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INTRODUCTION TO THE LAW OF CONTRACT

The Law of contract is an act that consists of contractual rights that are
available to citizens of a country. The history of English contract law
can be traced back to the industrial revolution, the change in the
economic atmosphere in this period time which resulted in the policy of
“laissez faire’’ (abstention by governments from interfering in the
workings of the free market) brought about contractual agreements that
were used to make trade deals because with the increase exchange of
resources, parties to agreements needed assurances that obligations and
promises would be honoured. Modern contract laws are composed of
case laws decided by the English courts.

The Indian Contract Act 1872 was enacted on April 25th 1872 and came
into force on the first day of September 1872.The prevalent system in
the ancient times was barter and it was based on the mutual principle of
give and take. This was confined to commodities as there was no
medium of exchange as it is seen in the form of money today and this
system can be traced back to the Indus Valley Civilization. However this
system is no longer relevant in the present economic system due to
complexity of the nature of the economic system and because of the fact
that money has evolved as the medium of exchange such that the value
of every commodity can now be quantified. Thus in an era of greater
economic transaction one finds the existence of Contract Laws. The
essence of the act was modelled after English Common Law.
Modifications were made according to the conditions and adaptability of
the Indian economy. No amendments to the act were made till present
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day, so the act is in its original form. This act extends to the whole of
India, except the State of Jammu and Kashmir.

Contracts play a very important role in the day to day life of every
person. Many a times, people enter into contracts without even realising
it. For example, when one buys an item at a store, say a newspaper, there
is a contract. In return for the money paid to the paper vendor, one gets
the newspaper. Similarly, there is also a contract when one opens the
doors of a taxi and announces his or her destination, the taxi-driver
agrees to take the person to that place, and in return, the person agrees to
pay the fare indicated by the taxi driver.

The law of contract thus affects every person, for everyone enters into
contracts day after day. In every purchase that a person makes, in every
loan of an article, in going for a ride in a bus or a taxi, and in various
other transactions of daily life, contracts are entered into and legal
relations are created. Though these ‘contracts’ may not seem important
to a layman, however, these contracts are of vital importance for a man
of business since most of his transactions are based on contracts.
The legal definition of the word ‘contract’ however can be found in
section 2(h) of the Indian Contract Act, 1872. It is defined as an
agreement enforceable by law, thus two essentials are required for the
formation of a legal contract (a) an agreement (b) the agreement should
be enforceable by law.

Agreement being every promise and every set of promises forming the
consideration for each other. Promise being defined as an accepted
proposal. Section 2(b) says that, “ a proposal, when accepted becomes a
promise.” In other words an agreement is an accepted proposal.
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In the same manner, a contract is an agreement which is enforceable by

law, an agreement being a reciprocal promise between both parties
involved. It differs from a general promise in a sense that each party is
legally bound to carry out the promise made.

An agreement can be considered a contract when it becomes enforceable

by law. In other words, an agreement that the law will enforce is a
contract. The conditions of enforceability are given in section 10,
according to this section; an agreement is a contract when it is made for
some consideration, between parties who are competent, with their free
consent and for a lawful object.

Agreements that are contracts:

All agreements are not contracts but all contracts are agreements, they
are only considered contracts when they are made with the free consent
of the parties that are competent to contract, for a lawful consideration
and with a lawful object and are not hereby expressly declared to be
void.

The general principles of Contract are laid down in section 1-75 of the
Act, the remaining provisions of the Act deals with three specific
contracts, namely, indemnity and guarantee, bailment and agency.
Besides these three specific contracts, there are other kinds of contracts,
e.g., contracts of sale and mortgage of immovable property, leases etc
which are not covered by the Indian contract act, but by the transfer of
property act. From this instance we can see that the Indian contract act is
not an exhaustive one in a sense that it does deal with all branches of the
law of contract. This shows that the Indian contract act is not a complete
code.
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FORMATION OF A CONTRACT:OFFER

Offer and acceptance are elements required for the formation of a legally
binding contract. The concept of offer in the Law of Contract will be
discussed in detail in the following pages

According to section 2 (a) When one 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 person making the promise is known as the offeror and the
person to whom it is made is called the proposee or offeree and when the
person to whom the offer was made accepts it he becomes a promisee.
It is to be noted that an offer to do or not to do something must be made
for the purpose of being agreed to. So, if one person informs another that
he is ready to do a particular act, this may be a threat or mere statement
of fact about himself, for example, if a person were to say that he would
die for his country, the statement is not recognised as a proposal, unless
it is made with the view of obtaining the assent of the other party to
whom it is addressed.

