BUSINESS LAWS

An Authentic Textbook for B.Com. (CBCS), University of Delhi

BUSINESS LAWS UGC Recommended

Text Book for B.Com. under CBCS

Bhushan Kumar Goyal

M.Com., LL.B.
Associate Professor
Department of Commerce
Shri Ram College of Commerce
University of Delhi

Kinneri Jain
Assistant Professor
Department of Commerce
Shri Ram College of Commerce
University of Delhi

Business Laws
© Bhushan Kumar Goyal :
• The Indian Contract Act, 1872 • The Sale of Goods Act, 1872 • The Information Technology Act, 2000
Kinneri Jain :
• The Limited Liability Partnership Act, 2008

First Edition, 2013

Ninth Edition, 2020

Price : R 390.00
ISBN : 978-93-88-790-00-0

Published by :
Singhal Publications
89/6 Bhagat Colony
West Sant Nagar, Burari, Delhi-84
Mob. 9873473459, 8505850850
e-mail: singhalpublications@gmail.com

All Rights Reserved : No part of this book, including its style and presentation, may be reproduced, stored in retrieval system, or
transmitted in any form, or by any means electronic, mechanical photocopying, recording or otherwise without the prior written
consent of the authors.
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prosecution.
General : While every effort has been made to prevent authentic information and avoid errors, the authors and the publishers are not
responsible for the consequences of any action taken on the basis of this book. Every effort has been made to avoid errors or
omissions in this publication. Any, mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the
next edition.
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Printed at :

PREFACE
TO THE NINTH EDITION

It gives us immense pleasure and satisfaction to present the ninth edition of Business Laws. We are highly
thankful to all the teachers and the students for appreciating the earlier editions of this book.
In this edition, we have thoroughly revised the whole book as per the revised syllabus. Examples and cases have
also been added in the Information Technology Act, 2000 to illustrate the legal provisions. Distinctions have been
given in the tabular form for convenience of the students.
We acknowledge the suggestions of our esteem readers for improving the book, particularly Dr. Renu Aggarwal
of Deen Dayal Upadhyaya College, Mr. J.S. Arora of Shri Tractical problems have also been given so that the eg
Bahadur Khalsa College, Mr. I.P. Singh Bhatia, Mr. Rajiv Midha of Shri Guru Nanak Dev Khalsa College, Ms. Smita
Sharma, Ms. Reena Chadha, Dr. Abhay Jain, Ms. Vartika Khandelwal, Ms. Shikha Makkar and Ms. Kanu Jain, Mr.
Sudhanshu Yadav of SRCC, Ms. Surjeet Kaur of Shri Guru Gobind Singh College of Commerce, Ms. Meenakshi Pant
of Shaheed Bhagat Singh College, Mr. P.P. Joshi and Dr. Dhani Ram of Ramjas College, Dr. Kiran Sachdeva and Ms.
Monica Chhabra of Jesus and Marry College, Dr. Anita Goel, Dr. Madhu Aggarwal, Alka Herneja of Laxmi Bai
College, Ms. Sadhna Gupta of Acharya Narender Dev College, Dr. Maninder Kumar of Lady Shri Ram College, Ms.
Nirmala Chauhan of Maitreyi College, Ms. Isha Goel of Daulat Ram College, Ms. Sharda Garg, Ms. Renu Arora of
Mata Sundari College, Dr. Nidhi Goel and Mr. Gurjinder Singh of Kirori Mal College. Dr. Bharat Bhushan, Dr. Sneha
Suri of Hansraj College, Ms. Sushma Bansal of Vivekanand Mahila College, Sh. Sushil Tandon of Delhi College of
Arts and Commerce and Dr. Subhash Malkani of P.G.D.A.V. College. Ms. Rita of Zakir Hussain College (D), Mr.
Naresh Dhawan of A.R.S.D. College, Ms. Renu Ghosh of Rajdhani College, Ms. Renu Aggarwal of D.D.U. College,
Ms. Nidhi of Kirori Mal College and Himanshu Shekhar of Ramanujan College.
We are confident that the revised edition would prove more useful to the teachers and the students.
We solicit suggestions to improve the book.
Bhushan Kumar Goyal
9810994452
bhushangoyal@rediffmail.com ________________________________________

Kinneri Jain
9911726224
kinnerijain@rediffmail.com
_____________________________________

PREFACE
TO THE FIRST EDITION

We have great pleasure in placing this book before the esteem readers. Our long experience of teaching Business
Laws at Sri Ram College of Commerce has been instrumental in writing this book. The following are the main
features of this book :

• It has been written in a simple language and in a systematic manner.

• All the legal rules and principles have been lucidly explained and well illustrated by examples and English and
Indian court cases.
• Court cases have been explained in detail for better understanding of legal rules.
• A large number of theoretical questions have been given at the end of each chapter.
• True/False questions and some multiple choice questions have also been given.
• A large number of pstudents can check their knowledge and understanding of the legal issue involved.
• Most of the theoretical questions, true/false questions and practical problems given at the end of the chapters
have been asked in the University and professional examinations.

We are confident that the book will serve the needs of the academic community of the University of Delhi.
We are thankful to all the faculty members who teach this subject in the University or have interest in this subject
for giving valuable suggestions. In particular, we convey our thanks to Shri P.P. Joshi (Ramjas College), Shri A.K.
Hasti, Shri K.B. Gupta and N.K. Aggarwal (School of Open Learning), Shri Bharat Bhushan and Shri Rakesh
Aggarwal (Hansraj College), Shri Sushil Tandon (Delhi College of Arts and Commerce), Shri Harpal Singh (Moti Lal
Nehru College), Dr. Subhash Malkani (PGDAV College), Shri M.S. Bhatia (S.G.T.B. Khalsa College), Mrs. Sarabjeet
Kaur (Shri Guru Gobind Singh College of Commerce), Mrs. Renu Gulati (I.P. College), Mrs. Sharda Garg and Mrs.
Renu Arora (Mata Sundari College), Mrs. Sushma Bansal (Vivekanand Mahila College), Mrs. Sima Sodhi (B.R.
Ambedkar College) Shri V.K. Tomar and Mrs. Puneeta Agrawal (Maharaja
Agrasen College), Shri Mohammad Naqi (Zakir Hussain College), Shri P.R. Chadha (Shivaji College), Dr. Sneh Lata
Gupta (Shyam Prasad Mukherjee College), Dr. R.K. Chopra (College of Vocational Studies), Shri Anil Kumar
Sharma and Shri Krishan Chadha (Satyawati College Eve.), Shri Ramesh Wadhwa (Satyawati College), Shri Salil
Kumar Verma (Shyam Lal College), Dr. J.S. Arora and Shri H.S. Arora (S.G.T.B. Khalsa College), Dr. M.S. Bhatia
(S.G.N.D. Khalsa College), Mrs. Sushma Arora and Ms. Isha Goel (Daulat Ram College), Ms. Rajni Jagota (PGDAV
College), Dr. Meenakshi Pant (Shaheed Bhagat Singh College), Dr. Anita Goel, Dr. Madhu Aggarwal and Ms.
Tejender Kaur (Lakshmi Bai College), Ms. Romila Aggarwal and Ms. Monika Arora (Bharati College), Ms. Sadhna
Gupta and Ms. Nidhi Kesri (ANDC), Dr. Kalpana Bhola (JDM), Dr. Maninder Duggal (Lady Shri Ram College) and
Dr. D.K. Jain (Shaheed Bhagat Singh Evening College). Our special thanks to our esteemed colleagues at Shri Ram
College of Commerce : Shri S.K. Aggarwal, Mrs. Smita Sharma, Miss Karuna, Mrs. Vartika Khandelwal, Miss Kanu
Jain, Miss Shalini Aggarwal, and Miss Kavita.
We are thankful to our family members for their support and patience.
We express our gratitude to the publishers for giving us an opportunity to serve the students.

Bhushan Kumar Goyal

9810994452
bhushangoyal@rediffmail.com ________________________________________

Kinneri Jain
9811726224
kinnerijain@rediffmail.com
_____________________________________

SYLLABUS
University of Delhi
B.Com.
SEMESFTER II—PAPER BC 2.2 : BUSINESS LAWS

Duratioon : 3 Hrs. Marks : 100 Credit : 6

Course Objective
To impart basic knowledge of the important business laws relevant to conduct general business activities in physical
and virtual spaces along with relevant case laws.

Course Leaning Outcomes

After completing the course, the student shall be able to:
CO1: Understand basic aspects of contracts for making the agreements, contracts and subsequently enter valid
business propositions.
CO2: Handle the execution of special contracts used in different types of business.
CO3: Learn legitimate rights and obligations under The Sale of Goods Act. CO4: Acquire skills to initiate
entrepreneurial ventures as LLP.
CO5: Understand the fundamentals of Internet based activities under The Information and Technology Act.

Course Contents
Unit I: The Indian Contract Act, 1872
Contract – meaning, characteristics and kinds. Essentials of valid contract - Offer and acceptance, consideration,
contractual capacity, free consent, legality of objects. Void agreements. Discharge of contract – modes of discharge
including breach and its remedies. Quasi – contracts.

Unit II: Special Contracts

Contract of Indemnity and Guarantee, Contract of Bailment and Pledge Contract of Agency.

Unit III: The Sale of Goods Act, 1930

Contract of sale, meaning and difference between sale and agreement to sell. Conditions and warranties . Transfer of
ownership in goods including sale by non-owners. Performance of contract of sale. Unpaid seller – meaning and rights
of an unpaid seller against the goods.
Unit IV: The Limited Liability Partnership Act, 2008
Salient Features of LLP, Difference between LLP and Partnership, LLP and Company LLP Agreement. Nature of
LLP. Partners and Designated Partners. Incorporation Document Incorporation by Registration, Registered office of
LLP and change therein. Change of name. Partners and their Relations. Extent and limitation of liability of LLP and
partners. Whistle blowing. Taxation of LLP. Conversion of LLP.

Unit V: The Information Technology Act 2000

Definitions under the Act. Digital signature. Electronic governance. Attribution, acknowledgement and dispatch of
electronic records. Regulation of certifying authorities Digital signatures certificates. Duties of subscribers. Penalties
and adjudication. Offences.

CONTENTS

Pages
BHUSHAN KUMAR GOYAL

1. INTRODUCTION 1—3 Definition and Object of Law; Definition and Scope of

Mercantile or Business law; Needs for its Study; Sources of
Indian Mercantile or Business Law; Meaning of “Plaintiff” and
“Defendant”, etc.

THE INDIAN CONTRACT ACT, 1872

2. NATURE AND KINDS OF CONTRACTS 4—18

Definition of Contract; Essential Elements of a Valid contract;
Classification of Contracts on the basis of Mode of Formation;
Classification of Contracts on the basis of Enforceability;
Classification of Contracts on the basis of Extent of
performance; Classification of Contracts on the basis of
Obligation Outstanding at the time of formation of contract;
Distinction between Agreement and Contract; Distinction
between Void Agreement and Voidable Contract; Distinction
between Void Agreement and Illegal Agreement; Distinction
between Void Agreement and Void Contract.

3. OFFER AND ACCEPTANCE 19—44 Legal Rules for a Valid Offer; Distinction between Offer and
Invitation to Offer; Distinction between General Offer and
Specific Offer; Distinction between Cross Offer and Counter
Offer; Communication of Special Terms or Standard Form
Contracts; Legal Rules for a Valid Acceptance; Communication
of Offer and Acceptance; Contracts through Telephone or Telex;
Communication of Revocation; Revocation and Lapse of Offer;
Revocation of Acceptance; Comment on Certain Statements.

4. CONSIDERATION 45—58 Definition of Consideration; Legal Rules as to Consideration;

Exceptions to the rule, “No Consideration, No Contract”.;
Privity of Contract; Exceptions to the Rule of Privity of
Contract.

5. CAPACITY OF PARTIES 59—71 Nature of Minor’s Agreements; Persons of Unsound Mind;

Other persons Disqualified from Contracting.
6. FREE CONSENT 72—99
Consent and Free Consent; Coercion; Undue Influence;
Difference between Coercion and Undue Influence;
Misrepresentation; Fraud ; Is Silence Fraud; Distinction
between Misrepresentation and Fraud; Loss of Right of Rescission; Mode of Communicating or Revoking
Rescission of Voidable Contract; Party rightfully Rescinding Contract
Entitled to Compensation; Mistake; Mistake of Law; Mistake of Fact; Instances of Bilateral Mistake (both
Common and
Mutual); Mistake as regards identity of Person ; Mistake as
regards Nature of Document.
 7. LEGALITY OF OBJECT AND CONSIDERATION 100—109
What Considerations and Objects are Unlawful; Agreements
Opposed to Public Policy; Effects of Unlawful or Illegal
Agreements; Object or Consideration Unlawful in Part.

8. AGREEMENTS EXPRESSLY DECLARED VOID 110—123

Agreements in Restraint of Marriage; Agreements in Restraint
of Trade; Agreements in Restraint of Legal Proceedings;
Uncertain Agreements; Wagering Agreements.

9. CONTINGENT CONTRACTS 124—127

Definition; Rule Regarding Performance of Contingent
Contracts; Difference between Wagering Agreements and
Contingent Contracts.

10. QUASI CONTRACTS OR CERTAIN RELATIONS RESEMBLING THOSE CREATED BY

CONTRACT 128—135
Meaning and Rationale; Claim for Necessaries supplied to a
person incapable of Contracting (S. 68); Reimbursement of person paying Money due to another, in
payment of which he is
interested (S. 69); Obligation of a person enjoying, benefit of a
non-gratuitous act (S. 70); Responsibility of finder or good
s (S.
71); Liability of a person to whom money is paid, or thing
delivered by mistake or under coersion (S. 72).

11. DISCHARGE OF CONTRACTS 136—155

Discharge of Contract by Performance; Discharge of Contract by
Agreement; Discharge of Contract by Lapse of Time; Discharge
by operation of law; Discharge of Contract by subsequent or
supervening impossibility or illegality (doctrine of frustration);
Discharge of Contract by breach; Actual Breach; Anticipatory
Breach.

12. REMEDIES FOR BREACH OF CONTRACT 156—176

Suit for Damages; Kinds of Damages; Duty to Mitigate Damage;
Liquidated Damages and Penalty; Suit upon Quantum Meruit;
Rescission of Contract; Suit for Specific Performance; Suit for Injunction.

13. CONTRACTS OF INDEMNITY AND GUARANTEE 177—198

Contract of Indemnity; Contract of Guarantee; Definition (S.
126); Essential Features of a Contract of Guarantee; Nature
and Extent of Surety’s Liability; Kinds of Guarantee; Rights of Surety; Discharge of Surety.

14. BAILMENT AND PLEDGE 199—222

Bailment; Definition (S. 148); Essential of Bailment; Kinds of Bailment; Duties of Bailee; Duties of
Bailor; Bailee’s Lien;
Particular Lien (S. 170); General lien (S. 171); Distinction
between Particular Lien and General Lien; Rights of Bailors
and Bailees against Wrong-doers (S. 181); Termination of Bailment; Pledge or Pawn; Pledge by Non-
onwers.

15. AGENCY 223—262

Definition of Agent, Principal and Agency (Section 182);
General Rules of Agency; Test of Agency; Essential Elements of Valid Agency; Distinction between
Agent and Servant;
Distinction between Agent and Independent Contractor;
Distinction between Agent and Bailee; Kinds of Agents;
Creation of Agency; Extent of Agent’s Authority; Delegation of Authority; Sub-Agent (Sections 191 to
193); Substituted Agent (Sections 194 and 195); Difference between Sub-Agent and
 Substituted Agent; Duties of Agent; Rights of Agent; Duties of Principal; Rights of Principal; Principal’s
Rights and Liabilities for the Acts of the Agent in Relation to Third Parties; Personal
Liability of Agent to Third Party; Termination of Agency;
Irrevocable Agency.

THE SALE OF GOODS ACT, 1930

16. CONTRACT OF SALE OF GOODS 263—281

Scope of the Act; Definition and Essential Elements or Features
of a Contract of Sale; Distinction between Sale and Agreement
to Sell; Distinction between Sale and Hire-Purchase Agreement;
Distinction between Contract of Sale and Contract for Work or
Service; Types of Goods; Effect of Perishing of Goods; The Price

17. CONDITIONS AND WARRANTIES 282—301

Definition of Condition and Warranty; Difference between
Condition and Warranty; When Breach of Condition is to be
treated as a Breach of Warranty; Express and Implied
Conditions and Warranties; Doctrine of Caveat Emptor.
18. TRANSFER OF PROPERTY 302—320 Meaning of ‘Property’; Importance of Time of Passing Property;
Risk Prima Facie Passes with Property; Transfer of Property in
Specific or Ascertained Goods; Transfer of Property in case of Sale on Approval; Transfer of Property in
Unascertained and
Future Goods; Sale or Transfer of Title by Non-Owners.

19. PERFORMANCE OF CONTRACT OF SALE 321—328 Delivery of Goods; Rules as to Delivery of

Goods.

20. REMEDIES FOR BREACH OF CONTRACT OF SALE 329—343

Definition of Unpaid Seller; Rights of Unpaid Seller against the
Goods; Right of Lien (Section 47, 48 and 49); Right of Stoppage
of Goods in Transit (Sections 50, 51 and 52); Right of Re-sale
(Section 54); Rights of Unpaid Seller against the Buyer
Personally; Buyer’s Rights Against Seller.

21. AUCTION SALE (Only for B.Com.) 344—345 Auction Sale.

THE INFORMATION TECHNOLOGY ACT, 2000

22. OBJECTIVES, SCOPE AND DEFINITIONS 346—356
Rational or Objectives of Passing the Information Technology
Act, 2000; Features of Information Technology Act, 2000; Scope of the Act; Non Applicability of the
Act; Definitions Under the
Act (Section 2); Difference Between Paper Based and Electronic
Documents.

23. DIGITAL SIGNATURE AND ELECTRONIC

SIGNATURE 357—368
Development of Internet and Digital Signature; Technology
behind Digital Signature; Meaning of “Encryption” and
“Decryption”; Encryption Technologies; Distinction between
Private Key and Public Key; Hash Function; Transition from
Digital Signature to Electronics Signature; Digital Signature;
Meaning of Digital Signature; Creation or Affixing of Digital
Signature; Verification of Digital Signature; Authentication of Electronic Records by Affixing Digital
signature; Distinction
between Handwritten signatures & Digital Signatures;
Electronic Signature; Authentication of an electronic record by
electronic signature; Emerging New Forms of Electronic
Signatures; e-Hastakshar; Distinction between Digital
 Signature and e-Hastakshar.

24. ELECTRONIC GOVERNANCE 369—374 Provisions which Facilitate and Strengthen Electronic
Governance; Legal Recognition of Electronic Records (S. 4);
Legal recognition of Electronic Signatures (S. 5); Use of Electronic Records and Electronic Signatures in
Government
and its agencies (S. 6); Retention of Electronic Records (S. 7);
Publication of rule, regulation etc., in Electronic Gazette (S. 8);
No Right to insist acceptance of Document in Electronic Form
(S. 9); Power to make Rules by Central Government in respect
of Electronic Signature (S. 10); Validity of contracts formed
through electronic means (S. 10A).

25. ATTRIBUTION, ACKNOWLEDGEMENT AND

DESPATCH OF ELECTRONIC RECORDS 375—379 Legal Provisions as Regards Attribution,
Acknowledgement and
Despatch of Electronic Records; Attribution of Electronic
Records (S. 11); Acknowledgment of Receipt (S. 12); Time and Place of Despatch and Receipt of
Electronic Record (S. 13).

26. SECURE ELECTRONIC RECORDS AND

SIGNATURES 380—381 Secure Electronic Records and Secure Electronic Signatures
(Sections 14-16).

27. REGULATION OF CERTIFYING AUTHORITIES 382—393 Public Key Infrastructure; Controller of

Certifying Authorities;
Appointment of Controller and other Officers (S. 17); Functions
of Controller of Certifying Authorities; Powers of Controller of Certifying Authorities; Power to regulate
Certifying Authorities
(S. 18); Recognition of Foreign Certifying Authorities (S. 19);
Power to grant or reject the application for giving licence to
issue Electronic Signature Certificates (S. 24); Power of Suspension and Revocation of Licence (Sections
25 and 26);
Power to Delegate (S. 27); Power to Investigate Contraventions
(S. 28); Power to access to Computers and Data (S. 29); Power of Controller to give Directions (S. 68);
Grant of Licence to be a
Certifying Authority (Sections 21 to 24); Certifying Authorities;
Regulatory provisions for Certifying Authorities (or Duties of Certifying Authorities) (Sections 30 to 34);
Functions and
Powers of Certifying Authorities.

28. ELECTRONIC SIGNATURE CERTIFICATE 394—397 Electronic Signature Certificate; Digital Signature
Certificate;
Procedure Relating to Electronic Signature Certificate;
Certifying Authority to Issue Electronic Signature Certificate
(S. 35); Representations upon Issuance of Digital Signature
Certificate (S. 36); Suspension of Digital Signature Certificate
(S. 37); Revocation of Digital Signature Certificate (S. 38);
Notice of Suspension and Revocation (S. 39).

