Legal Environment of

Business

B.A (H) BUSINESS ECONOMICS

SEM 1 GE
Dr. Upasana Dhanda
 UNIT I
PART I
INDIAN CONTRACT ACT,
1872
 Topics to be covered:
• Contract – meaning, essentials and kinds.
• Offer
• Acceptance
• Consideration-essentials and exceptions
• Capacity of parties
• Free consent
• Modes of discharge of a contract
• Remedies for breach of a contract
Lecture 3 and 4
 Basics of Offer
• Offer is the starting point of the agreement
and therefore the contract
• Who is an Offeror/Promisor- Section 2(c)
• Who is a Promisee- Section 2(c)
• Section 2(a)- definition of Offer
• Three Essentials of a valid offer
• Legal rules for a valid offer
• Revocation & lapse of an Offer
 Section 2(a)
• “a person is said to make a proposal when he
signifies to another his willingness to do or
abstain from doing anything with a view to
obtaining the assent of that other to such act
or abstinence”
 Offer
• It must be an expression of willingness to do
or abstain from doing something.
• The expression of willingness to do or to
abstain from doing something must be to
another person.
• The expression of willingness to do or to
abstain from doing something must be made
with a view to obtaining the assent of the
other person to such an act or abstinence.
 Question
• I may sell my bicycle for Rs. 17,000.
• I am thinking to sell my bicycle for 17000.
• Will you buy my bicycle for 17,000.
• I am willing to sell my bicycle for 17000.

Three essentials?
 OFFER
• Promisor or Offeror
• Promisee or acceptor
 Legal Rules of a Valid Offer
1. It can be express or implied. (either by words or conduct)

2. Capable of creating legal relationship.

– Social agreements
– Business contracts

3. Term of offer should not be vague

4. An invitation to offer is not an offer- it is just an invitation

to receive offer
– Invitation for sales of goods by auction
– Price given in catalogues
 Express or Implied
• M says to B that she is willing to sell her car
for 8,00,000.
• F writes to G that he is willing to buy her sofa
set for 60,000.
• DTC runs many buses on different routes to
carry passengers at the scheduled fares.
• A shoe shiner starts shining someone’s shoes
without being asked to do so.
 Offer – Vague or certain
• Radha purchased a horse from Manohar and
promised to purchase another if the first one
proves to be lucky. Radha refuses to buy
second horse.

Can Manohar enforce the agreement?

 Invitation to Offer
• ‘An offer is different from an invitation to
receive offer’
• An invitation to offer is just an invitation to
receive offer
– No intention to make offer
– Objective: Primarily circulating information
– Not valid offers in eyes of law
 Invitation to Offer
• Examples:
– Invitation for sales of goods by auction
(actual bids at the auction are offers)

– Price given in catalogues

(customer asks for goods or makes an offer)

– Tenders to supply goods

(College invites tenders for canteen contract)
 Invitation to Offer doesn't constitute a valid offer.
Why ?
• It is done generally to induce and negotiate.

• An invitation to offer gives rise to an offer after

due negotiation and it cannot be per se accepted.

• There is no expression of willingness by the

offeror to be bound by his offer.

• It is only a proposal of certain terms on which he

is willing to negotiate.
 Example
Self service store
 Invitation to Offer
• Judicial Precedents:
– Harris vs. Nickerson (Auction Sale)
– Harvey vs. Facie [1893]

• Following are instances of invitation to offer to buy or

sell:
– An invitation by a company to the public to subscribe for
its shares.
– Display of goods for sale in shop windows.
– Advertising auction sales and
– Quotation of prices sent in reply to a query regarding price
 Legal Rules of a Valid Offer….contd.
5. Offer can be specific or general:
General Offers:
– Carlill Vs. Carbolic Smoke Balls Co.
• How many individuals can accept this offer?
• Can we restrict the number of individuals?

6. It should be communicated to the offeree.

– Offer communicated afterwards would not
amount to a contract.
• For example-Lalman Shukla Vs. Gauri Datt.
General Offer: Carlill vs. Carbonic
Smoke Ball Co.

PLAY VIDEO TO WATCH

 Question
A without knowing about the reward that is
offered for the arrest of a particular criminal,
catches the criminal and gives the information
to the police.

