What is contract

essential of contract, offer & acceptance

1. What is contract? By Dr. Sridevi Krishna Assistant Professor Vidyavardhaka Law College Mysore

2. Definition Section 2(h) of the Indian Contract Act, 1872 defines “ a contract is an agreement enforceable by law .” Section 2(e) defines agreement as “every promise and every set of promises forming consideration for each other.” The two elements of an agreement are: ( i ) offer or a proposal; and ( ii ) an acceptance of that offer or proposal.

3. Definition c ontinued.. Section 2(b) defines promise 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.”

4. What agreements are contracts? Only those agreements which are enforceable at law are contracts. The Contract Act is the law of those agreements which create obligations, and in case of a breach of a promise by one party to the agreement, the other has a legal remedy . Thus, a contract consists of two elements: ( i ) an agreement; and ( ii ) legal obligation, i.e., it should be enforceable at law.

5. Continued.. There are certain agreement which do not give rise to contractual obligation. A invites B for dinner in a restaurant. B accepts the invitation. On the appointed day, B goes to the restaurant. To his utter surprise A is not there. Or A is there but refuses to entertain B . whether B has a remedy?

6. Continued.. Here the promise is not enforceable at law as there was no intention to create legal obligations. Such agreements are social agreements which do not give rise to legal consequences . This shows that an agreement is a broader term than a contract. And, therefore, a contract is an agreement but an agreement is not necessarily a contract

7. Continued.. An agreement of a purely social or domestic nature is not a contract. Balfour v. Balfour the defendant who was employed on a govt job in Ceylon, went to England with his wife on leave. For health reasons the wife could not accompany husband again to Ceylon. The husband promised to pay 30 pounds per month to his wife as maintenance for the period she had to live apart. The husband failed to pay this amount and wife sued him. Held: there being no intention to create legal relationship, the husband was not liable.

8. Jones V Padavatton Mrs Jones lived in Trinidad. Her daughter, who had been divorced and had young son, lived in Washington and was serving Indian embassy there. Mrs Jones persuaded her daughter to leave the job and study for the bar in England to become a barrister. Mrs. Jones offered to pay her daughter a monthly allowance during her studies for the bar in England. The daughter reluctantly agreed to the suggestion, left the job and went to England. In 1964,Mrs Jones brought a house in England. The daughter was allowed to stay in a part of the house where the other part was let out. The rent received from the part of the house was given to the daughter to cover her expenses. In 1967, some differences arose between the daughter and mother. Mrs Jones bought an action to evict her. Till that time the daughter had not completed her studies for the bar. Held: the mother succeeded as there was no intention to create legal relationship.

9. Meritt V Meritt The husband and wife were joint owners of a building which was subject to mortgage to a building society. The husband left matrimonial home to live with another women. At that time, at the instance of the wife, the husband signed a note saying that wife will pay all the outstanding amount in respect of the house and in return he will agree to transfer the property into sole ownership of the wife. Held: it was clear that the parties intended to create legal relationship and therefore, the husband was bound by the contract.

10. What obligations are contractual in nature ? Law of contracts is not the whole law of agreements. Similarly, all legal obligations are not contractual in nature. A legal obligation having its source in an agreement only will give rise to a contract .

11. Continued.. Law of Contracts creates rights in personam as distinguished from rights in rem. Right in personam - available against a person only. Right in Rem- available against whole world

12. Continued.. A agrees to sell his motor bicycle to B for Rs . 5,000. The agreement gives rise to a legal obligation on the part of A to deliver the motor bicycle to B and on the part of B to pay Rs . 5,000 to A . The agreement is a contract. If A does not deliver the motor bicycle, then B can go to a court of law and file a suit against A for non-performance of the promise on the part of A . On the other hand, if A has already given the delivery of the motor bicycle and B refuses to make the payment of price, A can go to the court of law and file a suit against B for non-performance of promise.

13. Essential elements of a valid contract Section 10: of the Act provides some elements which are essential in order to constitute a valid contract. It reads as follows: “All agreements are contracts if they are made by 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.”