29. DUTIES OF SUBSCRIBERS 398—400 Duties of Subscriber; Generating Key Pair (S. 40); Duties of Subscriber
of Electronic Signature Certificate (S. 40a);
Acceptance of Digital Signature Certificate (S. 41); Control of
Private Key (S. 42).

30. PENALTIES, COMPENSATION, ADJUDICATION AND CYBER APPELLATE TRIBUNAL

401—409
Penalties and Compensation or Contraventions; Penalty and
Compensation for Damage to Computer, Computer System, etc.
(S.43); Compensation for Failure to Protect Data (S. 43A);
Penalty for Failure to Furnish Information, Return, etc. (S. 44);
Residuary Penalty (S. 45); Compounding of Contravention (S.
63); Recovery of Penalty (S. 64); Adjudication on
 Contraventions; Power to Adjudicate (S. 46); Factors to be taken
into Account by the Adjudicating Officer (S. 47); The Cyber
Appellate Tribunal.

31. OFFENCES UNDER THE IT ACT, 2000 410—424 Meaning of offence; Distinction between
Contraventions (that is
civil offences) under the Act and cyber offences (that is Criminal
Offences) under the Act; Offences under the Act; Tampering
with Computer source Documents (S. 65); Computer related
Offences (S. 66); Dishonestly receiving Stolen Computer
Resource or Communication Device (S. 66B); Identity theft (S.
66C]; Cheating by Personation by using Computer Resource (S.
66D); Violation of Privacy (S. 66E); Cyber Terrorism (S. 66F);
Cyber Offences relating to Obscenity and Pornography (Ss. 67,
67A and 67B); Offence of not Preserving and Retaining
Information by Intermediaries (S. 67C); Offence of not following
the directions of the Controller (S. 68).; Violations of
Government Directions on Monitoring or Blocking Information;
Cyber Security (S. 70); Penalty for Misrepresentation (S. 71);
Penalty for Breach of Confidentiality and Privacy (S. 72);
Punishment for Disclosure of Information is Breach of Lawful
Contract (S. 72A).; Offences related to Electronic Signature
Certificate; Miscellaneous Provisions on Contraventions and
Offences.

KINNERI JAIN

LIMITED LIABILITY PARTNERSHIP ACT, 2008 32. NATURE OF LIMITED LIABILITY

PARTNERSHIP 425—436 Definition – Section 2(1) (n); Features of LLP; Nature of
Limited Liability Partnership; LLP Agreement; Difference
Between Partnership, Company and LLP.

33. INCORPORATION OF LIMITED LIABILITY

PARTNERSHIP 437—446 Incorporation of LLP – Section 11; Incorporation by
Registration – Section 12; Registered office of Limited Liability
Partnership–Section 13; Change of Registered Office – Section -
13; Effect of Registration – Section 14; Pre-incorporation
contracts; Name of LLP – Section 15; Reservation of Name –
Section 16; Change of Name of LLP ; Penalty for Improper use
of words “Limited Liability Partnership” or “LLP; Publication of Name and Limited Liability – Section
21.

34. PARTNERS AND THEIR RELATIONS 447—460 Eligibility to be Partners – Section 22; Who can be
Partners of LLP – Section 5; Who can not be Partners of LLP;
Disqualifications to become a Partner of LLP – Section 5;
Minimum and Maximum Number of Partners – Section 6;
Designated Partners; Cessation of Partnership Interest –
Section 24; Registration of Changes in Partners – Section 25;
Partner as Agent of LLP – Section 26; Extent of Liability of LLP
– Section 27; Extent of Liability of Partners of LLP – Section 28;
Liability by Holding Out – Section 29; Unlimited Liability in
case of Fraud – Section 30; Whistle Blowing (Waiver of Penalty)
– Section 31; Contributions.

35. FINANCIAL DISCLOSURE 461—469 Rules Related to Maintenance of Books of Account and other
Records – Section 34; Audit of Accounts; Annual Return –
Section 35; Inspection of documents kept by Registrar– (Section
36); Penalty for False Statement – Section 37; Power of Registrar to obtain Information – Section 38;
Compounding of Offences – Section 39; Destruction of old records – Section 40;
Enforcement of Duty to Make Returns etc. – Section 41.

36. CONVERSION TO LLP 470—482 Conversion from Firm into Limited Liability Partnership;
 Conversion from Private Company into LLP; Conversion from
Unlisted Public Company into LLP.

37. TAXATION 483—490 Eligibility to be Assessed as a Firm; Certain Specific Provisions

of the Income Tax Act Applicable to LLP.

QUESTION PAPERS
LEADING CASES
THE INDIAN CONTRACT ACT, 1872

Offer and Acceptance

1. Balfour vs. Balfour. There was no intention to create legal relations. 2. Harris vs. Nickerson. Advertisement for auction
is only an invitation to offer.
3. Pharmaceutical Society of Great Britain vs. Boots Cash Chemists (Southern) Ltd. Picking up a bottle of medicine
from shelves is only an invitation to offer.
4. Harvey vs. Facie. Mere statement of lowest price is only an invitation to offer.
5. McPherson vs. Appana. If an offeree’s agent says that the offeree will not accept anything less than a certain amount, it is
only an invitation to offer. 6. Carlill vs. Carbolic Smoke Ball Co. General offer is valid offer. 7. Harbhajan Lal vs.
Harcharan Lal. A general offer can be accepted by fulfilling the conditions mentioned in the offer.
8. Lalman Shukla vs. Gauri Dutt. There can be no acceptance unless there is knowledge of the offer.
9. Boulton vs. Jones. An offer can be accepted only by the person to whom it is made.
10. Hyde vs. Wrench. A counter offer puts an end to the original offer. 11. Brogden vs. Metropolitan Railway Co. Putting
the letter of acceptance in the drawer does not amount to communication of acceptance, without any external manifestation of
the intention to accept the offer.
12. Felthouse vs. Bindley. Silence cannot be prescribed as a mode of acceptance.
13. Powel vs. Lee. Acceptance must be communicated by authorised person. 14. Ramanbhai vs. Ghasiram. Partial
acceptance is not valid.
15. Adams vs. Lindsell. A binding contract comes into existence as soon as a letter of acceptance is posted.
16. Entores Ltd. vs. Miles For East Corporation. In case of instantaneous means of communication like telex and telephone,
the contract is complete only when the acceptance is received by the offeror; and at the place where acceptance is
received.
17. Bhagwan Das vs. Girdhari Lal. In case of contracts through telephone, the contract is complete at the place of the
offeror; and in case of contract through post contract is complete at the place of the offeree.
18. Henthorn vs. Fraser. The notice of revocation of proposal must reach the offerree before he mails his letter of acceptance.
19. Ramsgate Victoria Hotel Co. vs. Montefoire. An offer lapses after the expiry of reasonable time.
20. Hydge vs. Wrench. An offer lapses if it is rejected by the offeree. 21. Errington vs. Errington and Woods. A promise
made in consideration of the promisee performing an act constitutes a contract as soon as the promisee entered on the
performance of the act, unless the promisee included expressly or impliedly that it can be revoked before the act has been
completed. For details see chapter on ‘consideration’.
22. Nihal Chand vs. Amarnath. The counter offer makes an offer to lapse. 23. Henderson vs. Stevenson. Special terms and
conditions must also be communicated.
24. Olley vs. Marlborough Court Ltd. Special terms and conditions of the offer must be brought to the notice of the offeree
before or at the time of formation of contract, and not subsequently.
25. Lilywhite vs. Mannuswami. The terms and conditions in a standard form of contract must be reasonable.

Consideration
1. Durga Prasad vs. Baldeo. Consideration must move at the desire of the promisor.
2. Kedarnath vs. Gorie Mohomed. A promise to contribute to a charitable cause is enforceable as soon as any definite steps
are taken in furtherance of the object on the ground of presence of consideration.
3. Abdul Aziz vs. Masum Ali. In this case a Mahommedan promised to pay R 500 as subscription to a fund started for
rebuilding a mosque. But no steps were taken to rebuild the mosque. The subscriber was held not liable due to lack of
consideration.
4. Chinnaya vs. Ramayya. A stranger to consideration can sue. 5. White vs. Bluett. Consideration must be something of
value in the eyes of law..
 6. Bolton vs. Madden. Inadequacy of consideration will not make the contact void.
7. Collins vs. Godfroy. Consideration must be something which the promisor is not already bound to perform.
8. Ramchandra Chintamani vs. Kalu Raju. Consideration must be something more than what a promisee is already bound
to do.
9. Rajluckhy Dabee vs. Bhootnath Mukherjee. Nearness of relationship does not mean that there is love and affection
between the parties. 10. Dunlop Pneumatic Tyre Co. vs. Selfridge and Co. Ltd. A person who is not a party to a contract
cannot claim rights under the contract.
11. Jamna Das vs. Ram Avtar Pandey. A stranger to contract cannot sue on the contract, unless the case comes within one of
the recognised exceptions. 12. Khwaja Mohammad Khan vs. Hussaini Begum. A contract to provide benefit to a stranger to
contract under a charge on immovable property is enforceable.
13. Shappu Ammal vs. Subrahmanium. A stranger, usually female and old age members of the family, can sue on a contract
in case of family settlement.
14. Daropati vs. Jaspat Rai. Defendant’s wife was held entitled to sue the defendant for breach of contract entered into
between the defendant and her father.

Capacity of the Parties

1. Mohiri Bibi vs. Dharmodas Ghose. An agreement with a minor is void. 2. Sadiq Ali vs. Jai Kishore. The rule of
estoppel does not apply against a minor.
3. Khan Gul vs. Lakha Singh. When a minor misrepresents his age, the court can use its equitable jurisdiction and order the
refund of money.
4. Raj Rani vs. Prem Adib. A contract of service entered into by the father on behalf of the minor is not enforceable due to
lack of consideration. 5. De Francesco vs. Barnum. If contract of apprenticement is too harsh, the agreement is not
enforceable.
6. Suraj Narain vs. Sukhu Ahir. A minor’s agreement cannot be ratified on attaining the age of majority.
7. Raghava Cheriar vs. Srinivas. An agreement to give loan by minor on the mortgage of borrower’s property was held
enforceable by the minor. 8. Nash vs. Inman. ‘Clothing of an extravagant and ridiculous style’ are not necessaries.
9. Inder Singh vs. Parmeshwadhari Singh. An idiot is not competent to contract.

Free Consent
1. Chikham Ammiraju vs. Chikham Seshamma. A threat to commit suicide is coercion.
2. Mannu Singh vs. Umadat Pandey. Gift of whole of his property by a devotee to his guru was set aside on the ground of
undue influence. 3. Derry vs. Peek. A company’s false statement in the prospectus with honest belief does not amount to
fraud.
4. Mithoo Lal Nayak vs. LIC. The court does not entertain an action for refund of money, where in order to succeed, the
plaintiff has to prove his own fraud.
5. Horsfall vs. Thomas. A deceit which does not deceive is no fraud. 6. With vs. O. Flanagan. Non-disclosure of change of
circumstances amounts to misrepresentation or fraud, as the case may be.
7. Smith vs. Chandwick. The act constituting fraud must have induced the other party to enter into a contract.
8. Couturier vs. Hastie. Where both he parties to an agreement are under a mistake of fact essential to the agreement, the
agreement is void. 9. Cundy vs. Lindsay. If there is a mistake as regards identify of the person contracted with, the
agreement is void.
10. Phillips vs. Brooks. If there is no mistake as regards identify of the person contracted with and there is fraudulent
misrepresentation only, the contact is voidable and not void.
11. Said vs. Butt. Mistake of identity of the party makes the agreement void. 12. Dularia Devi vs. Janardan Singh. Mistake
as to character of a document make the agreement void.
13. Ningawwa vs. Byrappa. Mitake as to contents of the document makes the contract voidable.
14. Raja Singh vs. Chaichoo Singh. Mistake as to the nature of the document, makes the agreement void.
15. Upton-on-Seven Rural District Council vs. Powel. In this case, A (the defendant) called upon fire brigade, in mistake for
the Pershore fire brigade. A’s house was situated in Pershore fire brigade areas and not of Upton fire brigade. He was
entitled to services without payment from the Pershore fire brigade. The Upton fire brigade accepted the call in good
faith. It was held that A was contractually bound to pay for the services despite the fact that neither party thought they
wee entering into a contract.

Legality of Object and Consideration

1. Bhikan Bhai vs. Hiralal. If the object of the statute is not to forbid a transaction, it is not unlawful. It was held that
Bombay Tolls Act, 1875 was passed for the benefit of revenue.
2. Ram Sarup vs. Bansi Mandar. An agreement to work as a bonded labour is unlawful.
 3. Bai Vijli vs. Nansa Nagar. An agreement to advance money to a married women to enable her to obtain divorce from her
husband is unlawful. 4. Ouseph Poule vs. Catholic Union Bank. An agreement to stiffle prosecution is invalid. But in this
case the borrower agreed to make up the deficiency of stock due to its overvaluation by hypothecating more goods as
security. The agreement was held valid.
5. N.V.P. Pandian vs. M.M. Roy. An agreement to pay a sum of money to procure a seat in a medical college is unlawful as
it is against public policy. 6. Pearce vs. Brooks. An agreement to give goods on hire for an immoral purpose is illegal.

Agreements expressly declared void

1, Lowe vs. Peers. An agreement in restraint of marriage is void. 2. Madhub Chander vs. Raj Coomar. An agreement in
restraint of trade is void whether the restraint is general or particular.
3. S.B. Fraser & Co. vs. The Bombay Ice Manufacturing Co. An agreement among the traders not to sell goods below a
certain price or to pool output is not void, provided it is not in the nature of restraint of trade.
4. Charlesworth vs. Macdonald. Negative stipulations operating during the term of employment may not be in restraint of
trade.
5. Hukam Singh vs. Gammon (India) Ltd. Section 28 does not prevent the parties to the contract from selection of one of
the two competent courts for the disposal of their disputes.
6. Gherulal Parekh vs. Mohadeo Das Maiya. A wagering agreement is void and unenforceable but it is not forbidden by
law. Thus, collateral transactions to a wagering agreement are enforceable.
Discharge of Contract
1. Taylor vs. Coldwell. Destruction of subject-matter of a contract makes a contract void.
2. Krell vs. Henry. Failure of the object of the contract makes the contract void.
3. Satyabrata Ghosh vs. Magneeram Bangur & Co. Government intervention of temporary nature which does not vitally
affect the contract will not make the contract void.
4. Hurnandrai Fulchand vs. Pragdas Budhsen. A contract to supply goods “as and when they may be received from the
mills” does not mean “if and when received from the mills”.
5. Henri Bay Steam Boat Co. s. Hutton. Failure of one of the object does not make the contract void.
6. Hochester vs. De La Tour. Anticipatory breach of contact can be treated as a breach of contract. In this case, the promisor
expressly stated that he would not require the services of his courier.
7. Frost vs. Night. In this case, there was implied repudiation of contract as the promisor married another person before the
date of marriage.

Remedies for Brach of Contract

1. Haldley vs. Baxendale. Damages for loss of profits were not allowed in this case.
2. Jamal vs. Moola Dawood and Co. Ordinary damages are calculated as the difference between the contract price and
market price on the date of breach. 3. Madras Railway Co. vs. Govinda Raju. Compensation is not to be given for any
remote or indirect loss or damage sustained by reason of the breach of contract. There was delay in sending the sewing
machine in this case. 4. Niku vs. Pirbhu. The aggrieved party must minimise the damage. 5. Plinche vs. Coldburn. If a
person has done work for another in pursuance of a contract which has been discharged by the letter’s wrongful breach, he
may obtain reasonable compensable for his work on the basis of quantum merit.
6. Sumpter vs. Hedges. A person who is himself guilty of breach of contract cannot sue if the contract is not divisible.

Quasi-Contracts
1. Tulsa Kunwar vs. Jogeshwar. The case is on reimbursement of person paying money due to another, in payment of
which he is interested (S. 69 of the Indian Contract Act, 1872).
2. State of West Bengal vs. B.K. Mondal & Sons. If a person accepts the benefit of a structure constructed for it, is liable
under S. 70 of the Indian Contract Act, 1872.
3. Hollins vs. Fowler. A finder of goods is entitled to possess the goods as against everyone except the true owner.
Contracts of Indemnity and Guarantee
1. Adamson vs. Jarvis. There may be implied promise of indemnity. 2. Gajanan Moreshwar vs. Moreshwar Madan. If the
indemnified had incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from
that liability and pay it off.
3. Swan vs. Bank of Scotland. A guarantee for an unenforceable obligation will not be binding on the surety.
4. Bank of Bihar vs. Damodar Prasad. Surety’s liability arises immediately after default of the principal debtor.
5. M.S.E.B., Bombay vs. Official Liquidator. The liability of the surety is co extensive with that of the principal debtor
unless otherwise provided by the contract.
6. M.S. Anirudhan vs. Thomco’s Bank Ltd. Unsubstantial alteration in an instrument which are for the benefit of the
 surety, do not discharge the surety from liability.

Bailment and Pledge

1. State of Gujarat vs. Menon Mohammad Haji Hasan. Bailor-bailee relation may exist even though there is no contract
between them. 2. Kaliaperumal Pillai vs. Visalakshami. The mere leaving of box in room in goldsmith’s house when the
lady herself took away the key of the box, cannot amount to delivery of goods within the meaning of Section 149 of the
Indian Contract Act, 1872. Therefore, jweller was held not liable for stolen jewellery. 3. Utzen vs. Nicols. The owner of the
restaurant was held liable as a bailee as his waiter did not take reasonable care of the goods.
4. Houghland vs. R.R. Low (Luxury Coaches) Ltd. The respondent company was held liable for goods stolen from the
boot of the coach. 5. Jaggilal Kamlapat Oil Mills vs. Union of India The bailee is excused from returning the goods bailed
in case they are taken away from him by the authority of law exercised through regular and valid proceedings. 6. Chand Mal
vs. Gonda Singh. A bailee cannot claim particular lien for safe custody charges.

Agency
1. Watteau vs. Fenwick. Principal is liable if the agent acts within his ostensible or apparent authority, although he exceeds
his actual authority, unless the third party is aware of the restriction.
2. Ryan vs. Pilkington. An estate agent has implied authority to receive a deposit from an intending purchaser. Therefore,
the principal will be held liable if the estate agent misappropriates the money.
3. Couturier vs. Hastie. In case of emergency, the person entrusted with the property becomes an agent of necessity with the
implied authority to do what is necessary to save the property.
4. Boulton Partners vs. Lambert. Ratification tantamounts to prior authority.
5. Smart vs. Sandars. Where an authority is given for the purpose of securing some benefit to the agent, such authority is
irrevocable.
THE SALE OF GOODS ACT, 1930

Contract of Sale of Goods

1. Wood vs. Manley. A agreed to buy haystack from B on B’s land. The buyer, as per the contract, was allowed to come on
B’s land to take it away. This was held to be a sale and not agreement to sell.
2. Johnson vs. Macdonald. There was a contract for sale of a certain quantity of nitrate of soda to arrive by a certain ship.
This was held to be an agreement to sell.
3. Helby vs. Mathews. A hire purchaser cannot transfer a good title to a bonafide purchaser.

Conditions and Warranties

1. Baldary vs. Marshal. Suitability of the car for touring purposes is a condition and not a warranty.
2. Niblett vs. Confectioners’ Materials Co. The seller must have the right to sell the goods under the brand name under
which he is selling the goods, otherwise it will amount to breach of condition as to title.
3. Varley vs. Whipp. Condition in a sale by description.
4. Moore & Co. vs. Landauer & Co. Condition as to description also apply to the mode of packing also.
5. Drummond & Sons vs. Van Ingen. Condition in a sale by sample. There was latent defect in the worsted coatings.
6. Wallis vs. Pratt. Condition in a sale as well as description. Once a condition always a condition whether a not the
remedies remains the same or not. Common English sanfoin case.
7. Re Andrew Yule & Co. Condition as to quality or fitness. Hessian Cloth case. Buyer did not specify the purpose. Goods
fit for other purposes and not for the buyer’s purpose.
8. Priest vs. Last. Condition as to quality a fitness. Hot water bottle case. Bottle was not fit for hot water.
9. Grant vs. Australian Knitting Mills. Condition as to quality or fitness. Goods were not fit for the usual purpose. There
was chemical irritant in the undergarments.
10. Griffiths vs. Peter Canway Ltd. There was no breach of condition as the coat was fit for normal person.
11. Jones vs. Just. Condition as to merchandability. Manila hemp case. Goods were not merchantable as they were damaged
during sea transit. 12. Morelli vs. Fetch Gibbons. Goods were held not merchantable when the wine bottle broke at the neck
while it was being opened with corkscrew. 13. Frost vs. Aylesbury Dairy. Eatable must be wholesome. In this case milk
contained germs of typhoid fever.
14. Mason vs. Burgingham. Breach of warranty of quiet possession. 15. Ward vs. Hobbs. Rule of caveat
emptor.
Transfer of Property
1. Dennant vs. Skinner. Property passes when intended to pass. 2. Rugg vs. Minett. Property does not pass until the goods
are put in a deliverable state.
 3. Mahabir Commercial Co. Ltd. vs. CIT. Buyer’s consent to the passing of property is implied in the circumstances
mentioned in S. 23(1) of the Sale of Goods Act, 1932.
4. Folkes vs. King. Sale by a mercantile agent below the specified price was held valid.
5. Lee vs. Buttler. Buyer in possession of goods after an agreement to sell can transfer a good title to a bonafide purchaser
for value.
6. Bolsize Motor Supply Co. vs Cox. A person in possession of goods under a hire purchase agreement cannot transfer a
good title even to a bonafide purchaser for value.
Remedies for Breach of Contract of Sale
1. Valpy vs. Gibson. Where the seller repossesses the goods for some purpose, he cannot exercise the right of lien on those
goods.
2. GIP Rly. Co. vs. Hanuman Das. Transit comes to an end when the goods reach their destination and the buyer or his
agent obtains delivery thereof. 3. James vs. Griffin. Where the buyer does not accept the goods, the transit does not
terminate.

