Legal aspects od business

AMRITA SCHOOL OF BUSINESS, KOCHI LEGAL ASPECTS OF BUSINESS Assignment - 1 “AGREEMENT” GROUP-3 Submitted By, Roll No: 18 Dheera Roll No: 19 Dheeraj Roll No: 20 Divya Roll No: 21 Dona Roll No: 22 Febin Roll No: 23 Gauri Roll No: 24 Gayathri Roll No: 25 GiriShanker.M 1 An agreement establishes the first stage in the existence of a contract. The three main elements of contractual formation are whether there is (1) offer and acceptance (agreement) (2) consideration (3) an intention to be legally bound. As a first step of making a contract there must be a lawful offer by one party and a lawful acceptance of the offer by the other party. For example “A” offer to sell a watch to” B” for Rs.200 and “B” accept the offer a contract come into being . THE PROPOSAL OR OFFER The word proposal and offer are synonymous and are used interchangeably. section 2(a) of the Indian contract Act defines a proposal as ,”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.”This definition reveals the following three essentials of a proposal‟. (i) (ii) (iii) It must be an expression of the willingness to do or to abstain from doing something. The expression of willingness to do or to abstain from doing something must be to another person. There can be no proposal by a person to himself. The expression of willingness to do or to abstain from doing something must be made with a view to obtaining the assent of the other person to such act or abstinence. For example “I am willing to sell my motorcycle to you forRs.14000”, we have a „proposal‟ as it has been made with the object of obtaining the assent of N. The person making the „proposal‟ or „offer „ is called the „promisor‟ or „offeror‟,the person to whom the offer is made is called the „offeree‟ and the person accepting the offer is called the „promisee, or „acceptor‟. DIFFERENT KINDS OF OFFERS a) An offer may be general or specific 1. General offer: When an offer is addressed to an unascertained body of individuals it is called general offer. It is also known as offers at large.a general offer can be accepted by any individual. 2. Specific Offer: If an offer is made to a definite individual body of individual it is called a specific offer. Specific Offers are called offers individuals. It can be accepted by the person or persons to whom it is made. b) Standing Offer ( Open Offer): An offer for a continuous supply of a certain article at a certain rate over a definite period is called a standing offer. 2 c) Counter Offer: A counter offer is rejecting the original offer and making a new offer. The new offer is the counter offer. A person, who makes a counter offer, subsequently changes his mind and wishes to accept the original offer, cannot do so, as the first offer has already lapsed. d) Cross Offer: When two parties make identical offer to each other in ignorance of each other‟s, such offers are called cross offers. They shall not constitute acceptance of one‟s offer by the other. INVITATION TO OFFER Invitation to offer is offer to negotiate. That is, offers to receive offers. Where a party without expressing its final willingness proposes certain terms on which it is willing to negotiate, it only invites the other party to make an offer. Thus if an advertisement is made by a company that it has a stock of books to sell there is no offer. It is only an offer to negotiate. LEGAL RULES REGARDING A VALID OFFER A valid offer must be in conformity with the following rules: 1. AN OFFER MAY BE EXPRESSED OR IMPLIED An offer may be made either by words or by conduct. An offer which is expressed by words, spoken or written is called an ,express offer, and the one which is inferred from the conduct of a person or the circumstances of the case is called an implied offer. Illustration: (a) M says to N that he is willing to sell his motorcycle to him for Rs.20000.This is an express offer. (b) a shoe shiner starts shining some one‟s shoes ,without being asked to do so, in such circumstances that any reasonable man could guess that he expects to be paid for this ,he makes an implied offer. 3 2. AN OFFER MUST CONTEMPLATE TO GIVE RISE TO LEGAL CONSEQUENCE AND BE CAPABLE OF CREATING LEGAL RELATIONS If the offer does not intend to give rise to legal consequences, it is not valid offer in the eye of law. An offer to a friend to dine at the offeror‟s place, or an offer to one‟s wife to show her a movie is not a valid offer and as such cannot give rise to a binding agreement even though it is accepted and there is consideration, because in social agreements or domestic arrangements the presumptions is that the parties do not intend legal consequences to follow the breach of agreement .But in the case of agreements regulating business transactions the presumption is just the other way. In business agreements it is taken for granted that parties intend legal consequences to follow. 