A contract begins the moment an offer made by one party is accepted by another. Sections 3 to 9 of the Contract Act govern this process. The rules look simple at first read but produce some of the most-litigated questions in commercial life — when exactly was the contract formed, what were its terms, did the parties actually agree on the same thing?
What counts as an offer
Section 2(a) defines an offer (the Act uses the term "proposal") as: "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."
Three elements must be present for a statement to qualify as an offer:
- It must show willingness to do or not do something. A statement of intention ("I might sell my car next year") is not an offer. A statement of price in response to an enquiry ("the car is worth Rs. 5 lakh in my view") is not an offer. A clear "I will sell you this car for Rs. 4 lakh" is an offer.
- It must be made with a view to obtaining the assent of the other party. The maker must intend that the other party can accept and create a binding contract. A statement made in jest, or as part of an ongoing negotiation that both sides understand is not yet final, is not an offer.
- It must be communicated to the offeree. Section 4 makes communication essential. An offer that the offeree does not know about cannot be accepted. This rule has practical consequences: rewards announced in newspapers can only be claimed by people who knew about them at the time of acting.
Offers versus invitations to offer
This is one of the most-tested distinctions in Indian contract law, both in exams and in real disputes. Many commercial communications look like offers but are actually invitations to make an offer.
The price tag on goods in a shop is not an offer. It is an invitation to the customer to make an offer to buy at that price, which the shopkeeper can accept or refuse. This is why a shop is not legally obligated to sell at the marked price if it chooses not to.
A product listed on Amazon at a low price (sometimes due to a pricing error) is similarly an invitation to offer, not an offer. The customer's order is the offer. Amazon's confirmation is the acceptance. This is why Amazon can cancel orders made on grossly mispriced products without legal liability.
An advertisement for a job is generally an invitation to offer. The application is the offer. The appointment letter is the acceptance.
A prospectus issued by a company under the Companies Act is an invitation to offer. The shareholder's application is the offer. The allotment is the acceptance.
Distinguishing offers from invitations to offer requires looking at the language and circumstances. The key question is: did the maker intend that a simple "yes" from the other side would bind both parties to a contract? If yes, it is an offer. If the maker reserved discretion to accept or refuse the other side's response, it is an invitation to offer.
What counts as acceptance
Section 2(b) defines acceptance: "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted."
Acceptance, like offer, has three requirements:
- It must be absolute and unqualified. Section 7 requires this expressly. An acceptance that introduces new terms is not an acceptance at all — it is a counter-offer, which terminates the original offer.
- It must be communicated to the offeror. Mental acceptance without communication does not create a contract, even if the offeree fully intends to accept.
- It must be in the manner prescribed, if the offer specifies a manner. If the offer says "accept by email," acceptance by phone is not acceptance unless the offeror agrees.
The counter-offer rule causes more commercial confusion than almost any other rule in contract law. Party A offers to sell at Rs. 10 lakh. Party B replies "I accept, but at Rs. 9 lakh." Party B has not accepted. Party B has rejected Party A's offer and made a new offer at Rs. 9 lakh. Party A can accept or refuse the new offer; the original offer is gone. If Party A subsequently says "no, the price is Rs. 10 lakh," there is no contract — both offers are now off the table.
When acceptance becomes effective — the postal rule
This is one of the few areas where Indian contract law differs subtly from English common law. Section 4 sets out specific rules for when an offer and acceptance are deemed communicated.
An offer is communicated when it comes to the knowledge of the offeree. Simple enough.
Acceptance is communicated in two stages:
- As against the offeror, acceptance is complete when the acceptance is put in a course of transmission, so as to be out of the power of the acceptor. The moment the acceptor posts the letter or sends the email, the offeror is bound.
- As against the acceptor, acceptance is complete only when it comes to the knowledge of the offeror. Until the offeror actually receives the acceptance, the acceptor is not bound.
This asymmetric rule has a practical consequence. If A posts an offer to B, and B posts an acceptance, the contract is formed at the moment B posts the acceptance, against A. But if B changes mind before A receives the acceptance, B can revoke. The acceptor has a brief window of unilateral termination that the offeror does not.
In the era of email and instant messaging, courts have grappled with how this rule applies. The dominant view is that for electronic communications, the rule is essentially the same: acceptance is effective on dispatch as against the offeror, on receipt as against the acceptor. But there is no Supreme Court ruling resolving this definitively for all electronic contracts, and the area is one to watch.
Silence is not acceptance
An offer cannot impose a duty on the offeree to respond. "I will assume you have accepted unless you tell me otherwise within seven days" is not effective. The offeree's silence is not acceptance, even if the offer purports to make it so. The offeree must positively communicate acceptance for a contract to form.
This rule protects offerees from unsolicited communications that try to bind them through inaction. It also has implications for renewal clauses in contracts — automatic renewal can be enforceable as part of the original contract that both parties accepted, but it cannot be created by a unilateral renewal notice that the other party did not respond to if they were not previously bound to respond.
Revocation of offer and acceptance
Section 5 governs revocation. An offer can be revoked at any time before acceptance is complete as against the offeror. In postal terms, this means the offeror can withdraw the offer up until the moment the acceptor posts the acceptance. After that, the offeror is locked in.
Acceptance can be revoked at any time before it is complete as against the acceptor — meaning before the offeror receives it. This gives the acceptor a window in which to change their mind, but the revocation must reach the offeror before or at the same time as the acceptance.
In practice, this means: revocation in commercial contracts is technically possible up to the moment of full communication, but courts look hard at the conduct of the parties and may find that performance has begun or reliance has accrued in ways that make later revocation difficult.
Why this matters
Offer and acceptance is the moment of birth for the contract. Get this wrong and everything that follows is on uncertain ground. The most common practical disputes:
- Whether an email exchange amounted to a binding contract or just exploratory discussions.
- Whether a counter-proposal terminated the original offer and the parties then failed to come back to agreement.
- Whether the manner of acceptance was sufficient (oral when the offer required written, for example).
- Whether revocation was timely.
In commercial drafting, the way to avoid these disputes is to make the contract formation point explicit. Put in writing the moment the parties are bound: "this Agreement is binding on the parties from the date both parties have signed and exchanged the signed counterparts." That removes ambiguity.
The next module looks at the second element: consideration. What must be given in exchange for a promise to make it enforceable, and the Indian-law rule that surprises lawyers from common-law countries.