Offer and Invitation to Offer

By Shivani Chauhan 16 Minutes Read

Introduction

A contract is a fundamental part of legal agreements in various sectors. To ensure a contract is legally binding and enforceable, it must satisfy several essential elements. Each of these elements is crucial for the formation of a valid contract under the Indian Contract Act, 1872. Likewise, offer and invitation to offer are the most essential elements of a valid contract. Offer is the first step towards formation to a contract. The primary difference between an offer and an invitation to offer lies in the intention of the parties involved. An offer directly enables the other party to form a legally binding contract upon acceptance. In contrast, an invitation to offer invites the other party to negotiate and make their own offer to the seller.

What is an Offer?

• An offer/proposal is a clear, unequivocal statement or proposal made by one party (the offeror) to another (the offeree), indicating a willingness to enter into a contract on certain terms without further negotiation.
• Offer is defined under Section 2(a) of The Indian Contract Act, 1872 as:

‘When one person signifies to another his willingness to do or not 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.’

• When a person makes an offer to another person, he/she simply tells the other person that he would or wouldn’t do something for them in return for a promise from that person.
• An offer must be definite and capable of being accepted to form a binding contract.
• All of the terms and conditions of the agreement must be included in the offer, with no room for negotiation.
• For example, if Person A offers to sell his mobile phone to Person B for a specific amount, say Rs. 12,000, that is said to be an offer.
• Once this offer is accepted by the other person a contract is said to be formed and the offeror would be legally bound by the terms he/she put forth in the offer.
• In the above-mentioned example, if Person B accepts the offer then Person A has to deliver the mobile phone to Person B. Only then this contract would be considered to be fulfilled or “performed”.

Essential Elements of an Offer/Proposal

The terms of an offer must be clear so that the offeree understands what is being offered, what actions are required to accept it, and what is expected in return for the offer. An offer must contain the following key characteristics in order to constitute a valid offer:

• Definite and Clear: The terms of an offer must be specific and clear enough so that the offeree can comprehend and accept them.
• Legality: The offer must pertain to something legal that the offeror is capable of doing or refraining from doing.
• Intent to be Bound: The offeror must intend to fulfill the terms of the contract immediately or within a reasonable time frame. They cannot vaguely suggest doing it at some undefined future time.
• Communication: The offer must be conveyed to the offeree. Communication can be any form whether it is oral or written. In Lalman Shukla v. Gauri Dutt[1], the defendant’s servant was sent to find his lost nephew. During the servant’s absence, the defendant announced a reward for whoever found the nephew. Because the servant was unaware of this offer, his act of finding and returning the nephew did not qualify as acceptance of the offer. Therefore, the court held that the servant was not entitled to claim the reward.
• Specific Offeree: The offer must be directed to a specific individual or entity. An offer can be of two types- specific offer or general offer. An offer made to a specific offeree is known as a specific offer and the one made to the public at large is called a general offer. For instance, Person A making an offer to Person B to sell his land to him for Rs. 1 crore is a specific offer. Person A announcing reward for anyone who finds his lost son is a general offer.

Termination of an offer

• Section 5 of the Indian Contract Act, 1872 specifies the Revocation of proposals and acceptance. A proposal can be revoked by the offeror only before the offeree has dispatched their acceptance, so as to be out of the acceptor’s power.
• Offer can be revoked in any manner laid down in Section 6. An offer may be revoked:

• if the offeror communicates about the revocation to the offeree, or
• if the time period of acceptance mentioned in the offer has lapsed, or
• if the acceptor does not fulfil the condition precedent mentioned in the offer, or
• if the offeror dies or becomes insane.

What is Invitation to Offer/Treat?

• An invitation to offer is an invitation for others to make an offer.
• An invitation to offer is a step taken before making an actual offer, where one person encourages another to make an offer to them.
• This act is a preliminary negotiation or a statement inviting offers but is neither a firm offer nor a legally binding promise.
• Essentially, it signals a willingness to negotiate without intending to form an immediate binding agreement.
• An invitation to offer serves to inform the public about the terms and conditions under which someone is interested in entering into a contract. It is aimed at receiving offers and negotiating the terms of the potential contract. The inviter can then accept or reject these offers.
• When responded to appropriately, an invitation to offer results in an offer from the other party. The person making the invitation is not an offeror, but rather someone encouraging others to make offers to them. Therefore, acceptance of the invitation does not create a contract but constitutes an offer. Once the inviting party accepts this offer, a binding contract is formed.

