Law of Contract, Nature, Offer, Acceptance - Business Law B Com Notes | EduRev

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Law of Contract (1872)
1.1 Nature of contract

The Law of Contract came into force on 1 September 1872.

  1. The Indian Contract Act was passed and implemented to control various kinds of commercial and business contracts.
  2. This act is not complete code of contracts.It deals with general principles of The Law of Contract and special Contract.
  3. The act is applicable to the whole India except for the state of Jammu and Kashmir.
  4. The Contract Act only provides rules and regulations for the purpose of contract. It does not list any rights and liabilities between parties to the contract.
  5. Rights and liabilities and their manner of performance are decided by the parties themselves under the contract but it is within the purview of the act.

1.2  Some Fundamental definitions
1.2.1 Contract:- Section 2(h) of the Indian Contract Act,1872 states that ‘ an agreement enforceable by law is contract’.

1.2.2 Agreement:- Section 2(e) of the act defines it as: Every promise and every sert of promises froming the consideration for each other is an agreement.

1.2.3 Promise:- As per Section 2(b) of the Contract Act,a proposal when accepted becomes a promise.

1.2.4 Proposal:- Section 2(a) states that when one person signifies another person his willingness to do or abstain from doing anything with a view to obtaining the assent of that other to such an act or abstinence,he is said to make a proposal’.A proposal is also known as an offer.

1.2.5  Defendent:- A peson against whom a suit has been filed in court and who has to defend himself against the charges of breach of contract is called the defendant.

1.2.6 Palintiff:- A prson who files a suit in a court of law against another for breach of contract is called the plaintiff.

1.2.7 Promiser and Promisee:- According to Section 2© of the Act,the person making the proposal is called the ‘promisor’ and the person accepting the proposal is called the ‘promisee’.

1.2.8 Acceptance and Promise:- According to Section 2(b) of the Indian Contract Act: When the person to whom the proposal is made signifies his assent thereto,the proposal is said to be accepted.Aproposal,when accepted,becomes a promise.

1.2.9 Void Agreement:- Section 2(g) of the Act defines a void agreement as “an agreement not enforceable by law’.

1.2.10 Voidable Contract:- An agreement which is enforceable by law at the option of one or more of the parties thereto,but not at the option of others,is a voidable contract-Section 2(i).

Importance of Indian Contract Act, 1872:- Law of contract is the most important branch of mercantile law. It determines the circumstances under which promises made by the contracting parties shall be legally binding on them. It specifies the remedies that are available against a person who fails to perform the contract entered into by him, in a Court of law. It also defines the conditions under which the remedies are available.
The law of contract is essential to carry on trade or commerce smoothly, because it introduces definiteness in the business transactions. It does not mean that it affects only the business people. It affects the entire society. That is, it affects all of us in one way or the other. Every one of us enters into a number of contracts from morning to night. When a person purchases a book, or goes to cinema, or gives his car to the mechanic for repair etc., he enters into a contract. Hence, the Contract Act is considered as the most important factor in legal environment.

Nature of the Indian Contract Act, 1872:- The law relating to contracts in India is contained in the Indian Contract Act, 1872. The Act provides the general principles and rules governing contracts. All transactions that relate to the agreements and obligations of the contracting parties come under the purview of the Act. However, there are some contracts, which are governed by separate Acts. They are — Partnership Act, Sale of Goods Act, Negotiable Instruments Act, Insurance Act etc.
The Indian Contract Act deals with two aspects. The first aspect is the general principles of the law. Secs. 1 to 75 deals with them. The second aspect is certain special contracts such as indemnity, guarantee, bailment, pledge and agency. The provisions relating to these contracts are contained in Secs. 124 to 238 of the Act.
As the Act is not exhaustive, in cases not provided for in the Act, or other enactments relating to particular contracts, the High Courts may apply the Hindu Law of contract to Hindus, and the Mohammedan Law of contract to Mohammedans.

Offer in Contract:-  Offer is one of the components of agreement. It`s status is equal to that of question. Offer is otherwise known as proposal. The person who is making the offer is called offerer or promissory or proposer.

Definition of Offer:- When a person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the ascent of that other to such act or abstinence he is said to make a proposal. - Section 2 (a) of Indian Contract act.

Essentials of Offer
Offer may be General or Specific: Offers are of two types, namely specific offer and general offer. If offer is made particularly to one person, it is called specific offer. On the other hand if offer is made to a group of persons, it is called general offer. General offer also is so powerful as specific offer.

