18635902 Lesson 1 Introduction to Law and the Meaning and Essentials[1]

8/3/2019 18635902 Lesson 1 Introduction to Law and the Meaning and Essentials[1]

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LEGAL ASPECTS OF BUSINESSUNIT ILESSON 1:INTRODUCTION TO LAW AND THEMEANING AND ESSENTIALS OFCONTRACT

Learning Outcomes

At the end of this chapter, you will be able to know:

The meaning of law The main sources of mercantile law The meaning of contract The essential elements of valid contractIntroduction

Business laws are essential for the students of management to

understand the legal rules and aspects of business. Just like anyother study even business management is incomplete without aproper study of its laws. Any form of business needs legalsanction. Therefore, it is imperative that a manager understandsthe various ways in which businesses can be organized. Thissubject introduces some of the common forms of businessorganizations, including some forms unique to India like theJoint Hindu Undivided Family firm. Different types oforganizations like Sole Ownership, Partnership, Private LimitedCompany, Public Limited Company, Joint Stock Companyalong with the rationale for adopting these forms are explored.What form of business organization is the best under aparticular set of conditions? What advantage or disadvantage

does it have over other forms of business? Formalities to begone through and some the quasi-legal processes required forstarting a business will be discussed in detail in this subject.

For the proper working of the society, there must exist a codeof conduct. As you all know, in the ancient times the societywas not organized. The rights of the individuals were notrecognized. Gradually, the society evolved and the state cameinto being. As we all know, to regulate the state, there should bea specific code of conduct, which should be followed byeveryone. As a result of which law evolved as a system of rightsand obligations including all the rules and principles, which

regulate our relations with other persons and with the state.These rules and regulations took the form of statutes.

To enforce the law and to resolve the conflicts arising therefrom, courts of law were setup by the state.

Laws were made to govern almost every walk of life. You allmust know that criminal laws were made to control criminalactivities in the society like Indian Penal Code, which enumerateswhich activities are considered criminal and what will be thepunishment for committing a crime. Likewise, mercantile lawwas evolved to govern and regulate trade and commerce. Hence,the term mercantile law can be defined as that branch of law,

which comprises laws concerning trade, industry and commerce.It is an ever-growing branch of law with the changing circumstancesof trade and commerce.


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Now the question arises as to what are the sources of mercantilelaw in India. The answer is

The Indian statutes on mercantile law

English/ Foreign law

Precedents(previous judgments of the courts.)Customs and usageI must tell you that most of the Indian Mercantile Law is

contained in the statutes. The prime legislation is the IndianContract Act 1872 but it is not exhaustive to deal with all kindsof contracts. In addition to this there are the Sale of GoodsAct, 1930, The Indian Partnership Act 1932, The NegotiableInstruments Act 1881 etc. wherever the Indian Contract Act issilent, the Indian courts may apply the principles of the EnglishCommon Law.

It is interesting to know that in England there is no EnglishContract Act in the form of a statute. It has been derived fromcommon law, the usage of merchants and traders in differentspheres of trade, substantiated or ratified by decisions in thecourt of law. The judicial precedents are an important source oflaw. Sometimes, there is no provision, which can answer aparticular question of law. In such cases the court will look intothe previous decisions on similar matters to find the relevantlaw.

Custom and usage of a trade play an important role in businessdealings of that trade. To have a binding force, the custom orusage must be certain, reasonable and well known.

Now it is more than a century that that the mercantile laws aregoverning trade and commerce. The law of contract is thefoundation upon which the superstructure of modern businessis built. It is common knowledge that in business transactionsquite often promises are made at one time and the performancefollows later. In such a situation if either of the parties were freeto go back on its promise without incurring any liability, therewould be endless complications and it would be impossible tocarry on trade and commerce. Hence the law of contract wasenacted which lays down the legal rules relating to promises,their formation, their performance, and their enforceability.Explaining the object of the law of contract Sir William Ansonobserves. The law of contract is intended to ensure that what aman has been led to expect shall come to pass, that what hasbeen promised to him shall be performed.

The law of contract is applicable not only to the businesscommunity but also to others. Every one of us enters into anumber of contracts almost everyday, and most of the time wedo so without even realizing what we are doing from the pointof law. A person seldom realizes that when he entrusts hisscooter to the mechanic for repairs, he is entering into a contractof bailment; or when he buys a packet of cigarettes, he ismaking a contract of the sale of good; or again when he goes to

the cinema to see a movie, he is making yet another contract;and so on.


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Copy Right: Rai University


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Besides, the law of contract furnishes the basis for the otherbranches of mercantile law. The enactments relating to sale ofgoods, negotiable instruments, insurance, partnership andinsolvency are all founded upon the general principles ofcontract law. That is why the study of the law of contractprecedes the study of all other sub-division of mercantile law.

The Indian contract act was enacted from the 1st day of September;1872.it is applicable to the whole of India except the stateof Jammu and Kashmir. There may be some occasions whereIndian law disagrees with the English laws. In such cases, theIndian law will prevail.

Now we will move on to the definition and concept of thecontract.

The Indian Contract Act, 1972

The law of contract in India is contained in the Indian ContractAct 1872. This Act is based mainly on English common law,which is to a large extent made up of judicial precedents. (therebeing a separate contract act in England). It extends to thewhole of India except the state of Jammu and Kashmir andcame into force on the first day of September 1872(Sec.1 IndianContract Act 1872). The act is not exhaustive. It does not dealwith all the branches of the law of contract. There are separateacts, which deal with contracts relating to negotiable instruments,transfer of property, sale of goods, partnership,insurance, etc. Again the act does not affect any usage or customof trade (Sec.1).

Scheme of the Act.

The scheme of the Act may be divided into two main groups.

1.General principles of the law of contract (Secs. 1-75).2.Specific kinds of contracts, Viz;(a) Contracts of indemnity and Guarantee (Secs. 124-147).(b) Contracts of Bailment and pledge (Secs. 148-181).(c) Contracts of Agency (Secs. 182-238).Before 1930 the Act also contained provisions relating tocontracts of sale of goods and partnership. Sections 76-123relating to sale of goods were repealed in 1930 and a relating topartnership were repealed in 1932 when the Indian separate Actcalled the Sale of Goods Act was enacted. Similarly, sections239-266 partnership Act was passed.But we will not study the specific kinds of contracts for the time

being but only concentrate on contracts generally.Before we take up the discussion of the various provisions of

the Indian contract Act. It will be proper to see some of thebasic assumptions underlying the Act.

Definition of contractAccording to section 2(h) of the Indian Contract Act: An


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agreement enforceable by law is a contract. A contract therefore,is an agreement the object of which is to create a legal obligationi.e., a duty enforceable by law.

From the above definition, we find that a contract essentially

consists of two elements: (1) An agreement and (2) Legalobligation i.e., a duty enforceable by law. We shall now examinethese elements detail.

1.Agreement. As per section 2 (e): Every promise and everyset of promises, forming the consideration for each other,is an agreement. Thus it is clear from this definition that apromise is an agreement. What is a promise? the answerto this question is contained in section 2 (b) which definesthe term. When the person to whom the proposal ismade signifies his assent thereto the proposal is said to be

accepted. A proposal, when accepted, becomes a promise.An agreement, therefore, comes into existence only when

one party makes a proposal or offer to the other party andthat other party signifies his assent (i.e., gives hisacceptance) thereto. In short, an agreement is the sum totalof offer and acceptance.On analyzing the above definition the followingcharacteristics of an agreement become evident:

(a) At least two persons. There must be two or morepersons to make an agreement because one personcannot inter into an agreement with himself.

(b) Consensus-ad-idem. Both the parties to an agreementmust agree about the subject matter of the agreementin the same sense and at the same time.2.Legal obligation. As stated above, an agreement to becomea contract must give rise to a legal obligation i.e., a dutyenforceable by law. If an agreement is incapable of creatinga duty enforceable by law. It is not a contract. Thus anagreement is a wider term than a contract. All contracts areagreements but all agreements are not contracts,Agreements of moral, religious or social nature e.g., apromise to lunch together at a friends house or to take awalk together are not contracts because they are not likely tocreate a duty enforceable by law for the simple reason thatthe parties never intended that they should be attended bylegal consequences.I shall give you a very simple example to explain this point.An agreement to sell a car may be a contract but an agreement togo for lunch may be a mere agreement not enforceable by law.Thus all agreements are not contracts. In business agreementsthe presumption is usually that the parties intend to create legalrelations. Thus an agreement to buy certain specific goods at anagreed price e.g., 200 bags of rice at Rs.100 per bag is a contractbecause it gives rise to a duty enforceable by law, and in case ofdefault through a court provided other essential elements of a

contract was made by free consent of the parties competent tocontract, for a lawful consideration and with a lawful object .


