M/s. Padia Timber Co. P. Ltd. v. Board of Trustees of Visakhapatnam Port Trust

A timber supplier offered to supply railway sleepers, with inspection at its own depot. The Port Trust accepted but added that final inspection would be at its own stores. The supplier refused and asked for its deposit back. The Supreme Court held that an acceptance with a new condition is no acceptance, so there was no concluded contract.

Quick Revision

Read the full judgment: Indian Kanoon (unofficial copy)

Parties

M/s. Padia Timber Company (P) Ltd. — appellant; the supplier that made the offer. Its Director, Shri G.C. Padia, gave evidence.

The Board of Trustees of Visakhapatnam Port Trust, through its Secretary — respondent; the Port Trust that called the tender. It sued for damages for breach of contract.

Procedural History

1. The appeal is against the common judgment of 10 October 2006 of the High Court of Judicature at Hyderabad in Appeal Nos. 2196 and 2197 of 2000 (para 2).
2. The High Court confirmed the judgment of 31 March 2000 of the Additional Senior Civil Judge, Visakhapatnam. That judgment decreed O.S. No. 106 of 1993, the Port Trust's suit for damages, and dismissed O.S. No. 450 of 1994, the supplier's suit for refund of earnest deposit (paras 2, 26).
3. On or about 10 April 1992 the Port Trust filed O.S. No. 106 of 1993 in the court of the II Additional Subordinate Judge, Visakhapatnam, claiming Rs 33,19,991 with interest. The supplier filed its written statement on or about 23 March 1994 (para 21).
4. In or about June 1994 the supplier filed O.S. No. 450 of 1994 for refund of the earnest money with interest at 24 per cent a year from 24 April 1991 to 23 April 1993, and costs. The Port Trust denied liability (para 22).
5. The two suits were heard together by the First Additional Senior Civil Judge with common evidence. V. Adinarayana of the Stores Department gave evidence for the Port Trust and G.C. Padia for the supplier (paras 23, 25).

Facts

1. On or about 17 July 1990 the Port Trust floated a tender for supply of wooden sleepers. Tenders were due to be opened on 1 August 1990 (para 3).
2. Clause 15 of the tender made the supplier responsible until the stores arrived in good condition. The consignee had to notify loss or damage within 30 days of arrival. Clause 16 reserved the right to reject defective supplies, return them and recover freight (para 4).
3. The supplier made its offer on or about 1 August 1990. It was a specific condition that inspection would be only at the supplier's depot. It did not accept clauses 15 and 16 and made a counter proposal. It deposited Rs 75,000 as earnest deposit with its quotation (para 5).
4. On 2 August 1990 the Controller of Stores postponed the opening of tenders to 8 August 1990 (para 6).
5. On 8 August 1990 the supplier submitted a revised quotation, again saying inspection would be only at its depot. After the tenders were opened, there were discussions with the Tender Committee (para 7).
6. By letter of 11 October 1990 the supplier agreed to supply wooden sleepers on the terms in that letter. It said the Port Trust could inspect at the supplier's factory site at Vepagunta, Visakhapatnam, to ease re-transit of rejected goods to its depot (para 8).
7. The letter said that if the Port Trust still wanted inspection at its own site, the supplier would charge 25 per cent more. The letter set out seven points (paras 9, 10):
   • supply of B.G. Track Indian sal wood sleepers at the Port Trust site by its own transport;
   • the inspection clause;
   • 100 per cent payment on a week day after acceptance;
   • 24 per cent interest on late payments;
   • immediate supply of 2,000 B.G. sleepers;
   • its status as a regular supplier to Indian Railways;
   • a 10 per cent security deposit by bank guarantee, with refund of the Rs 75,000 earnest money.
8. By letter of 20 October 1990 the supplier said it had not agreed to inspection at the Port Trust's General Stores. If the Port Trust insisted, it would charge 24 per cent extra instead of 25 per cent. The Port Trust received this letter (para 10).
9. By letter of 29 October 1990 the Port Trust said it had accepted the supplier's offer at the quoted rate. It agreed the Inspection Committee would inspect at the supplier's site. It added a further condition that the supplier must transport the sleepers by road at its own cost to the General Stores, with final inspection there. It asked to extend the delivery period to 15 November 1990 (para 11).
10. By letter of 30 October 1990 the supplier said it did not accept those terms, which were not as per its offer. It declined to extend the validity of its offer because prices had gone up. It rejected the proposal and asked for the earnest money back (paras 12, 13).
11. On 30 October 1990 the Controller of Stores put up an office note seeking the Chairman's sanction to place orders for 10,596 B.G. Track Sleepers and 761 special size sleepers, at a total of about Rs 67,96,764, covered by a letter of intent cum purchase order dated 29 October 1990 (para 14).
12. Purchase order No. G 101126 90-91 of 31 October 1990 asked the supplier to supply 10,596 B.G. Track Sleepers and 761 B.G. Special Sleepers of first class sal wood to the latest Indian Railway Standards, on the terms in the purchase order and its special conditions (para 15).
13. By letter of 12 November 1990 the Port Trust asked the supplier to supply as per the purchase order. It said the order was placed within the validity of the quoted price. It warned of risk purchase at the supplier's cost and forfeiture of the Rs 75,000 deposit. It noted the supplier had not made the security deposit to which the order was subject (para 16).
14. By letter of 19 November 1990 the Port Trust asked the supplier to start supply. By letter of 27 November 1990 the supplier said there was no concluded contract and again asked for refund of the earnest money (para 17).
15. On or about 3 September 1991, after ten months, the Port Trust ordered wooden sleepers from M/s. Chhawohharia Machine Tools Corporation at a much higher rate (para 18).
16. The Port Trust said the purchase order and its special conditions were the terms of a binding contract. It said the supplier's refusal forced it to invoke the risk purchase clause (paragraph 16 of the special conditions) and buy at a higher rate from a third party, for which it claimed damages (para 19).
17. The supplier said negotiations did not end in a concluded contract, because the Port Trust did not accept its conditions fully and the supplier did not agree to the Port Trust's terms, in particular final inspection at the Port Trust's General Stores (para 20).