Can A get the reward?

 6. Communication of Offer:
Communication of special terms
• If the promisee had no knowledge of the
special terms before or at the time of the
contract- Not binding on promisee
– Handerson vs. Stevenson
• If the promisee had the knowledge or can be
presumed to have knowledge of the special
terms- Binding on promisee
– Parker vs South Eastern Railway co.
Example
 Communication of special terms
• What if the special terms are written in
foreign language?
• The offeree cannot plead illiteracy or
blindness
• The special conditions to be communicated
before or at the time of the contract
• Doctrine of fundamental breach and strict
construction: no unreasonable conditions
 Legal Rules of a Valid Offer….contd.
7. An offer should not contain terms, the non-
compliance of which would amount to
acceptance

8. An offer can be made subject to terms and

conditions
– Section7: Mode of Acceptance

9. Two identical cross offers do not make a contract

 Cross Offers
• When the offers made by two persons to each other containing
similar terms of bargain cross each other in post they are known
as cross offers.

• For example, on 1st January A offers to sell his radio set to B

for Rs. 500/- through a letter sent by post. On the same date B
also writes to A making an offer to purchase A’s radio set for
Rs. 500 /-

• When A or B send their letters they do not know about the

offer which is being made by the other side. In these cross
offers, even though both the parties intend the same bargain,
there arises no contract.

• A contract could arise only if either A or B , after having the

knowledge of the offer, had accepted the same.

26
 Lapse & Revocation of Offer
1. Lapse after a reasonable time (Section 6(2))
– What is reasonable time?
– Ramsgate Victoria Hotel Co. vs. Montefiore

2. By not being accepted in the prescribed manner (Section 7)

deviated acceptance

3. Lapse by rejection
– Expressed rejection
– Implied rejection
• Counter offer
• Conditional acceptance
 Example-1
A offered to sell his house to B for 9 lakhs.
B offered 8 lakhs which A refused to sell.
Subsequently, B offered to purchase the house for 9
lakhs.
A declined to adhere to the original offer.
 Continued…
Rejection is effective only when it comes to the
knowledge of the offeror.
 Lapse & Revocation of Offer….contd.
4. Lapse by death, insanity of the offeror or offeree before
acceptance
– In case of offeror’s death or insanity: provided his death,
insanity comes to the knowledge of promisee before
acceptance (Section 6(4))

5. Lapse by revocation- At anytime before acceptance, through

communication of notice of revocation (Section 6(1))
– Condition of a valid revocation:
• Revocation should be communicated to the promisee before his
acceptance
• For general offers, through the same mode as the original offer
• Must be expressed to promisee or to his duly appointed agent
• Revocation of Standing Offers
 Standing offer
• A standing offer is in the nature of an open or
continuing offer.
• The offeror is free to revoke the standing offer
with regard to further supply, at any time, by
giving a notice to the offeree, except where
the consideration is given for it.
Lapse & Revocation of Offer….contd.
6. Revocation by non-fulfillment of a condition
precedent to acceptance (Section 6 (3))

7. Lapse due to subsequent illegality or

destruction of subject matter.
 Examples
B offers to sell his car to A for 1 lakh if A joins his
club within one week.
One week has passed, A fails to join the club.
OFFER?

B offer to sell A wheat for 100Rs/Kg. After offer,

the government bans private dealing of wheat.
OFFER?
 TYPES OF OFFER
 Express offer
 Implied offer
 Specific offer
 General offer
 Cross offer
 Counter offer
 Standing offer
• Express offer - When offer is given to
another person either in writing or in oral.
• Implied offer - When offer is given to
another person neither in writing nor in oral.
• Specific offer - When offer is given to a
specific person.
• General offer - When offer is given to
entire world at a large.(Carlill Vs. Carbolic
smoke ball Co.,)
• Cross offer - When both the persons are
making identical offers to each other in
ignorance of other’s offer.
• Counter offer - When both the persons
are making offers to each other which are
not identical in ignorance of other’s offer.
• Standing offer - An offer which remains
continuously enforceable for a certain period
of time.
Lecture 5
Unit I Chapter 3
ACCEPTANCE
• A proposal when accepted, results in an agreement.

• It is only after the acceptance of the proposal that a contract

between the two parties can arise.

