This article is written by Piyush Gupta of 1st Semester of Institute of Law, Nirma University, an intern under Legal Vidhiya
Abstract
Contract law, a cornerstone of legal systems worldwide, plays a crucial role in facilitating and safeguarding countless daily transactions. It provides a robust framework for fostering predictability, trust, and accountability in interactions ranging from buying a cup of coffee to purchasing a property.[i]
Within the Indian legal system, legally enforceable agreements are established by the Indian Contract Act, 1872. The idea of the offer and proposal is fundamental to all contracts. These components are essential to creating a legally binding agreement and outlining the responsibilities of each participant. This article aims to give readers a comprehensive understanding of the Act’s provisions about offers and proposals. Through thoroughly examining these provisions, readers will acquire a deeper understanding of the laws and regulations that control the formation of contracts in India.
Keywords
Contract, Offer, Proposal, Acceptance, Revocation, Communication
Introduction
Contracts play a vital role in our everyday life, it is not used only in business deals but also exist in various courses of action we perform daily. From signing commercial deals to buying your daily essentials, knowing or unknowing we bind ourselves into contracts. As per the Indian Contract Act 1872, the term “contract” is defined in section 2(h)[1] as “An agreement enforceable by law”. Put more simply, a contract is an arrangement between two or more parties that requires them to carry out or refrain from carrying out specific legal obligations. That agreement, often known as a contract, also assigns certain rights and duties with terms and conditions.
The concept of contract formation and the importance of offer/proposal in that process.
Forming a contract is not as easy as it sounds, it involves several series of steps and elements that must be satisfied for a contract to be valid and enforceable. One of the key components in the process of creating a contract is the offer or proposal. An offer is an expression of a willingness to be bound by particular conditions. It signifies a party’s intention to engage in a contract with another party on the terms laid out. The offeree, or the party to whom the offer is made, must be informed of the offer by the offeror, or the party making the offer.
The offer is crucial since it serves as the foundation for the construction of the contract. It sets out the main terms and conditions that the parties are prepared to be bound by, such as the price, quantity, and other pertinent data. The offeree has the option to accept, reject, or negotiate the terms after the offer is made and effectively communicated. To enter into a valid agreement the offeree accepts the offer or proposal without making any changes, imposing duties on both sides. Thus, we can say that an agreement is an accepted proposal or offer. The process of definitions comes down to this: a contract is an agreement; an agreement is a promise and a promise is an accepted proposal.[2] Thus, every agreement, in its ultimate analysis, is the result of a proposal from one side and its acceptance by the other.
Offer/Proposal
As we know the entire process of making a contract starts with a proposal or offer, it is defined as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person to such an act or abstinence, he is said to make a proposal or an offer.”[3] As per section 2(a) of the Indian ContractAct 1872.
Offer vs Invitation to Offer
An invitation to make an offer is merely a request for others to make an offer; it is not the offer itself. It is the initial stage of contract creation in which one party indicates that they are open to negotiations without committing to any particular conditions. Understanding the distinction between an offer and an invitation to offer is crucial when it comes to contract law since only a legitimate offer that is accepted may lead to a binding contract.
Characteristics of an Invitation to Offer
No intention to be bound: The inviting party does not intend to be immediately bound by any response they receive.
Negotiable: Those who receive this invitation are welcome to suggest conditions for a potential agreement.
Examples: Pricing lists, menus, schedules, tenders, catalogues, product displays in stores, announcements of impending auctions, calls for bids, and ads.
| Feature | Offer | Invitation to Offer |
| Intention | To be bound by the terms | To invite further negotiation |
| Certainty of terms | Clear and precise | Vague or incomplete |
| Acceptance | Can be accepted, rejected, or counter-offered | If it cannot be accepted, it leads to the other party making an offer |
| Legal consequence | Formation of a binding contract upon acceptance | There is no legal consequence unless an offer is made in response |
Landmark cases dealing with invitations to treat/offer
- Fisher v. Bell (1961): This case held that a display of goods in a shop window is an invitation to offer, not an offer itself.
- Mohanlal v. Kashiram (1962): In this case, the court determined that a property sale advertisement constituted an invitation to treat rather than an offer. According to the court’s ruling, an offer made by one party and accepted by the other constitutes the formation of a contract.[4]
- Pharmaceutical Products of India Ltd. v. Gwalior Chemical Works Ltd. (1960)
The court determined that a pricing list in this case constitutes an invitation to treat rather than an offer or proposal. According to the court’s ruling, an offer made by one party and accepted by the other constitutes the formation of a contract.[5]
Features of a valid Offer/Proposal
1. Intention to Create Legal Relations:
- An offer must be made to create legal consequences upon acceptance. Social or domestic agreements generally lack this intention and are not enforceable as contracts.
