A contract is a legally binding agreement between two or more parties in which an exchange of value is made. The purpose of a contract is to form a relationship between two parties who seek to enter into a legal contract and specify their responsibilities and rights according to the contract and to set out the terms of the agreement and provide a record of that agreement which may be enforceable in a court of law. It acts as evidence of details. It Prevents misunderstandings. It ensures safety and confidentiality. It records business relations. In this article, we shall discuss different types of contracts with view of legal obligations.

Types of Contracts on the Basis of Formation:

On the basis of the formation of contract, the types of contracts are as follows:

Express Contract:

An express contract is an agreement with clearly stated terms to which both parties are bound at the time it is formed. This contract may be either oral or written. This contract involves at least two parties making legal obligations to each other to fulfil set/specified parameters. According to the law, they agree to be legally bound by these agreements.

According to the first part of Section 9 of the Indian Contract Act, in so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. This means that if a proposal or a promise is expressed by listing the terms in words – in writing or orally is said to be an Express Contract as long as it gets acceptance from the other party.

Example: A person A sends an email to person B, proposing to sell his car for a cost of Rs. 1,00,000/-. The person B calls the first person and agrees to the terms of the promise. This is express contract involving both written as well as oral contract.

Implied Contract:

An implied contract is a non-verbal and unwritten – yet still legally binding – contract that exists based on the conduct of the parties involved or on a set of circumstances. Implied-in-fact contracts exist when an individual expects to receive a product or service when they arrive at a business that provides it. implied-in-law contracts are not truly contracts. A court may decide that a contract did exist due to the parties’ behaviour, which implied that an agreement existed between them. A court might get involved when one party demands restitution from the other for services or products that were given in exchange for consideration. Implied in Law contracts are also called quasi contracts. They prevent injustice from taking place when one party is enriched in some way at the expense of the other party.

According to the second part of Section 9 of the Indian Contract Act, in so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. A contract in which the terms of the agreement are not expressed in written or oral form is an implied contract.

For example, When we are waiting for a bus to go to a certain place, the bus which can take us to the place where we desire to go arrives and halts at the bus stop. We enter the bus and pay requisite fair. A ticket is given to us. When destination comes the bus halts at the stop and we board down the bus. By entering the bus we accept the offer. In this case everybody is agreeing by the conduct. Thus. there was an implied contract.

Quasi-Contract:

A quasi-contract may be presumed by a court in the absence of a true contract, but not where a contract—either express or implied in fact—covering the same subject matter already exists. Because a quasi-contract is not a true contract, mutual assent is not necessary, and a court may impose an obligation without regard to the intent of the parties. When a party sues for damages under a quasi-contract, the remedy is typically restitution or recovery or fair resolution of the situation under a theory of quantum merit which means “as much as is deserved.”. Liability is determined on a case-by-case basis.

Example: A classic quasi contract circumstance may be created by the delivery of a pizza to the wrong address—that is, not to the person who paid for it. If the individual at the incorrect address fails to fess to the error and instead keeps the pizza, they could be seen as having accepted the food, and thus be obliged to pay for it. A court could then rule to issue a quasi contract that requires the pizza recipient to pay back the cost of the food to the party who purchased it or to the pizzeria if it subsequently delivered a second pie to the purchaser. 

E-Contract:

An e-contract is a contract where the offer and acceptance, and consideration etc., are done by electronic means.  An E-contract is also a valid form of contract but there is just one important factor involved is that the E-contracts come into force with the help of the Internet or digital mode of communication. The electronic means and devices may include emails, tests, telephones, digital signatures etc. They are also known as the Cyber contracts, the EDI contracts or the Electronic Data Interchange contracts. The terms of the contract are listed by electronic means or implied by the actions of the users.

Types of Contracts on the Basis of Form:

On the basis of the form of contract, the types of contracts are as follows:

Written Contract:

A written contract generally refers to a written document outlining an agreement between two parties. Written contracts provide more certainty for both parties than verbal contracts. They clearly set out the details of what was agreed. When a contract is not in writing, parties are exposed to a number of risks.

To ensure written contracts are enforceable, It should contain following information:

• The basic terms and conditions of the agreement, agreed upon by all involved parties
• The names and contact information of all the parties to be involved in the execution of the contract
• Clearly spelling out the duties to be fulfilled and any payment involved

Advantages of a written contract:

• It provides proof of what was agreed between the parties and serves as a record of the agreement.
• It clears status and part of performance of each party in the contract.
• It helps in preventing misunderstandings or disputes by making the agreement clear from the outset
• It reduces the risk of a dispute by detailing payments, time frames and work to be performed under the contract Thus it provides security and peace of mind.
• It sets out how a dispute over payments or services provided will be resolved and how the contract can be varied
• It specifies how either party can end the contract before the work is completed.

The Indian Contract Act does not require every contract to be in writing. If a contract is to be in writing as required by the provisions of any other law, then it must also be in writing.

For example, as per the Companies Act, the memorandum and the Articles of Association must be in written form, then the contract law also insists it in a written form only. Similarly, by the Transfer of Property Act, all the documents like sale-deeds, leases, mortgage deeds must be in writing then the contract law also insists them in a written form only. If by the Indian Registration Act, registration of documents is required then the contract law also insists that such requirements should be observed. Acknowledgement to save the law of limitation is also required to be in writing by Sec. 18 of the Limitation Act, 1963. Submissions under the Arbitration Act are similarly required to be in writing.

Handwritten changes or additions to a printed contract are part of the contract, as long as both / all parties to the contract agree to the changes/additions. The agreement is demonstrated by placing their initials and date of acceptance to changes next to the handwritten changes, each person placing their initials is signifying they have read the handwritten portion and are agreeing to it a part of the contract, just like the parts which are printed. Not putting initials next to a written change in a contract can lead to one party attempting to say they never agreed to those terms which would likely lead to litigation. Court has shown a view that the handwritten words reflect the real and immediate intention of the parties.

In W & K Holdings (NSW) Pty Ltd v.  Mayo [2013] NSWSC 1063 case, the Supreme Court of New South Wales rectified a lease contract (made by the plaintiff and the defendant themselves without hiring a lawyer) on the basis that there were inconsistencies between the printed terms of a template lease and the handwritten terms. The Supreme Court, in this case, gave more weight to the hand-written provisions in the contract. The court held that more weight should be given to the hand-written components as these required the particular attention of the drafter similarly they required the parties to put their mind to a provision. Court further added that the conflicts may be avoided entirely. To avoid unnecessary issues and conflicts, let the lawyer prepare the contract for the parties in a clash of interpretation. They have the knowledge, skills and expertise to create a contract that will embody the real intention of parties, can protect your interests. The expense of a paying a lawyer to look over and draft every contract initially seem massive, however, that expense is often small compared to the cost of litigation.

In Robertson v. French, (1803) 4 East 130 case. the Court held that Where there is conflict between the printed and written clauses of a policy, greater consideration will be paid to the written clauses.

Verbal or Oral Contract:

Many contracting arrangements use verbal contracts, which only work well if there are no disputes. A handshake agreement may still be a contract and may (though often with difficulty) be enforced by a court. However, verbal contracts can lead to uncertainty about each party’s rights and obligations. A dispute may arise if you have nothing in writing explaining what you both agreed to do.

In Nanak Builders and Investors Pvt. Ltd. v. Vinod Kumar Alag, AIR 1993 Delhi 315 case, the Delhi High Court observed that an oral agreement might be a legitimate and enforceable contract. As a result, a contract does not have to be in writing in the literal sense unless it is required by law or the parties deliberately intend to reduce the terms of the agreement to writing.

Part Verbal Part Written Contract:

Some agreements may be only partly verbal. For example, there may be supporting paperwork such as a quote or a list of specifications that also forms part of the contract. Examples of paperwork that may support a verbal contract:

• emails
• quotes with relevant details
• lists of specifications and materials
• notes about pre-discussion.

Standard Form Contract:

Standard form of contract is generally the terms and conditions of the contract that are pre-drafted by one of the party and the other party is supposed to sign it, without having any time or opportunity to get the terms changed. They are also known as boilerplate contracts or contracts of adhesion or “Take it or leave it” contracts. They are intended to make common agreements between suppliers and consumers more efficient and less costly. Standard contracts are frequently used in situations where vendors and consumers routinely participate in legally and technically complex transactions. In this form the most of the terms of the are set in advance and there is little or no negotiation between the parties occurs. Often, these are printed with a few blank spaces for filling in information such as names, dates and signatures. They tend to be one-sided documents that mostly benefit the person who prepared the contract. Thus, it is often a contract that is entered into between unequal bargaining partners. 

Indian contract system does not have any specific differentiation between SFC and general contract, as the SFC is a kind of contract which is govern by the laws provided for general contracts in Indian contract Act 1872.

Examples of Standard Form Contracts:

An insurance company may prepare a draft of insurance policy, which may form the basis of a contract with a large number of insured persons.

The railway authorities may print various terms and conditions in the Time Table, which may be deemed to be the basis of the contract with thousands of passengers who may be travelling by rail every day.

Advantages of Standard Form Contract:

• It reduces the cost of contracting by eliminating the need for custom contracts for individual tenders.
• It eliminates the scope for negotiation, and thus, speeds up the bidding process.
• It uses the same terms every time a contract is formed. Thus, it brings uniformity in the industry that is it makes it easy for people to become familiar with the terms of standard contracts of their industry.
• It legalizes transaction and helps in building trust.
• Consistency in contracts means less room for deviation from the terms set out in the contract. It prevents employers from making any changes to the contract without informing their clients.

Disadvantages of Standard Form Contract:

Boilerplate usually is found at the end of a contract. This is standardized language that most contracts have. Many people do not even read this section, considering it to be jargon. The problem is not usually what the boilerplate puts in but what it leaves out. For example, if the person issuing the contract has deleted the part that says the loser in litigation will pay the winner’s attorney fees, you could find yourself at a disadvantage even if you win a dispute. Another example of problems with boilerplate is the section that says disputes will be resolved by arbitration instead of a lawsuit. If you want to reserve the right to sue

Why people accept standard form of contract?

1. It works on take it or leave it concept, hence there is no room for negotiation and saved all the time for both the parties and speed up the process to enter into the contract.
2. It’s the most cost effective option. There is no need to address each individual and draft a contract separately.
3. After a while, people gets familiar with the format as the terms are same every time when a contract is made. This brings consistency and builds faith among customers and reduces the scope of deviation.

Types of Contracts on the Basis of Validity and Enforceability:

On the basis of validity and enforceability of contract, the types of contracts are as follows:

Valid Contracts:

A valid contract is a written or expressed agreement between two parties to provide a product or service. The Indian Contract Act, 1872 itself defines and lists the Essentials of a Contract either directly or through interpretation through various judgments of the Indian judiciary. Section 10 of the contract Act enumerates certain points that are essential for valid contracts.

An agreement is a contract if satisfies all the following criteria

1. The agreement should be by the free consent (coercion, undue influence, misrepresentation, mistake or fraud) (section 13 to 22)
2. The parties involved in the contract are competent. (Section 11 and 12)
3. The agreement is for a lawful consideration and a lawful object. (Section 23 to 25)
4. It is not an agreement expressly declared to be void. Social, moral and religious agreements are void w.r.t. contract. (Section 26 to 30)
5. The agreement should be legally enforceable.

If any of this condition is not satisfied it is a void agreement and not a contract.

Void Contracts:

The section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. This makes all those contracts that are not enforceable by a court of law as void. A contract is an agreement which is enforceable by law. Hence, we use word contract it satisfies all legal requirement. Hence the word “Void contract” is wrong. It should be “void agreement”. Thus, contracts can only be valid or voidable. A void contract is missing an element. In this case, the contract does not have to be terminated in court. It simply does not have to be executed, and both parties can walk away.

When we were studying valid contracts, we have seen ingredients of valid agreement. If any one of these ingredients is missing the agreement is void agreement. Contract involving minor void ab initio. A valid contract may become void contract by change in government policy.

Example: A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000. A dies of natural causes in 4 years. The contract is no longer valid and becomes void due to the non-enforceability of the agreed terms.

Voidable Contracts:

These types of Contracts are defined in section 2(i) of the Act: “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. The decision to enforce the contract is between the parties. In a voidable contract, one of the parties is legally bound to honour the contract. So, a voidable contract can be executed, even though there is an element missing, if the party not legally bound agrees to move forward. A voidable contract is regarded as legal and enforceable from the beginning, but it can be rejected by either party if its terms are found to be defective. 