• According to Section 2 (b) : When the person to whom the

proposal is made signifies his assent thereto, the proposal is
said to be accepted.

• A proposal, when accepted, becomes a promise “

• The person making the proposal does not become bound

thereby until acceptance. As soon as his proposal is accepted
that is known as promise whereby both the parties become
bound.
 Effect of Acceptance
• A contract is created only after an offer is accepted.
• Before the acceptance is made neither party is
bound thereby.
– At that stage the offeror is free to revoke or withdraw his
offer, and the offeree is free not to accept the offer or
reject the same.
• After the offer has been accepted it becomes a
promise which, if other conditions of a valid contract
is satisfied, binds both the parties to the promise.
• After acceptance each party becomes legally bound
by the promise made by him through the medium of
offer or acceptance of it.
ESSENTIALS OF A VALID ACCEPTANCE
1. ACCEPTANCE MUST BE GIVEN ONLY BY THE
PERSON TO WHOM THE OFFER IS MADE
– An offer made to a particular person can only be validly accepted
by him/her

– No other person can accept on offeree’s behalf without offeror’s

consent

– Specific Offers?

– General Offers?

– Boulton vs. Jones

 Question
A sold his business to his manager B without
informing his customers.
C, a customer who had a running account with A,
sent an order for the supply of goods to A by his
name.

B received the order and executed in his name.

C refused to pay the price to B.

Can B hold C liable for the contract?

 ESSENTIALS OF A VALID ACCEPTANCE…
contd.
2. ACCEPTANCE SHOULD BE ABSOLUTE AND UNQUALIFIED:
• It lapses by rejection or counter-offer

• Conditional or qualified acceptance is no acceptance which could

result in a contract.

• By such an acceptance the offer is deemed to be rejected.

• The effect of such a counter-offer in the eyes of law is to destroy

the original offer.

• And an offer once refused is dead and cannot be accepted unless

renewed.
 Question
M offered to sell his scooter to N for 40,000 and
N accepted the offer.

N later paid only 35,000 and promised to pay

5,000 later.

Is the contract valid?

 ESSENTIALS OF A VALID ACCEPTANCE…
contd.
3. ACCEPTANCE TO BE EXPRESSED IN PRESCRIBED MANNER ONLY
OR SOME USUAL/REASONABLE MANNER

• If the proposal prescribes any manner of acceptance:

– the acceptance must be made in that manner.
• When the manner of acceptance has not been prescribed
– it must be made in some usual and reasonable manner.

• Acceptance by post, telegram, telephone or through personal messenger may be

considered to be a usual manner of acceptance.

• If the proposal prescribes a manner in which it is to be accepted, and the acceptance

is not made in such manner, then, according to Section 7 (2), of the Indian Contract
Act, “the proposer may, within a reasonable time after acceptance is communicated
to him, insist that his proposal shall be accepted in prescribed manner, and not
otherwise ; but if he fails to do so, he accepts the deviated acceptance.”
45
 Types of Acceptance
• Expressed Acceptance
– Words-oral/written
• Implied Acceptance
– Conduct
– Doing some act that amounts to acceptance
• Can silence be prescribed as a mode of acceptance?
• Is mental acceptance possible?
• Acceptance must be communicated
• Consensus-ad-idem
• Felthouse vs. Bindley
 Question
X receives an offer by letter. In reply, he wrote a
letter a letter of acceptance but forgot to send
it.

Is it a contract?
 Question
X offered by letter to buy his nephew’s horse for 30
Euros. He added, “If I hear no more about him, I ll
consider the horse to be mine at 30 Euros.”
The nephew sent no reply to his uncle X but told his
manager to reserve the horse for his uncle.

The manager sold the horse by mistake and Mr. X

sued his for conversion of his property.

Can X sue the manager?

