LL.B.FIRST YEAR COURSE I Unit I: CONTRACT-1 st (CODE: K-102) Formation of Contract Proposal and acceptance, their communication and Revocation (sec 1 to 10) Unit-II: Essential of Contact - Capacity to Contract, Consent, Consideration, Legality of Object and Consideration (sec 11 to 24) Unit III: Kind of Agreement - Void, Voidable agreements, Contingent contract, Discharge of Contract Performance of contract and anticipatory breach, Impossibility or illegality and Performance (Sec 26 to 55) Unit VI: Quasi Contracts, Breach of Contract and remedies for the Breach of Contract (Sec 68 to 75) Unit V: Specific Relief Meaning and Equitable nature, Specific Relief Act, 1963 Classification of Specific Relief, Possession of Property, Specific performance of Contracts, Rectification of Instruments, Recession of Contracts, Cancellation of Instruments, Rectification of Instruments, Recession of Contracts, Cancellation of Instruments, Declaratory Decress, Preventive Relief, Perpetual injunctions (sec 5 to 43) BOOK RECOMMENDED: 1. H.D. Tyagi : Contract I 2. Mulla D.F. : Indian Contract Act 3. Dr. Avatar Singh : Indian Contract Act 4. Specific Relief Act, 1963 : Law of Contract Act 5. Cheshire & Fifoot : Law of contract Act 6. Anson : Principles of the English Law of Contract 7. Desai (Latest Edition) : Indian contract Act. 1
CHAPTER 1 FORMATION OF CONTRACT SYNOPSIS Agreement and contract Proposal or Offer-Essentials of offer Acceptance-Essentials of valid Acceptance Revocation of Offer and Acceptance Standard Form Contracts Promissory Estoppels 1. AGREEMENT AND CONTRACT Void agreement and voidable contract distinguished THE AGREEMENT (OFFER AND ACCEPTANCE) PROPOSAL OR OFFER Offer and Invitation to treat (offer) distinguished Intention to create legal relationship In Rose and Frank Co. v. Crompton lit Bros. Ltd., 4 the Communication of offer necessary Cross Offers Standing, Open or Continuing Offer SYNOPSIS Agreement and contract. Proposal or Offer-Essentials of offer. Acceptance-Essentials of valid Acceptance. Revocation of Offer and Acceptance. Standard Form Contracts. Promissory Estoppel. 2
A contract means an agreement which is enforceable by law. An agreement consists of reciprocal promises between the two parties. In case of contract each party is legally bound by the promise made by him. A contract or an obligation to perform a promise could arise in the following way:- i. By Agreement and Contract; ii. By Standard Form Contract; and iii. By Promissory Estoppel. I. Agreement and Contract.- The most common way of mak.ng a contract is through an agreement. The two parties may agree to something through mutual negotiations. When one party makes an offer and the other accepts the same there arises an agreement which may be enforceable by law. II. Standard Form Contracts.-In the modern age some persons institutions or establishments such as the Railway. Insurance Companies Bank manufacturers of various goods etc may have to enter into a very large number of contracts with thousands of persons. They cannot possibly negotiate individually with the persons with whom the contracts are to be made. Contracts with pre-drafted matters are generally prepared by one party, which the other has to agree to As a general rule, such Standard Form Contracts are as much valid as those entered into through due negotiation. Different situations and problems arising in such contracts have been discussed hereunder. III. Promissory Estoppels.-Sometimes there may be no agreement and contract in strict sense of the term but a person making a promise may become bound because of the application of the equitable doctrine of estoppels. The above mentioned different modes of creating contractual obligation are being discussed below. 3
1. AGREEMENT AND CONTRACT Contract According to section 2 (h) of the Indian Contract Act, An agreement enforceable by law is a contract. AIl agreements are not enforceable by law and, therefore, all agreements are not contracts. Some agreements may be enforceable by law and others not. For example, an agreement to sell a radio set may be a contract, but an agreement to go to see a movie may be a mere agreement not enforceable by law. Thus, all agreements are not contracts. Only those agreements which satisfy the essentials mentioned in section 10 become contracts. However, all contracts are agreements. Agreement According to section 2(e) : Every promise and every set of promises forming the consideration for each other is an agreement. In an agreement there is a promise from both sides. For example. A promises to deliver his watch to B and in return B promises to pay a sum of Rs. 2000 to A, there is said to be an agreement between A and B. A promise is a result of an offer (proposal) by one person and its acceptance by the other. For example, when a makes a proposal to sell his watch to B for Rs. 2,000 and B accepts his proposal, Act defines promise as under:- 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
Thus, when there is a proposal from one side and the acceptance of that proposal by the other side, it results in a promise. This promise from the two parties to one another is known as an agreement. It has been noted above that an agreement enforceable by law is a contract. All such agreements which satisfy the conditions mentioned in section 1 of the Act are contract. Section 10 is as under: 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 essentials needed for a valid contract, therefore, are as under:- 1. An agreement between the two parties. An agreement is the result of a proposal or an offer by one party followed by its acceptance by the other. 2. Agreement should be between the parties who are competent to contract. 3. There should be a lawful consideration and lawful object in respect of that agreement. 4. There should be free consent of the parties when they enter into the agreement. 5. The agreement must not be one which has been expressly declared to be void. From the point of view of the legality there are different types of agreements. 1. CONTRACT According to sec. 2(h) contract is an agreement which is enforceable by law. It has been noted above that in order that an 5
