CA Foundation Law I CA Saumil Manglani I Contract Unit 1

Unit 1. Nature of Contract 1.1.
CHAPTER 1
THE INDIAN CONTRACT ACT, 1872
UNIT I: NATURE OF
CONTRACT
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Unit 1. Nature of Contract 1.1.2
The Law of contract: Introduction

It may be said that the contract is the foundation of the civilized world. The law relating to contract is governed by
the Indian Contract Act, 1872. It came into force on September 01, 1872.
The preamble to the Act says that it is an Act "to define and amend certain parts of the law relating to contract". It
extends to the whole of India.
The Act mostly deals with the general principles and rules governing contracts. The Act is divisible into two parts.
The first part (Section 1-75) deals with the general principles of the law of contract, and therefore applies to all
contracts irrespective of their nature. The second part (Sections 124-238) deals with certain special kinds of
contracts, e.g., Indemnity and guarantee, bailment, pledge, and agency.
As a result of increasing complexities of business environment, innumerable contracts are
entered intoby the parties in the usual course of carrying on their business. ‘Contract’ is the most
usual method of defining the rights and duties in a business transaction. This branch of law
is different from other branches of law in a very important aspect. It does not prescribe so many
rights and duties, which the law will protect or enforce;instead it contains a number of limiting
principles subject to which the parties may create rights and duties for themselves. The Indian
Contract Act, 1872 codifies the legal principles that govern ‘contracts. The Act basically
identifies the ingredients of a legally enforceable valid contract in addition to dealing with certain
special type of contractual relationships like indemnity, guarantee, bailment, pledge, quasi
contracts, contingent contracts etc.
This unit refers to the essentials of a legally enforceable agreement or contract. It sets out rules
for the offer and acceptance and revocation thereof. It states the circumstances when an
agreement is voidable or enforceable by one party only, and when the agreements are void, i.e.
not enforceable at all.
1.1 WHAT IS A CONTRACT?
The term contract is defined under section 2(h) of the Indian Contract Act, 1872 as-
“an agreement enforceable by law”.
The contract consists of two essential elements:
(i) an agreement, and
(ii) its enforceability by law.
(i) Agreement - The term ‘agreement’ given in Section 2(e) of the Act is defined as-“every
promise and every set of promises, forming the consideration for each other”.

To have an insight into the definition of agreement, we need to understandpromise.
Section 2 (b) defines promise -
“when the person to whom the proposal is made I signifies his assent there to, the proposalis said to
be accepted. Proposal when accepted, becomes a promise”.
The following points emerge from the above definition:
1. when the person to whom the proposal is made
2. signifies his assent on that proposal which is made to him
3. the proposal becomes accepted
4. accepted proposal becomes promise
Thus, we say that an agreement is the result of the proposal made by one party to theother party and
that other party gives his acceptance thereto of course for mutual consideration.
Agreement = Offer/Proposal + Acceptance
(ii) Enforceability by law – An agreement to become a contract must give rise to a
legal obligation which means a duly enforceable by law.Thus,
from above definitions it can be concluded that –
Contract = Accepted proposal/Agreement + Enforceability by law
On elaborating the above two concepts, it is obvious that contract comprises of an agreement
which is a promise or a set of reciprocal promises, that a promise is the acceptance of a
proposal giving rise to a binding contract.
Further, section 2(h) requires an agreement capable of being enforceable by law before it is called
‘contract’. Where parties have made a binding contract, they created rights and obligations between
themselves.
Example 1: A agrees with B to sell car for Rs.2 lacs to B. Here A is under an obligationto give
car to B and B has the right to receive the car on payment of Rs.2 lacs and also B is under an
obligation to pay Rs.2 lacs to A and A has a right to receive Rs.2 lacs.
Example 2:Father promises his son to pay him pocket allowance of Rs. 500 every month.
But he refuses to pay later. The son cannot recover the same in court of law as this is a
social agreement. This is not created with an intention to create legal relationship and
hence it is not a contract.

So, Law of Contract deals with only such legal obligations which has resulted from agreements.
Such obligation must be contractual in nature. However, some obligations are outside the purview of
the law of contract.
Example: An obligation to maintain wife and children, an order of the court of law
etc. These are status obligations and so out of the scope of the Contract Act.
Difference between Agreement and Contract
Basis of Agreement Contract

differences
Meaning Every promise and every set of Agreement enforceable by law.
promises, forming the consideration foreach Agreement + Legal enforceability
other. Offer + Acceptance
Scope It’s a wider term including both legaland It is used in a narrow sense with the
social agreement. specification that contract is only legally
enforceable agreement.
Legal obligation It may not create legal obligation. An Necessarily creates a legal obligation. A
agreement does not always grant contract always grants certain rights to
rights to the parties every party.
--Nature All agreement are not contracts. All contracts are agreements.
1.2 ESSENTIALS OF A VALID CONTRACT
Essentials of a valid contract
As given by Section 10 of Indian Not given by Section 10 but
Contract Act, 1872 are also considered essential
1 Agreement 1 Two parties
2 Free consent 2 Intention to create legal relationship
3 Competency of the parties 3 Fulfillments of legal formalities
4 Lawful consideration 4 Certainty of meaning
5 Legal object 5 Possibility of performance
6 Not expressly declared to be void[as per Section 6 -

24 to 30 and 56]

In terms of Section 10 of the Act, “all agreements are contracts if they are made by the free
consent of the parties competent to contract, for a lawful consideration and with a lawful object
and are not expressly declared to be void”.
Since section 10 is not complete and exhaustive, so there are certain others sections which also contains
requirements for an agreement to be enforceable. Thus, in order to create a valid contract, the following
elements should be present:
1. Two Parties: One cannot contract with himself. A contract involves at least two parties- one party
making the offer and the other party accepting it. A contract may be made by natural persons
and by other persons having legal existence e.g. companies, universities etc. It is necessary to
remember that identity of the parties be ascertainable.
Example: To constitute a contract of sale, there must be two parties- seller and buyer. The seller and
buyer must be two different persons, because a person cannot buy his own goods.
In State of Gujarat vs. Ramanlal S & Co. when on dissolution of a partnership, the assets of the firm
were divided among the partners, the sales tax officer wanted to tax this transaction. It was held that it
was not a sale. The partners being joint owner of those assets cannot be both buyer and
seller.
2. Parties must intend to create legal obligations: There must be an intention on the part of the
parties to create legal relationship between them. Social or domestic type of agreements are not
enforceable in court of law and hence they do not result into contracts.
Example: A husband agreed to pay to his wife certain amount as maintenance every month
while he was abroad. Husband failed to pay the promised amount. Wife sued him for the recovery of
the amount. Here in this case wife could not recover as it was a social agreement and the parties did
not intend to create any legal relations. (Balfour v. Balfour
Example 6: Lekhpal promises to pay ` 5 lakhs to his son if the son passes the CA exams. On
passing the exams, the son claims the money. Here, the son could not recover as it was a
social agreement.
Example 7: A sold goods to B on a condition that he must pay for the amount of goods within
30 days. Here A intended to create legal relationship with B. Hence the same is contract. On
failure by B for making a payment on due date, A can sue him in the court of law.
3. Other Formalities to be complied with in certain cases: A contract may be written or spoken. As

to legal effects, there is no difference between a written contract and contract made by word of
mouth. But in the interest of the parties the contract must be written. In case of certain
contracts, some other formalities have to be complied with to make an agreement legally
enforceable.
e.g. Contract of Insurance is not valid except as a written contract. Further, in case of certain contracts,
registration of contract under the laws which is in force at the time, is essential for it to be valid, e.g. in
the case of immovable property.
Thus, where there is any statutory requirement that any contract is to be made in writing or
in the presence of witness, or any law relating to the registration of documents must be
complied with.
4. Certainty of meaning: The agreement must be certain and not vague or indefinite.
Example: A agrees to sell to B a hundred tons of oil. There is nothing certain in order to show what
kind of oil was intended for.
Example 9: XYZ Ltd. agreed to lease the land to Mr. A for indefinite years. The contract is not valid asthe
period of lease is not mentioned.
5. Possibility of performance of an agreement: The terms of agreement should be capable of
performance. An agreement to do an act impossible in itself cannot be enforced.
Example: A agrees with B to discover treasure by magic. The agreement cannot be
enforced as it is not possible to be performed.
Essential elements of a valid contract

According to Section 10 of the Indian Contract Act, 1872, the following are the essential elements
of a Valid Contract:
I. Offer and Acceptance or an agreement: An agreement is the first essential element of a
valid contract. According to Section 2(e) of the Indian Contract Act, 1872, “Every promise
and every set of promises, forming consideration for each other, is an agreement” and
according to Section 2(b) “A proposal when accepted,becomes a promise”. An agreement is
an outcome of offer and acceptance.
II. Free Consent: Two or more persons are said to consent when they agree upon the same
thing in the same sense. This can also be understood as identity of minds in understanding
the terms viz consensus ad idem.
Further such a consent must be free. Consent would be considered as free consent if it is
not caused by coercion, undue influence, fraud or, misrepresentation or mistake.
Example 11:A, who owns two cars is selling red car to B. B thinks he is purchasing the black car. There is no
consensus ad idemand hence no contract.
To determine consensus adidem the language of the contract should be clearly drafted. Thus, if A says B “ Will
you buy my red car for Rs. 30000? “ and B says “yes” to it. There is said to be consensus ad idem i.e. the meaning
is taken in same sense by both the parties.
Example: A threatened to shoot B if he (B) does not lend him Rs.2000 and B agreed to it.
Here the agreement is entered into under coercion and hence not a valid contract.
III. Capacity of the parties: Capacity to contract means the legal ability of a person to enter
into a valid contract. Section 11 of the Indian Contract Act specifies that
every person is competent to contract who
(a) is of the age of majority according to the law to which he is subject and
(b) is of sound mind and
(c) is not otherwise disqualified from contracting by any law to which he is subject. Aperson
competent to contract must fulfil all the above three qualifications. Qualification (a) refers
to the age of the contracting person i.e. the person enteringinto contract must be of 18
years of age. Persons below 18 years of age areconsidered minor, therefore,
incompetent to contract.

