The chapters in Part II of this book discuss how we use legal rules to decide the scope and extent of each party’s obligations under a contract—or, to put it differently, to decide what the parties have actually taken on under the contract. The three online videos for Part II explore the real-life impact usefulness of these legal rules, by giving you examples of everyday situations where the extent of a party’s rights or powers was at issue.
Each of the three sets of videos deals with one type of situation we’ve encountered in Part II of the book. The first deals looks at whether a statement in an ad campaign is ‘mere puff’ or has actual legal content. The second (consisting of two videos) looks at the legal rules around interpretation and implication, in the context of a situation where a contract gives near-unrestricted power to one party to impose charges on the other. The third looks at the rules around mistake, focusing specifically on mispriced items on a website.
As with the videos in Part I, each video is accompanied by an introduction and some commentary on the situation set out in the video. Treat these as setting out points for further discussion and reflection, and as a guide to working through the legal issues arising out of the situations described in the videos.
Video Exercise 1: Red bull gives you wings
Virtually everyone will have come across Red Bull’s slogan ‘Red Bull gives you wings’.In 2013, this slogan led to a lawsuit. Benjamin Careathers, a regular consumer of Red Bull, filed a claim in the Federal District Court for the Southern District of New York (the same court in which Leonard v Pepsico Inc (1999) 88 F Supp 2d 116 was filed) arguing that Red Bull’s claim was false. The dispute never went to trial, and was settled out of court. Nevertheless, the lawsuit is often cited online as an example of the silliness of class actions in the US. Surely it is obvious to any reasonable person that Red Bull isn’t actually claiming that people drinking it will magically sprout feathery appendages?
In fact, the complaint is more nuanced than that, raising issues that go to the heart of the distinction between representations, terms, and puff; as well as the question of when and how a pre-contractual statement can create binding legal obligations. Careathers argued that Red Bull’s advertisement strongly implied that it was a superior source of energy in comparison with other drinks. In point of fact, however, it contained far less than half the amount of caffeine that a cup of coffee would. Red Bull, the argument went, was marketing its products as providing a benefit that it was not.
Watch the ad and analyse whether it could be held to have any legal effect in English contract law. The points under comment 1 will help you to do this if you find yourself struggling.
- The key issue here is the distinction between statements that are ‘mere puff’ and those that have legal effect because they are either representations or terms. To decide into which of these categories a given statement falls, you will need to work through the points that the courts take into account in order to determine whether a statement was puff, or something that had legal effect.
- A statement is mere puff if it is not a literal statement of fact, and is not something that the person making them promises. Courts have tended to speak in terms of ‘extravagant phrasing which would naturally be discounted by sensible persons’. Hyperbolic claims in advertisements are usually mere puff.
- On the other hand, statements which might seem to be puff can also be held to convey some assurance as to the quality of goods being sold. An example is Osborn v Hart (1871) 23 LT 851, where the statement ‘superior old port’ was held to contain a term as to drinkability.
- The issue, ultimately, is one of balance. Given the nature of the statement, and the context in which it was made, was it intended to be taken seriously or literally?
- In general, English courts are unlikely to hold that an ad of this type contains any concrete representations or terms. Its contents will almost certainly be held to be mere puff, on the basis that no sensible person body would have taken Red Bull’s advertisements as serious statements of fact or serious promises as to Red Bull’s effects. The fantastical nature of the advertisement’s storyline is a key factor.
- The situation would be different were the ad to be articulated in less fantastical or more concrete terms. An advertisement which included a line like ‘perkier than espresso’, or included a comparative shot of a person drinking coffee and one of a person drinking Red Bull, may well have been taken to be making representations in relation to the comparative benefits of drinking Red Bull and coffee.
- A broader point is that modern courts have less reason to try and find concrete representations in advertisements than they did in the days of Osborn v Hart. Two things have changed.
- Firstly, the outcome that was reached in Osborn v Hart could today be more easily reached through the route of statutory implied terms—in relation to consumers, the terms contained in the Consumer Rights Act 2015 and in relation to businesses the terms contained in the Sale of Goods Act 1979. There is no need to rely on the ad being a representation rather than puff, because the statutory term provides you with a basis for your action that is easier to establish.
- Secondly, there is also less need for the common law to play a role in regulating advertisements. The industry is now largely self-regulated, through bodies such as the Advertising Standards Authority. The ASA’s code of conduct, amongst other things, requires advertisers to make sure their ads do not mislead consumers, ‘by inaccuracy, ambiguity, exaggeration, omission or otherwise.’ Whilst the ASA does not have the power to enforce its decisions, it has the power to refer cases to the Competition and Markets Authority, which can take enforcement action against misleading advertisements.
