19 February 2021
Introduction
In M/s. Padia Timber Company (P) Ltd. v. The Board of Trustees of Vishakhapatnam Port Trust[1], the Supreme Court has reiterated that the acceptance of a conditional offer with a further condition does not result in a concluded contract. The Court has observed that when the acceptor attaches a new condition while accepting the contract already signed by the proposer, the contract is not complete until the proposer accepts the new condition.
Factual Matrix
On or about July 17, 1990, the Vishakhapatnam Port Trust (“the Respondent”) floated a tender for supply of wooden sleepers (“Tender”). Clause 15 and 16 of the Tender inter alia provided that (i) the purchaser of the wooden sleepers i.e., the Respondent would not separately pay for transit insurance; (ii) in the event of the supplies being found defective, the Respondent would have the right to reject the same and recover the freight. In response to the said tender, M/s. Padia Timber Company (P) Ltd. (“the Appellant”) submitted its offer which inter alia contained a specific condition that inspection of the wooden sleepers would have to be conducted only at the Appellant’s depot. The Appellant did not accept Clause 15 and 16 of the Tender and in turn made a counteroffer. Subsequently, in accordance with the terms and conditions of the Tender, the Appellant made a payment of INR 75,000/- towards the earnest deposit, along with its quotation. As the opening of the Tender was postponed, the Appellant submitted a revised offer reiterating the specific condition the inspection of the wooden sleepers being held at its depot. Once the tenders were opened, certain discussions took place between the Appellant and the Respondent. Subsequently the Appellant made it clear to the Respondent that whilst it was not in favour of the inspection of the wooden sleepers being conducted at the general stores of the Respondent (“General Stores”), in the event the same was done, the Appellant would charge 25% above the rate quoted by it which was later revised to 24%.
By a letter dated October 29, 1990, the Respondent accepted the offer of the Appellant for supply of wooden sleepers. However, it imposed a further condition on the Appellant as regards the transport and inspection of the wooden sleepers. Furthermore, the Respondent requested the Appellant to extend the delivery period of the same.
Consequently, vide its letter dated October 30, 1990, the Appellant rejected the proposal of the Respondent and declined to extend the validity thereof. Further, the Appellant requested the earnest deposit made by it earlier be returned to the Appellant. Pertinently, on the same day, without accepting the offer made by the Appellant, the Respondent issued a purchase order dated October 29, 1990 (“Purchase Order”) for supply of wooden sleepers, on the terms and conditions specified therein. The Respondent warned the Appellant that if the supply of the wooden sleepers were not made as per the Purchase Order, risk purchase would be made at the cost of the Appellant and the earnest deposit would be forfeited.
Thereafter, the Respondent further requested the Appellant to commence the supply of the wooden sleepers. In response thereto, the Appellant contended that that there was no concluded contract between the parties. Therefore, once again the Appellant requested for a refund of the earnest deposit.
In the light of the above, the Respondent filed a suit for damages for breach of contract against the Appellant (“First Suit”) before the Additional Subordinate Judge, Vishakhapatnam (“Trial Court”). The Appellant also filed a suit for recovery of the earnest deposit along with interest, cost, and other consequential reliefs (“Second Suit”) before the Subordinate Judge of the Trial Court. Both the suits were clubbed together before the Trial Court and disposed of by a common order dated March 31, 2000 (“Trial Court’s Order”). The First Suit was decreed in favour of the Respondent and the Second Suit filed by the Appellant was dismissed. The Trial Court inter alia held that (i) as the Respondent had accepted the offer of the Appellant and issued a Purchase Order in relation to the same, the contract was concluded between the parties; and (ii) as the Appellant had not supplied the wooden sleepers as per the concluded contract, the Respondent was entitled to the damages for breach of obligations by the Appellant.
Aggrieved by the decision of the Trial Court, the Appellant filed two appeals before the High Court at Hyderabad (“High Court”) against the Trial Court’s Order. The High Court vide its judgment dated October 10, 2006 (“Impugned Judgment”) passed in both the appeals, upheld and confirmed the Trial Court’s Order. Being aggrieved, the Appellant filed an appeal before the Supreme Court against the Impugned Judgment.
