Scenario - Analysing Contract Formation
Reading: Parker and Box, Chapters 6 and 7
In the following scenario you need to ascertain whether a contract was formed between the parties.
In order to do so, you need to analyse the events that occurred by selecting words from the list below that best describe the events in each of the 12 paragraphs of the scenario:
Ivan receives a catalogue in his letter box from Klein Electronics store advertising mobile telephones and other electronic equipment. The catalogue shows product prices.
He visits the store and selects a Prima Z1 laptop from the shelf and approaches the counter. It has a marked price of $600.
He tells the shop assistant he will definitely buy it provided he receives a 10% discount on the marked price.
The shop assistant refuses suggesting only a 5% discount.
Ivan does not think that is enough and says he will continue to browse, looking at other products on the shelves.
He notices a Bandung Note14 laptop on the shelf and takes it to the counter.
The sales assistant advises him that the item is not for sale and should have been withdrawn from stock as there had been problems with its battery causing the unit to catch fire.
The sales assistant advises him that a new line- the Bandung Note 15- is available with a few in stock at the back of the store. He is told Note 15 does not have the technical problems of the Note 14 and has a bigger memory and processor and costs only $550.
Impressed by this, Ivan asks whether it comes with a 12 month warranty and the shop assistant confirms this.
Ivan agrees immediately to buy it and the shop assistant responds that Ivan has made a good choice, returning a few minutes later with a unit.
However, on seeing it, Ivan is not impressed with the colour or keyboard configuration and declines to buy it.
The shop assistant insists that he must buy it claiming that a contract had been made.
While browsing in a second hand shop, Jane notices two apparently identical
chests of drawers. One chest of drawers is a genuine antique and the other is a reproduction or imitation. The price tags ($4,000 and $200 respectively) have been accidentally swapped so that Jane believes that she can buy the antique (normally $4,000) for $200.
She tells the shop owner (Tarzan) that she will buy the antique for $200 and produces the money for her purchase.
Case Study - Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256
Tarzan realises that a mistake has been made and insists that the price should be $4,000. He therefore refuses to sell the antique to Jane.
Advise Jane whether a contract exists between her and Tarzan, using case references to illustrate your view.
The case of Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256 was discussed in the Lecture Topic 3.
Refer to Parker and Box, pp91-2 ( ‘Offers to the world at large’).
Facts: Carbolic Smoke Ball Company (CSB) advertised its product in the above advertisement. One of the readers of the advertisement, Mrs Carlill bought the product in reliance on the terms of advertisement which appeared to promise a reward of 100 pounds if the product failed to protect the user against influenza. Subsequently, Mrs C caught influenza and sued CSB for the reward. CSB refused to pay claiming the advertisement was not an offer but an invitation to treat.
Held: the terms of the advertisement indicated an offer to whoever read the advertisement, so a contract had been made when Mrs C accepted the terms of the advertisement i.e buying and using the product in accordance with its instructions.
(a) Provide a brief summary of the facts.
(b) What arguments were used by the Carbolic Smoke Ball Company to try to establish that the their advertisement was not an offer?
(c) On what grounds did the court find that the advertisement did constitute an offer?
(d) Are most advertisements offers? ( what is the general rule about advertisements?)
(e) Is it possible for a business to make an offer to the world at large?. Could that occur on the internet?
(f) To whom was the offer in the advertisement made?
(g) What steps did Mrs Carlill need to take to accept the offer in the advertisement?
(h) Was she required to communicate her acceptance? ( what is the general rule about communication of acceptance?)
(i) Could the Carbolic Smoke Ball company have properly withdrawn (revoked) their offer at any stage?
(j) Did the court use a subjective test or objective test in establishing the intentions of the
(k) This case resulted in a unilateral contract being made. What does that mean?
Jane sends a letter to Mary that reaches her on 5 July. The letter states: ‘I offer to sell you my car for $2,000’. Mary receives this letter on 8 July and replies with her own letter saying she accepts the offer. She posts it on 9 July but it does not reach Jane until 11 July.
On 9 July, having not heard from Mary, Jane sold the car to Elliot. When Jane eventually received Mary’s letter, she phones her up and tells her that she it too late, as the car has been sold.
Mary claims they have a contract.
Advise the parties.
Scenario - Analysing Contract Formation
- Invitation to treat
- Counter offer
- Rejection of offer and counter offer
- Rejection of offer
- Rejection of offer
- Request for information and supply of information
- Rejection of offer
- Rejection of offer (Not valid since contract has been formed)
Whether a contract exists between Jane and Tarzan?
Offer and acceptance are essential elements of a contract. An offer is made by an offeror to offeree, and the offeror must have the intention to bind him by the terms of the offer. In Harvey v Facey  UKPC 1 case, the court provided that an offer must be such that bound the offeror into its terms as soon as the offeree accepts it. However, an offer is different from an invitation to treat (Turner 2013). A contract cannot be formed based on mere acceptance of an invitation to treat given by a party. Pharmaceutical Society of Great Britain v Boots  1 QB 401 case is a helpful regarding this context. In this case, a company introduced a self-service system in the shop in which customers can pick up goods and bring them to the counter to pay. A suit was filed by the Pharmaceutical Society of Great Britain in which it argued that the law provides that pharmaceutical products are required to be sold by a company when a pharmacist is present in the shop. In its judgement, the court considered the products on the shelves as an invitation to treat, and customers have to bring them to the counter to purchase which was considered as an offer which could either accepted or rejected by the shop assistant (Samuel 2016).
