CONTRACT-I
– Definitions –
Q. 1. What do you mean by a contract? Define it and mention its essential characteristics.
Or
“An agreement enforceable by law is a contract”.
Or
“All contracts are agreements but all agreements are not contracts”.
Or
What are the essential elements for formation of a contract?
Ans. Definition of Contract. – According to Salmond, “Contract is an agreement creating and defining obligations between parties.”
Similarly, Sir Fredrick Pollock has defined the word “contract” as follows:-
“Every agreement and promise enforceable at law is a contract.”
Anson has defined the word ‘contract’ in the following words:
“A contract consists in an actionable promise or promises. Every such promise involves two parties, a promisor and a promisee, and an expression of a common intention and of expectation as to the act or forbearance promised.”
A similar definition has been given under the Indian Contract Act, 1872. Section 2 (h) of the Act defines contract in these words: “An agreement enforceable by law is a contract”.
It is an agreement made between two or more persons which is intended to be, and is, enforceable by law. It is constituted by the acceptance by one party of an offer made to him by the other party to do or to abstain from doing an act. An offer when accepted becomes a promise and it is the contract when there is legal obligation to perform the “promise”.
Essential elements of a contract
It follows from the definition provided under Section 2 (h) of the Indian Contract Act, 1872 that there are two main elements of a contract:
(1) There must be an agreement, and
(2) Such agreement must be enforceable at law
1. Agreement. There must be an agreement between the parties. The word “agreement” is defined under Section 2 (e) of the Indian Contract Act, 1872. Section 2 (e) provides: “Every promise and every set of promises, forming the consideration for each other, is an agreement.”
Section 2(b) of the Indian Contract Act, 1872 defines the word “promise”. It provides: “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”
Thus, an ‘agreement’ is a bilateral transaction between two or more than two persons which involves proposal or offer by one and acceptance of such proposal by the other. In other words, it requires ‘plurality of persons’ because a single person cannot enter into an agreement with himself.
Thus, agreement = Proposal + Acceptance.
2. Agreement must be enforceable by law. Section 10 of the Indian Contract Act deals with the conditions of the enforceability of an agreement in law. It provides: “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.”
The second para of the Section 10 further says-
“Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by whien any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.”
There cannot be a contract without an agreement but all agreements are not contracts.
Ingredients of Contract. According to Section 10 of the Indian Contract Act, following conditions must be essential to become a contract valid:-
(a) The parties must be competent to contract [Section 11]. The parties should be of the age of majority and of sound mind and nol disqualified from contracting by any law to which they are subject According to Section 11 of Indian Contract Act, “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.” Thus, the following persons are no competent to contract-
(1) Minors;
(2) Persons of unsound mind; and
(3) Persons disqualified from contracting by any law to which the are subject.
(b) The agreement must have been made by the free consent of the parties [Sections 13-22]. The parties to the agreement must have agreed to something in the same sense and the consent of a party must not have been obtained by (i) coercion, or (ii) undue influence, or (iii) fraud, or (iv) misrepresentation, or (v) mistake.
(c) The agreement must be for a lawful consideration and with a lawful object [Section 23]. Consideration or object is said to be unlawful if-
(i) it is forbidden by law, or
(ii) it is of such a nature that, if permitted, it would defeat the provisions of any law, or
(iii) it is fraudulent, or
(iv) it involves or implies an injury to the person or property of another, or
(v) the Court regards it as immoral, or opposed to public policy.
(d) The agreement must be made for some consideration [Section 25].-Section 25 declares that an agreement made without consideration is void. However, there are certain exceptions enumerated under Section 25 itself under which a contract without consideration is treated to be a valid one.
Exceptions to consideration. An agreement without consideration is void-
(1) unless it is in writing and registered; (Section 25)
(ii) a promise to compensate for something done; (Section 25)
(iii) promise to pay a time-barred debt. (Section 25)
(e) The agreement must not have been expressly declared to be void. Under this Act, the following agreements are declared void-
(i) Where both the parties to an agreement are under a mistake of fact essential to the agreement (Section 20); or
(ii) an agreement without consideration (Section 25); or
(iii) an agreement in restraint of the marriage of any person other than minor (Section 26); or
(iv) an agreement in restraint of trade (Section 27); or
(v) an agreement in absolute restraint of judicial proceeding (Section 28); or
(vi) an agreement the meaning of which is uncertain and incapable of being made certain (Section 29); or
(vii) an agreement by way of wager (Section 30); or
(viii) an agreements contingent on impossible events (Section 36); or
(ix) an agreement to do an act which is impossible in itself or which subsequently becomes impossible without any default of a party (Section 56).
