Law of Contract-I

2 Contact Hr
Formation of Contract
An Offer
“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.” – Sec 2(a)
 Offer/proposal is an expression by one party of his assent
to certain terms, provided that the other party involved in
the bargaining transaction will likewise express his assent
to the identically same terms.
 Offer looks forward to an agreement to mutual expression
of assent.
Two concepts of Offer
a) Promise
b) Request
Example: If A makes an offer to sell his horse to B for
Rs.3,000/- there is promise to sell the horse to B and
also a request for the payment of Rs.3,000/-
If A were to say to B “I will give my car to you” and B
were to say “I will give Rs.500,000/- there is no contract.
In such cases there is only a promise, a mere expression
of intention
Promise
“When a person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted.” –
Sec 2(b)
 Promise in law is an accepted offer
 If enforceable by law, is a contract, but if not, is a void
agreement
 An offer which is not accepted cannot bind the offeror
especially when the contract was intended to be reduced
into writing
Promisor and Promisee
The person making the proposal is called the “promisor”
and the person accepting the proposal is called the
“promisee”.
 The word person includes governments also.
 Promisor and promisee must be different person
 There cannot be an agreement by the same person acting
in different capacities
Example: Mortgagee put up the mortgage property for sale
under a power given him by his mortgage deed, he cannot
sell it to himself.
Consideration
“When at the desire of the promisor, the promisee or any other
person has done or abstained from doing or does or abstains
from doing, or promises to do or to abstain from doing,
something, such act or abstinence or promise is called the
consideration for the promise.”
 Consideration must be conducive to contract
 “at the desire of the promisor” imply a promise which has a real
effect in conducing the contract.
 A promise without consideration is no contract in law and is
therefore not enforceable.
 Consideration need not be to be benefit of the promisor (if the
promisee does some act by which a third person is benefited
which he would not have done but for the promise, the
consideration is sufficient).
 Consideration for a promise need not necessarily move from
the promisee but may move from a third party
Agreement
Every promise or every set or promises, forming the
consideration for each other, is an agreement.
 The acceptance of proposal may bring into existence a
promise but to have an agreement it is very essential that
there should be consideration for the promise.
Executed agreements: where one party has already
perform his part of agreement, while the other party has
to perform his part.
Executory: both the parties have to perform their mutual
promises.
Once the contract has passed the executory stage and
become a completed transaction, non-payment of price
no longer remains a ground for avoiding the contract
itself. The only remedy for the seller is to recover the price
Reciprocal promises
Promises which form the consideration or part of the
consideration for each other are called reciprocal
promises.
Void agreement
An agreement not enforceable by law is said to be void.
Contract
An agreement enforceable by law is a contract
Voidable contract
 An agreement which is enforceable by law at the option of
one or more of the parties thereto, but not at the option
of the other or others is a voidable contract.
 A contract is said to be void in which a contract fails to be
made when it seems to have been made.
 A contract is said to be voidable when it could be avoided
and which is not absolutely void.
Void contract
 A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable.
RIGHT IN PERSONAM AND NOT RIGHT IN
REM
 “Right in Rem” means a right available against the whole
world or world at large. Example, A is a owner of a flat in
Lahore. He has a right to possess and enjoy the flat
against the whole world.
 “Right in Personam” means a right against a particular
person. Example, A owes a sum of Rs. 25,000/- to B. Here
B has a right to recover Rs. 25,000/- from A only. This
right of B is called Right in Personam.
 The Contract creates obligations between the parties to
the contract and not against the whole world. It is,
therefore, rightly said that the law of contract creates
right in personam and not right in rem.
Communication, Acceptance and
Revocation of Proposals

The communication of proposals the acceptance of

proposals, and the revocation of proposals and
acceptances, respectively, are deemed to be made by
a) any act or
b) omission of the party proposing, accepting or revoking
by which he intends to communicate such proposal
acceptance or revocation, or which has the effect of
communicating it. (Sec 3)
Communication
 Sec 2(a) 0f the Contract Act 1872 says, When a person
signifies his willingness to do or to abstain from doing
something to another, with a view to obtaining the assent
of that another, he is said to make a proposal. Further,
 section 2(b) says that when the person to whom the
proposal is made signifies his assent, the proposal is said
to be accepted.
The important point to note here is that the party making
the proposal or the party accepting the proposal must
"signify" their willingness or assent to the other party.
Thus, a promise cannot come into existence unless the
willingness or assent is communicated to the other party.
Further, even the revocation, if any, must be
communicated to the other party for it to take effect.
Therefore, communication is the most critical aspect in
the making of a contract.
Explanation
Section 3 defines how a communication, acceptance, or revocation can
be signified:
The communication, acceptance, and revocation are deemed to be made by
any act or omission of the party proposing, accepting, or revoking, by
which he intends to communicate such proposal, acceptance, or
revocation, or which has the effect of communicating it.

