OFFER & ACCEPTANCE IN THE CONTRACT ACT: 8 LANDMARK CASES

This article is written by Kimaya Anavkar, a T.Y.LL.B. student at Kishinchand chellaram Law College.

THE FOUNDATION OF AGREEMENT – OFFER AND ACCEPTANCE

Welcome to our comprehensive three-part series exploring the landmark cases that have shaped the world of contract law. In this first installment, we delve into the very bedrock of any contract: Offer and Acceptance. Before any promise can be legally binding, there must be a mutual understanding—a “meeting of the minds.” This begins with a clear and valid offer, which is then met with an unequivocal acceptance.

But what truly counts as an offer? How is it different from a simple price quote or goods displayed in a store? The cases in this section, from the famous public offer in Carlill v. Carbolic Smoke Ball Co. to the essential requirement of communication in Lalman Shukla v. Gauri Datt, answer these fundamental questions. We will explore the critical rules that govern a valid acceptance, such as the principle that silence cannot be imposed as consent, as established in Felthouse v. Bindley. Join us as we examine the foundational principles that determine when a simple agreement transforms into a legally recognized contract.

1. LALMAN SHUKLA V. GAURI DATT (1913)

CITATION: (1913) 11 Alj 489
A pivotal Indian contract law case on the necessity of an offer being communicated.

• Detailed Facts:
  • The defendant, Gauri Datt, discovered that his nephew was missing.
  • He dispatched his servants to various locations to search for the boy. The plaintiff, Lalman Shukla, was one of these servants and was sent from Kanpur to Haridwar to conduct the search.
  • Crucially, after Lalman Shukla had already departed on his search, Gauri Datt announced a reward of Rs. 501 for anyone who successfully found the nephew.
  • Lalman Shukla managed to trace and find the boy in Haridwar. However, he did so in the performance of his duties as a servant and was completely unaware of the reward that had been publicly announced in his absence.
  • Upon his return, he was not paid the reward. Much later, after being dismissed from his job, he filed a suit to claim the reward money, arguing that he had fulfilled the condition of the offer.
• Legal Issues:
  • Can an individual accept an offer of which they have no knowledge?
  • Is the performance of the conditions of an offer, done in ignorance of the offer itself, sufficient to constitute a legally binding acceptance?
• Judgment:
  • The Allahabad High Court dismissed the plaintiff’s claim. Lalman Shukla was held to be not entitled to the reward.
• Legal Principle (Ratio Decidendi):
  • The foundational principle of this case is that an offer must be communicated to the offeree for a valid acceptance to occur. For a contract to form, there must be a “meeting of the minds” (consensus ad idem). Acceptance is more than just fulfilling the conditions of an offer; it must be an act done in response to and with knowledge of the offer. Since Lalman was acting out of a pre-existing duty and was ignorant of the reward, his actions did not constitute an acceptance.

2. CARLILL V. CARBOLIC SMOKE BALL CO. (1893)

CITATION: [1893] 1 QB 256

A landmark English case that defined the nature of a unilateral contract.

• Detailed Facts:
  • The Carbolic Smoke Ball Company, the defendant, placed an advertisement in several newspapers for its product, claiming it could cure influenza.
  • The advertisement made a specific promise: it would pay a £100 reward to any person who contracted influenza after having used their product three times daily for two weeks, according to the printed directions.
  • To show their sincerity and prove the promise was not an empty boast, the advertisement explicitly stated that the company had deposited £1,000 in a specific bank.
  • The plaintiff, Mrs. Louisa Carlill, saw the advertisement, purchased the smoke ball, and used it precisely as directed. Despite her adherence to the instructions, she contracted influenza.
  • When she made a claim for the £100 reward, the company refused to pay. They argued that the advertisement was mere “sales puff” and not a serious, legally binding offer.
• Legal Issues:
  • Could a newspaper advertisement, which is typically seen as an invitation to treat, be considered a binding unilateral offer to the entire world?
  • Does the performance of the conditions stipulated in such an offer constitute a valid acceptance without any formal notification to the offeror?
• Judgment:
  • The Court of Appeal ruled unanimously in favor of Mrs. Carlill, finding that a binding contract had been formed. The company was ordered to pay the £100.
• Legal Principle (Ratio Decidendi):
  • This case established that an advertisement can constitute a valid unilateral offer to the public at large. It is an offer that waives the need for negotiation.
  • The performance of the conditions outlined in the offer (in this case, using the smoke ball as directed) is a valid form of acceptance.
  • In a unilateral contract, there is no need for the offeree to communicate their intention to accept; the performance of the act itself is sufficient. The court noted that the deposit of £1,000 demonstrated a clear intention to create legal relations.

