Master in Business Laws - Part I - Law of Contract PDF

Master in Business Laws - Part I Law of Contract Course No: I Module No: I-IX CONTRACT LAW Distance Education Department National Law School of India University (Sponsored by the Bar Council of India and Establishe...

Master in Business Laws - Part I Law of Contract Course No: I Module No: I-IX CONTRACT LAW Distance Education Department National Law School of India University (Sponsored by the Bar Council of India and Established by Karnataka Act 22 of 1986) Nagarbhavi, Bangalore - 560 072 Phone: 3211010 Fax: 3217858 E-mail: [email protected] 1  CONTENTS TOPICS 1. Contract: Concept and its Role in Developing Society (Module I).............................................. 3 2. Capacity and Consideration (Module II)........................................................................................41 3. Free Consent and Public Policy (Module III).................................................................................75 4. Public and Government Contract Engineering Contract and Quasi Contract (Module IV)............................................................... 108 5. Discharge of Contract (Module V)................................................................................................. 142 6. Breach of Contract and Remedies (Module VI)............................................................................ 181 7. Representative Contracts (Module VII)......................................................................................... 212 8. Special Contracts (Module VIII)............................................................................................ 268 9. Digital Contract (Module IX)............................................................................................... 326 2  Master in Business Laws Law of Contract Course No: I Module No: I Contract: Concept & Its Role in a Developing Society Distance Education Department National Law School of India University (Sponsored by the Bar Council of India and Established by Karnataka Act 22 of 1986) Nagarbhavi, Bangalore - 560 072 Phone: 3211010 Fax: 3217858 E-mail: [email protected] 3  Materials Prepared By : 1. Prof. N.L. Mitra M.Com., LL.M., Ph.D. 2. Mr. S.V. Joga Rao B.Com., LL.M., M.Phil. Materials Checked By : 1. Mr. T. Devidas LL.M. 2. Ms. Sudha Peri LL.M. Materials Edited By : 1. Dr. P.C. Bedwa LL.M., Ph.D. 2. Mr. V. Vijaykumar M.A., LL.M., M.Phil. 3. Mr. Harihara Ayyar LL.M. 4. Mr. P.P.R. Nair © National Law School of India University Published by Distance Education Department National Law School of India University, Post Bag No: 7201 Nagarbhavi, Bangalore - 560 072. Printed at National Printing Press, Koramangala, Bangalore - 95 Ph: 5710658 4  INSTRUCTIONS Basic Readings The materials given in this course are calculated to provide exhaustive basic readings on topics and sub-topics included in the course. Experts in the area have collected the basic information and thoroughly analysed the same in topics and sub-topics. Lucid/supportive illustrations and leading cases are also provided. Relevant legislative provisions are also included. Care has been taken to communicate basic information required for decision making in problems likely to arise in the course-area. The reader is advised to read atleast three times. In the first reading information provided are to be selected by making marginal notes using markers. The first reading, therefore, necessarily has to be very slow and extremely systematic. While so reading the reader has to understand the implications of those informations. In the second reading the reader has to critically analyse the material supplied and jot down in a separate note book points stated in the material as well as the critical comments on the same. A third reading shall be necessary to prepare a Check List so that the check list can be used afterwards for solving problems like a ready reckoner. (The reader is required to purchase a Bare Act and refer to the relevant sections at every stage.) Supplementary Reading Several supplementary readings are suggested in the materials. It is suggested that the reader should register with a nearby public library like the British Council Library, the American Library, the Max Muller Bhavan, the National Library, any University Library where externals are registered for the purpose of library reading, any commercial library or any other public library run by Government or any private institution. Readers in Metropolitan and other big cities may have these facilities. It is advised that these basic materials be photocopied, if necessary, and kept in the course file. Supplementary readings are also required to be read more than once and marginal notes, marking notes, analytical notes and check lists prepared. Any reader requiring any extra readings not available in his/ her place may request the Course Coordinator to photocopy the material and send it by post for which charges at the rate of.50 paise per page for photocopying and the postage charge shall be sent either by M.O. or by Draft in advance. The Course Coordinator shall take prompt action on receiving the request and the payment. Case Law The course material includes some case materials generally based upon decided cases. These cases are to be studied several times for, (a) understanding the issues to be decided (b) decisions given on each issue (c) reasoning specified It is advised that while reading a case the reader should focus first on the facts of the case and make a self analysis of the facts. Then he/she should refer the check list prepared earlier for appropriate information relating to law and practice on the facts. Then the student should prepare a list of arguments for and on behalf of the plaintiff/ appellant. Keeping the arguments for the plaintiff/appellant in view of the reader should try to build up counter arguments on behalf of the defendant/respondent. These exercise can take days. After these exercises are done one has to prepare the arguments for or against and then decide on the issues. While deciding it may be necessary often to evolve a guiding principle which also must be clearly spelt out. Subsequently the reader takes up the decision given in the case by the judge and compare his/her own exercise with the judgment delivered. A few exercise of this type shall definitely sharpen the logical ability, the analytical skill and the lawyering competence. Though it is not compulsory, the reader may send his/ her exercises to the Course Coordinator for evaluation. On receiving such request the Course Coordinator shall get the exercises evaluated by the experts and send the experts’ comment to the students. Through these exercises one can build up an effective dialogue with the experts of the Distance Education Department (DED). Problems and Responses After reading the whole module which is divided into several topics and sub-topics the reader has to solve the problems specified at the end of the module. The module is designed in such a manner that a reader can take about a week’s time for completing one module in each of the four courses. It is expected that after finishing the module over a period of a week the student solves these problems from all possible dimensions to the issue. No time limit is prescribed for solving a problem though it would be ideal if the reader fixes his/her own time limit for solving the problem - which may be half an hour per problem - and maintain self discipline. While solving the problems the candidate is advised to use the check list, the notes and the judicial decisions - which he/she has already prepared. After completing the exercise the student is directed to send the same to Course Coordinator for evaluation. Though there is no time stipulation for sending these responses a student is required to complete these exercises before he/she can be given the certificate of completion to appear for final examination. 5  Contract : Concept and its Role in a Developing Society TOPICS 1. Genesis of Contract..................................................................................... 7 2. Contract : How to make............................................................................ 11 3. Justification for Contract............................................................................ 19 4. Types of Contract......................................................................................... 23 5. Terms of a Contract.................................................................................... 26 6. Contract in the Changing Society.............................................................. 29 7. Relevant Provisions of the Act................................................................... 33 8. Case Law...................................................................................................... 34 9. Problems....................................................................................................... 36 10. Supplementary Readings............................................................................. 