Essentials of a Contract

By Simranpreet Kaur

INTRODUCTION

The contracts in India are governed by the Indian Contract Act, 1872. The act came into force on 1^st September 1872. It is applicable to the whole of the Indian territory. The essentials of a contract are stated in section 2 of the Indian Contract Act, which are discussed in detail in this blog.

PROPOSAL

Section 2(a) of the Indian Contract Act defines the term ‘proposal’ or ‘offer’ as “when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtain the assent of the other to such act or abstinence, he is said to make a proposal”.

The person who makes a proposal is called ‘offeror or promisor’. The person to whom a proposal is made is called the ‘offeree or promisee’. Section 2(c) of the Indian Contract Act defines the terms ‘promisor’ and ‘promisee’.

There are 5 types of proposals or offers-:

1. General offer
2. Open and standing offer
3. Specific offer
4. Cross offer
5. Counter offer

 GENERAL OFFER–

This type of offer is made to the public at the large. The concept of ‘general offer’ can be understood through the Carlill v. Carbolic Smoke Ball Co (1893). One such case law of this type of offer is explained below.

 Case– Carlill v. Carbolic Smoke Ball Co (1893) 1 QB 256

Facts:- Carbolic smoke ball company offered by an advertisement that whosoever will use the ball according to printed directions and, still gets infected by epidemic influenza will get promised reward of £100. The plaintiff used the smoke ball according to the directions but contracted influenza. The defendant refused to give the promised reward.

It was held that the offer was made to the world at large (a general offer). Only a few people came forward and performed the condition on faith of advertisement. Here, the plaintiff also did the same. A contract was made between both parties, through a general offer by the defendant and the plaintiff’s acceptance by performing the condition. The plaintiff was awarded damages for the same.

OPEN AND STANDING OFFER-

This type of offer is left open for acceptance for some time. The concept of ‘opening and standing offer’ can be understood through the Dickinson v. Dodds (1876).

Facts:- Defendant offered to sell the property at a fixed price via a postscript to the plaintiff. The postscript read, “This offer to be left open until Friday 9 o’clock, a.m., 12^th June.” A day before expiry of the offer, the property was sold to a third party, this was being informed to the plaintiff. The plaintiff left the formal acceptance in writing with mother-in-law of the defendant. The agent of plaintiff found defendant on Friday morning at a railway station, where he handed him a duplicate of acceptance by plaintiff, but was informed too late. Few minutes later, plaintiff himself found defendant, but again it was too late.

Judgement- It was held that an offer can be withdrawn by offeror before acceptance by the offeree. The sale of the property to a third party was informed to the plaintiff, it was an effectual withdrawal of the offer. This act meant that the defendant wants to convey that ‘I withdraw the offer’.

CROSS OFFER-

When both parties make identical offer to each other, it is a cross offer. This type of offer can be explained through Tin v. Hoffman (1873). In this case, both parties made identical offer to each other for sale of 800 tons of iron. The price and terms of the offer were also same. The question arose whether the contract is valid or not. It was held that no valid contract is formed. A valid contract consists of an offer, acceptance and communication, which were absent in the present case. Further, it was held that no two identical crossing offer form a contract.

COUNTER OFFER-

When a person offers other for some consideration and the other person instead of accepting it directly, makes some changes in the offer; it is a counter offer.

For example: A offers B to sell a car for Rs. 10 lakhs. B asks A to reduce the price by one lakh ,i.e, 9 lakhs.

Here, the offer made by A got expired when B asked to make some changes (or started bargaining). A fresh offer was then made by B. This type of offer is known as a counter offer.

SPECIFIC OFFER–

When an offer is made to a specific person, it is a specific offer. For example, A offered to sell pen to B at Rs. 10. Here, the offer is specifically made to B only. The concept of this type of can be explained through Boulton v. Jones.

Facts- The plaintiff sent an order of certain goods to the plaintiff, not knowing the change in ownership of business. He came to know about this only when he received the invoice, at that point when he already consumed the goods. Defendant refused to pay the price. Plaintiff sued the defendant.

