Q1. Explain essentials of a contract?

The term “contract” is defined in § 2 (h) of the Indian contract act, 1872, as follows: “An
agreement enforceable by law is a contract.”
1. Offer and Acceptance: In the first place, there must be an offer and an acceptance for the
same. Such offer and acceptance should create legal obligations between the parties. This should
result in a duty on the person who promises or offers to do something. Similarly, this should also
give a right to the offeree to claim its fulfillment. Such duties and rights should be legal and not
merely moral.
2. Consent: ‘Consent’ means ‘knowledge and approval’ of the parties concerned. This can also
be understood as identity of minds in understanding the term viz consensus ad idem. Further
such a consent must be free. Consent would be considered as free consent if it is not vitiated by
coercion, undue influence, fraud, misrepresentation or mistake. Wherever the consent of any
party is not free, the contract is voidable at the option of that party.
Illustration: - A threatened to shoot B if he (B) does not lend him ` 2000 and B agreed to it.
Here the agreement is entered into under coercion and hence voidable at the option of B.
3. Capacity of the parties: The third element is the capacity of the parties to make a valid
contract. Capacity or incapacity of a person could be decided only after reckoning various
factors. Section 11 of the Indian Contract Act,1872 elaborates on the issue by providing that a
person who-
(a) has not attained the age of majority,
(b) is of unsound mind and
(c) is disqualified from entering into a contract by any law to which he is subject,
should be considered as not competent to enter into any contract. Therefore, law prohibits (a)
Minors (b) persons of unsound mind [excluding the Lucid intervals] and (c) person who are
otherwise disqualified like an alien enemy, insolvents, convicts etc. from entering into any
contract.
4. Consideration: The fourth element is presence of a lawful ‘consideration’.
‘Consideration’ would generally mean ‘compensation’ for doing or omitting to do an act or
deed. It is also referred to as ‘quid pro quo’ viz ‘something in return for another thing’. Such a
consideration should be a lawful consideration.
Example: - A agrees to sell his books to B for ` 100, B’s promise to pay ` 100 is the
consideration for A’s promise to sell his books and A’s promise to sell the books is the
consideration for B’s promise to pay ` 100.
5. Not expressly declared to be void: The last element to clinch a contract is that the
agreement entered into for this purpose must not be which the law declares to be either illegal
or void. An illegal agreement is an agreement expressly or impliedly prohibited by law. A void
agreement is one without any legal effects. For Example: Threat to commit murder or
making/publishing defamatory statements or entering into agreements which are opposed to
public policy are illegal in nature. Similarly, any agreement in restraint of trade, marriage, legal
proceedings etc. are classic examples of void agreements.
6. Intention to create a legally binding Contract: The parties must have an Intention to enter
into a legal relationship through the contract.
Case law:
In Balfour v. Balfour, a husband promised to pay maintenance allowance every month to his
wife, so long as they remain separate. When he failed to perform this promise, she brought an
action to enforce it. As it is an agreement of domestic nature, it was held that it does not
contemplate to create any legal obligation.

Q2. Explain Offer in detail?

A proposal and its acceptance are the universally acknowledged process for the making of an
agreement. § 2(a) defines proposal as: When a person signifies to another is willingness to do or
to abstain from doing anything, with a view to obtain the assent of that other to such act or
abstinence, he is said to make a proposal.
Hence there are two important ingredients to an offer. Firstly, it must be expressions of
willingness to do or to abstain from doing an act. Secondly, the willingness must be expressed
with a view to obtain the assent of the other party to whom the offer is made. This can be
illustrated as follows:
(a) Where “A” tells “B” that he desires to marry ‘B’ by the end of 2006, there is no offer made
unless, he also asks “will you marry me?”, conveying his willingness and tries to obtain the
assent of ‘B’ in the same breadth.
(b) Where “A” offers to sell his car to “B” it conveys his willingness to do an act. Through this
offer not only willingness is being conveyed but also an intention to obtain the assent can be
seen.
Classification of offer: Offer can be classified as general offer, special/specific offer, cross
offer, counter offer, standing/open/continuing offer. Now let us examine each one of them.
(a) General offer: It is an offer made to public at large with or without any time limit. In terms
of Section 8 of the Act, anyone performing the conditions of the offer can be considered to have
accepted the offer (Carlill v. Carbolic Smoke Ball). Until the general offer is retracted or
withdrawn, it can be accepted by anyone at any time as it is a continuing offer.
(b) Special/specific offer: Where an offer is made to a particular and specified person, it is a
specific offer. Only that person can accept such specific offer, as it is special and exclusive to
him.
(c) Cross offer: As per section 2(b), when a person to whom proposal (offer) is made signifies
his assent, the proposal is said to be accepted. Thus, assent can be only to a ‘proposal’. For
example, if A makes a proposal to B to sell some goods at a specified price and B, without
knowing proposal of A, makes a proposal to purchase the same goods at the price specified in the
proposal of A, it is not an acceptance, as B was not aware of proposal made by A. It is only cross
proposal (cross offer). And when two persons make offer to each other, it cannot be treated as
mutual acceptance. There is no binding contract in such a case [Tin v. Hoffman & Co. 1873]
(d) Counter offer: Upon receipt of an offer from an offeror, if the offeree instead of accepting it
straightway, imposes conditions which have the effect of modifying or varying the offer, he is
said to have made a counter offer. Counter offers amounts to rejection of original offer.
(e) Standing or continuing or open offer: An offer which is made to public at large and if it is
kept open for public acceptance for a certain period of time, it is known as standing or continuing
or open offer. Tenders that are invited for supply of materials and goods are classic examples of
standing offer.

