1 Formation of Contract LEARNING OBJECTIVES To know briefly about the nature, objectives and functions of the Law of Contracts To understand the scheme of the Contract Act, 1872 To lea the definition of Contract To differentiate between ‘Agreement’ and ‘Contract’ To understand the essential elements of a valid Contract To classify contracts into various categories “The movement of the progressive societies has hitherto been a movement from status to contract.” —Sir Henry Maine! INTRODUCTION Commercial law, also known as Mercantile Law or Business Law, is that branch of law which is related to trade and commerce. It deals with the rights and obligations of persons involved in various business transactions. The law of contract constitutes the oldest as well as the most important branch of commercial law. It may be provisionally described as that branch of law which determines the circumstances in which a promise shall be legally binding on the person making it.” Each one of us enters into a number of contracts almost every day whether we know or not. Every such contract gives rise to certain legal righis and obligations, example, stepping into a train, bus or giving one’s vehicle for service or buying any product from a shop. Se Sir Fredrick Pollock, Ancient Law, 1930 Edn..p. 182.00 “Anson's Law of Convracr, 1, Beatson, 28 ed. (2002), Oxtord University Press, p. 1.Law of Contract ipstanti a jus i memned with self-impose hich is subject t© ‘The law of contracts, @ st Jaw since it is primarily cone Contract design their own Ta ores ebodica we GuGnS well as SPrrmines the circumstances undet which any P person making it. Only those promises that are enfore Peepntracts. Those promises that are 0 enforceable tract law does ‘contracts. However, CO! jot cover whole : It confines itself to the enforcement of those civil obli created voluntarily. OBJECT AND FUNCTIONS ‘The object of the law of contract is emoving uncertainty and vagueness in Fonction is to ensure that, to the extent possible; expec cited by any promise are fulfilled f any party the ot Sbligation under that contract; the law of contract pro may be many other civil obligations that may srry outside the purview of contrac. For example, trust obligations under any other statute. Since many agreements do not requirements ofa contact, they remain beyond jimiting principles. is to create certainty In the words of Salmond: “The law of contract is not the whole law of agreement of obligations. It is the law of those agreements whicl those obligations which have their source in agreements HISTORY OF CONTRACT LAW “The history of contract law is far too detailed as well as complex sin back to ancient civilizations. In the words of Plato: [Chapter | in personam? ot personal right ‘4 obligations. The parties toa ‘certain principles. The law of Also, it romise can legally bind the ‘eable legally can be termed jn a court of law cannot be range of civil obligations gations that have been and definiteness by commercial transactions. Its primary tations of the parties contract does not fulfil his wides for remedies. There | be actionable under any other law, relationships ot fulfil the the scope of contract law. nor it the whole law create obligations and ice it dates If a man fails to fulfil an agreed contract—unless he had contracted 10 to something forbidden by law or decree, or gave his consent under tous pressure, or was involuntarily prevented from fulfilling some is contract because of some unlooked-for accident - an action for such an unfulfilled agreement should be brought in the tribal courts, if the parties have not previously been able to reconcile their differences be it neighbours, that is), ws eto abies (their The Roman law of contacts, Hike all contract law, distinguished bewweer promises that were legally enforceable’ and ‘those that were not.’® Thus, the _ y The gis of individuals can be classified as jus in personam (right in persona rem (right in rem). A right in personam is an interest protected solely 38 ym) ani jis inst spec! i forex individuals; example right to recover debt due to someone. A right in rem IS exerc! against the world at large; exampl it agit he viata Bccm ve right of reputation, right to privacy. 5 Plato, The Laws, Book 11, §23, Contracts Melcom P. Sharp, “Pacta Sunt Servanda,” 41 Columb. L. Rev. 783 (1941).Chapter H Formation of Contract E potion that promises itself may give Fise 10 an enforceable duty, A promise might pe morally biting but H was not legally enforceable until it fell within the gpecified categories vie, “stipulation”, “real” contracts "and “consensual sennracts”, Later on, a fourth eategory af enforceable promise was recognized as innominate contracts”. The general theories of contracts developed in Europe during the middle ages. The Roman notions of contract law did not directly find a ace in the Indian law of Contracts, The English contract laws, however. was Nemily’ influenced by Ancient Greek and Roman thought. Over the industrial revolution, English courts became more and more wedded to the concept of “freedom of contract”, The Indian law was framed by the English, who were well versed with the developments in the field of law of contracts in Rome. Thus. the Roman notions somehow, influenced the Indian Act. The early English common law writ system was not hospitable to the enforcement of promises and the plaintiff had to fit his complaint within one of the available writs. The common law writ of ‘covenant’ and ‘debt’ were two forms of action for enforcing rights that took a definite shape by the end of 15th century. The writ of ‘detinue’ was available in even more limited circumstances to recover goods that had been delivered to a bailee and then wrongfully withheld® There were certain problems with each of these forms of action. None of them could provide relief for breach of an informal bilateral contract that involved purely executor promises. Moreover, the ‘Wager of law’ procedure favoured the defendant in avoiding liability despite plethora of evidence. Torts law provided solution to this problem. If a person undertook to perform a duty and performi ithe caused harm to the obligor; the obligee could sue on the common law action of ‘trespass on the case’. This principle came to be known as ‘assumpsit’. 