Formation of Contract

 Contracts in Ancient India

 Earlier the Law was part and parcel of Religion

 Religion acted as Yardstick of Good and Bad

 Everything good in religious philosophy was legal

 During the entire ancient and medieval periods of human history in India, there was no general
code covering contracts.

 Principles were thus derived from numerous references- the sources of Hindu law, namely the
Vedas, the Dhramshatras, Smritis, and the Shrutis give a vivid description of the law similar to
contracts in those times.

 The rules governing contracts form a part of the law called Vyavaharmayukha (व्यवहारमयूख)

 Manusmriti, Vedas, Arthashastra are some of the main sources which mentions about contract
directly or indirectly

 Manusmriti provides for the essentials of a valid contract and what makes an agreement void
and illegal

 Manusmriti also provides for the main and basic condition to make a contract.

 The smritis also talked about spiritual debt, Narad smriti talked about the competent persons to
enter into the contract i.e. King, Vedic teacher and Head of Household.

 We can find the excerpts related to the recovery of debts, deposits, sale without ownership,
partnerships, non-payment of wages, nonperformance of agreements, topics related to the sale
and purchase, gifts and other issues related to the contract

 Concept of Debt (ऋण)

 The concept of liability in contract law finds its birth in the Vedic period too.

 Spiritual debts were referred as ‘wrin’ and it was constantly reinforced by the smritis that
failure to pay back the debts meant re-birth as a slave, servant, or beast in the house of creditor.

 So, the son was liable to pay of his father’s debts even if he did not inherit any property from
him.

 Chandragupta
 During Chandragupta’s reign, contract existed in the form of “bilateral transactions” between
two individuals of group of individuals.
  The essential elements of these transactions were free consent and consensus on all the terms
and conditions involved.
 It was an open contract openly arrived at.

 It was laid down that the following contracts were void:

 Contracts formed during the night.
 Contracts entered into the interior compartment of the house.
 Contracts made in a forest
 Contracts made in any other secret place
 There were certain exceptions to clandestine contracts such as:
 Contracts made to ward off violence, attack and affray
 Contracts made in celebration of marriage
 Contracts made under orders of government

 Contracts made by traders, hunters, spies and others who would roam in the forest frequently.

 Contract for Economic welfare

 Towards the end of the medieval age, the law of contracts was pretty much being governed by
two factors; the moral factor and the economic factor.

 Activities like transfer of property, performance of services etc. required rules for agreements
and promises, which covered not just business and commercial transactions, but also personal
relationships in all walks of life.

 This takes us to the next source, i.e. the Arthashastra by Kautilya

 यो ग्रामदेशसङ् घानां कृ त्वा सत्येन संविदम् ।

विसंवदेन्नरो लोभात् तं राष्ट्राद् विप्रवासयेत् ॥ २१९ ॥

 Yo grāmadeśasaṅghānāṃ kṛtvā satyena saṃvidam |

visaṃvadennaro lobhāt taṃ rāṣṭrād vipravāsayet || 219 ||

 If a man, after having entered into a contract under oath with a village, a country or a
confederation, and breaks it, through greed, The king shall vanish him from his kingdom

 Mughal Period
 During the Muslim rule in India, all matters relating to contract were governed under the
Mohammedan Law of Contract.

 The word contract in Arabic is Aqd meaning a conjunction.

 It connotes conjunction of proposal (Ijab) and acceptance which is Qabul.

  A contract requires that there should be two parties to it one party should make a proposal and
the other accept it, the minds of both must agree that is there declaration must relate to the same
matter and the object of contract must be to produce a legal result

Indian Contract Act

 The Indian Contract Act, 1872 was enacted on 25th April, 1872 and subsequently came into force on
the first day of September 1872

 An agreement enforceable by law.

 An agreement consists of reciprocal promises between two parties.

 And an agreement enforceable by law is termed as contract.

 Contract is an agreement in which each party can legally enforce the promise made by other party and
bound by the promise made by him.

 Different ways to form contract

A contract can be made by following ways:

1. By Agreement

2. By Standard Form Contract

3. By Promissory Estoppel

 Agreement and Contract

 Definition of Contract:

o Sec. 2(h): An agreement enforceable by law is a contract.

 All agreements are not enforceable by law, so all agreements are not contracts.

 Only those agreements which satisfied the conditions mentioned in Sec. 10 are
termed as contracts.