3. HARVEY V. FACEY (1893)

CITATION: [1893] UKPC 46
A definitive case clarifying the distinction between an offer and a mere supply of information.

• Detailed Facts:
  • The potential buyer, Harvey, sent a telegram to the property owner, Facey. This initial telegram contained two distinct questions: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price-answer paid.”
  • Facey replied via telegram with only the following words: “Lowest price for Bumper Hall Pen £900.” He did not answer the first question about his willingness to sell.
  • Upon receiving this, Harvey sent a third telegram, believing he was accepting an offer: “We agree to buy Bumper Hall Pen for the sum of nine hundred pounds asked by you.”
  • Facey refused to sell the property, leading Harvey to sue for breach of contract.
• Legal Issues:
  • Did Facey’s telegram stating the “lowest price” constitute a formal offer to sell, or was it merely a response to a request for information?
• Judgment:
  • The Privy Council held that no contract had been formed between the parties.
• Legal Principle (Ratio Decidendi):
  • The principle is that a simple statement of the lowest price is not an offer that can be accepted. It is considered an “invitation to offer” or an invitation to treat. Facey’s reply was only a supply of information, not a promise to be bound. The actual offer was Harvey’s third telegram (“We agree to buy…”), which Facey was free to accept or reject.

4. PHARMACEUTICAL SOCIETY OF GREAT BRITAIN V. BOOTS CASH CHEMISTS LTD. (1953)

CITATION: EWCA Civ 6, [1953] 1 QB 401, [1953] 1 All ER 482, [1953] 2 WLR 427
A crucial case applying contract principles to the modern self-service retail environment.

• Detailed Facts:
  • Boots Cash Chemists operated a pharmacy using a self-service model, which was a new concept at the time. Customers would enter, pick up items (including certain drugs listed in the Poisons Act) from shelves, and place them in a shopping basket.
  • The customer would then take their selected items to a cashier’s desk to pay.
  • The law required the sale of these particular drugs to be supervised by a registered pharmacist. Boots complied with this by having a pharmacist present at the cashier’s desk to authorize the transaction.
  • The Pharmaceutical Society brought a case against Boots, arguing that the contract of sale was completed when the customer took an item off the shelf, at which point the sale was unsupervised and therefore illegal.
• Legal Issues:
  • At what precise moment is a contract formed in a self-service retail store?
  • Does the display of goods on a shelf constitute an offer, or is it merely an invitation for the customer to make an offer?
• Judgment:
  • The court ruled in favor of Boots Cash Chemists, finding their self-service model did not violate the law.
• Legal Principle (Ratio Decidendi):
  • The display of goods in a store is an invitation to offer, not an offer.
  • It is the customer who makes the offer when they present the goods at the counter.
  • The cashier accepts the offer by processing the payment, at which point the contract is formed. This interpretation ensures that the sale of regulated items occurs under the pharmacist’s supervision at the checkout.

5. RAMSGATE VICTORIA HOTEL CO. V. MONTEFIORE (1866)

CITATION: (1866) LR 1 11 Ex 109
A leading authority on the lapse of an offer due to the passage of time.

• Detailed Facts:
  • In June, the defendant, Montefiore, made an offer to purchase shares in the Ramsgate Victoria Hotel Co.
  • Having received his offer, the company did not respond for five months.
  • In November, the company finally sent a letter of acceptance to Montefiore, allotting him the shares and requesting payment.
  • By this time, the value of the company’s shares had fallen, and Montefiore was no longer interested in them. He refused to accept or pay for them.
• Legal Issues:
  • Can an offer remain open for an indefinite period?
  • If no specific time for acceptance is mentioned, does an offer expire?
• Judgment:
  • The court ruled in favor of Montefiore, holding that there was no binding contract.
• Legal Principle (Ratio Decidendi):
  • An offer lapses after a reasonable time if no acceptance is made.
  • What is considered a “reasonable” time is not a fixed duration but depends entirely on the circumstances and the subject matter of the contract. For a commodity with a volatile price, such as company shares, a reasonable time is relatively short. The five-month delay was deemed unreasonable.

6. FELTHOUSE V. BINDLEY (1862)

CITATION: (1862) 11 Cb (NS) 869; [1862] EWHC CP J35; 142 ER 1037
The definitive case establishing that acceptance cannot be assumed from silence.