(f) Requirements under any other law. An agreement must fulfit the requirements or formalities necessitated by any particular law. An agreement must be in writing, attested and registered, if so required by any law in force in India and is not to be enforceable without compliance requirement e.g..
(i) agreement for transfer of immovable property is required to be written and registered (Section 17 of the Registration Act, 1908)
(ii) agreement to refer the matter to an arbitrator in case of disputes. must be reduced to writing.
Q. 2. Define the following:
1. Proposal
2. Acceptance
3. Promise
4. Consideration
5. Agreement
6. Contract
7. Consideration and object of an agreement -Unlawful
8. Voidable Contract
9. Void Agreement
10. Unenforceable agreement
Ans.
1. Proposal
Section 2 (a) of the Indian Contract Act, 1872 defines the term “proposal”. It provides:
“When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.”
Essentials of a valid proposal. – The following essential elements are necessary for a valid proposal –
(a) Proposal must be communicated.
(b) It must be made with a view to create legal relations.
(c) It must be certain and definite.
Illustration. A wants to sell his watch for Rs. 100 and for this purpose he expresses his willingness to B, so that B may purchase it. Hert expression of A’s willingness is a proposal.
The word ‘proposal of the Indian Contract Act is synonymous to the term ‘offer of the English law.
2. Acceptance
Section 2 (b) lays down the definition of the term “acceptance” as follows:
“When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.”
Essentials of acceptance. – Essentials of acceptance are the following:
(i) Communication. – Acceptance must be communicated by the person to whom the proposal is made or by a person authorised by him. According to Section 4 of the Act,-
“The communication of an acceptance is complete, as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor; as against the acceptor, it is complete when it comes to the knowledge of the proposer.”
(ii) To a person having right. Communication of acceptance must be made only to proposer or to the person having right to receive the acceptance.
(iii) Acceptor having knowledge of proposal. Acceptor must have knowledge of the proposal.
(iv) Acceptance to be absolute. Acceptance must be absolute and unconditional.
(v) Acceptance within reasonable time. Acceptance must be made within the time prescribed by the proposer or within a reasonable time.
(vi) Acceptance before lapse of proposal.-Acceptance must be made before lapse of proposal.
(vii) Mode of acceptance. Where the proposer prescribes a mode of acceptance, it has to be followed. If the mode is not prescribed, it should be accepted in some usual and reasonable manner.
3. Promise
Section 2(b) of the Indian Contract Act, 1872 defines the term “promise” as follows:
“A proposal, when accepted, becomes a promise.”
The person making the proposal is called the promisor, and the person accepting the proposal is called the promisee.
Thus, a proposal becomes promise only when it is accepted. Thus, a promise has two essentials-
(i) Proposal, and
(ii) Acceptance.
Illustration.- “A promises to pay Rs. 1000 if B does some work for A.” It is only a proposal by A to B to give assent to it or not. When B gives his assent, the proposal becomes promise. Prior to B’s assent it is only a proposal. Here A is the promisor and B the promisce.
4. Consideration
Section 2(d) of the Indian Contract Act, 1872 defines the term “consideration” as follows:
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does, or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”
Essentials of consideration. – From the above definition following essential ingredients may be deduced:
(i) The act or abstinence must be done at the desire of the promisor. An act done at the desire of a third person will not constitute a good consideration.
(ii) The consideration may be given by the promisee or any other person.
(iii) The consideration may be either past, present or even future.
5. Agreement
Section 2(e) of the Indian Contract Act, 1872 defines the term “agreement” as follows:
“Every promise and every set of promises, forming the consideration for each other, is an agreement.”
Thus, it is clear that there are two essential elements of an agreement-
(a) proposal, and
(b) acceptance.
An agreement not enforceable by law is said to be void. But an agreement which is enforceable by law is a contract. Again, an agreement which is enforceable by law at the option of one or more of the parties thereto is a voidable contract. Thus, every contract is an agreement, but the converse of this may not be true.
6. Contract
Please Refer Q.1,
7. Consideration and object of an agreement unlawful
Section 23 of the Indian Contract Act, 1872 provides:
The consideration or object of an agreement is lawful unless:
(i) it is forbidden by law, or
(ii) is of such a nature that, if permitted, it would defeat the provisions of any law, or
(iii) is fraudulent, or
(iv) involves or implies injury to the person or property of another,
(v) the Court regards it immoral or opposed to public policy. It is further provided that:
“In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.”