14. Elements There must be two persons. It must be made by persons who are competent to contract. There must be free consent. There must be lawful object and lawful consideration. The agreement must not be one which is expressly declared as void by law.

15. Continued.. The contract must be between two competent parties. They must have attained the age of majority according to Indian Majority Act. An agreement is the result of a proposal or an offer by one party followed by its acceptance by the other.

16. Kinds of agreement From the point of legality there are different types of agreement . 1) Void agreements Section 2(g)- an agreement not enforceable by law is said to be void. Ex: agreement with a minor- void ab initio Agreement without consideration Agreement in restraint of marriage, trade etc ,.

17. Voidable Agreements/contracts Section 2(i) an agreement which is enforceable at the option of one or more of the parties thereto, but not at the option of the other, is voidable contract. Ex: when the consent of the party is obtained by coercion, fraud, undue influence, misrepresentation it is voidable.

18. Illegal agreement Agreements forbidden by law is illegal agreements. Ex: agreement to commit crime

19. Offer & Acceptance Section 2(a)- Offer - when one person signifies to another his willingness to do or 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. One who makes an offer is offeror To whom it is made he is called offeree The term proposal used in Indian Contract Act is synonym to Offer used in English Law.

20. Offer & invitation to treat Books catalogue Auction sale Submission of tender Display of items in a super market Display of medicines in a medical store.

21. Hariss V Nickerson The defendant advertised a sale by auction. The plaintiff travelled to the advertised place of auction to find that the defendant had cancelled the auction sale. he brought an action against the defendant to recover the expenses of his travel. Held : defendant was not liable to the same as there was no contract between the parties.

22. Pharmaceutical Society of Great Britain V Boots Cash Chemicals Ltd The defendants were having the business of retail sale of drugs. Medicines were displayed on the shelves and the price were also indicated. They had self service system. On entry into the shop the customers were given a basket. After selecting the articles by the customer he could put them in the basket and taken them to the cash desk. The defendants had put a registered pharmacist near the cash counter, who had been authorized to stop any customer removing any drug from the premises. Held: the display of articles on self service basis was not offer but mere invitation to treat. When a customer selects some articles and takes them to cash counter it amounts to offer made by customer which may be or may not be accepted at the cash counter.

23. Whether quoting of price amounts to offer?

24. Quoting of price Harver V Facey The defendants in this case were the owners of plot of land known as bumper hall pen. The plaintiff were interested to buy the land, sent a telegram to the defendants writing “ will you sell us bumper hall pen? Telegraph us the lowest price” The defendants in replay wrote: “ the lowest price of bumper hall pen is 900 pounds”. The plaintiff sent another telegram to the defendants saying “ we agree to buy Bumper hall pen for 900 pounds asked by you. Please send us title deeds”. The defendants refused to sell the land. Plaintiff brought an action against the defendants. Held : quoting of price does not become an offer. The defendants had not accepted the offer made by plaintiff. So there is no binding contract.

25. Communication of offer Section 2(a) Offer- specifies that a person is said to make a proposal when he signifies to another person his willingness to do or abstain from doing something. Section 3 - offer may be communicated by the offeror by any act or omission by which the offeror- Intends to communicate the offer or Which has the effect of communicating the offer.

26. Express offer & implied offer Section 9 - when proposal or acceptance is made through words it is express offer. When proposal or acceptance is made otherwise than in words, it is said to be implied.

27. Communication of offer Section 4- the communication of offer is complete when it comes to the knowledge of the person to whom its made. Lalman Shukla V Gauri Dutt The defendant’s nephew absconded from home. The plaintiff, who was his servant was sent to search for the missing boy. After the plaintiff left to search the boy. Defendants announced a reward of 501 rs to be given to anyone who found the missing boy. The plaintiff who was ignorant of this reward was successful in searching the boy. When he came to know about the reward announced in his absence he filed a suit against the defendant claiming the same. Held : plaintiff cannot claim the reward because he was ignorant about the reward and his act of brining the boy did not amount to the acceptance.

