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Agreement, Contract, Proposal and
Acceptance
DEFINITION OF CONTRACT
THE term "contract" is defined in Section 2(h) of the Indian Contract Act, 1872, as fol- pvs: An agreement enforceable by law is a contract Thus, to arrive at a contract there must be—(1) an agreement, and (2) the agreement " uld be enforceable by law. | Agreement \n "agreement" is defined as "every promise and every set of promises forming the E-sideration for each other",^1 and a promise is defined as an accepted proposal. Section 1 -> says: "A proposal, when accepted, becomes a promise." This is another way of say- K :hat an agreement is an accepted proposal. The process of definitions comes down to s: A contract is an agreement; an agreement is a promise and a promise is an accepted ;sal. Hence, every agreement, in its ultimate analysis, is composed of a proposal i one side and its acceptance by the other. rceable by law igreement is regarded as a contract when it is enforceable by law.^2 An agreement that ".aw will enforce is a contract. The conditions of enforceability are stated in Section According to this section an agreement is a contract when it is made for some Conxion, between parties who are competent, with their free consent and for a lawful -L
5ec::on 2(e). ie^ion 2(h).
2 Textbook on Law of Contract and Specific Relief [S. 2(b)] [Chap. 1. What agreements are contracts. —All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in [India] and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. Thus, every contract is an agreement, but every agreement is not a contract. An agreement grows into a contract when the following conditions are satisfied: (1) There is some consideration for it. (2) The parties are competent to contract. (3) Their consent is free. (4) Their object is lawful. Scope The law of contract restricts itself to voluntarily created civil obligations. It is not even the whole law of civil obligations. Civil obligations created by the tort or trust law are outside the field of contract because they are not necessarily voluntary choices.^1 The law of contract is also not the whole law of agreements, because there are many agreements that the law will not enforce and, therefore, they remain outside the purview of the law of contract. Many agreements are, e.g. excluded from the range of enforceability under the legal device that the parties must not have intended legal consequences.
PROPOSAL OR OFFER
A proposal and its acceptance is the universally acknowledged process for the making of an agreement. The proposal is the starting point. Section 2(a) defines "proposal" as follows: 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. The person who makes the proposal is generally called the promisor or "offerer" and the person to whom it is made is called the "offeree", and when he accepts it, he is called
1 Even where a relationship is of voluntary nature, it may not necessarily be contractual. For example, the Bombay High Court has held in Sharad Vaidya (Dr) v Paulo Joel Vales, AIR 1992 Bom 478 that the word "contract" docs not include professional services rendered by a doctor. The liability for negligent service will be tortious not contractual. R. Rangaraj v Legal Representative , 2000 AIHC 2206, agreement signed by the very party to sell the land, valid for specific performance. Municipal Board v Yadu Nath Singh , AIR 2004 Raj 79, the contract not adequately signed from the side of the Municipality, no binding force. M.V. Shankar Bhat v Claude Pinto, (2003) 4 SCC 86, an agreement subject to ratification of others who were not parties, not a concluded contract. Syndicate Bank v R. Veeranna, (2003) 2 SCC 15: (2003) 4 Bom CR 325 (SC), provision for revision of interest, prior notice for exercising this power not necessary.
4 Textbook on Law of Contract and Specific Relief [S. 2(b)] [Chap.
This section was applied by the Supreme Court^2 in a case where on the orders of a go-between man certain goods were supplied by the plaintiff on his own account to the defendants. The defendants clearly and unerringly accepted the goods and paid a part of the price. Accordingly, a liability to pay the balance arose. A bid at an auction is an implied offer to buy. Stepping into an omnibus^3 and consuming eatables at a self-service restaurant, both create implied promises to pay for the benefits enjoyed. Where a person summoned the services of a fire brigade under the mistaken impression that his area was within the free service zone, he had to pay for the services.^4 Where the charterer of a ship chartered for loading steel billets, instead loaded general merchandise, for which the rate of freight was higher, he was held to have done so under an implied promise to pay the higher rate;^5 where the customer of a bank did not object to the charge of a compound rate of interest in accordance with the usual course of business, he was held to have impliedly contracted to pay the compound interest;^6 and where the rules of a yacht club regatta provided that competitors would be liable for damage done by fouling, they were held bound to each other by the rules, and where one of them fouled and sank a yacht, he was held liable.^7
4. Communication when complete.—The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of an acceptance is complete,— as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete,— as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge.