8. Voidable Contract
Section 2(i) of the Indian Contract Act, 1872 defines the term “voidable contract.” It provides:
“An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.”
A voidable contract is a result of absence of free consent. This lack of free consent may be due to coercion, undue influence, fraud or misrepresentation. A voidable contract is valid and enforceable until it is repudiated by the party who is entitled to avoid it. However, the party is entitled to repudiate the contract is not bound to avoid it, he may affirm it, in that case the other party remains bound to carry it on. Therefore, if the party entitled to avoid the contract does not avoid it, it becomes a valid contract.
Illustration. – A induces B to enter into a contract with him by fraud. Here the contract is voidable at the instance of B and B may set it aside. If B does not avoid it, A is bound by the contract.
9. Void Agreement
Section 2 (j) of the Indian Contract Act, 1872 defines the term “void agreement”. It provides:
“An agreement not enforceable by law is said to be void.”
Thus, in case of a void agreement, there does not arise any legal right or obligation.
Illustration. – A makes an agreement with B to purchase smuggled opium. The consideration and object of this agreement is unlawful and, therefore, it is void ab initio and cannot be enforced.
An agreement is void when it is altogether destitute of any legal effect. A void agreement has no legal effect at all. There are various agreements which are declared void on the ground of morality, social considerations, impracticability or because they are opposed to public policy.
For example, when both parties to an agreement are under a mistake of as to a matter of fact essential to the agreement, the agreement is void (Section 20).
A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact The agreement is void.
10. Unenforceable Agreement
Section 2(h) of the Indian Contract Act lays down, “An agreement enforceable by law is a contract”. Thus, an agreement which is not enforceable by law is unenforceable. A void agreement and an illegal agreement are not enforceable by law. Therefore, these agreements are unenforceable agreements.
For studying distinction between void agreement and illegal agreement, please refer to Question No. 3 (1).
Distinctions
Q. 3. Distinguish between the following:
1. Void agreement and Voidable Contract.
2. Void Agreement and Illegal Agreement.
3. Agreement and Contract.
4. Executed and Executory Contract.
5. Offer and an Invitation of Offer.
Ans. 1. Distinction between Void Agreement and Voidable Contract.
Void Agreement
1. An agreement not enforceable by law is void.
2. A void contract cannot be converted into a valid contract at the option of the parties thereto.
3. It is rigid in nature.
4. It has no effect from very beginning.
5. Anything obtained under a void contract cannot be validly transferred to a third party.
6. When a contract is shown to be void, it can create no legal rights. It is nullity.
Voidable Contract
1. An agreement not enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.
2. A party at the option of which a contract is voidable can give effect to such contract.
3. It is flexible in nature.
4. It is not void abinitio (from the very beginning) and remains so until one of its parties chooses to avoid it.
5. Anything obtained under a voidable contract can be transferred to a third party, provided that party entitled to declare the contract, void has not already done so and the transferee has received it without any notice of it.
6. A voidable contract is not a nullity. When the party entitled to avoid the contract does not avoid it, it creates legal rights.
2. Distinction between Void Agreement and Illegal Agreement
Void Agreement
1. All agreements are not void ab initio, these may become void subsequently.
2. An agreement is void either because of incompetence of the parties or want of consideration or want of free consent.
3. Void agreement includes illegal agreement also.
4. Collateral contracts are valid. [Rajat Kumar Rath V. Government of India, AIR 2000 Ori. 32]
Illegal Agreement
1. These are void ab initio.
2. An agreement is illegal if the object or consideration of it is unlawful.
3. Every void agreement is not illegal.
4. Collateral contracts are illegal. [Rajat Kumar Rath V. Government of India, AIR 2000 Ori. 32.]
In Deep Narain Singh v. Nageshwar Prasad, AIR 1930 All I (FB), the Full Bench of the Allahabad High Court observed, “There is a clear distinction between an agreement which may be forbidden by law and one which is merely declared to be void. In the former case, the legislature penalises or prohibits it. In the latter case it merely refuses to give effect to it.”
3. Distinction between Agreement and Contract
Agreement
1. Legal relationship does not arise from every agreement.
2. Every agreement is not a contract.
Contract
1. Legal obligations necessarily arise out of every contract.
2. Every contract is necessarily an agreement.
4. Distinction between Executed and Executory Contracts
Executed Contract
1. A contract is said to be executed, when it has been performed wholly on the one side.
2. Executed contract is that where consideration has already been executed.
3. Executed contract of sale creates right in rem.
4. Executed contract can be discharged by substitution of a new agreement.
Executory Contracts
1. An executory contract is one which is either (1) wholly unperformed or (2) there remains something to be performed by both the sides.