- Example: A casual invitation to dinner between friends wouldn’t be considered an offer with legal intent.
- Balfour vs Balfour is a landmark case that deals with the issue of intention to create a legal relationship
2. Certainty and Completeness:
- The offer must be clear, unambiguous, and contain all essential terms for a binding agreement. Vague or incomplete propositions might not be considered valid offers.
- Example: An offer to “sell you a car” without specifying the model, price, or condition wouldn’t be binding.
3. Communication:
- The offer must be communicated to the intended party (offeree) by the offeror (promisor). Communication can be direct or indirect, through words, acts, or conduct.
- Example: An advertisement in a newspaper is an offer communicated to the general public.
4. Consideration:
- Every promise requires consideration, which is an exchange of value between parties. A mere promise without consideration is generally not enforceable.
- Example: A promise to paint your house for free might not be binding unless there’s some form of consideration like you agreeing to provide them with lunch while they work.
5. Time Limit for Acceptance:
- An offer can be expressly limited to a specific timeframe for acceptance, or it can be implied based on the nature of the offer or surrounding circumstances.
- Example: An offer for auction bids is only valid until the auction ends.
Types of Offers/Proposals
Although the Act does not specifically classify offers, different categories have been developed by legal principles and judicial interpretations. These are a few important categories:
Based on Mode of Communication:
- Express Offer: offer made through clear and distinct words, written or spoken. Example: A written job offer letter, “A” says to “B” will you buy my bicycle for rupee 3000?
- Implied Offer: Inferred from conduct or circumstances. It is assumed and expressed without words Example: Displaying merchandise on a store shelf is an implied offer to sell it or calling a fire brigade for their services, as in Upton v. Powell.[ii]
Based on Target Audience:
- Specific Offer: offer that can only be accepted by the designated individual or group of people. For instance, a scholarship offer made to a certain student, ‘A’ offers to sell his house to ‘B’. Thus, a specific offer is made to a specific person, and only ‘B’ can accept the offer.[6]
- General Offer: offer made to the public at large, anyone from the public can accept the offer. Example: An advertisement for a “50% off sale” in a newspaper, “A” places an advertisement in the newspaper promising a prize of Rs. 2 lakhs to anyone who finds his missing kid. After reading it, “B” phones “A” to tell him about his missing son after finding the boy. As a reward, “A” is now obligated to pay “B” 2 lakh.
Based on Duration:
- Standing Offer: An offer that is made to a specific individual or group of individuals and is valid for a certain is known as a standing offer. It’s a particular kind of offer that can be accepted for the time frame given. Example: Tender invitations or a company offers a specific customer a fixed price for a product for one year, this is a standing offer.
- Temporary Offer: Valid for a limited time or until certain conditions are met. Example: Online flash sale.
- Continuing Offer: An offer that is still available for acceptance throughout a specific period of time is known as a continuing offer. For example, Company A sends a letter to Company B on January 1st, offering to supply 1,000 units of a specific product at $10 per unit. The offer will remain open for acceptance until February 1st.
It is significant to remember that these various offer kinds may have varied legal implications. A standing offer, for example, can only be accepted by the individual or group to whom it is directed and only during the designated time frame. An open offer can be accepted by anybody who meets the stipulated conditions within a reasonable timeframe, while a continuing offer can be accepted several times within the specified term.
Based on Negotiation:
Cross offer: When two parties simultaneously present each other with identical proposals, it’s called a cross offer. Since neither party has specifically accepted the other’s offer, this could lead to ambiguity. Here’s an example: Let’s say Person A is selling a used laptop and Person B is interested in buying it. Simultaneously, Person B decides to sell their old smartphone. Both individuals send messages to each other with their respective offers at the same time, In this situation, both Person A and Person B have made offers to each other. However, neither party has explicitly accepted the other’s offer. The result is a cross-offer situation, where both offers are on the table, but neither party has committed to the terms of the other.
Counter Offer: A counter-offer is a response to an earlier offer. A counter-offer signifies the rejection of the initial offer and the introduction of a new one. The counteroffer gives the original offerer three choices: accept, reject, or submit a new offer.