Illustrations (a) A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter. (b) B accepts A'.y proposal by a letter sent by post.
(^2) Haji Mohd Ishaq v Mohd Iqbal and MohdAli & Co, (1978) 2 SCC 493, see at p. 500. 3 Witkie v London Passenger Transport Board, [ 1947] 1 All ER 258. Upton Rural District Council v Powell, [ 1942] 1 All ER 220. Steven v Bromley & Sons, [1919] 2 KB 722. 6 7^ Haridas Ranchordas v Mercantile Bank of India, (1920) 47 IA 17. Clarke v Earl of Dunravan (The Salanita), 1897 AC 59. The Supreme Court laid down in Fori Gloster Industries Ltd v Sethia Mercantile (P) Ltd, AIR 1968 SC 1308: (1968) 3 SCR 450 that the evidence of the terms and conditions of a contract can be collected from the bye-laws of an association which are applicable to the transaction in question.
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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. (c) A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched. It is complete as against B when B receives it. B revokes his acceptance by telegram. B\s revocation is complete as against B when the telegram is despatched, and as against A, when it reaches him. An offer cannot be accepted unless and until it has been brought to the knowledge of jTe person to whom it is made. An announced reward for tracing a missing child could not be claimed by a person who had traced the child in ignorance of the announcement." An offer of £100 to any person who would swim a hundred yards in the harbour on the first day of the year would not in my opinion be satisfied by a person who was accidentally or maliciously thrown overboard on that date and swam the distance simply to save his life, without any thought of the offer. Where an offer has been accepted with knowledge of the reward, the fact that the in- "Drmer was influenced by motives other than the reward will be immaterial. Thus, where :-he information was given about the murderers of her husband by a woman, not so much -'or reward, as to assuage her feelings, she was allowed to recover.^12
Intention to contract
"here is no provision in the Indian Contract Act, 1872 requiring that an offeror its acceptance should be made with the intention of creating legal relations. But in English law it is i settled principle that to create a contract there must be a common intention of the parties -} enter into legal obligations".^13 It is not every loose conversation that is to be turned into a. contract, although the parties may seem to agree. A husband's promise to send to his ~ ife a monthly amount for herself and the children during the period of their inability to ;tay at one station was not allowed to be enforced.^14 Lord ATKIN explained the principle IUS: "There are agreements between parties which do not result in contract within the -leaning of that term in our law. The ordinary example is where two parties agree to take ; walk together, or where there is an offer and acceptance of hospitality. Nobody would -uggest in ordinary circumstances that these arrangements result in what we know as con- :^acts, and one of the most usual forms of agreement which does not constitute a contract i?pears...to be the arrangements which are made between husband and wife". Family and social matters. —The intention of the parties is naturally to be known -':r>m the terms of the agreement and the surrounding circumstances. It is for the court in :ach case to find out whether the parties must have intended to enter into legal obliga-
Latmim v Gauridatta, (1913) I I All U 489. Williams v Carwardine, (1833) 2 LJKB 101. Darlympte v Darlymple, (1811) 161 FR 665, per LORD STOWELL. * Balfour v Balfour, (1919) 2 KB 571.
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est price for Bumper Hall Pen, £ 900.' The plaintiffs immediately sent their last telegram stating: 'We agree to buy Bumper Hall Pen for £ 900 asked by you.' The defendants, however, refused to sell the property at that price. The plaintiffs contended that by quoting their minimum price in response to the inquiry, the defendants had made an offer to sell at that price. But the Judicial Committee turned down the suggestion. Their Lordships pointed out that in their first telegram, the plaintiffs had asked two questions, first, as to the willingness to sell and, second, as to the lowest price. The defendants answered only the second question and gave the lowest price. They reserved their answer as to the willingness to sell. Thus they had made no offer. The last telegram of the plaintiffs was an offer to buy, but that was never accepted by the defendants.^24 Catalogues and Display of Goods A shopkeeper's catalogue of prices is not an offer: it is only an invitation to the intending customers to offer to buy at the indicated prices. "The transmission of a price list," observed Lord HERSCHELL "does not amount to an offer to supply an unlimited quantity of the wine described at the price named, so that as soon as an order is given there is a binding contract to supply that quantity. If it were so, the merchant might find himself involved in any number of contractual obligations to supply wine of a particular description which he would be quite unable to carry out, his stock of wine of that description being necessarily limited."^25 For the same reason the display of goods in a shop with price chits attached is not an offer even if there is a "self-service" system in the shop.^26 Where a proposal to buy a property for Rs 6000 was reciprocated by saying "won't accepts less than Rs 10,000". This was held to be not a proposal to sell at Rs 10,000. It was an invitation for a proposal at the stated amount.^27 A banker's catalogue of charges is also not an :tfer.^28 A railway timetable is in the same category.^29 Where in pursuance of a scheme adopted by Esso, the petrol station proprietors announced that they would give "The World Cup Coins", one for every buyer of four gallons of petrol, it was held that the distribution of the coins was not a contract of sale so as to attract the provisions of the Purchase Tax Act, but was only a gift.^30
' Byomkesh v Nani Gopal, AIR 1987 Cal 92. ~ Grainger & Son v Gough, 1896 AC 325 at p. 334. Pharmaceutical Society of Great Britain v Boots Cash Chemists Ltd, [19521 1 QB 795, affirmed, 119531 1 _ QB 401: [19531 1 All ER 482 CA. ~ Col. D.I. MacPherson v M.N. Appana, AIR 1951 SC 184. 3^ State Aided Bank ofTravancore Ltd v Dhrit Ram, AIR 1942 PC 6. There is no direct authority for this, but ihis seems to be the most likely conclusion. Railway Time Tables include clauses against such contingencies. However, in one English case, namely, Denton v Great Northern Railway , (1865) 5 E&B 860, the railway company was held liable in damages for fraud in cancelling a train. a Esso Petroleum Co Ltd v Commrs of Customs and Excise, [1976] 1 WLR I: 11976] 1 All ER 117.
10 Textbook on Law of Contract and Specific Relief [S. 2(b)] [Chap.
Announcement to Hold Auction An auctioneer's announcement that specified goods will be sold by auction on a certain day is not an offer to hold the auction and he will not be liable to persons travelling up to the place if he changes his mind and does not hold the auction." Even when an auction is held the bid is not an acceptance so as to entitle the highest bidder to get the goods. The highest bid is nothing more than an offer to buy and it requires to be accepted by the auctioneer.^8 It does not matter for this purpose that the auction was held by the Government. Even a Government auction may be cancelled before any bid is finally accepted. After cancelling the auction (in this case the right to fell trees in a forest) the right was handed over to a Government corporation and it was considered to be no argument that a corporation cannot afford to pay an amount equal to private bidders. The Supreme Court also gave this latitude to a Government, as is enjoyed by a private auctioneer, that it may even ignore the highest bid and accept a lower bid. The highest bidder may be found to be an undesirable person for many reasons, e.g., from the mere enormity of the bid.^9 However, one contractor should not be preferred over another without any rhyme or reason, this would be more so in the matter of Government contracts. Where out of the participating bidders or tenderers, any one is called to revise his figure, an equal opportunity should be given to the highest bidder or the lowest tenderer,^10 provided there is otherwise nothing against him. Fixation of reserve price in an invitation for submission of tenders has been held to be not an offer.^11 Definiteness of Proposal A classified advertisement to the effect: "cocks and hens 25s. each" has been held to be not an offer to sell. Similarly, a letter which stated that the writer was prepared to offer for sale his estate for a certain price and allow reasonably sufficient time for verification of data and detail for the completion of the sale, was held to be not a definite offer. 12
8 Spencer v Harding, (1870) 5 CP 561. An auction may be cancelled on account ol inadequacy of the highest bid price, Swadesh Rubber Industries v Sardar Singh, AIR 1994 P&H 306, following Bombay Salt & Chemical Industries v L.J. Johnson, AIR 9 1958 SC 289. State oJ'U.P. V Vijay Bahadur Singh, (I982) 2 SCC 365: AIR 1982 SC 1234: 1982 All LJ 582. A Government contract is like any other contract between private parties and only those remedies are available for its breach as in other cases. Remedy by way of writ is not available for enforcing Government contract. 10 11 Desai & Co v Hindustan Petroleum Co, 1984 Guj LH 864 (Guj). Anil Kumar Srivastava v State ofU.P., (2004) 8 SCC 671: AIR 2004 SC 4299. (^12) Clifton V Palumbo, 1 1944| 2 All ER 497. See also Bigg v Boyd Gibbins Ltd, [ 1971 ] 2 All ER 183: (1971) 1 WLR 913. Dresser Rand SA v Bindal Agro Chem Ltd, (2006) I SCC 751, a letter of intent merely indicates a party's intention to enter into a contract on the lines suggested in the letter.
12 Textbook on Law of Contract and Specific Relief [S. 2(b)] [Chap.
13 Textbook on Law of Contract and Specific Relief [S. 8] [Chap.
43
where he has signed the document. In such cases the courts have been constrained to hold that he will be bound by the document even if he never acquainted himself with its terms. This has come to be known as the rule in L' Estrange v Graucob Ltd.^13 Mrs L signed an agreement without reading it under which she purchased a cigarette vending machine. The agreement excluded liability for all kinds of defect in the machine. The machine was totally defective. The court found it as a fact that the supplier had made no effort to bring the sweeping exemption term to the notice of Mrs L. Even so the court held: "Where a document containing contractual terms is signed, then, in the absence of fraud, or misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not." The individual, therefore, deserves to be protected against the possibility of exploitation inherent in such contracts. The following modes of protection have been evolved by the courts.
1. Reasonable Notice of Terms It is the duty of the person delivering a document to give adequate notice to the offeree of the printed terms and conditions. Where this is not done, the acceptor will not be bound by the terms. This was laid down by the House of Lords in Henderson v Stevenson. In this case a steamer ticket carried a printed term on the back excluding liability for damage to luggage put in the cloak room, without any warning on the face. The House of Lords observed that the plaintiff could not be said to have accepted a term "which he has not seen, of which he knew nothing, and which is not in any way ostensibly connected with that, which is printed and written upon the face of the contract presented to him". A notice will be regarded as sufficient only if it will "convey to the minds of people in general that the ticket contains conditions". A warning on the face of a token for deposit of luggage in a cloakroom was held to be not sufficient.^14 Where a folded up ticket was handed over to a passenger and the conditions printed on it were also obliterated in part by a stamp in red ink^15 and where, in another case, the words on a ticket, "For conditions see back", were obliterated by the date stamp,^16 it was held in either case that no proper notice of the terms had been given. A notice may be good even if it is in a foreign language. 17
13
- All ER Rep 16: 11934] 2 KB 394. (^14) Parker v SE Rly Co, 11874-80) All ER Rep 166. (^1) Richardson, Spence & Co v Routree, 1894 AC 217. (^16) Sugar v London. Midland and Scottish Rlx Co, [ 1941 ] 1 All ER 172. Mackillican v The Combagnie Marikcmes de France, (1880) 6 Cal Series 227.
/] [S. 4] Agreement, Contract, Proposal and Acceptance 15
Where tickets are issued by a machine, notice should be given beforehand, for the ticket comes too late. Explaining this in Thornton v Shoe Lane Parking Ltd,^4 '' Lord DENNING MR said: In the present case the offer was contained in the notice at the entrance giving the charges for garaging "at owner's risk". The offer was accepted when the plaintiff drove up to the entrance...and the ticket was thrust at him. The contract was then concluded and it could not be altered by any words printed on the ticket itself.