3. THE TERMS OF THE OFFER MUST BE CERTAIN AND NOT LOOSE OR VAGUE If the terms of the offer are not definite and certain, it does not amount to a lawful offer. Illustration: (a) X purchased a horse from Y and promised to buy another, if the first one proves lucky. X refused to buy the second horse .Y could not enforce the agreement, it being loose and vague. (b) A offers to B lavish entertainment, if B does a particular work for him. A‟s offer does not amount to lawful offer being vague and uncertain. 4. AN INVITATION TO OFFER IS NOT AN OFFER An offer must be distinguished from an „invitation to receive offer‟ or as it is sometimes expressed in judicial language an „invitatation to treat„. In the ease of an invitation to receive offer the person sending out the invitation does not make an offer but only invites the other to make an offer. His object is merely to circulate information that he is willing to deal with anybody who, on such information, is willing to open negotiations with him. Such invitations for offers are therefore not offers in the eye of law and do not become agreements by their acceptance. For example, quotations, catalogues of prices of goods with prices market hero do not constitute an offer. They are instead an invitation for offer and hence if a customer asks for goods or makes an offer, the shopkeeper is free to accept the offer or not. 5. AN OFFER MAY BE SPECIFIC OR GENERAL An offer is said to be specific when it is made to a definite person or persons. Such an offer can be accepted only by the person or persons to whom it is made. Thus where M makes an offer to N to sell his bicycle for Rs.200, there is a specific offer and N alone can accept it. A general offer, on the other hand is one which is made to the world at large or public in general and may be accepted by any person who fulfils the requisite conditions. 4 6. AN OFFER MUST BE COMMUNIACTED TO THE OFFEREE An offer is effective only when it is communicated to the offeree .Until the offer is made known to the offeree, there can be no acceptance and no contract. Doing anything in ignorance of the offer can never be treated as its acceptance, for there was never a consensus of wills. This applied to both „specific‟ and „general‟ offers. Illustration: (a) A, without knowing that a reward has been offered for the arrest of a particular criminal, catches the criminal and gives the information to the superintendent of police. A, cannot recover the reward as he cannot be said to have accepted the offer when he was not at all aware of it. 7. AN OFFER SHOULD NOT CONTAIN A TERM THE NON-COMPLIANCE OF WHICH SHOULD AMOUNT TO ACCEPTANCE Thus an offeror cannot say that if acceptance communicated up to a certain date, the offer would be presume to have been accepted. If the offeree does not reply, there is no contract because no obligation to reply can be imposed on him, on the grounds of justice. 8. AN OFFER CAN BE MADE SUBJECT TO ANY TERMS AND CONDITIONS An offerer may attach any terms and conditions to the offer he makes. He may even prescribe the mode of acceptance. The offeree will have to accept all the terms of the offer. There is no contract, unless all the terms of the offer are complied with and accepted in the mode prescribed. As regards mode of acceptance --, for example, if the offerer asks for sending the acceptance „ by telegram „and the offeree sends the acceptance „by post‟, the offerer may decline to treat that acceptance as valid acceptance provided he gives a notice to that effect to the offeree within a reasonable time after the acceptance is communicated to him. If he does not inform the offeree as to this effect, he is deemed to have accepted the deviated acceptance. 9. TWO IDENTICAL CROSS Offers do not make a contract – when two parties make identical offers to each other, in ignorance of each other‟s offer, the offers are „cross-offers‟. „Cross offers „do not constitute acceptance of one‟s offer, by the other and as such there is no completed agreement. Illustration: on 15 October, 2008 A wrote to b offering to sell him 100 tons of iron at Rs 25000 per ton. On the same day, B wrote to A offering to buy 100 tons of iron at Rs 25000 per ton. The letters crossed in the post. There is no concluded contract between A and B, because the offers were simultaneous, each being made in ignorance of the other, and there is no acceptance of each other‟s offer. 5 LAPSE AND REVOCATION OF OFFER An offer lapses and becomes invalid that is come to an end in the following circumstances: 1. AN OFFER LAPSES AFTER STIPULATED OR REASONABLE TIME An offer lapses if acceptance is not communicated within the time prescribed in the offer, or if no time is prescribed, within a reasonable time. What is a reasonable time is a question of fact depending upon the circumstances of each case. For example, an offer made by telegram suggests that a reply is required urgently and if the offeree delays the communication of his acceptance even by a day or two, the offer will be considered to have lapsed. Illustration – an application for allotment of shares was made on June 8.the applicant was informed on the 23 November that shares were allotted to him. He refused to accept them. It was held that his offer had lapsed by reason of the delay of the company in notifying their acceptance, and that he was not bound to accept the shares. 