Communication of Offer/Proposal
A contract must be created by communicating an offer, according the Indian Contract Act of 1872. It denotes the moment when the person to whom the offer is addressed (the offeree) learns about the proposition and is given the chance to accept it. Communication norms must be understood in order to ascertain the creation of a contract as well as the rights and obligations of the parties involved.
Section 4 of the Indian Contract Act 1872, states that “the communication of a proposal complete when it comes to the knowledge of the person to whom it is made”.[7]
There are three important aspects of this principle.
1. Timing of Completion:
- Against the Offeror: When an offer is sent to the offeree, the offer is considered fully communicated by the offeror. This implies that once an offer is made, it cannot be revoked by the offeror—regardless of whether the offeree receives it or not. For example, if A sends an offer by letter, the communication is complete as against A when the letter is posted.
- Against the Offeree: As soon as the offeree learns of it, the communication is considered complete as against him. This implies that the offeree, even if it takes a while to reach him, can accept the offer till he learns of it. For example, if A sends an offer by email, the communication is complete as against B when he receives the email.
2. Modes of Communication:
The timing of completion of an offer depends on the chosen method:
- Instantaneous Communication: In the case of face-to-face conversations, telephone calls, or other instant modes, the communication is complete immediately when the offer is made and understood by the offeree.
- Non-Instantaneous Communication: Like letters, emails, or telegrams, the communication is complete when the offer is:
- Put into the course of transmission: For letters, it is when the letter is posted; for emails, when it is sent; for telegrams, when handed over to the telegraph office.
- Received by the offeree: This is generally considered the more reliable way to determine completion, but it can be difficult to prove the exact time of receipt.
3. Knowledge is essential:
For the communication to be considered complete, the offeree must truly be aware of the offer. A simple display of goods or ads is not considered communication unless the offeree is made aware of it.
Acceptance of the Offer/Proposal
Acceptance of the offer marks the point when the offeree agrees to the terms proposed by the offeror, bringing the offer to life and binding both parties to an agreement. An offer is accepted when the acceptance is communicated.
Section 2(b) of the Act defines acceptance as: “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Thus, the proposal when accepted becomes a promise.”[8]
Thus, when an offer is accepted it becomes a promise. Example: ‘A’ offers to buy B’s house for rupees 40 lacs and ‘B’ accepts such an offer. Now, it has become a promise.[9]
Requirements for the valid acceptance.
- Clear and Unqualified Assent: The offeree’s acceptance of the terms of the offer must be clear. Partial and Conditional acceptance nullified the first offer, there is no regard for valid acceptance and will amount to counter offer.
- Communication to the Offeror: If no deadline is given, the offeree shall notify the offeror of their acceptance within a reasonable amount of time. Generally speaking, unless there is a well-defined course of activity between the parties, silence does not imply agreement.
- Mode of Communication: The acceptance may be conveyed via conduct, written communication, or verbal communication. The mode should match the offer or be a suitable method according to accepted communication practices.
Type of Acceptance
- Expressed Acceptance
Written or verbal acceptances are considered expressed acceptances.
Example
Through email, “A” proposes to “B” to sell his phone. In response to that email, “B” said he would accept the offer to purchase.
- Implied Acceptance
If the acceptance is demonstrated through conduct, it turns into an implicit acceptance.
Example
The Arts Museum holds an auction of a historical book to benefit charitable organizations. In the media, they run identical advertisements. This indicates that a mere invitation to an offer is subject to the Indian Contract Act of 1872.
Every guest makes the same proposal. The auctioneer has the last say when he strikes the hammer three times, yet the offer to buy is an express offer because it is made verbally. This is known as implicit acceptance.
- Conditional Acceptance
An eligible acceptance also called a conditional acceptance, occurs when a person accepts an offer and notifies the offeror of the circumstances under which they are willing to accept it. This kind of acceptance serves as a counter-proposal. Before the parties can enter into a contract, the initial offeror has to review a counteroffer.
Revocation of Offer
As per the Indian Contract Act of 1872, an offer is deemed non-binding until it is accepted. Consequently, the offeror holds the option to withdraw the offer before the offeree’s acceptance.
Section 5 of the Act states that a proposal (offer) can be revoked at any time before the communication of its acceptance is complete as against the proposer.