agreement becomes a contract. it has to satisfy all the essentials of a valid contract as mentioned in section 10. 2. VOID AGREEMENTS According to sec. 2(g). an agreement not enforceable by law is said to be void. For instance an agreement by a minor has been held to be void. Sections 24 to 30 make a specific mention about agreements which are void. Those agreements include an agreement without consideration. an agreement in restraint of marriage and an agreement in restraint of trade. (See Chapter 6). 3. VOIDABLE CONTRACTS According to section 2(i) 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 is a voidable contract. Thus a voidable contract is one which could be avoided by one of the parties to the contract at his option. If such a party does not avoid the contract the contract remains valid but if it prefers to avoid the contract then the contract becomes void. For instance when the consent of a party to a contract has been obtained by coercion undue influence fraud or misrepresentation the contract is voidable at the option of the party whose consent has been so obtained. VOID AGREEMENT AND VOIDABLE CONTRACT DISTINGUISHED A void agreement is a nullity from its inception and no rights will accrue to any party thereto or his transferee, etc. A voidable contract on the other hand is a contract which can be avoided at the option of one of 6
the parties thereto. Such a contract remains valid until it has been avoided but becomes void only if and when it is avoided. Until such a contract has been avoided rights may accrue in favour of the parties to the contract or their transferees, etc. 4. Illegal agreements There are certain agreements which are illegal in the sense that the law forbids the very act, the doing of which is contemplated by the agreement. For example, an agreement to commit a crime or a tort, or an agreement which tends to corrupt public life, or an agreement to defraud public revenue, is illegal. Such an agreement is patently opposed to public policy. The law forbids making of such agreements. An illegal agreement may be distinguished from a mere void agreement which may not be opposed to public policy. For example, an agreement to do an impossible act is void, although there may be nothing in such an agreement which is opposed to public policy. The law does not forbid making of such agreements, although if the parties have made such an agreement, the same is not enforceable in a court of law. Whether an agreement can be termed as illegal or not may depend on the degree to which it is opposed to public policy. For example, an agreement in restraint of trade is void but we may not term it as an illegal agreement as we do when it is an agreement to commit a crime. THE AGREEMENT (OFFER AND ACCEPTANCE) It has been noted above that an agreement between the parties is one of the essentials for creating a contract. An agreement arises by an offer or proposal by one of the parties and the acceptance of such 7
offer by the other. The rules regarding proposal and acceptance are being discussed below. PROPOSAL OR OFFER The term proposal has been defined in section 2 (a) as follows 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 term proposal used in the Indian Contract Act is synonymous with the term offer used in English law. The willingness to do or to abstain from doing something, i.e., the proposal or the offer may be made with a view to obtaining the assent of the other party thereto. For example, A's willingness to sell his radio set to B for Rs.500 if B accepts to purchase the same, amounts to proposal by A for the sale of the radio set. But if a statement is made without any intention to obtain the assent of the other party thereto, that cannot be termed as proposal. In Bank of India v. Swarankar it has been held by the Supreme Court that a contact of employment is governed by the Contact Act. Announcement of Voluntary Retirement Scheme by a nationalized bank is not an offer. The employee offering to retire makes on offer and the same becomes effective when the written request of retirement is accepted. An employee who has offered to retire under the scheme can withdraw before his request is accepted. 8
OFFER AND INVITATION TO TREAT (OFFER) DISTINGUISHED A proposal, or an offer has to be distinguished from an invitation to offer or treat. Sometimes a person may' not offer to sell his goods, but make some statement or give some information with a view to inviting others to make offers on that basis. For example, a book-seller sends catalogue of books indicating prices of various books to many persons. This catalogue is not an offer to sell those books at prices indicated against those books. This is an 'invitation to treat'. If any person is interested in purchasing the book or books mentioned in the catalogue, he may make an offer and the person circulating the catalogue has a discretion to accept or not to accept the offer. Similarly, inviting persons to an auction, where goods to be auctioned are displayed, is not an offer for the sale of goods. The offer is made by the intending buyers in the form of bid. Such an offer (bid), when accepted by the fall of hammer or in some other customary way, will result in a contract. (Sec. 64 (2), Sale of Goods Act, 1930.) In the same way, the advertisement calling for tenders is not a proposal or offer but merely an invitation to the contractors for making an offer. The submission of a tender is in the nature of an offer. It will result in a contract only when the tender is accepted. Making of the highest bid will not automatically result in a contract. The contract will arise only when the highest bid is accepted by the competent authority and the said acceptance is communicated to the tendered. An offer can be withdrawn before it is accepted. Similarly, a bid at an auction can be retracted before the sallie is accepted by the fall of hammer or in any other customary manner. Nobody is bound to accept an 9
