Understanding the concept of proposal and acceptance

Written by Purva Singh

The simple task of buying a burger at McDonald's to the complex process of buying a house, from exchanging goodies with your best friend to acquiring a stake in an MNC; all are examples of contracts. 'Contract' is a popular term and I'm sure we have all heard about it. As we know, nowadays promises to do or not to do something or to abstain or not to abstain from doing something are rarely kept. So, in order to convert these false promises into a legally binding obligation, the Indian Contract Act, 1872 “the holy grail for all the rules and regulations to be followed in order to constitute a binding and a legally viable agreement,” comes into play and under it are the terms we are concerned with:proposal & acceptance.

PROPOSAL

If the contract is a relationship between two or more parties then a proposal is the first step to create that relationship. An offer or proposal is an expression of willingness to do or not to do something to obtain the assent of the other person, the other party can accept it or reject it or he can make a counteroffer.

Section 2(a) of Indian Contract Act, 1872 defines 'proposal'.

The person who makes the proposal is called “promisor” or “offeror”, to whom the proposal is made is called the “proposee” or “offeree”, after the proposee accepts the proposal, he is called a “promisor”.

What makes an offer/proposal valid?

a. An offer must be clear, definite, complete, and final. It must not be vague. For example, A promises B to pay a higher price for a horse if it proves lucky. This offer is too vague and is not binding.

b. An offer must be communicated to the offeree. An offer only becomes effective when it is communicated to the offeree so as to give him an opportunity to accept or reject the same. Communication of offer can be expressed or implied.

Express offer is one that is expressed by words, written or spoken. For example, if you offer your watch to your friend for Rs. 10,000. An implied offer requires a meeting of minds, an offer which is made by conduct. For example, hawker sitting on the roadside through his conduct offers the sale of goods. Another example can be a bid at an auction, it is an implied offer to buy.

Intention to contract

Every loose conversation between two or more people can’t be considered a contract. Contracts are not the sports of an idle hour: an offer or acceptance must be made with the intention of creating a legal relationship. Every slack conversation, a mere matter of pleasantry and badinage, can’t be turned into a contract. For example, there can be an offer and acceptance of hospitality (dinner) yet the same would not create any contract because there is no intention of getting into a binding legal relationship.

How to determine intention? The intention can’t be ‘influenced by personal feelings or opinions in considering and representing facts’ means the test of contractual intention is objective, notsubjective. What matters is what a reasonable person would think, in the circumstances, not what the party had in mind.

In social relations, usually, the parties do not intend legal consequences to follow, whereas in the case of business relations the parties intend legal consequences to follow. This does not, however necessarily mean that in a family or social relation there cannot be a legally binding contract and in business matters there can’t be a contract without legal relations to follow.

For example, (a) an agreement to transfer wife ownership of the 40x60 plot/land at the time of separation was held to be binding. (b) And in the case of Rose & Frank Co vs. Crompton & Bros Ltd., an agreement was signed between two firms containing the 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.” The agreement was terminated by one of the parties contrary to its terms and brought an action for breach. It was held that there was no binding contract between the parties as there was no intention to affect legal relations.[2]

Letters of intent: Being a prelude to a contract, it merely indicates the party’s intention to enter into a contract. However, when it’s written that it would follow a detailed purchased order which would carry an arbitration clause, it was held that the letter was not a supply order and the arbitration clause contained in it did not by itself result into an arbitration agreement.

Offer and invitation to offer

The catalogues and display of goods is only an invitation to offer, intending customer to buy at the indicated prices. Where a party, without expressing the final willingness, proposes a certain term on which he is willing to negotiate he does not make an offer, he only invites the other party to make an offer to those terms.

When does the offer/proposal become invalid?

a) When the proposal is not accepted within the specified time (if any) or after a reasonable time (if none is specified)

b) It is not accepted in the mode prescribed or if no mode is prescribed in some usual or reasonable manner.

c) Either the offeror or the offeree dies before acceptance.

d) The offeree rejects it by distinct refusal to accept it.

e) Offeree makes a counteroffer, which amounts to a rejection of the actual offer, and an offer by offeree can be accepted or rejected by the offeror.

f) The acceptor fails to fulfill a condition precedent to an acceptance.