In fact, there are several ways a contract may be voidable:

• One or both of the parties wish to terminate the contract because an element was not present
• One of the parties was coerced into the contract

a voidable contract may become enforceable once any underlying contractual defects have been rectified. Nullification can occur for the same reasons as void contracts as well as voidable contracts.

Illegal contracts:

An illegal contract is an agreement that violates the law because its fulfillment requires the parties to engage in illegal activity. Such a contract is void ab initio and unenforceable. Thus, if the contract is breached, neither party will be entitled to any compensation or held liable. It is important to note that a contract can be illegal without violating the law. For example, this can occur when a contract deals with certain activities, like gambling or prostitution, that are not explicitly prohibited by law but are discouraged due to violation of public policy. Due to the criminal aspects of the illegal contracts, they are punishable under law. All the parties that are found to have agreed on an illegal promise are prosecuted in a court of law.

Unenforceable contract

An unenforceable contract is a written or oral agreement that will not be enforced by courts.  Contracts may be unenforceable because of their subject matter, because one party to the agreement unfairly took advantage of the other party, or because there is not enough proof of the agreement. Lack of capacity, duress or undue influence, deception, nondisclosure, unconscionability, public policy, error, and impossibility are all characteristics of unenforceable contracts.

Conclusion:

Whatever may be the type of contracts. It should have all the ingredients of valid contract. According to the act, the contract is “an agreement enforceable by law.” According to the Indian Contract Act 1872, “Agreements are also contracts made by the consent of parties, competent to contract to consider with a lawful object and are not hereby expressly declared to be void”. Agreement must be free from coercion, undue influence, misrepresentation, mistake or fraud and it is made between parties competent to contract.

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In contract proposal and acceptance of proposal are important ingredient. In last few articles, we have discussed, proposal, types of proposal, revocation of proposal and acceptance. In this article, we shall discuss revocation of acceptance in details.

Section 3: Communication, acceptance and revocation of proposals:

The communication of proposals the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.

Section 5: Revocation of proposals and acceptances:

A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

Illustrations:

A proposes, by a letter sent by post, to sell his house to B.

B accepts the proposal by a letter sent by post.

A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards.

B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.

The word ‘revocation’ means “taking back”. The Indian Contract Act lays out the rules of revocation of an offer and acceptance in Section 5. It says an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. . Once the proposer receives communication of acceptance, revocation of the acceptance is not possible. In England, once letter of acceptance is posted, it binds both the parties and there appears to be no scope of revocation of acceptance by sending a telegram or through a phone call.

Section 3 of the Act, lays down that the communication of proposal, acceptance, and revocation is must. It may be expressed or implied. The express communication can be written, through emails, telegraphic, telephonic, minutes of a meeting, words of mouth or conduct. Thus revocation acceptance may be communicated in any way which has the effect of laying before the offeror that there is revocation of the acceptance but it should satisfy the criteria given in the Act.

Section 5 para 2 lays down that an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards..

While Section 4 provides the time at which communication of acceptance and revocation of proposal and acceptance is complete, Section 5 first provides that both proposal and acceptance can be revoked, and secondly gives time before which the right of revocation should be exercised. Section 5 must be read along with Section 4.

Understanding Time Line of Revocation of Offer:

If the post is the correct method of acceptance, then acceptance takes place as soon as the letter is posted and not when it arrives. Provided the letter is properly stamped and addressed. Posted means put in control of post office, or one of its employees authorized to receive letters.

‘A’ offers by a letter dated April 2, sent by post, to sell his house to B at a certain price. B accepts the offer on April 6 by a letter sent by post. The letter reaches A on April 8 at 2 p.m. Here B may revoke his acceptance at any time before 2 p.m. on April 8, but not afterwards.

Sometimes, an interesting situation may arise. The letter of acceptance and the telegram containing revocation of acceptance may be delivered to the offeror at the same time. In such a situation the formation of a contract is a matter of chance. Which one is opened first by the offeror will decide the issue. Generally it is presumed that a man of ordinary prudence will first read the telegram. Hence, the revocation will be quite effective. When the parties at distant places communicate over telephone or telex, the question of revocation does not arise because there is instantaneous communication of the offer and its acceptance. The offer is made and accepted at the same time. In brief you should remember that an offer can be revoked at any time before the letter of acceptance’ is posted and an acceptance can be revoked before it reaches the offeror.

In Entores Ltd v Miles Far East Corporation, [1955] 2 QB 327 case, the Plaintiffs (Entores) were an English Company and the Defendants (Miles Far East Co) were an American corporation with agents in various locations, including Amsterdam. An offer and acceptance in relation to a contract for Japanese cathodes was made between the companies in London and Amsterdam. Specifically:

• the Plaintiffs (in London) sent an offer by telex to the Defendants (in Amsterdam).
• the Defendants (in Amsterdam) sent an acceptance by telex to the Plaintiffs (in London)

The issue was when the contract entered into force, as this would determine whether Dutch or English law would apply to the contract. Specifically, the Court was required to determine whether the postal rule (providing that acceptance occurs when and where the letter is sent) applied to telex communications.

The court held that the contract and damages were to be decided by English law. It was stated that the postal rule did not apply for instantaneous communications. Since Telex was a form of instant messaging, the normal postal rule of acceptance would not apply and instead, acceptance would be when the message by Telex was received. Thus, the contract was created in London. This general principle on acceptance was held to apply to all forms of instantaneous communication methods. Acceptance via these forms of communication had to be clear before any contract is created.

Conclusion:

A proposal and acceptance can be revoked at any time before it creates a binding contract. A proposal can be revoked anytime before the acceptance is complete against the proposer so as to create a binding contract. And an acceptance can be revoked anytime before the communication of acceptance is complete against the acceptor. The mode of communication should be as prescribed. In England, once letter of acceptance is posted, it binds both the parties and there appears to be no scope of revocation of acceptance by sending a telegram or through a phone call.

Under the Indian Contract act, 1872, an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Once the proposer receives communication of acceptance, revocation of the acceptance is not possible.

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The party who makes the offer is known as the offeror, and the party who accepts the offer is known as the offeree. Termination of offer is where the offer is terminated before the other side(offeree) has the opportunity to accept or reject it.  There are a number of ways for an offer to be terminated. An offer is terminated in the following circumstances:

• Revocation
• Rejection
• Lapse of time
• Conditional Offer
• Operation of law
• Death
• Acceptance
• Illegality

Termination of Offer by Revocation:

The word ‘revocation’ means “taking back”. The Indian Contract Act lays out the rules of revocation of an offer in Section 5. It says the offer may be revoked anytime before the communication of the acceptance is complete against the proposer/offeror. Once the acceptance is communicated to the proposer, revocation of the offer is not possible. An offer can be revoked at any time before acceptance takes place. However, the revocation must be communicated effectively directly or indirectly to the offeree before acceptance.

In Payne v Cave, (1789) 3 TR 148 case, the claimant put his goods up for sale at a public auction. The defendant made the highest bid, but then changed his mind. He purported to withdraw the bid before the auctioneer’s hammer fell. The claimant argued that there was a completed contract and the defendant had to pay for the goods. The Court held in favour of the defendant. The defendant’s bid was an offer, which had been withdrawn before it was accepted. As such, there was no contract.

In Byrne v Van Tien hoven, [1880] 5 CPD 344 case, Van Tien hoven offered to sell goods to Byrne by letter dated 1st October. Byrne received the letter on 11th October and telegraphed an acceptance on the same day. On 8th October Van Tien hoven posted a letter revoking the offer. This letter was received by Byrne on 20th October. Van Tien hoven refused to go through with the sale. The Court held that to be effective revocation must be communicated. Where post is used for acceptance, acceptance occurs when and where sent (provided it is contemplated as a means of acceptance) (the ‘postal rule’). However, this rule does not apply in relation to revocation of offers – if post is used for revocation, communication is only effective if and when it is received by the offeree. In this case receipt of the revocation occurred after acceptance with the result that there was a contract formed in this case.

Termination of Offer by Rejection:

The refusal of an offer by the offeree is called rejection. An offer is terminated when the offeree communicates his rejection to the offeror. Once an offer has been rejected, it cannot subsequently be accepted by the offeree. A counter-offer ranks as a rejection, but a mere inquiry as to the possibility of varying some term does not.

In Hyde v. Wrench, (1840) 49 ER 132 case, the defendant(offeror) offered to sell his farm for £1000 but the Plaintiff(offeree) offered him £950 and subsequently rejected the offer. So, the offeree filed the case as the offeror was bind by the contract but it was held that as soon as offeree put the condition the first offer becomes void which means that the offeror is not bounded by the contract as the original offer was rejected by the offeree.

In Stevenson, Jacques v McLean, (1880) 5 QBD 346 case, the defendant possessed several warrants for iron. He wrote the claimant in London asking them if they could find him a buyer. After negotiations, the defendant stated that 40s per ton was the lowest price he was willing to sell for. He told the claimant that this offer was open until the following Monday. The claimants sent a telegram on Monday morning asking if the defendant agreed to delivery over two months, and if not, how long he could give. The defendant did not respond, and sold the warrants to a third-party later that day. Before he informed the claimant of this, they sent another telegram in the afternoon accepting the defendant’s offer. The claimant sued the defendant for damages for non-delivery of the iron. The defendant argued that the claimant’s first telegram was a counter-offer, and therefore that his original offer had been revoked. The Court held in favour of the claimant. The first telegram was merely an inquiry for information, not a counter-offer. While the defendant could have revoked his offer at any time on Monday, he failed to do so before the offer was accepted. There was therefore a completed contract between the parties. A mere inquiry would not be considered as rejection.

Termination of Offer by Lapse of Time:

Where in a contract, a fixed time has been prescribed to the offeree to communicate the acceptance, the offeree is bound to accept the offer within the fixed time so prescribed because after the expiry of the fixed time the offer lapses. The validity of the offer by the offeree would not be affected if the letter of acceptance so posted within the stipulated time reaches the offeror after the completion of the specified time (Postal Rule). Where there is no express time limit, an offer is normally open only for a reasonable time. The length for a reasonable time will depend on the circumstances of the case with respect to offers involving other types of subject matter, definition of a reasonable time depends upon the demand for the subject matters and upon the volatility of its price.

In Ramsgate Victoria Hotel v Montefiore, case, the defendant, Montefiore wanted to buy shares in the complainant’s hotel (Ramsgate Victoria Hotel). He communicated his offer to the complainant that he wanted to buy shares in the hotel at a certain price. After six months, the complainant accepted the offer. However, by this time, the value of shares had gone down and Mr. Montefiore was no longer interested in buying shares. The defendant did not formally revoke the offer, but he did not proceed with the sale. The Complainant brought an action against the defendant for specific performance of contract. The Court passed an order in favour of the defendant. The Court held the company’s claim for specific performance was not successful because the Company had sufficient time to accept the defendant’s offer. Six months was sufficient time to accept an offer. The company accepted the offer after six months so, it was no longer valid due to expiry / lapses of a reasonable period of time. The Court was of the view that an offer must be accepted within the prescribed time and if a time is not prescribed, then it must be accepted within a reasonable period of time.

In Dickinson v Dodds, case, on 10th June Dodds offered to sell house to Dickinson, stating: this offer to remain open until 9.00am on 12th June. Dickinson decided to accept on 11th June but did not advise Dodds immediately. Later on the 11th, Dickinson was informed by a third party that Dodds had sold to someone else. Dickinson then purported to accept the offer. Dodds replied that it was too late – the property had already been sold. The Court held that no particular form of revocation is required. All that is required is that the offeror in some way conveys (directly or indirectly) to the offeree that s/he had changed his or her mind about the offer. There was no question that this had occurred here – Dickinson knew Dodds was no longer prepared to sell before purporting to accept. The promise to keep the offer open was not binding because it was not supported by consideration.

Termination of Offer by Condition:

An offer which expressly provides that it is to terminate on the occurrence of some condition cannot be accepted after that condition has occurred; and such a provision may also be implied. In other words, termination of an offer may also occur due to a condition not being met.

