Nature of Contracts (Part - 3) CA Foundation Notes | EduRev

Business Laws for CA Foundation

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CA Foundation : Nature of Contracts (Part - 3) CA Foundation Notes | EduRev

The document Nature of Contracts (Part - 3) CA Foundation Notes | EduRev is a part of the CA Foundation Course Business Laws for CA Foundation.
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PROPOSAL / OFFER [SECTION 2(a) OF THE INDIAN CONTRACT ACT, 1872]:

Definition of Offer/Proposal:
According to Section 2(a) of the Indian Contract Act, 1872, “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”.

Analysis of the above definition:
Essentials of a proposal/offer are:
1. The person making the proposal or offer is called the ‘promisor’ or ‘offeror’: The person to whom the offer is made is called the ‘offeree’ and the person accepting the offer is called the ‘promisee’ or ‘acceptor’.
2. For a valid offer, the party making it must express his willingness ‘to do’ or ‘not to do’ something: Mere expression of willingness does not constitute an offer.
Example: Where ‘A’ tells ‘B’ that he desires to marry by the end of 2017, it does not constitute an offer of marriage by ‘A’ to ‘B’. Therefore, to constitute a valid offer expression of willingness must be made to obtain the assent (acceptance) of the other. Thus, if in the above example, ‘A’ further adds, ‘Will you marry me’, it will constitute an offer.
3. An offer can be positive as well as negative: Thus “doing” is a positive act and “not doing”, or “abstinence” is a negative act; nonetheless both these acts have the same effect in the eyes of law.

Example: A offers to sell his car to B for Rs. 3 lacs is an act of doing. So in this case, A is making an offer to B. On the other hand, when A ask B after his car meets with an accident with B’s scooter not to go to Court and he will pay the repair charges to B for the damage to B’s scooter; it is an act of not doing or abstinence.
4.  The willingness must be expressed with a view to obtain the assent of the other party to whom the offer is made.
Nature of Contracts (Part - 3) CA Foundation Notes | EduRev
Classiffication of offer An offer can be classified as general offer, special/specific offer, cross offer, counter offer, standing/open/continuing offer.
Nature of Contracts (Part - 3) CA Foundation Notes | EduRev

Now let us examine each one of them.
(a) General offer: It is an offer made to public at large and hence anyone can accept and do the desired act (Carlill v. Carbolic Smoke Ball Co.). In terms of Section 8 of the Act, anyone performing the conditions of the offer can be considered to have accepted the offer. Until the general offer is retracted or withdrawn, it can be accepted by anyone at any time as it is a continuing offer.

Case Law: Carlill Vs. Carbolic Smoke Ball Co. (1893)
Facts: In this famous case Carbolic smoke Ball Co. advertised in several newspapers that a reward of £100 would be given to any person who contracted inuenza after using the smoke balls produced by the Carbolic Smoke Company according to printed directions. One lady, Mrs. Carlill, used the smoke balls as per the directions of company and even then suffered from inuenza. Held, she could recover the amount as by using the smoke balls she had accepted the offer.

Case Law: Lalman Shukla v. Gauri Dutt Facts: G (Gauridutt) sent his servant L (Lalman) to trace his missing nephew. He then announced that anybody who traced his nephew would be entitled to a certain reward L, traced the boy in ignorance of this announcement. Subsequently when he came to know of the reward, he claimed it. Held, he was not entitled to the reward, as he did not know the offer.
(b) Special/specific offer: When the offer is made to a specific or an ascertained person, it is known as a specific offer. Specific offer can be accepted only by that specified person to whom the offer has been made. [Boulton v. Jones]
Example: ‘A’ offers to sell his car to ‘B’ at a certain cost. This is a specific offer.
(c) Cross offer: When two parties exchange identical offers in ignorance at the time of each other’s offer, the offers are called cross offers. There is no binding contract in such a case because offer made by a person cannot be construed as acceptance of the another’s offer.

