Contract Law
A Leading Case – The Carbolic Smoke Ball
Much of the law as to what defines an enforceable contract was established in what we call a leading case. It concerns a quaint piece of 19th Century quackery which was offered to the market, foolishly with a reward to anyone who it didn’t work for. Lawyers across the common law world remember it from their uni days, and its well worth studying.
Carlill v Carbolic Smoke Ball Co is a 19th Century case revolving around a certain quack medicine belief. Mrs Carlill bought a medicinal product called a carbolic smoke ball – a piece of rubber intended to be burned, while the user inhales the smoke. She used it as stipulated, on the promise in the advertisement that it would prevent colds, influenza and similar. In spite of following directions she contracted influenza in spite of the treatment.
Mrs Carlill claimed her £100 reward, but the company refused, claiming it was only an advertisement. She sued and took the appeal as far as the House of Lords (equivalent to the High Court – which was affordable in those days). Mrs Carlill won the appeal.
The court reasoned that the company had crossed the line between a mere invitation to treat and an offer of a contract by stating in the advertisement that they had put £1000 on deposit to show their sincerity.
The company’s offer to the world at large was as valid as an offer to one individual at a time. This type of contract is a unilateral contract. As it was unilateral, Mrs Carlill was not required to give the company notice of her acceptance of their offer; therefore performance of the terms of contract was sufficient to show her acceptance.
It was a valid question to ask how long was the smoke ball was meant to protect the user. The court ruled that this is to be whatever is reasonably to be expected – judged on common, sensible expectations. The principle of reasonableness pervades jurisprudence and is very important to remember.
To gain a judgment in her favour Mrs Carlil needed to have a valid contract in which she had provided consideration of some sort on her part. The contract of sale had been completed so she could not rely on that; neither was there any consumer protection law to assist her. The court ruled that her use of the smoke ball constituted a cost or effort on her part as offeree, as consideration in return for the offer made on the label to those who used the product.
Estoppel – When There is no Contract
There is a rule known as Estoppel, which is part of a body of law called Equity. In most common law countries it is a defensive maneuver used during proceedings between parties wit ha pre-existing legal relationship, to protect a party that acted reasonably in reliance on a representation made by the other and who suffered detriment as a result. It fills the gap where a contract is thought to exist but is not properly made. This prevents an honest, but misinformed party from suffering for a lack of formality.
In Australia estoppel is not just a shield to be used in counter-argument, but it is a complete cause of action in itself. That is, in Australia you can sue on the basis of estoppel. The high court of Australia arrived at transforming this rule into a cause of action over the course of two major leading cases during the 1980’s. They serve as a good illustration of how it can be used, and how the evidence as to whether there is a valid contract may sometimes support the existence of contract-like obligations in spite of informality.
The word literally refers to a stopper in the mouth of the counter-party, making certain inconvenient evidence inadmissible – like a failure to sign a new written contract, or an agreement constituting a mere heads of agreement – so your own evidence on the specific point is unopposed.
Based mostly on Paterson et al, the following are conditions that need to be fulfilled for estoppel to work. These are:
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The relying party must have adopted an assumption induced by the representation of the other party. It can involve silence or conduct implying a representation. The representation can be a promise or a statement of fact, or similar.
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The relying party must have acted in reliance on the representation or inducement by the representor.
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Such act in reliance must be detrimental if the representation is not fulfilled.
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The relying party must have acted reasonably in reliance.
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It must be unconscionable (morally wrong) for the representor to depart from their representation. Ie: they are aware of the reliance.
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The representor has actually departed or is threatening to depart from the representation.
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The representation (if not implied) must be precise and unambiguous.
An early case in which estoppel was raised from its traditional status to a stand-alone argument suitable for appeal was Commonwealth v Verwayen. This case relates to injuries sustained during a collision between two naval ships, the HMAS Voyager and the HMAS Melbourne, in 1964. The plaintiff was on board one ship but below deck, performing duties related to navigation, in the same manner as would be the case if there was no combat training happening. He was therefore not involved directly I the combat operation. He sued the Commonwealth outside the statute of limitations on the basis that the Commonwealth had at first represented that it would not rely on the limitation period nor the fact that the injury occurred in the context of combat training operations, as defence arguments. It was to Mr Verwayen’s detriment that the matter proceeded and was then defeated with those arguments which were supposed to have been put aside. On appeal to the High Court, the rights of the Commonwealth to counter-argue as it had done were denied on the basis of estoppel.
Even more significant was Waltons Stores (Interstate) Ltd v Maher. The Mahers were property owners who negotiated with a department store chain, Waltons, to develop their land and establish a Waltons store on it. Waltons Stores, now WalMart, was attempting to establish a retail chain in Australia. Negotiations were almost complete, and Walton’s informed the Mahers that a contract was drawn up and signed. However, in fact, there was no signature. The Mahers went ahead with demolition of the existing building on their property to build what Waltons wanted.
Waltons told their solicitors to go slow and drag out the process. The Mahers never saw the contract. Eventually Waltons reneged on the deal. The Mahers had demolished their existing building. The High Court found that Waltons were estopped from denying the existence of a contract for lack of the basic formalities (ie: the expected signature/performance). This means that as far as Equity is concerned there actually was a legally binding contract, in spite of the lack of formalities.
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Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.
Paterson, Robertson and Heffey, Principles of Contract Law, 2nd Edition, [9.40]-[9.100], Thompson Lawbook Co, 2005.
Commonwealth v Verwayen (Voyager case) [1990] HCA 39, (1990) 170 CLR 394
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.
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