2. The executory contract is that where the consideration is to be performed in future.
3. Executory contract of sale creates right in personam.
4. Executory contract can be discharged by mutual consent.
5. Distinction between Offer and Invitation to Offer
Offer
1. Proposal or offer means signifying his willingness by a person to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence.
2. Proposal gives rise to legal obligation.
3. Proposal when accepted becomes binding.
Invitation to Offer
1. Invitation to offer is a stage anterior to the offer.
2. No legal obligation is created by it.
3. Legal obligation does not arise from invitation to offer.
Proposal or Offer
Q. 4 (a) Define Offer (proposal) and discuss its characteristics, and also state, what do you mean by an invitation to offer ?
Or
Explain that an offer must be capable of creating legal relations. Describe various kinds of proposals.
Ans. Definition of Proposal or Offer. – The word ‘proposal’ is defined in Section 2 (a) of the Indian Contract Act, 1872.
According to Section 2 (a) of the Act:
“When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.”
The word “proposal” of the Indian Contract Act is synonymous to the term “offer” of the English Law It must not be assumed that every statement of a person’s intention or of the nature of a declaration of his willingness to enter into negotiations will amount to a proposal.
Anson says that an offer must be distinguished from a statement of intention for an offer imports a willingness to be bound to the party to whom it is made Thus, if ‘A’ says to X. “I mean to sell one of my sheep if I can get £ 5 for it.” this is a mere statement which does not admit of being turned into an agreement; but if A says to X. “I will sell you whichever of my sheep you like to take for £ 5.” there is an offer. Anson again says that there must be something that can amount to an actual offer which is something more than a mere willingness to treat.
Invitation to Offer:
Meaning. A mere statement of intention made in conversation will not constitute a binding promise. To constitute an offer, the words used must be distinguishable from mere invitation to transact business and from ordinary advertisement. A catalogue of goods for sale is not a series of offer but only an invitation for offer. A mere reply to a query as to price does not constitute proposal to sell at the price stated. A statement of the lowest price made in answer to an enquiry is not an offer but only an invitation to offer.
Therefore, invitation to offer and offer both are different things and they are two distinct stages of an agreement. Invitation to offer is stage anterior to the offer.
Illustration.- A, who is a dealer in wax-works, displays in his shop window a waxen effigy of a famous film actor with poster prescribed with words ‘Price Rs. 600’. B walks inside the shop and puts Rs. 600 on the counter and demands the effigy. A refuses. B cannot compel A because the inscription ‘Price Rs. 600’ is only an invitation for offers and not an offer in itself whose acceptance creates a legally binding contract.
In Harvey v. Facey, (1893) AC 552, H telegraphed “Will you sell us Bumper Hall Pen? Telegraph lowest cash price.” F telegraphed in answer: “Lowest price for Bumper Hall Pen £ 900.” H telegraphed: “We agree to buy Bumper Hall Pen for £ 900 asked by you. Please send us your title-deeds.” No answer was sent to this last telegram. It was held that there was no contract. H in the first telegraph asked two questions: (i) “Will you sell? And (ii) What is the lowest price.” In answer F did not say, “I will sell for f 900”. He only answered the second question. So, H’s telegram is really the offer to pay £ 900 and his offer was for F to accept or not.
In Macpherson v. Appanna, 1951 SCR 161, the plaintiff made an offer to the agent of the defendant to purchase a house of the defendant for Rs. 6,000/- and said that he was ready to consider even a higher price. The agent conveyed to the defendant who said to his agent that he would not accept less than Rs. 10,000/- as price of the house. When the agent informed the plaintiff, the plaintiff wrote to the agent accepting the amount to be paid as price of the house but the defendant prior to it sold the house to another party. The plaintiff’s action failed. The Supreme Court approved Harvey v Facey. (1893) AC 552 and held, that as a mere statement of the lowest price at which the vendor would sell did not amount to any implied contract to sell at the price to the person making the enquiry. The defendant’s cable informing his agent of the lowest price could not be treated as a counter-offer capable to be accepted resulting in a concluded contract.
Essentials of Offer (Proposal)
The following are the essentials of proposal-
1. Offer is expression of willingness. – Offer is an expression of willingness to another to do or to abstain from doing something with a view to obtain the assent of that other. An offer may be made orally or in writing or by conduct [Gaddar Mal v. Tata Industrial Bank Ltd., (1957) 49 All 6741. Automatic weighing machines are very apt examples for offers made by conduct. The owner of the weighing machines by his conduct of putting the weighing machine at some public place, makes an offer, though neither in writing nor orally.