offer. An auctioneer, therefore, may not accept even the highest bid (offer). An advertisement by the auctioneer to sell goods by an auction being an invitation to treat rather than an offer, he does not incur any liability by t accepting the offer which is in the form of a bid. An auctioneer is free to cancel an auction sale announced by him. In Harris V. Nickerson 1, 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. It was held that he was not entitled to the same as there was as yet no contract between the two parties, which could make the defendant liable. When the goods are displayed either in a show-window or inside the shop and such goods bear price tags, the question which arises in such a case is, whether that amounts to an offer to sell goods at prices mentioned on the price tags. It has been held in Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd., that merely amounts to invitation to treat ami, therefore, if an intending buyer is willing to purchase the goods at a price mentioned on the tag, he makes an offer to buy the goods. The shopkeeper has the option to accept the offer or reject the same. The contract will arise only when the offer is accepted. No customer can force the shopkeeper to sell the goods at the price mentioned on the tag. In the above stated case, the defendants were having the business of retail sale of drugs. Medicines were displayed on the Shelves and their retail prices were also indicated. They had "selfservice" system. On entry into the shop a customer was given a wire basket. After selecting the articles needed by a customer he could put them in the basket and take them to the cash desk. The defendants had put 10
a registered pharmacist near the cash counter, who had been authorised to stop any customer removing any drug from the premises. The question which had arisen in this case was, whether the display of articles indicating their prices was an offer and the selection of articles by the customer an acceptance thereof, or the offer was made by a customer when he brought the articles to the cash desk and the defendants were free not to accept the offer, if they so liked. It was held that the display of articles, even on a self-service basis was not an offer but was merely an invitation to treat. When the customer selected an article and brought the same to the cash desk that amounted to an offer to buy the goods. The defendants were, therefore, free to accept the offer or not. The following observations of Lord Goddard, C.J. are worth noting :- I think that it is a well-established principle that the mere exposure of goods for sale by a shopkeeper indicates to the public that he is willing to treat but does not amount to an offer to sell. I do not think I ought to hold that principle is completely reversed merely because there is self-service scheme, such as this, in operation. In my opinion, it comes to no more than that the customer is informed that he may himself pick up an article and bring it to the shopkeeper with a view to buying it, and if, but if. the shopkeeper then expresses his willingness to sell, the contract for sale is completed. In fact, the offer is an offer to buy and there is no offer to sell: the customer brings the goods to the shopkeeper to see whether he will sell or not. In 99 cases out of a 100 he will sell and, if so, he accepts the customer's offer, but he need not do so. The very fact that the supervising pharmacist is at the place where the money has to be paid is an indication to the purchaser that the shopkeeper may not be willing to complete a contract with anybody who may bring the goods to him. 11
Ordinary principles of common sense and of commerce must be applied in this matter, and to hold that in the case of self-service shops the exposure of an article is an offer to sell, and that a person can accept the offer by picking up the article, would be contrary to those principles and might entail serious results. On the customer's picking up the article, the property would forthwith pass to him and he would be able to insist upon the shopkeeper allowing him to take it away though in some particular cases the shopkeeper might think that very undesirable. On the other hand if a customer had picked up an article he would never be able to change his mind and to put it back; the shopkeeper could say. "Oh no, the property has passed and u must pay the price. Harvey v. Facey is an example where the quotation of the price was held not to be an offer. The facts of the case are as under:- The defendants were the owners of a plot of land known as Bumper Hall Pen. The plaintiffs being interested in purchasing the same sent a telegram to the defendants. Will you sell us Bumper Hall Pen? Telegraph lowest cash price. The defendants in reply telegraphed:- Lowest price for Bumper Hall Pen, 900. The plaintiffs sent another telegram to the defendants saying. We agree to buy Bumper Hall Pen for 900 asked by you. Please send us your title deeds. The plaintiffs contended that the second telegram from the defendants quoting lowest price was an offer and the same had been accepted by the plaintiffs and the contract was complete. The defendants on the other hand, contended that quoting the price was not an offer which could be accepted. The Judicial Committee of the Privy Council 12
