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. The Section 3 of the Indian Contract Act, 1872 provides for Communication, acceptance and revocation of proposals.
Section 4 of the Indian Contract Act,1872 specifies when a communication is complete; Communication of a proposal is complete when it comes to the knowledge of the party to whom the proposal is made. For example, if A sends a proposal in the mail to B and if the mail is lost, it can be held that the communication of the proposal is not complete. In the case of Lalman vs Gauri Dutt 1913, it was held that the reward for the missing child cannot be claimed by a person who traced the child without any knowledge of the announcement. There was no contract between the two in the first place because the proposal never came to the knowledge of the person who found the child and thus he could never accept it. Communication of the acceptance is complete, as against the promisor, when it is put in course of transmission to the promisor so as to be out of the power of the acceptor, as against the acceptor, when it comes to the knowledge of the promisor. For example, as soon as B drops a letter of acceptance in mail back to A, A is bound by the promise. However, B is not bound by it unless A receives the acceptance letter. In the case of Adams vs Lindsell 1818, it was held that a contract arose as soon as the acceptance was posted by the acceptor. In this case, the plaintiff received the offer to sell wool on 5th and they posted an acceptance, which was received on 9th by the defendants. The defendants, however, had already sold the wool on 8th. The court observed that the contract must arise as soon as the acceptance is posted and is gone out of the reach of acceptor otherwise this will result in an infinite loop.
Section 7 specifies that an acceptance must be absolute and unqualified. A partial acceptance or a clarification regarding a proposal, or specifying a condition on acceptance is no acceptance.
In the case of Hyde vs Wrench, an offer was made to sell a farm for #1000, which was rejected by an plaintiff, who counter offered #950 for it. This was rejected by the defendant, upon which the plaintiff agreed to pay #1000. However, it was held than the defendant was not bound by any such second acceptance.
Section 7 further says that the acceptance must be in some usual and reasonable manner, unless the proposal prescribes the manner in which the acceptance should be made. If the proposal prescribes the manner, and if the acceptance is not done in that manner, the proposer may insist that the acceptance be made in the manner prescribed, and if he fails to do so, he accepts the acceptance. Thus, if the acceptance is sent by any way other than what is prescribed by the proposal, the proposer must reject it in a reasonable time otherwise the proposer accepts it. This is markedly different from English law where a proposal must be accepted in the manner required in the proposal otherwise, the acceptance is invalid. In the case of Elliason vs Henshaw , it was held that an acceptance sent by mail instead of through the wagon that brought the offer, was not valid.
Section 8 specifies that a proposal is accepted when the acceptor performs conditions prescribed for the acceptance or when he accepts the consideration given along with the offer for a reciprocal promise. When acceptance consists of an act as in the case of State of Bihar vs Bengal C & P Works, it was held that, when an order is sent for goods, the posting of goods itself is equivalent to acceptance. No further communication of acceptance is necessary. In the case of Carlill vs Carbolic smoke ball co, it was held that, purchasing and consuming the medicine performs the condition of the proposal.
Requirements for an acceptance
- Acceptance must be from a person to whom the proposal was made. In the case of Powel vs Lee, it was held that communication of an acceptance from an unauthorized person is invalid.
- Acceptance must be signified to the proposer. In the case of Felthouse vs Bindley, it was held that unless an acceptance is given to the offerer, it is no acceptance.
- It is required that there be an act that signifies the acceptance. As held in the case of Bhagwandas Goverdhandas Kedia vs Girdharilal Pursottamdas & Co, for an acceptance to be completed, a mere mental decision is not sufficient. An external manifestation of the decision is a must.
Section 5 specifies when a proposal and acceptance can be revoked:
A proposal can be revoked anytime before the communication of its acceptance is complete as against the proposer but not afterwards. For example, if A propose to B through a letter, A can revoke the proposal as long as B has not posted a letter of acceptance to A. In the case of Henthorn vs Fraser, an offer to sell a property was made to a person. This person was to reply to it within 14 days. He lived in another town and he posted an acceptance at 3.50PM, which reached the offerer at 8.30 PM. Meanwhile, the offerer posted the revocation letter at 1 PM, which reached the person at 5.30 PM. Thus, the revocation did not reach the offeree before the communication of the acceptance was complete as against the offerer. Thus, the revocation was held ineffective.
An acceptance may be revoked anytime before its communication is complete as against the acceptor. For example, B can revoke his acceptance that was sent by letter, by a telegram that reaches A before the acceptance letter. In the case of Union of India vs Bhimsen Walaiti Ram, the defendant won an auction for a liquor shop and paid 1/6 of the cost upfront. However, the bid was supposed to be finalized by the financial commissioner, which he had not done. Meanwhile, the defendant failed to pay the remaining amount and the commissioner ordered a re-auction. In the re-auction, less money was realized and the plaintiff sued to recover the shortfall. However, SC held that since the commissioner had not given is final approval for the bid, the communication of acceptance was not complete against the defendant, and thus the defendant was free to withdraw or revoke his proposal (i.e. the bid).
Section 6 specifies how a revocation can be made, a proposal is revoked
- by the communication of the notice of revocation by the proposer to the other party.
- by the lapse of prescribed time in the proposal for acceptance or if no time is prescribed, by the lapse of a reasonable time in communication of the acceptance.
- by the failure of the acceptor to perform a condition precedent to acceptance.
- by death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance.
Basic principles of law of contract, as enunciated in Sections 3, 4 and 7 of the Indian Contract Act, are applicable to the insurance contracts as well in the sense that for the formation of a contract, there has to be a proposal followed by an acceptance, and communication thereof to the proposer. This is evident in the case M/S Weston Tubes (Pvt) Limited v. National Insurance Company Ltd.