2. Offer should be capable of creating legal relations. – An offer may be one which is capable of creating legal relations; a mere statement of intention made in the course of conversation will not make an offer, for example, invitation to dinner, etc.
In Balfour v. Balfour, (1919) 2 K. B. 571, the defendant was employed in Ceylon. He along with his wife went to England to enjoy the leave. At the expiry of the leave, his wife was advised to stay in England on account of her health. The defendant promised to pay £ 30 every month to his wife for her maintenance. After some time, he stopped paying it. Lord Atkins rejected her claim and held that there was no contract because parties did not intend that they would be attended by legal consequences.
While rejecting her claim, Lord Atkin observed, “there are agreements between parties which do not result in contracts within the meaning of that term in our law. The ordinary example is where two parties agree to take a walk together, or where there is an offer and acceptance of hospitality. They are not contracts because parties did not intend that they shall be attended by legal consequences.”
In Rose and Frank Co. v. Cromption Bros., (1923) 22 Κ. Β. 261, regarding the test to determine as to whether the parties intended to create legal relation, Lord Atkin held-“To create a contract there must be a common intention of the parties to enter into legal relations mutually communicated expressly or impliedly.”
Anson observed, “The intention of the parties is a matter of inference from their conduct and the inference is more or less easily drawn according to the circumstances of cases.
In State of Gujarat v. Mis. Variety Body Builders. AIR 1976 SC 2108. the Supreme Court held-“The intention has to be primarily gathered from the terms and conditions which are agreed upon by the parties.”
3. Offer must be precise and definite. It is necessary that the proposal must be unambiguous and clear. If it is uncertain, it is not a valid proposal.
Section 29 of the Contract Act provides, “Agreements, the meaning of which is uncertain, or capable of being made certain, are void.” For example, A agrees to sell to B hundred tons of oil. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. [Illustration (a) to Section 291
4. An offer is different from invitation to offer. An offer is not the same thing as an invitation to offer. They are different. Invitation to offer is a stage anterior to the offer. Mere invitation to offer does not create any legal obligation.
A catalogue of prices is not an offer but a mere invitation to offer. Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd.. (1952) 2 QB 7951.
“A statement of the lowest price made in answer to an enquiry as to the lowest price for cash is not an offer but only evidence of willingness to treat.”
In Harvey v. Facey, (1893) AC 552, H telegraphed: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price”. F telegraphed, in answer, “Lowest price for Whiteacre £ 900′. H telegraphed: “We agree to buy Whiteacre for £ 900 asked by you. Please send us your title deeds.” It was held that there was no contract for H in his first telegram put two queries: (i) Will you sell? and (ii) What is the lowest price? In answer F did not say, “I will sell for £ 900”. He only answered the second question, so H’s second telegram is really the offer to pay £ 900 and it was for F to accept or not.
5. Offer may be made either to a specific person or persons or to the public at large. An offer may be made to a specific person or to specific persons or to public at large. An offer made to the public at large is a general offer. General offers are made by advertisements. The advertisement offering a specific reward for a lost dog to the finder is an example of offer to the general public. A general offer may be made but it can be accepted only by that person who acts according to the terms of the offer.
In Carlill v. Carbolic Smoke Ball Co.. (1893) 1 QB 256, the Carbolic Smoke Ball Company prepared a medical preparation called “The Carbolic Smoke Ball” and advertised reward of £ 100 to any person who contacted influenza, cold, etc., after having used the ball three times daily for two weeks. For the facility of the customers, a sufficient amount of the money had been deposited by the company in the bank to show the sincerity in the matter. A lady named Carlill used it in the manner and period specified even then she contracted influenza. She demanded that money and when she was refused she filed a suit. It was held that all the elements necessary to form a binding contract enforceable in the eye of law were present, and that the plaintiff, the lady, was entitled to the amount stated in the advertisement
In India, Section 8 of the Contract Act provides :
“Performance of the conditions of a proposal, or acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.”
Thus there may be a general offer or an offer can be made to the whole world, but it becomes a contract only when a specific person comes forward and accepts it or performs the conditions of the offer.
6. An offer must be communicated. A proposal must be communicated. Communication may be made either by words or by conduct. According to Section 4 of Indian Contract Act, 1872 the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. No one can accept a proposal who is unaware of it.