held that exchange of the above stated telegrams had not resulted in a contract. It was observed that the first telegram had asked two questions one regarding willingness to sell and the other regarding the lowest price. In reply only lowest price was quoted and this quoting of the price was not an offer. The third telegram from the plaintiffs saying we agree to buy was only an offer and not the acceptance of an offer. Since this offer had not been accepted there was no binding contract between the parties. In Badri Prasad v. State of Madhya Pradesh, the Divisional Forest Officer wrote to the plaintiff: Kindly inform whether you are ready to pay further Rs. 17,000 for the contract of big trees which (contract) is under dispute at present. The contract can be given to you on this compromise only on receipt of your reply the State Government will be informed. In reply to the above letter the plaintiff wrote back:- I am ready to pay Rs. 17,000 provided my claim to have the refund of Rs. 17,000 already paid, from the owner of the Village or any other relief consequential to the judgment of that case remains unaffected Subject to those conditions I shall pay Rs. 17,000 as required in your referred letter. The Supreme Court held that by those letters no contract had been concluded between the plaintiff and the Government. The letter from the Divisional Forest Officer seemed to be merely invitation to offer rather than offer. The letter in reply from the plaintiff was an offer. It was further observed that even if the letter from the Divisional Forest Officer to plaintiff is treated as an offer, there is no unconditional acceptance from the plaintiff and as such there is no contract in any case. 13
The case of Mac Pherson v. Appanna, is another illustration of an invitation to treat. The plaintiff having already offered to pay Rs. 6,000 to the defendant for his property, again wrote to the defendant's agent asking whether his offer had been accepted and also stating that he was willing to pay even higher price if found reasonable. The defendant's agent replied that the defendant would not accept less than Rs. 10,000. The plaintiff then wrote that he was willing to pay Rs. 10,000. The plaintiff contended that the offer of Rs. 10,000 had been accepted by him (the plaintiff) and sued for specific performance of the contract. It was held that in this case the letter from the defendant's agent was not a counter offer but was a mere quotation amounting to invitation to offer. The plaintiff s willingness to pay Rs. 10,000 was an offer and since the same had not yet been accepted, there was no binding contract between the parties. INTENTION TO CREATE LEGAL RELATIONSHIP In order that an offer, after acceptance, can result in valid contract, it is necessary that the offer should be made with an intention to create legal relationship. Promise in the case of social engagements is generally without an intention to create legal relationship. Such an agreement, therefore, cannot be considered to be a contract. Thus, an agreement to go for a walk, to go to a movie, to play some game, or entertain another person with a dinner, cannot be enforced in a court of law. Sometimes the parties may expressly mention that it is not a formal or legal agreement, whereas in some other cases such an intention could be presumed from their agreement. The test to know the intention of the parties is objective 14
and not subjective, merely because the promisor contends that there was no intention to create legal obligation would not exempt his from liability. In Rose and Frank Co. v. Crompton lit Bros. Ltd., the agreement between the parties to the contract provided that;- That arrangement is not entered into as a formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts..that it (the agreement) will be carried through by the parties with mutual loyalty and friendly co-operation. One of the parties made a breach of this agreement. In an action by the other party to enforce the agreement, it was held that since the agreement had provided that it was not a formal or legal agreement e same was not enforceable. An intention not to create legal relationship was implied in the case of Balfour v. Balfour. In this case the defendant, who was employed on a government job in Ceylon, went to England with his wife on leave. For health reasons the wife was unable to accompany the husband again to Ceylon. The husband promised to pay 30 per month to his wife as maintenance for the period she had to live apart. The husband having failed to pay this amount, was sued by the wife for the same. It was held that in this case, there being no intention to create legal relationship the husband was not liable. Atkin L.J. observed:- It is necessary to remember that 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 an acceptance of hospitality. Nobody 15
would suggest in ordinary circumstances that those agreements result in what we know as a contract, one of the most usual forms of agreements which does not constitute a contract appears to me to be the arrangements which are made between husband and wife To my mind those agreements or many of them, do not result in contracts at all... even though there may be what as between other parties would constitute..consideration. They are not contracts because the parties did not intend that they should be attended by legal consequences. In case of other close relationships also e.g., those of parents and their children, the same rules are applicable as are applicable to the husband and wife. The case of Jones v. Padavatton is an illustration of the agreement between a mother and her daughter. Mrs. Jones herself lived in Trinidad. Her daughter, who had been divorced and had a young son, lived in Washington and was serving in the Indian Embassy there. Mrs. Jones persuaded her daughter to leave her job in Washington 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 1962. In 1964 Mrs. Jones bought a house in England. The daughter was allowed to stay in a part of the house whereas 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 had arisen between Mrs. Jones and her daughter and Mrs. Jones brought an action to evict her daughter. Till that time the daughter had not completed her studies for the bar. The daughter contended that in 16
