1. Donoghue v. Stevenson [1932] AC 562 (House of Lords).

a. FACT:
On the evening of Sunday 26 August 1928, Mrs May Donoghue travelled by train from
Glasgow to Paisley, Scotland, for 30 minutes. She and a friend then went to the Wellmeadow
Coffee House in Paisley. After entering the house, Donoghue's friend ordered a drink and paid
the owner, Francis Minghella, for a bottle of ginger beer. The owner poured part of the beer into
a glass. Mrs Donoghue drank part of it and her friend poured the rest into May's glass. As she
did so, a rotten snail fell from the bottle of ginger beer into May's glass. Mrs May then suffered
from stomach pains and was diagnosed with gastroenteritis. On 9 April 1929, Donoghue sued
David Stevenson, a manufacturer of carbonated drinks in Paisley. Mrs May is seeking damages,
alleging that the gastroenteritis and mental distress she suffered were caused by the brewer's
negligence in making the beer.
 MATERIAL FACT: BEER GLASS BOTTLES PRODUCED BY David Stevenson ARE
DARK opaque GLASS, SO IT IS VERY DIFFICULT OR EVEN IMPOSSIBLE FOR
CONSUMERS TO SEE THE INGREDIENTS INSIDE THE BOTTLE.
b. ISSUE
Did the manufacturer owe Mrs Donoghue a duty of care in the absence of a contract to
purchase the beer produced by David Stevenson? Or more specifically, did the manufacturer
owe a tort liability to the consumer?
c. RULE
- English law
- Scots law
- Heaven v Pender (1882-83) LR 11 QBD 503, CA.
- Winterbottom v Wright152 ER 402, (1842) 10 M. & W. 109.
- George v Skivington (1869)
- Duty of care
- Neighbor principle
d. ANALYSIS
- Foreseeability: In this case, the manufacturer (Stevenson) bottled ginger beer in
opaque glass bottles, preventing consumers from inspecting the product before consumption. A
careful manufacturer could have foreseen that if the product were contaminated (e.g. containing
a dead snail), this could have serious consequences for the end consumer, including physical
and psychological harm.
 Application: The manufacturer must anticipate that the bottle of ginger beer will
reach the consumer without being thoroughly inspected between production, packaging and
consumption. Therefore, they have an obligation to ensure that the product does not contain any
hazardous substances.
- Proximity: In this case, although Ms. Donoghue did not directly purchase the ginger
beer (her friend did), she is still the ultimate consumer of the product. The relationship between
the producer and the ultimate consumer is “proximity” in that the product is made for direct
consumption without any further testing.
 Application: Although there was no direct contract between Ms Donoghue and the
manufacturer, the proximity in the supply and consumption chain (from manufacturer to end
consumer) gave rise to liability.
- Negligence: The manufacturer failed to properly test the product before releasing it to
the market. The presence of a dead snail in a bottle of ginger beer is clear evidence of a lack of
responsibility in the manufacturing process and quality control. This negligence violates the
basic legal duty that a manufacturer owes to the consumer.
 Application: If the manufacturing process had been carried out properly, the ginger beer
would not have contained any hazardous foreign matter. This shows that the manufacturer's
negligence was the direct cause of Mrs. Donoghue's injury.
- Causal Link: The manufacturer's negligent conduct (failure to inspect the ginger beer bottle)
directly caused Ms. Donoghue's physical and mental harm. The causal link between the
manufacturer's conduct and the harm is clear.
 Application: If there had been no snail in the bottle, Mrs. Donoghue would not have been
harmed. Therefore, her harm is a direct consequence of the manufacturer's actions.
e. CONCLUSION
The manufacturer (Stevenson) was held liable for failing to exercise his duty of care to the
consumer (Donoghue). This case laid the foundation for modern negligence law, emphasizing
the responsibility of manufacturers to ensure the safety of the products they put on the market.
f. RATIO AND OBITER
 Ratio: NEIGHBOR PRINCIPLE
Although the neighbour principle was an important part of Lord Atkin's reasoning and part
of his raito, none of the other judges in the majority explicitly endorsed it. In addition, the other
two judges who came to the same final judgment did not mention or endorse it, so it was not
part of the general reasoning of all the majority judges. The RATIO DECIDENDI is usually an
amalgamation of what was agreed by all the judges who agreed with the decision in the main
judgment. A general description of the RATIO DECIDENDI of the Donoghue case can
therefore be found in the judgments of Lords Macmillan, Atkin and Thankerton, the three
'majority' judges in Donoghue, who agreed that Mr Stevenson owed a duty of care to Mrs
Donoghue in the case.
 Lord atkin: A manufacturer of products which he sells in a form which he publicly
represents as intending them to reach the final consumer in the form in which they were left to
him, without the possibility of reasonable intermediate inspection and knowing that the lack of
reasonable intermediate inspection would result in injury to the life or property of the
consumer, the consumer is under a duty to exercise such reasonable care
 Obiter:
Lord Buckmaster said that in a case such as the present, where the defenders' goods were
widely distributed throughout Scotland, it would seem excessive to hold them responsible to
the public for the condition of the contents of each bottle issued from their work. It was clear
that, if that responsibility were placed on the defenders, they might be required to meet claims
for damages which they could not investigate or insure.
