Formation of Contract 1) Essential elements of a Contract a. Agreement b. Intention to Create Legal relationship c. Free and genuine Consent d.

Parties competent to contract e. Lawful consideration f. Lawful object g. Agreement not declared void or illegal h. Certainty of meaning i. Possibility of Performance j. Necessary Legal Formalities 2) Agreement Contract: sec 2(h) - An agreement enforceable by law is a contract Agreement:- sec 2(e) Every Promise and every set of promises, forming the consideration for each other, is an agreement Promise: 2(b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. Thus it can be said that; A contract is an agreement; an agreement is a promise and a promise is an accepted proposal. Thus every agreement, in its ultimate analysis, is the result of a proposal from one side and its acceptance by the other. Agreement = Proposal + Acceptance 3) Proposal or Offer Definition: 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. Offer as defined in Ansons Law of Contract: ...an intimation, by words or conduct, of a willingness to enter into a legally binding contract, and which in its terms expressly or impliedly indicates that it is to become binding on the offeror as soon as it has been accepted by an act, forbearance, or return promise on the part of the person to whom it is addressed. Offer as defined in Chitty on Contracts: an expression of willingness to contract made with an intention (actual or apparent) that it is to become binding on the person making it as soon as it is accepted by the person to whom it is addressed.

Thus, to have made a proposal, a person must have: i) Signified to another his willingness to do or to abstain from doing anything; and ii) Has done so with a view to obtaining the assent of that other to such act or abstinence. Illustration: A circular by a bank to its debtors intimating to them its decision to enhance the rate of interest from the date of notice is not a proposal but a unilateral declaration. Essentials of Proposal: 1) Communication of Proposal 2) Intention to Create Legal relationship Intention to contract Communication of Proposal: Section 3: Communication, acceptance and revocation of proposals: The communication of proposal, 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 communicate such proposal, acceptance or revocation, or which has the effect of communicating it. Thus it may; i) By words of mouth, or ii) By writing, or iii) By conduct An offer which is expressed by conduct is called an implied offer and the one which is expressed by words, written or spoken, is called an express offer. An acceptance may likewise be made expressly or impliedly. Section 9: Promise, Express and implied:- 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. Illustration: contract arising impliedly from conduct: Upton Rural District Council v. Powell (1942) 1 All ER 220 A fire broke out in the defendants farm. He believed that he was entitled to the free service of Upton Fire Brigade and therefore, summoned it. The Brigade put out the fire. It then turned out that the defendants farm was not within free service zone of the Upton, which therefore, claimed compensation. Illustration: Where the customer of a bank did not object to the charge of compound rate of interest in accordance with the usual course of business, he was held to have impliedly contracted to pay the compound interest. Illustration: A contract was signed between an Indian and Yugoslavian party. One of the terms provided for arbitration by the International Chamber of Commerce in Paris. Immediately thereafter the Indian party cabled and also wrote its objection about the arbitration clause. The other party made no reply to it, but permitted the work to go on. A dispute having arisen, it was held that the arbitration clause had become deleted from the contract by an implied agreement. A suit could lie in a court of law.

Communication when Complete: Section 4: The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. Lalman v. Gauri Datt (1913) 11 All LJ 489 Defendants nephew absconded from home. He sent his servant in search of the boy. When the servant had left, the defendant by handbills offered to pay Rs 501 to anybody discovering the boy. The servant came to know of this offer only when he had already traced the missing child. He, however, brought an action to recover the reward. But his action failed. Can offer be made to public at large? Carlill v. Carbolic Smoke Ball Co [1892] 2 QB 484 The defendants, who were the proprietors of a medical preparation called The Carbolic Smoke Ball, issued an advertisement in which they offered to pay 100 pounds to any person who succumbed to influenza after having used one of their smoke balls in a specified manner and for a specified period. They added that they had deposited a sum of 1000 pound with their bankers to show their sincerity. The plaintiff, on the faith of the advertisement, bought and used the ball as prescribed, but succeeded in catching influenza. She sued for the 100 pound. Held: Bowen LJ Although the offer is made to the world, the contract is made with that limited portion of the public who come forward and perform the condition on the faith of the advertisement. Intention to Create Legal Relationship Balfour v. Balfour (1919) 2 KB 571 The defendant and his wife were enjoying leave in England. When the defendant was due to return to Ceylon, where he was employed, his wife was advised, by reason of her heath, to remain in England. The defendant agreed to send her an amount of 30 pound a month for the probable expenses of maintenance. He did send the amount for some time, but afterwards differences arose which resulted in their separation and the allowance fell into arrears. The wifes action to recover the arrears was dismissed. Family and social matters The intention of the parties is naturally to be ascertained from the terms of the agreement and the surrounding circumstances. It is for the court in each case to find out whether the parties must have intended to enter into legal obligations. Jone v. Padavatton (1969) 2 All ER 616 A divorced woman was living in Washington with her son where she was employed as an assistant accountant in the Indian Embassy on attractive terms. Her mother was in Trinidad and wished her daughter to be near her. She was particularly attached to the grandson. The mother persuaded her daughter, much against her will, to leave service, to take legal education in England and finally to come back to Trinidad as a practising lawyer. The mother undertook to foot the expenses. Subsequently, the mother bought a house in England, part of which was allowed to the daughter and rest tenanted out. For five long years the daughter could not complete her education. She also remarried in the meantime. Differences arose between them and the mother stopped payments and also commenced proceedings to evict the daughter. Danckwerts LJ allowed the mothers appeal stating that .... this is one of those family arrangements which depend on the good faith of the promises which are made and are not intended to be rigid, binding agreements.