 ESSENTIALS OF A VALID ACCEPTANCE…
contd.
4. COMMUNICATION MUST BE MADE BY THE OFFEREE
OR HIS AUTHORISED AGENT

• In order that the acceptance can be treated as valid,

it is necessary that the same must be communicated
to the offeror either by the offeree, or by some duly
authorised person on his behalf only

• If the communication is made by an unauthorised

person it does not result in a contract

– Powell Vs. Lee, (1908) 49

 ESSENTIALS OF A VALID ACCEPTANCE…
contd.
5. ACCEPTANCE MUST BE GIVEN WITHIN A
REASONABLE TIME OR BEFORE THE OFFER LAPSES
• Offeror is free to withdraw the offer, or the offer is revoked
under various circumstances mentioned in section 6

• After the offer has been withdrawn or has lapsed there is

nothing which can be accepted

• It is, therefore, necessary that the acceptance should be made

while the offer is still alive and subsisting

• Acceptance after the lapse of the offer cannot give rise to a

contract
50
 ESSENTIALS OF A VALID ACCEPTANCE…
contd.

6. ACCEPTANCE MUST SUCCEED THE OFFER

• Acceptance must be given after receiving the

offer

• Anything done in ignorance of offer will not

amount to valid acceptance

51
 ESSENTIALS OF A VALID ACCEPTANCE…
contd.

7. REJECTED OFFERS CAN BE ACCEPTED ONLY IF

RENEWED

• Counter offers

52
COMMUNICATION OF
OFFER, ACCEPTANCE
AND REVOCATION
 COMMUNICATION OF OFFER,
ACCEPTANCE AND REVOCATION

CONTRACTING
PARTIES ARE FACE
TO FACE WITH EACH CONTRACTING PARTIES
OTHER ARE AT A DISTANCE
WITH ONE OTHER
 COMMUNICATION OF OFFER,
ACCEPTANCE AND REVOCATION
CONTRACTING PARTIES ARE FACE TO FACE WITH EACH OTHER

OFFEROR OFFEREE

NEGOTATIATE IN PERSON

INSTANTANOEOUS COMMUNICATION OF
OFFER & ACCEPTANCE

VALID CONTRACT COMES INTO EXISTENCE

GIVEN THERE IS ABSOLUTE ACCEPTANCE

NO QUESTION OF REVOCATION
 COMMUNICATION OF OFFER,
ACCEPTANCE AND REVOCATION

CONTRACTING PARTIES ARE AT A DISTANCE WITH EACH OTHER

OFFEROR POST OFFEREE

SERVICES OF SOME MODE OF TRANSMISSION ARE

UTILISED

NOT EASY TO ASCERTAIN THE EXACT TIME AT WHICH

COMMUNICATION CAN BE CONSIDERED COMPLETE

PROVISIONS OF SECTION 4 & 5 APPLY

 COMMUNICATION OF OFFER
• Communication of offer is complete:

– when it comes to the knowledge of

the person to whom it is made

–i.e when the letter reaches the offeree

COMMUNICATION OF ACCEPTANCE

Communication of acceptance is complete:

AS AGAINST AS AGAINST
OFFEROR OFFEREE
When it is put in the course
of transmission to offeror so When it comes to the
as to be out of power of knowledge of offeror
acceptor

Say as soon as the i.e. when the acceptance

letter is posted is received by offeror
 COMMUNICATION OF OFFER &
ACCEPTANCE
• A proposes by a letter to sell his house to B at $
50,000
• The letter is posted on 6th September and reaches
B on 8th September
• Communication of offer gets complete on?
• B accepts A’s offer by a letter sent by post on 9th
September which reached A on 11th September
• Communication of acceptance is complete on?
– As against A?
– As against B ?
 When does the contract comes into
existence?
• Does the contract comes into existence
when the letter is posted by offeree or
when is it received by offerer?

• This question was first asked in

–Adams vs. Lindsell (1817)
VIDEO: ADAMS VS. LINDSELL

PLAY TO WATCH THE VIDEO

When does the contract comes into
existence?