40 6 1. GENESIS OF CONTRACT SUB - TOPICS which are secular in character. One of the earliest code was Justenian code; 1.1 Introduction 3. Civil law system based on a well structured constitutional 1.2 Early history of Contract Law legal regime with inquisitorial procedural system. Western 1.3 Contract as a method of creating new rights European countries follow this system; 1.4 How is a contract made? 4. Socialist system with high public interest involved specially 1.5 Definitions on the issue of freedom of contract; and 5. Common law system which provided golden opportunity 1.1 INTRODUCTION for mercantilism and capitalism to develop with rapid industrialisation. Besides, more than half of the globe was A modern industrial society is primarily built upon the fabric of under the domination of this common law system under ‘contract’. The relational integration and determination of mutual the British in eighteenth, nineteenth and early twentieth rights and obligations to a great extent, are dependent on ex centuries. contractum (out of contract) terms. There is contract around, between employer and the employees, producers and In Common law, Law of Contract was carved out of the law of distributors, vendors and the customers, carrier and the buyer tort in the fourteenth and fifteenth centuries. Initially, three of services and the like. Even family relations also start with ‘writs' (‘Writ’ is a specific order/direction by the court to act in contract, marriage being either a contractual relation or similar a manner specified) used to play a very important key role. In to it. The very basic principle of market functioning in the early case of agreements of loan and credit Writ of debt was issued. period of mercantalism and industrialisation was laid down on In clear cases of agreements, especially in writing, on transfer of landed properties writ of covenant was issued asking the the efficient functioning of contractual relation by relative party to perform his part and a writ of trespass was issued in assessment of rights and duties arising out of a contract. In a the event of any party to the contract of quasi contractual modern state, government is also becoming a very important situation transgressing the rights acquired by the other party. party in contractual relations. It is, therefore, necessary to Another writ to provide remedy in the event of a party to the understand how and when parties enter into such a contract in contract committing breach, known as Writ of deceit was also order to examine their mutual rights and obligations, and the issued. Trespass was issued in the event of physical injury to time of origination of such rights and obligations. In order to person and property and deceit was issued in wide range of correctly evaluate these aspects, one has to understand the cases. Similarly a composite writ of debt-debtenu used to be following: issued in a situation where the defendant used to unjustly detain 1. Whether the parties have agreed to make any binding right something, on which, the plaintiff had the claim or was entitled and obligation for themselves?; to possess. Of course the functional distinction between the 2. How they have made it?; writs could not be very clearly stated now. One can, of course, start carefully tracing the history. 3. What are their mutual advantages and obligations?; The basic principle of action on civil wrong was based upon 4. How they intended to perform their mutual duties and three clear actions or inactions on the part of the defendant. when?; For example a person could have done something which is per 5. What are the conditionals? and se wrong. In law it is known as Misfeasance. Such as, A agreeing 6. What happens if one of the parties is unable to fulfil his/her to sell to B something on which A has no right of title and obligations? possession, and consequently B cannot acquire title or possession. Secondly, a right act could be wrongly done, which Here we shall try to explain you why, when, and how a contract in law is termed as Malfeasance. Such as, A by use of coercion is made. forces B to sell his land to A. Here, A has used foul means which he could rightly do as well i.e., without the use of force. 1.2 EARLY HISTORY OF CONTRACT LAW On the other hand, a right thing not done at all is known in law Generally speaking history of human civilization has experienced as Nonfeasance. Such as, A not paying back the amount of several legal systems. Some of which are still in vogue in pure or loan taken from B. In all these above cases the plaintiff could moderated form. Leading legal systems are: seek justice against the action or inaction of the defendant. The 1. Ecclesiastical/religious system is based on the religious, court used to issue writs in order to deliver justice to the plaintiff textual and customary processes inducted through religious by appropriately designing a simple or compound writ. But as faith and belief; matters got complicated during the period of mercantilism at the early part of industrialisation, different theoretical 2. Romana-Germanic system is based on growing codification foundations were necessary to legally bind parties in different on logical foundation as well as clear customary practices 7 contractual situations. In early sixteenth century the court of some sort of globalised code or under high globalisation. One King’s Bench formulated another remedy known as Assumpsit. can, at this stage, note the growing number of global legislations One could trace the conflict of ideas on remedying in the event in the area of contract. Sir Henry Maine (Friedman, Law in a of breach of contract between court of King’s Bench and court Changing Society, 119-120) is perhaps right when he said that of Common pleas. Anyway, according to the court of King’s codification is a test of modernisation of the legal system. One Bench under every executory contract the parties used to assume may further add to it by suggesting that universalisation and or promise to pay an amount or deliver goods. Thus action on secularisation are perhaps other two attributes of the most assumpsit was held to be more appropriate than the limited advanced legal culture. applications of writs. ‘Writs’ had pigeon-hole application whereas contract required a wider legal remedies, especially 1.3 CONTRACT AS A METHOD OF CREATING NEW when contract of services were also involved during the period RIGHTS of early industrialisation. In actions of assumpsit during the ‘Contract’ is the method through which individuals make law earlier period there was scope for speculation as to the matter for themselves by creating rights and obligations ex contractas. of promise gratuitously made. Gradually, English courts held As a human being, a person shall have some rights, duties and that a ‘quid pro quo’ would be required in all cases of promises obligations ex factum i.e., by mere fact of being a person in the to be legally binding excepting where a promise is ipso facto society. For example, basic human rights or fundamental rights made binding under court’s seal [This is explained in detail or family rights like right of parenthood, right of succession, subsequently on consideration]. With the rapid growth of right of paternal or maternal names etc., are rights ex factum. industrialisation in the last hundred and fifty years, importance But each individual is an economic being as well as a social of contract could not be over estimated in all legal systems. identity. As an economic being he/she takes rational economic Moral foundations of a promise to make it legally binding in decisions to enter into contracts with others to derive better religious or ecclesiastical systems, could not hold the system. social, economic and other pleasures, through such relations The principle of ‘Pacta Sunt Servanda’ of Romano-Germanic by creating new rights and obligations. A person understands system meaning thereby, promise once made is binding or ‘one that his/her factual social existence shall be more meaningful if must observe one’s words given to other, else he takes the curse he/she takes economic decisions rationally. By entering into a of the God’, a principle of the ecclesiastical system could not new contractual relation and thereby altering his/her position hold the test of time. Rapid industrialisation required more in relation to creation of wealth. Contract is the sole method transparancy in the legal system. Gradually more and more of altering factual situations and raising more and more wealth countries started codification of the law of contract. India and economic satisfaction. Without ‘contractual relations’ however, has its codified contract law enacted in 1872. One society would have remained static. Through contract wealth can easily understand the benefits of codification, viz., of a person is increased, so also of society’s and society is made 1. transperency of law at any given point of time; dynamic. 2. easy public accessibility; and 1.4 HOW IS A CONTRACT MADE ? 3. amendability with the change of time and need. A contract is made between two or more parties where- The argument made by common law advocates against codification is that it makes law more rigid as compared to the a. An agreement is made through one party making an offer judge made law, is untenable. Judges by their nature of training and the other accepting the same; an offer accepted and work, tend to become rigid and Status quoist (meaning becomes a promise; person supporting status quo). Hence Common Law system b. The agreement being legally enforceable in so far as it fulfills based upon case law became mostly non-dynamic specially the following conditions: before Karl Marx came on to the scene. Legislative process, (i) parties must be willing to enter into a legal relation; on the other hand, is bound to respond quickly to the requirement (ii) parties must be competent to enter into a contract of time. Members of the legislature as represent the people so that results in legally enforceable rights, duties and they understand well the need of the time and the people in a obligations; better way. (iii) parties must have given free consent to the terms of In fact with rapid globalization of economic production the contract; relations and quicker communication links, a uniform (iv) there is a lawful object and consideration; commercial code is bound to come for the whole world in the (v) the agreement is not against public policy or morality; long run. The movement is already felt strongly. Through and multi-lateral treaties and conventions many areas of the (vi) the agreement is not otherwise void in the eyes of commercial contract have already been globally codified. law. Marine contracts, contracts of transnational services, tele- communication contracts, contracts of exports and imports, c. Once an agreement fulfills the above conditions it becomes international commercial arbitration, technology use contracts, a legally binding contract. contracts on Intellectual properties etc. are either already under All these conditions require critical analysis. 