Formation of
Contracts
What is a
contract?
An agreement, upon sufficient
consideration, to do or not to do
a particular thing.
Sir William Blackstone
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A Contract consists in an actionable promise or
promises. Every such promise involves two parties a
promisor and promisee and an expression of a
common intention and of expectation as to the act
or forbearance promised
Anson
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An Agreement enforceable
by law is a contract.
Section – 2(h) of Indian Contract Act, 1872
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Essentials of a Contract
1 2 3 4 5
Agreement Competent to Free consent Lawful Not declared
between two contract Consideration expressly to
parties and object be void
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Contract Tort
Obligations – Voluntary and particular
to the parties Independent of agreement and are
imposed upon the parties by the law.
Right in Personam Right in Rem
Breach of Contract – fails to make
claimant’s position better – as per Tort makes the claimant’s position
contract. worse
Tort may be defined in terms of a breach of
Can be assigned duty other than a contractual duty.
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Making of the Act
• First draft made by Third Indian Law Commission – simplified statement of English
Law & modification – to suit India
• Indian Legislative Department
• Final draft was the work of Sir James Fitzjames Stephen.
Law of Contract after 1950
• Continued to be in operation by virtue of Article - Article 372(1) of
the Constitution
• Any provisions inconsistent with FR – Void Article 13
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What is Proposal?
(Acc. to ICA, 1872)
Sec. 2(a) : 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"
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An offer must be one capable of creating
legal relationship between the parties.
Essentials The terms must be certain.
of valid An offer must be intended to give rise to legal
or legal consequences.
proposal It should be offer and not a invitation to offer.
Offer must be communicated to the offeree.
Offer may be specific or general
Legal Relationship
➢ Balfour v Balfour, 1919 - Husband agreed to pay monthly allowance while the wife
was in a different country
➢ Jones v Padavattan, 1969 - Mother provided monthly allowance and house - studying
law
➢ Meritt v Meritt, 1970 - Co-owner of property – mortgage – wife was asked to pay the
rest of dues in return - the sole ownership would be transferred to her name.
➢ Would these agreements – create any legal obligation?
➢ Parties – intention to give rise to legal consequences
➢ Rose & Frank Co. v. Crompton & Bros. Ltd., 1923 - two firms – in the agreement stated
it is not a legal agreement and is out of mutual loyalty and friendly co-operation.
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Intention to Contract
• Family & Social Matters – general presumption that parties lack
legal intention. (E.g. Balfour v Balfour, 1919 )
• Business or Commercial Matters – presumption in favour of an
intention to create a legal relationship.
• Burden of Proofs/Onus?
• Test of Contractual Intention – Objective and not subjective –
what a reasonable person would think in the circumstances. –
Simpkins v Pays , 1955 – newspaper competition
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Offer must be certain
Agreements void for uncertainty.—
Section 29 of ICA Agreements, the meaning of which is not certain,
or capable of being made certain, are void.
Lyn purchased a horse from Gutting. Lyn promised
to buy another horse, or pay 45 pounds – if the horse
Gutting v Lyn
proves to lucky.
Would it be considered as a valid offer?
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Offer to be Communicated
(Specific or General)
➢ Carlill v. Carbolic Smoke Ball Co., 1893 – Defendants advertised in the newspaper.
➢ The Carbolic Smoke Ball”, when used according to the direction - would prevent colds
and influenza. The makers of the smoke ball additionally offered a 100£ reward to
anyone who caught influenza using their product, guaranteeing this reward by stating in
their advertisement that they had deposited 1000£ in the bank as a show of their
sincerity.
➢ The Plaintiff bought a smoke ball and used it as directed. Later she caught the flu.
➢ She didn’t get the reward and she filed a case against them.
➢ Will she succeed?
➢ Was there an Offer ?
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Young boy (Ram) – ran away from the house. Father issued a
Haribhajan Lal v pamphlet stating anybody who finds the boy and brings him home
will get 500rs.
Harcharan Lal, 1925 Harbhajan Lal, the plaintiff, located the boy at Bareilly railway
(Principle of Carbolic station, took him to Dharamshala PS, and informed the defendant
about the find via telegram. However, when it came time to provide
Smoke Ball Co. case the reward, the father claimed he did not receive any acceptance and
was followed) therefore believed the offer was not accepted.
Is the plaintiff eligible for reward?
• Fitch gives a wanted information for which reward was offered. But he
was not aware of the announcement of the reward at the time of giving the
Fitch v Snedaker, 1868 information. Later he came to know of the reward and want to claim it.
• Was there any acceptance of offer?
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Lalman Shukla v. Gauri Dutt, 1913
• Gauri Dutt’s Nephew had absconded and was nowhere to be found. Dutt had sent all
the servants in search of the missing nephew. The plaintiff Lalman Shukla was one of
the servants who had gone out in search of the nephew. The plaintiff eventually found
him and brought him back.
• As soon as Lalman Shukla had left the house, the defendant announced a reward of Rs.