2 “Assunpsit’ is a form of action in Common law for the recovery of damages caused by the breach or non-performance of a simple contract. Thus, a sub- category of trespass on the case, known as “special assumpsit” became available for breach of a promise by poor performance or “misfeasance”."” The writ of general assumpsit was available for the recovery of debts in an action in which a jury would serve as the finder of facts. LAW RELATING TO CONTRACTS IN INDIA. Law of Contract is ‘Common Law’ under the English Law, while in India. it is ‘Statutory’, though modeled mostly on the essence of the English law.'' The English Common and statute law in force at that time was made applicable to Agreements under which one party was promised to give or to do something in exchange for a ._ similar promise by the other party - B. Shipman, Handbook of Common Law Pleading 114-17 (3rd ed. 1923), vo Assumpst- Derived from Latin, assumere meaning ‘he has undertaken’. james B. Ames, The History of Assumpsit, 2 Harv. L. Rev. 1,5 (1888), The Jem “Common Law" refers to the’ body of inv derived from judicial decisions or ‘cedenis rather than from statutes while “Statutory Law’ denote aw derives from statutes and not from judicial deesions. saci he body of I derived[6] Law of Contract Jah century, whieh st India by the Charters of the the thrce presidency towns of Cl ras and | applicable to Indian circu stances. In 171A, PA al Court, The statutes ol a al a ermine al Cty Oe Hindus were replaced by the Supreme of 78 einem Court at Cateuta and Bory eect) 1 ee Te Samer rat are against Ne NE Stine 87) ui governed by the Hind lane Mode ef GEMM Capes foe ofthe 1 an aw was tobe ade aT the Musi pe as nd ims tothe suit were Mindy we cae Ther Muslin reg in Force til Sr the defendant were (0 apply system 12 of Indian Contract La Courts ca he ext Peer the statutes of punipne Catetta and Madras while 6 the persona i tn Sours cominued 10 APF Boy were abolished. THe Hh One tive Owes Fe overar stages. Gradually the Indian Tans but the same was made SUBIE e Ae alin Council’ under clause 4 0 hanes 865 the Charter of legislature got the power to alter s of cla reise of the same power t0 1865 and the Indian Contract ‘Act was enacl . govern matters pera The first draft of the Indian Contract Act ‘vas drafted by the third Indian ‘while the final draft was prepared by Fitzjames Stephen. ‘though most of the concepts were borrowed prePevarious codes of other countries the tnd result isa solid piece of aw. It has successfully withstood the test of the time till today even in today’s era of massive developments. PROPER LAW OF CONTRACT In the words ofthe Supreme Court of India: ‘The proper law of contact is the law ofthe county in which its elements The proper veely grouped and with which factually the contact Oo most Uyeeely connected A proper law intended as a whole to gov6t0 contract is Sciministered asa ‘living and changing body of law’ gpd effect is given to any changes occurring init before performance falls due. ‘THE SCHEME OF THE ACT i Indian Cones Act : ee ies the law relating to contracts in India 7 ; force on the Ist of September Te Aat, 1872" (9 of 1872) and came usages of t the enactment In 1862, the High esidency towns of The Contract Act can broadly be divided into two parts: (i) General Principles of Contract (Sections 1-75) The general pri The general principles of contract may be studied under the following three trod M. P. Jain, Outlines of Indian Legal and Constitutional History, (6th ed., 2 A395 MP. Jain, Outi i itt . 73 tutional History, (6th ed. 2006) PP. 7" (958)? 2 Delhi Cloth and Sait Cloth and General Mils Co, Lid v. Harnam Singh, AIR 1955 SC 590, 596Chapter 1] Formation of Contract Hi (a) Formation of Contract (b)_ Discharge of Contract (c) Remedies in the event of breach of contracts (ii) Specific Kinds of Contracts (Seetions 124-238) The specific or special contracts may be categorized as: (a) Contracts of Indemnity and Guarantee (Sections 124-147) (b) Contracts of Bailment and Pledge (Sections 148-181) (©) Contracts of Agency (Sections 182-238) Sections 76-123 of the Act were repealed in 1930 and a separate Act was enacted to deal with sale of goods called the Sale of Goods Act, 1932. Similarly, Sections 239-266 were repealed and the Indian Partnership Act, 1932 was created to deal with the contracts of partnership. Thus, the Contract Act, 1872 is not the only law covering the entire legal principles about contracts. There are other statutes also viz. the Negotiable Instruments Act, 1881; the Sale of Goods Act, 1930 and the Indian Partnership Act, 1932 etc. In the administration of the law of contract, the Courts in India have generally been guided by the rules of the English common law applicable to contracts where no statutory provision to the contrary is in force.'* However, the English law is not relevant on such aspects ofthe law of contract as are expressly dealt in by the Act." DEFINITION OF CONTRACT As per Salmond, The Contract is an agreement creating and defining obligations between parties. The word ‘contract’ is derived from the Latin word ‘contractum’, which means “drawn together.” Section 2(h) of the Indian Contract Act, 1872 defines ‘Contract’ as: ‘An agreement enforceable by law is a contract. Thus, the following ingredients are required for the formation of contract: (a) An agreement (b) Enforceability of the agreement by law. The Flow Chart 1. OFFER + ACCEPTANCE = AGREEMENT © Bhagnandas Goverdhandas Kedia v. Girdharlal Parshottamdas & Co., AIR 1966 SC 343, 4 ICR 656, 664. « Sia Cosa India v. Krishan Marga, (1981) 2 SCC 246: AIR 1980 SC 1717; pes V.D. Tulzapurkar and A.P. sen, JJ._ Law of Contract [Chap MENT + ENFORCEABILITY OF LAW = CONTRACT ose agreements that create legal obligati bination of the following jy 5 I. AGR The Contract Act is a law of only those agr ‘Thus, every contract, as a jurist concept, Is # 6 elements: (a) Agreement and (b) Obligation. These two elements are detailed as under: (a) The term ‘agreement’ is defined in Section 2(e) of the Act which provides as under: Every promise and every set of, other, is an agreement. ‘And the term ‘promise’ is defined i _A proposal, when accepted, becomes a promise. ‘Thus, an accepted proposal becomes an agreement. understood “as a legal tie, imposing upon a person the necessity of doing or abstaining from doing a promises, forming the consideration for eah n Section 2(b) which reads as under (b) ‘Obligation’ may be or group of persons, definite act or acts.” However, there may be certain a obligation. Example: X promises his wife “W' to take her for dinner. Such agreements are not enforceable in a court of law and therefore, ae ne contracts, In Speech and Software Technologies (India) (P) Lid. v. Neos Interactive Ltd," the Supreme Court held that, an agreement to enter into another agreement is nether enforceable nor does it confer any right upon the parties. A prelude to a contract should not be confused with the contract itself.” greements that do not give rise to any Key Features of Law of Contract «Freedom of Contract is one of the most essential features of any free society. ‘Not only is freedom of contract a key aspect of a free society: it has also been the great engine of commerce in the world. One of principal topics in the law of contracts is the extent of this freedom & the restraints that are imposed on it. Nearly every major aspect. © contract law involves some balancing of the principle suppotite freedom of contract and societal restraints on that same freedom.’ "© D, Chandra Bose, Business Lav, PHI, 2012; p 8, Speech and Sofware Technolog . 180° © pelt Poca gies (India) (P) Lid. v. Neos Interactive Ltd, (2009) "Dresser Rand Sv Bindal Agro Chemicals id, AIR 2006 SC 811 = (2006) 1 SCC 7S! Anthony K. Kronman, Paternalism andthe Law of Contract, 92 Yale LJ. 763 (1983)-Chapter 1] Formation of Contract ‘The Supreme Court hel require larger public interest to be taken into account” Thus, private contracts when involve Ee serenely Public interests can be subjected to reasonable restrictions by state. © Another central feature of law of contract is that such promises are made voluntarily. The contract law makes it possible for us to transform our intentions into legally binding obligation as an extension of the voluntary expression of our free will? * The principles of law of contract effects of the words and action: another key feature, s that determine the meaning and legal 's of the contracting parties constitute The remedies available to help enforce the underlying obligations arising out of promise are one of the most fundamental features of the contract. Without knowing the consequences of breach of contract, the Parties to the contract cannot always appreciate the spirit of a particular Contract, In the words of Justice Oliver Wendell Holmes, * The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, - and nothing else. * The business relations cannot flourish or function efficiently if the promises remain unenforceable. For that, the promises that can be expected need to be separated from ones that cannot be. The manner in which the enforceable promises are determined act as another key feature of law of contract. That is the reason that day today demand and supply transactions (of goods and services usually) are by and large enforceable. During the course of this book, these key features of the law of contract have been discussed in detail in the further chapters. ESSENTIALS OF A VALID CONTRACT Since, all agreements are not enforceable by law; therefore, all agreements are Not contracts. Only those agreements that fulfill the requirements prescribed under Section 10 of the Act become contracts, Section 10, What agreements are contracts All agreements are contracts if they are made by the free consent of parties competent 10 contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. ee 3) MPMathur . DTC, AIR 2007 SC 414: (2006) 13 SCC 706, Deepal There Se ‘of Punjab, AIR 1992 SC 1519: 1992 Supp (1) SCC 684; See also, 2 Slate of Haryana v: Malt Traders, AIR 2011 SC 3574; (2011) 13 SCC 200, 2 } William Hurst, Law and the Conditions of Freedom inthe 19th Century United States, (1968) * Oliver W Holmes, The Path of the Law, 10 Harv. L: Rev. 457,462 (1897),= Law of Contract (Chay Mapter | herein contained shall affect any law in force in India ang hereby expressly repealed, by which any contract ts 1 ond ot ‘ ide in rin the presence of witnesses, or any law relating t of documents » the registration Thus. as per the definition in Section 10, an agreement to become rhe ee the . contract my, fulfill the following requirements: Meeting of minds of the parties (consensus ad idem): (b) The free consent of the parties: (©) Competency of the parties: (a) Lawful consideration: (e) Lawful object: (The agreement must not have been expressly declared to be void. These essential elements are briefly discussed hereunder: (a) Consensus ad idem Parties are said to consent when they agree upon the same thing in the same sense. For example: Rohan offers to sell his 200 Square Feet Plot situated a Dwarka, New Delhi to Akshat for 50 Lakh. Akshat assumes that the flat is located at Dwarka in Gujarat. Since, there is no consensus, there cannot be a contract. (b) Free Consent ‘The consent of the parties is said to be free when any of the vitiating factors like coercion, undue influence, fraud, misrepresentation or mistake is not present. (©) Competency of the parties Sections 11 and 12 of the Act deal with this element. One who is of sound mind and is major is competent to enter in a contract. Any of the factors like minority: lunacy or drunkenness may render the parties incompetent. (d) Lawful Consideration Consideration refers to any benefit or advantage moving from one pat another party. A contract without consideration is not valid. ry 0 (e) Lawful Object The object sought to be achieved by a particular agreement should unlawful or illegal viz. immoral or opposed to public policy. not be () The Agreement must not have been Expressly Declared to be Void ; cout The agreement if declared void expressly, it can never be enforced by @Y Trin of law. For example: Agreement in restraint of marriage or agreement in of trade cannot be valid contracts. _Formation of Contract i hove mentioned essentials, intention to create legal nglish law but not in our country though it may indian Contract Act nowhere prescribes that the contract should be ing or in a particular format." There can be an equally binding contract between the parties on the basis of an oral agreement tnless there is law which requires the agreement to be in writing. ‘A person who signs a document which contains contractual terms is normally pound by them even though he has not read them, even though he is ignorant of the precise egal effect, In view of a clause in the contract having formed one of the stipulations in the contract along with others, it cannot be said to be nudum pactum and the maxim nudum pactum ex quo non oritur actio does not apply.’ ‘Apart from the relationship is essential in the B be conside' KINDS OF AGREEMENTS ‘There can be various modes of categorization of contracts that may be overlapping at times. However, Contracts can be broadly classified into following three categories: I. According to Legal Validity Contracts may be of following types based on their legal validity: (a) Valid Contract ‘The agreements that fulfil all the essential requirements as provided under Section 10 are said to be valid contracts. The rights and obligations are binding on the parties and enforceable by law. Example: Harish offers to sell his old car to Mahesh for Rupees 2 Lakh. Mahesh makes a payment of Rupees 2 Lakh to Harish who in turn hands over the car to him. It is a valid contract. (b) Void Agreement According to Section 2(g): ‘An agreement not enforceable by law is void agreement. Itis void ab-initio ic. it is nullity since its very inception. This type of agreement does not give rise to any rights or obligations upon the parties. Sections 24 to 30 of the Act incorporate details about such agreements. Example: Due to incapacity- An agreement by a minor or an agreement without consideration is void from the very beginning. _ Due to illegality.