1

CHAPTER
LAW OF CONTRACTS
2 Business Law I ncluding Company Law
1.1 NATURE OF CONTRACT
[Secti ons 12]
INTRODUCTION
We enter i nto contracts day after day. Taki ng a seat i n a bus amounts to enteri ng i nto
a contract. When you put a coi n i n the sl ot of a wei ghi ng machi ne, you have entered i nto
a contract. You go to a restaurant and take snacks, you have entered i nto a contract. I n such
cases, we do not even real i se that we are maki ng a contract. I n the case of peopl e engaged
i n trade, commerce and i ndustry, they carry on busi ness by enteri ng i nto contracts. The l aw
rel ati ng to contracts i s to be found i n the I ndi an Contract Act, 1872.
The l aw of contracts di ffers from other branches of l aw i n a very i mportant respect. I t
does not l ay down so many preci se ri ghts and duti es whi ch the l aw wi l l protect and enforce;
i t contai ns rather a number of l i mi ti ng pri nci pl es, subject to whi ch the parti es may create
ri ghts and duti es for themsel ves, and the l aw wi l l uphol d those ri ghts and duti es. Thus, we
can say that the parti es to a contract, i n a sense make the l aw for themsel ves. So l ong as
they do not transgress some l egal prohi bi ti on, they can frame any rul es they l i ke i n regard
to the subject matter of thei r contract and the l aw wi l l gi ve effect to thei r contract.
WHAT IS A CONTRACT?
Secti on 2(h) of the I ndi an Contract Act, 1872 defi nes a contract as an agreement enforceabl e
by l aw. Secti on 2(e) defi nes agreement as every promi se and every set of promi ses formi ng
consi derati on for each other. Secti on 2(b) defi nes promi se i n these words: When the person
to whom the proposal i s made si gni fi es hi s assent thereto, the proposal i s sai d to be accepted.
A proposal when accepted, becomes a promi se.
From the above defi ni ti on of promi se, i t i s obvi ous that an agreement i s an accepted
proposal . The two el ements of an agreement are:
(i) offer or a proposal ; and
(ii) an acceptance of that offer or proposal .
What agreements are contracts? Al l agreements are not studi ed under the I ndi an Contract
Act, as some of them are not contracts. Onl y those agreements whi ch are enforceabl e at l aw
are contracts. The Contract Act i s the l aw of those agreements whi ch create obl i gati ons, and
i n case of a breach of a promi se by one party to the agreement, the other has a l egal remedy.
Thus, a contract consi sts of two el ements:
(i) an agreement; and
(ii) l egal obl i gati on, i .e., i t shoul d be enforceabl e at l aw.
However, there are some agreements whi ch are not enforceabl e i n a l aw court. Such
agreements do not gi ve ri se to contractual obl i gati ons and are not contracts.
Examples
(1) A i nvi tes B for di nner i n a restaurant. B accepts the i nvi tati on. On the appoi nted
day, B goes to the restaurant. To hi s utter surpri se A i s not there. Or A i s there
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but refuses to entertai n B. B has no remedy agai nst A. I n case A i s present i n the
restaurant but B fai l s to turn-up, then A has no remedy agai nst B.
(2) A gi ves a promi se to hi s son to gi ve hi m a pocket al l owance of Rupees one hundred
every month. I n case A fai l s or refuses to gi ve hi s son the promi sed amount, hi s
son has no remedy agai nst A.
I n the above exampl es promi ses are not enforceabl e at l aw as there was no i ntenti on to
create l egal obl i gati ons. Such agreements are soci al agreements whi ch do not gi ve ri se to
l egal consequences. Thi s shows that an agreement i s a broader term than a contract. And,
therefore, a contract i s an agreement but an agreement i s not necessari l y a contract.
What obligations are contractual in nature? We have seen above that the l aw of contracts
i s not the whol e l aw of agreements. Si mi l arl y, al l l egal obl i gati ons are not contractual i n
nature. A l egal obl i gati on havi ng i ts source i n an agreement onl y wi l l gi ve ri se to a contract.
Example
A agrees to sel l hi s motor bi cycl e to B for Rs. 5,000. The agreement gi ves ri se to a l egal
obl i gati on on the part of A to del i ver the motor bi cycl e to B and on the part of B to
pay Rs. 5,000 to A. The agreement i s a contract. I f A does not del i ver the motor bi cycl e,
then B can go to a court of l aw and fi l e a sui t agai nst A for non-performance of the
promi se on the part of A.
On the other hand, i f A has al ready gi ven the del i very of the motor bi cycl e and B
refuses to make the payment of pri ce, A can go to the court of l aw and fi l e a sui t agai nst
B for non-performance of promi se.
Si mi l arl y, agreements to do an unl awful , i mmoral or i l l egal act, for exampl e, smuggl i ng
or murderi ng a person, cannot be enforceabl e at l aw. Besi des, certai n agreements have been
speci fi cal l y decl ared voi d or unenforceabl e under the I ndi an Contract Act. For instance, an
agreement to bet (Wageri ng agreement) (S. 30), an agreement i n restrai nt of trade (S. 27),
an agreement to do an i mpossi bl e act (S. 56).
An obl i gati on whi ch does not have i ts ori gi n i n an agreement does not gi ve ri se to a
contract. Some of such obl i gati ons are
1. Torts or ci vi l wrongs;
2. Quasi -contract;
3. Judgements of courts, i .e., Contracts of Records;
4. Rel ati onshi p between husband and wi fe, tr ustee and benefi ci ar y, i .e., status
obl i gati ons.
These obl i gati ons are not contractual i n nature, but are enforceabl e i n a court of l aw.
Thus, Sal mond has ri ghtl y observed: The l aw of Contracts i s not the whol e l aw of agreements
nor i s i t the whol e l aw of obl i gati ons. I t i s the l aw of those agreements whi ch create obl i gati ons,
and those obl i gati ons whi ch have, thei r source i n agreements.
Law of Contracts creates ri ghts i n personam as di sti ngui shed from ri ghts i n rem. Ri ghts
i n rem are general l y i n regard to some property as for i nstance to recover l and i n an acti on
of ejectment. Such ri ghts are avai l abl e agai nst the whol e worl d. Ri ghts i n personam are
agai nst or i n respect of a speci fi c person and not agai nst the worl d at l arge.
Examples
(1) A owns a pl ot of l and. He has a ri ght to have qui et possessi on and enjoyment of
the same. I n other words every member of the publ i c i s under obl i gati on not to
4 Business Law I ncluding Company Law
di sturb hi s qui et possessi on and enjoyment. Thi s ri ght of A agai nst the whol e worl d
i s known as ri ght i n rem.
(2) A i s i ndebted to B for Rs. 100. I t i s the ri ght of B to recover the amount from A.
Thi s ri ght of B agai nst A i s known as ri ght i n personam. I t may be noted that no
one el se (except B) has a ri ght to recover the amount from A.