501 for whosoever found Dutt’s nephew. Shukla had no idea that such an
announcement was made. The plaintiff found the missing nephew and brought him
back to his home in Kanpur.
• Can Lalman Shukla claim the reward after 6 months when he was removed from
the job?
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Basis of Comparison Invitation to offer Offer
Definition An invitation to offer is not an offer, but When one person signifies his willingness
an indication of a person’s willingness to to do or abstain from doing something
negotiate a contract with a view to obtain assent of another
person is called offer
Purpose Invitation to offer is made to get an offer. Offer is made with an objective to get
accepted
Defined in It is not defined in ICA, 1872 Section 2(a)
Acceptance Invitation to Offer becomes an offer Offer when accepted becomes a promise
Legal Consequences Doesn’t give rise to legal consequences Offer gives rise to legal consequences
Made by The person making the offer is called The person who has arranged or
offeror/promisor/Proposer. advertised the goods in any media cannot
be termed as offeror/promisor/Proposer.
Example Car dealer sending catalogue of cars If any person interested in any car from
indicating prices of various cars. that catalogue makes an offer to the car
dealer.
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Invitation to offer
Display of goods Calls for Tenders Auctions Advertisements/
for sale Uncertain Offers
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Invitation to Offer
➢Harvey v. Facie , 1893 - exchange of telegram –
i.) Harvey - Will you sell us Bumper Hall Pen? Telegram lowest cash price
ii.) Facie – Lowest price is £900
iii.) Harvey – We agree to buy Bumper Hall Pen for £900 asked by you
➢Harris v. Nickerson, 1873 – defendant advertised to auction to certain furniture at
a certain place at a certain date. Later furniture is withdrawn from the auction.
➢Fisher v. Bell,1961 – Flick knife with price is marked was exhibited in the show
window display of flick knife was in violation of Section 1(1) of the Restriction of
Offensive Weapons Act 1959 - only contained the words “offer for sale”and
displaying through window is invitation to offer but not offer for sale.
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Types of Offer
General Specific Express Implied
Offer Offer Offer Offer
Counter Cross Standing
Offer Offer Offer
If the promise refuses or varies or adds or deletes along with
acceptance, his acceptance merely operates as a counter-
offer. Where a counter-offer is made by the promise, there
Counter Offer could not be a contract between the parties.
Hyde v Wrench, 1840 The defendant offered to sell his estate at £ 1000 on June 6th
– on June 8th plaintiff offer to purchase it for £950. Refused
by defendant. On 29th June plaintiff writes to purchase for
£ 1000. Is it binding on the defendant?
a situation where two parties make the same
offer to each other without knowing that the
Cross Offer other party has made the same offer.
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2(b): ACCEPTANCE & PROMISE
Section 7. Acceptance must be absolute.—
In order to convert a proposal into a promise the acceptance must—
(1)be absolute and unqualified; (Hyde v Wrench, 1840)
(2)be expressed in some usual and reasonable manner,
• unless the proposal prescribes the manner in which it is to be accepted.
• If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made
in such manner, the proposer may, within a reasonable time after the acceptance is communicated
to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but,
if he fails to do so, he accepts the acceptance.
• Acceptance may be expressed or implied – Section 9
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Communication
Section 3 - What is
(acceptance or communication
revocation) Section 4 – When it
Of is complete
Proposals
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Paul Felthouse offered to buy a horse from his
FELTHOUSE nephew for £30. The offer stated that if Felthouse
v. didn't hear back, the horse would be his.
➢ that acceptance of an offer cannot be implied
BINDLEY, 1862
by silence.
➢ (one cannot impose an obligation on another to
reject one's offer.)
➢ Mr. Powell applied for the headmaster position.
Powell ➢ The appointing authority initially resolved to appoint him. However, this
decision was only discussed internally, Mr. Powell got to know about it
v. through informal sources.
➢ Later, the board canceled the decision. Is there any breach of contract?
➢ Acceptance of an offer must be communicated to the offeror by the
Lee, 1908 offeree himself or the authorized agent
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Leonard v. Pepsico, Inc.,
88 F. Supp. 2d 116
(S.D.N.Y. 1999)
https://www.youtube.com/watch?v=wxUuHF6A
fwY
700,000 dollars
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Modes of
Communication
i.)Any act (any conduct and words)
ii.)Omission – conduct or forbearance on
one’s part that the other person takes as
his willingness - Does it mean silence?
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In Electronic Form(Sec. 10A of the IT
**ProCD v. Zeidenberg (1996)**
established that clicking “I Agree” on
software or website terms forms a **valid
Act, 2000)
and binding contract**. The court held
that **clickwrap agreements** are
enforceable if users have a **reasonable
chance to review terms**. This case laid
the groundwork for **digital contract
acceptance**.
ProCD Inc v Mathew • Where a user indicates his assent to the displayed
Zeidenberg, 86 F 3d terms by clicking the “I agree” button on the website.
1447 (7th Cir, 1996) • Valid communication?
Trimex International FZE
Ltd v. Vedanta • Communication taking place through e-mail.
Aluminium Ltd, (2010) 3 • Would it be a valid contract?