Lord Macmillan: I have no hesitation in holding that a person who for profit is engaged in
the business of producing articles of food and drink intended for public consumption in the
form in which he issues them owes a duty of care in the production of these articles. In my
opinion he owes that duty to those whom he intends to consume his products. He produces his
goods for human consumption; he intends and contemplates that they will be consumed. By
that very fact he puts himself in a relationship with all potential consumers of his goods, and
that relationship, which he assumes and which he desires for his own purposes, imposes on him
a duty of care to avoid injuring them.
Lord Thankerton: The defendant - Stevenson, in placing on the market an article of drink
produced by him, deliberately excluded the interference or inspection of the article by any
intermediate handler of the goods between himself and the consumer, and he himself brought
the goods into direct contact with the consumer, with the result that the consumer was entitled
to rely on the manufacturer's due care to ensure that the article would not cause harm to the
consumer.
 Firstly I agree and support the judgment of the High Court and Justice Atkin but I would
like to make some further arguments. The neighbour principle from Donoghue v Stevenson
[1932] relies on the plaintiff proving that it was reasonably foreseeable that, if the defendant
did something negligently, there was a risk that the plaintiff would be injured or harmed. A
case like Donoghue v Stevenson could be decided purely on the foreseeability of the harm
from the manufacturer to the consumer, but there are some cases that cannot be decided on
this basis alone, for example Smith and Others v Littlewoods Organisation Ltd [1987].
Littlewoods bought a cinema and closed it down, intending to demolish it and build a
supermarket on the site. While it was derelict, some children broke into it and started a fire
which damaged neighbouring buildings. It was established that Littlewoods had not known
that the building was unsafe and that there had been two previous small fires within it. The
House of Lords held that, not knowing these facts, Littlewoods could not reasonably have
 foreseen the risk of damage occurring. Had Littlewoods known of future events, Littlewoods
would have owed a duty of care to the owners of the damaged buildings .
2. Solomon v. Salomon & Co Ltd [1897] AC 22.
a. FACT
In 1892, Aron Salomon converted his leather goods business into a limited company with
seven members, including himself and his family. He sold the business to the company for
£39,000, paid in shares and debentures. Salomon became the company's largest shareholder and
principal creditor. After the company was wound up, the assets were distributed among the
creditors: £6,000 for liabilities, £10,000 for debentures, and £7,000 for unsecured debt. After
the debentures were paid, nothing remained for the unsecured creditors. Salomon claimed
priority in payment because he believed he was a personal creditor, not a shareholder. The
liquidator representing the unsecured creditors claimed that Salomon was liable for the
company's debts because he was acting as the company's representative. However, Salomon
sued the company and the liquidator subsequently appealed.
b. ISSUE
- Whether the Salomon & Co. Ltd. was a company at all?
- Whether in truth the artificial creation of the legislation, ie, the company, had been
validly created in the instant case?
- Whether Salomon was charged for the debts of the company?
c. RULE
- The doctrines of corporate personality and limited liability
- Companies Act 1862 (25 & 26 Vict. c. 89) ss. 6, 8,13
- Erlanger v. New Sombrero Phosphate Co
- Taste Access Floors Inc. v Boswell [1991] Ch 512
- Macaura v Northern Assurance Co Ltd [1925] AC 619
- Lee (Catherine) v Lee's Air Farming Ltd [1960] 3 All ER 420
d. ANALYSIS
The Solomon v. Salomon & Co Ltd [1897] AC 22 decision established the principle of
separate legal personality, which protects shareholders from personal liability for the debts of
the company. This has been a cornerstone in corporate law, providing security for business
owners and encouraging investment by ensuring that personal assets are generally not at risk if
the company incurs debts. This principle continues to be applied widely, promoting
entrepreneurship and corporate growth by offering legal protections to investors, as long as the
company is incorporated properly.
 However, while Salomon protects shareholders, it does not shield against abuses of the
corporate form. Courts can "pierce the corporate veil" when the company is used to avoid legal
responsibilities or engage in fraudulent activities. This was seen in cases like Gilford Motor Co
Ltd v. Horne [1933], where the court disregarded the company's separate personality because it
was used to evade legal obligations. Courts ensure that the corporate structure is not misused to
the detriment of creditors or to perpetuate fraud.
Additionally, modern legal systems have developed doctrines like "sham companies" or
"alter ego" to prevent abuse of the corporate structure. In Prest v. Petrodel Resources Ltd
[2013], for example, the Supreme Court ruled that the corporate veil could be pierced when the
company was being used to conceal the true ownership of assets. This reflects the ongoing
balancing act between protecting shareholders' rights and maintaining fairness for creditors and
the wider public, ensuring that the corporate form is not exploited to evade responsibility.
While Salomon remains a key precedent in corporate law, its application is not absolute.
