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Contracts play an important role in our everyday life ranging from insurance policies to employment contracts. In Fact, we enter into contracts even without thinking for example while buying a movie ticket or downloading an app. Contracts are oral or written agreements between two or more parties. Parties entering into a contract might include individual people, companies, non-profits or government agencies. The whole process of entering into a contract starts with an offer by one party, an acceptance by another party, and an exchange of consideration (something of value). Let us take a look at the definition of an offer and the essentials of a valid offer.
Definition of an offer
According to Section 2(A) of the Indian Contracts Act, 1872,
When a person expresses his willingness to another person to do or to abstain from doing something and also obtain the consent of such expression, it is called an offer.
The person who makes an offer is called “Offerer” or “ Promiser” and the person to whom the offer is made is called the “Offeree” or “Promisee”.
Illustration- Mr. A says to Mr. B, “Will you purchase my car for Rs.1,00,000?” In this case, Mr. A is making an offer to Mr. B. Here A is the offeror and B is the offeree.
Essentials of a valid offer
There are mainly three essential elements of a valid offer:
(1) The offer must be Communicated
Communication or expression of the willingness by the offerer to enter into a contract or abstain from doing so is essential for a valid offer. Mere desire or willingness to do or not to do something is not enough and will not constitute for an offer.
In Lalman Shukla vs Gauri Dutt(1913) it was held that mere knowledge of an offer does not imply acceptance by the offeree.
(2) Terms of the offer must be clear and definite
Knowledge of the Intention of the parties is very essential as without this the courts will not be able to decide what the parties want to do. Therefore the terms of the offer must be clear and definite and not vague and loose.
Example-Ram offers Shyam to sell fruits worth Rs 600/-. This is not a valid offer since what kinds of fruits or their specific quantities are not mentioned.
(3)Must create a legal relationship
It is essential for a valid proposal that it must be made with the intention of creating a legal relationship otherwise it will only be an invitation. A social invitation may not create a social relationship. An offer must lead to a contract which creates legal obligations and legal consequences in the case of non-performance of the contract.
Example- A lunch invitation extended by A to B is not a valid offer.
Ways in which an offer can be communicated
(1) By words (whether written or oral)
The written offer can be made by letters, telegrams, E-mail, advertisements, etc. The oral offer can be made either in person or over the telephone.
(2) By conduct
The offer may be communicated by making positive acts or signs to the offeree. However, the silence of a party does not amount to an offer.
Example– When you board a taxi, you are accepting to pay the taxi fare via your conduct.
Difference between offer and an invitation to offer
An offer is defined in section 2 (a) of the Indian Contract Act, 1872. Conversely, an invitation to offer is not defined in the Indian Contract Act, 1872.
The major difference between the two is that the purpose of an offer is to enter into a contract whereas the purpose of an invitation to offer is to receive an offer in order to enter into a contract.
Illustration- A sees an article marked Rs 50 in B’s shop. He tells B he will buy it and offers him Rs 50.B says that he doesn’t wish to sell that article.
In this case, there is no contract at all and the price tag is not an offer but an invitation to offer. It is on the discretion of the shopkeeper if he wants to sell his article or not.
Therefore an offer is the final willingness of the party to create legal relations. An invitation to offer is not the final willingness but the interest of the party to invite the public to offer him.
(1)In Balfour vs. Balfour (1919)
Mr. Balflour was a civil engineer and worked for the government as the Director of Irrigation in Ceylon(now Sri Lanka).In 1915 both of them came back to England when Mr. Balflour was on leave but due to an illness(arthritis) of Mrs. Balfour, she was unable to come back to Ceylon with her husband. The husband promised to pay 30 euros per month to his wife until she rejoined him in Ceylon. The husband failed to pay her the said amount hence the wife sued him for the amount. The court held that the husband was not liable as there was no intention to create a legal relationship.
(2)In Jones v Padavatton(1969)
Mrs. Violet Laglee Jones agreed with her daughter Mrs. Ruby Padavatton that if she would give up her job in the USA and studied for the bar exam in England, the mother would pay her an allowance of 200$ per month. In 1964 the mother bought a house and varied the agreement by giving the daughter a part of the house to stay and a part to rent so as to cover her expenses and her maintenance. In 1967 the parties had an argument and as a consequence, the mother brought an action for the possession of the house. The mother based her claim on the allegation that the agreement was not made with the intention of creating a legal relationship. It was held that there was no intention to create a legal relationship and gave possession to the mother.
Definition of Acceptance
The Indian Contract Act 1872 defines acceptance in Section 2 (b) 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.”
Therefore once an offer is accepted it cannot be revoked because it has become a promise which creates a legal obligation between the parties.
Example -Anita offers to buy Priya’s car for Rs.10 lakhs and Priya accepts such an offer. Now, this has become a promise.
Essentials of a valid acceptance
Section 7 of The Indian Contract Act,1872 lays down two essentials of a valid acceptance.
(1) Must be unconditional and absolute
Conditional Acceptance will not be a valid acceptance as it would amount to a counter offer which would nullify the original offer. Example. Anita offers to sell her bag to Priya for 3000/-. Priya says she accepts if Anita will sell it for 1500/-. This does not amount to the offer being accepted and it will count as a counteroffer.
(2) Must be expressed in some usual and reasonable manner
If the offeror does not describe any prescribed manner then it must be expressed in the normal and reasonable manner, i.e. as it would be in the normal course of business.
Difference between an acceptance and a counter offer
A counter offer is an offeree’s new offer that varies the terms of the original offer and therefore, constitutes a rejection of the original offer.
In John Hancock Mutual Life Insurance Co. v. Dietlin(1964), an acceptance which is upon the condition or with a limitation is a counteroffer and requires acceptance by the original offeror before a contractual relationship can exist.
In Ardente v. Horan(1976), the defendants offered to sell their house to the Plaintiff who agreed to buy the house but he requested that certain furniture and fixtures should also come with the property. The Defendants refused to sell their furniture and fixtures along with the house and returned the unsigned agreement as well as the Plaintiff’s deposit. The Plaintiff sued for specific performance. It was held that a valid contract was not formed as the defendants never accepted the counteroffer. A contract is considered valid when the acceptance is definite and unequivocal, conditional acceptances shall be construed as counter-offers.
(1) In L’Estrange v Graucob (1934)
A buyer signed an agreement for the purchase of a cigarette vending machine without reading its terms. One of the terms excluded liability for all kinds of defects in the machine. The machine supplied was defective but the court held that the supplier was not liable.
(2)In Lalman Shukla vs Gauri Dutt(1913)
The plaintiff was in defendants service as a Munim. The defendant’s nephew absconded and the plaintiff went to find the missing boy. In the plaintiff’s absence, the defendant issued handbills, offering a reward of Rs 501 to anyone who might find the boy. The plaintiff traced him and claimed the reward. The plaintiff did not know of the handbills when he found the boy. The court held that the plaintiff was not entitled to a reward.
Offer and acceptance analysis is a traditional approach in contract law used to determine whether an agreement exists between two parties. An offer is an indication by one person to another of their willingness to contract on certain terms without further negotiations. A contract is then formed if there is an express or implied agreement. A contract is said to come into existence when acceptance of an offer has been communicated to the offeror by the offeree.
The communication of an offer is complete when it comes to the knowledge of the person to whom the offer is made and the communication of an acceptance is complete when the acceptance is put in a course of transmission to the offerer. Therefore, Offer and acceptance is the essential elements of a contract and in either case, it should be done out of one’s free will and with an intention to enter into a legally binding agreement.