Formation and Validity of Contracts (Offer, Acceptance, Consideration, Consent) | Legal Reasoning for CLAT PDF Download

Concept of Acceptance in Law of Contracts

• The Indian Contract Act, 1872 defines an acceptance as follows:
• ‘‘When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted”.
• Thus, acceptance is the act of giving consent to the proposal. A proposal when accepted becomes a contract.

Acceptance How Made?

As mentioned above, the offeree is deemed to have given his acceptance when he gives his assent to the proposal. The assent may be express or implied. It is express when the acceptance has been signified either in writing, or by word of mouth, or by performance of some required act. The first two kinds of acceptance are self-explanatory

Examples-

• A trader receives an order from a customer and executes the order by sending the goods. The customer’s order for goods constitutes the offer which was accepted by the trader by sending the goods. It is a case of acceptance by conduct. Here the trader is accepting the offer by the performance of the act.
• A loses his dog and announces a reward of Rs. 50 to anyone who brings his dog to him. B need not convey his acceptance of the general offer. If he finds the dog and gives it to A, he is entitled to the reward as he accepted the offer by doing the required act.

Acceptance is implied when it is to be gathered from the surrounding circumstances or the conduct of the parties.

Examples-

• A enters into a bus for going to his destination and takes a seat. From the very nature of the circumstance, the law will imply acceptance on the part of A.
• A’s scooter goes out of order and he was stranded on a lonely road. B, who was standing nearby, starts correcting the fault. A allows B to do the same. From the nature of the circumstances, A has given his acceptance to the offer by B.

Who can Accept?

In the case of a specific offer, it can be accepted only by that person to whom it is made. The rule of law is that if A wants to enter into a contract with B, then C cannot substitute himself for B without A’s consent.

Example-

• The facts of this case were as follows: B, who was a manager with X, purchased his business. J, to whom, X owed a debt, placed an order with X for the supply of certain goods. B supplied the goods even though the order was not addressed to him. J refused to pay B for the goods because he, by entering into contract with X, intended to set-off his debt against X.

Held: The offer was made to X and it was not in the power of B to have accepted the same.

• In the case of a general offer, it can be accepted by anyone by complying with the terms of the offer.

Essentials of a Valid Acceptance

There are some legal rules which make the acceptance effective so as to give rise to a valid contract. These are:

Acceptance must be absolute and unqualified.
An acceptance to be valid must be absolute and unqualified and according to the exact terms of the offer. An acceptance with a variation, however slight, is no acceptance, and may amount to a mere counter offer which the original offeror may or may not accept.

Examples-

• A offers to sell his house to B for Rs. 1,000. B replies, “I can pay Rs. 800 for it.” The offer of A is rejected by B as the acceptance is not unqualified. However, B subsequently changes his mind and is prepared to pay Rs. 1,000. This will also be treated as a counter offer and it is up to A whether to accept the same or not
  • M offered to sell land to N for £280. N replied purporting to accept and enclosed £80, promising to pay the balance of £200 by monthly instalments of £50 each.

Held: That N could not enforce acceptance because his acceptance was  not an unqualified one.

• A offers to sell his house to B for Rs. 10,000. B replies, “I am prepared to buy your house for Rs. 10,000 provided you purchase my 1980 model Ambassador Car for Rs. 60,000.” There is no acceptance on the part of B.

Example-

• A offers to sell his house to B, and B agrees to purchase it subject to the title being approved by B’s solicitor. The acceptance by B is absolute and unqualified as it is presumed that A has a title to the property and it was not necessary for A to mention anything about the title.

Acceptance must be communicated to the offeror
The communication of acceptance may be express or implied. A mere mental acceptance is no acceptance. A mere mental acceptance means that the offeree is assenting to an offer in his mind only and has not communicated it to the offeror.

Example-

• B, a supplier, sent a draft agreement relating to the supply of Coal and Coke to the manager of a railway company for his acceptance. The manager wrote the word “approved” on the same and put the draft in the drawer of his table intending to send it to the company’s solicitors for a formal contract to be drawn up. By an oversight, the draft agreement remained in the drawer.