COMMUNICATION OF PROPOSAL

The communication of a proposal is complete when it comes to the

knowledge of the person to whom it is made. Thus, if A promises
something if an act is done and B does that act not knowing about the
offer, there will be no contract.
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This principle enabled the Allahabad High Court in Lalman V. Gauri

Dutt to deal with the matter involving a very critical question on this
point. In this case, the defendants nephew absconded from home, he sent
his servant in search of the boy. When the servant had left, the defendant
by handbills offered to pay Rs. 501 to anybody discovering the boy. The
servant came to know about this offer only when he had already traced
the missing child. He however brought an action to recover the reward.
But his action failed.

When this case was decided, the English law on the point was
uncertain. But the principle that there can be no acceptance without
knowledge of the offer had already been adopted in the United States.
For example, as early as 1868, a judge remarked: “how can there be
consent or assent to that of which the party has never heard?” the
principle has been carried out a little further in Australian case where it
was held that even if the acceptor had once known of the offer but had
completely forgotten about it at the time of the acceptance, he would be
in no better position than a person who had not heard of the offer at all.

The Australian government had offered an award to anyone giving

information about certain murders. The offer further added that if the
information was given by an accomplice, not being himself the
murderer, he would also be entitled to a free pardon. The plaintiff, being
an accomplice, saw the offer and having been so excited by the hope of
pardon, that he gave the information to save himself, completely
forgetting about the reward. He could not recover the reward.1

1
Avtar Singh, Law of Contract and Specific Relief, page 9, ninth edition, eastern book company
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In a case of Powell v. Lee, X applied for the post of headmaster in a

school. At its meeting, the Managing Committee passed a resolution
appointing him to that post. X did not receive any official intimation of
his appointment; he was informed privately by one of the committee
members. The resolution was subsequently revoked. X could not sue the
Managing Committee for breach of contract as there was no official
communication of the offer to X by the committee and hence no contract
was formed. The court observed that the very fact that he was not
informed by the committee goes to show that their decision was not final
and that there was a probability of reconsidering it.

It has to be noted that a proposer cannot dictate the terms under which
the offer may be refused. That is, a person cannot say that if within a
certain time acceptance is not communicated, the offer would be
considered as accepted.

INTENTION TO OFFER

The term “ proposal” of the Indian Contract Act is synonymous with the
term “offer” of English law. An offer, in order to give rise to a contract,
must be intended to create and be capable of creating legal relations.
Mere social or moral obligations will not give rise to legal obligations, in
this way an invitation to dinner or an agreement to accompany another
for a walk does not constitute an offer. Therefore it can be seen that, in
order for an agreement to amount to a contract, there must be a promise
to do or abstain from doing something as a legal duty.
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In Rose Franklin Co v. R Crompton & Bros, Rose and Franklin and Co.
was the exclusive American distributor for JR Crompton’s new paper
product. Their agreement there was a clause included stated that the
arrangement was not intended to be a formal legal agreement and would
not be subject to a legal jurisdiction of either the UK or the US. JR
Crompton cancelled the agreement because they were unhappy with
Rose and Frank Co’s proceedings which led to them being sued by Rose
and Frank Co’s for breach of contract. They were successful at trail, JR
Crompton filed for appeal. The decision was reversed by the Court of
Appeal. One of the Judges in the case stated that although in business
relations it is generally assumed that a contract has been intended, here
there is a specific clause that states the intention of the parties not to be
bound in a legal contract. In contract law the intentions of the parties
matter. As the parties did not intend to be bound, there is no legally
enforceable contract.

The Supreme Court has expressed its reservation about the need of this
separate requirement of “intention to contract” under the Contract Act.
Going by the criticism which is already there in the West, the court
found that it was a necessity of those systems where consideration was
not a requisite of enforceability. Thus, it is still an open question whether
the requirement of “intention to contract” is applicable under the Indian
Contract Act in the way in which has been developed in England.

