This article is written by Harsimran Kaur.
Contracts form the very basis of our day-to-day activities. From purchasing goods from a supermarket to a property deal between two giant companies, multiple agreements are formed multiple times. Hence, it becomes very essential to understand the basis of a contract. A proposal, i.e., a ‘voluntary offer’ when accepted becomes a promise which along with a ‘consideration’ forms an ‘agreement’. An agreement enforceable by law becomes a contract. Further, since the advent of the pandemic, the digitalization of usual routines led by lockdowns has widely been observed. A preference for the new online mode of contracts has also been formed. This article hereby lays an emphasis on the essentials of a contract vis-à-vis its shift from paper to digital form.
According to Section 2(a) of the Indian Contract Act, 1872 [hereinafter ‘ICA’], which defines the term ‘proposal’, the essential elements comprising it are as follows:
- There must be two parties.
- The offer must be communicated to the offeree.
- The offer must show the willingness of the offeror.
- The offer must be made with a view to obtaining the assent of the offeree.
- An offer may involve a positive act or abstinence by the offeree.
It is important to note that not every loose conversation is a contract, there must be a legal intention to perform it. As stated by Lord Stowell in Dalrymple v Dalrymple, “A Contract is not a sport of an idle hour.” This can be provided by an illustration as follows – A invites his friends to his birthday party to which two of them don’t show up.
Even after there was a presence of all other essentials of a contract i.e., a valid proposal, ‘inviting friends to the party’, acceptance ‘friends accepting the invitation’ and consideration ‘From Friend’s side- coming to the place, From A’s side- serving them with party food’. He can’t sue them and ask for the amount of money he had spent in making the arrangements to welcome them as inviting friends to a party was not with an intention to form a legal relation. It was a social arrangement and can’t be called a contract.
Further, in Balfour v. Balfour, a husband agreed to pay his wife a monthly amount if she stayed at the desired location. The wife sues him for the performance of the same. The court held that the husband was not legally bound to perform because the arrangement was made without any legal intention. Hence, mere matters of pleasantry and badinage are not contracts. An intention to create a legal relationship is very essential.
Types of offers
- General Offer – The offers which are made to the public at large.
In Carlill v. Carbolic Smoke Ball Company, an offer was made through an advertisement claiming that anyone who uses the ball in the prescribed manner would not catch influenza – a viral disease, and if caught, would be paid €100. The company had also deposited a sum of €1000 in the alliance bank to show their sincerity. The plaintiff, after using the ball in the told manner, caught influenza and sued for damages. The court held that the offer was made to the public at large and anyone complying to the terms, could accept it. Hence, the company was liable to pay the said amount.
- Specific Offer – Such an offer is made to a specific person. For instance, B offers A to sell his bicycle. This offer can only be accepted by A and not any other party as it has been specifically made to him.
- Counteroffer – When a party alters the terms of the offer, i.e., makes an addition or an alteration to the initial offer, such offer is called a counteroffer. These offers don’t constitute an agreement as the acceptance of the proposal must be absolute.
- Cross offer – When both the parties send across identical offers in ignorance of each other’s offers. For instance, A asks B to sell his house for Rs.20,000 and at the same time B asks A to purchase his house for the same amount, it would amount to a cross offer. Such offers can’t result in a contract because while there are two offers there is no acceptance.
It is important to note that an offer is different from an inquiry. In an inquiry, the intention of the parties is not to form a contract but to gather information about a product. In Harvey v. Facey, the minimum price of Bumper Hall Pen, a property was quoted. It was a response to an inquiry and not an offer to sell the same.
Invitation to offer
In an invitation to offer, a party doesn’t make an offer but rather proposes certain terms on which he is willing to negotiate and invites other parties to offer the same. For instance, goods displayed at a grocery store. An auction is also an invitation to offer and the auctioneer won’t be liable to pay the traveling charges if he changes up his mind at a later stance.
