Invitation to treat: Indian Contract Act 1872 Analysis

Indian Contract Act 1872 is the main source of law regulating contracts in Indian law, as subsequently amended. It determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some right and duties upon the contracting parties. Indian contract deals with the enforcement of these rights and duties upon the parties. The Indian Contract Act 1872 sections 1-75 came into force on 1st September 1872.

It applies to the whole of India except the state of Jammu and Kashmir. It is not a complete and exhaustive law on all types of contracts. Section 2(h) of the Act defines the term contract as “any agreement enforceable by law”. There are two essentials of this act, agreement and enforceability. Section 2(e) defines agreement as “every promise and every set of promises, forming the consideration for each other. ” Again Section 2(b) defines promise in these words: “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.

Proposal when accepted becomes a promise. ” This project mainly deals with communication of acceptance and the position of English and Indian cases in relation to communication of acceptance.

SECTION 3 – COMMUNICATION, ACCEPTANCE AND REVOCATION OF PROPOSALS

The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by an act or omission of the party proposing, accepting or revoking, by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.

According to Section 2(a) and Section 2(b) a promisor has to signify his willingness and promisee has to signify his assent. The words “signifies to another” in section 2(a) clearly imply that the willingness or the assent as the case may be, must be brought to the notice of the other, in other words must be communicated to the other. Section 3 provides two general modes of communication. 1. Any act or 2. Omission The first mode, ‘any act’ would include any conduct and words, written (letters, telegrams, telex message, etc) or oral (telephonic messages).

Omission would include such conduct or forbearance on one’s part that the other person takes it as his willingness or assent. So we gather that the main principle is that there must be some external manifestation or an overt act of acceptance. A mere mental but unilateral act of assent in one’s own mind will not amount to a communication as it cannot have the effect of communicating it to the other. Some cases relating to this principle are as follows:- Brogden v. Metropolitan Railway Co. Facts- Mr.

Brogden, the chief of a partnership of three, had supplied the Metropolitan Railway Company with coals for a number of years. Brogden then suggested that a formal contract should be entered into between them for longer term coal supply. Each side’s agents met together and negotiated. Metropolitan’s agents drew up some terms of agreement and sent them to Brogden. Brogden wrote in some parts which had been left blank and inserted an arbitrator who would decide upon differences which might arise. He wrote “approved” at the end and sent back the agreement documents.

Metropolitan’s agent filed the documents and did nothing more. For a while, both acted according to the agreement document’s terms. But then some more serious disagreements arose, and Brogden argued that there had been no formal contract actually established. Judgment – The House of Lords held that a contract had arisen by conduct and Brogden had been in clear breach, so he must be liable. A mere mental assent to the agreement’s terms would not have been enough, but having acted on the terms made it so. Hindustan Cooperative Insurance Society v.

Shyam Sunder Facts- After an oral understanding to insure the defendant’s life and the completion of the medical examination, the company informed the proposer that if he submitted the proposal form and deposited the half yearly premium, his proposal would be accepted. He accordingly submitted the cheque and the company cashed it. But the company had not yet replied to him their acceptance when the proposer died. Issue- Whether by cashing the cheque the company had accepted the proposal without there being a formal acceptance.

Judgment- The court held that the deceased had clearly indicated that if the appellant accepted his proposal the cheque should be appropriated towards the first premium and that such appropriation would conclude the contract and therefore the act of the company would amount to acceptance of the proposal.

COMMUNICATION OF SPECIAL CONDITIONS

There has been a series of cases in which the first question is whether the proposal of special terms has been effectually communicated. It is the duty of the proposer to give a reasonable notice of the special conditions included in the contract; otherwise the acceptor will not be bound by the terms.

Henderson v. Stevenson Facts – the plaintiff bought a steamer ticket on the face of which were these words only: “Dublin” to “Whitehaven”; on the back were printed certain conditions one of which excluded the liability of the company for loss, injury or delay to the passenger or his luggage. The plaintiff had not seen the back of the ticket, nor was there any indication on the face about the conditions on the back. The plaintiff’s luggage was lost in the shipwreck caused by the fault of the company’s servants.

Judgment – The House of Lords held that the plaintiff could not be said to have accepted a term which he had 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.

SECTION 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. Lalman v. Gauri Datt Facts – 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 action to recover the reward. But his action failed Judgment – Banerji J, said that “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 of offer. Illustrations 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 accepts A’s proposal by a letter sent by post. 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 Difference between Indian and English laws The position of the acceptor is different from that provided in the Indian law.

In England when a letter of acceptance is posted, both the offeror and the acceptor become bound by the contract. But in India, the acceptor does not become bound by merely posting his acceptance. He becomes bound only when his acceptance “comes to the knowledge of the proposer”. The gap of time between the posting and the delivery of the acceptance can be utilized by the acceptor for revoking his acceptance by a speedier communication which will overtake the acceptance. The peculiarity of this rule is that after an acceptance is posted and before it comes to the knowledge of the offeror, only one party, that is the offeror, is bound.