 Thus, a proposal may be made by any way, which has the effect of laying
before another person his willingness to do or not do something.
 The acceptance can be signified similarly.
 Haji Mohd Ishaq vs Mohd Iqbal SCC 1978,
The defendants accepted the goods supplied by the plaintiff through a go
between man and also paid part of the price. It was held that the defendants
were liable to pay the remaining balance because the proposal and its
acceptance were signified by their actions.
Role of Communication
 For the proposal and acceptance communication
plays the central role. without communication
proposal and acceptance is not possible without
bringing proposal in the notice of the acceptor,
proposal cannot be completed. On the other
hand if the acceptance is not communicated to
the proposer, it cannot be completed. So we can
say that without communication agreement is
not possible between the two parties.
Communication of an Offer
The communication of an offer is completed when it comes the
knowledge of the person to whom it is made.
Example :- Suppose Mr. Warn proposes by letter to sell his factory to
Mr. Anderson for Rs. 10 million. When Mr. Anderson receives the
letter, the communication is completed.
In the above example this proposal is not completed as long as Mr .
Anderson does not receive the letter of Mr. Warn containing the above
proposal. If a proposer makes the proposal face to face to the acceptor
it completes, as the acceptors hears it.

Example, if A sends a proposal in the mail to B and if the mail is lost, it

can be held that the communication of the proposal is not complete.
In the case of Lalman vs Gauridatta 1913, it was held that the reward for
the missing child cannot be claimed by a person who traced the child
without any knowledge of the announcement. There was no contract
between the two in the first place because the proposal never came to
the knowledge of the person who found the child and thus he could
never accept it.
Communication of Acceptance is Completed
1st : The communication of acceptance is completed as against the proposer
when it is put in a course of transmission to him, so as to be out of the power of
the acceptor.

2nd : As against the acceptor, when it comes to knowledge of the proposer.

Example :- Suppose Mr. Anderson accepts the proposal of Mr. Warn in the
above case by letter. The communication of the acceptance is completed against
Mr. Warn when the letter is posted. While communication of the acceptance is
completed against Mr. Anderson when letter of acceptance is received by Mr.
Warn (Proposer).

Example, as soon as B drops a letter of acceptance in mail back to A, A is bound

by the promise. However, B is not bound by it unless A receives the acceptance
letter. In the case of Adams vs Lindsell 1818, it was held that a contract arose as
soon as the acceptance was posted by the acceptor. In this case, the plaintiff
received the offer to sell wool on 5th and they posted an acceptance, which was
received on 9th by the defendants. The defendants, however, had already sold
the wool on 8th. The court observed that the contract must arise as soon as the
acceptance is posted and is gone out of the reach of acceptor otherwise this will
result in an infinite loop.
Communication of Revocation
 Communication of a revocation is complete as against the
party who makes it when it is put in course of
transmission to the party to whom it is made, so as to be
out of the power of the party who makes it; as against the
party to whom it is made, when it comes to the
knowledge of the party to whom it is made.
Example, if A sends a letter revoking his proposal, it will
be complete against A as soon as the letter is dropped in
the mailbox and is out of his control. However, the
revocation will be held complete against B only when B
receives the letter.
Further, if B revokes his acceptance by telegram, it will he
deemed complete against B as soon as he dispatches the
telegram. It will be held complete against A, when A
receives the telegram.
Carbolic Smoke Ball Co. 's case
the patent-medicine company advertised that it would give a
reward of £100 to anyone who contracted influenza after using
the smoke balls of the company for a certain period according
to the printed directions. Mrs. Carlill purchased the advertised
smoke ball and contracted influenza in spite of using the smoke
ball according to the printed instructions. She claimed the
reward of £100. The claim was resisted by the company on the
ground that offer was not made to her and that in any case she
had not communicated her acceptance of the offer. She filed a
suit for the recovery of the reward.

Held: She could recover the reward as she had accepted the
offer by complying with the terms of the offer.)
Essential requirements of valid offer
An offer must have certain essentials in order to
constitute it a valid offer. These are:
 The offer must be made with a view to obtain
acceptance.
 The offer must be made with the intention of
creating legal relations. [Balfour v. Balfour (1919) 2
K.B.57Il
 The terms of offer must be definite, unambiguous
and certain or capable of being made certain. The
terms of the offer must not be loose, vague or
ambiguous.
Invitation to offer
 An offer must be distinguished from (a) a mere
declaration of intention or (b) an invitation to offer or to
treat.
 An auctioneer, at the time of auction, invites offers from
the would-be-bidders. He is not making a proposal.
 A display of goods with a price on them in a shop window
is construed an invitation to offer and not an offer to sell.
 A prospectus issued by a company for subscription of its
shares by the members of the public, is an invitation to
offer. The Letter of Offer issued by a company to its
existing shareholders is an offer.
 The offer must be communicated to the offeree. An offer
must be communicated to the offeree before it can be
accepted.
 The offer must not contain a term the non-compliance of
which may be assumed to amount to acceptance.
Cross Offers