THE INFORMATION TECHNOLOGY ACT, 2000

Definitions
1. Vyakti Vikas Kendra, India Public Charitable Trust through Trustee Mahesh Gupta & Others v. Jitender Bagga
and Another [CS (OS) No. 1340/2012], Delhi High Court held Google to be “intermediary” within the definition of
Section 2(1)(w) of the Information Technology Act, 2000.

Attribution, Acknowledgement and Despatch of Electronic Records

1. P.R. Transport Agency v. Union of India [AIR 2006 All 23], it was held that an electronic record is deemed to be
despatched at the place where the originator has his place of business.

Penalties, Compensation, Adjudication and Appellate Tribunal

1. Shri Umashankar Sivasubramanian v. ICICI Bank, it was held that the ICICI Bank did not exercise due diligence to
prevent the financial loss to the petitioner.

Offences under the IT Act, 2000

1. Syed Asifuddin v. The State of Andhra Pradesh, 2005 Cr.LJ 4314, the CDMA handsets which were given to the
Reliance Infocomm subscribers were technologically locked so that it would only work with Reliance Infocomm
services.
2. Vyakti Vikas Kendra, India Public Charitable Trust through Mahesh Gupta & Others v. Jitender Bagga and
Another [CS (OS) No. 1340/2012 (popularly known as ‘Art of Living’ case)], is a typical example of how vulnerable
public figures in India are to cyber defamation.

1 Introduction

LEARNING OBJECTIVES
After reading this chapter, you will learn :
➥ Definition and Object of Law
➥ Need for Study of Business Law
➥ Sources of Indian Business Law
➥ Meaning of Plaintiff, Dependent, etc.

DEFINITION AND OBJECT OF LAW

The term ‘law’ has been defined differently by different writers. This is because the term ‘law’ is used in many senses.
In its widest sense, the term refers to rule of external human action. In the context of physical and natural sciences, the
term ‘law’ means uniformity in nature. But when we speak of the law of the land or state, we use the term in a special
and restricted sense. Salmond in his book, Jurisprudence, defines law as “The body of principles recognized and
applied by the state in the administration of justices”. Similarly, Holland, in his book, Elements of Jurisprudence,
defines law as “a general rule of external human action enforced by a sovereign political authority.”
In simple words, it is a body of principles that govern human conduct in a civil society and the observance of
which can be enforced in courts. According to William Anson “the object of law is order, and the result of the order is
that men are enabled to look ahead with some sort of security as to the future.” In simple words, the object of law is
the creation and protection of legal rights to maintain order in the society because only in a state of order person feel
safe and secure.
There are several branches of law, such as International Law, Constitutional Law, Administrative Law, Criminal
Law and Civil Law. Mercantile or Business Law is a part of Civil Law.

DEFINITION AND SCOPE OF MERCANTILE OR BUSINESS LAW

Mercantile law is also known as Commercial Law or Business law. It is a body of legal rules which relates to the
conduct of business. According to Slater, “The phrase Mercantile Law or Commercial Law, is generally used to
denote those portions of the law which deal with the rights and obligations
2 Business Laws

arising out of transactions between mercantile persons.” It comprises a vast number of laws pertaining to business
transactions, and these laws govern the relation of businessmen to society. There is no separate statute entitled
‘Mercantile Law’, and the term appears to be “a convenient way of grouping together laws that should be regarded
important for men in business.” It comprises – laws concerning trade, commerce and industry.
Mercantile law is a part of civil law. It includes the Law of Contracts, Law relating to Sale of Goods, Partnership,
Companies, Negotiable Instruments, Charter Party and Bill of Lading, Insurance, Common Carriers, Arbitration
Consumer Protection and Insolvency. It is an ever growing branch of law.

NEEDS FOR STUDY OF BUSINESS LAW

As citizens all of us are expected to have some knowledge of law as ignorance of law is no excuse. This is because,
we are brought into legal relationship with others knowingly or unknowingly, day-in and day-out. Such legal
relationship casts upon us a legal duty or an obligation of doing or abstaining from doing a particular act. For instance,
when we board a bus, enter a restaurant or a theatre, receive an article or money on behalf of somebody, stand on a
weighing machine, borrow a book from library, pick up a purse lying on the road, we will automatically be brought
into legal relationship with the owner, and a legal tie of doing or refraining from doing a definite act is created.
It is here that the knowledge of law of contracts becomes desirable and it is the foundation of mercantile law.
Similarly, when a cheque is wrongfully dishonoured by the banker, knowledge of the law relating to negotiable
instrument becomes useful. Since rights and duties are correlative, the legal obligation imposed on us becomes the
right of another with whom the legal relation is created. If knowledge of law is necessary for non-mercantile persons,
it should be more so for mercantile person.
Knowledge of mercantile law would make them appreciate the legal problem pertaining to their transactions,
avoid legal pitfalls, and obtain in time expert advice before a transaction is completed.

SOURCES OF INDIAN MERCANTILE OR BUSINESS LAW The main sources of Indian

mercantile of business law are as follows :
1. English mercantile law. Indian mercantile law is mainly based upon English mercantile law. The various
statutes comprising mercantile law are mainly based upon the English law. Where Indian law is silent on a
point and the customs and usages prevailing in Indian permit, the courts in India take recourse to the English
law. Sources of English mercantile law include common law, equity, law merchant and statute law. Common
law refers to customs and usages
Introduction 3

which were prevalent in England and which were recognised and enforced by courts. It was created by
judicial pronouncements. Equity means morality, honesty, fairness or principles if natural justice. It is a
system of law parallel to rules of common law and statute law. The law merchant refers to a number if usages
prevalent among merchants of England and that of other European countries.
2. Statute law. A statute is a formally codified law enacted by legislature. Thus statute law is the law laid down in
the Acts of Parliament, State Legislatures and any other law-making body. Indian mercantile law is mostly
codified by Parliamentary enactments. If a bill is passed by Parliament and it is signed by the President, it
becomes an Act or a statute. The Indian Contract Act, 1872; The Negotiable Instruments Act, 1881; The Sale
of Goods Act, 1930; The Indian Partnership Act 1932; The Companies Act 1956 are some of the examples of
statutes.
3. Case law. Statute law is given effect to by courts of law, which interpret and explain the law. In the course of
 interpretation, a rule of law may be enunciated and if done so, it becomes a precedent for the subordinate
courts. A judicial precedent may by either authoritative or persuasive. The decisions of the Supreme Court of
India are authoritative for all courts in India, while a decision of High Court, although authoritative to its
subordinate courts are mainly persuasive to other High Courts and their subordinate courts.
4. Usage or custom of trade. Usage or custom of trade are also the guiding factor in deciding disputes provided
they are widely known and reasonable and not inconsistent with the provisions of the relevant statute. A
statute may provide that the provisions contained therein are subject to the particular usage or custom of
trade.

MEANING OF “PLAINTIFF” , “DEFENDANT”, ETC.

Plaintiff. Plaintiff is one who commences a law suit; the complaining party in any litigation.
Defendant. Defendant is a person who defends a legal action or required to make answers in a legal action or suit;
opposite of plaintiff. Appellant. Appellant is one who appeals against decision of lower court to higher court. Further,
the name of the appellant appears first in the case. For example, in Bhagwan Das Goverdhan Das Kedia v. Girdhari
Lal Purshottam Das & Co. [AIR 1966 SC 543], the appellant was Bhagwan Das Goverdhan Das Kedia in the
Supreme Court.
Respondent. Respondent is the party who makes an answer to an appeal, application application or petition or other
proceeding in court. In the above case, Girdhari Lal Purshottam Das & Co. was the respondent.
THE INDIAN CONTRACT ACT, 1872

2 Nature and Kinds of

Contracts

LEARNING OBJECTIVES
After reading this chapter, you will be able to learn :
➥ Importance of the Law of Contract
➥ Definition and Essentials of Contract
➥ Classification of Contracts

IMPORTANCE OF THE LAW OF CONTRACT

A study of mercantile or business law necessarily starts with a study of the rules of law governing contract, since the
law of contracts is the basis of other enactments covered by the term ‘mercantile or business law’. Further, the law of
contracts is applicable not only to mercantile community, but to others also. Almost everyone of us enters into a
number of contracts whether as businessmen or otherwise, and as such, it is necessary for us to familiarize ourselves
with the law of contract. According to Anson, “The law of contract is intended to ensure that what a man has been led
to expect shall come to pass; that what has been promised to him shall be performed.”

The Indian Contract Act, 1872

The Indian Contract Act, 1872, came into force with effect from 1st September, 1872.
The Indian contract Act, 1872, lays down the law relating to contracts. It enunciates the legal principles governing
business transactions in India. The Act recognizes freedom of contract, and the rights and duties created by a contract
can be enforced by courts of law.
The Act is not exhaustive. It does not cover all the branches of the law of contracts. The Act lays down general
principles of law of contract in Sections 1 to 75. It also deals with certain special contracts such as Indemnity and
Guarantee, Bailment and Pledge and Agency. Sections 124 to 238 deal with these special contract. It does not,
however, provide rules of law relating to other branches of contract. The Indian Partnership Act, The Sale of Goods
Act, The Negotiable Instruments Act, The Companies Act, etc., are separate
Nature and Kinds of Contracts 5
enactments, although they fall within the purview of the term ‘the law of contracts’. Sections 76 to 123 relating to sale
of goods were repealed in 1930 and the Sale of Goods Act was passed. Similarly Sections 239 to 266 were repealed in
1932 when the Indian Partnership Act was passed.
It does not override usage or custom of trade. Section 1 of the Act has laid down that, “Nothing herein
contained shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed, nor usage or
custom of trade, nor any incident of any contract, not inconsistent with the provisions of this Act.”
A contract creates rights in personam which can be enforced against party on whom legal obligation to do or not
to do a definite act is imposed.

DEFINITION OF CONTRACT
According to Halsburry, “A contract is an agreement between two or more persons which is intended to be
enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do
or abstain from doing some act.”
Section 2(h) of the Indian Contract Act, 1872 defines a contract as follows: “An agreement enforceable by law is
a contract”.
Thus a contract consists of the following two elements:
(1) An agreement, and
(2) Legal obligation, i.e., duty enforceable by law.

Contract = Agreement + Legal Obligation

An agreement is enforceable by law if it creates a legally binding obligation between two or more parties. It is
also essential that the legal obligation must arise out of an agreement. These two elements are discussed below :
(1) Agreement. According to Section 2(e) “Every promise and every set of promises, forming consideration for each
other, is an agreement,” Accordingly, an agreement is a promise or a set of promises. A promise is defined in
Section 2(b). It lays down that “a proposal when accepted,
becomes a promise.” An agreement is an accepted proposal. In other words, it means that there must be a
proposal or offer by one party and that proposal or offer must be accepted by the other party. Thus, an
agreement consists of a proposal or offer from a party and its acceptance by the other.

Agreement = Offer or Proposal + Acceptance of the Offer

Example : A makes an offer to sell his car for R 1,50,000 to B. B accepts the offer. This offer after acceptance
becomes a promise and the promise is an agreement between A and B.
6 Business Laws

Thus, there must be two or more persons to enter into an agreement because one person cannot enter into an
agreement with himself.
Further, there must be consensus ad idem or identity of minds. It signifies that the parties are agreed about the
same thing in the same sense. Accordingly, an agreement is said to be formed between two or more parties only when
their minds coincide or when they are ad idem or when they agree upon the same thing in the same sense. An
agreement may be oral or in writing or it may be implied from the conduct of the parties.
According to S. 2(c), the person making the proposal is called the “promisor”, and the person accepting the
proposal is called the “promisee”.
(2) Legal obligation. An agreement to become a contract must give rise to a legal obligation. Legal obligation means
a duty enforceable by law. It binds the parties to contract and imposes the necessity of doing or to abstain from
doing, a definite act or acts. If an agreement does not create a duty enforceable by law, it is not a contract. Thus,
an agreement is a wider term than a contract. An agreements creating social obligations does not make a
contract.
Example : A invites B to dinner and the invitation is accepted by B, the obligation of A to prepare the dinner and
the obligation of B to come for dinner are social obligations and they do not create a legally enforceable agreement. If
any one of the them does not perform his part of the social obligation, the other cannot take any action against the
former.
In case of business agreement, it is usually presumed that the parties intend to create legal obligations.
R
Example : An agreement to sell 100 kg of rice of a particular variety at 60 per kg is a contract because it gives
rise to a legal obligation i.e., a duty enforceable by law and in case of breach of contract by either party a suit can be
filled in a court of law provided other essentials of a valid contract as laid down in Section 10 are present.

Thus, all contracts are agreements but all agreements are not contracts. Only those agreements are contracts
which give rise to legal obligations.
On the other hand, all legal obligations are not contracts. Only those legal obligations constitute contract
which arise out of agreement. The obligations which are imposed by the general law of the land and do not arise out
of agreement are not contractual. These obligations include (a) judgement of court; (b) tort or civil wrong; (c) quasi-
contract and (d) status obligations. Obligations imposed by judgement of courts and entered in court records do not
have their source in agreements. A tortuous liability is imposed by the general law of the land.
Therefore, Salmond rightly says, “The Law of Contracts is not the whole law of agreements nor is it the
whole law of obligations. ; it is the law of those agreements which create obligations, and of those obligations
which have their source in agreements.” This is further explained below:
Nature and Kinds of Contracts 7

The law of contracts is not the whole law of agreements The law of contracts is the law of those
agreements which create legal obligations which are enforceable by law.
Examples : (i) A offers to sell his car to B for R 2,00,000. B accepts the offer. In this agreement if there is default
by either party, then the other party can file a suit for breach of contract provided all the essential
elements of a valid contract are present.
(ii) A invites B to a dinner. B accepts the invitation. B does not turn up for the dinner. A cannot sue B
because in this agreement there is no intention to create legal obligation.

The law of contract is not the whole law of obligations The law of contracts is the law of those legal
obligations which have their source in agreements. The law of contracts is not concerned with those obligations which
do not arise out of agreements.
Example : Obligations arising from judgements of courts, obligations arising from tort or civil wrong and
obligations to maintain wife and children do not arise out of agreements and hence they do not constitute contracts.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

Section 10 of the Act lays down the essentials of a valid contract. According to this section, “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 hereby expressly declared to be void.” Accordingly all contracts are agreements, but all
agreements need not be contracts. The following are the essentials of a contract, as per section 10 :
1. An agreement (or offer and acceptance). An agreement is essential for a contract. An agreement is the result
of offer and acceptance. An offer or proposal to do or not to do a definite act or acts is made by one party,
and the same must be accepted by the other party to whom the offer is made. Thus, agreement requires two
parties — one making the offer and the other accepting it. Offer and acceptance must satisfy their respective
legal rules. For example, the terms of an offer must be definite and certain and it must be communicated to
the other party. Similarly, the acceptance must be absolute and unqualified and it must be communicated to
the person who has made the offer. Offer and acceptance may be express or implied.
2. Intention to create legal relations. When two parties want to enter into a contract, their intention must be to
create legal relations between themselves. If the intention is not to create legal relations, it will not give rise
to a contract. In every day life, a number of social and domestic arrangements are entered into and in these
cases the parties usually do not intend to create legal relations between themselves. Therefore, they are not
contracts. An
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agreement to dine at a friend’s place, or to attend a social or a religious function, or to play a friendly cricket
match, or to go on a pleasure trip, or to see a movie, etc…, does not confer any right of action since it does
not create any legal obligation.
CASE : In the leading case Balfour vs. Balfour [(1919) 2KB 571], Mr. Balfour who was serving the Government
of Ceylon went to England with his wife on leave. After the expiry of the period of leave, Mr. Balfour had to go back
to Ceylon, but his wife could not accompany him for medical reasons. Consequently, he promised orally to pay an
allowance of £ 30 per month until she rejoined him. The amount was not fixed as compensation for or in satisfaction
of the obligation of the husband towards his wife to maintain her. On his failure to make the payment, the wife sued
him for the recovery of the promised amount. Her suit was dismissed by the court of Appeal on the ground that the
agreement was only an arrangement between the two, and the parties never intended to create legal relations.
 Generally speaking, in the case of agreements regulating social matters, the parties do not intend to create legal
relations. However, if the parties intend to crate legal relations, there can be a contract between family members or
between relatives. For example, in Mcgregor v. Mcgregor [(1888) 21 QBD 424], husband and wife withdrew their
complaints under an agreement by which the husband promised to pay an allowance and wife agreed to refrain from
pledging his credit. It was held that the agreement was a contract.
In the case of agreements regulating business transactions, the assumption is that the parties intend to create legal
relations. This presumption can, however, be rebutted by the party asserting that no legal relationship was intended.
Sometimes, the parties to a business agreement may specifically state that they do not intend to create legal
obligation. In such a case, the promise will be binding in honour only.

CASE : In Rose & Frank Co. vs. J.R. Crompton & Bros. Ltd. [(1925) AC 445] two firms entered into a written
contract for the sale and purchase of tissue paper. The agreement contained a clause to the effect that “this
arrangement is not entered into, nor is this memorandum written, as a formal or a legal document, and shall not be
subject to legal jurisdiction in the law court”. The goods were not delivered and, therefore, the buyers brought an
action for non-delivery. It was held that there was no intention to create legal relations on the part of the parties to
the agreement and thus there was no contract.

Thus, whether the parties to an agreement intended to create legal relations or not, is a question of fact to be
inferred from the circumstances of the case.
3. Consensus ad idem and free consent. In order that an agreement may become enforceable by law, the parties
should be ad idem. i.e., agree upon the same thing in the same sense (Sec. 13).
Example : A, who owns two houses, one in old Delhi and the other in New Delhi, offers to sell his Old Delhi house
to B for R 20,00,000 and B accepts the offer thinking it to
Nature and Kinds of Contracts 9

be in respect of A’s New Delhi house, the agreement between A and B is not enforceable, owing to the absence of
identity of minds.
Consent must also be free. Section 14 provides that consent is said to be free when it is not caused by coercion, or
undue influence, or fraud, or misrepresentation or mistake. If the contract is vitiated by any of the first four elements,
the contract would be voidable at the option of the party whose consent has been so caused.
Example : A threatens to shoot B if he (B) does not sell his goods worth R 50,000 for R 10,000. B agrees to sell the
goods under the threat. The consent of B is caused by coercion, therefore, it is not free. The contract is voidable at the
option of B.
4. Contractual capacity. The parties who enter into an agreement must be legally competent to do so. According
to Section 11, minors (i.e. a person who has not attained the age of 18 years), persons of unsound mind and
persons disqualified by any other law such as alien enemies are incompetent to contract. An agreement
entered into with a person who is not competent to contract at the time of entering into the agreement is void
and thus not enforceable. However, in some special cases, e.g., in case of necessaries supplied to a minor,
the supplier under Sec. 68 is entitled to be reimbursed from his estate.
5. Lawful consideration. Section 25 provides that an agreement without consideration is void, i.e., not
enforceable, barring the exceptions mentioned in that section. The absence of consideration makes a
promise gratuitous and, therefore, such promise is not enforceable by law.
Consideration is something in return for the promise, i.e., quid pro quo. Both the parties must give something and
get something in return. Thus, consideration is the price for the promise.
Example : A offers to sell his car to B for R 1,50,000 and B accepts the offer. For A, the promise of B to pay R

1,50,000 is the consideration and for B, the promise of A to deliver the car is the consideration.
Consideration may consist of the payment of money, the delivery of goods, a certain act, or a promise to do an act
or to refrain from doing an act. It may be past, present or future. It need not be adequate. But it must be real and
valuable in the eyes of law.
6. Lawful object. The object or the purpose of an agreement should be lawful. The object would be unlawful if it
is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is
fraudulent; or involves or implies injury to the person or property of another; or the court regards it as
immoral, or opposed to public policy (Sec. 23).
Example : A promises to B to drop a prosecution which he has instituted against B for robbery and B promises to
restore the value of things taken. The agreement is illegal, as its object is unlawful being opposed to public policy.
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 7. Not expressly declared void. Enforceability of an agreement also depends upon whether it is expressly
declared void by the Act. In fact, the Act itself has expressly declared void certain types of agreements. For
example, agreements in restraint of marriage, in restraint of trade, in restraint of legal proceeding, uncertain
agreements and wagering agreements. These agreements are void and therefore, the aggrieved party cannot
seek any relief from the court.
Example : A and B agree that if it rains today A will pay B R 100, and if it does not rain B will pay A R 100. it is a
wagering agreement and thus void.
The terms of the agreement should be certain or capable of being made certain (Sec. 29). If A agrees to sell a
hundred tons of oil and the agreement does not specify the type of oil agreed to be sold. The agreements being
uncertain, cannot be enforced. However, if the agreement is capable of being made certain by circumstances, the
agreement would be valid contract.
8. Possibility of performance. The act contemplated in the agreement should be capable of performance.
Agreements to do an act impossible of performance cannot be enforced (Sec. 56).
Example : A agrees with B to discover treasure by magic, or to make two parallel straight lines meet, B cannot
seek redressal of the grievance through the court on A’s failure to perform the promise.
9. Legal formalities. Agreements may either be oral or written. However, certain agreements are required to be
in writing or in the presence of witnesses or registered by law in force in India. Therefore, an agreement
must comply with the necessary legal formalities as to writing, registration, stamping etc., if any, required
in order to make it enforceable.
Thus, where a statute requires an agreement to be put in writing or registered, the same should be
complied with; otherwise the agreement will not be enforceable. For instance, negotiable instrument
should be in writing according to the Negotiable Instruments Act. The Arbitration law requires an
arbitration agreement to be in writing. The Transfer of Property Act has made the writing and registration
compulsory for contracts relating to transfer of immovable properties.
Example : A orally agrees to sell a flat to B. the agreement is unenforceable because such agreement must be in
writing and registered.

