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Essay on Formation of Contracts

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    Introduction An offer is the first step in the formation of a contract. It is something that creates a power of acceptance. It is a proposal made by one party to another to enter into a legally binding agreement with her?. In Acme Grain Co. v. Wenaus, 1917, it was observed: … To constitute a contract, there must be an offer by one person to another and an acceptance of that offer by the person to whom it is made. A mere statement of a person’s intention, or a declaration of his willingness to enter into negotiations is not an offer and ? cannot be accepted so as to form a valid contract.

    An offer is the manifestation of willingness to enter into a bargain, which justifies another person in understanding that her assent can conclude the bargain. It must be a clear, unequivocal and direct approach to another party to contract. A person is said to have made an offer, when she “signifies to another her willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence. ” The person making the offer is known as the offeror, proposer, or promiser and the person to whom it is made is called the offeree or proposee.

    When the offeree accepts the offer, she is called the acceptor or promisee . The offeror or proposer expresses her willingness ‘to do’ or ‘abstain from doing’ something with a view to obtain acceptance of the other party to such act or abstinence. Thus, there may be ‘positive’ or ‘negative’ acts which the proposer is willing to do. 1. 1 Mode of Making Offers 2 The offer must be intended to create, and be capable of creating, legal relations. 3 The terms of the offer must be definite, unambiguous and certain or capable of being made certain . An offer must be distinguished from a mere declaration of intention or an invitation to offer or to treat. A mere statement of intention, made in the course of conversation, does not constitute a valid offer, even though acted upon by the party to whom it is made. 5 The offer must be communicated to the offeree. The communication of a offer is complete when it comes to the knowledge of the person to whom it is made. In Blair v. Western Mutual Benefit Association, 1972, it was held that a corporate resolution is not an offer unless efforts are made to communicate it. The offer must not contain a term the non-compliance of which may be assumed to amount to acceptance. Thus, the offeror cannot say “if you don’t accept the offer within two days, the offer would be deemed to have been accepted”. 7 An offer may be made to a specific person or persons or it may be made to the public at large. In Carlill v Carbolic Smoke Ball Company, 1893, an advertisement was placed for ‘smoke balls’ to prevent influenza. The advertisement offered to pay ? 100 if anyone contracted influenza after using the ball. The company deposited ? 1,000 with the Alliance Bank to show their sincerity in the matter.

    The plaintiff bought one of the balls but contracted influenza. It was held that she was entitled to recover the ? 100. The Court of Appeal held that: (a) the deposit of money showed an intention to be bound, therefore the advertisement was an An offer can be made by any act or omission of the party proposing by which she intends to communicate such proposal or which has the effect of communicating it to the other . Words, gestures, or actions can signal an offer to enter into a contract and an acceptance. If one is forced to make an offer it is not a valid offer.

    Offers remain open until: (i) accepted; (ii) rejected; (iii) retracted prior to acceptance; (iv) countered; or (v) expired by their own terms. An offer can be made by an act in the following ways: 1 WORDS (WHETHER WRITTEN OR ORAL) The written offer can be made by letters, telegrams, telex messages, advertisements and e-mails. The oral offer can be made either in person or over telephone. 2 CONDUCT The offer may be made by acts or signs so that the person acting or making signs means to say or convey. However, silence of a party can in no case amount to offer by conduct. 3 IMPLICATION

    An offer may also be implied from the conduct of the parties or the circumstances of the case. 1. 2 Essential Requirements of a Valid Offer Not every offer made by an offeror is legally regarded as an offer. An offer must satisfy certain conditions in order to be considered as a valid offer. These conditions are as follows: 1 The offer must be made with a view to obtain acceptance . offer; (b) it was possible to make an offer to the world at large, which is accepted by anyone who buys a smoke ball; (c) the offer of protection would cover the period of use; and (d) the buying and using of the smoke ball amounted to acceptance. . 3 Special Terms in a Contract a proposal is revoked by the death or insanity of the proposer, if the fact of her death or insanity comes to the knowledge of the acceptor before acceptance. Any special terms forming part of the offer must be brought to the notice of the offeree at the time the offer is made. The special terms may be brought to the offeree’s notice either by drawing her attention to them specifically or by inferring that a person of ordinary prudence could find them by exercising ordinary intelligence.