  • A case on this occasion is Mrs. Cary Lli (Vs) Carbolic Smoke bal Company. In this case Carbolic Smoke bal company is a pharmaceutical company. During contemporary period of this case a fever called `Influenza` is in existence. This fever arises as a result of rat bite. This fever is characterized by propagation from one person to the other. On that occasion the company has invented capsules to cure influenza. Here the company makes a general offer saying that those capsules can cure influenza very quickly and prior consumption of their capsules will avoid attack by influenza. In addition to it the company says that if any person gets attacked by influenza even after prior consumption, the company will pay 100 pounds to such person. Mrs. Cary Lli makes prior consumption & gets attacked by that fever. Court decides that general offer also is valid and hence the company is under obligation to pay 100 pounds to her.

Offer must be Communicated: Offer attains validity only after Communication. Un-communicated offer is not valid.

  • A case on this point is Lalman (Vs) Gowridutt. In this case Gowridutt is fond of children, but he has no children. Therefore he has brought his sister`s son. On one day, the boy gets missed from the house. Lalman is Gowridutt`s servant. Gowridutt sends Lalman to search for the missed boy. After Laman`s departure, Gowridutt makes an offer according to which he will give a reward to the person who brings the boy back. Thereafter the boy is found back by Lalman himself. After sometime Lalman comes to know about the reward and claims that reward. Here court decides that Lalman has no knowledge of the offer and hence he cannot claim the reward.

Price Declaration, Advertisement, Prospectus etc are not offers: All these things are only invitations to make offer, but not offers. Prospectus is invitation to make offer, share application is offer and allotment is acceptance.

  • Related case is Harve (Vs) Facie. In this case A is owner of a pen corner and B is an officer. On one day B sends a telegram to A requesting to inform the price of Bumper ball pen. A sends Telegram to B saying that price of bumper ball pen is 10 pounds. Now B gives telegram to A send one pen. Afterwards A gives telegram saying that he has no stock of Bumper ball pens. B sues A. Here court decides that price declaration is invitation to make offer and therefore there is no Contract at all between A and B.

Offer should be made with a view to obtain ascent of the other party: In the absence of intention to get acceptance the offer is not valid.

Offer may be Expression or Implied: In presence of conversation it is called express offer and in the absence at conversation it is called implied offer. Both types of offers are Valid. It is well known that Implied Contract is Valid. On that ground it can be conformed that implied offer is Valid offer.

Reticence leads to acceptance - This wording sound should not be included in the offer: In case where offerer says that Silence indicates acceptance, that offer is not Valid. As per the rules of Valid acceptance, acceptance must be communicated. Mere silence is not sufficient.

  • A related case is Felthour (Vs) Bindley. In this case A makes an offer to B saying that he (A) wants to purchase B`s property for 30 pounds and still says that B`s reticency indicates acceptance. Court decides that the offer is not Valid.

Legal Obligations: Offer must be capable of creating legal relation. That means two directional consideration must be reflected in the offer.

  • A case on this point is Balfour (Vs) Balfour. In this case husband offers to send money to his wife at regular intervals of time for the purpose of medical treatment to which she gives acceptance. Here the offerer is not willing to get any consideration from offeree. Hence it is decided that the offer as well as contract are not creating legal relations.

Certainty: The language used in the offer must be certain there should be no element of un-certainty.

  • A related case is Taylor (Vs) Portington. In this case B makes an offer to A saying that A has to modernize his house & if the mode of modernization is satisfactory to B, He (B) will join as tenant. In this offer un-certainity can be seen. It is not Valid offer.

 Acceptance Under The Indian Contract Act, 1872
Definition:- Acceptance, even the word in itself means that there is some offer from one party and the counter party gives its assent. Similarly, even the Indian Contract Act, once the offeree accepts the proposal made by the offerer, it is said to be an Acceptance.
Hence, in the simplest of terms, assent or consent to an offer is known as Acceptance. Under the Indian Contract Act, Acceptance can be Expressed or Implied.

  • In case the acceptance is oral or written, it becomes an Expressed Acceptance

Arjun offers to sell his cellphone to Rakesh over an email. Rakesh replies to that email stating that he accepts the offer to buy.

  • In case the acceptance is shown by conduct, it becomes an Implied Acceptance thereby leading to an Implied Contract.

The Museum of Arts is holding an auction to sell a historic book to raise funds for charity. They advertise the same in the newspapers. This states a Mere Invitation to an Offer as per the Indian Contract Act, 1872. The invitees bid for the same. Bidding is expressed orally, so the offer to buy is an Express Offer but the final call is taken by the auctioneer by striking the hammer thrice. This is known as Implied Acceptance.

Who Can Accept?

Offers can either be made out to people in General or to a Specific counter-party

  • If it is a General Offer it can be accepted by anybody who firstly comes to know about this offer, has the capacity to contract and accepts the offer with all its terms and conditions.

For example there is an advertisement in the paper that any Holiday Packages booked with JGK Holidays before 31st of May 2015 is entitled to a discount 20% of the per person package cost.

  • If it is a Specific Offer it can ONLY be accepted by that Specific Counter-party to whom the offer is made.

