Offer and Acceptance (Overview)

The most basic and essential element of a valid contract is that there should be an offer and acceptance of the same. The intention to create a legal obligation is necessary for the existence of a valid contract. Communication of offer and acceptance is absolutely required. There are provisions for revocation of offer and acceptance as well.

I. Offer

Section 2(h) of the Indian Contract Act, 1872 defines the term “contract” as an agreement enforceable by law. A proposal/offer and its acceptance is the universally acknowledged process for making a contract of which the former is the beginning point. Section 2(a) defines a proposal as “when one person signifies to another his willingness to do or abstain from doing anything, with a view of obtaining the assent of that other to such act or abstinence, he is said to make a proposal.”[1]

The person who makes the proposal is called the promisor and the person accepting it called the promisee (Section 2(c)). As per the definition, a valid proposal has two main parts. Firstly, an expression of offeror’s willingness to do or abstain from doing something and secondly it is made with a view to obtaining the assent of the offeree to the proposed act or abstinence.[2]

Essentials of a Valid Offer

While making a contract, it is essential that the offer should be communicated to the other party. A proposal is complete when it is communicated. (Section 3)

A valid offer may be made either expressly or impliedly. An offer which is made by conduct is called an “implied offer” whereas the one which is made by words written or spoken, is called an “express offer” (Section 9). Conduct of the part includes not only their acts but also their omissions.[3]

Communication of proposal

Section 4 provides that the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. When such an offer is accepted with knowledge of the reward, the fact that an informer was influenced by some other motives other than the reward will be immaterial.[4] However, an act in ignorance of an offer does not amount to acceptance of that offer.

Intention to contract

In order to create a valid contract, every offer must be made with the intention to create a legal obligation. Under English law, the position was well settled in the case of Balfour v. Balfour[5], where it was held that “to create a contract there must be a common intention of the parties to enter into legal obligations”.

It is for the court in each court to decide whether the parties must have intended to enter into legal obligations. The test of contractual intention is objective, not subjective. What matters is not what the parties had in mind, but what a reasonable person would think, in the circumstances, their intention to be.

It is not specified anywhere under the Indian Contract Act, 1872 that parties should have the intention of creating a legal obligation. But it as essential as it is under the English law. It can be interpreted from the term “willingness” which shows the intention to be bound by the proposal when accepted.

The term of the offer must be certain and not vague. Agreements, the meaning of which are not certain, or capable of being made certain, are void (section 29). A agrees to sell B “100 tons of oil”. There is nothing whatsoever to show what kind of oil was intended. The agreement is void for uncertainty. But if A agrees to sell B all the grain in his granary at Ramnagar, then the agreement is valid.

General and Specific offers

An offer may either be a general offer or a specific one. If an offer is made to the world at large, it is called a general offer. However, it is important to understand that the contract is only made with that person who comes forward and performs the conditions of the proposal.[6] In such cases, ‘performance of the act’ or acceptance of any consideration for a reciprocal promise which may be offered with the proposal raises an inference of acceptance which is clearly laid down in Section 8 of the Act.

If a general offer is of a continuing nature it shall be open for acceptance by any number of persons until it is retracted or till its closing date. But if the offer is about information for a missing thing, it is closed as soon as the first information comes in.

Offer and Invitation to Offer

An offer has to be distinguished from an invitation to receive offers. The latter is an offer to negotiate or may be considered an offer to receive offers. Whereas an offer is the final expression of willingness by the offeror to be bound by his offer. If a party, without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he is only making an invitation to the other party to make an offer on those terms. The distinction was clearly laid down in the infamous case, Harvey v Facey.[7]

II. Acceptance

A proposal becomes a promise when it is accepted. Section 2(b) of the Act defines “acceptance” as “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.” Following are the legal rules for a valid acceptance:-

Acceptance may be express or implied – According to section 3 and 9, if acceptance is made with words spoken or written, it is an express acceptance, and if acceptance is made otherwise than in words, it is implied. What is necessary is that there should be some external manifestation of acceptance. A mere mental determination to accept unaccompanied by any external indication will not be sufficient.[8]

Communication must be communicated to offeror himself

Communication of acceptance of a proposal should be communicated to the offerer himself. If it is made to any other person, it will be ineffectual as if there was no communication. Moreover, as held in the case of Felthouse v Bindley[9], an offeror cannot say that if no answer is received within a certain time, the offer shall be deemed to have been accepted.

It is also pertinent that the communication of acceptance should be from a person who has authority to accept. In Powel v Lee[10], it was held that information from an unauthorized person is of no value.

Necessity of communication

In case of a specific offer, communication of acceptance must be made by the acceptor, and to the offerer himself. But in all cases of general offers, it can be accepted by anyone, who fulfils the condition of the offer. Section 8 provides that performance of the conditions of a proposal is an acceptance of the proposal.

Conclusion of contract

Under English law, when the parties are at a distance, the legal position is that a contract arises on the date when the letter of acceptance is posted in due course as held in the landmark case of Adams v Lindsell.[11]

The Indian position adopts a slightly different approach to this rule. By virtue of Section 4, when a letter of acceptance is posted and is out of the power of the acceptor, the proposer becomes bound whereas the acceptor will only be bound when the letter is received by the proposer.

Thus under English law, both the offeror and acceptor becomes bound at the same time whereas, in India, the acceptor becomes bound at a later stage when his acceptance comes to the knowledge of the proposer.[12]

The legal position is different both the parties are in direct contact with each other. Both under English and Indian Law, if they are in direct communication, no contract will arise until the offeror receives notification of acceptance as held in Entores Ltd v Miles Far East Corpn.[13]

Acceptance must be absolute and unqualified

Section 7 of the Act provides that ‘In order to convert a proposal into a promise, the acceptance must be absolute and unqualified. An acceptance with variation is no acceptance, but simply a counter-proposal which has to be accepted by original promisor before a contract is made.[14]

Partial acceptance of an offer is only a counter-proposal. An offeree cannot simply accept the terms which are favourable to him and reject the rest unless the offeror agrees to qualified acceptance.

III. Revocation

Section 6 of the Indian Contract Act, 1872 is about the ways in which a proposal may be revoked. It can be revoked by:

1. By the communication of notice of revocation by the proposer to the other party;
2. By the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance;
3. By the failure of the acceptor to fulfil a condition precedent to acceptance; or
4. By the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance.

Like an offer, acceptance of the same can also be revoked. Section 5 provides that acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. He should adopt a speedier mode of communication which will reach earlier than the acceptance of the offer. However, if they reach at the same time, the acceptance will be deemed to have been revoked.

---

[1] Indian Contract Act, 1872

[2] Business law, Avatar Singh (10^th Ed)

[3] Coffee Board v CCT, AIR 1988 SC 1487

[4] Williams v Carwardine, (1833) 2 LJKB 101

[5] (1919) 2 KB 571 (CA)

[6] Carlill v Carbolic Smoke Ball Co, (1893) 1 QB 256

[7] 1893 AC 552

[8] Cotton Corpn of India Ltd v Bombay Dyeing & Mfg Co Ltd, (2006) 5 Bom CR 105

[9] (1863) 7 LT 835

[10] (1908) 24 TLR 606

[11] (1818) 106 ER 250

[12] ONGC v Modern Construction & Co, (1997) 3 Guj LR 1855

[13] (1955) 2 OB 327

[14] Hyde v Wrench, (1840) 2 Beav 334

---