Example: If A makes a proposal to B to sell his car for Rs. 2 lacs and B, without knowing the proposal of A, makes an offer to purchase the same car at Rs. 2 lacs from A, it is not an acceptance, as B was not aware of proposal made by A. It is only cross proposal (cross offer). And when two persons make offer to each other, it can not be treated as mutual acceptance. There is no binding contract in such a case.
(d) Counter offer: When the offeree offers to qualified acceptance of the offer subject to modifications and variations in the terms of original offer, he is said to have made a counter offer. Counter-offer amounts to rejection of the original offer. It is also called as Conditional Acceptance.

Example: ‘A’ offers to sell his plot to ‘B’ for Rs. 10 lakhs. ‘B’ agrees to buy it for Rs. 8 lakhs. It amounts to counter offer. It may result in the termination of the offer of ‘A’. Any if later on ‘B’ agrees to buy the plot for Rs. 10 lakhs, ‘A’ may refuse.
(e) Standing or continuing or open offer: An offer which is allowed to remain open for acceptance over a  period of time is known as standing or continuing or open offer. Tenders that are invited for supply of goods is a kind of standing offer.

Essential of a valid offer:
1. It must be capable of creating legal relations: Offer must be such as in law is capable of being accepted and giving rise to legal relationship. If the offer does not intend to give rise to legal consequences and creating legal relations, it is not considered as a valid offer in the eye of law. A social invitation, even if it is accepted, does not create legal relations because it is not so intended.
2. It must be certain, definite and not vague: If the terms of an offer are vague or indefinite, its acceptance cannot create any contractual relationship. Thus, where A offers to sell B 100 quintals of oil, there is nothing whatever to show what kind of oil was intended. The offer is not capable of being accepted for want of certainty.
3. It must be communicated to the offeree: An offer, to be complete, must be communicated to the person to whom it is made, otherwise there can be no acceptance of it. Unless an offer is communicated, there can be no acceptance by it. An acceptance of an offer, in ignorance of the offer, is not acceptance and does not confer any right on the acceptor.

This can be illustrated by the landmark case of Lalman Shukla v. GauriDutt.
Facts: G (Gauridutt) sent his servant L (Lalman) to trace his missing nephew. He then announced that anybody who traced his nephew would be entitled to a certain reward. L traced the boy in ignorance of this announcement. Subsequently when he came to know of the reward, he claimed it. Held, he was not entitled to the reward, as he did not know the offer.
4. It must be made with a view to obtaining the assent of the other party: Offer must be made with a view to obtaining the assent of the other party addressed and not merely with a view to disclosing the intention of making an offer.
5. It may be conditional: An offer can be made subject to any terms and conditions by the offeror.

Example: Offeror may ask for payment by RTGS, NEFT etc. The offeree will have to accept all the terms of the offer otherwise the contract will be treated as invalid.
6. Offer should not contain a term the non compliance of which would amount to acceptance: Thus, one cannot say that if acceptance is not communicated by a certain time the offer would be considered as accepted.

Example: A proposes B to purchase his android mobile for Rs. 5000 and if no reply by him in a week, it would be assumed that B had accepted the proposal. This would not result into contract.
7. The offer may be either specific or general: Any offer can be made to either public at large or to the any specific person. (Already explained in the heading types of the offer)
8. Offer is Different from a mere statement of intention, an invitation to offer, a mere communication of information, Casual Equity, A prospectus and Advertisement.
(i)  An invitation to make an offer or do business. In case of “an invitation to make an offer”, the person making the invitation does not make an offer rather invites the other party to make an offer. His objective is to send out the invitation that he is willing to deal with any person who, on the basis of such invitation, is ready to enter into contract with him subject to final terms and conditions.
Example: An advertisement for sale of goods by auction is an invitation to the offer. It merely invites offers/bids made at the auction. Similarly, Red Herring Prospectus issued by a company, is only an invitation to the public to make an offer to subscribe to the securities of the company.
(ii) A statement of intention and announcement.
(iii) Offer must be distinguished from an answer to a question.
Case Law: Harvey vs. Facie [1893] AC 552 In this case, Privy Council succinctly explained the distinction between an offer and an invitation to offer. In the given case, the plaintiffs through a telegram asked the defendants two questions namely,
(i) Will you sell us Bumper Hall Pen? and
(ii) Telegraph lowest cash price.