CLASSIFICATION OF CONTRACTS
1. Classification of Contracts on the Basis of Mode of Formation
(a) Express contract. Where both offer and acceptance constituting a contract are made in words, spoken or
written, the contract is said to be express contract. Thus, a contract entered into between the
Nature and Kinds of Contracts 11

parties by words, written or spoken, is known as an express contract.

Example. A writes a letter to B for purchase of certain goods at a certain price. B accepts the offer by writing a
letter to A. This is an express contract.
(b) Implied contract. Where both offer and acceptance are made otherwise than in words, the contract is said to
be implied contract. Thus, an implied contract is that contract which is inferred from act or conduct of the
parties. It is not formed by words, written or spoken.
Examples : (i) Where a person boards a public transport bus, an implied contract is entered into between him and
the public transport bus owner
because by his act it is implied that he undertakes to pay the
relevant fare even though he makes no express promise to do so.
(ii) A, a coolie in uniform picks up the luggage of B to carry it out of the railway platform to the taxi
stand without being asked by B, and B
allows him to do so. In this case there is an implied offer by the
coolie and implied acceptance by the passenger and there is
implied contract between the two. The passenger is bound to pay
for the service rendered by the coolie.
(See Uptron Rural District Council vs. Powel case in the Chapter : Consideration)
It may be noted that certain contracts may be a mixture of the ‘express’ and ‘implied’ types of contracts. This
happens when out of offer and acceptances, one is made in words and the other otherwise than in words.
Quasi-contract. There are certain legal obligations which do not spring from agreement. As pointed out earlier,
quasi-contract is one of them. Quasi contractual obligations are imposed by law. In such cases no real contract,
express or implied, exists. Quasi-contractual obligations resemble to the obligations created by contracts. Therefore,
the Indian Contract Act describes these obligations as “Certain relations resembling those created by contracts”. It
rests on the doctrine of ‘unjust enrichment’. Thus, the term ‘quasi-contract’ is a misnomer.
Example : A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to
pay A for them, (Illustration to Sec. 70). For detailed discussion see chapter on “Quasi-Contracts”.

2. Classification of Contracts on the Basis of Enforceability

(a) Valid contract. A valid contract is an agreement enforceable by law. Thus, an agreement which satisfies all
the legal requirements laid down in Section 10 of the Act, is known as a contract or valid contract.
(b) Voidable contract. A voidable contract is defined in Section 2(i) thus: “An agreement which is enforceable
by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a
voidable contract.” Thus, a voidable contract is one which
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is enforceable at the option of one of the parties to it, but not at the option of the other.
Sometimes, a party to an agreement may procure the consent of the other party due to coercion, undue influence,
fraud or misrepresentation. In such cases where the consent is not free, the party whose consent is so caused becomes
the aggrieved party who can either affirm the contract or rescind it. This right to rescind the contract should, however,
be exercised within a reasonable time and before third party acquire rights under the contract. Otherwise, the contract
will be binding on the aggrieved party.
Example : A threatens to shoot B if he does not sell his goods worth R 50,000 for R 10,000. B agrees to sell the
goods to A for R 10,000 under coercion. The contract is voidable at the option of B since his constent is not free. B may
repudiate the contract or opt to be bound by it. In this case if before repudiation of contract by B, A sells the goods to a
third party and the third party purchases the goods in good faith and for consideration then B will lose his right of
rescission of the contract.
According to Section 64, when the aggrieved party avoids the contract, the other party thereto need not perform
any promise, and the party avoiding the contract should restore any benefit he has received under the contract to the
other party.
(c) Void agreement. According to Sec. 2(g ), “An agreement not enforceable by law is said to be void”. A void
agreement is a nullity in the eyes of law. Such an agreement does not create any legal rights, and nor does
impose any legal obligation on the parties to it.
Void agreement is void ab intio i.e., it is void from the beginning. An agreement with a minor, for instance, is
void from the beginning. An agreement without consideration is also void from the beginning.
(d) A contract which has become void or void contract. Section 2(j) of the Act lays down that “A contract
which ceases to be enforceable by law becomes void when it ceases to be enforceable.” A contract which is
enforceable by law, may sometime cease to be enforceable subsequently. Such contracts become void only
when they cease to be enforceable. Till then they are valid.
A contract becomes void in the following situations :
(i) Supervening impossibility or Subsequent illegality (Sec. 56). Section 56 has laid down that “A contact to
do an act which, after the contract is made, becomes impossible, or by reason of some event which the
promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
Example : A agrees to let a music hall for a series of concerts and before the day of performance, the music hall is
destroyed by fire, the contract becomes void on the destruction of hall by fire due to impossibility of performance.
(ii) Contract contingent on the happening of an uncertain event (Sec. 32). Section 32 provides that contingent
contracts do or not to do anything if an uncertain future event happens cannot be enforced
Nature and Kinds of Contracts 13

by law unless and until that event has happened. If the event becomes impossible such contracts become
void.
Example : A contracts to pay B a sum of money by way of loan if B marries C. C dies without being married to B,
the contract becomes void.
Obligation of person who has received benefit under an agreement which is discovered void or contract that
becomes void. Section 65 provides that when an agreement is discovered to be void or when a contract becomes void,
any person who has received any advantage under such agreement or contract is bound to restore it, or to make
compensation for it to the person from whom he received it.
Thus, the section provides for restitution of the benefit received in the situations mentioned in the section. They
are as follows:
 (i) When an agreement is discovered to be void. When an agreement is void from the very beginning, i.e., void
ab-initio, but the fact of its being void is discovered later on, the person who has received any advantage
under such agreement is bound to restore it, or to make compensation for it to the person from whom he
received it.
Example : A pays B R 5,000 in consideration of B’s promise to sell his horse to A. Later on it was discovered that
the horse was dead at the time of the agreement, though neither party was aware of the fact. In this case the
agreement is discovered to be void and must repay R 5,000 to A.
(ii) When a contract becomes void. Restitution is also allowed when a contract becomes void.
Example : A contracts to sing for B at a concert for R 10,000, which are paid in advance. A is too ill to sing. A is not
bound to make any compensation to B for the loss of profits which B would have made if A had been able to sing, but
must refund to B the R 10,000 paid in advance.
(e) Illegal or unlawful agreement. According to Sec. 23 the consideration or object of an agreement is unlawful
if it is forbidden by law; or is of such a nature that if permitted, it would defeat the provisions of law, or is
fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as
immoral, or opposed to public policy.
R
A promises to obtain for B an employment in the public service and B promises to pay 1,000 to A. The
agreement is void, as the consideration is unlawful.
An illegal agreement is void ab intio. All illegal agreements are void but all void agreements are not illegal. The
money paid or property transferred under an illegal agreement cannot be recovered. No action can be taken for breach
of an illegal agreement. (For details see chapter on “Legality of Object and Consideration”). In case of illegal
agreement the collateral transaction is also void.
Examples : (i) A agrees to pay B R 50,000 if B kills a certain person. B agrees. A takes a loan of R 50,000 from C
to pay B the promised amount. C
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knows the purpose of the loan. In this case the agreement between A and B is the main
agreement and the agreement of loan between A and C is the collateral transaction. The
agreement between A and B is illegal and void and B cannot recover the money and the collateral
transaction, i.e., the agreement of loan between A and C is void because C knows the purpose of
the loan. If C does not know the purpose of the loan, then loan transaction would be valid.
(ii) A and B enter into a wagening agreement which is void under Section 30. A loses the bet and
borrows money from C to pay his wagering debt. The contract of loan between A and C is valid
whether C knows the purpose of the loan or not.
(f) Unenforceable contract. An unenforceable contract is that which is good in substance but cannot be
enforced in a Court of law because of some technical defects such as expiry of the period within which
enforceable, absence of writing, registration and attestation, insufficient stamp etc. If the technical
defect can be cured, the contract becomes enforceable, if it cannot be cured, the contract remains
unenforceable.
Example. A and B enter into an oral arbitration agreement. The agreement is unenforceable as the law require
that the arbitration agreement must be in writing.

3. Classification of Contracts on the Basis of Extent of Performance

(a) Executed contract. When both the parties have completely performed their respective obligations under the
contract, the contract is said to be executed.
Example : A agrees to sell certain goods to B at a certain price. A delivers the goods and B pays the price. Thus,
both parties have performed their respective obligations. The contract becomes executed contract.
(b) Executory contract. When both the parties have not performed their respective obligations under the
contract, the contract is said to be executory.
Example : A agrees to sell his car to B for a certain sum of money. Delivery and payment are to be made after
fifteen days. The contract is executory. (c) Partly executed and partly executory contract. If one of the parties has
performed his part of the obligation but the other party has not yet completed his part of the obligation the contract is
executed as regards one party and executory as regards the other.
Example : A sells his television to B. A delivers the television to B but B is yet to make the payment. As regards A
the contracted is executed but as regards B it is executory.

4. Classification of Contracts on the Basis of Obligation Outstanding at the Time of Formation of

Contract
 (a) Unilateral contract. In case of unilateral contract the obligation is outstanding only on the part of one of
the
Nature and Kinds of Contracts 15

parties at the time of formation of contract. Offers made to the world at large are usually unilateral
offers, e.g., promising a reward for doing a particular act, like finding a missing person. Unilateral offer
can be made to a specific person also.

Example : A’s son is lost and he offers by advertisement a reward of R 40,000 to any one who will bring his son
safely home. B, who knows about the reward, finds the boy and brings him before A. As soon as he does this act the
contract comes into existence. The obligation to pay the reward money is outstanding on the part of A only.

(b) Bilateral contract. A bilateral contract is one in which obligations of both the parties are outstanding at the
time of formation of the contract. Most contracts are bilateral.
Example : A manufacturer agrees to supply certain goods at a certain price to a retailer after a certain time. The
payment is to be made at the time of delivery of goods. This is a bilateral contract as the obligations of both the parties
are outstanding at the time of formation of the contract.

CERTAIN DISTINCTIONS
Distinction Between Agreement and Contract
The following are the points of difference between an agreement and a contract :
Basis Agreement Contract
1. Definition Every promise and every set of promises forming An agreement enforceable by law is a contract [2 (h)].
consideration for each other
is an agreement [S. 2(e)].
2. Constituents Offer and acceptance constitute an agreement. An agreement and its enforceability or legal obligation constitute a contract.
3. Legal An agreement may or may not create a legal is not legally binding on the parties.
obligation obligation. A contract necessarily creates a legal obligation.
4. Binding on parties An agreement which does not create a legal obligation A contract is legally binding on the parties.

5. Scope An agreement is wider term than a contract. An All contracts are agreements but all agreements are not contracts. A contract is a
agreement is a genus. spiecie of agreement.

Distinction between Void Agreement and Voidable Contract

The following are the points of distinction between a void agreement and a voidable contract.
16 Business Laws

Basis Void Agreement Voidable Contract

1. Definition An agreement not enforceable by law is said to An agreement which is enforceable by law at the option of one or more of the
be void [2 (g)]. parties thereto, but not at the option of other or others is a voidable contract [2 (j)].
2. Void A void agreement is void from the very beginning i.e. A voidable contract is not void when it is made and
ab-intio it is void ab-intio. remains valid till it is rescinded by the aggrieved party.
3. Enforceability A void agreement being void ab-intio, cannot be enforced agreement is bound to
by any party. restore it, or to make
compensation for it, to the
person from whom he
received it (S. 65).
A voidable contract is enforceable like a valid contract until the party entitled to
set it aside elects to do so. If he elects to rescind it, the voidable contract becomes
void. If it is not rescinded, it continues to be enforceable.
4. Restitution When an agreement is discovered to be void, any
person who has received any When the aggrieved party avoids the contract, the other party need not perform it
advantage under such an and the party avoiding the contract should restore any benefit he has received
under the contract to the other party (S. 64).

5. Collateral transaction A void agreement, if it is illegal also, makes the collateral transaction void.
A voidable contract does not affect collateral transaction.

6. Compensation As a void agreement is not enforceable, a party to the performance of the

agreement cannot claim agreement.
compensation for non The party rightfully rescinding a voidable contract is entitled to claim damages for
the loss suffered by it in certain cases.

7. Right of third party time Third party may acquire a better title.
Third party does not acquire any right under it.
8. Lapse of A voidable contract cannot be rescinded after lapse of
reasonable There is no effect of lapse of reasonable time. reasonable time.

Distinction Between Void Agreement and Illegal Agreement

A void agreement differs from an illegal agreement in respect of the following :
Nature and Kinds of Contracts 17 Basis Void Agreement Illegal Agreement

1. Definition An agreement not enforceable by law is said to 2. Scope All void agreements are not illegal.
be void. [2 (g)]. An agreement is illegal if its object or consideration is forbidden by law; or if of
such a nature that, if permitted, it would defeat the provisions of law ; or is
fraudulent ; or involves or implies injury to the person or property of another ; or
the court regards it as immoral or opposed to public policy.
All illegal agreements are void.
3. Collateral transactions Collateral transactions are not void Collateral transactions are also void.
4. Punishment There is no punishment. Illegal agreement may be punishable.

Distinction between Void Agreement and Void Contract The following are the points of difference
between the two : Basis Void Agreement Void Contract
1. Definition An agreement not enforceable by law is said to A contract which ceases to be enforceable by law becomes void when it ceases to
be void [S. 2(g)]. be enforceable [S. 2 (j)].
2. Time of A void agreement is not enforceable from the very A void agreement is valid in the beginning and
enforceability beginning. becomes void later on.
3. Restitution If an agreement is discovered to be void, restitution under goods.
S. 65 is allowed. Restitution If a contract becomes void, restitution under S. 65 is allowed.
may not be allowed in other
cases of void agreement.
4. Title A person who acquires goods under a void agreement A person who acquires goods under a contract which has not become void would
would not get any title to the get a better title to the goods if he has purchased goods in good faith and for
consideration.

REVIEW QUESTIONS
1. Define Contract. State the essentials of a valid contract.
2. “All contracts are agreements but all agreements are not contracts.” Explain. [B.Com., B.Com. (H), D.U.]
18 Business Laws

3. Distinguish between the following :

(a) Void agreement and voidable contract; [B.Com., D.U.] (b) Void agreement and illegal agreement.
4. State with reasons whether the following statements are true or false: (a) Law of contract is not the whole law of
agreements.
(b) Law of contract is not the whole law of obligations.
(c) In commercial and business agreements the usual presumption is that the parties intend to create legal relations.
(d) Collateral transaction to a void agreement are also void.
(e) Collateral transactions to an illegal agreement are not void. [Hint : True : (a), (b), (c); False : (d), (e)]
5. Select the best choice :
(i) A voidable contract is one which
(a) is void ab initio,
(b) can be enforced at the option of both the parties,
 (c) can be enforced at the option of one of the parties thereto,
(d) is valid in the beginning and becomes void later on.
[Hint : (c)]
(ii) A void agreement is
(a) void ab initio
(b) enforceable at the option of one of the parties thereto,
(c) valid in the beginning and becomes voidable later on,
(d) enforceable at the option of both the parties.
[Hint : (a)]
6. “The Law of Contract is not the whole law of agreements, nor is it the whole law of obligations. Critically examine the
statement giving suitable examples. [B.Com. (H), D.U.]

PRACTICAL PROBLEMS
1. A makes a promise to his son to give him a pocket money of R 1,000 per month. After two months A stops making the
payment. Whether a legally enforceable contract is created between A and his son?
[Hint : No. There is social agreement between A and his son.]
2. A invites his friend B to see a picture with him on a particular day for a particular show at a cinema hall. A purchases two
tickets for that show and waits for B at the cinema hall. But B does not turn up. Can A sue B? [Hint : No. This is social
agreement between A and B and the usual presumption in such agreement is that the parties do not intend to create legal
relations.]
3. Is there a contract in the following cases :
(a) X boards a DTC bus
(b) X invites B to see a movie.
(c) A promises to pay B, his son, R 500 per month as pocket money. [Hint : (a) Yes, (b) No; (c) No.]

3 Offer and Acceptance

LEARNING OBJECTIVES
After reading this chapter, you will understand the provisions relating to : ➥ Meaning of and Legal
Rules for Offer
➥ Meaning of and Legal Rules for Acceptance
➥ Communication of Offer and Acceptance
➥ Revocation of Offer and Acceptance

An agreement enforceable by law is a contract. An agreement is a promise or set of promises forming consideration
for each other. A promise is an accepted proposal. Thus an agreement is a two-sided bargain. It requires two parties
one to make an offer and the other to accept the offer. There must be definite offer on one side and equally definite
acceptance of that offer on the other. Therefore, a proposal or offer is the starting point in the process of concluding an
agreement between the parties.

PROPOSAL OR OFFER
DEFINITION OF PROPOSAL OR OFFER
Section 2(a) of the Act defines a proposal thus :
“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.”
The person making the proposal or offer is called the offeror (or offerer) or proposer. The person to whom the
offer or proposal is made is called the offeree. When the offeree accepts the offer, he is called the acceptor.
Example : A says to B, “I am willing to sell my car to you for R 2,00,000.” Here A has made an offer to sell his car
to B. A is offeror and B is offeree.
 The following are the essentials of an offer as per the definition given in S.2 (a) :
(i) An offer must be an expression of willingness to do or to abstain from doing something.
(ii) The expression of willingness to do or to abstain from doing must be made to another person. A person
cannot make an offer to himself.
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(iii) The offer must be made with a view to obtaining the assent of the other person to such act or abstinence.
How an offer is made. An offer may be express or implied. Thus, an offer may be made either by words or by
conduct. If an offer is made in words, written or spoken, it is called an ‘express offer’ and if it is inferred from the
conduct of the parties it is called an ‘implied offer’. These have been explained later.
To whom can an offer be made. An offer can be made to a definite person or to the public at large. If an offer is
made to a definite person it is called ‘specific offer’ and if the offer is made to the world at large it is called ‘general
offer’. These have been explained later.

LEGAL RULES FOR A VALID OFFER

The following are the legal rules or requirements for a valid offer : 1. An offer may be express or implied. An offer
may be express or implied. As per S. 9, if the offer is made by words, spoken or written, it is called an express offer. If
an offer is made otherwise than in words i.e. inferred from the conduct of the party, it is called an implied offer.
Examples : (i) A says to B, “I am willing to sell my Parker pen to you for R 100.” This is an express offer by A.
(ii) A writes to B in a letter, “I am willing to sell my scooty to you for R 2,000.” This is an express offer.
(iii) A transport company runs buses on different routes in a metropolitan city to carry passengers at
fixed fares. This is an
implied offer by the transport company. The acceptance of the offer
is complete as soon as a passenger boards the bus.
(iv) A weighing machine kept at a cinema hall is an implied offer to use the machine by inserting the
necessary coin.
2. An offer must be made with an intention to create legal relations. An offer must intend to create legal relations.
Therefore, if an offer does not intend to create legal relations, it is not a valid offer in the eyes of law. For
example, an offer to a friend to dine at offeror’s place. Similarly, if a person makes an offer to one’s wife to take
her to a hill station is not a valid offer and therefore cannot constitute a legally binding agreement.
CASE : In the leading case Balfour v. Balfour [(1919) 2 KB 571] Mr. Balfour, who was serving the Government of
Ceylon, went to England with his wife on leave. After the expiry of the period of leave, Mr. Balfour had to go back to
Ceylon, but his wife could not accompany him for medical reasons. Consequently, he promised orally to pay an
allowance of £ 30 a month. The amount was not fixed as compensation for or in satisfaction of the obligation of the
husband towards his wife to maintain her. On his failure to make the payment, the wife sued him for the recovery of
the promised amount. Her suit was dismissed by the Court of Appeal on the ground that the agreement was only an
arrangement between husband and wife, and parties never intended to make a bargain.
3. The terms of the offer must be definite and certain. The terms of an offer must be definite and certain and not
vague or ambiguous. For
Offer and Acceptance 21

example, an agreement to agree in future is not a contract as the terms of the agreement are uncertain
because they are yet to be settled.
Accordingly, if the terms of an offer are vague or indefinite, a contract cannot be created between two parties
even if the offer is accepted.
Examples : (i) An agreement to take a lease of a house for three years at R 60,000 per annum, if the house is “put
into thorough repair, and the
drawing room handsomely decorated. according to the present
style”, can not be enforced as the terms are vague and uncertain.
(ii) A proposes to sell his car for R 2,00,000 or R 2,50,000. Here the offer made by A is not certain
because it is not clear which of the
two prices is intended.
If the terms of the offer are capable of being made certain, then the offer is not vague. For example, A offers to
sell 100 litres of oil to B at a certain price. A is a dealer in mustard oil only. It is a valid as the terms of the offer are
capable of being made certain by nature of A’s business.
4. An invitation to offer or a mere statement of intention is not an offer. An offer must be distinguished from an
‘invitation to offer’.
 In case of invitation to offer a party proposes certain terms on which he is willing to negotiate. He does not make
offer but invites other(s) to make offer on those terms. In case of an offer, the person is willing to enter into a contact
on the terms of the offer.
Invitation to offer, when acted upon by the other party, results in an offer. An offer, when acted upon by the other
party, may result in a contract.
The following are some instances of invitation to offer : (a) Advertisement for sale of goods by auction. An
advertisement for sale of goods by auction is not an offer to hold the sale. It does not bind the auctioneer to sell
the goods since the announcement is not an offer. Further, as there is no contract, he is also not liable to
indemnify a person who, while travelling to the place of auction has incurred expenses. When an auction is
actually held, a bid becomes an offer and when the hammer falls on the highest bid, there is acceptance and the
contract is concluded.
CASE : The leading case on this point is Harris v. Nickerson. [(1873) LR QB226]. In this case, in response to an
advertisement, that office furniture would be sold by public auction, A (the plaintiff) traveled all alone from London to
advertised place and found that auction sale was cancelled. A filed a suit for the recovery of the expenses on the
ground that the advertisement was an offer made to the public and that his acceptance by traveling to the place,
constituted a contract. The Court held that the advertisement was only a declaration of intention which cannot be
considered as a binding contract.