The l aw of contracts i s concerned wi th ri ghts i n personam onl y and not wi th ri ghts
i n rem.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
We have seen above that the two el ements of a contract are: (1) an agreement; (2) l egal
obl i gati on. Secti on 10 of the Act provi des for some more el ements whi ch are essenti al i n order
to consti tute a val i d contract. I t reads as fol l ows:
Al l agreements are contracts i f they are made by free consent of parti es, competent to
contract, for a l awful consi derati on and wi th a l awful object and are not hereby expressl y
decl ared to be voi d.
Thus, the essential elements of a valid contract can be summed up as fol l ows
1. Agreement.
2. I ntenti on to create l egal rel ati onshi p.
3. Free and genui ne consent.
4. Parti es competent to contract.
5. Lawful consi derati on.
6. Lawful object.
7. Agreements not decl ared voi d or i l l egal .
8. Certai nty of meani ng.
9. Possi bi l i ty of performance.
10. Necessary Legal Formal i ti es.
These essenti al el ements are expl ai ned bri efl y.
1. Agreement
As al ready menti oned, to consti tute a contract there must be an agreement. An agreement
i s composed of two el ementsoffer and acceptance. The party maki ng the offer i s known as
the offeror, the party to whom the offer i s made i s known as the offeree. Thus, there are
essenti al l y to be two parti es to an agreement. They both must be thi nki ng of the same thi ng
i n the same sense. I n other words, there must be consensus-ad-idem.
Thus, where A who owns 2 cars x and y wi shes to sel l car x for Rs. 30,000. B, an
acquai ntance of A does not know that A owns car x al so. He thi nks that A owns onl y car
y and i s offering to sell the same for the stated price. He gives his acceptance to buy the same.
There is no contract because the contracti ng parti es have not agreed on the same thi ng at
the same ti me, A offeri ng to sel l hi s car x and B agreei ng to buy car y. There i s no
consensus-ad-idem.
2. Intention to create legal relationship
As al ready menti oned there shoul d be an i ntenti on on the part of the parti es to the
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agreement to create a l egal rel ati onshi p. An agreement of a purel y soci al or domesti c nature
i s not a contract.
Example
A husband agreed to pay 30 to hi s wi fe every month whi l e he was abroad. As he fai l ed
to pay the promi sed amount, hi s wi fe sued hi m for the recovery of the amount.
Held: She coul d not recover as i t was a soci al agreement and the parti es di d not i ntend
to create any l egal rel ati ons [Balfour v. Balfour (1919)2 K.B.571].
However, even i n the case of agreements of purel y soci al or domesti c nature, there may
be i ntenti on of the parti es to create l egal obl i gati ons. I n that case, the soci al agreement i s
i ntended to have l egal consequences and, therefore, becomes a contract. Whether or not such
an agreement i s i ntended to have l egal consequences wi l l be determi ned wi th reference to
the facts of the case. I n commerci al and busi ness agreements the l aw wi l l presume that the
parti es enteri ng i nto agreement i ntend those agreements to have l egal consequences. However,
thi s presumpti on may be negati ved by express terms to the contrary. Si mi l arl y, i n the case
of agreements of purel y domesti c and soci al nature, the presumpti on i s that they do not gi ve
ri se to l egal consequences. However, thi s presumpti on i s rebuttabl e by gi vi ng evi dence to the
contrary, i .e., by showi ng that the i ntenti on of the parti es was to create l egal obl i gati ons.
Examples
(1) There was an agreement between Rose Company and Crompton Company, where
of the former were appoi nted sel l i ng agents i n North Ameri ca for the l atter. One
of the cl auses i ncl uded i n the agreement was: Thi s arrangement i s not... a formal
or l egal agreement and shal l not be subject to l egal juri sdi cti on i n the l aw courts.
Held that: Thi s agreement was not a l egal l y bi ndi ng contract as the parti es i ntended
not to have l egal consequences [Rose and Frank Co. v. J .R. Crompton and Bros.
Ltd. (1925) A.C. 445].
(2) An agreement contai ned a cl ause that i t shal l not gi ve ri se to any l egal rel ati onshi ps,
or be l egal l y enforceabl e, but bi ndi ng i n honour onl y.
Held: The agreement di d not gi ve ri se to l egal rel ati ons and, therefore, was not
a contract. [J ones v. Vernons Pools Ltd. (1938) 2 Al l E.R. 626].
(3) An aged coupl e (C and hi s wi fe) hel d out a promi se by correspondence to thei r
ni ece and her husband (Mrs. and Mr. P.) that C woul d l eave them a porti on of hi s
estate i n hi s wi l l , i f Mrs. and Mr. P woul d sel l thei r cottage and come to l i ve wi th
the aged coupl e and to share the househol d and other expenses. The young coupl e
sol d thei r cottage and started l i vi ng wi th the aged coupl e. But the two coupl es
subsequentl y quaral l ed and the aged coupl e repudi ated the agreement by requi ri ng
the young coupl e to stay somewhere el se. The young coupl e fi l ed a sui t agai nst the
aged coupl e for the breach of promi se.
Held: That there was i ntenti on to create l egal rel ati ons and the young coupl e coul d
recover damages [Parker v. Clark (1960) 1 W.L.R. 286].
3. Free and genuine consent
The consent of the parti es to the agreement must be free and genui ne. The consent of
the parti es shoul d not be obtai ned by mi srepresentati on, fraud, undue i nfl uence, coerci on or
mi stake. I f the consent i s obtai ned by any of these fl aws, then the contract i s not val i d.
6 Business Law I ncluding Company Law
4. Parties competent to contract
The parti es to a contract shoul d be competent to enter i nto a contract. Accordi ng to
Secti on 11, every person i s competent to contract i f he (i) i s of the age of majori ty, (ii) i s of
sound mi nd, and (iii) i s not di squal i fi ed from contracti ng by any l aw to whi ch he i s subject.
Thus, there may be a fl aw i n capaci ty of parti es to the contract. The fl aw i n capaci ty may
be due to mi nori ty, l unacy, i di ocy, drunkenness or status. I f a party to a contract suffers from
any of these fl aws, the contract i s unenforceabl e except i n certai n excepti onal ci rcumstances.
5. Lawful consideration
The agreement must be supported by consi derati on on both si des. Each party to the
agreement must gi ve or promi se somethi ng and recei ve somethi ng or a promi se i n return.
Consi derati on i s the pri ce for whi ch the promi se of the other i s sought. However, thi s pri ce
need not be i n terms of money. I n case the promi se i s not supported by consi derati on, the
promi se wi l l be nudum pactum (a bare promi se) and i s not enforceabl e at l aw.
Moreover, the consi derati on must be real and l awful .
6. Lawful object
The object of the agreement must be l awful and not one whi ch the l aw di sapproves.
7. Agreements not declared illegal or void
There are certai n agreements whi ch have been expressl y decl ared i l l egal or voi d by the
l aw. I n such cases, even i f the agreement possesses al l the el ements of a val i d agreement,
the agreement wi l l not be enforceabl e at l aw.