28. Kinds of offer Cross offer Specific and General offer Standing , open or Continuing offer Counter offer

29. Cross offer When the offers made by two persons to each other contains similar terms of bargain cross each other in post, they are known as cross offer. Ex- On 1 st Jan A offered to sell his bike to B for Rs 80,000 through a letter sent by post. On the same date B wrote to A making an offer to purchase A’s bike for Rs 80,000/-. When A & B sent their letters, they did not know about the offer which was being made by the other side. Even though the parties intended the same bargain, there would be no contract. Contract would arise only if either A or B had knowledge of the offer and had accepted the same.

30. Tinn V Hoffmann Defendant wrote to plaintiff indicating his willingness to sell 800 tonnes of iron at 69 Sh.per ton. On the same day Plaintiff also wrote to Defendant offering to buy 800 tons of iron at 69 sh.per ton. The two letters crossed each other in post. Plaintiff brought an action against the defendant for not supplying the iron contending that a valid contract had been created between the two parties. Held: there were only two cross offers present which neither party has accepted. Thus there is no contract.

31. Specific & General offer When an offer is made to a specific or ascertained person, it is known as a specific offer. When it is made to the public at large it is general offer. It is completed when anybody acts on the offer.

32. Carlill V Carbolic Smoke Ball Co The defendants advertised their product Carbolic Smoke Ball, a preventive remedy against influenza. In the add they offered to pay a sum of 100 pounds as reward to anyone who contacted influenza, cold or any disease caused by cold after having used the smoke ball three times a day for two weeks. They also announced that 100 pounds has been deposited with Alliance Bank to prove show their sincerity. The plaintiff relying on the add purchased the smoke ball and consumed it as per the printed direction. In spite of it she contacted influenza. She filed a suit against the company claiming the 100 pounds. Held: since it was a general offer it has ripened into a contract when the plaintiff acted upon it. She was therefore entitled to claim the reward.

33. Standing, open or continuing offer An offer which is allowed to remain open for acceptance for a period of time is known as standing, open or continuing offer. Ex- an offer to supply 1000 bags of wheat from 1 st Jan to 31 st Dec, in accordance with the orders which may be placed from time to time is standing offer.

34. Homee Wadia & Co V Bengal Coal Co The Bengal Coal co agreed to supply coal to the H W & co up to a certain quantity at an agreed price for a period of 12months, as may be required by them from time to time. HW placed orders for the supply of some coal a n d the same was complied with.before the expiry of said period of 12 months, Bengal Co withdrew their offer to supply coal further and refused to c omply with further orders placed thereafter. They were sued for breach of contract. Held: there was no contract between the parties and there could be no liability for breach of contract. There was simply a continuing offer to supply coal. They were free to revoke their offer in this case.

35. Rajendra Kumar Verma V State of M.P The respondents invited tenders for the sale of Tendu leaves. The petitioner submitted his tender and also deposited some security. The tender was to be opened on 9 th April 1969. Before the due date the petitioner made an application withdrawing his tender and requested that on the stipulated date the tender be not opened. In spite of his request the tender was opened, and that being the only tender the same was accepted. The petitioner refused to execute the agreement of purchase of leaves. The Govt sold the leaves to somebody else and then sued the petitioners claiming the loss of rs 25,000/-.one of the contention of respondents was there was a clause In the tender notice where the petitioner having submitted his tender was not entitled to withdraw the same. Held: in spite of such clause in the tender notice, the tender or any offer can be withdrawn and since the offer has been withdrawn no contract has arisen between the parties and petitioners are not liable

36. Counter Offer When an acceptance of an offer contemplates future negotiations for finalization of the terms of the contract it is counter offer. Ex if I make an offer to sell my watch to you for Rs 500 and you are willing to pay only Rs 400 for the same. There is no contract but only a counter offer made by you.

37. Acceptance The Indian Contract Act, 1872 defines an acceptance as follows: Section 2(b) ‘‘ When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted” . Thus , acceptance is the act of giving consent to the proposal. A proposal when accepted becomes a contract.