Objectivity, not subjectivity, test of contractual intention What matters is not what the parties had in mind, but what a reasonable person would think, in the circumstances, their intention to be. Illustration:- where three ladies, two of them being mother and daughter and the third a paying guest, together made entries into a crossword puzzle in the name of the mother, the expenses being met by one or other, without any rules. The entry was successful and the mother refused to share the prize. But the court held that she was bound to do so, for any reasonable man looking at their conduct would at once conclude that they must have intended to share the prize. (Simpkins v. Pays (1955) 3 All ER 10) Rose & Frank Co v. J.R. Crompton & Bros: (1923) 2 KB 261 An exhaustive agreement was drawn between one American and two English firms for their dealings in paper tissues. The agreement contained the following clause: This arrangement is not entered into as a formal legal agreement and shall not be subject to a legal jurisdiction in the law courts either in the U.S or in England. The agreement was terminated by one of the parties contrary to its terms. The American firm brought an action for the breach. It was held that the document did not constitute a binding contract as there was no intention to affect the legal relations. An investment in a partnership firm was taken by the Supreme Court to be of commercial nature putting the onus on the party asserting that he did not intend to be a legal partner to prove that fact. [CWT v. Abdul Hussain Mohd Ali, (1988) 3 SCC 562]. Intention to contract: Lord Cross of Chelsea Illustration: If I get into a taxi and ask the driver to drive me to the Victoria Station it is extremely unlikely that either of us directs his mind to the question whether we are entering into a contract. We enter into a contract not because we form any intention to enter into one but because if our minds were directed to the point we should as reasonable people both agree that we were in fact entering into one. Banwari Lal v. Sukhdarshan Dayal (1973) 1 SCC 294 In an auction sale of plots of land, a loudspeaker was spelling out the terms, etc., of the sale, one of the statements being that a plot of certain dimension would be reserved for a dharamshala. Subsequently, that plot was also sold for private purpose. The purchasers sought to restrain this. Chandrachud J. Said: Microphones have not yet acquired notoriety as carriers of binding representations. Promises held out over loudspeakers are often claptraps of politics. In the instant case, the announcement was, if at all, a puffing up of property put up for sale. Offer and invitation to treat An offer should be distinguished from an invitation to receive offers. When a man advertises that he has got a stock of books to sell, or house to let, there is no offer to be bound by any contract. Such advertisements are offers to negotiate offers to receive offers. Partridge v. Crittenden (1968) 2 All ER 421 The appellant had inserted a notice in a periodical entitled Cage and Aviary Birds which read Bramblefinch cocks and hens, 25s each. It appeared under the general heading of Classified Advertisements and the words offer for sale were not used. He was charged with

