This article on the landmark case of Felthouse vs. Bindley (1862) was written by Thejalakshmi Anil.  The article examines the facts, legal arguments, court reasoning, and the lasting impact of this decision on contract formation in common law jurisdictions. It also discusses how this principle has been applied, challenged, and refined in subsequent cases and in light of technological advancements in communication.

Introduction

The case of Felthouse vs. Bindley (1862), decided in 1862 by the Court of Common Pleas in England, stands as a cornerstone in the development of contract law, particularly in the realm of offer and acceptance. This case laid down the general rule behind acceptance is that it cannot be implied by mere silence on the part offeree and an offeror cannot impose a contractual obligation on the offeree by stating that unless the latter expressly rejects it, he will be held to have accepted it. The rationale is that it would be unfair to put the onus on the offeree to take the time and expense to avoid the imposition of unwanted contractual agreements. 

In this article, we will look at its facts, the legal arguments presented, the court’s reasoning, and the lasting impact of the decision. We will also consider how the principles established in Felthouse vs. Bindley have been applied, challenged, and refined in subsequent cases and in the face of technological advancements in communication.

Details of the case 

1. Name of the case: Felthouse vs. Bindley
2. Equivalent citations: [1862] EWHC CP J35
3. Type of case: Civil case 
4. Appellant: Paul Felthouse
5. Respondent: William Bindley 
6. Court: Court of Common Pleas (England) 
7. Bench: Justice Willes, Justice Byles, Justice Keating 
8. Date of the judgement: 08.07.1862  
9. Laws involved: Acceptance in Contract Law 

Facts of the case 

The case of Felthouse vs. Bindley heard in the Court of Common Pleas in 1862, centers around a dispute over the ownership of a horse. The key figures involved were Paul Felthouse, a builder from London and the plaintiff; William Bindley, an auctioneer from Tamworth and the defendant; and John Felthouse, the original owner of the horse and Paul’s nephew.

In December 1860, Paul and John had a conversation about selling the horse. John offered to sell the horse for 30 guineas. Paul, operating under a misunderstanding, thought the price was 30 pounds and agreed to buy it. On January 1st, John wrote to Paul, clarifying the price mix-up, stating that he would only sell for 30 guineas. Recognizing the difference in value between guineas and pounds (with 30 guineas being 1.5 pounds more than 30 pounds), Paul responded by offering to split the difference at 30 pounds and 15 shillings. He added that if he heard nothing further, he would consider the horse his at that price.

On February 25th, an auction took place where the horse was inadvertently sold by William Bindley with the rest of the stock for 33 pounds, which was handed over to John. The following day, William wrote to Paul, informing him about the mistake. On February 27th, John wrote to his uncle, explaining that the horse was mistakenly included in the sale, but the auctioneer had offered to buy it back without charge, although he forgot to do so. John mentioned that they were trying to recover the horse and even offered the buyer 5 pounds to return it.

This series of events led Paul Felthouse to bring an action against William Bindley for the conversion of the horse. The central question was whether a valid contract for the sale of the horse had been formed between Paul and his nephew before the auction, and consequently, whether Paul had legal ownership of the horse when it was sold by the auctioneer.

The case was first tried before Justice Keating at the Stafford Summer Assizes, where the jury initially found in favour of Paul, awarding him 33 pounds in damages. However, the defendant was granted leave to move for a nonsuit, bringing the matter before the Court of Queen’s Bench for further consideration.

Arguments raised by parties  

Plaintiff 

The plaintiff, Paul Felthouse, built his case on the assertion that a valid contract for the sale of the horse existed between himself and his nephew, John Felthouse, prior to the auction. He argued that there was a sufficient note of the contract in writing in order to satisfy the Statute of Fraud. He maintained that acceptance could be inferred from conduct, pointing out that his nephew had informed the auctioneer that the horse was sold and should be kept out of the auction. The plaintiff also argued for the admissibility of the letter from John Felthouse dated February 27th, 1861, claiming that this letter, combined with the earlier correspondence, constituted a valid written note of the contract.

