Supreme Court clarifies contract formation: Conditional Acceptance and Counter-Offers in Padia Timber Case (2021)

Introduction

Date of the Judgment: 5 January 2021

Citation: (2021) INSC 1

Judges: Navin Sinha, J., Indira Banerjee, J.

Can a contract be considered complete if the acceptance includes a new condition not present in the original offer? The Supreme Court of India recently addressed this question in a case involving a tender for wooden sleepers. The core issue revolved around whether a binding contract was formed when one party (the Visakhapatnam Port Trust) added a condition to its acceptance of a tender from another party (Padia Timber Company), and the other party did not agree to the new condition.

The Supreme Court bench comprised Justices Navin Sinha and Indira Banerjee, with Justice Indira Banerjee authoring the judgment.

Case Background

In July 1990, the Visakhapatnam Port Trust (the Respondent) issued a tender for the supply of wooden sleepers. Padia Timber Company (the Appellant) submitted a bid, including a specific condition that inspections would only take place at their depot. This condition was a counter-proposal to clauses 15 and 16 of the tender, which stipulated that the supplier would be responsible for the goods until they arrived in good condition at the destination and that the Port had the right to reject defective materials. The Appellant also deposited ₹75,000 as earnest money.

After some discussions, the Appellant reiterated that inspections should be at their factory site to avoid additional financial burdens for rejected goods. They also stated that if the Port Trust insisted on inspection at their site, they would charge 25% extra. The Port Trust, while agreeing to initial inspection at the Appellant’s depot, added a condition that final inspection would be at the Port Trust’s General Stores, with transportation costs borne by the Appellant. The Appellant rejected this new condition and asked for their earnest money to be returned.

Despite the Appellant’s rejection, the Port Trust issued a purchase order, claiming a binding contract existed. The Appellant denied this and refused to supply the sleepers. The Port Trust then purchased the sleepers from another supplier at a higher cost and sued the Appellant for damages. The Appellant filed a counter-suit for the refund of their earnest money.

Timeline

Course of Proceedings

The Visakhapatnam Port Trust sued Padia Timber Company in the Court of II Additional Subordinate Judge, Visakhapatnam, seeking damages for breach of contract. Padia Timber Company filed a counter-suit in the Court of Subordinate Judge, Visakhapatnam, for the refund of their earnest money. The two suits were clubbed together and heard by the First Additional Senior Civil Judge, Visakhapatnam.

The Trial Court ruled in favor of the Port Trust, stating that a contract had been formed and that Padia Timber Company had breached it. The court ordered Padia Timber Company to pay damages and dismissed their claim for a refund. Padia Timber Company appealed the decision to the High Court of Judicature at Hyderabad.

The High Court upheld the Trial Court’s decision, agreeing that a binding contract existed and that Padia Timber Company was liable for damages. Padia Timber Company then appealed to the Supreme Court of India.

Legal Framework

The Supreme Court primarily considered the following sections of the Indian Contract Act, 1872:

• Section 4: Communication when complete

  This section deals with when the communication of a proposal, acceptance, and revocation is complete. The Trial Court had relied on this provision to conclude that the contract was complete when the letter of intent was dispatched by the Port Trust.
  
  “4. Communication when complete.—The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of an acceptance is complete,— as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete,— as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge.”

• Section 7: Acceptance must be absolute

  This section specifies that for a proposal to become a promise, the acceptance must be absolute and unqualified. The Supreme Court emphasized that a conditional acceptance is essentially a counter-proposal.
  
  “7. Acceptance must be absolute. —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.”

• Section 73: Compensation for loss or damage caused by breach of contract

  This section discusses the compensation that can be claimed by a party who suffers a loss due to a breach of contract. The Trial Court had relied on this section to award damages to the Port Trust.
  
  “73. Compensation for loss or damage caused by breach of contract.—When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.”