• Detailed Facts:
  • An uncle, Paul Felthouse, was negotiating to buy a specific horse from his nephew, John.
  • After a misunderstanding over the price, the uncle wrote a letter to his nephew containing an offer, concluding with the statement: “If I hear no more about him, I consider the horse mine at £30 15s.”
  • The nephew did not reply to the letter. However, he did intend to accept the offer and instructed the auctioneer who was handling his farm sale, William Bindley, to set that particular horse aside and not sell it.
  • The auctioneer mistakenly sold the horse anyway. The uncle then sued the auctioneer in the tort of conversion, for which he needed to prove he was the owner of the horse at the time of the sale.
• Legal Issues:
  • Can an offeror impose acceptance on an offeree by stipulating that silence will be deemed consent?
  • Is an uncommunicated mental acceptance sufficient to form a binding contract?
• Judgment:
  • The court ruled that there was no contract between the uncle and the nephew for the sale of the horse. The uncle’s claim failed.
• Legal Principle (Ratio Decidendi):
  • Silence cannot be prescribed as a mode of acceptance. Acceptance must be a positive, overt act.
  • There must be clear communication of acceptance from the offeree to the offeror. The nephew’s private intention to accept, even though demonstrated by his instruction to the auctioneer, was not communicated to his uncle and therefore was not a valid acceptance.

7. BHAGWANDAS GOVERDHANDAS KEDIA V. GIRDHARI LAL (1966)

CITATION: 1966 AIR 543, 1966 SCR (1) 656, AIR 1966 SUPREME COURT 543
A key Indian Supreme Court decision on contract formation using instantaneous communication.

• Detailed Facts:
  • A commercial contract for the supply of cottonseed cakes was agreed upon over a telephone call.
  • The offer was made from Ahmedabad, and the acceptance was spoken into the phone by the offeree in Khamgaon.
  • When a dispute arose, the offeror filed a suit in an Ahmedabad court. The defendant argued that the contract was formed in Khamgaon, where the words of acceptance were spoken, and thus the Ahmedabad court had no jurisdiction.
• Legal Issues:
  • When a contract is made using an instantaneous form of communication like a telephone, where is the contract legally considered to be formed?
• Judgment:
  • The Supreme Court of India held that the contract was formed in Ahmedabad. Therefore, the Ahmedabad court had the jurisdiction to hear the case.
• Legal Principle (Ratio Decidendi):
  • For instantaneous communication (like telephone or telex), the postal rule (where acceptance is complete upon dispatch) does not apply.
  • Instead, a contract is formed at the place where the acceptance is heard by the offeror. The contract is only complete when the offeror receives the notification of acceptance.

8. POWELL V. LEE (1908)

CITATION: 99 LT 284
A case clarifying that acceptance must be communicated by an authorized individual.

• Detailed Facts:
  • Mr. Powell applied for the position of headmaster at a school.
  • The school’s board of managers held a meeting and passed a resolution to appoint him to the position. However, they did not make an official decision to communicate this to him.
  • One of the managers on the board, acting in his individual capacity and without any authority from the board as a whole, informed Powell that he had been selected.
  • The board later reconvened and rescinded its previous resolution, ultimately appointing a different candidate.
  • Powell sued the school for breach of contract.
• Legal Issues:
  • Is an acceptance valid if the communication of that acceptance is made by a person who was not authorized to do so?
• Judgment:
  • The court held that no contract had been formed, and Powell’s claim was dismissed.
• Legal Principle (Ratio Decidendi):
  • Acceptance must be communicated by a person who has the authority to accept the offer (i.e., the offeree or their authorized agent).
  • Communication by an unauthorized person does not form a valid contract. The manager’s communication was akin to unauthorized gossip and had no legal effect.

CONCLUSION

The journey through the foundational cases of offer and acceptance reveals a clear message: a contract is built on a platform of mutual, communicated consent. The principles established in these landmark rulings are not mere technicalities; they are the essential safeguards that prevent ambiguity and ensure that no party is bound to a promise they were unaware of or did not unequivocally accept.

From the public promise in Carlill v. Carbolic Smoke Ball Co. to the simple price quotation in Harvey v. Facey, these cases draw a bright line between a binding offer and preliminary negotiations. They teach us that acceptance must be a mirror image of the offer, actively communicated, and made with full knowledge of the proposal. Understanding these core tenets is the indispensable first step in mastering the language and logic of contract law.