unlawfully offering for sale a wild live bird contrary to the provisions of the Protection of Birds Act 1954 and was convicted. The divisional court quashed the conviction. There had been no offer for sale. Lord Parker Said I think when one is dealing with advertisements and circulars, unless they indeed come from manufacturers, there is business sense in their being construed as invitations to treat and not offer for sale. Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. (1952) 2 QB 795 The court had to decide whether the defendants had broken the provisions of section 18 of the Pharmacy and Poisons Act 1933, which made it unlawful to sell any listed poison unless the sale is effected under the supervision of a registered pharmacist Facts: The defendants adapted one of their shop to a self-service system. A customer, on entering, was given a basket, and having selected from the shelves the articles he required, put them in the basket and took them to the cash desk. Near the desk was registered pharmacist who was authorised, if necessary, to stop a customer from removing any drug from the shop. Fisher v. Bell (1961) 1 QB 394 Lord Parker:- It is clear that, according to the ordinary law of contract, the display of an article with a price on it in a shop window is merely an invitation to treat. It is in no sense an offer for sale acceptance of which constitutes a contract. (facts: Where a shopkeeper was convicted of offering for sale a flick-knife contrary to the Restriction of Offensive Weapons Act, 1959, which he had displayed in his shop window, it was held that it was in no sense an offer for sale the acceptance of which could constitute a contract. Harvery v. Facey (1893) AC 552 The plaintiffs telegraphed to the defendants, writing: will you sell us Bumper Hall Pen? Telegraph lowest cash price. The defendants replied also by a telegram: Lowest price for Bumper Hall Pen, 900 pound. The plaintiffs immediately sent their last telegram stating: we agree to buy Bumper Hall Pen for 900 pounds asked by you. The defendants, however, refused to sell the plot of land at that price. The plaintiffs contended that by quoting their minimum price in response to the inquiry the defendants had made an offer to sell at the that price. Announcement to hold auction An auctioneers announcement that specified goods will be sold by auction on a certain day is not an offer to hold the auction and he will not be liable to persons travelling up to the place if he changes his mind and does not hold the auction. Even when an auction is held that bid is not an acceptance so as to entitle the highest bidder to get the goods. The highest bid is nothing more than an offer to buy and it requires to be accepted by the auctioneer. Harris v. Nickerson (1873) LR 8 QB 286 In this case the plaintiff failed to recover damages for loss suffered in travelling to the advertised place of an auction sale which ultimately cancelled. His claim was condemned as an attempt to make a mere declaration of intention a binding contract. But Blackburn J:

This is certainly a startling proposition and would be excessively inconvenient if carried out. It amounts to saying that anyone who advertises a sale by publishing an advertisement becomes responsible to everybody who attends the sale for his cab hire or travelling expenses.

Free distribution of articles Esso Petroleum Co Ltd v. Commrs of Customs & Excise, (1976) 1 WLR 1 Where in pursuance of a scheme adopted by ESSO, the petrol station proprietors announced that they would give the World Cup Coins, one for every buyer of four gallons of petrol, it was held that the distribution of the coins was not a contract of sale so as to attract the provisions of Purchase Tax Act, but was only a gift. Tender An invitation for tenders for the supply of goods or for execution of works is not an offer. it is mere attempt to ascertain whether an offer can be obtained within such a margin as the employer is willing t adopt; it is an offer to negotiate. A tender is an offer as it is in response to an invitation to offer. Tenders commonly arise where, for example, a hospital invites offers to supply eatables or medicines. The persons filling up the tenders are giving offers. However, a tender may be either: (a) specific or definite; where the offer is to supply a definite quantity of goods, or (b) standing; where the offer is to supply goods periodically or in accordance with the requirements of the offeree. In the case of a definite tender, the suppliers submit their offers for the supply of specified goods and services. The offeree may accept any tender (generally the lowest one). This will result in a contract. Example A invites tenders for the supply of 10 quintals of sugar. B, C, and D submit their tenders. Bs tender is accepted. The contract is formed immediately the tender is accepted. In the case of standing offers, the offeror gives an open offer whereby he offers to supply goods or services as required by the offeree. A separate acceptance is made each time an order is placed. Thus, there are as many contracts as are the acts of acceptance. Example The G.N. Railway Co. invited tenders for the supply of stores. W made a tender and the terms of the tender were as follows: To supply the company for 12 months with such quantities of specified articles as the company may order from time to time. The company accepted the tender and placed the orders. W executed the orders as placed from time to time but later refused to execute a particular order. Held: W was bound to supply goods within the terms of the tender [Great Northern Railway v. Witham (1873) L.R. 9 C.P. 16]. The Supreme Court of India in this regard has observed: As soon as an order was placed a contract arose and until then there was no contract. Also each separate order and acceptance constituted a different and distinct contract [Chatturbhuj Vithaldas v. Moreshover Parashram AIR 1954 SC 326].