Study notes on Business Law- The Indian Contract Act,1872 (Part 1/4)

INDIAN CONTRACT ACT, 1872

COMPENDIUM

• Basics of Contracts
• Elements of Contracts
• Types of Contracts
• Performance of Contract
• Breach of Contract and its Remedies

I. BASICS OF CONTRACT

Contract  =  Agreement   +   Enforceability by law

An offer is created when :

• one person communicates 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

• It must be capable of creating legal relations – 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.

• 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.

• It must be communicated to the offeree – This can be illustrated by the landmark case of Lalman Shukla v. Gauri Dutt:

Facts of the case: G (Gauri Dutt) 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. It was held thathe was not entitled to the reward, as he did not know the offer.

• 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.

• Offer may be either specific or general – Any offer can be made to either public at large or to the any specific person.

• Offer may be express or implied – Either by conduct or words

• Offer is Different from a mere statement of intention or an invitation to offer –An invitation to offer is a mere information given to public or a set of persons to come forward to place an offer which shall be further accepted based on agreed terms and conditions.

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.’

Examples –

1. An advertisement for sale of goods by auction,
2. An invitation by a company to the public to subscribe for its shares,
3. Display of goods for sale in shop windows,
4. Quotation of prices sent in reply to a query regarding price, etc.

• General Offer: It is an offer made to public at large and hence anyone can accept and do the desired act. Until the general offer is retracted or withdrawn, it can be accepted by anyone at any time as it is a continuing offer.

• 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.

• Counter Offer: When the offeree accepts the ‘original offer’ upon any modifications / variations to the same, they are said to have made a counter offer. Counter off­er amounts to rejection of the original o­ffer. It is also called as Conditional Acceptance.

• Cross Offer: When two parties exchange identical offers in to each other’s offer without knowing before hand, the offers are called cross offers. There is no binding contract in such a case.

Example: If A makes a proposal to B to sell his car for ` 2 lacs and B, without knowing the proposal of A, makes an offer to purchase the same car at ` 2 lacs from A, it is not an acceptance, as B was not aware of proposal made by A. There is no binding contract in such a case.

• Standing 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 an example of standing o­ffer.

• When the person to whom the proposal is made
• Signifi­es his assent thereto,
• Proposal is said to be accepted

• A proposal, when accepted, becomes a promise

• Acceptance can be given only by the person to whom offer is made

• Acceptance must be absolute and unqualified

• The acceptance must be communicated and shall be expressed in some usual and reasonable manner unless the proposal prescribes the manner in which it must be accepted

• Acceptance must be in the prescribed mode

• Acceptance must be given within the specified time limit and if no time is stipulated, acceptance must be given within the reasonable time and before the o­ffer lapses

• Mere silence is not acceptance unless the o­fferee has in any previous conduct indicated that his silence is the evidence of acceptance

• Acceptance may be by way of conduct, i.e, Implied Acceptance

• Communication of acceptance is complete:

• As against the proposer, when it is put in the course of transmission to him, so that it is out of the power of the acceptor to withdraw the same;

• 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.

• 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

• Communication of special conditions – 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 example, 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.

In case the special conditions were not communicated prior to the date of contract, these are not binding on the offeree.

A) COMMUNICATION OF REVOCATION (OF THE PROPOSAL OR ITS ACCEPTANCE) IS COMPLETE:

• as against the person who makes it – when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it, and

• as against the person to whom it is made – when it comes to his knowledge

B) REVOCATION OF ‘ACCEPTANCE’

• Contract through post – The acceptor can revoke his acceptance any time before the letter of acceptance reaches the o­fferor. Therefore, if the revocation telegram arrives before or at the same time with the letter of acceptance, the revocation is absolute.

• Contract over Telephone – If telephone unexpectedly goes dead during conversation, the acceptor must confirm again that the words of acceptance were duly heard by the 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 revoked otherwise than by communication or lapse of time

C) MODES OF REVOCATION

• By notice of revocation

• 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.

• By non-fulfillment of proposed terms and condition

• By death or insanity – Death or insanity of the offeror would result in automatic revocation of the proposal – but only if the fact of death or insanity comes to the knowledge of the acceptor.

• By counter o­ffer

• By the non-acceptance of the o­ffer according to the prescribed or usual mode

• By subsequent illegality

‘Not all agreements are contracts, but all contracts are agreements’

CONTRACT	AGREEMENT
Agreement + Enforceability by Law	Offer + Acceptance
Presence of legal relation between the parties is a must	Legal relation between the parties may or may not be present
Includes only legal agreements	Includes legal as well as social agreements
A contract grants legal rights to its parties	An agreement may or may not grant legal rights to its parties