Q3. What is Invitation to offer?

An offer and invitation to offer are not one and the same. The difference between the two must
be appreciated. An offer is definite. It is an intention towards a contract. An invitation to offer is
an act precedent to making an offer. It is done with intent to generally to induce and negotiate.
An invitation to offer gives rise to an offer after due negotiation and it cannot be per se accepted.
In an invitation to offer there is no expression of willingness by the offeror to be bound by his
offer. It is only a proposal of certain terms on which he is willing to negotiate. It is not capable of
being accepted as it is.
When there is advertisement by a person, he has a stock of books for sale, it is an invitation to
offer and not an offer. This advertisement is made to receive offers and to further negotiate.
In terms of Section 2[a] of the Act, it is very clear that an offer is the final expression of
willingness by the offeror to be bound by the offer if it is accepted by the other party. Hence the
only thing that is required is the willingness of the offeree to abide by the terms of offer.
The test to decide whether a statement is an ‘offer’ or ‘invitation to offer’ is to see the
‘intention’. If a person who makes the statement has the intention to be bound by it as soon as the
other accepts, he is making an offer. If he however intends to do some other act, he is making
only an invitation to offer. Thus, the intention to be bound is the important thing, which is to be
seen.
In Harvey vs. Facie [1893] AC 552 Privy Council succinctly explained the distinction between
an offer and an invitation to offer.
The plaintiffs sued the defendants contending that they had made an offer to sell the property at
₤900 and therefore they are bound by the offer. However, the Privy Council did not agree with
the plaintiffs on the ground that while plaintiffs had asked two questions, the defendant replied
only to the second question by quoting the price but did not answer the first question but
reserved their answer with regard to their willingness to sell. Thus, they made no offer at all.
Their Lordships held that the mere statement of the lowest price at which the vendor would sell
contained no implied contract to sell to the person who had enquired about the price.

Q4. Explain Acceptance in detail?

In terms of Section 2(b) of the Indian Contract Act, “A proposal or offer is said to have been
accepted when the person to whom the proposal is made signifies his assent to the proposal to do
or not to do something”. In short, act of acceptance lies in signifying one’s assent to the proposal.
(1) Acceptance must be absolute and unqualified: As per section 7 of the Act, acceptance is
valid only when it is absolute and unqualified and is also expressed in some usual and reasonable
manner unless the proposal prescribes the manner in which it must be accepted. If the proposal
prescribes the manner in which it must be accepted, then it must be accepted accordingly.
(2) The acceptance must be communicated: To conclude a contract between the parties, the
acceptance must be communicated in some perceptible form. Any conditional acceptance is no
acceptance. Such conditional acceptance is a counter proposal and has to be accepted by the
proposer, if the original proposal has to materialize into a contract. Further when a proposal is
accepted, the offeree must have the knowledge of the offer made to him. If he does not have the
knowledge, there can be no acceptance. The acceptance must relate specifically to the offer
made.
A mere variation in the language not involving any difference in substance would not make the
acceptance ineffective. [Heyworth vs. Knight [1864] 144 ER 120].
(3) Acceptance must be in the prescribed mode: Where the proposal prescribes the mode of
acceptance, it must be accepted in that manner. Where the proposal does not prescribe the
manner, then it must be accepted in a reasonable manner. If the proposer does not insist on the
proposal being accepted in the manner in which it has to be accepted, after it is accepted in any
other manner not originally prescribed, the proposer is presumed to have consented to the
acceptance. Sometimes the acceptor may agree to a proposal but may insist on a formal
agreement, in which case until a formal agreement is drawn up there is no complete acceptance.
(4) The acceptance must be given within a reasonable time and before the offer lapses.
(5) Mere silence is not acceptance. The acceptor should expressly accept the offer. Acceptance
can be implied also. Acceptance must be given only by that person to whom it is made, that too
only after knowing about the offer made to him.
(6) Acceptance by conduct: As already elaborated above, acceptance has to be signified either
in writing or by word of mouth or by performance of some act. The last of the method, namely
‘by some act’ has to be understood as acceptance by conduct. In a case like this where a person
performs the act intended by the proposer as the consideration for the promise offered by him,
the performance of the act constitutes acceptance. In other words, there is an acceptance by
conduct.
Section 8 of the Act very clearly in this regard lays down that “the performance of the
condition(s) of a proposal or the acceptance of any consideration of a reciprocal promise which
may be offered with a proposal constitutes an acceptance of the proposal.

