The Regulatory Framework & Contract Formation — Practice

Question 1

Explain the statement 'All contracts are agreements but all agreements are not contracts', building the answer from the definitions in the Indian Contract Act, 1872.

Accepted Answer

The Act constructs its central concepts as a chain of definitions.

A proposal is made when one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining that other's assent. When the person to whom the proposal is made signifies his assent, the proposal is accepted, and an accepted proposal becomes a promise. Every promise, and every set of promises forming the consideration for each other, is an agreement. An agreement enforceable by law is a contract.

So an agreement is offer plus acceptance, and a contract is an agreement plus enforceability by law.

It follows immediately that every contract must be an agreement, since enforceability is added to an agreement and cannot exist without one. There is no such thing as a contract that is not first an agreement.

The converse does not hold, because an agreement becomes enforceable only if it satisfies the further requirements the Act imposes — free consent of parties competent to contract, lawful consideration, lawful object, not being expressly declared void, certainty of meaning, possibility of performance, any required legal formalities, and an intention to create legal relations.

An agreement failing any of these remains an agreement but is not a contract. A promise to meet a friend for dinner is an agreement, but the parties had no intention of creating legal obligations, so it is not enforceable. An agreement with a minor is an agreement, but the minor is not competent to contract, so it is void ab initio. An agreement to sell 'my goods at a fair price' may fail for uncertainty.

The relationship is therefore one of a smaller class within a larger one: contracts form a subset of agreements, distinguished by enforceability.

Question 2

Distinguish ratio decidendi from obiter dicta, and explain the constitutional basis on which Supreme Court decisions bind lower courts.

Accepted Answer

The ratio decidendi is the principle of law on which a decision is based — the reasoning necessary to reach the outcome on the facts before the court. It is the part of a judgment that constitutes binding precedent.

Obiter dicta are observations made by the court in passing, on points not necessary to the decision. They may be considered opinions on hypothetical facts, comments on arguments not ultimately relied on, or general remarks about the state of the law. They carry persuasive weight, particularly when made by a superior court, but they do not bind.

The distinction matters because a judgment may run to many pages of which only a small part is the ratio. Citing an obiter observation as though it were binding is a real error in practice, and identifying the ratio requires asking what proposition of law the court had to accept in order to decide as it did.

The constitutional basis for binding precedent is Article 141 of the Constitution, which provides that the law declared by the Supreme Court shall be binding on all courts within the territory of India. This makes the doctrine of precedent a matter of constitutional obligation rather than of judicial convention.

The hierarchy that follows: Supreme Court decisions bind every court in India, including High Courts. A High Court's decisions bind the subordinate courts within its territorial jurisdiction, and are persuasive but not binding on other High Courts. A larger bench of a court binds a smaller bench of the same court.

Judicial precedent is thus one of the sources of Indian law, alongside the Constitution as the supreme source, legislation enacted by competent legislatures together with the delegated legislation made under it, and customs and usages where they are ancient, certain, reasonable and not contrary to statute.

Question 3

State the essentials of a valid offer, and explain with reasons whether each of the following is an offer: (a) an advertisement in a newspaper offering ₹50,000 to anyone who finds and returns a lost dog; (b) a catalogue listing goods with prices; (c) an auctioneer inviting bids; (d) a letter stating 'I will sell you my motorcycle for ₹60,000; if I do not hear from you by Friday I shall assume you have accepted.'

Accepted Answer

Essentials of a valid offer. It must be made with the intention of creating legal relations; its terms must be certain and definite, not vague; it must be communicated to the offeree, since an offer of which a person is unaware cannot be accepted by them; it must be distinguished from an invitation to offer; any conditions attached must be communicated before or at the time of assent; and it must not contain a term imposing a burden of refusal on the offeree.

(a) Advertisement offering a reward for a lost dog — this is an offer, and specifically a general offer made to the world at large. Its terms are certain, it contemplates acceptance by performance rather than by prior communication, and a contract is concluded with whoever performs the condition with knowledge of the offer. A person who found and returned the dog without knowing of the advertisement could not claim, since acceptance requires knowledge of the offer.

