Law and You > Business Laws > Indian Contract Act, 1872 > Introduction to Indian Contract Act, 1872
The foundation of every legally enforceable agreement lies in the basic yet crucial concept of a proposal—commonly known as an offer. Under the Indian Contract Act, 1872, the formulation of a proposal marks the very first step in the process of creating a contract. It is through a proposal that one party expresses a willingness to do or abstain from doing something, with the intention of obtaining the assent of another. This expression of willingness, when communicated, understood, and accepted, transforms into a promise, forming the cornerstone of contractual relations.
Understanding what amounts to a valid proposal is essential not only for law students and legal practitioners but also for businesses, consumers, and individuals who routinely enter into agreements, often unknowingly. The Act meticulously outlines the requirements, communication rules, and legal implications associated with proposals, thereby ensuring clarity and fairness in contractual dealings. This article examines the meaning, essentials, types, and legal framework governing proposals under the Indian Contract Act, 1872, laying the groundwork for deeper study of contract formation.
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.”
Thus, Contract = Offer from offeror (Promisor) + Free consent from another party (Offeree / Promisee) + Legal consideration + Legal enforceability.
Thus, 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.
Illustration: If A tells B “he is interested in buying his (B’s) car for ₹ 2 lakh. Will, you sell the car to me?”. Here, with information, there is a consideration (₹ 2 lakhs) and expectation of agreement from B. Thus this is a proposal.
In Bank of India v. O. P. Swaranakar, AIR 2003 SC 858 case, the Court held that a proposal is made when one person signifies to another his willingness to do or abstain from doing anything with a view to obtaining the assent of the other to such act or abstinence.
In Balram Gupta v. Union of India, AIR 1987 SC 2354 case, the Court held that a person can withdraw or modify his offer or tender before communication of acceptance is complete as against him, that is before its acceptance is intimated to him.
Essential Elements of an Offer / A Proposal:
There must be minimum two parties in a contract.
A party to a contract is one who holds the obligations and receives the benefits of a legally binding agreement. When two parties enter into an agreement, there are two distinct roles each play: the promisor and the promisee. The promisor is the party that makes the promise, while the promisee is on the receiving end of the promise.
Offer must be communicated to the offeree.
The offer is completed only when it has been communicated to the offeree. Until the offer is communicated, it cannot be accepted. Thus, an offer accepted without its knowledge does not confer any legal rights on the acceptor.
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.
The case of Lalman Shukla v. Gauri Dutt established an important principle in contract law that a person cannot claim the benefit of an offer without having knowledge of it at the time of performance. It clarified that acceptance must be made knowingly and with intent, and that an act done as part of a pre-existing duty does not constitute valid consideration for a new contract. Since Lalman had no knowledge of the reward when he found the missing boy and was acting under his role as a servant, no valid contract existed, and therefore, he was not entitled to the reward. The case continues to serve as a key precedent in Indian contract law, especially in matters involving unilateral offers and acceptance by conduct.
In Powell v. Lee (1908 24 TLR 606) case the plaintiff Powell applied for the post of a headmaster and his application was accepted by the School Board. Before the formal appointment, one of the Board members had informed Powell of the decision which was later rescinded by the Board. Powell sued the School for breach of contract. The court held that the acceptance was not communicated by someone authorized by the School Board and thus there was no valid contract.
The judgment emphasizes upon the principle of ‘Communication of Acceptance’ which asserts that, for a promise to be enforceable it must involve clear, formal acceptance and agreement on material terms, by the competent authority, which was not present in this case.
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.
The offeror must make the offer known to the offeree in order for it to be established as a legitimate one; an offeree cannot accept an offer they are unaware of. Since the claimant (i.e., Taylor) failed to make the offer known to the offeree, there was no contract in this instance.
The offer must be certain definite and not vague or unambiguous.
There must be no confusion about the terms used in an offer. Both offeror and offeree should understand one and the same thing from the offer. The terms of offer must be clear and it is made with the intention that it should be binding.
Examples:
- A offered to sell to B, ‘a hundred tons of oil’. We can see that the offer is not specifying which type of oil (groundnut or sunflower or sesame, or rice bran, etc.) A want to sell to B. Thus the offer is vague, ambiguous, and uncertain. Hence it is not an offer.
- A says to B: “I will sell you my car for a reasonable price.” In this case “reasonable price” is uncertain. Hence the offer is too vague to be enforceable.
- A says to B: “I will sell you some of my land.” Here, the term “some” is undefined and it lacks certainty regarding quantity and description. Hence order is ambiguous.
- A says to B: “I will supply goods to you soon.” Here type of goods, quantity of goods, and price of goods is not mentioned hence due to ambiguity it cannot be a valid offer.