8 1.5 DEFINITIONS Railway station. There he saw the boy, overheard part of the In order to understand the law and technicalities of contract conversation of the boy and realised that he was Ram Kishan. specially as to when and how a contract is made, we are required He promptly took the boy to the Railway Police station where to have a clear understanding of denotative (area of application) he made a report and sent a telegram to the boy’s father. Could and connotative (quality and attribute) definitions of some of Mr. Harbhajan be entitled to the reward? In this example, it is the terminologies we use in this course. immaterial to argue whether the extent of Mr. Harbhajan’s liberty to trace the boy is of paramount consideration, or the extra (a) Proposal effort to undertake the liability of finding out the boy. Rather In English common law a proposal is known as an offer. In objectivists try to define the term more positively by defining every contract one party, generally speaking, is required to take the contract as a ‘promise enforceable by law’. This positive initiative for proposing or offering a term which other party definition has also certain demerits of irreconcilability with may accept if interested to make an agreement. A proposal or questions of morality and ethics at times. Suppose, the father offer can be defined as ‘an intimation by words or conduct, of came to know that Mr. Harbhajan traced the boy but just before a willingness to enter into a legally binding contract, and which he could take the boy to police station and sent the telegram he in its terms expressly or implicitly indicates that it is to become withdrew the proposal for reward. Is this not an immoral or binding on the offer or as soon as it has been accepted by an unethical act for him to do? In fact, at times some subjective act, forbearance or return promise on the part of the person to considerations become essential on the issue of legality and whom it is addressed. (Guest, A.G, Ansons’s Law of Contract, illegality. For example, in the above situation, the question (24th Edn, LPE), p.28) According to sec. 2(a) of the Indian whether Mr. Harbhajan did fulfil all conditions of the offer for Contract Act (ICA) when a person signifies to another his reward was the issue in consideration. For the time being let us willingness to do or to abstain from doing anything, with a view take the advice of Anson, that certain legal concepts are to obtaining the assent of the other to such act or abstinence, he ‘defeasible’. These are capable of being ‘withered or defeated is said to make a proposal. [See sec. 2 (a)] in a number of different contingencies’ but if no such contingency arises, the import ‘remains intact’. The Indian (b) Acceptance Contract Act 1872, has tried to define the term in Sec. 2(h) in According to sec. 2(b) of the Indian Contract Act, when the the same positive manner as ‘an agreement enforceable by law person to whom the proposal or offer is made signifies his assent is a contract'. thereto, the proposal is said to be accepted. (f) Void agreements (c) Promise An agreement which is not enforceable by law at all is an According to sec 2(b) a proposal when accepted becomes a agreement void ab initio i.e., from the very beginning. This promise. Suppose A offers to sell his horse to B, and B accepts means that such agreements do not create any rights or the offer, there is a promise. obligations in favour of or against the agreementing parties. The second marriage of a Hindu spouse, while the first marriage (d) Agreement subsists, does not create any rights in favour of the second To make a contract there has to be an agreement. An offer and spouse, and hence there is no necessity of a decree of divorce. acceptance constitute the agreement. According to sec.2(e) of In other words, if a party to an agreement, agrees to do an act the Indian Contract Act, every promise and every set of which he is forbidden by law to do, no contractual rights or promises, forming the consideration of each other, is an obligations arise. Such an agreement cannot be the basis of agreement’. Suppose A offers Rs.1,00,000/- for B’s plot of any further agreement, because all those consequential or land and B accepts the offer, there is an agreement between A collateral agreements also become void ab initio. For example, and B. A agrees to sell a property to B to which he has no title or right of possession. This agreement therefore cannot create any right (e) Contract in favour of B, nor an obligation against A. Now suppose, According to some juristic writers of the nineteenth century, relying on the validity of this agreement B agrees to sell the contract is an agreement between free and consenting minds. same property to C, that agreement is also void ab initio. In In this subjective sense, the concept is very near to the Roman Cundy v. Lindsay [(1878) 3 App.C.459]. The plaintiff received idea of ‘consensus ad idem’, i.e., the meeting of two minds. an order for handkerchiefs from Blenkarn who gave his address There are obvious difficulties in accepting this definition as, 37 Woodstreet, Cheapside. He signed his name to make it because ‘individual liberty’ and ‘freedom of contract’ - the two look like Blenkiron & Co. a respectable firm known by essential notions necessary for consenting minds, are two ideal reputation to the plaintiffs and carrying on their business at classical notions that have cased to have idealistic attraction in 123, Woodstreet. The plaintiff sent the goods to “Blenkiron & an acquisitive society of modern times. For example, a young Co, 37 Woodstreet,” where Blenkiron took possession of them. boy of 13 or 14 years, Ram Kishan, ran away from his home at He later sold them to the defendants. It was held that there was Baheri on the 9th of June 1993. The father offered a reward of no contract between the plaintiffs and Blenkarn, as the plaintiff Rs.500 to “anybody who traces the boy and brings him home”. had never intended to deal with him. So the property in the On July 19, Mr. Harbhajan was at Dharmshala of Bareilly 9 handkerchiefs did not pass to Blenkarn, and, consequently, he agrees to sell the property to Dinesh because Dinesh has could pass none to the defendant. So plaintiff was entitled to threatened to kill his brother unless Manish agrees to sell the take the whole lot of handkerchiefs from the defendant, and the property. Now suppose the sale did take place, and thereafter defendant’s argument that they had purchased the goods Dinesh sold part of it to Harish. After sometime Manish applied bonafide, for value consideration was not deemed a valid to the court and did prove that he had to agree because of the defence. threats from Dinesh. The Court gives the decree of avoidance i.e., declares the contract between Manish & Dinesh void. Here (g) Void Contracts Manish will not be able to get the part of the property sold to A contract which is valid at the time of entering into it, but Harish, because the contract between Dinesh and Harish was becomes void at the time of performing the contract due to valid and could not be terminated on grounds of avoidance of change of circumstances is known as void contract. That is, if contract due to ‘Coercion’, unless of course Harish was also a a contract is enforceable by law at the time of entering into it, party to that coercion or Harish had purchased the property but becomes unenforceable at the time of execution, such with knowledge of the coercion. contract is known as void contract. A contract collateral to a void contract is not necessarily void. For example, suppose (h) Voidable Contracts Suresh has landed property in Bombay. He received a notice A contract which is avoidable at the option of a party is known of acquisition on 1-1-1994. He thought that in order to as voidable contract. In other words, a voidable contract is one substantiate the market rate of the land or a reasonable value he where one party can go to the court on justifiable plea and can could resort to an agreement of sale of the land. So he offered avoid the contract under the direction of the Court. Such a his land for sale to Dinesh for Rs.50 lakhs. Dinesh was unaware contract remains absolutely valid until the court gives the order of the notice of acquisition. This agreement is void ab initio of avoidance. As per sec. 19(a) & (b) of the Indian Contract and no importance is to be given to the existence of agreement Act, a contract is voidable by the party suffering from the while computing the compensation. Whether Dinesh had paid consequences of coercion (S.15), undue influence (S.16), fraud any advance on the agreement need not also be considered. (S.17), and misrepresentation (S.18). Once the court gives the But suppose Suresh and Dinesh had entered into the agreement order, the contract becomes void. for sale - purchase of land before the issuance of notice of acquisition to Suresh. In such a case, consideration could be (i) Illegal agreement given while computing compensation about the existence of An illegal agreement is one where, if the agreement is performed that contract, which had become void on the service of the parties would violate the provisions of some law. For example, notice. We can take another example to this point. Manish, a A offers to pay Rs.1,00,000 to B if B murders C. This agreement minor, sold a property to Dinesh, who later on sold part of the is illegal. Such an agreement itself is an act of conspiracy. If B property to Harish. Here both the sales are void, because the murders C, B will be prosecuted for murder and A on charge of agreement between Manish and Dinesh is void ab initio, and murder or abetment of murder. All illegal agreements are void, consequently the later agreement between Dinesh and Harish but all void agreements are not illegal. is also void. But suppose, Manish is an adult person and he 10 2. CONTRACT : HOW TO MAKE SUB TOPICS us take an example. A proposes to sell his land for Rs. 50,000 and signifies it to B, which B may accept. This is a proposal. 2.1 Introduction But one must not confuse ‘desire’ of a person with ‘intention to 2.2 Proposal do’ or ‘abstain from doing a thing.’ For example, A has a desire (a) Various methods of making a proposal to become Prime Minister of the country, which he tells to B. This is not a proposal in the legal sense of the term. (b) Buyer is the offeror in the common law system 2.2.1 Various methods of making a proposal (c) Proposal must not be confused with invitation to treat (d) Proposal must be communicated Proposal or offer can be made in various ways. A bus plying in a route is an offer by conduct. Any intending passenger getting (e) Counter offer into the bus, accepts the service. But that is not so in the case (f) Proposal to be made to a person of plying a train. Train fare has to be tendered in the counter proposing the destination and the ticket must be obtained. (g) Withdrawal or revocation of a proposal Proposing the place for journey and tendering the fare is the 2.3 Acceptance proposal and issue of tickets is the acceptance, the railway ticket (a) Acceptance must be in toto itself being the formal document of acceptance. A railway time- table or a book list or a menu chart are not proposals. These are (b) When is acceptance made? mere documents of information available to the intending buyer. (c) Silence is no acceptance Proposal may be given in writing. In some cases a proposal is (d) Acceptance by conduct required to be in writing. For example, a government contract, a contract of significant resource mobilization or a contract for (e) Revocation of acceptance transfer of immovable property are given in writing. On the 2.4 Where is the contract made? other hand, in innumerable contracts in our daily life proposal is 2.5 Proposal and acceptance in three forms made orally. When parties are situated at a distance, an oral as well as a written proposal is generally made through the use of 2.6 Types of Agreement tele-communication system like telephones, telex, teleprinter, 2.7 Contract : A final comment telegram, fax or through letters. 2.1 INTRODUCTION 2.2.2 Rules for ascertaining the offeror: According to the provisions of Indian Contract Act, 1872, an 1. Labelling Method agreement enforceable by law is a contract. So to make a In the common law system a buyer is generally the proposer. contract there has to be (i) an agreement and (ii) it must be In a modern agreement, the proposal is given in a clear form enforceable by law. An agreement is a promise or a set of and conditionalities of it often become transparent over a series promises. A proposal when accepted becomes a promise. of dialogue which is required to be taken together to formulate Formation of contract can be explained by the following chart. the final proposal. Sellers often stipulate conditionalities but these are not the proposals. It is the buyer who formulates his CONTRACT proposal on the conditionalities stipulated in such a form that “ the seller can accept the proposal. For example, a person requires a project loan from a bank. He makes an enquiry. The bank (S. 2h) Agreement enforceable by law “ stipulates that the project papers are required to be given in a stipulated form specifying certain informations required to be (S. 2e) Promise/Set of promises certified by a recognised chartered engineer and the loan can “ be sanctioned on some definite terms and conditions. Whatever (S. 2a) Proposal + (S. 2b) Acceptance the bank has stipulated would be considered as mere information and the person seeking that information cannot say Note: From the above, it is clear that the basis of contract is a ‘I accept your terms’ and hence the bank would be liable to proposal made by one person and an acceptance of the provide a loan. It is upon the person seeking the loan to prepare same by another. all papers as per the conditionalities and submit the proposal which the bank may or may not accept. 2.2 PROPOSAL Conceptually speaking, this principle of suggesting that a buyer The following are the ingredients in a proposal : (i) two persons is always the proposer can be said to be a ‘labelling process’ are necessary for a proposal - One to make it and the other to i.e., the buyer is labelled as the offeror. In this ‘labelling process’ receive it. If A wants to sell a house, there has to be another the court generally starts its calculation from the behaviour of person B, who would be willing to buy the house i.e., A cannot the customer in order to locate what is his offer and what are sell the house to himself; (ii) the proposer must signify his/her the terms and when it is made in its entire form. Thus the court willingness; (iii) to do something or to abstain from doing; and makes the forward calculation as to what has happened one (iv) the proposal requires the consent of the other person. Let after the other from the point of buyer giving his proposal. 11 2. Back Calculation Method anything less than Rs.10,000 would not be accepted. There was Some of the authors suggested a different inquisitorial method no definite proposal. The earlier person’s accepting to pay Rs of back calculation (meaning the court goes back to the first 10,000 was itself the proposal which was never accepted by the instance giving rise to the contract to ascertain the rights and owner. Hence there was no agreement and, as such, no breach liabilities of the parties. In this method the courts do not start of contract by the owner. with the presumption that the buyer is the offeror) in which the 2.2.3 Proposal must not be confused with invitation to treat proximate action of the defendant is examined for determination of plaintiff’s remedy and then back-calculate the chain of Proposal and invitation, information and intention to propose actions according to the approximation of remedy. Whereas must be distinguished. The following examples would illustrate the former has a question of moral hurdle involved, the latter the same: has a principle involved in decision making. To make things i. The Secretary of a school advertised inviting applications clear, suppose, a seller has marked a packet of dozen table for the post of headmaster. X, an applicant was interviewed tennis balls at say, Rs.100.00 in the self-service counter. A for the post. The board of managers interviewed the possible customer picks the packet up and tenders Rs.100.00 candidates and selected X for the post. A manager in his which the seller in the counter refuses to sell. In the labelling individual capacity informed X about the selection. But X method, buyer being the proposer, proposes the packet to the did not get any letter of appointment. The court held that seller at Rs.100.00. The seller may or may not accept it. Since there was no contract. The fact remains that there was no seller does not accept it, there is no remedy. The question offer. Advertisement for the post was merely intention to involved here is that how far the seller displaying the packet in offer. Application for the post was information. Interview the self-service shelf stipulating a price and thereafter refusing as the preparatory step for the possible offer. The letter of to sell it, is morally justified? Has he not ditched the buyer? appointment would only be the offer. (See Powell v. Lee (1908) 99 L.Y. 284) According to this argument the court has to critically look into the behaviour pattern of the seller which has immediately caused ii. A through telegram communicated to B, “will you sell us the grievance. Suppose the court finds the action of refusal to your Bangalore house ? Telegraph at what price”. B replied sell as unjustified and unreasonable, it may back calculate and by telegram, `lowest price of the Bangalore house rupees decide that the price stipulation is itself a proposal. Suppose, nine lakhs’. A communicated back by telegram “accepted the packet is already sold and is inadvertantly placed in the your offer of nine lakhs”. It is not a contract because B’s shelf, then the court may decide the action of the seller to be telegram of `lowest price is simply an information and justified and placement of the article and stipulation of the price not a definite proposal. (See Harvey v. Facey ((1893) A to be not an offer. Here the ‘certainty in law’ is at stake. C 552-59) IE & E. 295, 309) Labelling makes decision making definite whereas the ‘back (iii) A advertised in the newspapers that an auction shall take calculation’ meets the need for variations to be taken into place at an address on a stipulated day and time. B reaches decision-making in each individual case but sacrificing the spot but finds the auction withdrawn without notice. ‘certainty’. Business world prefers ‘certainty’ than judicial No action can be taken because it is an invitation to offer discretion and uncertainty. and not an offer. (See Harris v. Nickerson [(1873) L.R.8 In Mc Pherson v. Appanna, (AIR 1951 SC 184) the owner of Q.B. 286] a house property had two local representatives for two The three examples given above relating to intention, properties. Both were told to look after a particular property to information and invitation to contract show the common law be sold. One customer wanted to pay for the house rupees six situation of ‘invitation to treat’ to be distinguished from the thousand and the caretaker of the property sent the information offer or proposal. In civil law system things are not very to the owner communicating the offer of rupees 6,000 by different. But in civil law system, for example in France, a telegram. The owner, in return, sent a telegram to the caretaker group of lawyers (Notably, Baudry Lacantinerie et Barde, 1,30.) stating “Won’t accept less than ten thousand”. Caretaker consider catalogues or trade circulars as conditional offers, i.e., informed the proposer about the content of his master’s telegram. offer open until the stock is exhausted. Goods displayed in the The same proposer immediately accepted whatever was shop window or on a counter with a price attached are also stipulated by the owner of property as the counter-offer and legally analysed in the same way. According to them this is the later on sent a letter communicating his acceptance of the term natural way. Ofcourse other section of the jurists as well as the of paying Rs 10,000 for the property. Meantime, the other courts seems to be inclined in interpreting in the common law representative sent another offer of Rs.11,000 which the owner way. They consider it only as an ‘invitation to treat’ without accepted and asked his representative to complete the sale-deed. attaching any liability to the seller on the statements made. (See The earlier person filed a suit for breach of contract. Here the Planiol et Ripert, 6,no 127,ni; Req. 29.4.1923 D 1904.1.136 et court tried to examine the nature of the telegram of the owner al.) Ofcourse, as against the later there is a very strong objection suggesting that he would not accept anything less than that this is ‘to impute artificially the initiative to the wrong party Rs.10,000/-. This according to the court was not a counter [See Carbomier, 2 (100)]. offer which could be accepted. Incidentally, it may