Issues Raised

The Court stated the main question (para 1):

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

The issues in the first suit were whether the supplier committed breach of contract, whether the Port Trust could recover the suit amount, and what relief was due (para 23). The issues in the second suit were whether the supplier was entitled to refund of earnest money with interest, whether the suit was barred by limitation, and what relief was due (para 24).

Arguments Contended

The judgment does not set out counsel's arguments in the Supreme Court. It records the parties' cases from the pleadings and the lower courts:

For the appellant (the supplier):

• The negotiations did not become a concluded contract, since the Port Trust did not fully accept the offer's conditions and the supplier did not accept the Port Trust's terms, in particular final inspection at the General Stores (para 20).
• It had revoked its offer before acceptance, and the offer's validity was not extended (paras 12, 29).
• In the High Court it relied on a series of cases on whether there was a concluded contract (para 46).
• Before the High Court it argued that there was no previous approval of the Board of Trustees under the proviso to Section 34(1) of the Major Port Trusts Act, 1963, so no enforceable contract. It also said the letter of intent was subject to ratification by the Board (paras 47, 53).
• Before the trial court it relied on Rajasthan State Electricity Board v. Dayal Wood Works, Fateh Chand v. Balkishan Das, G.M.T.A.P. Co-op. Mkts. Ltd. v. Dy. Registrar, Co-op Societies, Raichur and Marimuthu Gounder v. Ramaswamy Gounder (paras 35, 39 to 41).

For the respondent (the Port Trust):

• The Port Trust accepted the offer by its letter of intent cum purchase order of 29 October 1990, within the validity of the quoted price, so there was a concluded contract (paras 19, 28).
• The conditions in the purchase order, including the special conditions of purchase, are the terms of a binding contract (para 19).
• The supplier's refusal forced it to use the risk purchase clause, and it was entitled to damages (para 19).
• Before the trial court it relied on A.K.A.S. Jamal v. Moola Dawood Sons & Co., M/s Saraya Distillery v. Union of India, Murlidhar Chiranjilal v. M/s Harishchandra Dwarkadas and State of Maharashtra v. Digambar Balwant Kulkarni (paras 35, 36, 42 to 44).
• The Port Trust is a statutory authority that had to follow its rules in calling tenders from a third party, which answered the supplier's complaint of delay (para 37).