Q5. Explain Communication of Offer and Acceptance.

The importance of ‘offer’ and ‘acceptance’ in giving effect to a valid contract was explained in
the previous paragraphs. One important common requirement for both ‘offer’ and ‘acceptance’ is
their effective communication. Effective and proper communication prevents avoidable
revocation and misunderstanding between parties. The communication part of it assumes
importance because parties are separated by and distance. In which case the modes of
communication like, post/courier, telegram, fax, email, telephone etc., become very relevant
because the method of communication would also decide the ‘time’ of ‘offer’ and ‘acceptance’.
The Indian Contract Act,1872 gives a lot of importance to “time” element in deciding when the
offer and acceptance is complete.
Communication of offer: In terms of Section 4 of the Act, “the communication of offer is
complete when it comes to the knowledge of the person to whom it is made”. Therefore,
knowledge of communication is of relevance. Knowledge of the offer would materialize when
the offer is given in writing or made by word of mouth or by some other conduct. This can be
explained by an example. Where ‘A’ makes a proposal to ‘B’ by post to sell his house for ` 5
lakhs and if the letter containing the offer is posted on 10th March and if that letter reaches ‘B’
on 12th March the offer is said to have been communicated on 12th March when B received the
letter. Thus, it can be summed up that when a proposal is made by post, its communication will
be complete when the letter containing the proposal reaches the person to whom it is made.
Communication of acceptance: There are two issues for discussion and understanding. Section
3 of the Act prescribes in general terms two modes of communication namely, (a) by any act and
(b) by omission, intending thereby to, to communicate to the other or which has the effect of
communicating it to the other.
Communication by act would include any expression of words whether written or oral. Written
words will include letters, telegrams, faxes, emails and even advertisements. Oral words will
include telephone messages. Again, communication would include any conduct intended to
communicate like positive acts or signs so that the other person understands what the person
‘acting ‘or ‘making signs’ means to say or convey. Communication can also be by ‘omission’ to
do any or something. Such omission is conveyed by a conduct or by forbearance on the part of
one person to convey his willingness or assent. However, silence would not be treated as
communication by ‘omission’.
Communication of acceptance is also done by conduct. For instance, delivery of goods at a price
by a seller to a willing buyer will be understood as a communication by conduct to convey
acceptance. Similarly, one need not explain why one boards a public bus or drop a coin in a
weighing machine. The first act is a conduct of acceptance and its communication to the offer by
the public transport authority to carry any passenger. The second act is again a conduct
conveying acceptance to use the weighing machine kept by the vending company as an offer to
render that service for a consideration.
The other issue in communication of acceptance is about the effect of act or omission or conduct.
These indirect efforts must result in effectively communicating its acceptance or non-acceptance.
If it has no such effect, there is no communication regardless of which the acceptor thinks about
the offer within himself. Thus, a mere mental unilateral assent in one’s own mind would not
amount to communication. Where a resolution passed by a bank to sell land to ‘A’ remained
uncommunicated to ‘A’, it was held that there was no communication and hence no contract.
[Central Bank Yeotmal vs Vyankatesh (1949) A. Nag. 286].
In terms of Section 4 of the Act, it is complete,
(i) As against the proposer, when it is put in course of transmission to him so as to be out of the
power of the acceptor to withdraw the same;
(ii) As against the acceptor, when it comes to the knowledge of the proposer.
Where a proposal is accepted by a letter sent by the post, the communication of acceptance will
be complete as against the proposer when the letter of acceptance is posted and as against the
acceptor when the letter reaches the proposer. For instance, in the above example, if ‘B’ accepts,
A’s proposal and sends his acceptance by post on 14th, the communication of acceptance as
against ‘A’ is complete on 14th, when the letter is posted. As against ‘B’ acceptance will be
complete, when the letter reaches ‘A’. Here ‘A’ the proposer will be bound by B’s acceptance,
even if the letter of acceptance is delayed in post or lost in transit. The golden rule is proposer
becomes bound by the contract; the moment acceptor has posted the letter of acceptance. But it is
necessary the letter is correctly addressed, sufficiently stamped and duly posted. In such an event
the loss of letter in transit, wrong delivery, non-delivery etc., will not affect the validity of the
contract. However, from the view point of acceptor, he will be bound by his acceptance only
when the letter of acceptance has reached the proposer. So, it is crucial in this case that the letter
reaches the proposer. If there is no delivery of the letter, the acceptance could be treated as
having been completed from the viewpoint of proposer but not from the viewpoint of acceptor.
Of course, this will give rise to an awkward situation of only one party to the contract being
treated as bound by the contract though no one would be sure as to where the letter of acceptance
had gone.
Communication through Performance: Communication of a proposal is complete when it
comes to the knowledge of the person to whom it is meant. As regards acceptance of the
proposal, the same would be viewed from two angles. These are (i) from the viewpoint of
proposer and (ii) the other from the viewpoint of acceptor himself. From the viewpoint of
proposer, when the acceptance is put in to a course of transmission, when it would be out of the
power of acceptor. From the viewpoint of acceptor, it would be complete when it comes to the
knowledge of the proposer.
At times the offeree may be required to communicate the performance (or act) by way of
acceptance. In this case it is not enough if the offeree merely performs the act but he should also
communicate his performance unless the offer includes a term that a mere performance will
constitute acceptance. The position was clearly explained in the famous case of Carlill Vs
Carbolic & Smokeball Co. The court laid down the following three important principles:
(i) an offer, to be capable of acceptance, must contain a definite promise by the offer or that he
would be bound provided the terms specified by him are accepted;
(ii) an offer may be made either to a particular person or to the public at large, and
(iii) if an offer is made in the form of a promise in return for an act, the performance of that act,
even without any communication thereof, is to be treated as an acceptance of the offer.

