Author: Sourish Saha, Research Associate
Every promise and every set of promises that forms the consideration for each other is an agreement1. A contract may be defined as an agreement between two or more parties that is intended to be legally binding2. An agreement is formed when one party accepts the offer of another and involves a meeting of the minds, which means agreeing to the same thing in the same sense (consensus)3. Agreement subject to ratification by others who are not parties to it is not a conclusive contract4. All agreements are contracts if they are made by the free consent of parties competent to contract in exchange of a lawful consideration and with a lawful object, then such agreements are not expressly declared to be void5. If any of the following is missing then an agreement is not formed and the contract shall not be legally binding. Section 20 however talks about an agreement being void if both parties are under the impression of mistake of fact. The Explanation to the Section however explains the exception that an erroneous opinion as to the value of the thing which forms the subject-matter of the agreement may not to be deemed to be a mistake of fact6.
Agreements that are contract
In order to constitute a valid agreement, both the parties must consent to the terms of the contract7. If entering into a contract containing prescribed terms and conditions is necessary under the statute then that contract becomes a statutory contract8. A person who by reason of infancy is incompetent to contract cannot make a contract within the meaning of the Act9. Therefore capacity to contract is important in the formation of agreement and thereby a contract. Other elements include intention to create legal relations, consideration, consent and legality of the contract itself.
Offer – An offer is an expression of willingness to contract made with the intention that it shall become binding on the offeror as soon as it is accepted by the offeree. An authentic offer is different from what is known as an “invitation to treat”. Invitation to treat therefore means where a party is merely inviting offers, and it is at the discretion of the offeree to accept or reject the offer. The following are examples of invitations to treat10.
- Goods on Display – The display of goods with a price ticket attached in a shop window or on a supermarket shelf is not an offer to sell but an invitation for customers to make an offer to buy. The customer makes an offer to purchase the goods. Once the trader decides to accept the offer, it becomes an agreement11.
- Advertisements – This includes goods for sale which are normally interpreted as invitations to treat12. In some cases, advertisements may be construed as offers if they are unilateral and acceptance is completed by performance which forms the agreement13. Example- offers for rewards14.
- Contract by Tender – The request for tenders represents an invitation to treat and each tender submitted amount to an offer unless the request specifies that it will accept the lowest or highest tender or other condition. Therefore acceptance of such tender will constitute valid acceptance and thereby the agreement. If the request contains such a condition this will amount to an offer of a unilateral contract where acceptance takes place on performing the condition15.
- Auctions – In an auction, call for bids is an invitation to treat. Therefore, the bids made by persons at the auction constitute the offer, and it is the auctioneer’s discretion to accept or reject16. The bidder may also retract his bid before it is accepted17. Where an auction takes place with reserve, every new bid is an offer which is then accepted by the auctioneer forming a valid agreement. Where the auction takes place without reserve price/value, the auctioneer makes a unilateral offer, which is accepted by the placing of the highest bid18.
- Quotations of Prices – A statement of the minimum price at which a party may be willing to sell will not amount to an offer19. Therefore, agreement cannot be formed from this20.
- Machines21- Agreement is completed as the machine represents the offer and by inserting a coin (say for car parking) or using, the machine represents acceptance22.
Acceptance – An acceptance is a final and unqualified acceptance of the terms of an offer. Acceptance is an unequivocal statement (written, oral or by conduct) by the offeree agreeing to the offer23. Therefore, a binding agreement is formed when the acceptance exactly matches the offer. In some cases, an agreement may still be formed if the terms do not match exactly24. The general rule is that the offeror must receive the acceptance before it is effective25. The offeree must accept all the terms of the offer and such acceptance must be communicated to the offeree. The conditions of acceptance must exactly match the terms of the offer and that the agreement must be certain26. Silence will not amount acceptance27. Acceptance can be through conduct or performance of conditions. This true for unilateral contracts28.
Consideration – Another essential of a valid agreement is consideration. This means one party promises to do something in return for a promise from another party to provide a benefit in exchange of value or the consideration29. It is usually the price paid by the parties for each other’s promises. Therefore, it need not be a value or a price, it may constitute the promise itself where the parties agree or promise to refrain from doing something30.
Intention to create legal relations or legal consequences – One of the essentials of a valid contract and hence a valid agreement is that the parties should have an intention to create legal relations and that the agreement enforceable by law is a valid contract31. However, an agreement not enforceable by law is a void contract32. Further, if parties do not intend to enter into legal relations, it should be stated explicitly in the contract.
Agreements to negotiate
Agreements to enter into a future agreement are not binding. In the United Kingdom, the House of Lords held that agreements to negotiate are likewise not enforceable33. We can thus infer that lockout agreements, i.e., agreements not to negotiate with a third party for a period is sufficiently certain and will not be struck down for uncertainty. Any ambiguous part of a contract will be unenforceable. However, if it is possible to sever this part from the remainder of the agreement, then the court will do so and uphold the remainder of the contract otherwise the whole agreement will be unenforceable34.