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Thus it may be concluded that the Act restricts the use of the

word contract to only those agreements, which give, rise to legal

obligations between the parties.It will be appropriate to point out here that the law of contractdeals only with such legal obligations which arise form

agreements, obligations which are not contractual in nature areoutside the purview of the law of contract.

Before moving further we must know the conditions whichmust be satisfied for the contract to become valid.

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Essential Elements of a Valid Contract

A contract has been defined in section 2(h) as an agreementenforceable by law. To be enforceable by law, an agreementmust possess the essential elements of a valid contract ascontained in sections 10, 29 and 56. According to section 10, all

agreements are contracts if they are made by the free consent ofthe parties, competent to contract, for a lawful consideration,with a lawful object, are not expressly declared by the Act to bevoid, and where necessary, satisfy the requirements of any law asto writing or attention or registration. As the details of theseessentials form the subject matter of our subsequent chapters,we propose to discuss them in brief here.

The essential elements of a valid contract are as follows.

1.Offer and acceptance. There must a lawful offer and alawful acceptance

of the offer, thus resulting in anagreement. The adjective lawful implies that the offer and

acceptance must satisfy the requirements of the contract actin relation thereto.2.Intention to create legal relations. There must be anintention among the parties that the agreement should beattached by legal consequences and create legal obligations.Agreements of a social or domestic nature do notcontemplate legal relations, and as such they do not giverise to a contract. An agreement to dine at a friends housein not an agreement intended to create legal relations andtherefore is not a contract. Agreements between husband

and wife also lack the intention to create legal relationshipand thus do not result in contracts.Try to work out the solution in the following cases and then goto the answer.

Illustrations.

(a) M promises his wife N to get her a necklace if she willsing a song. N sang the song M did not bring thenecklace for her.(b) The defendant was a civil servant in Ceylon. He and hiswife were enjoying leave in England. When thedefendant was due to return to Ceylon, his wife couldnot accompany him because of her health. Thedefendant agreed to send her 30 a month asmaintenance expenses during the time they were thusforced to live apart. She sued for breach of thisagreement.Answers

(a) N cannot bring an action in a court to enforce theagreement as it lacked the intention to create legalrelations.(b) Her action was dismissed on the ground that no legalrelations had been contemplated and therefore there

was no contract.(Balfour vs. Balfour)In commercial agreements an intention to create legal relations ispresumed. Thus, an agreement to buy and sell goods intends


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to create legal relationship hence is a contract, provided otherrequisites of a valid contract are present. But if the parties areunder a legal obligation, even a business agreement does notamount to a contract. The case of Rose & Frank co, vs.

Crompton & Brothers Ltd. Provides a good illustration on the

point.Illustration In the above case R Company entered into anagreement with C Company. By means of which the former wasappointed as the agent of the latter. One clause of the agreementwas as follows. This arrangement is not entered into as aformal or legal agreement. And shall not be subject to legaljurisdiction in the law courts. It was held that there was nointention to create legal relations on the part of parties to theagreement and hence there was no contract.

Now let us go to the third essential of a contract i.e.

3.Lawful consideration. The third essential element of a validcontract is the presence of consideration. Considerationhas been defined as the price paid by one party for thepromise of the other. An agreement is legally enforceableonly when each of the parties to it gives something andgets something. The something given or obtained is theprice for the promise and is called consideration subject tocertain exceptions; gratuitous promises are not enforceableat law.The consideration may be an act (doing something) orforbearance (not doing something) or a promise to do or notto do something. It may be past, present or future. But only

those considerations are valid which are lawful. The considerationis lawful. unless it is forbidden by law; or is of such anature that, if permitted it would defeat The provisions of anylaw; or is fraudulent; or involves or implies injury to the personor property of another; or is immoral; or is opposed to publicpolicy (sec.23).

4.Capacity of parties. The parties to an agreement must becompetent to contract. But the question that arises now isthat what parties are competent and what are not. Thecontracting parties must be of the age of majority and ofsound mind and must not be disqualified by any law towhich they are subject (sec.11). If any of the parties to theagreement suffers form minority, lunacy, idiocy,drunkenness etc. The agreement is not enforceable at law,except in some special cases e.g., in the case of necessariessupplied to a minor or lunatic, the supplier of goods isentitled to be reimbursed from their estate (sec 68).5.Free consent. Free consent of all the parties to anagreement is another essential element. This concept hastwo aspects.(1) consent should be made and (2) it shouldbe free of any pressure or misunderstanding. Consentmeans that the parties must have agreed upon the same

thing in the same sense (sec. 13). There is absence of freeconsent, if the agreement is induced by (i)coercion, (ii)undue influence, (iii) fraud, (iv) mis-representation, or (v)


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mistake (sec. 14). If the agreement is vitiated by any of thefirst four factors, the contract would be voidable andcannot be enforced by the party guilty of coercion, undueinfluence etc. The other party (i.e., the aggrieved party) caneither reject the contract or accept it, subject to the rules laiddown in the act. If the agreement is induced by mutualmistake which is material to the agreement, it would be

void (sec. 20)LEGAL ASPECTS OF BUSINESS


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6.Lawful object. For the formation of a valid contract it isalso necessary that the parties to an agreement must agreefor a lawful object. The object for which the agreement hasbeen entered into must not be fraudulent or illegal orimmoral or opposed to public policy or must mot imply

injury to the person or the other of the reasons mentionedabove the agreement is void. Thus, when a landlordknowingly lets a house to a prostitute to carry onprostitution, he cannot recover the rent through a court oflaw or a contract for committing a murder is a void contractand unenforceable by law.7.Writing and registration. According to the Indian contractAct, a contract to be valid, must be in writing andregistered. For example, it requires that an agreement to paya time barred debt must be in writing and an agreement tomake a gift for natural love and affection must be in

writing and registered to make the agreement enforceableby law which must be observed.8.Certainty. Section 29 of the contract Act provides that Agreements, the meaning of which is not certain or capableof being made certain, are void. In order to give rise to avalid contract the terms of the agreement must not bevague or uncertain. It must be possible to ascertain themeaning of the agreement, for otherwise, it cannot beenforcedIllustation. A, agrees to sell B a hundred ton of oil there isnothing whatever to show what kind of oil was intended. Theagreement is void for uncertainly.

9.Possibility of performance. Yet another essential feature ofa valid contract is that it must be capable of performance.Section 56 lays down that An agreement to do an actimpossible in itself is void. If the act is impossible initself, physically or legally, the agreement cannot be enforcedat law.Illustration. A agrees with B, to discover treasure by magic. Theagreement is not enforceable.

10.Not expressly declared void. The agreement must not havebeen expressly declared to be void under the Act. Sections24-30 specify certain types of agreements that have beenexpressly declared to be void. For example, an agreement inrestraint of marriage, an agreement in restraint of trade,and an agreement by way of wager have been expresslydeclared void under sections 26, 27 and 30 respectively.Before dealing with the various essentials of a valid contract oneby one in detail, it will be appropriate to discuss the kinds ofcontracts. First, because we shall be using the terms likevoidable contract, void contract, void agreement, etc. veryoften in the course of our discussion.

Here we end our discussion on essentials of a valid contract.Now attempt the following questions for a better understanding:


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1.Comment that the all contracts are agreements but allagreements are not contract.2.What are the essential elements of a valid contract?3.

A invites B to see a picture with him. B accepts the offer. Apurchase a ticket for B and waits for him outside thecinema hall. B does not turn up has A any cause of actionagainst B. [Hint: No]4.A agrees with B to murder C for Rs. 10,000. Is this a validcontract?[Hint: No]

5.X agrees to pay Y Rs. 1000 if Y writes 100 pages for him

in one minute. Is it a valid contract? [Hint: No]6.State whether there is any valid contract in the followingcases?7.(i) X boards a DTC bus at Mayur Vihar for ShalimarBagh.(ii) X and Y agree to go for fishing(iii) X buys an evening paper(iv) X a minor borrows Rs. 5000 from Yand agreed torepay back the same within a week.References

Kapoor, N.D. (2003), Elements of Mercantile Law,Sultan Chand and Sons, New Delhi.http://www.indialawinfo.com/bareacts/soga.htmlM.C. Kucchal ( 2002), Business Law, Vikas PublishingHouse Pvt. Ltd, Delhi.P.C. Tulsian (2002), Business Law, Tata Mc. Graw HillPvt. Ltd, Delhi.Notes:



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LESSON 2KINDS OF CONTRACTS

Learning Outcomesother circumstances under which a contract becomes

By the end of the lecture we should be able to answer thefollowing questions:

The different types of contracts with respect toperformance, enforceability, validity and formationIntroduction

First of all we will study

[I] Kinds of contracts from the point of view of EnforceabilityValid contractVoidable contract.Void contractUnenforceable contractIllegal or unlawful contractFrom the point of view of enforceability a contract may bevalid, voidable, void, unenforceable or illegal.