Held: That there was no contract as the manager had not communicated his acceptance to the proposer.

• The acceptance of an offer cannot be implied from the silence of the offeree or his failure to answer.

Example-

• F offered by letter to buy his nephew’s horse for £30, saying: “If I hear no more about it, I shall consider the horse is mine at £30.” The nephew did not reply at all, but he told an auctioneer who was selling his horses not to sell that particular horse as he had sold it to his uncle. By mistake, the auctioneer sold the horse. F sued the auctioneer for conversion. Held, F could not succeed as his nephew had not communicated acceptance and there was no contract

Acceptance must be according to the mode prescribed.
Where the offerer prescribes a particular mode of acceptance, then the acceptor should follow that mode. In case no mode of acceptance is prescribed by the proposer, then the acceptance must be according to some usual and reasonable mode. If the proposer prescribed 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.

Examples-

• A sends an offer to B through post in the usual course. B should make the acceptance in the “usual and reasonable manner” as no mode of acceptance is prescribed. He may accept the offer by sending a letter, through post, in the ordinary course, within a reasonable time.
• A sends an offer to B through post in the usual course and asks for an acceptance by wire. B should accept the order by wire. However, if B accepts the offer by a letter, then A may insist that the acceptance should be in the prescribed mode. But if the proposer does not insist within a reasonable time then the proposer is bound by the acceptance, though not made in the prescribed mode.
• The acceptance must be given within the time specified, if any, otherwise it must be given within a reasonable time. What is a reasonable time is a question of fact and would depend upon the circumstances of each case.

Termination or Lapse of an Offer

An offer is made with a view to obtain assent thereto. As soon as the offer is accepted it becomes a contract. But before it is accepted, it may lapse, or may be revoked. Also, the offeree may reject the offer. In these cases, the offer will come to an end.

Agreement to Agree in Future

Law does not allow making of an agreement to agree in the future. The parties must agree on terms of the agreement. The terms of the agreement must be either definite or capable of being made definite without further agreement of the parties.

Examples-

• A, an actress was engaged for a provincial tour. The agreement provided that if the party went to London, A would be engaged at a ‘salary to be mutually arranged between us’.

Held: That there was no contract as the terms were not definite and were incapable of being made definite without further agreement of the parties.

• F sold part of his land to a motor company subject to a condition that the company should buy all their petrol from F ‘at a price to be agreed by the parties in writing and from time to time.’ The agreement also provided that dispute, if any, was to be submitted to arbitration. The price was never agreed and the company refused to buy the petrol.

Held: That there was a binding contract. The agreement provided the method by which the price could be ascertained. The terms of the agreement were definite and the parties did not agree to settle the terms in future by their mutual consent.

All about Consideration in Law of Contracts

In simplest terms, consideration is what a promisor demands as the price for his promise.

“an act or forbearance of one party or the promise thereof is the price for which the promise of the other is bought and the promise thus given for value is enforceable.”

Examples-

• A agrees to sell his house to B for Rs. 10,000. Here B’s promise to pay the sum of Rs. 10,000 is consideration for A’s promise to sell the house; and A’s promise to sell the house is the consideration for B’s promise to pay Rs. 10,000.
• A promises to pay B Rs. 1,000 at the end of 6 months, if C, who owes that sum to B, fails to pay it. B promises to grant time to C, accordingly. Here the promise of each party is the consideration for the promise of the other party.
• A promises, for a certain sum paid to him by B to make good to B the value of his ship if it is wrecked on a certain voyage. Here A’s promise is the consideration for B’s payment and B’s payment is the consideration for A’s promise.
• A promises to maintain B’s child and B promises to pay A Rs. 1,000 yearly for the purpose. Here the promise of each party is the consideration for the promise of the other party.

Consideration must move at the desire of the promisor

Accordingly, an act done at the desire of a third party is not a consideration.