8. Certainty of meaning
The meani ng of the agreement must be certai n or capabl e of bei ng made certai n otherwi se
the agreement wi l l not be enforceabl e at l aw. For instance, A agrees to sel l 10 metres of cl oth.
There i s nothi ng whatever to show what type of cl oth was i ntended. The agreement i s not
enforceabl e for want of certai nty of meani ng. I f, on the other hand, the speci al descri pti on
of the cl oth i s expressl y stated, say Terrycot (80 : 20), the agreement woul d be enforceabl e
as there i s no uncertai nl y as to i ts meani ng.
However, an agreement to agree i s not a concl uded contract [Punit Beriwala v. Suva
Sanyal AI R 1998 Cal . 44].
9. Possibility of performance
The terms of the agreement shoul d be capabl e of performance. An agreement to do an
act i mpossi bl e i n i tsel f cannot be enforced. For instance, A agrees wi th B to di scover treasure
by magi c. The agreement cannot be enforced.
10. Necessary legal formalities
A contract may be oral or i n wri ti ng. I f, however, a parti cul ar type of contract i s requi red
by l aw to be i n wri ti ng, i t must compl y wi th the necessary formal i ti es as to wri ti ng, regi strati on
and attestati on, i f necessary. I f these l egal formal i ti es are not carri ed out, then the contract
i s not enforceabl e at l aw.
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1.2 CLASSIFICATION OF CONTRACTS
Contracts may be cl assi fi ed i n terms of thei r (1) val i di ty or enforceabi l i ty, (2) mode of
formati on, or (3) performance.
1. Classification according to validity or enforceability
Contracts may be cl assi fi ed accordi ng to thei r val i di ty as (i) val i d, (ii) voi dabl e, (iii) voi d
contracts or agreements, (iv) i l l egal , or (v) unenforceabl e.
A contract to consti tute a val i d contract must have al l the essenti al el ements di scussed
earl i er. I f one or more of these el ements i s/are mi ssi ng, the contract i s voi dabl e, voi d, i l l egal
or unenforceabl e.
As per Secti on 2 (i) a voi dabl e contract i s one whi ch may be repudi ated at the wi l l of one
of the parti es, but unti l i t i s so repudi ated i t remai ns val i d and bi ndi ng. I t i s affected by a
fl aw (e.g., si mpl e mi srepresentati on, fraud, coerci on, undue i nfl uence), and the presence of
anyone of these defects enabl es the party aggri eved to take steps to repudi ate the contract.
I t shows that the consent of the party who has the di screti on to repudi ate i t was not free.
Example
A, a man enfeebl ed by di sease or age, i s i nduced by Bs i nfl uence over hi m as hi s medi cal
attendant to agree to pay B an unreasonabl e sum for hi s professi onal servi ces. B empl oys
undue i nfl uence. As consent i s not free; he can take steps to set the contract asi de.
An agreement whi ch i s not enforceabl e by ei ther of the parti es to i t i s voi d [Secti on 2(i)].
Such an agreement i s wi thout any l egal effect ab initio (from the very begi nni ng). Under the
l aw, an agreement wi th a mi nor i s voi d (Secti on 11).*
A contract whi ch ceases to be enforceabl e by l aw becomes voi d when i t ceases to be
enforceabl e [Secti on 2(i)].
Examples
(1) A and B contract to marry each other. Before the l i me fi xed for the marri age, A
goes mad. The contract becomes voi d.
(2) A contracts to take i ndi go for B to a forei gn port. As government afterwards
decl ares war agai nst the country i n whi ch the port i s si tuated. The contract becomes
voi d when war i s decl ared.
* Other i nstances of voi d agreements are:
(a) Agreements entered i nto through a mutual mi stake of fact between the parti es (Secti on 20).
(b) Agreements, the object or consi derati on of whi ch i s unl awful (Secti on 23).
(c) Agreements, part of the consi derati on or object of whi ch i s unl awful (Secti on 21).
(d) Agreements made wi thout consi derati on (Secti on 25).
(e) Agreements i n restrai nt of marri age (Secti on 26).
(f) Agreements i n restrai nt or trade (Secti on 27).
(g) Agreements i n restrai nt of l egal proceedi ngs (Secti on 28).
(h) Uncertai n agreements (Secti on 29).
(i ) Wageri ng agreements (Secti on 30).
(j) I mpossi bl e agreements (Secti on 56).
(k) An agreement to enter i nto an agreement i n the future.
8 Business Law I ncluding Company Law
I n the above two exampl es, the contracts were val i d at the ti me of formati on. They
became voi d afterwards. I n exampl e (1) the contract became voi d by subsequent impossibility.
I n exampl e (2) the contract became voi d by subsequent illegality.*
I t i s mi snomer to use a voi d contract as ori gi nal l y entered i nto. I n fact, i n that case
there i s no contract at al l . I t may be cal l ed a voi d agreement. However, a contract ori gi nal l y
val i d may become voi d l ater.
An illegal agreement is one the consi derati on or object of whi ch (1) i s forbi dden by l aw;
or (2) defeats the provi si ons of any l aw; or (3) i s fraudul ent; or (4) i nvol ves or i mpl i es i njury
to the person or property of another; or (5) the court regards i t as i mmoral , or opposed to
publ i c pol i cy.
Examples
(1) A, B and C enter i nto an agreement for the di vi si on among them of gai ns acqui red
or to be acqui red, by them by fraud. The agreement i s i l l egal .
(2) A promi ses to obtai n for B an empl oyment i n the publ i c servi ce, and B promi ses
to pay Rs. 1,000 to A. The agreement i s i l l egal .
Every agreement of whi ch the object or consi derati on i s unl awful i s not onl y voi d as
between i mmedi ate parti es but al so tai nts the col l ateral transacti ons wi th i l l egal i ty. I n Bombay,
the wageri ng agreements have been decl ared unl awful by statute.
Example
A bets wi th B i n Bombay and l oses; makes a request to C for a l oan, who pays B i n
settl ement of As l osses. C cannot recover from A because thi s i s money pai d under
or i n respect of a wageri ng transacti on whi ch i s i l l egal i n Bombay.
An unenforceable contract i s nei ther voi d nor voi dabl e, but i t cannot be enforced i n the
court because i t lacks some item of evidence such as wri ti ng, regi strati on or stampi ng. For
instance, an agreement whi ch i s requi red to be stamped wi l l be unenforceabl e i f the same i s
not stamped at al l or i s under-stamped. I n such a case, i f the stamp i s requi red merel y for
revenue purposes, as i n the case of a recei pt for payment of cash, the requi red stamp may
be affi xed on payment of penal ty and the defect i s then cured and the contract becomes
enfor ceabl e. I f, however, the techni cal defect cannot be cur ed the contr act r emai ns
unenforceabl e, e.g., i n the case of an unstamped bi l l of exchange or promi ssory note.
