MODULE - 02

FORMATION OF
CONTRACT
1. Agreement and Contract
 Contract
 definition U/S 2(h)
 Contract = Agreements + enforceable by law
 Agreements which satisfy the essentials mentioned under sec. 10 becomes
contract
 All contracts are agreements
 Sec. 10 – all agreements are contracts if they are -
 Made by the free consent - Sec. 13 to 22
 Competent to contract – Sec. 11 and 12
 For a lawful consideration – sec. 2(d) and Sec. 25
 With a lawful object – Sec. 23 to 30
 Are not hereby expressly declared to be void – Sec. 2(j) and (sec. 20, 24 to 29)
 Must fulfil the requirement of a particular law
 Agreement
 definition U/S 2(e) - promise / promises
 agreement is formed where one part makes the proposal and other party
accepts it.
  Agreement = Offer + Acceptance
 An executed consideration would not be reckoned as an agreement
 Essentials of a valid Agreement
 There must be atleast two parties
 The agreement must relate to definite act or acts
 It must relate to legal matters but not to social matters
 The parties must have identity of mind
 The parties must communicate with each other
 Types of Agreement
 Agreements which destroys rights and obligations like release or surrender
 Agreements which transfer rights from one party to another
 Agreements which relate to social, religious and moral matters
 Agreements which create legal rights and obligations
 Contracts - Sec. 2(h)
 Void Agreements – Sec. 2(g) – (Sec. 24 to 30)
 Voidable Contracts – Sec. 2(i)
 Illegal agreements
 Agreements which are not contract
 Agreement to kill a person – illegal act
 Agreement to come to dine – not enforceable by law as it depends upon
volition
 A contract entered for the purpose of another contract
 A contracts to marry B. B cannot enforce specific performance of this contract