Example-

• D constructed a market at the instance of the Collector of a District. The occupants of the shops in the said market promised to pay D a commission on articles sold through their shops. Held : There was no consideration because the money was not spent by the plaintiff at the request of the defendants, but voluntarily for a third person and thus the contract was void.

Consideration may move from the promisee or any other person

Although it is necessary that consideration must move at the desire of the promisor, it may be supplied either by the promisee or any other person.

Examples-

• A who is indebted to B sells his property to C and C promises to pay off the debt to B. In case C fails to pay, B has no right to sue; C being stranger to the contract.
• Upon A’s marriage his father and father-in-law entered into a contract to contribute a certain sum of money to be given to A after his marriage. A’s father paid his contribution but his father-in-law failed to pay.

Held : A could not sue his father-in-law since he (A) was a stranger to the contract

Consideration need not be adequate

Example-

• A agrees to sell a horse worth Rs. 1,000 for Rs. 100. A denies that his consent to the agreement was freely given. The inadequacy of consideration is a fact which the Court should take into account in considering whether or not A’s consent was freely given.

Consideration must be real and competent

Consideration must be real. If it is illusory, e.g., if a man promises to discover treasure by magic, the transaction is void.

Examples-

• A promises to pay an existing debt punctually if, B, the creditor, gives him a discount. The agreement is without consideration and the discount cannot be enforced.

Exceptions to the Rule “No Consideration No Contract”

The general rule of law is that an agreement without consideration is void. “A bargain without consideration is a contradiction in terms and cannot exist.”* But there are a few exceptional cases where a contract, even though without consideration, is enforceable. They are as follows:

An agreement made without consideration is valid if—

• it is expressed in writing, and
• it is registered (under the law for the time being in force for registration of documents), and
• it is made on account of natural love and affection, and
• made between parties standing in a near relation to each other.

Examples

• An elder brother, on account of natural love and affection, promised to pay the debts of his younger brother. The agreement was put to writing and was registered.

Held: The agreement was valid.

• A Mohammedan husband, by a registered agreement promised to pay his earnings to his wife.

Held: The agreement, though without consideration, was valid

Examples

• A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is a valid contract.
• A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a valid contract.
• A promise to pay, wholly or in part a debt which is barred by the law of limitation can be enforced if (a) it is in writing, and (b) is signed by the debtor or his authorised agent

Consent and all its related concepts in Law of Contracts

Meaning of Consent

It is essential to the creation of a contract that both parties agree to the same thing in the same sense. When two or more persons agree upon the same thing in the same sense, they are said to consent.

Examples-

• A agrees to sell his Fiat Car 1983 model for Rs. 80,000. B agrees to buy the same.
  There is a valid contract since A and B have consented to the same subject matter.
• A, who owns three Fiat Cars, offers to sell one, say, ‘car x’ to B for Rs. 80,000. B agrees to buy the car for the price thinking that A is selling ‘car y’. There is no consent and hence no contract. A and B have agreed not to the same thing but to different things.

Free Consent Defined

Consent is said to be free when it is not caused by—
(a) Coercion
(b) Undue influence
(c) Fraud
(d) Misrepresentation
(e) Mistake

Coercion under Law of Contracts

Coercion is (i) the committing, or threatening to commit any act forbidden by the Indian Penal Code or (ii) the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

Examples-

• A Hindu widow is forced to adopt X under threat that her husband’s corpse (dead body) would not be allowed to be removed unless she adopts X. The adoption is voidable as having been induced by coercion .
• A threatens to kill B if he doesn’t transfer his house in A’s favour for a very low price. The agreement is voidable for being the result of coercion.
• An agent refused to hand over the books of accounts of the principal unless he (principal) released him from all liabilities concerning past transactions.

Held: The release so given was not binding, being the outcome of coercion.

Note that, it is not necessary that coercion must have been exercised against the promisor only, it may be directed at any person.

Examples-

• A threatens to kill B (C’s son) if C does not let out his house to A. The agreement is caused by coercion.X threatens to kill A if he does not sell his house to B at a very low price. The agreement is caused by coercion though X is stranger to the transaction.

