A contract may be defined as a legally binding agreement or, in the words

of Sir Frederick Pollock: “A promise or set of promises which the law will
enforce.”

Section 2(h) of Indian Contract Act, 1872 defines contract as “An

agreement enforceable by law”. Thus, formation of a contract there must be
an agreement, and the agreement should be enforceable by law.

Enforceability of Contracts
 Void Contracts: A ‘void contract’ is one where the whole transaction is
regarded as a nullity. It means that at no time has there been a contract
between the parties. Any goods or money obtained under the
agreement must be returned. Where items have been resold to a third
party, they may be recovered by the original owner.
 Voidable Contracts: A contract which is voidable operates in every
respect as a valid contract unless and until one of the parties takes
steps to avoid it. Anything obtained under the contract must be returned,
in so far as this is possible. If goods have been resold before the
contract was avoided, the original owner will not be able to reclaim
them.
 Unenforceable Contracts: An unenforceable contract is a valid
contract but it cannot be enforced in the courts if one of the parties
refused to carry out its terms. Items received under the contract cannot
generally be reclaimed.

Agreement, Contract and Proposal

Agreement definition [SECTION 2(e)]
Agreement is defined as “every promise and every set of promises forming
the consideration for each other”. And a promise is defined as an accepted
proposal.

WHAT AGREEMENTS ARE CONTRACTS [ SECTION 10 ]

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.

AGREEMENT BECOMES A CONTRACT IF BELOW

CONDITIONS ARE MET:
1. There is some consideration
2. The parties are competent to contract
3. Their consent is free
4. Their object is lawful

Proposal or Offer
PROPOSAL DEFINITION [SECTION 2(A)]
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.

PROPOSAL TERMINOLOGY [SECTION 2(C)]

The person making the proposal is called the “promisor”, and the person
accepting the proposal is called the “promisee”

Communication of Proposal
COMMUNICATION, ACCEPTANCE AND REVOCATION OF
PROPOSALS [SECTION 3]
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,
by which he intends to communicate such proposal, acceptance or
revocation, or which has the effect of communicating it.

Thus, a proposal may be communicated in any way which has the effect of
laying before the offeree the willingness to do or abstain. It may for
example be done by words of mouth, or by writing, or even by conduct.

Promises, express and implied [SECTION 9]

In so far as the proposal or acceptance of any promise is made in words,
the promise is said to be express. In so far as such proposal or acceptance
is made otherwise than in words, the promise is said to be implied.

An offer which is expressed by conduct is called an implied offer and the

one which is expressed by words, written or spoken, is called an express
offer
For example, a bid at an action is an implied offer to buy, stepping into an
omnibus, and consuming eatables at a self-service restaurant.

Case Law: Upton Rural District Council v Powell:

A fire broke out in the defendant’s farm. He believed that he was entitled to
the free services of Upton Fire Brigade and, therefore, summoned it. The
Brigade put out the fire. It then turned out that the defendant’s farm was not
within free service zone of the Upton, which therefore, claimed
compensation for the services. The court said: “The truth of the matter is
that the defendant wanted the services of Upton; he asked for the services
of Upton and Upton, in response to that request, provided the services.
Hence, the services were rendered on an implied promise to pay for them.

Communication when complete [SECTION 4]

The communication of a proposal is complete when it comes to the
knowledge of the person to whom it is made.

An offer cannot be accepted unless and until it has been brought to the
knowledge of the person to whom it is made. This principle enabled the
Allahabad High Court in Lalman v Gauri Datt to deal with a matter involving
a very crucial question on this point.

Defendant’s nephew absconded from home. He sent his servant in search

of the boy. When the servant had left, the defendant by handbills offered to
pay Rs.501 to anybody discovering the boy. The servant came to know of
this offer only when he had already traced the missing child. He, however,
brought an auction to recover the reward. But his action failed. BAERJI
J explains: “In my opinion a suit like the present can only be founded on a
contract. In order to constitute a contract, there must be an acceptance of
an offer and there can be no acceptance unless there is knowledge to the
offer”.

Intention to Contract
There is no provision in the Indian Contract Act requiring that an offer or its
acceptance should be made with the intention of creating a legal
relationship. But in English law it is a settled principle that “to create a
contract there must be a common intention of the parties to enter into legal
obligations.”

