In Chapters 2-5, you have seen a number of examples of everyday transactions which are governed by the law of contract. The three online videos for Part I explore in greater depth the role of contract in everyday life, by looking at how the law of contract deals with advertisements. Each of the three videos deals with one advertising campaign. The videos are followed by a brief commentary, which picks up on legal issues the ads raise.
The issues raised in the commentary are not fanciful: two of the advertisements—in video 1 and video 3—actually led to lawsuits for breach of contract, as you will see when you get to the commentary. In one case (video 3), the ad led directly to the collapse of a large consumer company, simply because it had not quite reckoned with the extent of liability the ad would create under the law of contract. Treat the commentary as setting out points for further discussion and reflection, and as a guide to working through the legal issues created by the advertisements.
Video Exercise 1: Giving away a Harrier Fighter
In 1995 and 1996, Pepsi ran a special promotion in the US. Consumers who bought Pepsi could collect ‘Pepsi Points’, which they could then exchange for ‘Pepsi Stuff’—essentially, Pepsi-branded merchandise such as baseball caps and T-shirts, listed in a Pepsi Stuff Catalog. The form to send in was also printed in the Catalog. People who did not manage to collect enough points for the item they wanted could buy extra Pepsi Points for 10 cents a point.
Pepsi ran the following ad on TV to publicize the promotion. The final scene of the ad shows a character disembarking from a Harrier fighter jet, and carries the caption: “HARRIER FIGHTER 7,000,000 PEPSI POINTS”. The Pepsi Stuff Catalog did not include the fighter. John Leonard saw this ad. He raised US$ 700,000, and wrote to Pepsico Inc. claiming the reward of the Harrier Fighter. Pepsi refused, and the matter ended up in court in the Federal District Court for the Southern District of New York. The court found against the plaintiff, holding that the ad did not create a binding obligation in relation to the Harrier Fighter (See Leonard v Pepsico Inc. (1999) 88 F Supp 2d 116, available online on Justitia).
At one level, this outcome is intuitive and commonsensical: a fighter plane is not a likely reward to promote a soft drink. Explaining why the outcome makes legal sense, however, is not necessarily straightforward, particularly when it is put in the context of other ad campaigns that were also run in the 1990s (see videos 2 and 3). From a strictly legal point of view (as opposed to a layperson’s commonsensical point of view), the specifics of what was said and shown in the ad assume considerable importance in determining whether or not it is an offer.
Watch the ad carefully, and analyze its legal effect in terms of the law of formation. The points under comment 1 will help you to do this if you find yourself struggling. The commentary then describes the main grounds on which the court in the US held there to be no contract, and invites you to consider how those issues would have been decided under English law.
- To consider whether a contract was formed in this situation, you need to work through the elements of formation: namely, offer and acceptance, consideration, and the intention to create legal relations.
- Ordinarily, a situation like this would fall at the first hurdle, because advertisements are usually only invitations to treat, and not offers. As you will remember from your reading of Chapter 2, however, advertisements announcing rewards are very often taken to be offers. The transaction is seen as creating a unilateral contract (Carlill v Carbolic Smoke Ball Co  1 QB 256). The first question you need to consider, therefore, is whether the advertisement in this case is sufficiently similar to Carlill for it to constitute an offer.
- On the issue of consideration, consider the facts of this case in light of Chappel v Nestle  AC 87 (HL).
- On the issue of intention to create legal relations, the key question is whether the ad would objectively be seen as evidencing an intention to take on binding legal obligations (as opposed, for example, to being obviously a joke).
- In holding that the ad did not constitute an offer, the Federal District Court placed considerable weight on the fact that Pepsico had issued a Pepsi Stuff Catalog, which was referenced in the ad itself. In consequence, the Court held that it was the Catalog that was the offer, rather than the ad. Because the Harrier Fighter was not listed as a reward in the Catalog, no offer had been made in relation to the Fighter, and there was therefore no contractual obligation to supply a fighter in exchange for 7,000,000 Pepsi Points.
- Consider the extent to which this reasoning applies in English law. You will, in particular, need to consider the implications of the objective test. Draw on cases like Storer v Manchester City Council 1 WLR 1403 (CA) and Gibson v Manchester City Council  1 WLR 294 (HL) to flesh out your reasoning.
- The Court also held that the ad was obviously a joke, placing emphasis on the ‘callowness’ of the youth, the fact that jets of that nature are not suitable transports to school, and the fact that the deal is ‘too good to be true’.
- In English law, the equivalent principle is the intention to create legal relations. How would the presumptions discussed in Chapter 4 apply to this ad? Would the circumstances identified by the Federal District Court be seen in English law as negativing intention to create legal relations? Consider how you might distinguish this situation from the ads in videos 2 and 3.
Video Exercise 2: Giving away a billion dollars
In 2003 and 2004, Pepsi ran a promotion called ‘Play for a Billion’. People purchasing Pepsi received a code which they could redeem online or by post. Some of these codes won small prizes. One thousand, however, appeared on a special game show, where people were eliminated until just one person was left. That person won US$ 1 million, and had a chance to win a final prize of US$ 1 billion. The contest was set up to make winning the final prize difficult (involving, among other things, selection by a chimpanzee), but it was theoretically possible to win. A summary of the rules of the contest is available online.