There must be the intention that the offer should be binding
In Jones v Padavatton, [1968] EWCA Civ 4 case, Mrs. Violet Laglee Jones, the mother had asked her daughter, Mrs Padavatton to leave her job in the United States and come to the UK to study for the bar. The mother had further promised maintenance of 200 dollars per week. On this basis, the daughter in November 1962 came to the UK and started her education. The allowance agreed was insufficient for Mrs Padavatton. In 1964 the mother bought a house and varied the agreement by giving the daughter a part of the house to stay and a part to rent so as to cover her expenses and her maintenance. Mrs Padavatton failed to clear bar exam. In 1967 the parties had an argument and as a consequence, the mother brought an action for the possession of the house. The mother based her claim on the allegation that the agreement was not made with the intention of creating a legal relationship. The issues themselves primarily revolve around the validity of the contract and the intention to create a legally binding relationship. The Court held that there cannot be a legally valid contract if there was no intention to form one in the first place and there is a strong possibility that members of a family do not intend to get into legally binding agreements and the Court handed over possession of house to Mrs. Jones.
There is a presumption that family arrangements are based on mutual trust, family ties and affection, and that there is no intention to create legally binding contracts capable of enforcement in the courts. This presumption can be rebutted, but the lack of formality regarding the agreement between mother and daughter strongly indicated there was no such intention and the daughter had no defence to her mother’s claim for the house.
The offer must be capable of creating a legal relation.
An offer in order to give rise to a contract must be intended to create and be capable of creating legal relations. A social relation (moral or matrimonial or religious or friendly) do not create legal relations.
‘A’ invited ‘B’ to dinner and ‘B’ accepted the invitation. It is a mere social invitation. And A will not be liable if he fails to provide dinner to B.
In Balfour v. Balfour (1919 2 K.B. 571) case Mr. Balfour is the Defendant and Mrs. Balfour is the Plaintiff. The couple lived in Ceylon (Now Shrilanka) and visited England on a vacation. The plaintiff remained in England for medical treatment. The defendant has agreed to send her a specific amount of money each month until she could return. The defendant failed to honour the promise. Mrs. Balfour sued for restitution of her conjugal rights and for alimony equal to the amount her husband had agreed to send. The lower court entered judgment in favor of the plaintiff and held that the defendant’s promise to send money was enforceable. The court held that Mrs. Balfour’s consent was sufficient consideration to render the contract enforceable and the defendant appealed. The Higher Court held that the agreement between husband and wife is of social nature and cannot be enforceable by law. Hence Mr. Balfour is not liable for honouring the agreement. By this case law, all social agreements are not enforceable by the law. This judgment is considered a Landmark judgment.
According to this case law, a contract is not enforceable unless the parties intended the contract to create legal relations. Whether or not the parties intended to create legal relations is determined accurately by examining the circumstances existing at the time of execution of the contract. Whether a promise is made or not, it is between the parties to uphold it to their fullest potential. The parties cannot enforce and the judges who had made the decision concluded that the court cannot come into marital affairs and it is up to their full knowledge for solving their own problems. So the case law gave a new perspective to contract validation.
In Rose & Frank Co. v. Crompton & Bros. Ltd, 1923(2) KB 261 case, when companies entered into an agreement about the exchange and purchase of toilet paper at a certain price. The agreement made between both the companies stated that “This agreement is not entered into nor is the memorandum written as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts”. The Court held the agreement void since the contract does not give any possible legal consequences.
It is generally assumed that parties in business relationships intend to be bound. The lack of enforceability of an express legal arrangement under an agency agreement does not preclude the legal transactions. The orders constituted mutual offers and acceptances with each transaction having ordinary legal significance.
Offer may be express and implied.
An offer which is expressed by words, written or spoken, is called an express offer. 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 also an express offer.
The offer which is expressed by the conduct is called an implied offer. When we are waiting for a bus to go to a certain place on a bus stop. 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. Thus acceptance is by conduct. Such offers are implied offers.
In Uptron Rural District Council v. Powell, 1942 1 All ER 220 case, the defendant has asked the plaintiff to do the services as he thought they will do it for free. But as the service was not entitled to a free service zone the plaintiff demanded money for their services. It was held that the defendant desired and requested Upton’s services, according to the court, and they were given. As a result, the services were deemed to be delivered based on an implied commitment to pay.
Communication of offer should be complete.
Under the Indian Contract Act, 1872, an offer becomes effective only when it is communicated to the person to whom it is made. A person cannot accept an offer unless they have knowledge of it. Therefore, communication of the offer is a mandatory requirement for a valid contract to be formed. Section 4 of the Act states that the communication of an offer is complete when it comes to the knowledge of the person to whom it is made.
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 ₹ 10,000. Thus as offeree, A 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.
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.”
Mere Intention is not enough.
A statement of intention made during a conversation will not constitute an offer, even though acted upon by the party to whom it is made.
