AGREEMENT DEFINITION [SECTION 2(E)]
An Agreement is a promise between two entities creating mutual obligations by law. Agreement is defined as “every promise and every set of promises forming the consideration for each other” And a promise is defined as an accepted proposal.
TO FORM AN AGREEMENT, THE FOLLOWING INGREDIENTS ARE REQUIRED:
- PARTIES : There need to be two or more parties to form an agreement.
- OFFER/ PROPOSAL : When a person signifies to another his willingness of doing or omitting to do something with a view to obtain other’s assent. [ SECTION 2(a) ]
- ACCEPTANCE : When the person to whom the proposal is made signifies his assent for the same thing in the same sense as proposed by the offeror. [ SECTION 2(b)]
- PROMISE : When a proposal is accepted, it becomes a promise. [SECTION 2(b)]
- CONSIDERATION : It is the price for the promise. It is the return one gets for his act or omission. [SECTION 2(d)]
- An agreement is, therefore, a PROMISE OR SET OF PROMISES forming consideration for all the parties. [SECTION 2(e)]
AGREEMENT = PROMISE OR SET OF PROMISES (offer + acceptance) + CONSIDERATION (for all the parties)
WHAT AGREEMENTS ARE CONTRACTS [ SECTION 10 ]
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.
AGREEMENT BECOMES A CONTRACT IF BELOW CONDITIONS ARE MET:
- There is some consideration
- The parties are competent to contract
- Their consent is free
- Their object is lawful
PROPOSAL OR OFFER
PROPOSAL/OFFER DEFINITION [SECTION 2(A)]
The entire process of entering into a contract begins with the proposal or an offer made by one party to another. The proposal must be accepted to enter into an agreement.
According to the Indian Contract Act 1872, proposal is defined in SECTION 2(A) as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person to such an act or abstinence, he is said to make a proposal or an offer.
”PROPOSAL TERMINOLOGY [SECTION 2(C)]
The person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”
FEATURES OF A VALID OFFER
- The person making the offer/proposal is referred to as the “promiser” or the “offeror” And the person who accepts an offer is referred to as “promisee” or the “acceptor”.
- The offeror must express his willingness to do or abstain from doing an act. Only willingness is not adequate. Or just an urge to do something or not to do anything will not be an offer.
- An offer can either be positive or negative. It can be a promise to do some act, and can also be a promise to abstain from doing any act/service. Both are valid offers.
THE ELEMENT OF A VALID OFFER
Here are some essentials which make the offer valid
- THERE MUST BE TWO PARTIES
There have to be at least two parties a person making the proposal and the other person agreeing to it. All the persons are included i.e, Legal persons as well as artificial persons.
- EVERY PROPOSAL MUST BE COMMUNICATED
Communication of the proposal is mandatory. An offer is valid if it is conveyed to the offeree. The communication can either be express or implied. It can be communicated by terms such as word of mouth, messenger, telegram, etc. SECTION 4 of the Indian Contract Act says that the communication of a proposal is complete when it comes to the awareness of the person to whom it is made.
- IT MUST CREATE LEGAL RELATIONS
An offer must be such that when accepted it will result in a valid contract. A mere social invitation cannot be regarded as an offer, because if such an invitation is accepted it will not give rise to any legal relationship.
- IT MUST BE CERTAIN AND DEFINITE
The terms of the offer must be certain and clear in order to create a valid contract, it must not be ambiguous.
- IT MAY BE SPECIFIC OR GENERAL
The specific offer is an offer that is accepted by any specific or particular person or by any group to whom it is made. Whereas, The general offers are accepted by any person.
CLASSIFICATION OR TYPES OF OFFER
- EXPRESS OFFER
An offer may be made by express words, spoken or written. This is known as Express offer. FOR EXAMPLE When ‘A’ says to ‘B’, “will you purchase my car for Rs 2,00,000”?