—When the agreement between the parties is completely illegal example to commit murder, itis also void ab initio. ™ ‘The agreement, in special cases whenever provided by any law, should be in writing or in the Presence of witnesses or should be registered % Tarsem Singh v. Sukhminder Singh, AIR 1998 SC 1400. En State Electricity Board v. Green Rubber Industries, AIR 1990 SC 699 : (1990) 1 SCC( —_ ia, (c) Void Contract ee According to Section 2(j) a contract which ceas enforceable. Thus, a contract which is enforceable by law at the time when it is ma to some reasons becomes unenforceable later. Such contract is te contract. 8 10 be enforceable becomes void when it cease, S10 be Ut dy Med as ye Example: Somansh promises to give his black horse “Badal” to Hy Rupees 50, 000/- on Christmas that year. Baadal died before Christma for contract becomes void because of supervening impossibility. 38. The (d) Voidable Contract According to Section 2( 4an 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 is a voidable contract Thus, this type of contract can be avoided only by one of the parties to th contract but if that party prefers to continue with the rights and obligations, contract becomes perfectly enforceable. Contracts induced by. fraud misrepresentation are voidable at the option of the party whose consent has bee 80 caused. Until rescinded, it is valid and binding. Section 14 defines 4 Sections 15-21 detail the same. : Example: Kunal agrees to sell his house to Raman as Raman threatens to kill him if he does not do so. The agreement is voidable at the option of Kunal and he may put an end to this agreement. (e) Illegal Agreement If the law forbids the very act which is to be performed under the agreement, such agreement is illegal Section 23 incorporates the detail of this type of agreement. An illegal agreement is void ab-initio. Example: Agreement to kidnap someone's child, Sale of liquor without license. (P) Unenforceable Contract The contracts that cannot be enforced in a Court of law due to some technical defects and there is no remedy for breach. Once those defects are rectified, the contract becomes perfectly enforceable. Example: If the stamp duty is inadequate on a document, the contract made 1 that document remains unenforceable. But if the requisite stamp is affixed. contract becomes perfectly enforceable Il. According to Formation Contracts may be of the following types, based on the mode of their formatio”:Chapter 1] Formation of Contract [a3] (a) Express Contract As per Section 9: In so far as the proposal or acceptance of any promise is made in words, the Promise is said to be express ‘Thus, an express contract is one that is made in express written or oral terms. Such contracts may be concluded with multi-page agreements to a mere node, hand shake or wave of hand. Example: Mr. Ujwal writes a letter to Miss. Saloni that he is ready to buy her sofa set for Rupees 60,000. Miss. Saloni replied by a letter that she had accepted the offer. This is an express contract. (b) Implied Contract Section 9 further states: In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. Such contract comes into existence on account of act or conducts of the parties and may be characterized further as ‘implied in fact’ and ‘implied in law’. Example: Miss Aalya went to a coffee shop and drank a cup of coffee. This is an implied contract that she will pay for that cup of coffee. ‘Implied in fact’ contracts ‘These contracts are created quite informally. Following may be the elements: (i) One party (defendants) requested another (plaintiff) to do something. (ii) The other party (plaintiff) expected some remuneration or compensation for doing that work. (iii) That party (defendants) should have known that the plaintiff expected compensation. However, there is no legal difference between an express contract and a contract ‘implied in fact’. ‘Implied in law’ contracts A contract ‘implied in law’ is based on the law of restitution. The law of restitution seeks to prevent unjust enrichment and does not depend on voluntary consent of the party. The distinction between the terms is always not possible and hence, many law researchers have suggested elimination of both the terms. *” Doug Rendleman, ‘Quantum Meruit for the Subcontractor : Has Restitution Jumped off Dawson's Dock?", 79 Tex. L. Rev. 2055 (2005).Law of Comract ic << Chap (c) Quasi Contract ‘There are certain situations where none of the parties intended to make but the law imposes one, In fact, it is not a contract but a principle of equity Example: Mr. Zagir found a gold ring lying on the road, He obligation to find out the true owner and return the ring to him. A contract ‘implied in law’ is, in fact, a quasi-contract. 'S under ay (@) Quantum Meruit Quantum Meruit literally means ‘as much as he deserved’. It is used to ob compensation for work or labor performed. in The courts, however, use the terms “quasi contract”, “unjust enrichmeny “restitution” and “quantum meruit” interchangeably. III. According to Performance Contracts may be of following types based on their performance. (a) Executed Contract A contract where both the parties have completely or at least substantially performed their respective obligations is termed as executed contract.”* Example: Mr. Pritam buys a LCD TV from M/s Marry Electronics on cash payment of Rupees 70,000/-. Since both the parties have performed their respective obligations. This is an executed contract. | However, the word ‘executed’ is sometimes referred to by the Courts as synonymous with ‘signed’ or ‘authenticated’. (b) Executory Contract A contract where both the parties have not performed their respective obligations under the contract is termed as executory contract. The obligations of the parties are to be performed at a later time. Example: Mr. Bakshi agrees to sell his bike to Mr. Khatri. The delivery of the bike and payment are to be made in the coming month. The contract is said to be executory contract. (c) Unilateral Contract In such contracts, only one party has to fulfill his obligations whi) a party has already performed his obligations. Such a contract is called a unild! or one sided contract. Here the obligation is outstanding only against one © parties at the time of formation of the contract. Example: The Phoenix Ltd. announces a reward of Rupees 50,0! person who solves the puzzle correctly. Naman solves the puzzle _—_ 28 Smith v. Allen, 436 P. 2d 65 (Cal.1968). Je the other eral 100 to an