LAW OF CONTRACTS I

PROF. SWASTI GUPTA

BACKGROUND

 Barter System

 Feudal system

 Industrial Revolution - Modern Market based economic system

 The essence of the market-based system is that individuals voluntarily exchange

 The system presupposes a state that invests individuals with the legal rights and guarantees of exchange.

 Contract Law is made up of the rules of this exchange.

BACKGROUND

 Merchants and traders travelled widely in England and Europe and later overseas. They approached courts to settle any disputes. They
raised several questions such as,
 Did the parties get into a voluntary agreement?

 Can a person pull out after getting into an agreement?

 If a person does not perform his part, what benefits should be given to the aggrieved person?

 What if an agreement is formed through lies and deception?

 What if an agreement is formed against state’s law?

 What if one party want to avoid the contract?

 What if the performance could not be met due to unforeseen natural occurrences?

 What if………?

------- Therefore, codification was attempted which means that the principles of law enunciated by the courts were put into writing by the
legislature in order to regulate the business contracts.
BACKGROUND

Most important • General rules relating to all types of

part of contracts and
• Special provisions relating to some
mercantile law specific contracts.
which deals • Relevant statute : Indian Contract Act,
with: 1872
DEFINITION

 Salmond: A contract is an agreement, creating and defining the obligation between parties
 Fredrick Pollock: Every agreement and promise enforceable at law is a contract
 William Anson: An agreement enforceable by law made between two or more persons by which rights
are acquired by one or more to act on the part of others
STATUTORY DEFINITION


Section 2 (h) of the Indian Contract Act, 1872 (‘The Act’)

“An agreement enforceable by law is a contract.”

Contract = Agreement + its enforceability by law

AGREEMENT


Section 2(e) : “Every promise and every set of promises forming the consideration for each other is
an agreement.”


An agreement = Offer/Proposal + Acceptance;


At least 2 parties;


Meeting of minds i.e. parties must agree on the same thing in the same sense – consensus ad idem


Consideration: The benefits that the two sides promise each other
 An agreement to do or not to do something creates rights and obligations for the two parties, respectively.

 Offer Communication Meeting of the minds Acceptance

 Example: JGU to Royals/ YB

 Cab driver says 600 - OK

 Cab Driver says 600, you say I’ll be a regular customer so for me 500 – OK
 ENFORCEABLE BY LAW


An agreement must give rise to a legal obligation to be regarded as a contract.


The conditions of enforceability are stated in Section 10 of the Act.

“All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful
consideration and with a lawful object, and are not hereby expressly declared to be void”
• For a valid contract, parties should have an intention to create legal relationship, this intention can be
inferred from the facts of the case.
- For example: an agreement to go for a picnic is not a contract, because it does not create an obligation
or a duty enforceable by law.
- Such agreements are purely of a social nature where there is no intention to create legal relationship.
 Void agreements – Agreement that cannot be enforced by law, S. 2(g)

 Example: Agreement with a minor?

 It is void-ab-initio (void from the beginning) 
 Voidable agreement – Can be rendered unenforceable at the behest of any of the parties.

Failure by one or both parties to disclose a material fact. A mistake, misrepresentation, or fraud
 Therefore, all contracts are agreements, but all agreements are not
contracts
Only
 Agreements enforceable by law are contracts.
OFFER

Section 2 (a) : Proposal


Section 9: Can be expressed (spoken or written in words) or implied through gestures, body language, actions, commissions
and omissions.


Offer may be ‘specific’ or ‘general’.


Section 8, – “performance of the conditions of a proposal is an acceptance of the proposal”


A offers to sell her house to B for x amount. B accepts.


A offers to pay 10,000 to anyone who finds her cat. B finds A’s cat,


A offers to sell his house for X amount. B offers to buy it for Y amount. A says he wouldn’t sell it for any amount other than X.
B accepts.


Counter-Offer: Replying to an offer with another offer either by substituting the original offer with a new offer or by adding
conditions to the original offer.
CONDITIONS OF A VALID OFFER


Offer must intend to create a legal relation.


Terms of offer must be certain, definite and not vague


Offer must be communicated.


Offer should not contain a term the non-compliance of which would amount to acceptance.


Special terms and conditions in an offer must also be communicated.


The offer must be distinguished from a mere declaration of intention


Offer must be distinguished from an invitation to offer.

