Indian Contract Act

CHAPTE 2
INDIAN CONTRACT
ACT, 1872
UNIT – 1: NATURE OF CONTRACTS
LEARNING OUTCOMES
After studying this Chapter, you will be able to understand:
♦ The meaning of the terms ‘agreement’ and ‘contract’ and note the
distinction between the two.
♦ The essential elements of a contract.
♦ About various types of contract.
♦ The concept of offer and acceptance and rules of communication
and revocation thereof.
UNIT OVERVIEW
© The Institute of Chartered Accountants of India

2.2 BUSINESS LAWS
UNIT OVERVIEW
Contract
Elements of Essentials of a Types of

Contract valid Contract Contracts
Agreement Enforceability
Offer Acceptance
Legal
Essentials Commun Legal Rules Communica
Rules of Kinds of
of a ication of of a valid tion of
a valid offer
proposal offer acceptance acceptance
offer
Contract Law before Indian Contract Act, 1872

To understand the Contract Law before the Indian Contract Act, 1872, we should understand
the journey of contract law during different time periods. In the ancient and medieval time,
there was no specific law for contracts. For this purpose, generally, different sources of Hindu
law like; Vedas, Dharam shastras, Smritis, Shrutis etc. were referred which gave a vivid
description of the law similar to contracts in those times. During the period of Mauryas,
contracts were in the form of "bilateral transactions" which were based on free consent on all
the terms and conditions involved.
During the Mughal rule in India, contracts were governed by Mohammedan Law of Contract.
In this law, the Arabic word ‘Aqd’ is known for contract which means a conjunction. In the
same way, word ‘Ijab’ was used for proposal and ‘Qabul’ was used for acceptance. The
formation of a contract according to Islamic law does not require any kind of formality; the
only requirement is the express consent of both parties on the same thing in the same sense.
Hindu law is basically different from that of English law. Hindu law is actually the compilation
of numerous customs and works of Smritikaras, who interpreted and analysed Vedas to
develop the various aspect of Hindu law. According to Hindu law, minor, intoxicated person,
old man or handicapped cannot enter into a valid contract. According to Narada smriti,
someone of age upto 8 years is considered as an infant. Age from 8 years to 16 years is
considered as boyhood and after 16 years the person is competent to enter into a contract.

THE INDIAN CONTRACT ACT, 1872 2.3
During British period; before the advent of the Indian Contract Act, the English Law was
applied in the Presidency Towns of Madras, Bombay and Calcutta under the Charter of 1726
issued by king George to the East India Company. If one of the parties of contract is from
either of the religion and other is from other religion then the law of the defendant is to be
used. This was followed in the presidency towns, but in cities outside the presidency towns,
the matters were solved on the basis of justice, equity and good conscience. This procedure
was followed till the Indian Contract Act was implemented in India.
The Law of contract: Introduction
The Law of Contract constitutes the most important branch of mercantile or commercial law.
It affects everybody, more so, trade, commerce and industry. It may be said that the contract
is the foundation of the civilized world. The law relating to contract is governed by the Indian
Contract Act, 1872. It was formed on April 25, 1872 and came into force on September 01,
1872. The preamble to the Act says that it is an Act "to define and amend certain parts of the
law relating to contract". It extends to the whole of India including the state of Jammu and
Kashmir after removal of Article – 370 of Indian Constitution.
The Act mostly deals with the general principles and rules governing contracts. The Act is
divisible into two parts. The first part (Section 1-75) deals with the general principles of the
law of contract, and therefore applies to all contracts irrespective of their nature. The second
part (Sections 124-238) deals with certain special kinds of contracts, e.g., Indemnity and
guarantee, bailment, pledge, and agency.
As a result of increasing complexities of business environment,
innumerable contracts are entered into by the parties in the usual
course of carrying on their business. ‘Contract’ is the most usual
method of defining the rights and duties in a business
transaction. This branch of law is different from other branches
of law in a very important aspect. It does not prescribe so many rights and duties, which the
law will protect or enforce; instead it contains a number of limiting principles subject to which
the parties may create rights and duties for themselves. The Indian Contract Act, 1872 codifies
the legal principles that govern ‘contracts’. The Act basically identifies the ingredients of a
legally enforceable valid contract in addition to dealing with certain special type of contractual
relationships like indemnity, guarantee, bailment, pledge, quasi contracts, contingent
contracts etc. It basically defines the circumstances in which promises made by the parties to
a contract shall be legally binding on them.
This unit refers to the essentials of a legally enforceable agreement or contract. It sets out
rules for the offer and acceptance and revocation thereof. It states the circumstances when an
agreement is voidable or enforceable by one party only, and when the agreements are void,
i.e. not enforceable at all.

2.4 BUSINESS LAWS
1.1 WHAT IS A CONTRACT?

The term contract is defined under section 2(h) of the Indian Contract Act, 1872 as-
“an agreement enforceable by law”.
The contract consists of two essential elements:
(i) an agreement, and
(ii) its enforceability by law.
(i) Agreement - The term ‘agreement’ given in Section 2(e) of the Act is defined
as- “every promise and every set of promises, forming the consideration for
each other”.
To have an insight into the definition of agreement, we need to understand
promise.
Section 2 (b) defines promise as- “when the person to whom the proposal is
made signifies his assent there to, the proposal is said to be accepted. Proposal
when accepted, becomes a promise”.
The following points emerge from the above definition:
1. when the person to whom the proposal is made
2. signifies his assent on that proposal which is made to him
3. the proposal becomes accepted
4. accepted proposal becomes promise
Thus, we say that an agreement is the result of the proposal made by one party
to the other party and that other party gives his acceptance thereto of course
for mutual consideration.
Agreement = Offer/Proposal + Acceptance + Consideration

(ii) Enforceability by law – An agreement to become a contract must give rise to
a legal obligation which means a duly enforceable by law.
Thus, from above definitions it can be concluded that –

Contract = Agreement + Enforceability by law
On elaborating the above two concepts, it is obvious that contract comprises of an agreement
which is a promise or a set of reciprocal promises, that a promise is the acceptance of a
proposal giving rise to a binding contract. Further, section 2(h) requires an agreement capable
of being enforceable by law before it is called ‘contract’. Where parties have made a binding
contract, they created rights and obligations between themselves.

Example 1: A agrees with B to sell car for ` 2 lacs to B. Here A is under an obligation to give
car to B and B has the right to receive the car on payment of ` 2 lacs and also B is under an
obligation to pay ` 2 lacs to A and A has a right to receive ` 2 lacs.
Example 2: Father promises his son to pay him pocket allowance of Rs. 500 every month. But
he refuses to pay later. The son cannot recover the same in court of law as this is a social
agreement. This is not created with an intention to create legal relationship and hence it is
not a contract.
So, Law of Contract deals with only such legal obligations which has resulted from
agreements. Such obligation must be contractual in nature. However, some obligations are
outside the purview of the law of contract.
Example 3: An obligation to maintain wife and children, an order of the court of law etc. These
are status obligations and so out of the scope of the Contract Act.
Difference between Agreement and Contract
Basis of differences Agreement Contract
Meaning Every promise and every set Agreement enforceable by law.
of promises, forming the (Agreement + Legal enforceability)
consideration for each other.
(Promise + Consideration)
Scope It’s a wider term including It is used in a narrow sense with the
both legal and social specification that contract is only
agreement. legally enforceable agreement.
Legal obligation It may not create legal Necessarily creates a legal
obligation. An agreement obligation. A contract always
does not always grant rights grants certain rights to every party.
to the parties
Nature All agreement are not All contracts are agreements.
contracts.
1.2 ESSENTIALS OF A VALID CONTRACT

Essentials of a valid contract
As given by Section 10 of Indian Not given by Section 10 but are also

Contract Act, 1872 considered essential
1 Agreement 1 Two parties
2 Free consent 2 Intention to create legal relationship

2.6 BUSINESS LAWS
3 Competency of the parties 3 Fulfilments of legal formalities

4 Lawful consideration 4 Certainty of meaning
5 Legal object 5 Possibility of performance
6 Not expressly declared to be void [as per 6 -
Section 24 to 30 and 56]
In terms of Section 10 of the Act, “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 expressly declared to be void”.
Since section 10 is not complete and exhaustive, so there are certain other sections which also
contains requirements for an agreement to be enforceable. Thus, in order to create a valid
contract, the following elements should be present:
1. Two Parties: One cannot contract with himself. A contract involves at least two parties-
one party making the offer and the other party accepting it. A contract may be made
by natural persons and by other persons having legal existence e.g. companies,
universities etc. It is necessary to remember that identity of the parties be
ascertainable.
Example 4: To constitute a contract of sale, there must be two parties- seller and
buyer. The seller and buyer must be two different persons, because a person cannot
buy his own goods.
In State of Gujarat vs. Ramanlal S & Co. when on dissolution of a partnership, the
assets of the firm were divided among the partners, the sales tax officer wanted to tax
this transaction. It was held that it was not a sale. The partners being joint owner of
those assets cannot be both buyer and seller.
2. Parties must intend to create legal obligations: There must be an intention on the
part of the parties to create legal relationship between them. Social or domestic type
of agreements are not enforceable in court of law and hence they do not result into
contracts.
Example 5: A husband agreed to pay to his wife certain amount as maintenance every
month while he was abroad. Husband failed to pay the promised amount. Wife sued
him for the recovery of the amount. Here, in this case, wife could not recover as it was
a social agreement and the parties did not intend to create any legal relations. (Balfour
v. Balfour)
Example 6: Mr. Lekhpal promises to pay ` 5 lakhs to his son if the son passes the CA
exams. On passing the exams, the son claims the money. Here, the son could not
recover as it was a social agreement.

