Case name & citation: Rose & Frank Co. v Crompton & Bros. Ltd., [(1925) AC 445]
Jurisdiction: The House of Lords
Claimant: Rose & Frank Co.
Defendant: Crompton & Bros. Ltd.
What is the case about?
Rose & Frank v Crompton & Bros. is a leading contract law case that throws light on the enforceability of business agreements. It answers how the intention of the parties to create a legal relationship affects the legality of contracts.
Facts of the case (“Rose & Frank v Crompton & Bros.”)
In 1913, there was an agreement between Rose & Frank Co. and Crompton & Bros. Ltd. wherein the former was appointed as sole selling agents for the latter’s goods in North America. The agreement was to sell some carbonized tissue paper manufactured by Crompton & Bros. Ltd. The claimant would order goods from the defendant and sell them as the defendant’s sole agent.
One of the clauses of the agreement stated as follows:
“This arrangement is not entered into…… as a formal or legal agreement and shall not be subject to legal jurisdiction in the Law Courts…… that it will be carried through by the parties with mutual loyalty and friendly co-operation.”
Later, on one occasion, Crompton & Bros. Ltd. breached this agreement by cancelling the delivery of products to Rose & Frank Co. Some dispute occurred between the two business firms.
Rose & Frank Co. had placed orders for paper, which were accepted by Crompton & Bros. But before the orders were fulfilled, Crompton & Bros. cancelled the agency agreement and refused to send the items, arguing that the 1913 agreement was not legally binding and that, as a result, the orders did not produce legal obligations.
On this, Rose & Frank Co. initiated an action against the defendant.
Did the agreement between the two entities constitute a contract?
Was the said clause sufficient enough to negate the legality of the agreement?
Relevant law behind this case
One of the essential requirements of a contract is that there must be an intention among the parties to create a legal relationship. If the agreement is not capable of creating a legal obligation, it is not regarded as a contract.
Generally, there is no desire to create a legal relationship in the case of social or domestic agreements. An invitation to dinner or to go to a movie, for example, has no intention to create a legal relationship and hence is not a contract. For example, A invites his friend B to dinner, and B accepts the invitation. If B does not show up for dinner, A cannot go to court to recover his losses. The assumption in social agreements is that the parties do not intend to form a legal relationship. Similarly, certain agreements between a husband and wife usually do not constitute contracts because there is no intention of establishing a legal relationship.
Likewise, the usual presumption in commercial or business transactions is that the parties aim to establish legal relations. In a business agreement, it is presumed that it will be followed by legal consequences. This presumption, however, may be negated by express terms to the contrary. And the case of Rose & Frank v Crompton & Bros. is a relevant example of this. If the parties to a business agreement decide that none of them shall go to Court in case of its breach, then even such an agreement will not be treated as a contract.
Judgement of the Court in “Rose & Frank v Crompton & Bros.”
In this case, the agreement between the two entities clearly provided that it was not in the nature of a legally enforceable contract and that it ought to be carried on mutual understanding. As such the Court determined that the agreement was not a legally binding contract because there was no intent to create legal relationships.
The agreement, thus, had no legal effect and was not enforceable by the Courts.
It is important to remember that whether or not an agreement contains an intention to create a legal relationship is a matter for the Court to assess, which may consider the terms and conditions of the agreement as well as the circumstances surrounding the agreement (under which it was made).
In addition, as far as the orders for sale were concerned, the Court also ruled that the fact that the arrangement is not a legal contract does not bar the orders and acceptances from being legally enforceable contracts of sale. The inability of an expressed legal arrangement under an agency agreement to be enforced does not preclude the legality of transactions. Hence, the orders were mutual offers and acceptances, with each transaction carrying ordinary legal weight.
Where an agreement clearly provides that it was not a legal agreement, the same would be unenforceable.
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