In Financings Ltd v Stimson, [1962] 3 All ER 386 case, the parties entered into a hire-purchase agreement for a car. The claimant, a finance company, gave the dealer authority to draw up the agreement on its behalf. That agreement stated that it would only be binding on the claimant once the claimant had signed and accepted it. Two days later, before the claimant signed the agreement, the defendant informed the dealer that he no longer wanted to go through with the agreement. The night before the claimant signed the agreement, the car was stolen from the dealer. By the time the car was found, it had been damaged. The claimant sued the defendant for the price of the car, minus a deduction for the value of the damage. The defendant then argued that he was not obliged to pay, because he had revoked his offer before the claimant signed the agreement. The Court of Appeal held in favour of the defendant. The dealer acted as the claimant’s agent. In that capacity, he had ostensible authority to accept the defendant’s revocation of the offer. Since the claimant had to sign the contract to accept the offer, and they had not done so before the offer was revoked. Therefore, there was no contract. Additionally, the Court held that the offer was conditional on the car being in the condition it was when the offer was made. As such, even if the offer had not already been revoked, it was no longer capable of being accepted once the car was damaged.

Termination of Offer by Operation of Law

If there is no option contract, death or incapacitation of either party prior to acceptance will terminate the offer. It does not need to be communicated to the other party either. Death and incapacity do not terminate irrevocable offers. If the laws change prior to acceptance of the offer, the law will terminate the offer because it would become a void contract. In the event that the subject matter of the offer is destroyed prior to acceptance, this constitutes termination of the offer as well.

Termination of Offer by Death or Mental Incapacity:

The right to accept an ordinary offer is not transferable. Thus, the death of either the offeror or the offeree will cause termination of the offer. The unaccepted offer of a deceased person cannot be converted into a contract binding upon his estate.

In Raja of Bobbili v. A. Suryanarayana Rao, (1919) 42 Mad 776 case, an auction sale was held by the Court, the bid was subject to its sanction or acceptance by the Court but before the Court could accept it, the bidder died and it was held that on the death of the bidder his bid stood revoked.

In Reynolds v Atherton, (1922) 127 LT 189 case, the claimant were a firm of cotton brokers. They acted under a brokerage contract with the defendant, a cotton spinning company. In order to renew their contract, the claimant purchased various shares in the defendant. In 1911, the claimant wrote the company a letter addressed to the directors. It stated that the claimants were willing to transfer their shares, while they remained the defendant’s broker. The defendant acknowledged the letter but did not respond until 1918. By that time, the shares had risen considerably in value and the composition of the defendant’s board of directors had changed. Three directors had also died. The defendant sent a letter purporting to accept the claimant’s offer on behalf of the directors who had run the company in 1911 (including the estates of those who had died). The claimant sought a declaration that there was no enforceable contract. The House of Lords held in favour of the claimant. The claimant had made their offer to the board of directors as an entity, whose composition might change. They had not made the offer to the particular directors who ran the company in 1911. The defendant’s letter had therefore not properly accepted the offer.

Termination of Offer by Acceptance:

Once the offer was accepted by the offeree, the contract is formed and brought the offer to an end. It can be made either orally, in writing, or by the implication of conduct when they are received by the offeror.

In Felthouse v Bindley, (1862) EWHC CP J35 case, the complainant, Paul Felthouse, had a conversation with his nephew, John Felthouse, about buying his horse. After their discussion, the uncle replied by letter stating that if he didn’t hear anymore from his nephew concerning the horse, he would consider acceptance of the order done and he would own the horse. His nephew did not reply to this letter and was busy at auctions. The defendant, Mr Bindley, ran the auctions and the nephew advised him not to sell the horse. However, by accident he ended up selling the horse to someone else. The Court held that there was no contract for the horse between the complainant and his nephew. There had not been an acceptance of the offer; silence did not amount to acceptance and an obligation cannot be imposed by another. Any acceptance of an offer must be communicated clearly. Although the nephew had intended to sell the horse to the complainant and showed this interest, there was no contract of sale. Thus, the nephew’s failure to respond to the complainant did not amount to an acceptance of his offer.

Illegality:

Finally, a change in the law which makes a potential contract illegal will terminate an offer, since courts will not enforce an illegal contract.

Conclusion:

Termination of an offer is not the same as contract termination. In the case of termination of an offer, the contract was not fully formed. Termination of an offer ends the power of the offeror to perform. A termination of offer can only be terminated prior to the offeree accepting it. It can happen by one of the party’s actions or operation of law.

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Q1. What is a Contract? Mention any three essential elements a valid contract?

A contract is an agreement which is enforceable by law. Hence, when we use word ‘contract’ it satisfies all legal requirement. Hence the word “Void contract” is wrong. It should be “void agreement”. Thus, contracts can only be valid or voidable. Section 10 of the Indian Contract Act – 1972 defines the criteria of valid contracts.

An agreement is a contract if satisfies all the following criteria

1. The agreement should be by the free consent (free from coercion, undue influence, misrepresentation, mistake or fraud) (section 13 to 22)
2. The parties involved in the contract are competent. (Section 11 and 12)
3. The agreement is for a lawful consideration and a lawful object. (Section 23 to 25)
4. It is not an agreement expressly declared to be void. Social, moral and religious agreements are void with respect to contract. (Section 26 to 30)
5. The agreement should be legally enforceable.

If any of this condition is not satisfied it is a void agreement and not a contract.

Q2. Define Proposal. Mention any three essentials of a valid Proposal.

The term “proposal” of the Indian Contract Act is synonymous to the term “Offer” in English law. Section 2(a)of the Indian Contract Act, 1872 defines proposal as “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 person making proposal/offer is called the proposer/offeror and the person to which the proposal is made is called propose or offeree.

Essential Elements of an Offer / A Proposal:

• There must be two parties.
• The offer must be communicated to the offeree.
• The offer must show the willingness of offeror.
• The offer must be made with a view to obtaining the assent of the offeree.
• An offer may involve a positive act or abstinence by the offeree.
• A mere expression of willingness or expression made jokingly or desire does not constitute an offer.

Q3. Define Acceptance. Mention any three essentials of a valid Acceptance.

A contract comes into being from the acceptance of an offer. Section 2(b) of the Act defines acceptance as follows: “When the person to whom the offer is made signifies his assent thereto, the proposal is said to be accepted”. The acceptance of the offer must be absolute and unqualified i.e. it cannot be conditional.

1. It must be absolute and unqualified.
2. The Acceptor must in indicate an intention to fulfill the promise.
3. It must be communicated:
4. It must be in the mode prescribed:
5. Silence cannot be prescribed as a mode of acceptance:
6. It must be given within the time stipulated or within a reasonable time if time is not mentioned.
7. Acceptance and its communication must be made by the offeree or his authorized agent.
8. If the proposal is made through an agent, it is sufficient if the acceptance is communicated to him.

Q4. Mention any three types of Offers.

• Express Offer: When the offer is made by express communication then the offer is said to be an express offer. The express offer can be made face to face or via telephone. The express offer in written format can be made via text messages, advertisements, letters or e-mail.
• Implied Offer: when the offer is not communicated expressly but communicated by conduct or by the circumstances of the case, then offer is called an implied offer. When we are waiting for a bus to go to a certain place, the bus which can take us to the place where we desire to go arrives and halts at the bus stop. We enter the bus and pay requisite fair. A ticket is given to us. When destination comes, we board down the bus. The bus halts at the stop. By this conduct, he is giving an offer to us. By entering the bus, we accept the offer. Thus, acceptance is also by conduct. Such offers are implied offers.
• Special Offer: Special offer means an offer made to (a) a particular person or (b) a group of persons. It can be accepted only by that person to whom it is made. communication of acceptance is necessary in case of a specific offer. ‘A’ offers to buy a car from B for Rs 10 Lakh. Thus, a specific offer is made to a specific person, and only B can accept the offer. Communication from B for acceptance or rejection is necessary.
• General Offer: General offer means an offer which is made to the public in general. A General offer can be accepted by anyone. If offeree fulfills the terms and conditions which are given in offer then offer is accepted. Communication of acceptance is not necessary in the case of a general offer
• Cross Offer: When two parties exchange identical offers in ignorance at the time of each other’s offer the offers are called cross offer. Two cross offers do not constitute a contract. In the cross offer, the offers are made by the same parties to one another, each party not knowing about the offer made by the other party.  The terms and conditions contained in cross offers are the same. Note that in this case, both are offeror and same time offerree.
• Counter Offer: When the offeree gives a qualified acceptance of the offer subject to
  modified and variations in the terms of the original offer, then the offer made by the original offeree is called counter-offer. The counter-offer amounts to the rejection of the original offer.
• Standing or Open or Continuous Offer: An offer is allowed to remain open for acceptance over a period of time is known as standing, open or continually offer.

Q5. Mention any three circumstances under which an Offer gets revoked.

The word ‘revocation’ means “taking back”. The Indian Contract Act lays out the rules of revocation of an offer in Section 5. It says the offer may be revoked any time before the communication of the acceptance is complete against the proposer/offeror. Once the acceptance is communicated to the proposer, revocation of the offer is now not possible.

• By Notice of Revocation (S. 6 Clause 1): A proposal is revoked by a proposer by communication of notice of revocation proposal to the propose only before the proposee sends the communication of acceptance.
• By Lapse of Time (S. 6 Clause 2): A proposal is revoked by the lapse of the time prescribed in such proposal for acceptance, or, if no time is prescribed by the lapse of a reasonable time, without communication of the acceptance.
• By Non-Fulfilment of a Condition Precedent to Acceptance (S.6 Clause 3): Sometimes, the offeror may ask the offeree to fulfill certain conditions before acceptance. If the offeree fails to comply with the conditions prescribed in the communication of offer, then offeror can revoke the offer. Thus if these conditions are not fulfilled, the offer lapses.
• By Death or Insanity of the Proposer (S. 6 Clause 4): A proposal can be revoked by death or insanity of the proposer if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. Death of the offeror revokes the proposal and if acceptance is made it has no effect.
• By Counter Offer: When the offeree gives a qualified acceptance of the offer subject to modified and variations in the terms of the original offer, then the offer made by the original offeree is called counter-offer. The counter-offer amounts to the rejection of the original offer.
• By Acceptance not Being Accepted in the Mode Prescribed: If the offeror has prescribed a mode of acceptance, it should be strictly followed by the offeree. If the offer is not accepted in the mode prescribed, the offeror can reject acceptance by giving notice to the offeree within a reasonable time that offer should be accepted in the mode prescribed and not otherwise.
• By Rejection of the Offer by Offeree: An offer also comes to an end when the offeree does not accept it and an offer once rejected cannot be revived again by him.
• Before Fall of Hammer: In an auction sale, a bidder may withdraw his bid at any time before the fall of the hammer (acceptance).

Q 6 Explain the case of Lalman Shukla V/s Gauri Dutt.

In Lalman Shukla v. Gauri Datt (1913) All LJ 489 case ‘A’s nephew has absconded from his home. He sent his servant to trace his missing nephew. When the servant had left, ‘A’ then announced that anybody who has discovered the missing boy would be given the reward of Rs.500. The servant discovered the missing boy without knowing the reward. When the servant came to know about the reward, he asked for the same from ‘A’. ‘A’ refused to give the reward. The servant brought an action against ‘A’ in the court of law to recover the same. But the court held that when the servant discovered the boy, he was not aware of the reward. Thus, the offer was not communicated to him. Hence, he is not liable to get the reward from A.

Essential Elements of an Offer / A Proposal:

• There must be two parties.
• The offer must be communicated to the offeree.
• The offer must show the willingness of offeror.
• The offer must be made with a view to obtaining the assent of the offeree.
• An offer may involve a positive act or abstinence by the offeree.
• A mere expression of willingness or expression made jokingly or desire does not constitute an offer.

Q 7 Distinguish between Void Agreement and Voidable Contract.

Q 8 What is an Invitation to an Offer? Mention two examples of Invitation to Offer.

An offer must be distinguished from an invitation to offer (Invitation to treat by English Law). An invitation to offer is an action inviting other parties to make an offer to form a contract. These actions may sometimes appear to be offers themselves, and sometimes it is very difficult to distinguish between the two. The distinction is important because accepting an offer creates a binding contract while “accepting” an invitation to offer is actually making an offer.

• Invitation for Tenders: An invitation or a request for tenders is a formal, structured invitation to suppliers to submit a bid to supply products or services. Thus, a person may invite tenders for the supply of specific goods or services. Thus, a tender is the response to the request of tenders, and it is an offer.
• Auctions: It is a public sale in which goods or property are sold to the highest bidder. an advertisement for auction is an example of an invitation to offer. In auction sales, the offer proceeds from the bidder, and it is for the auctioneer to accept it or not.  In an auction, the acceptance of the offer is signified by the fall of the hammer. But the offer can be revoked before such acceptance.
• Proposals for Insurance: When a person submits a proposal form to the insurance company, it is an invitation to offer. Now the insurance company gives an offer which is accepted by the person after paying the premium. After paying the premium the contract is concluded. Once the premium is paid, it is immaterial that the insurance company has issued the policy or not.