correct adChapter 1 Formation of Contract The contract comes into existence the moment Naman solves the puzzle. Now only the Phoenix Ltd, has to perform its obligation by paying the reward to Naman, Such contracts involve only one promise where only one party makes an offer that ean only be accepted by performance (d) Bilateral Contract In a bilateral contract, obligation is on both the parties to do something at the time of the formation of the contract. It involves two promises: one promise in exchange of another. Example: Ansh promises to prepare a portrait of Miss Shalini for an amount of Rupees 25,000/-, It is bilateral contract as there is exchange of promises and obligations of both the parties are outstanding at the time of the formation of the contract. The distinction is based on the manner in which acceptance is made. If the offer does not invite acceptance in the form of a return promise but insists on performance as the exclusive manner of acceptance, the contract is not generally regarded as formed until completion of the requested performance.”? (e) Formal Contract ‘A contract that is negotiated and expressed carefully is referred as formal contract. Example: Negotiable Instruments, Letter of Credit (P Informal Contract This type of contract refers to all other types of contracts excluding formal ones, be it written or oral; simple or complex. The degrees of formality do not in any way affect the enforceability of the agreement. Adhesion Contracts /Standard form Contracts ‘The contracts where one of the parties has almost nil opportunity to bargain over the specific terms of the agreement while the other party isin a position to dictate its terms are termed as adhesion contracts."* The dominating party drafts the agreement and incorporates the clauses suitable to it. The other party has the option either to accept the conditions or leave the contract. Thus, a standard form of contract carrying the same terms is entered into with every willing customer, Example: Bank Account opening contracts, employment contracts or insurance contracts, 5 Restatement (Second) of Contracts Sec. 32 Cmt. b. (1981). Henningsen v. Bloomfield Motors, Ine. 161 A.2d 69 (N.J.1960).; Law of Contract tarot __ tp In Sukhnandan Saran Dinesh Kumar v. Union of India,” the SC held tha 4. state can impose a restriction in the interest of general public on the right te party to contract where in the opinion of the Government the contracting panic? are unable to negotiate on the footing of equality ies Statutory Contracts Those contracts where one party to the cor Union or a Governor of a State or someone Statutory Contracts. ‘Article 298 of the Constitution authorizes both the Union of India and the States to make contracts for any purpose and to carry on any trade or business The right to make a contract includes right not to make any contract. By definition, the said right is inherent in every person capable of entering in to 4 contract. However, such a right, to either enter or not to enter into a contract with any person of the state, is subject to a constitutional obligation to obey the command of Article 14 of the Constitution.” When a contract is entered into by or with the Central or State Governments, it should fulfil the requirements of Article 299 of the Constitution of India. Article 299 (1)" lays down three conditions for making of a contract by the President of the Union or by a Governor of a State: 1. It must be expressed to be made by the President or the Governor as the case may be. 2. It must be executed. 3. The execution should be by such person and in such manner as the President or the Governor may direct or authorize. In the words of Sen J. ...Article 299(1) applies to a contract made in exercise of the executive powers of the Union or the State. It is different from a contract made in exercise of statutory powers. Article 299 has no application to a case where a particular authority as distinguished from the Union or the States enters into a contract which is statutory in nature.’* A contract would not become statutory merely because it has been awarded by # statutory body.*> In the next chapters, the essential elements required for formation of a com are discussed in detail. ntract is either the President of i, acting on their behalf are termed s tract C150. ' Sukhinandan Saran Dinesh Kumar v. Union of India, AIR 1982 SC 902 : (1982) 2 SC Patel Engg. Lid. v. Union of India, AIR 2012 SC 2342 : (2012) 11 SCC 257. The Constuton of ada 1950 3 State of Haryana v. Lal Chand and others, AIR 1984 SCR(3) 715. 'S. Usha v. General Manager, Southern Railway, Chenmat) Date of Decision 11.02 201 8 Madras High Court per Vinod K. Sharma J. Available at http://indiankanoon.org/éoe/!> Accessed on I January, 2015,Chapter 1] Formation of Contract fi7] POINTS TO REMEMBER > Commercial law is that branch of law which is related to trade and commerce. > The Contract Act, 1872 provides the basic legal framework on contracts in India. » The Indian Contract Act, 1872 contains provisions that were derived from various codes in force in various jurisdictions at that time; however, it has successfully withstood the test of time. Contract is an agreement creating and defining the obligations between the parties. v Allcontracts are agreements, however, all agreements are not contracts. > The essentials of a valid contract are consensus ad idem, free consent, competency of the parties, lawful consideration and object etc. A‘Void agreement is unenforceable from the very beginning, while a ‘voidable contract’ becomes unenforceable only after the aggrieved party decides to fescind it. Until then, it continues to remain valid. SSProposal LEARNING OBJECTIVES al and its essential elements. = To learn definition of an offer/Propos: Invitation to offer and = To understand the difference between ‘Otter. 