Coverage of this Article
- The proposals and offers that we reject remain mere proposals and never bloom into agreements or contracts.
2. What Is Contract
- A contract is an agreement between parties, which creates mutual obligations for both parties and is enforceable by law.
- Sec.2 (h) of the Indian Contracts Act, of 1872 defines a contract.
3. Essentials Of A Valid Offer
- Case Law- Weeks vs. Tybald, 1605 Noy
4. Offer VS. Invitation To Offer
- Case Law- Harvey vs. Facey, (1893) AC 552
5. Capability To Create Legal Relations
- Balfour vs. Balfour, (1919) 2 K.B. 571
6. Communication To Offeree
- Lalman Shukla vs. Gouri Dutt , (1913)
7. Types Of Offer
- Oral Offer
- Written Offer
- Cross Offer
- Standing/ Open/ Continuing Offer
8. Differentiate Between Indian Law and English Law
9. Compensation Under Contract Law
10. Penalty VS. Compensation
- It has made sure that the Indian Contacts Act does not fade into oblivion.
In today's business, commerce and business-dominated world where we all are interdependent on each other for our needs we come across multiple offers and proposals each day some of which we agree while some we reject. The proposals and offers that we reject remain mere proposals and never bloom into agreements or contracts. The ones that we agree to become agreements until a pinch of enforceability is added which ultimately makes it a contract! However, unfortunately, most of us are not informed and aware enough to know when and how are we making and entering into agreements, what kinds of agreements exist, what are the different elements that make a valid agreement and what statutes govern them.
Through this piece, I Adv. Niharika Lohan, through some relevant and mutual questions, will try to shed some light on one of the many elements and dynamics of contracts and help my readers understand what are offers, what are the different types of offers, what statutes govern offers, what are the various important precedents that one should learn about while learning about this topic and how are oral offers different from the written ones. Let's start with the basics,
WHAT IS A CONTRACT?
In lay man terms, a contract is an agreement between parties, which creates mutual obligations for both the parties and is enforceable by law. An agreement is born when an offer is proposed by one party and is accepted by the other by free will in lieu of a legal and valid consideration.
Now speaking the language of the law, sec.2 (h) of Indian Contracts Act, 1872 defines a contract very simply as, “an agreement enforceable by law is a contract.” This definition gives us two key words, “agreement” and “enforceability”. Sec.10 gives essentials of an agreement, which are: (i) free consent, (ii) competent parties, i.e., major and sound mind (iii) lawful consideration, (iv) lawful object and (v) not declared void by law.
Let us now look at the essentials of a valid contract, (i) offer (ii) acceptance (iii) consideration (iv) enforceability.
This article will enlighten the readers about the first essential, i.e., Offer.
An offer is defined by sec. 2(a) as, ‘When one person signifies to another, his willingness to do or abstain from doing anything with a view to obtaining the assent of the other, to such an act or abstinence, he is said to make a proposal.’ The word “proposal” and “offer” are interchangeably used in English and Indian law.
ESSENTIALS OF A VALID OFFER
(1) Firstly, there must be something that can amount to an actual offer which is something more than a mere statement made during conversation, as held in Weeks vs. Tybald, 1605 Noy. 11
(2) Secondly, to constitute an offer the words used must be distinguishable from mere invitations to transact business or mere willingness to treat and from ordinary advertisements.
(3) Thirdly, the offer must be intended to create and capable of creating legal relations.
(4) Finally, an offer is made when and not until it is communicated to the acceptor.
OFFER VS. INVITATION TO OFFER
Quotation of the price or catalogue of goods or invitation for tender or quotation of tender is not an offer but invitation to offer.
Here are a few landmark cases with clarifies the distinction between the two:
• The plaintiffs telegraphed to the defendants, writing: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price.” The defendants replied, also by telegram: “Lowest price for Bumper Hall Pen, L900”. The plaintiffs immediately sent their last telegram stating: “ We agree to buy Bumper Hall Pen for L900 asked by you.” The defendants, however refused to sell the plot of land at that price. It was held that no contract was concluded because defendant did not make any offer or counter offer but was merely inviting offers, as held in Harvey vs. Facey , (1893) AC 552
• A catalogue of goods for sale is not an offer but only an invitation for offer and similarly a shopkeeper who places goods in a shop window with a price label or upon shelves in a self-service shop does not make an offer but merely an invitation to offer, as held in Great Britian Pharmaceutical Society vs. Boots Cash Chemists, (1953) 1 B.Q. 401
• When a merchant or commission agent sends his quotations or terms of business to other people it is merely an intimation on his part of his readiness to transact business on those terms and in such a case a contract arises only after an order is placed and accepted, as held in Chaturbhuj Vithal Dass vs. Moleshwar Parasram, AIR 1954 SC 236
CAPABILITY TO CREATE LEGAL RELATIONS
The general proposition that in addition to the existence of an agreement and the presence of consideration there is also the third contractual element in the form of intention of the parties create legal relations, as held in the landmark case of Balfour vs. Balfour, (1919) 2 K.B. 571 (maintenance agreement)
The intention of the parties create legal relations could be express or implied. In family or social dealings the inference is that the parties did not intend legal consequences and in business matters the inference is opposite, that is, the parties did intend legal consequences.
