Introduction to contracts

By Sagnik Saha

Editor’s note:

This paper lays down the basic concepts of law of contracts, beginning with an offer/proposal, which is essentially a person’s willingness to do or abstain from doing a certain act, and how it varies from the next stage, i.e., a promise, where assent is signified, and then the contract becomes binging on both parties. It touches upon American and Indian definitions, and elucidates how a contract differs from a promise, as well as from an invitation to offer, with landmark judgments on the same. It concludes with various rules regarding consideration, the commonly a transaction of money for goods or services rendered.

Definition of Proposal (Offer)

According to Section 2(A) of the Indian Contracts Act, 1872, 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.

Hence, proposal is synonymous to offer. So, we can say that the above definition of proposal is also valid for offer.

Definition of Promise

According to Section 2(B) of the Indian Contract Act, 1872, when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.

Offer is an open invitation by the promisor for the acceptance of the terms and conditions of the undertaking, which when accepted by the promisee becomes binding on both parties and the proposal becomes a promise. Hence the difference between an offer (proposal) and a promise lies in acceptance of the offer (proposal).

Definition of Offer

In American Law, an element required in the creation of an enforceable contract. An offer is a proposal to enter into an agreement and must express the intent of the person making the offer to form a contract, must contain the essential terms — including the price and subject matter of the contract — and must be communicated by the person making the offer. A legally valid acceptance of the offer will create a binding contract.

Definition of Contracts

In the Indian Contract Act, 1872, under Section 2 (H) it is said that an agreement enforceable by law is said to be a contract.

American Law defines contract in the following manner -A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

How an Offer Becomes a Contract

An offer when accepted gives rise to an agreement. It is at this stage that the agreement is reduced into writing and a formal document is executed on which parties affix their signature or thumb impression so as to be bound by the terms and conditions of the agreement as set out in the document. Such an agreement has to be lawful and we know from the definition of contract of the Indian Contract Act, 1872 that an agreement enforceable by law is a contract. This is how an offer becomes a contract.

In contracts, a promise is essential to a binding legal agreement and is given in exchange for consideration, which is the inducement to enter into a promise. A promise is illusory when the promisor does not bind herself to do anything and, therefore, furnishes no consideration for a valid contract.

For an offer to be accepted there must be an offer and that has to be accepted to make an agreement. Though this might seem self explanatory, but one has to differentiate it from the legal phrase ‘amounts to a valid offer’. The various modes of making an offer are orally, in a written form or by conduct. Irrespective of the mode in which the offer is made, it is the intention or willingness of the offeree which is of paramount importance and that is clearly a subjective issue.

It is important to differentiate at this point between an offer and an “invitation to offer”. Carlill v Carbolic Smoke Ball Co[1] is an important case which brings out the difference between offer and “invitation to treat.” Parties may enter into preliminary negotiations before entering into a contract. The issues they discuss will not necessarily be a part of the contract and are considered to be ‘invitations to offer’. A classic example of this is the display of products at Supermarkets and on shelves, e.g. Pharmaceutical Society of Great Britain v Boots[2]. The advertised price results in an ‘invitation to an offer’ only. The offer does not become a contract until the merchandise is taken to the counter and the price checked. At this point the customer can accept the merchandise and pay the price, thereby completing the transaction and forming the contract. Also, the legality of acceptance of acceptance is equally as important as the offer and this acceptance to the terms of this offer must be an ‘unqualified expression’ of acceptance of the offer. Acknowledgement of an offer would neither amount to credence acknowledgement nor would a ‘statement of intent’. On the footing laid forward by the offer there must be a clear unequivocal communicating of acceptance of the offer.

The offer and acceptance are the prominent conditions of the contract, but perhaps even more prominent is the requirement of ‘consideration’. Consideration means transaction of money for goods or services rendered or the exchange of an item of ‘value’ to the parties. It perhaps can be regarded as extremely contentious of the requirements for a legal and valid agreement and also the most complex.

In English Law, a promise will never materialize into an enforceable contract without some form of consideration. But it is not enough that the parties make this exchange of worth, the consideration must be of ‘adequate value’ and not ‘inadequate’ consideration.

There are various rules governing the law of consideration:

  1. It must not be a past consideration.

  2. It might be a sufficient consideration but it does not have to be sufficient.

  3. The consideration must come from the side of the promisee.

  4. A valid consideration will not amount to an existing public duty.

  5. A valid consideration will not amount to an existing contractual duty.

  6. For a promise to forego the balance, part payment of a debt is not valid consideration.

Edited by Neerja Gurnani

[1] [1893] 1 QB 256

[2] [1953] 1 QB 401

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