Acceptance of a contract with a new condition won't be considered as acceptance but only a counter-proposal: Supreme Court

Acceptance of a contract with a new condition won't be considered as acceptance but only a counter-proposal: SC

The Supreme Court of India (SC) reaffirmed that acceptance of a contract with a new condition is no acceptance it is a 'counter-proposal'that should be accepted fully by the original proposer

Brief Facts of the Case

An appeal was filed by M/s. Padia Timber Company (P) Ltd. (appellant) against the Board of Trustees of Visakhapatnam Port Trust through its Secretary (respondent) before the Supreme Court of India (SC). This appeal is against a common judgment and order dated 10 October 2006 passed by the High Court of Hyderabad (HC) confirming a judgment and order dated 31 March 2000of the Additional Senior Civil Judge, Visakhapatnam (Trial Court).

On 17 July 1990, the Respondent floated a tender for the supply of Wooden Sleepers. The tenders were due to be opened on 1 August 1990.

Under the said tender, the Appellant submitted its offer on or about 1 March 1990. It was a specific condition of the offer of the Appellant that inspection of the Sleepers, as per the requirement of the Respondent, would have to be conducted only at the depot of the Appellant.

The Appellant did not accept Clauses 15 and 16 of the Tender and rather made a counter-proposal. According to the terms and conditions of the tender, the Appellant deposited Rs.75,000/-towards an earnest deposit, along with its quotation.

On 2 August 1990, the Controller of Stores of the Respondent informed the tenderers that the opening of the tenders had been postponed to 8 August 1990. The Appellant submitted its revised quotation and/or offer, reiterated that inspection according to the requirement of the Respondent would have to be conducted only at the depot of the Appellant. After the tenders were opened certain discussions took place between the Appellant and the Tender Committee of the Respondent.

Through a letter dated 11 October 1990, the Appellant agreed to supply wooden sleepers to the Respondent on the terms and conditions stipulated in the said letter. The Appellant reiterated that the Respondent could inspect the goods to be supplied, at the factory site of the Appellant at Vepagunta, Visakhapatnam, as this would facilitate re-transit of rejected goods to the depot of the Appellant, without additional financial burden.

The Appellant made it clear to the Respondent, that if the Respondent still required inspection at the site of the Respondent, the Appellant would charge 25% above the rate quoted by the Appellant for the supply of wooden sleepers.

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 depositing of security as a condition precedent instead of a condition subsequent, was not accepted.

Issues before the Courts

1. Whether the Appellant committed a breach of contract?

2. Whether the Appellant was entitled to refund of the earnest money with interest as claimed from the Respondent?

3. To what relief, if any, was the Appellant entitled?

The Trial Court and the HC had overlooked Section 7 of the Indian Contract Act. The Trial Court and the High Court held that since the appellant had committed a breach of its obligations under a concluded contract; the respondent was entitled to damages.

Observations of the SC

Aggrieved by the order of the HC, Padia Timber Company (Padia/appellant) appealed before the SC and the matter was rendered by a Bench comprising of Justices Navin Sinha and Indira Banerjee.

The SC stated, "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 this Court in Haridwar Singh v. Bagun Sumbrui and Ors."

According to the Court, 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."

The SC further noted 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-Port Trust, the Appellant had submitted its offer conditionally subject to inspection being held at the Depot of the Appellant. This condition was not accepted by the Respondent-Port Trust unconditionally. The Respondent-Port Trust agreed to inspection at the Depot of the Appellant, but imposed a further condition that the goods would be finally inspected at the showroom of the Respondent-Port Trust. 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 SC relied on the case of Union of India v. Bhim Sen Walaiti Ram, where it was held that if the acceptance is conditional, the offer can be withdrawn at any moment until absolute acceptance has taken place. While setting aside the HC judgment, the bench further said, "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."

The SC held that the appellant was neither in breach nor liable to damages, it is not necessary for us to examine the questions of whether the compensation and/or damages claimed by the Respondent was reasonable or excessive, whether a 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.

The appellant was entitled to a refund of earnest money deposited with the Respondent. The earnest money shall be refunded within four weeks with interest @ 6% per annum from the date of institution of suit no.450 of 1994 till the date of refund thereof.

The SC allowed the appeal and ruled in favor of the appellant holding that the appellant company had not accepted the contract which was varied by the respondent, and hence, there was no concluded contract. The judgment and order of the HC under appeal as also the common judgment and order of the Trial Court were set aside with no costs.