Nature Of Contracts – Chapter Notes
CA Foundation Business Laws Chapter 2 Unit 1 notes on the Indian Contract Act, 1872: nature of contracts, offer, acceptance, communication and revocation.
Contents
Before the Indian Contract Act, 1872 was enacted, there was no single, uniform law governing contracts in India. Contractual disputes were settled through a patchwork of personal laws, customs, and colonial directives.
- Governed by Vedas, Dharam Shastras, Smritis & Shrutis
- Mauryan contracts were bilateral transactions
- Based on free consent and mutual agreement
- 'Aqd' = Contract
- 'Ijab' = Proposal / Offer
- 'Qabul' = Acceptance
- No special formality required
- Free consent + agreement in same sense
- Based on customs, traditions & Smritikaras
- Minors, intoxicated & old persons incompetent
- After 16 years → competent (per Narada Smriti)
- English law applied in Madras, Bombay & Calcutta
- Charter of 1726 by King George
- Outside Presidencies → justice, equity & good conscience
- Passed on: 25th April 1872
- Came into force: 1st September 1872
- Extends to the whole of India (incl. J&K)
- Part 1 — General Principles (Sections 1–75): Offer, Acceptance, Consideration, Capacity, Consent
- Part 2 — Special Contracts (Ss. 124–238): Indemnity, Guarantee, Bailment, Pledge, Agency
"To define and amend certain parts of the law relating to contracts."
"An agreement enforceable by law."
"Every promise and every set of promises, forming the consideration for each other."
"When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise."
Difference Between Agreement and Contract
| Basis | Agreement | Contract |
|---|---|---|
| Meaning | Promise + Consideration | Agreement + Legal enforceability |
| Scope | Wider — includes social & legal agreements | Narrower — only legally enforceable agreements |
| Legal Obligation | May not create legal obligation | Necessarily creates legal obligation |
| Nature | All agreements are not contracts | All contracts are agreements |
"All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and are not expressly declared to be void."
Essentials Listed in Section 10
- Agreement — Offer + Acceptance + Consideration (Section 2(e))
- Free Consent — Consensus ad idem (meeting of minds) — not caused by coercion, undue influence, fraud, misrepresentation, or mistake
- Competency of Parties — Major, sound mind, not disqualified by law (Section 11)
- Lawful Consideration — Quid pro quo (something in return)
- Legal Object — Not forbidden, fraudulent, immoral, or opposed to public policy (Section 23)
- Not Expressly Declared Void — Sections 24–30 and 56
Additional Essentials (Outside Section 10)
- Two Parties — A person cannot contract with himself; identity must be certain
- Intention to Create Legal Relationship — Social/domestic agreements generally excluded
- Fulfilment of Legal Formalities — Writing, witness, registration where required
- Certainty of Meaning — Terms must be clear, definite, certain
- Possibility of Performance — Impossible agreements are void
On dissolution of partnership, assets were distributed among partners. The Sales Tax Officer treated this as a sale.
It was not a sale. Partners were joint owners; the same persons cannot be both buyer and seller.
A contract requires two distinct parties. One person cannot be both sides of a transaction.
A husband promised to pay maintenance to his wife while abroad but failed to pay later.
It was a domestic/social agreement. No intention to create legal relationship. Hence, not enforceable in court.
Social and domestic agreements do not create legal relations and are therefore not enforceable as contracts.
Essential Elements Under Section 10 — Detailed
II. Free Consent — Consensus Ad Idem
Consent means the parties agree upon the same thing in the same sense — meeting of minds. Consent is free when NOT caused by:
- Coercion
- Undue Influence
- Fraud
- Misrepresentation
- Mistake
III. Capacity of Parties — Section 11
Every person is competent to contract if they are:
- Major — 18 years or above
- Of Sound Mind — understands the nature and consequences of the contract
- Not Disqualified by Law — alien enemy, foreign sovereign, convicts are disqualified
IV. Consideration — Quid Pro Quo
Consideration means something in return. It may be a benefit to one party or a loss/responsibility to another.
V. Lawful Consideration and Object — Section 23
Consideration/object is unlawful if it is: forbidden by law, fraudulent, causes injury, immoral, or opposed to public policy.
VI. Not Expressly Declared Void
- Threat to murder
- Defamation
- Opposed to public policy
- Restraint of trade
- Restraint of marriage
- Restraint of legal proceedings
I. On the Basis of Validity
Legally binding and enforceable. Contains all essential elements. Valid Contract = Agreement + All Essential Elements.