Contracts which must be in writing. The fol l owi ng must be i n wri ti ng, a requi rement l ai d
down by statute i n each case:
(a) A negoti abl e i nstrument, such as a bi l l of exchange, cheque, promi ssory note (The
Negoti abl e I nstruments Act, 1881).
(b) A Memorandum and Arti cl es of Associ ati on of a company, an appl i cati on for shares
i n a company; an appl i cati on for transfer of shares i n a company (The Compani es
Act, 1956).
(c) A promi se to pay a ti me-barred debt (Secti on 25 of the I ndi an Contract Act, 1872).
* Other exampl es of contracts becomi ng voi d are:
(a) A conti ngent contract to do or not to do anythi ng i f an uncertai n future event happens becomes voi d i f
the event becomes i mpossi bl e (Secti on 32).
(b) A contract voi dabl e at the opti on of the promi see, becomes voi d when the promi see exerci ses hi s opti on
by avoi di ng the contract. (Secti ons 19; 19A).
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(d) A l ease, gi ft, sal e or mortgage of i mmovabl e property (The Transfer of Property
Act, 1882).
Some of the contracts and documents evidencing contracts are, in addition to be in
writing, required to be registered also. These are:
1. Documents comi ng wi thi n the purvi ew of Secti on 17 of the Regi strati on Act, 1908.
2. Transfer of i mmovabl e property under the Transfer of Property Act, 1882.
3. Contracts wi thout consi derati on but made on account of natural l ove and affecti on
between parti es standi ng i n a near rel ati on to each other (Secti on 25, The I ndi an
Contract Act, 1872).
4. Memorandum of Associ ati on, and Arti cl es of Associ ati on of a Company, Mortgages
and Charges (The Compani es Act, 1956).
2. Classification according to mode of formation
There are di fferent modes of formati on of a contract. The terms of a contract may be
stated i n words (wri tten or spoken). Thi s i s an express contract. Al so the terms of a contract
may be i nferred from the conduct of the parti es or from the ci rcumstances of the case. Thi s
i s an implied contract (Secti on 9).
Example
I f A enters i nto a bus for goi ng to hi s desti nati on and takes a seat, the l aw wi l l i mpl y
a contract from the very nature of the ci rcumstances, and the commuter wi l l be obl i ged
to pay for the journey.
We have seen that the essence of a val i d contract i s that i t i s based on agreement of the
parti es. Someti mes, however, obl i gati ons are created by l aw (regardl ess of agreement) whereby
an obl i gati on i s i mposed on a party and an acti on i s al l owed to be brought by another party.
These obl i gati ons are known as quasi -contracts. The I ndi an Contract Act, 1872 (Chapter V
Secti ons 6872) descri bes them as certai n rel ati ons resembl i ng those created by contract.
Examples
(1) A suppl i es B, a mi nor, wi th necessari es sui tabl e to hi s condi ti on i n l i fe. A i s
enti tl ed to be rei mbursed from Bs property.
(2) A suppl i es the wi fe and chi l dren of B, a mi nor, wi th necessari es sui tabl e to thei r
condi ti on i n l i fe. A i s enti tl ed to be rei mbursed from Bs property.
(3) A, a tradesman, l eaves goods at Bs house by mi stake. B treats the goods as hi s
own. B i s bound to pay A for them.
I n al l the above cases, the l aw i mpl i es a contract and a person who has got benefi t i s
under an obl i gati on to rei mburse the other.
3. Classification according to performance
Another method of cl assi fyi ng contracts i s i n terms of the extent to whi ch they have been
performed. Accordi ngl y, contracts are: (1) executed, and (2) executory or (1) uni l ateral , and
(2) bi l ateral .
An executed contract i s one whol l y performed. Nothi ng remai ns to be done i n terms of
the contract.
Example
A contracts to buy a bi cycl e from B for cash. A pays cash. B del i vers the bi cycl e.
10 Business Law I ncluding Company Law
An executory contract i s one whi ch i s whol l y unperformed, or i n whi ch there remai ns
somethi ng further to be done.
Example
On June 1, A agrees to buy a bi cycl e from B. The contract i s to be performed on June 15.
The executory contract becomes an executed one when compl etel y performed. For instance,
i n the above exampl e, i f both A and B perform thei r obl i gati ons on June 15, the contract
becomes executed. However, i f i n terms of the contract performance of promi se by one party
i s to precede performance by another party then the contract i s sti l l executory, though i t has
been performed by one party.
Example
On June 1, A agrees to buy a bi cycl e from B. B has to del i ver the bi cycl e on June 15
and A has to pay pri ce on Jul y 1. B del i vers the bi cycl e on June 15. The contract i s
executory as somethi ng remai ns to be done i n terms of the contract.
A Unilateral Contract i s one wherei n at the ti me the contract i s concl uded there i s an
obl i gati on to perform on the part of one party onl y.
Example
A makes payment for bus fare for hi s journey from Bombay to Pune. He has performed
hi s promi se. I t i s now for the transport company to perform the promi se.
A Bilateral Contract is one wherei n there i s an obl i gati on on the part of both to do or
to refrai n from doi ng a parti cul ar thi ng. I n thi s sense, Bi l ateral contracts are si mi l ar to
executory contracts.
An i mportant corol l ary can be deduced from the di sti ncti on between Executed and
Executory Contracts and between Uni l ateral and Bi l ateral contracts. I t i s that a contract i s
a contract from the ti me i t i s made and not from the ti me i ts performance i s due. The
performance of the contract can be made at the ti me when the contract i s made or i t can be
postponed al so. See exampl es above under Executory Contract.
Classification/Types of Contracts
1. From the point of view of enforceability
(a) Val i d contracts
(b) Voi dabl e contracts
(c) Voi d contracts or agreements
(d) I l l egal agreements
(e) Unenforceabl e Agreements (Certai n contracts must be i n wri ti ng)
2. According to Mode of Formation
(a) Express contract
(b) I mpl i ed contract
(c) Quasi -contracts
3. According to Performance
(a) Executed
(b) Executory
(c) Uni -l ater al
(d) Bi -l ater al
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Classification of Contracts in the English Law
I n Engl i sh Law, contracts are cl assi fi ed i nto (a) Formal Contracts and (b) Si mpl e Contracts.
Formal contracts are those whose val i di ty or l egal force i s based upon form al one.
Formal Contracts can be ei ther (a) contracts of record or (b) contracts under seal or by (deed
or speci al i ty contracts. No consi derati on i s necessary i n the case of Formal Contracts. Such
contracts do not fi nd any pl ace under I ndi an Law as consi derati on i s necessary under Secti on
25 (of course there are some excepti ons to the pri nci pl e that a contract wi thout consi derati on
i s voi d).
Contracts of Record are not contracts i n the real sense as the consensus-ad-idem is
l acki ng. They are onl y obl i gati ons i mposed by the court upon a party to do or refrai n from
doi ng somethi ng.