view of the promise made by her mother, she was legally bound to maintain her until she completed her studies. It was held that there was nothing to indicate that there was an intention to create legal relationship between the parties, as is evident from the fact that neither the agreement was reduced to writing nor the duration for which she was to be maintained had been mentioned. The mother's action against the daughter for eviction succeeded. It may be noted that although in the case of close relationships, there may be generally no intention to create legal relationship but there is nothing which prevents these persons from agreeing to be bound by their promises. Thus, if an arrangement clearly contemplates an intention to create legal relationship, the parties become bound' thereby. In Meritt v. Meritt, the husband and wife were the joint owners of a building which was subject to a mortgage to a building society. The husband left the matrimonial home to live with another woman. At that time, at the insistence of the wife, the husband signed a note saying that the wife will pay all outstanding amounts in respect of the house and in return I will agree to transfer the property into your sole ownership. It was held that in this case it was clear that the parties intended to create legal relationship and, therefore, the husband was bound by the contract. In S.V.R. Mudaliar v. Rajababu, it has been held by the Supreme Court that even if an agreement is described as gentleman's understanding, yet if there is a clear agreement that the property which is being conveyed will be re-conveyed to the vendor, the agreement is binding and there is no need to prove that there was intention to create legal relationship, because that is presumed in such a case. 17
COMMUNICATION OF OFFER NECESSARY An offer when accepted results in a contract. An offer can be accepted only after the same has come to the knowledge of the offeree. It means that the offer has to be communicated to the offeree in order that the offeree can accept it. According to sec. 4, The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. If an offer has not yet been communicated, even if somebody acts according to the terms of the offer, he cannot be deemed to be the acceptor of that offer. Acting in ignorance of an offer does of an offer does not amount to the acceptance of the same. The point may be explained by referring to the case of Lalman Shukla v. Gaurt Dutt. In this case the defendant's nephew absconded from home. The plaintiff, who was defendant's servant, was sent to search for the missing boy. After the plaintiff had left in search of the boy, the defendant issued handbills announcing a reward of Rs. 501 to anyone who might find out the boy. The plaintiff who was ignorant of this reward was successful in searching the boy. When he came to know of the reward which had been announced in his absence he brought an action against the defendant to claim this reward. It was held that since the plaintiff was ignorant of the offer of reward, his act of bringing the lost boy did not amount to the acceptance of the offer and therefore he was not entitled to claim the reward. If a person has the knowledge of the offer. His acting in accordance with the terms thereof a amounts to the acceptance of the same. In such a case it is material that at the time of accepting the offer the accepted does not intend to claim the reward mentioned in the offer. In Williams v. 18
Carwardine the plaintiff who knew that reward had been announced to be given to anyone who gave information leading to the conviction of an assailant for murder, gave the necessary information. While giving the information, the plaintiff mentioned that she had given the information 'to ease her conscience. At that time she did not intend to claim the reward. She however subsequently brought an action to claim the same. It was held that since the offer had been accepted with its knowledge, there was a valid contract and, therefore she was entitled to claim the reward. Cross Offers When the offers made by two persons to each other containing similar terms of bargain cross each other in post they are known as cross offers. For example, on 1st January, A offers to sell his watch to B for Rs. 2,000 through a letter sent by post. On the same date B also writes to A making an offer to purchase A's watch for Rs. 2,000. When A or B send their letters, they do not know about the offer which is being made by the other side. In these cross offers, even though both the parties intend the same bargain, there arises no contract. A contract could arise only if either A of B, after having the knowledge of the offer, had accepted the same. In Tinn v. Hoffmann, A wrote to B indicating his willingness to sell 800 tons of iron at 69 sh. per ton. On the same day, B also wrote to A offering to buy 800 tons of iron at the same rate of 69 sh. per ton. The two letters crossed each other in post. B brought an action against A for the supply of iron contending that a valid contract had been created between the two parties. It was held that in this case there were only two cross offers and the offer of neither of the parties having been accepted by the other: there was no contract which could be enforced. 19
SPECIFIC AND GENERAL OFFERS When the offer is made to a specific or an ascertained person, it is known as a specific offer, but when the same is not made to any particular person but to the public at large, it is known as general offer. For instance, an offer to give reward to anybody who finds a lost dog, is a general offer. This general offer will be deemed to be accepted by anyone who actually finds the lost dog. The person, who accepts this offer, generally by performing the condition of the proposal, can bind the person making the offer. According to sec. 8, Performance of the conditions of a proposal... is an acceptance of the proposal. Thus, although a general offer is made to the public at large, the contract is concluded only with that person who acts upon the terms of the offer, viz., who accepts the case of Carbolic Smoke Ball Co. is an illustration of a contract arising out of a general offer. The facts of the case are:- The defendants advertised their product Carbolic Smoke Ball. a preventive remedy against influenza. In the advertisement they offered to pay a sum of 100 as reward to anyone who contacted influenza, cold or any disease caused by taking cold, after having used the Smoke Ball three times a day for two weeks, in accordance with the printed directions. They also announced that a sum of 1,00 had been deposited with the Alliance Bank to show their sincerity in the matter. The plaintiff (Mrs. Carlill) relying on the advertisement purchased a Smoke Ball from a chemist, used the same in accordance with the directions of the defendants but still caught influenza. She sued the defendants to claim the reward of 100 advertised by them. It was held that this being a general offer addressed to all the world had ripened into a contract with the plaintiff by her act of performance of the required conditions and thus 20
