Proposal: Section 2(a) of The Indian Contracts Act, 1872

 

INTRODUCTION

The Indian Contract Act, 1872(hereinafter referred to as ‘Contract Act’ or ‘The Act’) lays down the law relating to the contracts in India. Section 2(h) of the act defines the term ‘Contract’ as “an agreement which is enforceable by law”. Therefore, for the formation of a contract there must be:

•            Agreement-

‘Agreement’ is defined in Section 2(e) as “every promise and every set of promises forming the consideration for each other”.

‘Promise’ is defined in Section 2(b) as: "A proposal, when accepted, becomes a promise." Thus, it can be said that an agreement is an accepted proposal. This flow of definitions can be understood better with a flowchart;

 Thus, every contract is basically the outcome of an offer and its acceptance.

 

•           The agreement should be enforceable by law-

An agreement that the law will enforce is a contract. The conditions for the enforceability of contract are laid down in section 10 which is as under,

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.

Nothing herein contained shall affect any law in force in [India] and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.

Hence, the conditions for an agreement to be enforceable by law are,

1.     Free consent of parties

2.     Competent parties

3.     Lawful consideration

4.     Lawful object

Thus, we can conclude that ‘Every contract is an agreement, but not every agreement is a contract.’ For an agreement to be a contract it has to satisfy the above conditions.

This article will deal with the foremost prerequisite for the formation of contract in detail which is that there should be an agreement. The definition of agreement and promise in the Contract Act indicates that an agreement can be formed by the method of proposal and its acceptance. It is necessary for any transaction to be recognised as an agreement and ultimately a contract, it must in its unsurpassed analysis resolve itself into a proposal and its absolute and unqualified acceptance.

In this article we will understand what is a valid proposal in detail.

PROPOSAL

 Section 2(a) of the Contract Act defines ‘proposal’ as

“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.”

In Halsbury’s laws Of Indian Contract Act, ‘proposal’ is defined as

“an expression by one person or group of persons, or by agents on his behalf, made to another, of his willingness to be bound to a contract with that other on terms either certain or capable of being rendered certain.”

In Chitty on Contracts, the word ‘proposal’ has been defined as

“an expression of willingness to contract made with an intention (actual or apparent) that it is to become binding on the person making it as soon as it is accepted by the person to whom it is addressed.”

The above definitions make two things clear that to have made a proposal, a person must have:

a.     signified to another his willingness to do or to abstain from doing anything(communication); and

b.     has done so with a view to obtaining the assent of that other to such act or abstinence(intention to create legal relations).

The offeror i.e. the person making the offer/proposal, therefore manifests or makes known his intention of doing or not doing something, and he does so with the purpose of getting the offeree i.e. the person to whom the offer/proposal is made, to assent to it.

There are certain essentials of a valid proposal which can be made out from the definition of the proposal in section 2(a):

 

A.   Communication:

The first part of the definition emphasizes on the requirement of the willingness to make a proposal to be 'signified'. In the traditional language of the law of contract, the word ‘signifies’ in the definition indicates that the offer must be communicated to the offeree.  Sections 3 and 4 of the Contract Act, deal with the rules regarding communication of proposals, acceptances, and revocation of proposals and acceptances. Section 3 describes what is communication whereas Section 4 specifies when it is completed. The section states that the communication of a proposal or acceptance may be made by an act or omission, by which the person intends to communicate, or which has the effect of communicating it. Therefore, the communication of a proposal can be made in any way which can deliver before the offeree the willingness to do or abstain from doing something. It can be done by spoken words, by writing, or even by conduct; it can also be made through electronic means.

Communication of a proposal is said to be complete when it is made known to the person to whom it is made. Proposal is not complete until it is communicated to the offeree and is thus inconclusive. In a case where the offeree does not have knowledge of the proposal then an acceptance without knowledge of the proposal is not an acceptance and will not amount to a contract. It will form a cross-offer, however, cross-offers do not result in a contract, even though their terms are parallel. 

Section 4 requires imparting actual knowledge of the proposal to the offeree, but it is sufficient if the proposer does all that is reasonably expected to give notice of its terms to the intended offeree. Whether the offeree does or does not have knowledge of the proposal is purely a question of fact and not a question of law.

