Unit1: Formation of Contract: Offer and Revocation of Offer
I. Introduction: A modern industrial society is primarily built upon the fabric of ‘contract’. ‘Contract’
is the method through which individuals make law for themselves by creating rights and
obligations ex contractum (out of contract) terms.
However, the conditions that form a valid contract require critical analysis. We are required to have
a clear understanding of denotative (area of application) and the connotative (quality and attribute)
definitions and technicalities provided in Contract Law.
II. Formation of a Contract: S. 2(h) of the Indian Contract Act, 1872, defines contract as “an agreement
enforceable by law”.
So to make a contract there has to be:
a) an agreement and
b) it must be enforceable by law.
An agreement is a promise or a set of promises. A proposal when accepted becomes a promise.
Formation of contract can be explained by the following chart.
CONTRACT
(S. 2h) Agreement enforceable by law
(S. 2e) Promise/Set of promises
(S. 2a) Proposal (Offer) + (S. 2b) Acceptance
From the above, it is clear that the basis of contract is a proposal made by one person and an
acceptance of the same by another.
III. PROPOSAL/ OFFER: In English common law a proposal is known as an offer. In every contract
one party, generally speaking, is required to take initiative for proposing or offering a term which
other party may accept if interested to make an agreement.
A proposal or offer can be defined as ‘an intimation by words or conduct, of a willingness to enter
into a legally binding contract, and which in its terms expressly or implicitly indicates that it is to
become binding on the offer or as soon as it has been accepted by an act, forbearance or return
promise on the part of the person to whom it is addressed.
S 2(a) 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 (offer)”.
The person who makes the proposal is called a "promisor", the person accepting the proposal is
called a promisee.
Essentials elements of an Offer:
i. There must be two parties.
ii. The offer must be communicated to the offeree.
iii. The offer must show the willingness of offeror. Mere telling the plan is not offer.
iv. The offer must be made with a view to obtaining the assent of the offeree.
v. A statement made jokingly does not amount to an offer.
vi. An offer may involve a positive act or abstinence by the offeree.
vii. Mere expression of willingness does not constitute an offer.
For example: A proposes to sell his land for Rs. 50,000 and signifies it to B, which B may accept.
This is a proposal.
But one must not confuse ‘desire’ of a person with ‘intention to do’ or ‘abstain from doing a
thing.’ For example, A has a desire to become Prime Minister of the country, which he tells to B.
This is not a proposal in the legal sense of the term.
IV. Legal Rules as to Valid Offer:
i. 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.
Example: A’s nephew has absconded from his home. He sent his servant to trace his missing
nephew. When he servant had left, A then announced that anybody who 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 brought an
action against A to recover the same. But his action failed. It was held that the servant was not
entitled to the reward because he did not know about the offer when the discovered the
missing boy. [Lalman Shukla v. Gauri Datt]
ii. The offer must be certain definite and not vague unambiguous and certain.
Example: A offered to sell to B. ‘a hundred tons of oil’. The offer is uncertain as there is
nothing to show what kind of oil is intended to be sold.
iii. The offer must be capable of creating legal relation: A social invitation is not create legal
relation.
Example: A invited B to a 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.
iv. Offer may be express and implied: The offer may be express or implied; An offer may be
express as well as implied. An offer which is expressed by words, written or spoken, is called
an express offer. The offer which is expressed by conduct, is called an implied offer.
v. Communication of complete offer: According to sec.3 of the Indian Contract Act, offer must
be communicated to the offeree in the manner intended by the offeror. Uncommunicated offer
is no offer and it cannot be accepted.
A proposes by letter to sell his house to B for Rs.50,000/-The communication of offer is
complete when B receives it.
Terms of offer must also be communicated to bring out the terms and conditions within the
offer. This is very important specially in the case of standard form agreements .
For example, a customer intending to get power connection has to submit his proposal or
application for power connection on the basis of terms and conditions stipulated by the Board
or in the offer where terms and conditions are written elsewhere.