 Definition of Agreement:

o Sec. 2(e): Every promise and every set of promises, forming the consideration for
each other, is an agreement;

 Definition of Promise:

o Sec. 2(b): When a person to whom the proposal is made, signifies his assent thereto, the
proposal is said to be accepted. A proposal, when a accepted, becomes a promise;

 Definition of Proposal:
 o Sec. 2(a): 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;

 Agreement Contract
 All the agreements which satisfies the conditions of sec. 10 are contracts

 Sec. 10: What agreements are contracts

o 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.

 Essentials required for a valid contract

1. An Agreement

2. Between competent parties

3. For lawful consideration

4. For lawful object

5. Consent of parties must be free

6. Agreement should not be expressly declared void

 Types of Agreements
1. Contracts: Which fulfilled the conditions of Sec. 10. (enforceable by law)

2. Void Contracts: Sec. 2(g): An agreement not enforceable by law is said to be void.

3. Voidable Contracts: Sec. 2(i): An agreement which is enforceable by law at the option of one
or more of the parties thereto, but not at the option of the other or others, is a voidable contract.

4. Illegal Agreements: those agreements which are forbidden by law and opposed to public
policy are illegal agreements.

 Contract by Agreement
 Contracts made by agreements consists of offer by one party and acceptance from other party.

 Proposal/Offer
  Definition of Proposal: Sec 2(a) 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

 Invitation to treat or offer

 Sometimes a person may not offer to sell his goods, but makes some statement or gives some
information with a view to inviting others to make offer on that basis.

 These statements are considered as Invitation to Treat.

Eg: 1. Catalogue of books

2. Auction Sale

3. Tenders

 Harris v. Nickerson (1873)

 Defendant advertised an auction sale

 Plaintiff travelled to the place of auction.

 Found that defendant has cancelled the auction.

 Plaintiff brought a suit for the recovery of expenses made by him to reach the place of auction.

 Whether he is entitled to recover the money?

It was held that since there is no contract between the parties plaintiff is not entitled for any kind of
expenses.

 Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd.

(1952)
 Defendant was having the business of medicines.

 They had “ Self Service” system.

 Medicines were displayed with price tags.

 Plaintiff picked up a medicine and bring it to the cash counter founding that he was rejected by
the cashier to sell that medicine to him.

 Plaintiff brought a suit for the enforcement of contract.

 Whether suit of plaintiff will be succeed?

 It was held that mere display of articles does not amount to offer, it is only invitation to offer,
displayer can reject the customer to sell the article.

 Harvey v. Facey (1893)

  Defendant was having a piece of land called “Bumper hall pen”

 Plaintiff send a telegraph, “ Will you sell us Bumper Hall Pen?, Telegraph lowest cash price”
 Defendant replied, “Lowest price for bumper hall pen is £ 900”
 Plaintiff send another telegraph, “ We agree to buy bumper hall pen for £900, please send us
the your title deeds”

 Defendant refused to sell the land and defendant sued him.

 What will be the fate of this case?

 It was held that second telegraph which quoted lowest price was invitation to treat and third
was offer and not acceptance, so defendant was not liable.

 Intention to create legal relationship

 In order that an offer after acceptance results in a contract, offer must be made with an intention
to create legal relationship.

 Without this intention, agreement shall not be considered as a valid contract.

 Eg: promise to go for a walk, to go for a movie

Test to check the intention

 Intention may be presumed from the nature of agreement and circumstances.

 Balfour v. Balfour (1919)

 Defendant was govt. Employee in Ceylon.

 Went to England with his wife for holiday.

 For health reasons wife was unable to accompany the husband gain to Ceylon.

 Husband promised to pay £ 30 per month as maintenance for this period she had to live apart.

 Husband failed to pay this amount and sued by wife.

 Whether husband is liable to pay the amount?

 Decision

 Court held that in case of close relationships, promises made usually not bear the intention to
create legal relationship so husband is not liable to pay the amount.

 Jones v. Padavatton (1969)

 Mrs. Jones was lived in Trinidad.

 Her daughter was in Washington and was serving in Indian Embassy.

  Mrs. Jones persuaded her to leave the job and to study Law at Bar in England and promised
her to maintain her.

 Mrs. Jones purchased a house there and allowed her daughter to live in a portion of the house
and other portion was let out.

 After some time Mrs. Jones filed a suit to evict her daughter from house.

 Whether her action against daughter is maintainable?

 Court’s Decision

 Since there is no intention to create legal relationship from the side of Mrs. Jones, her suit
succeed.

 Meritt v. Meritt (1970)

 Husband and Wife were the joint owners of one house subject to mortgage.

 Husband left the matrimonial home to live with another lady.