Examples of Invitation to Offer

• A car dealer advertises, “Cars starting from $10,000.” This is an invitation to offer. It invites customers to come and make an offer to buy a car at the advertised price.
• Advertisements– Attention-grabbing advertising aims to spark curiosity; it does not guarantee a sale at a particular price.
• Auction– An invitation to offer comes from an online auction site featuring a vintage car. The real offers are those made by prospective buyers in their bids. The seller is free to accept the highest offer or to reject any and all bids.
• Similarly, menu cards in restaurants, online shopping apps, government tender etc. are examples of invitation to offer.

Legality of Invitation to Offer

• In the case of Harvey v. Facey[2], Harvey asked what Bumper Hall Pen’s “lowest cash price” was. Facey answered with their most affordable price, But Facey’s response, the court decided, was an invitation to offer rather than a legally enforceable one, Harvey then made an “agreement” to buy, but that was insufficient to create a contract.
• Similarly, Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd.[3] primarily established the principle that the display of articles in a shop, including self-service arrangements, constitutes an invitation to offer. When a customer selects an item and brings it to the cash desk, this action constitutes a proposal or offer by the customer. The acceptance of this offer occurs when the shopkeeper accepts payment from the customer.

Role of Intention in Determining Offer and Invitation to Offer

• Intention is the most important factor which determines whether a statement constitutes a valid offer in contract law.
• In an offer, both parties intend to enter into a legally binding agreement after negotiations. This intention is not present in an invitation to offer.
• The parties to a contract must have intended to form a legal relationship in order for it to be enforceable. This implies that the parties must have intended for their agreement to be enforceable.
• Unless there is convincing evidence to the contrary, courts generally assume that agreements made in domestic or social contexts (such as between family members or friends) do not intend to establish legal relations. A promise made at a family meal, for instance, is typically not regarded as legally enforceable.
• For example, in Balfour v. Balfour[4], it was held that Mr. Balfour’s promise to pay £30 per month to his wife for her maintenance does not constitute a legally enforceable contract. The court concluded that agreements between spouses, which are made in the context of their domestic relationship, generally do not intend to create legal obligations. The court emphasized the necessity of intention to create legal relations as a fundamental requirement for the formation of a contract. Agreements between spouses are typically presumed to lack this intention.
• In Carlill v. Carbolic Smoke Ball Company[5], the company made a general offer stating that anyone who used their product as directed would not catch a cold or influenza, and they offered a £100 reward to anyone who did. To show their sincerity, they deposited £1,000 in a public bank. The plaintiff used the product as prescribed and still caught influenza. The court held that a binding contract was formed between the company and the plaintiff once she purchased the product, demonstrating the company’s intention to enter into a contract.

Difference Between Offer and Invitation to Offer

Conclusion

An offer is valid only when communicated properly or when there is an intention to create a legally binding contract. Conversely, an invitation to offer indicates a willingness to negotiate rather than a commitment to a specific agreement. Recognizing this distinction ensures that both parties understand their obligations and reduces misunderstandings during negotiations. Even if an invitation to offer is accepted, it does not necessarily result in a legally binding contract. This distinction is crucial for businesses, as advertisements, product displays, and requests for proposals often serve as invitations for offers rather than actual offers. Understanding these concepts allows businesses to navigate the early stages of contract formation more effectively. Therefore, grasping the difference between an offer and an invitation to offer is essential.

[1] 1913 40 ALJ 489.

[2] (1893) AC 552.

[3] [1953] EWCA Civ 6.

[4] [1919] 2 KB 571.

[5] [1893] 1 QB 256.

Shivani Chauhan

Shivani is a Contributing Editor @LegalWires. She has done B.A.LL.B.(Hons.) from Dr. RMLNLU and has completed her LL.M. in Business law. Her areas of interest are Competition Law, IPR and Sports Law.