    If the special terms were not communicated at the time of making the offer, there would be no valid offer and if offer is accepted and the contract is formed the offeree is not bound by the special terms that were not brought to her notice. 1. 4 Termination and Lapse of an Offer Thus, if the offer were accepted in ignorance of the death or insanity of offeror, there would still be a valid contract. In the case of the death of offeree before acceptance, the offer is terminated. An offer terminates in the following circumstances: 1 The offeree accepts the offer.

    The moment an offer has been accepted, a binding contract is made and the offer ends. 2 The offeree rejects the offer. When the offeree rejects the offer that is the end of it. 3 The offeror revokes the offer before acceptance. The offer may be revoked by the offeror at any time until it is accepted. However, the revocation of the offer must be communicated to the offeree. Unless and until the revocation is so communicated, it is ineffective. 4 The offer is not accepted in the mode prescribed, or if no mode is prescribed, in some usual and reasonable manner. A conditional offer terminates when the offeree does not accept the condition. An offer may be made subject to conditions. Such a condition may be stated expressly by the offeror or implied by the courts from the circumstances. If the condition is not satisfied the offer is not capable of being accepted. An offer cannot be accepted if it has lapsed, revoked, terminated or has been rejected earlier. An offer is made with a view to obtain assent of the offeree. As soon as the offer is accepted it becomes a contract (provided other essentials of a valid contract are present).

    But before the offer is accepted, it may lapse, or may be revoked. Also, the offeree may reject the offer. In these cases, the offer will come to an end. An offer lapses after the stipulated or reasonable time. The offer must be accepted by the offeree within the time mentioned in the offer and if no time is mentioned, then within a reasonable time. What is a reasonable time is a question of fact and would depend upon the circumstances of each case. An offer also lapses by the death or insanity of the offeror or the offeree before acceptance. The law provides that: Revocation of Offer

    An offer may be revoked by the offeror at any time before it is accepted. A offer is revoked in the following circumstances: (i) when the offeror notifies the other party that the offer is being revoked; (ii) by lapse of the time prescribed in such offer for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time; (iii) by the failure of the acceptor to fulfil a condition precedent to acceptance; or (iv) by the death or insanity of the offeror, if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance. 1. 6 Invitation to Treat ver the scanner. Then you have a completed contract. 2 INVITATION OF TENDERS Releasing advertisements inviting tenders is an invitation to treat, not an offer to award the contract to the highest bidder. The bid, or the tender submitted, is the offer. It is then up to the person who put out the tender to accept or reject the bid. 3 ADVERTISEMENTS An invitation to make an offer (sometimes called an ‘invitation to treat’) may be the start of negotiations, but it is not a true offer. Sometimes it is difficult to tell whether a statement is an invitation to treat or a true offer.

    Price quotations, invitation for tenders, advertisements, circulars, catalogues, display of goods and notice for holding an auction sales are not offers but only invitation to others to make an offer. These issues are discussed below: 1 PRICE QUOTATIONS Most advertisements appearing in newspapers, store windows, etc. , are not offers to sell. This is because they do not contain sufficient words of commitment to sell. For example, a pamphlet stating, “Men’s shirts, Rs. 250 each,” would not be an offer to sell shirts at that price, because it is too vague regarding quantity, duration, etc.

    However, if the advertisement contains specific words of commitment, especially a promise to sell a particular number of units, then it may be an offer. For example, “100 men’s shirts at Rs. 250 apiece, first come first served starting Saturday,” is so specific that it probably is an offer. 3 CIRCULARS AND CATALOGUES Price quotations are invitations to enter into negotiations. A price quotation cannot be ‘accepted’ so as to form a contract. If you go to a department store to buy something, when does offer and acceptance occur, so that a contract is formed? Is the offer made by the store by sticking a price tag on the item?