accepting the offer. She was, therefore, entitled to claim the reward. The following observation by Bowen, L.J., may be noted: It is an offer made to all the world, and why should not an offer be made to all the world which is to ripen into a contract with anybody who comes forward and performs the condition? It is an offer to become liable to anyone who, before, it is retracted, performs the conditions, and, although the offer is made to the world, the contract is made with that limited portion of the public who come forward and perform the condition on the faith of the advertisement. It has been noted above that performance of the conditions of the offer amounts to the acceptance of the offer. It may be further noted here that unless the person p forming those conditions has got the knowledge of the offer, there is no question of his act amounting to acceptance. In Laxman Shukla v. Gauri Dutt, the defendant's nephew having been lost, he sent the plaintiff, his servant, to search for the nephew. After the plaintiff had gone, the defendant, through handbills, advertised that a reward of Rs. 501 would be paid to anyone who would find the lost boy. The plaintiff, who was ignorant of this offer, was successful in finding out the boy. After finding the boy, the plaintiff came to know of the reward and he sued the defendant to claim the same. It was held that since the plaintiff was ignorant of the offer, his finding out the boy did not amount to the acceptance of the offer and, therefore, he was not entitled to claim the reward. On the other hand, if the plaintiff knows that the defendant has announced a reward of Rs. 500 to be paid to anyone who finds the defendant's son, the plaintiff can claim this amount when he is successful in finding the defendant's son. Similarly, if the plaintiff knows 21
that a reward has been announced to be given to anybody giving information leading to the conviction of an assailant for murder, she would be entitled: the reward on supplying the necessary information. STANDING, OPEN OR CONTINUING OFFER An offer which is allowed to remain open for acceptance over a period of time is known as a standing, open or a continuing offer. For example, an offer to supply 1,000 bags of wheat from 1st January to 31st December, in accordance with the orders which :nay be placed from time to time, is a standing offer. As and when the orders are placed that amounts to acceptance of the offer to that extent. In the above stated illustration if an order for the supply of 100 bags of wheat is placed on 15th January, there is acceptance of the offer to that extent and the offer or becomes bound to supply those 100 bags of wheat. So far as the remaining quantity is concerned. This offer can be revoked just like any other offer. Tender for the supply of goods is a kind of standing offer. An advertisement inviting tenders is merely an invitation for quotations. When the tender is approved. it becomes a standing offer. As and when an order is placed on the basis of the tender that amounts to acceptance of the offer and results in a binding contract. Such an offer may be revoked or withdrawn before the order has been placed. Even though the offer is originally made open till a particular time, it may be revoked earlier than that, because the offer or is not bound to keep the offer subsisting and he may revoke it at any time before its acceptance. 22
CHAPTER-III ACCEPTANCE A proposal when accepted, results in an agreement. It is only after the acceptance of the proposal that a contract between the two parties can arise. According to Anson, Acceptance is to offer what a lighted match is to a train of gunpowder. An offer creates no legal rights or duties unless it has been accepted. It is an acceptance which converts an offer into a contract. According to section 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. According to Cheshire and Fifoot: An invitation to accept or even a mental resolve to accept a proposal does not give rise to a contract. There must be some over or mental manifestation of the intent by speech, writing or other Act. Felthouse v. Bindley, (1863) 7 L T 835: The plaintiff wrote a letter to his nephew offering to buy his horse for 30, 15s. He also wrote in his letter. If I hear no more about him, I shall consider the horse mine at 30, 15s. The nephew did not give any reply of his letter. However, he told the defendant, an auctioneer, not to sell the horse. Thus, he intended to reserve the horse for his uncle. But the defendant sold the horse by mistake. The plaintiff, thereupon, sued the defendant, the auctioneer for conversion of property. 23
The court dismissed this plea and held that since the nephew did not communicate his acceptance. No contract took place between the plaintiff and his nephew and consequently he had no right to complain of the sale. The Court also held that the communication of acceptance must be made to offerer himself or his agent. The communication of acceptance to stranger will not be a valid acceptance. Powell v. Lee, (1908) 90 L T 234: The plaintiff was an applicant for the headmastership 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 an the plaintiff sued for breach of contract. The court rejected the action and observed that there must be notice of acceptance from. the contracting party in some way. Information by an unauthorized person is an insufficient as overhearing from behind the door. Bhagwandas v. Girdharilal and Co., AIR 1966 SC 543: The principle is that there should be some external manifestation (Court Act) of acceptance. A mere mental determination to accept unaccompanied by any external indication will not be sufficient: 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 external manifestation of that intent by speech, writing or other act. Communication of Acceptance must be by a Person who has Authority to Accept 24