Nevertheless, this right is not absolute and is subject to the following restrictions:
1. Timing of Revocation:
- Before Acceptance: An offer can be revoked any time before the acceptance is communicated to the offeror. However, the timing of completion for communication of acceptance depends on the mode used:
- Instantaneous Communication: In face-to-face encounters or phone calls, the offer can be revoked until the offeree accepts immediately.
- Non-Instantaneous Communication: Revocation is acceptable for methods such as letters, emails, and telegrams before acceptance:
- Is put into the course of transmission: For letters, this is before posting; for emails, before sending; for telegrams, before handing over to the telegraph office.
- Is received by the offeror: This is generally considered the safer option but harder to prove the exact timing.
- After Acceptance: Once the acceptance is communicated, even partially or conditionally, the offer becomes a binding contract and can no longer be revoked.
2. Methods of Revocation:
- Clear Communication: The offeree must be duly informed of the revocation using an identical or comparable method that was utilized to convey the initial offer.
- Proof of Revocation: The burden of proof is on the offeror to provide evidence that the revocation was adequately communicated before the acceptance.
Exceptions to Revocation Before Acceptance:
Although revocation before acceptance is generally permitted, there are specific circumstances in which this right is restricted:
- Standing Offers: Similar to tenders, offers that invite continuous acceptance or specify a duration are non-cancellable and cannot be revoked before the expiration date or after a reasonable period of time has passed for acceptance.
- Option Contracts: The offeror is restricted from withdrawing the offer during the specified time period if the offeree sends consideration (such as payment) in exchange for keeping the offer open.
- Estoppel: In the absence of a formal option contract, the offeror may be estopped (prevented) from revoking the offer before acceptance if the offeree reasonably relies on and acts upon the offer due to the offeror’s conduct.
Conclusion
During this in-depth analysis, we have explored the complexities of the “offer” concept under the Indian Contract Act of 1872. It is undoubtedly the foundation on which a valid and binding contract is constructed. The legal framework of an offer encompasses crucial elements such as clarity and communication, as well as subtleties like revocation and counter-offers, thus providing a roadmap for unambiguous agreements.
References
- E. Allan Farnsworth, Contracts. (Aspen Publishers 4th ed. 2004).p3
- Frederick Pollock, The Indian contract Act, 1872, (LexisNexis Butterworths 2014).
- Notes on Contract Law: Types of Contracts, CLATalogue, https://lawctopus.com/clatalogue/clat-pg/contract-law-notes-clat-pg/ (last visited Jan. 13, 2024).
- Fathima Mehendi, Offer and Acceptance (Overview), Legal Bites – Law and Beyond (Feb. 7, 2019), https://www.legalbites.in/offer-and-acceptance/.
- Offer and Acceptance Under Indian Contract Act, 1872, iPleaders, https://blog.ipleaders.in/offer-acceptance/ (last visited Jan. 13, 2024).
- Gyan Sanchay – Chhatrapati Shahu Ji Maharaj University, Kanpur, https://gyansanchay.csjmu.ac.in/wp-content/uploads/2023/10/contract-proposal-notes.pdf (last visited Jan. 13, 2024).
- Proposal under Indian Contract Act, LawBhoomi, https://lawbhoomi.com/proposal-under-indian-contract-act/ (last visited Jan. 13, 2024).
- https://lddashboard.legislative.gov.in/sites/default/files/A1872-09.pdf (last visited Jan. 13, 2024).
- Contract & Specific Relief by Avtar Singh (12th Edition)
[1] https://lddashboard.legislative.gov.in/sites/default/files/A1872-09.pdf (last visited Jan. 13, 2024).
[2] Contract & Specific Relief by Avtar Singh (12th Edition)
[3] supra note 1
[4] Proposal under Indian Contract Act, LawBhoomi, https://lawbhoomi.com/proposal-under-indian-contract-act/ (last visited Jan. 13, 2024).
[5] Id.
[6] Gyan Sanchay – Chhatrapati Shahu Ji Maharaj University, Kanpur, https://gyansanchay.csjmu.ac.in/wp-content/uploads/2023/10/contract-proposal-notes.pdf (last visited Jan. 13, 2024).
[7] supra note 1.
[8] Fathima Mehendi, Offer and Acceptance (Overview), Legal Bites – Law and Beyond (Feb. 7, 2019), https://www.legalbites.in/offer-and-acceptance/.
[9] Offer and Acceptance Under Indian Contract Act, 1872, iPleaders, https://blog.ipleaders.in/offer-acceptance/ (last visited Jan. 13, 2024).
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