Qualification (b) requires a person to be of sound mind i.e. he should be in his senses so
that he understands the implications of the contract at the time of entering into a contract. A
lunatic, an idiot, a drunken person or under the influence of some intoxicant is not
supposed to be a person of sound mind.
Qualification (c) requires that a person entering into a contract should not be disqualified by his
status, in entering into such contracts. Such persons are: an alien enemy, foreign sovereigns,
convicts etc. They are disqualified unless they fulfil certain formalities required by law.
Contracts entered by persons not competent to contract are not valid.
IV. Consideration: It is referred to as ‘quid pro quo’ i.e. ‘something in return’. A valuable
consideration in the sense of law may consist either in some right, interest, profit, or benefit
accruing to one party, or some forbearance, detriment, loss or responsibility given,
suffered or undertaken by the other.
Example: - A agrees to sell his books to B for Rs. 100, B’s promise to pay Rs. 100 is the
consideration for A’s promise to sell his books and A’s promise to sell the books is the
consideration for B’s promise to pay Rs.100.
V. Lawful Consideration and Object: The consideration and object of the agreement must be
lawful.
Section 23 states that consideration or object is not lawful if it is prohibited by law, or it is
such as would defeat the provisions of law, if it is fraudulent or involves injury to the
person or property of another or court regards it as immoral or opposed to public policy.
Example: ‘A’ promises to drop prosecution instituted against ‘B’ for robbery and ‘B’ promises
to restore the value of the things taken. The agreement is void, as its object is unlawful.
Example 15: A agrees to sell his house to B against 100 kgs of cocaine (drugs). Such
agreement is illegal as the consideration is unlawful.
VI. Not expressly declared to be void: The agreement entered into must not be which the law
declares to be either illegal or void. An illegal agreement is an agreement expressly or
impliedly prohibited by law. A void agreement is one without any legal effects.

Example: Threat to commit murder or making/publishing defamatory statements or
entering into agreements which are opposed to public policy are illegal in nature. Similarly,
any agreement in restraint of trade, marriage, legal proceedings, etc. are classic examples
of void agreements.
1.3 TYPES OF CONTRACT
Now let us discuss various types of contracts.
Types of Contracts on the basis of
I. On the basis of the validity
1. Valid Contract: An agreement which is binding and enforceable is a valid contract. It contains all
the essential elements of a valid contract.
II. Example17: A ask B if he wants to buy his bike for Rs.10,000. B agrees to buy bike. It isagreement
which is enforceable by law. Hence, it is a valid contract.
1. Void Contract: Section 2 (j) states as follows: “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”. Thus, a void contract is one
which cannot be enforced by a court of law.
Example: Mr. X agrees to write a book with a publisher. Such contract is valid. But after few days, X
dies in an accident. Here the contract becomes void due to the impossibility of performance of
the contract. Thus, a valid contract when cannot be performed because of some uncalled happening becomes
void.

Example: A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before
the supply is affected, the fire caught in the factory and everything was destroyed. Here the
contract becomes void.
It may be added by way of clarification here that when a contract is void, it is not acontract at all but for
the purpose of identifying it, it has to be called a [void] contract.
2. Voidable Contract: Section 2(i) defines that “an agreement which is enforceableby law at
the option of one or more parties thereto, but not at the option of the
other or others is a voidable contract”.
This in fact means where one of the parties to the agreement is in a position or islegally
entitled or authorized to avoid performing his part, then the agreement is treated and
becomes voidable.
Such a right might arise from the fact that the contract may have been brought about by one of the
parties by coercion, undue influence, fraud or misrepresentation and hence the other party
has a right to treat it as a voidable contract.
Example 20: X promise to sell his scooter to Y for ` 1 Lac. However, the consent of X has been procured by Y at a
gun point. X is an aggrieved party and the contract is voidable at his option but not on the option of Y. It means
if X accepts the contract, the contract becomes a valid contract then Y has no option of rescinding the
contract.
At this juncture it would be desirable to know the distinction between a Void Contract and a
Voidable Contract. These are elaborated hereunder

S. Basis Void Contract Voidable Contract

No.
1 Meaning A Contract ceases to be An agreement which is enforceable by
enforceable by law becomes law at the option of one or more of
void when it ceases to be the parties thereto, but not at the
enforceable. option of the other or others, is a
voidable contract.
2 Enforceability A void contract cannot be It is enforceable only at the option
enforced at all. of aggrieved party and not at the
option of other party.
3 Cause A contract becomes void due A contract becomes a voidable
to change in law or change in contract if the consent of a party
circumstances beyond the was not free.
contemplation of parties.
4 Performance A void contract cannot be If the aggrieved party does not,
of contract performed. within reasonable time, exercise his
right to avoid the contract, any party
can sue the other for claiming the
performance of the contract.
5 Rights A void contract does not The party whose consent was not
grant any legal remedy to free has the right to rescind the
any party. contract within a reasonable time. If
so rescinded it becomes a void
contract. If it is not rescinded it
becomes a valid contract.
4. Illegal Contract: It is a contract which the law forbids to be made. The court will not enforce
such a contract but also the connected contracts. All illegal agreements are void but all void
agreements are not necessarily illegal. Despite this, there is similarity between them is that in both
cases they are void ab initio and cannot be enforced by law.
Example 21: Contract that is immoral or opposed to public policy are illegal in nature. Similarly, if
R agrees with S, to purchase brown sugar, it is an illegal agreement.
According to Section 2(g) of the Indian Contract Act, “an agreement not enforceable by law is
void”. The Act has specified various factors due to which an agreement may be considered as
void agreement. One of these factors is unlawfulness of object and consideration of the contract
i.e. illegality of the contract which makes it void. The illegal and void agreement differ from each

other in the following respects:
Basis of difference Void agreement Illegal agreement

Scope A void agreement is not An illegal agreement is always
necessarily illegal. void.
Nature Not forbidden under law. Are forbidden under law.
Punishment Parties are not liable for Parties to illegal agreements are
any punishment under liable for punishment.
the law.
Collateral It’s not necessary that agreements Agreements collateral to