In order that the acceptance can be treated as valid it is necessary that the same must be communicated to the offer or either by the offered or by some duly authorized person on his behalf. If the communication is made by an unauthorized person, it does not result in a contract. Powell v. Lee, (1908) 99 L T 284: 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 this case court held that no contract was concluded because a communication of acceptance to be valid must be made by the offeree himself or his unauthorized agent. Karan Singh v. The Collector, Chattarapur, AIR 1980 MP 89: In an auction of the quarry lease, the petitioner bids of Rs. 1800 was the highest. In accordance with the auction conditions the petitioner deposited the security and earnest money of Rs. 540. The bid was not accepted at the auction. The bid was subsequently accepted by the collector, but instead of sending the communication of acceptance to the petitioner, the same was wrongly sent to somebody else. The officer concerned realized the mistake after the expiry of the period of lease. Then a demand notice was sent to the petitioner asking him to pay the lease money. The petitioner, on the other hand, demanded the refund of the security of Rs. 540. It was held that the petitioner's bid which was an offer although accepted on file, did not result in a contract as no intimation was sent to the petitioner and received by him. The demand notice for recovering the lease money was quashed and the respondent were directed to refund the security deposit. 25
Acceptance may also be inferred from the Conduct of Parties It is well-settled that an offer may be accepted by conduct. But conduct would only amount to acceptance if it is clear that the offeree did the act with the intention actual or apparent of accepting the offer. Brogden v. Metropolitian Railway Co., (1877) LR 2 App Cas 666: The respondents were being supplied coal and coke for their locomotives by the appellants for sometime without any formal agreement for the same. The respondents sent a draft agreement to the appellant leaving some blanks to be filed and signed by the appellant. The court held that mere silence does not constitute acceptance but it may be implied from the conduct of the parties. In this case the fact that the respondents had placed order for supply of coal and accepted the same, constituted their acceptance and the fact that the appellant supplied the coal on the terms of the agreement clearly showed that the parties had entered into the contractual relationship on the basis of the agreement sif;l1ed by the appellant. The appellant was, therefore, held liable. Rakesh Kumar Dinesh Kumar v. U.G. Hotels & Resorts Ltd., AIR 2001 HP 135 (138): In a contract for supply of goods by plaintiffs to defendant, there was default by defendant in making payment. Subsequently, the defendant made on offer, in writing to a certain amount in full and final settlement of dues. The conduct of the parties showed that the plaintiff had impliedly accepted the offer and received part of amount. Thereafter the plea that the said offer in writing cannot be termed as fresh concluded contract for time-barred debt and as such suit for recovery was not within limitation would be untenable. 26
IMPLIED ACCEPTANCE The acceptance of an offer/promise can be in express terms and can also be in implied terms. Bharat Petroleum Corporation Ltd. v. Great Eastern Shipping Co. Ltd., AIR 2008 SC 257: There was an agreement called the time charter party in legal parlance entered into between the appellant and the respondent on 6th may, 1997, for letting on hire vessels for a period of two years, on terms and conditions set-out in the said agreement. The charter party was extended for further period. However, there had been correspondence with regard to the finalization of the hire rates. No new agreement was signed between the parties, however, the appellant continued to use the vessel on hire with them. Under the time charter dated 6th May, 1997. It was held by the Apex Court that the conduct of the parties, as evidenced in the said correspondence and, in particular appellant's silence on respondent letters. Coupled with the fact that they continued to use the vessel, manifestly went to show that they accepted the stand of the respondent sub silento and thus contained to bind themselves by the terms and conditions contained in the Charter Party dated 6th May, 1997. WHEN IS COMMUNICATION OF ACCEPTANCE COMPLETE As soon as the communication of acceptance is complete, a contract comes into being, whereby both the parties become bound in case the parties to the contract are present at the same place, one making the offer and the other communicating the acceptance, both the parties become bound immediately. The problem arises when the parties are at 27
different places and the communication of offer and acceptance is made by post or telephone etc. According to section 4: 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, when it comes to the know ledge of the proposal. Illustration 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 B. Postal Communication.-When the parties are at a distance and are contracting through post or by messengers, the question arises when is the contract conducted? Does the contract arise when the acceptance is posted or when it is received. It was contended on their behalf that till the plaintiffs answer was actually received there could be no binding contract and therefore they were free to sell the-wool on 8th. According to court, the complete contract arises on the date when the letter of acceptance is posted in due course. Household Fire and Accidental Insurance Co. v. Grant, (1879) Ex D 216: In this case, the defendants made an application for the allotment of shares in the plaintiffs company. The plaintiff posted a letter of acceptance in due lime but the defendant never received this letter. Yet it 28