Arguments Advanced
The Respondent inter alia contended that since the Appellant refused to discharge its obligation to supply the sleepers in terms of the contract, read with the revised Purchase Order, the Respondent was constrained to invoke the risk purchase clause (under the special conditions of purchase appended to the Purchase Order). The Respondent further submitted that it purchased the wooden sleepers at a higher rate from a third party, incurring losses, for which the Respondent was entitled to claim damages from the Appellant. It was the case of the Respondent that the conditions stipulated in the Purchase Order, including the special conditions of purchase constitute the terms of a binding contract.
The Appellant inter alia contended that (i) the negotiations between the Appellant and Respondent did not fructify into a concluded contract, since the Respondent did not accept the conditions of the offer of the Appellant fully; and (ii) the Appellant did not agree to the terms and conditions on which the Respondent insisted, particularly the condition of final inspection of the sleepers at the General Stores.
Findings
Highlightingthe importance of Section 7[2] of the Contract Act (that requires an acceptance of an offer to be absolute and unqualified to be converted into a promise), the Supreme Court held that both the Trial Court as well as the High Court had erred in overlooking the said provision whilst arriving at their decision. The Court iterated that it was a cardinal principle of the law of contract that the offer and acceptance of the offer must be absolute, and it could give no room for doubt. The Supreme Court held that the offer and acceptance must be based or founded on three components, that is, certainty, commitment, and communication. It held that an acceptance with a variation is no acceptance and would be, in effect and substance, simply a counter proposal which must be accepted fully by the original proposer before a contract is made. The Court clarified that when the acceptor puts in a new condition while accepting the contract already signed by the proposer, the contract is not complete until the proposer accepts that condition.
Whilst emphasising on the principle of ‘absolute and unconditional acceptance,’ the Supreme Court relied on and took note of some of its earlier decisions passed in this regard, namely:
(i) In Union of India v. Bhim Sen Walaiti Ram[3], a three-Judge bench of the Supreme Court had held that acceptance of an offer may be either absolute or conditional. If the acceptance is conditional, offer can be withdrawn at any moment until absolute acceptance has taken place.
(ii) In Jawahar Lal Burman v. Union of India[4] , a three-Judge bench of the Court had held that under Section 7 of the Contract Act acceptance of the offer must be absolute and unqualified, and it cannot be conditional.
(iii) Similarly, a division bench in Haridwar Singh v. Bagun Sumbrui and Ors[5] had observed that when the acceptor puts in a new condition while accepting the contract already signed by the proposer, the contract is not complete until the proposer accepts that condition.
In the light of the above analysis and the aforesaid cases, the Supreme Court observed that the Appellant had, in response to the tender issued by the Respondent, submitted its offer conditionally subject to inspection of the sleepers being carried out at the depot of the Appellant. The Court further iterated that this condition of the Appellant was not accepted by the Respondent unconditionally. However, the Respondent agreed to inspection and imposed a further condition that the sleepers would be finally inspected at the General Stores. Pertinently, the latter condition of the Respondent was not accepted by the Appellant and it could not, therefore, be said that there was a concluded contract. Consequently, the Supreme Court held that there being no concluded contract, there could be no question of any breach on the part of the Appellant or of damages or any risk purchase at the cost of the Appellant. Setting aside the Trial Court’s Order and the Impugned Judgment, the Supreme Court directed the Respondent to refund the earnest money deposited by the Appellant along with interest.
Conclusion
Whilst analysing the fundamental contractual principles of offer and acceptance, the Supreme Court has highlighted the importance of certainty, commitment, and communication in the formation of a concluded contract. Further, the Court has observed that it is trite law that while deciding whether a contract has been concluded, parties ought to keep in mind that acceptance of an offer must be absolute and unqualified. This commercially-sound judgment serves as a useful and contemporary precedent for Courts. It also provides clarity and guidance, and underscores the importance of absolute acceptance, especially for parties that undertake multiple rounds of discussions before finalising their contract.
For further information, please contact:
Aditya Mehta, Partner, Cyril Amarchand Mangaldas
aditya.mehta@cyrilshroff.com
[1] Judgment dated January 5, 2021 passed in Civil Appeal No. 7469 of 2008
[2]“7. Acceptance must be absolute.—In order to convert a proposal into a promise the acceptance must— —In order to convert a proposal into a promise the acceptance must—”
(1) be absolute and unqualified;
(2) be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but, if he fails to do so, he accepts the acceptance.”
[3] (1969) 3 SCC 146
[4] AIR 1962 SC 378
[5] AIR 1972 SC 1242