(b) Display of goods in a shop with price tags. Where a shop-keeper displays goods in his shop with a slip on
them stating a price, his act is not an offer, but is merely an invitation to the public to make an offer to buy
the goods at the price stated. If a customer, therefore, enters his shop, tenders the prices and demands the
article, the shop-keeper is not bound to sell it to him. The demand of the
22 Business Laws

customer is an offer which the shop-keeper may or may not accept. The following is the leading case on this
point :

CASE : In the leading case Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd.
[(1953) All ER 482], a customer selected a drug from the shelves in a self-service shop and brought the same to the
cash desk where a registered pharmacist supervised the purchase of all drugs. The question was whether the taking
of the goods from the shelves constituted an offer to buy or it constituted acceptance of the offer by the shop-keeper
to sell. Holding that it was only an offer to buy, the learned judge observed that “It would be wrong to say that the
shop-keeper is making an offer to sell every article in the shop to any person who might come in and that, the
person can insist on buying any article by saying, ‘I accept your offer’. Therefore, I am of opinion, the mere fact that
a customer picks up a bottle of medicine from the shelves in this case does not amount to an acceptance of an offer
to sell. It is an offer by the customer to buy, and there is no sale effected until the buyer’s offer is accepted by the
acceptance of the price.”

(c) Catalogues and price lists. A catalogue or a price list, which contains description of goods meant for sale,
with prices stated against them, although appears to contain a number of offers, it is, in fact, merely an
inducement to invite offers.
(d) Advertisement inviting tenders and quotations. An advertisement inviting tenders and quotations of the lowest
price, is also an invitation to offer and not an offer capable of acceptance.
CASE : In Spencer v. Harding [(1870) LR 5 CP 561], A (the defendant) advertised goods to be sold by tender. B
(the plaintiff) send in a tender which turned out to be the highest, but it was not accepted. In a suit by him, it was
held that the advertisement did not amount to a contract or promise to sell to the person who made the highest
tender. It was merely a mode of determining what offers can be had.

Tender may either be-

(i) for a definite quantity of certain goods, or
(ii) for supply during a specified period of certain goods not exceeding a certain quantity, deliveries to be
made if and when demanded or standing offer.
(i) Tender for a definite quantity. If a tender is invited for a definite quantity of certain goods, the acceptance of
the tender is an acceptance in legal sense and creates a legal obligation.
(ii) Standing offer. If tender is invited for the supply during the coming year of certain goods not exceeding a
certain quantity, deliveries to be made if and when demanded, the tender is standing offer. In this case, the
‘acceptance’ of the tender does not convert the offer into binding contract. The offeree has the right not to place any
order after having approved the tender and the offeror has the right to withdraw the offer before the order is placed, in
case of standing offer.
(e) Mere statement of lowest price. A mere statement of the lowest price at which the vendor would sell contains
 no contract to sell at that
Offer and Acceptance 23

price to the person making the enquiry. The following is the leading case on this point :

CASES : (i) In the leading case Harvey v. Facey [(1893) AC 552], A (the plaintiff) telegraphed to B (the
defendant) “Will you sell us Bumper Hall Penn? Telegraph lowest cash price.” B replied: “Lowest price for Bumper
Hall Penn £ 900.” A then telegraphed: “We agree to buy Bumper Hall Penn for £ 900 asked by you. Please send us
your title deeds in order that we may get early possession.” On refusal to sell the Bumper Hall Penn (a plot of land)
A sued B. It was held that the first telegram contained two questions namely : (i) the willingness of B to sell the plot
of land and (ii) its lowest price. B replied the second question only. The last telegram was offer to buy, which was
rejected.
(ii) In the leading case McPherson v. Appana [AIR 1951 SC 184], A (the plaintiff) offered to purchase the lodge
owned by B (the defendant) for R 6,000. He (A) wrote to B’s agent asking whether his offer had been accepted and
saying that he was prepared to accept any higher price if found reasonable. The agent replied : “Won’t accept less
than R 10,000”. A accepted this and brought a suit for specific performance. It was held by the Supreme Court that B
did not make any offer or counter offer but was merely inviting offers. There was no assent to A’s offer to buy at R
10,000 and, therefore, no concluded contract. In this case the Supreme Court relied on the principle enunciated in
Harvey v. Facey.

(f) Announcement of voluntary retirement scheme. In Bank of India v. O. P. Swarankar [AIR 2003 SC 858], it
was held that announce ment of a voluntary retirement scheme by a nationalized bank is not an offer. The
employee who expresses his willingness to retire makes an offer and the same becomes effective if it is
accepted by the management.
Similarly display of time-table by railways and advertisement for letting out a house are examples of invitation to
offer.

Distinction between offer and Invitation to offer

Basis Offer Invitation to an offer
1. Meaning Offer is expression of willingness to obtain assent of 2. Parties The offeror makes the offer to the offeree.
another for an agreement. Invitation to an offer is expression of invitation to negotiate for an agreement.
The person making the invitation invites the other person to make the offer.
3. Formation of contract The offer is made to the person inviting the offer and
Offer can be accepted by the offeree. he may accept the offer.
4. Forms It is in form of a specific offer to an individual and general It is in the form of displayed goods in a shop, catalogues, price lists, share issue by
offer to public at large. a company.
5. Example M offers N to sell his bike. A gives an advertisement to sell certain goods by auction.
24 Business Laws

5. An offer may be specific or general. An offer may be specific or general. It is said to be specific when addressed
to a specific individual or a specific group or individuals. When an offer is made to an unascertained body of
individuals or to the public at large, it is said to be a general offer.
An offer to a definite person can only be accepted by him and no one else. In the case of a general offer, however,
the offeror indicates his willingness to contract with any member of the public who accepts his offer. Frequently, such
promises are made in return for an act, thus leading to the formation of unilateral contract. Section 8 of the Act
recognizes acceptance by performing conditions of the proposal.

CASES : (i) The leading case on general offers is Carlill v. Carbolic Smoke Ball Co. [(1893) 1 QB 256], In this
case, a company (the defendants), who were the proprietors and vendors of a medical preparation called ‘the
carbolic smoke ball’, inserted in newspapers an advertisement, offering a reward of £ 100 to anyone who contracted
influenza after using their smoke ball three times daily for two weeks, according to the printed directions. It was also
stated that £ 1,000 had been deposited with the Alliance Bank, Regent Street, to show their sincerity in the mater.
Mrs. Carlill (the plaintiff), bought one of the balls on the faith of the advertisement, and used it as directed from Nov.
20 to Jan. 17, when she was attacked by influenza. She sued the company for the promised reward. It was held that
the company was liable to pay the reward. The Court held that general offer was a valid offer and the lady had
accepted the offer by performing the conditions attached to the offer. The Court further held that
inconvenience sustained by one party at the request of the other is enough to create a consideration.
(ii) In the leading case Harbhajan Lal v. Harcharan Lal [AIR 1925 All 539], A issued a handbill offering a reward of
R
500 to anybody who would trace his missing son. B, who knew about the reward traced the boy and sent a
telegram to A that he had found his son. It was held that the handbill was a general offer and was capable of
 acceptance by any person who fulfilled the conditions mentioned in the offer. Therefore, B was entitled to receive
the reward.

It should be noted that where a reward is offered for information or for tracing missing person or for
tracing missing article, the offer can be accepted by only one individual who performs the conditions mentioned
in the offer first of all and as soon as the condition is first performed the offer is closed. In case of general offer
of continuing nature, as was the case in Carlill v. Carbolic Smoke Ball Co., the offer can be accepted by a
number of persons who fulfill the conditions of the offer and there would be equal number of separate
contracts.
Distinction between General offer and Specific offer Basis General Offer Specific Offer
1. To whom accept conditions of the offer
offer is made General offer is made to world/public at large Specific offer is made to a specific individual.
2. Who can It can be accepted by any one who fulfills the required It can be accepted only by that specific person.
Offer and Acceptance 25

3. Number of contracts many people accept the offer. Only one contract is formed with the specific
Offer can be revoked by the same channel through individual.
4. Revocation of offer which the offer was made but offeror is bound by the
Here as many number of contracts may be formed as contracts made prior to revocation. Revocation of offer can be made prior to acceptance.

5. Example/ case There was general offer in Cartill vs. Carbolic smoke Ball A offers B to buy his car for R 50,000.
Co.

6. The offer must be communicated. An offer does not become operative until it has been communicated to the
person to whom the same is addressed. This is obviously because of the reason that the offeree cannot accept an
offer unless he knows of its existence.
Communication is necessary whether the offer is specific or general. According to Section 4 of the Act, “The
communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.”
There can be no acceptance unless there is knowledge of the offer. The leading case on this point is as follows :

CASE : In the leading case Lalman Shukla v. Gauri Dutt [(1913) 11 All LJ 489], A’s (the defendant’s) nephew
absconded from home. A sent his servants to different places to trace the boy. Amongst these servants was B,
munim, (the plaintiff) who was sent to Haridwar. Subsequently, A issued handbills offering a reward of R 501 to
anyone who might trace the boy. B traced the boy and sent a telegram to A who went to Haridwar and brought the
boy back to Kanpur. He gave B, inter alia, R 20. B, without asking for anything more, continued to work for B for six
months. Thereafter, he was dismissed. he then filed a suit against A claiming the reward. The Allahabad High
Court held that since there can be no acceptance unless there is knowledge of the offer, B was not entitled
to the reward. It was further held in this case that “there was already a subsisting obligation and therefore, the
performance of the act cannot be regarded as consideration for defendant’s promise.”

In an Australian case, R v. Clarke [(1927) 40 CLR 227], it was held that even if the acceptor had the knowledge
of the offer but had completely forgotten about it at the time of acceptance, he would be in no better position than a
person who had not heard of the offer at all.

CASE : In R v. Clarke,12 the government offered a reward for giving information about some murders. The offer
further added that if the information was given by an accomplice, not being himself the murderer, he would also be
entitled to a free pardon. The plaintiff, being an accomplice, saw the offer and was so much excited by the hope of
pardon, that he gave the information to save himself, completely forgetting the reward. It was held that he could not
recover the reward.

7. An offer should not contain any term the non-compliance of which amounts to acceptance. The offeror may
prescribe any mode of
26 Business Laws

acceptance, but he cannot prescribe the form or time of refusal so as to fix a contract on the acceptor. He cannot,
for instance, say that if the acceptor does not communicate his acceptance within a specified time, he is deemed to
have accepted the offer.
In the leading case Felthouse v. Bindley [(1863) 7LT 835], the offeror stated in his letter that if an acceptance is
 not communicated by a certain date, the offer would be presumed to be accepted. This term was held to be void.
8. Two identical cross offers do not result in a contract. Two identical offers, each being made in ignorance of the
other, do not make a contract. It may cross in the course of transit, a similar offer made by another person. In such
a case, although the offer made by the second person is on similar terms as that of the first person, the two offers
do not make a concluded contract between the two. They are only identical offers known as ‘cross offers’ and
they do not constitute acceptance of one’s offer by the other and, therefore, there is no contract.

CASE : In Tinn v. Hoffman & Co. [(1873) 29 LT 271], A company (the defendants) wrote to B (the plaintiff) on
28th November, 1871, offering to sell 800 tons of iron at 69 sh. per ton. On the same day, B wrote to the company
offering to buy 800 tons at 69 sh. The two letters crossed in post, and neither of them knew anything about the offer
of the other. B contended that there was a good contract for 800 tons at 69 sh. It was held that there was no
contract and, therefore, the company would not be bound as a result of the simultaneous offers, each being made in
ignorance of the other.

Distinction between Cross offer and Counter offer Basis Cross Offer Counter Offer
1. Meaning Two persons make identical offers to each other in Offeree makes a conditional acceptance to the offer thereby resulting in a counter
ignorance of the offer of the offer.
other.
2. Knowledge There is no knowledge of offer being made by the other. Offeror is aware of the counter offer being made by the offeree.
3. Validity of offer offer. making counter offer and counter offer is the new
The offers do not come to an end by making cross Original offer by the offeror comes to an end by offer.
4. Contract A contract is made only when a party gives acceptance to If the offeror accepts the counter offer made by the offeree then only contract
the offer made by the other. shall take place.
5. Medium of communica tion of offer means are utilised to convey an offer.
It generally happens when service of post or electronic It may happen in any form of communication of offer.

6. Example A writes a letter to B to buy his bike for 20,000. B also A offers B to buy A’s bike for R 20,000. But B says he would
Offer and Acceptance 27

writes a letter to A to sell his bike to him for R 20,000. of R 18,000 by B is a counter offer which A may or may not accept.
R R
give 18,000 then original offer of 20,000 by A comes to an end and new offer

Communication of Special Terms or Standard Form Contracts An agreement is a two-sided bargain

which is based on freedom of contract. The buyer of an article or service is in many cases, in modern times, in an
unfavourable position relatively to the seller, who insists on the former’s acceptance of the terms and conditions of his
offer. Freedom of contract becomes one-sided in the case of agreements with common carriers, dry cleaners, tailors,
insurance companies, hire-vendors, landlords, public utilities, etc. The difficulty of drawing up a separate agreement
with every individual, have brought into existence, printed forms of agreements, known as ‘Standard Form Contracts’.
The examples of such contracts are : life insurance policy, railway and bus tickets, dry cleaner’s receipt, charter party
and bill of lading, etc. The customer is not given any opportunity to negotiate the terms of the contract. In such cases it
is a ‘take it or leave it’ decision for the customer. Even if he goes to another service provider, he will face similar
standard form contracts.
Such standard form contracts contain a large number of terms and conditions, very often in small print, which
restrict or exclude liability of the party who has prepared them. The other party is compelled by circumstances to
accept all the terms and conditions of the offer, regardless of fact whether he likes them or not. In case of any dispute
between the two parties, even courts of law have found it extremely difficult in some cases to protect the interests of
the weaker party, particularly when he has signed a standard form contract.
It is only with a view to mitigating the hardship caused by such contracts, that courts of law have evolved certain
rules. These are as follows : (i) When the offer contains special terms and conditions, the offeror must give reasonably
sufficient notice of all the terms and conditions.

CASES : (i) In Henderson v. Stevenson [(1875) 32 LT 709], A (the plaintiff) bought a ticket from a steamship
company. On the face of the ticket the words ‘from Dublin to Whiteheaven’ were written, but on the back of it were
printed certain conditions which excluded the liability of the company for loss or injury to the passenger or luggage.
A had not seen the back of the ticket, nor was there any indication on the face to draw his attention to the conditions
printed at the back. He lost his luggage as a result of ship wreck caused by the negligence of the company’s
servants. In a suit by him claiming damages for the loss, it was held that A was entitled to succeed.
(ii) In Parker v. South Eastern Railway Co. [(1877) 2 CPD 416], A (the plaintiff) deposited a bag in the clock room
 of a railway station belonging to a railway company (the defendants). He got a ticket in exchange. On the face of the
ticket was printed among other things, the words ‘see back’. On the back a number of conditions were printed. One
of the conditions limited the liability of the company to a loss up to £
28 Business Laws

10 unless extra charge was paid. A notice to this effect was hung up in the cloak room. A’s bag was lost. He filed
a suit for claiming the full value of the bag which was £ 24-10-0. It was held that A was bound by the conditions as
the railway company had done what was reasonably sufficient to give him notice of their existence. It is no defence
to say that the acceptor is illiterate, or cannot read the language in which the conditions are printed, provided the
notice is reasonably sufficient for the class of persons to which he belongs.
(iii) In Bharati Knitting Co. v. DHL Worldwide Express Courier [AIR 1996 SC 2508], the appellant manufacturer
(Bharati Knitting Co.) signed a contract with the respondent courier company (DHL) for sending certain export
documents under a cover to a foreign buyer with whom the Bharati Knitting Co. had an agreement of sale pertaining
to summer season. Under the terms and conditions of the contract between the appellant and the
respondent, the liability of the Courier company of the documents was limited to the lesser of US $100 or
the amount of loss or damage actually sustained or actual value of the document or parcel. Further its
liability for any consequential loss of market or any other indirect loss was excluded. Bharati Knitting Co.
had not purchased the insurance cover. The cover containing the document did not reach the destination.
Though the duplicate copies were subsequently sent but by the date of receipt of the consignment, the season was
over. Due to delay, the German buyer paid only DM 35,000, against the value of DM 56,469. Bharati Knitting Co.
filed a complaint against the courier company demanding actual damages suffered by it due to non-delivery of the
courier. The National Commission (the apex consumer court) held that since the liability was only to the extent
mentioned in the contract, Bharati Knitting Co. was entitled for the deficiency of service only to that extent (US $
100) plus interest @ of 18%. On appeal, the Supreme Court upheld the decision of the National Commission.

(ii) Notice must be contemporaneous with the contract i.e., it should be given either before or at the time of
contracting. If the notice is given subsequently, the other party is not bound unless he accepts the variations
in the terms of the contract. A party cannot unilaterally introduce terms after the contract has been made.

CASE : In Olley v. Marlborough Court Ltd. [(1949) 1KB 532], A (the plaintiff) and her husband hired a room at a
hotel, and paid a week’s advance for boarding and lodging. When they went up to occupy their room, they found a
notice on one of the walls which read thus : “The proprietors will not hold themselves responsible for articles lost or
stolen, unless handed to the managers for safe custody.” Owing to negligence of the hotel staff, they lost some
property. In a suit against B, the Court of Appeal held that the notice did not form a part of the contract since A could
not see it until after the contract was made.

(iii) Even where sufficient notice of the terms and conditions has been given, the party imposing the conditions
may still be liable if he has committed a breach of the contract which can be described as fundamental.
Every contract contains a ‘core’ or ‘fundamental’ which must be performed. If one party does not perform the
fundamental obligation, he will be held liable for breach of contract whether or not an exempting clause has been
inserted.
Offer and Acceptance 29

(iv) Unreasonable terms are excluded from contracts. A term is not enforceable if it would defeat the purpose of
the contract or if it is unreasonable. It was held by the Supreme Court in LIC of India v. Consumer
Education & Research Centre [AIR 1995 SC 1811], that an “unfair and untenable or irrational clause in a
contract is unjust and amenable to judicial review.”
CASES : (i) In Lilly White v. Mannuswami [AIR 1966 Mad 13], a laundry receipt contained a condition that the
customer would be entitled to claim only 15% of the market price of the article in case of loss. The plaintiff’s new
saree was lost. The clause was held to be void being opposed to public policy by the Madras High Court. The Court
said that if a condition is imposed which is in flagrant infringement of the law relating to negligence the Court will not
enforce such a term which is not in the interest of the public and which is not in accordance with public policy.
Similar was the decision by the Bombay High Court in R.S. Deboo v. M.V. Hindelkar [AIR 1995 Bom 68].
(ii) In Delhi Transport Corporation v. D.T.C. Mazdoor Congress [AIR 1991 SC 101], AIR 1991 SC 101, the
clause for termination of service of permanent employee of public or semi-government undertakings or statutory
corporations only on one months’s notice or pay in lieu of notice without any inquiry was held illegal.

ACCEPTANCE
DEFINITION OF ACCEPTANCE
According to S. 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.”
Thus, acceptance is the manifestation of the assent of the person to whom the offer is made, to the terms of an
offer. Once the offer is accepted, a binding contract comes into existence provided other essentials of a contract are
present. But before the offer is accepted, it can be revoked.
Example : A makes an offer to sell his car to B for R 2,00,000. B signifies his assent to A to buy car for R 2,00,000.
B’s act amounts to acceptance of A’s offer.