(b) A catalogue listing goods with prices — an invitation to offer, not an offer. It invites the public to make proposals to buy. The customer who orders makes the offer, and the trader may accept or decline it. The practical justification is that a trader who circulated a catalogue to thousands would otherwise be in breach to everyone beyond the extent of his stock.

(c) An auctioneer inviting bids — an invitation to offer. The bidder makes the offer, and the auctioneer accepts it by the fall of the hammer. Until then a bid may be withdrawn, and the auctioneer is under no obligation to accept the highest bid unless the auction was expressly stated to be without reserve.

(d) The letter about the motorcycle — the first part is a valid offer, being specific, certain and communicated. The second part is ineffective. An offeror cannot impose a burden of refusal on the offeree, and silence does not amount to acceptance. If the recipient does nothing by Friday, no contract arises, because acceptance must be communicated and mental assent that is never expressed is not acceptance at all.

Question 4

A, of Delhi, posts a letter on 1 August offering to sell goods to B of Chennai for ₹2,00,000. B receives it on 4 August and posts his acceptance on 5 August. A posts a letter of revocation on 3 August, which reaches B on 6 August. B's letter of acceptance reaches A on 8 August. Advise whether a contract exists, and state on what date it was concluded.

Accepted Answer

Provision. Under section 4 of the Indian Contract Act, 1872, the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of an acceptance is complete 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, and as against the acceptor when it comes to the knowledge of the proposer. The communication of a revocation is complete as against the person who makes it when it is put into a course of transmission so as to be out of his power, and as against the person to whom it is made when it comes to his knowledge.

Section 5 provides that a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

Application. A's proposal was posted on 1 August and reached B on 4 August, so communication of the proposal was complete on 4 August.

B posted his acceptance on 5 August. At that moment the acceptance passed out of B's power and into a course of transmission, so communication of the acceptance became complete as against A, the proposer, on 5 August. A was bound from that date.

A posted his revocation on 3 August, but the date of posting is irrelevant to whether it was effective against B. Communication of a revocation is complete as against the person to whom it is made only when it comes to his knowledge, which here was 6 August.

A could revoke his proposal only before communication of the acceptance was complete as against him, that is before 5 August. His revocation reached B on 6 August, which is after that date. The revocation was therefore too late.

Note that B could still have revoked his own acceptance, because communication of the acceptance was complete as against B only when it reached A on 8 August. Had B sent a telegram reaching A before 8 August, the acceptance would have been validly revoked. B did not do so.

Conclusion. A valid contract came into existence on 5 August 2026, the date B posted his acceptance. A's revocation is ineffective, and A is bound to sell the goods for ₹2,00,000.

Question 5

Explain the rules governing a valid acceptance. State with reasons the position where (a) X offers to sell his house to Y for ₹40,00,000 and Y replies agreeing to buy at ₹38,00,000, and later purports to accept at ₹40,00,000; (b) an offer requires acceptance by registered post but the offeree accepts by email.

Accepted Answer

Rules governing acceptance. It must be absolute and unqualified, since any variation converts it into a counter offer. It must be communicated to the offeror, and by the offeree or a person authorised by them. It must be in the manner prescribed by the offer, where one is prescribed. It must be given within the time prescribed, or within a reasonable time where none is. It cannot precede the offer, and it must be made with knowledge of the offer. Silence does not amount to acceptance, and an offeror cannot impose a burden of refusal.

(a) X's offer and Y's reply. Y's reply agreeing to buy at ₹38,00,000 is not an acceptance, because it varies a material term of the offer and so is not absolute and unqualified. It is a counter offer, which in law is a fresh proposal made by Y to X.

The consequence carrying the marks is that a counter offer destroys the original offer. Once Y responded with different terms, X's offer at ₹40,00,000 ceased to exist and was no longer capable of acceptance. Y's later purported acceptance at ₹40,00,000 is therefore ineffective as an acceptance; it is at best a fresh offer by Y, which X is free to accept or decline.

No contract exists unless X accepts Y's later communication. Note that a mere request for information — for example, asking whether X would consider instalments — is not a counter offer and does not destroy the original offer. The distinction is whether the response varies the terms or merely enquires about them.