Case law: Balfour v Balfour

The defendant and his wife were enjoying leave in England. When the
defendant was due to return to Ceylon, where he was employed, his wife
was advised, by reason of her health, to remain in England. The defendant
agreed to send her an amount of 30 pound a month for the probable
expenses of maintenance. He did send the amount for some time, but
afterwards differences arose which resulted in their separation and the
allowance fell into arrears. The wife’s action to recover the arrears was
dismissed.

Family & Social matters

All that the law requires is that the parties must intend legal consequences.
In the case of McGregor v McGregor, illustration of a binding engagement
between a husband and wife. Here a husband and wife withdrew their
complaints under the agreement by which the husband promised to pay her
an allowance and she to refrain from pledging his credit, the agreement
was held to be a binding contract.

Business matters
Supreme Court’s view
The Supreme Court noted the general proposition that in addition to the
existence of an agreement and the presence of consideration there is also
the third contractual element in the form of intention of the parties to create
legal relations.

Letters of intent
A letter of intent merely indicates a party’s intention to enter into a contract
on the lines suggested in the letter. It may becomes a preclude to a
contract. However, where a letter stated that it would be followed by a
detailed purchase order which carried an arbitration clause, it was held that
the letter was not a supply order and the arbitration clause contained in it
did not by itself fructify into an arbitration agreement.

General Offers
Acceptance by performing conditions, or receiving
consideration [SECTION 8]
Performance of the conditions of a proposal, or the acceptance of any
consideration for a reciprocal promise which may be offered with a
proposal, is an acceptance of the proposal.

Carlil v Carbolic Smoke Ball Co

A company offered by advertisement to pay 100 pound to anyone “who

contracts the increasing epidemic influenza, colds or any disease caused
by taking cold, after having used the ball according to printed directions.” It
was added that 1000 pound is deposited with the Alliance Bank showing
our sincerity in the matter”. The plaintiff used the smoke balls according to
the directions but she nevertheless subsequently suffered from influenza.
She was held entitled to recover the promised reward.

General offer of continuing nature

Where a general offer is of continuing nature, as it was, for example, in the
Smoke Ball case, it will be open for acceptance to any number of persons
until it is retracted. But where an offer requires some information as to a
missing thing, it is closed as soon as the first information comes in.

Offer and Invitation to Treat

An offer should be distinguished from an invitation to receive offers. When
a man advertises that he has got a stock of books to sell, or houses to let,
there is no offer to be bound by any contract. “Such advertisements are
offers to negotiate – offers to receive offers – offers to chaffer”.

Harvey v Facey

The plaintiff relegraphed to the defendants, writing: “Will you sell us

Bumper Hall Pen? Telegraph lowest cash price”. The defendants replied
also by telegram: “Lowest price for Bumber Hall Pen, 900 pound.” The
plaintiff immediately sent their last telegram stating: “We agree to buy
Bumper Hall Pen for 900 pound asked by you.” The defendants refused to
sell the plot.

The Lordships pointed out that in their first telegram, the plaintiffs asked
two questions, first, as to the willingness to sell and, second, as to the
lower price. The defendants answered only the second, and gave only the
lowest price. They reserved their answer as to the willingness to sell. Thus,
they made no offer. The last telegram of the plaintiffs was an offer to buy,
but that was never accepted by the defendants.

 Catalogues and display of goods: A shopkeeper’s catalogue of prices

is not an offer, only an invitation to offer.
 Announcement to hold auction: An auctioneer’s announcement that
specified goods will be sold by auction on a certain day is not an offer to
hold the auction.
 Definiteness of proposal: A classified advertisement to the effect:
“cocks and hens 25s each” has been held to be not an offer to sell.
 Free distribution of articles: Not a contract of sale

Acceptance – Section 2(b)

Introduction of Acceptance – Sec. 2(b)
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 “acceptance” is the assent given to a proposal, and it has the effect of
converting the proposal into promise.

This is another way of saying that an agreement is an accepted proposal.

Every agreement, in its ultimate analysis, is the result of a proposal from
one side and its acceptance by the other.

There are three factors in Acceptance:

1. Communication to Offeror
2. Communication to Acceptor
3. When Communication is not necessary

Communication of Acceptance
ACCEPTANCE BY EXTERNAL MANIFESTATION OR
OVERT ACT.
SHAH J says “An agreement does not result from a mere state of mind:
intent to accept an offer or even a mental resolve to accept an offer does
not give rise to a contract. There must be… some external manifestation of
that intent by speech, writing or other act.”

Brogden v Metropolitan Railway co.