A Contract of Record i s ei ther (i) a judgement of a court or (ii) recogni zance. An obl i gati on
i mposed by the judgement of a court and entered upon i ts records i s often cal l ed a Contract
of Record.
Example
A i s i ndebted to B for Rs. 500 under a contract, A fai l s to pay. B sues A and gets a
judgement i n hi s favour. The previ ous ri ght of B to obtai n Rs. 500 from A i s repl aced
by the judgement i n hi s favour and executi on may be l evi ed upon A to enforce payment,
i f need be.
A Recognizance i s a wri tten acknowl edgement to the crown by a cri mi nal that on
defaul t by hi m to appear i n the court or to keep peace or to be of good conduct, he i s bound
to pay to the crown a certai n sum of money. Thi s i s al so an obl i gati on i mposed upon hi m by
the court.
A contract wi th the fol l owi ng characteri sti cs i s known as a contract under seal or by deed
or a contract of speciality; (i) I t is in writing, (ii) I t is signed, (iii) I t is sealed, and (iv) I t is
delivered by the parties to the contract.
These contracts are used i n Engl i sh Law for vari ous transacti ons such as conveyances
of l and, a l ease of property for more than three years, contracts made by corporati ons,
contracts made wi thout consi derati on. Under the I ndi an Contract Act al so, a speci al i ty contract
i s recogni sed i f the fol l owi ng condi ti ons are sati sfi ed: (1) the contract must be i n wri ti ng
(2) i t must be regi stered accordi ng to the l aw of regi strati on of documents, (3) i t must be
between parti es standi ng i n near rel ati on to each other, and (4) i t shoul d proceed out of
natural l ove and affecti on between the parti es (Secti on 25 of the I ndi an Contract Act, 1872).
Al l contracts other than the formal contracts are cal l ed si mpl e or parol contracts. They
may be made: (i) oral l y, (ii) i n wri ti ng, or (iii) i mpl i ed by conduct.
1.3 OFFER AND ACCEPTANCE
[Secti ons 39 of the I ndi an Contract Act, 1872]
OFFER/PROPOSAL
A proposal i s defi ned as when one person si gni fi es to another hi s wi l l i ngness to do or to
abstai n from doi ng anythi ng, wi th a vi ew to obtai ni ng the assent of that other to such act or
12 Business Law I ncluding Company Law
absti nence, he i s sai d to make a proposal . [Secti on 2 (a)]. An offer i s synonymous wi th proposal .
The offeror or proposer expresses hi s wi l l i ngness to do or not to do (i .e., abstai n from doi ng)
somethi ng wi th a vi ew to obtai n acceptance of the other party to such act or absti nence. Thus,
there may be posi ti ve or negati ve acts whi ch the proposer i s wi l l i ng to do.
Examples
(1) A offers to sel l hi s book to B. A i s maki ng an offer to do somethi ng, i .e., to sel l
hi s book. I t i s a posi ti ve act on the part of the proposer.
(2) A offers not to fi l e a sui t agai nst B, i f the l atter pays A the amount of Rs. 200
outstandi ng. Here the act of A i s a negati ve one, i .e., he i s offeri ng to abstai n from
fi l i ng a sui t.
HOW AN OFFER IS MADE?
An offer can be made by (a) any act or (b) omi ssi on of the party proposi ng by whi ch he
i ntends to communi cate such proposal or whi ch has the effect of communi cati ng i t to the
other (Secti on 3). An offer can be made by an act i n the fol l owi ng ways:
(a) by words (whether wri tten or oral ). The wri tten offer can be made by l etters,
tel egrams, tel ex messages, adverti sements, etc. The oral offer can be made ei ther
i n person or over tel ephone.
(b) by conduct. The offer may be made by posi ti ve acts or si gns so that the person
acti ng or maki ng si gns means to say or convey. However si l ence of a party can i n
no case amount to offer by conduct.
An offer can al so be made by a party by omission (to do somethi ng). Thi s i ncl udes such
conduct or forbearance on ones part that the other person takes i t as hi s wi l l i ngness or
assent.
An offer i mpl i ed from the conduct of the parti es or from the ci rcumstances of the case
i s known as implied offer.
Examples
(1) A proposes, by l etter, to sel l a house to B at a certai n pri ce. Thi s i s an offer by
an act by wri tten words (i .e., l etter). Thi s i s al so an express offer.
(2) A proposes, over tel ephone, to sel l a house to B at a certai n pri ce. Thi s i s an offer
by act (by oral words). Thi s i s an express offer.
(3) A owns a motor boat for taki ng peopl e from Bombay to Goa. The boat i s i n the
waters at the Gateway of I ndi a. Thi s i s an offer by conduct to take passengers from
Bombay to Goa. He need not speak or cal l the passengers. The very fact that hi s
motor boat i s i n the waters near Gateway of I ndi a si gni fi es hi s wi l l i ngness to do
an act wi th a vi ew to obtai ni ng the assent of the other. Thi s i s an exampl e of an
i mpl i ed offer.
(4) A offers not to fi l e a sui t agai nst B, i f the l atter pays A the amount of Rs. 200
outstandi ng. Thi s i s an offer by absti nence or omi ssi on to do somethi ng.
Specific and General Offer
An offer can be made ei ther:
1. to a defi ni te person or a group of persons, or
2. to the publ i c at l arge.
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The fi rst mode of maki ng offer i s known as speci fi c offer and the second i s known as a
general offer. I n case of the speci fi c offer, i t may be accepted by that person or group of
persons to whom the same has been made. The general offer may be accepted by any one
by compl yi ng wi th the terms of the offer.
The celebrated case of Carlill v. Carbolic Smoke Ball Co., (1813) 1 Q.B. 256 i s an excel l ent
exampl e of a general offer and i s expl ai ned bel ow.
Examples
(1) A offers to sel l hi s house to B at a certai n pri ce. The offer has been made to a
defi ni te person, i .e., B. I t i s onl y B who can accept i t [Boulton v. J ones (1857) 2H.
and N. 564].*
(2) I n Carbolic Smoke Ball Co.s case (supra), the patent-medi ci ne company adverti sed
that i t woul d gi ve a reward of 100 to anyone who contracted i nfl uenza after usi ng
the smoke bal l s of the company for a certai n peri od accordi ng to the pri nted
di recti ons. Mrs. Carl i l l purchased the adverti sed smoke bal l and contracted i nfl uenza
i n spi te of usi ng the smoke bal l accordi ng to the pri nted i nstructi ons. She cl ai med
the reward of 100. The cl ai m was resi sted by the company on the ground that
offer was not made to her and that i n any case she had not communi cated her
acceptance of the offer. She fi l ed a sui t for the recovery of the reward.
Held: She coul d recover the reward as she had accepted the offer by compl yi ng
wi th the terms of the offer.