Drawing on the case of Smith vs. Neale (1857), the plaintiff’s counsel asserted that it was not necessary for the nephew’s assent to be in writing, as long as there was a written proposal from one party and verbal assent from the other. Furthermore, citing Bill vs. Bament (1841), they argued that a memorandum satisfying the Statute of Frauds could be made at any time before action is brought.

Defendant

The defendant argued that there did not exist a valid contract between the plaintiff and his nephew at the time of the auction. His argument was that there was no binding contract for the sale of the horse when the auction took place. Hence, the plaintiff could not have any insurable interest in the horse at the time of the auction, 

Additionally, the defendant also opposed the admission of the letter which was dated on February 27, 1861 from the nephew. The defendant argued that the letter was written after the sale and therefore could not create a contract that did not exist at the time of the auction post the sale of the horse. 

The defendant also argued that a written note or memorandum was needed to evidence the sale of the goods. By referencing the case of Carter vs. Toussaint (1822), the defendant argued that the plaintiff had not accepted the horse in a manner that would satisfy the Statute of Frauds. They argued that a mere verbal agreement and the arrangements made for keeping the horse did not amount to acceptance. The defendant’s stance was that on February 25th, the day of the sale, the plaintiff had no legal claim to the horse. Additionally, they pointed out that an admission made by a third party after the fact could not alter the legal positions of the parties as they stood on the day of the sale.

Furthermore, the defendant highlighted that even if the nephew had mentally decided to sell the horse to his uncle at the agreed price, he had neither communicated this intention to his uncle nor taken any steps to legally bind himself to the sale. By emphasising these points, the defendant sought to show that the plaintiff’s claim to the horse was invalid, as there had been no proper acceptance or binding agreement.

Issues raised 

1. Whether a valid contract for the sale of the horse had been formed between Paul Felthouse and his nephew prior to the auction;
2. Whether the letter from John Felthouse dated February 27, 1861, was admissible as evidence or not?

Law involved in Felthouse vs. Bindley (1862)

Acceptance in Contract law 

An agreement arises from a proposal that is accepted. It is only after the acceptance does a contract arise between two parties. An offer does not create any legal rights or duties unless accepted. 

This case established the proposition that acceptance cannot be made through silence. The rule is that acceptance cannot be implied from a mere silence on the part of the offeree and that an offeror cannot enforce an obligation upon the offeree that unless he rejects the offer would be held to have accepted it. It is thought to be unfair to put an offer to time and expense in order to avoid the imposition of an unwanted contractual agreement. 

In Powell vs. Lee (1908), the plaintiff had applied for headmastership of a school. While the managers had passed a resolution to appoint him, this decision was not communicated to him officially. One member informed the same in his individual capacity to the applicant. Subsequently, the resolution was cancelled and the plaintiff sued for breach of contract. This action was rejected by the Court which observed that there must be a notice of acceptance from the contracting party in some way. 

However, there are certain exceptions to this situation when the law does not require the communication of the acceptance. 

Unilateral Offer

When one party makes an offer to pay another if the other party performs or refrains from an act, this is called a unilateral contract. The other party need not make a promise to do or refrain from the act. In such cases, the acceptance occurs through performance and there is no need to communicate this acceptance. 

In the case of Carlil vs. Carbolic Smoke Ball Company (1893), it was held that full performance is acceptable in such an offer and there is no need to communicate this attempt to perform. This is waived since it would be unreasonable for the offeror to rely on the absence of communication which would have been superfluous or which no reasonable person would expect to be made.

Postal Acceptance rule 

The communication of acceptance by post leads to certain practical difficulties since a letter of acceptance may take several days to arrive. To overcome this problem, the Court has devised an exception to the general requirement of communication in the cases of Adams vs. Lindsell (1818) and Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) 4 Ex D 216.