 And agreed to his wife that if she paid all the outstanding amount he will transfer that house to
her.

 Wife cleared all the mortgage amount but husband refused to transfer the house and
subsequently sued by the wife for the same.

 What will be the fate of this suit?

 Court Held

 It was held that circumstances of the case showed that there is intention to create legal
relationship between both the husband and the wife so wife is entitled to the full ownership of
the house.

 Communication of the offer

 Sec 2(a) explains that When one person signifies to another his willingness.......

 Emphasis on the word “Signifies” mean that the proposal must be communicated to the intended
person for which it has been made.

 How to communicate?
 Sec 3: The communication of proposals, the acceptance of proposals, and the revocation of
proposals and acceptance, respectively, are deemed to be made by any act or omission of the
party proposing, accepting or revoking, by which he intends to communicated such proposal,
acceptance or revocation, or which has the effect of communicating it.

 It means offer may be communicated by the offeror by any act or omission by which the offeror:-
 1. Intends to communicate such offer.

2. Which has the effect of communicating the offer.

 Express and Implied Offers

 Sec. 9: In so far as the proposal or acceptance of any promise is made in words, the promise is
said to be express. In so far as such proposal or acceptance is made otherwise than in words, the
promise is said to be implied.

 Express offer
 An offer would be an express when it is made in words:

1. of mouth

2. By writing

 Implied offer
 An offer made otherwise then words is said to be an implied offer.

 Eg: 1. Bus or train services

2. putting coin in a automatic machine

3. passenger boarding a bus

 Communication: When completed

 Sec. 4: The communication of a proposal is complete when it comes to the knowledge of the person
to whom it is made.

 Eg: A can not said to make an offer to B unless he brings the same to the knowledge of B.

likewise, B cannot accept an offer if the offer has been not communicated to him, even if acted
according to the terms of the offer.

 Lalman Shukla v. Gauri Dutt (1913)

 Defendant’s nephew absconds from home and plaintiff (servant of defendant) sent to search the
missing boy.

 Then defendant issued handbills announcing a reward of Rs. 501 to anyone who might find out the
boy.

 Plaintiff ignorant of the reward successfully found the boy and handed over him to the defendant.

 When he came to know of the reward he brought a suit to recover Rs. 501.

 Whether he is entitled for the reward?

 Court held:

 It was held by the court that since the offer has not been communicated to the plaintiff, there arise
no question of its acceptance so plaintiff is not entitled to the reward.

 Cross offers
 When two offers having same terms and conditions crossed each other in the post, they are called
as cross offers.

 Both are offers, none of them would be considered as acceptance to other though terms and
conditions are same in both.

 Tinn v. Hoffmann (1873)

 A wrote to B that he is willing to send 800 tons of iron at 69 sh./ ton

 Same day B wrote to A that he is willing to buy 8oo tons of iron at the price of 69 sh. per ton.

 Two letters crossed each other in post.

 Then B brought action against A for not supplying the iron.

 what will be the fate of this suit?

 Decision

 It was held that there were only two cross offers and the offer of neither of the parties having been
accepted by the other, so there was no contract which could be enforced.

 Specific and General Offers

 When an offer is made to a specific person it is known as by Specific Offer.

 When the offer is made for public at large, it is known as by General Offer.

 Carlill v. Carbolic Smoke Ball Co. (1893)

 Defendants advertise their product “ Carbolic Smoke Ball” as a preventive remedy against
influenza.

 They also offered to pay a sum of £ 100 to anybody to whom influenza caused even after taking the
medicine.

 They deposited the amount with one Alliance Bank.

 One Mrs. Carlill consumed the medicine as per directions but still caught influenza.

 she sued the co. for amount of reward.

 Whether she is entitled for the amount?

  Court held:

 Court held that she is entitled to the amount of reward as she accepted all the conditions of offer
and same amounts to a contract.

 Standing, open, continuing offer

 An Offer which is allowed to remain open for acceptance over a period of time is known as by
Standing, open or continuing offer.

 Eg: An offer to supply 1000 pens in one academic session as and when required

 If demand of 100 pens is raised it will amount to acceptance

 For remaining pens this offer can be withdrawn like other offers

 Bengal Coal Co v. Homee Wadia & co 1899

 Bengal Coal Co agreed to supply coal to Wadia at an agreed price for a period of 12 months as may
be required

 An order for some coal was placed and it was honoured

 But before other order Bengal Coal Co withdraw its offer and make it clear that in future no order
would be honored

 They were sued for breach of contract

 Court held that they can withdraw their offer as it was standing offer