Q6. Explain Revocation of Offer and Acceptance.

If there are specific requirements governing the making of an offer and the acceptance of that
offer, we also have specific law governing their revocation. In term of Section 4, communication
of revocation (of the proposal or its acceptance) is complete. (i) 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, and (ii) as against the person to whom it is made, when it
comes to his knowledge.
The above law can be illustrated as follows: - If you revoke your proposal made to me by a
telegram, the revocation will be complete, as for as you are concerned when you have dispatched
the telegram. But as far as I am concerned, it will be complete only when I receive the telegram.
As regards revocation of acceptance, if you go by the above example, I can revoke my
acceptance (of your offer) by a telegram. This revocation of acceptance by me will be complete
when I dispatch the telegram and against you, it will be complete when it reaches you. But the
important question for consideration is when a proposal can be revoked? And when can an
acceptance be revoked? These questions are more important than the question when the
revocation (of proposal and acceptance) is complete. In terms of Section 5 of the Act a proposal
can be revoked at any time before the communication of its acceptance is complete as against the
proposer. An acceptance may be revoked at any time before the communication of acceptance is
complete as against the acceptor.
Revocation of proposal otherwise than by communication: When a proposal is made, the
proposer may not wait indefinitely for its acceptance. The offer can be revoked otherwise than by
communication or sometimes by lapse.
Following are the situations worth noting in this regard
(i) When the acceptor fails to fulfill certain conditions precedent to acceptance: - Where
the acceptor fails to fulfill a condition precedent to acceptance the proposal gets
revoked. This principle is laid down in Section 6 of the Act. The offeror for instance
may impose certain conditions such as executing a certain document or depositing
certain amount as earnest money. Failure to satisfy any condition will result in lapse
of the proposal. As stated earlier ‘condition precedent’ to acceptance prevents an
obligation from coming into existence until the condition is satisfied. Suppose where
‘A’ proposes to sell his house to be ‘B’ for ` 5 lakhs provided ‘B’ leases his land to
‘A’. If ‘B’ refuses to lease the land, the offer of ‘A’ is revoked automatically.
(ii) When the proposer dies or goes insane: Death or insanity of the proposer would
result in automatic revocation of the proposal but only if the fact of death or insanity
comes to the knowledge of the acceptor
(iii) When time for acceptance lapses: The time for acceptance can lapse if the acceptance
is not given within the specified time and where no time is specified, then within a
reasonable time. This is for the reason that proposer should not be made to wait
indefinitely. It was held in Ramsgate Victoria Hotel Co Vs Montefiore (1866 L.R.Z.
Ex 109), that a person who applied for shares in June was not bound by an allotment
made in November. This decision was also followed in India Cooperative Navigation
and Trading Co Ltd Vs Padamsey Prem Ji. However, these decisions now will have
no relevance in the context of allotment of shares since The Companies Act, 1956 has
several provisions specifically covering these issues.