Video Exercise 2: Contracts conferring unilateral powers
The case of Arnold v Britton  UKSC 36, which you encountered in Chapter 7 in relation to contractual interpretation, arose out of a landlord’s power to increase service charges on holiday chalets. It points to a broader issue that is common in modern contracting, namely, that contracts often give one party the power to unilaterally change the obligations of the other party. This happens quite frequently in contracts relating to land. People very often own their houses on a leasehold, which means they have to pay ground rent to the owner of the freehold, or own apartments subject to a covenant that means they have to pay an annual service charge. The contract will typically give the owner of the freehold, or the company providing services, the power to increase the ground rent or the service charge. This power is often unfettered. Contracts also give the owner of the freehold the power to determine how much must be paid to extend the lease on the land. This charge can be very high.
The exercise of these powers often causes real hardship. The two videos below illustrate the problems individuals can face as a result of these clauses. Watch the two videos, and consider why contract law produces these consequences.
- Both videos above relate to houses. The issue of unilateral powers, however, extends beyond houses. Problems have also arisen in relation to interest rates, when financial institutions have taken advantage of unfettered powers to increase rates very rapidly to significantly higher levels.
- In general, courts give full effect to clauses conferring powers of this type. The only restriction is an implied term to the effect that the power must be exercised ‘rationally (as well as in good faith) and consistently with its contractual purpose’ (Braganza v BP Shipping Ltd  UKSC 17  (Baroness Hale JSC)).
- This term applies to all contracts where one party has the power to make a unilateral determination or decision. However, it focuses only on the decision-making process. Did the party making the determination act capriciously or arbitrarily? Did they exercise the power for a purpose which differed for that which it was given? If the answer to either question is ‘yes’, the determination will be in breach of the implied term.
- Critically, the court does not look to the substance of the determination or its impact on the other party. The fact that it causes hardship, or is disproportionate, is not relevant. As a result, virtually all determinations of this type have been upheld, even where the amounts charged appear extortionate.
- Several statutes have given the courts the power to refuse to give effect to clauses which are excessively imbalanced. Examples include the powers of the Court in relation to unfair terms under Part II of the Consumer Rights Act 2015 (which you will find discussed in Chapter 13), as well as its powers under the Consumer Credit Act 1974. But these powers are narrowly drawn in terms of their scope, and do not extend beyond the types of clauses the statue covers.
- The reluctance of the courts to intervene is deeply ingrained. A key theme that has underlain Part II is that English contract law is premised on parties acting in their own interests. It is only in very exceptional circumstances that a party is required to pay attention to the other party’s interest, typically when they have voluntarily agreed to do so (for example, by agreeing to a best endeavours clause). As a result, absent statutory regulation, English contract law does not prevent a party from aggressively pursuing its self-interest, even if doing so imposes hardship on the other party. It is for each party to protect itself by negotiating to have appropriate clauses included in the contract. If a party fails to do so, the law will not intervene to protect it.
- Consider whether you agree with this position. Is there a broader role which courts should play in policing contracts for unfairness, or in imposing legal fetters on powers that, under the contract, are framed in very broad terms? What is the argument to be made for it? What arguments can be made against it? In making an argument either way, think carefully through potential negative consequences of giving the courts a larger role.
Video Exercise 3: When websites display the wrong price
Websites are driven by software, and software has bugs. Sometimes those bugs produce unfortunate results. The video below gives you one such example—an instance when the website of a major retailer in the US began displaying goods at a price far lower than that at which they were supposed to be displayed. Similar situations have also arisen in the UK. In cases like this, the sellers are usually able to cancel all orders placed on the basis of the incorrectly displayed price, by drawing on the law of mistake.
Watch the video below, and consider the situation in light of the legal rules pertaining to mistake.
- Two varieties of mistake are possibly applicable to this situation.
- Mutual mistake deals with situations where the parties have misunderstood each other, and their words cannot be given a clear objective meaning. The classic case is Raffles v Wichelhaus (1864) 2 H&C 906, where the parties contracted to send a shipment on a ship called the ‘Peerless’, without realising that there were two ships with the same name.
- Unilateral mistake as to terms deals with a situation where one party accidentally misstates the terms. The other party is aware of the mistake, and deliberately seeks to take advantage of it. For unilateral mistake to affect a contract’s validity, there must be an actual mistake such that one party actually believes that the terms are otherwise than they actually are, and enters into the contract on that basis. The other party must know (or ought to have known) of the mistake.
- Unilateral mistakes as to terms will not apply if the mistake relates to a background matter of fact rather than to a term itself. The distinction between the two is illustrated by the contrast between the cases of Hartog v Colin and Shields  3 All ER 566 and The Hariette N  EWHC 2257 (Comm). In the latter case, the other party knew of the first party’s mistake and deliberately kept silent. Nevertheless, the contract was valid because the mistake did not relate to a term (as the phrase is understood in law).
- On the facts of this case, it is likely that the law of unilateral mistake will apply, because the price of goods is a term. Nevertheless, it is important to understand that unilateral mistake is a narrow concept. Parties are not under a general duty to act ethically, and taking advantage of a mistake made by the other is perfectly fine as long as there is no legal rule to the contrary.