2. AN OFFER LAPSES BY NOT BEING ACCEPTED IN THE MODE PRESCRIBED, OR IF NO MODE IS PRESCRIBED, IN SOME USUAL AND REASONABLE MANNER. If the offeree does not accept the offer according to the mode prescribed, the offer does not lapse automatically. It is for the offeror to insist that his proposal shall be accepted only in the prescribed manner, and if he fails to do so he is deemed to have accepted the acceptance. 3. AN OFFER LAPSES BY REJECTION An offer lapses if it has been rejected by the offeree. The rejection may be express, i.e., by word spoken or written, or implied. Implied rejection is one: (a) where either the offeree makes a 'counter offer', or (b) where the offeree gives a conditional acceptance. Illustrations: i. A offered to sell his house to B for 90,000. B offered Rs. 80,000 for which price A refused to sell. Subsequently, B offered to purchase the house for Rs. 90, 000. A declined to adhere to his original offer. B filed a suit to obtain specific performance of the alleged contract. Dismissing the suit, the court held that A was justified because no contract had come into existence, as B, by offering Rs 80, 000, had rejected the original offer. Subsequent willingness to pay Rs. 90, 000 could be no acceptance of A's offer as there was no offer to accept. The original offer had already come to an end on account of 'counter offer'. 6 ii. A offered to sell his motorcar to B for Rs. 85, 000. B said that he accepted the offer if he was appointed as General Manager of A's factory. B's acceptance is a 'conditional acceptance' which amounts to rejection of A's offer and there is no contract. 4. AN OFFER LAPSES BY THE DEATH OR INSANITY OF THE OFFEROR OR THE OFFEREE BEFORE ACCEPTANCE If the offeror dies or becomes insane before acceptance, the offer lapses provided that the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. The fact of death or insanity of the offeror would not put an end to the offer until it comes to the notice of the acceptor before acceptance. An offeree's death or insanity before accepting the offer puts an end to the offer and his heirs cannot accept for him. 5. AN OFFER LAPSES BY REVOCATION An offer is revoked when it is retracted back by the offeror. An offer may be revoked at any time before the acceptance, by the communication of notice of revocation by the offeror to the other party. For example, at an auction sale, A makes the highest bid. But he withdraws the bid before the fall of the hammer. There cannot be a concluded contract because the offer has been revoked before acceptance. Further, an offer, agreed to be kept open for a definite period, may be revoked even before the expiry of that period, unless there is some consideration for so keeping it open. The effect of fixing a time for acceptance is merely to fix a time beyond which the offer cannot be accepted. Where no time limit is set, the offer cannot be accepted after a reasonable time. Illustration M offers to sell his house to N for Rs 140000.N says to M that if he agrees to keep the offer open for 10 days, as N has obtained an option to purchase the house within 10 days. If M revokes the offer before the expiry of 10 days; he can be sued for breach of option contract. 6. REVOCATION BY NON- FULFILMENT OF A CONDITION PRECEDENT TO ACCEPTANCE An offer stands revoked if the offeree fails to fulfill a condition precedent to acceptance. Thus, where A, offers to sell his scooter to B, for Rs 4000, if B joins the Lions Club within a week, the offer stands revoked and cannot be accepted by B, if B fails to join the Lions Club. 7 7. AN OFFER LAPSES BY SUBSEQUENT ILLEGALITY OR DESTRUCTION OF SUBJECT MATTER An offer lapses if it becomes illegal after it is made, and before it is accepted. Thus, where an offer is made to sell 10 bags of wheat for Rs. 6500 and before it is accepted a law prohibiting the sale of wheat by private individuals is enacted, the offer comes to an end. In the same manner, an offer may lapse if the thing, which is the subject matter of the offer, is destroyed or substantially impaired before acceptance. THE ACCEPTANCE A contract, as already observed, emerges from the acceptance of an offer. Acceptance is giving one‟s consent to an offer. And, when the offeree accepts the offer, it becomes a contract. LEGAL RULES REGARDING A VALID ACCEPTANCE A valid acceptance must be in conformity with the following rules; 1. ACCEPTANCE MUST BE GIVEN ONLY BY THE PERSON TO WHOM THE OFFER IS MADE An offer can be accepted only by the person or the person‟s to whom it is made and with whom to imports an intention to contract: it cannot be accepted by the another person without the consent of the offeror. The rule of law is clear that” if you propose to make a contract with A, then B can‟t substitute himself for A without your consent”. An offer made to a particular person can be validly accepted by him alone. Similarly an offer made