Suppose the front side of the document refers to ‘vide reverse’ or ‘turn back’ or ‘conditions
given overleaf’, such a notice is enough to bring those conditions within the fold of the offer.
But if no notice is given and the conditions are kept outside the promise, then the offer is not
complete.
A proposal made through a telephone but not heard does not become a proposal or offer. A
teleprinter or a fax not bringing the total proposal does not constitute any offer or proposal.
vi. Counter-offer: Counter offer results in rejection of offer. When the offeree gives qualified
acceptance of the offer subject to modified and variations in the terms of original offer.
Counter offer amounts to rejection of the original offer.
vii. Cross offer do not conclude a contract
viii. Various methods of making a proposal: Proposal or offer can be made in various ways. A bus
plying in a route is an offer by conduct. Any intending passenger getting into the bus, accepts
the service. In case of plying a train, train fare has to be tendered in the counter proposing the
destination and the ticket must be obtained. Proposing the place for journey and tendering the
fare is the proposal and issue of tickets is the acceptance, the railway ticket itself being the
formal document of acceptance. Proposal may be given in writing. In some cases a proposal is
required to be in writing. For example, a government contract, a contract of significant
resource mobilization or a contract for transfer of immovable property are given in writing.
On the other hand, in innumerable contracts in our daily life proposal is made orally. When
parties are situated at a distance, an oral as well as a written proposal is generally made
through the use of `tele-communication system like telephones, telex, teleprinter, telegram,
fax or through letters.
ix. Offer different from Invitation to treat: According to Anson, as offer is different from an
"invitation to treat". A catalogue of goods for sale is not an offer but only an invitation to
offer. A shopkeeper who keeps his goods in the shop window with label of price attached, is
making an invitation to offer. Similarly, a mere reply to a letter quoting prices will not
constitute a proposal to sell.
A railway time- table or a book list or a menu chart are not proposals. These are mere
documents of information available to the intending buyer.
In Powell v. Lee, the court held that advertisement for the post was merely intention to offer.
Application for the post was information. Interview as the preparatory step for the possible
offer. The letter of appointment would only be the offer.
In Harvey v. Facey, H through telegram communicated to F, “will you sell us your Bangalore
house ? Telegraph at what price”. F replied by telegram, `lowest price of the Bangalore house
rupees nine lakhs’. H communicated back by telegram “accepted your offer of nine lakhs”. It
is not a contract because F’s telegram of `lowest price is simply an information and not a
definite proposal.
V. Kinds of Offer:
i. Express offer - When the offeror expressly communicates the offer, the offer is said to be an
express offer the express communication of the offer may be made by Spoken word or
Written word.
ii. Implied offer – when the offer is not communicated expressly. An offer may be implied from
the conduct of the parties or the circumstances of the case.
iii. General Offer: Offer not made to anyone in particular i.e., one which may be accepted by
anyone, is a general offer.
In Carlill Vs. Smoke Ball Company: The defendant advertised that they would pay 100
pounds to anyone who gets influenza, after using their smoke-ball. This smoke-ball is to treat
the nostrils with a kind of carbolic acid snuff. This is to be used as per directions of the
defendant company. The company had deposited money in a bank to show their sincerity.
Carlill got influenza after using it. She claimed the reward. The court held that the company
was liable to she was entitled to the reward.
iv. Specific Offer: When offer is made to a specific person it is a specific offer. For example, if a
reward is declared to anyone who finds the lost dog, it is a general offer, but X’s offer to
purchase Y’s law books for Rs.50,000/- is a specific offer.
v. Cross offer:- When two parties exchange identical offers in ignorance at the time of each
other's offer the offer's are called cross offer. Two cross offer does not conclude a contract.
Two offer are said to be cross offer if (a) they are made by the same parties to one another; (b)
Each offer made in ignorance of the offer made by the; (c) The terms and conditions
contained in both the offers' are same.