was held that the contract was complete when the letter of acceptance was posted and hence the defendant was bound by the acceptance. The siger L.J. stated that an acceptance which only remains in the breast of the acceptor without being actually and by legal implication communicated to the offeror, is no binding agreement. The acceptor, in posting the letter has put it out of his contract and done an extraneous act which clinches the matter, and shows beyond all doubt that each side is bound. Dunlop v. Higgins, (1848) 1 HLC 381: Dunlop & Co. offered to sell 200 tons of iron pigs at 65 shilling per ton to Higgons & Co. through their letters dated 22nd and 28 January, 1945. Higgins & Co. received the letters an 30th Jan and 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 service and the letter of acceptance instead of reaching on 31st January reached Dunlop & Co. on 1st February Dunlop & Co. refused to supply iron pigs on the ground that the receipt of the letter of acceptance by them had been delayed. It was held that Develop & Co. had become bound by the contract as soon as the letter of acceptance was posted to them, i.e., on 30th January, 1945. Bhagwandas v. Girdharilal & Co., AIR 1966 SC 543: This rule was based on commercial expediency or watch which also called the 'empirical grounds'. It makes a large inroad upon the concept of consensus a meeting of minds' which is the basis of foundation of formation or contract. Kulkuram Kesharwari v. State of Madhya Pradesh, AIR 1986 MP 204: The Madhya Pradesh High Court observed that the general rule 29
is that it is the acceptance of offer by the offeree and intimation of that acceptance to the offerer which result in a contract. Progreesive Construction Ltd. v. Bharat Hydro Power Corp. Ltd., AIR 1996 Del 92: It has been held that when the parties enter into contract by correspondence by post, the contract would be deemed to be complete, where the offer was received and the acceptance was posted. The place of delivery of letter is irrelevant and, therefore, the cause of action does not arise where the contract of letter is delivered. Acceptance by Telephone or Telex.-Sections 4 and 5, which make provisions about the communication of offer and acceptance and the revocation thereof, do not make a mention whether these provisions relate to communication made with the help of telephone and telex also, 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 the fact of acceptance. Entares Ltd. v. Mills Far East Corporation, (1955) 2 QB 327: The plaintiff made an offer from London by telex to the agents in Holland of the defendant of the purchase of certain goods, and the offer was accepted by a communication received on the plaintiff's telex machine in London. On the allegation that breach of contract was committed by the defendant corporation, the plaintiff sought leave to serve notice of a writ on the defendant corporation claiming damages for the breach of contract. The defendant corporation contended that the contract was made in Holland. Court of Appeal held that where a contract is made by instantaneous communication for example by telephone the contract is 30
complete only when the acceptance is received by offerer, since generally an acceptance must be notified to the offerer to make a binding contract. Denning L.J.: That the rule about instantaneous communication between the parties is different from the rule about the post. The contract is only complete when the acceptance is received by the offerer, and the contract is made at the place where the acceptance is received. In the case of telephone conversation, in a sense the parties are in the presence of each other: each party is able of hear the voice of the other. There is instantaneous communication of speech intimating offer and acceptance, rejection or counter-offer. Intervention of an electrical impulse which results in the instantaneous communication of messages from a distance does not alter the nature of the conversation so as to make it analogous to that of an offer and acceptance through post or by telegraph. 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 prescribe the manner in which it is to be accepted, if the proposal prescribe 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. 31
ESSENTIALS OF A VALID ACCEPTANCE 1. Acceptor should be communicated by the offeree to the offeror. 2. Acceptance should be absolute and unqualified. 3. Acceptance should be made in some usual and reasonable manner, unless the proposal prescribes the manner of acceptance. 4. Acceptance should be made while the offer is still subsisting. 1. Acceptance should be communicated When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. It means that the offeree must signify his assent, or communicate the acceptance. The communication of acceptance is deemed to be made by any act or omission of the party accepting, by which he intends to communicate such acceptance or which has the effect of communicating it. For a valid contract, the acceptance must be communicated and moreover, such communication should be made to the offeror. If I decide to accept your offer but do not communicate my acceptance to you or after having decided to accept your offer I tell my servant about my intention that cannot give rise to a contract. Illustration.-A law book seller, without any order from A sent by post a costly law book to him with the note that if he did not return the book, he would presume that the same has been accepted by him. A was of course ready to return the book but the book-seller was not agreeable to accept the same inasmuch as a new edition of the book had been published during this period. Is A in any way liable to the book-seller? The court observed that the offeror cannot impose upon the offeree an obligation to accept nor proclaim that silence of the offeree shall be 32