to a class of persons (i.e., teachers) can be accepted by any member of that class. An offer made to the world at large can be accepted by any person who has knowledge of the existence of the offer. Illustration: A sold his business to his manager B without disclosing the fact to his customers. C, a customer , who had a running account with A, set an order for supply of goods to A by name. B received the order and executed the same. C refused to pay the price. It was held that there was no contract between B and C because C never made any offer to B and as such C was not liable to pay the price to B. 8 2. ACCEPTANCE MUST BE ABSOLUTE AND UNQUALIFIED In order to be legally effective it must be an absolute and unqualified acceptance of all the terms of the offer. Even the slightest deviation from the terms of the offer makes the acceptance invalid. In effect a deviated acceptance is regarded as a counter offer in law. Illustration: L offered to M his scooter for Rs. 4500. M accepted the offer and tendered Rs. 3900 cash down, promising to pay the balance of Rs. 100 by the evening. There is no contract, as the acceptance was not absolute and unqualified. 3. ACCEPTANCE MUST BE EXPRESSED IN SOME USUAL AND REASONABLE MANNER, UNLESS THE PROPOSAL PRESCRIBES THE MANNER IN WHICH IT IS TO BE ACCEPTED If the offeror prescribes no mode of acceptance, the acceptance must be communicated according to some usual and reasonable mode. The usual modes of communication are by word of mouth, by post or telegram; it is called an express acceptance. Implied acceptance may be given either by doing some required act, for example, by tracing the lost goods for the announced reward, or by accepting some benefit or service, for example, stepping in a public bus by a passenger. Illustration: If the offeror prescribes 'acceptance by telegram' and the offeree sends acceptance through a messenger, there is no acceptance of the offer, if the offeror informs the offeree that the acceptance is not according to the mode prescribed. But if the offeror fails to do so, it will be presumed that he has accepted the acceptance and a valid contract will rise. 4. ACCEPTANCE MUST BE COMMUNICATED BY THE ACCEPTOR For an acceptance to be valid, it must not only be made by the offeree but must also be communicated by, or with the authority of, the offeree (or acceptor) to the offeror. Illustration: P was a candidate for the post of headmaster in a school. The managing committee of the school passed a resolution selecting him for the post, a member of the managing committee, and acting in his individual capacity, informed P that he had been selected, but P received no other intimation. Subsequently, the resolution was cancelled, and P was not appointed to the post. P filed a suit against the committee for breach of contract. The court held that in the absence of an authorized communication from the committee there was no binding contract. 9 5. ACCEPTANCE MUST BE GIVEN WITHIN A REASONABLE TIME AND BEFORE THE OFFER LAPSES AND/OR IS REVOKED. To be legally effective acceptance must be given within the specific time limit, if any, and if no time is stipulated, acceptance must be given within a reasonable time because an offer cannot be kept open indefinitely. The acceptance must be given before the offer is revoked or lapses by reason of offeree‟s knowledge of the death or insanity of the offeror. 6. ACCEPTANCE MUST SUCCEED THE OFFER. Acceptance must be given after receiving the offer. It should not precede the offer. In a company shares were allotted to a person who had not applied for them. Subsequently he applied for shares being unaware of the previous allotment. It was held that the allotment of shares previous to the application was invalid. 7. REJECTED OFFERS CAN BE ACCEPTED ONLY, IF RENEWED. Offer once rejected cannot be accepted again unless a fresh offer is made. COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION When the contracting parties are face to face and negotiate in person, there is instantaneous communication of offer and acceptance, and a valid contract comes into existence the moment the offeree gives his absolute and unqualified acceptance to the proposal made by the offeror. The question of revocation of either offer or acceptance does not arise, for, in such cases a definite offer is made and accepted instantly at one and the same time. But where services of the post office are utilized for communicating among themselves by the contracting parties because they are at a distance from one another, it is not always easy to ascertain the exact time at which an offer or/and an acceptance is made or revoked. In these cases the following rules will be applicable: 1. COMMUNICATION OF AN OFFER The communication of an offer is complete when it comes to the knowledge of the person to whom it is made, ie, when the letter containing the offer reaches the offeree. 