ESSENTIALS OF A CONTRACT LAW: OFFER, ACCEPTANCE, CONSIDERATION, ETC.,

This article is written by R. Jemima Christy Rebekah, IFIM Law School, Final Year BBA LLB student during an internship at LeDroit India.

Keywords

• Offer
• Acceptance
• Consideration
• Capacity to Contract
• Free Consent
• Legality of Object

Introduction

Contract law is one of the backbones of the Indian judiciary system, which administrates the agreements between parties. It ensures that the promises made are enforceable by law. A contract’s applicability depends on specific components which includes the presence of an offer, acceptance, consideration, intention to form legal association and the capacity to contract. Further, factors like free consent, legality of object and consideration are the important in assessing the contract’s validity. These components ensures that the contract is binding and enforceable in a court of law. In this article, we will explore the important aspects of contract law essentials, definitions and conditions including landmark judgements which shapes the modern contract law.

Offer

Definition

Section 2 (a) of the Indian Contract Act, 1872 defines

When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a “proposal”

The word “proposal and Offer” can be used reciprocally for Brevity. The person who makes the offer or promise is called as “Offeror or Promisor”. The person to whom the offer or promise is made is called as “Offeree or Promisee”.

Essentials of an Offer

• Offer must be communicated
• It should create legal relationships
• It should be definite, unambiguous and certain in nature
• It may be general or specific in nature
• It should not contain any undue terms

Types of Offers

1. General offer: Offer made at large or in Public.
2. Specific offer: Offer made to an individual or to a specific group of individuals.
3. Counter offer: Rejection of an old offer and a new offer is made instead.
4. Cross offer: Two parties make similar offers to each other simultaneously,      without the knowledge of other’s offer.
5. Express offer: Direct statement of plan to make a contract.
6. Implied offer: Offer made from a situation or conduct other than written or verbal words.

Landmark Judgements

Carlill v. Carbolic Smoke Ball Company Ltd (1893)

This is a landmark judgment of general offer. In this case, the court of appeal held that the person whoever satisfies the essentials and conditions of the offer will be entitled for the gratuity of the offer.^[1]

Lalman Shukla v. Gauri Dutt (1913)

The High Court of Allahabad held that a proposal cannot be accepted until it reaches to the knowledge of the person who is accepting it.^[2]

Acceptance

Definition

Section 2 (b) of the Indian Contract Act, 1872 defines

When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a “promise”

If someone accepts the proposal, then it turns to an acceptance. Substantially, acceptance converts a proposal into a binding commitment.

Essentials of an acceptance

• Acceptance must be unconditional and absolute
• Acceptance must be communicated to the offeror
• Acceptance must bind to the prescribed manner
• Acceptance must be made within the reasonable time
• Acceptance must be an implied acceptance

Types of acceptance

1. Express Acceptance: Acceptance must be explicit and direct in nature.
2. Implied Acceptance: Acceptance must be made from a situation or conduct like an execution of a requested act.
3. Conditional Acceptance: Acceptance should be made of certain rules and conditions or requirements.

Landmark Judgements

Powell v. Lee (1908)

This is a prominent English case. In this case, the court held that there was no contract because the acceptance made was not communicated by an authorized person and it established that the acceptance must be communicated by the offeree or by an authorized person.^[3]

Bhagwandas Goverdhandas Kedia v. M/S. Girdharilal Parashottamdas and Co. (1965)

This is a prominent case in Indian Contract Law. The Supreme Court of India held that in the event of immediate communication (like telephone), if the acceptance is heard by the offeror, then spontaneously the contract is formed at the place. This case explained the formation of contract through instantaneous communication.^[4]

Consideration

Definition

Section 2 (d) of the Indian Contract Act, 1872 defines

When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.

Consideration means that the promised or something value given by one party to another in exchange for a promise or act. Consideration is a bargain between two parties.

Essentials of a valid Consideration

• Consideration only valid when the promisor requests it.
• Consideration may move from one person to any other person even if you’re a stranger.
• Consideration should be lawful.
• An illegal consideration is not valid, and it makes the contract void.
• Consideration should have real and possible act.
• Consideration must not be uncertain.
• Adequacy of consideration is not necessary.

Types of Consideration

1. Past Consideration: It refers to an act or something that has been done already or received before the promise is made.
2. Present Consideration: It is also known as executed consideration. This means that the consideration has already been performed at the time of the contract made.
3. Future Consideration: It is also known as executory consideration. This means that the consideration yet to be performed in the future.

Landmark Judgements

Durga Prasad v. Baldeo and Ors (1881)

The Court ruled that the plaintiff’s act of building a shop subjected to valid consideration and the defendant was bound by his promise.^[5]

Kedarnath Bhattacharji v. Gorie Mohamed (1886)

The Court held that, a promise to pay is a legally binding act if the party to whom the promise is made has constituted to the liability based on that promise.^[6]

Intention to Create Legal Relations

The existence of intention to create legal relations is a fundamental objective to form a valid contract. Without the intention, agreements remain mere promises and absence enforceability.