Example 7: A sold goods to B on a condition that he must pay for the amount of goods
within 30 days. Here A intended to create legal relationship with B. Hence the same is
contract. On failure by B for making a payment on due date, A can sue him in the court
of law.
3. Other Formalities to be complied with in certain cases: A contract may be written
or spoken. As to legal effects, there is no difference between a written contract and
contract made by word of mouth. But in the interest of the parties the contract must
be written. In case of certain contracts some other formalities have to be complied with
to make an agreement legally enforceable.
For e.g. Contract of Insurance is not valid except as a written contract. Further, in case
of certain contracts, registration of contract under the laws which is in force at the
time, is essential for it to be valid, e.g. in the case of immovable property.
Thus, where there is any statutory requirement that any contract is to be made in
writing or in the presence of witness, or any law relating to the registration of
documents must be complied with.
4. Certainty of meaning: The agreement must be certain and not vague or indefinite.
Example 8: A agrees to sell to B a hundred tons of oil. There is nothing certain in order
to show what kind of oil was intended for.
Example 9: XYZ Ltd. agreed to lease the land to Mr. A for indefinite years. The contract
is not valid as the period of lease is not mentioned.
5. Possibility of performance of an agreement: The terms of agreement should be
capable of performance. An agreement to do an act impossible in itself cannot be
enforced.
Example 10: A agrees with B to discover treasure by magic. The agreement cannot be
enforced as it is not possible to be performed
Now, according to Section 10 of the Indian Contract Act, 1872, the following are the essential
elements of a Valid Contract:
I. Offer and Acceptance or an agreement: An agreement is the first essential element
of a valid contract. According to Section 2(e) of the Indian Contract Act, 1872, “Every
promise and every set of promises, forming consideration for each other, is an
agreement” and according to Section 2(b) “A proposal when accepted, becomes a
promise”. An agreement is an outcome of offer and acceptance for consideration.
II. Free Consent: Two or more persons are said to consent when they agree upon the
same thing in the same sense. This can also be understood as identity of minds in
understanding the terms viz consensus ad idem. Further such consent must be free.

2.8 BUSINESS LAWS
Consent would be considered as free consent if it is not caused by coercion, undue

influence, fraud, misrepresentation or mistake.
Example 11: A, who owns two cars is selling red car to B. B thinks he is purchasing the
black car. There is no consensus ad idem and hence no contract.
To determine consensus ad idem the language of the contract should be clearly drafted.
Thus, if A says B “Will you buy my red car for ` 3,00,000?“. B says “yes” to it. There is
said to be consensus ad idem i.e. the meaning is taken in same sense by both the
parties.
Example 12: A threatened to shoot B if he (B) does not lend him ` 2,00,000 and B
agreed to it. Here the agreement is entered into under coercion and hence not a valid
contract.
(Students may note that the terms coercion, undue influence, fraud, misrepresentation,
mistake are explained in the Unit-3)
III. Capacity of the parties: Capacity to contract means the legal ability of a person to
enter into a valid contract. Section 11 of the Indian Contract Act specifies that every
person is competent to contract who
(a) is of the age of majority according to the law to which he is subject and
(b) is of sound mind and
(c) is not otherwise disqualified from contracting by any law to which he is subject.
A person for being competent to contract must fulfil all the above three qualifications.
Qualification (a) refers to the age of the contracting person i.e. the person entering
into contract must be of 18 years of age. Persons below 18 years of age are considered
minor, therefore, incompetent to contract.
Qualification (b) requires a person to be of sound mind i.e. he should be in his senses
so that he understands the implications of the contract at the time of entering into a
contract. A lunatic, an idiot, a drunken person or under the influence of some
intoxicant is not supposed to be a person of sound mind.
Qualification (c) requires that a person entering into a contract should not be
disqualified by his status, in entering into such contracts. Such persons are an alien
enemy, foreign sovereigns, convicts etc. They are disqualified unless they fulfil certain
formalities required by law.
Contracts entered by persons not competent to contract are not valid.
IV. Consideration: It is referred to as ‘quid pro quo’ i.e. ‘something in return’. A valuable
consideration in the sense of law may consist either in some right, interest, profit or
benefit accruing to one party, or some forbearance, detriment, loss or responsibility
given, suffered or undertaken by the other.

Example 13: A agrees to sell his books to B for ` 100.

B’s promise to pay ` 100 is the consideration for A’s promise to sell his books.
A’s promise to sell the books is the consideration for B’s promise to pay ` 100.
V. Lawful Consideration and Object: The consideration and object of the agreement
must be lawful.
Section 23 states that consideration or object is not lawful if it is prohibited by law, or
it is such as would defeat the provisions of law, if it is fraudulent or involves injury to
the person or property of another or court regards it as immoral or opposed to public
policy.
Example 14: ‘A’ promises to drop prosecution instituted against ‘B’ for robbery and
‘B’ promises to restore the value of the things taken. The agreement is void, as its
object is unlawful.
Example 15: A agrees to sell his house to B against 100 kgs of cocaine (drugs). Such
agreement is illegal as the consideration is unlawful.
VI. Not expressly declared to be void: The agreement entered into must not be which the
law declares to be either illegal or void. An illegal agreement is an agreement expressly
or impliedly prohibited by law. A void agreement is one without any legal effects.
Example 16: Threat to commit murder or making/publishing defamatory statements
or entering into agreements which are opposed to public policy are illegal in nature.
Similarly, any agreement in restraint of trade, marriage, legal proceedings, etc. are
classic examples of void agreements.
1.3 TYPES OF CONTRACTS

Now let us discuss various types of contracts.
Type of Contract on the basis of
Validity or Formation Performance

enforceability
Express contract
Valid contracts Executed contract
Implied contract
Void contracts Executory contract
Quasi-contract
Voidable contracts Unilateral Bilateral
E-contracts contract contract
Illegal agreements
Unenforceable contracts

2.10 BUSINESS LAWS
I. On the basis of the validity

1. Valid Contract: An agreement which is binding and enforceable is a valid
contract. It contains all the essential elements of a valid contract.
Example 17: A ask B if he wants to buy his bike for ` 50,000. B agrees to buy
bike. It is agreement which is enforceable by law. Hence, it is a valid contract.
2. Void Contract: Section 2 (j) states as follows: “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”. Thus, a void
contract is one which cannot be enforced by a court of law.
Example 18: Mr. X agrees to write a book with a publisher. Such contract is
valid. But after few days, X dies in an accident. Here the contract becomes void
due to the impossibility of performance of the contract. Thus, a valid contract
when cannot be performed because of some uncalled happening becomes
void.
Example 19: A contracts with B (owner of the factory) for the supply of 10 tons
of sugar, but before the supply is effected, the fire caught in the factory and
everything was destroyed. Here the contract becomes void.
It may be added by way of clarification here that when a contract is void, it is
not a contract at all but for the purpose of identifying it, it has to be called a
[void] contract.
3. Voidable Contract: Section 2(i) defines that “an agreement which is
enforceable by law at the option of one or more parties thereto, but not
at the option of the other or others is a voidable contract”.
This in fact means where one of the parties to the agreement is in a position or
is legally entitled or authorized to avoid performing his part, then the
agreement is treated and becomes voidable.
Following are the situations where a contract is voidable:
(i) When the consent of party is not free is caused by coercion, undue
influence, misrepresentation or fraud.
Example 20: X promise to sell his scooter to Y for ` 1 Lac. However,
the consent of X has been procured by Y at a gun point. X is an
aggrieved party, and the contract is voidable at his option but not on
the option of Y. It means if X accepts the contract, the contract
becomes a valid contract then Y has no option of rescinding the
contract.

(ii) When a person promises to do something for another person, but the
other person prevents him from performing his promise, the contract
becomes voidable at the option of first person.
Example 21: There is a contact between A and B to sell car of A to B
for ` 2,00,000. On due date of performance, A asks B that he does not
want to sell his car. Here contract is voidable at the option of B.
(iii) When a party to a contract promise to perform a work within a
specified time, could not perform with in that time, the contract is
voidable at the option of promisee.
Example 22: A agrees to construct a house for B upto 31-3-2022 but
A could not complete the house on that date. Here contract is voidable
at the option of B.
At this juncture it would be desirable to know the distinction between
a Void Contract and a Voidable Contract. These are elaborated
hereunder:
S. Basis Void Contract Voidable Contract

No.
1 Meaning A Contract An agreement which is
ceases to be enforceable by law at the
enforceable by option of one or more of the
law becomes parties thereto, but not at the
void when it option of the other or others,
ceases to be is a voidable contract.
enforceable.
2 Enforceability A void contract It is enforceable only at the
cannot be option of aggrieved party
enforced at all. and not at the option of
other party.
3 Cause A contract A contract becomes a
becomes void voidable contract if the
due to change in consent of a party was not
law or change in free.
circumstances
beyond the
contemplation
of parties.

2.12 BUSINESS LAWS
4 Performance A void contract If the aggrieved party does

of contract cannot be not, within reasonable time,
performed. exercise his right to avoid the
contract, any party can sue
the other for claiming the
performance of the contract.
5 Rights A void contract The party whose consent
does not grant was not free has the right to
any legal remedy rescind the contract within a
to any party. reasonable time. If so
rescinded, it becomes a void
contract. If it is not rescinded
it becomes a valid contract.
4. Illegal Contract: It is a contract which the law forbids to be made. The court
will not enforce such a contract but also the connected contracts. All illegal
agreements are void but all void agreements are not necessarily illegal. Despite
this, there is similarity between them is that in both cases they are void ab initio
and cannot be enforced by law.
Example 23: Contract that is immoral or opposed to public policy are illegal in
nature. Similarly, if R agrees with S, to purchase brown sugar, it is an illegal
agreement.
According to Section 2(g) of the Indian Contract Act, “an agreement not
enforceable by law is void”. The Act has specified various factors due to which
an agreement may be considered as void agreement. One of these factors is
unlawfulness of object and consideration of the contract i.e. illegality of the
contract which makes it void. The illegal and void agreement differ from each
other in the following respects:
Basis of Void agreement Illegal agreement

difference
Scope A void agreement is not An illegal agreement is

necessarily illegal. always void.
Nature Not forbidden under law. Are forbidden under law.
Punishment Parties are not liable for any Parties to illegal

punishment under the law. agreements are liable for
punishment.