The general offer creates for the offeror l i abi l i ty i n favour of any person who happens
to ful fi l the condi ti ons of the offer. I t i s not at al l necessary for the offeree to be known to
the offeror at the ti me when the offer i s made. He may be a stranger, but by compl yi ng wi th
the condi ti ons of the offer, he i s deemed to have accepted the offer.
Essential requirements of a valid offer
An offer must have certai n essenti al s i n order to consti tute i t a val i d offer. These are:
1. The offer must be made wi th a vi ew to obtai n acceptance [Secti on 2(a)].
2. The offer must be made wi th the i ntenti on of creati ng l egal rel ati ons. [Balfour v.
Balfour (1919) 2 K.B. 571.]**
3. The terms of offer must be defi ni te, unambi guous and certai n or capabl e of bei ng
made certai n (Secti on 29). The terms of the offer must not be l oose, vague or
ambi guous.
Examples
(1) A offers to sel l to B a hundred qui ntal s of oi l . There i s nothi ng whatever to show
what ki nd of oi l was i ntended. The offer i s not capabl e of bei ng accepted for want
of certai nty.
(2) A who i s a deal er i n coconut oi l onl y, offers to sel l to B one hundred qui ntal s of
oi l . The nature of As trade affords an i ndi cati on of the meani ng of the words, and
there i s a val i d offer.
* For facts or thi s case, pl ease refer to page 21.
** See page 5.
14 Business Law I ncluding Company Law
4. An offer must be di sti ngui shed from (a) a mere decl arati on of i ntenti on or (b) an
i nvi tati on to offer or to treat.
Offer vis-a-vis declaration of intention to offer
A person may make a statement wi thout any i ntenti on of creati ng a bi ndi ng obl i gati on.
I t may amount to a mere decl arati on of i ntenti on and not to a proposal .
Examples
(1) An aucti oneer, N adverti sed that a sal e of offi ce furni ture woul d take pl ace at a
parti cul ar pl ace. H travel l ed down about 100 Km to attend the sal e but found the
furni ture was wi thdrawn from the sal e. H sued the aucti oneer for hi s l oss of ti me
and expenses.
Held: N was not l i abl e [Harris v. Lickerson. (1875) L.R.S. Q.B. 286.].
(2) A father wrote to hi s woul d-be son-i n-l aw that hi s daughter woul d have a share of
what he woul d l eave at the ti me of hi s death. At the ti me of death, the son-i n-l aw
staked hi s cl ai m i n the property l eft by the deceased.
Held: The son-i n-l aws cl ai m must fai l as there was no offer from hi s father-i n-l aw
creati ng a bi ndi ng obl i gati on. I t was just a decl arati on of i ntenti on and nothi ng
more [Re Ficus (1900) 1. Ch. 331.].
Offer vis-a-vis invitation to offer
An offer must be di sti ngui shed from i nvi tati on to offer. A prospectus i ssued by a col l ege
for admi ssi on to vari ous courses i s not an offer. I t i s onl y an i nvi tati on to offer. A prospecti ve
student by fi l l i ng up an appl i cati on form attached to the prospectus i s maki ng the offer.
An aucti oneer, at the ti me of aucti on, i nvi tes offers from the woul d-be-bi dders. He i s not
maki ng a proposal .
A di spl ay of goods wi th a pri ce on them i n a shop wi ndow i s construed an i nvi tati on to
offer and not an offer to sel l .
Example
I n a departmental store, there i s a sel f-servi ce. The customers pi cki ng up arti cl es and
take them to the cashi er s desk to pay. The customers acti on i n pi cki ng up parti cul ar
goods i s an offer to buy. As soon as the cashi er accepts the payment a contract i s
entered i nto [Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern)
Ltd. (1953) 1 Q.B. 401].
Li kewi se, prospectus i ssued by a company for subscri pti on of i ts shares by the members
of the publ i c, the pri ce l i sts, catal ogues and quotati ons are mere i nvi tati ons to offer.
On the basi s of the above, we may say that an offer i s the fi nal expressi on of wi l l i ngness
by the offeror to be bound by hi s offer shoul d the other party choose to accept i t. Where a
party, wi thout expressi ng hi s fi nal wi l l i ngness, proposes certai n terms on whi ch he i s wi l l i ng
to negoti ate, he does not make an offer, he onl y i nvi tes the other party to make an offer on
those terms. Thi s i s perhaps the basi c di sti ncti on between an offer and an i nvi tati on to offer.
I n Harvey v. Facie, the pl ai nti ffs (Harvey) tel egraphed to the defendants (Faci e), wri ti ng:
Wi l l you sel l us Bumper Hal l Pen?* Tel egraph l owest cash pri ce. The defendants repl i ed al so
* Bumper Hal l Pen was the name of the real estate.
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by a tel egram, Lowest pri ce for Bumper Hal l Pen 900. The pl ai nti ffs i mmedi atel y sent thei r
l ast tel egram stati ng: We agree to buy Bumper Hal l Pen for 900 asked by you. The
defendants refused to sel l the pl ot of l and (Bumper Hal l Pen) at that pri ce. The pl ai nti ffs
contenti on that by quoti ng thei r mi ni mum pri ce i n response to the i nqui ry, the defendants
had made an offer to sel l at that pri ce, was turned down by the Judi ci al Commi ttee. Thei r
Lordshi p poi nted out that i n thei r fi rst tel egram, the pl ai nti ffs had asked two questi ons, first
as to the wi l l i ngness to sel l and second, as to the l owest pri ce. They reserved thei r answer
as to the wi l l i ngness to sel l . Thus, they had made no offer. The l ast tel egram of the pl ai nti ffs
was an offer to buy, but that was never accepted by the defendants.
5. The offer must be communicated to the offeree. An offer must be communi cated
to the offeree before i t can be accepted. Thi s i s true of speci fi c as wel l as general offer.
Example
G sent S, hi s servant, to trace hi s mi ssi ng nephew. Subsequentl y, G announced a
reward for i nformati on rel ati ng to the boy. S, traced the boy i n i gnorance of the
announcement regardi ng reward and i nformed G. Later, when S came to know of the
reward, he cl ai med i t. Hel d, he was not enti tl ed to the reward on the ground that he
coul d not accept the offer unl ess he had knowl edge of i t [Lalman Shukla v. Gauri Dutt,
I I , A.L.J. 489].
6. The offer must not contai n a term the non-compl i ance of whi ch may be assumed
to amount to acceptance. Thus, the offeror cannot say that i f the offeree does not
accept the offer wi thi n two days, the offer woul d be deemed to have been accepted.
Example
A tel l s B I offer to sel l my dog to you for Rs. 45. I f you do not send i n your repl y, I
shal l assume that you have accepted my offer . The offer i s not a val i d one.