According to this rule, acceptance is complete when posted putting the risk of loss and delay on the offeror. This will prevail only in certain circumstances wherein the use of post was reasonably contemplated by the parties or stipulated by the offeror as laid down in Household Fire Insurance v Grant (1879). This will not allow a contract to be concluded by posting the acceptance where the letter is incorrectly addressed by the offeree as laid down in LJ Korbetis vs. Transgrain Shipping BV (2005). 

Due to advancements in technology and the problems created by this rule, the courts are restricting the scope of this exception. In Holwell Securities vs. Hughes (1974) the postal acceptance rule did not apply because the offeror did not intend that it would apply. While this case is authority for the proposition that the terms of an offer must be met for acceptance to be valid, it also illustrates the reservations modern courts have over the postal acceptance rule.

With the advent of modern, nearly instantaneous forms of communication like fax and email, courts have shown a marked reluctance to apply the postal acceptance rule. Therefore, in Entores Ltd vs. Miles Far East Corporation (1955), it held that when parties are in direct communication no contract will arise until the offeror receives notification of acceptance. In JSC Zestafoni Nikoladze Ferroalloy Plant vs. Romly Holdings (2004), fax was deemed an instantaneous form of communication. The case of Thomas vs. BPE Solicitors (2010) suggested that the postal rule should not apply to email contracts, a view supported by the Singapore decision in Chwee Kin Keong vs. Digilandmall.com Pte Ltd (2004).

Regarding internet trading, the Electronic Commerce Regulations (2002) do not specify when acceptance is effected. However, for consumer contracts, these regulations state that orders and acknowledgments are considered received when accessible to the addressee. This implies a default rule of acceptance upon receipt, rather than upon sending as in the postal rule.

Currently, English contract law lacks a definitive case addressing nearly instantaneous communications like fax or email. While it’s clear that contracts can be formed through these media, as seen in Allianz Insurance Co-Egypt vs. Aigaion Insurance Co SA (2008), the technology involved means they are not entirely instantaneous. Emails, in particular, may experience delays depending on their routing.

Postal Acceptance Rule in India 

According to Section 4 of the Indian Contract Law, there is a peculiar modification of the rule. As per this section, when a letter of acceptance is posted and out of the power of the acceptor, the proposer becomes bound. However, the acceptor will be bound only when the letter is received by the proposer. Hence, the offeror only becomes bound when a properly addressed and adequately stamped letter of acceptance is posted as emphasised in Ram Das Chakarbarti vs. Cotton Ginning Co Ltd.

Therefore, even after an acceptance is posted, before it comes to the knowledge of the offeror, only the offeror is bound. The acceptor still has the authority to recede from the contract by revoking the acceptance. 

In terms of direct communication, the principle laid down in the Entores case has been endorsed by the Supreme Court in Bhagwandas Goverdhandas Kedia vs. M/S. Girdharilal Parshottamdas And Co.

Judgement in Felthouse vs. Bindley (1862)

J. Willes delivered the lead judgement in this case concurred by the other judges including J. Byles and J. Keating. While there was acknowledgement that the transaction between the plaintiff and his nephew complicated things, the crucial question at hand was whether the horse was the property of the plaintiff at the time of the auction.  

The Court of Queen’s Bench held that the letter sent by John was inadmissible as evidence. The court also considered whether there was sufficient written memorandum of the agreement to satisfy the requirements of the statute for contracts involving the sale of goods. The absence of a clear written acceptance from John Felthouse prior to the action weakened the claim of the plaintiff.

Further, the Court argued that there was no complete bargain to transfer the ownership of the horse to the plaintiff before the sale by the defendant. Hence, the Court ruled in favour of the defendant making the rule for nonsuit absolute, and overturned the initial verdict in the favour of the defendant.

Therefore the judgement of this case lays down three key propositions, firstly, acceptance must be communicated to the offeror himself. Secondly, acceptance must be communicated to the offeror or person authorised to receive the acceptance and thirdly the offer cannot impose the burden of refusal. 