(b) Prescribed manner not followed. Where an offer prescribes a manner of acceptance and the offeree accepts in some other manner, the acceptance is not automatically void. The offeror may, within a reasonable time after the acceptance is communicated, insist that the acceptance be made in the prescribed manner and notify the offeree accordingly.

If the offeror does so insist, the offeree must comply for the acceptance to be valid. If the offeror does not object within a reasonable time, he is taken to have accepted the deviated acceptance, and the contract is concluded on the terms of the email.

So the position here depends on the offeror's response: the acceptance by email binds unless the offeror promptly requires acceptance by registered post.

Question 6

Distinguish a void agreement from an illegal agreement, and explain why the distinction matters for collateral transactions.

Accepted Answer

A void agreement is one not enforceable by law. It creates no legal rights or obligations, but it is not necessarily forbidden — the law simply declines to enforce it. An agreement in restraint of marriage, a wagering agreement and an agreement whose meaning is uncertain are all void.

An illegal agreement is one whose object or consideration is forbidden by law, or is of such a nature that if permitted it would defeat the provisions of any law, or is fraudulent, or involves injury to the person or property of another, or is regarded by the court as immoral or opposed to public policy.

The relationship between the two is asymmetric and is the point of the question. Every illegal agreement is void, because the law will not enforce what it forbids. But not every void agreement is illegal — a wagering agreement is void in most of India and yet is not forbidden, and an uncertain agreement is void merely because the court cannot determine what was agreed.

Why the distinction matters for collateral transactions.

A collateral transaction is one connected with the principal agreement, such as a loan advanced to enable a party to perform it, or a guarantee given in respect of it.

Where the principal agreement is merely void, collateral transactions are not affected and remain enforceable. Money lent to a person to enable them to enter a wagering transaction is generally recoverable in most of India, because although the wager itself is void the loan is a separate and lawful transaction.

Where the principal agreement is illegal, the illegality taints everything connected with it. Collateral transactions are also void and unenforceable. Money lent knowingly to enable a person to commit an unlawful act cannot be recovered, and a guarantee given in respect of an illegal transaction cannot be enforced.

The underlying policy is that the law refuses to lend its assistance in any way to a transaction it forbids, whereas it is merely neutral about a transaction it declines to enforce.

Question 7

Distinguish privity of contract from privity of consideration, state which applies in India, and set out the exceptions. Advise in the following case: A sold his business to B, and as part of the consideration B promised A that he would pay ₹20,000 a month to A's mother for her lifetime. B stopped paying after six months. Can A's mother sue B?

Accepted Answer

The two doctrines.

Privity of consideration is the rule that consideration must move from the promisee — that a person who has not himself furnished consideration cannot enforce the promise. This is the English position.

Privity of contract is the rule that only a party to a contract can sue upon it — that a person who is a stranger to the contract acquires no rights under it, however much it was intended to benefit them.

The Indian position. Privity of consideration does not apply in India. Section 2(d) of the Indian Contract Act, 1872 defines consideration as something done or promised 'at the desire of the promisor, by the promisee or any other person'. The words 'any other person' expressly permit consideration to move from a stranger, and a promisee may therefore enforce a promise even where the consideration was furnished by someone else. This is sometimes called constructive consideration.

Privity of contract does apply in India. A person who is not a party to the contract cannot sue on it, notwithstanding that consideration may move from a stranger.

Distinguishing the two carefully is essential, because problems are constructed to exploit the confusion. The test is not whether the claimant furnished consideration; it is whether the claimant is a party to the contract.

Exceptions to privity of contract, where a stranger may nevertheless enforce.

A beneficiary under a trust, or a person in whose favour a charge is created on specific immovable property.
A provision made for a member's marriage expenses or maintenance under a family settlement or partition arrangement.
Acknowledgement or estoppel, where a party by his conduct acknowledges liability to the third person and thereby constitutes himself that person's agent.
A covenant running with the land, which binds a subsequent purchaser taking with notice of it.
A provision in a marriage settlement or partition deed made for a person's benefit.
Agency, where a person contracts through an agent, the principal being able to sue although not named.

Application to the facts.

The contract is between A and B for the sale of the business. A's mother is not a party to it; she furnished no consideration and gave no promise. On the general rule of privity of contract, she could not sue B.