38. Acceptance How Made? The offeree is deemed to have given his acceptance when he gives his assent to the proposal. The assent may be express or implied. It is express when the acceptance has been signified either in writing, or by word of mouth, or by performance of some required act . Acceptance can also be made by performing the required act. Acceptance is implied when it is to be gathered from the surrounding circumstances or the conduct of the parties.

39. Who can Accept? In the case of a specific offer, it can be accepted only by that person to whom it is made. The rule of law is that if A wants to enter into a contract with B, then C cannot substitute himself for B without A’s consent

40. ESSENTIALS OF A VALID ACCEPTANCE 1. Acceptance must be communicated by offeree to the offeror The communication of acceptance may be express or implied . A mere mental acceptance is no acceptance. A mere mental acceptance means that the offeree is assenting to an offer in his mind only and has not communicated it to the offeror.

41. Felthouse V Bindley Felthouse offered by letter to buy his nephew’s horse for £30, saying: “If I hear no more about it, I shall consider the horse is mine at £30.” The nephew did not reply at all, but he told an auctioneer who was selling his horses not to sell that particular horse as he had reserve it to his uncle. By mistake, the auctioneer(Bindley) sold the horse. Felthouse sued the auctioneer for conversion. Held: Felthouse could not succeed as his nephew had not communicated acceptance and there was no contract.

42. Communication must be made by the offeree or his authorized agent . Powell V Lee Powell was one of the candidates for the post of head master of a school. The board of Managers passed a resolution selecting him for the post. No communication about this decision was made to Powell by the Board. One of the members of the board who had not been authorized to communicate this decision, acting in his individual capacity informed Powell about his selection for the post. Subsequently, the board of managers met again and decided to cancel the appointment of powell and appointed another candidate Parker in his place. Powell sued Lee the chairman of the board for breach of contract.

43. Continued.. Held: since the resolution passed by the board was not communicated to P owell by the board, or any authorized person on its behalf, it could not give rise to a contract. Powell’s action therefore, failed.

44. Continued.. Section 8 – Performance of the conditions of a proposal is an acceptance of the proposal. Carill V Carbolic Smoke Ball Co case.

45. Acceptance by Post/Telegram Section 4 – The communication of acceptance is complete as against the proposer, when it is put in the course of transmission to him so as to be out of power of the accepter. The communication of acceptance is complete as against the acceptor, when it comes to the knowledge of the proposer. B accepts A’s proposal by a letter sent by post. The communication of the acceptance is complete- As against A , when the letter is posted, As against B, when the letter is received by A.

46. Dunlop V Higgins Dunlop & Co offered to sell 200 tons of iron pigs at 65 sh per ton to Higgons & Co through their letters dated 22 nd and 28 th Jan, 1945. Higgns & Co received the letters on 30 th Jan & replied the same day, indicating their acceptance to purchase the iron pigs in accordance with the offer. Due to frosty weather there was disruption in the train services and the letter of acceptance instead of reaching on 31 st Jan reached Dunlop & Co on 1 st Feb. Dunlop & co refused to supply iron pigs on the ground that the receipt of the letter of acceptance by them had been delayed. Held- Dunlop & co had become bound by the contract as soon, as the letter of acceptance was posted to them, i.e on 30 th Jan 1945.

47. Acceptance by Telephone In case of telephonic conversation the position was the same as in the case where the parties were in the presence of each other Bhagwandas V Giridhar Lal & Co . the plaintiffs made an offer on phone from Ahmedabad for the purchase of cotton seed cake from the defendants. The defendants accepted this offer on phone at Khamgaon . The defendants having failed to supply the cake were sued by the plaintiffs to pay compensation amounting to Rs.31,150 for the breach of contract. The suit was filed at Ahmedabad. The defendants contended that the Ahmedabad court had no jurisdiction because the contract was completed by the acceptance of offer on telephone, at Khamgaon . On the other hand, plaintiff pleaded that the contract wasstruck when he heard acceptance at Ahmedabad. Held: contract was made at Ahmedabad where the acceptance was communicated and the part of cause of action for an action for breach had arisen within the jurisdiction of Ahmedabad court.