1.Valid contract. According to section 2(i), it isan agreementenforceable by law, an agreement becomes enforceable bylaw when all the essential elements of a valid contract aswere enumerated in the last lesson are present.If one or more of these elements is/are missing the contract iseither void, voidable, illegal or unenforceable.

2.Voidable contract. According to section 2(i), an agreementwhich is enforceable by law at the option of one or moreof the parties thereto, but not at the option of the otheror others, is a voidable contract. Thus, a voidable contractis one which is enforceable by law at the option of one ofthe parties only. Until it is avoided or rescinded by the partyentitled to do so by exercising his option in that behalf, itis a valid contract.Usually a contract becomes voidable when the consent of oneof the parties to the contract is obtained by coercion, undueinfluence, misrepresentation or fraud. Such a contract is voidableat the option of the aggrieved party i.e., the party whoseconsent was so caused (secs. 19 and 19A). but the aggrievedparty must exercise his option of rejecting the contract (i) withina reasonable time, and (ii) before the rights of third partiesintervene, otherwise the contract cannot be repudiated.

Illustration.


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(a) A : threatens to shoot B if he does not sell his newBajaj scooter to A for Rs. 2,000. B agrees. The contracthas been brought about by coercion and is voidable atthe option of B.(b) A. intending to deceive B. falsely represents that fivehundred quintals of indigo are made annually at Asfactory, and thereby induces B to buy the factory. The

contract has been caused by fraud and is voidable at theoption of B.voidable. The Indian contract act has laid down certainother situations also under which a contract becomesvoidable. For example.

(i)When a contract contains reciprocal promises, and oneparty to the contract prevents the other from performinghis promises, then the contract becomes voidable at theoption at the party so prevented (sec. 53).Illustration. A. Contracts with B that A shall whitewash Bs

house for Rs. 100. A. is ready and willing to execute the workaccordingly, but B prevents him from doing so. The contractbecomes voidable at the option of A.

(ii)When a party to the contract promises to do a certain thingwithin a specified time, but fails to do it, then the contractbecomes voidable at the option of the promisee. If theintention of the parties was that time should be of theessence of the contract. (sec.55)Illustration. X Agrees to sell and deliver 10 bags of wheat to Yfor Rs. 2,5000 within one week. But X does not supply thewheat within the specified time. The contract becomes voidable

at the option of Y.

Consequences of rescission of voidable contract. Section 64 laysdown the rights and obligations of the parties to a voidablecontract after it is rescinded. The section states that when aperson at whose option a contract has become has received anybenefit from another party to such contract, he must restoresuch benefit. If an amount has been received as a security forthe due performance of the contract, such earnest moneydeposit is not to be returned if the contract becomes voidableunder section 55 on account of the promisors failure tocomplete the contract at the time agreed and has been rescindedby the promisee because it is not a benefit received under thecontract.

3.Void contract. Literally the word void means not bindingin law. Accordingly the term. void contract implies auseless contract which has no legal effect at all. Such acontract is a nullity, as for there has been no contract at all.Section 2(j) defines: A contract which ceases to beenforceable by law becomes void, when it ceases to beenforceable. It follows form the definition that a voidcontract is not void from its inception and that it is validand binding on the parties when originally entered but

subsequent to its formation it becomes invalid anddestitute of legal effect because of certain reasons.The reasons which transform a valid contract into a void


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contract, as given in the contract Act. Are as follows.

(a)Supervening impossibility (sec. 56) A contract becomesvoid by impossibility of performance after the formationof the of contract for example, A and B contract to marryLEGAL ASPECTS OF BUSINESS


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each other. Before the time fixed for the marriage, A goes

mad. The contract to marry becomes void.

(b) Subsequent illegality (sec, 56) A contract also becomes voidby subsequent illegality. For example, A agrees to sell B 100

hags of wheat at Rs. 650 per bag. Before delivery thegovernment bans private trading in wheat. The contractbecomes void.(c)Repudiation of a voidable contract. A voidable contractbecomes void, when the party, whose consent is not free,repudiates the contract. For example, M by threatening tomurder Bs son, makes B agree to sell his car worth Rs.30,000 for a sum of Rs. 10,000 only. The contract, beingthe result or coercion, is voidable at the option of B. B mayeither affirm or reject the contract. In case B decides torescind the contract, it becomes void.

(d)In the case of a contract contingent on the happening ofan uncertain future event, if that event becomesimpossible. A contingent contract to do or not to dosomething on the happening of an uncertain future event,becomes void, when the event becomes impossible(sec.32). for example, A contracts to give Rs. 1,000 as loanto B marries C. C dies without being married to B. thecontract becomes void.Void agreement- An agreement not enforceable by law is saidto be void [sec.2 (g)]. Thus, a void agreement does not giverise to any legal consequences and is void agreement does notgive rise to any legal consequences and is void ab-initio. In the

eye of law such an agreement is no agreement at all from its veryinception. There is absence of one or more essential elementsof a valid contract, except that of free consent, in the case of avoid agreement. Thus, an agreement with a minor is void abinitioas against him, because a minor lacks the capacity tocontract. Similarly, an agreement without consideration is voidab-initio, of course with certain exceptions as laid down insection 25. Certain agreements have been expressly declared voidin the contract act e.g., agreements which are in restraint of tradeor of marriage or of legal proceedings or which are by way orwager.

A void agreement should be distinguished from a voidcontract. A void agreement never amounts to a contract as itis void ab-initio. A void contract is valid when it is enteredinto, but subsequent to its formation something happenswhich makes it unenforceable by law, notice that a contractcannot be void ab-initio and only an agreement can be void abinitio.

Obligation of person who has received advantage under voidagreement or contract that becomes void. In this connectionsection 65 lays down that when an agreement is discovered tobe void or when a contract becomes void, any person who hasreceived any advantage under such agreement or contract is

bound to restore it. Thus, this section provides for restitutionof the benefit received. Thus both parties may stand uneffectedby the transaction in the following two cases.


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(a)When an agreement is discovered to be void. In otherwords, when an agreement is void being discovered at alater stage. For example, A pays B Rs. 1,000 for Bs agreeingto sell his horse to him. It turns out that the horse wasdead at the time of the bargain, through neither party was

aware of the fact. In this case the agreement is discoveredto be void and B must repay to A Rs. 1,000. it should,however, be noted that agreements which are known to bevoid or illegal, when they are entered into, are excludedfrom the purview of this section. Thus, if L pays Rs.10,000 to M to murder Z, the money cannot be recovered.Similarly, nothing can be recovered in the case of expresslydeclared void agreements, of course, subject to thefollowing exceptions.

(i)In the case of an agreement caused by bilateral mistake of

essential fact (although it is expressly declared void undersection 20) restitution is allowed as it comes under thecategory of an agreement discovered to be void.(ii)In the case of an agreement with a minor who commitsfraud by misrepresenting his age (although agreement witha minor is known to be void.) restoration is allowed inspecie on equitable grounds because a minor cannot beallowed to cheat people, and also because the other partyhas not lost his title to the thing in question.(b) When a contract becomes void, restitution is also allowedin the case of a void contract. For example, A agrees to sellB after one month 10 quintals of wheat at Rs. 625 per

quintal and receives Rs. 500 as advance. Soon after thecontract, private sales of wheat becomes void but A mustreturn the sum of Rs. 500 to B. Similarly, where afteraccepting Rs. 1,000 as advance for singing at a convert for B,A is too ill to sing. A is not bound to make compensationto B for the loss of the profits which B would have madeif A would have been able to sing, but A must refund to Bthe 1,000 rupees paid in advance.4.Unenforceable contract. An unenforceable contract is onewhich is valid in itself, but is not capable of being enforcedin a court of law because of some technical defect such asabsence of writing, registration, requisite stamp, etc., ortime barred by the law of limitation. For example, an oralarbitration agreement is unenforceable because the lawrequires an arbitration agreement to be in writing. Similarly,a bill of exchange or promissory note, though valid initself, becomes unenforceable after three years from the datethe bill or note falls due, being time barred under thelimitation act.5.Illegal or unlawful contract. The word illegal meanscontrary to law and the term contract means anagreement enforceable by law. As such to speak of anillegal contract involves a contradiction in terms, because it

means something like this an agreement enforceable by lawand contrary to law. There is apparent contradiction interms. Moreover, being of unlawful nature, such an


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agreement can never attain the status of a contract. Thus, itwill be proper if we use the term illegal agreement in placeof illegal contract an illegal agreement is void ab-initio.Some important comparisons



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Agreement and Contractagreement with a minor is void as against him but not

An agreement is a promise or set of promises (s).