Initially valid but later becomes unenforceable by law (Section 2(j)). Cannot be enforced in court. E.g., impossibility of performance after contract is formed.
Enforceable at the option of one party only (Section 2(i)). Arises when consent is not free or one party prevents performance.
Forbidden by law. Void ab initio. Collateral agreements also become void. E.g., agreements for purchase of drugs.
Valid in substance but cannot be enforced due to a technical defect (absence of writing, non-registration, barred by limitation, lack of stamp duty).
Comparison: Void vs. Voidable Contract
| Basis | Void Contract | Voidable Contract |
|---|---|---|
| Meaning | Ceases to be enforceable by law (S. 2(j)) | Enforceable at option of aggrieved party (S. 2(i)) |
| Enforceability | Cannot be enforced at all | Enforceable only at option of aggrieved party |
| Cause | Change in law or circumstances | Consent of a party was not free |
| Performance | Cannot be performed | If right not exercised within reasonable time, any party can sue |
| Rights | No legal remedy to any party | Aggrieved party can rescind; if not rescinded → valid contract |
Comparison: Void Agreement vs. Illegal Agreement
| Basis | Void Agreement | Illegal Agreement |
|---|---|---|
| Scope | Not necessarily illegal | Always void |
| Forbidden by Law | Not forbidden | Forbidden |
| Punishment | No punishment | Parties liable to punishment |
| Collateral Agreements | Collateral agreements may be valid | Collateral agreements always void |
II. On the Basis of Formation
- Terms expressed clearly in words (spoken or written)
- Section 9: promise made in words → express promise
- Arises from conduct, actions, or circumstances
- Section 9: promise otherwise than in words → implied
- Includes Tacit Contracts (silent, from conduct)
- Not an actual contract — resembles one
- Created by law to prevent unjust enrichment
- No offer and acceptance required
- Formed through electronic means
- Also known as: cyber contracts, mouse-click contracts, EDI contracts
III. On the Basis of Performance
- Both parties have performed their obligations
- Example: goods sold for cash payment — delivered & paid
- Obligations remain to be performed in the future
- Unilateral: one party performed, other's obligation pending
- Bilateral: obligations outstanding on both sides
"When one person signifies to another his willingness to do or abstain from doing anything with a view to obtaining the assent of that other person, he is said to make a proposal."
- Person making offer → Offeror / Promisor
- Person to whom offer is made → Offeree
- Person accepting → Promisee / Acceptor
- General Offer
- Specific / Special Offer
- Cross Offer
- Counter Offer
- Standing / Continuing / Open Offer
Types of Offers — Explained
The company advertised that anyone using its smoke ball as directed and still contracting influenza would receive £100. £100 was deposited in a bank as a show of sincerity. Mrs. Carlill used the ball correctly, contracted influenza, and claimed the reward. The company refused, arguing there was no acceptance and no contract.
The advertisement was a general offer. The deposit of £100 showed intention to create legal relations. Mrs. Carlill accepted the offer by performing the prescribed conditions. A valid contract existed; the company was liable to pay £100.
A general offer can be accepted by anyone by performing the stated conditions. Communication of acceptance is not necessary in case of a general offer.
Formula: Counter Offer = Rejection of Original Offer + New Offer
Legal Rules for a Valid Offer
- Must Create Legal Relationship — Social invitations do not create legal obligations
- Must be Certain — Clear, definite; vague offers cannot create a contract
- Must be Communicated — Acceptance without knowledge of offer is not valid
- Must Seek Assent — Must be made to obtain the other party's acceptance
- May be Conditional — Offeror may impose terms; offeree must accept all conditions
- Silence Cannot Amount to Acceptance — Offer cannot deem silence as acceptance
- May be General or Specific — To public at large or to a specific person
- May be Express or Implied — By words or by conduct
Gauri Dutt sent his servant Lalman Shukla to search for his missing nephew. After Lalman had already left, Gauri announced a reward for anyone who found the nephew. Lalman found the boy without knowledge of the reward and later claimed it.
Lalman Shukla was not entitled to the reward. Acceptance requires knowledge of the offer. Since he performed the act without knowing about the reward, there was no valid acceptance and hence no contract.
Knowledge of offer is essential for acceptance. An act done in ignorance of the offer cannot constitute a valid acceptance or create a contract.