Court's Reasoning

The judgment has numbered paragraphs and one opinion, delivered by Indira Banerjee, J. Steps follow the order of the paragraphs.

Indira Banerjee, J. (judgment of the Bench)

1. Noted: The short question is whether acceptance of a conditional offer with a further condition results in a concluded contract, irrespective of whether the offerer accepts the further condition. The High Court and the court below do not appear to have addressed it (para 1).
2. Noted: The appeal is against the High Court's common judgment of 10 October 2006 in Appeal Nos. 2196 and 2197 of 2000, which confirmed the trial court's judgment of 31 March 2000 (para 2).
3. Noted: The Court sets out the tender of 17 July 1990, clauses 15 and 16 of the tender, and the supplier's offer of 1 August 1990 with its condition of inspection at the supplier's depot (paras 3 to 5).
4. Noted: It records the postponement of the opening of tenders, the revised quotation of 8 August 1990, the discussions with the Tender Committee, and the supplier's letter of 11 October 1990 with its seven points (paras 6 to 9).
5. Noted: It records the supplier's letter of 20 October 1990. It also records the Port Trust's letter of 29 October 1990. That letter agreed to inspection at the depot. It added final inspection at the General Stores and asked to extend delivery to 15 November 1990 (paras 10, 11).
6. Noted: It records the supplier's letter of 30 October 1990 rejecting the terms, declining to extend validity and asking for the earnest money back (paras 12, 13).
7. Noted: It records these events (paras 14 to 18):
   • the Port Trust's office note of 30 October 1990;
   • the purchase order of 31 October 1990;
   • the letters of 12, 19 and 27 November 1990;
   • the later order to another supplier on 3 September 1991.
8. Noted: It records the Port Trust's case on risk purchase and damages, and the supplier's case that no concluded contract arose (paras 19, 20).
9. Noted: It records the two suits, their issues, the evidence and the trial court's common judgment of 31 March 2000 (paras 21 to 26).
10. Noted: The trial court found that the Port Trust had invited tenders and the supplier had bid. It held the Port Trust accepted the offer and issued the letter of intent cum purchase order on 29 October 1990, within the price validity, which ran to 31 October 1990 (paras 27, 28).
11. Noted: The trial court rejected the supplier's plea that it had revoked its offer before acceptance. It held that the contract was concluded on 29 October 1990 when the letter of intent was issued (para 29).
12. Noted: The trial court said the crucial question was whether the tender was accepted within 31 October 1990. It held acceptance was complete as against the supplier when the letter was dispatched (para 30).
13. Noted: The trial court relied on Section 4 of the Contract Act. As against the proposer, communication of an acceptance is complete when it is put in course of transmission. As against the acceptor, it is complete when it comes to the proposer's knowledge (para 31).
14. Noted: The trial court held there was a concluded contract and the supplier, which admittedly did not supply, was in breach. It held that receipt and endorsement of the letter of intent within 31 October 1990 showed the contract was concluded (para 32).
15. Noted: The trial court awarded damages under Section 73, which gives compensation for loss that naturally arose from the breach or that the parties knew was likely. It held the Port Trust could claim the difference between the contract price and the market price at the place of delivery, or the controlling market price (paras 33, 34).
16. Noted: The trial court considered the cases cited by both sides. Relying on Saraya Distillery, it held that proof of actual repurchase was not necessary for damages (paras 35, 36).
17. Noted: It rejected the plea of delay in calling tenders from a third party, because the Port Trust was a statutory authority bound to follow its rules. It held the contract enforceable until completion or abandonment, and rescission and forfeiture of security deposit proper under its terms (paras 37, 38).
18. Noted: The Court summarises the cases before the trial court. In Dayal Wood Works the High Court found no concluded contract for sleepers, so the deposit was refundable (para 39).
19. Noted: In Fateh Chand a five-Judge Bench held that the court may award reasonable compensation up to the stipulated limit, and the section dispenses with proof of actual loss but does not justify compensation when no legal injury results. Where an amount deposited is forfeitable, the court awards only what it considers reasonable, not above the stipulated amount (para 40).
20. Noted: Marimuthu Gounder held proof of actual damage is a sine qua non. G.M.T.A.P. Co-op. Mkts. held a penalty cannot be imposed on a milling agent for default in supply without pre-estimation of loss (para 41).
21. Noted: Murlidhar Chiranjilal set out two principles. The plaintiff must be placed, as far as money can, as if the contract were performed, but must take reasonable steps to mitigate loss. Without proof of the market rate on the date of breach, no damage naturally arose and none was awarded (para 42).
22. Noted: Digambar Balwant Kulkarni held a contract could not be rescinded after the due date, and abandonment after that date is a breach giving a claim for damages (para 43).
23. Noted: A.K.A.S. Jamal held a plaintiff suing for damages must take all reasonable steps to mitigate loss and cannot claim sums incurred through his own neglect (para 44).
24. Noted: The High Court dismissed the appeals. It held the trial court had, on the whole evidence, decreed the Port Trust's suit and dismissed the supplier's claim (para 45).