Expressed and implied offers
According to Section 9 of ICA, an offer can be either expressed or implied. When an offer is made through words, either spoken or written, it is termed as an ‘expressed offer’. Where A writes a letter to B to sell his furniture, the offer is made through written words and is expressed in nature. Whereas, when an offer is made otherwise than in words then it is an ‘implied offer’. The principle of implied offer and acceptance was further laid in Upton-on Severn RDC v Powell, where a fire broke out at the defendant’s house and he availed the services of the brigade believing that his area was covered in free services and refused to pay. The court held the defendant liable to pay the amount as his conduct of calling the brigade and availing the services was such that the offer was implied.
According to Section 2(b) of ICA, the essential elements of acceptance are:
- There must be a party to whom the proposal is made. Hence, a contract gives rise to a right in personam.
- The party must signify or communicate his assent.
Further, Section 7 of ICA ensures that:
- An acceptance should be absolute and unqualified.
- It should be expressed in a usual and reasonable manner unless the proposal prescribes the manner in which it is to be accepted.
- Section 8 of ICA defines the ways in which a proposal can be said to be accepted. The two ways are:
a. By performing the conditions of the proposal – In unilateral contracts, acceptance can be straightaway made by performing the conditions of a proposal. For instance, in cases of lost and found, the found subject in itself constitutes acceptance.
b. By agreeing on consideration to a reciprocal promise – Where the acceptance and offer both go hand in hand. For instance, A accepts to pay Rs.1000 when B delivers him 10kg apples.
According to Section 2(d) of ICA, the essential elements of consideration are:
- The act of abstinence or promise must be made at the desire of the promisor.
- Promisee or any other person who may be his agent must do, promise to do, or have already done something i.e., consideration can be from present, past and future.
- The consideration should be made in turn of the promise.
Consideration should not only be something of value to the parties but also of value to the law. The consideration may or may not be adequate but must be real and not illusory. In India, the rule of privity of consideration isn’t followed.
Though agreements without consideration, are void there are certain exceptions to the rule as expressed in Section 25 of ICA:
- Wherein the contract is made out of love and natural affection between parties in a near relation which is expressed in writing and registered.
- Wherein one promises to compensate wholly or in part for some act that was done voluntarily.
- Wherein the debtor promises to pay wholly or in part a time-barred debt and expresses the same in writing and is registered.
Communication of offer and acceptance
According to Section 3 of ICA, the following are the essentials of communication –
- There should be an act or omission of the party.
- The party should intend to communicate or do something which has the effect of communicating it.
Section 4 of ICA defines the completion of communication as:
- In the case of an offer, “The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.” In Lalman Shukla v. Gauri Datt the defendant had sent his servant in search of his missing nephew who found the boy without being aware of an offer of a reward declared through handbills. When he later asked for the reward, it was not given and he sued his master for non-performance of the contract. The court held the communication of the offer as incomplete as he found the boy without the knowledge of any such offer of his master.
- For a valid acceptance, “The communication of an acceptance gets complete against the proposer when it is put in a course of transmission to him and is out of the power of the acceptor; The communication against the acceptor gets completed when it comes to the knowledge of the one who proposed”. It varies according to the medium of exchange. In the case of a letter, the communication of acceptance is complete as soon as it is posted whereas, the communication of acceptance in the mail is complete, the moment the mail is received by the proposer.
The communication must be made by the acceptor himself. In Powell v. Lee, one of the members of an institution informed the plaintiff about his appointment before the official notice. The institution later selected another candidate and the plaintiff sued for non-performance. To this, the court held that the acceptance must come from the acceptor.
In Felthouse v. Bindley, a nephew decided to sell his horse to his uncle and doesn’t convey the same to him which was further sold by his agent to a third party, whereby Uncle sued him for non-performance. The court held that “mere mental decision or silence is no acceptance”, its basis lay in its communication.
It is important to note that as per Section 7, “If a mode of communication of the acceptance has been prescribed by the proposer that it has to be made in the same manner, if the acceptance is made in any other manner, then the proposer has to insist on the prescribed mode within the reasonable time where he fails to do so. He is considered to accept the acceptance.”