- IMPLIED OFFER
An offer may be derived from the actions or circumstances of the parties.This is known as Implied offer. FOR EXAMPLE,There is an implied offer by the transport company to carry passengers for a certain fare when a transport company operates a bus on a particular route.
- GENERAL OFFER
A general offer is not made by any specified party. It is one that is made by the public at large. Any member of the public can, therefore, accept the offer and have the right to the rewards/consideration. FOR EXAMPLE ‘A’ advertises in the newspaper that whosoever finds his missing son would be rewarded with 2 lakh. ‘B’ reads it and after finding the boy, he calls ‘A’ to inform about his missing son. Now ‘A’ is entitled to pay 2 lakh to ‘B’ for his reward.
- SPECIFIC OFFER
It is the offer made to a specific person or group of persons and can be accepted by the same, not anyone else. FOR EXAMPLE ‘A’ offers to sell his house to ‘B’. Thus, a specific offer is made to a specific person, and only ‘B’ can accept the offer.
DIFFERENCE BETWEEN GENERAL OFFER AND SPECIFIC OFFER
- CROSS OFFER
Two parties make a cross-offer under certain circumstances. It means that both make the same offer at the exact time to each other. However, in either case, the cross-offer will not amount to accepting the offer. FOR EXAMPLE, ‘A’ and ‘B’ both send letters to each other offering to sell and buy B’s house at the same time. This is the cross offer made where one party needs to accept the offer of another.
- COUNTER-OFFER
A counter-offer is an answer given to an initial offer. A counter-offer means that the original offer has been refused and replaced by another. The counteroffer offers three choices to the original offerer; accept, refuse, or make another offer.
LAPSES AND REVOCATION OF AN OFFER
- An offer lapses after a defined or reasonable time.
- An offer lapse by not being accepted in the specified mode
- An offer lapses by rejection.
- An offer lapses by the offeror or the offeror’s death or insanity until acceptance.
- An offer lapses by revocation before acceptance.
- An offer lapses by subsequent illegality or destruction of the subject matter.
Case Law : UPTON RURAL DISTRICT COUNCIL V POWELL :
A fire broke out in the defendant’s farm. He believed that he was entitled to the free services of Upton Fire Brigade and, therefore, summoned it. The Brigade put out the fire. It then turned out that the defendant’s farm was not within free service zone of the Upton, which therefore, claimed compensation for the services. The court said: “The truth of the matter is that the defendant wanted the services of Upton; he asked for the services of Upton and Upton, in response to that request, provided the services. Hence, the services were rendered on an implied promise to pay for them.
COMMUNICATION WHEN COMPLETE [SECTION 4]
The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.
An offer cannot be accepted unless and until it has been brought to the knowledge of the person to whom it is made. This principle enabled the Allahabad High Court in LALMAN V GAURI DATT to deal with a matter involving a very crucial question on this point.
Defendant’s nephew absconded from home. He sent his servant in search of the boy. When the servant had left, the defendant by handbills offered to pay Rs.501 to anybody discovering the boy. The servant came to know of this offer only when he had already traced the missing child. He, however, brought an auction to recover the reward. But his action failed. BAERJI J explains: “In my opinion a suit like the present can only be founded on a contract. In order to constitute a contract, there must be an acceptance of an offer and there can be no acceptance unless there is knowledge to the offer”.
TIME OF REVOCATION OF AN OFFER
REVOCATION OF THE OFFER (SECTION 4)
A proposal can be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterward.
- INTENTION TO CONTRACT
There is no provision in the Indian Contract Act requiring that an offer or its acceptance should be made with the intention of creating a legal relationship. But in English law it is a settled principle that “to create a contract there must be a common intention of the parties to enter into legal obligations.”
Case law: Balfour v Balfour
The defendant and his wife were enjoying leave in England. When the defendant was due to return to Ceylon, where he was employed, his wife was advised, by reason of her health, to remain in England. The defendant agreed to send her an amount of 30 pound a month for the probable expenses of maintenance. He did send the amount for some time, but afterwards differences arose which resulted in their separation and the allowance fell into arrears. The wife’s action to recover the arrears was dismissed.