Who can accept. A specific offer can be accepted only by the person to whom it is made. In other words, a
specific offer can be accepted only by the offeree. But a general offer, e.g., an offer made to the world at large can be
accepted by any member of the public who has knowledge of the offer. This has been explained further later in this
chapter.
How to make acceptance. Acceptance may be express or implied. If the acceptance is made in words, written or
spoken, it is called express acceptance; and if it is made otherwise than in words it is called implied acceptance. This
has been explained further later in this chapter.

LEGAL RULES FOR A VALID ACCEPTANCE

The following are the legal rules for a valid acceptance :
1. Acceptance may be express or implied. Just as an offer may be
30 Business Laws

express or implied, acceptance may also be express or implied. As per S. 9, if the acceptance is made in words,
written or spoken, it is called express acceptance. If the acceptance is made otherwise than in words, i.e. inferred
from the conduct of the party, the acceptance is implied.
Examples : (i) A says to B, “Will you sell your car for R 2,00,000? Then B says to A, “I am willing to sell the car to
you for R 2,00,000.” This is a case
of express acceptance.
(ii) Delhi Transport Corporation runs buses on different routes to carry passengers. A, a passenger
boards the bus. This is a case of
implied acceptance by A.

2. Acceptance must be given only by the person to whom it is made. An offer can be accepted only by the person to
whom it is made. This is clear from the language of Section 2(b) which states that, ‘When the person to whom the
proposal is made signifies his assent thereto’…… If anyone else were to accept it, no agreement is formed, since
the offeror never intended to enter into an agreement with that person.
CASE : The leading case one this point is Boulton v. Jones [(1857) 157 ER 232], In this case, A (Jones, the
defendant), who was a customer of S and with whom he had a right of set off, ordered some goods from S. B
(Boulton, the plaintiff), who had taken over the business of S, supplied the goods to A (Jones), without informing him
that the business had changed hands. When A came to know that the goods were supplied not by S but by B, he
refused to pay for the same. In a suit by B against A for the price of the goods, it was held that A was not liable,
since B knew that the offer was not addressed to him.

If the offer is addressed not to a specific person, but to a particular class of persons, it can be accepted by anyone
of that class. However, in the case of general offer, it may be accepted by any member of the public having knowledge
of the offer by performing the conditions of the proposal.
3. Acceptance must be absolute and unqualified. “In order to convert a proposal into a promise, the acceptance
must be absolute and unqualified” [S. 7(1)]. To be absolute and unqualified, the acceptance should not depart
from the terms of the offer, and it should be unconditional. The word ‘absolute’ implies acceptance of the
whole of the offer. The offeree cannot accept a part of the offer which is favourable to him and reject the rest of
the offer. A person by accepting a part of the offer cannot say that a contract has been made. The acceptance
must be unconditional. This means that the offeree should not attach any conditions to the acceptance. A
qualified or conditional acceptance is no acceptance at all.
CASE : In the leading is Ramanbhai v. Ghasiram [ILR (1918) 42 Bom 595], a person applied for shares in a
company. The application for shares contained the condition that he should be appointed cashier in the company.
The company allotted shares to him but he was not appointed cashier in the company. It was held that the
acceptance of his application was not valid as whole of the offer was not accepted.
Offer and Acceptance 31

If the offeree accepts such of those terms of the offer as are favourable to him and rejects the others, such
an acceptance is a counter-offer or counter-proposal. Similarly, a qualified or conditional acceptance is a
counter-offer. Accordingly, acceptance of only some terms of the offer, or all the terms subject to some condition
attached, or a variation of the terms of offer, or addition of some terms; are all examples of counter-offer which, in
turn, should be accepted by the original proposer. If he does not accept the same, no agreement is formed between the
two. A counter offer puts an end to the original offer and it cannot be revived by subsequent acceptance.

CASE : In the leading case Hyde v. Wrench [(1840) 3 Beav. 334], A (the defendant) offered to sell his farm to B
(the plaintiff) for £ 1,000. B replied ‘I will give you £ 950’. This was refused by A. subsequently, B replied, ‘Very well,
I will give you the £ 1,000 you ask’. When A declined to stick to his original offer, B sued him for specific
performance of the contract. The Court held that the offer to buy for £ 950 in response to the offer to sell for £ 1,000
was only a counter-offer which amounted to rejection of the original offer and it was not possible to revive the
original offer. Hence, there was no contract between the parties.

Examples : (i) A offers to sell his car and motor-cycle for R 2,20,000. B accepts the offer for the car only. The
acceptance is not valid because it is not for the whole for the offer.
(ii) A makes an offer to B to purchase certain goods at a certain price. B accepts the offer, but
subject to payment in advance. This is not valid acceptance.

A provisional acceptance subject to final approval does not ordinarily bind either party until the final approval is
given. Meanwhile the offeror can revoke his offer.

CASE : Somasundharam Pillai v. Provincial Government of Madras [AIR 1947 Mad 366], a forest crop was
put to public auction for sale with a reserve price. B’s bid was the highest but it was much below the reserve price.
His bid was provisionally accepted by the auctioner subject to confirmation by the Divisional Forest Officer. One of
the conditions of the auction sale was that the bid could not be withdrawn between the date of provisional
acceptance and final confirmation by the Divisional Forest Officer. No confirmation was received after lapse of long
time. B revoked his bid. Subsequntly the Divisional Forest Officer sent confirmation, despite revocation by B. It was
held that B was entitled to withdraw his bid because prohibition against withdrawal did not have the force of
law as there was no consideration to bind him down to the condition that once a bid has been made it could
not be withdrawn.

4. Acceptance must be expressed in some usual and reasonable manner, unless the proposal prescribes the
manner in which it is to be made. Sub-section (2) of Section 7 of the Act clearly lays down that “the
acceptance must be expressed in the some usual and reasonable manner, unless the proposal prescribes the
manner in which it is to be accepted.”
32 Business Laws

The proposer may prescribe the manner of acceptance. He may require that acceptance be expressed orally or in
writing, or be communicated to him by post or telephone or through email or fax or by doing some other act. For
example, the offeror may ask the offeree to nod his head, clap his hands, make a gesture of the hand, wave a flag, fire
a gun, trace the lost goods for the announced award etc.
In Trimex International FZE Ltd. v. Vedanta Aluminium Ltd. [(2010) 3 SCC 1], the Supreme Court held that
unconditional acceptance conveyed through e-mail, of offer made through e-mail specifying terms and conditions
thereof, satisfied the requirements of section 4 and 7.
Section 7(2) further provides, “If the proposal prescribes the manner in which it is to be accepted, and the
acceptance is not made in such manner, the proposer may, within reasonable time after the acceptance is
communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he
fails to do so, he accepts the acceptance.” Thus, is case of deviated acceptance, the proposer may insist that his
proposal must be accepted in the prescribed manner. This he should do, within a reasonable time after acceptance is
communicated to him. If the proposer fails to insist, within a reasonable time on the offeree’s sticking to the mode
prescribed, he is deemed to have accepted the deviated acceptance.
It must be noted that the offeror cannot prescribe ‘silence’ as the mode of acceptance. He cannot say that, in
case offeree remains silent without communicating his acceptance within the time stipulated, his silence itself would
amount to acceptance. This principle has been clearly brought out in Felthouse v. Bindley. This case has been
explained under the next legal rule.
5. Acceptance must be communicated. Acceptance and communication of acceptance of offer, are both necessary
for a concluded contract. This is clear from the language of S. 2(b), which has used the phrase ‘signifies his assent
thereto’. Signification of assent is obviously not a mental resolve but some external manifestation. A mere intent
to accept an offer or even a mental resolve to accept an offer does not give rise to a contract. There must be
intent to accept and some external manifestation of that intent by speech, writing or other act and thus
acceptance must be communicated to the offeror. This is so even where the offeror has said that silence itself
should be construed as acceptance. Thus a mere mental acceptance is no acceptance in the eyes of law. Further
acceptance should be communicated only by the person who has authority to accept. An unauthorized
communication will not be a valid acceptance.
 CASES : (i) In the leading case Brogden v. Metropolitan Railway Co. [(1877) 2AC 666], A made an offer to B to
supply certain goods at a certain price. B wrote the letter of acceptance and put the letter of acceptance in the
drawer of his table and forgot all about it. It was held that putting the letter of acceptance in the drawer did not
Offer and Acceptance 33

amount to communication of acceptance without any external manifestation of the intention to accept the
offer.
(ii) In the leading case Felthouse v. Bindley [(1862) 142 ER 1037], A (the plaintiff) offered by a letter, to buy his
nephew’s horse for £ 30-15-0 adding, ‘If I hear no more about him, I shall consider the horse mine at £ 30-15-0.’ The
nephew did not reply to this letter, but told B (the defendant), an auctioneer, to keep the horse out of sale as he
intended to reserve it for his uncle. The auctioneer sold the horse by mistake and A (the uncle) sued him for
conversion. A (the uncle) did not succeed. The Court said, “It is clear that the nephew in his own mind intended
the uncle to have his horse, but he had not communicated his intention to the uncle.” Thus, the nephew not
having signified his assent to the offer by his uncle, his mental acceptance cannot be taken to be
acceptance.
(iii) In the leading case Powell v. Lee [(1908) 99 LT 284], Powell applied for the post of headmaster of a school.
The board of managers of the school passed a resolution appointing him. They did not officially communicate their
resolution to him, but Dismore, one of the managers, in his individual capacity, told Powell that he has been
appointed. Later, the matter was re-opened, and Parker, another candidate, who had originally been rejected was
appointed in Powell’s place. Powell, the plaintiff, thereupon sued Lee, the chairman of the board of managers, for
breach of contract. The Court held that in the absence of authorized communication by the entire board, there would
not be a contract, and “there must be notice of acceptance from the contracting party in some way. Information by
an unauthorized person is as insufficient as overhearing from behind the door.”

Acceptance by performing condition, or receiving consideration. In case of an offer of reward performance of

the conditions of a proposal is an acceptance of the proposal. This is so because it is impossible for the offeree to
communicate his acceptance otherwise than by performing the conditions of the proposal. Section 8 of the Act
recognize acceptance by conduct. It says : “Performance of the conditions of a proposal, or the acceptance of any
consideration for a reciprocal promise which may be offered with the proposal, is an acceptance of the proposal. See
Carlill v. Carbolic Smoke Ball Co. case, given earlier.
6. Acceptance must be given within a reasonable time and before the offer lapses or revoked. If the proposer has
fixed any time for the acceptance of his offer, the offeree should accept it within the time so prescribed and in the
absence of any time limit so prescribed, within a reasonable time after the offer is communicated to him. In other
words, acceptance should be given before the offer lapses by the expiry of time fixed or a reasonable time, or
before it is withdrawn or revoked by the offeror. An offer, once dead, cannot be accepted unless a fresh offer is
made.

CASE : In Ramsgate Victoria Hotel Co. Ltd. V. Montefoire [(1866) LR 1 Ex. Ch 109], A, the defendant, applied
for shares in the plaintiff company on 8th June. The company did not write to him allotting the shares until 23 rd Nov.,
when he was informed that shares were allotted to him. His refusal to accept the shares led to the dispute. It was
held that he was not bound to accept the shares as his offer lapsed owing to the delay by the company in notifying
its acceptance.
34 Business Laws

7. Acceptance must succeed the offer. Acceptance of an offer in ignorance of the same, or performance of the
conditions of an offer in ignorance of the offer, is not a valid acceptance. This is true whether the offer is specific
or general. Acceptance should be induced by the offer. As such, acceptance should follow the offer and not
precede it.

COMMUNICATION AND REVOCATION

COMMUNICATION OF OFFER AND ACCEPTANCE

Section 3 provides that communication of proposal, acceptance of proposal and revocation of proposal and
acceptance, respectively, are deemed to be made by an act or omission of the party proposing, accepting or revoking
by which he intends to communicate such proposal, acceptance or revocation.
Section 4 of the Act has prescribed following rules regarding communication of offer and acceptance :
Communication of offer. According to Section 4. “The communication of a proposal is complete when it comes
to the knowledge of the person to whom it is made.”
Example : A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is
complete when B receives the letter. (Illustration to S.4). Communication of acceptance. Section 4 of the Act further
lays down that, “The communication of an acceptance is complete: as against the proposer, when it is put in a course
of transmission to him, so as to be out of the power of the acceptor; as against the acceptor, when it comes to the
knowledge of the proposer.”
Example : A proposes, by letter, to sell a house to B at a certain price. B accepts A’s proposal by letter sent by
post. The communication of acceptance is complete, as against A, when the letter is posted; as against B, when the
letter is received by A. (Illustration to S. 4).

Thus, where an offer is properly accepted by means of a letter sent through post, the acceptance is
complete, and a binding contract made, as soon as the letter of acceptance is posted, even though the letter is
lost in transit and never reaches the offeror. The rule is based on commercial expediency. Similar is the legal
position in case of acceptance of offer by telegram.

CASES : (i) In the leading case Adams v. Lindsell [(1818) 106 ER 250], A (the defendant) offered, by a letter to
B (the plaintiff) on 2nd Sept. 1817, to sell a certain quantity of wool at a certain price, requiring the answer by post. B
received the letter on 5th Sept. The offer was accepted immediately, but owing to delay in transit, the letter of
acceptance was received by A only on 9 th Sept. Waiting for the letter till 7 th Sept. A sold the wool to another person.
In a suit by B for breach of contract, it was held that the offer had been validly accepted. The contention of B that
there could be no binding contract till A’s letter of acceptance was actually received by him was rejected by the
court.
Offer and Acceptance 35

(ii) In Household Fire and Accident Insurance Co. v. Grant [(1879) LR 4 Ex. Div.], A (the defendant) applied for
shares in a company (the plaintiffs) on 13th Sept. 1874. The letter of allotment mailed by the company to A on 20th
Sept., 1874 never reached him. Three years later, the company went into liquidation. When the liquidator demanded
payment, A contended that he was not a shareholder at all since his offer was not accepted. It was, however, held
that he was liable as a shareholder since the mere posting of the letter of allotment by the company amounted to
acceptance.

Thus, when acceptance is effected through the postal medium, the proposer becomes legally bound by the
acceptance, although the letter of acceptance is delayed or lost, provided the letter of acceptance is properly addressed,
sufficiently stamped and proved to have been actually mailed. The contract is deemed to have been made on the
date of mailing the letter of acceptance, and at the place where acceptance is made.

Contracts through Telephone or Telex

In case of instantaneous means of communication like telephone the contract is complete only when the
acceptance is received by the offeror and at the place where acceptance is received. The offeree, therefore, must
make sure that his acceptance is heard and understood by the offeror. Similar is the case in case of contracts through
telex.
CASES : (i) In the leading case Entores Ltd. v. Miles Far East Corporation [(1955) 2 All ER 493] A (the
plaintiffs, an English company) made an offer by telex to B (the defendants, an American company). A’s office in
London could get into direct and instantaneous communication with B’s office in Amsterdam, Holland. The offer was
to sell a quantity of metal, and B accepted the offer by telex. The question was whether the contract was completed
in Holland or England. It was held that, “the rule about instantaneous communications between the parties is
different from the rule about the post. The contract is complete only when the acceptance is received by the offeror;
and the contract is made at the place where the acceptance is received.”
(ii) In the leading case Bhagwan Das Goverdhan Das Kedia v. Girdhari Lal Parashottam Das & Co. [AIR 1966
SC 543], A (Girdhari Lal Purashottam Das & Co., the plaintiffs) made an offer from Ahmedabad by telephone to B
(Bhagwan Das Goverdhan Das Kedia, the defendants) at Khamgaon to purchase certain goods and B accepted the
offer by telephone. B failed to supply the goods. A instituted civil proceedings against B at Ahmedabad. The
Supreme Court by majority preferred to follow the English rule as laid down in the Entores case and saw no reason
for extending the post office rule to telephonic conversations. The Court held that the conversation between the
plaintiffs and the defendants resulted in contract at Ahmedabad and not at Khemgaon and therefore, the
City Civil Court at Ahmedabad had the jurisdiction to try the case.

The following points emerge from the cases cited above regarding communication through telephone or
telex :
(a) The rule regarding the formation of contract through telephone or telex is same as in the case of an oral
agreement entered into by the parties when they are in the presence of each other.
(b) If the telephone lines goes dead when the offeree is speaking his acceptance, no contract is concluded. The
contract is formed only
36 Business Laws
 when the offeree repeats his acceptance and it is heard by the offeror. The contract is made not on the first
time when the offeror does not hear, but only the second time when he hears the acceptance. If the offeree
does not repeat the acceptances, there is no contract.
(c) In case of contracts through telephone or telex the question of revocation does not possibly arise as a definite
offer is made and accepted at the same time.

Place of Completion of Contract

The place of formation or completion of contract depends upon the manner of communicating acceptance. When the
contracting parties are face to face during their negotiations, then the contract is complete at the place where they are
at that time.
When the contract is made though post, i.e., letter or telegram the contract is complete at the acceptor’s place
[Adams v. Lindsell (Supra)]. When the contract is entered into by instantaneous means of communication like
telephone or telex, the contract is complete at the place where acceptance is received, i.e., at the offeror’s place
[Entors Ltd. v. Miles Far East Corporation; Bhagwan Das v. Girdhari Lal ].

COMMUNICATION OF REVOCATION
According to Section 4 of the Act “Communication of revocation is complete, as against the person who makes it,
when it is put in a course of transmission to the person who makes it; as against the person to whom it is made, when
it comes to his knowledge.”
Examples : (i) A proposes, by letter, to sell a house to B at a certain price. A revokes his proposal by telegram.
The revocation is complete as
against A when the telegram is dispatched. It is complete as against
B when B receives it. (Illustration to S. 4)
(ii) A proposes, by letter, to sell a house to B at a certain price. B accepts A’s proposal by a letter
sent by post. B revokes his
acceptance by telegram. B’s revocation is complete as against B
when the telegram is dispatched and as against A when it reaches
him. (Illustration to S. 4).

REVOCATION OF OFFER AND ACCEPTANCE

Revocation and Lapse of Offer
According to Sir William Anson, “Acceptance is to an offer what a lighted match is to a train of gunpowder. It
produces something which cannot be recalled or undone.
But the powder may have laid until it has become dump, or the man who laid the train may remove it before the
match is applied. So an offer may lapse for want of acceptance or be revoked before acceptance. Also the offeree may
decide to reject the offer.”
Offer and Acceptance 37

The lighted match analogy, not only brings out the effect of acceptance of an offer, but also the circumstances in
which an offer is terminated. An offer is terminated in the following circumstances :
1. By notice of revocation. Section 6(1) provides that a proposal is revoked “by the communication of notice of
revocation by the proposer to the other party.” So long as the offer remains unaccepted, the offeror is free to
revoke his offer at any time. Section 5 provides that a “proposal may be revoked at any time before the
communication of acceptance is complete as against the proposer.” According to S. 4, the communication of
acceptance, as against the proposer is complete, when it is put in a course of transmission to him so as to be out of
power of the acceptor. Thus, the offeror may revoke his offer before the letter of acceptance is posted. Mere
decision to withdraw the offer is not sufficient. The offeror, i.e., the proposer, must give a notice of revocation to
the offeree.
Example. A proposes by a letter to sell his house to B, and B accepts the proposal by a letter, A may revoke his
proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. (Illustration to
S. 5).

CASE : In Henthorn v. Fraser [(1892) 2 Ch. 27], A (the defendant) offered to sell a property for £ 750 giving B
(the plaintiff) the right to accept the offer within 14 days. B, who received the offer in person, took it away to his
home-town. The next day, he mailed his letter of acceptance at 5.30 p.m. The letter was received by A the next day
at 8.30 p.m. However, at about 1 p.m. A had posted a letter revoking his offer. The letters of acceptance and of
revocation crossed each other in post. B received the letter of revocation at 5.30 p.m. In a suit by B, it was held that
revocation was not effective.
 Thus, the notice of revocation of offer should reach the offeree before the letter of acceptance is posted. It is
necessary that the communication of revocation should be from the offeror or from his duly authorized agent.
Agreement to keep the offer open for a specified period. Where an offeror promises to keep the offer open for a
fixed time the promise is mere nudum pactum, i.e., void, unless supported by consideration [Alfred v. Muthunayna
Chetti, (1892) 2 Mad LJ 57]. In the absence of the consideration to keep the offer open, the offeror can withdraw his
offer at any time before acceptance.
In Mountford v. Scott [(1975) 1 All ER 198], the owner of a house agreed, in consideration of one pound, to
give the plaintiff an option to purchase the house for ten thousand pounds within a stated period. It was held that the
offer was irrevocable for the specified period of time and the offeree could accept it notwithstanding the purported
revocation.
Revocation of bid. In case of sale by auction a bid may be retracted before the hammer is down. Similarly, where
a bid has been provisionally accepted the bidder can withdraw it before confirmation takes place as the contract is
concluded when the bid is confirmed, and formal communication of it is given to the bidder. [Hardwar Singh v.
Begum Sumbrui, AIR 1972 SC 1242].
38 Business Laws

Revocation of general offer. Where a general offer is made through newspapers, it may be withdrawn by the same
or similar media. The revocation will be effective even if a person, after the withdrawal of offer, performs its terms in
ignorance of the withdrawal.
Revocation of standing offer. Where a person offers to supply goods up to a specified quantity or in any quantity
which may be required, at a certain rate, during a specified period, it is called a standing offer or continuing offer. It
may be accepted from time to time by placing an order for the required quantity as per the terms of the tender. A
contract arises only when an order is placed on the basis of the tender. The offeror can revoke the standing offer with
regard to further supply of goods, at any time, by giving a notice to the offeree, unless the tenderer has for some
consideration promised not to withdraw or where there is a statutory prohibition against withdrawal. [Union of India
v. Maddala Thattial, AIR 1966 SC 1724].
In case of standing offer, the offeree has the right not to place any order after having approved the tender.
2. By lapse of time. Section 6(2) lays down that a proposal is revoked “by lapse of time prescribed in such proposal
for its acceptance or, if no time is so prescribed, by lapse of reasonable time, without communication of
acceptance.”
An offer is revoked by lapse of time if the proposer has fixed a time within which alone acceptance is to be
effected, and the acceptance is not made within that time. If, for instance, the offer stipulates that “this offer is to be
left open until Friday, 9 a.m., 12th June”, it should be accepted, if unrevoked, at any time up to the hour named, after
which the offer would lapse. In such a case, it would just be sufficient if the acceptor has posted the letter of
acceptance before the time stipulated although the proposer may receive the letter of acceptance after the expiry of the
time.
If the offer does not stipulate any period of time for acceptance, the offer may be accepted within a reasonable
time. What is a reasonable time, will, of course, depend upon the circumstances of each case and it is for the court to
determine the reasonable time.