Differences

Enforceability An agreement may or my not beenforceable at law. For example, social agreements aregenerally not enforceable while business agreementsare enforceable at law.Effect An agreement is not always a binding on theconcerned parties.Scope All agreements are not contracts.

Agreement

Illegal and Void Agreements

SimilaritiesThese agreements are not enforceable at law.DifferencesScope-These agreements are narrower in scope. Allillegal ag reements are void.

Effect on collateral transaction Collateraltransaction of an illegal contract also becomes illegaland contract not be enforced.Punishment Parties may be punished for makingillegal agreement.

A contract is essentially an agreement, i.e., a promise

or set of promise (s).

A contract is an agreement which is enforceable atlaw.

A contract is always concluded and binding on theconcerned parties,All contracts are agreements.

Illegal agreementVoid agreement

Despite the similarity between an illegal and a void agreementthat in either case the agreement is void ab- initio and cannot beenforced by law, I will explain the above points in detail now.

(i)An illegal agreement is narrower in scope than a voidagreement. all illegal agreements are void but all voidagreements are not necessarily illegal. The object orconsideration of an agreement way not be contrary to lawbut may still be void. For example, an agreement may notbe contrary to law but may still be void. For example, an

illegal. Again, an agreement theterms of which are uncertain isvoid but such an agreement the


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terms of which are uncertain isvoid an agreement is not illegal.

(ii) An illegal agreement iswider in effect in relation tocollateral transactions than a voidagreement. When an agreement is

illegal, other agreement which areContractincidental or collateral to it are also tainted with illegality,hence void, provided the third parties have the knowledgeof the illegal or immoral design of the main transaction.The reason underlying this rule is that no person shall be

These agreements are not enforces able at law.

These agreements are wider in scope.An agreement may be void because of a reason otherthan illegality.

Collateral transaction of an agreement which is voidfor a reason other than illegality are enforceable atlaw.Being void does not make a contract punishable.

allowed to invoke the aid of thecourt if he is himself implicatedin the illegality. On the otherhand, when an agreement isvoid (but not illegal),agreements which are collateralto it are not invalidated and

remain valid.

Illustrations. (a) A engages B toMurder C and borrows Rs.

5,000 from D to pay B. D is aware of the purpose of the loan.Here the agreement between A and B. D is aware of thepurpose of the loan. Here the agreement between A and B isillegal and the agreement between A and D is collateral to anillegal agreement. As such the loan transaction is illegal andvoid and D cannot recover the money. But the position willchange if D is not aware of the purpose of the loan. In thatcase the loan transaction is not collateral to the illegal agreementand is a valid contract.

Void and Voidable Contract

Void Agreement and Void Contract

SimilaritiesRestitution If any benefit is passed between the If any benefit is passed between the parties, it may beparties, it may be restored back. restored back.DifferencesDefinition When a contract ceases to be enforceable It is a contract which is en

forceable by law at theat law, it becomes void contract. option of one or more parties thereof, but notat the


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option of others.Status A void contract cannot create any legal rights.

A voidable contract takes its full

It is a total nullity.

and proper legal effect unless it is

Nature A void contract is valid when it is made. Butsubsequently it becomes void due to one reason or disputed and set aside by thepersonthe other.

entitled to do so.

Rights A void contract is valid when it is made. But

A contract may be voidable since very beginning, or

subsequently it becomes void due to one reason or

may subsequently become voidable.

the other.

A voidable contract gives rights to the aggrieved party

Effect When a contract is void because of illegality,

to rescind the contract, and claim the damages, etc. in

its collateral transactions also becomes void.

certain cases.

A voidable contract does not effect the collateraltransactions.



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SimilaritiesA void agreement cannot create any legal rights. It is a

A void contract cannot create any legal rights. It is atotal nullity.

total nullity.DifferencesIt is an agreement. It never takes form of a contract.

It is a contract.It is a nullity since very beginning.

When it is formed it is perfectly valid.Subsequently it becomes a nullity.

Kinds of contracts from the point of view of modeof creation

From the point of view of mode of creation a contract may beexpress or implied or constructive.

1.Express contract. Where both the offer and acceptanceconstituting an agreement enforceable at law are made inwords spoken or written, it is an express contract. Forexample. A tells B on telephone that he offers to sell his carfor Rs. 20,000 and B in reply informs A that he accepts theoffer, there is an express contract.2.Implied contract. Where both the offer and acceptance

constituting an agreement enforceable at law are madeotherwise than in words i.e., by acts and conduct of theparties, it is an implied contract. Thus, where A, a coolie inuniform takes up the luggage of B to be carried out of therailway station without being asked by B, and B, allowshim to do so, then the law implies that B agrees to pay forthe services of A, and there comes into existence animplied contract and N is under obligation to pay to M.It is relevant to state in respect of mode of creation, certaincontracts may be a mixture of the express and implied typesof contracts, that is, where out of the two components of anagreement, namely, offer and acceptance, one is expressed inwords and the other is implied from acts and circumstances.Such contracts may be called as contracts of mixed character. Forexample, A offers to buy Bs scooter for Rs. 4,000 and B acceptsthe offer by sending the scooter itself. Here As offer is expressedin words and Bs acceptance is implied form his conduct. It is acontract of mixed character.

1.Constructive or quasi contract. The term constructive orquasi contract is a misnomer, the cases grouped under thistype of contracts have little or affinity with contract. Such acontract does not arise by virtue of any agreement, expressor implied between the parties but the law infers or

recognizes a contract under certain special circumstances.For example, obligation to finder of lost goods to returnthem to the true owner or liability or person to whom


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money is paid under mistake to repay it back cannot be saidto arise out of a consent, but these are very mushconversed under quasi contracts as per sections 71 and 72respectively. The contract act has rightly named suchcontracts as certain relations resembling those created bycontract.example, and A says to B, If you dig my garden next Sunday, I

will pay you Rs. 500. B makes no commitment, but says, I amnot sure that I shall be able to, but if I do, I shall be happy totake Rs. 500. This arrangement is not bilateral. A has committedhimself to pay Rs. 500 in certain circumstances, but B has madeno commitment at all. He is totally free to decide whether hewants to dig As garden or not. If B does not turn up onSunday to dig the garden, A cannot do anything about is. If,however, B reaches to As place on Sunday to do the work, it willamount to his acceptance a contract will be formed where bothparties will be bound by their performance.

Before I end the discussion on kinds of contracts I would like

to discuss another kind of contract called the Standard FormContract

When a large number of contracts have got to be entered intoby a person, from a practical point of view and for the sake ofconvenience, a standard form for the numerous contracts maybe used. An insurance policy, shares or a railway ticket are fewexamples of such standardized contracts. The special termsand conditions become binding as part of the contract only ifthey are brought to the notice of the acceptor before or at thetime of the contract. In view of the unequal bargaining powerof the two parties, the courts and the legislature have evolvedcertain rules to protect the interest of the weaker party:

(1)Reasonable notice e.g. by printing on a ticket, Forconditions see back, or obtaining signatures on thedocument containing terms, or otherwise explaining thethe terms,. Where an adequate notice is not given theofferee is not bound by the terms.(2)Notice should be contemporaneous with the contract if aparty to the contract wants to have exemption from liabilityhe must give a notice about the exemption while thecontract is being entered into and not thereafter ( Olley Vs.Marlborough Court. Ltd.)(3)Terms of contract should be reasonable if the terms ofthe contract are unreasonable and opposed to public policy,they will not be enforced.(4)Fundamental breach of contract no exemption clause isallowed to permit the non-compliance of the basiccontractual obligation i.e. obligation which is fundamentalor core of the contract. Thus, the dry cleaner has to beanswerable , even if the contract contains all sorts ofexemption clauses, if the cloth is altogether lost.

A quasi contract is based upon the equitable principle that aperson shall not be allowed to retain unjust benefit at theexpense of another. Sections 68-72 of the contract act describe


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the cases which are to be deemed quasi contracts.

Now we come to

(5)Strict construction a strict construction shall be applied to

exemption clause, and any ambiguity is to be resolved infavour of the weaker party.(6)Statutory protection The English Unfair Contract TermsAct, 1977 severely limits the right of the contracting partiesLEGAL ASPECTS OF BUSINESS


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to exclude or limit their liability through exemption clausesin the agreement. India lacks such an Act.