Threat to Commit Suicide—Is it Coercion?

The doubt arises because suicide though forbidden by the Indian Penal Code is for obvious reasons not punishable. A dead person cannot be punished. But, since Section 15 declares that committing or threatening to commit any act forbidden by the Indian Penal Code is coercion, a threat to commit suicide should obviously be so regarded (suicide being forbidden).
‘A’ obtained a release deed from his wife and son under a threat of committing suicide. The transaction was set aside on the ground of coercion.

Consequences of Coercion

• When consent to an agreement is caused by coercion, the agreement is a contract voidable at the option of the party whose consent was so obtained. In other words, the aggrieved party can have the contract set aside or if he so desires to insist on its performance by the other party.
• A person to whom money has been paid, or anything delivered under coercion must repay or return it.

Example-

• A railway company refuses to deliver certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive.

Undue Influence under Law of Contracts

• Undue influence consists in the improper exercise of a power over the mind of one of the contracting parties by the other. According to Sec. 16, a contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

Examples-

• A having advanced money to his son B during his minority, upon B coming of age, obtains, by misuse of parental influence, a bond from B for greater amount than the sum due in respect of the advance. A employs undue influence.
• A, a man enfeebled by disease or age is induced by B’s influence over him as his medical attendant to agree to pay B an unreasonable sum for his professional service. B employs undue influence.
• A, a spendthrift and a weak-minded just come of age, conveys a share of his family estate to his father-in-law for nominal consideration. Undue influence is presumed to have been exercised.

Consequences of Undue Influence

An agreement caused by undue influence is a contract voidable at the option of the party whose consent was obtained by undue influence. However, any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder upon such terms and conditions as the court deems fit.

Example-

• A, a money-lender, advances Rs. 100 to B, an agriculturist, and by undue influence, induces B to execute a bond for Rs. 200 with interest at 6 percent per month. The Court may set the bond aside, ordering B to repay Rs. 100 with such interest as may seem just.

Undue Influence In Money Lending Transactions

The mere fact of the rate of interest being high is not evidence of undue influence. ‘A’ who is in urgent need of money borrows from a lender who charges him very high rate of interest. The transaction, on the face of it, is not one induced by undue influence.

Example-

• A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

Example-

• A, being in debt to B, the money-lender of his village, contracts, for a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence.

Fraud under Law of Contracts

‘Fraud’ means and includes any of the following acts committed by a party to a contract (or with his connivance or by his agent) with intent to deceive another party thereto or his agent; or to induce him to enter into the contract:

• the suggestion, as a fact, of that which is not true by one who does not believe it to be true;
• the active concealment of a fact by one having knowledge or belief of the fact;
• a promise made without any intention of performing it;
• any other act fitted to deceive;
• any such act or omission as the law specially declares to be fraudulent. From the analysis of the above, it follows that for fraud to exist there must be:

1. A representation or assertion, and it must be false: To constitute fraud there must be an assertion of something false within the knowledge of the party asserting it. Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud.

Examples-

• H sold to W certain pigs. The pigs were suffering from some fever and H knew it.
  The pigs were sold “with all faults.” H did not disclose the fever to W.

Held : There was no fraud.

• A sells by auction to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud by A.
  However, (i) Silence is fraudulent, if the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak.* The duty to speak exists where the parties stand in a fiduciary relationship, e.g., father and son, guardian and ward, etc.; or where the contract is a contract uberimae fidei (requiring utmost good faith), e.g., contracts of insurance. The duty to disclose may also be an obligation imposed by statute.

Example-

• A sells by auction to B, a horse which A knows to be unsound. B is A’s daughter and has just come of age. Here the relation between the parties would make it A’s duty to tell B if the horse is unsound.
  (ii) Silence is fraudulent where the circumstances are such that, “silence is in itself equivalent to speech”.