1s To find types of offer vz. General offer, Specific offer, Cross offer, Standing offers etc. = To understand communication, acceptant offer. ce and revocation of an INTRODUCTION [As discussed in the previous chapter, for any valid contract to come in existence, certain essential elements should be present. The entire process begins by examining the parties’ communications to determine whether a proposal was made and if so, if it was accepted. Thus, a proposal is the very first step in the formation of any contract between two parties or persons; one party to make the proposal and the other to accept the same. DEFINITION {A proposal is the first manifestation towards a commitment to be bound as compare to preliminary negotiations. Whenever this first manifestation of commitment to be bound is made, it is referred to by the law as an “offer”. Thus, an offer is a communication that objectively manifests its maker’s willingness to enter a bargain and is made in a way that justifies another person in believing that his or her assent to the bargain is invited and will conclude it." The Indian Contract Act 1872 uses the term ‘Proposal’ while ‘Offer’ is the term used in English law. 1 Jeftey T. Fertiell, Understanding Contracts, 2nd ed., LexisNexis, 2009.L jaw of comract [Chapter » jss to do 0F 10 abstain from js willingne 1 of that other to such acy yother note ning the assem re valid must possess the following iy, ee tials @ The person ! «Ie must be signifies must be willing (° do something. to the other person be made wit! in the assent of that other. «Tt must be mas ° 20), the person W mi the proposal is called the offeror o, As per Section 2 son to whom it's nak fg called the promisee or offers yromisor . a m when the proposal is accepted, it becomes a promise as defined in Section 2(b). Section 2(a) lays emphasis upon the proposal. To signify refers to declare, the proposal should be ‘communicated ‘A communication that fails (© reasonal deal cannot reasonably be interpreted as an €XP! into a contract. Use of specific words, for example, ‘offer’, ‘bid’, ‘proposal’ or any other expression signifying 2 commitment simply suggests willingness to enter intoa i determine whether it is an legally binding agreement offer or not. Similarly, the absence of ‘does not mean that the communication is not an offer. The most basic method to decide whether the p' ns or not, is to examine the str enforceable obligatio: between them to evaluate whether, they have express same terms. ESSENTIALS OF A VALID OFFER Following are the essential elements of a valid offer: nify the willingness to make iy need to sig) indicate or communicate. Thus, nnounce, to the other party. tify the essential terms of th ly ide 1 ession of a willingness to enter arties have created legally eam of ‘communications ed mutual assent to the (i Intention to create legal relationship The off i R See ees ome creating legal relations. If the offer does not Cas ices, it i i i language of the offer must be unequivocal valid offer fn he eves of HY Ind tt aru A prospective buyer Mr. B asked the owne property) for the sum of $6,000? Mr. O replied, 5 Jeffrey T. Ferriell, Understand: tr id ed. lexis, mics 3 2 I, Underst 2m 4 Ferri ‘anding Contracts, 2n i Econo ; , 2nd ed., LexisNexis, 2009. _, Contract Formation; 85 Va L. Rev. “385 (1999) sa ™ Owen v. Tunison, 158 A. 926 (Me. 1932). » un _Proposal ie) improvements... 1 would not be possible for me to sell it unless I was to receive $16,000 cash.” Mr. B immediately said, “[1] accept your offer.” Later, Mr. O refused to convey the property. Mr, B sued, ‘The Court held that, the owner's fanguage did not manifest a willingness to sell. Instead, it was more in the nature ‘ofan invitation to open negotiations. Th indies the language fails to convey the willingness of the person making it or (¢ something different, the communication is not an offer. (ii) The offer must be definite or certain ‘The terms and contents of the offer should be clear, unambiguous and not uncertain or vague. Since the parties are free to design their own contract, the law cannot make a contract out of those terms that are whimsical, illusionary or incapable of being ascertained. Section 29 of the Act states: Agreements, the meaning of which is not certain, or capable of being made certain, are void. Thus, no contract would come in existence if the terms or clauses were vague. Moreover, all the terms necessary to conclude a binding exchange should be included in the offer. (iii) The offer must be communicated to the other party ‘A person cannot accept an offer unless he is aware of the existence of that offer. Hence, no issue of acceptance or of any contract to come into existence can arise Lill the offer is not communicated to the other party. Moreover, an offer accepted without knowing its manifestations does not confer any legal rights on the party accepting the same. (iv) The offer must be made with a view to obtain acceptance The offer must be signified to the other party so as to declare or convey the intentions of the offeror to seek acceptance of the other party. It should not be a mere statement or expression of interest or mere display of some product. (¥) No additional steps required In order to conclude a contract, no additional steps are needed to be taken other than the offeree’s acceptance. If further steps must be taken before the other party can accept, no appropriate offer has been made Few of these essential elements are detailed hereunder: Communication of Proposal Section 3 of the Act prescribes how can an offer be signified or communicated to the party to whom it is made... 22 Law of Contract (Chapter ion, acceptance and revocation of prop, oo < Section 3. Communi The communication of proposals, the acceptance of proposals, and yy, revocation of proposals and acceptances, respectively, are deemed io 4. made by any act or omission of the party proposing. accepting or revoking by which he intends to communicate such proposal, acceptance revocation, or which has the effect of communicating it. or The section simply states: (1) That communication may be made by any act or omission which the effect of communicating the same for example, by words of mou, by advertisement using any medium, by announcements or even p; conduct etc. y The words “signifies to another” clearly imply that the willingness o, the assent, as the case may be, must be brought to the notice of the other, in other words, “is communicated to the other.”* (ii) Such communication need not always be express or in writing since the language of Section 3 does not provide so. ‘The other party should be notified of the offer and the acceptance so that the meeting of minds may happen resulting in a promise. Section is relevant here in this regard. Section 9. Promises, express and implied— In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. Thus, an offer or acceptance when made by words, written or verbal, it is said to be express. When the same is made by any other method, it is said to be implied. Bid at an auction is a very good example of an implied offer. Likewise, stepping into a DTC bus or eating in a restaurant are respectively, implied acceptances to pay for the services afterwards, The case of Upton Rural District Council vy, Powell® is an appropriate illustration in this regard. A fire broke out in the Powell’s farm. Believing that he was entitled to the be services of the Upton Fire Brigade, he summoned it to extinguish that fire. " ™ Brigade put out the fire and claimed compensation for the services. It was fou later that his farm was not within the free service zone of that Council. It ¥* held that he was bound to pay. The Court said: The truth of the matter is that the defendant wanted the services of Upton he asked for the services of Upton and Upton, in response to that request provided the services. Hence, the services were rendered on an implies promise to pay for them. 5 “Anirudh Wadhwa, Mulla: The Indian Contract Act, 13th ed., LexisNexis, 2011, at P-?