The Need of Contractual Obligations
In this modern era, almost every transaction between two or more parties is often looked upon with suspicion and concern. The parties remain uncomfortable during the long negotiations and enumeration of conditions in the fear of becoming a victim of any fraudulent activities by the opposite party. The easily accessible high-techs and cooking the books a little are an easy way for the swindlers to satisfy their avarice for power and status. Therefore, legal contractual relationships, which can hold such deceits accountable were the need of the hour. These sophisticated contractual agreements may be concluded after extensive debate and a lot of paperwork yet only these complex negotiations provide insurance to the possibility of framing all the details of the possible future agreement.
Every contract has a different time period. Contracts such as mergers, acquisitions or selling of companies can be concluded within months; while some contracts, like the large-scale construction of an amusement park, can extend for years. This has a more lasting effect on the financial and social conditions of both parties. But even before the formation of a satisfactory legal contract there exists a “pre-contractual period” — the time period between the start of the negotiations and the conclusion— which can last for weeks and even several weeks. Parties exchange their terms and conditions; their expectations from the relationship; in case of any conflict, the agreeable dispute resolution method and everything else which is enough to satisfy the prerequisites of both the parties and finally conceive a concrete commitment.
In order to serve and secure the Indian society with definite legal terms for forming a contract, the INDIAN CONTRACTS ACT was enacted on 25th April 1872 [Act 9 of 1872] and subsequently came into force on the first day of September 1872.
What is a contract?
Section 10 of the Act, 1872 lays down the essentials needed for a valid contract-
- An agreement should be the result of the proposal or an offer made by one party followed by its acceptance by the opposite party.
- The agreement must be made within parties which are competent to contract
- There must be a lawful consideration and lawful object in the respect of the agreement.
- All the parties should have entered into the contract with their free consent.
- The agreement into question must not be the one who’s nature has already been declared void.
This article shall dwell on the number one ingredient for making a lawful contract which deals with the concept of “proposal” or “offer”.
What is Proposal or Offer
The term “proposal” is defined in Section 2(a) of the Indian Contracts Act, 1872 as follows-
“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”
“This term is often used interchangeably with the term “offer” used in the English Law. The willingness and abstinence talked about in the definition are often made with a view to obtaining the assent of the opposite party.
The party (can also be called a company) which makes the offer is referred as “The Offeror” and the party to whom such offer is made is known as “The Offeree”.
Some very relaxed examples of offer can be:
- A agrees to give B Rs.1000 if he delivers her bracelet to her aunt.
- A is willing to sell her radio set for Rs.500 if B is willing to buy.
- A is willing to give his car to B if he quits drinking within a month.
- A is willing to pay for B’s school fee, if he babysits her daughter.
In all these situations, A is offering something to B hence will be called The Offeror, while B acts as The Offeree, who can either accept or decline such an offer from A.
Superficially, these situations appear like a child’s play where one proposes while the other either accepts or disposes of but actually, it is entangled with a myriad of complexities and restrictions which when juxtapositioned constituted the characteristics of an “Offer”.
Characteristics of an offer or Proposal
For an offer, after its acceptance, to take the shape of a contract it is essential that such offer had been made with a genuine intent for forming a legal contract. This criterion often fails during social engagements, during which promises are generally made without an intention of creating a legal contract, an unfulfillment of which can take one to court.
Sometimes the parties mention it not being a contract while most of the time during these casual colloquies either of the parties avoids discussing this. To understand the actual intention is an objective test. The problem arises when a person contends that there was no intention on his side to create a legal obligation, which cannot emancipate him from the liability but also cannot render him liable for damages.
- Balfour v. Balfour
The husband (respondent) was a government employee and had to leave the country for a vacation along with his wife but due to health issues she was unable to accompany her and the husband had to leave alone. The husband however promised to send 30 pounds per month to his wife for her expenditure. The husband, having failed to deliver his promise, was sued by his wife for the same. The court held that there existed no intention to create a legal contract on the husband’s side when he made that offer, it was a mere social promise, therefore the husband cannot be held liable.
- Jones v. Padavatton
The suit began when Mrs Ruby Padavatton filed a suit against her mother alleging that she had failed to dispose of her legal obligation which was to provide Mrs Ruby with a house to live in if she completes her Law study from England. Mrs Violet Jones (the mother/ respondent) took the defence of ‘no legal intention’ and cited Balfour v Balfour to bolster her argument. She argues that there existed no intention from her side to create a legal contract with her daughter but was rather an arrangement between the family members, a mere domestic promise. However, Mrs ruby was adamant to declare it a legal obligation and therefore demanded the possession of a house.
The court upheld Mrs. Jones’s contention and emancipated her from any liability. Court further added that neither the daughter nor the mother had anticipated the legal issues or legal relations before also.
The aspect asks the reader to look beyond the commitment of the offeror on his offer. No matter how strong and valid his intentions are to create a legal obligation, it is extremely necessary that the same offer is communicated and put into the knowledge of the offeree otherwise nothing will be gained from the transaction.