Practical Problems

Attempt the following problems, giving reasons for your

answers.

1.A invites B to a dinner. B accepts the invitation. A madeelaborate arrangement but B failed to turn up. Can A sue Bfor the loss he has suffered?.[Hint. No, A cannot sue B for the loss he suffered becausethe agreement was of a social nature and hence lacked theintention to create legal relationship one of the essentialsof a valid contract.]

2.

M agrees to pay N Rs. 100 and in consideration N agrees inwrite for him 100 pages within five minutes. Is it a validcontract?[Hint. No, it is not valid contract. It is a void agreementbecause as per section 56 an agreement to do an actimpossible in itself is void.]

3.C orally offered to pay A, an auto mechanic, Rs.50 fortesting a used car which C was about to purchase from D.A agreed and tested the car. C paid A Rs. 50 in cash for hisservices. Is the agreement between A and C(a) Express or implied

(b) Executed or executory(c)Valid, voidable or void6.A promises to pay B Rs.500 if beats C.B beats C but Arefuses to pay. Can B recover the amount?( Hint : No as the agreement is illegal.)

4.X invites Y to dinner. Y accepts the invitation but fails toturn up. Can X sue Y for the damage?Solution: X cannot claim any damages from Y because theagreement between X and Y is not enforceable by law. It is asocial agreement and the usual presumption in such agreementis that the parties do not intend to create legal relationship.

5.X makes a promise to his wife Y to give her pocket moneyof Rs 1,000 per month. After 6 months, he stops makingthe payment. Can Y claim damages from XSolution: Y cannot claim any damages from X because theagreement between X and Y is not enforceable by law. It is asocial agreement and the usual presumption in such agreementis that the parties do not intend to create legal relationship.

6.X promises Y to give a diamond ring at the time ofhis marriage. X fails to give the ring. Can Y claim the


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ring?Solution: Y cannot claim the diamond ring because there is noconsideration from Y.

7.X polished Ys shoes without being asked by Y to do so. Ydoes not make any attempt to stop X from polishing the

shoes. Is Y bound to make payment to X?Solution: Y is bound to pay because he has accepted X simplied offer by conduct (i.e. by not stopping X from polishingthe shoes). 9. X agreed to sell a particular horse to Y. Later on, it

was discovered that the horse was dead at the time of making

the contract. Advise the parties.Solution:. The agreement is void because both the parties wereunder a mistake of fact regarding existence of the subjectmatter.

8.X agrees to let his flat to Y for use as a gambling den on amonthly rent of Rs 10,000. After 3 months, Y stopsmaking the payment of rent. Advise X.Solution: X cannot recover anything. The agreement between Xand Y is void because the object of the agreement is unlawful.

9.X threatens to kill Y if he does not sell his house to X forRs 1,00,000. Y agrees. X borrows Rs 1,00,000 from Z whois also aware of the purpose of the loan. What is the

nature of the agreement between X and Y, and X and Z?Solution: The contract between X and Y is a contract which isvoidable at the option of Y because Ys consent is not free as ithas been obtained by coercion. The contract between X and Z isa valid contract because the object of contract (i.e. borrowing forthe purchase of a house) is lawful.

10.X agrees to pay Y Rs 1,00,000 if Y kills Z. To pay Y, Xborrows Rs 1,00,000 from W who is also aware of thepurpose of the loan. Y kills Z but X refuses to pay. X alsorefuses to repay the loan to W. Advise Y and W.Solution: The agreement between X and Y is an illegal agreementbecause its object is unlawful. Hence, Y cannot recoveranything from X. Since the main agreement between X and Y isillegal, the agreement between X and W which is collateral to themain agreement is also void and hence W cannot recoveranything from X.

References

Kapoor, N.D. (2003), Elements of Mercantile Law,Sultan Chand and Sons, New Delhi.

http://www.indialawinfo.com/bareacts/soga.htmlM.C. Kucchal ( 2002), Business Law, Vikas Publishing


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House Pvt. Ltd, Delhi.P.C. Tulsian (2002), Business Law, Tata Mc. Graw HillPvt. Ltd, Delhi.Rohini Aggarwal(2003), Students Guide To MercantileAnd Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd,

Delhi.Notes:



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LESSON 3:ACCEPTANCE

Learning Outcomes

After todays class you should be able to answer the followingquestions:

The meaning of offer and acceptanceThe communication of offer and acceptanceThe revocation of offer and acceptanceIntroduction

By now you must be aware of the essentials of a contract. In

todays lecture we shall do a detailed study of the concept ofoffer

The four basic elements of a contract are offer, acceptance,consideration and contractual capacity out of which we shallstudy the first one in this lesson.

While discussing the essential elements of a valid contract in thepreceding chapter we observed that as a first step in the makingof a contract there must be a lawful offer by one party and alawful acceptance of the offer by the other party, thus where A,offers to sell a wrist watch to B for Rs. 200 and B accepts theoffer, a contract comes into being provided other essentials of a

valid contract like that of competency of parties to contract, etc.are present. We propose to discuss now the legal rules relatingto a lawful offer.

The Proposal or Offer

The words proposal and offer are synonymous and are usedinterchangeably. Section 2 (a) of the Indian contract act defines aproposal as, when one person signifies to another hiswillingness to do or to abstain form doing anything, with aview to obtaining the assent of that other to such act orabstinence, he is said to make a proposal. This definitionreveals the following three essentials of a proposal.

(i)One person signifies to another; it must be an expressionof the willingness to do or to abstain from doingsomething. According to section 3 to signify means thatthe proposal must be communicated to the other party.(ii)The expression of willingness to do or to abstain formdoing some thing must be to another person. There can beno proposal by a person to himself(iii) The expression of willingness to do or to abstain fromdoing some-thing must be made with a view to obtaining

the assent of the other person to such act or abstinence.Thus a casual enquiry do you intend to sell yourmotorcycle? is not a proposal. Similarly, a mere statement


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of intention I may sell my motorcycle if I can get Rs.14,000 for it is not a proposal. But if M says to N, willyou buy my motorcycle fro Rs. 14,000, or I am willingto sell my motorcycle to you for Rs. 14,000, we have aproposal as it has been made with the object ofobtaining the assent of N.The person making the proposal or offer is called the

promisor or offeror, the person to whom the offer is madeis called the offeree, and the person accepting the offer is calledthe promisee or acceptor.

Legal Rules Regarding a Valid Offer

A valid offer must be in conformity with the following rules:

1.An offer may be express or implied. An offer may bemade either by words or by conduct. An offer which isexpressed by words, spoken or written is called an express

offerand the one which is inferred form the conduct of aperson or the circumstances of the case is called an implied

offer. Thus stepping into a taxi and consuming eatables ata restaurant both create implied promise to pay for benefitsemployed. In Upton Rural District Council v Powell, a firebroke out in the defendants farm . believing that he wasentitled to the free service of Upton Fire Brigade (which hewas not) he summoned it. Upton claimed compensationfor its services. Held services were rendered on an impliedpromise to pay for them.I will give a few more illustrations in this regard.

Illustration

(a)M says to N that he is willing to sell his motorcycle to himfor Rs. 20,000. this is an express offer.(b)X writes to Y he offers to sell his house to him for Rs.80,000. there is an express offer.(a)The Delhi Transport Corporation runs omnibuses ondifferent routes to carry passengers at the scheduled fare.This is an implied offer by the D.T.C.(b) A shoe shiner starts shining some ones shoes, withoutbeing asked to do so, in such circumstances that anyreasonable man could guess that he expects to be paid forthis, he makes an implied offer.The second essential of a valid offer is intention.

2.An offer must contemplate to give rise to legalconsequences and be capable of creating legal relations.If the offer does not intend to give rise to legal consequences, itis not a valid offer in the eyes of law. An offer to a friend todine at the offerors place, or an offer to ones wife to show her amovie is not a valid offer and as such cannot give rise to abinding agreement, even though it is accepted and there is

consideration, because in social agreements or domesticarrangements the presumption is that the parties do not intendlegal consequences to follow the breach of agreement. But in


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the case of agreements regulating business agreements it istaken for granted that parties intend legal consequences tofollow. Even in the case of a business agreement if the partiesagree that the breach of the agreement would not confer oneither of the parties a right to enforce the agreement in a court



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of law, there is no contract (Rose & Frank Co. vs. Crompton &Brothers Ltd.)