25. Noted: The High Court noted that the main submissions concerned whether there was a concluded contract. The supplier cited six cases: Visakhapatnam Port Trust v. Bihar Alloy Steels, Raghunandhan Reddy v. State of Hyderabad, Mahesh Transport Co. v. T. & D. Workers' Union, M.V. Shankar Bhat v. Claude Pinto, Jawahar Lal Burman v. Union of India and U.P. Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd. (para 46).
26. Noted: The High Court did not discuss any of those judgments. It only recorded the supplier's contention that there was no previous approval of the Board of Trustees under Section 34(1) of the Major Port Trusts Act, 1963, so no enforceable contract (para 47).
27. Noted: In Bihar Alloy Steels the High Court held that Section 34 prescribes how a contract is made for the Board, and sub-section (3) says a contract not so made does not bind the Board. Citing H.S. Rokhy v. New Delhi Municipality, it held such a prohibition makes the contract void and unenforceable (para 48).
28. Noted: In that case this Court held the promise in the Traffic Manager's letter to lease an area was void and unenforceable against the Board, as there was no contract under Section 34 (para 49).
29. Noted: In Raghunandhan Reddy the High Court held a contract is concluded only when an offer is accepted. Before acceptance the offerer can withdraw, and if the acceptance is conditional or not final, there is no concluded contract (para 50).
30. Noted: Mahesh Transport Co. concerns the reference of an industrial dispute under Section 10(1) of the Industrial Disputes Act, 1947, and has no relevance here. In M.V. Shankar Bhat an agreement subject to ratification by heirs under a will did not create a conclusive contract, but its relevance is unexplained (para 51).
31. Noted: In U.P. Rajkiya Nirman Nigam this Court held a contract by a Government notification is not binding unless executed in accordance with its Articles of Association (para 52).
32. Noted: The High Court found it undisputed that tenders were called. It recorded the Port Trust's case that the offer was accepted and the purchase order issued on 31 October 1990 by registered post, acknowledged but refused by the supplier. It recorded the supplier's contention on lack of Board approval (para 53).
33. Noted: The High Court did not deal with the submission that the letter of intent was subject to ratification by the Board, or with the Port Trust witness's admission that no contract had been concluded. It held that the supplier's own letter of 27 November 1990 admitted receipt of the 29 October 1990 letter and acceptance of the tender, so it could not say there was no acceptance. It held the breach was the supplier's and the forfeiture rightly made (para 53).
34. Held: The High Court has dealt only briefly with the supplier's contentions and has not even discussed the cases cited for it (para 54).
35. Held: The trial court relied on Section 4 but completely overlooked Section 7 of the Contract Act (para 55).
36. Noted: Section 7 says that to convert a proposal into a promise the acceptance must be absolute and unqualified, and expressed in a usual and reasonable manner. If the proposer prescribes the manner, he may insist on it within a reasonable time, and if he does not, he accepts the acceptance (para 55).
37. Held: Offer and acceptance must be absolute and leave no room for doubt. They must rest on three components, "certainty, commitment and communication". When an acceptor puts a new condition while accepting a contract already signed by the proposer, the contract is not complete until the proposer accepts it, as held in Haridwar Singh v. Bagun Sumbrui (para 56).
38. Held: "An acceptance with a variation is no acceptance." It is in effect a counter proposal that the original proposer must fully accept before a contract is made (para 56).
39. Noted: In Union of India v. Bhim Sen Walaiti Ram a three-Judge Bench held acceptance may be absolute or conditional. If it is conditional, the offer may be withdrawn at any moment until absolute acceptance has taken place (para 57).
40. Noted: In Jawahar Lal Burman v. Union of India, cited by the High Court, this Court held under Section 7 that acceptance must be absolute and unqualified. On its facts, reading the acceptance letter as a whole, the argument that the letter made a substantial variation by making the security deposit a condition precedent was not accepted (para 58).
41. Held: The High Court also overlooked Section 7. Both courts overlooked that in response to the tender the supplier offered conditionally, subject to inspection at its depot. The Port Trust did not accept this condition unconditionally (para 59).
42. Held: The Port Trust agreed to inspection at the supplier's depot but added a further condition of final inspection at the Port Trust's showroom (the General Stores). The supplier did not accept it. "It could not, therefore, be said that there was a concluded contract." (para 59).
43. Held: With no concluded contract there was no breach by the supplier, no damages and no risk purchase at its cost. The earnest deposit is liable to be refunded (para 59).
44. Noted: Because the supplier was neither in breach nor liable, the Court did not examine whether the damages claimed were reasonable or excessive, whether damages need proof of actual loss, or whether the Port Trust mitigated its losses (para 60).
45. Noted: The Court also did not decide whether prior approval of the Board of Trustees is a condition precedent for a valid contract for supply of goods, or whether ratification afterwards would suffice (para 60).
46. Held: The supplier was entitled to refund of the earnest money. It must be refunded within four weeks, with interest at 6 per cent a year from the institution of suit No. 450 of 1994 until refund (para 61).
47. Held: The appeal is allowed. The High Court judgment and the trial court's common judgment in O.S. No. 106 of 1993 and O.S. No. 450 of 1994 are set aside. There is no order as to costs (para 62).

