Important Case Laws in the Law of Contracts

A contract is an agreement, the objective of which is to create a legal obligation.  In the words of Anson “the law of contract is that branch of law which determines the circumstances in which a promise shall be legally binding on the person making it”

Example: If there is an agreement between A and B that a will construct a house for B and B will pay Rs. 50 Lakhs to A, the agreement is a contract. Likewise, if there is an agreement A and B, that B will get Rs. 5000, if he does not canvas votes for C, that agreement is also a contract, because of the account of the agreement, A is entitled to B’s forbearance. Thus, when an agreement enables a man to compel another to do something or not to do something, it is called a contract.

Some landmark cases in contract law are:

1. Powell v. Lee
2. Harvey v. Facey
3. Carlill v. Carbolic Smoke Ball Co.
4. Mohiri Bibi v. Dharmodas Ghose
5. Donoghue v. Stevenson

Powell v. Lee [Powell v. Lee (1908) 99 LT 284]

The plaintiff sued the defendant for breach of contract.

Fact

The name of the aforementioned case is “Powell v. Lee”. The plaintiff, Powell, applied for the post of headmaster in a school. His application was accepted by the school board. This message was conveyed to the plaintiff informally by one of the members on the school board who knew the plaintiff. Later, the decision to appoint the plaintiff as the headmaster was canceled by the school’s board. Hence the plaintiff sought legal action against the school, alleging them for a “breach of contract”. The plaintiff believed that he suffered a “loss of salary”.

Issue

Was there a breach of contract on the defendant’s part?

Held

It was held that there was no breach of contract as there was no contract in the first place. There was no contract as there was no communication of intention to contact on the school’s part.  

Synopsis of Rule of Law

For an acceptance to be treated as valid,  it is essential that this information needs to be communicated to the offeror by the offeree or by some authorized person on his behalf. If the communication of contract is made my some unauthorized people, it is not considered as a valid contract.

Harvey v. Facey [Harvey v. Facey [1893] UKPC 1]

Facts

The name of the case is “Harvey v. Facey”. Mr. Harvey Anor, the plaintiff was interested in buying a piece of Jamaican property which was owned by Mr L.M.Facey. Mr. Harvey sent a telegram to Mr. Facey which said “Will you sell us Bumper Hall Pen? Telegraph lowest cash price- answer paid”. On the same day, Facey responded by quoting the lowest price for the Bumper Hall Pen to be £900. Harvey responded by stating that he agreed to buy the Bumper Hall Pen for a sum of nine hundred pounds as asked by Facey. He also requested Facey to send him the title deed so that he would get the possession of the property as soon as possible. Facey then stated that he no longer wished to sell the pen to Facey. Harvey then sued Facey claiming that there was a contract between them and therefore Facey was supposed to sell the pen to him.

Issue

Whether Harvey’s telegram quoting the lowest price as £900 was an offer subject to acceptance?

Held

The House of Lords held that there was no valid contract between the parties in this case. The court held that Facey’s telegram was an invitation to offer and not a valid offer.  Facey had not answered as to whether he would sell the property to sale and was just answering Harvey’s question. Hence, there was no valid offer on Facey’s part, which means that there was also a non-contract between them.

Synopsis of Rule of Law

An invitation to offer and offer are two different concepts. A statement is not an offer, unless it is made with the view of obtaining the assent of the other party to whom it is addressed. Many statements that seem to be offers are often invitations to offer. Invitation to offer is the interest of a party to invite the public to make a proposal. Every statement that seems to be an offer may not be an offer and may not create a legal obligation.

Carlill v. Carbolic Smoke Ball Co. [ [1892] EWCA Civ 1]

A medical firm advertised its new drug stating that it would cure people’s flu. When sued, Carbolic Smoke Ball Company argued that the advertisement was not to be taken seriously. They stated the advertisement to be a mere invitation to offer.

Facts

The Carbolic Smoke Ball Company advertised that any person who caught influenza after using the medicine of the Company in a specified way and for a specified period would be paid 100 Pounds. It was further mentioned that the company had deposited 1000 Pounds with the Alliance Bank to show the sincerity of the Company in the matter. Mrs. Louisa Carlill caught influenza, even after using this medicine.

Issue

Whether the language in the defendant’s advertisement, which stated the 100 pounds rewards was meant to be an express promise, or a sales gimmick?

Held

It was held that Mrs. Carlill was entitled to recover 100 Pounds because the company’s advertisement was something more than an invitation to transact business. The company was held liable for:

1. The alleged offer was a mere advertisement or gimmick, for the statement that 1000 Pounds had been deposited to meet possible claim, was evidence tending to show that the offer was sincere
2. The acceptance was complete, as the offer in question admitted of no other acceptance than the performance of the condition.
3. The objection raised by the Company that Mrs. Carlill ought to have notified her acceptance to the  Company was rejected by the Court.