Example-

• B says to A — “If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here A’s silence is equivalent to speech.
• Thus, we may say that to constitute fraud, ordinarily, there must be active misstatement of fact or such a partial and fragmentary statement of fact as that the witholding of that which is not stated makes that which is stated absolutely false,the prospectus issued by a company did not refer to the existence of a document disclosing liabilities. The impression thereby created was that the company was a prosperous one, which actually was not the case.

Held : The suppression of truth amounted to fraud.

2. The representation or assertion must be of a fact: The representation or assertion alleged to be false must be of a fact. A mere expression of opinion, puffery or flourishing description does not constitute fraud.

Example-

• A, a seller of a horse, says that the horse is a ‘Beauty’ and is worth Rs. 5,000. It is merely
• A’s opinion. But if in fact A paid only Rs. 2,000 for it, then he has misstated a fact.

3. The representation or statement must have been made with a knowledge of its falsity or without belief in its truth or recklessly.

Example-

• A company issued a prospectus giving false information about the unbounded wealth of Nevada. A share broker who took shares on the faith of such an information wanted to avoid the contract.

Held : He could do so since the false representation in the prospectus amounted to fraud.

4. The representation must have been made with the intention of inducing the other party to act upon it.
For fraud to exist, the intention of misstating the facts must be to cause the other party to enter into an agreement.

5. The representation must in fact deceive: It has been said that deceit which does not deceive is not fraud. A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised or to whom such misrepresentation was made does not render a contract voidable.*

Examples-

• A bought a cannon of B. B knew the cannon had a defect, which rendered it worthless, and so put a metal plug to conceal the defect. A accepted the cannon without examining it. The cannon burst, when used.

Held : There was no fraud because A would have bought it even if no deceptive plug had been put. He was not in fact deceived by it.

6. The Party subjected to fraud must have suffered some los: It is a common rule of law that “there is no fraud without damages”. As such, fraud without damage does not give rise to an action of deceit.

Misrepresentation under Law of Contracts

Like fraud, misrepresentation is incorrect or false statement but the falsity or inaccuracy is not due to any desire to deceive or defraud the other party. It is innocent. The party making it believes it to be true.
The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true.

Example-

• X learns from A that Y would be director of a company to be formed. X tells this to B in order to induce him to purchase shares of that company and B does so. This is misrepresentation by X, though he believed in the truthness of the statement and there was no intent to deceive, as the information was derived not from Y but from A and was mere hearsay.
• Any breach of duty which, without an intent to deceive, gives an advantage to the person committing it (or anyone claiming under him), by misleading another to his prejudice or to the prejudice of anyone claiming under him.
• Causing, however innocently, a party to an agreement to make a mistake as to the substance of thing which is the subject of the agreement.

Examples-

• X entered into contract with C for the sale of hops. X told Y that no sulphur had been used in their growth. Y agreed to buy only if no sulphur had been used for their growth. As a matter of fact, sulphur had been used in 5 out of 300 acres which fact was evidently forgotten by X when he represented that no sulphur was used.

Held : That the representation that no sulphur had been used was in the nature of a primary stipulation and in a sense a condition, without which the contract would not have been proceeded with and, therefore, the contract could be avoided, though the representation was not fraudulent.

• A chartered a ship from B which was described in the ‘charter party’ and was represented to him as being not more than 2,800 registered tonnage. It turned out that the registered tonnage was 3,045 tons. A refused to accept the ship in fulfillment of the charter party, and it was held that he was entitled to avoid the charter party by reason of the erroneous statement as to tonnage.

Mistake under Law of Contracts

Mistake means wrong belief which is innocent, and leads one party to rise misunderstanding against other. Mistake happened when the terms and conditions of the agreement is not clear between the parties. When one said something and white was not clear in the mind of other. The both parties understand consequences on the different terms and there was no consensus-ad-idem i.e. meeting of mind , and thus not understanding same thing in same sense.

Mistake has been further classified into two cases under Indian Contract Act , 1872.

• Mistake of Fact- Ignorance of Fact is excusable under law of contract.
• Mistake of Law- Ignorance of law is not excusable under India Contract act. However there are exceptions such as mistake regarding foreign law and mistake regarding private rights of any party.