- FAMILY & SOCIAL MATTERS
All that the law requires is that the parties must intend legal consequences. In the case of McGregor v McGregor, illustration of a binding engagement between a husband and wife. Here a husband and wife withdrew their complaints under the agreement by which the husband promised to pay her an allowance and she to refrain from pledging his credit, the agreement was held to be a binding contract.
- BUSINESS MATTERS
SUPREME COURT’S VIEW
The Supreme Court noted the general proposition that in addition to the existence of an agreement and the presence of consideration there is also the third contractual element in the form of intention of the parties to create legal relations.
- LETTERS OF INTENT
A letter of intent merely indicates a party’s intention to enter into a contract on the lines suggested in the letter. It may becomes a preclude to a contract. However, where a letter stated that it would be followed by a detailed purchase order which carried an arbitration clause, it was held that the letter was not a supply order and the arbitration clause contained in it did not by itself fructify into an arbitration agreement.
ACCEPTANCE BY PERFORMING CONDITIONS, OR RECEIVING CONSIDERATION [SECTION 8]
Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.
CARLIL V CARBOLIC SMOKE BALL CO
A company offered by advertisement to pay 100 pound to anyone “who contracts the increasing epidemic influenza, colds or any disease caused by taking cold, after having used the ball according to printed directions.” It was added that 1000 pound is deposited with the Alliance Bank showing our sincerity in the matter”. The plaintiff used the smoke balls according to the directions but she nevertheless subsequently suffered from influenza. She was held entitled to recover the promised reward.
- GENERAL OFFER OF CONTINUING NATURE
Where a general offer is of continuing nature, as it was, for example, in the Smoke Ball case, it will be open for acceptance to any number of persons until it is retracted. But where an offer requires some information as to a missing thing, it is closed as soon as the first information comes in.
- OFFER AND INVITATION TO TREAT
An offer should be distinguished from an invitation to receive offers. When a man advertises that he has got a 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 – offers to chaffer”.
HARVEY V FACEY
The plaintiff relegraphed to the defendants, writing: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price”. The defendants replied also by telegram: “Lowest price for Bumber Hall Pen, 900 pound.” The plaintiff immediately sent their last telegram stating: “We agree to buy Bumper Hall Pen for 900 pound asked by you.” The defendants refused to sell the plot.
The Lordships pointed out that in their first telegram, the plaintiffs asked two questions, first, as to the willingness to sell and, second, as to the lower price. The defendants answered only the second, and gave only the lowest price. They reserved their answer as to the willingness to sell. Thus, they made no offer. The last telegram of the plaintiffs was an offer to buy, but that was never accepted by the defendants.
- CATALOGUES AND DISPLAY OF GOODS: A shopkeeper’s catalogue of prices is not an offer, only an invitation to offer.
- 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.
- DEFINITENESS OF PROPOSAL : A classified advertisement to the effect: “cocks and hens 25s each” has been held to be not an offer to sell.
- FREE DISTRIBUTION OF ARTICLES : Not a contract of sale.
ACCEPTANCE – SECTION 2(B)
INTRODUCTION OF ACCEPTANCE – SECTION 2(b)
As per the Indian Contract Act 1872, Section 2 (b), acceptance is defined as “When the person to whom the proposal has been made signifies his assent thereto, the offer is said to be accepted. Thus the proposal when accepted becomes a promise.”
When an offeree (person to whom the offer is made) gives his unconditional consent to the offer made to him by the offeror, it is considered as an acceptance given by the offeree. Acceptance is important for an offer to be considered complete and to become a promise.
TYPES OF ACCEPTANCE
- EXPRESSED ACCEPTANCE
When acceptance is given by the offeree in a written or oral form, it is considered as an expressed acceptance of the offer.
Acceptance by some refers to when some, but not all, of the drawers, agree to the transaction. When the drawee agrees to pay the bill in installments, the bill is accepted for installment payments. This must be stated clearly at the outset of the contract.