Where two parties make identical offers to each other, in

ignorance of each other's offer, the offers are known as
cross-offers and neither of the two can be called an
acceptance of the other and, therefore, there is no
contract.
Termination or Lapse of an Offer

 An offer is made with a view to obtain assent thereto. As soon as the

offer is accepted it becomes a contract. But before it is accepted, it
may lapse, or may be revoked. Also, the offeree may reject the offer.
In these cases, the offer will come to an end.
 The offer lapses after stipulated or reasonable time
 An offer lapses by the death or insanity of the offeror or the offeree
before acceptance.
 An offer terminates when rejected by the offeree.
 An offer terminates when revoked by the offeror before acceptance.
 An offer terminates by not being accepted in the mode prescribed, or
if no mode is prescribed, in some usual and reasonable manner.
 A conditional offer terminates when the condition is not accepted by
the offeree.
 Counter Offer
Acceptance

Acceptance has been defined as "When the person to

whom the proposal is made signifies his assent thereto,
the proposal is said to be accepted”.
Acceptance how made

 The offeree is deemed to have given his acceptance when

he gives his assent to the proposal. The assent may be
express or implied. It is express when the acceptance has
been signified either in writing, or by word of mouth, or
by performance of some required act.
 Ex- A enters into a bus for going to his destination and
takes a seat. From the very nature, of the circumstance,
the law will imply acceptance on the part of A.
 In the case of a general offer, it can be accepted by anyone
by complying with the terms of the offer.
Essential of Valid Acceptance
 Acceptance must be absolute and unqualified.
 Acceptance must be communicated to the offeror.
 Acceptance must be according to the mode prescribed.
 Ex- A sends an offer to B through post in the usual course.
B should make the acceptance in the "usual and
reasonable manner" as no mode of acceptance is
prescribed. He may accept the offer by sending a letter,
through post, in the ordinary course, within a reasonable
time.
Acceptance by performing conditions, or
receiving consideration
 Section 8 specifies that a proposal is accepted when the
acceptor performs conditions prescribed for the
acceptance or when he accepts the consideration given
along with the offer for a reciprocal promise.
 When acceptance consists of an act as in the case of State
of Bihar vs Bengal C & P Works 1954, it was held that,
when an order is sent for goods, the posting of goods
itself is equivalent to acceptance. No further
communication of acceptance is necessary.

In the case of Carlill vs Carbolic smoke ball co 1893, it was

held that, purchasing and consuming the medicine
performs the condition of the proposal
Requirements for an acceptance
 Acceptance must be from a person to whom the proposal
was made. In the case of Powel vs Lee 1908, it was held
that communication of an acceptance from an
unauthorized person is invalid.
 Acceptance must be signified to the proposer. In the case
of Felthouse vs Bindley 1863, it was held that unless an
acceptance is given to the offerer, it is no acceptance.
 It is required that there be an act that signifies the
acceptance. As held in the case of Bhagvandas
Goverdhandas Kedia vs Girdharilal Pursottamdas & Co SC
AIR 1966, for an acceptance to be completed, a mere
mental decision is not sufficient. An external
manifestation of the decision is a must.
When an Acceptance can be Revoked
 An acceptance may be revoked anytime before its communication is
complete as against the acceptor.
Example, B can revoke his acceptance that was sent by letter, by a
telegram that reaches A before the acceptance letter.
In the case of Union of India vs Bhimsen Walaiti Ram 1969, the
defendant won an auction for a liquor shop and paid 1/6 of the cost
upfront. However, the bid was supposed to be finalized by the
financial commissioner, which he had not done. Meanwhile, the
defendant failed to pay the remaining amount and the commissioner
ordered a re-auction. In the re-auction, less money was realized and
the plaintiff sued to recover the shortfall. However, SC held that since
the commissioner had not given is final approval for the bid, the
communication of acceptance was not complete against the
defendant, thus the defendant was free to withdraw or revoke his
proposal (i.e the bid).
Continued…….
Example :- In the above example proposal of Mis. Reema
to sell her plaza to Mr. Chand is opened for revocation as
long as Mr. Chand does not post his letter of acceptance.
As Mr. Chand has posted the letter of acceptance. Miss.
Reema cannot revoke his proposal.
On the other hand Mr. Chand can revoke his acceptance
as long as the letter of acceptance does not reach to Miss.
Reema. But as the letter of acceptance reaches to Miss
Reema, it finishes the revocation power of Mr. Chand.
Section 6 specifies how a revocation can be
made:
A proposal is revoked
 by the communication of the notice of revocation by
the proposer to the other party.
 by the lapse of prescribed time in the proposal for
acceptance or if no time is prescribed, by the lapse of a
reasonable time in communication of the acceptance.
 by the failure of the acceptor to perform a condition
precedent to acceptance.
 by death or insanity of the proposer, if the fact of the
death or insanity comes to the knowledge of the
acceptor before acceptance.