Arguments

Appellant (Padia Timber Company)’s Arguments:

• The Appellant argued that no concluded contract was formed because the Respondent did not accept their offer unconditionally. The Appellant had clearly stated that inspection should be conducted at their depot, and any deviation from this would attract additional charges.

• The Appellant contended that the Respondent’s acceptance was conditional, as it added a condition for final inspection at the Respondent’s General Stores. This constituted a counter-offer, not an acceptance.

• The Appellant submitted that they had rejected the counter-offer and asked for the return of their earnest money, thereby revoking any offer they had made.

• The Appellant relied on several judgments to support their argument that a conditional acceptance does not create a binding contract.

Respondent (Visakhapatnam Port Trust)’s Arguments:

• The Respondent argued that a valid contract was formed when they issued the letter of intent and purchase order within the validity period of the Appellant’s offer.

• The Respondent contended that the Appellant’s offer was accepted, and the additional condition regarding final inspection at the General Stores was a part of the contract.

• The Respondent argued that the Appellant’s refusal to supply the wooden sleepers constituted a breach of contract, entitling them to damages.

• The Respondent relied on Section 4 of the Indian Contract Act, 1872, to argue that the contract was complete when the letter of intent was dispatched.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the acceptance of a conditional offer with a further condition results in a concluded contract, irrespective of whether the offerer accepts the further condition proposed by the acceptor?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• Haridwar Singh v. Bagun Sumbrui and Ors. [AIR 1972 SC 1242], Supreme Court of India

  The Court relied on this case to reiterate that when an acceptor puts in a new condition while accepting a contract, the contract is not complete until the proposer accepts that condition.

• Union of India v. Bhim Sen Walaiti Ram [(1969) 3 SCC 146], Supreme Court of India

  This case was cited to support the principle that a conditional acceptance allows the offer to be withdrawn until absolute acceptance takes place.

• Jawahar Lal Burman v. Union of India [AIR 1962 SC 378], Supreme Court of India

  The Court referred to this case to highlight that acceptance of an offer must be absolute and unqualified, as per Section 7 of the Indian Contract Act, 1872.

• Rajasthan State Electricity Board and Others v. Dayal Wood Works [AIR 1998 AP 381], High Court of Andhra Pradesh

  The High Court had found on facts that there was no concluded contract for supply of sleepers and consequently the plaintiff was entitled to refund of security deposit.

• Fateh Chand v. Balkishan Das [AIR 1963 SC 1405], Supreme Court of India

  The Court held that in assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case.

• G.M.T.A.P . Co-op. Mkts. Ltd. v. Dy. Registrar, Co-op Societies, Raichur [AIR 1998 Karnataka 354], High Court of Karnataka

  The Court held that penalty could not be imposed on a milling agent for default in supply of rice, in the absence of pre-estimation of the loss suffered on account of the default, even though the contract may have provided for imposition of penalty.

• Marimuthu Gounder v. Ramaswamy Gounder and Ors. [AIR 1979 Madras 189], High Court of Madras

  The Court held that proof of actual damage was a sine qua non to seek damages.

• A.K.A.S. Jamal v. Moola Dawood Sons & Co. [AIR 1915 Privy Council 48], Privy Council

  The Privy Council held that a plaintiff who sues for damages owes the duty of taking all reasonable steps to mitigate the loss consequent upon the breach and cannot claim as damages any sum which is incurred due to his own neglect.

• M/s Saraya Distillery, Sardarbaggar v. Union of India and Anr. [AIR 1984 Delhi 360], High Court of Delhi

  The High Court held that proof of actual repurchase was not necessary for claiming damages.

• Murlidhar Chiranjilal v. M/s Harishchandra Dwarkadas and Anr. [AIR 1962 SC 366], Supreme Court of India

  The Court held that the aggrieved party is to be placed, as far as money can do it, in as good a situation as if the contract had been performed.

• State of Maharashtra and Anr. v. Digambar Balwant Kulkarni [AIR 1979 SC 1339], Supreme Court of India

  The Court held that a contract could not be rescinded after the expiry of the due date for the purpose thereof.