collateral to void agreements may
Agreement also be void. It may be valid also. illegal agreements
are always void.
5. Unenforceable Contract: Where a contract is good in substance but because of some
technical defect i.e. absence in writing, barred by limitation etc. one or both the parties cannot sue
upon it, it is described as an unenforceable contract.
6. Example 22: A bought goods from B in 2015. But no payment was made till 2019. B cannot sueA for
the payment in 2019 as it has crossed three years and barred by Limitation Act. A good debt
becomes unenforceable after the period of three years as barred by Limitation Act.
II.On the basis of the formation of contract
1. Express Contracts: A contract would be an express contract if the terms are expressedby
words or in writing. Section 9 of the Act provides that if a proposal or acceptanceof any
promise is made in words the promise is said to be express.
Example: A tells B on telephone that he offers to sell his house for Rs. 2 lacs and Bin reply
informs A that he accepts the offer, this is an express contract.
1.4 Implied Contracts: Implied contracts in contrast come into existence by implication.
Most often the implication is by action or conduct of parties or course of dealings between them. Section 9
of the Act contemplates such implied contracts when it lays down that in so far as such proposal
or acceptanceis made otherwise than in words, the promise is said to be implied.
Example: Where a coolie in uniform picks up the luggage of A to be carried out of the railway
station without being asked by A and A allows him to do so, it is an implied contract and A must
pay for the services of the coolie detailed by him.
Example 25: A drinks a coffee in restaurant. There is an implied contract that he should pay for the
price of coffee.
Tacit Contracts: The word Tacit means silent. Tacit contracts are those that are inferred through
the conduct of parties without any words spoken or written. A classic example of tacit contract
would be when cash is withdrawn by a customer of a bank from the automatic teller machine
[ATM]. Another example of tacit contract is where a contract is assumed to have been entered
when a sale is given effect to at the fall of hammer in an auction sale. It is not a separate form of
contract but falls within the scope of implied contracts.
1.5 Quasi-Contract: A quasi-contract is not an actual contract but it resembles a contract. It is created
by law under certain circumstances. The law creates and enforces legal rights and obligations when
no real contract exists. Such obligations are known as quasi-contracts.In other words, it is a contract in
which there is no intention on part of either party to make a contract but law imposes a contract
upon the parties.
Example: Obligation of finder of lost goods to return them to the true owner or liability of person to
whom money is paid under mistake to repay it back cannot be said to arise out of a contract even in
its remotest sense, as there is neither offer and acceptance nor consent. These are said to be
quasi-contracts.
2 E-Contracts: When a contract is entered into by two or more parties using electronics means, such as e-mails
is known as e-commerce contracts. In electronic commerce, different parties/persons create networks which are
linked to other networks through ED1 - Electronic Data Inter change. This helps in doing business transactions using
electronic mode. These are known as EDI contracts or Cyber contracts or mouse click contracts.On the
basis of the performance of the contract
2.2 Executed Contract: The consideration in a given contract could be an act or forbearance.
When the act is done or executed or the forbearance is brought on record, then the contract is an
executed contract.
Example: When a grocer sells a sugar on cash payment it is an executed contract
because both the parties have done what they were to do under the contract.
2.3 Executory Contract: In an executory contract the consideration is reciprocal promise or obligation.
Such consideration is to be performed in future only and therefore these contracts are described
as executory contracts.
Example: Where G agrees to take the tuition of H, a pre-engineering student, from the next month
and H in consideration promises to pay G Rs.1,000 per month, the contract is executory because
it is yet to be carried out.
Unilateral or Bilateral are kinds of Executory Contracts and are not separate kinds.
1. Unilateral Contract: Unilateral contract is a one-sided contract in which one party has
performed his duty or obligation and the other party’s obligation is outstanding.
Example: M advertises payment of award of Rs. 5000 to anyone who finds his missing boy and
brings him. As soon as B traces the boy, there comes into existence an executed contract
because B has performed his share of obligation and it remains for M to pay the amount of reward
to B. This type of Executory contract is also called unilateral contract.
2. Bilateral Contract: A Bilateral contract is one where the obligation or promise is
outstanding on the part of both the parties.
Example: A promises to sell his plot to B for Rs.1 lac cash down, but B pays only Rs.
25,000 as earnest money and promises to pay the balance on next Sunday.
On the other hand, A gives the possession of plot to B and promises to execute a sale deed on the receipt of the
whole amount. The contract between the A and B is executory because there remains something to be done on both sides.
Such Executory contracts are also known as Bilateral contracts.
2.4 PROPOSAL / OFFER [SECTION 2(a) OF THE INDIAN CONTRACTACT, 1872]
Definition of Offer/Proposal:
According to Section 2(a) of the Indian Contract Act, 1872, “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”.
Analysis of the above definition Essentials of a proposal/offer are-
1. 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’.
2. For a valid offer, the party making it must express his willingness ‘to do’ or ‘not to
do’ something:
There must be an expression of willingness to do or not to do some act by the offeror.
Example 31:A willing to sell his good at certain price to B.

Example 32:A is willing to not to dance in a competition if B pays him certain sum of money.
3. The willingness must be expressed with a view to obtain the assent of the other party to whom
the offer is made.
Example: Where ‘A’ tells ‘B’ that he desires to marry by the end of 2019, it does not constitute an
offer of marriage by ‘A’ to ‘B’. Therefore, to constitute a valid offer expression of willingness must be
made to obtain the assent (acceptance) of the other. Thus, if in the above example, ‘A’ further adds,
‘Will you marry me’, it will constitute an offer.
4. An offer can be positive as well as negative: Thus “doing” is a positive act and “not
doing”, or “abstinence” is a negative act; nonetheless both these acts have thesame effect in
the eyes of law.
Example: A offers to sell his car to B for Rs.3 lacs is an act of doing. So, in this case, A is
making an offer to B.
Example : When A ask B after his car meets with anaccident with B’s scooter not to go to Court
and he will pay the repair charges to B for the damage to B’s scooter; it is an act of not doing
or abstinence.

Classification of offer
An offer can be classified as general offer, special/specific offer, cross offer, counter offer, standing/open/ continuing offer.
Now let us examine each one of them.

(a) General offer: It is an offer made to public at large and hence anyone can accept and dothe desired
act (Carlill v. Carbolic Smoke Ball Co.). In terms of Section 8 of the Act, anyone performing
the conditions of the offer can be considered to have accepted the
offer. Until the general offer is retracted or withdrawn, it can be accepted by anyone atany time as
it is a continuing offer.
Case Law: Carlill Vs. Carbolic Smoke Ball Co. (1893)
Facts: In this famous case Carbolic smoke Ball Co. advertised in several newspapers that a
reward of £100 would be given to any person who contracted influenza after using the smoke balls
produced by the Carbolic Smoke Ball Co. according to printed directions. One lady, Mrs. Carlill,
used the smoke balls as per the directions of companyand even then, suffered from influenza. Held,
she could recover the amount as by usingthe smoke balls she had accepted the offer.
(b) Special/specific offer: When the offer is made to a specific or an ascertained person, it is known
as a specific offer. Specific offer can be accepted only by that specified person to whom the offer
has been made. [Boulton v. Jones]
Example: ‘A’ offers to sell his car to ‘B’ at a certain cost. This is a specific offer.

(c) Cross offer: When two parties exchange identical offers in ignorance at the time of each
other’s offer, the offers are called cross offers. There is no binding contract in such a case
because offer made by a person cannot be construed as acceptance of the another’s offer.
Example: If A makes a proposal to B to sell his car for Rs. 2 lacs and B, without knowing
the proposal of A, makes an offer to purchase the same car at Rs. 2 lacs from A, it is not an
acceptance, as B was not aware of proposal made by A. It is only cross proposal (cross offer). And
when two persons make offer to each other, it cannot be treated as mutual acceptance. There is no
binding contract in such a case.
(d) Counter offer: When the offeree offers to qualified acceptance of the offer subject to modifications
and variations in the terms of original offer, he is said to have made a counter offer. Counter-offer
amounts to rejection of the original offer. It is also called as Conditional Acceptance.
Example: ‘A’ offers to sell his plot to ‘B’ for Rs.10 lakhs. ’B’ agrees to buy it for Rs. 8 lakhs. It amounts
to counter offer. It will result in the termination of the offer of ’A’. If later on ‘B’ agrees to buy the plot
for Rs.10 lakhs, ’A’ may refuse.
(e) Standing or continuing or open offer: An offer which is allowed to remain open for acceptance
over a period of time is known as standing or continuing or open offer. Tenders that are invited for
supply of goods is a kind of standing offer.
Essential of a valid offer
1. It must be capable of creating legal relations: Offer must be such as in law is capable of
being accepted and giving rise to legal relationship. If the offer does not intend to give rise to
legal consequences and creating legal relations, it is not considered as a valid offer in the eye
of law. A social invitation, even if it is accepted,does not create legal relations because it is
not so intended.
2. It must be certain, definite and not vague: If the terms of an offer are vague or indefinite, its
acceptance cannot create any contractual relationship. Thus, where A offersto sell B 100 quintals
of oil, there is nothing whatever to show what kind of oil was intended. The offer is not capable
of being accepted for want of certainty.

3. It must be communicated to the offeree: An offer, to be complete, must be communicated to the
person to whom it is made, otherwise there can be no acceptance of it. Unless an offer is
communicated, there can be no acceptance by it. An acceptance of an offer, in ignorance
of the offer, is not acceptance and does not confer any right on the acceptor.
This can be illustrated by the landmark case of Lalman Shukla v. Gauri Dutt
Facts: G (Gauridutt) sent his servant L (Lalman) to trace his missing nephew. He then announced
that anybody who traced his nephew would be entitled to a certain reward. L traced the boy in
ignorance of this announcement. Subsequently when he came to know of the reward, he claimed it.
Held, he was not entitled to the reward, as he did not know the offer.
4. It must be made with a view to obtaining the assent of the other party: Offer must be
made with a view to obtaining the assent of the other party addressed and notmerely with a view
to disclosing the intention of making an offer.
5. It may be conditional: An offer can be made subject to any terms and conditions by the
offeror.
Example: Offeror may ask for payment by RTGS, NEFT etc. The offeree will have to accept all the
terms of the offer otherwise the contract will be treated as invalid.
6. Offer should not contain a term the non-compliance of which would amount to
acceptance: Thus, one cannot say that if acceptance is not communicated by a certain time the
offer would be considered as accepted.
Example: A proposes B to purchase his android mobile for Rs.5000 and if no reply byhim in
a week, it would be assumed that B had accepted the proposal. This would not result into
contract.
7. The offer may be either specific or general: Any offer can be made to either public at large or to
the any specific person. (Already explained in the heading types of the offer)
8. The offer may be express or implied: An offer may be made either by words or by conduct.
Example: A boy starts cleaning the car as it stops on the traffic signal without being asked
to do so, in such circumstances any reasonable man could guess that he expects to be paid for
this, here boy makes an implied offer.