Types of offer

General offer: it’s an offer made to the world at large, kind of a public offer. In such a case the contract is not made with the entire world but only with those who come forward and fulfill all the conditions of the offer.

These offers are continuing in nature, more than one person can accept it and can even claim the reward. But if the reward is for seeking some information or seeking the restoration of missing thing, then the offer can be accepted by one individual who does it first of all. The condition is that the claimant must have prior knowledge of the reward before doing that act or providing that information.

Specific offer: When an offer is made to an ascertained person or an ascertained group of persons. It is also called a private offer. The contract arises only when it has been accepted by an ascertained person or a particular person to whom the offer has been made. (Acceptance of the offer by the person to whom the offer has not been made is no acceptance)

Counteroffer: Offer in response to an offer is called a counter-offer. It does not create any contract, rather it creates a new offer that may or may not be accepted by the original offeror.

Cross offer: When two persons made similar offers to each other, having no knowledge about the offer of the other person and their offers cross each other's in post and later they get the knowledge of the offer of each other.

Standing offer: Acceptance of this offer merely amounts to an intimation that the offer will remain open during a fixed period and it will be accepted at a certain rate from time to time by placing an order for specified quantities. For example, A made an offer to B for selling 1000 bags of wheat, B accepts that offer. On 5th January B deliver 100 bags of wheat to A so on that day the acceptance is made only for 100 bags. Each order made was a separate contract. It’s continuing in nature.

When is the communication of a proposalcomplete?

As soon as the knowledge of the proposal comes to the knowledge of the person to whom it is made, the proposal is complete. Therefore, an offer cannot be accepted until and unless it has been brought to the knowledge of the offeree.

Acceptance

It's a very crucial stage of the contract because at this age the contract becomes binding. When the offeree signifies his assent to the given offer, he is said to have accepted the offer.

Section 2(b) of the Indian Contract Act, 1872 defines acceptance.

Rules Governing Acceptance

a) Acceptance may be express: through words spoken or written. It may also be implied from the conduct of the parties.

b) The offer must be accepted in the manner prescribed by the offeror.

Does the departure from that manner invalidate acceptance? It’s the duty of the offeror to reject such acceptance in reasonable time and if he fails to do so, the offeror will become bound by the contract.

c) If the offeror gets no answer from the side of the offeree, he certainly cannot assume that the offer has been accepted. If the offeree merely remains silent,it does not amount to acceptance. In other words, the offeror cannot impose the burden of refusal.

d) Counteroffer will lapse the original offer. Mere inquiry about terms is not a counter-proposal. By the acceptance of the counter-proposal, a new contract will arise and it will follow the terms of such counter-proposal only.

e) Acceptance must be absolute and unqualified. Partial acceptance like accepting the part which is favorable and rejecting the rest is another kind of counteroffer.

f) Mental acceptance is not enough. For completion of acceptance, it needs to be communicated to the offeror. In some cases, communication is not necessary. For example, a general offer impliedly indicates that acting on their term will be a sufficient acceptance.

g) Acceptance should be made in a reasonable time (if no specified time is given)

h) Acceptance should be communicated by the acceptor himself.

i) Performance of condition of an offer without the knowledge of same amounts to no acceptance.

j) An offer will lapse by the death of the offeror and it cannot be accepted then.

Revocation of an offer by the offeror & acceptance by the offeree

An offer becomes irrevocable by acceptance. The offeror can revoke the offer only before the acceptance takes place. A person can revoke its acceptance at any time before the communication of acceptance is complete. The revocation of an offer must reach the offeree before he sends out the acceptance. Completion of revocation of an offer takes place only when it comes to the knowledge of the offeree.

[1] Avtar Singh, Contract and Specific Relief (Eastern Book Company, Lucknow, 12th edn., 2019)

[2]Rose & Frank v JR Crompton & Bros Ltd [1924] UKHL 2, AC 445

[3]Indian Contract Act, 1872, s.2(a).

[4]Indian Contract Act, 1872, s.2(b).