B had been supplying coal to a railway company without any formal

agreement. B suggested that a formal agreement should be drawn up. The
agents of both the parties met and drew up a draft agreement. It had some
blanks when it was sent to B for his approval. He filled up the blanks
including the name of an arbitrator and then returned it to the company.
The agent of the company put the draft in his drawer and it remained there
without final approval having been signified. B kept up his supply of coals
but on the new terms and also received payment on the new terms. A
dispute having arisen B refused to be bound by the agreement.

ACCEPTANCE BY CONDUCT
Mere mental assent to an offer does not conclude a contract either under
the Indian Contract Act or in English Law.

COMMUNICATION TO OFFEROR HIMSELF

Acceptance must be communicated to the offeror himself. A
communication to any other person is as ineffectual as of no
communication has been made.

Caselaw: Felthouse v Bindley – Offer cannot Impose Burden of

Refusal

Facts – “The plaintiff offered by means of a letter to purchase his nephew’s

horse. The letter said: “If I hear no more about the horse, I consider the
horse mine at pount 33.15s”. To this letter, no reply was sent. But the
nephew told the defendant, his auctioneer not to sell the horse as it was
already sold to his uncle. The auctioneer by mistake put up the horse for
action and sold it. The plaintiff sued the auctioneer on the ground that
under the contract the horse had become his property and,
therefore, defendant’s unauthorized sale amounted to conversion. But the
action failed.”

COMMUNICATION TO ACCEPTOR HIMSELF

Communication of acceptance should be from a person who has the
authority to accept. Information received from an unauthorised person is
ineffective.

Caselaw: Powell v Lee

Facts – “The plaintiff was an applicant for the headmaster-ship of a school.

The managers passed a resolution appointing him, but the decision was
not communicated to him. One of the members, however, in his individual
capacity informed him. The managers cancelled their resolution and the
plaintiff sued for breach of contract.”

WHEN COMMUNICATION NOT NECESSARY

In certain cases, communication of acceptance is not necessary. The
offeror may inform a particular mode of acceptance, then all that the
acceptor as to do is to follow that particular mode.

Caselaw: Carlil v Carbolic Smoke Ball

BOWEN LJ observed as: “But there is this clear gloss to be made upon that
doctrine, that as notification of acceptance is required for the benefit of the
person who makes the offer, he may dispense with notice to himself… and
there can be no doubt that where the offeror expressly or impliedly
intimates a particular mode of acceptance as sufficient to make the bargain
binding it is only necessary for the other person to follow the indicated
method of acceptance; and if the person making the offer expressly or
impliedly intimates in his offer that it will be sufficient to act on the proposal
without communicating acceptance of it to himself, performance of the
condition is a sufficient acceptance without notification”.

MODE OF COMMUNICATION
Acceptance should be made in prescribed manner

Acceptance has to be made in the manner prescribed or indicated by the

offeror. An acceptance given in any other manner may not be effective.
particularly where the offeror clearly insists that the acceptance shall be
made in the prescribed manner. For example,

A offered to buy flour from B requesting that acceptance should be sent by

the wagon which brought the offer. B sent his acceptance by post, thinking
that this would reach the offeror more speedily. But the letter arrived after
the time of the wagon. A was held to be not bound by the acceptance.
Absolute and Unqualified
Section 7: Acceptance Must Be Absolute
In order to convert a proposal into a promise, the acceptance must — (1)
be absolute and unqualified, (2) be expressed in some usual and
reasonable manner, unless the proposal prescribes the manner in which it
is to be accepted.
EFFECT OF DEPARTURE FROM PRESCRIBED MANNER
A departure from that manner does not of itself invalidate the acceptance.
A duty is cast on the offeror to reject such acceptance within reasonable
time.

1. a minor departure from the prescribed mode of communication should

not upset the fact of acceptance provided that the communication is
made in an equally expeditious way.
2. for, in a case, where the offeree was told to reply by ‘by return of post’ it
was said by the Court of Exchequer Chamber that a reply sent by some
other method equally expeditious would constitute a valid acceptance.

Where no manner prescribed: reasonable and usual

manner
Where no mode of acceptance is prescribed, acceptance must “be
expressed in some usual and reasonable manner”. As per Indian Contract
Law, post is a reasonable mode.
WHEN CONTRACT CONCLUDED (POSTAL
COMMUNICATION)
When the parties are at a distance and are contracting through post or by
messengers, the question arises when is the contract concluded.