Q7. Explain Consideration and its Legal Requirements.

The expression ‘consideration’ has to be understood as a price paid for an obligation. In Curie
Vs Misa (1875) LR 10 Ex 153 is was held (in U K) that consideration is “some right, interest,
profit or benefit accruing to one party or forbearance, detriment, loss, or responsibility given,
suffered or undertaken by the other”. The judgment thus refers to the position of both the
promisor, and the promisee in an agreement. Section 2 (d) of the Indian Contract Act, 1872
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 abstains from doing or promises to do or abstain
from doing something, such an act or abstinence or promise is called consideration for the
promise’. From the above definition it can be inferred that, Consideration is doing or not doing
something, which the promisor desires to be done or not done. (1) Consideration must be at the
desire of the promisor. (2) Consideration may move from one person to any other person (3)
Consideration may be past, present or future and (4) Consideration should be real though not
adequate in most cases the promisor for doing an act or not doing an act derives some benefit by
way of consideration. Thus, consideration is identified as quid pro quo from the promise or
performance of the promisor. But it is also possible that there may not be any identifiable benefit
towards consideration. For example, ‘A’ promises to carry ‘B’s goods free of charge and B
allows ‘A’ to carry the same. Here ‘B’ does not offer any consideration to ‘A’. Is this a valid
contract?
Consideration = Promise / Performance that parties exchange with each other. Form of
consideration= Some benefit, right or profit to one party / some detriment, loss, or forbearance
to the other. Whether gratuitous promise can be enforced? The word “gratuitous” means ‘free
of cost’ or ‘without expecting any return’. It can therefore be inferred that a gratuitous promise
will not result in an agreement in the absence of consideration. For instance, a promise to
subscribe to a charitable cause cannot be enforced.
Legal requirements regarding Consideration

(i) Consideration must move at the desire of the promisor: Consideration must move at the
desire of the promisor, either from the promisee or some other third party. But consideration
cannot move at the desire of a third party. [Durga Prasad Vs Baldev (1880) 3, All 221]
(ii) Consideration can flow either from the promisee or any other person: The consideration
for a contract can move either from the promisee or from any other person. This point is made
clear even by the definition of the word “consideration”, according to which at the desire of the
promisor, the promisee or any other person, doing something is consideration. That the
consideration can legitimately move from a third party is an accepted principle of law in India
though not in England. [Chinnaya Vs Ramaya(1881) 4.mad.137] Thus a stranger to a contract
can sue upon a contract in India and also in England, where as stranger to a consideration can sue
under Indian law though not under English law.
(iii) Executed and Executory consideration: Where consideration consists of performance, it is
called “executed” consideration. Where it consists only of a promise, it is executory. A
forbearance by the promisor should however be considered as an executed consideration
provided the forbearance is sufficient at the time of contract.
(iv) Past consideration: The next issue is whether past consideration can be treated as
consideration at all. This is because consideration is given and accepted along with a promise
concurrently. However, the Act recognizes past consideration as consideration when it uses the
expression in Section 2(d) ‘has done or abstained from doing”. But in the event of services being
rendered in the past at the request or desire of the promisor the subsequent promise is regarded as
an admission that the past consideration was not gratuitous. The plaintiff rendered services to the
defendant at his desire during his minority. He also continued to render the same services after
the dependent attained majority. It was held to be good consideration for a subsequent express
promise by the defendant to pay an annuity to the plaintiff but it was admitted that if the services
had not been rendered at the desire of the defendant it would be hit by section 25 of the Act.
[Sindia Vs Abraham (1985) Z. Bom 755]
(v) Adequacy of Consideration: Consideration need not necessarily be of the same value as of
the promise for which it is exchanged. But it must be something which can be inadequate as
well. Inadequate consideration would not invalidate an agreement but such inadequate
consideration could be taken into account by the court in deciding whether the consent of the
promisor was freely given. In Chijjitumal Vs. Rampal Singh AIR, 1968, the Supreme Court
reiterated that consideration need not be material and may be even absent. In the said case, the
father had died leaving his house to two sons. They had agreed to partition the house which did
not admit the division in exactly equal parts and one of the sons had agreed not to construct a
door at a certain place in his portion of the house. In a dispute, the agreement was challenged on
the ground