2. COMMUNICATION OF AN ACCPTANCE The communication of an acceptance has two aspects, as against the proposer and as against the acceptor. The communication of an acceptance is complete (a) against the proposer, when it is put in a course of transmission to him, so as to be out of power of the acceptor, and (b) as against the acceptor, when it comes to the knowledge of the proposer ie, when the letter of acceptance is received by the proposer. 10 Illustrations: (i) (ii) A proposes, by letter, to sell a house to B for Rs 80,000. The letter is posted, on 6th instant. The letter reaches B on 8th instant. The communication of the offer is complete when B, the offeree, receives the letter i.e. on 8th. B accepts A‟s proposal, in the above case, by a letter sent by post on 9 th instant. The letter reaches A on 11th instant. The communication of the acceptance is complete: as against A, when the letter is posted i.e., on 9th and as against B, when the letter is received by A, i.e., on 11th. 3. COMMUNICATION OF A REVOCATION The communication of a revocation is complete: (a) as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person revoking, i.e., when the letter of revocation is posted, and (b) as against the person to whom it is made, when it comes to his knowledge, i.e., when the letter of revocation is received by him. Illustration: (a) In the illustration given above, A revokes his offer by letter on 8 th instant, The letter reaches B on 10th instant. The revocation is complete against A on 8th, when the letter of revocation is posted. It is complete as against B on 10th, when the letter of revocation is received by him. (b) In the illustration given above, B revokes his acceptance by letter on 10th instant. The letter reaches A on 12th instant. The revocation is complete as against B on 10th, the date on which the letter of revocation is posted and as against A on 12th, the date on which the letter reaches him. 4. TIME LIMIT FOR REVOCATION OF OFFER AND ACCEPTANCE An offer may be revoked at any time but only before the communication of its acceptance is complete, as against the offeror. Accordingly, once the communication of acceptance of the offer is complete as against the offeror, as aforesaid, the offer cannot be revoked thereafter. In a similar manner, an acceptance, too, may be revoked at anytime, but only before the communication of its acceptance is complete, as against the acceptor. Accordingly, once a communication of acceptance of the offer is complete, as against the acceptor, as aforesaid, it cannot be revoked thereafter. 11 CASE LAWS Harvey v. Facey Plaintiff/Appellant: Harvey Defendant/Appellee: Facey Citation: (1893) A.C. 552 (Privy Council) (Jamaica) Significance and importance of the decision - Mere statement of the lowest price at which the seller would sell contains no implied contract to sell at the price to the person making the enquiry. - Normal rules of offer and acceptance - Differences regarding the rules of offer and acceptance when the sale concerns land compared to the normal rules of offer and acceptance. Short Summary This case considers the issue of offer and acceptance and whether or not a series of telegrams regarding a property which was for sale amounted to a binding contract .The plaintiff (Harvey) telegraphed to the defendants (Facey) „Will you sell us Bumper Hall Pen? Telegraph lowest cash price‟. The defendants telegraphed in reply, „Lowest price for Bumper Hall Pen £900‟. It was held by the Privy Council that the price statement was not an offer, but only an answer to the second question in the first telegram, only giving information. This case is important because it makes a distinction between an offer and an invitation to treat. In an offer there is an intention to create a legally binding contract; “an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed”. An invitation to treat is an action inviting other parties to make an offer to form a contract; “an expression only of a general willingness to bargain and as such of no legal effect”. In the English system the standard rules of contract apply to the sale of land, but the courts apply those rules fairly strictly, tending to require very clear evidence of an intention to be bound before they will state that an offer has definitely been made. 12 Issue(s): Is the reply by Facey a binding offer for the sale of the property? Holding: Reversed and the judgment of the trial court restored. Reasoning: Mere statement of the lowest price at which the vendor would sell contains no implied contract to sell at that price to the persons making the inquiry. Conclusion Almost 120 years on, the outcome of this case serves as a reminder of the need to remain wary of the difference between statements made in the course of negotiations that are offers and those that are merely invitations to negotiate. Within a tender process, it is most likely to be the bidder who makes the offer. But when purchasing goods or services, take care not to unwittingly become bound by statements made in tender documents that could amount to an offer capable of acceptance by a bidder (for example, by stating the highest or lowest bid will be successful). 13