Contract
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This article is written by Meera Annie Koshy, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

To create a legally enforceable contract there must be a proposal which has to be accepted by the other party. Once a proposal is accepted by the other party and it is properly communicated to the party who made the proposal it becomes a binding contract, provided the object and consideration is not illegal and the parties do have an intention to create a legal relationship. Once it becomes a binding contract the parties cannot go back on their respective commitments.

The parties can revoke the proposal or acceptance any time before the communication of the same is complete against the other party.  Let us examine the revocation of proposal, revocation of acceptance and requirements of communication in detail.

Chapter 1 of the Indian Contract Act 1872 deals with the communication, acceptance and revocation of proposals.

Communication of proposal and acceptance

When the proposal is accepted it creates legal relations between the two parties. Effective communication and a clear understanding of it is important to avoid misunderstanding between all the parties. When the parties are talking face-to-face the communication happens in real time and the offer and acceptance can be communicated on the spot, creating no confusion. But often in business the communication occurs via letters and emails etc. So, in this case, the timeline of communication is vital.

Mode of Communication

All communication should be according to the prescribed mode. If no mode is prescribed, the communication must be through an acceptable mode. If the offer is not accepted according to the prescribed or usual mode, the offer lapses provided the offeror gives notice to the offeree within a reasonable time that the acceptance is not according to the mode prescribed.

Revocation of Proposal

The party who has made the proposal can withdraw the proposal any time before the communication of acceptance is complete as against the proposer. The communication of acceptance of a proposal is complete 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 (Sec 4, Indian Contract Act 1872). The proposing party must communicate the revocation to the other party before the other party accepts the offer.

Once the revocation has been communicated to the other party, the original proposal stands cancelled and the other party cannot legally accept the proposal as the proposal is not in existence anymore. Revocation comes into effect as soon as it has been communicated to the relevant party.

In Byrne & Co. v Leon Van Tienhoven & Co (1880) LR 5 CPD 344, Common Pleas Division the court held that withdrawal of an offer by telegram is only valid if the telegram is received before the offer is accepted.

Section 5 of the Indian Contract Act deals with the revocation of the proposal. A proposal can be revoked by giving a notice of revocation to the other party.

Communication of revocation can be direct or indirect and can be made by a third party. If the communication is indirect, it needs to be clear, unambiguous and understood by a “reasonable person” and should be communicated by a reliable source.

Selling an item to someone else is considered a legal revocation so long as the original offeree is notified of the sale before they accept the offer. In Dickinson v. Dodds (1874 ) the court opines that “If an offer has been made for the sale of property, and before that offer is accepted, the person who has made the offer enters into a binding agreement to sell the property to somebody else, and the person to whom the offer was first made receives notice in some way that the property has been sold to another person, can he after that make a binding contract by the acceptance of the offer? I am of opinion that he cannot.” This case further establishes that the party making the offer can communicate the revocation through a third party.

In Payne v. Cave (1789): The defendant withdrew his bid which was the highest in the action sale, before the fall of the auctioneer’s hammer. It was held that the defendant was not bound to purchase the goods. His bid amounted to an offer which he was entitled to withdraw at any time before the auctioneer signified acceptance by knocking down the hammer.

Offers made through a publication are something of a special case. These offers can be revoked by a notice in that publication without specifically contacting the offeree.

The communication of revocation is dealt with in section 4 of the Act.

The communication of a revocation is complete:

  1. as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it;
  2. as against the person to whom it is made, when it comes to his knowledge.

Communication of Acceptance

In communication of acceptance, there are two factors to consider, the mode of acceptance and then the time of acceptance. Acceptance can be by an act which includes communication by words, oral or written through phone, letters, e-mails, fax, etc. or by conduct like boarding a bus etc.

When is Acceptance complete? Time of acceptance

A proposal can be accepted by the offeree any time before the communication of revocation is complete against him. Once accepted by the offeree the communication of acceptance is complete:

  1. 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;
  2. as against the acceptor, when it comes to the knowledge of the proposer.