Courts balance shareholder protection with the prevention of corporate abuse, ensuring that the
legal structure established in Salomon is not used to shield wrongful conduct. This evolving
interpretation of corporate law helps maintain the integrity of business practices while
respecting the original principles set out in Salomon..
e. CONCLUSION
In Salomon v. Salomon & Co Ltd [1897] AC 22, the House of Lords confirmed that a
company is a separate legal entity, meaning Salomon was not personally liable for its debts.
This ruling is sound, as it supports limited liability, encourages investment and
entrepreneurship. However, it may be criticized when the corporate form is misused, although
courts later allowed piercing the corporate veil to prevent fraud, balancing Salomon's
protections with fairness.
f. RATIO AND OBITER
 RATIO
A limited liability company is a separate legal entity with its own shareholders and directors.
This means that the company has its own legal identity, distinct from the individuals who own
and manage it. In other words, the company has its own separate legal personality. Therefore,
the company’s debts, liabilities, and obligations will not be binding on the shareholders or
directors.
The Court has determined that the principle of corporate entity should be recognized and
respected, except in cases where the company is a mere facade or a scam, individuals set up the
company for such purposes, or there is evidence of fraud or misconduct. In such cases, the
founders of the company will have unlimited liability to the company's creditors. The Court has
also recognized that the principle of limited liability of shareholders should apply, meaning that
they are only liable for the debts and obligations of the company to the extent of their
investment. This has enabled investors and entrepreneurs to start and finance businesses
without facing much risk, as they are not personally liable for the debts of the company beyond
the amount of their investment.
The Salomon Principles have become the foundation of modern corporate law and have had
a significant impact on business and investment practices. They have encouraged
entrepreneurship, innovation and investment, and have helped businesses grow and prosper.
 OBITER
In the Salomon case, the judge emphasized the principle of separate legal entities but also
recognized that the use of multiple corporate structures could lead to abuse. The judge
recognized the benefits of establishing multiple companies with separate legal identities, such
as reducing risk and liability and facilitating the management of complex business operations.
However, the judge also warned that this practice could be abused for fraud or tax evasion and
suggested that additional regulation or legislation may be needed to prevent such abuse.
The judges' comments on the risks of using multiple corporate structures have been cited in
subsequent cases and have contributed to the development of the "piercing the corporate veil"
principle. This principle allows courts to disregard the separate legal status of a company in
certain circumstances, such as when the company is used for fraud or to evade legal
obligations. However, the circumstances in which this principle can be applied are limited and
must be carefully considered on a case-by-case basis.
In summary, the obiter dicta in the Salomon case recognized the benefits of the separate
legal entity principle but also recognized the risks and abuses associated with the use of
multiple corporate structures. The judge's comments have had a lasting influence on the
development of the law.
 This landmark ruling established the principle that companies are separate legal entities,
leading to the widespread adoption of the corporate form as a means of mitigating
individual risk and achieving economic goals through collective investment. It reinforced
the protective barrier that limits shareholders’ financial liability to their investment in the
company, known as the corporate veil. However, the case also opened the door for future
legal review and reform to prevent abuses of the corporate structure, especially in cases
involving fraud, crime, or other manipulative conduct that could harm creditors and other
stakeholders. The Salomon case remains an important reference point in discussions of
corporate law, corporate governance, and the rights and responsibilities of shareholders and
 directors. This decision has stood the test of time, affecting not only UK company law but
also international corporate practices.
3. Carlill v carbolic smoke ball co (1893) 1 QB 256.
a. FACT
The defendant, the “Smoke Ball” medical product manufacturing company, advertised that
they would pay £100 to anyone who caught flu after using their product according to the
instructions supplied with it. 1000 The board was deposited with ALLIANCE BANK, Regent
Street, demonstrating the defendant's good faith in the matter (escrow).
The plaintiff, Louisa Elizabeth Carlill saw the advertisement and bought one of the balls.
The plaintiff used it as directed however, she still caught the flu. The plaintiff therefore claimed
£1000 from company as advertised. However, Carbolic ignored two letters demanding
compensation, so they filed a lawsuit.
At the first instance, Judge Hawkins J of the Court of Queen's Bench held that the facts
established a contract by the defendant to pay the plaintiff in accordance with the
advertisement; that contract was neither a wagering contract nor an insurance policy. The
defendant then appealed to the higher court and was heard by the Court of Appeal.
b. ISSUE
- Was there a contract between Mrs. Carlill and the Smoke Ball Company?
- In the event that a contract exists, is there any binding force between the two parties?
- Was Mrs. Carlill required to give notice of her acceptance of the Carbolic Company's
advertisement?
- Did Mrs Carlill offer any concession in exchange for the £100 offered by the company?
c. RULE
- Rule in Spencer v. Harding Case (1870) LR 5 CP 561.
- Rule in Williams v. Carwardine Case (1833) EWHC KB J44
- Rule in Brogden v Metropolitan Railway Co. (1876–77) LR 2 App. Cas. 666.
- Rule in Gerhard v. Bates (1853)
d. ANALYSIS
In Carlill v. Carbolic Smoke Ball Co (1893), the court applied several key principles of
contract law to decide whether a unilateral contract had been formed. The Carbolic Smoke Ball
Company's advertisement was considered to be a clear offer rather than an invitation to treat.