Offer Distinguished from Invitation to Offer
Where a party, without expressing final willingness, proposes certain terms on which he is willing to negotiate — he does not make an offer but only invites the other party to make an offer on those terms.
| Basis | Offer | Invitation to Offer |
|---|---|---|
| Meaning | Final expression of willingness to be bound (Section 2(a)) | Invitation for others to make an offer; no final willingness expressed |
| Intention | Immediately bound upon acceptance | Wants to negotiate terms first |
| Sequence | Cannot precede invitation to offer | Always precedes an offer |
- Prospectus of a company
- Display of goods in a shop
- Advertisement for auction
- Quotation of prices / price lists
- Menus in restaurants
Harvey sent a telegram asking: (1) Will you sell Bumper Hall Pen? (2) What is the lowest price? Facey replied only to the second question: "Lowest price is £900." Harvey immediately sent a telegram saying he agreed to buy at £900. Facey refused to sell.
The Privy Council held that while Harvey asked two questions, Facey only replied to the second — quoting the price — and reserved their answer regarding willingness to sell. Hence no offer was made, and no contract was formed.
A mere statement of the lowest price is not an offer but only supply of information. An offer must show a clear intention to enter into a contract.
Defendant advertised that goods would be sold at auction. Plaintiff travelled to attend but goods were withdrawn before the sale. Court held that the advertisement was only an invitation to offer, not a binding offer. No contract arose and plaintiff could not claim damages. A contract is formed only when the auctioneer accepts a bid.
An advertisement for auction is an invitation to offer, not an offer itself.
Plaintiff offered ₹6,000 for a bungalow. Defendant replied "Won't accept less than ₹10,000." The plaintiff treated this as an offer and agreed to pay ₹10,000. The Supreme Court held that the statement was not an offer or counter-offer but merely a statement of minimum price. No contract was formed.
A mere statement of the lowest price is only an invitation to offer and not a binding offer.
"When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. The proposal when accepted becomes a promise."
An offer alone has no legal effect until it is accepted. Before acceptance, the offeror can withdraw the offer. Once accepted, it becomes a promise and a binding contract is formed — it cannot then be revoked.
Legal Rules for Valid Acceptance
- Only by Person to Whom Offer is Made — Specific offer: only that person can accept. General offer: any person with knowledge of the offer.
- Must be Absolute and Unqualified — Acceptance must match the exact terms of the offer. Acceptance with variation = counter offer.
- Must be Communicated — Mental acceptance or silence is not acceptance. Must be expressed or implied.
- Must be in Prescribed Mode — If a mode is prescribed, acceptance must follow it (unless offeror waives it).
- Within Specified or Reasonable Time — Acceptance not given within reasonable time is not valid.
- Silence is Not Acceptance — Offeror cannot impose a condition that silence = acceptance.
- Acceptance by Conduct (Implied Acceptance) — Performance of conditions of offer amounts to acceptance.
Boulton bought a business from Brocklehurst. Jones placed an order with Brocklehurst. Boulton supplied the goods though the order was not in his name. Jones refused to pay Boulton. Held: since the offer was not made to Boulton, there was no contract between Boulton and Jones.
In case of a specific offer, it can be accepted only by the person to whom it is made.
Felthouse wrote to his nephew: "If I hear no more about the horse, I consider it mine at £30." The nephew intended to sell but gave no reply. The auctioneer Bindley accidentally sold the horse. Felthouse sued Bindley, claiming a valid contract existed with the nephew.
There was no valid acceptance by the nephew. Mere silence cannot amount to acceptance. No binding contract existed between uncle and nephew.
Silence does not amount to acceptance. Acceptance must be clearly communicated — mental intention is not sufficient.
Negotiations for purchase of cotton seed cake were conducted over telephone. A dispute arose regarding when acceptance was complete and at what place the contract was concluded (relevant for court jurisdiction).
The Supreme Court held that telephone is an instantaneous mode of communication. Acceptance is complete only when it is actually received/heard by the offeror. The contract is formed at the place where acceptance is received.
In instantaneous communication (telephone, telex, fax), acceptance is complete only when received by the offeror — not when spoken by the acceptor.
"The communication of offer is complete when it comes to the knowledge of the person to whom it is made."
Communication of Acceptance — Section 4
| Against Whom | When Complete | Practical Meaning |
|---|---|---|
| Against the Proposer | When acceptance is put in course of transmission, out of acceptor's power | Moment the acceptor posts the letter → proposer becomes bound |
| Against the Acceptor | When acceptance comes to the knowledge of the proposer | Acceptor becomes bound only when proposer actually receives the acceptance |
Instantaneous Communication (Telephone / Telex / Fax / E-mail)
The contract is complete only when acceptance is actually received by the proposer. The contract is formed at the place where acceptance is received.