Collateral It’s not necessary that Agreements collateral to

Agreement agreements collateral to illegal agreements are
void agreements may also always void.
be void. It may be valid also.
5. Unenforceable Contract: Where a contract is good in substance but because

of some technical defect i.e. absence in writing, barred by limitation etc. one or
both the parties cannot sue upon it, it is described as an unenforceable contract.
Example 24: A bought goods from B in 2018. But no payment was made till
2022. B cannot sue A for the payment in 2022 as it has crossed three years and
barred by Limitation Act. A good debt becomes unenforceable after the period
of three years as barred by Limitation Act.
Similarly, an agreement for transfer of immovable property should be written
for being enforceable.
II. On the basis of the formation of contract

1. Express Contracts: A contract would be an express contract if the terms are
expressed by words or in writing. Section 9 of the Act provides that if a proposal
or acceptance of any promise is made in words, the promise is said to be
express.
Example 25: A tells B on telephone that he offers to sell his house for ` 20 lacs
and B in reply informs A that he accepts the offer, this is an express contract.
2. Implied Contracts: Implied contracts in contrast come into existence by
implication. Most often the implication is by action or conduct of parties or
course of dealings between them. Section 9 of the Act contemplates such
implied contracts when it lays down that in so far as such proposal or
acceptance is made otherwise than in words, the promise is said to be implied.
Example 26: Where a coolie in uniform picks up the luggage of A to be carried
out of the railway station without being asked by A and A allows him to do so,
it is an implied contract and A must pay for the services of the coolie detailed
by him.
Example 27: A drinks a coffee in restaurant. There is an implied contract that
he should pay for the price of coffee.
Tacit Contracts: The word Tacit means silent. Tacit contracts are those that are
inferred through the conduct of parties without any words spoken or written. A
classic example of tacit contract would be when cash is withdrawn by a

2.14 BUSINESS LAWS
customer of a bank from the automatic teller machine [ATM]. Another example
of tacit contract is where a contract is assumed to have been entered when a
sale is given effect to at the fall of hammer in an auction sale. It is not a separate
form of contract but falls within the scope of implied contracts.
3. Quasi-Contract: A quasi-contract is not an actual contract, but it resembles a
contract. It is created by law under certain circumstances. The law creates and
enforces legal rights and obligations when no real contract exists. Such
obligations are known as quasi-contracts. In other words, it is a contract in
which there is no intention on part of either party to make a contract but law
imposes a contract upon the parties.
Example 28: Obligation of finder of lost goods to return them to the true owner
or liability of person to whom money is paid under mistake to repay it back
cannot be said to arise out of a contract even in its remotest sense, as there is
neither offer and acceptance nor consent. These are said to be quasi-contracts.
Example 29: T, a tradesman, leaves goods at C’s house by mistake. C treats the
goods as his own. C is bound to pay for the goods.
4. E-Contracts: When a contract is entered into by two or more parties using
electronics means, such as e-mails is known as e-commerce contracts. In
electronic commerce, different parties/persons create networks which are
linked to other networks through ED1 - Electronic Data Inter change. This helps
in doing business transactions using electronic mode. These are known as EDI
contracts or Cyber contracts or mouse click contracts.
III. On the basis of the performance of the contract

1. Executed Contract: The consideration in a given contract could be an act or
forbearance. When the act is done or executed or the forbearance is brought
on record, then the contract is an executed contract.
Example 30: When a grocer sells a sugar on cash payment it is an executed
contract because both the parties have done what they were to do under the
contract.
2. Executory Contract: In an executory contract the consideration is reciprocal
promise or obligation. Such consideration is to be performed in future only and
therefore these contracts are described as executory contracts.
Example 31: Where G agrees to take the tuition of H, a pre-engineering
student, from the next month and H in consideration promises to pay G
` 1,000 per month, the contract is executory because it is yet to be carried out.

Unilateral or Bilateral are kinds of Executory Contracts and are not separate
kinds.
(a) Unilateral Contract: Unilateral contract is a one sided contract in

which one party has performed his duty or obligation and the other
party’s obligation is outstanding.
Example 32: M advertises payment of award of ` 50,000 to any one
who finds his missing boy and brings him. As soon as B traces the boy,
there comes into existence an executed contract because B has
performed his share of obligation and it remains for M to pay the
amount of reward to B. This type of Executory contract is also called
unilateral contract.
(b) Bilateral Contract: A Bilateral contract is one where the obligation or
promise is outstanding on the part of both the parties.
Example 33: A promises to sell his plot to B for `10 lacs cash down,
but B pays only ` 2,50,000 as earnest money and promises to pay the
balance on next Sunday. On the other hand, A gives the possession of
plot to B and promises to execute a sale deed on the receipt of the
whole amount. The contract between the A and B is executory because
there remains something to be done on both sides. Such Executory
contracts are also known as Bilateral contracts.
1.4 PROPOSAL / OFFER [SECTION 2(a) OF THE INDIAN

CONTRACT ACT, 1872]
Definition of Offer/Proposal:
According to Section 2(a) of the Indian Contract Act, 1872, “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”.
Essentials of a proposal/offer are-
1. The person making the proposal or offer is called the ‘promisor’ or ‘offeror’: The
person to whom the offer is made is called the ‘offeree’ and the person accepting the
offer is called the ‘promisee’ or ‘acceptor’.
2. For a valid offer, the party making it must express his willingness ‘to do’ or ‘not
to do’ something: There must be an expression of willingness to do or not to do
some act by the offeror.

2.16 BUSINESS LAWS
Example 34: A willing to sell his good at certain price to B.

Example 35: A is willing to not to dance in a competition if B pays him certain sum of
money.
3. The willingness must be expressed with a view to obtain the assent of the other
party to whom the offer is made.
Example 36: Where ‘A’ tells ‘B’ that he desires to marry by the end of 2022, it does not
constitute an offer of marriage by ‘A’ to ‘B’. Therefore, to constitute a valid offer
expression of willingness must be made to obtain the assent (acceptance) of the other.
Thus, if in the above example, ‘A’ further adds, ‘Will you marry me’, it will constitute
an offer.
4. An offer can be positive as well as negative: Thus “doing” is a positive act and “not
doing”, or “abstinence” is a negative act; nonetheless both these acts have the same
effect in the eyes of law.
Example 37: A offers to sell his car to B for ` 3 lacs is an act of doing. So in this case,
A is making an offer to B.
Example 38: When A ask B after his car meets with an accident with B’s scooter not
to go to Court and he will pay the repair charges to B for the damage to B’s scooter; it
is an act of not doing or abstinence.
Kinds of Offer
How made To whom made
Express offer Implied offer General offer Specific offer
Classification of offer
An offer can be classified as general offer, special/specific offer, cross offer, counter offer,
standing/ open/ continuing offer.
General Special Counter Cross Standing

Offer Offer Offer Offer Offer

Now let us examine each one of them.

(a) General offer: It is an offer made to public at large and hence anyone can accept and
do the desired act (Carlill Vs. Carbolic Smoke Ball Co.). In terms of Section 8 of the
Act, anyone performing the conditions of the offer can be considered to have accepted
the offer. Until the general offer is retracted or withdrawn, it can be accepted by anyone
at any time as it is a continuing offer.
Case Law: Carlill Vs. Carbolic Smoke Ball Co. (1893)
Facts: In this famous case, Carbolic smoke Ball Co. advertised in several newspapers
that a reward of £100 would be given to any person who contracted influenza after
using the smoke balls produced by the Carbolic Smoke Ball Co. according to printed
directions. One lady, Mrs. Carlill, used the smoke balls as per the directions of company
and even then, suffered from influenza. Held, she could recover the amount as by using
the smoke balls she had accepted the offer.
(b) Special/specific offer: When the offer is made to a specific or an ascertained person,
it is known as a specific offer. Specific offer can be accepted only by that specified
person to whom the offer has been made. [Boulton Vs. Jones]
Example 39: ‘A’ offers to sell his car to ‘B’ at a certain cost. This is a specific offer.
(c) Cross offer: When two parties exchange identical offers in ignorance at the time of
each other’s offer, the offers are called cross offers. There is no binding contract in
such a case because offer made by a person cannot be construed as acceptance of the
another’s offer.
Example 40: If A makes a proposal to B to sell his car for ` 2 lacs and B, without
knowing the proposal of A, makes an offer to purchase the same car at ` 2 lacs from
A, it is not an acceptance, as B was not aware of proposal made by A. It is only cross
proposal (cross offer). And when two persons make offer to each other, it cannot be
treated as mutual acceptance. There is no binding contract in such a case.
(d) Counter offer: When the offeree offers to qualified acceptance of the offer subject to
modifications and variations in the terms of original offer, he is said to have made a
counter offer. Counter-offer amounts to rejection of the original offer. It is also called
as Conditional Acceptance.
Example 41: ‘A’ offers to sell his plot to ‘B’ for `10 lakhs. ’B’ agrees to buy it for ` 8
lakhs. It amounts to counter offer. It will result in the termination of the offer of ’A’. If
later on ‘B’ agrees to buy the plot for ` 10 lakhs, ’A’ may refuse.

2.18 BUSINESS LAWS
(e) Standing or continuing or open offer: An offer which is allowed to remain open for
acceptance over a period of time is known as standing or continuing or open offer.
Tenders that are invited for supply of goods is a kind of standing offer.
Essential of a valid offer
1. It must be capable of creating legal relations: Offer must be such as in law is capable
of being accepted and giving rise to legal relationship. If the offer does not intend to
give rise to legal consequences and creating legal relations, it is not considered as a
valid offer in the eye of law. A social invitation, even if it is accepted, does not create
legal relations because it is not so intended.
Example 42: A invited B on his birthday party. B accepted the proposal but when B
reached the venue, he (B) found that A was not there. He filed the suit against A for
recovery of travelling expenses incurred by him to join the birthday party. Held, such
an invitation did not create a legal relationship. It is a social activity. Hence, B could
not succeed.
2. It must be certain, definite and not vague: If the terms of an offer are vague or
indefinite, its acceptance cannot create any contractual relationship.
Example 43: A offers to sell B 100 quintals of oil, there is nothing whatever to show
what kind of oil was intended. The offer is not capable of being accepted for want of
certainty.
If in the above example, A is a dealer in mustard oil only, it shall constitute a valid offer.
3. It must be communicated to the offeree: An offer, to be complete, must be
communicated to the person to whom it is made, otherwise there can be no acceptance
of it. Unless an offer is communicated, there can be no acceptance by it. An acceptance
of an offer, in ignorance of the offer, is not acceptance and does not confer any right
on the acceptor.
This can be illustrated by the landmark case of Lalman Shukla v. GauriDutt
Facts: G (Gauridutt) sent his servant L (Lalman) to trace his missing nephew. He then
announced that anybody who traced his nephew would be entitled to a certain reward.
L traced the boy in ignorance of this announcement. Subsequently when he came to
know of the reward, he claimed it. Held, he was not entitled to the reward, as he did
not know the offer.
4. It must be made with a view to obtaining the assent of the other party: Offer must
be made with a view to obtaining the assent of the other party addressed and not
merely with a view to disclosing the intention of making an offer.