But earlier to this, a limited recognition of the applicability of this

principle in India could be inferred from the decision of the Supreme
Court in Banwari Lal v Sukhdarshan Dayal. In this Indian case, an
auction for the sale of land was held, a loudspeaker was spelling out the
terms, etc., of the sale, one of the statements being that plot dimensions
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would be reserved for Dharamshala (public inn). Subsequently that plot

was sold for private purposes. The purchasers sought to restrain this. It
was held that since microphones had not yet acquired notoriety as
carriers of binding representations. Promises held out over loudspeakers
are often seen as claptraps of politics. In the instant case, the
announcement was, if at all, a puffing up of property

In an English case Balfour v. Balfour, Mr. B, who was posted in Ceylon,

promised his wife living in England, to pay her a monthly allowance, so
long as she could not go to Ceylon for reasons of health. When Mr. B
failed to honour his promise, she filed a suit against him, the Court held
that she could not enforce the obligation, as from the nature of the
contract, it was clear that no intention existed to give rise to a legal
obligation. It was merely a domestic arrangement.

However this does not mean that family matters are excluded from
formation of legally binding contracts. What is important is whether the
parties intended legal consequences. This can be seen in a leading case,
McGregor v. McGregor(1888) , where the husband and wife withdrew
the complaints they had filed against each other under an agreement by
which the husband promised to pay an allowance to the wife, in
exchange for that she would agree not to pledge his credit. The court
held that the agreement was a contract.

The principle also applies to dealings between other relations, such as

father and son and daughter and mother. In Jones v Padavatton, a
divorced woman was living in Washington with her son where she was
employed as an assistant accountant in the Indian Embassy on attractive
terms. Her mother was in Trinidad and wished her daughter to be near
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her. She was particularly attached to the grandson. The mother

persuaded her daughter, much against her will to leave service, to take
legal education in England and finally to come back to Trinidad as a
practising lawyer. The mother undertook to foot the expenses.
Subsequently, the mother bought a house in England part of which was
allowed to the daughter and the rest tenanted out. For five long years the
daughter could not complete her education. She also married in the
meantime, differences between them arose and the mother stopped
payments and also commenced proceedings to evict the daughter. 2
One of judges allowed the mother’s appeal on the ground
that deal was in fact a contract. He felt that the acting on her
mother’s promise, the daughter had left an attractive service and
gone to another country for education and the mother could not
under these circumstances get out of the promise at her sweet will
and leave the daughter in that condition. The engagement,
therefore, did result in a contract, but the agreement could last
only for a period reasonably sufficient for the daughter to
complete her education and the period of five years was more than
sufficient for the purpose. She could have not expected her mother
to support her, her son and her husband in perpetuity.

COUNTER OFFERS:

An offer made in response to a previous offer by the other party during

negotiations for a final contract is known as a counter offer. Making a
counter offer automatically rejects the prior offer, and requires an

2
Avtar Singh, Law of Contract and Specific Relief, page 9, ninth edition, eastern book company
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acceptance under the terms of the counter offer or there is no contract.

(dictionary.law.com) 3
For example, if A makes an offer to B to sell his pen for Rs. 100, but B
says that he is willing to buy the pen for 90. A, however insists on Rs.
100 for the pen. B goes away, but after a while comes back and says that
he is willing to buy the pen for Rs. 100. At this point A refuses to sell
the pen for Rs. 100. He is entitled to do so. When B offered to pay Rs.
90 for the pen it was a rejection of A’s offer and his offer to pay Rs. 90
for it became a counter offer which was rejected by A. Later when B
came back and purported to accept A’s offer of Rs.100, he could not do
so as there was no offer from A at that point of time. It was just B who
was now making a fresh offer for Rs. 100 which A was entitled to reject.

Hyde v. Wrench is a leading English Contract law case on the issue of

counter offers and their relation to initial offers. It was here that it was
established that any counter offer cancels the original offer. In this case
the defendant offered to sell a farm to the claimant for 1,000 pounds.
The claimant in reply offered 950 pounds which the defendant refused.
The claimant then sought to accept the original offer of 1,000 pounds.
The defendant refused to sell the claimant and the claimant brought an
action for specific performance. It was held however, that there was no
contract due to the fact that when a counter offer is made, this destroys
the original offer so that it is no longer open to the offeree to accept. 4

IMPLIED AND EXPRESSED OFFERS

3
Dictionary.law.com, visited April 5th
4
E-lawresources.com, visited April 5th
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In order for a proposal to be considered an offer, it needs to be signified

to the other party, and by signify it is meant that the person should
indicate or declare. In other words the offer or proposal needs to be
communicated to the other party. However, there are instances where an
offer is implied and not indicated verbally nor does it need to be formal.
It can be expressed by mere conduct. An offer which is implied by mere
conduct is called “implied offer”. For example, where a bus company
runs a regular service between points A and B, there is an implied offer
from the bus company to take any person waiting at the bus stop on the
route who is willing to pay the usual fare.(translegal.com). a bid at an
auction is an implied offer to buy. In the same way acceptance of an
offer may also be expressed through conduct.