The company promised a £100 reward to anyone who used the product as directed and still
contracted influenza, a clear and measurable condition. This was a specific offer, and as such, it
was capable of forming a binding contract if the conditions were met.
 Mrs. Carlill accepted the offer by performing the act specified in the advertisement—using
the smoke ball as contracted and contracting influenza. This fulfills the conditions for
acceptance under a unilateral contract, where acceptance is typically made by performing the
act required by the offeror, rather than through a formal declaration. The company argued that
the advertisement was not meant to be taken seriously, but the court found that the deposit of
£1,000 in the bank demonstrated the company's intention to make the offer legal binding. This
deposit provides evidence that the company had a genuine intention to enter into a contract,
fulfilling the requirement of intention to create legal relations.
In practical terms, the Carlill case established important precedents for unilateral contracts,
especially in public advertisements. It emphasizes that offers must be clear and unambiguous to
be enforceable, as vague or uncertain terms could prevent a contract from being formed.
Furthermore, businesses must be aware that if they make clear offers to the public, such as
offering rewards for specific actions, they may be legally bound by those offers once the
conditions are met.
This case remains significant for modern contract law, particularly in cases involving
advertisements. It shows that when an offer is clear, measurable, and made with the intention to
be legally binding, it can create enforceable obligations. As such, companies must be careful
when making offers to the public, ensure that the terms are explicit and the offer is capable of
acceptance through performance.
e. CONCLUSION
The Defendant’s appeal was dismissed, and the Plaintiff was entitled to receive £100. The
Court held that in the absence of clear advertising, the expression relating to the payment of the
bonus was a general advertising gimmick, which was not enforceable. However, in this case,
the Defendant had made reference to the £1,000 deposit in their advertisement, as a way of
showing good faith. Because the Defendant had done so, the Court found that their offer of the
bonus was a promise, supported by their good faith.
f. RATIO AND OBITER
• RATIO
The Carbolic Company advertisement was a unilateral offer to consumers worldwide: The
company's offer was binding even though it did not specify the conditional benefit. It was a
unilateral offer that did not require acceptance because it was made to consumers worldwide.
Lindley referred to the case law “William v. Carwardine” which similarly had decisions based
on offers in advertising with rewards.
 The use of a smoke ball as directed in an advertisement is an element of acceptance: This
was explained in Brogden v. Metropolitan Ry.Co., where if notice of acceptance is required, the
offeror must give such notice at the same time as the condition for acceptance. Justice Bowen
referred to Spencer v. Harding, where a promise made to the public is capable of forming a
contract when a person meets the requirements for performance.
The purchase or use of the smoke ball by consumers clearly demonstrated an exchange of
benefits - one of the main elements constituting the contract, which on the one hand caused a
disadvantage to the Company, on the other hand, more people buying smoke balls from the
advertisement was a benefit to Carbolic.
The fact that the company stated that the £1000 had been deposited with Alliance Bank
shows a serious intention to be legally bound.
 The legal principle is that an advertisement containing certain terms for the receipt of a
reward constitutes a binding unilateral offer which can be accepted by anyone who complies
with its terms. This case is notable for the way the contract was handled and the frivolity of
the advertisement. It was based on the fact that the defendant company advertised that they
would pay £1,000 to anyone who caught influenza after using their product (Carbolic
Smoke Ball) as directed. Mrs Carlill followed the instructions and sued the company for the
reward when they refused to pay. The Court of Appeal held that the advertisement was a
valid offer and that the plaintiff had accepted it by using the product.
• OBIT
Judge Hawkins, J: The advertisement was inserted in the Pall Mall Gazette in large type in
the hope that all who read that magazine would read it and the company also announced that
£1,000 had been deposited with the Alliance Bank could only have been included for the
purpose of making those who read it believe that the company were serious about their
proposal and would fulfil their promise, the advertisement also stated "our sincere intention in
this regard".
Judge Lindley LJ said that the advertisement was not merely an exaggeration because the
Company made a specific statement that "£1,000 was deposited with the Alliance Bank,
demonstrating our sincerity in the matter". This statement clearly showed that the Company's
intention was clear enough when it offered the reward in the first place.
Bowen: A specific notice of acceptance is not necessary in such situations.
Smith explained the meaning in the Carbolic company's advertisement: "When you buy my
smoke ball, and then use it as directed by me, I promise that if you contract influenza within a
certain period of time, I will pay you £100." and to show sincerity, £1000 was deposited in the
Alliance Bank for this purpose.