Q 9 Mention any three Exceptions to the general rule No Consideration No Contract.

Consideration is an integral part of a contract. The rules of consideration state that it is essential to have consideration for a contract. But there are some specific exceptions to the “No consideration no contract” rule. Section 25 lists the exceptions under which the rule of no consideration no contract does not hold, as follows:

• Natural Love and Affection: If an agreement is in writing and registered between two parties in close relation (like blood relatives or spouse), based on natural love and affection, then such an agreement is enforceable even without consideration.
• Past Voluntary Services: If a person has done a voluntary service in the past and the beneficiary promises to pay at a later date, then the contract is binding provided: the service was rendered voluntarily in the past, it was rendered to the promisor, the promisor was in existence when the voluntary service was done (especially important when the promisor is an organization), the promisor showed his willingness to compensate the voluntary service
• Promise to pay a Time-Barred Debt: If a person makes a promise in writing signed by him or his authorized agent about paying a time-barred debt, then it is valid despite there being no consideration. The promise can be made to pay the debt wholly or in part.
• Creation of an Agency: According to section 185 of the Indian Contract Act, 1872, no consideration is necessary to create an agency.
• Gifts: The rule of no consideration no contract does not apply to gifts. Explanation (1) to Section 25 of the Indian Contract Act, 1872 states that the rule of an agreement without consideration being void does not apply to gifts made by a donor and accepted by a donee.
• Bailment: Section 148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods from one person to another for some purpose. This delivery is made upon a contract that post accomplishment of the purpose, the goods will either be returned or disposed of, according to the directions of the person delivering them. No consideration is required to effect a contract of bailment.
• Charity: If a person undertakes a liability on the promise of another to contribute to charity, then the contract is valid. In this case, the no consideration no contract rule does not apply.
• Remission: Sec. 63 of the Indian Contract Act, 1872 lays down that where a person agrees to receive less than what is due to him, such an agreement is said to be an agreement of remission. No consideration is required for a contract of remission.
• Guarantee: Sec. 127 of the Indian Contract Act, 1872 lays down that under the contract of guarantee, no consideration is received by the surety, even then the contract of guarantee is valid.

In Rajlakhi Debi v. Bhootnath Mukerjee case (1900) 4 Cal WN 488, a husband promised to pay to his wife, after constant quarrels between them, a fixed monthly amount for her maintenance and separate residence without any consideration. The promise was in writing and registered When he refused to pay, the wife filed a case. She was not allowed anything by court on the ground that the exception was not applicable as there was no natural love left between them.

Q 10 What is Doctrine of Privity of Contract? Mention any one exception to it.

The Indian Contract Act clearly states that there cannot be a stranger to a contract. It means any third party which is not a part of the contract for breach of contract. There are some exceptions. These exceptions are explained through the Doctrine of Privity of a Contract.

In general, from the Indian Contract Act, a contract creates rights and obligations only between the parties to the contract. A third party neither acquires a right nor any liabilities under such contract i.e. the law does not allow a stranger to file a suit on the contract. This right is available only to a person who is party to the contract. This is what the proclaimed doctrine of “privity of contract”

Example: A has borrowed some money from B. A owns property and decides to sell it to C. C promises to pay B on behalf of A. However, if C fails to pay, then B cannot sue C since C is a stranger to the contract between A and B.

The doctrine of Privity has exceptions which allow a stranger to enforce a Contract through an agent.

• Trust: This is the most common exception to the doctrine of privity of contract. If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.
• Family Settlement (Marriage/Partition): If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract.
• Contract Through Agent: If a person enters into a contract through an agent, where the agent acts within the scope of his authority and in the name of the person (principal). In this case, the principal gets rights and obligations under contracts entered through agent provided agent acts within the authority and on behalf of the principal.
• Acknowledgment or Estoppel: If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment can also be implied.
• A Covenant running with the Land: When a person purchases a piece of land with the notice that the owner of the land will be bound by all duties and liabilities affecting the land, then he can sue upon a contract between the previous land-owner and a settler even if he was not a party to the contract.

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Guarantee is an undertaking to answer for another’s liability and collateral thereto. It is a collateral undertaking to pay the debt of another in case he does not pay it. It is a provision to answer for the payment of some debt, or the performance of some duty in the case of failure of some person who, in the first instance, is liable for such payment or performance. A Contract of Guarantee means a contract to perform the promises made or discharge the liabilities of the third person in case of his failure to discharge such liabilities.

The words surety and guarantor are used as synonymous terms in Indian law and English Law. But in American law, guarantee is distinguished from suretyship in being a secondary, while suretyship is a primary, obligation; or, as sometimes defined, guarantee is an undertaking that the debtor shall pay; suretyship, that the debt shall be paid. A surety differs from a guarantor, who is liable to the creditor only if the debtor does not meet the duties owed to the creditor; the surety is directly liable. While a surety’s liability begins with that of the principal, a guarantor’s liability does not begin until the principal debtor is in default.

Section 126 of the Indian Contract Act defines four terms as under:

126. ‘Contract of guarantee’, ‘surety’, ‘principal debtor’ and ‘creditor’

A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor’. A guarantee may be either oral or written.

Thus, if A says to B, “Lend Rs. 4,000 to C for one year at interest 12 p.c.p.a. If he does not pay this amount with interest at the end of 1 year, I shall pay it to you.” This is a contract of guarantee.

It involves three parties namely,

1. Surety, who gives the guarantee. In the above example, A is a surety
2. Principal Debtor, in respect of whose default the guarantee is given. In the above example, C is the principal debtor.
3. Creditor, to whom the guarantee is given. In the above example, B is a creditor.

Thus three parties are involved in a contract of guarantee. At the same time, there are three collateral contracts also namely,

1. As between B and C [B is giving term loan to C who promises that he would pay].
2. As between B and A [A gives a guarantee that on default on part of C, I will pay].
3. As between A and C [C indemnifies A in case of C’s default in paying the amount to B).

Essential Elements of Contract of Guarantee:

Should be valid contract:

A contract of guarantee must have all the essentials of a valid contract such as offer and acceptance, intention to create a legal relationship, capacity to contract, genuine and free consent, lawful object, lawful consideration, certainty and possibility of performance and legal formalities.

Concurrence of three parties must:

In a contract of guarantee there must be three parties namely, the principal debtor, the creditor and the surety.  In such contract, the surety undertakes his obligation at the request (express or implied) of the principal debtor. All of them must agree to make such a contract.

Written or Oral Contract:

A contract of guarantee may either be oral or written. It may be express or implied from the conduct of parties. Contracts of guarantee have to be interpreted taking into account the relative position of the contracting parties in the backdrop of the contract. The court has to consider all the surrounding circumstances and evidence to come to a finding when the guarantor refutes his liability. It is to be noted that under English Law (the Statute of Frauds (29 Car. II, c.3) Section 4), a Contract of Guarantee must always be in writing.

In P. J. Rajappan v Associated Industries (P) Ltd [1990 (1) All India Banking Law Judgments 321], the guarantor, having not signed the contract of guarantee, wanted to wriggle out of the situation. He contended that he did not stand surety for the performance of the contract. Evidence showed the involvement of the guarantor in the deal, having promised to sign the instrument later. The Kerala High Court held that a contract of guarantee is a tripartite agreement, involving the principal debtor, surety and the creditor. In a case where there is evidence of involvement of the guarantor, the mere failure on his part in not signing the agreement is not sufficient to demolish otherwise acceptable evidence of his involvement in the transaction leading to the conclusion that he guaranteed the due performance of the contract by the principal debtor. When a court has to decide whether a person has actually guaranteed the due performance of the contract by the principal debtor all the circumstances concerning the transactions will have to be necessarily considered. The court cannot adopt a hyper-technical attitude that the guarantor has not signed the agreement and so he cannot be saddled with the liability. Due regard has to be given to the relative position of the contracting parties and to the entire circumstances which led to the contract.

In Mathura Das v Secretary of State (AIR 1930 All 848) and in Nandlal Chanandas v Firm Kishinchand (AIR 1937 Sindh 50), it was held that contract of guarantee can be created either by parol or by a written instrument and that it may be express or implied and may be inferred from the course of the conduct of the parties concerned. There is overwhelming evidence in this case that the second defendant had guaranteed the due performance of the contract by the first defendant, principal debtor. Hence the mere omission on his part to sign the agreement cannot absolve him from his liability as the guarantor.

Liabilities must legally enforceable:

In a contract of guarantee, liability of the surety is secondary i.e., the creditor must first proceed against the debtor and if the latter does not perform his promise, then only he can proceed against the surety. A contract of guarantee pre-supposes the existence of a liability, which is enforceable at law. If no such liability exists, there can be no contract of guarantee. If the debt, which is sought to be guaranteed is already time barred or void, the surety is not liable.

In Manju Mahadev v Shivappa (1918) 42 Bom. 444 case, the Court observed “The word ‘liability’ in Section 126 of the Indian Contract Act, 1872, means a liability which is enforceable at law, and if that liability does not exist, there cannot be a contract of guarantee. A surety, therefore, is not liable on a guarantee for payment of a debt which is statute-barred.”

In Coutts & Co v Brown Lecky and others [1946] 2 All E.R. 207 court held that to be legally effective a guarantee must be given for debt which is enforceable. If the debt is not enforceable, the guarantee will not be enforceable. Thus a minor not being answerable for a debt he incurs, a guarantee for such debt is likewise void.

In State of Maharashtra v Dr. M. N. Kaul, AIR 1967 SC 1634 case, the Supreme Court held that under the law, a guarantor cannot be made liable for more than he has undertaken; a surety is a favoured debtor and he can be bound “to the letter of his engagement”.

Consideration:

There must be consideration between the creditor and the surety so as to make the contract enforceable. The consideration must also be lawful. Section 127 of the Contract Act provides that anything done, or any promise made, for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee. Thus, any benefit received by the debtor is adequate consideration to bind the surety. A past consideration is no consideration for a contract of guarantee. There must be a fresh consideration moving from the creditor.

In Sonarlinga v Pachai Naicken, (1913) 38 Mad 680; 22 IC 1 case, the Court held that consideration is the legal detriment incurred by the promisee at the promisor’s request and it is immaterial whether there is or is not any apparent benefit to the promisor

In Ram Narain v Lt. Col. Hari Singh, AIR 1964 Rajasthan 76 case, the Court held that A contract of guarantee executed after the contract between the creditor and principal debtor and without consideration is void. It must be contemporaneous with the contract of the creditor and principal debtor. The past benefit to the principal debtor is not a good consideration.

In State Bank of India v Premco Saw Mill, AIR 1984 Gujarat 93 case, the State Bank gave notice to the debtor – defendant and also threatened legal action against her, but her husband agreed to become surety and undertook to pay the liability and also executed a promissory note in favour of the State Bank and the Bank refrained from threatened action. It was held that such forbearance on the bank’s part constituted good consideration for a guarantor.

Disclosure:

The creditor should disclose to the surety the facts that are likely to affect the surety’s liability. The guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is invalid if the creditor obtains it by the concealment of material facts.

In Muthukaruppa v Kathappudayan (1914) 27 MLJ 249 case, the Court held that The mere fact that A lends money to B on the recommendation of C is no consideration for a subsequent promise by C to pay the money in default of B.

No Misrepresentation:

The guarantee should not be obtained by misrepresenting the facts to the surety.

Difference Between Contract of Indemnity and Contract of Guarantee:

Indian Legal System > Civil Laws > Indian Contract Act, 1872 > Section 126: Contract of Guarantee

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Section 125 of the Indian Contract Act lays down the three important rights of indemnity holder

Section 125.   Rights of indemnity-holder when sued.

The promise in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor—

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the promisee/ the indemnified/ indemnity-holder against the promisor/ indemnifier, provided he has acted within the scope of his authority.

Right to recover damages paid in a suit [Section 125(1)]:

When a third party lays down a claim against the indemnity holder, it is well established the duty to pay the latter arises for the indemnifier at the first place. The damages would definitely be the end result of the total liability that the indemnity holder had to carry.

The logical principle is that a person who had acted on the faith of another party should be indemnified.  An indemnity-holder has the right to recover from the indemnifier all damages which he may be compelled to pay in any suit in respect of any matter covered in the contract of indemnity.

