In one of its recent decisions, the Supreme Court of India has clarified that accepting an offer with a condition is no acceptance at all -- it is a counter-proposal. A counter-proposal made while accepting an offer must be accepted by the original proposer to conclude a contract. Until that happens the parties must not assume that a concluded contract1 exists. So, until there is a concluded contract, no question of any breach would arise, but often parties accepting offers with counter-proposals do not realize that.
A recent Indian court case Padia Timber Company (P) Limited versus The Board of Trustees of Visakhapatnam Port Trust Through its Secretary )2 -- involving the seller, Padia Timber Company (P) Limited and the buyer - Visakhapatnam Port Trust -- illustrates what can happen when parties are unaware of this problem.
In this case, the buyer issued a request for proposal (RFP) for purchasing wooden (railroad) sleepers and the proposal of the seller was selected for award.
Wooden railroad sleepers
The seller had made a conditional offer and further conditions were added by the buyer while accepting seller’s offer. After the contract was awarded, disputes arose between the buyer and the seller and lawsuits were filed by them. During the decisive case, the Supreme Court of India considered whether a contract was concluded between the two parties in dispute and held that acceptance of a conditional offer with a further condition attached to the acceptance does not result in a concluded contract.3
The issues that led to the dispute emerged from the following clauses 15 and 16 of the buyer’s RFP:
“Clause 15: The purchaser [buyer] will not pay separately for transit insurance and the supplier [seller] will be responsible till the entire stores contracted for arrive in good condition at destination. The consignee [buyer] will as soon as but not later than 30 days of the date of arrival of stores at destination notify the supplier [seller] of any loss, or damage to the stores [supplies] that may have occurred during transit.
Clause 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 [seller] and recover the freight by the [Visakhapatnam] Port is reserved.”
Although the seller submitted its offer to the buyer, they did not accept clauses 15 and 16 of the RFP. Instead they requested that the wooden sleepers would have to be inspected by the buyer only at the factory site of the seller, because that would make it easier to transport the rejected sleepers back to seller’s depot without additional financial burden on the seller. The seller further clarified to the buyer that should the buyer still require carryinginspection at buyer’s store, there would be an increase in cost by 25% which was later reduced to 24%. The seller would also deposit earnest money in accordance with conditions of the RFP.
The buyer then informed the seller that their offer had been accepted and the inspection would be carried out at the seller’s factory. However, the buyer, in their acceptance letter introduced a new condition that final inspection would be carried out at the buyer’s facility. The buyer also requested the seller to extend the delivery period.
The seller did not accept the condition stipulated by the buyer in their acceptance letter, because the stipulation contradicted the seller’s offer. The seller also declined to extend the delivery period, and requested refund of their earnest money deposit. The buyer issued a letter of intent followed by a purchase order within the validity period of seller’s offer asking the seller to supply the wooden sleepers according to the terms and conditions of the purchase order.
After releasing the purchase order, the buyer requested the seller to supply the sleepers immediately, arguing that they had placed the order within the validity period of seller’s offer. The buyer also stated that if supplies were not delivered on time, the buyer would activate the risk purchase clause, purchase the wooden sleepers at the seller’s cost (per purchase order terms) and forfeit the seller’s earnest money deposit. But the seller contended that a contract did not conclude between them and the buyer and they again requested a complete refund of their earnest money deposit.
Eventually, the buyer placed an order with another supplier at a much higher rate and informed the seller that their lack of response activated the risk purchase clause of the purchase order and therefore the buyer was entitled to claim damages.
Breach of contract proceedings before trial and high court
The buyer then filed a suit against the seller before the Additional Subordinate Judge, Vishakhapatnam (Trial Court) seeking damages to the tune of INR 33,19,991 (45,830 US Dollars approx.) along with interest thereon for breach of contract by the seller. The seller also filed a suit before the Subordinate Judge of the Trial Court against the buyer claiming return of the earnest money deposit along with interest thereon, costs and other consequential reliefs.
The two lawsuits clubbed as one was heard by the Trial Court and the Trial Court, dismissing seller’s suit, decreed in favor of buyer’s suit, and held that:
- the seller had not revoked its offer before acceptance by the buyer, and there was a concluded contract between the parties because the buyer had accepted the offer of the seller and issued a letter of intent/purchase order within the validity date of price quoted by the seller;
- in view of the contract having been concluded, the seller had breached the contract by not having supplied the goods to the buyer; and
- the buyer was entitled to claim damages.
The High Court at Hyderabad upheld and confirmed the Trial Court’s order in response to appeals filed by the seller being aggrieved by the decision of the Trial Court. Thereafter, the seller filed an appeal before the Supreme Court against High Court’s judgement.
Decision of the Supreme Court – adding a condition could be problematic!
The Apex Court held that both Trial Court and the High Court, having overlooked the provision of Section 7 of the Contract Act (requiring an acceptance of an offer to be absolute and unqualified to be converted into a promise)4 had erred in arriving at their decisions.
Iterating on the principle of absolute and unconditional acceptance, and relying on its following earlier decisions, the Supreme Court called forth three prior case precedents justifying their decision:
- In Union of India v. Bhim Sen Walaiti Ram5, the Supreme Court had held that 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.
- In Jawahar Lal Burman v. Union of India6 the Court had held that under Section 7 of the Contract Act, acceptance of the offer must be absolute and unqualified.
- In Haridwar Singh v. Bagun Sumbrui and Ors7, the Court had held that when the acceptor includes new condition while accepting the contract already signed by the proposer, the contract is not complete until the proposer accepts that condition.
The Court, in January 2021, held that an acceptance with a condition is no acceptance and in fact amounts to a counteroffer which must be accepted fully by the original proposer before a contract could be said to have been concluded.
Considering the provisions of Section 7 of the Contract Act, the Court observed that the seller’s offer was conditional requiring the inspection to be conducted at the depot of the seller. This condition was not accepted by the buyer in absolute term and the buyer imposed a further condition that the wooden sleepers would be finally inspected at the buyer’s facility. This additional condition was not accepted by the seller; therefore, the offer could be revoked by the seller at any time. As a result, the contract was not concluded. And, because of that, no breach of contract existed; therefore no damages could be claimed.
The Supreme Court set aside the orders of the High Court and Trial Court and directed the buyer to refund the earnest money deposited by the seller along with interest.
Absolute acceptance means exactly that!
This judgement emphasizes the importance of absolute acceptance, especially for those who negotiate complex contracts requiring multiple rounds of negotiations on terms and conditions. The parties concluding a contract must ensure that terms and conditions negotiated during the pre-award stage are clearly documented and unequivocally accepted by the parties; this leaves no room for doubts that can challenge the very existence of a contract in future.
- Pleaders article: Difference between agreement to agree vis-à-vis concluded contract
- Padia Timber Company (P) Ltd. Vs The Board of Trustees of Visakhapatnam Port Trust Through its Secretary Civil Appeal No. 7469 of 2008.
- See also in article: Formation of Contract – When Completes
- The Indian Contract Act, 1872, Chapter I, Section 7
- Union of India & ors. v. M/S. Bhim Sen Walaiti Ram, 1971 AIR 2295
- Jawahar Lal Burman v. Union of India, 1962 AIR 378
- Haridwar Singh v. Bagun Sumbrui and Ors., 1972 AIR 1242
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