The acceptor still has the right to recede from the contract by revoking his acceptance. A contract on the other hand means an agreement which binds both the parties to it. When the parties are at a distance and are contacting through post or by messengers, the question arises when is the contract concluded? Does the contract arise when the acceptance is posted or when it is received? The question first arose in England in Adams v. Lindsell. Adams v. Lindsell On September 2, 1817, the defendants sent a letter offering to sell quantity of wool to the plaintiffs.

The letter added, “receiving your answer in course of post”. The letter reached the plaintiffs on September 5. On that evening the plaintiffs wrote an answer agreeing to accept the wool. This was received by the defendants on September 9. The defendants waited for the acceptance up to September 8 and not having received it, sold the wool to other parties on that date. They were sued for breach of contract. It was contended on their behalf that till the plaintiffs’ answer was actually received there could be no binding contract and, therefore, they were free to sell the wool on 8th.

But the court said; “If that were so, no contract could ever be completed by post. For if the defendants were not bound by their offer when accepted by the plaintiffs till the answer was received, then the plaintiffs ought not to be bound till after they had received the notification that the defendants had received their answer and assented to it. And so it might go on infinitum (endlessly). ” The result of the decision is that a complete contract arises on the date when the letter of acceptance is posted in due course. This rule was affirmed by the Court of Appeal in Household Fire & Accident Insurance Co.

v. Grant The Household Fire and Carriage Accident Insurance Company (Limited) v Grant Facts – Mr. Grant applied for shares in the Household Fire and Carriage Accident Insurance Company. The company allotted the shares to the defendant, and duly addressed to him, posting a letter containing the notice of allotment. The letter was lost in the post and he never received the acceptance. Later the company went bankrupt, and asked Mr. Grant for the outstanding payments on the shares, which he refused saying there was no binding contract. The liquidator sued.

Issue – The question was whether Mr. Grant’s offer for shares had been validly accepted, and was he legally bound to pay? Judgment – The court held that there was a valid contract, because the rule for the post is that acceptance is effective even if the letter never arrives. He noted that anyone can opt out of the rule, and that even if it sometimes causes hardship, it would cause even more hardship to not have the rule. Once someone posts acceptance, he argued, there is a meeting of minds, and by doing that decisive act a contract should come into effect.

The offeror becomes bound when a properly addressed adequately stamped letter of acceptance is posted. This aspect was emphasized by the Allahabad High Court in Ramdas Chakrabarti v. Cotton Ginning Co Ltd wherein “a letter of allotment of shares was claimed to have been posted by a company, but the applicant denied to have received it. The high court said: “it follows from this (section 4 and 5) that a notice of allotment, which is the acceptance of the offer to purchase shares, is communicated to the allottee when it is dispatched, and from that moment there is a complete contract for him.

Whether he receives the letter or not is absolutely immaterial.

DIRECT COMMUNICATION BETWEEN PARTIES

The rules discussed above, followed in India or in England, apply only when the parties are at a distance and they communicate by post. But where the parties are in each other’s presence or, though separate in space, are in direct communication, as for example by telephone, no contract will arise until the offeror receives the notification of acceptance. Entores Ltd v. Miles Far East Corporation.

Facts – Entores was a London-based trading company that sent an offer for the purchase of copper cathodes by telex from a company based in Amsterdam. The Dutch company sent an acceptance by telex. The contract was not fulfilled by the Dutch Company and so Entores attempted to sue the owner of the Dutch company for damages. The controlling company, Miles Far East Corp. , was based in the U. S. and so Entores could only bring the action in the U. S. if it could be found that the contract was formed in London rather than Amsterdam.

Decision – The Court of Appeal held that telex is a method of instantaneous communication and the rule about instantaneous communications between the parties is different from the postal rule. The contract is only complete when the acceptance is received by the offeror; and the contract is made at the place where the acceptance is received. Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co. Facts – The plaintiffs commenced an action in the City Civil Court at Ahmadabad against the Kedia Ginning Factory and Oil Mills of Khamgaon for a decree for Rs.

31,150/- on the plea that the defendants had failed to supply cotton seed cake which they had agreed to supply under an oral contract dated July 22, 1959 negotiated between the parties by conversation on long distance telephone. The plaintiffs submitted that the cause of action for the suit arose at Ahmadabad, because the defendants had offered to seed cotton seed cake which offer was accepted by the plaintiffs at Ahmadabad, and also because the defendants were under the contract bound to supply the goods at Ahmadabad, and the defendants were to received payment for the goods through a Bank of Ahmadabad.

The defendants contended that the plaintiffs has by a message communicated by telephone offered to purchase cotton seed cake, and they had accepted the offer at Khamgaon, that under the contract delivery of the goods contracted for was to be made at Khamgaon, price was also to be paid at Khamgaon and that no part of the cause of action for the suit had arisen within the territorial jurisdiction of the City Civil Court Ahmadabad. Decision – A majority of the judges preferred to follow the English rule as laid down in the Entores case and saw no reason for extending the post office rule to telephonic communications.