 Bowen LJ gave a similar legal example of a horse race, where a person placing a bet on a
horse was not required to communicate his acceptance to the bettor. Lindley LJ suggested
that if the advertisement stated that a reward would be given to anyone who merely
purchased the product without using it, there would be no contract because there would be
no consideration. AL Smith LJ observed that if the advertisement was an offer to any person
to perform the condition, then a person could use a smoke ball and then wait until he had flu
before accepting the reward
 The court ruling has influenced English contract law, setting precedent in English and
Australian contracts that an offer can be unilateral – it does not have to be made to a specific
party. The precedent can be seen as a reminder to traders that they are not allowed to make
promises and then break them. The precedent also established that acceptance of such an
offer does not require notice and that when a party purchases the goods and uses them as
directed, the contract is valid. The purchase also represents consideration for the offer and
therefore the contract is legally formed. In particular, the precedent has influenced the
concept of unilateral contracts because companies are now more cautious when advertising
globally. Whenever a company puts out an advertisement, it needs to be careful about the
content and the way it is marketed. The content of the company's advertisement needs to be
carefully censored to avoid being considered a fraudulent advertisement and being subject to
criminal liability. Not only the content, the company's marketing strategy also plays a very
important role because if not carefully calculated, it can cause serious damage to that
company because they can be involved in unnecessary disputes. This is a landmark case in
protecting consumer rights and determining the responsibilities of companies. The case law
is still cited in consumer contract disputes today.
4. Escola v. Coca4. Cola Bottling Co., 24 Cal.2d 453, 150 P.2d 436 (1944).
a. FACT
On March 27, 1940, Gladys Escola, a waitress, was seriously injured when a bottle of Coca-
Cola exploded in her hand. The Coca-Cola bottle had been bottled by the Fresno Bottling Co.
and delivered to the restaurant where she worked. Escola was transferring the bottles to a
refrigerator 36 hours after they had been delivered. She believed the explosion was caused by
excessive pressure or a defective bottle that made it dangerous. The bottle broke into many
sharp pieces, causing deep cuts to her hand. Although the broken bottle was not present at trial
because it was thrown away by another employee, Escola described the condition of the broken
bottle and provided a drawing. One of the Coca-Cola Company drivers testified that he had
seen other bottles explode before and had found the broken piece in storage, but did not know
what caused it. Escola sued Coca-Cola in state trial court, seeking damages because the bottle
may have been defective or contained dangerous pressure. The jury ruled in favor of Escola,
and Coca-Cola appealed to the state Supreme Court.
b. ISSUE
- Can the doctrine of Res ipsa loquitur be used to infer negligence on the part of the
manufacturer in placing a defective product on the market?
- Whether the Defendant is solely liable for failing to inspect the goods which were proven
to be defective causing injury to the Plaintiff?
c. RULE
- Sheward v. Virtue, 20 Cal.2d 410 [ 126 P.2d 345];
- Kalash v. Los Angeles Ladder Co., 1 Cal.2d 229 [ 34 P.2d 481]
- Res ipsa loquitur doctrine “The nature of the matter speaks for itself”
- Prosser on Torts, supra, at page 300.
- McPherson v. Buick Motor Co., 217 NY 382 [111 NE 1050, Ann.Cas. 1916C440, LRA
1916F 696]
d. ANALYSIS
The court applied the principle of strict liability to determine whether Coca-Cola Bottling
Co. was responsible for Ms. Escola’s injuries. Ms. Escola, who was working as a waitress at a
restaurant, was injured when a Coca-Cola bottle exploded while she was holding it.
Importantly, the Coca-Cola bottle was damaged before Ms. Escola used it, and she could not
have noticed any abnormality or defect in the bottle when she received it from the company.
The court found that even though there was no evidence of negligence or recklessness on
the part of Coca-Cola, the company was still liable for the dangerous defect in its product. The
court applied the principle of absolute liability, which meant that Ms. Escola did not have to
prove negligence on the part of the company, but only that its product was defective and caused
the damage. The court held that manufacturers are liable when their products pose a danger to
consumers, because they have the ability to control the quality of their products and are
responsible for protecting consumers from these dangers.
The application of the principle of absolute liability in this case is based not only on the fact
that Ms. Escola could not identify the defect in the product, but also because Coca-Cola was the
only party capable of testing and ensuring that its product was free of defects. This also means
that if an incident occurs, the company is responsible for compensating for damages without
having to prove negligence. Applying this principle in practice has great significance for
protecting consumers. Product liability lawsuits have become more common, especially in
consumer industries, such as food, beverages, and other consumer products. The principle of
absolute liability helps ensure that manufacturers are responsible for producing and providing
safe products to consumers. This has also influenced the formation of product quality control
standards and the rigor in testing products before they are put on the market, in order to
minimize risks to consumers.
e. CONCLUSION
The final judgment is that the Plaintiff, Ms. Gladys Escola, is the winning party and the
Coca Cola Bottling Company is obliged to compensate the following amounts: wages for
injuring Ms. Gladys Escola, resulting in her inability to continue working; compensation for
damage to health; compensation for mental health; and hospital fees so that the Plaintiff can
treat the injuries caused by the Defendant.
f. RATIO AND OBITER
• RATIO
The judge applied the doctrine of res ipsa loquitur throughout his reasoning. In particular, he
agreed with the ruling, but he believed that the manufacturer’s negligence should not be the
sole factor in determining the plaintiff’s right to compensation in cases such as this. In his view,
it is now necessary to recognize that a manufacturer is strictly liable when a product that he
places on the market, knowing that it will be used without testing, is defective and causes injury
to a person. However, even in the absence of negligence, public policy requires that liability be
established wherever it can most effectively mitigate the dangers to life and health inherent in
defective products on the market. The retailer, although not equipped to test the product, is still
absolutely responsible to the customer, because the implied warranties of fitness for the
intended use and merchantable quality include the guarantee of safety of the product. Of
course, the manufacturer's responsibility should be determined in terms of the safety of the
product during normal and proper use, and should not extend to injuries that cannot be traced to
the product once it reaches the consumer.