STANDARD: Objectivity i.e. how would an Ordinary and Reasonable person perceive it? It does not matter what was the
intention.
1. Goods displayed in a shop or on window shelves
A night lamp is placed on the shop window with a price tag of INR 2500. I walk into the store and pick it up and pay 2500 to the
shop owner. Owner takes the money.
>>When a night lamp is placed on a shop window, the owner has made an invitation to treat. When I pick up the lamp and pay the
price of the lamp to the owner, I make an offer. When the shop owner accepts takes the money, he shows his acceptance to my offer.

What about self service stores?

Whether the displaying of goods with price tag on them is ‘an offer to sell’ or just ‘an invitation to offer’? ‘It was an invitation to
offer only, the property in the thing would not pass in favour of buyer unless his offer is accepted by the seller.’

- Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd. (1952) 2Q.B. 795.
 Advertisements: A pamphlet or an ad in the TV?

 In the business sense, advertisements are generally invitations to treat

>> “£100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic
influenza colds, or any related disease caused by taking cold, after having used the ball (medicine) three times daily for two
weeks, according to the printed directions supplied with each ball.
£1000 is deposited with the Alliance Bank, Regent Street, showing our sincerity in the matter.”

 Advertisements are treated as offers in situations when there is an advertisement to general public offering a reward to
anyone who does something (Carlill v. Carbolic Smoke ball company, 1983).
 An advertisement is merely a communication and it is decided by its content whether it is an offer or not.
 Auction-

 Putting up the good for sale is not an offer but an invitation to treat.

 When I make a bid, I am making an offer. The owner of the good (auctioneer) signifies his acceptance by the fall
of the hammer for the winning bid. I now have a legally binding contract with the seller so long as there is no
reserve price that hasn’t been reached.
 However, I am free to withdraw the bid and the auctioneer is free to withdraw the good anytime before the striking
of the hammer
INVITATION TO OFFER/ PROPOSAL


Opportunity given by a person who is willing to contract to invite others to make an offer. A reply to an invitation
to offer does not constitute agreement but merely an offer.


While an offer when accepted leads to a binding contract, an invitation to treat cannot be accepted as it is simply
an invitation to an offer.


Price lists, catalogues, Pamphlets, Showcase and Shop windows, quotation of prices, general announcements of
sale.


“In each case of this type it is a question to be determined upon the language used, in the light of the
circumstances in which it is used, whether what is said by the vendor is a mere quotation of price or in truth an
offer to sell” - Middleton J. in Canadian Dyers Assn’n Ltd. v. Burton (1920) 47 O.L.R. 259at 260.
ACCEPTANCE


The term defined u/s 2(b) of the Indian Contract Act, 1872


A proposal (defined under Sec 2(a)) when accepted becomes ‘a promise’


It can be expressed or implied
WHO CAN ACCEPT

•
Only by the person or persons to whom it is made

or by their authorized agent.

•
A specific offer can be accepted only by the specific person and no one else.

•
A general offer can be accepted by any person provided-

•
(a) knowledge of the offer;

•
(b) acts as per the terms and conditions of the offer.
RULES OF A VALID ACCEPTANCE

1) Must be absolute and unqualified - Sec 7(1)

•
Adding conditions, variance, terms to acceptance => a ‘counter offer’

•
X (agent) offered to sell a lodge for Rs 10,000. Y replied that they were ready to purchase it if sold at Rs. 6000.
But the agent replied that he would not sell it at less than Rs. 10,000. Y agreed this time and expressed their
willingness to buy. X refused to sell. Y sued X for specific performance.

•
SC: There was no offer or counter-offer but only an invitation to offer by the defendant to which the final offer
was made by the plaintiff. The defendant did not assent to this final offer of Rs. 10,000 so no conclusive contract
was made. In the absence of contract there cannot be any specific performance. (Caselaw: Mcpherson v Apanna)
RULES OF A VALID ACCEPTANCE

2. Must be in prescribed manner - Sec 7(2)


It must be in a specified mode of communication.


Where no manner is prescribed? Acceptance must be expressed in some usual and reasonable manner.
RULES OF A VALID ACCEPTANCE

3. Must be communicated – ‘in the course of transmission’ (S.4)

Example: X in Sonipat sends a letter by post to Y offering to sell his Contract-law notes for Rs 2000/-. The letter is
posted on February 14, 2023. This letter reaches Y on February 15, 2023. Y accepts the offer and posts her letter the
next day i.e. February 16, 2023 which reaches X on February 18, 2023.