5. It may be conditional: An offer can be made subject to any terms and conditions by
the offeror.
Example 44: Offeror may ask for payment by RTGS, NEFT etc. The offeree will have to
accept all the terms of the offer otherwise the contract will be treated as invalid.
6. Offer should not contain a term the non-compliance of which would amount to
acceptance: Thus, one cannot say that if acceptance is not communicated by a certain
time the offer would be considered as accepted.
Example 45: A proposes B to purchase his android mobile for `5000 and if no reply
by him in a week, it would be assumed that B had accepted the proposal. This would
not result into contract.
7. The offer may be either specific or general: Any offer can be made to either public
at large or to the any specific person. (Already explained in the heading-types of the
offer)
8. The offer may be express or implied: An offer may be made either by words or by
conduct.
Example 46: A boy starts cleaning the car as it stops on the traffic signal without being
asked to do so, in such circumstances any reasonable man could guess that he expects
to be paid for this, here boy makes an implied offer.
9. Offer is Different from a mere statement of intention, an invitation to offer, a
mere communication of information, A prospectus and Advertisement.
(i) A statement of intention and announcement.
Example 47: A father wrote his son about his wish of making him the owner of
all his property is mere a statement of intention.
Example 48: An announcement to give scholarships to children scoring more
than 95% in 12th board is not an offer.
(ii) Offer must be distinguished from an answer to a question.
Case Law: Harvey vs. Facie [1893] AC 552

In this case, Privy Council succinctly explained the distinction between an offer
and an invitation to offer. In the given case, the plaintiffs through a telegram
asked the defendants two questions namely,
(i) Will you sell us Bumper Hall Pen? and
(ii) Telegraph lowest cash price.

2.20 BUSINESS LAWS
The defendants replied through telegram that the “lowest price for Bumper Hall
Pen is £ 900”. The plaintiffs sent another telegram stating “we agree to buy
Bumper Hall Pen at £ 900”. However, the defendants refused to sell the property
at the price.
The plaintiffs sued the defendants contending that they had made an offer to
sell the property at £ 900 and therefore they are bound by the offer.
However, the Privy Council did not agree with the plaintiffs on the ground that
while plaintiffs had asked two questions, the defendant replied only to the
second question by quoting the price but reserved their answer with regard to
their willingness to sell. Thus, they made no offer at all. Their Lordships held
that the mere statement of the lowest price at which the vendor would sell
contained no implied contract to sell to the person who had enquired about
the price.
The above decision was followed in Mac Pherson vs Appanna [1951] A.S.C.
184 where the owner of the property had said that he would not accept less
than £ 6000/- for it. This statement did not indicate any offer but indicated only
an invitation to offer.
(iii) A statement of price is not an offer: Quoting the price of a product does not
constitute it as offer. (refer case of Harvey Vs. Facie as discussed above)
Example 49: The price list of goods does not constitute an offer for sale of
certain goods on the listed prices. It is an invitation to offer.
(iv) An invitation to make an offer or do business. In case of “an invitation to make
an offer”, the person making the invitation does not make an offer rather invites
the other party to make an offer. His objective is to send out the invitation that he
is willing to deal with any person who, on the basis of such invitation, is ready to
enter into contract with him subject to final terms and conditions.
Example 50: An advertisement for sale of goods by auction is an invitation to
the offer. It merely invites offers/bids made at the auction.
When goods are sold through auction, the auctioneer does not contract with
anyone who attends the sale. The auction is only an advertisement to sell but
the items are not put for sale though persons who have come to the auction
may have the intention to purchase. Similar decision was given in the case of
Harris vs. Nickerson (1873).
Similarly, Prospectus issued by a company, is only an invitation to the public to
make an offer to subscribe to the securities of the company.

10. A statement of price is not an offer

What is invitation to offer?
An offer should be distinguished from an invitation to offer. An offer is definite
and capable of converting an intention into a contract. Whereas an invitation to an
offer is only a circulation of an offer, it is an attempt to induce offers and precedes a
definite offer. An invitation to offer is an act precedent to making an offer. Acceptance
of an invitation to an offer does not result in the contract and only an offer emerges
in the process of negotiation.
When a person advertises that he has stock of books to sell or houses to let, there is
no offer to be bound by any contract. Such advertisements are offers to negotiate-
offers to receive offers. In order to ascertain whether a particular statement amounts
to an ‘offer’ or an ‘invitation to offer’, the test would be intention with which such
statement is made. Does the person who made the statement intend to be bound by
it as soon as it is accepted by the other or he intends to do some further act, before
he becomes bound by it. In the former case, it amounts to an offer and in the latter
case, it is an invitation to offer.
Difference between offer and invitation to make an offer:
In terms of Section 2(a) of the Act, an offer is the final expression of willingness by the
offeror to be bound by the offer should the other party chooses to accept it. On the
other hand, offers made with the intention to negotiate or offers to receive offers are
known as invitation to offer. Thus, where a party without expressing his final willingness
proposes certain terms on which he is willing to negotiate he does not make an offer,
but only invites the other party to make an offer on those terms. Hence the only thing
that is required is the willingness of the offeree to abide by the terms of offer.
In order to ascertain whether a particular statement amounts to an offer or an
invitation to offer, the test would be intention with which such statement is made. The
mere statement of the lowest price which the vendor would sell contains no implied
contract to sell at that price to the person making the inquiry.
If a person who makes the statement has the intention to be bound by it as soon as
the other accepts, he is making an offer. Thus, the intention to be bound is important
factor to be considered in deciding whether a statement is an ‘offer’ or ‘invitation to
offer.’
Following are instances of invitation to offer to buy or sell:
(i) A Prospectus by a company to the public to subscribe for its shares.
(ii) Display of goods for sale in shop windows.

2.22 BUSINESS LAWS
(iii) Advertising auction sales and

(iv) Quotation of prices sent in reply to a query regarding price.
Basis Offer Invitation to offer

Meaning Section 2(a) of the Act, an Where a party without expressing
offer is the final expression his final willingness proposes
of willingness by the certain terms on which he is
offeror to be bound by the willing to negotiate he does not
offer should the other party make an offer, but only invites the
chooses to accept it. other party to make an offer on
those terms.
Intention of the If a person who makes the If a person has the intention of
parties statement has the intention negotiating on terms it is called
to be bound by it as soon invitation to offer.
as the other accepts, he is
making an offer.
Sequence An offer cannot be an act An invitation to offer is always an
precedent to invitation to act precedent to offer.
offer.
Words Written
Act
Offer can be made
Conduct Oral
by
Abstinence
1.5 ACCEPTANCE
Definition of Acceptance: In terms of Section 2(b) of the Act, ‘the term acceptance’ is defined
as follows:
“When the person to whom the proposal is made signifies his assent thereto, proposal
is said to be accepted. The proposal, when accepted, becomes a promise”.
Analysis of the above definition
1. When the person to whom proposal is made - for example if A offers to sell his car to
B for ` 2,00,000. Here, proposal is made to B.
2. The person to whom proposal is made i.e. B in the above example and if B signifies his
consent on that proposal, then we can say that B has signified his consent on the
proposal made by A.

3. When B has signified his consent on that proposal, we can say that the proposal has
been accepted.
4. Accepted proposal becomes promise.

Relationship between offer and acceptance: According to Sir William Anson “Acceptance
is to offer what a lighted match is to a train of gun powder”. The effect of this observation
is that what acceptance triggers cannot be recalled or undone. But there is a choice to the
person who had the train to remove it before the match is applied. It in effect means that the
offer can be withdrawn just before it is accepted. Acceptance converts the offer into a promise
and then it is too late to revoke it. This means as soon as the train of gun powder is lighted it
would explode. Train of Gun powder [offer] in itself is inert, but it is the lighted match [the
acceptance] which causes the gun powder to explode. The significance of this is an offer in
itself cannot create any legal relationship but it is the acceptance by the offeree which creates
a legal relationship. Once an offer is accepted it becomes a promise and cannot be withdrawn
or revoked. An offer remains an offer so long as it is not accepted but becomes a contract as
soon as it is accepted.
Legal Rules regarding a valid acceptance
(1) Acceptance can be given only by the person to whom offer is made: In case of a
specific offer, it can be accepted only by the person to whom it is made. [Boulton vs.
Jones (1857)]
Case Law: Boulton vs. Jones (1857)
Facts: Boulton bought a business from Brocklehurst. Jones, who was Broklehurst’s
creditor, placed an order with Brocklehurst for the supply of certain goods. Boulton
supplied the goods even though the order was not in his name. Jones refused to pay
Boultan for the goods because by entering into the contract with Blocklehurst, he
intended to set off his debt against Brocklehurst. Held, as the offer was not made to
Boulton, therefore, there was no contract between Boulton and Jones.
In case of a general offer, it can be accepted by any person who has the knowledge of
the offer. [Carlill vs. Carbolic Smoke Ball Co. (1893)]
(2) Acceptance must be absolute and unqualified: As per section 7 of the Act,
acceptance is valid only when it is absolute and unqualified and is also expressed in
some usual and reasonable manner unless the proposal prescribes the manner in which
it must be accepted. If the proposal prescribes the manner in which it must be
accepted, then it must be accepted accordingly.
M offered to sell his land to N for £280. N replied purporting to accept the offer but
enclosed a cheque for £ 80 only. He promised to pay the balance of £ 200 by monthly