For example, Aarkey Group of Companies wants a specific type of tool to help in their construction business. They have a long-standing association with Mayfair Tool Suppliers. Because of this relationship, Mayfair offered to sell this custom-made tool at a special price which was only set for the Aarkey Group.

Legal Rules and Conditions for Acceptance

  1. Acceptance must be absolute and unqualified: The acceptance made by the offeree cannot be conditional. For example if Aseema wants to sell her bike to Kartika for Rs. 62000/-, Kartika can’t come back and state that she accepts the offer but she will buy the same for Rs. 55000/-
  2. Acceptance must be communicated to the offerer: If the acceptor just accepts the offer in his head and does not state the same to the offerer whether in an Express manner or an Implied Manner, it cannot be called as an Acceptance.
  3. Acceptance must be in the mode prescribed: Acceptance sometimes is asked for in a prescribed/specified mode of communication. For instance Deepak wants the acceptance made orally in person, but Ravi accepts Deepak’s offer and posts his acceptance to him. This shall not be considered as a valid acceptance.
  4. Acceptance must be given within a reasonable amount of time: It’s very rare that an offer will be open to acceptance at all times and any time. More often than not, the offer states a time limit. In case it doesn’t, the acceptance shouldn’t take forever.
  5. Mere silence is not acceptance: In case the offeree does not respond to an offer made to him, his silence cannot be mistaken for an acceptance. But, there is an exception to this rule. If it is specified that the non-acceptance has to be communicated to the offerer within say 3 weeks from the date the offer is made, the silence shall be communicated as acceptance.

How do you form a contract?

A valid contract has four parts:
Offer:- First, one party must make an offer. They must state the terms that they want the other party to agree to. If the other side agrees to the terms of the offer, the other side may accept it, and the contract is complete.
Acceptance:- Accepting another party’s offer makes a contract complete. The party that accepts the offer must accept it on the same terms as the terms of the original offer. They must make sure that the other side knows they accept it.
If they propose different terms, there’s no contract. Instead, their terms are a counteroffer. It’s then up to the first party to accept the counteroffer or propose another counteroffer.
Consideration:-  A valid contract requires each party to give something up. That’s called consideration. For example, in the case of an employment contract, one party agrees to give up money, and the other party agrees to give up labor. A contract is a two-way street with each party giving up something to get something else that they want.

Mutual intent to enter into an agreement:-  To have a valid contract, both parties must intend to be bound by the contract. If a document says that it’s only a statement of intent, the parties may not have a mutual agreement to enter into a contract. Informal agreements between friends often fall into this category.
Typically a promise or an offer of a reward in exchange for certain behavior creates an enforceable contract with the person who undertakes the activity. For example, if someone offers a reward for information that leads to an arrest for a crime, the person who provides the information can seek enforcement of the reward. On the other hand, an advertisement is not a contract without an additional, personalized invitation from the seller for the buyer to buy the good.
A contract can be implied. For example, a person who seeks medical treatment has an implied contract with the doctor who treats them to pay a reasonable charge for services. Likewise, a person who orders dinner at a restaurant has an implied contract to pay for the meal that they order.

How do the courts interpret a contract?
To interpret a contract, a court looks at the clear language of the contract from the viewpoint of an objective and reasonable person. If the contract isn’t clear, the court may consider outside evidence including outside statements and the behavior of the parties. It’s best to put a contract in writing, and the statute of frauds may even invalidate some contracts.

Choice of law and jurisdiction:- When lawyers create contracts and handle contract disputes, they should be aware of choice of law and jurisdiction issues. Choice of law means the state law that the court uses to interpret the contract. Because most contract law is state law, choosing to litigate a contract dispute with the laws of one state over another can completely change the outcome of the case.
Lawyers should carefully consider whether to incorporate a choice of law provision into the contract at the time of drafting. They should also be careful when they choose a jurisdiction to bring a contract dispute. Because the rules vary in each state, these considerations can have a large impact on the outcome of a case.

Breach of contract:- When there’s a disagreement about the terms of a contract or when there’s a breach of contract, the parties might involve a court to resolve the dispute. The party seeking damages must prove that a valid contract exists. They must also convince the court that there’s an appropriate remedy.
Remedies available for breach of contract:- There are several remedies that a party might ask a court to impose for a breach of contract. The most common is compensatory damages. These are the real, financial losses that a party has because of the breach of contract. If the parties agree in advance about damages if a breach occurs, that’s called liquidated damages. When a breach occurs without any real damages, the aggrieved party can still get a small amount of damages. That’s called nominal damages.
In some cases, a party acts very poorly and inexcusably to breach a contract. When that happens, the court may award extra damages called punitive damages. However, this is rare. It’s also rare for a court to order the parties to perform the contract. That might happen in a case where compensatory damages are inadequate like in a contract of sale for a rare item.

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