> © Upton Rural District Council v. Powell, (1942) AIL ER 220. [4Chapter Proposal 2B In the case of Haji Mohd. Ishaq y. Mohd Iqbal,’ the Indi Y an Supreme Court has applied Scetion 9 of the Act Certain goods were supplied by the plaintiff on his own account fo the defendants who accepted the goods clearly and unerringly and paid a part of the price to the plaintiff. A dispute regarding the payment of balance amount had arisen between the parties. The Supreme Court ruled that, the defendants by their conduct had accepted the goods. They never repudiated ny of the numerous letters and telegrams of the plaintiff demanding the payment of money. This clearly showed that a direct contract which in law was called an implied contract by conduct was brought about between them and therefore, they were liable to pay. The general rule is that an offer is not accepted by mere silence on the part of the offeree but there may be further facts, conduct of the parties along with the offeree’s silence that may amount to acceptance.” When persons express their agreement in writing, it is for the express purpose of getting rid of any indefiniteness and to put their ideas in such a shape that there can be no misunderstanding, which often occurs when reliance is placed upon oral statements. !° COMMUNICATION OF OFFER WHEN COMPLETE An offer cannot be accepted until and unless it has been brought to the knowledge of the person to whom it is made. This principle is embodied in Section 4. Section 4 Communication when complete— The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. 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. The communication of a revocation is complete,— as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as 10 be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge. } Haji Mohd. Ishag v. Mohd. Igbal, (1978) 2 SCC 493 See also Ramji Dayawala & Sons v. Invest Import, (1981) 1 SCC 80 : AIR 1981 SC 2085, Clarke v. Earl of Dunraven, (1897) AC 59; Haridas v. Mercantile Bank of India, (1920) LR 4714.17. Brogden v. Metropolitan Rly Co., (1877) 2 App Cas 666; R. v. Fulham, Hammersmith 1» ard Kensington Rent Tribunal, ex parte Zerek, (1951) 2 KB 1 1951 Roop Kumar v. Mohan Thedani, AIR 2003 SC 2418,Law of Contract [Chap Bal Gauri Dutt! the nephew of the defendant absconded Tine phanatt a servant ot te det dat, ay sen 1S eh tor the mia After the planntt had tefl 19 search of the oy we defendant \.."* ad TE Rupees SOL to anyone who could find oy, rout the reward, found out the boy. Later} : tion against the defenda be In Lalman Shukla home boy handhills announeiy hoy. The plaintiff, not know int pe know af the reward and brought an aS t 10 claim reward Te was held that, sine of finding the boy could 1 not entitled to claim the sard principle in the following words: be founded on a contract. In order 1 ceptance of ap offer and there can te is knowledge of the offer. ~ If a person says something that may be reasonably interpreted by another 3, willingness to enter into the said transaction and that the only thing needed to done to conclude that transaction is a simple “yes ‘a proposal can be to be made. To determine whether a particular communication is an offer or 9 re courts consider the language. If the language of the communication ws ‘unequivocal and a mere acceptance is necessary 10 conclude that bargain. the eee aeiyveation may be said to be an offer. If something more than the po: expression of consent is required to be done on part of the offeree so as i oxide that deal, the communication cannot be said to be an offer. t further, let us consider a very. simple illustrate: d mobile phone. If Anubha says to Navyz. mobile phone,” it might not be f was ignorant of the offer of reward, | ance of the offer. He, theret the plaintif ot amount to accept award erjé J. explained the present can only re must be an Ma A suit like the constitute a contract, ther iptance unless there To understand this concep wherein Anubha wants fo sell her use “1 want to get at least Rupees 35. 000 for my clear to Navya whether, Anubha’s statement was: an offer to sell her mobile phone to her (specifically) for Rupees aan invitation to Navya to make an offer herself or 5,000) a general conversation. If Anubha’s language is an offer, then Nay her consent by saying, “Hurrah! DU rake Anubha’s statement can, in no way, be termed a s her willingness (0 sell the mobile to Navya for Rupees 35,000. At best, merely an invitation to offer. Since, Anubha's statement is merely an invitation ofter@Anki ttempt to accept does not result in a contract with Anubhs, NavyQrwanisto buy the mobile, she will have to make an offer to Amubha &! she can either accept or decline. 7 1 Lata Shukla Gigur Dute (1913) U1 AML 48. Thid., 249; see also, Fitch v, Snedakar, (1868) 38 NY 248; Ry. Clarke, (1927) 40 CURChapter 2] = Proposal BB Alternatively, Anubha might respond in such a way that her statement can equivocally qualify to be an offer, for example, “Your mobile is worth Rupees 30,000. T might consider buying for this much." The use of words “might consider’ does not express her: willingness to bind herself to this bargain. Navya's acceptance may also not result in a binding contract, Hence, in this to qualify to be an offer. illustration, none of the parties has made a statement INTENTION TO CONTRACT ‘There are certain promises that law does not recognize as a contract or those are not enforceable in court of law. For e.g. A promise to go for a movie or dinner with a friend. The reason is that there has never been an intention to create a legal relationship in such situations, Thus, an offer should be made with as to bind another party and made ex; not an offer. What the law requir consequences. Thi an intention to create legal relationship so pression of present intent to do something is ires is that the parties must intend legal ough the Indian Contract Act does not contain any provision to convey that an offer or its acceptance should be made with the intention of creating legal relation but it is a settled principle in English law." TEST OF CONTRACTUAL INTENTION ‘The test of contractual intention is alway matters practically is what a reason: prevalent circumstances, ys objective and not subjective. What able person would think under the certain and not what the parties had in their respective minds. However, at the same time, it does not mean that contract