CASE : In Ramsgate Victoria Hotel Co. v. Montefoire [(1866) LR Ex. Ch. 109], an offer to purchase share made
in June was not accepted till November. It was held that the offer had lapsed because of the delay to accept it within
reasonable time.

3. By failure of the acceptor to fulfill a condition precedent. S. 6(3) provides that a proposal is revoked “by the
failure of the acceptor to fulfill a condition precedent to acceptance.”
A offers to sell certain goods. at a certain price, to B if he (B) stops selling the product of A’s competitor. The
offer stands revoked and cannot be accepted by B, if B continues to sell the product of A’s competitor.
Offer and Acceptance 39

4. By death or insanity of the proposer. S.6(4) provides that a proposal is revoked “by the death or insanity if the
proposer, if the fact of his death comes to knowledge of the acceptor before acceptance.” An acceptance in
ignorance of the death or insanity of the offeror gives rise to a contract.
Although S.6 of the Act does not say anything about the effect of death of the offeree, it was observed in
Reynolds v. Atherton [(1921) 125 LT 690], that an offer ceases by operation of law on the death of the offeree
because the offer is not meant to be made to a dead person or his executors.
5. By rejection of offer. An offer lapses if it is rejected by the offeree. The rejection may be express or implied.
Implied refection takes place when the offeree makes a counter proposal or gives conditional acceptance.

CASE : In the leading case Hyde v. Wrench, [(1840) 3 Beav. 334], A, made an offer to sell a farm to B for £
1,000. B offered £ 950. A refused the counter-offer. Later on, B offered to purchase the farm for £ 1,000. it was held
that there was no contract because B by offering £ 950 has rejected the original offer.

6. By supervening impossibility. An offer lapses if the contract contemplated by the offer become illegal or
impossible to perform.
Example. A makes an offer to B to sell his car that a certain price and before the acceptance of the offer by B the
car is destroyed by fire.

Revocation of Acceptance
According to Section 5, “An acceptance may be revoked at any time before the communication of acceptance is
complete as against the acceptor, but not afterwards.”
Since communication of the acceptance is complete as against the acceptor, when it comes to be knowledge of the
proposer as per Section 4 of the Act, the acceptor is permitted to make use of this interval to revoke his acceptance. In
other words, if the acceptor wants to revoke his acceptance after mailing the letter of acceptance, he should intimate
his revocation to the offeror earlier than the receipt of acceptance by the offeror.
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. B may revoke his acceptance at anytime before or at the moment when the letter communicating it reaches A, but
not afterwares. (Illustration to Section 5.)
The illustration suggests that when the letter of acceptance and the letter or telegram revoking the acceptance
reach together it would be a case of revocation of acceptance as they both cancel each other and as such there would
be no binding contract. Moreover in the illustration the expression used is before or at the moment. It may be noted
here that there is no unanimity of this point and some authors believes that it would be a case of revocation when the
telegram revoking the acceptance is read first than the letter of acceptance and a case of contract if the letter of
acceptance is read first than the letter or telegram of revocation.
40 Business Laws

If the letter of acceptance and letter or revocation of acceptance were received together, the revocation was held
to be effective. The Court said, “the admission that the two letters were received together puts and end to the case”
[Countess of Dunmore v. Alexander (1890) 9 Court of Sessions 190].

COMMENT ON CERTAIN STATEMENTS

Agreement subject to contract
Where an offeree acceptance an offer “subject to contract” or “subject to final contract” or “subject to contract to be
prepared by the solicitors”, the matter is still in the negotiation stage and parties do not intend to create legal relation
until a formal contract is prepared and signed by them.

CASE : A and B entered into an agreement for purchase of a residential flat by B “subject to a proper contract” to
be prepared by B’s solicitors. A document was prepared by A’s solicitors and approved by B’s solicitors, but B
refused to sign the document. It was held that there was no contract [Chillingworth v. Eshe, (1924) 1 Ch. 97].

Agreement to agree in future

An agreement to agree in future is not a contract, because unless all the terms of the contract are agreed there is
no binding contract. Thus a contract to enter into a contract is not a valid contract. In Foley vs. Classique Coaches
Ltd. [(1934) 2 KB 1], it was observed. “It is indisputable that unless all the material terms of the contract are agreed
there is no binding obligation. An agreement to agree in the future is not a contract. Similarly there is no contract if
material term is neither settled nor implied by law and the document contains no machinery for ascertaining it.” If an
agreement contains a machinery for ascertaining a vague term, the agreement is not void.

CASE : In the aforesaid Foley’s as case45 A sold a piece of land to a motor company subject to an agreement that
the company would buy petrol required for their vehicles from A at a price to be agreed by the parties from time to
time and in case of any dispute by arbitration. The price was never agreed between A and the motor company and
the company refused to buy the petrol. It was held that there was a binding contract to buy petrol of reasonable
quality at a reasonable price to be determined in case of dispute by arbitration
“Acceptance is to offer what a lighted match is to a train of gun powder”
Sir William Anson says : “Acceptance is to offer what a lighted match is to a train of gunpowder. It produces
something which cannot be recalled or undone. But the powder may have laid until it has become dump, or the man
who laid the train may remove it before the match is applied. So an offer may lapse for want to acceptance, or be
revoked before acceptance. Acceptance converts the offer into a promise, then it is too late to remove”. This means
that as soon as a lighted match is brought in contact with a train of gunpowder,
Offer and Acceptance 41

the gunpowder explodes. When acceptance, which is compared to a lighted match, comes into contract with a train of
gun powder, it ripen into a contract in exactly the same way as instantaneous explosion. An acceptance has, thus, the
same effect of turning the offer into a binding obligation. The lighted match analogy, not only brings out the effect of
acceptance of an offer, but also the circumstances in which an offer is terminated.

REVIEW QUESTIONS
1. What is an offer? State the essentials of a valid offer.
2. Distinguish between an offer and an invitation to offer.
[B.Com., B.Com. (H), D.U.]
3. Define acceptance and state the legal rules for a valid acceptance. 4. “A mental resolve to accept an offer does not give rise
to a contract.” Comment. [B.Com. and B.Com. (H)] 5. “Acceptance is to offer what a lighted match is to a train of
gunpowder.” Discuss the statement in the context of acceptance of an offer.
6. “Performance of the conditions of a proposal is an acceptance of the proposal.” Discuss the statement in the context of
communication of acceptance in case of general offer.
7. “Two manifestations of a willingness to make the same bargain do not constitute a contract unless one is made with
reference to the other.” Comment. [Hint : Explain cross offers]
8. “Acceptance is more than a mere mental assent.” Comments.
9. “A contract to make a contract is no contract.” Comment.
10. How and on what grounds a proposal stands revoked ? Explain. [B.Com., D.U.]
11. State the law relating to contracts by post and contracts by telephone. [B.Com., D.U.]
12. Write short notes on the following :
(a) Invitation to offer (b) Cross offers (c) Counter-offer (d) Standing offer (e) Lapse of offer.
13. “Special conditions of the offer must be communicated to the other party at the time of formation of a contract.” Critically
examine this statement giving suitable examples. [B.Com. (H), D.U.]
14. State with reasons whether the following statement are true or false. (a) A proposal when accepted always
becomes a contract.
(b) All kinds of obligations created between the parties form part of contracts.
(c) Communication of an offer is complete when the letter is posted though it has not reached the person to whom the
offer is made.
(d) Acceptance can be made even without the knowledge of the offer. (e) A proposal may be revoked by the proposer
before the posting of the letter of acceptance by the acceptor.
[Ans. True : (e) False : (a), (b), (c), (d).]
15. Select the best answer :
(i) A sends a letter of offer on 12th July. It reaches B on 15th July. B posts
42 Business Laws

his letter of acceptance on 18th July. The letter of acceptance reaches A on 21st July. The communication of offer is
complete on :
(a) 12th July; (b) 15th July; (c) 18th July; (d) 21st July; [Hint : (b) 15th July]
(ii) In the above question communication of acceptance is complete as against B on :
(a) 15th July; (b) 18th July; (c) 21st July; (d) none of these [Hint : (c) 21st July]

PRACTICAL PROBLEMS
1. A writes to B and says: “I hear that you are thinking of selling your television. If it is in good order and if the price if right,
I would like to buy it. Please advise by return post.”
B wrote back saying : “The television is in good working order and is cheap at R 8,000”.
To this A replied saying: “I accept your offer and will buy television for R 8,000.”
Shortly after receiving this letter from A, B received an offer of R 10,000 from his friend. As a result B now wishes to sell
the television to his friend. (a) Advise B.
 (b) Would your answer be different if B had said in his letter to A. “The television is in good working order and cheap
at R 8,000. Please advise by return post whether you wish to have the television.”
[Hint : (a) No contract between A and B (Harvey v. Facey). (b) contract between A and B.]
2. The dog of A was missing. He distributed handbills whereby he announced a reward of R 1,000 to any person who would
trace the dog. B had not seen the handbills, traced the dog of A. Had B validity accepted the offer of A? [Hind: B had not
validly accepted the offer as he had not seen the handbills (Lalman Shukla V. Gauri Dutt)]
3. The Figure Correction Company issued the following advertisement in the newspaper:
“Any person who uses our latest invention. called “Fatloss” in accordance with the prescribed conditions shall lose
weight upon ten kilos in one month. The company shall pay an amount of R 1,000 to anyone who does not lose weight, as
stated above, after using the ‘Fatloss’ for one month as required above.”
The ‘Fatloss’ is purchased and used by ten persons, according to the prescribed conditions, and all of them find that it is
absolutely ineffective. Discuss whether these persons can claim the promised reward from the company.
[Hint : The persons can claim the promised reward from the company (Carlill v. Carbolic Smoke Ball Co.).]
4. A offered to purchase the car of B for R 1,50,000 through a letter dead July 1.20x2. The letter also stated. “It I do not hear
anything from you by July, 15, 20x2. I shall consider the car as mine at R 1,50,000. B, who was badly in need of money,
sold the car on July 10, 20x2, after receipt of A’s letter for R 1,48,000. No reply was sent to B by A. A filed a suit against
B on the ground that under the contract the car had become his property as no reply was sent by B to him. Decide.
Offer and Acceptance 43

[Hint : There was no contract between A and B for the purchase of car as silence cannot be prescribed as the mode of
acceptance (Felthouse v. Bindley).]
5. A sends a letter on July 1, 20x2, by post, to B offering to purchase his house for R 5,00,000. The letter was received by B
on July 4, 20x2. B posts his letter of acceptance to A on July 6, 20x2. The letter of acceptance is however, lost in the
transit and never reaches A. Is there a binding contract in this case?
[Hint : Yes (Household Fire Insurance Co. v. Grant)]
6. A posts an offer to B on July 1, 20x2. B posts his acceptance on July 5, 20x2. In the meantime A posts his letter of
revocation of offer to B on July 4, 20x2 which is received by B on July 6 20x2. Is there an enforceable contract in this
case?
[Hint : Yes, Revocation of offer is not effective in this case.]
7. Shop- owner declares a 50% reduction sale of all items displayed on the counter. A picks up a shirt from the counter
having original price tag of R 350 on it and offers R 175 for it. The shop-owner refuses to sell it on the ground that it was
not for sale. Advise.
[Hint : Shop-owner can refuse to sell (Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern)
Ltd.).]
8. Land development authority advertised in the press for sale of plot of land by auction on July 1, 20x2. Large number of
people had come from far and distance after spending lot of money. On the fixed date, an official of the authority
appeared on the venue of the auction and announced that auction had been postponed by a month and express regrets for
the inconvenience caused to the prospective bidders. Can the bidders claim any compensation from the authority for the
inconvenience and damage caused to them by postponement of the auction without any valid reasons?
[Hint : The prospective bidders cannot claim any compensation (Harris v. Nickerson).]
9. A offered B to buy certain goods at R 10,000. A again wrote to B’s agent asking whether his offer had been accepted and
also stating that he (A) was willing to pay even higher price if found reasonable. B’s agent replied that B would not
accept less than R 15,000. A then wrote that he was willing to pay R 15,000. Whether there was a concluded contract in
this case ?
[Hint : No (Mcpherson v. Appanna).]
10. On 28th November, 20x2 B wrote to A offering to sell and deliver to him 20 bags of rice of 50 kg. each at R 1,500 per bag.
On the same day, A wrote to B offering to buy 20 bags of rice of 50 kg. each at R 1,500 per bag. The two letters crossed in
post. A contends that there is a contract between himself and B. Is A’s contention tenable ? Given reasons for your
answer.
[Hint : A’s contention is not tenable. Cross offers.]
11. A offers to sell his cycle to B for R 400. B offers to buy it for R 350. A refuses to sell. B then says to A, “I accept your offer
and shall purchase the cycle for R 400.” Is A bound to sell the cycle to B for R 400?
[Hint : B’s acceptance is a counter-offer. A is not bound to sell the cycle. (Hyde v. Wrench.)]
12. A offers to sell some goods to B for R 10,000 and asks him to convey his acceptance by telegram. B accepts the offer and
sends a letter to that effect. Is a bound by B’s acceptance.
[Hint : Deviated acceptance. A is not bound if he intimates to B that he does not acceptance the acceptance given in a
different manner.]
44 Business Laws

R
13. A in Delhi rings up B of Mumbai offering to sell a machine for 1,00,000. B says that he accepts the offer but at that
 precise moment due to some mechanical defect in A’s telephone, A does not hear B’s acceptance. Is there binding
contract between A and B?
[Hint : There is no contract. Acceptance has not been communicated (Entorse Ltd. v. Miles Far East Corporation;
and Bhagwan Das Goverdhan Das Kedia v. Girdhari Lal Parashottam Das & Co.).]
14. A and B are standing in the opposite banks of a small river. A shouts offering his scooter to B for R 5,000. B hears the offer
and shouts back that he accepts it. Unfortunately, at that precise moment, a low flying aircraft passes by and B’s
acceptance is not heard by A because of the noise. Is there is binding contract between A and B ?
[Hint : No. Acceptance has not been communicated.]
15. A offered to pay R 50,000 to any person who would swim one km. on Mumbai’s sea coast on the New Year’s Day of 20x2.
A fisherman, without any information about the offer, claimed R 50,000 on swimming the distance to save his life after he
was accidently thrown overboard by the rough sea waves. Can the fisherman claim the money?
[Hint : No. There cannot be acceptance in ignorance of the offer (Lalman v. Gauri Dutt).]

4 Consideration

LEARNING OBJECTIVES
After reading this chapter, you will be able to understand :
➥ Need for and Definition of Consideration
➥ Legal Rules as to Consideration
➥ Exceptions to the Rule “No Consideration, No Contract”.
➥ Privity of Contract

NEED FOR CONSIDERATION

Consideration is one of the most important essentials of a valid contract. Section 10 of the Act declares that an
agreement is enforceable by law only if it is made for lawful consideration, and Section 25 lays down that an
agreement made without consideration is void. Accordingly an agreement which is not supported by consideration is
nudum pactum (a a bare agreement) i.e. void, and no cause of action arises from a bare agreement.
Thus, barring the exception mentioned in section 25 of the Act and elsewhere, consideration, as a rule, is
necessary for the validity of an agreement. The absence of consideration makes a promise gratuitous and a gratuitous
promise is not enforceable at law.

DEFINITION OF CONSIDERATION
Consideration is price of a promise, or something in return for the promise, i.e., quid pro quo. Sir Frederick Pollock in
Pollock on Contracts, 13th Ed., page 133, says: “Consideration is the price for which the promise of the other is
bought, and the promise thus given for value is enforceable” [(1975) LR 10 Ex. 153].
In Currie v. Misa, Lush, J. gave the most popular and influential definition of consideration, which is as follows:
“A valuable consideration, in the sense of law, may consist either in some right, interest, profit or benefit
accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the
other.”
Section 2(d) of the Act defines consideration comprehensively. It says: “When at the desire of the promisor,
the promisee or any other person has done or abstained from doing, or does or abstains from
46 Business Laws

doing, or promises do or to abstain from doing something, such act or abstinence or promise is called a
consideration for the promise.” The analysis of the definition given in S.2 (d) shows that it consists of the following
components:
(1) The act, abstinence or promise which forms the consideration must be done at the desire of the promisor; (2) it
may be done by the promisee or any other person; (3) the act or abstinence may have been already executed or in the
process of being done or may be still executory and (4) it need not be adequate but it must be something of value in
the eyes of law.
 Examples : (i) A agrees to sell his house to B for R 10,000. Here B’s promise to pay the sum of R 10,000 is the
consideration for A‘s promise to sell
the house, and A’s promise to sell the house is the consideration for
B’s promise to pay R 10,000. [Illustration (a) to S.23]
(ii) A promises his debtor B not to file a suit against him for six months on B’s agreeing to pay him R
100 more. The abstinence of A is the
consideration for B’s promise to pay.
(iii) A says to B, “ If you drink 10 bottles of a cold drink in less than 2 minutes, I will give you a specific
shirt. The consideration for B is
the shirt and for A the suffering taken up by B.
(iv) Two television companies enter into an agreement under which one would not telecast movies on
Saturdays and the other would not
telecast movies on Sundays for a specified period. The
consideration for both parties is the detriment placed on each other.
(v) A Ltd. enters into an agreement with its brand ambassador that he will not endorse the brands of
any rival company. A Ltd. would pay
him rupees one crore for this. The consideration for the brand
ambassador is rupees one crore, and that for A Ltd. is the detriment
placed on the brand ambassador.

CASE : In Chappell & Co. Ltd. v. Nestle Co. Ltd. [(1959) 2 All ER 701], Nestle Co. Ltd. offered to supply
gramophone records in exchange for three wrappers of chocolates and a specified amount of money. It was held
that wrappers formed part of the consideration.

LEGAL RULES AS TO CONSIDERATION

An analysis of the definition of consideration given in Section 2(d) of the Act, enables us to mention the following
legal rules as to consideration:
1. Consideration must be furnished at the desire of the promisor. The act, abstinence, or promise, which is the
consideration for the promise should be done, suffered, or promised to be done at the desire of the promisor, as
the opening sentence of the definition of consideration lays down. The desire of promisor may be express or, it
may be implied from the conduct of the parties. An act done at the desire of a third party is not consideration.

CASE : In the leading case Durga Prasad v. Baldeo [(1880) 3 All 221], A (the plaintiff) constructed a market at
the request of the District Collector. The persons (the
Consideration 47

defendants), who occupied the shops, promised to pay to A, the plaintiff, a commission on articles sold in the market
established by him. In suit by A for the recovery of commission, it was held that the promise was not supported by
consideration, since the market was constructed not at the request of the shop-keepers but at the request of the
District Collector.

Promise to contribute to a charitable or religious cause. Where the promisor has agreed to contribute to
charitable or religious cause, the promise becomes enforceable as soon as any definite steps have been taken in
furtherance of the object and on the faith of the promised subscription. Such a promise is treated as equivalent of
consideration in connection with the law of charitable subscriptions.