An illustration of a contract arising impliedly from conduct is Upton

Rural District Council v Powell. A fire broke out in the defendant’s
farm. He believed that he was entitled to the free services of Upton Fire
Brigade and therefore, summoned it. The Brigade put out the fire. It then
turned out that the defendant’s farm was not within the free service zone
of the Upton, which therefore, claimed compensation for the services.
The court said, “ the truth of the matter is that the defendant wanted the
services of Upton, he asked for the services of Upton and Upton, in
response to that request, provided the services. Hence the services were
rendered on an implied promise to pay them.” 5

Express contracts consist of agreements in which the terms are stated by

the parties. The terms may be stated orally or in writing. But the contract
as a whole must reflect the intention of the parties. As a general rule, if
5
Avtar Singh, Law of Contract and Specific Relief, page 9, ninth edition, eastern book company
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an express contract between the parties is established, a contract

embracing the identical subject cannot be implied in fact, as the law will
not normally imply a substitute promise or contract for an express
contract of the parties.

INVITATION TO OFFER

Implied offers, however, need to be distinguished from an invitation to

offer. Many a time statements which may seem to be offers are in fact
only invitations to offer. As for example, quotation of prices of a trader,
a catalogue of goods and books etc. In these situations, it is the
purchaser who is making an offer and it is up to the shopkeeper to either
accept or reject the offer. These statements are not offers and hence
create no legal obligation.

For example if A enters into B’s shop and sees a commodity that is
marked as 100 rupees in the shop and tells B that he is willing to buy the
commodity but B tells him that he does not wish to sell the commodity
to him, it can be seen that there was no contract at all. If a consumer
enters a shop, names a price and demands the commodity or article, the
shop-keeper is not bound to sell it to him for the statement of price by
the consumer is only an offer and it is up to the seller whether he wants
to accept it or not.

In an English case, Harvey v. Facey, A telegraphed B to inquire about

whether Bumper Hall Pen would be sold and also asked for a quotation
of the lowest price, and B telegraphed that the lowest price would be
900. To which A replied that they agreed to buy it. In this case the court
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held that there was no contract as B did not offer the sale of the hall but
instead only quoted the lowest price and never expressed his willingness
to sell.

AUCTION SALES

The same principle stands for auction sales. In auction sales, the offer
arises from the bidders and it is up to the auctioneer whether to accept or
reject it. In auctions, the acceptance is signified by the fall of the
hammer however, the offer can be received before the acceptance. An
announcement at auctions is only invitations to offer. There is no
obligation put upon the auctioneer to accept the bids even if it is the
highest bid unless it was already earlier announced that the goods would
be sold to the highest bidder.

For example, A held an auction for his furniture, in which B, C and D

make bids. The highest bid was made by D but A refused to sell them to
him. There is no contract between them as the auctioneer merely invites
offers, the bidders make the offers which may or may not be accepted by
the auctioneer with the fall of the hammer, the property may be
withdrawn or offers not accepted before the hammer falls.

In the same way an auctioneer’s announcement that specified goods will

be sold by auction on a specific day does not constitute an offer but
merely an invitation to offer and he will not be liable to persons
travelling up to the place if he changes his mind and decides not to hold
the auction.
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In the case of Harris v. Nickerson, the defendant, an auctioneer

advertised in the London papers that certain brewing materials, plant and
office furniture would be sold by him at Bury St. Edmund’s on a certain
day and two following days. The plaintiff, a commission broker in
London, having a commission to buy the office furniture went down to
the sale on the third day as advertised in the papers, and found that all
the lots of furniture were withdrawn. The plaintiff brought an action
against the defendant to recover for his loss of time and expenses. The
plaintiff could not maintain the action for the advertising of the sale was
a mere declaration and did not amount to a contract with anyone who
might act upon it, nor to a warranty that all the articles would be put for
sale.