in family or social matters, The case of Balfour v. Balfour,'* is an apt illustration in this regard. The husband was employed in a government job in Ceylon, He went to England with his wife during vacations. The wife was not in a position to travel back to Ceylon because of certain health issues. The husband promised to pay £30 per month to her towards maintenance for the period she had to live apart. The husband failed ‘o pay the promised amount. She sued him for not fulfilling his promise. Tt was held that, there was no intention to create legal relationship when the husband made that promise and hence he could not be held to be liable. Atkin LJ. observed: there can never be a valid It is necessary to remember that there are agreements between parties which do not result in contracts within the meaning of that term in our law. ‘The ordinary example is where two parties agree to take a walk together or where is an offer and an acceptance of hospitality. Nobody would suggest in ordinary circumstances that those agreements result in what we know as a Contract, one of the most usual forms of agreements which does not constitute @ contract appears to me to be the arrangements which are made between SesvessstSUInIAISTTINTTETNTERSTIS! tt See Searles v. Trustees of St. Joseph's College, 695 A.2¢. 1206 (Me. 1997), "Balfour “saloon (13) 2 KB 811; Also see Rose v Crompton, (1923) 2 KB 261Law of Contract hapter 7 i agreements or many of them, d ‘ coca To my mind tho " tusband and ia all. -e¥e MOUEH there may BE Wha 8 bee Lt rest in ood constitute consideration...- a ey be no contra Recause the parties did nol Me eal ahat they should be attended by tega) consequences. ‘The above principle applies to dealings between close relations, such as father ® mother with son or daughter. s ; tn i sv, ve has also expressed his opinion ts L.J. in Jones V. Padavatton, © als 4 on ty ants case, one Mrs. Jones lived in Trinidad. Her daughter, a divorg ie fady with a baby boy, lived in Wes hington and was employed with the Indi, Embassy there. Mrs. Jones persuaded her daughter to leave her job in Washington and study in England to become a Barrister. Mrs. Jones offered pay a monthly allowance to her during her studies for the bar in England. Venkatachaliah J. had referred to Chitty on Contracts'® in this case’ and held that: ... the presumption is that legal obligations are intended. The onus is on the parties asserting the absence of legal relations and the test is not subjective, Dut is an objective one. In an eatlier case, Banwari Lal v. Sukh darshan Dayal,'* the Indian apex coun applied this principle to some extent. Chandrachud J. (afterwards CJI) said: Microphones have not yet acquired notoriety as carriers of binding representations. Promises held out over loud speakers are often Claptsaps of wealtice In the instant case, the announcement was, if at all, @ puffing up of property put up for sale. ‘Though, till date, there is no established norm as to whether, this requireme contractual intention is a must or not. nt of However, in M.P. Housing Board v. Progressive Writers and Publishers,” it was reiterated, that, the intention of the parties is to be gathered from the words used in the agreement. TYPES OF OFFER/PROPOSAL The following are the various kinds of offers: (A) Specific Offer/General Offer The offer is a specific offer when mad le to a named person while it is said t bea general offer when made generally to public at large or is open to all, Jones v. Padavatton, (1969) 2 AILER 616 : (1 BI (1969 'S “Chitty on Contracts, 5th ed, Vol. 1, Sweet & Maxwell Lid 1983, cwr iin Mul vv. Abdul Hussain Mulla Mohd. Ali, (1988) 3 SCC 562; See also, Bahamas Oil Co. v. Kristiansan re t Refine stiansands Tankraderie As and others and Shell intermanional Marine Lids 9" Lloyds Law Reports 211 and Edw is ards v. Skyways, "8 Banwari Lal v. Sukh darshan Dayal, (1973) 1 Scegon | ERS MP. Housing Board v. Progress ; ne rogressive Writers and Publishers, AIR 2009 SC 1585 : 20”Chapter 21 Proponal a Daumple (1) Aimakes on offer to B to sell a car owned by B for 22 lakhs to him. This iva specific offer (2) An advertisement appears in the newspaper that whosoever finds A missing son would be entitled for an award of Rupees. 50000, This is a general offer and the contract is made only with that person who comes forward and performs the conditions of the proposal. In Lalman Shukla vy. Gauri Dutt,” as discussed earlier in this chapter, there was no concluded contract since the servant had no knowledge of the offer. Mears CJ of the Allahabad High Court applied the same provision to the case of Har Bhajan Lal v. Harcharan Lal,”' even though the terms of a general offer ‘were not complied with substantially. A young boy ran away from his father's home. The father circulated a pamphlet, offering a reward. The paper said, that, “Anybody who finds trace of the boy and brings him home will get Rupees 500.” The plaintiff was at Dharmashala of a railway station, where he happened to see a boy. He overheard a conversation partly in this regard and realized that the boy was the missing boy. He promptly took the boy to Railway Police Station and sent a telegram to the boy's father that he had found his son. The father denied any obligation towards him. It was held by the Court that, the handbill was an offer open to the whole world and capable of acceptance by any person who fulfilled the condition, and that the plaintiff substantially performed the condition and was entitled to the amount offered. In Carlill v. Carbolic Smoke Ball & Co.” is a well known authority on this issue of general offer. A company offered by advertisement £ 100 to anyone who would catch influenza, cold or any such disease after having used the smoke ball according to printed directions. It was said in the same advertisement that £ 1,000 was deposited with the Alliance Bank in this regard showing their sincerity in the matter. Mrs. Carlill used the smoke balls according to the directions but she contracted influenza. The company did not fulfill their promise of reward towards her stating following reasons: © That there was no intention to enter into legal relations as it was simply a ‘puffy’ advertisement «© that the offer was not made to any one person in particular and * that the plaintiff had not communicated her intention to accept. Bowen LJ stated the statement was not mere puff. Since the company had lodged £ 1,000 with the bank for the purpose. His Lordship refuted the company’s argument that an offer could not be made to the world at large. He observed: i ceseiseeeskcesasne cedars 3 Lalman Shukla v. Gauri Dut, (1913) 11 ALL LI 489. 2% Har Bhajan Lal v. Harcharan Lal, AIR 1925 All $39. Carlill v, Carbolic Smoke Ball & Co., (1893) | QB 256.