2.24 BUSINESS LAWS
instalments of £ 50 each. It was held that N could not enforce his acceptance because it
was not an unqualified one. [Neale vs. Merret [1930] W. N. 189].
A offers to sell his house to B for ` 30,00,000/-. B replied that, “I can pay ` 24,00,000
for it. The offer of ‘A’ is rejected by ‘B’ as the acceptance is not unqualified. B however
changes his mind and is prepared to pay ` 30,00,000/-. This is also treated as counter
offer and it is upto A whether to accept it or not. [Union of India vs. Bahulal AIR
1968 Bombay 294].
Example 51: ‘A’ enquires from ‘B’, “Will you purchase my car for ` 2 lakhs?” If ‘B’ replies
“I shall purchase your car for ` 2 lakhs, if you buy my motorcycle for
` 50,000/-, here ‘B’ cannot be considered to have accepted the proposal. If on the other
hand ‘B’ agrees to purchase the car from ‘A’ as per his proposal subject to availability
of valid Registration Certificate / book for the car, then the acceptance is in place
though the offer contained no mention of R.C. book. This is because expecting a valid
title for the car is not a condition. Therefore, the acceptance in this case is
unconditional.
(3) The acceptance must be communicated: To conclude a contract between the parties,
the acceptance must be communicated in some perceptible form. Any conditional
acceptance or acceptance with varying or too deviant conditions is no acceptance.
Such conditional acceptance is a counter proposal and has to be accepted by the
proposer, if the original proposal has to materialize into a contract. Further when a
proposal is accepted, the offeree must have the knowledge of the offer made to him.
If he does not have the knowledge, there can be no acceptance. The acceptance must
relate specifically to the offer made. Then only it can materialize into a contract. The
above points will be clearer from the following examples:
Brogden vs. Metropolitan Railway Co. (1877)
Facts: B a supplier, sent a draft agreement relating to the supply of coal to the manager
of railway Co. viz, Metropolitian railway for his acceptance. The manager wrote the
word “Approved” on the same and put the draft agreement in the drawer of the table
intending to send it to the company’s solicitors for a formal contract to be drawn up.
By an over sight the draft agreement remained in drawer. Held, that there was no
contract as the manager had not communicated his acceptance to the supplier, B.
Where an offer made by the intended offeree without the knowledge that an offer has
been made to him cannot be deemed as an acceptance thereto. (Bhagwandas v.
Girdharilal)
A mere variation in the language not involving any difference in substance would not
make the acceptance ineffective. [Heyworth vs. Knight [1864] 144 ER 120].

Example 52: A proposed B to marry him. B informed A’s sister that she is ready to
marry him. But his sister didn’t inform A about the acceptance of proposal. There is no
contract as acceptance was not communicated to A.
(4) Acceptance must be in the prescribed mode: Where the mode of acceptance is
prescribed in the proposal, it must be accepted in that manner. But if the proposer
does not insist on the proposal being accepted in the manner prescribed after it has
been accepted otherwise, i.e., not in the prescribed manner, the proposer is presumed
to have consented to the acceptance.
Example 53: If the offeror prescribes acceptance through messenger and offeree
sends acceptance by email, there is no acceptance of the offer if the offeror informs
the offeree that the acceptance is not according to the mode prescribed. But if the
offeror fails to do so, it will be presumed that he has accepted the acceptance and a
valid contract will arise.
(5) Time: Acceptance must be given within the specified time limit, if any, and if no time
is stipulated, acceptance must be given within the reasonable time and before the offer
lapses. What is reasonable time is nowhere defined in the law and thus would depend
on facts and circumstances of the particular case.
Example 54: A offered to sell B 50 kgs of bananas at Rs. 500. B communicated the
acceptance after four days. Such is not a valid contract as bananas being perishable
items could not stay for a period of week. Four days is not a reasonable time in this
case.
Example 55: A offers B to sell his house at Rs. 20,00,000. B accepted the offer and
communicated to A after 4 days. Held the contract is valid as four days can be
considered as reasonable time in case of sell of house.
(6) Mere silence is not acceptance: The acceptance of an offer cannot be implied from
the silence of the offeree or his failure to answer, unless the offeree has in any previous
conduct indicated that his silence is the evidence of acceptance.
Case Law: Felthouse vs. Bindley (1862)
Facts: F (Uncle) offered to buy his nephew’s horse for £30 saying “If I hear no more
about it I shall consider the horse mine at £30.” The nephew did not reply to F at all.
He told his auctioneer, B to keep the particular horse out of sale of his farm stock as
he intended to reserve it for his uncle. By mistake the auctioneer sold the horse. F sued
him for conversion of his property. Held, F could not succeed as his nephew had not
communicated the acceptance to him.

2.26 BUSINESS LAWS
Example 56: ’A’ subscribed for the weekly magazine for one year. Even after expiry of
his subscription, the magazine company continued to send him magazine for five
years. And also ‘A’ continued to use the magazine but denied to pay the bills sent to
him. ’A’ would be liable to pay as his continued use of the magazine was his acceptance
of the offer.
(7) Acceptance by conduct/Implied Acceptance: Section 8 of the Act lays down that “the
performance of the conditions of a proposal, or the acceptance of any consideration
for a reciprocal promise which may be offered with a proposal, constitutes an
acceptance of the proposal. This section provides the acceptance of the proposal by
conduct as against other modes of acceptance i.e. verbal or written communication.
Therefore, when a person performs the act intended by the proposer as the
consideration for the promise offered by him, the performance of the act constitutes
acceptance.
Example 57: when a tradesman receives an order from a customer and executes the
order by sending the goods, the customer’s order for goods constitutes the offer,
which has been accepted by the trades man subsequently by sending the goods. It is
a case of acceptance by conduct.
1.6 COMMUNICATION OF OFFER AND ACCEPTANCE

The importance of ‘offer’ and ‘acceptance’ in giving effect to a valid contract was explained in
the previous paragraphs. One important common requirement for both ‘offer’ and
‘acceptance’ is their effective communication. Effective and proper communication prevents
avoidable revocation and misunderstanding between parties.
When the contracting parties are face-to-face, there is no problem of communication because
there is instantaneous communication of offer and acceptance. In such a case the question of
revocation does not arise since the offer and its acceptance are made instantly.
The difficulty arises when the contracting parties are at a distance from one another and they
utilise the services of the post office or telephone or email (internet). In such cases, it is very
much relevant for us to know the exact time when the offer or acceptance is made or
complete.
The Indian Contract Act, 1872 gives a lot of importance to “time” element in deciding when
the offer and acceptance is complete.
Communication of offer: In terms of Section 4 of the Act, “the communication of offer is
complete when it comes to the knowledge of the person to whom it is made”.

Example 58: Where ‘A’ makes a proposal to ‘B’ by post to sell his house for ` 5 lakhs and if
the letter containing the offer is posted on 10th March and if that letter reaches ‘B’ on 12th
March the offer is said to have been communicated on 12th March when B received the letter.
Thus, it can be summed up that when a proposal is made by post, its communication will be
complete when the letter containing the proposal reaches the person to whom it is made.
Mere receiving of the letter is not sufficient, he must receive or read the message contained
in the letter.
He receives the letter on 12th March, but he reads it on 15th of March. In this case offer is
communicated on 15th of March, and not 12th of March.
Communication of acceptance: There are two issues for discussion and understanding. They
are: The modes of acceptance and when is acceptance complete?
Let us, first consider the modes of acceptance. Section 3 of the Act prescribes in general
terms two modes of communication namely, (a) by any act and (b) by omission, intending
thereby, to communicate to the other or which has the effect of communicating it to the other.
Communication by act would include any expression of words whether written or oral.
Written words will include letters, telegrams, faxes, emails and even advertisements. Oral
words will include telephone messages. Again communication would include any conduct
intended to communicate like positive acts or signs so that the other person understands
what the person ‘acting ‘ or ‘making signs’ means to say or convey.
Communication of acceptance by ‘omission’ to do something. Such omission is conveyed
by a conduct or by forbearance on the part of one person to convey his willingness or assent.
However, silence would not be treated as communication by ‘omission’.
Example 59: A offers ` 50,000 to B if he does not arrive before the court of law as an evidence
to the case. B does not arrive on the date of hearing to the court. Here omission of doing an
act amounts to acceptance.
Communication of acceptance by conduct. For instance, delivery of goods at a price by a
seller to a willing buyer will be understood as a communication by conduct to convey
acceptance. Similarly, one need not explain why one boards a public bus or drop a coin in a
weighing machine. The first act is a conduct of acceptance against its communication to the
offer by the public transport authority to carry any passenger. The second act is again a
conduct conveying acceptance to use the weighing machine kept by the vending company as
an offer to render that service for a consideration.
The other issue in communication of acceptance is about the effect of act or omission or
conduct. These indirect efforts must result in effectively communicating its acceptance or non
acceptance. If it has no such effect, there is no communication regardless of which the
acceptor thinks about the offer within himself. Thus, a mere mental unilateral assent in one’s

2.28 BUSINESS LAWS
own mind would not amount to communication. Where a resolution passed by a bank to sell
land to ‘A’ remained uncommunicated to ‘A’, it was held that there was no communication
and hence no contract. [Central Bank Yeotmal vs Vyankatesh (1949) A. Nag. 286].
Let us now come to the issue of when communication of acceptance is complete. In terms of
Section 4 of the Act, it is complete,
(i) As against the proposer, when it is put in the course of transmission to him so as to
be out of the power of the acceptor to withdraw the same;
(ii) As against the acceptor, when it comes to the knowledge of the proposer.
Where a proposal is accepted by a letter sent by the post, the communication of
acceptance will be complete as against the proposer when the letter of acceptance is posted
and as against the acceptor when the letter reaches the proposer.
For instance in the above example, if ‘B’ accepts, A’s proposal and sends his acceptance by
post on 14th, the communication of acceptance as against ‘A’ is complete on 14th, i.e. when
the letter is posted. As against ‘B’ acceptance will be complete, when the letter reaches ‘A’.
Here ‘A’ the proposer will be bound by B’s acceptance, even if the letter of acceptance is delayed
in post or lost in transit. The golden rule is proposer becomes bound by the contract, the moment
acceptor has posted the letter of acceptance. But it is necessary that the letter is correctly
addressed, adequately stamped and duly posted. In such an event the loss of letter in transit,
wrong delivery, non delivery etc., will not affect the validity of the contract.
However, from the view point of acceptor, he will be bound by his acceptance only when the
letter of acceptance has reached the proposer. So, it is crucial in this case that the letter
reaches the proposer. If there is no delivery of the letter, the acceptance could be treated as
having been completed from the viewpoint of proposer but not from the viewpoint of
acceptor. Of course this will give rise to an awkward situation of only one party to the contract,
being treated as bound by the contract though no one would be sure as to where the letter
of acceptance had gone.
Acceptance over telephone or telex or fax: When an offer is made of instantaneous

communication like telex, telephone, fax or through e-mail, the contract is only complete
when the acceptance is received by the offeree, and the contract is made at the place where
the acceptance is received (Entores Ltd. v. Miles Far East Corporation). However, in case of
a call drops and disturbances in the line, there may not be a valid contract.
Communication of special conditions: Sometimes there are situations where there are
contracts with special conditions. These special conditions are conveyed tacitly and the
acceptance of these conditions are also conveyed by the offeree again tacitly or without him
even realizing it.