9. Offer is Different from a mere statement of intention, an invitation to offer, amere
communication of information, A prospectus and Advertisement.
(i) A statement of intention and announcement.

Example 42: A father wrote his son about his wish of making him the owner of all his
propertyis mere a statement of intention.
Example 43: An announcement to give scholarships to children scoring more than 95% in
12th board is not an offer.
(ii) Offer must be distinguished from an answer to a question.
Case Law: Harvey vs. Facie [1893] AC 552
In this case, Privy Council succinctly explained the distinction between an offer and aninvitation to
offer. In the given case, the plaintiffs through a telegram asked the defendants two
questions namely,
(i) Will you sell us Bumper Hall Pen? and
(ii) Telegraph lowest cash price.
The defendants replied through telegram that the “lowest price for Bumper Hall Pen is £ 900”. The
plaintiffs sent another telegram stating “we agree to buy Bumper Hall Pen at £ 900”. However, the
defendants refused to sell the property at the price.
The plaintiffs sued the defendants contending that they had made an offer to sell the property at £
900 and therefore they are bound by the offer.
However, the Privy Council did not agree with the plaintiffs on the ground that while plaintiffs had
asked two questions, the defendant replied only to the second question by quoting the price reserved
their answer with regard to their willingness to sell. Thus, they made no offer at all. Their Lordships
held that the mere statement of the lowest price at which the vendor would sell contained no
implied contract to sell to the person who had enquired about the price.
The above decision was followed in Mac Pherson vs Appanna [1951]
where the owner of the property had said that he would not accept less than £ 6000/- for it. This
statement did not indicate any offer but indicated only an invitation to offer.
(iii) A statement of price is not an offer: Quoting the price of a product does not constitute it
as offer. (refer case of Harvey Vs. Facie as discussed above)

Example 44: The price list of goods does not constitute an offer for sale of certain goods on the listed
prices. It is an invitation to offer.
(iv) An invitation to make an offer or do business. In case of “an invitation to make an offer”,
the person making the invitation does not make an offer rather invites the other party to
make an offer. His objective is to send out the invitation that he is willing to deal with any
person who, on the basis of such invitation, is ready toenter into contract with him subject to
final terms and conditions.
Example: An advertisement for sale of goods by auction is an invitation to the offer. It merely
invites offers/bids made at the auction.
when goods are sold through auction, the auctioneer does not contract with anyone who attends
the sale. The auction is only an advertisement to sell but the items are not put for sale though
persons who have come to the auction may have the intention to purchase. Similar decision was
given in the case of Harris vs. Nickerson (1873).
Similarly, Red Herring Prospectus issued by a company, is only an invitation to the public to
make an offer to subscribe to the securities of the company.A statement of price is not an
offer
What is invitation to offer?
An offer should be distinguished from an invitation to offer. An offer is definite and
capable of converting an intention into a contract. Whereas an invitation to an offer is only a
circulation of an offer, it is an attempt to induce offers and precedes a definite offer. An invitation
to offer is an act precedent to making an offer. Acceptance of an invitation to an offer does not
result in the contract and only an offer emergesin the process of negotiation.
When a person advertises that he has stock of books to sell or houses to let, there is no offer to
be bound by any contract. Such advertisements are offers to negotiate-offers toreceive offers. In order
to ascertain whether a particular statement amounts to an ‘offer’ or an ‘invitation to offer’, the test
would be intention with which such statement is made.Does the person who made the
statement intend to be bound by it as soon as it is accepted by the other or he intends to do
some further act, before he becomes bound by it. In the former case, it amounts to an offer and in the
latter case, it is an invitation to

offer.
Difference between offer and invitation to make an offer:
In terms of Section 2(a) of the Act, an offer is the final expression of willingness by the
offeror to be bound by the offer should the other party chooses to accept it. On the other
hand, offers made with the intention to negotiate or offers to receive offers are known as
invitation to offer. Thus, where a party without expressing his final willingness proposes certain terms
on which he is willing to negotiate he does not make an offer, but only invites the other party to make
an offer on those terms. Hence the only thing that is required is the willingness of the offeree to
abide by the terms of offer.
In order to ascertain whether a particular statement amounts to an offer or an invitation tooffer, the test
would be intention with which such statement is made. The mere statement of the lowest price
which the vendor would sell contains no implied contract to sell at that price to the person making
the inquiry.
If a person who makes the statement has the intention to be bound by it as soon as the other
accepts, he is making an offer. Thus, the intention to be bound is important factor to be considered in
deciding whether a statement is an ‘offer’ or ‘invitation to offer.’
Following are instances of invitation to offer to buy or sell:
a. An invitation by a company to the public to subscribe for its shares.
b. Display of goods for sale in shop windows.
c. Advertising auction sales and
d. Quotation of prices sent in reply to a query regarding price.

Basis Offer Invitation to offer

Meaning Section 2(a) of the Act, an offer is the Where a party without
final expression of willingness by the expressing his final willingness
offeror to be bound by the offer proposes certain terms on
should the other party chooses to which he is willing to negotiate
accept it. he does not make an offer, but
only invites the other party to
make an offer on those terms.
Intention of the parties If a person who makes the statement If a person has the intention of
has the intention to be bound by it as negotiating on terms it is called
soon as the other accepts, he is invitation to offer
making an offer.
Sequence An offer cannot be an act precedent An invitation to offer is always

to invitation to offer an act precedent to offer

1.5 ACCEPTANCE
Definition of Acceptance: In terms of Section 2(b) of the Act, ‘the term acceptance’ is defined as
follows:
“When the person to whom the proposal is made signifies his assent thereto, proposal is
said to be accepted. The proposal, when accepted, becomes a promise”.
Analysis of the above definition
1. When the person to whom proposal is made - for example if A offers to sell his car to B for Rs.
200000. Here, proposal is made to B.
2. The person to whom proposal is made i.e. B in the above example and if B signifies his consent on
that proposal. then wecan say that B has signified his consent on the proposal made by A.
3. When B has signified his consent on that proposal, we can say that the proposal has been
accepted.
4. Accepted proposal becomes promise.
Relationship between offer and acceptance: According to Sir William Anson “Acceptance
is to offer what a lighted match is to a train of gun powder”. The effect of this observation is
that what acceptance triggers cannot be recalled or undone. But there is a choice to the
person who had the train to remove it before the match is applied. It in effect means that the
offer can be withdrawn just before it is accepted. Acceptance converts the offer into a
promise and then it is too late to revoke it. This means as soon as the train of gun powder is
lighted it would explode. Train of Gun powder [offer] in itself is inert, but it is the lighted match
[the acceptance] which causes the gun powder to explode. The significance of this is an offer in
itself cannot create any legal relationship but it is the acceptance by the offereewhich creates
a legal relationship. Once an offer is accepted it becomes a promise and cannot be withdrawn or
revoked. An offer remains an offer so long as it is not accepted but becomes a contract as soon
as it is accepted.
Legal Rules regarding a valid acceptance
(1) Acceptance can be given only by the person to whom offer is made: In case of a specific

offer, it can be accepted only by the person to whom it is made. [Boulton vs.Jones (1857)]
Case Law: Boulton vs. Jones (1857)
Facts: Boulton bought a business from Brocklehurst. Jones, who was Broklehurst’s creditor,
placed an order with Brocklehurst for the supply of certain goods. Boulton supplied the goods even
though the order was not in his name. Jones refused to pay Boultan for the goods because by
entering into the contract with Blocklehurst, he intended to set off his debt against Brocklehurst. Held,
as the offer was not made to Boulton, therefore, there was no contract between Boulton and
Jones.
In case of a general offer, it can be accepted by any person who has the knowledge of the offer.
[Carlill vs. Carbolic Smoke Ball Co. (1893)]
(2) Acceptance must be absolute and unqualified: As per section 7 of the Act, acceptance is
valid only when it is absolute and unqualified and is also expressed in some usual and
reasonable manner unless the proposal prescribes the manner in which it must be accepted. If the
proposal prescribes the manner in which it must be accepted, then it must be accepted
accordingly.
M offered to sell his land to N for £280. N replied purporting to accept the offer but enclosed a
chequefor £ 80 only. He promised to pay the balance of £ 200 by monthly instalments of £ 50 each. It
was held that N could not enforce his acceptance because it was not an unqualified one. [Neale vs.
Merret [1930]W. N. 189].
A offers to sell his house to B for ` 1,00,000/-. B replied that, “I can pay ` 80,000 for it. The offer of ‘A’ is rejected
by ‘B’ as the acceptance is not unqualified. B however changes his mind and is prepared to pay ` 1,00,000/-. This is
also treated as counter offer and it is upto A whether to accept it or not. [Union of India v. Bahulal AIR 1968
Bombay 294].
Example: ‘A’ enquires from ‘B’, “Will you purchase my car for Rs. 2 lakhs?” If ‘B’ replies “I shall purchase
your car for Rs. 2 lakhs, if you buy my motorcycle for Rs. 50000/-, here‘B’ cannot be considered to
have accepted the proposal. If on the other hand ‘B’ agrees to
purchase the car from ‘A’ as per his proposal subject to availability of valid Registration Certificate /
book for the car, then the acceptance is in place though the offer contained no mention of R.C. book.
This is because expecting a valid title for the car is not a condition. Therefore, the

