The Supreme Court expounds that acceptance of a contract with a variation is no acceptance but is simply a ‘counter-proposal’ which must be accepted fully by the original proposer before a contract can be said to have concluded between the parties. (M/s. Padia Timber Company(P) Ltd. vs. Board of Trustees of Visakhapatnam Port Trust)

The judgment rendered by a Bench comprising of Justices Navin Sinha and Indira Banerjee came in an appeal by Padia Timber Company (Padia/ appellant) against an order of the High Court of Judicature at Hyderabad.

The Court ruled in favor of Padia holding that the appellant company had not accepted the contract which was varied by the respondent, Visakhapatnam Port Trust (Port Trust), and hence, there was no concluded contract.

“It is a cardinal principle of the law of contract that the offer and acceptance of an offer must be absolute..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,” the judgment said.

On 17-7-1990, the respondent floated a tender for the supply of Wooden Sleepers. The main dispute was related to Clauses 15 and 16 of the tender, which is extracted herein below:

“15. The purchaser will not pay separately for transit insurance and the supplier will be responsible till the entire stores contracted for arriving in good condition at destination. The consignee will as soon as but not later than 30 days of the date of arrival of stores at destination notify the supplier of any loss, or damage to the stores that may have occurred during transit.

“16. In the event of the supplies being found defective in any matter the right to reject such materials and return the same to the supplier and recover the freight by the Port is reserved.”

According to the aforesaid tender, the appellant submitted its offer with a specific condition of the offer that inspection of the Sleepers, contrary to the requirement of the respondent, had to be conducted only at the depot of the appellant, thereby making a counter-proposal. The appellant deposited Rs.75,000/- towards an earnest deposit, along with its quotation while reiterating that if the respondent required inspection at the site of the respondent, the appellant would charge 24% above the rate quoted by him for the supply of goods. Though the respondent agreed that the goods would be inspected at the site of the appellant, a further condition was imposed that the final inspection would be made at the General Stores of the respondent and the respondent also requested to extend the delivery period of the sleepers until 15-11-1990. The Appellant rejected the proposal of the Respondent and requested that the deposited earnest money be returned to it.

The respondent contended that, because of the refusal of the appellant to discharge its obligation of supplying the requisite number of sleepers, it had been constrained to invoke the risk purchase clause as contained in Paragraph 16 of the Special Conditions of purchase and had to purchase the wooden sleepers at a higher rate from a third party, incurring losses, for which the respondent was entitled to claim damages.

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.

The issue before the Apex Court in an appeal filed by the Company was whether the acceptance of a conditional offer with a further condition results in a concluded contract, irrespective of whether the offer accepts the further condition proposed by the acceptor. Referring to some earlier judgments on the subject, the bench observed:

“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. Begun Sumbrui and Ors. 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 Court noted that, in Union of India v. Bhim Sen Walaiti Ram, 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 High Court judgment, the bench further said:

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 depositing security a condition precedent instead of a condition subsequent, was not accepted. The High Court also overlooked Section 7 of the Contract Act. Both the Trial Court and the High Court overlooked 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 the 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.