But the arrangement falls within the exception relating to a provision made for the benefit of a family member as part of a family arrangement or settlement of property. Where a person transfers property and, as part of the consideration, the transferee undertakes to make payments to a member of the transferor's family, the courts have permitted the beneficiary to enforce that undertaking. The obligation is treated as creating a charge or a trust in the beneficiary's favour, particularly where the promise concerns maintenance of a family member out of property received.

Conclusion. A's mother may sue B to enforce the monthly payment of ₹20,000, because although she is a stranger to the contract the case falls within the recognised exception for provisions made for the maintenance of a family member as part of an arrangement concerning property. Note that A, being a party to the contract, could in any event sue B for breach.

Question 8

State the exceptions to the rule that an agreement without consideration is void. Advise on each of the following: (a) an uncle orally promises his nephew ₹5,00,000 out of natural love and affection; (b) P finds and returns Q's lost briefcase without being asked, and Q afterwards promises P ₹10,000; (c) R owes S a debt barred by limitation and signs a written promise to pay ₹50,000 of it; (d) M promises to pay N ₹1,00,000 for having nursed M during an illness, N having done so at M's request.

Accepted Answer

Provision. Under section 25 of the Indian Contract Act, 1872, an agreement made without consideration is void, subject to three exceptions.

First, where it is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other.

Second, where it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do.

Third, where it is a promise, made in writing and signed by the person to be charged or by his duly authorised agent, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law of limitation of suits.

Two further cases are usually stated alongside: a completed gift is valid as between donor and donee notwithstanding the absence of consideration, and no consideration is necessary to create an agency under section 185.

(a) The uncle's oral promise. The first exception requires four conditions to be satisfied cumulatively: natural love and affection, parties standing in a near relation to each other, the agreement expressed in writing, and registration.

Here the first two are present — an uncle and nephew stand in a near relation and the promise was made out of natural love and affection. But the promise was oral, so it is neither in writing nor registered. Two of the four conditions fail. The agreement is void for want of consideration and the nephew cannot enforce it. This is the standard examination pattern: supply the emotional elements and omit the formal ones.

(b) P returning Q's briefcase. P acted voluntarily, without any request from Q. The act was therefore not done at the desire of the promisor and is not consideration within section 2(d).

However, the second exception to section 25 applies precisely to this situation. Q's promise is a promise to compensate a person who has already voluntarily done something for the promisor. The exception does not require writing or registration. Q's promise to pay ₹10,000 is therefore enforceable, and P may recover.

(c) R's written promise on a time-barred debt. The third exception applies. The debt is one of which S might have enforced payment but for the law of limitation, and R has made a promise in writing, signed by him, to pay part of it.

The promise is enforceable to the extent of ₹50,000, that being the amount promised. Note that the promise must be in writing and signed — an oral promise to pay a time-barred debt is not saved by this exception — and that it need not be registered.

(d) M's promise to N for nursing at M's request. This case does not require section 25 at all, and identifying that is the point of including it.

N nursed M at M's request. The act was therefore done at the desire of the promisor, and section 2(d) expressly recognises past consideration — something the promisee 'has done' at the promisor's desire is good consideration in India, unlike in English law. M's promise is supported by consideration and is a valid contract in the ordinary way.

Conclusion. The nephew in (a) cannot recover; P in (b) can recover under the second exception; S in (c) can recover ₹50,000 under the third exception; and N in (d) can recover because the agreement is supported by past consideration and is not an agreement without consideration at all.

Question 9

Explain general offers, cross offers and standing offers, and state the legal position in each. Illustrate the general offer with the position of a person who performs the required act without knowing of the offer.

Accepted Answer

General offer. An offer made to the world at large rather than to a definite person, typically by public advertisement. It is a valid offer notwithstanding that no particular offeree is identified, and it is accepted by any person who fulfils its terms.

Where the offer contemplates acceptance by performance — as with a reward for finding lost property or for information — no prior communication of acceptance is required. Performance of the condition is itself the acceptance, and the contract is concluded with the person who performs. A general offer of this kind can be accepted by any number of persons where its terms so permit, as with an offer of a reward to anyone using a product who nonetheless contracts a disease; but where the subject matter is a single item, the first person to perform concludes the contract and the offer is exhausted.