 Salmond – The law of contract is not the whole law of agreements,

nor is it the whole law of obligations and those obligations which
have their source in agreements.
 The law of contract deals with only agreements which create legal
rights and obligations
 Agreements giving rise to social obligations will not constitute
binding contracts
 Agreements of domestic nature do not give rise to contracts
 All agreements are not enforceable by law
 Thus all agreements are not contracts but all contracts are
agreements.
2. Proposal and Acceptance
a) Proposal – essential elements, forms, invitation for proposals
and tenders, communication of proposal, floating offers,
options
 Proposal / Offer
 Derived from latin word ‘offerre’ – present of provide
 As a noun it means – a proposal to do thing, a proposal to be accepted or
rejected
 As a verb it means – to present for acceptance or rejection, to make a proposal
to
 Proposal under ICA, 1872 = Offer under English Contract Act.
 Offer (English) (Anson’s Law of Contract Act) – an intimation by words or
conduct, of a willingness to enter into a legally binding contract, and which in
its terms expressly or impliedly indicated that it is to become binding on the
offeror as soon as it has been accepted by an act, forbearance, or return
promise on the part of the person to whom it is addressed.
 Emphasises as intention to enter into a legally binding contract and upon the
requirement of consideration from the offeree
 Chitty – On Contracts – an expression of willingness to contract made with an
intention (actual or apparent) that it is to become binding on the person
  Sec. 2(a) – offer - To have made a proposal, a person must have
 Signifies to another his willingness to do or to abstain from doing anything
 Has done so with a view to obtaining the assent of that other to such act or
abstinence
 A proposal consists two parts – a promise by the offeror and a request to the
offeree for something in return
 Promisor / proposer / offeror – promisee / proposee / offeree
 Example – A offer to sell his car to B for Rs. 5,00,000.
 Intention of the person making a proposal is an objective one
 Essential Elements / Requisites of a Valid / legal offer / proposal
 There must be two parties
 proposer and proposee – can be legal person or artificial persons
 Offer must be communicated to the offeree
 offer is effective only when it is communicated to the offeree – whether the
offer is specific or general – may be made by choosing any available means –
Sec. 4 – Lalman Shukla v. Gauri Dutt (1913)
 The terms of an offer must be certain
 must be definite, unambiguous and certain – must not be loose, vague,
indefinite or uncertain – Exp – A promise to pay an extra Rs. 500/- if a
particular house proves lucky is too vague to be enforceable
  Sec. 29 – uncertain agreements are void - A agrees to sell to B a hundred
tons of oil – what kind of oil not mentioned thus void of uncertainty
 Montreal Gas co v. Vasey (1900) – clause in agreement was ambiguous and
not binding on the company
 An offer must be intended to give rise to legal consequences
 Intention to make legal consequences – in commercial agreements intention
is presumed and the burden of rebutting the same lied heavily on the party
ascertaining that no legal effect was intended
 Rose v. Frank Co. v. Crompton & Bros. Ltd. (1923)
 An offer must be one capable of creating legal relationship between the parties
 Social, religious or moral acts without any intention of creating legal relations
will not be a valid offer
 Business agreements – presumptions is that parties intended to create legal
relations
 Balfour v. Balfour (1919) – suit was dismissed by the court on the grounds
that the agreement was only an arrangement between husband and wife,
the parties never intended to create legal obligations
 Meritt v. Meritt – the parties intended to create legal relationship and
therefore the husband was bound by the contract.
  Offer may be conditional (terms of the proposal)
 May be essential and ancillary – can lay down any terms and conditions – if
other party accepts it then has to abide by all Offer must be made with a
view to obtaining the assent – the special terms and conditions in an offer
must be brought to the notice of the offeree at the time of making proposal
 An offer should not contain a term the non-compliance of which would amount
to acceptances
 Offer is different from invitation to offer or quotation
 Offer may be specific or general (must be addressed)
 Cross and counter offers are not valid offers
 Forms of Proposal / Offer
 General Offer – made to the world at large / Carlill v. Carbolic Smoke Ball case /
there is no need for communication of acceptance, anyone who performs the
conditions of the contract is said to have communicated his/her acceptance /
Sec. 8 – valid acceptance based on fulfilment of condition / Lalman Shukla v.
Gauri Dutt / Har Bhajan Singh v. Har Charan Lal / State of Bihar v. Bengal
Chemical & Pharmaceutical Works Ltd. / General Offer is of continuing nature -
it can be accepted by a number of people till it is retracted / when a similar
offer requires information regarding a missing thing, it is closed as soon as the
first information comes in.
 Specific Offer - offer that is made to a specific or ascertained person, this type
 Express and Implied Offer – Defined U/S 9 / any offer that is made with words,
it may be regarded as express. Any promise that is made otherwise than in
words is implied / a bid at an auction / Upton-on-Servern RDC v. Powell / Ramji
Dayawala & Sons (p) Ltd v. Invest Import
 Cross Offer - When two parties make an identical offer to each other, in
ignorance to each other’s offer, they are said to make cross offers / Basic
essentials – same offer to one another – offer must be made in ignorance of
each other / Tinn v. Hoffman / for a valid contract to be formed there needs to
be an offer and acceptance of the same / not valid offers
 Counter Offer - When the offeree offers a qualified acceptance of the offer
subject to modifications and variations in terms of the original offer / rejection
of an original offer / Haji Mohd Haji Jiva v. Spinner / Hyde v. Wrench / Partial
Acceptance - a party to the contract cannot agree to those conditions of the
agreement that favour him and reject the rest, the acceptance should be of the
complete agreement / Ramanbhai M. Nilkanth v. Ghashiram Ladliprasad
(Shares) / Acceptance of a counter proposal - Hargopal v. People’s Bank of
Northern India LTD - When a counter proposal is accepted the contract arises in
terms of the counter proposal and not in terms of the original contract.
 Standing Offer - An Offer which remains open for acceptance over a period of
time is called a standing offer / Tenders that are invited for supply of goods is a
kind of Standing Offer / Perclval Ltd. V. London County Council Asylums and
Mental deficiency Committee
b) Acceptance - essential elements, forms, the requirement of
communication, silence as acceptance
 Acceptance – Meaning
 Derived from latin word ‘acceptare’ – to accept; to assent to a promise made
by another
 The act of receiving (willingly or with consent)
 Proposal under ICA, 1872 – 2(b)
 Tamiln – acceptance is the taking and accepting of anything in good part and
as it were a tacit agreement to a preceding act, which might have been
defeated and avoided were it not for such acceptance.
 It is the receipt of a thing offered by another with an intention to retain it
 A contract is formed when offer is accepted – the offeree’s willingness to be
bound by the terms of the offer is known as acceptance
 Thus acceptance is the assent or consent given to a proposal by a offeree
 Transforms proposal into a contract
 Example – A offers to sell his house to B for Rs. 60,00,000/-. B accepts the offer
by paying Rs. 60,00,000/-. A’s offer is said to be accepted and it becomes a
‘promise’
 An offer before acceptance does not create any legal obligations between the
parties but once the offer is accepted, it becomes a promise and it is
 Forms / Kinds of Acceptance
 Sec. 9 under ICA
 Express - If the acceptance is written or oral, it becomes an Expressed
Acceptance.
 The condition of acceptance must be stated very clearly in the agreement
and must be understood immediately. (bills in instalment)
 A qualification must be done such that the instrument holder understands
what was accepted and on what qualifications it was accepted.
 Example - A makes an offer in person orally to B for buying his house for 50
lakh. B sends an email to A, giving his acceptance to the offer. This is an
expressed acceptance.
 Implied - If the acceptance is shown by conduct/ behaviour, It thus becomes an
Implied acceptance.
 Example - A buys some products in the supermarket. This is an implied
acceptance of A to pay the price that the supermarket is asking for the
products.
 Conditional / qualified - he offeree agrees to give his acceptance to the offer
only if certain changes are made to the terms and conditions of the offer. This
acceptance now becomes a counteroffer which must be then accepted by the
offeror for it to become a promise.
 Example - A agrees to make the payment to B for the renovation of his house
 Essential Elements of Acceptance
 Acceptance must be given only by the offeree – class of persons / two persons /
third party / world at large / legal person / Case – Boulton v. Jones (1857) /
Powell v. Lee
 Acceptance must be communicated - to the offeror for the proposal or offer to
become a binding contract / the offeree must be aware of the fact that an offer
has been made to him / cannot be communicated without the knowledge of the
offer / The intent to give acceptance is not considered valid in case it is
required for the acceptance to be communicated clearly / performance of the
condition of the offer would amount to acceptance / Felthouse v. Bindley
(1862)/ Powell v. Lee (1908
 Acceptance must be absolute and unconditional – Sec.7 / conditional or
qualified will be only a counter offer which may be accepted or rejected by the
offeror / Hyde v. Wrench
 Acceptance must be in the mode prescribed – clause 2 of Sec. 7
 Acceptance must be given within a reasonable time – depends on the facts and
situation in each case / if not accepted within prescribed or reasonable time
periods then the proposal will lapse / the causes beyond control also doesn't
matter / B. Rajkumar Patra v. UOI AIR 1981
 Acceptance must be after an offer
 Acceptance should be made while the offer is still subsisting
 A proposal once rejected cannot be accepted unless it is renewed – Hyde v.
Wrench (1840)
 Revocation of acceptance – under English law it is irrevocable / under Indian
law it can be revoked
 Provisional acceptance is no acceptance – subject to contract / not binding /
until the approval is given the offeror is at liberty to cancel the offer made to
the offeree / UOI v. S Narain Singh AIR 1953
 Death of offeree – if he dies without having accepted or refused / no power to
executors (England or India) / no presumption as to contract by offeror