- Price of two chests are swapped, and the antique (normally $4,000) is swapped with $200
- Jane bought the antique chest to the shop owner to purchase it for $200
- Tarzan realised the mistake and insisted that it should be sold for $4000
As discussed in Pharmaceutical Society of Great Britain v Boots case, the goods displayed on the counter are considered as an invitation to treat rather than an offer. Thus, Tarzan can decline to sell the chest for $200 since no contract has formed.
In conclusion, a contract did not exist between Jane and Tarzan.
- The defendant of the case is Carbolic Smoke Ball Company which placed an advertisement in the paper on 13thNovember 1891. The advertisement was about the ‘Carbolic Smoke Ball’ which is developed by the company to prevent colds and influenza. Instructions were given to use the ball which include three times daily and for two weeks straight. The company also made an offer in the advertisement that it will offer £100 to anyone who would catch influenza after using the product. In order to show sincerity, the corporation deposited £1000 in the bank. Lilli Carlill is the plaintiff in the case who purchased a smoke ball for personal use (Gordon 2014, p. 3). Carlill used the smoke ball three times in a day; she continued to use it for two weeks straight as per instructions. Several weeks later she caught the flu and demanded £100. The company rejected her claim by stating that no contract has formed between the parties.
- Following arguments were made by Carbolic Smoke Ball Co.:
- The advert was a mere sales puff, and not intention was present
- Not possible to make an offer to the world
- Acceptance was not communicated
- Wording was too vague
- Consideration was not present
- The court constitutes the advertisement as an offer on following grounds:
- The company deposited £1000 in the bank to show sincerity, thus, the advert cannot be considered as a mere sales puff
- The court provided that an offer can be open for the entire world
- Communication of acceptance is not required in the case of a unilateral offer
- While there was ambiguity in the wordings however it can be determined based on a reasonable time that people using the ball have caught the flu
- Carbolic receives value because people were purchasing its products which were its consideration (Bender & Do 2014)
- In Partridge v Crittenden (1968) 2 All ER 421 case, the court provided that generally advertisements are considered as invitations to treat (Bender & Do 2014).
- People can make a unilateral offer which is open to the world, and it is not necessary that people communicate the acceptance to the party. The offer can be accepted by them by complying with the instructions given in the offer. It is possible to make a unilateral offer through the internet.
- The advertisement was open for the world, and people who use the smoke ball as per the instructions given in the advertisement can accept the offer.
- Mrs Carlill complied with the instructions given in the advertisement to accept the offer.
- Acceptance must be communicated by the offeree. It is also necessary that the offeror receives it within an appropriate time as provided by the court in the judgement of Entores v Miles Far East  2 QB 327 (Monaghan & Monaghan 2013).
- In Errington v Errington Woods  1 KB 290 case, Lord Denning provided that since the acceptance of unilateral contract is given only after the full performance, it cannot be revoked by the party (Monaghan & Monaghan 2013). Thus, a unilateral offer cannot be revoked once performance has begun by a party except if the performance is not completed within a reasonable period of time.
- The court used an objective test in the case.
- Formation of a unilateral contract means a party (promisor) makes an offer to another party (promisee) to pay certain consideration if in return the party performance an act. Unilateral contract enables a person to make a promise or agreement.
Whether a contract exists between Jane and Mary?
In Entores v Miles Far East  2 QB 327 case, it was held that in order to constitute as a valid acceptance, the general rule has to follow. It provides that offeree must communicate the acceptance, and the offeror must receive it within appropriate time to avoid it being ineffective (Monaghan and Monaghan, 2013). Following are essential elements of acceptance:
- Acceptance must be communicated
- Terms must not change
However, while sending an acceptance through the post, ‘the postal rule’ applies. The rule provides that if parties are communicating through the post, then the acceptance took place when letter which is addressed and stamped is placed by the offeree in the post box. Adams v Lindsell (1818) 106 ER 250 is a relevant case in this context. An offer was made through post in this case for selling of wool. Due to the postal issue, the letter was delayed. Although even after the delay, the acceptance was sent on the same day by the claimant, but, the defendant sold the wool. A leading judgement was given by the court based on the postal rule which held that contract was formed on the day the acceptance was put in the post box (McKendrick & Liu 2015).
- Jane made an offer to Mary to sell his car through letter on 5thJuly
- Mary received letter on 8thJuly
- Mary accepted the offer and posted it on 9thJuly, however, the letter reached on 11th July
- Jane sold her car to Elliot
As discussed in Adams v Lindsell case, the postal rule provides that acceptance is made when properly addressed and stamped letter is placed in the post box. Thus, a contract has formed between Jane and Mary on 9th July.
In conclusion, a contract exists between Jane and Mary.
Adams v Lindsell (1818) 106 ER 250
Bender, M & Do, C 2014, How to Pass Business Law, CCH Australia Limited, NSW.
Entores v Miles Far East  2 QB 327
Entores v Miles Far East  2 QB 327
Errington v Errington Woods  1 KB 290
Gordon, B 2014, ‘Acceptance by conduct in ecommerce transactions in Australia’, Commercial Law Quarterly: The Journal of the Commercial Law Association of Australia, vol. 28, no. 2, p.3.
Harvey v Facey  UKPC 1
McKendrick, E & Liu, Q 2015, Contract Law: Australian Edition, Palgrave Macmillan, Basingstoke.
Monaghan, C & Monaghan, N 2013, Beginning Contract Law. Routledge, Abingdon.
Partridge v Crittenden (1968) 2 All ER 421
Pharmaceutical Society of Great Britain v Boots  1 QB 401
Samuel, G 2016, Epistemology and method in law. Routledge, Abingdon.
Turner, C 2013, Contract law. Routledge, Abingdon.
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