acceptance in this case is unconditional.
(3) The acceptance must be communicated: To conclude a contract between the parties, the
acceptance must be communicated in some perceptible form. Any conditional acceptance or
acceptance with varying or too deviant conditions is no acceptance. Such conditional
acceptance is a counter proposal and has to be accepted by the proposer, if the original
proposal has to materialize into a contract. Further when a proposal is accepted, the offeree must have
the knowledge of the offer made to him. If he does not have the knowledge, there can be no
acceptance. The acceptance must relate specifically to the offer made. Then only it can materialize
into a contract. The above points will be clearer from the following examples,
(a) Brogden vs. Metropolitan Railway Co. (1877)
Facts: B a supplier, sent a draft agreement relating to the supply of coal to the manager of
railway Co. viz, Metropolitan railway for his acceptance. The manager wrote the word “Approved”
on the same and put the draft agreement in the drawer of the table intending to send it to the
company’s solicitors for a formal contract to be drawn up. By an over sight the draft agreement
remained in drawer. Held, that there was no contract as the manager had not communicated
his acceptance to the supplier, B.
Where an offer made by the intended offeree without the knowledge that an offer has been
made to him cannot be deemed as an acceptance thereto. (Bhagwandas
v. Girdharilal)
A mere variation in the language not involving any difference in substance would not make
the acceptance ineffective. [Heyworth vs. Knight [1864] 144 ER 120].
Example 47: A proposed B to marry him. B informed A’s sister that she is ready to marry him. But his
sister didn’t inform A about the acceptance of proposal. There is no contract as acceptance was not
communicated to A.
(4) Acceptance must be in the prescribed mode: Where the mode of acceptance is prescribed in
the proposal, it must be accepted in that manner. But if the proposer does not insist on the
proposal being accepted in the manner prescribed after it has been accepted otherwise, i.e., not
in the prescribed manner, the proposer is presumed to have consented to the acceptance.
Example: If the offeror prescribes acceptance through messenger and offeree sends acceptance

by email, 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 arise.
(5) Time: Acceptance must be given within the specified time limit, if any, and if no time is
stipulated, acceptance must be given within the reasonable time and before the offer lapses.
What is reasonable time is nowhere defined in the law and thus would depend on facts and
circumstances of the particular case.
Example 49: A offered to sell B 50 kgs of bananas at Rs. 500. B communicated the acceptance after four
days. Such is not a valid contract as bananas being perishable items could not stay for a period ofweek. Four
days is not a reasonable time in this case
Example 50: A offers B to sell his house at Rs. 10,00,000. B accepted the offer and communicated to Aafter 4
days. Held the contract is valid as four days can be considered as reasonable time in case of sellof house.
(6) Mere silence is not acceptance: The acceptance of an offer cannot be implied from the silence of
the offeree or his failure to answer, unless the offeree has in any previous conduct indicated
that his silence is the evidence of acceptance.
Case Law: Felthouse vs. Bindley (1862)
Facts: F (Uncle) offered to buy his nephew’s horse for £30 saying “If I hear no more about
it I shall consider the horse mine at £30.” The nephew did not reply to F at all. He told his
auctioneer, B to keep the particular horse out of sale of his farm stock as he intended to
reserve it for his uncle. By mistake the auctioneer sold the horse. F sued him for conversion
of his property. Held, F could not succeed as his nephew had not communicated the acceptance
to him.
Example: ’A’ subscribed for the weekly magazine for one year. Even after expiry of his
subscription, the magazine company continued to send him magazine for five years. And also ‘A’
continued to use the magazine but denied to pay the bills sent to him. ’A’ would be liable to pay as
his continued use of the magazine was his acceptance of the offer.
(7) Acceptance by conduct/Implied Acceptance: Section 8 of the Act lays down that “the
performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal
promise which may be offered with a proposal, constitutes an acceptance of the proposal. This section
provides the acceptance of the proposal by conduct as against other modes of acceptance i.e. verbal

or written communication.
Therefore, when a person performs the act intended by the proposer as the consideration for
the promise offered by him, the performance of the act constitutes acceptance.
For example, when a tradesman receives an order from a customer and executes the order by
sending the goods, the customer’s order for goods constitutes the offer, which has been accepted
by the trades man subsequently by sending the goods. It is a case of acceptance by conduct.
Example 53: When a cobbler sits with a brush and polish, a person giving his shoes for polishing constitutes as
acceptance by conduct. 1.6 COMMUNICATION OF OFFER AND ACCEPTANCE
The importance of ‘offer’ and ‘acceptance’ in giving effect to a valid contract was explained in the
previous paragraphs. One important common requirement for both ‘offer’ and ‘acceptance’ is their
effective communication. Effective and proper communication prevents avoidable revocation
and misunderstanding between parties.
When the contracting parties are face-to-face, there is no problem of communication because there
is instantaneous communication of offer and acceptance. In such a case the question of revocation
does not arise since the offer and its acceptance are made instantly.
The difficulty arises when the contracting parties are at a distance from one another and they
utilize the services of the post office or telephone or email (internet). In such cases, it is
very much relevant for us to know the exact time when the offer or acceptance is made or
complete.
The Indian Contract Act,1872 gives a lot of importance to “time” element in deciding when the
offer and acceptance is complete.
Communication of offer: In terms of Section 4 of the Act, “the communication of offer is

complete when it comes to the knowledge of the person to whom it is made”.
Example - Where ‘A’ makes a proposal to ‘B’ by post to sell his house for Rs. 5 lakhs and if the
letter containing the offer is posted on 10th March and if that letter reaches ‘B’ on 12th March the
offer is said to have been communicated on 12th March when B received the letter.
Thus, it can be summed up that when a proposal is made by post, its communication will be
complete when the letter containing the proposal reaches the person to whomit is made.
Mere receiving of the letter is not sufficient, he must receive or read the message contained in
the letter.

He receives the letter on 12th March, but he reads it on 15th of March. In this case offeris
communicated on 15th of March, and not 12th of March.
Communication of acceptance: There are two issues for discussion and understanding.They are:
The modes of acceptance and when is acceptance complete?
Let us, first consider the modes of acceptance. Section 3 of the Act prescribes in general terms
two modes of communication namely, (a) by any act and (b) by omission, intending thereby,
to communicate to the other or which has the effect ofcommunicating it to the other.
Communication by act would include any expression of words whether written or oral. Written words
will include letters, telegrams, faxes, emails and even advertisements. Oral words will include telephone
messages. Again, communication would include any conduct intended to communicate like positive acts
or signs so that the other person understands what the person ‘acting ‘or ‘making signs’ means to
say or convey.
Communication of acceptance by ‘omission’ to do something. Such omission is conveyed
by a conduct or by forbearance on the part of one person to convey his willingness or assent.
However, silence would not be treated as communication by ‘omission’.
Example 55: A offers Rs. 50000 to B if he does not arrive before the court of law as an evidence to the case. B
does not arrive on the date of hearing to the court. Here omission of doing an act amounts to acceptance.
Communication of acceptance by conduct - For instance, delivery of goods at a price by a
seller to a willing buyer will be understood as a communication by conduct to convey
acceptance. Similarly, one need not explain why one boards a public bus or drop a coin in a
weighing machine. The first act is a conduct of acceptance against its communication to the
offer by the public transport authority to carry any passenger. The second act is again a conduct
conveying acceptance to use the weighing machine kept by the vending company as an offer to
render that service for a consideration.