In Lalman Shukul v. Gauri Dutt. (1913) || ALJ 489, the defendant’s nephew absconded. The plaintiff who was defendant’s munim was sent to search for the missing boy. In the meantime, the defendant issued hand bills offering Rs. 500 to the man who found out the boy. The plaintiff did not know of the offered reward but traced the boy and on hearing about the reward claimed it. The Court held-“The plaintiff had undertaken the duty of searching for the boy before the reward was offered. In order to constitute a contract, there must be an acceptance of the offer and there can be no acceptance unless there is a knowledge of the offer.” An act done by a person ignorant of the offer does not amount to performance of the conditions of the offer.
Acceptance
Q. 4. (b) What is acceptance? What are the essentials of a valid acceptance?
Or
“Acceptance of Proposal must be absolute and unqualified.” Explain and illustrate this statement.
Or
“Acceptance of offer finalises the agreement.” Comment. Does silence amount to acceptance of an offer?
Or
“Acceptance is to offer what a lighted match is to train of gun powder” (Anson). Discuss.
Ans. Definition of Acceptance. After an offer has been made, the next important stage in the formation of contract is that of acceptance. It is so important stage that William Anson has remarked about it-“Acceptance is to offer what a lighted match is to a train of gun powder”.
An offer creates no legal rights or duties unless it has been accepted. It is the acceptance which converts an offer into a contract.
“Acceptance” has been defined in Section 2 (b) of the Contract Act in these words:
“When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise
Acceptance may be express or implied. An acceptance made by spoken or written words is known as express acceptance. If it is made by conduct, it is known as implied acceptance. For example, where a person boards a train or bus, he impliedly accepts to pay usual fare.
Essentials of Acceptance
An acceptance to be binding must fulfil the following essential conditions:-
(1) Acceptance must be communicated. An acceptance to be binding must be communicated. Mere intention to accept or even a mental resolve to accept a proposal does not give rise to a contract. There must, also, be some overt or external manifestation of the intent by speech, writing or other act.
In Felthouse v. Bindley. (1863) LT 836, ‘A’ wrote a letter to his nephew ‘B’ offering to buy his horse for £33,15s. He also wrote in his letter, if I hear no more about him I shall consider the horse mine at £33.15s. The nephew told his auctioneer not to put the horse for sale as he had sold it to his uncle. The auctioneer due to some mistake sold the horse to another person. However, the nephew, did not give any reply to his uncle. The Court held that since the nephew did not communicate his acceptance, no contract took place between ‘A’ and ‘B’. Mere silence of the nephew would not constitute acceptance.
The Court also held that the communication of acceptance must be made to the offerer himself or his agent. The communication of acceptance to stranger will not be a valid communication.
Where offer made by bidder was merely accepted but no communication of acceptance was made, the contract did not come into being in the absence of communication of acceptance. U.P. Avas Evam Vikas Parishad v. Om Prakash Sharma, (2013) 5 SCC 182]
In Bhagwandas v. Girdhari Lal & Co.. AIR 1966 SC 543, the Supreme Court observed:-
“Even if the offeree has made up his mind to a final acceptance the agreement is not yet complete. There must be an external manifestation of assent, some word spoken or act done by the offeree or by his authorised agent which law can regard as the communication of the acceptance to the offerer.”
(2) Communication of acceptance must be by a person who has authority to accept.-A communication of acceptance to be valid, must be either by the offeree himself or by his authorized agent. A communication of acceptance by any other person will not be valid.
In Powell v. Lee, (1909) 99 LT 284, the Board of Managers of a school passed a resolution selecting ‘A’ for the post of Headmastership. The decision about his selection was not communicated to him. One of the managers in his individual capacity, informed him of the said resolution. Subsequently, the Board of Managers rescinded the decision. On an action of ‘A’ for breach of contract, the Court held-No contract was concluded because a communication of acceptance to be valid must be made by the offeree himself or his authorised agent. The communication by an unauthorised person would not be valid.
(3) Acceptance must be absolute and unqualified and must correspond to the terms of the offer. According to Section 7 (1) of the Contract Act in order to convert a proposal into a promise the acceptance must be absolute and unqualified. In other words, acceptance must correspond to the terms of the offer.
Acceptance of an offer with variations, conditions or reservations means rejection of original offer and amounts to counter-offer. Thus, conditional acceptance, acceptance with variance or acceptance with reservation is not an acceptance.
In Hyde v. Wrench. (1840) 3 Beav. 334, the defendant offered to sell his farm to the plaintiff at £1,000, but the plaintiff said he would buy it to £950 only. Later on, he informed to the defendant to buy the farm for £1,000. But the defendant refused to sell the farm.