The position of a person acting without knowledge of the offer. Acceptance requires knowledge of the offer, because a person cannot assent to terms of which they are unaware. A person who finds and returns a lost article, unaware that a reward had been advertised, has not accepted the offer and cannot claim the reward. What they have done is an act done voluntarily rather than at the desire of the promisor, so it is not consideration either.

The practical consequence is that if the owner afterwards promises to pay the finder, that promise is enforceable — not as a contract formed by acceptance of the general offer, but under the second exception to section 25, as a promise to compensate a person who has voluntarily done something for the promisor.

Cross offers. Two parties make identical offers to each other, each in ignorance of the other's offer, and the two cross in transmission. No contract results. Neither communication is an acceptance of the other, because each was made without knowledge of the other, and acceptance presupposes knowledge of an existing offer. Both parties have made offers and neither has accepted; either may still accept the other's offer if it remains open.

Standing or open offer. An offer kept open for acceptance over a period, most commonly a tender to supply goods or services as and when required. The acceptance of a tender of this kind does not itself conclude a contract for the whole quantity; it establishes a standing offer, and each order placed under it is a separate acceptance concluding a separate contract for that order.

The consequences are practical. The offeror may revoke the standing offer as to future orders at any time before an order is placed, unless consideration was given to keep it open. And the offeree is under no obligation to place any order at all, unless the arrangement expressly binds them to do so.

Question 10

State the essentials of a valid contract, and explain why intention to create legal relations is included even though section 10 does not mention it.

Accepted Answer

Essentials of a valid contract.

Offer and acceptance, producing an agreement.
Intention to create legal relations.
Lawful consideration.
Capacity of the parties to contract.
Free consent.
Lawful object.
The agreement not being expressly declared void by the Act.
Certainty of meaning.
Possibility of performance.
Compliance with any legal formalities required, such as writing, registration or stamping.

Section 10 provides that 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 expressly declared to be void. The remaining requirements come from other provisions of the Act — certainty from the provision avoiding uncertain agreements, possibility from the provision on impossible acts, and formalities from other statutes such as the Registration Act.

Why intention to create legal relations is included.

Section 10 does not mention it, and Indian courts have read it into the Act as an implied requirement. Its function is to separate agreements the parties meant to be legally binding from those they did not.

Without such a requirement, every social and domestic arrangement would be a contract. An agreement to meet a friend for lunch satisfies offer, acceptance and arguably consideration in the form of reciprocal promises, and yet no court would entertain a suit for its breach. The reason is that the parties plainly did not intend legal consequences to follow.

The requirement operates through presumptions rather than as a matter of proof in every case. In social, domestic and family arrangements, the presumption is that legal relations were not intended, and a party asserting otherwise must displace it — which is possible, as where spouses have separated and make a formal maintenance arrangement. In commercial and business agreements the presumption runs the other way: legal relations are presumed to be intended, and a party denying it must show clear words excluding legal consequences, such as an express statement that the arrangement is binding in honour only.

The requirement therefore does real work in commercial law, since it is the basis on which letters of comfort, memoranda of understanding and agreements 'subject to contract' are held not to bind.

Question 11

State the circumstances in which an offer comes to an end. Advise whether a contract exists where A offers to sell goods to B, B does not reply for four months, and then purports to accept; and where A offers to sell his car to B and dies before B accepts, B being unaware of the death.

Accepted Answer

Circumstances in which an offer comes to an end.

By notice of revocation communicated to the offeree, at any time before communication of the acceptance is complete as against the proposer.
By lapse of the time prescribed for acceptance, or where no time is prescribed, by lapse of a reasonable time.
By the failure of the offeree to fulfil a condition precedent to acceptance.
By rejection, whether express or by way of a counter offer, since a counter offer destroys the original offer.
By the death or insanity of the offeror, provided the fact comes to the knowledge of the offeree before acceptance.
By the death or insanity of the offeree, since an offer can be accepted only by the person to whom it is made.
By destruction of the subject matter of the offer.
By subsequent illegality or a change in the law rendering the contract unlawful.