3.The terms of the offer must be certain and not loose orvague. The terms of the offer must be certain and not

vague (sec 29). Mangham L.J. has rightly observed: unlessall the material terms of the contract are agreed, there is nobinding obligation. Thus an agreement to agree in futureis not a contract, because the terms of agreement areuncertain as they are yet to be settled.Let us try to work out these problems on our own

Illustrations.

(a)X purchased a horse form Y and promised to buy another,if the first one proves lucky. X refused to buy the second

horse.(b) A offers to B lavish entertainment. If B does a particularwork for him.(c)A agrees to sell to B my white horse for Rs. 500 or Rs.1000Answers

(a)Y could not enforce the agreement, it being loose andvague (Taylor vs. Porting ton)(b) As offer does not amount to lawful offer being vague anduncertain.

(c)There is nothing to show which of the two prices was tobe given, thus it is not a valid offer.3.An invitation to offer is not an offer. An offer must bedistinguished form an invitation to receive offer or as it issometimes expressed in judicial language an invitation totreat. In the case of an invitation to offer the personsending out the invitation does not make an offer but onlyinvites the other party to make an offer. His object ismerely to circulate information that he is willing to dealwith anybody who, on such information, is willing to opennegotiations with him. Such invitations for offers aretherefore not offers. In the eyes of law and do not becomeagreements by their acceptance. We may give someexamples of them here.(a)An advertisement for sale of goods by auction does notamount to an offer to hold such sale. It merely invitesoffers. Actual bids made at the auction are offers, eachhigher bid superseding the previous one, and when thehammer falls on the higher bid, there is an acceptance andthe contract becomes complete. An advertisement for anauction sale does not even bind the auctioneer to hold theauction and the prospective bidders have no legal right to

complaint if they have wasted their time and money incoming to the advertised place of the auction sale (Harriesvs. Nickerson)


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(b) There is a self-service system in a shop. A customer selectsthe goods and takes them to the cashier for payment of theprice. The cashier totals the price and accepts the amount.The contract, in this case in made, not when the customerselects the goods, but when the cashier accepts the offer byaccepting the payment. The selection of goods by thecustomer constitutes an implied offer to buy goods and

the acceptance of payment by the cashier constitutes

acceptance of the offer. [Pharmaceutical society of Great

Britain vs. Boots cash Chemists (southern). Ltd.]

(c)A notice that goods will be sold by tender does notamount to an offer. It is only an attempt to ascertainwhether an offer can be obtained within such a margin asthe seller is willing to adopt (Spencer vs. Harding) thetenders to accept them or not.

(d) In Mc Pherson vs Appanna it was held that mere statementof the lowest price at which the offerer would sell containsno implied contract to sell at that price.(e)In the case of Harvey vs Facey the plaintiffs telegraphed tothe defendants writing; will you sell us Bumper Hall Pen?Telegraph lowest cash price. The defendants replied, alsoby a telegram: Lowest price for pen, 900. The plaintiffsimmediately sent their last telegram stating: We agree tobuy Pen for 900 asked by you. The defendants, however,refused to sell the plot of land at that price. The courtobserved that the defendants had made no offer. Theplaintiffs last telegram was an offer to buy, but that was

never accepted by the defendants.5.An offer may be a specific or general. There are two kindsof offers - general and specific. The specific order is madeto a specific person, while a general offer is made to theworld or public at large. However, in case of general offersthe contract is made only with that person who comesforward and performs the conditions of the proposal assuch performance amounts to the acceptance ofperformance. Such an offer can be accepted only by theperson or persons to whom it is made. Thus, where Mmakes an offer to N to sell his bicycle for Rs. 200, there is aspecific offer and N alone can accept it. A general offer onthe enter hand is one which is made to the world at large orpublic in general and may be accepted by and person whofulfils the requisite conditions. The leading case on thesubject of general offer is that of Carlill vs Carbolicsmoke Ball co,Illustration

In the above case the carbolic smoke Ball co. issued an advertisementin which the company offered to pay 100 to any personwho contract influenza, after having used their smoke Ballsthree times daily for two weeks, according to the printeddirections. Mrs. Carlill, on the faith of the advertisement,

bought and used the Balls according to the directions, but shenevertheless subsequently suffered from influenza. She sued thecompany for the promised reward. The company was held


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liable.

Offers of reward made by way of advertisement, addressed tothe public at large, for the rendering of certain services, or therestoration of lost article are also examples of general offers.Such offers may be accepted by performance of the conditionsby an individual person in order to give rise to a contractual

obligation to pay the reward. It is worth noting that therecannot result into a contract until it has been accepted by anascertained person. If a large number of persons accepted ageneral offers of continuing nature, as it was in the smoke Ball



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company case discussed above, which can be accepted bynumber of persons. In case of general offer of reward for someinformation or restoration of a missing thing, the offer is openfor acceptance to only one individual who performs the requiredcondition first of all, and as soon as the condition is firstperformed the offer is closed.

6.An offer must be communicated to the offeree. Thecommunication of a proposal is complete when it comesto the knowledge of the person to whom it is made (Secn4). An offer is effective only when it is communicated tothe offeree. Until the offer is made known to the offeree,there can be no acceptance and no contract. Doing anythingin ignorance of the offer can never be treated as itsacceptance, for there was never a consensus of wills. Thisapplies to both specific and general offers.Illustrations (a) A. without knowing that a reward has been

offered for the arrest of a particular criminal, catches the criminaland gives the information to the superintendent of police. Acannot recover the reward as he cannot be said to have acceptedthe offer when he was not at all aware of it.

In Lalman Shukla vs. Gauri Datt. the defendants nephewabsconded from home. He sent his servant, the plaintiff, insearch of the boy. After the servant had left. The defendantannounced a reward of Rs. 501 to anybody giving informationrelating to the boy. The servant, before seeing the announcement,had traced the boy and informed the defendant. Later, onreading the notice of reward, the servant claimed it. His suit wasdismissed on the ground that he could not accept the offer,

unless he had knowledge of it.

The court observed: where an offer has been accepted withknowledge of the reward the fact that the informer wasinfluenced by motives other than the reward will be immaterial.In Williams vs. Carwardine where information was givenabout the murderers of her husband of a woman, not so muchfor reward, but to assuage her feelings, she was allowed torecover. The court further observed that in the case of publicadvertisements offering a reward, the performance of the actraises an inference of acceptance. But in the case of LalmanShukla vs Gauri Dutt , the plaintiff being a servant was alreadyunder an obligation to do what he did and therefore theperformance of act cannot be regarded as a consideration fordefendants promise.

7.Cross offers when two parties make identical offers toeach other, in ignorance of each others offer, the offers arecross offers. Such offers do not constitute acceptance ofones offer by the other and as such there is no completedagreement. For eg. A wrote to B offering to sell him certaingoods. On the same day, B wrote to A offering to buy thesame goods. The letters crossed in the post. There is noconcluded contract between A and B.

Let me give you an example so that you can understand itbetter. Suppose on 15 October, 1989 A wrote to B offering tosell him 100 tons of iron at Rs. 8,800 per ton. On the same day,


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B wrote to A offering to buy 100 tons of iron at Rs. 8,800 perton. The letters crossed in the post. There is no concludedcontract between A and B, because the offers were simulta

neous. Each being made in ignorance of the other, and there is

no acceptance of each others offer.You all must be thinking about the contracts which are enteredinto a by large number of people at the same time. These arecalled standard form contracts we have already discussed themin brief but now I would like to take up a few examples ofsuch contracts.

Communication of special terms (Standard Form Contracts)Regarding the communication of the special terms of thecontract as contained in a ticket, receipt, or, standard formdocuments, the more important rules adopted by the courtsare as follows.

(i)If the acceptor or the promisee had no knowledge ofspecial terms. Before or at the time of the contract, they arenot binding upon the acceptor.Illustration In Handerson vs. Stevenson. the plaintiff boughta steamer ticket which bore on its face the words. Dublin towhite haven on the back of the ticket certain special terms wereprinted one of which excluded the liability of the company forloss, injury or delay to the passenger or his luggage. Theplaintiff never looked at the back of the ticket bore no referenceto the back. The plaintiffs luggage was lost in the shipwreckcaused by the fault of the companys servants. He claimed

damages for its loss. It was held that the plaintiff was entitledto recover his loss from the company as there was not sufficientcommunication of the terms and conditions contained on theback of the ticket.