Held,- There was no acceptance of plaintiff’s offer but it was in fact a counter-offer which destroyed the original offer.
In Badri Prasad v. State of M.P., AIR 1970 SC 706, the Supreme Court held-When there is variance between the offer and acceptance even in respect of any material term, acceptance cannot be said to be absolute and unqualified to result in the formation of a legal contract.
Acceptance of an offer with a condition or some variance cannot be a valid acceptance. In order to convert a proposal into a promise, it must be absolute and without any condition. [World Industrial Co. Pvt. Ltd. v. Mahanadi Coalfields, AIR 2007 Ori., 71, 73 (DB)|
It is a cardinal principle of the law of contract that offer and acceptance must be absolute. The offer and acceptance must be based on three components, that is, certainty, commitment and communication. However, when acceptor puts in a new condition while accepting contract already signed by the proposer, contract is not complete until proposer accepts that condition. (Padia Timber Co. (P.) Ltd. v. Board of Trustees of Visakhapatnam Port Trust, AIR 2021 SC 3411
(4) Acceptance must be made within a reasonable time. For a valid acceptance, it is necessary that it must be made within the time allowed by the offerer and if no time is specified, it must be made within a reasonable time.
(5) Acceptance must be according to the mode prescribed or by any usual or reasonable mode. According to Section 7 (2) of the Contract Act. 1872, acceptance must be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the acceptance is not made in the manner prescribed, the proposer may within a reasonable time after the acceptance is communicated to him, insist that the acceptance must be made in the manner prescribed. Failure on the part of the offerer to do so, will imply that he has accepted the acceptance although it is not in the desired manner.
(6) The acceptor must be aware of the proposal at the time of the offer. Acceptance follows proposal. If the acceptor has no knowledge of the existence of the proposal, it cannot be accepted. (Lalman Shukul v. Gauri Dutta. (1913) 11 All LJ 489]
(7) Acceptance must be made before the proposal lapses or before the proposal is revoked. The acceptance must be made while the proposal is in force.
(8) Acceptance cannot be implied from silence.-No valid contract is formed if the offeree remains silent and does nothing to show that he has accepted the proposal. Thus, mental acceptance is no acceptance.
(9) An offer may be made to the world at large i.e., general public. An offer may be made to the world at large, but no contract can arise until it is accepted by a specific person or persons. [Carlill v. Carbolic Smoke Ball Co. Ltd., (1893) 1 QB 256]
Law Relating to Communication of Proposal, Acceptance and Revocation
Q. 4 (c) Describe the law relating to the communication of proposal, acceptance and revocation. If offer and acceptance both are being made on telephone what would be place of entering into contract?
Or
When is the communication of acceptance complete? Analyse the law with the support of decided cases.
Or
State when communication and revocation of offer and acceptance are complete as against proposer and acceptor in order to make the contract binding.
Or
How can a proposal and acceptance be revoked? Discuss. When will the communication of such revocation complete?
Ans. Mode of Communication, acceptance and revocation [Section 3].-Section 3 of the Indian Contract Act lays down:-
“The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances respectively are deemed to be made by any act or omission of the party proposing, accepting or revoking-
(a) by which he intends to communicate such proposal, acceptance or revocation, and
(b) which has the effect of communicating it.”
Communication whether of a proposal or of acceptance or of revocation consists of an act or omission with intent to communicate, and which effectively communicates the proposal, acceptance or revocation.
In Brogden v. Metropolitan Railway Company. (1877) 2 A.C. 666, the appellants used to supply coal and coke to the respondents. The agent of the respondents after preparing the agreement sent it to the appellants who filled in blanks in the agreement and also named an arbitrator and then returned to the respondents. The agent of the respondents kept it in the drawer. On the plea of no binding agreement between the parties because the appellants used to fill in the agreement name of the arbitrator, the House of Lords held-A binding agreement arose because after the receipt of agreement to the agent of the respondents transaction took place between the parties. The act done shall take effect in the manner as the communication of acceptance.
Communication may be by conduct. Communication may be by the conduct. It need not necessarily be by words. There must be some overt act. A mere mental assent cannot be treated as communication. Intention may be communicated with the help of pre-arranged code of words, or secret writings.
Thus, no words are needed to explain the intent with which a man steps into a ferry boat or a train car or drops a coin into an automatic weighing machine
Communication when complete
(1) Communication of proposal [Section 4].-Section 4 provides that the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made
Illustration. A proposes by a letter to sell his house to B. the communication of the proposal is complete when B receives the letter.