7. A tender i s an offer as i t i s i n response to an i nvi tati on to offer. Tenders commonl y
ari se where, for exampl e, a hospi tal i nvi tes offers to suppl y eatabl es or medi ci nes. The
persons fi l l i ng up the tenders are gi vi ng offers. However, a tender may be ei ther:
(a) speci fi c or defi ni te; where the offer i s to suppl y a defi ni te quanti ty of goods, or
(b) standi ng; where the offer i s to suppl y goods peri odi cal l y or i n accordance wi th
the requi rements of the offeree.
I n the case of a defi ni te tender, the suppl i ers submi t thei r offers for the suppl y of
speci fi ed goods and servi ces. The offeree may accept any tender (general l y the l owest one).
Thi s wi l l resul t i n a contract.
Example
A i nvi tes tenders for the suppl y of 10 qui ntal s of sugar. B, C, and D submi t thei r
tenders. Bs tender i s accepted. The contract i s formed i mmedi atel y the tender i s
accepted.
I n the case of standi ng offers, the offeror gi ves an open offer whereby he offers to suppl y
goods or servi ces as requi red by the offeree. A separate acceptance i s made each ti me an
order i s pl aced. Thus, there are as many contracts as are the acts of acceptance.
Example
The G.N. Rai l way Co. i nvi ted tenders for the suppl y of stores. W made a tender and
the terms of the tender were as fol l ows: To suppl y the company for 12 months wi th
such quanti ti es of speci fi ed arti cl es as the company may order from ti me to ti me. The
16 Business Law I ncluding Company Law
company accepted the tender and pl aced the orders. W executed the orders as pl aced
from ti me to ti me but l ater refused to execute a parti cul ar order.
Held: W was bound to suppl y goods wi thi n the terms of the tender [Great Northern
Railway v. Witham (1873) L.R. 9 C.P. 16].
The Supreme Court of I ndi a i n thi s regard has observed: As soon as an order was pl aced
a contract arose and unti l then there was no contract. Al so each separate order and acceptance
consti tuted a di fferent and di sti nct contract [Chatturbhuj Vithaldas v. Moreshover Parashram
AI R 1954 SC 326].
I t i s to be noted that i f the offeree gi ves no order or fai l s to order the ful l quanti ty of
goods set out i n a tender there i s no breach of contract.
Revocation or Withdrawal of a tender. A tenderer can wi thdraw hi s tender before i ts fi nal
acceptance by a work or suppl y order. Thi s ri ght of wi thdrawal shal l not be affected even i f
there i s a cl ause i n the tender restri cti ng hi s ri ght to wi thdraw. A tender wi l l , however, be
i rrevocabl e where the tenderer has, on some consi derati on, promi sed not to wi thdraw i t or
where there i s a statutory prohi bi ti on agai nst wi thdrawal [The Secretary of State for I ndia
v. Bhaskar Krishnaji Samani AI R 1925 Bom 485].
Special terms in a contract. The special terms, formi ng part of the offer, must be dul y
brought to the noti ce of the offeree at the ti me the offer i s made. I f i t i s not done, then there
i s no val i d offer and i f offer i s accepted, and the contract i s formed, the offeree i s not bound
by the speci al terms whi ch were not brought to hi s noti ce. The terms may be brought to hi s
noti ce ei ther:
(a) by drawi ng hi s attenti on to them speci fi cal l y, or
(b) by i nferri ng that a man of ordi nary prudence coul d fi nd them by exerci si ng ordi nary
i ntel l i gence.
(a) the exampl es of the fi rst case are where certai n condi ti ons are wri tten on the back
of a ti cket for a journey or deposi t of l uggage i n a cl oak room and the words. For
condi ti ons see back are pri nted on the face of i t. I n such a case, the person buyi ng
the ti cket i s bound by whatever condi ti ons are wri tten on the back of the ti cket
whether he has read them or not.
Examples
(1) P, a passenger deposi ted a bag i n the cl oakr oom at a Rai l way Stati on. The
acknowl edgement recei pt gi ven to hi m bore, on the face of i t, the words See back.
One of the condi ti ons pri nted on the back l i mi ted the l i abi l i ty of the Rai l ways for
any package to 10. The bag was l ost, and P cl ai med 24. 10s, i ts val ue, pl eadi ng
that he had not read the condi ti ons on the back of the recei pt.
Held : P was bound by the condi ti ons pri nted on the back as the company gave
reasonabl e noti ce on the face of the recei pt as to the condi ti ons at the back of the
document [Parker v. South Eastern Rly. Co. (1877) 2 C.P.D. 416].
(2) A l ady, L, the owner of a cafe, agreed to purchase a machi ne and si gned the
agreement wi thout readi ng i ts terms. There was an exempti on cl ause excl udi ng
l i abi l i ty of the sel l er under certai n ci rcumstances. The machi ne proved faul ty and
she purported to termi nate the contract.
Held : That she coul d not do so, as the exempti on cl ause protected the sel l er from
the l i abi l i ty [LEstrange v. Grancob Ltd. (1934) 2 R.B. 394].
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(3) T purchased a rai l way ti cket, on the face of whi ch the words: For condi ti ons see
back were wri tten. One of the condi ti ons excl uded l i abi l i ty for i njury, however
caused. T was i l l i terate and coul d not read. She was i njured and sued for damages.
Held : That the rai l way company had properl y communi cated the condi ti ons to her
who had constructi ve noti ce of the condi ti ons whether she read them or not. The
company was not bound to pay any damages [Thompson v. LM. and L. Rly. (1930)
1 KB. 417].
(b) The same rul e hol ds good even where the condi ti ons formi ng part of the offer are
pri nted i n a l anguage not understood by the acceptor provi ded hi s attenti on has
been drawn to them i n a reasonabl e manner. I n such a si tuati on, i t i s hi s duty to
ask for the transl ati on, of the condi ti ons and i f he does not do so, he will be
presumed to have a constructive notice of the terms of the conditions [Mackillingan
v. Campagine de Massangeres Maritimes (1897) 6 Cal . 227 J ].
I f condi ti ons l i mi ti ng or defi ni ng the ri ghts of the acceptor are not brought to hi s noti ce,
then they wi l l not become part of the offer and he i s not bound by them.
Example
A passenger was travel l i ng wi th l uggage from Dubl i n to Whi tehaven on a ti cket, on the
back of whi ch there was a term whi ch exempted the shi ppi ng company from l i abi l i ty for
the l oss of l uggage. He never l ooked at the back of the ti cket and there was nothi ng
on the face of i t to draw hi s attenti on to the terms on i ts back. He l ost hi s l uggage and
sued for damages.
Held : He was enti tl ed to damages as he was not bound by somethi ng whi ch was not
communi cated to hi m [Henderson v. Stevenson (1875) 2 H.L.S.C. 470].
Also, if the conditions are contained in a document which is delivered after the contract
is complete, then the offeree is not bound by them. Such a document i s consi dered a non-
contractual document as i t i s not supposed to contai n the condi ti ons of the contract. For
instance, i f a touri st dri vi ng i nto Mussoori e, recei ves a ti cket upon payi ng tol l -tax, he mi ght
reasonabl y assume that the object of the ti cket was that by produci ng i t he mi ght be free from
payi ng tol l at some other tol l -tax barri er, and mi ght put i n hi s pocket wi thout readi ng the
same. The ti cket i s just a recei pt or a voucher.