In Parker v. Lewis, (1873) 8 Ch App 1035 case, the logical principle of providing the indemnity to a person who had acted on the faith of another party is upheld. The Court laid down that it would be obvious for the person indemnified, who has altered his position and faced action for that action, to be indemnified and be protected by the third party. Once a suit is decided against the indemnified and he, being the judgment debtor, pays the money to the judgment creditor, or, when in a compromise, he prudently settles the dispute by paying the damages; indemnifier becomes absolutely liable to indemnify him (i.e. the decree becomes conclusive for the purpose of invoking indemnity), notwithstanding that the suit could have been brought or could have been appealed against. Also, if the indemnifier trusts indemnified to further appeal against the judgment, he will still be liable to pay under the indemnity contract to the indemnified, if the latter had paid the decreed amount under the previous suit. It is only if indemnified finally wins the case, shall the judgment debtor will pay the decreed amount to the indemnifier.

In Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457 case, the Court held that the suit, in which the indemnified is roped in, has a binding effect on the indemnifier in terms of its final result, even though he was not a party to the contract. This is not an exception to the rule of res judicata rather; it is so because the claim against which the indemnification had been promised has been conclusively established.

In Gokuldas v. Gulab Rao, AIR 1926 Nag 108 case, the Court held that the indemnifier cannot plead that he was not a party to a dispute hence the result should be implemented upon him.

In Nallappa Reddi v. Vridhachala Reddi, (1914) 37 Mad 270 case, the Court held that the indemnifier cannot escape from the responsibility of providing the damages to the indemnified.

In Anwar Khan v. Gulam Kasam, AIR 1919 Nag 126 case, the Court held that the measure of damages would depend upon the extent to which the person has been indemnified, if more than the amount, the indemnifier may refuse as well.

Right to recover costs incurred in defending (Section 125(2)): 

When pursuing a suit, in which the purpose or the action of the indemnity is being involved, the indemnity holder is being provided with the statutory right to claim costs as well with the damages from the indemnifier provided they are reasonable.

An indemnity-holder has the right to recover from the indemnifier all incidental costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit.

In Pepin v. Chunder Seekur Mookerjee, (1880) ILR 5 Cal 811 case, the Court held that the expenses do arise while reducing or ascertaining or resisting the claim. Hence, the cost of such a nature can be recovered.

In Gopal Singh v. Bhawani Prasad, (1888) ILR 10 All 531 case, the Court held that only those costs would be recoverable that are supposed to be incurred by a prudent man.

Right to recover sums paid under compromise )Section 125 (3)):

This is similar to previous right, but it arises in the case of compromise. An indemnity-holder also has the right to recover all amounts from the indemnifier which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

In Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457 case, the court laid down the conditions for the claim by the promisee, to be valid. If the indemnity holder genuinely wants the amount to be recovered, certain conditions with respect to the compromise so effected would have to fulfill:

1. The compromise should have been put to effect in a bona fide manner.
2. It has been resolved without any sort of collusion
3. It has not been impeached as an immoral bargain

Right to sue for specific performance:

An indemnity-holder is entitled to sue for specific performance if he has incurred absolute liability and the contract covers such liability. The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor

Rights of Indemnifier:

The rights of the indemnifier have not been mentioned expressly anywhere in the Act. In Jaswant Singh v. Section of State, 14 BOM 299, it was decided that the rights of the indemnifier are similar to the rights of a surety under Section 141 where he becomes entitled to the benefit of all securities that the creditor has against the principal debtor whether he was aware of them or not. Where a person agrees to indemnify, he will, upon such indemnification, be entitled to succeed to all the ways and means by which the person originally indemnified might have protected himself against loss or set up his compensation for the loss.

Indian Legal System > Civil Laws > Indian Contract Act, 1872 > Section 125: Rights of Indemnity Holder

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The distinctive feature of Contract Law, as compared to other branches of law, is that in the former the parties make law for themselves within the broad framework of the Contract Law. The importance of the contract in regulating business and other social and economic relations is so great that Dot only private enterprise, but public enterprise units and the Government have resorted to contract as an instrument of participating in their country’s market economy. In this article, we shall study the meaning of indemnity, the contract of indemnity under the Indian Contract Law, 1872.

Indemnity Under English Law:

The word indemnity means security or protection against a financial liability i.e. it is a security or protection against loss. In a contract of indemnity one party – i.e. the indemnifier promise to compensate the other party i.e. the indemnified against the loss suffered by the other. It is one of the most important forms of commercial contracts. Several industries, such as the insurance industry, rely on these contracts. These contracts basically help businesses in indemnifying their losses and, therefore, reduce their risks. The objective of entering into a contract of indemnity is to protect the promisee against unanticipated losses. Contract of indemnity is really a kind of contingent contract.

The English law definition of a contract of indemnity is – “it is a promise to save a person harmless from the consequences of an act”. Thus it includes within its ambit losses caused not merely by human agency but also those caused by accident or fire or other natural calamities.

In Adamson v. Jarvis, (1827) 4 Bing 66, case, Adamson (the petitioner) was an auctioneer who was given cattle by Jarvis (the defendant) to be sold at an auction. Adamson followed the instructions and sold the cattle. But Jarvis was not the owner of the cattle. The real owner of the cattle sued Adams for conversion and was successful. Adamson had to pay damages and he then sued Jarvis to be indemnified for the loss that he suffered by way of damages to be paid to the real owner. The Court held that Adamson carried out Jarvis’s instructions and was entitled to presume that if anything went wrong as per instructions, he would be indemnified. Jarvis was ordered to pay damages to Adams.

In Betts v. Gibbins, (1834) 2 Ad. & E. 57, case the Court held that an undertaking or promise to indemnify may be implied.

In Toplis v. Grane, 5 Bing. N. C. 636 case, Tindal C.J. observed that when an act has been done by the plaintiff under the express directions of the defendant which occasions an injury to the rights of third persons, yet if Such an act is not apparently illegal in itself but is done honestly and bona fide in compliance with the defendant’s directions, he shall be bound to indemnify the plaintiff against the consequences thereof.

In Dugdale v Lovering, (1875) LR.10 CP196 case,  the plaintiffs were in possession of certain trucks, which were claimed by the defendant, and also by the proprietors of the K. P. Colliery. A correspondence took place between the plaintiffs and the defendant, in which the plaintiffs asked for an indemnity if they should deliver up the trucks to the defendant. The defendant, without giving any answer as to the indemnity, wrote requiring the plaintiffs to send the trucks back to him, which they thereupon did. The K. P. Colliery proprietors then brought an action against the plaintiffs for the conversion of the trucks, and their claim proving well-founded, the plaintiffs were obliged to pay a sum of money, in settlement of the action, which they sought to recover from the defendant upon a contract of indemnity. The Court held that the doctrine laid down in Betts v. Gibbins, (2 Ad. & E. 57) and Toplis v. Grane (5 Bing. N. C. 636), that there was, under the circumstances of the case, evidence of implied promise.  The Court also held that the principle upon which in such cases a contract of indemnity is implied is not confined to cases of principal and agent, or employer and employed

In Sheffield Corp. v. Barclay, 1905 AC 392 case, a corporation, having registered a transfer of stock on the request of the banker, was held entitled to recover indemnity from the banker when the transfers were discovered to be forged.

In Starkey v. Bank of England, (1903) AC 114 (HL) case, a stockbroker innocently acted upon the power of attorney on which one out of three signatures were forged. The court allowed the bank to recover indemnity from an agent who presented the document.

Indeminity Under the Indian Contract Act:

Section 124 of the Indian Contract Act defines a contract of immunity.

Section 124: “Contract of indemnity” defined

A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”.

Illustration

A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

Section 124 starts with the word ‘contract’, hence the contract of immunity should have all the ingredients of a valid contract. There are generally two parties in indemnity contracts.   The person who gives the indemnity is called an ‘indemnifier’ and the person for protection it is given is called ‘indemnity holder’ or said to be ‘indemnified’.

For example, X promises to deliver certain goods to Y for Rs. 20,000 every month. Z comes in and promises to indemnify Y’s losses if X fails to so deliver the goods. This is how Y and Z will enter into contractual obligations of indemnity. In this case Z is indemnifier and Y is indemnity holder.

It is kind of contingent contract whereby one promises to save another harmless from the result of the conduct of the promisor or of any other person. Hence to invoke contract of indemnity, there must be a loss to promise.

Compare to English definition of ‘indemnity’, the Indian definition is narrower. The English definition of indemnity is wide enough to include a promise of indemnity against loss arising from any cause whatsoever, e.g., loss caused by fire or by some other accident. Thus as per this definition every contract of insurance, other than life insurance, is contract of indemnity. As per Section 124 of the Act the loss must have been caused either by the conduct of the promisor or any other person, it does not include loss caused by natural factors, not involving human factors.

Essential Elements of Contract of indemnity:

• It should be a valid contract. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them. 
• There should be two parties to such a contract. There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder.
• It is a promise to compensate for or security against damage, loss or injury. The loss may be caused due to the conduct of the promisor or any other person.
• Every contract of insurance, other than life insurance, is a contract of indemnity.
• It is not a collateral but an independent contract.
• It is a tool for allocating risks contingent liability.
• To activate the contract of indemnity, the loss to promise is essential.
• The contract of indemnity may be express (i.e. made by words spoken or written) or implied (i.e. inferred from the conduct of the parties or circumstances of the particular case).
• Consideration and objects of such contract must be lawful.
• Indemnity clauses, amongst other things, in such contract must be clear, specific, where possible stipulate the circumstances under which the indemnity will arise

Enforcement of Contract of Indemnity:

• A contract of indemnity can be enforced according to its terms and measure of damages could be up to the extent to which the promisee has been indemnified
• Claim of Indemnity holder can include: damages, legal costs of adjudication, amount paid under the terms of compromise.
• Indemnifier should ideally be informed of the legal proceedings or should be joined as third party.
• There is no onus to show breach or actual loss.

In Gajanan Moreshwar Parelkar V. Moreshwar Madan Mantri, AIR 1942 Bom 302 case, the plaintiff transfers a plot of land to BMC and BMC agreed to keep the plot on lease for 999 years. Now the defendant wanted to construct a building on the piece of land and the owner allowed to do so. Now the plot was in the possession of the defendant but the owner was the plaintiff. Construction materials were supplied by a Keshavdas Mohandas. At one point of time, there was a due of Rs. 5000 but the defendant was unable to pay. So the defendant requested the plaintiff to a mortgage. So the property was mortgaged to Keshavdas Mohandas and as a result, now Rs5000 and 10% interest were payable. Again Rs. 5000 was demanded on supply by Keshavdas Mohandas. The defendant requested now on the same property charge was put to Keshavdas Mohandas. A date was set for the return of the principal amount. The defendant had agreed to pay the principal amount, the interest and to get the mortgage deed released before a certain date. Now the property was too transferred to the plaintiff, but the title deed was with Keshavdas Mohandas and he did not give. The owner now sued for indemnity as he wanted title deeds as consideration for land transfer. The Stance of the Defendant was that the plaintiff had suffered no loss and thus could not claim anything under Sections 124 and 125. The Court held that an indemnity holder has rights other than those mentioned in the Sections above. If the indemnity holder has incurred a liability and the liability is absolute, he can turn to the indemnifier to take care of the liability and pay it off. Thus, the plaintiff was entitled to be indemnified by the defendant against all liability under the mortgage and deed of charge.

In K.P Ram Kuppam Chettiar v. Sp. Ram swami Chettiar, AIR 1946 Mad 472 case, the Madras High Court laid down the principle that if an act done by A at the request of B which is not apparently tortuous to the knowledge of A but turns out to be injurious to right of C and A is held liable to pay C, A is entitled to be indemnified by B.

Indian Legal System > Civil Laws > Indian Contract Act, 1872 > Section 124: Contract of Indemnity

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In contract proposal and acceptance of proposal are important ingredient. In last few articles, we have discussed, proposal, types of proposal, revocation of proposal. In this article, we shall discuss the communication of acceptance.

Section 2(h) of the Indian Contract Act , 1872, defines the term ‘Contract’ as “An agreement enforceable by law is a contract.” Section 2(e) of the Act defines the term “agreement’ as “Every promise and every set of promises, forming the consideration for each other, is an agreement.”

The term ‘Proposal’ is defined under Section 2(a) of the Act as “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.”