• OBIT
For the retailer, although not equipped to test the product, is absolutely liable to his
customer, because the warranties of fitness for purpose and merchantable quality include a
warranty of safety of the product. The courts have recognised that the retailer cannot be held
liable for this warranty and have allowed him to recover any loss by the manufacturer's
warranty of safety in sale. However, such a procedure is unnecessarily roundabout and leads to
wasteful litigation. It would be more efficient if the injured person could claim the warranty
directly from the manufacturer. However, usually the direct purchaser is a dealer who does not
intend to use the product himself, and if the warranty is for health and safety purposes, the
authority must be given to someone other than the dealer.
 Here, the Plaintiff can only rely purely on the doctrine of Res ipsa loquitur to sue the
Plaintiff. So if another argument is made, the Judges will not be able to rely on this doctrine
to convict the Defendant because the accident occurred after the Defendant had given full
control of the bottle of water to the Plaintiff, so it cannot be certain that during the 36 hours
it was in the warehouse, there was any agent that affected the bottle of water causing
damage or not. Therefore, the Defendant cannot be held entirely responsible. In addition, the
doctrine of res ipsa loquitur allows for the inference of negligence when an accident occurs
in circumstances where such accidents could not have been foreseen without someone's
negligence. In product liability cases, if the manufacturer has exclusive control over
production and testing, they may be found negligent if a product defect causes injury. Justice
Traynor's concurring opinion suggested that manufacturers should aim for absolute liability
to promote public safety and minimize the dangers from defective products.
5. Dunlop Pneumatic Tire Co Ltd v Selfridge & Co Ltd [1915] AC 847 (26 April 1915)
(House of Lords).
a. FACT
The Plaintiff, Dunlop Pneumatic Tyre Company Limited, entered into a contract with its
dealers requiring them not to sell their products at less than the list price to private customers or
other dealers, and to maintain similar terms in contracts with subsequent dealers. Messrs. A. J.
Dew & Co. entered into a dealership contract with the Plaintiff in 1911, and in 1912 the
Defendant, Selfried Company Limited, entered into a dealership contract with Messrs. A. J.
Dew & Co. stipulating that they would not sell their products at less than the list price.
However, the Defendant breached the contract by selling a Dunlop board at less than the list
price. The Plaintiff sued the Defendant for breach of contract. The trial court ruled in favor of
the Plaintiff, but the Court of Appeal reversed the judgment, holding that there was no contract
between the Plaintiff and the Defendant. The Plaintiff appealed to the Supreme Court.
b. ISSUE
- Was there any contract signed between Dunlop and Selfridge?
- Does Dew & Company contract with the Selfridge dealership within the Dunlop
Pneumatic Tyre Company's dealership footprint?
- Is the dealer selfridge liable for compensation for selling tires at the wrong price to the
company dunlop?
c. RULE
- Basic Principles of Privity of Contract
- Theory of review
- Doctrine of prudence
d. ANALYSIS
 The court applied the principle of privivity of contract to determine the rights and
obligations of the parties to the contract. Specifically, Dunlop entered into a contract with
Selfridge for the supply of tires, which included a provision that if Selfridge sold the tires
below the agreed price, they would be liable for a penalty. However, the problem arose when
Selfridge sold the tires to a third party, who in turn sold the tires at a lower price, in violation of
the terms of the contract.
Dunlop, which was a party to the contract with Selfridge, sought to enforce the penalty
clause against a third party, even though it was not a party to the contract. However, the court
applied the principle of privity of contract, deciding that Dunlop had no right to enforce the
contractual clause against the third party because it was not a party to the original contract.
Both Selfridge and Dunlop were parties to the contract, but the third party had no direct
contractual connection with Dunlop and therefore could not be compelled to comply with the
terms of the contract between Dunlop and Selfridge.
In practice, this means that in commercial contracts, parties must be careful when setting out
terms that may affect third parties, as they cannot require third parties to perform their
contractual obligations without express agreement between the parties. For example, in
distribution or supply contracts, if there are price terms, parties should be aware that these
terms can only be enforced against the parties to the contract, unless there is express agreement
by the third parties to be responsible for those terms.