The other issue in communication of acceptance is about the effect of act or omission or conduct.
These indirect efforts must result in effectively communicating its acceptance or non-
acceptance. If it has no such effect, there is no communication regardless of which the
acceptor thinks about the offer within himself. Thus, a mere mental unilateral assent in one’s
own mind would not amount to communication. Where a resolution passed by a bank to sell land
to ‘A’ remained uncommunicated to ‘A’, it was held that there was no communication and hence no
contract. [Central Bank Yeotmal vs Vyankatesh (1949) A. Nag. 286].
Let us now come to the issue of when communication of acceptance is complete. In terms of
Section 4 of the Act, it is complete,
(i) As against the proposer, when it is put in the course of transmission to him so as to be out of
the power of the acceptor to withdraw the same;
(ii) As against the acceptor, when it comes to the knowledge of the proposer.
Where a proposal is accepted by a letter sent by the post, the communication of acceptance
will be complete as against the proposer when the letter of acceptance is posted and as against
the acceptor when the letter reaches the proposer.
For instance, in the above example, if ‘B’ accepts, A’s proposal and sends his acceptance by
post on 14th, the communication of acceptance as against ‘A’ is complete on 14th, when the letter is
posted. As against’ B acceptance will be complete, when the letter reaches ‘A’. Here ‘A ‘the proposer
will be bound by B’s acceptance, even if the letter of acceptance is delayed in post or lost in
transit. The golden rule is proposer becomes bound by the contract, the moment acceptor has
posted the letter of acceptance. But it is necessary that the letter is correctly addressed,
adequately stamped and duly posted. In such an event the loss of letter in transit, wrong
delivery,

non-delivery etc., will not affect the validity of the contract. However, from the view point of
acceptor, he will be bound by his acceptance only when the letter of acceptance has
reached the proposer. So, it is crucial in this case that the letter reaches the proposer. If
there is no delivery of the letter, the acceptance could be treated as having been completed
from the viewpoint of proposer but not from the viewpoint of acceptor. Of course, this will give rise to
an awkward situation of only one party to the contract, being treated as bound by the contract
though no one would be sure as to where the letter of acceptance had gone.
Acceptance over telephone or telex or fax: When an offer is made of instantaneous
communication like telex, telephone, fax or through e-mail, the contract is only complete
when the acceptance is received by the offeree, and the contract is made at the place where the
acceptance is received (Entores Ltd. v. Miles Far East Corporation). However, in case of a
call drops and disturbances in the line, there may not be a valid contract.
Communication of special conditions: Sometimes there are situations where there are contracts
with special conditions. These special conditions are conveyed tacitly and the acceptance of
these conditions are also conveyed by the offeree again tacitly or without him even realizing it.
For instance, where a passenger undertakes a travel, the conditions of travel are printed at the back
of the tickets, sometimes these special conditions are brought to the notice of the passenger,
sometimes not. In any event, the passenger is treated as having accepted the special condition the
moment he bought his ticket.
When someone travels from one place to another by air, it could be seen that specialconditions
are printed at the back of the air ticket in small letters [in a non- computerized train ticket even
these are not printed] Sometimes these conditions are

found to have been displayed at the notice board of the Airlines office, whichpassengers may not
have cared to read. The question here is whether these conditions can be considered to have
been communicated to the passengers of the Airlines and can the passengers be treated as having
accepted the conditions. The answer to the question is in the affirmative and was so held in Mukul
Datta vs. Indian Airlines [1962] AIR cal. 314 where the plaintiff had travelled from Delhi to Kolkata
by air and the ticket bore conditions in fine print. But such terms and condition should be reasonable.
Example where a launderer gives his customer a receipt for clothes received for washing. The
receipt carries special conditions and are to be treated as having been duly communicated to the
customer and therein a tacit acceptance of these conditions is implied by the customer’s
acceptance of the receipt [Lily White vs. R. Mannuswamy [1966] A. Mad. 13].
CASE LAW: Lilly White vs. Mannuswamy (1970)
Facts: P delivered some clothes to drycleaner for which she received a laundry receipt containing a
condition that in case of loss, customer would be entitled to claim 15% of the market price of
value of the article, P lost her new saree. Held, the terms were unreasonable and P was entitled
to recover full value of the saree from the drycleaner.
In the cases referred above, the respective documents have been accepted without a protest and
hence amounted to tacit acceptance.
Standard forms of contracts: It is well established that a standard form of contract may be
enforced on another who is subjectively unaware of the contents of the document, provided the
party wanting to enforce the contract has given notice which, in the circumstances of a
case, is sufficiently reasonable. But the acceptor will not incur any contractual obligation, if the
document is so printed and delivered to him in such a state that it does not give
reasonable notice on its face that it contains certain

special conditions. In this connection, let us consider a converse situation. A transport carrier
accepted the goods for transport without any conditions. Subsequently, he issued a circular to the
owners of goods limiting his liability for the goods. In such a case, since the special conditions were
not communicated prior to the date of contract for transport, these were not binding on the owners of
goods [Raipur transport Co. vs. Ghanshyam [1956] A. Nag.145].
1.7 COMMUNICATION OF PERFORMANCE
We have already discussed that in terms of Section 4 of the Act, communication of a proposal is
complete when it comes to the knowledge of the person to whom it is meant. As regards acceptance
of the proposal, the same would be viewed from two angles. These are:
(i) from the viewpoint of proposer and
(ii) the other from the viewpoint of acceptor himself:
From the viewpoint of proposer, when the acceptance is put in to a course of transmission, when it
would be out of the power of acceptor. From the viewpoint of acceptor, it would be complete when it
comes to the knowledge of the proposer.
At times the offeree may be required to communicate the performance (or act) by way of
acceptance. In this case it is not enough if the offeree merely performs the act but he should also
communicate his performance unless the offer includes a term that a mere performance will constitute
acceptance. The position was clearly explained in the famous case of Carlill Vs Carbolic
&Smokeball Co. In this case the defendant a sole proprietary concern manufacturing a medicine
which was a carbolic ball whose smoke could be inhaled through the nose to cure influenza,
cold and other connected ailments issued an advertisement for sale of this medicine. The
advertisement also included a reward

of $100 to any person who contracted influenza, after using the medicine (which was described as
carbolic smoke ball’). Mrs. Carlill bought these smoke balls and used them as directed but contracted
influenza. It was held that Mrs. Carlill was entitled to a reward of
$100 as she had performed the condition for acceptance. Further as the advertisement did not require
any communication of compliance of the condition, it was not necessary to communicate the same.
The court thus in the process laid down the following three important principles:
(i) an offer, to be capable of acceptance, must contain a definite promise by the offeror
that he would be bound provided the terms specified by him are accepted;
(ii) an offer may be made either to a particular person or to the public at large, and
(iii) if an offer is made in the form of a promise in return for an act, the performance of thatact, even
without any communication thereof, is to be treated as an acceptance of the offer
1.8 REVOCATION OF OFFER AND ACCEPTANCE
If there are specific requirements governing the making of an offer and the acceptance ofthat offer,
we also have specific law governing their revocation.
In term of Section 4, communication of revocation (of the proposal or its acceptance)is
complete.
(i) as against the person who makes it when it is put into a course of transmission to theperson to
whom it is made so as to be out of the power of the person who makes it, and
(ii) as against the person to whom it is made, when it comes to his knowledge.
The above law can be illustrated as follows: If you revoke your proposal made to me by a telegram,
the revocation will be complete, as far as you are concerned when you have dispatched the telegram.
But as far as I am concerned, it will be complete only when I

receive the telegram.
As regards revocation of acceptance, if you go by the above example, I can revoke my acceptance (of
your offer) by a telegram. This revocation of acceptance by me will be complete when I dispatch the
telegram and against you, it will be complete when it reachesyou.
But the important question for consideration is when a proposal can be revoked? And
when can an acceptance be revoked? These questions are more important thanthe question
when the revocation (of proposal and acceptance) is complete.
Ordinarily, the offeror can revoke his offer before it is accepted. If he does so, the offeree cannot
create a contract by accepting the revoked offer.
For example, the bidder at an auction sale may withdraw (revoke) his bid (offer) before it is accepted
by the auctioneer by fall of hammer.
An offer may be revoked by the offeror before its acceptance, even though he had originally agreed to
hold it open for a definite period of time. So long as it is a mere offer, it can be withdrawn whenever
the offeror desires.
Example: X offered to sell 50 bales of cotton at a certain price and promised to keep it open for
acceptance by Y till 6 pm of that day. Before that time X sold them to Z. Y accepted before 6
p.m., but after the revocation by X. In this case it was held that the offer was already revoked.
In terms of Section 5 of the Act a proposal can be revoked at any time before the
communication of its acceptance is complete as against the proposer. An acceptance may
be revoked at any time before the communication of acceptance is complete as against
the acceptor.
Example: A proposes, by a letter sent by post, to sell his house to B. B accepts the

proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment
when B posts his letter of acceptance, but not afterwards. Whereas B may revoke his acceptance
at any time before or at the moment when the letter communicating it reaches A, but not
afterwards.
An acceptance to an offer must be made before that offer lapses or is revoked.
The law relating to the revocation of offer is the same in India as in England, but the law
relating to the revocation of acceptance is different.
In English law, the moment a person expresses his acceptance of an offer, that moment the
contract is concluded, and such an acceptance becomes irrevocable, whether it is made orally or
through the post. In Indian law, the position is different as regards contract through post.
Contract through post- As acceptance, in English law, cannot be revoked, so that once the letter of
acceptance is properly posted the contract is concluded. In Indian law, the acceptor or can revoke his
acceptance any time before the letter of acceptance reaches the offeror, if the revocation telegram
arrives before or at the same time with the letter of acceptance, the revocation is absolute.
Contract over Telephone- A contract can be made over telephone. The rules regarding offer and
acceptance as well as their communication by telephone or telex are the same as for the contract
made by the mutual meeting of the parties. The contract is formed as soon as the offer is accepted
but the offeree must make it sure that his acceptance isreceived by the offeror, otherwise there will
be no contract, as communication of acceptance is not complete. If telephone unexpectedly goes
dead during conversation, the acceptor must confirm again that the words of acceptance
were duly heard bythe offeror.
Revocation of proposal otherwise than by communication: When a proposal is made,

the proposer may not wait indefinitely for its acceptance. The offer can be revokedotherwise
than by communication or sometimes by lapse.
Modes of revocation of offer
(i) By notice of revocation