When a reward has been offered a person who was ignorant of the proposal cannot claim it. This principle was laid down in the case of Lalman Shukla vs. Gauri Dutt where the nephew of the respondent was lost and he had ordered his servant, the plaintiff to go find him. In the meantime, he announced that he will issue handbills to anyone who would find his nephew. The servant having found the nephew claimed this award. The respondent refused to award him. The court held that the plaintiff could not claim the award since the proposal was made in his absence and not communicated to him before he found the nephew.

•   Postal Rule

A proposal by letter must be deemed to have reached the addressee when the letter ordinarily would be delivered at the addressee’s residence. Any delay in addressee actually receiving it in his hands, caused owing to his failure to make proper arrangements to receive the communication, will not be considered. A proposal by letter is made not at the place where it is posted but where the offer is received or the letter delivered because a proposal is not complete unless and until it comes to the knowledge of the person to whom it is made.

•  Proposal must be certain-

Since a contract is concluded by mere acceptance of an offer, the terms of the proposal must be sufficiently definite to permit the conclusion of the contract by mere acceptance. The terms of the offer must therefore be definite and certain. This does not mean that each and every term may be stated. Sometimes even essential terms may be left out, but if these can be determined or supplied by interpreting the agreement, or with reference to usages, previous conduct or practices, or implied terms, the offer would be adequately definite. A proposal is certain if, under the general rules of construction or otherwise, the intention of the parties can be ascertained, and if it can be rendered certain, as by reference to something certain. For e.g. An offer for purchase lacking specification of quantity required is vague and would not carry a contractual relationship.

•  Conditional proposals-

Special terms or conditions that exclude or restrict liability or impose onerous obligations must be clearly communicated and brought to the special notice of the party to whom they will bind. A strict rule was laid down regarding such proposals in the case of Special Secretary to Government of Rajasthan (Finance) Jaipur, Rajasthan vs. Vedakantara Venkataramana Seshaiyer, It was held that if a purchaser of a lottery ticket receives a ticket with some conditions printed in fine print on the reverse of the ticket which are not brought to his notice, the terms are not part of the contract.

A conditional proposal does not affect its certainty. 

Clear communication of a proposal is essential for a proposal to be valid. This is clearly illustrated by Taylor vs. Laird:

Taylor was employed as a captain of Laird’s ship during an expedition up the River Niger. During the course of the expedition, he voluntarily gave up his position and worked as a normal crew member. The defendants had no knowledge about such change in the position of the plaintiff. The plaintiff later claimed remuneration for the services that he provided as a crew member. 

The court held that he could not succeed. The defendants were not given the option of accepting or refusing the services of the plaintiff. As the plaintiff's offer was uncommunicated, it could not be accepted and thus there was no contract. Hence, Laird had no contractual obligations towards Taylor. 

As Pollock CB said, “Suppose I clean your property without your knowledge, have I a claim on you for payment? How can you help it? One cleans another’s shoes; what can the other do but put them on? Is that evidence of a contract to pay for the cleaning?”

 

B.   Intention to create legal relation:

For a proposal to be binding by mere acceptance, it must be such that it can reasonably be regarded as having been made in the contemplation of producing legal consequences. For creating a contract there must be a common intention of the parties to enter into a legal relation and be bound by legal obligations. Contracts must not be the sports of an idle hour, mere matters of pleasantry and badinage, never intended by the parties to have any serious effect whatsoever. Not every loose conversation can be turned into a contract, even though the parties may seem to agree. The test of intention to create legal relations is an objective one rather than a subjective one. The offeror will be legally bound if it can be understood reasonably that there was an intention to contract and create legal relations on behalf of the offeror. What matters is not what the parties had in mind, but what a reasonable person would think their intention were in the circumstances. This is illustrated in Simpkins vs. Pays, where three ladies, two of them being mother and daughter and the third a paying guest, together made entries into a crossword puzzle in the name of the mother, the expenses being met by one or other, without any rules. Their entry won the prize but the mother refused to share it with the other two ladies. The court held that she was bound to share the prize, for any reasonable man looking at their conduct would at once conclude that they must have intended to share the prize.

Generally, most social or domestic agreements may not be contracts since they are not intended to be legally binding. The case of Balfour vs. Balfour has become a well-known illustration of this principle. The facts of the case are;

A husband(defendant) and his wife were on a leave in England. When the defendant was due to return to Ceylon (now Sri Lanka), 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 a month for the probable expenses of maintenance. He did send the amount for some months, but due to certain differences which arose they ended up separating from each other and the allowance fell into arrears. The wife's action to recover the arrears was dismissed. She was unable to succeed because the parties did not intend to enter into a legally binding agreement.