Offeror becomes bound when a

properly addressed and duly stamped
letter of acceptance is posted
COMMUNICATION OF REVOCATION

Communication of revocation is complete:

AS AGAINST THE AS AGAINST THE PERSON

PERSON MAKING IT TO WHOM IT IS MADE

When it is put into the course of

transmission to whom it is When it comes to his
made so as to be out of power knowledge
of the person revoking

Say as soon as the i.e. when the letter of

letter of revocation revocation is received by
is posted him
 TIME DURING WHICH AN OFFER OR
ACCEPTANCE CAN BE REVOKED
• Whether a revocation is operative or not?
• The limit of time within which an offer or
acceptance can be revoked?
• Section 5
– Offer
– Acceptance
 REVOCATION OF OFFER

• Offer can be revoked at anytime before

communication of acceptance is
complete as against the _________ but
not afterwards.
– Acceptance with respect to whom?
 REVOCATION OF OFFER

• Offer can be revoked at anytime before

communication of acceptance is
complete as against the proposer but not
afterwards.
 REVOCATION OF ACCEPTANCE
• Since the acceptor does not become bound immediately on posting his letter
of acceptance, he is free to revoke the acceptance by adopting speedier mode
of communication, whereby his communication of revocation of acceptance
may reach earlier than his letter of acceptance.

• Section 5 expressly permits the revocation of acceptance through the

following provision :

– “An acceptance may be revoked at any time before

the communication of the acceptance is complete as
against the acceptor, but not afterwards.”
Illustration:
• A proposes, by a letter sent by post, to sell his house to B. B accepts the
proposal by a letter sent by post. B may revoke his acceptance at any time
before or at the moment when the letter communicating it reaches A, but
not afterwards.
 Revocation of acceptance (England)

• Under the English law, once the letter of

acceptance is posted it binds both the parties
and there appears to be no scope of
revocation of acceptance by sending a
telegram or through a phone call.
 Valid Revocation
As against the proposer As against the acceptor
Offer At anytime before acceptance is completed as per the
proposer.
Acceptance At anytime before it acceptance is complete as per the
acceptor.
 EFFECT OF DELAY OR LOSS OF LETTER OF
ACCEPTANCE IN POSTAL TRANSIT
• The offeror remains bound by the acceptance as
acceptance is completed as against the offeror

• Prerequisites:
– Properly addressed and stamped
– Actually posted
– What if wrong address was given by offeror?

• The contract remains voidable at the option of

acceptor till the acceptance is communicated to the
offeror
Communication of acceptance to a
wrong person
• It has already been seen that the offeror becomes
bound as soon as the letter of acceptance is posted to
him.

• If the letter of acceptance is posted at the wrong

address or to a wrong person, that will not bind the
offeror.
 Example
• A offer B to sell his house for Rs 1,00,000 on 2
January 2023 by post. Letter reaches B on 4
January 2023.
• B puts a letter of acceptance on 5 January
2023.
• Letter of acceptance got lost in transit.
• Is the contract valid?
ACCIDENTAL FORMATION OF CONTRACTS
• What happens if both the letter of acceptance’ and the ‘telegram
of revocation of acceptance’ are delivered to the to the offeror at
the same time?

• In such a situation the formation of contract will depend on a

matter of chance.

• If the offeror reads the letter of acceptance first and then the
telegram, a binding contract will arise.

• But if the offeror reads the telegram of revocation of acceptance

first and then the letter of acceptance, there will be no binding
contract because the communication of revocation comes to the
offeror’s notice first than the communication of acceptance.
 CONTRACTS OVER TELEPHONE/TELEX
• Section 4 and 5, which makes provisions about the communication of
offer and acceptance and revocation thereof, do not make a mention
whether these provisions relate to communications through letters
and telegrams only or they also include communication made with the
help of telephone and telex also.

• In Bhagwandas Vs. Girdhari Lal & Co. (1966) the Supreme Court has
held that in case of telephonic conversation the position is the same as
in the case where the parties are in the presence of each other, and
the rule of contract through post does not apply to such contracts.

• In case of acceptance sent by post the contract is concluded when the

letter of acceptance is posted, whereas in the case of acceptance by
phone, the contract is deemed to be complete when the offeror hears
the acceptance at his end rather than when the acceptor speaks the
words of acceptance.
 Summary
• Offer is completed when it comes to the
knowledge of the offeree.
• Acceptance is completed
against the offeror- when the letter is posted
against the offeree- when the acceptance is
received by the offeror.
• The contract will be binding and offeror becomes
bound when a properly addressed and duly
stamped letter of acceptance is posted.
 Summary
• Communication of revocation is completed
As against the person who makes it- when the
letter is posted
As against the person to whom it is made- when
the letter of revocation is received by him
 Summary
Offer can be revoked at anytime before
communication of acceptance is complete as
against the proposer but not afterwards.
 Summary
An acceptance may be revoked at any time
before the communication of the acceptance is
complete as against the acceptor, but not
afterwards.
 Example
A sent an offer on 5th December to B.
B received the letter on 8th December.