The defendants replied through telegram that the “lowest price for Bumper Hall Pen is £ 900”. The plaintiffs sent another telegram stating “we agree to buy Bumper Hall Pen at £ 900”. However the defendants refused to sell the property at the price.

The plaintiffs sued the defendants contending that they had made an offer to sell the property at £ 900 and therefore they are bound by the offer.

However the Privy Council did not agree with the plaintiffs on the ground that while plaintiffs had asked two questions, the defendant replied only to the second question by quoting the price but did not answer the first question but reserved their answer with regard to their willingness to sell. Thus they made no offer at all. Their Lordships held that the mere statement of the lowest price at which the vendor would sell contained no implied contract to sell to the person who had enquired about the price.

The above decision was followed in Mac Pherson vs Appanna [1951] A.S.C. 184 where the owner of the property had said that he would not accept less than £ 6000/- for it. This statement did not indicate any offer but indicated only an invitation to offer.

Similarly when goods are sold through auction, the auctioneer does not contract with any one who attends the sale. The auction is only an advertisement to sell but the items are not put for sale though persons who have come to the auction may have the intention to purchase. Similar decision was given in the case of Harris vs. Nickerson (1873).
9. The offer may be express or implied: An offer may be made either by words or by conduct.

Example: A boy starts cleaning the car as it stops on the traffic signal without being asked to do so, in such circumstances any reasonable man could guess that he expects to be paid for this, here boy makes an implied offer.
10. A statement of price is not an offer
What is invitation to offer?

An offer should be distinguished from an invitation to offer. An offer is definite and capable of converting an intention into a contract. Whereas an invitation to an offer is only a circulation of an offer, it is an attempt to induce offers and precedes a definite offer. An invitation to offer is an act precedent to making an offer. Acceptance of an invitation to an offer does not result in the contract and only an offer emerges in the process of negotiation.

When a person advertises that he has stock of books to sell or houses to let, there is no offer to be bound by any contract. Such advertisements are offers to negotiate-offers to receive offers. In order to ascertain whether a particular statement amounts to an ‘offer’ or an ‘invitation to offer’, the test would be intention with which such statement is made. Does the person who made the statement intend to be bound by it as soon as it is accepted by the other or he intends to do some further act, before he becomes bound by it. In the former case, it amounts to an offer and in the latter case, it is an invitation to offer.
Example: The price list of goods does not constitute an offer for sale of certain goods on the listed prices. It is an invitation to offer.

Difference between offer and invitation to make an offer: In terms of Section 2(a) of the Act, an offer is the final expression of willingness by the offeror to be bound by the offer should the other party chooses to accept it. On the other hand, offers made with the intention to negotiate or offers to receive offers are known as invitation to offer. Thus where a party without expressing his final willingness proposes certain terms on which he is willing to negotiate he does not make an offer, but only invites the other party to make an offer on those terms. Hence the only thing that is required is the willingness of the offeree to abide by the terms of offer.

In order to ascertain whether a particular statement amounts to an offer or an invitation to offer, the test would be intention with which such statement is made. The mere statement of the lowest price which the vendor would sell contains no implied contract to sell at that price to the person making the inquiry.

If a person who makes the statement has the intention to be bound by it as soon as the other accepts, he is making an offer. Thus the intention to be bound is important factor to be considered in deciding whether a statement is an ‘offer’ or ‘invitation to offer.’ Following are instances of invitation to offer to buy or sell:
(i) An invitation by a company to the public to subscribe for its shares.
(ii) Display of goods for sale in shop windows.
(iii) Advertising auction sales and
(iv) Quotation of prices sent in reply to a query regarding price.
Nature of Contracts (Part - 3) CA Foundation Notes | EduRev

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