Section 2(b) of the Act defines the term ‘Promise’ and and 2 (c) of the Act defines the terms ‘Promisor’ and ‘Promisee’. According to Section 2(b) of the Act, When a 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; According to Section 2(c) of the Act, the person making the proposal is called the “promisor”, and the person accepting the proposal is called “promisee”,

A contract comes into being from the acceptance of an offer. Section 2(b) of the Act defines acceptance as follows: “When the person to whom the offer is made signifies his assent thereto, the proposal is said to be accepted .” The acceptance of the offer must be absolute and unqualified i.e. it cannot be conditional. Sections 7 and 8 lay down criteria of valid acceptance.

Section 3:Communication, acceptance and revocation of proposals:

The communication of proposals the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.

Section 4: Communication when complete:

The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.

The communication of an acceptance is complete,—

as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor;

as against the acceptor, when it comes to the knowledge of the proposer.

The communication of a revocation is complete,—

as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it;

as against the person to whom it is made, when it comes to his knowledge.

Illustrations

a) A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter.

(b) B accepts A‟s proposal by a letter sent by post. The communication of the acceptance is complete, as against A when the letter is post; as against B, when the letter is received by A.

(c) A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched. It is complete as against B when B receives it. B revokes his acceptance by telegram. B‟s revocation is complete as against B when the telegram is despatched, and as against A when it reaches him.

Communication of Acceptance:

Section 4 para 2 of the Indian Contract Act lays down conditions for communication for acceptance. In section 4 para 1 lays down that the communication of offer is completed when it comes to the knowledge of the person to whom it is made. Similarly, the acceptance by the offeree needs to be communicated to the offeror. This is important because, the promisor can always revoke his or her offer before there is an acceptance, but not after.

In case of a specific offer, it is made to a specific person, and only that person or his agent can accept the offer. Communication from acceptor or his agent for acceptance or rejection is necessary. In the case of a general offer, it is made to the public in general. A General offer can be accepted by anyone. If offeree fulfills the terms and conditions which are given in offer then offer is accepted. Communication of acceptance is not necessary in the case of a general offer

The Section 4 para 2 of the Act lays down that the communication of an acceptance is complete:- as against the proposer, when it is put in the course of transmission to him, so as to be out of the power of the acceptor to withdraw, and as against the acceptor, when it comes to the knowledge of the offeror.

In Ram Das Chakrabarti v. Cotton Ginning Co. Ltd. ILR (1887) 9 All 366 case the Court held that the offeror becomes bound when a properly addressed and adequately stamped letter of acceptance is posted.

In Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas, AIR 1966 SC 543 case, the Supreme Court made clear the confusion about the completion of the contract by telephone or telex. The majority of judges held that the communication on telephone or telex is like an exception of section 4 and held where a contract is made by telephone, the contract is complete only when acceptance is received by the proposer. The contract is made at a place where acceptance is received, it means at the place of the proposer.

Mode of Acceptance:

Acceptance can be done in two ways, namely

Communication of Acceptance by words: In this case, communication is initiated via words, whether oral or written. For this communication telephone calls, letters, e-mails, telegraphs, etc. may be used. A written application by a candidate for a post of manager in a written form is an express offer. Confirmation of his appointment with the explanation of terms of employment by the vice president of a company who is authorized to do so by telephone is acceptance of the offer by Act. This mode of acceptance is expressed acceptance.

Communication of Acceptance by Conduct: The offeree can also convey his acceptance of the offer through some action of his, or by his conduct. When we are waiting for a bus to go to a certain place, the bus which can take us to the place where we desire to go arrives and halts at the bus stop. We enter the bus and pay requisite fair. A ticket is given to us. When destination comes we board down the bus. The bus halts at the stop. By this conduct, he is giving an offer to us. By entering the bus we accept the offer. Thus acceptance is also by conduct. This mode of acceptance is implied mode of acceptance.

In Tinn v. Hoffman & Co., (1873) 29 LT 271 case, the defendant wrote to the plaintiff offering to sell a certain quantity of iron at a certain price. On the same day without knowledge the plaintiff wrote to the defendant that he want to buy the same quantity of iron at the same price. The letters crossed in the Post. The plaintiff contended that there was a concluded contract. But the Court held that the defendant were not liable by the simultaneous offers, each made in ignorance of the other. Blackburn J. said “when contract is made between two parties, there is a promise by one in consideration of the promise made by the other, there are two assenting mind, the parties agreeing in opinion and one having promises in consideration of the promise made by the other- there is exchange of promise. But I do not think exchanging offers would , upon the principle, be at all the same thing….. The promise or offer made on each side in ignorance of the promise or offer made on the other side, neither of them can be construed as an acceptance of the other.”

Timing of Acceptance

As against the offeror, the communication of the acceptance is complete when he puts such acceptance in the course of transmission. After this it is out of his hand to revoke such acceptance, so his communication will be completed then. So, the offer of the offeror is deemed to be accepted the moment the offeree has transmitted the acceptance to the offeror and there is no possibility for him to retract it, even before the offeror has received it or comes to know about it.

As against the offeree, the communication in case of the acceptor is complete when the proposer acquires knowledge of such acceptance. For the offeree, the acceptance is considered to be communicated to the offeror only when the offeror has received it and come to know about it. An offeror cannot stipulate in the offer that silence or no communication will deem to be an acceptance.

Understanding the TimeLine of Communication of Acceptance:

A of Agra by a letter to B of Bhatinda offers his car for ₹ 2,00,000 through by a letter dated on 15^th August 2017. B receives the offer letter on 17^th August 2017. Now the communication of offer is complete on 17^th August 2017. B writes a letter of the acceptance to A on 20^th August 2017 and posts it on the same day. A receives the letter of acceptance on 22^nd August 2017. The communication of acceptance is done by B on 20^th August 2017. Now the control of letter of acceptance is not with B. Thus for B the communication of acceptance is completed on 20^th August 2017and for A the communication of A is completed on 22^nd August 2017.

In Ramsgate Victoria Hotel v Montefiore, (1865-66) LR 1 Ex 109 case, the defendant, Montefiore wanted to buy shares in the complainant’s hotel (Ramsgate Victoria Hotel). He communicated his offer to the complainant that he wanted to buy shares in the hotel at a certain price. After six months, the complainant accepted the offer. However, by this time, the value of shares had gone down and Mr. Montefiore was no longer interested in buying shares. The defendant did not formally revoke the offer, but he did not proceed with the sale. The Complainant brought an action against the defendant for specific performance of contract. The Court passed an order in favour of the defendant. The Court held the company’s claim for specific performance was not successful because the Company had sufficient time to accept the defendant’s offer. Six months was sufficient time to accept an offer. The company accepted the offer after six months so, it was no longer valid due to expiry / lapses of a reasonable period of time. The Court was of the view that an offer must be accepted within the prescribed time and if a time is not prescribed, then it must be accepted within a reasonable period of time.

In Dickinson v Dodds, (1876) 2 Ch D 46 case, on 10th June Dodds offered to sell house to Dickinson, stating: this offer to remain open until 9.00am on 12th June. Dickinson decided to accept on 11th June but did not advise Dodds immediately. Later on the 11th, Dickinson was informed by a third party that Dodds had sold to someone else. Dickinson then purported to accept the offer. Dodds replied that it was too late – the property had already been sold. The Court held that no particular form of revocation is required. All that is required is that the offeror in some way conveys (directly or indirectly) to the offeree that s/he had changed his or her mind about the offer. There was no question that this had occurred here – Dickinson knew Dodds was no longer prepared to sell before purporting to accept. The promise to keep the offer open was not binding because it was not supported by consideration.

In Byomkesh Banerjee v. Nani Gopal Banik, AIR 1987 Cal 92 case, A letter of allotment of shares was claimed to have been posted by a company, but the applicant denied to have received it. The Court said: “It follows from S. 4 and S. 5 that a notice of allotment, which is acceptance of the offer to purchase shares, is communicated to the allottee when it is dispatched, and from that moment there is a complete contract with him. Whether or not he receives the letter is absolutely immaterial”. In this case, the company failed to furnish any evidence of the posting of the notice of allotment.

In Financings Ltd v Stimson, [1962] 3 All ER 386 case, the parties entered into a hire-purchase agreement for a car. The claimant, a finance company, gave the dealer authority to draw up the agreement on its behalf. That agreement stated that it would only be binding on the claimant once the claimant had signed and accepted it. Two days later, before the claimant signed the agreement, the defendant informed the dealer that he no longer wanted to go through with the agreement. The night before the claimant signed the agreement, the car was stolen from the dealer. By the time the car was found, it had been damaged. The claimant sued the defendant for the price of the car, minus a deduction for the value of the damage. The defendant then argued that he was not obliged to pay, because he had revoked his offer before the claimant signed the agreement. The Court of Appeal held in favour of the defendant. The dealer acted as the claimant’s agent. In that capacity, he had ostensible authority to accept the defendant’s revocation of the offer. Since the claimant had to sign the contract to accept the offer, and they had not done so before the offer was revoked. Therefore, there was no contract. Additionally, the Court held that the offer was conditional on the car being in the condition it was when the offer was made. As such, even if the offer had not already been revoked, it was no longer capable of being accepted once the car was damaged.

In Hairoon Bibi v. united India Life Insurance Co, AIR 1947 Mad 122 case, where a premium due on a life insurance policy was sent by money order, it was held that the policy had revived from the date of the money order and not from the date of its receipt by the company. The assured having died in the meantime, his widow recovered the proceeds.

Conclusion:

Acceptance, only effective once communicated to the offeror. An offeror can however dispense (expressly or impliedly) with the need for actual communication of the acceptance- by treating the doing of the act as an effective acceptance (unilateral contract). The general rule is that an acceptance must be communicated to the offeror. Until and unless the acceptance is so communicated, no contract comes into existence. The acceptance must be communicated by the offeree or someone authorized by the offeree. If someone accepts on behalf of the offeree, without authorization, this will not be a valid acceptance.

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A proposal is main ingredient of a valid contract. The term “proposal” of the Indian Contract Act is synonymous to the term “Offer” in English law. Section 2(a)of the Indian Contract Act, 1872 defines proposal as “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 person making proposal/offer is called the proposer/offeror and the person to which the proposal is made is called propose or offeree. In this article, we shall discuss types of offer. Section 9 talks of an express offer, express acceptance, implied offer, and implied acceptance. in this article, we shall study revocation of offer.

Communication means imparting or exchanging information by speaking, writing, or using some other medium. Chapter I of the Act deals with the communication, acceptance, and revocation of Proposal. An offer and its acceptance, to be valid must be communicated to the other party. Similarly, the revocation offer should be communicated to the offeree by the offeror.

Section 3: Communication, acceptance and revocation of proposals:

The communication of proposals the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.

Section 5: Revocation of proposals and acceptances:

A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

Illustrations:

A proposes, by a letter sent by post, to sell his house to B.

B accepts the proposal by a letter sent by post.

A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards.

B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.

Section 6: Revocation how made:

A proposal is revoked

(1) by the communication of notice of revocation by the proposer to the other party;

(2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance;

(3) by the failure of the acceptor to fulfil a condition precedent to acceptance; or

(4) by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance.

The word ‘revocation’ means “taking back”. The Indian Contract Act lays out the rules of revocation of an offer in Section 5. It says the offer may be revoked anytime before the communication of the acceptance is complete against the proposer/offeror. Once the acceptance is communicated to the proposer, revocation of the offer is not possible.

Section 3 of the Act, lays down that the communication of proposal, acceptance, and revocation is must. It may be expressed or implied. The express communication can be written, through emails, telegraphic, telephonic, minutes of a meeting, words of mouth or conduct. Thus revocation proposal may be communicated in any way which has the effect of laying before the offeree that there is revocation of the proposal but it should satisfy the criteria given in the Act.

Section 5 para 1 lays down that revocation of offer can be done at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

While Section 4 provides the time at which communication of acceptance and revocation of proposal and acceptance is complete, Section 5 first provides that both proposal and acceptance can be revoked, and secondly gives time before which the right of revocation should be exercised. Section 5 must be read along with Section 4.

Example: A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. A revokes his proposal by telegram. The revocation is complete as against A when the telegram is dispatched. It is complete as against B when B received it.

The revocation of the proposal is complete as against the person (proposer) who makes it when it is put into a course of transmission to the person (proposee) to whom it is made, so as to be out of the power of the person who makes it.  The communication of revocation of Proposal is complete as against the person (offeree) to whom it is made when it comes to his knowledge.