The condition of acceptance must be stated very clearly in the agreement and must be understood immediately. Suppose a drawee wants to make a qualification during acceptance. In that case, it must be done such that the instrument holder understands what was accepted and on what qualifications it was accepted.
EXAMPLE: ‘A’ offers to sell his phone to ‘B’ over an email. ‘B’ respond to that email saying he accepts the offer to buy.
- IMPLIED ACCEPTANCE
If the acceptance is shown by conduct/behavior/ sny other mannerism of the offeree , It thus becomes an Implied acceptance. FOR EXAMPLE, A buys some products in the supermarket. This is an implied acceptance of A to pay the price that the supermarket is asking for the products.
- CONDITIONAL ACCEPTANCE
Conditional acceptance is also known as qualified acceptance. In this case, the offeree agrees to give his acceptance to the offer only if certain changes are made to the terms and conditions of the offer. This acceptance now becomes a counteroffer which must be then accepted by the offeror for it to become a promise.
EXAMPLE : A agrees to make the payment to B for the renovation of his house if the work is completed on the due date.
RULES REGARDING VALID ACCEPTANCE
- ACCEPTANCE CAN ONLY BE GIVEN BY THE OFFEREE
Acceptance of an offer can only be given by the person to whom the offer has been made. Self-acceptance meaning states that the acceptance given by the offeree only is considered valid. A third party cannot accept the offer without the knowledge of the offeree. If the offeree has authorized an agent to give the acceptance on his behalf, then the acceptance is considered valid.
CASE LAW: POWELL VS LEE
In this case, the plaintiff had applied for the job as a headmaster and one of the school managers acted without authority, conveying to him that he had been appointed. Later, the managers decided to appoint someone else on the post. The plaintiff sued the school for a breach of contract but the verdict for the case stated that there was no contract as the manager did not have the authority to give acceptance.
- ACCEPTANCE MUST BE COMMUNICATED
Acceptance must always be communicated to the offeror for the proposal or offer to become a binding contract. Before giving his acceptance, the offeree must be aware of the fact that an offer has been made to him. Acceptance cannot be communicated without the knowledge of the offer. The intent to give acceptance is not considered valid in case it is required for the acceptance to be communicated clearly.
EXAMPLE : A sends an offer letter to B for buying his house for 50 lakh. B signs the offer but does not send the letter back. In this case, acceptance has not been communicated. Hence, it is not valid.
- ACCEPTANCE MUST BE GIVEN IN THE PRESCRIBED MODE
Acceptance must be given in the prescribed/specified manner that has been stated in the offer. In case a specific mode has not been mentioned, acceptance must be made in a reasonable manner that is used in the normal course of business. In cases where a specified form of giving acceptance is not stated, silence is not considered a form of acceptance.
- IT MUST BE UNQUALIFIED AND ABSOLUTE
Acceptance must be complete and unconditional. Conditional acceptance is impossible because it would be a counteroffer, nullifying the initial offer. FOR EXAMPLE. B accepts A's offer to buy his cycle for $2,000/-. B says he'll take it if A sells it for 1500/-. This does not imply that the offer has been accepted; instead, it is a counteroffer.
If no such regulated form is specified, it must be expressed ordinarily and reasonably, that is, as it would be in the ordinary course of business. It must also be expressed in a specific way. Implied acceptance can also be demonstrated through behavior, act, or other means.
On the other hand, the law does not recognize silence as a kind of acceptance. As a result, the offeror cannot state that the offer would be considered acceptable if no response is received.
- IMPLIED ACCEPTANCE
Section 8 of the Indian Contract Act 1872, provides that acceptance by conduct or actions of the promisee is acceptable. So if a person performs certain actions that communicate that he has accepted the offer, such implied acceptance is permissible. So if A agrees to buy from B 100 bales of hay for 1000/- and B sends over the goods, his actions will imply he has accepted the offer.