First situation — four months' silence.

Where an offer does not prescribe a time for acceptance, it must be accepted within a reasonable time, and it lapses thereafter. What is reasonable depends on the nature of the subject matter and the circumstances. For goods, particularly perishable goods or goods whose prices fluctuate, a reasonable time is short; for the sale of land it may be considerably longer.

Four months' silence in respect of an offer to sell goods will almost certainly exceed a reasonable time, and the offer will have lapsed by the time B purports to accept. B's communication is therefore not an acceptance of a subsisting offer but at most a fresh offer, which A is free to accept or decline. No contract exists unless A accepts.

Second situation — death of the offeror.

The rule is that an offer lapses on the death or insanity of the offeror only if the fact of the death or insanity comes to the knowledge of the offeree before acceptance.

Here B was unaware of A's death when he accepted. The condition for lapse is therefore not satisfied, and the offer had not come to an end at the moment of acceptance. A contract accordingly came into existence, and it binds A's legal representatives, who must perform it out of A's estate.

The position would be different if B had learned of A's death before accepting, in which case the offer would have lapsed and B's purported acceptance would be ineffective. Note the contrast with the death of the offeree, which terminates the offer absolutely, since an offer can be accepted only by the person to whom it was made and the right to accept is not transmissible.

Question 12

A shopkeeper advertises in a newspaper: 'Special sale — 50 televisions at ₹15,000 each, first come first served, Saturday 10 a.m.' On Saturday, C arrives first and tenders ₹15,000. The shopkeeper refuses, saying the price was misprinted and should have read ₹25,000. Advise C. Then explain how your advice would differ if the advertisement had promised ₹5,000 to anyone attending who was not able to buy a television.

Accepted Answer

Provision. A proposal is made when one person signifies to another his willingness to do or abstain from doing something with a view to obtaining that other's assent. An advertisement for the sale of goods is ordinarily an invitation to offer rather than a proposal, because the advertiser is inviting the public to make offers to buy rather than signifying a willingness to be bound to every person who responds. A general offer, by contrast, is one made to the world at large which contemplates acceptance by performance of its terms, and it does constitute a proposal capable of acceptance by anyone who performs.

The distinction turns on whether the advertisement contemplates further negotiation and selection by the advertiser, or whether it is a definite commitment capable of being accepted by conduct without more.

Application to the first situation.

The advertisement announces goods for sale at a stated price. This is an advertisement for the sale of goods, and the settled position is that such an advertisement, like a catalogue, a price list or a display of goods in a window, is an invitation to offer. The words 'first come first served' indicate the order in which the shopkeeper will deal with those who present themselves, but they do not convert the announcement into a commitment to sell to each of them.

The practical justification is the same one that underlies the rule generally: the shopkeeper has fifty televisions, and if the advertisement were an offer he would be in breach of contract to every person beyond the fiftieth who purported to accept, and indeed to anyone who accepted after stock was exhausted.

C, by attending and tendering ₹15,000, made the offer. The shopkeeper, as offeree, was entitled to accept or decline, and by refusing he declined. No acceptance took place and no contract came into existence.

Conclusion on the first situation. C cannot compel the sale at ₹15,000. The refusal is lawful, and the misprint is in fact beside the point — even had the price been correctly stated, the shopkeeper was under no obligation to sell.

How the advice would differ with the promise of ₹5,000.

That promise is of a different legal character. It is not an announcement of goods for sale at a price, inviting offers to buy. It is a definite undertaking to pay a stated sum to any person satisfying a stated condition — attending, and being unable to buy a television.

Such a promise is a general offer. Its terms are certain, it is addressed to the world at large, it contemplates acceptance by performance rather than by prior communication, and the promise of a specific sum of money indicates an intention to be bound rather than an invitation to negotiate. A commercial promise of this kind carries a presumption that legal relations were intended, and the offeror would need clear words to displace it.

C, having attended and been unable to buy a television, has performed the condition. Performance with knowledge of the offer constitutes acceptance, and no separate communication of acceptance is required where the offer contemplates acceptance by conduct.