CASES : (i) In the leading Case Kedarnath Bhattacharjee v. Gorie Mohomed [1866 ILR 14 Cal 64], the
Commissioners of the Howrah Municipality started inviting and collecting subscriptions from the public with a view to
erecting a Town Hall at Howrah. A (the plaintiff) was the Vice-Chairman of the Municipality. B (the defendant) was
one of the subscribers, having signed his name in the subscription book for R 100. On the basis of promise made by
the subscribers, (included B), A entered into a contract with a contractor for the purpose of building the Town Hall. B
did not pay the amount promised. Therefore, he was sued by A as B was one of the persons who has promised to
subscribe for the specific purpose. B contended that there was no consideration. He was, however, held liable.
The act of A in entering into contract with the contractor was done at the desire of B, the promisor
(defendant), so as to constitute consideration within the meaning of Section 2(d).
(ii) In Abdul Aziz v. Mosum Ali (AIR 1914 All 22), a person, (the defendant), promised to pay R 500 as subscription
for rebuilding a mosque. He was held not liable to pay the subscription as nothing had been done to carry out the
repairs and reconstruction of the mosque.
However, promise to pay subscription in order to meet a liability already incurred is not enforceable.
In Doraswami lyer v. Arunachala Ayyar [AIR 1936 Mad 135], the repair of a temple was in progress. As the
work proceeded more money was required and to collect the required amount subscriptions were invited. A (the
defendant) promised to pay R 125. Later the backed out. A suit was filed by temple authorities to recover the sum of R
125. But no recovery was allowed by the Madras High Court as no fresh liabilities were incurred by the promisee.
2. Consideration may move from promisee or any other person. According to the definition laid down in Section
2(d), the act constituting consideration may be done either by the promisee or any other person. Thus,
consideration may move from promisee or any other person. Therefore, a stranger to consideration can sue on
a contract, provided he is party to the contract. The leading case on this point is Chinnaya v. Ramayya.
Example : A, B and enter into a contract under which A pays B R 5,000 for purchase of certain garments for C.
Here, C is a stranger to consideration, but he can enforce the contract against B as the consideration has been given
by A.
48 Business Laws

CASE : In the leading case Chinnaya v. Ramayya [(1882) 4 Mad 137], on 9th April, 1877. A, an old lady, by way
of gift, made over certain property to B (Ramayya, the defendant), her daughter, by a registered deed of gift with a
stipulation that the daughter should pay annually R 653 to C, the donor’s brother (Chinnaya, the plaintiff), as the
mother was paying formerly, and the amount should be paid until the daughter gave him a village which yielded the
same amount. On the same date, B executed an agreement in favour of C, the brother of the donor, promising to
carry out the terms of the deed of gift. Since B declined to fulfill her promise, C (the donor’s brother) filed a suit. It
was held, that the agreement was enforceable by C. C, the maternal uncle of B, though a stranger to
consideration was entitled to maintain his suit. It may be noted that the consideration had moved from old lady and
not from her brother.

In Nihal Singh v. State of Punjab [AIR 2013 SC 3547], the Supreme Court also held that consideration for a
contract need not always necessarily flow from parties to the contract.
3. Consideration may be past, present or future. The usage of the words, ‘has been or abstained from doing’, ‘or
does or abstains from doing’, ‘or promises to do or to abstain from doing,’ in the definition of consideration given
in section 2(d) of the Act, clearly indicates that consideration may be past, present or future.
Thus consideration may consists of either something done or not done in the past or something done or not done
in the present or something promised to be done or not done in the future.
Past consideration. Past consideration is something done or not done, at the desire of the promisor, before the
making of the agreement. It always consists of an act done or not done without any promise. In other words, “When a
promise is made by one person in favour of another for something done by the latter in the past or something
abstained from being done in the past, the consideration is said to be past consideration.”
Example : A’s warehouse has cought fire, B being an on-looker, is requested by A to assist him in quenching the
fire. Accordingly, B gratuitously assisting him. Subsequently, A promises to pay R 100 to B for the assistance he
rendered. Here, the consideration is past since the act was performed before making the promise or before making the
agreement.
Section 2(d) requires that the act is done at the desire of the promisor. This presupposes the existence of a
promise to pay for the act done. Even if a subsequent promise is given the courts can infer an implied promise to pay.
According to the English law, past consideration is no consideration at all. In India, past consideration is sufficient to
support a promise, and this is clear from the language of Section 2(d) of the Act. However, it should move at the
request of the promisor. A past voluntary service, on the other hand, is
governed by exception provided for in Section 25(2) of the Act. Present or executed consideration. The consideration
which moves simultaneously with the promise is called present consideration. It consists of an act for a promise. It is
the act which forms the consideration. No contract
Consideration 49

is formed unless and until the act is performed, e.g., payment for a railway ticket. In such a case, the liability is
outstanding on one side only. In case of present consideration the formation of contract and provision of
consideration by one of the parties takes place simultaneously. If the consideration is executed on both sides it is a
case of executed contract and not of present consideration.
Examples : (i) A sells and delivers a bag of rice of 50 kg to B upon the latter’s promise to pay R 1,000 next week.
A’s consideration for B’s promise
is present or executed.
(ii) A reward is offered for finding a lost dog, the offer can be accepted by producing the dog to the
offeror and that is also the
consideration for the promise.

Future consideration. Where both parties to a contract have promised to each other of doing or not doing
something, the promise of one is the consideration for the promise of the other, and consideration on both sides
moves at a future date. In such a case, consideration is said to be future or executory.
Example. A promises to sell and deliver a bag of rice of 50 kg to B for R 2,000 after a week, upon B’s promise to
pay the amount to A at the time of delivery. The promise of A is supported by promise of B and the consideration is
executory on both sides.
Thus, in the case of future consideration, the consideration is outstanding on both sides whereas in case of present
consideration it is outstanding on one side only.

CASE : In Upton Rural District Council v. Powell [(1942) 1 All ER 220], fire broke out in the defendant’s farm.
He believed that he is entitled to the free services of Upton Fire Brigade and therefore, summoned it to put out the
fire. The Brigade put out the fire. The defendant’s farm was not within the free service zone of the Upton Fire
Brigade. Therefore, it claimed compensation for the services. The court said : “The truth of the matter is that the
defendant wanted the services of Upton; he asked for the services of the Upton and Upton, in response to that
request provided the services. Hence, the services were rendered on an implied promise to pay for them.”
Therefore, the defendant was held liable to pay for the services rendered by the Upton.

4. Consideration may be an act, abstinence or promise. According to S2(d) consideration may be an act, abstinence
or promise. In other words consideration may consists of either a positive act or an abstinence i.e. a negative act
or, it may consists of a promise.
(a) An act. It means doing of a positive act.
Example : A request B to sell and deliver certain goods on credit. B agrees to do so provided C guarantees the
payment of the price of the goods. C guarantees the payment of the price. Here sale of goods by B to A is sufficient
consideration for C’s promise to guarantee the payment.
(b) An abstinence. It means abstaining from doing something. Thus, forbearance to sue is a good consideration
provided the plaintiff has a bonafide belief that he has a reasonably good claim against the
50 Business Laws

defendant. Similarly, refraining from smoking, gambling or drinking would supply consideration needed to
support another’s promise to pay a certain sum to the one who refrained.
In Debi Radha Rani v. Ram Das [AIR 1941 Pat 282], a wife’s forbearance to sue her husband amounted to
consideration for husband’s agreement for payment of maintenance allowance.
Example : There is an agreement of loan between A, the lender, and B, the borrower. The loan becomes due. B
fails to pay the loan. B promises to raise the rate of interest from 10% to 12% per annum in consideration of A
refraining from filing a suit against B for a year. Here A’s abstinence is in consideration of B’s promise.
(c) A return promise. Consideration may be promise by one party in return of a promise by the other party.
Example : A agrees to sell his house to B for R 5,00,000. Here B’s promise to pay the sum of R 5,00,000 is the
consideration for A’s promise to sell the house, and A’s promise to sell the house is the consideration for B’s promise to
pay R 5,00,000.

5. Consideration need not be adequate. Consideration need not be adequate or equivalent to the promise. All that is
necessary is that an agreement should be supported by consideration, and the parties are free to determine the
appropriate consideration for a promise at the time of making the bargain. Adequacy or otherwise of consideration
is only the look-out of the promisor.

CASE : In Bolton v. Madden [(1873) LR 9 QB 55], A agreed to sell to B a watch at a much lower price than its
worth. A’s consent to the agreement was freely given. The contract was held enforceable although consideration
was not adequate.

Explanation 2 to Section 25 of the Act states that, “An agreement to which the consent of the promisor is freely
given is not void merely because the consideration inadequate; but the inadequacy of consideration may be taken into
account by the Court in determining the question whether the consent of the promisor was freely given.”
Examples : (i) A agrees to sell a horse worth R 1,000 for R 10. A’s consent of the agreement was freely given. The
agreement is a contract notwithstanding the inadequacy of the consideration. (Illustration to S. 25)
(ii) A agrees to sell a horse worth R 1,000 for R 10. A denies that his consent to the agreement was
freely given. The inadequacy of the consideration is a fact which the Court should taken into
account in considering whether or not A’s consent was freely given. [Illustration to S. 25]
6. Consideration must be something of value in the eyes of law. Consideration need not be adequate to the promise,
but it must be of some value in the eyes of law.
Example. A promise to B to give his new Rolls-Royce car to B, provided B shall fetch it from the garage. The act
of fetching the car cannot be called consideration for the
 Consideration 51

promise. Such an act may satisfy the words of the definition, but it does not catch its spirit.

CASES : (i) In White v. Bluett [(1853) 23 LJ], the promise by a father to release his son from an outstanding loan
if the latter refrained from boring with complaints that he had not been treated equally with other children in the
distribution of property, was refused to be enforced, since the essential elements of a bargain were lacking. The
Court observed that, “It would be ridiculous to suppose that such promises could be binding. In reality there was no
consideration whatever.”

(ii) In Errington v. Errington and Woods [(1952) 1 KB 290], A, father bought a home for his son B and daughter-
in-law C to live in. He paid one-third of the purchase price and borrowed the balance on mortgage. He told B and C
that if they paid the weekly instalments, he would convey the house to them when all instalments are paid. B and C
duly paid the instalments though they never contracted to do so. Payment of mortgage debt by B and C was held to
be consideration for A’s promise to give the house to them.

Consideration must be lawful. It should not be uncertain or vague. It should not be impossible.

7. Pre-existing Obligations. Consideration is illusory when a person promise to do something which he is already
bound to do by law or by contract to the same party. Consideration must be something more than what a promise
is already bound to do. But doing or agreeing to do more than one’s official duty will serve as consideration.

CASES : (i) In Collins v. Godefroy [(1831) 109 ER 1040], A(the plaintiff), who has received summons to give
evidence on behalf of B (the defendant) in a case in which the latter was a litigant, had been promised by B six
guineas for the trouble taken. In a suit by A for the recovery of the promised amount, it was held that there was no
consideration for the promise.
(ii) In Stilk v. Myric [(1809) 2 Comp 317], two seamen deserted in the course of a voyage from London to Baltic sea
and back. As the captain could not find any substitutes, he promised the rest of the crew members that wages of the
two who had deserted would be equally divided among them if they would work the ship home. On their arrival at
London, the extra pay was refused. Stilk (one of the rest of the crew members) filed a suit for recovery of the extra
wages. It was held that the seamen were already under a duty to work the ship to its return journey to London .
Therefore, they were not entitled to the extra wages.
(iii) In Ramchandra Chintamani v. Kalu Raju [(1877) 2 Bom 362], The plaintiff, an advocate, agreed to appear on
behalf of client in a certain suit. Subsequently, the client agreed to pay the advocate a certain sum in addition to his
fees, if the suit was successful. The client won the case. But he refused to pay the additional amount. The advocate
brought an action for recovery of the additional amount. it was held that the plaintiff having accepted the
vakalatnama was already bound to render his best service as a pleader.

Example : A fire breaks out in D’s shop. He offers to pay an amount of R 500 to anyone who would bring out his
trapped son S safe. P, a fireman, at great risk to his life brings out S alive. D is bound to pay the promised amount to P,
as he is not bound to risk his life in that rescue.
52 Business Laws

EXCEPTIONS TO THE RULE, “NO CONSIDERATION, NO CONTRACT” The general rule as

specified in S.25 is that, “An agreement made without consideration is void”. But there are certain exceptions to this
rule, where an agreement without consideration will be enforceable. These exceptions are as follows :
1. Agreement made on account of natural love and affection. According to Section 25 (1), an agreement without
consideration is valid if, “it is expressed in writing and registered under the law for the time being in force for the
registration of documents, and is made on account of natural love and affection between parties standing in a
near relation to each other.”
Section 25(1) lays down four essential requirements for validity of an agreement made without consideration.
They are : (a) agreement is expressed in writing, (b) registered, (c) made on account of natural love and affection, and
(d) it is between parties standing in near relation to each other.
Example. A, for natural love and affection, promises to give his son B R 1,000. A puts his promise to B in writing
and registers it. This s a contract. (Illustration to S. 25) The expression “near relation” means parties related by blood
or marriage. But nearness of relationship does not necessarily mean that there is love and affection between the
parties.

CASES : (i) In Rajlukhy Dabee v. Bhootnath Mukherjee [(1900) 4 Cal WN 488], a Hindu husband, after
referring to frequent quarrels between him and his wife, agreed by a registered document, to pay her a fixed sum for
her separate residence and maintenance. In a suit by the wife to enforce the agreement, Calcutta (now Kolkata)
High Court held that the agreement was void for want of consideration, and the agreement could not be said to have
been made on account of natural love and affection to attract the exception laid down in Section 25 (1).
(ii) In Ranganayakamma v. K.S. Prakash [(2008) 15 SCC 673], a power of attorney was executed by sister
 relinquishing her right to share in joint family properties in favour of her brother on receipt of rupee 1 out of love and
affection for the brother authorizing the brother to enter into partition on her behalf. The power of attoney was
registered. The Supreme Court held that the deed of partition was valid being in writing and registered, not void in
view of exception provided under Section 25.

2. Promise to compensate for voluntary service. Section 25(2) lays down that an agreement made without
consideration is valid and enforceable if “it is a promise to compensate, wholly or in part, a person who has
already voluntarily done something for the promisor, or something which the promisor was legally compellable
to do.”
Examples : (i) A finds B’s purse and gives it to him. B promises to give R 50. This is a contract. (Illustration to S.
25)
(ii) A supports B’s infant son. B promises pay A’s expenses in so doing. This is a contract.
(Illustration to S. 25).
In order to bring a promise within this statutory exception, it is necessary to satisfy the certain conditions. These
are:
Consideration 53

(a) Voluntary service. The services must have been rendered voluntarily. If the services have been rendered at
the desire of the promisor, then it is covered under S. 2(d) and not under this exception.
(b) For the promisor. The voluntary act should have been done for the promisor and not for anybody else.
Example. W is bathing on the bank of a river. She slips into the water. B, a boatman is able to save her voluntarily
and she promises to pay him R 1,000 for saving her life. Subsequently W refuses to pay the said amount to B. B sues
W. B is entitled to recover the amount under S. 25(2).
(c) Existence of promisor. The promisor must be in existence at the time when the act was done. For example,
where services are rendered for a company by the promoter before the formation of the company, a
subsequent promise to pay for the services cannot be brought within the exception except in certain cases as
Specified in the Specific Relief Act.
(d) Intention to compensate the promisee. The intention of the promisor should have been to compensate the
promisee. There should not be any other motive.
CASE : A father, who was heavily indebted, transferred some immovable property to his son in consideration of
the son having sent money to his father from time to time, not intending to make a loan. The transaction was held
not to fall within this exception as the real intention was not to compensate the son but to defraud the creditors of the
father [Abdullah Khan v. Purshottam, (1948) AIR Bom. 265].

(e) Contractual competence. The promisor may not be competent to contract at the time of receiving service. It
has been held that a promise made after attaining majority to compensate a person, who has already
voluntarily done something for the promisor even at a time when the promisor was minor falls within the
purview of S. 25 (2) of the Indian Contract Act [Karam Chand v. Basant Kaur, (1911) Punj Records No.
31]. However, if a minor makes a promise to compensate during his minority for the voluntarily service
rendered for him, the promise shall not be binding.
In a leading case, a promise made by a person after attaining majority to repay money advanced during his
minority was held to be invalid and outside the scope of S. 25 (2) of the Indian Contract Act because a
promise to repay a loan taken during minority cannot be called a promise to compensate for a voluntary act
[Indrani Ramaswami v. Anthappa, (1906) 16 Mad LJ 422].
(f) Lawful services. The services rendered must be legal. A promise to pay for past cohabitation with a woman
whose husband is alive, cannot fall under this exception because past cohabitation is deemed to be
adulterous [Alice Mary Hill v. William Clark, (1905) 27 All 266].
54 Business Laws

3. A promise to pay time-barred debt. A promise to pay a time-barred debt cannot be enforced for want of
consideration. However, S. 25(2) lays down that a promise to pay, wholly or in part, time barred debt is
enforceable if the following conditions are satisfied :
(a) Written promise and signed by the promiser. The promise should be in writing and signed by the promisor
or his agent authorised in that behalf. Neither an oral promise nor a mere acknowledgment of liability is
enforceable.
(b) Promise by a person liable for the debt. The promise should be given by the person to be charged therewith,
i.e., by the person who was liable for the original debt. hence, a promissory note by the wife for a time-
 barred debt of the husband, executed not as an agent but in her personal capacity, is not covered by S. 25
(3).
(c) Law of limitation. The debt must be such of which the creditor might have enforced payment but for law for
the limitation of suits.
Example. A owe B R 1,000, but the same is barred by the limitation act. A signs a written promise to pay B R
500
an account of the debt. This is a contract. (Illustration to S. 25)
4. A completed gift. Explanation I to Section 25 of the Act has laid down that, “Nothing in this section shall affect
the validity, as between the donor and donee, of any gift actually made.” Thus, in the case of a gift actually made,
no consideration is necessary. Agreement to make a gift is not valid.
5. Agency. Section 185 of the Act states that “No consideration is necessary to create an agency.”
6. Remission. Under Section 63 of the Act, no consideration is necessary for an agreement to receive less than what is
due. It is known as remission in India and accord and satisfaction in England.
7. Promise to subscribe for a charitable or religious cause. A promise to subscribe for a charitable or religious
cause is sometime taken as an exception to the doctrine of consideration although strictly speaking it is not an
exception. For details see first legal rule as to consideration.
8. Gratuitous bailment. The deteriminent suffered by the bailor in parting with the possession of the goods is
sufficient consideration for the bailee to return the goods. Thus, it is also, strictly speaking not an exception.

PRIVITY OF CONTRACT
As explained earlier, S. 2(d) provides that consideration may move from promisee or any other person. It means that a
stranger to consideration can sue, provided he is party to the contract. But as regards stranger to contract the
general rule is that a person who is not a party to the contract cannot sue. Thus, a stranger to consideration can
sue, but a
Consideration 55

stranger to contract cannot sue. A person who is not a party to a contract cannot claim right under the contract. This
is called “Privity of Contract”.
CASES : (i) In the leading case Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [(1915) AC 847 (HL)],
Dunlop Pneumatic Tyre Co. Ltd. (the plaintiffs) sold a number of their tyres to Dew & Co., on the terms that Dew &
Co., would not resell them below the list price and that, in the event of sale to trade customers, they would obtain, a
similar undertaking from them. Dew & Co. sold the tyres to Selfridge & Co. (the defendants) who undertook to
observe the restrictions and to pay to Dunlop Co. £ 5 for each tyre sold in breach of the agreement. Selfridge & Co.
supplied tyres to two of their customers below the list price. Consequently, Dunlop Co. sued Selfridge & Co. to
recover two sums of £ 5 each as liquidated damages and asked for an injunction to restrain further breaches of
agreement. The House of Lords gave judgement in favour of Selfridge & Co. because Dunlop Co. was a stranger to
the contract between Dew & Co. and Selfridge & Co.
(ii) In Jamna Das v. Ram Avtar Pandey [(1911) 30 IA 7], A mortgaged certain properties to B for R 40,000. Later, A
sold the properties to C for R 44,000 and allowed the purchaser C to retain R 40,000 of the price to pay B for
redemption of the mortgage. B sued C for recovery of the mortgage money but he could not suceed as he was not a
party to the contract between A and C.

Similar was the decision of the Supreme Court in M.C. Chako v. State Bank of Travancore [AIR 1970 SC
504].

Exceptions to the Rule of Privity of Contract

It is now a settled law in India that a stranger to a contract cannot sue on the contract, i.e., third parties to a
contract have no rights and no liabilities under it owing to the rule of privity of contract. However, there are certain
well recognised exceptions to this rule. Accordingly, in the following cases, a person who is not a party to a contract
can sue upon it :

1. Beneficiary in case of trust or charge. Where a trust, express or implied, is created by a contract, a beneficiary
may enforce the rights which the trust so created has given him. The basis of this rule is that though he is not a
party to the contract his rights are equitable and not contractual. Similarly, when a charge is created on specific
immovable property in favour of a person, he can enforce the charge if he is a beneficiary under the terms of the
contract or gift deed.

CASE : (i) (Trust). In a case R, the appellant was appointed by his father as his successor. He was given the
possession of the entire estate. In consideration thereof the appellant agreed with his father to pay a certain sum of
money and to give a village to the illegitimate son of his father, on his attaining majority. It was held that the
illegitimate son was entitled to claim the specified amount and the village as a trust was created in his favour [Rana
Uma Nath Baksh Singh v. Jang Bahadur, AIR 1938 PC 245].
(ii) (Trust). It has been held that an addressee of insured articles can claim compensation from the Central
Government on non-delivery of insured articles as a constructive trust is created in his favour [Post Master General
v. Ram Kripal Sahu, AIR 1955 Pat. 442]