Household Fire & Accident Insurance Co v Grant

The defendant in this case had applied for allotment of 100 shares in the
plaintiff company. A letter of allotment addressed to the defendant at his
residence was posted in due time, but it never reached the defendant.
Nevertheless he was held bound by the acceptance.

SECTION 4 – COMMUNICATION WHEN COMPLETE

The only difference that the section makes is in the position of the acceptor.
In England when a letter of acceptance is posted, both the offeror and the
acceptor become irrevocably bound. But in India, the acceptor does not
become bound by merely posting his acceptance. He becomes bound only
when his acceptance “comes to the knowledge of the proposer”. The gap of
time between the posting and the delivery of the acceptance can be utilised
by the acceptor for revoking his acceptance by a speedier communication
which will overtake the acceptance.

Counter proposals
An acceptance containing additions, limitations, or other modifications
shall be rejection of the offer and shall constitute a counter-offer.

However, a reply to an offer which purports to be an acceptance but which

contains additional or different terms which do not materially alter the terms
of the offer shall constitute an acceptance unless the offeror promptly
objects to the discrepancy; if he does not object, the terms of the contract
shall be the terms of the offer with the modifications contained in the
acceptance.
If the proposal prescribes a manner in which it is to be accepted, and the
acceptance is not made in such manner, the proposer may, within a
reasonable time after the acceptance is communicated to him, insist that
his proposal shall be accepted in the prescribed manner, and not
otherwise; but if he fails to do so, he accepts the acceptance.
PARTIAL ACCEPTANCE
Acceptance should be of the whole of the offer. The offeree cannot accept
a part of its terms which are favourable to him and reject the rest. Such an
acceptance is another kind of counter proposal and does not bind the
offeror.
INQUIRY INTO TERMS OF PROPOSAL
A mere inquiry into the terms of a proposal is not the same thing as a
counter-proposal. On acceptance of the proposal, the contract will be
created on the basis of the terms and conditions of the original proposal
including arbitration clause.

ACCEPTANCE WITH CONDITION SUBSEQUENT

If an acceptance carries a condition subsequent, it may not have the effect
of a counter-proposal. Thus, where an acceptance said: “terms accepted,
remit cash down Rs.25,000 by February 5, otherwise acceptance subject to
withdrawal, this was not a counter-proposal, but an acceptance with a
warning that if the money was not sent the contract would be deemed to
have been broken.

ACCEPTANCE OF COUNTER PROPOSAL

Even “where the acceptance of a proposal is not absolute and unqualified
the proposer may become bound, if, by his subsequent conduct, he
indicates that he has accepted the qualifications set up”.

Hargopal v People’s Bank of Northern India

An application for shares was made conditional on an undertaking by the

bank that the applicant would be appointed a permanent director of the
local branch. The shares were allotted to him without fulfilling the condition.
The applicant accepted the position as a shareholder by accepting
dividends, filing a suit to recover it and by pledging his shares.

It was, therefore, held “that he could not content that the allotment was void
on the ground of non-fulfillment of the condition as he had by his conduct
waived the conditions.

PROVISIONAL ACCEPTANCE
An acceptance is sometimes made subject to final approval. A provisional
acceptance of this kind does not ordinarily bind either party until the final
approval is given.

ACCEPTANCE AND WITHDRAWAL OF TENDERS

A tender is in the same category as a quotation of prices. It is not an offer.
When a tender is approved, it is converted into a standing offer. A contract
arises only when an order is placed on the basis of the tender. These
principles were laid down by the Bombay High Court in the well-known
case of Bengal Coal Co Ltd v Homee Wadia & Co.

Lapse of Offer
1. Notice of revocation
2. Lapse of Time
3. By failure to accept condition precedent
4. By death or insanity of offerer
Revocation of Acceptance
Section 5: Revocation of proposals and acceptances
A proposal may be revoked at any time before the communication of its
acceptance is complete as against the proposer, but not afterwards.

An acceptance may be revoked at any time before the communication of

the acceptance is complete as against the acceptor, but not afterwards.

NOTICE OF REVOCATION
Withdrawal before expiry of fixed period

Where an offeror gives the offeree an option to accept within a fixed period,
he may withdraw it even before the expiry of that period.

CASE LAW: Alfred Schonlank v. Muthunayna Chetti

The defendant left an offer to sell a quantity of indigo at the plaintiff’s office
allowing him eight days’ time to give his answer. On the 4th day however
the defendant revoked his proposal. The plaintiff accepted it on the 5th day.
Holding the acceptance was useless.