SECTION 7 – ACCEPTANCE MUST BE ABSOLUTE

In order to convert a proposal into a promise, the acceptance must 1. be absolute and unqualified; 2. be expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance.

The rule in the first sub-section is based on the principle that unless the parties have consensus ad idem i. e. are of one mind, there cannot be an agreement between them. The rule is in itself obviously necessary, for words of acceptance which do not correspond to the proposal actually made are not really an acceptance of anything and therefore, can amount to nothing more than a new proposal, or a counter offer. Haji Mohd Haji Jiva v. E. Spinner

Facts -Before accepting the offer the plaintiff introduced certain terms like ‘Free Bombay Harbour and Interest’, which were not there in the original offer. This, the defendant refused to accept. Subsequently the plaintiff communicated his acceptance of the original offer, but the defendant did not assent to this. Judgment – Any departure from the terms of the offer or any qualification vitiates the acceptance unless it is agreed to by the person from whom the offer comes.

In other words, an acceptance with a variation is no acceptance; it is simply a counter proposal, which must be accepted by the original promisor before a contract is made. Nihal Chand v. Amar Nath Facts – The plaintiff offered by a letter to sell certain claims to the defendant at a specified rate. The defendant in turn offered to buy at a little less rate which the plaintiff did not accept, but he did not withdraw his original offer. Then the defendant accepted the rate as originally offered.

This also the plaintiff did not accept and was sued for breach of contract by the defendant. Decision – It was held that the defendant by his counter-offer to buy at a reduced rate impliedly rejected the original offer made by the plaintiff and hence there was no contract.

SECTION 8 – ACCEPTANCE BY PERFORMING CONDITIONS, OR RECEIVING CONSIDERATION

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. Harbhajan Lal v. Harcharan Lal

Facts – a young boy ran away from his father’s home. The father eventually issued a pamphlet, offering a reward of Rs. 500 to anybody who finds his son and brings him home. The plaintiff sent a telegram to the boy’s father informing him that he had found his son. Decision – It was held that the handbill was an offer open to the whole world and capable of acceptance by any person who fulfills the condition, and that the plaintiff substantially performed the condition and was entitled to the amount offered. Carlill v. Carbolic Smoke Ball & Co.

Facts – The Carbolic Smoke Ball Company made a product called the “smoke ball”. It claimed to be a cure for influenza and a number of other diseases, in the context of the 1889-1890 ‘flu pandemic which is estimated to have killed 1 million people. The smoke ball was a rubber ball with a tube attached. It was filled with carbolic acid (phenol). The tube was then inserted into the user’s nose. It was squeezed at the bottom to release the vapours into the nose of the user. This would cause the nose to run, and hopefully flush out the viral infection.

The Company published advertisements in the Pall Mall Gazette and other newspapers on November 13, 1891, claiming that it would pay ? 100 to anyone who got sick with influenza after using its product according to the instructions set out in the advertisement. “? 100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza colds, or any disease caused by taking cold, after having used the ball three times daily for two weeks, according to the printed directions supplied with each ball.

?1000 is deposited with the Alliance Bank, Regent Street, showing our sincerity in the matter. Mrs. Louisa Elizabeth Carlill saw the advertisement, bought one of the balls and used three times daily for nearly two months until she contracted the flu on January 17, 1892. She claimed ? 100 from the Carbolic Smoke Ball Company. They ignored two letters from her husband, who had trained as a solicitor.

On a third request for her reward, they replied with an anonymous letter that if it is used properly the company had complete confidence in the smoke ball’s efficacy, but “to protect themselves against all fraudulent claims” they would need her to come to their office to use the ball each day and be checked by the secretary. Mrs. Carlill brought a claim to court. The barristers representing her argued that the advertisement and her reliance on it was a contract between her and the company, and so they ought to pay. The company argued it was not a serious contract. Judgment – The Court of Appeal unanimously rejected the company’s arguments and held that there was a fully binding contract for ?

100 with Mrs. Carlill. Among the reasons given by the three judges were (1) that the advertisement was a unilateral offer to the entire world (2) that satisfying conditions for using the smoke ball constituted acceptance of the offer (3) that purchasing or merely using the smoke ball constituted good consideration, because it was a distinct detriment incurred at the behest of the company and, furthermore, more people buying smoke balls by relying on the advertisement was a clear benefit to Carbolic (4) that the company’s claim that ?

1000 was deposited at the Alliance Bank showed the serious intention to be legally bound.

CONCLUSION

From the above discussion we gather that except for some rules like the postal rule most of rules followed in English and Indian cases are almost similar. In fact there are some cases like the entores case for example where the Indian judges have followed the judgments given previously in English cases when confronted with similar cases in India. Bibliography * Mulla The Indian Contract Act 12th edition by G. C. Barukha * Anson’s Law of Contract.