be noted In most of the commercial contracts parties go through a chain that an offer cannot be conditionally accepted. If any condition of events. In case everything goes well there is no problem. is attached to the acceptance, it becomes a counter offer. But But once a problem arises the whole process of the contract in this case it was not a counter offer since there was no definite requires a thorough scrutiny, in order to understand wherefrom proposal in the telegram. It was merely an information that the offer started and upto what situation is simply remains as 12 an invitation to treat. It has already been stated earlier that the Terms of offer must also be communicated to bring out the common law system (followed in India) and the civil law system terms and conditions within the offer. This is very important of France and Germany have different ways of approach. specially in the case of standard form agreements (Standard Whereas, in common law the identification is based upon the form agreement is one where conditions are standardised by buyer and seller, and the buyer makes the offer unless it is clearly the sale of goods and services in the form of information based provided otherwise; in civil law the point of origin of the right of on which terms the proposer has to submit his proposal). For promise, is taken as the first point of origin of the contract i.e., example, a customer intending to get power connection has to the offer. Upto that point, the dialogue between the parties in submit his proposal or application for power connection on the exchanging information remains as an ‘invitation to treat’. Often basis of terms and conditions stipulated by the Board or in the the offer itself crystallises after a long dialogue, containing offer where terms and conditions are written elsewhere. several enquiries, information, identification of subject matter, Suppose, the terms and conditions in a laundry are stated on offer of trade and cash discounts etc. Until the total offer the backside of the ‘bill’. The notice of the customer must be crystallises, there is no question of any acceptance. It means attracted to those conditions. In such a case it will be sufficient that before the subject matter of the agreement is determined a if the proposal gives a reasonable notice of the contractual terms. lot of information passes between the parties, and only then, Suppose the front side of the document refers to ‘vide reverse’ the buyer identifies the article he intends to buy. After a course or ‘turn back’ or ‘conditions given overleaf’, such a notice is of dialogue and exchanges the buyer comes to understand the enough to bring those conditions within the fold of the offer. reasonable price that he can offer. And, finally, they talk of a But if no notice is given and the conditions are kept outside the lot of other issues like terms of sale, guarantees and warranties promise, then the offer is not complete. and the after sales service. It may appear to the onlooker that A proposal made through a telephone but not heard does not there are innumerable number of offers and acceptances become a proposal or offer. A teleprinter or a fax not bringing constituting the whole deal, but that is not so. In fact, when the total proposal does not constitute any offer or proposal. everything crystallises and the buyer is in a position to propose According to sec. 4 of the Indian Contract Act, the comprehensively, the ‘offer’ is said to be made. Upto that level, communication of proposal is complete only when it comes to all that is thought to be various offers and acceptances are only the knowledge of the person to whom it is made. in reality ‘invitation, intention and information’ necessary for (e) Counter-offer making an offer. Due to this complexity in modern commercial contract, European law on contract started becoming codified If the offer is not accepted in its original terms and conditions according to the common law practice of ‘the buyer being the and is accepted with different terms or new terms stipulated, offeror’ unless otherwise intended by the parties. the original offer is rejected and it stands terminated. Afterwards the same cannot be activated. The acceptance with new terms (d) Proposal must be Communicated or suggestion of new terms becomes a counter-offer. For According to sec.3 of the Indian Contract Act, offer must be example, A offers to sell a farm to B for Rs.10,00,000. B wants communicated to the offeree in the manner intended by the to pay Rs.9,50,000. This is a counter-Offer. Suppose A refuses offeror. Uncommunicated offer is no offer and it cannot be it. B afterwards wanting to pay Rs.10,00,000 would not be accepted. In Lalman Sukla v. Gouri Dutt,[(1913) ALJ 489] able to accept A’s earlier proposal because that proposal has the plaintiff was an employee of the defendant. He agreed to been terminated or cancelled with the counter-offer. B’s offer go to Haridwar to search for the missing nephew of the is to be termed as a new proposal, i.e., a counter-offer. defendant and finally found the boy without knowing that the Sometimes in a business contract it becomes very difficult to defendant had announced some reward for the work. The issue identify the proposal in its entire form with conditionalities, was ‘could he demand the reward’ ! The court held that ‘being because the proposal crystallises over a bilateral dialogue. If under the obligation, which he had incurred before the reward the dialogue is through correspondence or is made orally, the in question was offered, he cannot claim the amount’. A person whole of it must be viewed in its entirety according to the ignorant of the offer cannot be said to have accepted it only intention of the parties in order to determine the proposal in its because he has done something which the offer has stipulated. entire form. Anson has rightly observed ‘ a person who does an act for which (f) Proposal to be made to a person a reward has been offered in ignorance of the offer cannot say either that there was a consensus of wills between him and the Proposal or offer must be made to another person. In one sense it means that offer must not be made to self. For example, a offeror, or that his act was done in return for the promise offered. stock broker’s offer for buying and selling the same share (Guest Ansons’s Law of Contract 24 Edn, LPE, p.34). benami, shall not constitute a proposal at all. The second Communication of offer is essential for its consequent meaning is that offer requires two persons, one to make it and acceptance. A pair of cross offers with same terms from opposite another to whom it is made. A proposal made by the Managing parties do not make an agreement unless one is made with Director of a limited company for and on behalf of that company reference to the other. For example, suppose X intends to to the Managing Director but acting in his private capacity, is a purchase 800 tons of coal at Rs.700 per ton and writes to Y and good proposal. Here the proposer is the limited company since Y at the same time writes to X for selling 800 tons at Rs.700 it is a legal person. The other person is the MD, acting in his per ton. These are known as cross offers where one crosses the private capacity. But it is not necessary that offer has to be made other at the transit. This is not a contract. (Tim v. Hoffman LC to a definite person. Offer not made to anyone in particular (1873) 29 L.T. 271) i.e., one which may be accepted by anyone, is a general offer. 13 When offer is made to a specific person it is a specific offer. For offer into a promise. It may only entitle the party for an action example, if a reward is declared to anyone who finds the lost for damages on ‘quantum merit’. dog, it is a general offer, but X’s offer to purchase Y’s law According to sec.6 of the Indian Contract Act, revocation may books for Rs.50,000/- is a specific offer. The third meaning is be (a) by way of notice; (b) by lapse of time; (c) by failure of the that a ‘person’ to make an offer and to receive it must be either a person-in-fact or a person-in-law’. The corporate bodies are acceptor to fulfil condition precedent to acceptance; and (d) by person-in-law and can make or receive offer, ofcourse, within incapacity or death of the acceptor. the scope of its terms of incorporation. These principles are Distinction must be made between lapse of an offer and same or similar in all other legal systems. revocation. Though effect is same, revocation is by the deliberate action of the proposer. He withdraws it by notice. But a proposal (g) Withdrawal or revocation of proposal is ‘dampened’ due to lapse of time. A proposal standing for a Offer or proposal may be withdrawn at anytime before it is specific time limit, becomes automatically withdrawn at the end accepted. This is the general principle of revocation of offer in of the time unless it is renewed. Infact, such a withdrawal does common law as well as in civil law. In India the codified law is not require a notice to be served. If it is to be renewed, then more detailed, because the law relating to acceptance was not only a notice is to be served again. Similarly, if the acceptor is the same earlier in India as it was in the common law or in the unable to fulfil prior condition, the proposal is automatically civil law system. According to sec.5 of the Indian Contract withdrawn. A proposes to pay B Rs.500 if B marries C. B marries Act, proposal can be revoked at anytime before the D. The proposal is automatically withdrawn. communication of acceptance is complete as against the proposer but not afterwards. Suppose X proposes to buy B’s Death or incapacity automatically revokes the proposal, if the motor car for rupees one lakh on 1.1.92. The letter reaches X other party comes to know of it before acceptance. In civil law, on 5.1.92. The offer is made on 5.1.92. Now suppose B agreed such as French law, death or insanity of the proposer to sell the car and sends the letter on 8.1.92. The communication automatically terminates the proposal provided it happens of acceptance is complete against X on 8.1.92. So if X wants before acceptance. Knowledge of the acceptor is immaterial. to withdraw or revoke the offer, he has to do it before 8.1.92. (Req. 21.4.1891 D.1892.1.181) It seems that French law in this Suppose X agrees