    Do you accept when you put the item in your basket, or when you reach the checkout? The courts have said that the price tag is just an invitation to treat. You, the customer, make the offer at the checkout. At that time, the cashier accepts your offer by passing the item Circulars and catalogues are generally not seen as offers. If the catalogues were viewed as offers every order form sent in by a customer would be an acceptance and the trader would be bound in contract even though they might not have a sufficient supply of those goods. 4 DISPLAYS OF GOODS

    Displays of goods do not generally constitute an offer but rather the offer occurs when a customer takes them to a checkout counter. 5 NOTICE OF AUCTION SALE When an item is put up for auction, this is usually not an offer, but is rather a solicitation of offers (bids) from the audience. At auctions bidders make offers when they bid rather than the offer being the holding of the auction itself. The auctioneer accepts the bid on the fall of the hammer. 1. 7 Validity of Particular Types Of Offers the offer is to supply goods periodically or in accordance with the requirements of the person inviting tenders.

    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. In the case of standing offers, the offeror gives an open offer whereby she offers to supply goods or services as required by the person inviting tenders. A separate acceptance is made each time an order is placed. Thus there are as many contracts as are the acts of acceptance. 5 CROSS-OFFERS The following is a discussion of various types of offers: 1 OFFER MADE IN JEST

    An offer which the offeree knows or should know is made in jest is not a valid offer. Thus even if it is “accepted,” no contract is created. 2 PRELIMINARY NEGOTIATIONS If a party who desires to contract solicits bids, this solicitation is not an offer, and cannot be accepted. Instead, it merely serves as a basis for preliminary negotiations. For example, A says, “I would like to sell my house for at least Rs. 100,000. ” This is almost certainly a solicitation of bids, rather than an offer, so B cannot ‘accept’ by saying, “Here’s my check for Rs. 100,000. ” 3 STANDING OR OPEN OFFER

    Government departments, Railways and other bodies, who require stores in large quantities, often invite tenders for the supply of goods. An advertisement inviting tenders is not an offer in itself; it is merely an invitation to offer. It is the person sending the tender who is making on offer which the party inviting the tenders may or may not accept. 4 TENDERS When two parties make identical offers to each other, in ignorance of each other’s offer, the offers are known as cross offers and neither of the two can be called an acceptance of the other and, therefore there is no contract.

    A offers to sell a certain property to B at a certain price. B writes to A offering to buy the same property at the same price. The letters cross in the post. Is there (a) an offer and acceptance, (b) a contract? 6 COUNTER OFFERS A Tender is an offer as it is in response to an invitation to offer. Tenders commonly arise where, for example, an University invites offers to supply stationery. The persons filling up the tenders make offers. A tender may be either: (i) specific or definite, where the offer is to supply a definite quantity of goods; or (ii) standing tender, where

    When in place of accepting the terms of an offer as they are, the offeree accepts the same subject to certain condition or qualification, she is said to make a counter-offer. If in her reply to an offer, the offeree introduces a new term or varies the terms of the offer, then that reply cannot amount to an acceptance. Instead, the reply is treated as a ‘counter offer’, which the original offeror is free to accept or reject. A counter-offer also amounts to a rejection of the original offer that cannot then be subsequently accepted.

    An offer terminates by counter-offer by the offeree. A counter-offer should be distinguished from a mere request for information. 7 SPECIFIC OFFER When an offer is made to a definite person, it is called a specific offer. Only the person to whom it is made can accept it. 8 GENERAL OFFER When an offer is made to the world at large, it is called a general offer. Any person may accept such an offer. 9 AUCTION SALES An announcement of an auction is only an invitation to offer, and a bid made at the auction constitutes the offer.

    Like all other offers it may be accepted or rejected. Thus, there is no obligation on the auctioneer to accept any bid even if it is the highest bid unless it has been announced in advance that the goods would be sold to the highest bidder. Thus, if the auctioneer advertises that she will have an auction sale at a particular place, it does not legally bind her to hold such an auction, nor does it make her liable to indemnify persons who have incurred expenses to attend such a sale. Such advertisements are only invitation to offer.

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