In Weeks v. Tybaid (1605 Noy. 11) case the defendant announced he would give £100 to a man who would marry his daughter with his consent. The plaintiff married with defendant’s daughter with the consent of the plaintiff. After the marriage, the plaintiff asked for the money but the defendant refused to pay the same. The plaintiff sued him in the court of law. The Court held this was a mere puff and in the context not to be taken with seriousness because the words were spoken to entire suitors of his daughter.
An offer must not thrust the burden of acceptance on the offeree.
A person cannot say that, if within a certain time, acceptance is not communicated, the offer would be considered as accepted.
Examples:
- A writes to B: “If I do not hear from you by Friday, I will assume you have agreed to purchase my car for ₹1,00,000.” This is not a valid offer because silence cannot be treated as acceptance. A cannot force B into a contract by threatening him with “automatic acceptance.”
- A emails B: “I will start supplying you 50 bags of cement every month unless you object.” This shifts the burden of rejection onto B. Hence it is thrusting the burden of acceptance on the offeree.
- A writes to B: “I offer to sell you my laptop for ₹40,000. If you wish to accept, please reply by Friday.” The offer does not assume acceptance. In this case, voluntary acceptance is required. This is valid offer.
The acceptance to offer cannot be presumed from silence.
When A makes an offer to the B, and there is no communication from B about the acceptance of the offer, then A cannot assume that the offer has been accepted by B. Failing to reply to an offer is not acceptance in most cases. This is true even if the offer says silence will be considered acceptance.
‘A’ offers to paint B’s house for $100. If B does not respond to A’s offer, there is no acceptance. If, however, A specifically state to B that, “If I do not hear anything from you by Friday, I will assume you agree to my offer. You reply,” In this case the silence become acceptance on Friday.
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.
The case of Felthouse vs Bindley establishes silence does not constitute acceptance. Hence, an individual cannot impose an obligation on another person to reject an offer in such cases.
Offer must be distinguished from an invitation to offer.
When a person expresses something to another person, to invite him to make an offer, it is known as an invitation to offer. The objective of the invitation of the offer is to receive offers from people and negotiate the terms on which the contract will be created. In invitation offer, the persons responding to it are making offers.
The menu card of a restaurant is an invitation to put an offer. Price – tags attached to the goods displayed in any showroom or supermarket is also an invitation to offer. If the salesman or the cashier does not accept the price, the interested buyer cannot compel him to sell, if he wants to buy it, he must make a proposal. Other examples of invitation to offer are vacancy job advertisements, auction advertisement, and tender advertisement.
In the Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd, 1952 2 QB 795 case, the court held that in invitation to offer, it was an offer to buy, and no sale would take place until the buyers offer is accepted at the price offered.
This is the landmark judgment which laid down a very important distinction between offer and invitation to offer. When a customer is obtaining an item by self-service method, it would amount to invitation to offer and when the customer takes the item to the cashier this would constitute offer.
The offeror should have the intention to obtain the consent of the offeree.
The offeror must give an offer to offeree with intention of getting consent. The statement like “Marry with me or go to hell” is not an offer.
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 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. In these case there was intention to obtain the consent of the offeree. But actual consent or acceptance was not there.
An answer to a question is not an offer.
When one person simply answers a question—e.g., about price, availability, or terms—he is not making a final proposal, but only giving information. Since there is no intention to be bound, it cannot amount to an offer.
In Harvey vs Facey [1893] AC 552 case, On October 6, 1893, Harvey sent a telegram to Facey while Facey was travelling by train. The telegram asked, “Will you sell us a Bumper Hall Pen? Telegraph lowest cash price—answer paid.” Later that day, Facey responded with a simple telegram stating, “Lowest price for Bumper Hall Pen £900.” Believing that Facey’s reply constituted an offer, Harvey sent another telegram agreeing to purchase the property for £900 and requested the title deed to finalise the transaction. However, Facey refused to sell the property to Harvey. This refusal led to Harvey suing Facey, claiming that a contract had been formed when he accepted Facey’s quoted price. Lord Morris delivered the judgement, emphasising that Facey’s response was simply an indication of the lowest price he would consider and not an offer to sell the property. The court pointed out that Harvey’s initial telegram asked two separate questions: whether Facey was willing to sell and the lowest price he would accept. Facey’s response answered only the second question and did not address his willingness to sell, which is crucial in forming a binding offer.
An offer must be a clear and unequivocal expression of willingness to contract. The case serves as a crucial reminder to distinguish between a mere statement of price and a genuine offer. It highlights the importance of clear communication of the offer.
Conclusion:
In contract law, proposal (offer) and acceptance analysis is a basic process for determining whether two parties have achieved an agreement. A proposal or an offer is a declaration made by one person to another that they are willing to engage in a contract on specific terms without further negotiation. A contract is considered to exist when the offeree conveys his or her acceptance of an offer to the offeror. An offer’s communication is full when the person to whom the offer is made is aware of it, and an acceptance’s communication is full when the acceptance is placed in a transmission channel to the offeror. To establish a binding contract, a proposal can be revoked at any time until final acceptance is given to the proposer.