3. Theory of Fundamental Breach Another means of getting round the injustice of exemption clauses is by means of the doctrine of fundamental breach. It is a method of controlling the unreasonable consequences of wide and sweeping exemption clauses. Even where adequate notice of the terms and conditions in a document has been given, the party imposing the conditions may not be able to rely on them if he has committed a breach of the contract which can be described as "fundamental".^30 Every contract contains a 'core' or fundamental obligation which must be performed. If one party fails to perform this fundamental obligation, he will be guilty of a breach of the contract whether or not any exempting clause has been inserted which purports to protect him. Where a dry cleaner's receipt stipulated that in case of damage to the garment only three times of the amount of cleaning charges would be payable, it was held that this limitation upon the amount of liability was not applicable because damage to the garment was caused by a sub-cleaner to whom the garment was handed over. This was quite outside from the scope of contract. The cleaner was liable for the full amount of loss.^18 In Alderslade v Hendon Laundry Ltd^19 , on the other hand, the plaintiff's handkerchiefs were lost in the laundry itself and, therefore, the exemption clause effectively limited the defendant's liability to twenty times the charge made for laundering. Where a ticket of parcel office of a railway station contained a condition which exempted railway executive from liability for misselecting or loss of any article exceeding £5 in value, it was held that they could not rely on the exemption clause because they had committed a fundamental breach of contract in allowing a stranger (though plaintiff's friend) to take away the goods.^20 A clause fixing the contractor's liability to a specified amount was held to be not applicable where the work done by him (pipes for carrying moulton plastic was wholly unfit for the main purpose).^21
(^18) Davis v Wills, [ 1945] l All ER 247. (^19) 11945] KB 189CA. (^20) Alexander v Railway Executive, [ 1951 ] 2 KB 882: [ 1951 ] 2 All ER 442. (^21) Harbuit's Plasticine Ltd v Wayne Tank and Pump Co Ltd, (1970) 1 All ER 225. 21 See Section 3.
16 Textbook on Law of Contract and Specific Relief [S. 2(b)] [Chap.
It has been laid down by the Court of Appeal^55 that where the goods are lost from the custody of a bailee (a carpet cleaner in this case) fundamental breach would be presumed unless he accounts for the loss. The bailee must show that the loss had not occurred in consequence of a fundamental breach on his part since he is in a better position than the bailer to know what had happened to the goods while they were in his possession. Since the cleaner could not account for the loss, he was not permitted to rely upon a clause by which he had limited his liability to a negligible figure.
4. Strict Construction Exemption clauses are construed strictly, particularly where a clause is so widely expressed as to be highly unreasonable. Any ambiguity in the mode of expressing an exemption clause is resolved in favour of the weaker party. Where the words are capable of bearing a wider as well as a narrower construction, the narrower construction would be preferred ar.d against the party who has inserted the exemption clause " contra proferentem ".^56 The Supreme Court held that the power to vary terms relating to quantum of work cannot be --.limited. Any clause giving absolute power to one party to modify the contract terms ~ould amount to interfering with the integrity of the contract. Under the general law of contract, once the contract is entered into, any clause giving absolute power to one party :: modify the terms of the contract at his sweet will or to cancel the contract would be in essence a negation of the contract.^57 5 Liability in tort Even where an exemption clause is exhaustive enough to exclude all kinds of liability --.der the contract, it may not exclude liability in tort. In White v _John Warwick & Co LuP_ The plaintiff hired a cycle from the defendants. The defendants agreed to maintain the cycle in working order and a clause in the agreement provided: "nothing in this agreement shall render the owners liable for any personal injuries ...." While the plaintiff was riding the cycle the saddle tilted forward and he was thrown and injured. t: -■■. as held that although the clause exempted the defendants (even if they were negligent) "-jm their liability in contract, it did not exempt them from liability in negligence. It is, " I'.vever, open to the parties to exclude liability even for negligence by express words or :"ecessary implication. For example in Rutterv Palmer,™ a car was given to the defendants s Levison v Patent Steam Carpel Cleaning Co, (1977| 3 All ER 498 CA. See Professor Brian Coote, Breach and Exception Clauses, (1970) Camb LJ 238. United India Insurance Co Ltd v Pushpataya Printers, (2004) 3 SCC 694: AIR 2004 SC 1700: (2004) 2 ICC 770 (SC), damage to building by "impact" covered in insurance policy, damage caused by bulldozer moving on the road closely to the building, held, fell within the expression damage by "impact". Even if its meaning was not clear, it was _ to be taken in favour of the insured. ' National Fertilizers v Puran Chan^ Nangia, (2000) 8 SCC 343. ™ [1953] 1 WLR 1285. * [1922] 2 KB 87: [1922] All ER Rep 367.