to be the guarantor if Y discount bills with regard is more logical than the common law on which statutory State Bank of India for a period of twelve months. This is law in India is framed. Similarly, a proposal open for a definite known as a standing offer for twelve months against acts of period, according to French law cannot be retracted but in discounting bills. On every bill being discounted, the offer or common law, so also in Indian law, proposal for definite or proposal turns into a promise. Suppose after three months X indefinite period can be revoked with notice. revokes his guarantee giving notice, he shall not be liable for further discounting of bills. (See Offord v. Davies (1862) 12 N.S. 2.3 ACCEPTANCE 748. A Statutory law, or a law passed by the legislative system A proposal becomes a promise only when it is accepted by the of a country and promulgated on the people is known as a other party to whom the proposal is made. For example, a traveller codified law. So Indian Contract Act, 1872 is a codified law). intending to go to a place by train tenders the fare at the railway In unilateral contracts (Unilateral contract is a promise for an act counter. This is a proposal made to the railways for going to a e.g. reward for an act) the revocation of the proposal becomes place by train. When the ticket is issued to the proposer, it is sometimes a complicated issue. Suppose X proposes a reward said to be accepted. Once accepted the proposal becomes a of Rs.1000 if anyone brings back his lost dog. Here if X is promise. Acceptance can be formal through written documents. allowed to withdraw his offer before the finder of the lost dog For example, suppose A writes to B, offering to purchase B’s brings it to him, there may be a miscarriage of justice. Suppose plot of land for Rs. 50,000. B writes back accepting the proposal. X comes to know that B has found his lost dog and is about to This is a formal acceptance. But acceptance may also be made come with it and X withdraws his offer. This will be against orally or by conduct. Suppose A advertised in the newspaper fairness and natural justice. In order to prevent such miscarriage announcing that anyone who contracts influenza within a of justice Lord Denning held that when the other party started fortnight of taking the ‘antiflu’ tablet made by the proposer to execute the act, the acceptance is complete and hence it cannot would be given a thousand rupees. If B takes the tablets after be withdrawn thereafter. In Errington v. Errington, [(1952) seeing the advertisement and gets the flu within a fortnight, B 1 KB 290] a father promised that if his son and daughter-in- would be entitled to the money because B’s taking, of the antiflu law paid up the mortgage amount on the property, the property tablet is his acceptance of the proposal. (See Carlill v. Carbolic would be theirs. They started paying off the mortgage amount Smoke Ball Co). Similarly, if B gets into a plying route-bus, he in instalments. Lord Denning held that the promise could not is bound to pay the fare since he has accepted by his conduct be withdrawn thereafter though the execution of the promise could be done only when the payment is made. Some authors to travel in the bus. (See Derry v. Peak) Thus acceptance may argue that acceptance must be distinguished from performance be in the form of (a) an act ; or (b) a promise. If A proposes to of the act. To the parties who have already commenced give his daughter in marriage to B and B accepts, B is actually execution, the proposer is obligated to keep the offer open for a promising to marry A’s daughter on the stipulated date and reasonable time. But there are contradictory decisions on this time. issue. For example, The House of Lords in Morrison Steamship Co. Ltd v. The Crown ((1924) 20 U.L.R. 283) According to sec.2 (b) of the Indian Contract Act, “when the held that commencement of execution of an act does not convert person to whom the proposal is made signifies his assent 14 thereto” the proposal is said to be accepted. As such, a the agent of the proposer. As such, a letter posted with proper proposal to be accepted requires (a) assent of the promise; stamp and correct address, or telephone made or a telegram and (b) of the actual proposal in its entire form. sent or a letter sent by fax must be taken as complete against both the parties. But a cut-off communication or a dead letter (a) Acceptance must be in toto box or a disconnected fax system or a dead telephone line cannot set the acceptance in the course of transmission. Such as, a A offers B his ‘horse in harness for £ 30e. B accepts it ‘in proposal orally made and accepted orally with a disturbed sound double harness’. (Jordon v. Norton) This is no acceptance. on account of an overflying aeroplane and not being heard by This is only a counter-offer. Acceptance in order to convert a the proposer is not a communication, as Lord Denning tries to proposal into a promise must be ‘absolute and unqualified’.(U.P. explain. If a modern course of communication is inoperative, State Electricity Board v. Goel Electric Stores, AIR 1977 All one cannot say that the acceptance is complete when the acceptor 494) Any alteration of terms or changing of conditions of the puts the acceptance in the inoperative system. But if the fax proposal by the acceptor while accepting will make the machine is operative and the message is received, the proposer acceptance a counter-offer. Counter-offer is the new offer which cannot take a defence by saying that “there was no staff in the now the original proposer is to consider for acceptance. Suppose office to send the message to the defendants”. On the contrary, A proposes to purchase B’s house for Rs.60,000 and B says he if the fax machine does not receive the message or suddenly may consider a proposal not below Rs. 1,00,000. B’s statement stops taking the message in full without communicating the is not a counter-proposal. B’s statement amounts to (1) rejection exact position, the acceptance is not made at all. of A’s proposal out right and (2) information to A that B is likely to consider any proposal unless it is Rs. 1,00,00 or more. (c) Silence is no acceptance So far as manner of ‘acceptance is concerned the acceptor is Silence is no indicator in a positive legal system such as ours. to accept the proposal “in some usual and reasonable manner”. Justice Macnaughten once observed that human mind is a trait, But if the proposal prescribes a manner in which it is to be even the devil does not know what is in the mind, what to talk accepted, and the acceptance is not made in such manner, the about a poor judge ! Positive law requires clear positive proposer may, within a reasonable time after the acceptance is indication of acceptance. So long the matter is confined to the communicated to him, insist that his proposal shall be accepted ‘self’ of the acceptor, it is not regarded as acceptance. Besides, in the prescribed manner not otherwise, but if he fails to do so, no one can compel another to consider his/her proposal and he is deemed to have accepted the acceptance. For example, A therefore to speak. Suppose X makes a proposal to Y. X cannot writes to B offering to purchase B’s house for rupees nine lakhs compel Y to consider the proposal and to speak on it. Y has the and requires acceptance by post. Suppose B meets him and right to completely disregard it and maintain his silence. So communicates his acceptance orally. A may insist that B write silence cannot be presumed as a mode of acceptance because if his acceptance. If he does not insist, it will be presumed that A it is allowed, a person is compelled to speak. Suppose X has accepted his acceptance. proposes to Y and suggests ‘if you remain silent’ I will take it as acceptance. It means now Y has to say ‘no’ if she does not (b) When is acceptance made? intend to marry X and as such cannot ignore X’s proposal. This is unreasonable and an infrigment on the ‘right’ of a person. Unless the proposer dispenses with communication of acceptance, for example by proposing that ‘find out my lost But that does not mean that ‘conduct’ cannot be prescribed as a dog’ I will pay you rupees two hundred, acceptance is made means of acceptance. Suppose a pharmaceutical company when it is communicated. According to sec.4 of Indian Contract advertises ‘reward’ to anyone contracting influenza within a Act, acceptance is complete. fortnight of using the anti-flu tablet manufactured and sold by (a) as against the proposer when it is put into the course of the firm, the firm has to give the amount to anyone who transmission so as to be out of the power of acceptor, and, (b) purchases the pill, uses it and has an attack of ‘flu’ within the as against the acceptor when the proposer receives the time. This is not a mental acceptance only because acceptance. For example, A accepts by a letter or by a telegram, communication of acceptance is not made i.e., ‘swallowing the B’s proposal of offering Rs. 6 lakhs for A’s house, as per A’s pill’ was not informed to the company. ‘Acceptance’ may not instruction. As soon as the letter is posted or the telegram is be communicated if the proposer dispenses with the despatched, the communication of acceptance is complete communication. If ‘swallowing the pill’ is enough prescription, against the proposer and the acceptance is complete as against no further communication is needed. If one follows the the acceptor as soon as the letter or the telegram reaches B. In instructions printed in the prescription of the company, as in England acceptance is complete against both acceptor and the the instant case, that would constitute ‘acceptance’ and no proposer as soon as the acceptance is put into the course of communication to the company is necessary. Acceptance may transmission. That is, acceptance once made cannot be taken be made either by a ‘Promise’ to act in future or immediately. back because it is complete and binding against both the parties The nature and manner of acceptance is determined by the as soon as it is put in the course of transmission. According to proposer. In a case where a proposal was made to supply coal the principles of law in England, the course of transmission is at a price to a railway company and the manager of the railway stipulated by the proposer and therefore, the