Incompleteness of Agreement
As a general accepted rule, parties must deal with the essential terms for the agreement in order for it to be enforceable. The exchange value is considered essential generally35. It is not essential that an agreement be worked out in precise detail and it is possible for parties to nominate one of the parties or a third party to determine certain matters in the future36, provided the parties themselves do not need to reach further agreement. This gives a glimpse of arbitration proceedings in contract law37.
Vagueness or Ambiguity affects Agreement
If an agreement is uncertain in a material respect it cannot constitute a binding contract38. However, if it is not feasible to give a definite meaning to words used in an agreement, it will be considered too vague or ambiguous to constitute a contract39. When viewed objectively it must be possible to determine exactly what the parties have agreed to40. If the terms differ this will amount to a counter offer and no contract will exist. The terms of the acceptance must exactly match the terms of the offer41.
- Section 2(e) of the Indian Contract Act, 1872 [↩]
- Law Teacher, “Formation of Contract,” http://www.lawteacher.net/contract-law/lecture-notes/agreement-lecture.php, accessed May 2013 [↩]
- Section 10, The Indian Contract Act, 1872. [↩]
- M.V. Shankar Bhat v. Claude Pinto (Deceased) by LRs (2003) 4 SCC 86 [↩]
- Small Business Development Corporation, Western Australia, http://www.smallbusiness.wa.gov.au/four-essential-elements-of-a-contract/, accessed May 2013 [↩]
- Section 20, The Indian Contract Act, 1872 [↩]
- Steel Authority of India Ltd. v. Salem Stainless Steel Suppliers AIR 1994 SC 1415 [↩]
- Thermal Power Ltd. v. State of Madhya Pradesh AIR 2000 SC 1005 [↩]
- Mohoribibi v. Dharmodas Ghose (1903) 30 IA 114 [↩]
- Supra n. 1 [↩]
- See Pharmaceutical Society of Great Britain v. Boots  1 QB 401, Also see Fisher v. Bell  1 QB 394 [↩]
- Partridge v. Crittenden  2 All ER 425 [↩]
- “Contractual agreement- offer and acceptance”, http://e-lawresources.co.uk/Offer-and-acceptance.php, accessed May 2013. [↩]
- Carlill v. Carbolic Smoke Ball Company  1 QB 256 [↩]
- Spencer v. Harding Law Rep. 5 C. P. 561 [↩]
- J. Beatson, Anson’s Law of Contract, 28th edition, 2002 [↩]
- Payne v. Cave (1789) 3 Term Rep 148 [↩]
- Heathcote Ball v. Barry  EWCA Civ 235 [↩]
- Supra n. 10 [↩]
- Harvey v Facey  AC 552 [↩]
- Avtar Singh, Contract and Specific Relief, Tenth Edition [↩]
- Thornton v Shoe Lane Parking  2 WLR 585 [↩]
- Australian Contract Law, “Agreement,” http://www.australiancontractlaw.com/law/formation-agreement.html, accessed May 2013 [↩]
- Brogden v Metropolitan Railway Co. (1877) 2 App Cas 666, See also Percy Trentham Ltd v Archital Luxfer Ltd  1 Lloyd’s Rep 25 [↩]
- Entorres v Miles Far East  2 QB 327 [↩]
- Michael Furmston, G.C. Cheshire and H.S. Fifoot, Law of Contract, 1992 [↩]
- Felthouse v Bindley  EWHC CP J35 [↩]
- Butler Machine Tool v Ex-cell-o Corporation  1 WLR 401 [↩]
- T.R Desai, The Indian Contract Act and Sale of Goods Act [↩]
- Supra n. 5 [↩]
- Section 2(h), The Indian Contract Act, 1872 [↩]
- Section 2(g), The Indian Contract Act, 1872 [↩]
- Walford v Miles  2 AC 128 [↩]
- Supra n. 21 [↩]
- Godecke v Kirwan (1973) 129 CLR 629 [↩]
- ANZ v Frost Holdings Pty Ltd Supreme Court of Victoria (Full Court)  VR 695 [↩]
- R.G. Padia, Pollock and Mulla Indian Contract and Specific Relief Acts, 13th Edition, 2006 (4th Reprint,2009). [↩]
- Raffles v Wichelhaus (1864) 2 H & C 906 [↩]
- Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd  HCA 8; (1968) 118 CLR 429 [↩]
- Compare the cases of Scammell & Nephew v. Ouston  AC 251 and Sudbrook Trading Estate v. Eggleton  AC AC 444 to understand certainty of terms of contract [↩]
- Hyde v Wrench (1840) 49 ER 132 [↩]