 Silence as Acceptance
 Silence generally does not amount to acceptance / Sec. 2(b) – assent must be
communicated to the offeror / should be signified and in reasonable manner /
Felthouse v. Bindley (1862)
 Communication of Proposal (Offer) & Acceptance (requirements)
 Derived from latin word ‘communicationem’ ‘communico’ ‘ communicare’ – to
give by way of information, to make known
 Through speech, writing, gestures / in business means of communication are
prescribed or authorised / unexecuted assent or unsuccessful attempt or mere
mental act of assent cannot be treated as communication
 Sec. 3 – specifies what is communication, acceptance and revocation – any act
or omission / intends to communicate / has the effect of communicating
 Sec. 4 – describes when it is complete (completion)
 Communication of Offer
 Offeror must communicate his offer to the acceptor for the purpose of
acceptance
 Offeree must be aware about the offer
 Offer – How communicated?
 Direct Communication – face to face / when offeror and offeree are present
at one place and on spot (Valid Contract)
 Proposal made by letter (Postal systems) (Internet) - IT Acts
 Communication of Offer / Proposal – When Completed?
 Sec. 4
 Lalman Shukla v. Gauri Dutt (1913) / Williams v. Carwadine (1833)
 Communication of Acceptance
 Necessary to make a binding contract / acceptance not complete unless and
until it is communicated to the proposer in a prescribed manner / knowledge
is important
 Communication of Acceptance – when completed?
 Direct communication
 Sec. 4
 More than mental assent / must be communicated to the offeror
 J K Enterprises v. State of M.P. AIR 1997 / Brogden v. Metropolitan Railway
Co. 1877
 When Communication of Acceptance is not necessary?
 Waiver of the communication of acceptance
 Acceptance of an offer by conduct – Carlill v. Carbolic Smoke Ball Co. 1893
 Unilateral Contract
 Difference between communication of offer and acceptance
c) Revocation of Proposal and Acceptance
 Meaning of Revocation – derived from Latin word ‘revocare’ – call back / calling
back of a thing granted / any deed or thing revoked it is as if it never had
been / annulling, rescinding, withdrawing etc
 Sec. 3, 4, 5 and 6 deals with revocation
 Revocation of Offer / Proposal
 Sec. 5 / cannot be revoked where a statutory rule applicable to it precludes
withdrawal of a bif before communication of its acceptance or refusal
(Tenders)
 Revocation or Proposal – How made? (Sec. 6)
 By Notice of Revocation – English law the offer stands revoked even if the
information is received through some other source / India a notice by the
proposer is required
 By lapse of time
 By failure to fulfil a condition precedent
 By death or insanity of the offeror
 By rejection of a proposal – Hindustan Aluminium Corp Ltd. V . UP State
electricity Board (1973)
 Revocation by Counter-Offer
 Revocation by failure to accept in the mode prescribed
 Revocation of Acceptance
 In England
 Acceptance once made cannot be withdrawn
 Anson – Acceptance is to an offer what a lighted match is to a train of
gunpowder. It produces something which cannot be recalled or undone.
 According to Anson – There cannot be an acceptance after revocation of
the offer and when once there is an acceptance there can be no
revocation
 Revocation of Acceptance in India (Sec. 5)
 Communication of Revocation of Proposal and Acceptance
 Sec. 4
 Modes of Communication (Including Electronic medium)
 Direct Communication
 Communication through post (Non-instantaneous mode of
communication)
 Byrne v. Leon Van Tienhoven (1880) / Rules / Comparison
 Communication through telegram – same as post
 Communication over Telephone or Telex or Fax (Instantaneous Mode) –
India and England same laws related to this / England – Entores Ltdv.
Miles Far East Corporation (1955) / India – Bhagwandas Goverdhandas
d) E-Contracts with reference to provisions of the Information
Technology Act, 2000
 E-contracts (Sec. 4, 5 and 10A)
 Main Parties are – The Originator - Sec. 2 C1(za) IT Act, Sec. 11 and The
Addressee
 Kinds of E-Contract
 Shrink wrap agreements – licensing agreement used for software purchase
 Click Wrap Agreements – I agree button to purchase or download
 Browse Wrap Agreements – binding on parties using website
 Other online agreements – contracts for consultants, employees, contractors,
sales and resale agreement, distributors, software developer and licensing
agreements, source code escrow
 Communication of Proposal and acceptance through electronic medium
 Model law on E Commerce was adopted by The United Nations Commission of
International Trade Law (UNCITRAL) in 1996 / India has recognised the sane in
IT Act 2000 / Sec. 12 refers to the acknowledgment and receipt
 Communication of Acceptance through computer internet – acceptance and
revocation / Sec. 4 of ICA / calling back option / read receipts etc
 Time and Place of the Completion of Contract through internet – Sent as soon as
it leaves the originators computer / receipt as soon as it enters the addressee’s
computer / the principal place of business or place of residence
 Acknowledgment of electronic records - Sec. 12 of IT Act 2000 – acknowledgment
of receipt – in particular format within reasonable time etc. – delivered and read
receipt or – Sec. 4
 Electronic signature – Sec. 5 of IT Act