Example 60: Where a passenger undertakes a travel, the conditions of travel are printed at
the back of the tickets, sometimes these special conditions are brought to the notice of the
passenger, sometimes not. In any event, the passenger is treated as having accepted the
special condition the moment he bought his ticket.
When someone travels from one place to another by air, it could be seen that special
conditions are printed at the back of the air ticket in small letters [in a non-computerized train
ticket even these are not printed] Sometimes these conditions are found to have been
displayed at the notice board of the Airlines office, which passengers may not have cared to
read. The question here is whether these conditions can be considered to have been
communicated to the passengers of the Airlines and can the passengers be treated as having
accepted the conditions. The answer to the question is in the affirmative and was so held in
Mukul Datta vs. Indian Airlines [1962] AIR cal. 314 where the plaintiff had travelled from
Delhi to Kolkata by air and the ticket bore conditions in fine print. But such terms and
condition should be reasonable.
Example 61: Where a launderer gives his customer a receipt for clothes received for washing. The
receipt carries special conditions and are to be treated as having been duly communicated to the
customer and therein a tacit acceptance of these conditions is implied by the customer’s
acceptance of the receipt [Lily White vs. R. Mannuswamy [1966] A. Mad. 13].
CASE LAW: Lilly White vs. Mannuswamy (1970)
Facts: P delivered some clothes to drycleaner for which she received a laundry receipt
containing a condition that in case of loss, customer would be entitled to claim 15% of the
market price of value of the article, P lost her new saree. Held, the terms were unreasonable
and P was entitled to recover full value of the saree from the drycleaner.
In the cases referred above, the respective documents have been accepted without a protest
and hence amounted to tacit acceptance.
Standard forms of contracts: It is well established that a standard form of contract may be
enforced on another who is subjectively unaware of the contents of the document, provided
the party wanting to enforce the contract has given notice which, in the circumstances of a
case, is sufficiently reasonable. But the acceptor will not incur any contractual obligation, if
the document is so printed and delivered to him in such a state that it does not give
reasonable notice on its face that it contains certain special conditions. In this connection, let
us consider a converse situation. A transport carrier accepted the goods for transport without
any conditions. Subsequently, he issued a circular to the owners of goods limiting his liability
for the goods. In such a case, since the special conditions were not communicated prior to
the date of contract for transport, these were not binding on the owners of goods [Raipur
transport Co. vs. Ghanshyam [1956] A. Nag.145].

2.30 BUSINESS LAWS
1.7 COMMUNICATION OF PERFORMANCE

We have already discussed that in terms of Section 4 of the Act, communication of a proposal
is complete when it comes to the knowledge of the person to whom it is meant. As regards
acceptance of the proposal, the same would be viewed from two angles. These are:
(i) from the viewpoint of proposer and
(ii) the other from the viewpoint of acceptor himself
From the viewpoint of proposer, when the acceptance is put into a course of transmission,
when it would be out of the power of acceptor. From the viewpoint of acceptor, it would be
complete when it comes to the knowledge of the proposer.
At times the offeree may be required to communicate the performance (or act) by way of
acceptance. In this case, it is not enough if the offeree merely performs the act but he should
also communicate his performance unless the offer includes a term that a mere performance
will constitute acceptance. The position was clearly explained in the famous case of Carlill
Vs Carbolic & Smokeball Co. In this case the defendant a sole proprietary concern
manufacturing a medicine which was a carbolic ball whose smoke could be inhaled through
the nose to cure influenza, cold and other connected ailments issued an advertisement for
sale of this medicine. The advertisement also included a reward of $100 to any person who
contracted influenza, after using the medicine (which was described as ‘carbolic smoke ball’).
Mrs. Carlill bought these smoke balls and used them as directed but contracted influenza. It
was held that Mrs. Carlill was entitled to a reward of $100 as she had performed the condition
for acceptance. Further as the advertisement did not require any communication of
compliance of the condition, it was not necessary to communicate the same. The court thus
in the process laid down the following three important principles:
(i) an offer, to be capable of acceptance, must contain a definite promise by the offeror
that he would be bound provided the terms specified by him are accepted;
(ii) an offer may be made either to a particular person or to the public at large, and
(iii) if an offer is made in the form of a promise in return for an act, the performance of
that act, even without any communication thereof, is to be treated as an acceptance
of the offer.
1.8 REVOCATION OF OFFER AND ACCEPTANCE

If there are specific requirements governing the making of an offer and the acceptance of that
offer, we also have specific law governing their revocation.
In term of Section 4, communication of revocation (of the proposal or its acceptance) is
complete.

(i) 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 to be out of the power of the person who makes
it, and
(ii) as against the person to whom it is made, when it comes to his knowledge.
The above law can be illustrated as follows: If you revoke your proposal made to me by a
telegram, the revocation will be complete, as far as you are concerned when you have
dispatched the telegram. But as far as I am concerned, it will be complete only when I receive
the telegram.
As regards revocation of acceptance, if you go by the above example, I can revoke my
acceptance (of your offer) by a telegram. This revocation of acceptance by me will be complete
when I dispatch the telegram and against you, it will be complete when it reaches you.
But the important question for consideration is when a proposal can be revoked? And when
can an acceptance be revoked? These questions are more important than the question when
the revocation (of proposal and acceptance) is complete.
Ordinarily, the offeror can revoke his offer before it is accepted. If he does so, the offeree
cannot create a contract by accepting the revoked offer.
Example 62: the bidder at an auction sale may withdraw (revoke) his bid (offer) before it is
accepted by the auctioneer by fall of hammer.
An offer may be revoked by the offeror before its acceptance, even though he had originally
agreed to hold it open for a definite period of time. So long as it is a mere offer, it can be
withdrawn whenever the offeror desires.
Example 63: X offered to sell 50 bales of cotton at a certain price and promised to keep it
open for acceptance by Y till 6 pm of that day. Before that time X sold them to Z. Y accepted
before 6 p.m., but after the revocation by X. In this case it was held that the offer was already
revoked.
In terms of Section 5 of the Act a proposal can be revoked at any time before the
communication of its acceptance is complete as against the proposer. An acceptance may be
revoked at any time before the communication of acceptance is complete as against the
acceptor.
Example 64: A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal
by a letter sent by post. A may revoke his proposal at any time before or at the moment when
B posts his letter of acceptance, but not afterwards. Whereas B may revoke his acceptance at
any time before or at the moment when the letter communicating it reaches A, but not
afterwards.
An acceptance to an offer must be made before that offer lapses or is revoked.

2.32 BUSINESS LAWS
The law relating to the revocation of offer is the same in India as in England, but the law
relating to the revocation of acceptance is different.
In English law, the moment a person expresses his acceptance of an offer, that moment the
contract is concluded, and such an acceptance becomes irrevocable, whether it is made orally
or through the post. In Indian law, the position is different as regards contract through post.
Contract through post- As acceptance, in English law, cannot be revoked, so that once the
letter of acceptance is properly posted the contract is concluded. In Indian law, the acceptor
or can revoke his acceptance any time before the letter of acceptance reaches the offeror, if
the revocation telegram arrives before or at the same time with the letter of acceptance, the
revocation is absolute.
Contract over Telephone- A contract can be made over telephone. The rules regarding offer
and acceptance as well as their communication by telephone or telex are the same as for the
contract made by the mutual meeting of the parties. The contract is formed as soon as the
offer is accepted but the offeree must make it sure that his acceptance is received by the
offeror, otherwise there will be no contract, as communication of acceptance is not complete.
If telephone unexpectedly goes dead during conversation, the acceptor must confirm again
that the words of acceptance were duly heard by the offeror.
Revocation of proposal otherwise than by communication: When a proposal is made, the
proposer may not wait indefinitely for its acceptance. The offer can be revoked otherwise than
by communication or sometimes by lapse.
Modes of revocation of offer

(i) By notice of revocation:
Example 65: A offered B to sell goods at Rs. 5,000 through a post but before B could
accept the offer A received highest bid for the goods from C. So, A revoked the offer
to B by informing B over the telephone and sold goods to C.
(ii) By lapse of time: The time for acceptance can lapse if the acceptance is not given
within the specified time and where no time is specified, then within a reasonable time.
This is for the reason that proposer should not be made to wait indefinitely. It was held
in Ramsgate Victoria Hotel Co. Vs Montefiore (1866 L.R.Z. Ex 109), that a person
who applied for shares in June was not bound by an allotment made in November.
This decision was also followed in India Cooperative Navigation and Trading Co.
Ltd. Vs Padamsey Prem Ji. However, these decisions now will have no relevance in
the context of allotment of shares since the Companies Act, 2013 has several provisions
specifically covering these issues.