Example : A offers by a letter to sell 100 tons of steel at Rs.1,000 per ton. On the same day, B
also writes to A offering to buy 100 tons of steel at Rs.1,000 per ton.
vi. Counter-offer: If the offer is not accepted in its original terms and conditions and is accepted
with different terms or new terms stipulated, the original offer is rejected and it stands
terminated. Afterwards the same cannot be activated. The acceptance with new terms or
suggestion of new terms becomes a counter-offer.
For example, A offers to sell a farm to B for Rs.10,00,000. B wants to pay Rs.9,50,000. This
is a counter-Offer. Suppose A refuses it. B afterwards wanting to pay Rs.10,00,000 would not
be able to accept A’s earlier proposal because that proposal has been terminated or cancelled
with the counter-offer. B’s offer is to be termed as a new proposal, i.e., a counter-offer.
vii. Standing, open and continuous offer:- An offer is allowed to remain open for acceptance
over a period of time is known as standing, open or continually offer. Tender for supply of
goods is a kind of standing offer.
Example: When we ask the newspaper vendor to supply the newspaper daily. In such case, we
do not repeat our offer daily and the newspaper vendor supplies the newspaper to us daily.
The offers of such types are called Standing Offer.
VI. Withdrawal or Revocation of Proposal: Offer or proposal may be withdrawn at any time before it is
accepted. This is the general principle of revocation of offer in common law as well as in civil law.
According to sec.5 of the Indian Contract Act, proposal can be revoked at any time before the
communication of acceptance is complete as against the proposer but not afterwards.
Example: X proposes to buy B’s motor car for rupees one lakh on 1.1.92. The letter reaches X on
5.1.92. The offer is made on 5.1.92. Now suppose B agreed to sell the car and sends the letter on
8.1.92. The communication of acceptance is complete against X on 8.1.92. So if X wants to
withdraw or revoke the offer, he has to do it before 8.1.92.
Modes of Revocation: According to sec.6 of the Indian Contract Act, revocation may be (a) by
way of notice; (b) by efflux of time; (c) by failure of the acceptor to fulfil condition precedent to
acceptance; and (d) by incapacity or death of the acceptor.
i. Revocation by Notice: An offer may come to an end by communication of notice of
revocation by the offeror. In other words, an offeror can revoke his offer at any time before he
becomes before bound by it. Thus, the communication of revocation of offer should reach the
offeree before the acceptance is communicated.
ii. By efflux of time: A proposal standing for a specific time limit, becomes automatically
withdrawn at the end of the time unless it is renewed. In fact, such a withdrawal does not
require a notice to be served. If it is to be renewed, then only a notice is to be served again.
iii. By failure to fulfil conditions: If the acceptor is unable to fulfil prior condition, the proposal
is automatically withdrawn. Where, the offer requires that some condition must, be fulfilled
before the acceptance of the offer, the offer lapses, if it is accepted without fulfilling the
condition. A proposes to pay B Rs.500 if B marries C. B marries D. The proposal is
automatically withdrawn.
iv. By Death or incapacity: Where, the offeror dies or becomes, insane, the offer comes to an
end if the fact of his death or insanity comes to the knowledge of the acceptor before he
makes his acceptance. But if the offer is accepted in ignorance of the fact of death or insanity
of the offeror, the acceptance is valied. This will result in a valid contract, and legal
representatives of the deceased offeror shall be bound by the contract. On the death of offeree
before acceptance, the offer also comes to an end by operation of law.
International aspect of revocation of offer: In civil law, such as French law, death or
insanity of the proposer automatically terminates the proposal provided it happens before
acceptance. Knowledge of the acceptor is immaterial. It seems that French law in this regard
is more logical than the common law on which statutory law in India is framed. Similarly, a
proposal open for a definite period, according to French law cannot be retracted but in
common law, so also in Indian law, proposal for definite or indefinite period can be revoked
with notice.