COMMUNICATION TO OFFEREE
An offer in order to be a valid offer it must be communicated and without the knowledge of offer there cannot be acceptance.
Lalman Shukla vs. Gouri Dutt , (1913) 11 A.L.J. 489 is a famous case of communication of offer. In this case, Gouri Dutt’s nephew went missing. Lalman Shukla was the servant of Gouri Dutt, who was sent to find the missing nephew. After Shukla left to find the nephew, Gouri Dutt issued a reward of Rs.501 to anyone who would find his nephew. Shukla was unaware of this award money. After a few days, he was successful in finding the nephew. Later, he got to know of this award and claimed it, Dutt denied his claim, against which Shukla filed a case. It was held that since Shukla was unaware of this reward at the time he left to find the nephew, his bringing the lost nephew home did not amount to acceptance of the offer, and therefore his reward was denied.
This judgment clarified that acceptance of the offer is to be seen as to the knowledge of the offer and acts done by such person in accordance to the terms of such offer.
TYPES OF OFFER:
Widely, offers can be Oral/Verbal and Written. This is a wide ambit of offers, this is an umbrella under which many different kind of offers take shade. They all are dealt with below:
• Oral Offer
As the name specifies, an offer made by mouth, or an offer made in words is called an oral offer. For e.g., ‘A’ offers to sell his horse to ‘B’ by stating, “I want to sell the horse for Rs.50,000”. Here ‘A’ makes an oral offer.
• Written Offer
When a person signifies to another an offer in a written form, via a letter, post, e-mails, etc is said to be a written offer. For e.g., a company XYZ offers via a letter to another company ABC to buy its shares. It will be called a written offer.
• Cross Offers
When an offer is made by two parties to each other bearing same terms of bargain cross each other in post, they are called as Cross Offers. For e.g., ‘A’ offered to sell his phone to ‘B’ for Rs.1000 on 22 September through a letter sent by a registered post. On the same day, ‘B’ also wrote to ‘A’ making an offer to purchase ‘A’s’ phone for Rs.1000. Now, when ‘A’ and ‘B’ sent their respective offers, they were unaware of the offer made by the other party. Here, even though both intended the same contract, there will arise no contract. A contract can arise only if either of the parties offered and the other party accepted it, having the knowledge of that very offer.
• Counter Offer
An acceptance with a variation is no acceptance and it is in effect and substance, simply a counter offer which must be accepted fully by the original proposer, before a contract is made. As held in Haji Mahomed vs. E. Spinner (1900) 24 Bom. 510
A conditional acceptance is not acceptance at all and it is in fact rejection of the original offer and is merely a counter offer, as held in the case of
Jawahar Lal Burman vs. U.O.I. , AIR 1962 SC 378
• Specific Offers and General Offer
An offer to a specific person or a certain person specifically, it is called a specific offer. Whereas an offer made to the general public at large is a general offer. For e.g., an offer to give reward to anybody who finds a lost pet cat, is a general offer. This will be deemed to be accepted by any person from the general public who ultimately finds the pet cat. However, if an offer is to give ‘A’ an award if he finds the cat, is a specific offer.
• Standing / Open / Continuing Offer
The offers which are allowed to stay open for acceptance over a period of time are termed as standing, open or containing offer. Such offers continue to stay active over that stipulated time frame. For e.g., an offer to supply 1000 electric bulbs from 11 January to 11 December, in accordance with the orders which may be placed during that time , is a standing offer. Whenever, in this duration an order for the supply is placed, amounts to acceptance of that offer. If on 9 February, an order for the supply of 500 electric bulb is made, there is acceptance to the offer to that extent and the offeror then becomes bound to supply those 500 electric bulbs. So far as the remaining quantity is concerned, the offer can be revoked just like any other offer.
It is the cardinal principle of law of contract that offer and acceptance of an offer must be absolute. However, when acceptor puts in a new condition while accepting contract already signed by proposer, contract is not complete until proposer accepts that condition. This has been held in multiple cases including:
(a) Haridwar Singh vs. Bagum Sumbrui & Ors., AIR 1972 SC 1242
(b) M/s Padia Timber Company (P) Ltd. vs. The Board of Trustees of Visakhapatnam Port Trust, AIR 2021 SC 341
DIFFERENCE BETWEEN INDIAN AND ENGLISH LAW
In India, the death or insanity of the offeror does not automatically make the offer to lapse and offer stands revoked only when the fact of death or insanity comes to the knowledge of the acceptor before acceptance. Whereas, under English law on the death or insanity of the offeror, the offer automatically lapses and same cannot be accepted even if the offeree is ignorant of the offeror’s death or insanity.
