In 1893, the famous case of Carllil v Carbolic Smoke Ball Co.1 demonstrated the extent of the establishment of a legally binding contract based on the intention of the parties via advertisements. However, the formation of contracts is not solely based on the intentions between parties. After the invitation to treat, there should be an offer and acceptance, intention to create legal relation, consideration, capacity, legality, possibility and certainty, and only when both parties have fulfilled all these requirements would a traditional binding contract be formed. Therefore, would a contract be legally binding or does it even exist if it is solely based on the intention of the parties? In my answer, I will be discussing why the existence of some contracts are recognised based on the intention of the parties and some do not. The intention to create legal relations means that the agreements between parties will be legally binding and enforceable by law if things do not go as planned. Traditionally, a formal contract is formed (as mentioned before) by a way of a deed where all elements such as offer and acceptance, consideration and certainty are involved, and therefore, there is no doubt that there is legal intent.
Other less formal agreements can be into three categories which are social and domestic agreements (i.e. a father promises his son to buy him a video game if he passes his exam); commercial agreements (i.e an employer promises his/her employee to raise his/her wages) and advertisements (i.e. a supermarket promising their customers to pay them the difference if their products are more expensive than other supermarket). As these agreements can be in verbal, written or implied form, it is often vague and unclear in whether the agreement is legally intent or a puff to attract people’s attention. Therefore, the role of court is to identify the initial intention of the parties by seeking and applying the rules of offer and acceptance. However, the courts generally seek to ascertained the objective intentions of the parties rather than to ascertain the objective intentions because a judge cannot be certain about what was taking place in the minds of the parties. Instead, he would look at the intention of the party that has allegedly made an offer and examine the intention of the other party.
Moreover, the party who alleged to constitute the offer has to have the distinction between an offer and an expression of a willingness to negotiate in minds, otherwise, the court must ascertain the intention of the parties when the statement was made. In examining whether or not an offer has been made, the court is asked to look at the correspondence that has passed between the parties to determine whether the statement that had been made constitutes to an offer. The presumption of commercial agreements and advertisements is that the parties intend to be legally bound to their agreements and it is difficult to rebut the presumption. Generally, when ascertaining whether an offer has been made in advertisements, the court has to look at whether the promise was legally intent or only a mere puff. In Carllil v Carbolic Smoke ball2 Co., for example, was held that there was a contract between Mrs Carllil and the Carbolic Smoke ball company. The defendants argued that the nature of the advertisement was too vague and obscure to be enforced because there was no clear explanation to how long would be a reasonable time to claim the compensation should someone contracted influenza after using their products. Therefore, the defendants claimed that the advertisement was a mere puff or a proclamation rather than a promise or offer intended to constitute to a contract.
As a result, there was no contract between the company and its customers and they were not held any liability for those who contracted influenza after using their products. In his judgement3, Lord Justice Bowen commented that although the advertisement seemed to be that its vagueness showed that no contract was intended. However, Bowen LJ carried on, suggested that as the advertisement was intended to be read by the public and to achieve the effect of attracting people buying their products, then it should be read as how ordinary people would construe it. The company claimed in their advertisement that 1000l. was lodged at the bank for their costumers to claim should they contract influenza after using their product.
Thus, it cannot be argued that the statement of 1000l. being stored in the bank was intended only to be a mere puff. According to Bowen LJ, “… if a person chooses to make extravagant promises of this kind he probably does so because it pays him to make them, and, if he has made them, the extravagance of the promises is no reason in law why he should not be bound by them.” Therefore, in this case, the advertisement was the offer and a contract was established when a person sees the advertisement and buys a carbolic smoke ball as a result, therefore, the defendants were held liable to compensate Mrs Carllil the 1000l. at the moment she fulfilled the contract (contracting influenza) because the advertisement was more than a mere puff but legally intent and is a collateral contract.