The Court also stressed that if contractual terms are to be enforceable against third parties,
the parties to the contract need to establish a clear agreement, either through terms agreed to by
the third parties involved or through additional contracts such as guarantees, or other forms of
commitment.
e. CONCLUSION
The House of Lords concluded that Dunlop Pneumatic Tire Co Ltd could not enforce the
penalty clause against Selfridge & Co Ltd's third-party buyer because of the privity of contract
rule. The court affirmed that only the parties to the contract (Dunlop and Selfridge) had the
right to enforce the terms, and third parties were not bound by or able to enforce the contract
terms.
f. RATIO AND OBITER
• RATIO
The Lords Court affirmed the principle of privivity of contract, according to which only parties
to a contract can sue for breach of contract. Specifically, Dunlop, a tire supplier, entered into a
contract with Selfridge, requiring Selfridge not to sell tires below the agreed price. However,
Selfridge sold the tires to a third party, and this third party continued to breach the price clause in
the contract. Dunlop attempted to sue the third party for breach of price clause, but the Lords
Court decided that the third party was not a party to the contract between Dunlop and Selfridge, so
Dunlop had no right to sue for breach of contract. This judgment emphasized that only parties
directly involved in a contract can demand performance or sue for breach of contract, protecting
the principle that legal rights belong only to the parties involved in the contract.
The Court also noted that the only exception to the privivity principle is when a contracting
party acts as an agent for an unnamed party. In this case, the unnamed party can be sued for breach
of contract, even though they did not directly enter into the contract with the demanding party.
However, in this case, there was no involvement of an agent or an unnamed party, and there was
no agreement between the parties to extend contractual liability to a third party. Therefore, the
Court did not apply this exception and upheld the ruling that only the contracting parties can sue
for breach of contract. This reinforces the principle that contracts are only valid between the
contracting parties and protects the interests of the parties directly involved in the contractual
relationship, while limiting the extension of liability to parties who are not formally involved.
• OBIT
Lord Parmoor made an important observation in the obiter dictum, in which he emphasized that
"a person cannot claim to be a party to a contract, unless this is in accordance with the terms of the
contract itself." This observation reflects Lord Parmoor's view of the principle of privivity of
contract, in which only those parties directly involved in a contract have legal rights and
obligations under that contract.
Lord Parmoor explained that parties to a contract must comply with the terms they have entered
into. If a party is not a party to the contract or is not formally involved in the conclusion of the
contract, they cannot assume any rights or obligations under the contract. This means that although
they may indirectly benefit from the contract, third parties cannot ascribe to themselves the right to
enforce the terms of the contract unless there is a formal and agreed participation in the contract.
This is an affirmation of the binding nature of the terms of the contract on the parties, and also
a protection of the rights of the parties under the original contract. This was clearly demonstrated
in the case where the Lords Court decided that Dunlop could not sue a third party for breach of
contract without the formal participation of that third party. Lord Parmoor's judgment reinforces
the principle that contractual rights cannot be automatically transferred to a party outside the
contract without prior consent or agreement.
 It can be seen that the case of Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd
established the principle of privity of contract. Privity is a doctrine in English contract law
that governs the relationship between parties to a contract and other parties or agents. At its
 most basic level, the rule is that a contract cannot confer rights or impose obligations on
anyone who is not a party to the original agreement, i.e. a "third party". This was not the
first case to apply this principle. Historically, third parties could enforce the terms of a
contract, as demonstrated in Provender v Wood, but the law changed in a series of cases in
the 19th and early 20th centuries, and the 1861 case of Tweddle v Atkinson is one of the
most famous examples of this principle. However, there are still many who argue that this
doctrine is unfair. where the parties to the contract clearly intended it to be enforced by a
third party, and it was applied so inconsistently that it gave no firm rule and was considered
unfair. hence "bad" law. Therefore, with the passing of the Contracts (Rights of Third
Parties) Act 1999 on 11 November 1999, the doctrine was significantly changed and it now
allows a third party to enforce the terms of a contract if the third party is specifically
authorised by the contract to do so or if the contract terms are "intended to benefit" such a
third party
6. Regal (Hastings) v Gulliver [1942] 1 All ER 378, (House of Lords).
a. FACT
Regal was founded in 1933 with a capital of £20,000 and owned the Regal Cinema in
Hastings. In July 1935, Regal formed a subsidiary company, Amalgamated, to lease two new
cinemas in Hastings and St. Leonards. On 2 October 1935, the directors received an offer to
buy the Regal Cinema and the lease back to the two cinemas for £92,500, and accepted the
offer. On 7 October, Amalgamated officially leased the two cinemas for £5,000, with Regal
holding £2,000, and the directors and outside investors owning the remainder. On 24 October,
the directors sold 3,000 shares of Amalgamated for £3 16s 1d each, making a profit of £2 16s
1d. The transfer of the company was then made official. The company sued the directors and
the company's solicitors, claiming £8,124 - the profit from the sale of the shares.
b. ISSUE
Did the board members breach their fiduciary duty to Regal?