Section 4 of the Indian Contract Act 1872 deals with the completion of a proposal, acceptance and revocation enumerates that the communication of the offer is completed when it has come to the knowledge of the person that it was supposed to have been made to.
When the offeree (specific offer) or any member of the public (general offer) becomes aware/knows of the offer, the communication of the offer is said to be complete. When two people are talking, face-to-face or via telephone, etc., the communication will be complete as soon as the offer is made.
Section 2(h) of the Indian Contracts Act, 1872 explains that a person Is said to make a contract when he “signifies” his willingness to do……something. emphasis is put on the term “signifies” which means “to communicate” or “to make known”.
Section 3 of that same act explains how we can test if the offer is communicated. It states that an offer may be communicated by the offeror, by any act or omission, by which the offeror:
- intends to communicate such offer; or
- which has the effect of communicating an offer.
Section 9 states that:
“In so far as the proposal or acceptance of any promise is made in words, the promise is said to be expressed. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”
When A offers to sell his motorbike to B in exchange of Rs.25,000, it is an express offer. When A enters the tram, without speaking a word, of B knowing that the tram only runs through a particular route, it is an implied offer that A wants to use the services of B and is making an agreement.
Failure to make the offer heard and acknowledged by the offeree will render the contract void
Illustration: John was offering to sell his farmhouse to Alex for $5bn. John wrote an email explaining all the terms and conditions of his offer and hit the sent button but unfortunately, his laptop had no internet connection which John failed to notice and his email was sent to Alex 6 hours later. Meanwhile, Alex decided to buy Mark’s farmhouse for the same price thinking that John is not interested in selling his farmhouse anymore. John later sued Alex. Court held that there was no communication of the offer to Alex as even though John had sent his email earlier than Mark but John’s email was delivered later than Mark’s therefore Alex got to know about John’s offer later than Mark’s and hence is completely justified in accepting his offer over John’s.
The defendant’s nephew had eloped from his house. Defendant sent out a search party to look for the child. Defendant’s house servant also went to the lookout. Meanwhile, the defendant announced a reward to anyone who brings back his nephew. This announcement was made after the departure of the servant therefore, the servant had absolutely no knowledge about this offer. Interestingly, the servant was able to track the nephew and bring him back. It was only after coming back that he got aware of this reward, when he demanded his compensation, the defendant refused.
The court held that because the plaintiff did not know of the reward offer, his act of finding the boy who was lost did not mean he accepted the offer as he only came to know after finding the boy. Thus, he was not entitled to claim the reward. An offer can be accepted only after the same has come to the knowledge of the offeree, as per contract law. It means that the offer has to be proposed by the offeror so that there is acceptance by the other party, the offeree. This case law shows how communication of offer is essential.
3. DEFINITE TERMS
The terms of the offer must be absolute and definite. Any discrepancies in the offeror in the communication of such offer can render the contract void. However, silence does not mean fraud. The offeror is liable to answer every query of the offeree about the offer in question, but the concealment of facts about the offer will not amount to fraud until and unless the offeror provides wrongful information to the offeree in a view to obtain his assent.
The terms of the offer must be formed in such a way that a reasonable man is able to understand them and the court must be able to interpret and enforce them. Nothing should be hidden between the lines.
John was offering to sell his farmhouse to Alex for $5bn. Alex was being driven to the airport. The moment John mentioned his offer an airplane flew over Alex’s car creating a lot of vibration and disturbance due to which Alex was unable to understand John’s offer clearly. Nevertheless, Alex accepted John’s offer thinking that he was offering to sell his pool house. Court held that the contract was void as there was no clear communication from the offeror
The difficulties to make a contract by applying offer and acceptance rules are clearly linked to safeguarding the legal interests of the parties. The multitude of sections, characteristics, rules, regulations etc., all bolster the parties’ intentions to make a lawful and definite contract.
In this article, an attempt was made to make the reader aware of what a contract is, what an offer is, how offers are formed and communicated, situations when an offer can be held invalid etc., through various illustrations and case laws.
The article allowed the reader to draw attention to the characteristics of an offer which explains how a person wishing to form a legal contract must take the first step.
Firstly, there must be an intention of the offeror to present such an offer that if accepted will form a legal obligation. Hollow promises and social/domestic promises cannot morph into any legal contract.
Secondly, communication is the key, until and unless the offer is not communicated to the offeree there is no acceptance and hence no contract. The communication must be done via a reasonable source.
Thirdly, caveat vendor, the offeror must be beware that whether the offeree understands the terms and conditions of his offer absolutely or not. Any discrepancies or mismatch in the offer and acceptance can render the contract void.
Finally, after going through the extensive offer and acceptance negotiations, the parties are bound in a contract and are now obliged to perform their respective duties.
This Article has been written by Nandini Varshney, 1st Year BA.LLB(Hons.) Student at Rajiv Gandhi National University of Law, Patiala.