Conclusion on the second situation. A contract came into existence between C and the shopkeeper on C's performance, and C may recover ₹5,000. The contrast between the two limbs is the point: the same advertisement can be an invitation to offer as to the goods and a binding general offer as to the ancillary promise, because the two parts are of different legal character.

Question 13

Explain the significance of the words 'or any other person' in section 2(d) of the Indian Contract Act, 1872, comparing the Indian and English positions, and show how a candidate should reason through a problem in which the claimant neither furnished consideration nor was a party to the contract.

Accepted Answer

The words and what they do.

Section 2(d) defines consideration as arising when, at the desire of the promisor, 'the promisee or any other person' has done or abstained from doing, does or abstains from doing, or promises to do or abstain from doing something.

The words 'or any other person' mean that consideration need not move from the promisee. It may be furnished by a third party, provided it was furnished at the desire of the promisor. This is known as constructive consideration or the doctrine that a stranger to the consideration may sue.

The English position is different. There, consideration must move from the promisee, so a person who has not himself furnished consideration cannot enforce the promise even if he is a party to the contract. The Indian statute departs from this deliberately.

The consequence is that in India the source of the consideration is not a bar to enforcement. What remains a bar is not being a party to the contract at all.

Why this is examined.

Problems are constructed to conflate two distinct doctrines. Privity of consideration — that consideration must move from the promisee — does not apply in India. Privity of contract — that only a party to a contract may sue on it — does apply. Candidates who have absorbed English law, or who have learned 'a stranger cannot sue' as a single undifferentiated proposition, apply the wrong rule.

How to reason through such a problem.

Step one: identify the parties to the contract. Ask who made the promises and who accepted them. This is a question about the structure of the transaction, not about who paid.

Step two: identify who furnished the consideration. Note that this may be a different person, and that in India that fact alone does not defeat the claim.

Step three: ask which question the problem is actually raising.

If the claimant is a party to the contract but the consideration moved from someone else, the claim succeeds on this ground. The claimant is a promisee, and section 2(d) expressly permits consideration to come from any other person. State the words of the section and note the contrast with English law, because the contrast is what the question is testing.

If the claimant is not a party to the contract at all, privity of contract applies and the general rule defeats the claim, however clearly the contract was intended to benefit them and however substantial the benefit. The answer must then turn to the exceptions — a trust or a charge on specific immovable property, a provision for maintenance or marriage expenses under a family settlement or partition, acknowledgement or estoppel constituting the promisor an agent, a covenant running with land, a provision in a marriage settlement, or agency.

Step four: apply the exception if one fits, naming it and showing why the facts fall within it.

The error to avoid. A candidate who writes 'consideration may move from a stranger in India, therefore the claimant may sue' has answered the wrong question where the claimant is not a party. The doctrine about consideration removes one obstacle; it does not confer standing on a person outside the contract. Conversely, a candidate who writes 'a stranger cannot sue' where the claimant is a party who simply did not pay has applied the English rule that Indian law rejects.

Stating both doctrines and identifying which one the facts engage is what earns the provision and application marks in full.

Question 14

Explain how the completion rules in section 4 and the revocation rules in section 5 operate together, and why the Act treats the proposer and the acceptor differently. Illustrate with a case in which both parties attempt to revoke.

Accepted Answer

How the two sections interlock.

Section 4 fixes when a communication is complete, and it does so separately for each party. Communication of an acceptance is complete as against the proposer when the acceptance is put in a course of transmission out of the acceptor's power, and as against the acceptor when it reaches the proposer's knowledge. Communication of a revocation is complete as against its maker when put in transmission, and as against its recipient when it reaches their knowledge.

Section 5 then fixes the revocation windows by reference to those completion moments. A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor.

Substituting section 4's rules into section 5 gives the practical position. The proposer's window to revoke closes when the acceptance is posted, and the revocation must actually reach the offeree before that moment to be effective. The acceptor's window remains open until the acceptance reaches the proposer, so the acceptor may revoke by any faster means that overtakes the acceptance.

Why the parties are treated differently.

The asymmetry is deliberate and reflects the position each party is in.