Authorities

• Haridwar Singh v. Bagun Sumbrui and Ors., AIR 1972 SC 1242. Followed. When an acceptor adds a new condition, the contract is not complete until the proposer accepts it (para 56).
• Union of India v. Bhim Sen Walaiti Ram, (1969) 3 SCC 146 (three Judges). Followed. A conditional acceptance leaves the offer open to withdrawal until absolute acceptance (para 57).
• Jawahar Lal Burman v. Union of India, AIR 1962 SC 378. Cited by the High Court. Acceptance must be absolute and unqualified. On its facts the variation argument failed (para 58).
• Rajasthan State Electricity Board and Others v. Dayal Wood Works, AIR 1998 AP 381. Cited by the supplier before the trial court. No concluded contract; deposit refundable (paras 35, 39).
• Fateh Chand v. Balkishan Das, AIR 1963 SC 1405 (five Judges). Cited by the supplier. Reasonable compensation up to the stipulated limit (paras 35, 40).
• G.M.T.A.P. Co-op. Mkts. Ltd. v. Dy. Registrar, Co-op Societies, Raichur, AIR 1998 Karnataka 354, and Marimuthu Gounder v. Ramaswamy Gounder and Ors., AIR 1979 Madras 189. Cited by the supplier on proof of loss (paras 35, 41).
• A.K.A.S. Jamal v. Moola Dawood Sons & Co., AIR 1915 Privy Council 48. Cited by the Port Trust. Duty to mitigate loss (paras 35, 44).
• M/s Saraya Distillery, Sardarbaggar v. Union of India and Anr., AIR 1984 Delhi 360. Relied on by the trial court: actual repurchase need not be proved for damages (paras 35, 36).
• Murlidhar Chiranjilal v. M/s Harishchandra Dwarkadas and Anr., AIR 1962 SC 366. Cited by the Port Trust on measure of damages and mitigation. It quotes British Westinghouse Electric and Manufacturing Company Limited v. Underground Electric Railways Company of London, [1912] AC 673 (paras 35, 42).
• State of Maharashtra and Anr. v. Digambar Balwant Kulkarni, AIR 1979 SC 1339. Cited by the Port Trust on abandonment after the due date (paras 35, 43).
• Visakhapatnam Port Trust, Visakhapatnam and Anr. v. Bihar Alloy Steels Ltd. and Ors., 1991 (1) A.L.T. 582, with H.S. Rokhy v. New Delhi Municipality, AIR 1962 SC 554. Cited for the supplier. Contract not made under Section 34 is void and unenforceable (paras 46, 48, 49).
• Raghunandhan Reddy v. The State of Hyderabad, AIR 1963 AP 110. A conditional acceptance gives no concluded contract (paras 46, 50).
• Mahesh Transport Co. v. T. & D. Workers' Union, AIR 1974 SC 868. No relevance (paras 46, 51).
• M.V. Shankar Bhat and Anr. v. Claude Pinto since (D) by Lrs. and Ors., (2003) 4 SCC 86. Relevance unexplained (paras 46, 51).
• U.P. Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd. and Ors., AIR 1996 SC 1373. Contract by Government notification must follow the Articles of Association (paras 46, 52).