course of company wrote the letter of acceptance but kept the same in his transmission becomes agent of the proposer. Suppose if the drawer, it was held there was no communication of acceptance proposer stipulates either post or, telegram or telephone or Fax, and hence no contract. (Brogdan v. Metropolitan Railway as the course of transmission, the communication media Company). It was almost similar to a mental acceptance and becomes the instrumentality of the proposer, or in other words not allowed in a positive legal structure. Ofcourse under old 15 Hindu law in India ‘silence used to be treated as acceptance’. it is still not binding because as against A the acceptance is However under our present contract laws, this principle does complete only when the letter reaches B. If A sends another not find a place. letter through speed post and that letter reaches B earlier than the letter of acceptance, the second letter withdrawing the (d) Acceptance by conduct acceptance is valid and binding. According to sec.5 letter of Acceptance can be validly made by conduct if ‘conduct’ is revocation is complete against the revoker as soon as it is posted prescribed by the proposer to accept an offer. As for example, and against the other party when it reaches. So, A’s withdrawal any proposal to reward against an act by the offeree can only letter is required to be posted before his letter of acceptance be accepted if the offeree does that act. Suppose a reaches B. pharmaceutical company gives an advertisement for paying Rs.10,000 to any person who takes the ‘anti-flu’ tablet for 7 The reason for giving an opportunity of revoking the acceptance days continuously and yet contacted with flu within a month is perhaps an equitable one. While the proposer has a after taking the tablets. Now suppose Mrs. X purchased the reconsideration time between his proposing the issue and tablets and consumed those tablets for 7 days and then suffered acceptor’s putting in his acceptance, acceptor is given a an attack of flu within 15 days, can she demand Rs.10,000 from breathing and rethinking time between putting in a letter of the company? Can the company refuse payment because Mrs.X acceptance and its reaching the proposer. This is perhaps, a did not inform them about her taking the tablets and thereby demand of equality of opportunity. accepting their offer? Can the company take a plea that it was In India therefore there can be a situation where the acceptance only inviting offers for taking the tablets manufactured by the is complete against the proposer, because the communication company? of acceptance is put in the course of transmission, but the Here the advertisement of the Company cannot be treated as acceptance is not complete against the acceptor himself even ‘information to treat’. In an ‘information to treat’ a response is though he puts the acceptance letter into the communication needed for making a proposal. Here no such reaction is needed. line. Apparently it looks illogical, because, the proposer is As such, it is a proposal by itself. The proposal stipulated the bound by the contract though he does not know when was the action of “taking the anti-flu tablet for 7 days and contacting flu communication put into the course of transmission and he is within one month”. It did not prescribe that the proposer had to not in receipt of the same. He cannot take the plea that since he communicate acceptance before taking the tablet. Hence has not received the communication of acceptance, he is not fulfilment of the prescription by the company is quite a valid bound by it. Lord Justice Macnaughten explained this apparent acceptance. It is acceptance by conduct. contradiction. According to him, while making the offer usually the offeror stipulates the media of communication. So if the acceptor has correctly and in time puts the acceptance in (e) Revocation of acceptance transmission as per the offeror’s directions, has he not done In English common law acceptance once made cannot be everything what he is required to do? So on account of any revoked. But as suggested earlier in English law over the years fault in the media of transmission if either party has to suffer it two rules of communication transpired. One for oral is illogical that the proposer should suffer instead of the acceptor. communication of ‘offer’ and ‘acceptance’ in which the Ofcourse Justice Macnaughten did not take into account communication of acceptance to the offer is emphasised, i.e., mechanical faults of the communication media in his principles acceptance is made only when acceptance is communicated to of communication but by and large his logic is sound. According the offeror. The other for the acceptance in writing and sending to some authors, this rule of communication of acceptance is it by post where communication is complete as soon as it is put full of dichotomy, because, even with knowledge that the into the course of transmission. Here in the second case, whether acceptance has been made the acceptor himself is not bound by the offeror really got the communication of acceptance or not the contract until the letter reaches the proposer. In defence of cannot be the issue at all. In both the cases, common law is the statutory provision it can be said that the Statute wanted to based upon the premise that acceptance once made cannot be extend similar opportunity of revocation to both the offeror and revoked or withdrawn. According to Anson, acceptance is like acceptor; because, the offeror can revoke his offer until the a lighted match-stick to a train of gun-powder. Once the lighted acceptance is put in course of transmission. Hence the match-stick is thrown, there is no escape from explosion. opportunity to ‘rethink’ is also given to the acceptor also, and, he can withdraw the acceptance before the acceptance is A lighted match-stick cannot operate explosion unless the gun received by the proposer. powder is dampened by operation of time or by counter-offer. It can also not operate if the gun-powder is removed i.e., the Those who argue for the dichotomy, offer and acceptance offer is revoked before the acceptance. Otherwise, acceptance according to them are made in two places, which makes the once made, makes the proposal a contract which is a complete problem of jurisdiction of the court very complicated. This is fusion between a proposal and acceptance. explained in the next issue. In India, the law is different. Here acceptance can be withdrawn 2.4 WHERE IS THE CONTRACT MADE at anytime (sec. 4 and 5 of ICA) before the acceptance is complete as against the acceptor i.e., before the acceptance is The question ‘where is the contract made’, is a very important actually communicated to the proposer. Suppose A accepted issue because (a) it determines the time of forming the contract; through a letter a proposal from B. As soon as A puts the letter (b) it stipulates the jurisdiction of the court; and (c) it affixes the of acceptance in the post box, it is binding on B and he cannot rights and obligations of the parties. A contract is made as thereafter withdraw his proposal. But as far as A is concerned soon as it is accepted. Under the common law system, as per 16 the postal rules acceptance is complete as soon as acceptance 2.5 PROPOSALAND ACCEPTANCE IN THREE FORMS letter is put into the course of transmission. So if the ‘acceptance Proposal and acceptance can take shape in three ways, viz, letter’ is put into the course of transmission in ‘Rai-Bareilly’, promise for a promise or bilateral promise ; promise for an action acceptance is complete there at ‘Rai-Bareilly’, and the District or unilateral promise ; and action for an action or bilateral action. court there will have jurisdiction. In England once the letter of A bus plying on a route and an intending traveller makes a acceptance is put in the course of transmission, the acceptance contract by bilateral action i.e., plying of the bus is the proposal is complete against both the parties and the contract is and getting into it is the acceptance. A promise of a reward for immediately formed. Sir William Anson gave a simili for an act is a unilateral promise, e.g., a promise of a reward for acceptance in the ‘lighted match-stick’ to a ‘train of gun-powder’ finding a lost child is a unilateral promise. A promise to buy a example. In this logic the media of communication acts as the agent of the proposer. In India we do not follow the same rule in land is a bilateral promise because there are two promises one totality. Acceptance is complete, as already stated, against proposes to buy the land and the other accepts it. Contract may proposer, when the letter is posted. Hence, in so far as formation be executory or executed. For example, a promise to pay railway of the contract is concerned, the time and place of posting the fare for a travel takes the form of a contract only when the acceptance letter in transmission is decisive, the acceptor also promise to pay the fare is executed. This is an executory contract, gets an equitable opportunity to withdraw his acceptance till but a land deal remains an executory promise for long because the letter reaches the proposer. The media of communication is execution of the contract takes place after a long time. This is treated independent and not as an agent of the proposer. The an executory contract. A unilateral promise is binding only when postal rule is clear and easily applicable in cases where the other party has acted according to the demand of the conventional communication method is followed. But in case promise. of modern communications the difficulty arises. For example, if 2.6 TYPES OF AGREEMENT acceptance letter is posted at Bangalore, acceptance is complete in Bangalore and Bangalore city court shall have the jurisdiction. A proposal accepted becomes an agreement. Such agreements But suppose it is faxed from Bangalore to Delhi. Where is the may be either expressed by words spoken or written or it may contract made? Lord Denning explained the situation in Entores be implied i.e., not spoken or written in words. For example X Ltd v. Miles Far East Corporation [ (1955) 2 ALL ER]. According sits in Y’s shop and sells goods in the presence of Y. There is to him “there is no clear rule about contracts made by telephone deemed to be a contractual