This concept makes sure that parties understand the legal consequences of their commitments.  Parties needs to fulfil their obligations legally to enter into a lawful contract.

Tests for Determining Intention

1. Objective Test: Analyses either the reasonable person can believe that the parties intended to create a legally binding contract or not.
2. Rebuttable Presumption: In some circumstances like family or social agreement, the court may presume the intention to create a legal relationship. However, there is a presumption against legal intention which can be rebutted by evidence providing a opposite intention.

Landmark Judgement

Balfour v. Balfour (1919)

The court first acknowledged that certain forms of agreements does not fulfil the requirements of contract. But the agreement between the husband and wife frequently considered as forms of agreements. However, these agreements are not contracts because “parties did not intend that they should be attended by legal consequences”. The court ruled that agreements between husband and wife are generally not intended to be legally binding.

Capacity to contract: Who can enter a Contract?

Section 11 of the Indian Contract Act,1872 defines

“Every person is competent to contract who is of the age of majority according to the law to which he is subject) and who is of sound mind and is not disqualified from contracting by any law to which he is subject.”

As per the section, the following individuals can enter a contract:

1. The person must be in the age of majority that is above the age of 18 years or 21 years under special circumstances.
2. The person must be of sound mind while entering the contract.
3. The person must not be disqualified by the law while entering the contract.

It is important to note that any person who is under the age of 18 or unsound mind or disqualified by the law cannot enter the contract and the agreement as a party.

Landmark Judgement

Mohori Bibee v. Dharmodas Ghose (1903)

In this case, Dharmodas was a minor while entering into an agreement. The privy Council said that the contract was void because dharmodas was a minor at the time of the agreement. The court ruled that a contract with a minor is void ab initio which means void from the beginning or invalid from the outset. Therefore, the person Dharmodas was not required to return the money advanced to the mortgage.^[7]

Free consent: Coercion, Undue Influence, Misrepresentation and Fraud

Section 14 of the Indian Contract Act, 1872 defines free consent as

Consent is said to be free when it is not caused by—

1. coercion, as defined in section 15, or
2. undue influence, as defined in section 16, or
3. fraud, as defined in section 17, or
4. misrepresentation, as defined in section 18, or
5. mistake, subject to the provisions of sections 20, 21 and 22. Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.

As per the section 14, the consent must be free to make a valid contract.

Elements

• Coercion (Section 15): Compelling someone to enter a contract by using force or threats.
• Undue Influence (Section 16): Influencing individual is often able to take advantage of the weaker party.
• Fraud (Section 17): Intent to deceive another party to induce consent.
• Misrepresentation (Section 18): Untrue statement of a material fact made to a party by another party to induce consent.
• Mistake (Sections 20,21 and 22): contract which is performed without knowing the essentials of contract by the parties.

Legality of Object and Consideration

23. What consideration and objects are lawful, and what not—The consideration or object of an agreement is lawful, unless—

• it is forbidden by law; or
• is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or
• involves or implies injury to the person or property of another; or
• the Court regards it as immoral or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

Under section 23 of the Indian Contract Act, the object of the contract and the consideration must be lawful. If the object and the consideration is illegal, immoral or against public policy then the contract is void.

Landmark judgement

Gherulal Parakh v. Mahadeodas Maiya and Ors (1959)

The Supreme Court of India held that wagering contracts are void under section 30 of the Indian Contract Act. However, under section 23 they are not “forbidden by law”. This case cleared that agreements including wagering are void but still legal which means they do not captivate the consequences of being against the public policy under section 23 of the Indian Contract Act, 1872.

Conclusion

The essential elements of contract law are offer, acceptance, consideration and intention to create legal relations which creates the base for the legally binding agreement. These components make contract enforce; without these components a contract cannot be enforceable. Moreover, it ensures the free consent and the legality of the object and consideration which prevents exploitation and unlawful activities. By complying with these principles, parties can create contracts which can equitable and enforceable. These essentials safeguard the legal rights and makes the contract law a main factor of everyday transactions.

Reference

1. Legal Service India E- Journal.com
2. LawBhoomi.com
3. Blog.ipleaders.in
4. Toppr.com

[1] The Indian Contract Act (Landmark Judgement), DefactoJudiciary.in (May 4, 2024)

[2] Ibid

[3]  The Indian Contract Act (Landmark Judgement), DefactoJudiciary.in (May 4,2024)

[4] Ibid

[5] The Indian Contract Act (Landmark Judgement), DefactoJudiciary.in (May 4, 2024)

[6] Ibid

[7] Mohori Bibee v. Dharmodas Ghose (1903) 30 I.A. 114, Drishti Judiciary (October 30, 2023)