Revocation of Acceptance

There can be instances where a proposer makes an offer and the acceptor accepts the proposal and communicates the same to the proposer. Can the acceptor revoke/cancel this acceptance? Yes, the acceptor can cancel this acceptance before the communication of acceptance reaches the proposer. That is before the communication of acceptance is complete as against the acceptor. If the revocations of acceptance reached the proposer before the acceptance comes to the knowledge of the proposer there can be a valid revocation of acceptance. The Revocation of Acceptance is complete only at any time before the communication of acceptance is complete as against the acceptor, but not afterwards.

Communication of Revocation of Acceptance

The communication rules for revocation of offer will be applicable to revocation of acceptance as well. The communication is complete against the proposer when it comes to is knowledge.

Instantaneous Communication

Where the communication of acceptance is instantaneous, the contract is effective when the acceptance is received (Entores Ltd v. Miles Far East Corp [1955]). The court held the postal rule does not apply to instantaneous forms of communication. As a result, in the case of instantaneous communications (including by telex) acceptance occurs when and where received.  Lord Justice Denning concluded that the rule about instantaneous communications between the parties is different from the rule about the post. 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.

Significance of communication in online and traditional contract

A contract formed electronically will be valid provided all the elements of a valid contract are present. The use of digital contracts and electronic signatures has become a common thing in the present era. Traditional contract law principles can and should apply to electronic contracts. To ensure the validity and enforceability of contracts formed electronically, the application of both electronic and traditional contracts should be considered. With the growth of e-commerce there is a rapid advancement in the use of e-contracts. But electronic contracts pose a lot of challenges.

Communication via the Internet

With the exponential growth of the internet for communication and the availability of various communication tools via the internet, the formation of online contracts has become very common. The traditional contract law as it has developed is insufficient to apply for electronic contracts. There is no clarity as to which rule of communication is to be applied in cases of offer acceptance and revocation through the internet. With technological advancements, situations are not as simple as a post, a telegram, or a fax.

Online users use email, facebook and Instagram for communication. When someone sends a message through these mediums and the other party replies immediately these can be taken as instantaneous communication but what if the other party replies later can it still be categorised under instantaneous communication. Besides there can be cases where the message has been delivered to the recipient and the recipient has not seen it 

Section 13 of the Information technology Act lays down that when an addressee has designated a computer resource for receiving electronic record receipt occurs at the time when the electronic record enters the designated computer resource.

In N.M. Superannuation Pty. Ltd. v. Hughes (Supreme court of New South Wales 1992) the court’s opinion was that it was reasonable to assume that if a fax machine was kept switched on then it is available for the purpose of receiving letters or other communications on it. That amounts to receipt… in that it had made and kept available the means of documents being received by it. A fax that may have arrived outside normal business hours was considered enough for notice.

Emails

Many companies use Emails for informal communications before the final contract is entered into. Most of the terms of the contract are negotiated through emails but do these communications create a legally binding obligation. In most of the cases it is a no. These communications are made for negotiation purposes and neither party would make any claims based on this. They try to incorporate the negotiated terms in the final contract in a way that is acceptable to both the parties.

Sec 10 A Information Technology Act 2000

Inserted in the 2008 amendment this section is similar to Article 11 of the UNCITRAL (United Nations Commission on International Trade Law) Model law on Electronic commerce 1996. Article 11 deals with the formation and validity of contracts. It specifies that an offer and acceptance may be expressed by data messages and in cases where such data messages are used for the formation of a contract such contracts shall not be denied validity and enforceability on the ground that data messages were used for the purpose.

Section 10 A of the IT act reads “Where in a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.”

This section lays down the legislative authority to electronic contracts in India. In spite of all this, except in case of e-commerce websites most companies prefer to rely on formally darted contracts to avoid future complications where all the terms are incorporated into the contract rather than relying on the email communications through which the offer and acceptance is made.

Conclusion

To put in a nutshell a proposal and acceptance can be revoked at any time before it creates a binding contract. A proposal can be revoked anytime before the acceptance is complete against the proposer so as to create a binding contract. And an acceptance can be revoked anytime before the communication of acceptance is complete against the acceptor. The mode of communication should be as prescribed. In the light of the developments in e-commerce and use of e-contracts the traditional rules of contract should be revisited so as to cater to the modern modes of communication to create a binding contract.

References


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