Example 61: A offered B to sell goods at Rs. 5,000 through a post but before B could accept the
offerA received highest bid for the goods from C. So, A revoked the offer to B by informing B over the
telephone and sold goods to C.
(ii) By lapse of time: The time for acceptance can lapse if the acceptance is not given within
the specified time and where no time is specified, then within a reasonable time. This is for
the reason that proposer should not be made to wait indefinitely. It was held in Ramsgate
Victoria Hotel Co. Vs Montefiore (1866 L.R.Z. Ex 109), that a person who applied for shares
in June was not bound by an allotment made in November. This decision was also followed in
India Cooperative Navigation and Trading Co. Ltd. Vs Padamsey PremJi. However, these
decisions now will have no relevance in the context of allotment of shares since the Companies
Act, 2013 has several provisions specifically covering these issues.
(iii) By non-fulfillment of condition precedent: Where the acceptor fails to fulfill a condition
precedent to acceptance the proposal gets revoked. This principle is laid down in Section 6 of
the Act. The offeror for instance may impose certain conditions such as executing a certain
document or depositing certain amount as earnest money. Failure to satisfy any condition
will result in lapse of the proposal. As stated earlier ‘condition precedent’ to acceptance prevents
an obligation from coming into existence until the condition is satisfied. Suppose where ‘A’
proposes to sell his house to be ‘B’ for Rs. 5 lakhs provided ‘B’ leases his land to ‘A’. If
‘B’ refuses to lease the land, the offer of ‘A’ is revoked automatically.
(iv) By death or insanity: Death or insanity of the proposer would result in automatic
revocation of the proposal but only if the fact of death or insanity comes to the
knowledge of the acceptor.

(v) By counter offer
(vi) By the non-acceptance of the offer according to the prescribed or usual mode
(vii) By Subsequent illegality
Summary
Contract: A Contract is an agreement enforceable by law [Section2(h)]. An agreement is enforceable
by law, if it is made by the free consent of the parties who are competent to contract and the agreement is
made with a lawful object and is for a lawful consideration, and is not hereby expressly declared to be void
[Section10]. All contracts are agreements but all agreements are not contracts. Agreements lacking any of
the above said characteristics are not contracts. A contract that ceases to be enforceable by law is called
‘void contract’, [Section2(i)], but an agreement which is enforceable by law at the option of one party
thereto,but not at the option of the other is called ‘voidable contract’ [(Section 2(i)].
Offer and Acceptance: Offeror undertakes to do or to abstain from doing a certain act if the Offer is
properly accepted by the Offeree. Offer may be expressly made or may even be implied in conduct of the
Offeror, but it must be capable of creating legal relations and must intend to create legal relations. The
terms of Offer must be certain or at least be capable of being made certain.
Acceptance of offer must be absolute and unqualified and must be according to the prescribed or usual
mode. If the offer has been made to a specific person, it must be accepted by that person only, but a
general offer may be accepted by any person.
Communication of offer and acceptance, and revocation thereof-
(a) Communication of an offer is complete when it comes to the knowledge of the offeree.
(b) Communication of an acceptance is complete: As against the offeror when it is put in the course of
transmission to him and as against the acceptor, when it comes to the knowledge of the offeror.
(c) Communication of revocation of an offer or acceptance is complete: It is complete as against the
person making it, when it is put into a course of transmission so as to be out of power of the
person making it and as against the person to whom it is made, when it comes to his
knowledge.

Meaning of certain terms
Proposal [(i.e., offer) Section 2(a)]  When one person signifies to another
 his willingness
 to do or to abstain from doing anything
 with a view to obtaining the assent of that either to-
• such act; or
• abstinence,
 he is said to make a proposal (i.e. offer).
Promise [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.
Agreement [Section 2(e)]  Every promise and every set of promises,
 forming consideration for each other,
 is an agreement.
Contract [Section 2(h)] An agreement enforceable by law is a contract.
Promisor and Promisee [Section 2(c)] When the proposal is accepted-
 the person making the proposal is called as
‘promisor’; and
 the person accepting the proposal is called as ‘promisee’.
Consideration [Section 2(d)] When, at the desire of the promisor, the promisee
 has done or abstained from doing something; or
 does or abstains from doing something; or any other person
 promises to do or abstain from doing something,
Such act, abstinence or promise is called a consideration for the
promise.
Void agreement [Section 2(g)] An agreement not enforceable by law is said to be void.
A void agreement is not enforceable from the very beginning, i.e. it is
void ab initio.
Voidable Contract [Section 2(i)] An agreement is a voidable contract if-
 it is enforceable by law at the option of one or more of the
parties thereto,
 it is not enforceable by law at the option of the other or
others.
Void contract [Section 2 (j)]  A contract
 which ceases to be enforceable by law
 becomes void when it ceases to be enforceable.

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. An agreement enforceable by law is a
(a) Promise (b) Contract
(c) Obligation (d) Lawful promise
2. A void agreement is one which is -
(a) Valid but not enforceable (b) Enforceable at the option of both the parties
(c) Enforceable at the option of one party (d) Not enforceable in a court of law.
3. An agreement which is enforceable by law at the option of one or more of the parties thereon but not atthe
option of the other or others is a
(a) Valid Contract (b) Void contract
(c) Voidable contract (d) Illegal contract
4. When the consent of a party is not free, the contract is
(a) Void (b) Voidable
(c) Valid (d) Illegal
5. In case of illegal agreements, the collateral agreements are:
(a) Valid (b) Void
(c) Voidable (d) None of these

6. An offer may lapse by:
a. Revocation (b) Counter Offer

(c) Rejection of offer by offeree (d) All of these
7. A proposal when accepted becomes a
a. Promise (b) Contract

(c) Offer (d) Acceptance
8. If A says to B “I offer to sell my house to you for ` 10,00,000” and B accepts the offer by saying clearly “I accept
your offer”, it is a/an
(b) Implied offer (b) Express offer
(c) General offer (d) None of the above
9. ‘A’ offered a reward of ` 10,000 for recovery of some valuable missing articles. ‘B’ who did not know ofthis offer,
found the missing articles. Which one of the following is the correct solution to this problem?
(c) Giving delivery of articles to ‘A’ amounts to an acceptance and hence ‘B’ is entitled to get the
reward of ` 10,000
(d) Giving delivery of articles to ‘A’ amounts to performance of a condition precedent to an offerand
hence there is valid acceptance. So ‘B’ must get the reward of ` 10,000
(e) As there is no acceptance of an offer due to want of Knowledge, ‘B’, is not entitled to get the reward
of ` 10,000
(f) In the absence of any legal obligation on ‘A’, no claim for reward of ` 10,000 is maintainable by‘B’.
10. Arun has two cars- one of white colour and another of red colour. He offers to sell one of the cars to Basu thinking
that he is selling the car which has white colour. Basu agrees to buy the car thinking that Arun is selling the car
which has red colour. Will this agreement becomes a valid contract?
(g) Yes (b) No
(c) Insufficient information (d) None of the above.
11. A dress is displayed in the showroom with a price tag attached to the dress. A buyer interested in the dress and
ready to pay the price mentioned in the tag approached the shopkeeper for purchasing thedress.
(h) The shopkeeper can refuse to sell the dress as display of dress is just an invitation to offer.
(i) The shopkeeper cannot refuse to sell the dress as the buyer has accepted the offer
(j) In case of refusal, the shopkeeper will be liable for breach of contract
(k) The shopkeeper cannot refuse to sell the dress but may charge higher price
12. A agrees to pay ` 1,000 to B if a certain ship returns within a year. However, the ship sinks within theyear. In this
case, the contract becomes
(l) Valid (b) Void
(c) Voidable (d) Illegal
13. A notice in the newspaper inviting tenders is
(m) a proposal (b) An invitation to proposal
(c) A promise (d) An invitation for negotiation
14. A telephonic acceptance is complete when the offer is
(n) spoken into the telephone
(o) heard but not understood by the offeror

(p) heard and understood by the offeror
(q) is received, heard and understood by some person in the offeror’s house
15. A and B agree to deal in smuggled goods and share the profits. A refuses to give B’s share of profit.
Inthis case:
(r) B can enforce the agreement in the court
(s) B can only claim damages
(t) B has no remedy as the contract is illegal
(u) B can enforce the contract and claim damages
16. Which one of the following statements is correct?
(v) Void agreements are always illegal
(w) Illegal agreements are voidable
(x) Illegal agreement can be ratified by the parties
(y) Illegal agreements are always void
17. A voidable contract is one which
(z) Can be enforced at the option of aggrieved party
(aa) Can be enforced at the option of both the parties
(bb) Cannot be enforced in a court of law
(cc) Courts prohibit
18. When offer is made to a definite person, it is known as
(a) General Offer (b) Cross Offer

(c) Counter offer (d) Special offer
19. On the face of a ticket, it is mentioned that to look for the terms and conditions look behind. Mr. A
boughtthe ticket but didn’t read the terms and conditions. He:
a. is not bound by the terms and condition
b. may decide to bound by certain terms and ignore others
c. is bound by all the terms and conditions whether he read it or not
d. none of the above
Answers to MCQs
(b) (d) (c) (b) (b)

1. 2. 3. 4. 5.
(d) (a) (b) (c) (b)
6. 7. 8. 9. 10.
(a) (b) (b) (c) (c)
11. 12. 13. 14. 15.
16. 17. 18. 19.
(d) (a) (d) (c)

Theoretical Questions
1. “All contracts are agreements, but all agreements are not contracts”. Comment.
2. A sends an offer to B to sell his second-car for ` 1,40,000 with a condition that if B does not reply within a
week, he (A) shall treat the offer as accepted. Is A correct in his proposition?
3. Explain the type of contracts in the following agreements under the Indian Contract Act, 1872:
(i) A coolie in uniform picks up the luggage of A to be carried out of the railway station without being
asked by A and A allows him to do so.
(ii) Obligation of finder of lost goods to return them to the true owner.
(iii) A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before the supply is
effected, the fire caught in the factory and everything was destroyed.
4. Shambhu Dayal started “self service” system in his shop. Smt. Prakash entered the shop, took a basket and
after taking articles of her choice into the basket reached the cashier for payments. The cashier refuses to
accept the price. Can Shambhu Dayal be compelled to sell the said articles to Smt. Prakash? Decide as per the
provisions of the Indian Contract Act, 1872.
5. State whether there is any contract in following cases:
(a) A engages B to do certain work and remuneration to be paid as fixed by C.
(b) A and B promise to pay for the studies of their maid’s son
(c) A takes a seat in public bus.
(d) A, a chartered accountant promises to help his friend to file his return.
6. Miss Shakuntala puts an application to be a teacher in the school. She was appointed by the trust of the school. Her friend who
works in the same school informs her about her appointment informally. But later due to some internal reasons her
appointment was cancelled. Can Miss Shakuntala claim for damages?
Answer to the Theoretical Question

1. An agreement comes into existence when one party makes a proposal or offer to the other party and that
other party gives his acceptance to it. A contract is an agreement enforceable by law. It means that to
become a contract an agreement must give rise to a legal obligation i.e. duty enforceable by law. If an
agreement is incapable of creating a duty enforceable by law, it is not a contract. There can be agreements
which are not enforceable by law, such as social, moral or religious agreements. The agreement is a wider
term than the contract. All agreements need not necessarily become contracts but all contracts shall always
be agreements.
All agreements are not contracts: When there is an agreement between the parties and they do not intend to
create a legal relationship, it is not a contract.
All contracts are agreements: For a contract there must be two things (a) an agreement and (b) enforceability
by law. Thus, existence of an agreement is a pre-requisite existence of a contract. Therefore, it is true to say
that all contracts are agreements.
Thus, we can say that there can be an agreement without it becoming a contract, but we can’t have a
contract without an agreement.
2. Acceptance to an offer cannot be implied merely from the silence of the offeree, even if it is expressly stated in
the offer itself. Unless the offeree has by his previous conduct indicated that his silence amount to acceptance,
it cannot be taken as valid acceptance. So, in the given problem, if B remains silent, it does not amount to
acceptance.
The acceptance must be made within the time limit prescribed by the offer. The acceptance of an offer after
the time prescribed by the offeror has elapsed will not avail to turn the offer into a contract.
3. (i) It is an implied contract and A must pay for the services of the coolie detailed by him.

Implied Contracts: Implied contracts come into existence by implication. Most often the implication is
by law and or by action. Section 9 of the Act contemplates such implied contracts when it lays down that
in so far as such proposal or acceptance is made otherwise than in words, the promise is said to be
implied.
(ii) Obligation of finder of lost goods to return them to the true owner cannot be said to arise out of a
contract even in its remotest sense, as there is neither offer and acceptance nor consent. These are
said to be quasi-contracts.
Quasi-Contract: A quasi-contract is not an actual contract but it resembles a contract. It is created
by law under certain circumstances. The law creates and enforces legal rights and obligations when
no real contract exists. Such obligations are known as quasi-contracts. In other words, it is a contract in
which there is no intention on part of either party to make a contract but law imposes a contract
upon the parties.
(iii) The above contract is a void contract.
Void Contract: Section 2 (j) states as follows: “A contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable”. Thus, a void contract is one which cannotbe enforced by a court of law.
4. Invitation to offer: The offer should be distinguished from an invitation to offer. An offer is the final
expression of willingness by the offeror to be bound by his offer should the party chooses to accept it. Where a
party, without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he does
not make an offer, but invites only the other party to make an offer on those terms. This is the basic
distinction between offer and invitation to offer.
The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in no sense
an offer for sale, the acceptance of which constitutes a contract. In this case, Smt. Prakash by selecting some
articles and approaching the cashier for payment simply made an offer to buy the articles selected by her. If the
cashier does not accept the price, the interested buyer cannot compel him to sell.
5. (a) It is a valid express contract
(b) It is not a contract as it is a social agreement
(c) It is an implied contract. A is bound to pay for the bus fare.
(d) It is a social agreement without any intention to create a legal relationship.
6. No, Miss Shakuntala cannot claim damages. As per Section 4, communication of acceptance is complete as
against proposer when it is put in the course of transmission to him.
In the present case, school authorities have not put any offer letter in transmission. Her information from a third person will not form
part of contract.

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Unit 1. Nature of Contract 1.1.

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The Law of contract: Introduction

As a result of increasing complexities of business environment, innumerable contracts are

contracts, contingent contracts etc.

not enforceable at all.

1.1 WHAT IS A CONTRACT?

“an agreement enforceable by law”.

The contract consists of two essential elements:

(i) an agreement, and

(ii) its enforceability by law.

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Section 2 (b) defines promise -

be accepted. Proposal when accepted, becomes a promise”.

The following points emerge from the above definition:

1. when the person to whom the proposal is made

2. signifies his assent on that proposal which is made to him

3. the proposal becomes accepted

4. accepted proposal becomes promise

Agreement = Offer/Proposal + Acceptance

(ii) Enforceability by law – An agreement to become a contract must give rise to a

legal obligation which means a duly enforceable by law.Thus,

from above definitions it can be concluded that –

Contract = Accepted proposal/Agreement + Enforceability by law

which is a promise or a set of reciprocal promises, that a promise is the acceptance of a

proposal giving rise to a binding contract.

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the law of contract.

Difference between Agreement and Contract

Basis of Agreement Contract

1.2 ESSENTIALS OF A VALID CONTRACT

Essentials of a valid contract

As given by Section 10 of Indian Not given by Section 10 but

Contract Act, 1872 are also considered essential

1 Agreement 1 Two parties

2 Free consent 2 Intention to create legal relationship

3 Competency of the parties 3 Fulfillments of legal formalities

4 Lawful consideration 4 Certainty of meaning

5 Legal object 5 Possibility of performance

6 Not expressly declared to be void[as per Section 6 -

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and are not expressly declared to be void”.

elements should be present:

remember that identity of the parties be ascertainable.

not intend to create any legal relations. (Balfour v. Balfour

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the case of immovable property.

performance. An agreement to do an act impossible in itself cannot be enforced.

Example: A agrees with B to discover treasure by magic. The agreement cannot be

enforced as it is not possible to be performed.

Essential elements of a valid contract

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I. Offer and Acceptance or an agreement: An agreement is the first essential element of a

according to Section 2(b) “A proposal when accepted,becomes a promise”. An agreement is

an outcome of offer and acceptance.

the terms viz consensus ad idem.

not caused by coercion, undue influence, fraud or, misrepresentation or mistake.

every person is competent to contract who