Entores (London) sent an offer by telex to Miles Far East (Holland). Acceptance was communicated through telex. A dispute arose regarding the place of contract formation (relevant for court jurisdiction).
Telex is an instantaneous mode of communication. The contract is complete only when acceptance is received by the offeror. If the message is not received due to the acceptor's fault, there is no contract. However, if the offeror fails to receive due to his own fault, he may still be bound. The contract was concluded in London where acceptance was received.
In instantaneous communication, acceptance is complete only upon receipt by the offeror, and the contract is formed at that place.
Indian Law vs. English Law — Postal Acceptance
| Aspect | English Law | Indian Law |
|---|---|---|
| When acceptance posted | Contract immediately complete — acceptance CANNOT be revoked | Contract complete, but acceptance CAN be revoked before it reaches offeror |
| Rule Name | Absolute Postal Rule | Modified Postal Rule |
| Flexibility | No flexibility for acceptor | Greater flexibility — acceptor may revoke if revocation reaches before acceptance |
Standard Form Contracts
A standard form contract is where one party prepares terms in advance and the other simply accepts. Also called boilerplate or take-it-or-leave-it contracts. Examples: transport contracts, railway tickets, insurance policies, mobile services, banking forms.
A passenger booked a ticket subject to printed conditions. Dispute arose regarding enforceability of those terms. Court held that terms printed on a ticket are binding only if reasonable notice of them is given to the passenger. Hidden or unusual conditions are generally not enforceable.
Terms and conditions are binding only when reasonable notice of them is given before or at the time of contract.
Customer gave clothes to Lilly White Dry Cleaners. The receipt contained a clause: "Articles accepted at owner's risk." Clothes were lost due to the dry cleaner's negligence. The dry cleaner argued the clause exempted them from liability.
The vague clause "owner's risk" did not completely exclude liability for negligence. The dry cleaner was held liable to pay compensation.
General exemption clauses cannot protect a party from liability arising out of their own negligence. Exclusion clauses must be clearly worded to cover the liability intended to be excluded.
Transport company accepted goods without communicating any limiting conditions. After the contract was concluded, they issued a circular with conditions restricting liability. Court held that conditions communicated after the contract is completed are not binding. A party cannot unilaterally add terms after formation of the agreement.
Special conditions in a standard form contract are binding only when reasonable notice of them is given before or at the time of contract.
Withdrawal or cancellation of a proposal (offer) or acceptance before a contract becomes final.
Communication of Revocation — Section 4
| Against Whom | When Complete |
|---|---|
| Against the person who makes it | When it is put into course of transmission, out of his power |
| Against the person to whom it is made | When it comes to his knowledge |
Revocation of Offer — Section 5
"A proposal may be revoked at any time before communication of acceptance is complete as against the proposer."
This means the offer can be revoked any time before the acceptor dispatches acceptance. Once acceptance is dispatched, the offer cannot be revoked.
Revocation of Acceptance — Section 5
"Acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor."
This means acceptance can be revoked before the acceptance letter reaches the proposer. If the revocation of acceptance arrives before (or simultaneously with) the acceptance letter, the revocation is valid under Indian law.
Modes of Revocation of Offer
- By Notice of Revocation — Offeror expressly withdraws the offer before acceptance
- By Lapse of Time — If not accepted within specified or reasonable time, offer lapses automatically
- By Non-Fulfilment of Condition Precedent — If a required condition is not fulfilled, offer automatically lapses
- By Death or Insanity — If offeror dies or becomes insane AND acceptor has knowledge of it
- By Counter Offer — If offeree makes a counter offer, the original offer is destroyed
- By Non-Acceptance in Prescribed Mode — If acceptance is not made in the prescribed or usual mode
- By Subsequent Illegality — If law changes and the proposed act becomes illegal, offer lapses automatically
Montefiore applied in June for shares of the company. The company did not immediately accept. Five months later, in November, the company allotted shares and informed Montefiore. He refused to accept the shares. The company sued him claiming a valid contract.
An offer cannot remain open forever. The delay of five months was unreasonable. The offer had lapsed before acceptance. No contract was formed.
An offer must be accepted within the prescribed time, or within a reasonable time if no time is prescribed. Unreasonable delay causes the offer to lapse automatically.