CASE NOTE: Contract Law- House of Lords- Contract terms adjusted to include third-party – Plaintiffs sued for breach of contract – Court held that transactions between parties constituted valid contract.

By: Rajrishi Ramaswamy, Second Year B.B.A. LLB, Symbiosis Law School, Hyderabad.

Bench: Earl of Birkenhead, Lord Atkinson, Lord Summer, Lord Buckmaster and Lord Phillimore.

Facts:

Rose and Frank Company were the American distributor for the new product of Jas. R. Crompton and Brothers, Ltd., a company with whom their relations had begun as early as 1905. The plaintiffs were engaged in the USA as dealers in carbonising tissue papers, which they purchased from the defendants. 

In 1913, the relations between the two parties were reconsidered after it was brought to the notice of the plaintiffs that the respondents Brittains, Ltd. were interested with the defendants in supplying carbonised tissue and therefore

the three parties entered into an arrangement whereby the plaintiffs were to try their best to expand trade and also only exclusively purchase the carbonised tissue from the English companies only. This arrangement was initially to last for three years but later was again extended till 31^st March, 1920.

The defendants, during the early part of 1919 sought the termination of the contract stating that the plaintiffs were not conducting the business as they should and that the 1913 agreement was not legally binding because of a clause that reads “This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned, to which they each honourably pledge themselves with the fullest confidence—based on past business with each other— that it will be carried through by each of the three parties ” with mutual loyalty and friendly co-operation.”

The plaintiffs sued the defendants for breach of contract.

Issues:

1. Whether the 1913 contracts were legally binding.
2. Whether the orders of 1919 could be considered to be legally binding, despite the clause in the agreements entered into by the parties in the year 1913.

Judgment:

The Trial Judge held that there was a valid contract, following which the case was appealed at His Majesty’s Court of Appeal.

His Majesty’s Court of Appeal (England): Sir Thomas Edward Scrutton, who wrote for the majority, expressed that there was no legally enforceable contract due to the clause that states that the agreement is not legally binding.

Lord Atkin, who was in the dissent agreed that the contract was not enforceable. However, he held that the orders and transactions between the two parties constituted a valid contract.

The House of Lords: The judgement given by the Court of Appeal was reversed by The House of Lords, which agreed with the judgement given by Lord Atkin and Lord Justice Bankes. Lord Justice Atkin agreed that the 1913 arrangement was not a legally binding agreement; but he opined that the 1919 orders were not affected by the arrangement of 1913 and constituted contracts binding upon the defendants.

This was a precedent setting judgement in Contract Law.