Agreement to keep Offer open for Specified Period

Where the agreement to keep the offer open for a certain period of time is
for some consideration, the offeror cannot cancel it before the expiry of that
period.

CASE LAW: Mountford v Scott

Communication of Revocation should be from Offerer Himself

It is necessary that the communication of revocation should be from the

offeror or from his duly authorised agent. But it has been held in the case
of Dickinson v. Dodds, that it is not enough if the offeree knows reliably
that the offer has been withdrawn.

Revocation of General Offers

Where an offer of a general nature is published through newspapers, it can
be withdrawn by the same media and the revocation will be effective even if
a particular person, subsequent to the withdrawl, happened to perform its
terms in ignorance of the withdrawal.

CASE LAW: Skarsm Ramanathan v NTC Ltd

Superseding proposals by Fresh Proposal

Where before acceptance a proposal is renewed in some parts of it and not

in its entirety as proposed earlier and the letter purports it to supersede the
earlier communication, such proposal is no longer available for acceptance.

CASE LAW: Banque Paribas v Citibank NA

Cancellation of allotment of land

An allotment of land was made under the order of a Development Authority.

CASE LAW: Rochees Hotels P Ltd v Jaipur Development Authority

Revocation of Bid

In the case of an auction, “the assent is signified on the part of the seller by
knocking down the hammer”. A bid may be retracted before the hammer is
down.

CASE LAW: Union of India v Bhimsen Walaiti Ram

A liquor ship was knocked down to a bidder at a public auction. This was
subject to the confirmation by the Chief Commissioner who had the power
before granting the licence to inquire into the financial condition of the
bidder. The bidder had to pay one-sixth part of the price immediately and in
case of any default on his part the Government had the power to re-auction
the shop and the shortfall, if any, was recoverable from the bidder. He
failed to pay one-sixth part and, therefore, the Chief Commissioner did not
confirm the bid and ordered resale. Resale realized much less than the
original bid and the question of bidder’s liability to pay the shortfall arose.
The court said: It is not disputed that the Chief Commissioner had
disapproved of the bid offered by the respondent. If the Chief
Commissioner had granted sanction in favor of the respondent, then there
would have been a completed transaction and he would have been liable
for any shortfall on the resale.

LAPSE OF TIME
An offer lapses on the expiry of the time, if any, fixed for acceptance.
Where an offer says that it shall remain open for acceptance up to a certain
date, it has to be accepted within that date. For example, where an offer
was to last until the end of March and the offeree sent a telegram accepting
the offer on 28th March which was received by the offeror on 30th March, it
was held that the option was duly exercised.

FAILURE TO ACCEPT CONDITION PRECEDENT

Where the offer is subject to a condition precedent, it lapses if it is accepted
without fulfilling the condition. Where a salt lake was offered by way of
lease on deposit of a sum of money within a specified period, and the
intended lessee did not deposit the amount for 3 long years, it was held
that this entailed cancellation of the allotment.

DEATH OR INSANITY OF OFFEROR

An offer lapses on the death or insanity of the offeror, provided that the fact
comes to the knowledge of the offeree before he makes his acceptance.

In the case of Dickinson v Dodds, it was held that an offer cannot be

accepted after the death of the offeror.

SECTION 6: Revocation how made

A proposal is revoked —

1. by the communication of notice of revocation by the proposer to the

other party;
2. by the lapse of the time prescribed in such proposal for its acceptance
or, if no time is so prescribed, by the lapse of a reasonable time, without
communication of the acceptance;
3. by the failure of the acceptor to fulfill a condition precedent to
acceptance; or
4. by the death or insanity of the proposer, if the fact of his death or
insanity comes to the knowledge of the acceptor before acceptance.

Revocation of Acceptance
According to English law an acceptance once made is irrevocable. In the
words of Anson: “Acceptance is to offer what a lighted match is to a train of
gunpowder. Both do something which cannot be undone. This rule is
obviously confined in its operation only to postal acceptance. It is
suggested in Anson that in other cases “an acceptance can be revoked at
any time before acceptance is complete, provided, of course, that the
revocation itself is communicated before the acceptance arrives.
In India, on the other hand, acceptance is generally revocable. An acceptor
may cancel his acceptance by a speedier mode of communication which
will reach earlier than the acceptance itself. Section 5 is the relevant
provision.

Standard Form Contracts

 Exploitation of weaker party
 Protective Devices
 Reasonable notice
 Notice should be contemporaneous with contract
 Theory of fundamental breach
 Strict construction
 Liability in tort
 Unreasonable terms