 Exception of Applicability of IT Act, 2000

 First Schedule of IT Act prohibits the following
 Negotiable Instruments (other than a cheque)
 POA
 Trust Deeds
 Wills (including any other testamentary disposition)
 Contracts for the sale or conveyance of immovable property or any interest
thereof
3. Express and Implied Terms, Express and Implied
Contracts
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4. Standard forms of Contract – their vices and

strategies to handle the vices
 Meaning
 type of contract which contain standardized, pre-printed and non-negotiable
provisions
 “boilerplate contracts” or “take it or leave it” contracts as they offer no room
for negotiation
 Offered only for acceptance or rejection
 Examples - Insurance policies / train tickets or plane tickets / MNC’s – gives
superior bargaining power – mass distribution of goods and services – reduces
time, efforts and transaction cost
 Advantages
 Reduced Transaction cost
 Speeds up the process
 Easy to Understand
  Legalize the transactions
 Helps Builds Trust
 Brings Uniformity in Practice
 Consistency in Contracts
 Vices (Iniquities or Corruptions)
 Boilerplate clauses – clauses at the end / easy for other party to overlook /
mostly contain how dispute will be resolved or jurisdiction etc. / must pay
attention to what's left out / jurisdiction – arbitration – attorney fees – right to
sue etc.
 Price Fixing – competitors agree (verbally or written) not to sell the products,
commodity or services at a price lower than set price / reduces the competition
but affects the consumer / sometimes price is left blank which hallows
negotiations / in pre-printed price no room for negotiation, leads to price
fixing / must make sure that though the price is favourable there is a room for
negotiation in future
 Legal Jargon – use of legal language / difficult for layman to understand at
different meaning than regular English / have to hire lawyer which costs money
and time
 Favouring one party over another
 Literacy Rate
 Strategies to handle the Vices (Iniquities or Corruptions)
 There should be contractual documents
 There should not be no misrepresentation
 There should be a reasonable notice of the contractual terms
 Notice should be contemporaneous with the contract
 The terms of the Standard form for Contract should be reasonable
 Protection to weaker party
 There should be no fundamental breach of contract
 No negotiation of liability
 Liability towards third party
 Enactments to give protection to weaker party

5. Formalities – Writing, Signature, attestation, registration,

notarization, stamp duty
Formalities of a contract with the government - Article 299 of the.
Constitution of India (Art 299, 298, 14 of Constitution, Section 70, 65 of
ICA)
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