48. 2. Acceptance should be absolute & unqualified An acceptance to be valid must be absolute and unqualified and according to the exact terms of the offer. An acceptance with a variation, however slight, is no acceptance, and may amount to a mere counter offer which the original offeror may or may not accept. A offers to sell his house to B for Rs . 1,000. B replies, “I can pay Rs . 800 for it.” The offer of A is rejected by B as the acceptance is not unqualified. However, B subsequently changes his mind and is prepared to pay Rs . 1,000. This will also be treated as a counter offer and it is up to A whether to accept the same or not

49. Hyde V Wrench There was an made by Defendant to Plaintiff for the sale of a farm for 1000 pounds. Plaintiff rejected this offer and said that he will pay only 950 pounds to which Defendant did not agree. There upon Plaintiff said that he was willing to pay 1000 pounds to which also Defendant did not agree. Plaintiff sued A and contended that there was a contract by which Defendant was bound. Held: Plaintiff once rejected Defendant offer by his counter offer to pay 950 pounds and this made the original offer to lapse, and therefore, no contract had resulted in this case.

50. 3. Acceptance should be expressed in usual/ prescribed manner Section 7(2) the acceptance must be expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted. Prescribed Manner - State of Madhya Pradesh V Gobardhan Dass , the Chief Conservator of forest invited from intending buyers tenders for the sale of certain quantity of lac products. One of the conditions of sale subject to which the tenders were to be made, was that 25% of the purchase price was to be deposited immediately after the close of sale viz , the acceptance of tender. The tenders of the respondent firm was highest and they were accepted for and on behalf of the CCF. The respondent neither paid 25% nor paid remaining 75%. After notice for payment of the said amount was given to respondent, the goods were sold by CCF. Action was then brought against the respondent firm for breach of contract and the recovery of the loss which resulted o n resale. Held: since respondents failed to comply with the condition precedent to the making of the contract, there was no contract concluded in this case and therefore no question of breach o f contract or liability will arise.

51. 4. Acceptance should be made while offer is still subsisting After the offer has been withdrawn or has lapsed, there is nothing which can be accepted. It is therefore necessary that acceptance should be made while the offer is still subsisting. Acceptance after the lapse of offer cannot give rise to a valid contract. Acceptance must be made within a reasonable time.

52. Revocation of offer and Acceptance Revocation of offer Section 5 – A proposal may be revoked at any time, before the communication of its acceptance is complete as against the proposer, but not afterwards. Withdrawal of resignation Bids Tenders

53. Managing Committee SGA High School V State of Bihar & others A prospective resignation is an offer to quit a post and the same can be withdrawn before the offer ids accepted by a competent authority. Dr. Paramanand the secretary of the managing committee of a school sent his letter of resignation on 9/7/1980 requesting the managing committee to accept the same. He sent another letter dt 9/8/80 with drawing his resignation. The Managing committee, which met on 11/8/80 considered the letter of resignation of Dr. Paramanand but ignored his subsequent withdrawal of resignation, and decided to accept the resignation. Held- it was clear from the letter of resignation that the resignor intended his resignation to be prospective in the sense that he wanted it to be accepted by the managing committee and therefore he was free to withdraw the same before it became effective by acceptance. It was observed that in view of the withdrawal of the resignation, the resolution of the managing committee accepting the resignation in its meeting held on 11/8/80 was invalid.

54. Withdrawal of bids In case of sale by auction the bids made at the auction are offers and the highest offer may be accepted by the auctioneer. In such a case the sale is complete when the auctioneer announces its completion by the fall of hammer or in any other customary way and until such announcement is made, any bidder may retract his bid.

55. Tenders Mere clause in a tender will not take away the right of the offeror to withdraw the offer. Rajendra Kumar Verma V State of Madhya Pradesh But if there is a contract between the parties wherein on e of them has promised not to withdraw his offer until a certain time, the offer cannot be withdrawn in such a case.