(ii)If the acceptor or the promisee had the knowledge or maybe presumed to have the knowledge; because a reasonablysufficient notice has been given to him by suitable wordson the document; of special terms, before or at the time ofthe contract, the terms are binding upon the acceptorwhether he has read them or not is immaterial. The leadingcase on the point is Parker vs. South Eastern Railway co.Illustration. in the above case P deposited his bag at the cloak room at a railway station and received a ticket containing on itsface the words, see back. On the back of the ticket there was acondition that, the company will not be responsible for anyexceeding the value of 10 unless extra charge was paid. Anotice to the same effect was hung up in the cloak- room P sbag was lost and he claimed the actual value of the lost bag. 24 sh 10 P, admitted knowledge of the printed matter on theticket, but denied having read it. It was held that, even thoughhe had not read the exemption clause, he was bound by it. Asthe defendants had done what was reasonably sufficient to givehim notice of its existence, and therefore P was entitle the

recover only 10.

Again, where the terms are printed in a language which the


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acceptor does not understand, he cannot set up this fact as areason for not being bound by the terms, provided hisattention is drawn to them by suitable words on the document.It is the acceptors duty to ask for a translation of the termsbefore he actually accepts the offer and if he did not ask, hemust suffer for his ignorance (MacKillican vs. the CompagnieMarkemas de France.) similarly, the acceptor cannot plead that he

was illiterate or blind, provided the notice is reasonably



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sufficient for the class of persons to which he belongs (Thomp

son vs. L.M. & S. Railway co.)It is important to note that the special terms and conditionsbecome binding as part of the contract only if they are brought

to the notice of the acceptor before or at the time of contract. Asubsequent communication will not bind the contracting partyunless he has assented thereto. The facts of Olley vs.Marlborough court LTD. Case provide a good illustration onthe point.

Illustration. in the above case Olley and her husband hired aroom at a hotel and paid for a weeks board and lodging inadvance. When they went to occupy the room there was a noticeon one of the walls which contained the clause. the proprietorswill not hold themselves responsible for articles lost or stolen,unless handed to the manageress for safe custody. Owing to the

negligence of the hotel staff, a thief entered the room and stolesome of their property. The owner of the hotel was held liablesince the notice formed no part of the contract as it came to theknowledge of the plaintiff after the contract had been enteredinto.

Again, where the terms are printed in a language which theacceptor does not understand, he cannot set up this fact asdefence. He must suffer for his ignorance (Mackillican vs. thecompanies Marukemas de France) similarly, the acceptor cannotplead that he was illiterate of blind the contracting party unlesshe has assented thereto. The facts of olley vs. Marlboroughcourt Ltd. Case provide a good illustration on the point.

Finally, we must note that even where adequate notice of theterms and conditions in a document has been given, thedoctrine of fundamental breach and strict construction protectsthe contracting party form the unreasonable consequences ofwide and sweeping exemption clauses. Thus a dry-cleanersterms that he will pay only eight times the amount of cleaningcharges, for any damage to or loss of garments has been held tobe unreasonable (M. siddalingappa vs. T. Nataraj).

7.An offer should not contain a term the non- compliance ofwhich would amount to acceptance. Thus an offeror cannotsay that if acceptance is not communicated up to a certaindate, the offer would be presumed to have been accepted.If the offeree does not reply, there is no contract, becauseno obligation to reply can be imposed on him, on thegrounds of justice.The question that comes up now is whether any terms orconditions can be attached to an offer:

8.An offer can be made subject to any terms and conditions.An offeror may attach any terms and conditions to theoffer he makes. He may even prescribe the mode of

acceptance. The offeree will have to accept all the terms ofthe offer. There is no contract, unless all the terms of theoffer are complied with and accepted in the mode


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prescribed. As regards mode of acceptance, it must benoted that in case of deviated acceptance, for example, ifthe offeror asks for sending the acceptance by telegramand the offeree sends the acceptance by post the offerormay decline to treat that acceptance as valid acceptanceprovided the gives a notice to that effect to the offereewithin a reasonable time after the acceptance is

communicated to him. If he does not inform the offereeas to this effect, he is deemed to have accepted the deviatedacceptance. (sec. 7)

Now we come to revocation of the offer

Lapse and Revocation of offer

An offer lapses and becomes invalid (i.e., comes to an end) in

the following circumstances.

1.An offer lapses after stipulated or reasonable time. An offerlapses if acceptance is not communicated within the timeprescribed in the offer, or if no time is prescribed, within areasonable time. [sec. 6 (2)]. What is a reasonable time is aquestion of fact depending upon the circumstances of eachcase. for example, an offer made by telegram suggests thata reply is required urgently and if the offeree delays thecommunication of his acceptance even by a day or two, theoffer will be considered to have lapsed.In Ramsgate Victoria Hotel Co. vs. Montefiore. An applicationfor allotment of shares was made on 8 June. The applicant wasinformed on the 23 November that shares were allotted to him.

He refused to accept them. It was held that his offer had lapsedby reason of the delay of the company in notifying theiracceptance, and that he was not bound to accept the shares.

2.An offer lapses by not being accepted in the modeprescribed, or if no made is prescribed, in some usual andreasonable manner. But, according to section 7, if theofferee does not accept the offer according to the modeprescribed, the offer does not accept the offer according tothe mode prescribed, the offer does not lapse automatically.It is for the offeror to insist that his proposal shall beaccepted only in the prescribed offeror to insist that hisproposal shall be accepted only in the prescribed manner,and if he fails to do so he is deemed to have accepted theacceptance.3.An offer lapses by rejection. An offer lapses if it has beenrejected by the offeree. The rejection may be express i.e., bywords spoken or written, or implied. Implied rejection isone(a) where either the offeree makes a counter offer, or (b)where the offeree gives a conditional acceptance.How about some examples in this context

(i)

A offered to sell his house to B for Rs. 90,000. B offeredRs.80,000 for which price A refused to sell. Subsequently Boffered to purchase the house for Rs.90,000. A, declined to


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adhere to his original offer. B filled a suit to obtain specificperformance of the alleged contract. Dismissing the suit,the court held that A was justified because no contract hadcome into existence, as B, by offering Rs. 80,000, hasrejected the original offer. Subsequent willingness to payRs. 90,000 could be no acceptance of As offer as there wasno offer to accept. The original offer had already come to an

end on account of counter ( Hyde vs. wrench).(ii)A offered to sell his motorcar to B for Rs. 25,000. B saidthat the he accepted the offer if he was offeror. Forexample, C makes an offer to D by letter. Immediately onreceiving the letter D writes a letter rejecting the offer.LEGAL ASPECTS OF BUSINESS


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Before the rejection reaches C, D changes his mind hand

telephones his acceptance. There would be a contract C and

D and the rejection shall not be effective.

It is worth noting that a rejection is effective only when it comesto the knowledge of the offeror. For example, C makes an offerto D by letter. Immediately on receiving the letter D writes aletter rejecting the offer. Before the rejection reaches C, Dchanges his mind and telephones his acceptance. There wouldbe a contract between C and D and the rejection shall not beeffective.

4.An offer lapses by the death or insanity of the offeror orthe offeree before acceptance. If the offeror dies or becomesinsane before acceptance, the offer lapsed provided that the

fact of his death or insanity comes to the knowledge of theacceptor before acceptance [sec. 6 (4)]. From the language ofthe section, it may be inferred that an acceptance inignorance of the death or insanity of the offeror, is a validacceptance, and gives rise to a contract. Thus the fact ofdeath or insanity of the offeror would not put an end tothe offer until it comes to the notice of the acceptor beforeacceptance. An offerees death or insanity before acceptingthe offer puts an end to offer and his heirs cannot acceptfor him (Reynolds vs. Atherton).5.An offer lapses by revocation. An offer is revoked when itis retracted back by the communication of notice of

revocation by the offeror to the other party [sec. 6(1). Forexample, at an auction sale, A makes the highest bid. Buthe withdraws the bid before the fall of the hammer. Therecannot be a concluded contract because the offer has beenrevoked before acceptance;Further, an offer, agreed to be kept open for a definite period,may be revoked even before the expiry of that period, unlessthere is some consideration for so keeping it open. The effect offacing a time for acceptance is merely to fix a tie beyond whichthe offer cannot be accepted. Where no time limit is set, theoffer open for a definite period, unsupported by consideration,is regarded as a bare pact, and hence not offer open, supportedby consideration, is called an option an option is in effect aseparate contract making the promisor liable for breach if herevokes the offer before the expiry o f agreed time.

Illustration. M. offers to sell his house to N for Rs. 1,40,000. Nsays to M that if he agree the offer open for 10 days he (N) willpay him Rs. 1,000. M agrees M cannot revoke the offer beforethe expiry of 10 days, as N has obtained an option to purchasethe house within 10 days. If M revokes the offer before theexpiry of 10 days. He can be sued for breach of option contract.