(2) The Communication of an ‘acceptance’ [Section 4].- The Communication of an acceptance is complete-
(i) “as against the proposer” when it is put in a course of transmission to him, so as to be out of the power of the acceptor,
(ii) “as against the acceptor”-when it comes to the knowledge of the proposer.
Thus, the communication of an acceptance is complete as against the proposer when it is put in the course of transmission, whether it is delayed in delivery or miscarried, is immaterial. Posting of a duly addressed letter is communication of acceptance.
Illustration.-B accepts proposal of A’s house and communicates his acceptance by the post, communication of an acceptance is complete as against A when B posted the letter, so as to be out of the power of B (the acceptor)
It is the duty of the acceptor to prove that the letter of acceptance was duly posted. When the letter of acceptance bears correct address of the roposer, and proof of dispatch date, mode of dispatch or any other material proof such as receipt given by the postal or courier agent etc. is produced then only it can be inferred that the letter was duly dispatched or put in the course of transmission to the proposer.
In Households Fire and Accident Insurance Company v. Grant. (1879) L. R. 4 Ex. D. 29 (C.A.), the Court held-Where the proof of dispatch of letter of acceptance is present, the acceptance will bind the proposer irrespective of the fact that the proposer never received the letter of acceptance and the same was lost in transit. [Followed in J. K. Enterprises v. State of M. P., AIR 1997 M. P. 68-701.
Communication of acceptance will be complete and, therefore, binding (provided other essentials of a contract are present) as against the acceptor when the communication comes to the knowledge of the proposer. In other words, an acceptance is complete, when it is put in the course of transmission as against the proposer only. However, it is complete as against the acceptor, when it reaches the proposer.
Illustration. When A (the proposer) receives B’s (the acceptor’s) letter of acceptance, the communication is complete as against B (the acceptor).
(3) The communication of a revocation is complete [Section 4].-
(i) “as against the person who makes it”. when it is put into a course of transmission to the person to whom it is made so as to be out of the power of the person who makes it;
(ii) “as against the person to whom it is made”. when it comes to the knowledge of person to whom it is made.
Thus, a revocation of the proposal reaching the acceptor after the latter has forwarded his acceptance will not be good. A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer.
Illustration. If A revokes his proposal to B by a telegram (the communication of revocation is complete) against A (i.e., the person making the revocation) when the telegram is dispatched to B (that is, the person to whom revocation is made) so as to be out of the power of A (the person who makes the revocation). It is complete against B (the person to whom revocation is made), when it comes to his knowledge.
Difference between Indian and English law
According to English Law, the communication of an acceptance is complete as soon as it is posted and cannot be revoked, for example, by a telegram dispatched after the posting of the acceptance letter. But under the Indian Contract Act, 1872 since the communication of acceptance is complete as against the acceptor when it reaches the proposer, the acceptor has the right to revoke the letter of acceptance by some speedier means of communication for example, by a telegram, which would reach earlier than his letter of acceptance.
This rule has been very well summed up by Hershell in Henthorn v Fraser, (1892) 2 Ch 27, in the following words:”the revocation of a proposal is effectual only if actually communicated before the dispatch of an acceptance ………….. But when an acceptance, without notice of offer being revoked, is dispatched in due course by means of communication such as the post, the acceptance is complete from the date of dispatch.’
Acceptance by Telephone or Telex
When the parties are in each other’s presence or though separated in space yet are in direct communication as by telephone, the contract is not complete until the offerer comes to know of the fact of acceptance.
In Entores Lid. v. Mills Far East Corporation. (1955) 22 QB 327, an offer was made by the plaintiffs for the purchase of certain goods from London by telex, and it was received by the defendants on their tele-printer al Amsterdem in Holland and the defendants accepted by telex. On a dispute, the action was brought for breach of contract in London. The question arose whether acceptance was complete at London so as the case be actionable there. Lord Denning held-It was a case of instantaneous communication as if the acceptance was made in the presence of the offeror. The same principle would apply to the acceptance by telephone. The rule about instantaneous communications between the parties is different from the rule about the post. The contract is only complete when the acceptance is received by the offeror, and the contract is made at the place where the acceptance is received.
In Bhagwandas v. Mis. Girdharilal and Co., AIR 1966 SC 543, the rule laid down in the Entores Ltd. was affirmed by the Supreme Court.
Thus, in the case of acceptance by telex or telephone, acceptance is complete only when it is received by the offeree and the rule regarding acceptance by post does not apply.