Rationale behind this judgement

The Court in this case discussed the principles of contract formation, specifically the requirements for a valid offer and acceptance. It was argued that there was no complete bargain when the plaintiff sent the letter on January 2 offering to split the difference in price. The Court reasoned that the plaintiff had no right to impose the sale on the nephew with the condition that the silence would be taken as acceptance. The court considered the uncle’s letter of January 2nd as an open offer. While the nephew could have bound his uncle to the bargain by writing to him, the uncle could also have retracted his offer at any time before acceptance.

The Court also reasoned that even if the nephew intended to sell the horse to the plaintiff at the price proposed by him, this was not communicated to the plaintiff and neither had been legally bound himself to the sale. Therefore, when the horse had been sold by the defendant on 25th February, no action had been taken to vest the property of the horse in the plaintiff. Therefore, the plaintiff has no legal basis for his claim. 

With respect to the admissibility of the letter of February 27, the Court held that while this could be considered as an acceptance of the terms of the plaintiff or an evidence of prior agreement, it would still not work in the favour of the plaintiff. If the letter is considered as a first time acceptance, then it would be too delayed since the horse was already sold. If the letter is considered as a documentation of a prior verbal agreement, then a later acceptance cannot have a retroactive effect to bind third parties in accordance with the principle laid in Stockdale vs. Dunlop (1840). Therefore, the defendant does not incur liability for selling the horse since at the time of the sale, the horse was not the property of the plaintiff. 

Analysis of the case 

The primary principle that has been established in this case asserts that silence cannot constitute acceptance in contract law, and has been both foundational and controversial over the years. While this rule is central to ensuring that contracts are formed through clear and explicit communication, its application has also raised certain complexities and potential exceptions.

With respect to the decision in the case itself, it is argued that the specific facts of the case suggest a different kind of reasoning to be adopted. For instance, the plaintiff had effectively waived the need for explicit communication of acceptance. Moreover, the nephew also had informed the auctioneer about the sale of the horse. This action could be seen as manifesting acceptance, indicating that the court may have applied the rule too rigidly, without taking into account the conduct and intention of the parties. The broader criticism of this rule also arises since many cases also seem to deviate from its strict application. For example, in The Hannah Blumenthal, the House of Lords concluded that a contract to abandon a reference to arbitration could be formed by the silence of both parties. This seems to contradict the principle laid down in this case, suggesting that in some situations, silence can indeed amount to acceptance.

It is important to note, however, that no case has overruled this decision. The contradiction in arbitration-related cases can be attributed to the unique circumstances of arbitration law, where neither arbitrators nor courts traditionally had the power to dismiss an arbitration for want of prosecution. This necessity has led courts to adopt equitable common law doctrines in these situations. Therefore, while the rule that silence does not amount to acceptance remains a fundamental principle, it is not absolute. Exceptions are particularly relevant in certain contexts for instance in ongoing business relationships, where established patterns of behaviour can also mean consent. This flexibility acknowledges the realities of commercial interactions, where silence might reasonably be interpreted as acceptance based on prior dealings.

Despite its foundational status, the rule faces a certain degree of uncertainty in the application, especially in scenarios where the offeree believes their silence has concluded a contract and acts accordingly. Some legal scholars argue that in such cases, the courts should recognize a contract, prioritising the parties’ actual intentions and conduct over strict adherence to formal rules. However, reconciling this view with the precedent set by this case presents significant challenges. Hence, the solution to this dilemma in order to balance the interests of both parties and also to ensure fairness is to require some form of positive action from the offeree in order to constitute evidence of acceptance. This helps to prevent abuse where an offeree taking advantage of this loophole may claim their acceptance only when the contract is advantageous. 

Hence, requiring clear and demonstrable agreement to contract terms reduces ambiguity and potential disputes.