Even a government auction may be cancelled before any bid is accepted.

The Supreme Court gave the latitude to a government, as is enjoyed by a
private auctioneer, that it may ignore the highest bid and accept the
lowest bid. The highest bid may be found to be an undesirable person for
many reasons, example, from the mere enormity of the bid. However,
one contractor should not be preferred over another without any rhyme
or reason, this would be more so in the matter of governmental contract.

STANDING OR OPEN OFFERS

Big organisations such as the government, railways etc often require

stores in large amounts and so they invite tenders for the supply of
goods. However, it must be recognised that an advertisement inviting
tenders is not an offer in itself, it is merely an invitation to offer. The
person who sends their tenders are the one making the offer and the offer
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may be accepted or rejected. The acceptance of such offers merely

insinuates that the offer will be considered to remain open during the
period specified and that it will be accepted from time to time. There is
no obligation on the side of the party accepting the tender to place any
order and there is no obligation on the side of the party making the
tender to continue the offer, he may revoke before any order has actually
been placed.

In the case Bengal Coal Co. V. Homee Wadia & Co., A agreed in writing
to supple coal to B at certain prices and up to a stated quantity, or in any
quantity which may be required for a period of time of twelve months, is
not in contract unless B binds himself to take some certain quantity, but
a mere continuing offer which may be accepted by B from time to time.
In such cases, each order given by B is an acceptance of the offer and A
can withdraw the offer at any time before its acceptance by an order
from B. Such a transaction may be reduced to a statement by the
intending vendor in this form ‘if you will send me orders for coal, I shall
supply it to you for a period of twelve months at a particular rate’. This
is merely a proposal from A to B. If in reply to such a proposal, B says
to A ‘I agree’, it does not constitute an acceptance of the proposal. An
acceptance can take place only by B sending orders to A.

In an English case Perclval Ltd. v. London County Council Asylums and

Mental Deficiency Committee, the Plaintiffs advertised for tenders for
the supply of stores. The defendant made a tender to the effect that he
undertook to supply the company for twelve months with such quantities
of special articles as the company may order from time to time. The
company, by a letter accepted the tender and subsequently, gave various
orders which were executed by the defendant. Ultimately, the Company
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gave an order for goods within the schedule, which the defendant
refused to supply. The Company succeeded in an action for breach of
contract. The tender was a standing offer to be converted into a series of
contracts by the subsequent acts of the company and that an order
prevented the possibility of revocation, and the defendant, though he
might regain his liberty of action for the future, was meanwhile, bound
to supply the goods actually ordered.6

REVOCATION OF OFFERS

Revocation is the act of recall or annulment. It is the reversal of an act,

the recalling of a grant or privilege or the making void of some deed
previously existing.

According to section 5 of the Indian Contract Act 1872, a proposal may

be revoked at any time before the communication of its acceptance is
complete as against the proposer, but not afterwards.
A proposal can be revoked in the following four ways:
1. By the communication of notice of revocation by the proposer to
the other party.
2. By the lapse of the time prescribed for its acceptance or, if no time
is prescribed, by the lapse of a reasonable time, without
communication of the acceptance.
3. By the failure of the acceptor to fulfil a condition precedent to
acceptance.
4. By the death or insanity of the proposer, if the fact of his death or
insanity comes to the knowledge of the acceptor before accepting.
6
Indiancaselaws.wordpress.com, visited April 5th
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Under the English law, death of either party, before such acceptance
causes the offer to lapse, and the question of such fact coming to the
knowledge of the other party(as under Indian law) does not rise at all.
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CONCLUSION

As seen from the previous pages of detailed information on the concept

of Offer in the Law of Contract, we can conclude that although certain
statements may seem to be offers, in fact, they are just mere statements.
In order for a statement to constitute an offer, it must be made for the
purpose of being agreed to; it must be made with a view to create legal
bond between the two parties; it must be communicated to the offeree
while also keeping in mind that an offer is different from an invitation to
offer. If a proposal contains all these essentials, then it can be considered
an ‘offer’. Else, it cannot be said to be a valid contract and anything
short of it is void ab initio or null and void.
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BIBLIOGRAPHY

Biblio-lawteacher.net