When is the offer completed?

 Example
B sent his acceptance on 9th December and it
reached A on 12th December?

When is the acceptance completed?

 Example
Offer can be revoked at anytime before
communication of acceptance is complete as
against the proposer but not afterwards.

A can revoke offer any time before

communication of acceptance is complete
against proposer i.e. A which is 9 December.
 Example
If offer is revoked after 9th December, revocation
of offer is inoperative.

B’s acceptance is valid.

 Example

• A offers to sell his house to B for Rs. 1,00,000 on 2nd

January 2023 by post. The letter reaches B on 4th January
2023.

• B puts a letter of acceptance on 5th January 2023 and it

reaches A on 7th January 2023.

• A post a letter of revocation of offer on 6 January 2015.

• Is the contract valid?

 Example
• A offers to sell his house to B for Rs 1,00,000 on 2
January 2023 by post. Letter reaches B on 4 January
2023.

• B puts a letter of acceptance on 5 January 2023 and it

reaches A on 7 January 2023.

• B posts a letter of revocation of acceptance on 6

January 2023 which reaches A on 8th of January 2023.

• Is the contract valid?

 Example

• A offers to sell his house for Rs 1,00,000 to B on 2 January

2023 by post. Letter reaches B on 4 January 2023.

• B puts a letter of acceptance on 5 January 2023 and it

reaches A on 8 January 2023 at 15:00 hours.

• B post a letter of revocation of acceptance on 6 January

2023 which reaches A on 8 January 2023 at 15:00 hours. Is
the contract valid? Explain.
 Acceptance by post
Section 4 of the Act mentions the following rules when the
communication of acceptance is made by post :

1. The communication of acceptance is complete as against the proposer,

when it is put in the course of transmission to him, so as to be out of
the power of the acceptor.

2. The communication of acceptance is complete as against the acceptor,

when it comes to the knowledge of the proposer.

Illustration
B accepts A’s proposal by a letter sent by post. The communication of
the acceptance is complete, --
As against A , when the letter is posted ;
As against B, when the letter is received by A.
 Offeror bound when letter of
acceptance posted to him
• It has been noted that the communication of
acceptance is complete as against the proposer
when the letter of acceptance is posted to him.

• Once the letter of acceptance is posted the

offeror becomes bound.

• He becomes bound immediately on the posting

of the letter to him and it makes no difference
that the receipt of the letter is delayed in transit,
or even if the letter is lost in the post and the
offeror never receives it.
– Dunlop Vs. Higgins (1848)
Acceptor Bound when his letter reaches the
offeror
• It has been noted above that though the
offeror becomes bound when the letter of
acceptance is posted to him, the acceptor
himself does not become bound thereby.

• Acceptor becomes bound by his acceptance

when his letter of acceptance comes to the
knowledge of the offeror.
 Communication of acceptance not needed in
acceptance by conduct
• It has been noted above that as a general rule no contract can
arise unless and until the acceptance has been communicated
to the offeror.

• In exceptional cases the terms of the offer may be such which

waive the necessity of communication of acceptance, or a
certain kind of conduct on the part of the offeree may be
treated sufficient to create a contract.

• If that is so, the contract could be created even without

communication of acceptance.

• According to Section 8, “Performance of the conditions of the

proposal……………. Is an acceptance of the proposal.” ( case of
Mrs. Carlil Vs. Carbonic Smoke Ball Co.)
 LEGAL RULES OF A VALID
ACCEPTANCE
• Acceptance must be given as per the mode prescribed
by the offerer.

• Acceptance must be given before the lapse of time or

within reasonable time.

• Acceptance must be unconditional.

• Acceptance may be given by any person in case of

general offer.
 LEGAL RULES OF A VALID
ACCEPTANCE…... CONTD.
• Acceptance may be given by any specific person in case
of specific offer.

• Acceptance must be communicated.

• Mental acceptance is no acceptance or acceptance must

not be derived from silence.

• Acceptance must not be precedent to offer.