Understanding the TimeLine:

A and B are sitting together on a coffee table. A offers his Car for ₹ 2,00,000 to B. The offer reaches the ears of B, the offer of A is complete. B accepts the offer. Now the revocation of the proposal cannot be done.

A and B are sitting together on a coffee table. A offers his Car for ₹ 2,00,000 to B. The offer reaches the ears of B, the offer of A is complete. B says he requires a week time to think over it. Now the revocation of the proposal can be done by A anytime before B gives his acceptance.

A of Agra by a letter to B of Bhatinda offers his car for ₹ 2,00,000 through by a letter dated on 15^th August 2017. B receives the offer letter on 17^th August 2017. Now the communication of offer is complete on 17^th August 2017. B writes a letter of the acceptance to A on 20^th August 2017 and posts it on the same day. A receives the letter of acceptance on 22^nd August 2017. The communication of acceptance is done by B on 20^th August 2017. Now the control of letter of acceptance is not with B. Thus A has a chance to revoke his offer before the letter of acceptance is being posted by B i.e. before 20^th August 2017. Once the letter of acceptance goes beyond the control of B, the offer cannot be revoked by A.

Methods of Revocation of Offer:

Section 6 of the Act provides the methods by which the proposal can be revoked.

By Notice of Revocation (S. 6 Clause 1): 

A proposal is revoked by a proposer by communication of notice of revocation proposal to the propose only before the proposee sends the communication of acceptance.

A of Agra by a letter to B of Bhatinda offers his car for ₹ 2,00,000 through by a letter dated on 15^th August 2017 and asks B to confirm is acceptance within 7 days of acceptance of letter. B receives the offer letter on 17^th August 2017. B writes a letter of the acceptance to A on 20^th August 2017 and posts it on the same day. A receives the letter of acceptance on 22^nd August 2017. The communication of acceptance is done by B on 20^th August 2017. Now the control of letter of acceptance is not with B. Thus A has a chance to revoke his offer by sending a notice before the letter of acceptance is being posted by B i.e. before 20^th August 2017. Once the letter of acceptance goes beyond the control of B, the offer cannot be revoked by A.

In Nutakki Shesharatanam v. Sub Collecto,r (LA), AIR 1992 SC 131 case, the landowner offering land for acquisition if lump sum price is paid. He withdrew his offer before the Acquisition officer prepares his award of acceptance. The Court held the withdrawal good. Thus the communication of revocation should reach the offeree before the acceptance is out of his power.

In Tenax Steamship C. Ltd. v. Brimness, 1975 QB 929 (CA) case, A notice of withdrawal of ship from charterer’s services was sent by telex and was received by plaintiff’s telex machine during normal business hours, but the plaintiff read the message the next day. The Court held that he was bound by the notice when his machine received it. Thus the notice of revocation shall be deemed to have been served when it reaches the offeree’s address.

By Lapse of Time (S. 6 Clause 2): 

A proposal is revoked by the lapse of the time prescribed in such proposal for acceptance, or, if no time is prescribed by the lapse of a reasonable time, without communication of the acceptance.

A of Agra by a letter to B of Bhatinda offers his car for Rs. 2,00,000 through by a letter dated on 15^th August 2017 and asks B to confirm its acceptance within 7 days of acceptance of letter. B receives the offer letter on 17^th August 2017 and fails to communicate the acceptance by 24^th August 2017. As time lapses A can revoke the offer. If time is specified in offer letter a reasonable time should be considered for the period of acceptance.

In Henthorn v. Fraser, (1892) 2 Ch 27 case, The secretary of a building society handed to the plaintiff in the office of the society an offer to sell a property at 750 pounds giving him right to accept within fourteen days. The plaintiff resided in a different town and took away with him the offer to that town. Next day at about 3.50 p.m. he sent by post his letter of acceptance. This letter was received at the society office at 8.30 p.m. But before that at about 1.00 p.m. the society had posted a letter revoking the offer. The revocation and the acceptance crossed in the course of post. The plaintiff received the letter of revocation at 5.30 p.m. The Court held the revocation ineffective.

In Alfred Schonlank v. Muthunya Chetti, (1892) 2 MLJ 57 case, the defendant left an offer to sell a quantity of indigo at the plaintiff’s office allowing him eight days time to give his answer. On the fourth day, however, the defendant revoked his proposal. The plaintiff accepted it on the fifth day. Holding the acceptance to be useless the Madras High Court said: “Both on principle and authority it is clear that in absence of consideration for the promise to keep the offer open for a time, the promise is mere nudum pactum (bare promise).”

In Byrne v Van Tien hoven, [1880] 5 CPD 344 case, Van Tien hoven offered to sell goods to Byrne by letter dated 1st October. Byrne received the letter on 11th October and telegraphed an acceptance on the same day. On 8th October Van Tien hoven posted a letter revoking the offer. This letter was received by Byrne on 20th October. Van Tien hoven refused to go through with the sale. The Court held that to be effective revocation must be communicated. Where post is used for acceptance, acceptance occurs when and where sent (provided it is contemplated as a means of acceptance) (the ‘postal rule’). However, this rule does not apply in relation to revocation of offers – if post is used for revocation, communication is only effective if and when it is received by the offeree. In this case receipt of the revocation occurred after acceptance with the result that there was a contract formed in this case.

In Ramsgate Victoria Hotel v Montefiore, case, the defendant, Montefiore wanted to buy shares in the complainant’s hotel (Ramsgate Victoria Hotel). He communicated his offer to the complainant that he wanted to buy shares in the hotel at a certain price. After six months, the complainant accepted the offer. However, by this time, the value of shares had gone down and Mr. Montefiore was no longer interested in buying shares. The defendant did not formally revoke the offer, but he did not proceed with the sale. The Complainant brought an action against the defendant for specific performance of contract. The Court passed an order in favour of the defendant. The Court held the company’s claim for specific performance was not successful because the Company had sufficient time to accept the defendant’s offer. Six months was sufficient time to accept an offer. The company accepted the offer after six months so, it was no longer valid due to expiry / lapses of a reasonable period of time. The Court was of the view that an offer must be accepted within the prescribed time and if a time is not prescribed, then it must be accepted within a reasonable period of time.

In Dickinson v Dodds, case, on 10th June Dodds offered to sell house to Dickinson, stating: this offer to remain open until 9.00am on 12th June. Dickinson decided to accept on 11th June but did not advise Dodds immediately. Later on the 11th, Dickinson was informed by a third party that Dodds had sold to someone else. Dickinson then purported to accept the offer. Dodds replied that it was too late – the property had already been sold. The Court held that no particular form of revocation is required. All that is required is that the offeror in some way conveys (directly or indirectly) to the offeree that s/he had changed his or her mind about the offer. There was no question that this had occurred here – Dickinson knew Dodds was no longer prepared to sell before purporting to accept. The promise to keep the offer open was not binding because it was not supported by consideration.

By Non-Fulfillment of a Condition Precedent to Acceptance (S. 6 Clause 3): 

Sometimes, the offeror may ask the offeree to fulfill certain conditions before acceptance. If the offeree fails to comply with the conditions prescribed in the communication of offer, then offeror can revoke the offer. Thus if these conditions are not fulfilled, the offer lapses.

A of Agra by a letter to B of Bhatinda offers his car for Rs. 2,00,000 through by a letter dated on 15^th August 2017 and asks B to confirm is acceptance and deposit Rs. 50,000 within 7 days of acceptance of letter. B receives the offer letter on 17^th August 2017 and confirms the acceptance by 14^th August 2017 by telegram. But fails to deposit Rs. 50,000 to A. As the condition of the offer is not satisfied, A has the right to revoke his offer.

entered into a hire-purchase agreement for a car. The claimant, a finance company, gave the dealer authority to draw up the agreement on its behalf. That agreement stated that it would only be binding on the claimant once the claimant had signed and accepted it. Two days later, before the claimant signed the agreement, the defendant informed the dealer that he no longer wanted to go through with the agreement. The night before the claimant signed the agreement, the car was stolen from the dealer. By the time the car was found, it had been damaged. The claimant sued the defendant for the price of the car, minus a deduction for the value of the damage. The defendant then argued that he was not obliged to pay, because he had revoked his offer before the claimant signed the agreement. The Court of Appeal held in favour of the defendant. The dealer acted as the claimant’s agent. In that capacity, he had ostensible authority to accept the defendant’s revocation of the offer. Since the claimant had to sign the contract to accept the offer, and they had not done so before the offer was revoked. Therefore, there was no contract. Additionally, the Court held that the offer was conditional on the car being in the condition it was when the offer was made. As such, even if the offer had not already been revoked, it was no longer capable of being accepted once the car was damaged.

By Death or Insanity of the Proposer (S. 6 Clause 4): 

A proposal can be revoked by death or insanity of the proposer if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. Death of the offeror revokes the proposal and if acceptance is made it has no effect.

In Raja of Bobbili v. A. Suryanarayana Rao, (1919) 42 Mad 776 case, an auction sale was held by the Court, the bid was subject to its sanction or acceptance by the Court but before the Court could accept it, the bidder died and it was held that on the death of the bidder his bid stood revoked.

Other Methods of Revocation of Offer:

By Counter Offer: 

When the offeree gives a qualified acceptance of the offer subject to modified and variations in the terms of the original offer, then the offer made by the original offeree is called counter-offer. The counter-offer amounts to the rejection of the original offer. By the counter-offer following legal effects come into existence (a) Rejection of original offer, (b) The original offer lapses, and (c) A counter offer result is a new offer.

A offered to sell his old car to B for ₹1,00,000. B replied, “I am ready to pay ₹90.000”. On A’s refusal to sell at this price, B agreed to pay ₹1,00,0000. Now A is not bound to sell his car to B at ₹ 1,00,000. Initial offer to sell the car for ₹ 1,00,000 was made by A. B rejected the offer by giving a counter-offer to buy the car at ₹ 90,000. A refused this counter-offer. Now again B is giving a new offer to A to buy the car at ₹ 1,00,000. Thus as offeree, he has the right to accept or reject the new offer by B. Note that a counter-offer amounts to a rejection of the original offer and gives power to offeror to revoke the offer.

In Harvey v.  Facey, ((1893) A. C. 552) case the plaintiffs telegraphed to the defendants, writing, “Will you sell us Bumper Hall Pen? Telegraph lowest cash price”. The defendants replied, also by a telegram, “Lowest price for Pen, £ 900”. The plaintiffs immediately sent their last telegram stating, “We agree to buy Pen for £ 900 asked by you”. The defendants, however, refused to sell the plot of land at that price. The court held that the defendants gave only the lowest price and did not express their willingness to sell the plot of the land. The offer was made by the plaintiff in his last telegram to the defendant which was never accepted by the defendant.

By Acceptance not Being Accepted in the Mode Prescribed: 

If the offeror has prescribed a mode of acceptance, it should be strictly followed by the offeree. If the offer is not accepted in the mode prescribed, the offeror can reject acceptance by giving notice to the offeree within a reasonable time that offer should be accepted in the mode prescribed and not otherwise.

A company selects Mr. M for the post of General Manager and sends him the offer letter and asks him to confirm is acceptance within 7 days of acceptance of its email by email only. B receives the offer letter on and communicates the acceptance to the company by speed post. The communication of offer clearly mentions that the communication should be by email only. Thus the condition of the offer is not satisfied. Hence the offer given can be revoked.

By Rejection of the Offer by Offeree: 

An offer also comes to an end when the offeree does not accepts it and an offer once rejected cannot be revived again by him.

A of Agra by a letter to B of Bhatinda offers his car for Rs. 2,00,000. B rejects the offer. Now B cannot revive it.

In Hyde v. Wrench, (1840) 49 ER 132 case, the defendant(offeror) offered to sell his farm for £1000 but the Plaintiff(offeree) offered him £950 and subsequently rejected the offer. So, the offeree filed the case as the offeror was bind by the contract but it was held that as soon as offeree put the condition the first offer becomes void which means that the offeror is not bounded by the contract as the original offer was rejected by the offeree.

In Stevenson, Jacques v McLean, (1880) 5 QBD 346 case, the defendant possessed several warrants for iron. He wrote the claimant in London asking them if they could find him a buyer. After negotiations, the defendant stated that 40s per ton was the lowest price he was willing to sell for. He told the claimant that this offer was open until the following Monday. The claimants sent a telegram on Monday morning asking if the defendant agreed to delivery over two months, and if not, how long he could give. The defendant did not respond, and sold the warrants to a third-party later that day. Before he informed the claimant of this, they sent another telegram in the afternoon accepting the defendant’s offer. The claimant sued the defendant for damages for non-delivery of the iron. The defendant argued that the claimant’s first telegram was a counter-offer, and therefore that his original offer had been revoked. The Court held in favour of the claimant. The first telegram was merely an inquiry for information, not a counter-offer. While the defendant could have revoked his offer at any time on Monday, he failed to do so before the offer was accepted. There was therefore a completed contract between the parties. A mere inquiry would not be considered as rejection.