The rule of English law is that a mere offer to sell the property, which can be withdrawn at any time and which is made dependent on the acceptance of the person to whom, the offer has been made, is a mere nudum pactum. The person to whom, the offer has been made cannot, by acceptance makes a binding contract after he knows that the person who has made the offer has sold the property to someone else. -Dickinson vs. Dodds, 1876 Ch. D. 463
COMPENSATION UNDER CONTRACT LAW:
The principles for determining compensation has been laid down under Section 73 & 74 of the Contract Act. Section 73 embodies the following four rules for assessing damages in case of a breach of a contract. The aforesaid four rules are as under:
First Rule-When a contract has been broken the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused by him thereby, ---
(i) which may fairly and reasonably be considered arising naturally i.e. which naturally arose in the usual course of things from such breach or
(ii) which the parties knew, when they made the contract, to be likely to result from the breach of it i.e. in contemplation of both the parties at the time they made the contract.
Second Rule: Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. A party is not liable for loss which is too remote, i.e. which is not the natural or probable consequence of the breach of contract.
Third Rule: In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.” On breach of contract, the plaintiff being under the duty to take all reasonable steps to mitigate the loss consequent to the breach, he is debarred from claiming any part of damage which is due to his neglect to take such steps.
Fourth Rule: Damages payable for the breach of a quasi-contract are exactly the same as these for breach of an ordinary contract. In other words all the above rules also apply to Quasi-contracts. This principle was affirmed in multiple case, some of which are:
(a) Hadley vs. Baxendale, (1854) 9 Ex. 341
(b) Pannalal Jankidas vs. Mohanlal , AIR 1951 SC 145
(c) Thawards Pherumal & Another vs. U.O.I., AIR 1955 SC 468
(1) The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in the case of breach and stipulations by way of penalty and if there is method to measure the actual damages then actual damages calculated as per Section 73 not exceeding the amount specified in the contract would be given whether the sum named is a pre-estimated loss or by way of penalty.
(2) If the sum mentioned in the contract is a sum which they contemplated would flow from the breach, it is liquidated damages.
(3) If on the other hand, there is no attempt to assess the loss, then the sum so mentioned is imposed as security for the due performance of the contract and it is a penalty. The expression “any other stipulation by way of penalty” comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered.
(4) Where a sum is mentioned in a contract as a liquidated amount payable by way of damages, the party complaining of breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both the parties.
(5) In other cases, where a sum is named in a contract as a penalty only reasonable compensation can be awarded not exceeding the amount so stated. Penalty is the upper limit beyond which the Court cannot grant reasonable compensation.
(6) Section 74 awards reasonable compensation for damage or loss caused by a breach of contract and damage or loss caused is a sine qua non for the applicability of the Section. The expression “whether or not actual damage or loss is proved to have caused thereby” applies where it is not possible to ascertain actual damage or loss and where amount mentioned is liquidated sum as a genuine pre-estimate of damages. Where the right to recover liquidated damages under Section 74 exists no question of ascertaining damages really arises.
(7) Reasonable compensation will be fixed in well-known principles that are applicable under Section 73 of the Contract Act and Section 74 has to be read with Section 73 of the Contract Act.
(8) Section 74 would be applicable to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application.
Reading of Section 74 would go to show that in order to forfeit the sum deposited by the contracting party as “earnest money” or “security” for the due performance of the contract, it is necessary that the contract must contain a stipulation of forfeiture. In other words, a right to forfeit being a contractual right and penal in nature, the parties to a contract must agree to stipulate a term in the contract in that behalf. A fortiori, if there is no stipulation in the contract of forfeiture, there is no such right available to the party to forfeit the sum. This was held in the case of Suresh Kumar Wadhwa vs. State of M.P., AIR 2017 SC 5435
PENALTY VS. COMPENSATION
A distinction must be drawn between penalty and compensation under the Contracts Law.
(1) If there is an agreement to pay a sum of money by a particular date with a condition that if the money is not paid on that date large sum shall be paid, that condition is in the nature of a penalty against which a court of equity can grant relief and award to the party seeking payment only such damage as he suffered by the non-performance of the contract.
(2) On the other hand if there is an agreement to pay a particular sum followed by a condition allowing to the debtor a concession, for example, the payment of a lesser sum, or payment by instalments, by a particular date or dates, then the party seeking to take advantage of that concession must carry out strictly the conditions on which it was granted and there is no power in the Court to relieve him from the obligation of doing so. It cannot be held that a creditor who has shown a little forbearance to his debtor in regard to some instalments is thereby deprived of his rights as to the other. Where the contract stipulates payment on the due dates or within a reasonable time thereafter and the judgment-debtors have made default in payment, there is no reason why the creditor should not be entitled to insist upon his full rights.
The cases of Khetro Swain vs. Padmanabha Singh Deo, AIR 1943 Patna 403 and Prithvichand Ramchand Sablok vs. S. Y. Shinde, AIR 1993 SC 1934 affirmed the above mentioned distinction.
The concepts of offer, acceptance and consideration laid down by the British Government have withstood the test go time and are relevant today’s they were over about 150 years ago. The Indian judiciary has kept pace with the changing times. By giving recognition to communication of offers via e-mail, WhatsApp and other social media platforms. It has made sure that the Indian Contacts Act does not fade in oblivion.