c. RULE
- Keech v Sandford (1726)
- Ex parte James (1802)
- Hamilton v Wright (1842)
- Aberdeen Railway Company v Blaikie (1853)
- Imperial Hydropathic Company v Hampson (1882)
- Forest of Dean Coal Mining Co (10 CD 450)
- Fraue Electric Co (40 CD141)
- Parker v. McKenna (LR 10 Ch. 96)
 - Imperial Mercantile Credit Association v Coleman
- Huntington Copper Co v Henderson
d. ANALYSIS
In this case, Regal (Hastings) Ltd. established a subsidiary, Amalgamated, and the directors
of Regal, including Gulliver, held shares in Amalgamated. They sold shares in Amalgamated,
which resulted in a personal profit, but they did not seek the approval of Regal's shareholders
for this transaction. The directors argued that their actions were justified, as the sale of shares
ultimately benefited Regal in the long term. However, this argument did not account for the fact
that the directors had personally profited from the transaction, which could have been avoided
if they had acted solely in the best interests of Regal. The directors' actions were seen as a
breach of their fiduciary duty because the profit from the sale of shares in Amalgamated was
not for Regal but for themselves. Fiduciary duty requires that directors act in the best interests
of the company and avoid situations where their personal interests might conflict with the
interests of the company. Here, the directors were using their position to benefit personally
from the sale of the shares, which was a direct conflict with their obligation to the company.
The case emphasizes that directors must ensure that any profit made through their position is
for the benefit of the company, not themselves.
The House of Lords held that the directors should have guaranteed that Regal received the
profit from the sale of shares in Amalgamated. Since the directors failed to do this, they were
found responsible for the profits they made. This decision underscores the importance of
transparency and accountability in corporate governance, especially in situations where the
directors' personal financial interests might conflict with those of the company they serve. The
directors' failure to act in the best interests of Regal violates the principles of good governance
and fiduciary responsibility.
In practical terms, this case sets an important precedent for how directors must handle
situations where personal and company interests might intersect. Companies and their boards of
directors must be vigilant to avoid conflicts of interest and must always ensure that any
personal gains made from their role as directors are justified by proper authorization from
shareholders. This case serves as a reminder that the duty of loyalty to the company is
paramount, and directors must prioritize the company's interests over personal financial gain.
e. CONCLUSION
The House of Lords concluded that the directors had indeed breached their fiduciary duty by
profiting personally from the sale of shares in Amalgamated, and they were charged to account
for the profits made. The directors had failed to act in the best interest of Regal (Hastings) Ltd.,
and the personal profit they made from the sale of shares was not justifiable under the
circumstances. The case reinforces the principle that directors must not profit from their
position without the express consent of the company.
f. RATIO AND OBITER
• RATIO
Directors' Fiduciary Duty: Directors owe a fiduciary duty to the company, which requires
them to act in the best interests of the company at all times. This includes avoiding any conflict
of interests where their personal interests conflict with the interests of the company.
Profits from Directorial Position: If a director makes a personal profit through their position
or any transaction involving the company, that profit belongs to the company unless the
shareholders explicitly approve it. A director cannot personally benefit from their position
without the consent of the company, and such profit must be accounted for by the director.
Breach of Fiduciary Duty: The sale of shares in Amalgamated by the directors, which
resulted in a personal profit, without approval from the company's shareholders, was a breach
of their fiduciary duty to Regal. The directors were required to ensure that the profit made from
the transaction would go to the company and not to themselves.
This case reinforces the principle that directors must not allow their personal financial
interests to conflict with their duties to the company, and any profit derived from the company's
business must be for the benefit of the company unless shareholders approve otherwise.
• OBIT
Personal Benefit and Conflict of Interest: While the key issue in the case was whether the
directors breached their fiduciary duty, the Lords observed that even if the directors' actions had
ultimately benefited the company in the long run, this would not have justified their personal
profit from the transaction. The court emphasized that a director's personal financial gain from
a corporate transaction, even if beneficial to the company, is not permissible without the
company's consent.
The Standard of Disclosure: The Lords also discussed the importance of full disclosure and
transparency in situations where directors stand to benefit personally. They noted that the
directors had failed to inform the shareholders of their personal financial interest in the
transaction and had not sought approval from them. This implies that directors must disclose all
relevant facts and seek the necessary authorization from shareholders when their actions could
result in personal gain.
The Extent of Liability: Another observer commented concerning the extent of the liability
of the directors. While the primary issue was whether the directors should account for the
profits, the Lords indicated that directors could be liable for any profits made from their actions
if it was not properly disclosed and authorized, even if the company had not suffered a financial
loss.
These obiter comments helped clarify the broader implications of fiduciary duties,
disclosure, and personal gain in corporate governance, extending the principles beyond the
specifics of the case itself. While not binding, these remarks provide important guidance on
how directors should conduct themselves to avoid conflicts of interest and uphold their
responsibilities to the company.
 The case of Regal (Hastings) v Gulliver highlighted the fiduciary duty of directors to their
companies, requiring them to act in the best interests of the company and avoid conflicts of
interest. The House of Lords ruled that directors cannot make personal profits from
company transactions without shareholder approval, even if the transactions may be in the
long-term interest of the company. However, it could be argued that if the directors prove
that the transaction was genuinely beneficial to the company and there was no intention to
gain personal gain, the Court may decide differently. Applying this to a hypothetical
situation, if a director sells shares without notice or shareholder approval, they may still be
required to repay their personal profits, but if they prove that the transaction is in the
company’s significant interest, the outcome may be different. This case provides an
important lesson that directors must always be transparent and seek shareholder approval
before making transactions that may create personal benefits.