SCC 1.
In **Trimex International v. Vedanta Aluminium (2010)**, the Supreme Court ruled that **emails can form a valid contract** if
they show clear **offer, acceptance, and intent to be bound**. Electronic communication is legally recognized for contract
formation.
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Communication of Special Conditions*
• Mackillican v. Compagnie des Messageries Maritimes de
France [(1880) 6 Cal WN 227] –
challenges of accepting contractual terms, especially when
language barriers are involved.
- The plaintiff had reasonable notice of the conditions and
that it was his fault if he did not acquaint himself with
them.
• Shrinkwrap Licences – terms only accessible after
opening - are the terms binding?
• Approve or return policy – valid?
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Communication when complete?
1. Communication of Offer The communication of a revocation is
2. Communication of Acceptance complete—
3. Communication of Revocation
as against the person who makes it,
when it is put into a course of
transmission to the person to whom it is
made, so as to be out of the power of
the person who makes it;
as against the person to whom it is
made, when it comes to his knowledge.
Communication of Acceptance
•The parties to the contract are present at the same place,
one making the offer and the other communicating the
General Rule
acceptance – Binding on both parties – immediately.
• B accepts A’s proposal by a letter sent by post. The communication of the
acceptance is complete –
By Post/Telegram as against A, when the letter is posted;
as against B, when the letter is received by A.
(Postal Rule)
• Offeror bound when the letter of acceptance is posted to him
• Acceptor bound when the letter reaches the offeror
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• On Sep 2, the defendant (Lindsell) sent a letter offering to sell wool
to the plaintiffs. The letter added "receiving your answer in course
of post". The letter reached Adam on Sep 5, in that evening, a letter
agreeing to accept the wool was sent. This reached Lindsell on Sep
9. Lindsell waited for acceptance till Sep 8 and not having received
Adam v. Lindsell, (1818) it, sold the wool to other parties on that date. Would this amount to
106 ER 250 breach?
• The court held that a contract was formed when
Adams posted his acceptance letter, despite the
delay in delivery, establishing the "postal rule".
• Grant had negotiated to purchase shares in Household Fire. His
application was accepted, and his name was added to the list of registered
shareholders.
Household Fire and • However, the letter informing the acceptance never reached Grant.
Accidental Insurance Co. v. Grant’s earnings from dividends were credited to his account. Eventually,
Household Fire went into liquidation and the liquidator applied for money
Grant, (1879) Ex D 216 from the Grant.
• He refused to pay – as he didn’t receive any notification. Is there a valid
contract?
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By Telephone (Instantaneous communication)
An offer was made from London by Telex to a party in Holland and it was duly
accepted through Telex.
Whether the contract was made in Holland or England?
Entores Ltd v In instantaneous forms of communication like Telex, a contract is only
Miles Far East Corpn formed when the acceptance of an offer is received by the
offeror; meaning the postal rule (where acceptance is effective upon
posting) does not apply, and the contract is considered to be made at the
location where the acceptance is received.
Bhagwandas The principle of the Entores case was applied by SC.
In this case, the plaintiffs made an offer from Ahmedabad to the defendants at
Goverdhandas Kedia v Khamgaon to purchase certain goods and the defendants accepted the offer.
Girdharilal The question was whether the conversation resulted in a contract at Khamgaon
or Ahmedabad. HELD: The contract arose at the place where the acceptance
Parshottamdas & Co was received.
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Section 5 - of proposals
and acceptances
Revocation
Section 6 – How made?
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Valid Contract – Sec. 2(h) & Sec. 10
Void Contract – Sec. 2(g) & 2(j)
On the basis of
the Voidable Contract – Sec. 2(i)
Validity/Enforce
Illegal Contract – law forbids – All illegal agreement are void but all void
ability agreements are not necessarily illegal
Unenforceable Contract – some technical defect (barred by limitation)
Types of Express Contract – Sec. 9
Contract On the basis Implied Contract – Sec. 9
of the Quasi Contract – not actual contract – created by law
Formation under certain circumstances – (Chapter V)
E-Contract – electronic means
On the basis of Executed Contracts – act is done or executed
Unilateral Contract – one party’s
the obligation is outstanding
Performance Executory Contracts – to be performed in future
Bilateral Contract – obligation is
outstanding – both the parties
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Standard Form Contracts
What? Protective Devices M. Siddalingappa v T.
It would be difficult for such Nataraj, 1969 SCC
large organisations to draw out 1. Reasonable notice of the terms OnLine Kar 94
a separate contract with every 2. Notice should be
contemporaneous with the where a condition that
individual. They have,
therefore, printed forms of contract only eight percent of the
contract. Such standardised 3. Theory of Fundamental Breach cost of a garment would
4. Strict Construction
contracts contain a large
5. Unreasonable terms
be payable in case of
number of terms and loss was held to be
conditions. 6. Liability in tort cannot be
- Can lead to exploitation of excluded unreasonable.
weaker party (party which doesn’t 7. Exemption Clauses and third
have any bargaining power) parties
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Thank you!