Judgement- The judge gave unanimous judgement holding that the defendant is not liable. It was held that whenever a person makes contract with specific personality, no one has authority to come in and maintain that he is the party contracted with.

CONSIDERATION

Section 2(d) of the Indian Contract Act defines “consideration” as “When, at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstain from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called consideration of promise.

Consideration is ‘the price of promise’. Section 25 of the Indian Contract Act states that “An agreement made without consideration is void”. So, consideration is one of the most important parts of a contract, without which a contract cannot be made.

The concept of consideration can be explained through Durga Prasad v. Baldeo. On the order of collector of town, Durga prasad built some shops on his own expense in a market. The shopkeepers who occupied shops promised to pay Durga prasad commission. But they didn’t pay commission and were sued by Durga prasad. It was held by court that the promise of commission was not supported by any consideration because shops were built on order of collector and not on shopkeeper’s request. Therefore, Durga prasad can’t claim commission.

ACCEPTANCE

The term ‘Acceptance’ has been defined as “When the person to whom the promise is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise”. Acceptance acts as a tool to convert a proposal into a promise.

Acceptance can be done in two ways; it can either be implicit or explicit. Acceptance can be given implicitly through gesture; for example, a bus was going to Delhi. A sat in the bus and bus reached Delhi. Here, sitting in the bus which was leaving for Delhi shows that A accepted to go to the Delhi, by his gesture of sitting in it.

Acceptance can be done explicitly through words, either written or spoken. For example; A wanted to sell a bag of one kg of wheat at Rs. 100, B said “I will buy this bag of wheat for Rs. 100”. Here, B showed his acceptance through words.

   Case– Lalman Shukla v. Gauri Dutt (1913) 11 A11 LJ 489

Facts:- Defendant’s nephew absconded from home. He sent his servant (the plaintiff) to search for him. After sending his servant, he by way of a bill announced a reward for the person who will find his nephew. The servant being unaware of the reward found the defendant’s nephew. After he got to know about the reward, he brought an action to recover the reward.

Judgement- It was held by the court that to constitute a contract, the offer must be accepted. To accept the offer, the offer should come to the knowledge of the person to whom it was made.

AGREEMENT

An agreement is defined as “every promise and every set of promises forming consideration for each other”, in section 2(e) of the Indian Contract Act. It can be also called ‘an accepted proposal’. It is the result of proposal on one side and acceptance on the other side.

An agreement when enforceable by law, becomes a contract. The rules or conditions for its enforceability are stated in section 10 of the Indian Contract Act. For an agreement to become a contract, the following conditions need to be fulfilled -:

1.  Free Consent of the parties
2. Parties need to be competent
3. Lawful consideration
4. Lawful object

Example of a contract:

A proposes B to buy book at Rs.100. B agrees to buy book at Rs. 100.Here, A is the promisor. B is the promise. Rs. 100 is the consideration. When B accepts the proposal, it becomes an agreement. Now, as this agreement is fulfilling all conditions section 10; such as Rs. 100 as consideration, both parties are competent and has consented freely for a lawful object (i. e, book), it becomes a contract.

In the case of State of Bihar v. Bengal chemical and pharmaceutical works Ltd., it was held that mere performance of acts prescribed by the offer is sufficient for acceptance. Even without communicating acceptance, the act itself will form a contract.

CONCLUSION

The concept of contract is not just confined to business-related activities, it has a wider scope. It is used in our day-to-day life as well, such as buying a pen from the shopkeeper. The essentials of a contract help us to understand it more easily as well as they play a very important role while forming a contract. If even one of the essentials is missing, it might not constitute a valid contract. Thus, the essentials of a contract are crucial for forming a valid contract.

Read More about contracts.

All contracts are agreements but all agreements are not contracts- iPleaders

The Basics of Business Contracts and Agreements (thebalancesmb.com)

Types of Contracts – Indian Contract Act, 1872 (legalbites.in)