But there are exceptions to it, this does not apply to all social or domestic relations. For example, when the husband and wife are about to separate or are separated. In Merritt v. Merritt, an estranged husband promised to pay GBP 40 a month to his wife, and told her to pay out of it the outstanding mortgage debt on the matrimonial house, the relevant papers of which he handed over to her. He agreed to transfer the sole ownership of the house once the loan was paid off. After the mortgage was paid off, he reduced the monthly allowance to GBP 25 per month and refused to transfer the house. The agreement was held binding.

Thus, in case of social or domestic relation it is necessary to prove there was an intention of entering into a legally binding contract. In commercial relationships, however, it is not necessary to prove that there was an intention of entering into a legally binding contract. The onus is on the party who is disputing that such an intention was not there. In Rose and Frank Co. vs. JR Crompton & Bros Ltd., an exhaustive agreement was drawn between one American and two English firms for their dealings in paper tissues. The agreement contained the following clause:

“This agreement is not entered into nor is this memorandum written as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned to which they each honorably pledge themselves with the fullest confidence based on past business with each other, that it will be carried through by each of the three parties with mutual loyalty and friendly cooperation.”

The agreement was terminated by one of the parties contrary to its terms. One of the other parties initiated a suit for the breach of contract. It was held that in social and family matters, an intention of not creating a legal relationship was readily implied, but there was no reason why in business matters also, the parties should not intend to rely on each other’s good faith and honor, and to exclude all ideas of settling disputes by any outside intervention. If they clearly express such an intention, there is no reason in public policy why effect should not be given to their intention. The above clause was interpreted by the court of appeal to mean that the clause was not intended to affect their legal relation or be enforceable in a court of law.

Recognition of the applicability of this principle in India could be inferred from the decision of the Supreme Court in Banwari Lai vs. Sukhdarshan Dayal. In an auction sale of plots of land, the terms of the sale were spelled out by a loudspeaker, one of the statements was that a plot of certain dimensions would be reserved for a Dharamshala (public inn).  That plot was sold later for private purposes. The purchasers sought to restrain this. As Chandrachud J said: “Microphones...have not yet acquired notoriety as carriers of binding representations. Promises held out over loudspeakers are often claptraps of politics. In the instant case, the announcement was, if at all, a puffing up of property put up for sale and there was no intention of constituting a binding legal agreement.”

 

INVITATION TO OFFER

A proposal must be distinguished from a mere statement of intention or an invitation to offer, which is not intended to require acceptance. The latter is a mere declaration of willingness to enter into business; it is not a proposal, and its purported acceptance does not create a binding contract. Examples of invitations to offer are;

·      invitation of tenders; an invitation for tenders for the supply of goods or for the execution of some work is not an offer. It is an attempt to receive such an offer within a margin that the employer is inclined to accept. The actual tender is the offer, and if accepted, it becomes a binding contract.

A tender for the supply of goods without specifying the quantity as may be required is a continuing offer that is accepted whenever an order is given for any goods enumerated in the tender. Thus, the contract becomes binding when performance is initiated.

The highest bidder or the lowest tenderer are not entitled to have their bid or tender accepted unless expressly specified.

·      auctions; an announcement that an auction will be conducted on a specific day is not an offer to hold the auction and the auctioneer will not be accountable to the persons traveling up to the place if he does not hold the auction. Even when certain goods are being auctioned, the bid made by a person is not an acceptance so as to entitle the highest bidder to get the goods. Instead, any bid is an offer to buy the goods and it needs to be accepted by the auctioneer for there to be a contract. The final drop of the gavel is considered as acceptance of the offer. 

·      voluntary retirement scheme; A voluntary retirement scheme offered by an employer is not a proposal, but merely an invitation to treat. The application made by employees constitutes the proposal to be accepted by the employer.

·     advertisements for goods for sale in a newspaper or TV or a display of goods for sale on a shelf in a self-service store. However, all advertisements may not be so. An advertisement which envisages that the advertiser will enter into a unilateral contract like advertisements of rewards for lost articles/persons are held to be valid offers.

The distinction between offer and invitation to treat is the intention of the person making it. A person while making an offer should have the intention that he would be bound as soon as the offeree accepts it. It must require only acceptance to convert it into a promise. It declares the readiness of the offeror to undertake an obligation under certain specified terms and conditions, giving the offeree the option of acceptance or refusal.