Communication of offer is complete on? And communication of acceptance?


What if the letter of acceptance is lost in transit or delayed?
COMMUNICATION OF ACCEPTANCE

Is complete when :

(a) 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 and

--- Feb 16

(b) As against the acceptor, when it comes to the knowledge of the proposer.

--- Feb 18

This is sometimes known as the “Mailbox Rule” (America) or “Posting Rule” (England) (Adams v. Lindsell)
Is it fair?
COMMUNICATION OF ACCEPTANCE


Therefore, the Offeror bound by the acceptance as soon as the letter of acceptance is duly posted by the acceptor, but


The Acceptor is bound by his/her acceptance only when the letter of acceptance reaches the Offeror.

Implication: A valid contract arises even if the letter of acceptance is lost in transit or is delayed.


The offeror is bound by the acceptance because the acceptor has done all that is required on his/her part to accept.


The time period in between posting of letter and reaching of the letter in the knowledge of proposer can be used by
the acceptor to revoke acceptance as well.
REVOCATION OF OFFER

•
Revocation of offer defined u/sec 5.

•
‘A proposal may be revoked at any time before the communication of its acceptance is complete as against the
proposer, but not afterwards’.

•
An offer can be revoked at any time before the letter of acceptance has been put in the course of transmission.

- Revocation must always be expressed, and

- Move from the Offeror him/herself or a duly authorised agent.

- General offer: Notice must be given through the same channel by which the original offer was made.

- Read How are revocations made: Section 6

Ayush offers to sell his ipad to Jestina for 40k via a letter posted on February 14, 2023. The letter reaches Jestina on
February 16, 2023. She accepts the offer and send her reply the next day day. The letter reaches Ayush after the weekend on
February 20, 2023

 When is the communication of offer complete?

- February 16 when it reaches Jestina

 When is the communication of acceptance complete

- February 17, when Jestina posts it

 By when can Jestina revoke her acceptance

- Between February 17 and February 20

 By when Ayush revoker his offer

- By February 17 when the letter is put in the course of transmission

 REVOCATION OF TIME BOUND PROPOSALS

Roshni, has a spare laptop and offers to sell her old Macbook Pro to Anisha for 60k via an email stating ‘this offer is
valid until I go home for the Holi break on March 06, 2023’. On March 01, 2023 Anisha finds out that Roshni has
agreed to sell her laptop to Bhawana. On the same day, Anisha delivers her acceptance to Roshni to buy the laptop.
- Roshni takes the money from Anisha and promises to deliver the laptop after she brings it from her house during the
Holi break.
 Facey (D) was in negotiations with the Mayor and Council of Kingston regarding the sale of his store.

 Harvey (P) sent Facey a telegram stating: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price-answer
paid.”
 On the same day, Facey sent Harvey a reply by telegram stating: “Lowest price for Bumper Hall Pen £900.”

 Harvey sent Facey another telegram agreeing to purchase the property at the asking price.

 D refused to sell and P sued for specific performance and an injunction to prevent Kingston from taking the
property.
HARVEY V FACEY

 Issue: - Is a statement of the minimum price at which a seller would sell an offer?

 Analysis: -

1st Telegram (Sent by Plaintiff)- Asks for willingness to sell and what the lowest price is

2nd Telegram (Sent by defendant)- Replies to second question only i.e. states the lowest price

3rd Telegram (Sent by plaintiff)- Treats Facey’s telegram as an offer when it was only an invitation to offer
 D posted an ad in a newspaper about some land he needed to sell urgently. P saw the ad and inquired about it.
 D sent P information about the property, along with directions to get to it. D stated that the rock-bottom price was
$2500; D also made sure that the letter purported itself to be a "form letter".
 P wrote to D asking for more info on the land and suggesting an escrow service "should [he] desire to purchase
the land".
 D wrote back giving the legal description of the land and saying that if P was really interested, he should decide
quickly since D expected to have a buyer in a week or so.
 D sold the property to a third party.
 Three days later, P opened an escrow account and sent D a letter telling him that he was purchasing the land.
 Upon finding out that the land had already been sold, P sued D for breach of contract.  
MACPHERSON V M.N.APPANNA

 Issues:

 Where is the line between contract negotiation and contract formation?

 Does an advertisement qualify as an offer?

 Holding/Rule:

 A contract is officially formed when one party makes an offer and the other party assents to the offer.
 An advertisement is a mere request for an offer.