(iii) By non-fulfilment of condition precedent: Where the acceptor fails to fulfill a

condition precedent to acceptance the proposal gets revoked. This principle is laid
down in Section 6 of the Act. The offeror for instance may impose certain conditions
such as executing a certain document or depositing certain amount as earnest money.
Failure to satisfy any condition will result in lapse of the proposal. As stated earlier
‘condition precedent’ to acceptance prevents an obligation from coming into existence
until the condition is satisfied. Suppose where ‘A’ proposes to sell his house to be ‘B’
for ` 5 lakhs provided ‘B’ leases his land to ‘A’. If ‘B’ refuses to lease the land, the offer
of ‘A’ is revoked automatically.
(iv) By death or insanity: Death or insanity of the proposer would result in automatic
revocation of the proposal but only if the fact of death or insanity comes to the
knowledge of the acceptor.
(v) By counter offer
(vi) By the non-acceptance of the offer according to the prescribed or usual mode
(vii) By subsequent illegality.
SUMMARY
Contract: A Contract is an agreement enforceable by law [Section 2(h)]. An agreement is
enforceable by law, if it is made by the free consent of the parties who are competent to
contract and the agreement is made with a lawful object and is for a lawful consideration and
is not hereby expressly declared to be void [Section 10]. All contracts are agreements, but all
agreements are not contracts. Agreements lacking any of the above said characteristics are
not contracts. A contract that ceases to be enforceable by law is called ‘void contract’, [Section
2(i)], but an agreement which is enforceable by law at the option of one party thereto, but not
at the option of the other is called ‘voidable contract’ [(Section 2(i)].
Offer and Acceptance: Offeror undertakes to do or to abstain from doing a certain act if the
offer is properly accepted by the offeree. Offer may be expressly made or may even be implied
by the conduct of the offeror, but it must have intention and be capable of creating legal
relations. The terms of offer must be certain or at least be capable of being made certain.
Acceptance of offer must be absolute and unqualified and must be according to the
prescribed or usual mode. If the offer has been made to a specific person, it must be accepted
by that person only, but a general offer may be accepted by any person.

2.34 BUSINESS LAWS
Communication of offer and acceptance, and revocation thereof-

(a) Communication of an offer is complete when it comes to the knowledge of the offeree.
(b) Communication of an acceptance is complete: As against the offeror when it is put in

the course of transmission to him and as against the acceptor, when it comes to the
knowledge of the offeror.
(c) Communication of revocation of an offer or acceptance is complete: It is complete as

against the person making it, when it is put into a course of transmission so as to be
out of power of the person making it and as against the person to whom it is made,
when it comes to his knowledge.
Meaning of certain terms
Proposal [(i.e., offer) Section 2(a)] ♦ 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 either to-
• such act; or
• abstinence,
♦ he is said to make a proposal (i.e. offer).
Promise [Section 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.
Agreement [Section 2(e)] ♦ Every promise and every set of
promises,
♦ forming consideration for each other,
♦ is an agreement.
Contract [Section 2(h)] ♦ An agreement enforceable by law is a
contract.
Promisor and Promisee [Section 2(c)] When the proposal is accepted-
♦ the person making the proposal is
called as ‘promisor’; and
♦ the person accepting the proposal is
called as ‘promisee’.

Consideration [Section 2(d)] When, at the desire of the promisor, the

promisee
♦ has done or abstained from doing
something; or
♦ does or abstains from doing something;
or any other person
♦ promises to do or abstain from doing
something,
Such act, abstinence or promise is called a
consideration for the promise.
Void agreement [Section 2(g)] An agreement not enforceable by law is said to
be void.
A void agreement is not enforceable from the
very beginning, i.e. it is void ab initio.
Voidable Contract [Section 2(i)] An agreement is a voidable contract if-
♦ it is enforceable by law at the option of
one or more of the parties thereto,
♦ it is not enforceable by law at the option
of the other or others.
Void contract [Section 2 (j)] ♦ A contract
♦ which ceases to be enforceable by law
♦ becomes void when it ceases to be
enforceable.
Indian Contract Act, 1872 (1st September 1872)
Promise [Sec.2(b)] Agreement [Sec.2(e)] Contract [Sec. 2(h)]
Offer (Proposal) + Agreement

Promise + Consideration
Acceptance +Enforceability by law
Note: Agreement may be social or legal. Social Agreement is not enforceable by law.

2.36 BUSINESS LAWS
ESSENTIALS OF VALID CONTRACT
As given by Not given by Section

Section 10 10 but essential
Offer & Free Capacity Lawful Lawful Agreement not

Acceptance consent of parties consideration Object declared void
Two Intention to Legal Certainty of Possibility of

Parties create legal Formalities meaning Performance
Relationship
CLASSIFICATION OF CONTRACTS
On the Basis of Validity or On the Basis of On the Basis of Performance

Formation 1. Executed Contracts: Both
Enforceability
1. Express Contract: By the parties have performed
1. Valid Contract: Contains all the
words spoken or written their respective obligations.
essential elements of valid contract.
2. Implied Contract or 2. Executory Contract: Both
2. Void Contract: Sec. 2(j): A contract,
tacit contract: Where the the parties have yet to perform
which ceases to be enforceable by law.
proposal or acceptance is their obligations.
3. Voidable Contract: Sec.2(i): An otherwise than in words. a. Unilateral or one-sided
agreement which is enforceable by law
3. Quasi Contract: The contract: Only one party has
at the option of one or more of the
law creates and enforces fulfilled his obligation
parties thereto, but not at the option of
legal rights and
other or others. b. Bilateral contract:
obligations when no real
4. Illegal Contracts: A contract which is contract exists. Both the parties have to
forbidden by law. perform
4. E-Contracts: A contract
5. Unenforceable Contract: Contract is entered into by two or
is good in substance but having more parties using
technical defect electronics means.

PROPOSAL OR OFFER Sec.2(a)
“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”.
Classification of Offer
Essentials of A Valid Offer
(a) General Offer: Offer to the
world at large. 1. Must be with intent to create legal relationship
(b) Specific Offer: Offer made to
2. Terms of the offer must be certain, definite & unambiguous.
a definite person
3. Must be communicated to the offeree.
(c) Cross Offer: When two parties
make identical offers to each 4. Must be made with a view to obtaining the assent of the
other
other party.
(d) Counter Offer: When offeree
5. May be conditional.
imposes conditions which have
the effect of modifying or varying 6. Must not contain a term the non-compliance of which
the offer.
amount acceptance.
(e) Standing or continue or
7. May be general or specific or express or implied.
open offer: Offer to public at
large for acceptance for certain 8. An offer must be distinguished from an invitation to offer.
period of time
ACCEPTANCE Sec 2(b)
“When the person to whom the proposal is made signifies his assent thereto, proposal is said to
be accepted. The proposal when accepted, becomes a promise”.
Legal Rules COMMUNICATION OF OFFER AND ACCEPTANCE

1. Given only by the person to Mode of Communication: By Act, By Omission, By Conduct
whom offer is made.
Communication of Offer: (Sec.4)
2. Must be absolute and
The communication of offer is completed when it comes to
unqualified.
the knowledge of person to whom it is made.
3. Must be communicated.
Communication of Acceptance: (Sec.4)
4. Must be in the prescribed
The communication of acceptance is complete-
mode.
- as against the proposer when it is put into a course of
5. Mere silence is not
transmission to him, so as to be out of the power of
acceptance.
acceptor to withdraw the same.
6. May be by conduct/implied - as against the acceptor when it comes to the
Acceptance knowledge of proposer.

2.38 BUSINESS LAWS
REVOCATION OF OFFER AND ACCEPTANCE
Mode of Revocation
Time for revocation 1. By communication of notice.
Proposal: Before the 2. By lapse of time it is not accepted within the
communication of its prescribed time.
acceptance is complete as
against the proposer. 3. By non-fulfillment by the offeree of a
condition precedent to acceptance.
Acceptance: Before
communication of the 4. By death or insanity of the offer or provided
acceptance is complete as the offeree comes to know of it before
against the acceptor acceptance.
5. If a counter-offer is made to it.
TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. An agreement enforceable by law is a
(a) Promise
(b) Contract
(c) Obligation
(d) Lawful promise

2. A void agreement is one which is -
(a) Valid but not enforceable
(b) Enforceable at the option of both the parties

(c) Enforceable at the option of one party
(d) Not enforceable in a court of law.
3. An agreement which is enforceable by law at the option of one or more of the parties
thereon but not at the option of the other or others is a
(a) Valid Contract
(b) Void contract

(c) Voidable contract

(d) Illegal contract
4. When the consent of a party is not free, the contract is
(a) Void
(b) Voidable
(c) Valid
(d) Illegal
5. In case of illegal agreements, the collateral agreements are:
(a) Valid
(b) Void
(c) Voidable
(d) None of these
6. An offer may lapse by:
(a) Revocation
(b) Counter Offer
(c) Rejection of offer by offeree
(d) All of these
7. A proposal when accepted becomes a

(a) Promise
(b) Contract
(c) Offer
(d) Acceptance
8. If A says to B “I offer to sell my house to you for ` 40,00,000” and B accepts the offer by
saying clearly “I accept your offer”, it is a/an
(a) Implied offer
(b) Express offer
(c) General offer

(d) None of the above

2.40 BUSINESS LAWS
9. ‘A’ offered a reward of ` 1,00,000 for recovery of some valuable missing articles. ‘B’ who
did not know of this offer, found the missing articles. Which one of the following is the
correct solution to this problem?
(a) Giving delivery of articles to ‘A’ amounts to an acceptance and hence ‘B’ is entitled
to get the reward of ` 1,00,000
(b) Giving delivery of articles to ‘A’ amounts to performance of a condition precedent
to an offer and hence there is valid acceptance. So ‘B’ must get the reward of `
1,00,000
(c) As there is no acceptance of an offer due to want of Knowledge, ‘B’, is not entitled
to get the reward of ` 1,00,000
(d) In the absence of any legal obligation on ‘A’, no claim for reward of ` 1,00,000 is
maintainable by ‘B’.
10. Arun has two cars- one of white colour and another of red colour. He offers to sell one
of the cars to Basu thinking that he is selling the car which has white colour. Basu agrees
to buy the car thinking that Arun is selling the car which has red colour. Will this
agreement become a valid contract?
(a) Yes
(b) No
(c) Insufficient information
(d) None of the above.
11. A dress is displayed in the showroom with a price tag attached to the dress. A buyer
interested in the dress and ready to pay the price mentioned in the tag approached the
shopkeeper for purchasing the dress.
(a) The shopkeeper can refuse to sell the dress as display of dress is just an invitation
to offer.
(b) The shopkeeper cannot refuse to sell the dress as the buyer has accepted the offer
(c) In case of refusal, the shopkeeper will be liable for breach of contract
(d) The shopkeeper cannot refuse to sell the dress but may charge higher price
12. A agrees to pay ` 1,000 to B if a certain ship returns within a year. However, the ship
sinks within the year. In this case, the contract becomes
(a) Valid
(b) Void