By Subsequent Illegality of Subject Matter of the Offer : 

An offer lapses if it becomes illegal before its acceptance by the offeree.

A offers “Pan Masala” of Rs. 2,00,000 to B on 1 st July 2012 and asks him to confirm acceptance by 15^th July 2012. On 10th July 2012, the State Government declared the sale of “Pan Masala” as illegal. Thus consideration is becoming illegal. Hence the offer lapses.

By Subsequent  Destruction of Subject Matter of the Offer:

An oil trader offers 10 tons of palm oil to B on 1 st July 2012 and asks him to confirm acceptance by 15^th July 2012. On 10th July 2012, due to fire, all the stock of oil of A gets destroyed. As the subject matter of the offer is destroyed, the offer lapses.

Before Fall of Hammer:

In an auction sale, a bidder may withdraw his bid at any time before the fall of the hammer (acceptance).

In Payne v Cave, (1789) 3 TR 148 case, the claimant put his goods up for sale at a public auction. The defendant made the highest bid, but then changed his mind. He purported to withdraw the bid before the auctioneer’s hammer fell. The claimant argued that there was a completed contract and the defendant had to pay for the goods. The Court held in favour of the defendant. The defendant’s bid was an offer, which had been withdrawn before it was accepted. As such, there was no contract.

Irrevocable Offer:

The right to revoke an offer before it is accepted by the offeree always lies with the offeror, but the offeror in some cases can waive this right by creating a contract that obligates both parties agree to keep the offer available for a specific or indefinite duration until a specific event occurs.

An irrevocable offer is an offer which when entered into a contract is signed by the offeror or his or her agent which clearly emphasizes and states that the said offer is irrevocable during the time officially set and fixed. The said offer cannot be revoked during this particular time because of the absence of consideration to ensure irrevocability.

A party that refuses to fulfil its obligations of this contract becomes financially responsible in court. For example, an offer is made to sell land for ₹1000000, and in consideration of ₹100000, which is paid by the offeree, the person offering agrees to keep the land open for a week. The offeror, however, asks for revocation on the third day, but it will not be valid because he or she cannot sell the property for that specific week. Furthermore, if he or she does so, he or she has to make a payment for damages. Therefore, such an offer is irrevocable. 

Offers are considered irrevocable under the following conditions:

• If it is stated that the offer shall be kept open as part of consideration.
• If the offeree relied on the offer being open to their detriment/ option.
• If the contract is unilateral, has been partially completed or is underway and the offeree is still in compliance with the terms.
• Signed offers with firm terms that guarantee a party will buy or sell goods that include an assurance that the offer must be held open, even if no consideration is present.
• If a stated period is provided, the offer is irrevocable for the lesser of that period or three months time.

Conclusion:

A proposal can be revoked any time before the acceptance is complete against the proposer so as to create a binding contract. The revocation of the proposal is complete as against the person (proposer) who makes it when it is put into a course of transmission to the person (proposee) to whom it is made, so as to be out of the power of the person who makes it.  The communication of revocation of Proposal is complete as against the person (offeree) to whom it is made when it comes to his knowledge. Postal rule is not applicable to revocation of offer.

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A proposal is main ingredient of a valid contract. The term “proposal” of the Indian Contract Act is synonymous to the term “Offer” in English law. Section 2(a)of the Indian Contract Act, 1872 defines proposal as “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 person making proposal/offer is called the proposer/offeror and the person to which the proposal is made is called propose or offeree. In this article, we shall discuss types of offer. Section 9 talks of an express offer, express acceptance, implied offer, and implied acceptance. in this article, we shall study communication of offer.

Communication means imparting or exchanging information by speaking, writing, or using some other medium. Chapter I of the Act deals with the communication, acceptance, and revocation of Proposal. An offer and its acceptance, to be valid must be communicated to the other party. Similarly, the revocation offer should be communicated to the offeree by the offeror.

Section 3:Communication, acceptance and revocation of proposals:

The communication of proposals the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.

Section 4: Communication when complete:

The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.

The communication of an acceptance is complete,—

as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor;

as against the acceptor, when it comes to the knowledge of the proposer.

The communication of a revocation is complete,—

as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it;

as against the person to whom it is made, when it comes to his knowledge.

Illustrations

a) A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter.

(b) B accepts A‟s proposal by a letter sent by post. The communication of the acceptance is complete, as against A when the letter is post; as against B, when the letter is received by A.

(c) A revokes his proposal by telegram. The revocation is complete as against A when the telegram is dispatched. It is complete as against B when B receives it. B revokes his acceptance by telegram. B‟s revocation is complete as against B when the telegram is dispatched, and as against A when it reaches him.

Communication of Offer:

Section 3 of the Act, lays down that the communication of proposal, acceptance, and revocation is must. It may be expressed or implied. The express communication can be written, through emails, telegraphic, telephonic, minutes of a meeting, words of mouth or conduct. Thus proposal may be communicated in any way which has the effect of laying before the offeree the willingness to do or abstain.

Section 4 para 1 of the Act lays down that the communication of an offer is complete when it comes to the knowledge of the person to whom it is made. When an offer is made by post, its communication will be complete when the offeree receives the letter. In face to face or telephonic conversation, the instant the offeree listens to the offer by the offeror, the communication is complete.

Thus when the offeree (in case of a specific offer) or any member of the public (in case of a general offer) becomes aware of the offer, the communication of the offer is said to be complete.

Understanding the TimeLine of Communication of Proposal:

• A and B are sitting together on a coffee table. A offers his Car for ₹ 2,00,000 to B. The offer reaches the ears of B, the offer of A is complete.
• A calls B on a telephone and offers his Car for ₹ 2,00,000 to B. The offer reaches the ears of B, the offer of A is complete.
• A of Agra by a letter to B of Bhatinda offers his car for ₹ 2,00,000 through by a letter dated on 15^th August 2017. B receives the offer letter on 17^th August 2017. Now the communication of offer is complete on 17^th August 2017 for B (Offeree) and on 15^th August 2017 for A (Offeror).

Case Laws:

In Ram Krishan Singhal v. Executive Engineer, ILR v(1991) 1 Del 275 case, the Court held that a contract can come into existence between the parties by the exchange of letters.

In SBI v. Aditya Finance & Leasing Co. Pvt. Ltd. AIR 1999 Del 18 the Court inferred a lease contract from the correspondence and minutes of the meeting between the parties.

In P. Syamala v. R. Gopinathan (2004) 1 CTC 117 case, there was an oral agreement of sale of property and seller received cheques for the price and encashed them. Court held that in this case, the oral agreement is valid because there was the conclusion of the oral contract and subsequent sale of the property by the seller to subsequent buyer is invalid.

In T. Jayram Naidu v. Yashodha, AIR 2008 NOC 972 (Mad) case, the Court held that an oral agreement for sale is valid and enforceable, proving such agreement may be difficult, but when proved, valid.

In Lalman Shukla v. Gauri Datt (1913) All LJ 489 case A’s nephew has absconded from his home. He sent his servant to trace his missing
nephew. When the servant had left, A then announced that anybody who has discovered the missing boy would be given the reward of Rs.500. The servant discovered the missing boy without knowing the reward. When the servant came to know about the reward, he asked for the same from A. A refused to give the reward. The servant brought an action against A in the court of law to recover the same. But the court held that when the servant discovered the boy, he was not aware of the reward. Thus the offer was not communicated to him. Hence he is not liable to get the reward from A.

In Taylor v. Laird, 25 L.J. Ex. 329 case, the plaintiff was employed as the captain of a ship which was owned by the defendant. Whilst in a foreign port during the course of the voyage, he voluntarily gave up his position as a captain and worked as an ordinary crew member during his passage back to Britain. The defendant was not made aware of this change of position. Upon his return, he sought to claim wages from the defendant for his work as a crew member during this journey. The court held that the plaintiff has not communicated his offer to work as a crew to the defendant and hence he had not entered into any contractual agreement with the defendant for the performance of his work as an ordinary crew member.  hence the plaintiff is not entitled to wages for the return journey.

In Felthouse v Bindley, (1862) EWHC CP J35 case, the complainant, Paul Felthouse, had a conversation with his nephew, John Felthouse, about buying his horse. After their discussion, the uncle replied by letter stating that if he didn’t hear anymore from his nephew concerning the horse, he would consider acceptance of the order done and he would own the horse. His nephew did not reply to this letter and was busy at auctions. The defendant, Mr Bindley, ran the auctions and the nephew advised him not to sell the horse. However, by accident he ended up selling the horse to someone else. The Court held that there was no contract for the horse between the complainant and his nephew. There had not been an acceptance of the offer; silence did not amount to acceptance and an obligation cannot be imposed by another. Any acceptance of an offer must be communicated clearly. Although the nephew had intended to sell the horse to the complainant and showed this interest, there was no contract of sale. Thus, the nephew’s failure to respond to the complainant did not amount to an acceptance of his offer.

Postal Acceptance Rule:

Adams v Lindsell, decided two centuries ago, is well-known as a source of what we now call the ‘postal acceptance rule’: the rule that a contract entered through postal correspondence is concluded when the offeree posts his letter of acceptance, rather than when the offeror receives the letter. This rule is often thought to be an exception to the more general principle that a contractual agreement is concluded when the offeree’s acceptance is communicated to the offeror.

In Adams v. Lindsell, 106 ER 250 (KB) case, on September 2, 1817, Lindsell (defendant), a dealer in wool, sent a letter to Adams (plaintiff), a manufacturer of wool, offering to sell Adams a certain amount of wool. The offer provided for acceptance by written notice sent through regular mail (“in course of post”). Based on the timing of sending the letter, Lindsell expected to receive a response from Adams by September 7th. However, Lindsell sent the letter to the wrong address, and Adams did not receive the letter until September 5th. That evening, Adams wrote an acceptance of the offer and mailed it back to Lindsell. Lindsell received Adams’s acceptance on September 9th. However, because Lindsell had not received a response from Adams as expected on September 7th, Lindsell sold the wool it had originally offered to Adams to a third party on September 8th. Adams brought suit against Lindsell for breach of contract. The trial court held that Adams’s acceptance was valid when placed by Adams in the mail, and that any delay in receiving the acceptance was caused by Lindsell’s failure to send the initial offer to the correct address. The trial court entered judgment for Adams, and Lindsell moved for a new trial.

Instant Communication:

In Entores Ltd v Miles Far East Corporation, [1955] 2 QB 327 case, the Plaintiffs (Entores) were an English Company and the Defendants (Miles Far East Co) were an American corporation with agents in various locations, including Amsterdam. An offer and acceptance in relation to a contract for Japanese cathodes was made between the companies in London and Amsterdam. Specifically:

• the Plaintiffs (in London) sent an offer by telex to the Defendants (in Amsterdam).
• the Defendants (in Amsterdam) sent an acceptance by telex to the Plaintiffs (in London)

The issue was when the contract entered into force, as this would determine whether Dutch or English law would apply to the contract. Specifically, the Court was required to determine whether the postal rule (providing that acceptance occurs when and where the letter is sent) applied to telex communications.

The court held that the contract and damages were to be decided by English law. It was stated that the postal rule did not apply for instantaneous communications. Since Telex was a form of instant messaging, the normal postal rule of acceptance would not apply and instead, acceptance would be when the message by Telex was received. Thus, the contract was created in London. This general principle on acceptance was held to apply to all forms of instantaneous communication methods. Acceptance via these forms of communication had to be clear before any contract is created.

Conclusion:

Communication means imparting or exchanging information by speaking, writing, or using some other medium.  A communication is the building block of any contract, without this there cannot be a contract. An offer and its acceptance, to be valid must be communicated to the other party. Similarly, the revocation offer should be communicated to the offeree by the offeror.

Effective communication of the offer and a clear understanding of it is important to avoid misunderstanding between all the parties. When the parties are talking face-to-face the communication takes place in real-time and on spot. Hence there is almost no confusion. For other forms of communication, the communication should be clear and unambiguous. At the same time, the timeline of communication is important.

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