Once the acceptor has posted the acceptance, he has done everything required of him and has parted with control of the communication. From his point of view the bargain is concluded, and he will begin to act on it. It would be unjust to allow the proposer to withdraw after that point merely because the letter has not yet arrived, since the proposer's own offer invited exactly this response.

The acceptor, by contrast, is protected until the proposer actually knows of the acceptance, because until then the proposer has not relied on anything and has suffered no prejudice by the acceptance being withdrawn. Nothing has changed in the proposer's position, so allowing revocation costs him nothing.

The result is a rule that binds the party whose invitation started the process at the earlier moment, and releases the party responding to it at the later one. It favours the acceptor, and the justification is that the proposer chose to make an offer and set the terms on which it could be accepted.

Illustration where both attempt to revoke.

A posts an offer to B on 1 June, which B receives on 4 June. B posts his acceptance on 6 June. On 5 June A posts a revocation, which reaches B on 8 June. On 7 June B sends a telegram revoking his acceptance, which reaches A on 7 June. B's letter of acceptance reaches A on 10 June.

A's revocation. A could revoke only before communication of the acceptance was complete as against him, which was on 6 June when B posted. A's revocation reached B on 8 June, which is too late. The date A posted it, 5 June, is irrelevant, because a revocation is complete as against the person to whom it is made only when it reaches his knowledge. A's revocation therefore fails.

B's revocation. B could revoke at any time before communication of his acceptance was complete as against him, which would have been on 10 June when the letter reached A. B's telegram reached A on 7 June, comfortably before that. B's revocation is therefore effective.

Conclusion. No contract exists. A's attempt to revoke failed and A was bound from 6 June, but B validly revoked his acceptance on 7 June before he himself became bound. The outcome illustrates the asymmetry precisely: for a period of one day A was bound and B was not, and B used that period to escape.

Question 15

A company's prospectus invites the public to subscribe for shares. D applies for 500 shares and encloses the application money. The company allots him 200 shares and posts the letter of allotment, which is lost in the post and never reaches D. D claims he is not a shareholder. Advise, explaining the principles engaged.

Accepted Answer

Provision. A prospectus inviting the public to subscribe for shares is an invitation to offer, not an offer. The applicant who submits an application form with the application money makes the offer, and the company accepts it by allotment.

Under section 4 of the Indian Contract Act, 1872, the communication of an acceptance is complete 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, and as against the acceptor when it comes to the knowledge of the proposer.

Where the parties have contemplated the post as the means of communication, the acceptance is complete against the proposer on posting, whether or not the letter ever arrives, provided it was properly addressed and despatched.

Application.

The prospectus was an invitation to offer. D, by applying for 500 shares with the application money, made the offer to take shares.

The company accepted by allotting 200 shares and posting the letter of allotment. D is the proposer, and the company is the acceptor. Under section 4, communication of the company's acceptance was complete as against D, the proposer, at the moment the letter of allotment was put in a course of transmission out of the company's power — that is, when it was posted.

The loss of the letter in the post does not affect this. The rule fixes completion at the moment of posting for the very reason that neither party can control the post thereafter, and the risk of loss falls on the party who invited communication by that means. Since the prospectus contemplated allotment being communicated by post, D took the risk of the post failing.

A further point supports the conclusion. D's application was for 500 shares and the company allotted 200. In the context of a share application this is not treated as a counter offer destroying the original, because an application for shares is understood as an offer to take that number or such smaller number as may be allotted, and the prospectus and articles contemplate partial allotment on over-subscription.

Conclusion. D is a shareholder in respect of the 200 shares allotted to him. The contract was concluded when the letter of allotment was posted, and the loss of that letter in transit does not undo it. D is liable for the balance of the amounts payable on those shares.

The position would be different in one respect. If it were the company seeking to hold D to something, and D who had posted a communication that was lost, the analysis would be the same on these principles — but note that the acceptor is not bound until his acceptance reaches the proposer, so the risk allocation always falls on the party who is the proposer. Here that party is D.

Practice — The Regulatory Framework & Contract Formation

Sign in to save attempts to your dashboard and track your accuracy over time

Find a verified tutor

Join a live course

Browse coaching centres

About

Categories

Support

Documentation

Get Study Tips & Updates

Download Our App

Download for iOS

Download for Android

Popular Cities