Also cited in footnotes: the footnotes only give citations of the cases above.

Provisions

• Section 4, Indian Contract Act, 1872: communication of a proposal, acceptance and revocation is complete at the stated points. The trial court relied on it (para 31).
• Section 7, Indian Contract Act, 1872: acceptance must be absolute and unqualified, and in a usual and reasonable manner. The Court held it was overlooked (paras 55, 56, 58, 59).
• Section 73, Indian Contract Act, 1872: compensation for loss caused by breach. Not examined by the Court (paras 33, 60).
• Section 34(1) and (3), Major Port Trusts Act, 1963: how contracts are made for the Board of Trustees. The Court left the point open (paras 47 to 49, 53, 60).
• Section 10(1), Industrial Disputes Act, 1947: reference of industrial disputes, mentioned only in discussing Mahesh Transport (para 51).

Judgement

1. The appeal is allowed.
2. The judgment and order of the High Court under appeal, and the common judgment and order of the trial court in O.S. No. 106 of 1993 and O.S. No. 450 of 1994, are set aside (para 62).
3. The Port Trust must refund the earnest money within four weeks, with interest at 6 per cent a year from the date of institution of suit No. 450 of 1994 until refund (para 61).
4. There is no order as to costs (para 62).

Legal Principle / Ratio

Under Section 7 an acceptance must be absolute and unqualified. If the acceptor adds a new condition, it is a counter proposal, and no contract exists until the original proposer accepts it. Key holding: "An acceptance with a variation is no acceptance."

Critical Analysis

Analysis based on the judgment text.

• The Court decides the case on Section 7 alone. It leaves open whether the Board's prior approval under Section 34 of the Major Port Trusts Act is a condition for a valid contract, and the damages questions (para 60).
• The Court notes the lower courts did not address the question and did not discuss the cases cited (paras 1, 54). It then restricts itself to the offer and acceptance point.
• The Court notes the Port Trust's witness admitted that the contract was not concluded, and that the High Court did not deal with it. The Court did not rely on this admission (para 53).
• The text has small inconsistencies. The heading lists a bench of three Judges but the signature block has two names. The suit numbered O.S. No. 106 of 1993 is said to have been filed on or about 10 April 1992. The Port Trust's place of final inspection is called the General Stores in most places and the showroom in para 59.

Significance

• The case restates that acceptance must be absolute and unqualified, with certainty, commitment and communication.
• It applies the rule that acceptance with a variation is a counter proposal.
• It shows that an offerer is free to refuse a new condition and withdraw before absolute acceptance.
• It shows that a party cannot claim damages or forfeit a deposit without a concluded contract.

Exam-Important Points

• Rule first: acceptance must be absolute and unqualified (Section 7). A new condition makes it a counter proposal.
• Offer and acceptance rest on certainty, commitment and communication.
• Until the proposer accepts the new condition, there is no contract, and a conditional acceptance leaves the offer open to withdrawal.
• Trap: Section 4 fixes when communication of acceptance is complete. It does not decide whether the acceptance was absolute.
• Without a concluded contract there is no breach, no damages and no risk purchase. The earnest deposit is refundable.
• The Court left open whether prior Board approval under Section 34, Major Port Trusts Act, is needed.
• Directions: refund the earnest money within four weeks with 6 per cent interest from the institution of O.S. No. 450 of 1994. No costs.

Prepared from the full text of the judgment. Paragraph numbers follow the official Supreme Court judgment text; law reports may number the same paragraph differently.