(c) Voidable
(d) Illegal
13. A notice in the newspaper inviting tenders is
(a) a proposal
(b) An invitation to proposal
(c) A promise
(d) An invitation for negotiation
14. A telephonic acceptance is complete when the offer is
(a) spoken into the telephone
(b) heard but not understood by the offeror
(c) heard and understood by the offeror
(d) is received, heard and understood by some person in the offeror’s house
15. A and B agree to deal in smuggled goods and share the profits. A refuses to give B’s share
of profit. In this case:
(a) B can enforce the agreement in the court
(b) B can only claim damages
(c) B has no remedy as the contract is illegal
(d) B can enforce the contract and claim damages
16. Which one of the following statements is correct?
(a) Void agreements are always illegal
(b) Illegal agreements are voidable

(c) Illegal agreement can be ratified by the parties
(d) Illegal agreements are always void
17. A voidable contract is one which

(a) Can be enforced at the option of aggrieved party
(b) Can be enforced at the option of both the parties
(c) Cannot be enforced in a court of law
(d) Courts prohibit

2.42 BUSINESS LAWS
18. When offer is made to a definite person, it is known as

(a) General Offer
(b) Cross Offer
(c) Counter offer
(d) Special offer
19. On the face of a ticket, it is mentioned that to look for the terms and conditions look
behind. Mr. A bought the ticket but didn’t read the terms and conditions. He:
(a) is not bound by the terms and condition
(b) may decide to bound by certain terms and ignore others
(c) is bound by all the terms and conditions whether he read it or not
(d) none of the above
20. It does not effect the free consent of the parties,
(a) Fraud
(b) Coercion
(c) Incompetency of parties
(d) Undue Influence
21. __________ contract is made without intention of parties.
(a) Express
(b) Implied
(c) Quasi
(d) Executory
22. A offers B to supply Books at Rs. 500 each. B accepts the same with condition of 30%
discount. It is _______
(a) Counter Offer
(b) Cross Offer

(c) Specific Offer
(d) General Offer

Descriptive Questions
1. “All contracts are agreements, but all agreements are not contracts”. Comment.
2. A sends an offer to B to sell his second-car for ` 1,40,000 with a condition that if B does
not reply within a week, he (A) shall treat the offer as accepted. Is A correct in his
proposition?
3. Explain the type of contracts in the following agreements under the Indian Contract Act,
1872:
(i) A coolie in uniform picks up the luggage of A to be carried out of the railway
station without being asked by A and A allows him to do so.
(ii) Obligation of finder of lost goods to return them to the true owner.
(iii) A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but
before the supply is effected, the fire caught in the factory and everything was
destroyed.
4. Shambhu Dayal started “self service” system in his shop. Smt. Prakash entered the shop,
took a basket and after taking articles of her choice into the basket reached the cashier
for payments. The cashier refuses to accept the price. Can Shambhu Dayal be compelled
to sell the said articles to Smt. Prakash? Decide as per the provisions of the Indian
Contract Act, 1872.
5. State whether there is any contract in following cases:
(a) A engages B to do certain work and remuneration to be paid as fixed by C.
(b) A and B promise to pay for the studies of their maid’s son
(c) A takes a seat in public bus.
(d) A, a chartered accountant promises to help his friend to file his return.
6. Miss Shakuntala puts an application to be a teacher in the school. She was appointed by
the trust of the school. Her friend who works in the same school informs her about her
appointment informally. But later due to some internal reasons her appointment was
cancelled. Can Miss Shakuntala claim for damages?

2.44 BUSINESS LAWS
ANSWER/HINTS
Answers to MCQs
1. (b) 2. (d) 3. (c) 4. (b) 5. (b) 6. (d)
7. (a) 8. (b) 9. (c) 10. (b) 11. (a) 12. (b)
13. (b) 14. (c) 15. (c) 16. (d) 17. (a) 18. (d)
19. (c) 20 (c) 21 (c) 22 (a)
Answers to the Descriptive Questions

1. An agreement comes into existence when one party makes a proposal or offer to the
other party and that other party gives his acceptance to it. A contract is an agreement
enforceable by law. It means that to become a contract an agreement must give rise
to a legal obligation i.e. duty enforceable by law. If an agreement is incapable of
creating a duty enforceable by law, it is not a contract. There can be agreements which
are not enforceable by law, such as social, moral or religious agreements. The
agreement is a wider term than the contract. All agreements need not necessarily
become contracts but all contracts shall always be agreements.
All agreements are not contracts: When there is an agreement between the parties and
they do not intend to create a legal relationship, it is not a contract.
All contracts are agreements: For a contract there must be two things (a) an agreement
and (b) enforceability by law. Thus, existence of an agreement is a pre-requisite
existence of a contract. Therefore, it is true to say that all contracts are agreements.
Thus, we can say that there can be an agreement without it becoming a contract, but
we can’t have a contract without an agreement.
2. Acceptance to an offer cannot be implied merely from the silence of the offeree, even
if it is expressly stated in the offer itself. Unless the offeree has by his previous conduct
indicated that his silence amount to acceptance, it cannot be taken as valid acceptance.
So, in the given problem, if B remains silent, it does not amount to acceptance.
The acceptance must be made within the time limit prescribed by the offer. The
acceptance of an offer after the time prescribed by the offeror has elapsed will not
avail to turn the offer into a contract.
3. (i) It is an implied contract and A must pay for the services of the coolie detailed
by him.
Implied Contracts: Implied contracts come into existence by implication. Most
often the implication is by law and or by action. Section 9 of the Act

contemplates such implied contracts when it lays down that in so far as such
proposal or acceptance is made otherwise than in words, the promise is said to
be implied.
(ii) Obligation of finder of lost goods to return them to the true owner cannot be
said to arise out of a contract even in its remotest sense, as there is neither offer
and acceptance nor consent. These are said to be quasi-contracts.
Quasi-Contract: A quasi-contract is not an actual contract but it resembles a
contract. It is created by law under certain circumstances. The law creates and
enforces legal rights and obligations when no real contract exists. Such
obligations are known as quasi-contracts. In other words, it is a contract in
which there is no intention on part of either party to make a contract but law
imposes a contract upon the parties.
(iii) The above contract is a void contract.
Void Contract: Section 2 (j) states as follows: “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”. Thus, a
void contract is one which cannot be enforced by a court of law.
4. Invitation to offer: The offer should be distinguished from an invitation to offer. An
offer is the final expression of willingness by the offeror to be bound by his offer should
the party chooses to accept it. Where a party, without expressing his final willingness,
proposes certain terms on which he is willing to negotiate, he does not make an offer,
but invites only the other party to make an offer on those terms. This is the basic
distinction between offer and invitation to offer.
The display of articles with a price in it in a self-service shop is merely an invitation to
offer. It is in no sense an offer for sale, the acceptance of which constitutes a contract.
In this case, Smt. Prakash by selecting some articles and approaching the cashier for
payment simply made an offer to buy the articles selected by her. If the cashier does
not accept the price, the interested buyer cannot compel him to sell.
5. (a) It is a valid express contract
(b) It is not a contract as it is a social agreement
(c) It is an implied contract. A is bound to pay for the bus fare.
(d) It is a social agreement without any intention to create a legal relationship.
6. No, Miss Shakuntala cannot claim damages. As per Section 4, communication of
acceptance is complete as against proposer when it is put in the course of transmission
to him.
In the present case, school authorities have not put any offer letter in transmission. Her
information from a third person will not form part of contract.

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CHAPTE 2

UNIT – 1: NATURE OF CONTRACTS

© The Institute of Chartered Accountants of India

Elements of Essentials of a Types of

Contract Law before Indian Contract Act, 1872

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

1.1 WHAT IS A CONTRACT?

Agreement = Offer/Proposal + Acceptance + Consideration

Thus, from above definitions it can be concluded that –

© The Institute of Chartered Accountants of India

1.2 ESSENTIALS OF A VALID CONTRACT

As given by Section 10 of Indian Not given by Section 10 but are also

© The Institute of Chartered Accountants of India

3 Competency of the parties 3 Fulfilments of legal formalities

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Consent would be considered as free consent if it is not caused by coercion, undue

© The Institute of Chartered Accountants of India

Example 13: A agrees to sell his books to B for ` 100.

1.3 TYPES OF CONTRACTS

Type of Contract on the basis of

Validity or Formation Performance

© The Institute of Chartered Accountants of India

I. On the basis of the validity

© The Institute of Chartered Accountants of India

S. Basis Void Contract Voidable Contract

© The Institute of Chartered Accountants of India

4 Performance A void contract If the aggrieved party does

Basis of Void agreement Illegal agreement

Scope A void agreement is not An illegal agreement is

Nature Not forbidden under law. Are forbidden under law.

Punishment Parties are not liable for any Parties to illegal

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Collateral It’s not necessary that Agreements collateral to

5. Unenforceable Contract: Where a contract is good in substance but because

II. On the basis of the formation of contract

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III. On the basis of the performance of the contract

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(a) Unilateral Contract: Unilateral contract is a one sided contract in

1.4 PROPOSAL / OFFER [SECTION 2(a) OF THE INDIAN

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Example 34: A willing to sell his good at certain price to B.

How made To whom made

Express offer Implied offer General offer Specific offer

General Special Counter Cross Standing

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Now let us examine each one of them.

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Case Law: Harvey vs. Facie [1893] AC 552

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10. A statement of price is not an offer

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(iii) Advertising auction sales and

Basis Offer Invitation to offer

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