Revocation of an offer must be communicated or made knownto the offeree, otherwise the revocation does not prevent

acceptance. Revocation of a general offer must be madethrough the same channel by which the original offer wasmade. Again, revocation must always be express and must be


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communicated by the offeror himself or his duly authorizedagent to the other party.

Revocation of standing offer or tender. Where a person offersto another to supply specific goods, up to a stated quality or inany quality which may be required, at a certain rate, during a

fixed period, he makes a standing offer. A standing offer is inthe nature of an open or continuing offer. An acceptance ofsuch an offer merely amounts to an intimation that the offerwill be accepted from time to time by placing order for specified,quantities. Each successive order given, while the offer remainsin force, is an acceptance of the standing offer as to the quantityordered, and creates a separate contract. In view of this legalposition, the offeror is free to revoke the standing offer withregard to further supply, at any time, by giving a notice to theofferee, except where consideration is given for it.

6.

Revocation by non- fulfillment of a condition precedentto acceptance. An offer stand revoked if the offeree fails tofulfill a condition precedent to acceptance [sec. 6 (3)]. Thus,where A, offers to sell his scooter to B for Rs. 4,000. if Bjoins the lions club within a week the offer stands revokedand cannot be accepted be B if B fails to join the lionsclub.(in default of payment of earnest money.)7.An offer lapses by subsequent illegality or destruction ofsubject matter. An offer lapses if it becomes illegal after it ismade, and before it is accepted. Thus, where an offer ismade to sell 10 bags of wheat for Rs. 6,500 and before it isaccepted, a law prohibiting the sale of wheat by private

individuals is enacted, the offer comes to an end. In thesame manner, an offer may lapse if the thing, which is thesubject matter of the offer, is destroyed or substantiallyimpaired before acceptance.Practice Questions

I.Comment on the following statements(1) Offer must be communicated to the offeree.(2) Terms of an offer must be certain.(3) An offer must be distinguished from an invitation tooffer.(4) A proposal cannot be revoked otherwise than bycommunication.II.Define the term offer. Explain the legal rules regarding theterm offer.III.How does an offer get terminated?IV.Distinguish between(1) General offer and specific offer(2) Offer and an invitation to offer(3) Cross offer and counter offerV.

Solve the following problems giving reasons(1)A garment store gave a following advertisement in the


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newspaper : Special sale for tomorrow only. Mens nightsuits reduced fromRs.200 to Rs.100 only is it a valid offer or not.

(2)A sees a rare book displayed in a shop. It is labelled FirstEdition Rs.15. a enters the shop and puts Rs.15 on the

counter and asks for the book. The bookseller does notagree to sell saying that the real price of the book isRs.50and that it had been marked as Rs.50 by mistake. Isthe bookseller bound to sell the book for Rs.15?LEGAL ASPECTS OF BUSINESS


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(3) A sent a telegram to B, will you sell your car? Quote lowestprice. B sent a reply, lowest price Rs.25000. A sent asecond telegram to B, I agree to buy your car at Rs.25000.B thereafter refuses to sell. Can a compel B to do so. Isthere a contract between A and B?

References:

Kapoor, N.D. (2003), Elements of Mercantile Law,Sultan Chand and Sons, New Delhi.http://www.indialawinfo.com/bareacts/soga.htmlM.C. Kucchal ( 2002), Business Law, Vikas PublishingHouse Pvt. Ltd, Delhi.P.C. Tulsian (2002), Business Law, Tata Mc. Graw Hill

Pvt. Ltd, Delhi.Rohini Aggarwal(2003), Students Guide To MercantileAnd Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd,Delhi.Notes:



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LESSON 4:ACCEPTANCE OF AN OFFER

Learning Outcomes

After todays class you should be able to answer the followingquestions:

The meaning of acceptanceThe essentials elements of acceptanceThe communication of an acceptanceIntroduction

Today first we will start with the meaning of acceptance

A contract as already observed, emerges from the acceptance ofan offer. Section 2(b) states that A proposal when acceptedbecomes a promise and defines acceptance as when theperson to whom the proposal is made signifies his assentthereto, the proposal is said to be accepted. Thus, acceptanceis the manifestation by the offeree of his assent to the terms ofthe offer. Thus there are two essential requirements of a validacceptance

Firstly the offeree to the offeror should communicateacceptance.

Secondly, acceptance should be absolute and unqualified.Legal Rules Regarding a valid Acceptance

A valid acceptance must be in conformity with the followingrules.

1.Acceptance must be given only by the person to whom theoffer is made.An offer can be accepted only by the person or persons towhom it is made and with whom it imports an intentionto contract. It cannot be accepted by another personwithout the consent of the offeror. The rule of law is clearthat if you propose to make a contract with A. then Bcant substitute himself for A without your consent. Anoffer made to a particular person can be validly accepted byhim alone. Similarly an offer made to a class of person s(i.e., teachers) can be accepted by any member of that class.An offer made to the world at large can be accepted by anyperson who has knowledge of the existence of the offer.

Let us suppose A sold his business to his manager B withoutdisclosing the fact to his customers. C, a customer, who had arunning account with A, sent an order for the supply of goods

to A by name. B received the order and executed the same. Crefused to pay the price. It was held that there was no contractbetween B and C because c never made any offer to B and as


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such C was not liable to pay the price to B (Boulton vs. Jones).I will give you another example. In Felthouse vs Bindley thenephew intended his uncle to have the horse but had notcommunicated this to the uncle, instead he told the auctioneernot to sell the horseas it was already sold to his uncle. It wasthereby held that the communication to a stranger like theauctioneer in this would not do. A communication to any other

person is no communication in the eyes of law. The offerorcannot say that if no answer is received in a certain time the offeris deemed to be accepted. Mere silence is no acceptance of theoffer.

2.Acceptance must be absolute and unqualified [sec. 7(1)]. Inorder to be legally effective it must be an absolute andunqualified acceptance of all the terms of the offer. Eventhe slightest deviation from the terms of the offer makesthe acceptance invalid. In effect a deviated acceptance is

regarded as a counter offer in law.Illustration. L offered to M his scooter for Rs. 4,000 M acceptedthe offer and tendered Rs. 3,900 cash down, promising to paythe balance of Rs. 100 by the evening. There is no contract, asthe acceptance was not absolute and unqualified.

Other important features that we must know in respect ofacceptance would be

3.Acceptance must be expressed in some usual andreasonable manner, unless the proposal prescribes themanner in which it is to be accepted. [sec. 7(2)]. If the

offeror prescribes no mode of acceptance, the acceptancesmust be communicated according to some usual andreasonable mode. The usual modes of communication areby word spoken or written or by conduct, it is called animplied or tacit acceptance. Implied acceptance may be giveneither by doing some required act, for example, tracing thelost goods for the announced reward, or by accepting somebenefit or service, for example, stepping in a public bus bya passenger.If the offeror prescribes a mode of acceptance, the acceptancegiven accordingly will no doubt be a valid acceptance, even if theprescribed mode is funny. Thus, if an offeror prescribes lightinga match as a mode of acceptance and the offeree accordinglylights the match, the acceptance is effective and complete. Butwhat happens if the offeree deviates from the prescribed mode?The answer to this query is given in section 7(2) itself whichstates that in cases of deviated acceptances the proposer may,within a reasonable time after the acceptance is communicationto him, insist that his proposal shall be accepted in the prescribedmanner, and not otherwise; but, if he fails to do so, heaccepts the (deviated) acceptance.

For Example If the offeror prescribes acceptance by telegramand the offeree sends acceptance through a messenger, there isno acceptance of the offer, if the offeror informs the offeree

that the acceptance is not according to the mode prescribed. Butif the offeror fails to do so, it will be presumed that he hasaccepted the acceptance and a valid contract will arise.


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It should be noted that law does not allow an offeror toprescribe silence as the mode of acceptance. Thus, a personcannot say that if within a certain time acceptance is notcommunicated the offer would be considered as accepted.



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Similarly, a trader who, of his own without receiving any order,sends goods to some person with a letter saying if I do nothear from you by the next Monday, I shall presume that youhave bought the goods, cannot impose a contract on theunwilling recipient. It is so because in the absence of such a rulethe offerees will be at the mercy of offerors, unless they replay

all such offers in negative which will certainly be causing a lot ofinconvenience and financial burden to them.

Now what about the cases where no acceptance is communi

cated although there is an intention of entering into a contract.Mental acceptance ineffectual. Mental acceptance or quiet assentnot evidenced by words or conduct does not amount to a validacceptance, and this is so even where the offeror has said thatsuch a mode of acceptance will suffice. Acceptance must

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18635902 Lesson 1 Introduction to Law and the Meaning and Essentials[1]

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