Acceptance of a conditional offer with a further condition results in a concluded contract? - Supreme Court order

The Hon’ble Supreme Court set aside the order of the High Court in the matter of M/s. Padia Timber Company (P) Ltd. v. The Board of Trustees of Vishakhapatnam Port Trust and dealt with the question as to 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.

Factual Matrix

Trustees of Visakhapatnam Port Trust (“Respondent”) floated a tender for supply of Wooden Sleepers (“Tender”). The Tender inter-alia imposed a condition that the purchaser (Respondent) will not pay separately for transit insurance and in the event of the supplies being found defective, Respondent would have the right to reject such materials.

1. Offer (with condition) by Appellant: Padia Timber Company (P) Ltd (“Appellant”) in response to the said Tender, submitted its offer by paying earnest money with a counter proposal that inspection of the material would have to be conducted only at the Appellant’s depot as this would facilitate re-transit of rejected goods to the Appellant’s depot, without additional cost. And if the Respondent still required inspection at the Respondent’s site, the Appellant would charge 25% above the rate. [To summarise – inspection at Appellant’s depot]
2. Acceptance of Offer with further condition by Respondent: The Respondent accepted Appellant’s offer with a further condition that the Appellant would have to transport the material to the Respondent’s store by road, at Appellant’s cost and the final inspection would be made at Respondent’s store. [To summarise – final inspection at Respondent’s depot]
3. Rejection of further condition by Appellant: The Appellant informed the Respondent that it is not accepting the terms and conditions stipulated by the Respondent and requested refund of earnest money.
4. Execution of Contract by Respondent: The Respondent requested the Appellant to supply the materials ordered as per the purchase order and warned the Appellant that if supply was not made as per the purchase order, risk purchase would be made at the cost of the Appellant and the Earnest Deposit of Rs.75,000 would be forfeited.
5. Denial of any concluded contract by Appellant: The Appellant refused the existence of a concluded contract between the parties and once again requested for refund of earnest money.
6. Claim for damages by Respondent: Respondent filed a suit seeking damages for breach of contract followed by another suit which was  filed by the Appellant claiming refund of earnest money deposited by the Appellant with the Respondent.

Order of Trial Court

The Trial Court rejected the contention of the Appellant that the Appellant had revoked its offer before acceptance thereof by the Respondent-Port Trust, and held that there was a concluded contract between the Appellant and the Respondent-Port Trust, since the Respondent-Port Trust had accepted the tender submitted by the Appellant.

Order of High Court

The High Court dismissed the appeal filed by the Appellant, holding that the Trial Court had, on consideration of the entire evidence and materials available on record, decreed the suit filed by the Respondent and dismissed the claim of the Appellant.

Order of Supreme Court

It was observed that in order to determine whether or not there was a concluded contract between the parties, the crucial question was whether the tender submitted by the Appellant had been accepted by the Respondent within the stipulated time period. The Trial Court found that acceptance of the purchase order was completed as against the Appellant, when the letter of intent cum purchase order was dispatched from the end of the Respondent.

Relevant Provisions

Section 4 of the Indian Contract Act, 1872 was taken into consideration by the Trail Court, which is set out hereinbelow for convenience:

“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.”

However, Supreme Court emphasised that both the Trail Court and High Court relied on Section 4 but completely overlooked on Section 7 of the Indian Contract Act, 1872 is set out hereinbelow for convenience:-

“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.”

Relevant Case laws

It is a cardinal principle of the law of contract that the offer and acceptance of an offer must be absolute. It can give no room for doubt. The offer and acceptance must be based or founded on three components, that is, certainty, commitment and communication. However, 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, as held by the Supreme Court in Haridwar Singh v. Bagun Sumbrui and Ors. 

Reliance was also placed on Union of India v. Bhim Sen Walaiti Ram, wherein, a three-Judge Bench of the Supreme Court held that acceptance of an offer may be either absolute or conditional. If the acceptance is conditional, the offer can be withdrawn at any moment until absolute acceptance has taken place.

In Jawahar Lal Burman v. Union of India, the Supreme Court held that under Section 7 of the Contract Act, acceptance of the offer must be absolute and unqualified and it cannot be conditional. However, in the facts and circumstances of that case, on a reading of the letter of acceptance as a whole, the Appellant’s argument that the letter was intended to make a substantial variation in the contract, by making the deposit of security a condition precedent instead of a condition subsequent, was not accepted.

Final Judgement

Hon’ble Supreme Court of India held that the 

“High Court also overlooked Section 7 of the Contract Act.” 

Both the Trial Court and the High Court over-looked the main point that, in the response to the tender floated by the Respondent, the Appellant had submitted its offer conditionally subject to inspection being held at Appellant’s Depot. This condition was not accepted by the Respondent unconditionally. 

The Respondent agreed to inspection at the Appellant’s Depot, but imposed a further condition that the goods would be finally inspected at Respondent’s store. This Condition was not accepted by the Appellant. It could not, therefore, be said that there was a concluded contract. 

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. The earnest deposit of the Appellant is liable to be refunded.

The Supreme Court also examined the question as to whether the compensation and/or damages claimed by the Respondent were reasonable or excessive, whether claim for damages could only be maintained subject to proof of the actual damages suffered, and whether the Respondent had taken steps to mitigate losses. We also need not embark upon the academic exercise of deciding whether prior approval of the Board of Trustees of the Respondent is a condition precedent for creation of a valid contract for supply of goods, or whether post facto ratification by the Board would suffice.

Key Takeaways

This judgement underscores the importance of unequivocal acceptance of all the clauses of a contract by both the parties. It also serves as a ready reference for any prospective disputes/ controversies in scenarios where a contract goes through numerous sessions of negotiations.

Therefore, to reiterate, an acceptance with a variation is no acceptance. It is, in effect and substance, simply a counter proposal which must be accepted fully by the original proposer, before a contract is made.