Synopsis of Rule of Law

Acceptance of the proposal need not always be expressed in words. Sometimes, the proposal, instead of being made to a definite person, is made to the public at large, and as soon as any person who is willing to accept it, accepts it by words or conduct, a contract is made.In these cases, the proposal may be of two kinds. Firstly the proposal may be in the nature of an offer made to the world at large and secondly, the proposal itself might indicate the performance is the mode of acceptance.

Mohiri Bibi v. Dharmodas Ghose [(1903) 30 Cal 539]

The plaintiff and the defendant entered into a contract when the defendant was a minor. Later, the defendant refused to fulfill the terms of the contract stating that he was a minor at the time of the contract.

Facts

Brahmo Dutt was a moneylender who resided in Calcutta. Dharmodas Ghose mortgaged his property as a security and took a loan of Rs. 20,000 from him. These events took place when Dharmodas Ghose was a minor. However, Brahmo Dutt did not know about this. The transaction mentioned was carried by Kedar Nath, Brahmo Dutt’s attorney, due to Brahmo Dutt’s absence. Kedar Nath had the knowledge that the defendant was a minor.

The money lent to the defendant was actually less than Rs. 20,000. On 10^th September 1895, Dharmodas and his mother filed a suit against Brahmo Dutt stating that the mortgage that was executed by them was when Dharmodas was a minor. They further stated that since the contract was entered into by a minor, the contract was void. During the process of this petition, Brahmo Dutt died and the further proceedings were done by his executors.

Issue

1. Whether the deed was void under section 2, 10(5), and 11(g) of the Indian Contract Act, 1872 or not?
2. Whether the defendant was liable to return the amount of the loan which he had received by him under such deed or mortgage or not?
3. Whether the mortgage commenced by the defendant was voidable or not?

Held

The court held that minors are not competent to enter into a contract under Section 11 of the Indian Contract Act,1872. Section 11 of the Indian Contract Act,1872 states that any person who has attained the age of majority is competent to enter into a contract. Hence it states that contracts entered into by minors are void ab initio i.e. void from the beginning.

The court held further that the contract was invalid. Hence the mortgage was invalid and the minor was not compelled to pay the amount given to him as a loan. 

Synopsis of Law

All agreements are contracts if they are made by competent parties. S.11 of the Indian Contracts Act,1872 lays down that a party is competent to a contract if:

1. He is of the age of majority
2. He is of sound mind
3. He is not disqualified by law from entering into a contract

According to the Indian Majority Act, a minor is the one who has not completed 18 years of age. According to the Indian Contract Act, 1872, age of majority of the contracting parties is a necessary element for the validity of contracts.

Donoghue v. Stevenson [[1932] UKHL 100]

Facts

On 26^th August,1928, May Donoghue and a friend had gone to a café in Paisley, Glasgow. Donoghue ordered for a ginger beer. Donoghue’s friend paid for the drink. She then consumed half of it. The bottle which contained the drink was made of a dark colored class. When the remaining portion of the drink was poured into the glass, Mrs. Donoghue noticed the remains of a snail floating out which shocked her. She suffered from severe gastroenteritis. Mrs. Donoghue issued proceedings against Stevenson, the manufacturer of the ginger beer.

Issue

Does the defendant owe a duty of care to the plaintiff although there was no contractual obligation?

Held

The House of Lords held that Mr. Stevenson owed a duty of care to Mrs. Donoghue as the manufacturer failed to ensure the product’s safety for the safety of the consumer. It was also held that there is a sufficient relationship between the consumer and the manufacturer.

Synopsis of the Law

1. Previous to this case, the plaintiff had to enter into a contract for negligence to be proven. In this case, since Donoghue had not purchased the drink herself, she could not prove the contractual obligation of Stevenson. Yet, Lord Atkin’s judgment established that Stevenson will still be responsible for the integrity of the product.
2. This case established that the manufacturers possess a duty of care towards the customers. According to Lord Atkin’s ratio decendi, “a manufacturer of products, which he sells to reach the ultimate consumer in the form in which they left him, owes a duty to the consumer to take reasonable care”.
3. This case also produced Lord Atkin’s “neighbor principle” which is controversial in its nature. This principle extended the tory of negligence beyond the tortfeasor and the immediate party. It raised the question of exactly which people might be affected by negligent action.

Conclusion

These case laws highlight principles like the validity of a contract, contract by minors, contractual obligation of the parties to contract, and invitation to offer.