On the other hand, it is important to distinguish an offer from a request for information such as Harvey v Facey4 where the courts assessing the intention of the parties in “correspondence” cases and found that there was no contract between the parties because the mere statement of the defendant did not constitute an implied offer but only a reply to the plaintiff’s inquiry. Therefore, the offer in this case was the last telegraph sent by the plaintiff which was not accepted by the defendant. Another classic example of intention to create legal relation in commercial agreements is Gibson v Manchester City Council5. The issue in this case was to ascertain whether there was a legally bound contract when an offer is mirrored by a clear acceptance. This is a complicated case because the approach used in the Court of Appeal by Lord Denning was difference from the approach used in the House of Lords by Lord Diplock where the result in the Court of Appeal was reversed in the House of Lords. This is because Lord Denning used general intention approach in deciding this case which is based on the Laissez-faire principle which is based on the idea that “let people do what they do” and that transactions between private parties are free from government restriction.
This approach is more flexible and based on the intention of the parties involved. Whereas Lord Diplock used strict procedural approach which is more inflexible and old fashion. Judges using strict procedural approach look for all of the traditional elements in a contract in order for it to be established. In Gibson v Manchester County Counci, Lord Denning suggested that ‘ To my mind it is a mistake to think that all contracts can be analysed into the form of offer and acceptance. […] there is no need to look for a strict offer and acceptance. You should look at the correspondence as a whole and at the conduct of the parties and see therefore whether the parties have come to an agreement on everything that was material. If by their correspondence and their conduct you can see agreement on all material terms – which was intended thenceforward to be binding – then there is a binding contract in law even though all the formalities have not binding.” which perfectly illustrates the situation of Mr Gibson as he had good faith in buying the house and did everything he could have done to ensure he had applied for it.
Moreover, even though there was not a strict offer and acceptance, the letters between Mr Gibson and the corporation showed that they have agreed on and liable to sell Mr Gibson the house. However, although it was very clear that Mr Gibson intended to buy the house, the result was reversed in the House of Lord. Lord Kieth of Kinkel claimed that he could not accept ‘a letter which says that the possible vendor “may be prepared to sell the house to you” be regarded as an offer to sell capable of acceptance so as to constitute a contract.’ This is because the language used in the letter does not allow it to be regarded as a firm offer to sell the house and it was stated in the letter that it cannot be seen as a formal application. In this case, in conclusion, it was rather subjective to the judges whether a contract was established due to the nature of the correspondence and the conduct of the parties and the used of language. In contrast, the courts generally presume there is no intention to create legal relations in social and domestic agreements unless the agreement itself states so because these kinds of agreements are usually made between friends and family without much formality. It is also because these agreements are based on a pre-existing relationship rather than for business and commercial purpose and it is suggested that the basis of agreement should be trust rather than law.
For example, Balfour v Balfour6, although the husband promised his wife to pay her £30 a month he was away, the Court of Appeal reversed the decision by the trial judge and held that there was no legal intent between Mr and Mrs Balfour because by the time the promise was made, the parties were living “in amity” and was based on love and affection, therefore, there was no contract. However, in some circumstances where money is involved, the agreement is more likely to be legally bound such as Simpkins v Pays7 where two unrelated parties agreed to a house. It was held that the plaintiff was entitled one third of the share because although it was not very formal, the two parties had agreed that the forecast should go in into the defendant’s name but all parties can have equally amount of the share no matter who won and this was legally bound.
In conclusion, although it is said that generally the presumptions of commercial agreements and advertisements are legally bound and social and domestic agreements are not, it may not be true in every single case. In my opinion, the agreements are more likely to be legally bound if money is involved and an actual transaction has been carried out. Moreover, I think whether a contract exists based on the intention of the parties to create legal relations, it is more of a subjective approach by judges using objective tests (i.e. some judges think that different transaction should be examined by different approaches whereas other think that all contracts should be treated the same.) where the subjectiveness is which objective approach they choose to use. Therefore, decisions by judges may vary in cases who was well demonstrated in Gibson v Manchester County Council.
Courtney from Study Moose
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