Example
C hi red a chai r from the Muni ci pal Counci l i n order to si t on the beach. He pai d the
rent and recei ved a ti cket from an attendant. On the back of the ti cket, there was a
cl ause exempti ng the Counci l for any acci dent or damage ari si ng from hi re of chai rs.
C sustai ned personal i njuri es as the chai r broke down whi l e he was si tti ng therei n. He
sued for damages.
Held : That the Counci l was l i abl e [Chapleton v. Barry U.D.C. (1940) 1 K.B. 532].
From the illustrations given it may be concluded that whether the offeree will be bound
by the special conditions or not will depend on whether or not he had or could have had notice
by exercising ordinary diligence.
Detai l ed observati ons wi th respect to pri nted condi ti ons on a recei pt were made by the
Bombay Hi gh Court i n R.S. Deboo v. M. V. Hindlekar, AI R 1995 Bom. 68. These observati ons are:
1. Terms and condi ti ons pri nted on the reverse of a recei pt i ssued by the owner of
the l aundry or any other bai l ee do not necessari l y form part of the contract of
18 Business Law I ncluding Company Law
bai l ment i n the absence of the si gnature of the bai l or (customer) on the document
rel i ed upon. The onus i s on the bai l ee to prove that the attenti on of the bai l or was
drawn to the speci al condi ti ons before contract was concl uded and the bai l or had
consented to them as contractual terms.
2. I t cannot be just assumed that the pri nted condi ti ons appeari ng on the reverse of
the recei pt automati cal l y become contractual terms or part of the contract of
bai l ment.
3. I n certai n si tuati ons, the recei pt cannot be consi dered as a contractual document
as such, i t i s a mere acknowl edgement of entrustment of certai n arti cl es.
Cross Offers
Where two parti es make i denti cal offers to each other, i n i gnorance of each other s offer,
the offers are known as cross-offers and nei ther of the two can be cal l ed an acceptance of the
other and, therefore, there i s no contract.
Example
H wrote to T offeri ng to sel l hi m 800 tons of i ron at 69s. per ton. On the same day T
wrote to H offeri ng to buy 800 tons at 69s. Thei r l etters crossed i n the post. T contended
that there was a good contract.
Held: that there was no contract. [Tinn v. Hoffman & Co. (1873) 29 L.T. Exa. 271.].
Termination or Lapse of an Offer
An offer i s made wi th a vi ew to obtai n assent thereto. As soon as the offer i s accepted
i t becomes a contract. But before i t i s accepted, i t may l apse, or may be revoked. Al so, the
offeree may reject the offer. I n these cases, the offer wi l l come to an end.
Essential Requirements of a Valid Offer
1. Must be made wi th a vi ew to obtai n acceptance.
2. Must be made wi th the i ntenti on of creati ng l egal rel ati ons.
3. Terms of offer must be defi ni te, unambi gous and certai n or capabl e of bei ng
made certai n.
4. I t must be di sti ngui shed from mere decl arati on of i ntenti on or an i nvi tati on to
offer.
5. I t must be communi cated to the offeree.
6. The offer must not contai n a term the non-compl i ance of whi ch may be assumed
to amount to acceptance.
7. A tender i s an offer as i t i s i n response to an i nvi tati on to offer.
8. The Special terms, formi ng part of the offer, must be dul y brought to the
noti ce of the offeree at the ti me the offer i s made.
9. Two i denti cal cross-offers do not make a contract.
(1) The offer lapses after stipulated or reasonable time. [Secti on 6(2)] The offer
must be accepted by the offeree wi thi n the ti me menti oned i n the offer and i f no
ti me i s menti oned, then wi thi n a reasonabl e ti me. The offer l apses after the ti me
Law of Contracts 19
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sti pul ated i n the offer expi res i f by that ti me offer has not been accepted. I f no ti me
i s speci fi ed, then the offer l apses wi thi n a reasonabl e ti me. What i s a reasonabl e
ti me i s a questi on of fact and woul d depend upon the ci rcumstances of each case.
Example
M offered to purchase shares i n a company by wri ti ng a l etter on June 8. The company
al l otted the shares on 23rd November. M refused the shares.
Held : That the offer l apsed as i t was not accepted wi thi n a reasonabl e ti me [Ramsgate
Victoria Hotel Co. v. Montefiore (1860) L.R.I . Ex. 109].
2. An offer lapses by the death or insanity of the offerer or the offeree before
acceptance. Secti on 6(4) provi des that a proposal i s revoked by the death or
i nsani ty of the proposer, i f the fact of hi s death or i nsani ty comes to the knowl edge
of the acceptor before acceptance. Therefore, i f the acceptance i s made i n i gnorance
of the death, or i nsani ty of offerer, there woul d be a val i d contract. Si mi l arl y, i n
the case of the death of offeree before acceptance, the offer i s termi nated.
3. An offer termi nates when rejected by the offeree.
4. An offer termi nates when revoked by the offerer before acceptance.
5. An offer termi nates by not bei ng accepted i n the mode prescri bed, or i f no mode
i s prescri bed, i n some usual and reasonabl e manner.
6. A condi ti onal offer termi nates when the condi ti on i s not accepted by the offeree.
Example
A proposes to B I can sel l my house to you for Rs. 12,000 provi ded you l ease out your
l and to me. I f B refuses to l ease out the l and, the offer woul d be termi nated.
7. Counter offer. An offer termi nates by counter-offer by the offeree.
When i n pl ace of accepti ng the terms of an offer as they are, the offeree accepts the same
subject to certai n condi ti on or qual i fi cati on, he i s sai d to make a counter-offer. The fol l owi ng
have been hel d to be counter-offers:
(i) Where an offer to purchase a house wi th a condi ti on that possessi on shal l be gi ven
on a parti cul ar day was accepted varyi ng the date for possessi on [Routledge v.
Grant (1828) 130 E.R. 920].
(ii) An offer to buy a property was accepted upon a condi ti on that the buyer si gned an
agreement whi ch contai ned speci al terms as to payment of deposi t, maki ng out
ti tl e compl eti on date, the agreement havi ng been returned unsi gned by the buyer
[J ones v. Daniel (1894) 2 Ch. 332].
(iii) An offer to sel l ri ce was accepted wi th an endorsement on the sol d and bought note
that yel l ow and wet grai n wi l l not be accepted [All Shain v. Moothia Chetty, 2 Bom
L.R. 556].
(iv) Where an acceptance of a proposal for i nsurance was accepted i n al l i ts terms
subject to the condi ti on that there shal l be no assurance ti l l the fi rst premi um was
pai d [Sir Mohamed Yusuf v. S. of S. for I ndia 22 Bom. L.R. 872].