Relevance in India

Acceptance in contract law

The general rule of contracts is that an acceptance is not accepted unless it is communicated to the offeror. According to Section 2(b) in the Indian Contracts Act (1872), when a person to whom a proposal is made signifies his assent, only then a proposal is accepted. The term ‘signifies’ used in the section indicates that an acceptance must be communicated to the offeror According to Section 7, a contract is created when the acceptance is communicated to the offer. An accepted proposal becomes a promise. 

Therefore both acceptance and intimation of this is necessary for binding contracts. The acceptance must be absolute and must correspond with the terms of the offer. 

The principle which has been established in the Felthouse case has been upheld in multiple Indian cases. In Bhagwandas vs. Girdharilal and Co (1966), the Court laid down the principle that there must be an external manifestation of acceptance. A mere mental determination to accept which is not accompanied by any external indication is insufficient. 

In the case of Raj Kumar And Anr. vs Shiva Prasad Gupta And Ors (1939) it was held that law does not impose a duty on the person to whom a proposal is made to reply to the same. Additionally, in Hulas Kunwar vs Allahabad Bank Ltd. (1958) it was held that acceptance cannot be inferred from the mere silence on the part of the offeree. 

Conclusion 

The Felthouse case is a landmark case with respect to the establishment of contract law principles. It has brought significant developments with respect to the shaping of how ‘acceptance’ in contracts is to be understood. Therefore, it has played a significant role in shaping the legal thinking around contract formation in common law jurisdictions. 

The significance of this case lies in its emphasis on establishing the importance of clear communication in order to form contractual relationships. This plays a very important role in ensuring that individuals are not bound by agreements which they did not consent to. In this globalised world, this principle is especially important due to the increasing complexity of transactions. 

However, with today’s changing context, modern application of this principle also brings forward certain specific challenges that need to be addressed. For instance, the increasing use of electronic communication has led to questions about when and how acceptance needs to be communicated. Therefore, even if the basic principle is the same, the courts of today have had to think about how to apply it in a rapidly changing time. 

This has meant that the principles laid down have undergone many changes with emerging exceptions according to specific contexts. For instance, in the case of unilateral contracts or the cases of arbitration. Even the postal acceptance rule, which was developed before the case, faces some tension with the principle laid down in the Felthouse case. This demonstrates the confusion and complexities that arise when there is a need to strike a balance between commercial practicality and legal certainty. 

Despite these challenges, the core principle of the case remains sound and continues to provide a clear guideline for contract formation, ensuring that parties are not bound by agreements without their explicit consent. 

Frequently Asked Questions (FAQs) 

What is the Statute of Frauds?

The Statute of Frauds is an act of England that required that certain types of contracts, wills, and grants, and assignments or surrender of leases or interest in the property should be in writing and signed in order to avoid fraud in the court by perjury. This is satisfied if the contract is evidenced by a writing or writings, contains the essential terms of a contract, is signed by the party against whom the contract is to be enforced, and has enough information to evidence the intent of the parties to enter into a contract. 

What is the difference between English and Indian law with respect to the postal acceptance rule? 

The only difference here is the position of the acceptor. While in England, both the offeror and acceptor become irrevocably bound when a letter of acceptance is posted, in India the acceptor does not become bound by just posting his acceptance. Here, he becomes bound only when his acceptance comes to the knowledge of the proposer. Therefore this gap between posting and delivery of acceptance can be used by the acceptor for revoking his acceptance by a speedier communication. 

References

• https://www.london.ac.uk/sites/default/files/study-guides/contract-law-study-guide.pdf
• https://uk.practicallaw.thomsonreuters.com/2-553-0606?transitionType=Default&contextData=(sc.Default)&firstPage=true
• http://student.manupatra.com/Academic/Abk/Law-of-Contract-and-Specific-Relief/Chapter3.htm#:~:text=Powell%20v.%20Lee%2C%20(1908)%2099%20LT%20284%3A,person%20will%20not%20be%20valid.
• Casebook on Contract Law by Jill Poole (OUP, 2016)
• Contract Law Text, Cases and Materials Tenth Edition by Ewan McKendrick

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