56. Sharad Trading Co V State of MP The MP govt invited tenders from those desirous of purchasing tendu leaves. The petitioner submitted his tender for the purchase of leaves for the season ending 31 st dec 1973. his tender was accepted. In the agreement a provision for renewal of the agreement for the next season was also there. It said that- government may in its discretion renew this agreement for a further period of 1 yr only, provided that certain conditions are satisfied.

57. Continued.. One of the condition was if the purchaser has to submit application for renewal by 15 th Sept 1973. the purchaser who submitted his application for renewal shall be bound by his offer and also by the terms and conditions of the agreement, till orders and also by the terms and conditions of the agreement, till orders of the govt accepting or rejecting his offer are passed. Further breach of this condition shall entail forfeiture of security deposit, make the purchaser liable to be black listed and the purchaser will also have to pay damages for the loss suffered by the govt.

58. Continued.. The petitioner who was given contract for purchase of leaves applied for renewal. However, before the govt accepted or rejected his application for renewal, he sent a telegram withdrawing the application for renewal. The govt forfeited his security deposit. Held: the condition in the agreement that the application for renewal could not be withdrawn was part of the contract for purchase of leaves and that was duly supported by consideration and that the petitioner was bound by that condition I the contract.

59. Modes of revocation of offer Section 6 - A proposal is revoked- By notice of revocation given by the proposer By the lapse of time By failure of the acceptor to fulfill a condition precedent to acceptance or By the death or insanity of the proposer.

60. By notice of revocation Before an offer is accepted it can be revoked. An offer may be revoked by the communication of notice of revocation by the proposer to the other party. Under English law the offer stands revoked even though the offeree comes to know about the revocation of the offer through some other source and not by the offeror himself.

61. Dickinson v Dodds Dodds made an offer on 10 th June 1874 to Dickinson for the sale of his property for 800 pounds. It was mentioned that the offer was open till 12 th June 9 AM. On 11 th June Dodds sold the same property to somebody else. Dodds did not himself inform Dickinson about the sale of property to somebody else but Dickinson had come to know about this act from some other source. On 12 th June before 9:00 AM Dickinson accepted the offer and then sued Dodds for specific performance of the contract. Held - sale of property to somebody else by Dodds on 11 th June amounted to implied revocation of the offer for the sale of the property to Dickinson and therefore , the offer having being revoked on 11 th June was incapable of being accepted on 12 th . Untill the offer is accepted, it creates no legal obligation.

62. By lapse of time A proposal is revoked by the lapse of time prescribed in such proposal for its acceptance but if no time is prescribed by the lapse of a reasonable time. Ramsgate Victoria Hotel Co V Montefiore The defendant made an offer to purchase shares in the plaintiff company in June. This offer was accepted by the plaintiff company by allotting shares to him in November. The defendant contended that his offer has lapsed and therefore, he was not bound to take the shares. Held- the offer had lapsed as the same had not been accepted within a reasonable time and the defendant was not bound to buy shares.

63. By failure to fulfill a condition precedent When the offer is subject to some condition precedent, such a conditions must be fulfilled by the acceptor before making the acceptance. If the acceptor fails to fulfill the condition precedent to acceptance, the offer stands revoked. State of M.P V Gobardan Dass

64. By death or insanity of the offeror An offer is revoked 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. In India, death or insanity of the offeror does not automatically make the offer lapse. The offer stands revoked if the fact of death or insanity comes to the knowledge of the acceptor before acceptance. If death or insanity is not within the knowledge of offeree while he accepts the offer, it is valid acceptance giving rise to a contractual obligation. In England, if the offeree knows about the offeror’s death, the offer lapses.

65. Revocation of Acceptance S 5 - an acceptance may be revoked a any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. In India it can be revoked before the communication of the acceptance is complete. In England, acceptance once given cannot be revoked. As observed b y Anson- “Acceptance is to offer what a lighted match stick is to a train of gunpowder”