relation between X and Y authorising or by telex. Communication by these means are virtually X to sell goods. (sec 9) An agreement may be reciprocal in instantaneous and stand on a different footing”. Lord Denning, nature. Bilateral promises are reciprocal promises. For example, therefore, rejected the postal rule and decided that ‘it is not until a contract between A and B that A will deliver goods and B will the message is received that the contract is made’. In essence pay on delivery of the goods. This is a reciprocal promise (sec original offer was faxed by the defendant firm, Miles Fax East 8 & 51). An agreement may be a joint promise by two or more Corporation of Amsterdam, against which, the London firm being promisors or by two or more promisees. In an agreement there the plaintiff made a counter offer. As such the court decided can be an alternate promise, as well. For example, A promises that since the acceptance through fax was received in London, his home X or Y to B for Rs. 51,00,000. This is an alternate the London court has the jurisdiction in deciding the case. Thus promise. Agreements may be contingent depending upon a according to this decision, in all cases where telephone, telex or future uncertain event or conditional, based on conditions, fax is used, the place of receipt of the message is construed as expressed or implied. the place of contract. This rule is against the postal rule and Indian law regarding 2.7 CONTRACT : A FINAL COMMENT communication. According to this age-old principle, as soon An agreement enforceable by law is contract. Therefore, to be as the acceptance is put into the course of transmission at its a contract there has to be (a) agreement as explained above and place, acceptance is complete (in case of India, of course against (b) such an agreement must be enforceable by law. Sec.10 of the proposer). So the place of dispatching fax or telex or the Indian Contract Act stipulates that an agreement to be telegram should be the place determining the jurisdiction, not enforceable by law : the place of receipt of the message. As such decision in Entores (i) must be entered into by persons capable of entering into is just the reversal of the common law principle, “acceptance is the contract (Ss. 10, 11 and 12); effective when and where it enters the channel of communication”. Justice Shaw also noticed that the views of (ii) must be a product of free consent i.e., consent free from state courts in the US which enforced this old Common law coercion, undue influence, fraud, misrepresentation or principle. According to the state courts in the US “by the mistake (Ss, 15 to 22) ; technical law of contracts the contract is made in the district (iii) must have valid consideration and lawful objects (Ss. 23, where the acceptance is spoken” (See Traders & Co. v. Arnold 24 and 25); and Gin Co. Tax Civ App 225 SW. 29 1011). Justice Hidayatullah (iv) must not be otherwise void under Ss. 26 to 30. had very rightly doubted the justiciability of the `ratio’ in Entores and held that the language of sec.4 of the Indian Ofcourse, contract is to be entered into by parties intending to Contract Act could cover the case of communication over the create a legal relation. Social agreements are kept out of the telephone, as well.(Bhagwandas Goverdhandas Kedia v. realm of contract because otherwise social relations shall be Girdharilal Purshottamdas & Co. & others, AIR 1966 SC vitiated by stringent legal provisions. In Balfour v. Balfour, 543). Lord Justice Atkin opined that in respect of such social and domestic promises “each home is a domain into which King’s 17 writ does not seek to run, and to which his officers do not seek here was not intended by either party to be attended by legal to be admitted”. In this case a husband promised to send £ 30 consequences”. monthly to run the household to his wife who remained in A flow chart of agreement and the revocation of offer and England on medical grounds whereas the husband returned to acceptance is given below : his place of work at Ceylon. The Court held that “the promise Figure 1: Flow Chart of Agreement & Revocation Explanation of Chart us ascertain whether a valid contract has been achieved between On 1-1-94, A dropped a letter of offer to B which reached B on the parties applying the principles governing communication 7-1-94 at 1 p.m. In the meanwhile A had sent another letter and revocation of offer and acceptance. withdrawing the offer on 7-1-94 at 10 a.m. B had despatched his letter of acceptance on 14-1-94 at 4 p.m., which reached A The sequence of events relating to communicatin and revocation on 23-1-94 at 6 p.m. Before the letter of acceptance reached A, of offer and acceptance against A and B may be explained as B had sent his letter revoking the acceptance on 22-1-94 at 1 follows: p.m. which reached A on 27-1-94. In the light of these facts, let Communication of offer is Against 'A' Against 'B' Offeror Acceptor Communication of offer is complete on 1-1-94 10 a.m. (Posted) 7-1-94 at 1 p.m (Reached) Revocation of offer is complete on 7-1-94 at 10 a.m. (Posted) 14-1-94 at 2 p.m. (Reached) Communication of acceptance complete 23-1-94 at 6 p.m. (Reached) 14-1-94 at 4 p.m. (Posted) Revocation of acceptance complete 27-1-94 at 10 a.m. (Reached) 22-1-94 at 1 p.m. (Posted) Now the questions are: valid acceptance. In effect, there cannot be a binding contract. 1) Is there a valid offer and acceptance? Similarly the letter of revocation of offer is valid because it has 2) Is there a valid revocation of offer? reached the acceptor before the letter of acceptance is posted. 3) Is there a valid revocation of acceptance? Letter of acceptance is not valid against 'A' because it reached 4) Ultimately, what is the effect of correspondence? him on 23-1-94 by which time, the offer was withdrawn and came into effect against 'A' on 7-1-94 itself. Revocation of Since the letter of acceptance is posted at 4 p.m. on 14-1-94, by acceptance is not significant and effective as there was no valid which time the offer is already withdrawn, there cannot be a offer, nor acceptance existing on 22-1-94. 18 3. JUSTIFICATION FOR CONTRACT SUB-TOPICS Max Weber in a capitalist society social institutions have 3.1 Introduction conflicting interests. Necessarily, therefore, people involved in those social institutions have conflicting interests. Such 3.2 Sociological Reasons conflicting interests are constantly at friction by their respective 3.3 Political Reasons positions and through their respective strengths and weaknesses. 3.4 Economic Reasons These conflicting strengths and weaknesses are adjusted through 3.5 Towards building of a Legal Theory the method of contract. Therefore according to him there is no presumption of equality in the status of contract. Contract brings 3.1 INTRODUCTION those conflicting social interests at an optimal balance beyond which the system cannot be stretched. Hence, contract is a Contract is a method through which individuals make law for limited modality of interest adjustments. themselves by creating rights and obligations through mutual understanding and contract. As a human being a person enjoys 3.3 POLITICAL REASONS some rights and at the same time he is liable to discharge certain duties and obligations ex factum, i.e., by mere fact of being a Various political theoreticians tried to explain the emergence person in the society. For example, some human rights or of the state through a system of multi partite contract between fundamental rights or family rights like right to parenthood, people living over a geographical location with a distinct identity right of succession, etc, these are rights ex factum. But each of a common language, culture and ethos. According to Hobbes, individual is also a social, political and economic being having state is a product of a social contract of all persons in a given a distinct identity. Thus each one of us design and acquire geographical location with distinct identity in a situation of utter some rights or are subject to certain duties and obligations by chaos and confusion which Indian philosophers described as mutual understanding for making a society developed and Matsyanyaya, and the French philosopher called it leviathan progressed. Contract is the sole method of altering factual i.e., anarchy. In such a desperate situation, people who wanted situations through the process of give and take. Without this to put an end to the chaos and confusion argeed to transfer all contractual relations society would have remained static. This their rights to a ruler/sovereign who in turn would protect all contractual phenomenon is explained by different people in individuals. Thus according to Hobbes the state, authority and different ways. Several theories are formulated to explain why kingship originated. The other French philosopher propounding a contract is a dynamic process of building up of a society. the social contract theory gave another version. According to According to the theoretical justifications the reason why a Locke people of a given area having distinct identity agreed contract is made is explained in the following paragraphs. amongst themselves not in a stage of chaos but at a stage of understanding and mutual cooperation to transfer, one most 3.2 SOCIOLOGICAL REASONS important power in them to a person or a group of persons. This important right was the right of interpretation of law of Society progresses through the process of contract. Contract nature. Thus contract was the method through which one right brings various sections of the society closer through interacting of all the individuals, viz, the right to interpret the law of nature processes which make the culture uniform and standardise the was reposed to their Sovereign. In fact, the Constitution of practice. Through the instrument of contract, Hobbs explained, India has also followed the same pattern of social contract that there is a constant mix in the society. Some sociologists process and that is the reason why the preamble declares that term it as a ‘hot-pot’ in which there is a constant movement of the people of India gave to themselves this Constitution. social institutions. According to Durkheim through the process According to the political theoreticians contract is a mutual of mutual give and take a social equilibrium i