• Visakhapatnam Port Trust, Visakhapatnam and Anr. v. Bihar Alloy Steels Ltd. And Ors. [1991 (1) A.L.T. 582], High Court of Andhra Pradesh

  The High Court held that the contract not made in accordance with Section 34 of the Major Port Trusts Act, 1963, shall not be binding on the Board.

• Raghunandhan Reddy v. The State of Hyderabad thr. The Secretary to Government Revenue Department [AIR 1963 AP 110], High Court of Andhra Pradesh

  The High Court held that only when an offer is accepted that the contract is concluded and binds the parties and if the acceptance is conditional or is not final, then there is no concluded contract.

• Mahesh Transport Co. v. T. & D. Workers’ Union [AIR 1974 SC 868], Supreme Court of India

  The Court held that this case relates to the validity and propriety of the reference of an industrial dispute under Section 10(1) of the Industrial Disputes Act, 1947, and has no relevance to the issues involved in this case.

• M.V. Shankar Bhat and Anr. v. Claude Pinto since (D) by Lrs. and Ors. [(2003) 4 SCC 86], Supreme Court of India

  The Court held that an agreement which was subject to ratification by heirs under a will who were not parties to the agreement did not create a conclusive contract.

• U.P . Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd. And Ors. [AIR 1996 SC 1373], Supreme Court of India

  The Court held that a contract by a Government Notification is not binding unless it is executed in accordance with its Articles of Association.

Legal Provisions:

• Section 4, Indian Contract Act, 1872

  Deals with the communication of proposal, acceptance, and revocation.

• Section 7, Indian Contract Act, 1872

  Specifies that acceptance must be absolute and unqualified.

• Section 73, Indian Contract Act, 1872

  Deals with compensation for loss or damage caused by breach of contract.

Authority Table:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Haridwar Singh v. Bagun Sumbrui and Ors. [AIR 1972 SC 1242]* to emphasize that a contract is not complete until the proposer accepts the new condition.
• The Court followed Union of India v. Bhim Sen Walaiti Ram [(1969) 3 SCC 146]* to support the principle that a conditional acceptance allows the offer to be withdrawn until absolute acceptance takes place.
• The Court referred to Jawahar Lal Burman v. Union of India [AIR 1962 SC 378]* to highlight that acceptance of an offer must be absolute and unqualified, as per Section 7 of the Indian Contract Act, 1872.

The Supreme Court held that the High Court and the Trial Court had erred in concluding that a contract was formed. The Court emphasized that the acceptance of an offer must be absolute and unqualified, as per Section7 of the Indian Contract Act, 1872. The Court found that the Port Trust’s acceptance was not absolute, as it included a new condition regarding final inspection at their General Stores, with transportation costs borne by the Appellant. This constituted a counter-offer, not an acceptance, and therefore, no contract was formed.

The Supreme Court allowed the appeal of Padia Timber Company, setting aside the judgments of the High Court and the Trial Court. The Court ordered the Port Trust to refund the earnest money of ₹75,000 to Padia Timber Company along with interest at 6% per annum from the date of deposit until the date of payment.

Ratio Decidendi

The ratio decidendi of the judgment is that a conditional acceptance of an offer is not an acceptance but a counter-offer, which does not create a binding contract. The acceptance must be absolute and unqualified to form a valid contract.

Flowchart

Conclusion

The Supreme Court’s judgment in the Padia Timber case is a significant clarification of contract law principles, particularly concerning conditional acceptance and counter-offers. The Court reiterated that an acceptance must be absolute and unqualified to form a binding contract. A conditional acceptance, which introduces new terms or conditions, is not an acceptance but a counter-offer that requires acceptance by the original offeror to create a valid contract.

This judgment serves as a crucial reminder for businesses and individuals involved in contract negotiations. It underscores the importance of clearly understanding the terms of an offer and ensuring that any acceptance is absolute and without any additional conditions. Failure to do so may result in the non-formation of a contract and potential legal disputes.