Tenders, Auctions and Advertisements in Contract Law

Advertisements, tender notices and auction calls do not automatically constitute offers under Indian contract law. They are generally treated as invitations to offer, meaning that they invite another person to make an offer. The distinction is important because it determines when a contract is formed and which party has the power to accept the offer.

Offer vs Invitation to Offer

Under Section 2(a) of the Indian Contract Act, 1872, a proposal is made when a person signifies willingness to do or abstain from doing something with a view to obtaining the assent of another person. An offer therefore indicates an intention to be bound once it is accepted. An invitation to offer, on the other hand, merely invites other persons to submit offers or enter into negotiations. A price quotation, advertisement, tender notice or auctioneer’s call for bids will generally fall into this category.

The distinction is important because a contract is formed only when an offer is accepted. Identifying the offer therefore determines who can accept it and when the contractual relationship comes into existence.

Advertisements as Invitations to Offer

As a general rule, commercial advertisements are treated as invitations to offer rather than offers. An advertisement usually invites customers to make offers, leaving the advertiser free to decide whether to accept a particular transaction. There is, however, an important exception. An advertisement may constitute a genuine offer where it contains a clear and specific promise intended to be accepted by performance.

In Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256, the company advertised a reward for anyone who used its product according to specified conditions and nevertheless contracted influenza. The Court held that the advertisement constituted a general offer which could be accepted by performing the stated conditions. Section 8 of the Indian Contract Act also recognises acceptance by performing the conditions of a proposal. Indian law also recognises the importance of knowledge of the offer. In Lalman Shukla v Gauri Dutt (1913), the person who performed the act giving rise to the reward had not known about the reward when he acted and was therefore not entitled to claim it.

Tenders as Invitations to Offer

An invitation to tender is generally an invitation to offer. The tender submitted by a bidder constitutes the offer, which the inviting authority may then accept or reject. In Spencer v Harding (1870), an invitation to submit tenders was held not to be a promise to sell to the highest bidder. The position can be different where the tender notice contains an express undertaking to accept a particular bid. For example, in Harvela Investments v Royal Trust of Canada [1986], an undertaking to accept the highest offer affected the legal character of the invitation. A standing tender for the supply of goods may also operate as a continuing offer, with individual purchase orders constituting acceptances.

Where a government authority issues a tender, principles of administrative law may also become relevant. Courts generally exercise restraint when reviewing tender decisions but may intervene where the decision-making process is affected by arbitrariness, bias, mala fides or similar grounds.

Auctions and Offers

In a typical auction, the auctioneer’s call for bids is an invitation to offer, while each bid constitutes an offer. The sale is generally completed when the auctioneer accepts the bid, traditionally by the fall of the hammer. For auctions of goods, Section 64 of the Sale of Goods Act, 1930 contains important rules. Each lot is generally treated as a separate contract, a bidder may retract a bid before the sale is complete, and the seller’s right to bid must be expressly reserved. The section also deals with reserve prices and pretended bidding.

In Union of India v Bhim Sen Walaiti Ram (1969), the Supreme Court considered an auction where the bid was subject to confirmation by the competent authority. Since the required confirmation had not occurred, the bid remained an offer and had not been absolutely accepted.

Advertisements, Tenders and Auctions: Key Difference

The basic distinction can be understood by identifying the communication that constitutes the invitation and the response that constitutes the offer. In an advertisement, the advertisement is generally the invitation and the customer’s response is the offer. In a tender, the notice inviting tenders is generally the invitation and the submitted tender is the offer. In an auction, the auctioneer’s call for bids is the invitation and the bidder’s bid is the offer.

The position may change where the advertisement, tender conditions or auction terms expressly demonstrate an intention to be bound in a particular manner.

Example

Suppose a municipal corporation publishes a Notice Inviting Tender for road construction without promising to accept the lowest bid. A contractor submits the lowest tender, but the corporation awards the work to another bidder. The tender notice would generally be an invitation to offer, while the contractor’s tender would be the offer. If the corporation never accepted that offer, no contract would arise merely because the contractor submitted the lowest bid. However, the contractor may still have a public-law remedy if the tender decision was arbitrary, mala fide or discriminatory.

Common Mistakes

Students should avoid treating every advertisement as an invitation to offer without considering exceptions such as Carlill. They should also remember the knowledge requirement illustrated by Lalman Shukla, identify the bidder rather than the auctioneer as the offeror in an ordinary auction, and distinguish contractual questions from judicial review of government tenders.

Frequently Asked Questions

Is an advertisement an offer or an invitation to offer?

An advertisement is generally an invitation to offer. It may become an offer where it contains a clear and specific promise intended to be accepted by performance, such as a qualifying reward advertisement.

Is a tender an offer?

The tender submitted by a bidder is generally the offer, while the notice inviting tenders is an invitation to offer.

When is an auction contract complete?

For an auction of goods, the sale is generally completed when the auctioneer announces completion, traditionally by the fall of the hammer, subject to the applicable auction conditions.

Can a bidder withdraw an auction bid?

Under Section 64(2) of the Sale of Goods Act, a bid may generally be retracted before the sale is completed, subject to the applicable conditions of sale.

Is the lowest tenderer entitled to the contract?

No. Unless the tender conditions contain an undertaking to accept the lowest or highest bid, submission of the lowest tender does not by itself create an entitlement to the contract.

Conclusion

The general rule is that advertisements, tender notices and auction calls are invitations to offer, while the response—such as a customer’s offer, submitted tender or auction bid—constitutes the offer. The position can change where the communication demonstrates a clear intention to be bound, as in Carlill, or where tender or auction conditions expressly provide otherwise.

The central question is therefore whether the communication demonstrates an intention to be bound or merely invites another person to make an offer.