Communication of acceptance is of utmost importance to form a legally binding contract. As said by Sir William Anson, “An Acceptance to an offer is what a lighted matchstick is to a train of GunPowder”. Hence, it is given its shot, i.e., once a lighted matchstick is contacted with a train filled with gunpowder, it explodes and this is something that can’t be undone. Similar is the case with the acceptance but it may get revoked any time before the acceptance reaches the proposer.
A comparison of paper and digital means of communication
With the changing times, people are making contracts even on phone calls, signifying that electronic medium of exchange is being given more preference. While forming contracts, digital means of communication are preferred over the traditional medium of exchange. For instance, to communicate their acceptance, people don’t prefer standing in long lines to get a new electricity connection and rather use the online application for the same. Nowadays, contracts are made through e-mail, fax, and other web applications like WhatsApp, Messenger, etc., rather than by the conventional methods like by letter or post. Goods and services are easily booked on MakeMyTrip, Ola, Uber, Olx, and an endless number of such platforms.
Digital means lead to timely communication. Also, there is no ambiguity in the minds of the party. For instance, A wants to sell his bicycle to B by using a traditional method, i.e., the posts his proposal through a letter. After posting his offer he would have to wait for a reasonable amount of time, which may last at least a week, to get a reply from B and will remain bound till then. Had he used email or any other digital medium his offer would have reached timely, also the reasonable time in this scenario would have been comparatively lesser.
Due to the ongoing COVID-19 pandemic, most of our services are being availed online. As such, the rapid evolution of digital consideration has been witnessed. From music concerts to study webinars, all of the services are provided on platforms like Zoom, Google meets, etc. Services of e-paper, e-magazines, and even e-libraries have come into use. There are endless contracts being formed online, be it for a Netflix subscription or joining some online course. Even payment is made through online platforms like Paytm, Google pay, etc.
Case study on Amazon shopping: a digital contract
The online supermarket, Amazon has become the world’s largest online retail company and has more than one trillion valuations. Through this case study, the author would like to illustrate the manner in which digital contracts are being formed.
When the Amazon application is opened, all goods are displayed with their quoted prices, which is an invitation to offer whereby the company invites the potential buyers to purchase those commodities. The discounts that are being shown by the company on the online platform are general offers and can be accepted by anyone. However, the coupons or the special discounts which prime members receive are specific offers and can be accepted by only those individuals who receive them. Further, as soon as an individual selects an item and selects the ‘make payment’ option, an offer to the company to purchase the commodity is made.
The moment ‘payment accepted’ notification arrives, the proposal stands accepted. The terms and conditions kept by the online platform act as an offer and ticking the box to agree is its acceptance by which the terms of the contract are entered. The consideration while forming this contract is the amount paid by the individual and the commodity that would be delivered from the company. Thereby, it becomes a valid agreement.
According to Section 10 of ICA, the essentials to form it into a contract are:
- Free consent
Generally, consent is free in digital contracts. There is no scope of bargaining in such contracts but the buyer always has an option to leave the commodity if the terms or the price quoted are unfair or unreasonable.
According to the company’s rule, a minor can’t order the commodity mere on his own behalf. Hence, the individuals should not be minor and should be of sound mind.
- Lawful consideration and lawful object
The company can’t sell commodities that are not lawful in nature. For instance, recently a ban was laid on E-Cigarettes, the company can’t sell the same.
- Not expressly declared to be void
Such contracts are not void as Section 10-A of the Information Technology Act, 2000 validates such contracts as it states, “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.”
Hence, with the presence of all the essentials, it qualifies to be a valid contract.
The essentials of a contract include a valid proposal, acceptance, lawful consideration, free consent, and competent parties. It should not be declared void by any law. The proposal and the acceptance must be communicated between the parties. It is also important that the parties have a legal intention to form a contract. Further, a transition from paper to digital mode of contracts has been witnessed in the present era which has seemingly been elevated due to the pandemic situation. Digital communication of offer and acceptance and even digital considerations have formed the new normal. Digital contracts have saved considerable time for the parties. Further, various stages of the formation of a digital contract have been established with the help of a case study on amazon shopping. Hence, the digital contracts must contain all the essentials of a contract prescribed by the ICA.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: