formation of Contract

All contracts are made by the process of a lawful, offer by one patty and the lawful. acceptance- of the offer by the other party. X says to Y, “Will you buy my house for Rs 50,000 ?This is an offer. If Y says, “Yes”, the offer is accepted and a contract is formed.


An “offer” involves the making of a “proposal” The term proposal is defined in the Contract Act as follows :

“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” -Sec. 2(a).


A proposal is also called an offer. The promisor or the person making the offer is called the offeror. The person to whom the offer is made is called the offeree.

Promise and Acceptance

“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.”-Sec, 2(b),”The person making the proposal is called the `promisor’ and the person accepting the proposal is called the `promisee’.” -Sec. 2(c).

Examples of offer and acceptance :

(i) Specific Offer : X offers to sell his motor car to y at the price of Rs. 5000. This is a proposal. X is the promisor or the offeror. Y is the offeree. If Y agrees to buy the car at the price stated ; Y becomes the promisee or the acceptor. There is a contract.

(ii) Specific Offer : p puts up a notice offering to pay a reward of Rs. S to any student who finds out and returns a book lost in the college. Q a student, reads the notice and then finds and brings the book to P. P’s notice is an offer and Q is the acceptor. There is a contract.

(iii) general Offer : A transport company runs tramway cars along the streets. This is an offer by the company to carry passengers at the scheduled fares. The offer is accepted when a passenger gets up on a tram with the intention of becoming a passenger.


  • Offer alone and acceptance alone are “inactive”, “inert” or “powerless”:
  • When separate they cannot lead to the formation of a contract.
  • But an offer together with acceptance leads to a contract which is enforceable by the Court, provided the other’­essential elements of contract exist.
  • The formation of a “contract can be illustrated by the famous `gunpowder and lighted match’ simile of Anson. The materials in a gunpowder (like sulphur, iron fillings, etc.) by themselves are not enough to cause an explosion. But when a lighted match is applied to the inflammable mixture, an explosion occurs.
  • Similarly, offer and acceptance together can explode leading to the formation of a valid contract.
  • But if there is any disquali­fication on the part of either offer or acceptance, no contract will be formed just as if a gunpowder lacks sulphur or a lighted match is damp no explosion will occur.
  • The idea being clear, we can recall the original saying. “Acceptance is to offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone. But the powder may have lain till it has become damp or the man who laid the train may remove it before the match is applied. So an offer may lapse for want of acceptance or be revoked before acceptance. Accep­tance converts the offer into a promise and then it is too late to remove it” (Anson)


rules regarding offer

The Contract Act contains various rules regarding offer or proposal. They can be summed up as follows :

1. An offer may be express or may be implied from the ‘ circumstances :

  • An offer may be made in two ways :

I.      by words, spoken or written and

II.      by conduct.

  • When an-offer is made by stating so in words or in writing, it is called an Express offer. When an offer is implied from the conduct of a person, it is. called an Implied offer. Examples (i) and (it) in the last page, are cases of express offer. Example -(ii) is a case of an implied offer.

“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”-Sec. 9.

2. An offer may be made to a definite person ;

  • to some definite class of persons ; or to the world at large :( An offer made to a definite person or a definite class of person is called a Specific offer. A
  • n offer sent to all persons (or the world at large) is called a General offer.)Example (i) is an offer to a definite person ; example (ii) is an offer’ to a definite class of persons; and example (iii) is an offer to the world at large. (See pp. 17-18) relationship is required :

  • The offer must be one which -is capable of creating a legal relationship.
  • A social party or an invitation to play cards is not a legal relationship. Therefore, an offer to such an affair does not lead to a binding contract. (See chapter 3, Part I, p. 33)
  • The terms of the offer must be certain, definite, unam­biguous and not vague : X says to Y, “I will give some money if you marry Z “. This is not an offer which can be accepted because the amount of money to be paid is not certain.

A mere statement of intention is not an offer :

  • A distinction is usually made, between an “offer” and “a statement of intention”.
  • Price-lists and catalogues, and enquiries for cus­tomers are merely statements of intention.
  • They are not regarded as offers but as invitation to others to made offers.
  • An advertise­ment in a newspaper or elsewhere may be so worded that it amounts to an offer. But ordinarily and advertisement is considered to be an invitation to make offers.
  • Similarly, in an auction sale, articles are displayed with an intention that the bidders present may bid for them i.e. may make an offer.
  • Thus in an auction sale a bid is an otter while the fall of the hammer signifies the acceptance of the auctioner. (Payre v. Cave)

Examples :

(i) intention to sell:

A lable on an article in a shopkeepers showcase stating `price Rs. S’ is considered to be the expression of an intention to sell the article at Rs.5 . If is not an offer to the .world at large which can be accepted by anybody. The intending purchaser who wishes to buy the article is the proposer. The shopkeeper may or may not accept the proposal. The same rule applies to price­list and catalogues. Fisher v. Bell.

(ii) Quotation of prices :

A quotation of prices is not an offer, but an invitation for offers. Mylappa Chettiar v. Aga Mirza Mohamed Shirazee.This is true of many common forms of advertisement.

(iii) Advertisements :

A newspaper advertisement inviting applications ~ for a ‘job or inviting tenders for some work is not an offer. It is only an invitation to make offers. The applicants who reply to the advertisement are the proposers or offerors. The advertiser is free to accept any one of. the applications.

(iv) Catalogue :

A banker’s catalogue of charges is not an offer. Bank of Travancorr v. Dhirt Ram

(v) Time-table :

A railway time-table is not an offer. Therefore if a train does not work according to the table, the ticket-holder cannot file a’ case for breach of contract.

(vi) Question and Reply :

H telegraphed to F asking the tatter to inform him whether he would sell Bumper Hall Pen and if so at what price. F informed H that the lowest price was £900 but did not* say that he was willing to sell at that price. H telegraphed. that he would bay at that price. F gave no reply to the telegram. Held, there was no contract because neither the question of H nor the reply of F constituted an offer. Harvey v. Facey

(vii) Auction :

When particular goods are advertised for sale by auction the auctioneer does not contract any one who attends the sale intending to purchase those goods that they shall be actually put up for sale. Harris v. Nickerson.

6. offer must be communicated to the offeree :

  • A person cannot accept an offer unless he knows of the existence of the offer.
  • P offers a reward to anyone who returns his lost dog. Q finding the dog brings it to P without having heard of the offer. Held, he was not entitled to the reward. Fitch v. Snedaker In this case it was argued that a man cannot accept an offer without intending to do so, and he cannot intend to accept an offer of which he was ignorant.
  • In Lalman v. Gauri Dutt. G sent his servant in search of his missing nephew. Subsequently G announced a reward for information concerning the boy. L brought back the missing boy, without having known of the reward. Held, there was so contract between L and G and the reward cannot be claimed.

7. an offer may be conditional :

  • An offer may be made subject to conditions. In such cases, the conditions must be clearly communicated to the offeree.
  • If a person accepts an offer without knowledge of the conditions, the offeror cannot claim fulfillment of the conditions. But if the conditions arc clearly written or expressed and should have been known to the offeree, he cannot plead ignorance of the conditions.

Example  :

(i) Strict enforcement :

X agreed to buy goods from Y and signed an order form given by Y containing a number of clauses in small print, without .reading them. Held, clauses were binding on X. L Estrange v. graucob Ltd

(ii) strict enforcement :

T, who could not read, took an excursion ticket on the railway. On the front of the ticket was printed “for conditions see back”. One of the conditions was that the railway company would not be liable for personal injuries to passengers. T was injured by a railway accident. Held, T was bound by the conditions and could not recover any damages. Thomson v. L. M. & S Rly

(iii) No reasonable notice :

R booked her passage on a ship and received a ticket ‘folded in such a way that no writing was visible. On the ticket were printed certain conditions in small type, one of which was that the shipowner’s liability was limited to V00. R knew that there was printing on the ticket but did not know that the printing related to conditions of the contract. Held, R was not bound by the conditions as she did not know of their existence, and having regard to the smallness of the type in which they were printed, the absence of calling of attention to them, the shipowner had not given reasonable notice of them. Richardson v. Rawntree.

(iv) Against public interest :

M delivered one new sari to a laundry for washing. On the back of the printed receipt it was stated that the customer would be entitled to recover only 15% of the market-price of the article in case of loss. The sari was lost owing to the negligence of the laundry. In a suit by :bf it was held that the term was unreasonable. Such a term would give a premium on dishonesty and is against the public interest. Lily White v. R Munnuswami.

(v) unreasonable :

in a Karnataka case, a laundry would pay only 8% of the price in case of loss. The court held that the term          was unreasonable. M. Siddalingappa v. T. Nataraj

Comments : A contract formed on a conditional offer is valid. The terms of the contract can be constructed strictly or leniently. Formerly, all contracts were constructed and enforced strictly. See examples (r) and (ii), above. In recent times, however, the courts have adopted various protective measures for the aggrieved persons. Conditional offers are invalid under the following circumstances :

1. Lack of reasonable notice. Example (iii)

2. Unreasonable terms. Example (iv) and (v)

3.breach of fundamental rights.

4.Tortious action by offeror:

8. Printed Contracts :

  • Printed Contracts (or Standard Forms of Contracts) often’ contain a large number of terms and conditions which exclude liability under the contract.
  • For examples, the Life Insurance -Corporation of India, the Railway Administration, Statutory Corporation and big companies issue printed forms of contract.
  • The individual is bound to sign them whether he likes the terms or not.
  • Previously, the offerees of such printed forms were helpless against the massive organisations like those above.
  • These organisations have availed of the opportunity to exploit the weak individual by imposing onerous terms upon them. Therefore; nowadays in order to protect the oppressed individual the courts have evolved various modes of protection.


Who can accept ?

  • An offer can be accepted only by the person or persons for whom the offer is intended.
  • An offer made to a particular person can only be accepted by him because he is the only person intended to accept.
  • An offer made to a class of persons can be accepted by any member of that class.
  • An-offer made to the world at large can be accepted by any person whatsoever.

X sold his business to Y without disclosing the fact to his customers. Z sent an order for goods to X by name.. Y received it and sent a letter of acceptance. Held, there was no contract between Y and Z because Z never made any offer to Y. Boulton v. Jones.

Rules regarding -acceptance

The acceptance of an offer to, be legally effective must satisfy, the following requirements

1.must be ‘an absolute and unqualified acceptance of all the terms of the offer-Sec 7(1).

If there is any variation, even onan unimportant point, between the terms of the offer and the terms of the acceptance, there is no contract.


(i) M offered land to N at £280. N replied accepting and enclosing, £80, and promising to pay the balance by monthly instalments of £50. Held, there was no contract, as there was no unqualified acceptance. Neale v .merrett.

(ii) P offered to buy O’s mare on Q giving a guarantee that the mare was quite in harness. Q guaranteed that. the mare was “quiet in

double harness “. Held, no acceptance. Jordan v. Norton

2. conditional Acceptance :

  • In accordance with English law as well as with the terms of the Contract Act, an acceptance with a variation is no acceptance ; it is simply a counter-proposal. which must be accepted by the original promisor before a contract is made.
  • X offered to sell his house for Rs. 12,000. Y said, “accepted for Rs. 10,000.” This is not an acceptance but a counter offer or counter offer on counter proposal. Kundan Lal v. Secretary of State ; Hyde v. Wrench.
  • But an acceptance is not called `conditional’ if an immaterial term is added or if there occurs any misunderstanding between the parties for the interpretation of collateral terms.

3. Contracts subject to condition :

  • There are cases where an `immediate binding contract is formed although some of the parties’ rights and obligations may be dependent’ upon the happening of a particular event.
  • For example, the agreement may contain such a term as `subject to the purchaser’s solicitors approving the title.” Smith v. Butler-1. (Anson-Law of contract, p. 54)

4. Clarification :

The seeking clarification of offer neither amounts to the acceptance of the offer nor to the making of a counter offer. Cheshire and Fifoots’ Law of Contracts. 9 Edn.p. 34 ; U. P. State Electricity Board and another v. M/s Goel Electric stores, Chandigarh.

5. the acceptance must be expressed in same usual or reasonable manner :-Sec 7(2).

  • The offeree may express his acceptance by word of mouth, telephone, telegram or by post. These are the usual methods of communicating acceptance to the offeror. [Communication.-See p. 26]
  • An offer may also be accepted by conduct. If the offeree does what the offeror wants him to do, there is acceptance of . the offer by conduct. Section 8 of the Act states that, “Perfor­mance of the conditions of a proposal or the acceptance of any consideration for reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.”

Examples :

(i) Oral or by writing. P offers to buy Q’s bicycle at Rs. 50. Q may accept this offer by stating so orally or through telephone or by writing a letter or by sending a telegram to that effect.

(ii) conduct. A company offered £100, to anyone who contracted influenza after using their smoke ball 3 times daily for 2 weeks. Mrs. Carlill used the smoke ball but nevertheless got influenza. She claimed the reward. The company objected, that she should have notified them for her acceptance of the offer. Held, the use of the smoke ball by Mr. Carlill constituted acceptance of the offer by conduct, and no formal notice of acceptance was necessary. Carlill v. Carbolic Smoke Ball Company.

(iii) Conduct. A widow invited her niece to stay with her in her residence and promised to settle on her a particular immovable property. The niece stayed with her in residence till her death. Held, (by the Privy Council) that the niece was entitled to the property because she had accepted the aunt’s offer by going to her residence and staying with her as desired. V.Rao v. A Rao.

6. Mental acceptance or uncommunicated assent does -not result in a contract :

  • No contract is formed if the offeree remains silent and does nothing to show that he has accepted the offer. Acceptance must be communicated to the offeror or shown by conduct.
  • Acceptance cannot be implied from silence of the offeree. See example (iii).

Example :

(i) F offered to buy B’s horse for f30, saying, “!f 1 hear no more about . him ! shall consider the horse as mine at £30″ B did not reply. Held, there was no contract because there was no communication of acceptance. Mental acceptance or uncommunicated assent does not result in a contract. Felt house v. Bindley.

(ii) A person received an offer by letter ; he wrote on the letter “accepted”, put the letter in his drawer and forgot all about it. Held there was no contract because the other party was not informed. Brogden v. Metropolitan Rly Co.

(iii) Insurance proposal; Acceptance is complete only when it is communicated to the offeror. Silence or receipt and retention of premium cannot be construed as acceptance. Life Insurance Cor­poration of India v. Raja vasireddy Komalavalli Kamba and others

7.The mode of acceptance :

  • Where the promisor prescribes a particular mode of acceptance, the offeree must follow the _ particular mode of acceptance.
  • For example, if the offeror says, “acceptance to be sent by telegram”, the offeree must send a telegram.
  • If the offeree fails to follow the prescribed mode of acceptance, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that the proposal be accepted in the prescribed manner and not otherwise.
  • But if the proposer does not insist upon it, he accepts the acceptance as actually communicated.-Sec 7(2).
  • Thus, under the Indian law the proposer has the option of waiving compliance with the prescribed mode of acceptance.

Example :

X offers to buy a certain quantity of coal from Y at a certain price and asks Y to. send a telegram if he accepts, Y writes a letter accepting the offer. X may insist on a telegram from Y ; but if X does not so insist, the acceptance is good.

8. time of Acceptance :

  • It the offeror prescribes a time, the acceptance must be done within that time.
  • If no time is prescribed the acceptance must be done within reasonable time.
  • What is `reasonable’ depends on the facts of the case. See the Case of Ramsgate Victoria Hotel Co. v. Montefiore

9. when acceptance is complete : Section 4 of the Contract Act lays down that the communication of an acceptance is complete,-as against the proposer, when it is put in a course of transmission to hint, ‘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.

Examples :

(i) A proposes, by letter, to bell a house to B at a certain price. The communication of the proposal is complete’: when 8 receives the fetter.

(ii) B accepts A’s proposal by a letter sent by post. The communication of the acceptance is compete-as against A, when the letter is posted, as against B, when the letter is received by A.

10. Before Offer:

Acceptance must be given before the offer.This is the natural sequence.There cannot be acceptance before the offer is given from any person. See the case of Lalmnn v. Gauri Du1t.

11. the acceptance must be made while the offer is in force, i. e. before the offer has been revoked or the offer has lapsed. How an offer is revoked is described below.


Section 3 of the Contract Act states as follows : The commu­nication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, 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.

How is an Offer to be Communicated?

  • An offer may be communicated to the offeree or offerees by word of mouth, by writing or by conduct.
  • A written offer may be contained in a letter or a telegram. A circular or advertisement or a notice may be written in such a language that it amounts to an offer.
  • A tramway car and a bus going along a street and picking up passengers are examples of offers by conduct.
  • Section 4 states : “The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made

How is an acceptance to be Communicated ?

offer and Acceptance by Post

  • An offer may be made by post.
  • An offer may also be accepted by post, if there is no other mode of acceptance specially prescribed by the proposer.
  • When a proposal is made through the post, the post office is by implication the agent of the proposer.
  • Therefore a letter of acceptance duly addressed and posted is sufficient acceptance even though the letter does not actually reach the proposer. (Notice to an agent is considered to be notice to the principal).
  • The letter must, however, be correctly addressed.
  • The letter must be actually posted. It is not enough to iv e it to somebody to post.

Examples :

(i) G applied for shares in a company. A letter of allotment was posted “~ but the letter did not reach G. Held there was a binding contract and G was a shareholder of the company. Household Fire Insurance Co: v. Gran1.

(ii) A registered envelope was tendered by the postman to the addressee, who refused to accept it. It is to be presumed that the addressee has the knowledge of the content thereof.. Har Charn Singh v. Shiv rani and Others.

Offer and Acceptance through Telephone

  • Offer and acceptance can be communicated through the telephone.
  • But there are certain rules regarding oral communi­cation. It has been held that the offer and acceptance must be audible, heard and understood.
  • If these conditions are satisfied and the other essential elements of contract exist, the parties are bound through a telephone conversation The High Court judg­ment about this matter is quoted below. `Now, when the parties negotiate a contract orally in the presence of each other or over telephone and one of them makes an oral offer to the other, it is plain that an oral acceptance is expected, and the acceptor must ensure that his acceptance is audible, heard and understood by the offer. The acceptance in such a case must be by such words which have the effect of communicating it:’ Kanhaiylal v. Dineshwar Chandra
  • In an English court it was held that a communication, sent through a telex or a teleprinter machine in the office, is valid. A contract made by “telex” was no exception to the general rulethat acceptance is not complete until communicated. Entores Ltd. v. miles Far Eastern Corporation


There was an auction sale of plots of land. The terms, including certain restrictive conditions, were announced by a microphone. The Supreme Court held, “Microphones have not yet acquired notoriety as carriers of binding representations. Promises held out over loudspeakers are often claptraps of politics.” Banwari Lal v. Sukhdarshan Dayal.


An option is a conditional contract to do something. Suppose that P the owner of a house, agrees in consideration of Rs. 200, to give Q an option to buy the house within six months at a certain price. This is a contract binding upon P to allow Q to purchase the house at the agreed price at any time within six months. A promise to keep an offer open to acceptance for a certain time is not binding’ on the proposer unless there is a consideration separately given for that promise, as in the example given above.


Contracts for the supply of goods over a period of time are some times so worded that the buyer has an option as regards the quantity to be purchased and the time, of purchase. Such contracts are called “Standing Contracts” or “Open Proposals”.


P signed a tender addressed to the London County Council, agreeing, on acceptance, to supply. all the goods specified in the schedule, to the extent ordered. The tender was accepted but the L. C. C. did not order any goods. Held, the L. C. C. was not bound to order any goods, but if it did so, P was bound to deliver the goods as and when ordered. Percival Ltd. v. L.C.C. In such cases as above, a contract comes into existence when a definite quantity is ordered Bengal coal co. v wadia


Revocation of an Offer. When does an Offer Lapse?

An offer comes to an end, and is no longer open to acceptance under the following circumstances.-Sec 6.

1. By notice

  • If the offeror gives notice of revocation to the other party, i.e., expressly withdraws the offer, and the offer comes to an end. An offer may be revoked any time before acceptance. but not afterwards.
  • Once an offer is accepted there is a binding contract.
  • The acceptance of an offer becomes binding on the offeror as soon as the acceptance is, put in course of commu­nication to the offeror so as to be out of the power of the acceptor.
  • But any time before this happens the offer may be revoked.
  • A proposal is sent by X to Y and is accepted by Y by letter. The proposal might have been revoked any time before the letter of acceptance was posted but it cannot be revoked after the letter is posted.
  • The notice of revocation does not take effect until it comes within the knowledge of the offeree.

2. By lapse of time

When the proposer prescribes a time within which the proposal must be accepted, the proposal lapses as soon as the time expires.

3. After expiry of reasonable time

If no time has been prescribed, the proposal lapses after the expiry of a reasonable time. What is reasonable time will depend on the circumstances of the case.

example :

On 8th June, M offered to take shares in R company. He received a letter of allotment on 23rd November. M refused to take the shares. Held, M was entitled to refuse as the offer had lapsed by the delay in acceptance. Ramsgate Victoria Hotel Co. v. Montefiore.

4. By failure of a condition precedent

An offer lapses by the failure of the acceptor to fulfill a condition precedent to acceptance, where such a condition has been prescribed

Example :

P says to Q. “I will sell my house at Delhi to you for Rs. 50,000 if you are married.” The offer cannot be accepted until and unless Q is married.

5.By death or insanity

An offer lapses 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.

6.Counter Offer

When a counter offer is given, the original offer lapse. See the Case of Hyde v. Wrench

7.By refusal

A proposal once refused is dead and cannot be revived by its subsequent acceptance.

Example :

A offers to sell his farm to B for Rs. 1,000. B replies offering to pay Rs. 950. A refuses. Subsequently B writes accepting the original offer. There is no contract because the original offer has lapsed.

Revocation of Acceptance

Section 5 of the Contract Act provides that an acceptance can be revoked any time before the acceptance comes to the knowledge of the proposer but not afterwards.

Example :

P proposes, by a letter sent by post, to sell his house to Q. Q accepts the proposal by a letter sent by post. Q may revoke his acceptance any time before the letter communicating it reaches P but not afterwards.

  • The English law on this point is different. Under English law an acceptance is irrevocable once it is put in course of communication to the offeror. Thus in the above example Q could not have revoked the acceptance once he had posted the letter of acceptance.

Communication of Revocation

  • According to Section 3 of the Act, the revocation of .aproposal or an acceptance is deemed to be made by any act or omission of the party by which he intends to communicate such , revocation, or which has the effect of communicating it.
  • According to Section 4 of the Act, the communication of revocation is complete­
  • 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 ;              as against the person to whom it is made; when it comes to his knowledge.

Examples :

(i) P nukes a proposal to Q. Q sends a letter of acceptance. Subsequently Q revokes his acceptance by telegram. Q’s revocation is complete, as against Q when the telegram is despatched, and as against P when it reaches him.

(ii) A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched. It is complete as against B when B receives it. B revokes his acceptance by telegram. B’s revocation is complete as against B when the telegram is despatched, and as against A when it reaches him.