. Acceptance is communicated to the
offeror. Once offeror has received the acceptance a contract has been formed.

If either party does not hold up their end of the bargain (perform), then BREACH
and REMEDIES.

What if one party changes its mind? REVOCATION of an offer must be received
BEFORE it is accepted. Once it has been accepted, a revocation becomes a breach.

What if the offeree first accepts and then has a change of mind? Again,
REVOCATION must be received by the offeror before the acceptance. If the
acceptance is communicated before the revocation, a contract was formed and,
by revoking it, is breached. Result: Remedies.
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7. Auction

Lot 33 is a fine Egyptian vase and the last bidder offered $3,900. There is a pause,
the auctioneer makes his call, then raises his hand to hit the gavel on the table
when another bid of $4,000 is made.

Which bidder gets the vase?

Did the auctioneer make a second final call?

Under what circumstances could the very last bidder revoke his offer?
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8. Terms of a Contract

Express terms and implied terms

Conditions and Warranties
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Exclusions