A statement of fact that is made simply to provide some information is not an offer whose acceptance can create a valid contract. The intention or willingness to enter into an agreement must be specified. For example, if a person A in reply to an offer made by B to buy his house for $5000 says that he would not sell his property for an amount less than $7000, he merely issues an invitation to offer and does not make any offer to sell at the price mentioned by him. But a letter communicating willingness to sell at a price in reply to an inquiry whether the property is for sale, has been held to be an offer.

In Harvey vs. Facey, H sent a telegraph to F "Will you sell us Bumper Hall Pen? Telegraph lowest cash price, answer paid". F replied by telegram, "Lowest price for Bumper Hall Pen £900". H telegraphed, "We agree to buy Bumper Hall Pen for £900 asked by you". H claimed that a valid offer and acceptance can be understood through this exchange of telegrams. (Bumper Hall Pen is a piece of land)

The Privy Council explained that the telegraph of H presented two questions to F, 

(1) as to the willingness of B to sell, and 

(2) as to the lowest price; 

F's telegram addressed the second question only. They reserved their answer so as to the first question about their willingness to sell. B did not express his willingness thus, not answering the first question directly instead proposed certain terms on which he is willing to negotiate. Therefore, he did not make an offer that could be accepted by H but only invited H to make an offer on those terms. Therefore, no contract has been made. F was just supplying information in his telegram. The third message in the communication was an offer by H which was never accepted by F. 

GENERAL OFFER

An offer can be made to the world at large but a contract can be made only with one person who comes forward and performs the conditions of the offer. This principle is stated in Anson,

“An offer need not be made to an ascertained person, but no contract arises until it has been accepted by an ascertained person.” 

Such kind of an offer prima facie creates a power of acceptance on every person who has knowledge about it. But the contractual obligations come into existence only when the conditions stipulated are performed by a person and not before it.

An example of a general offer can be seen in the case of Lalman Shukla vs. Gauri Dutt and Carlill vs. Carbolic Smoke Ball Co. (Smoke Ball case). In the former case, the offer made was regarding the return of the defendant’s nephew. Such kind of offer is exhausted once it is accepted.

In the latter case, the nature of the offer was such that it could be accepted by any number of persons where such a person would have to perform the terms of the offer to signify assent. The facts of the case were, a company offered by advertisement to pay £ 100 to anyone "who contracts the increasing epidemic influenza, colds or any disease caused by taking cold, after having used the balls according to printed directions". It was mentioned that "£ 1000 is deposited with the Alliance Bank showing our sincerity in the matter". The plaintiff used the smoke balls according to the printed directions but she still suffered from influenza. The court held that she was eligible to get the promised reward by the defendant's company. His lordship in this case upheld the validity of a general offer disregarding the argument of the defendant that an offer cannot be made to the world at large. He opined that “Why should not an offer be made to all the world which is to ripen into a contract with anybody who comes forward and performs the condition? It is an offer to become liable to anyone who, before it is retracted, performs the conditions, and although the offer is made to the world, the contract is made with that limited portion of the public who come forward and perform the condition on the faith of the advertisement.”

All of the aspects of a valid proposal or offer are discussed above. The next article will discuss the acceptance of a proposal.

References:

1.     Indian Contract Act, 1872.

2.     Pollock & Mulla, The Indian Contract and Specific Relief Acts, 16^th edition.

3.     Avtar Singh, Contract and Specific Relief, 12^th edition.

4.     Anson’s Law of Contract, 29^th edition.

5.     Halsbury’s Laws of India Contract, 2e 2015.

6.     Chitty on Contracts,28^th edition.

7.     Lalman Shukla vs. Gauri Dutt, (1913) 11 All LJ 489.

8.     Special Secretary to Government of Rajasthan (Finance) Jaipur, Rajasthan vs. Vedakantara Venkataramana Seshaiyer, (1983) 2 AP LJ 236 .

9.     Taylor vs. Laird, (1856) 25 LJ Ex 329.

10.  Simkins vs. Pays, [1955] 1 WLR 975.

11.  Balfour vs. Balfour, [1919] 2 KB 571.

12.  Merritt vs Merritt, [1970] 2 All ER 760.

13.  Rose and Frank Co. vs. JR Crompton & Bros Ltd, [1924] All ER Rep 245(HL).

14.  Banwari Lai vs. Sukhdarshan Dayal, (1973) 1 SCC 294.

15.  Harvey vs. Facey, 1893 AC 552.

16.  Carlill vs. Carbolic Smoke Ball Co., (1893) 1 QB 256 (CA).