The promotion ran twice. Each time, one person won the US$ 1 million prize. The US$ 1 billion prize was never won. The question you are asked to consider, however, is whether the ad campaign run by Pepsico would have placed them under a contractual obligation to pay out US$ 1 billion if an individual had won the contest.
Watch the ad carefully, and analyze its legal effect in terms of the law of formation. Consider, in particular, what distinguishes this ad campaign from the campaign in Video 1, especially in relation to the intention to create legal relations. As with Video 1, much of your analysis will have to be fact-specific, and will require you to relate the legal tests to the specific facts of the case.
- As with Video 1, to consider whether a contract was formed in this situation, you need to work through the elements of formation: namely, offer and acceptance, consideration, and the intention to create legal relations.
- As far as offer and acceptance go, the issue here once again relates to the fact that although advertisements are usually not offers but only invitations to treat, advertisements announcing rewards are often offers of a unilateral contract (Carlill v Carbolic Smoke Ball Co  1 QB 256). In relation to the Harrier Fighter in video 1, the fact that there was a separate Pepsi Stuff Catalog meant that the ad was not an offer. No such catalog is referenced in this ad. Does that make it an offer?
- On the issue of consideration, you should once again consider these facts in the light of Chappel v Nestle  AC 87 (HL).
- On the issue of intention to create legal relations, the key question is once again whether the ad would objectively be seen as evidencing an intention to take on binding legal obligations. Does the ‘callowness’ of the youth in this ad, and the fact that the deal also seems ‘too good to be true’ mean that there is no intention to create legal relations here as well? Or is there something distinguishing this ad from the ad in video 1, which gives it a binding character?
Video Exercise 3: Giving away international flight tickets
In 1992, Hoover ran a promotion to increase the sales of its vacuum cleaners and washing machines. They offered two free flights to Europe (and, subsequently, also to the US) to anyone who bought a Hoover appliance worth over £100 (approximately equivalent to £200 in 2018). This was an extraordinarily lucrative benefit. Flying was considerably more expensive in 1992, before the era of Ryanair, than it is today. The average value of the free flights would have been £400 (approximately equivalent to £800 today). The result was that very large numbers of individuals bought vacuum cleaners they neither needed nor wanted for the sole purpose of getting the flight tickets. Hoover ended up facing nearly 600,000 claims for free flights—far more than it had anticipated. As the video below discusses, the impact on Hoover was dramatic. It incurred losses of around £50 million, and the company was eventually sold by its parent in the US.
Watch the video below, and consider the issues discussed in the commentary.
- Analyse the transaction in terms of offer and acceptance, consideration, and intention to create legal relations.
- What constitutes the offer of the free flights (as distinct from the offer of the vacuum cleaner)? At what point is the offer accepted?
- What is the consideration for the promise to provide free flights (as distinct from the promise to provide a vacuum cleaner)?
- On what basis can we conclude that Hoover had the intention to create legal relations?
- As far as offer and acceptance are concerned, it is likely that the advertising material is an offer, which the purchaser accepts by purchasing an appliance which meets the terms of the offer. Intention to create legal relations, similar, follows from the fact that transactions having a commercial character are presumed to be intended to create legal relations (see the discussion in chapter 4).
- Consideration is a little trickier. There are two ways of analyzing the situation. Firstly, we can apply Chappel v Nestle  AC 87 (HL), where the Court held that used candy wrappers, which were sent in to claim a reward under a promotion, were consideration for the promise to supply the reward. Alternately, we can apply Edmonds v Lawson  QB 501, where consideration was interpreted as imputing a requirement of self-interested action. Either way, the conclusion is that there is consideration.
- The Hoover free flights fiasco also illustrates two broader dimensions of the law of contract, which are briefly summarized below.
- Firstly, it illustrates a key aspect of the doctrine in consideration in operation. As Chapter 3 has discussed in greater detail, English law states that consideration must be sufficient, but need not be adequate. It does not matter if what is promised under a contract is out of proportion to the contract price. As long as the contract meets the tests of offer and acceptance, consideration, and intention to create legal relations, a contract is formed. Hoover was contractually bound by its promise to offer free flights, even though they were worth several times the value of the vacuum cleaner. The fact that the benefit Hoover promised was completely out of proportion to the benefit it received was not legally relevant to determining what Hoover’s obligations were.
- Secondly, subsequent events also demonstrate the importance of the actual terms of the offer to determining the rights of the parties. Hoover sought to mitigate its losses by invoking fine print in the terms of its offer. It denied two types of claims. If an individual had bought multiple vacuum cleaners, it rejected all their claims, invoking a clause in the terms of its offer under which each household was restricted to a single claim. Secondly, if the dates of the flights it offered did not suit the customer, it refused to offer alternate dates. Many people whose claims were rejected sued in the small claims court, and Hoover was still defending actions against it over six years after the promotion. In general, Hoover tended to win cases where it refused to offer alternate dates if the dates it initially offered were inconvenient. However, it lost cases where it had refused to provide any flights to persons who had put forward multiple claims. Judges in small claims courts tended to hold that under the terms of the contract, Hoover had to provide free flights under one of the claims, and could not reject every single claim where multiple claims were put forward. Hoover’s reliance on small print ultimately led the ASA to revise its code of conduct for promotions, requiring companies to make conditions clear to consumers from the outset.