Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas [1966 SC]

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Girdharilal Parshottamdas and Company- “the plaintiffs” commenced an action in the City Civil Court at Ahmedabad against the Kedia Ginning Factory and Oil Mills of Khamgaon- “the defendants” for a decree for Rs. 31,150 on the plea that the defendants had failed to supply cotton seed cake which they had agreed to supply under an oral contract, dated July 22, 1959 negotiated between the parties by conversation on long distance telephone. The plaintiffs submitted that the cause of action for the suit arose at Ahmedabad, because the defendants had offered to sell cotton seed cake which offer was accepted by the plaintiffs at Ahmedabed, and also because the defendants were under the contract bound to supply the goods at Ahmedabad, and the defendants were to receive payment for the goods through a Bank at Ahmedabad.

The defendants contend that in the case of a contract by conversation on telephone, the place where the offer is accepted is the place where the contract is made, and that Court alone has jurisdiction within the territorial jurisdiction of which the offer is accepted and the acceptance is spoken into the telephone instrument. It is submitted that the rule which determines the place where a contract is made is determined by Ss. 3 and 4 of the Indian Contract Act, and applies uniformly whatever may be the mode employed for putting the acceptance into a course of transmission, and that the decisions of the Courts in the United Kingdom, dependent not upon express statutory provisions but upon the somewhat elastic rules of common law, have no bearing in determining this question.

The plaintiffs on the other hand contend  that intimation of acceptance of the offer being essential to the formation of a contract, the contract takes place where such intimation is received by the offeror.

A contract unlike a tort is not unilateral. If there be no “meeting of minds” no contract may result. There should, therefore, be an offer by one party, express or implied, and acceptance of that offer by the other in the same sense in which it was made by the other. But an agreement does not result from a mere state of mind: intent to accept an offer or even a mental resolve to accept an offer does not give rise to a contract. There must be intent to accept and some external manifestation of that intent by speech, writing or other act, and acceptance must be communicated to the offeror, unless he has waived such intimation, or the course of negotiations implies an agreement to the contrary.

The Contract Act does not expressly deal with the place where a contract is made. Sections 3 and 4 of the Contract Act deal with the communication, acceptance and revocation of proposals. By S. 3 the communication of a proposal, acceptance of a proposal and revocation of a proposal and acceptance, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking, by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.

In terms S. 4 deals not with the place where a contract takes place, but with the completion of communication of a proposal, acceptance and revocation.

By the second clause of S. 4, 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. This implies that where communication of an acceptance is made and it is put in a course of transmission to the proposer, the acceptance is complete as against the proposer: as against the acceptor, it becomes complete when it comes to the knowledge of the proposer. But S. 4 does not imply that the contract is made qua the proposer at one place and qua the acceptor at another place. The contract becomes complete as soon as the acceptance is made by the acceptor and unless otherwise agreed expressly or by necessary implication by the adoption of a special method of intimation, when the acceptance of offer is intimated to the offeror.

Acceptance and intimation of acceptance of offer are, therefore, both necessary to result in a binding contract. In the case of a contract which consists of mutual promises, the offeror must receive intimation that the offeree has accepted his offer and has signified his willingness to perform his promise. When parties are in the presence of each other the method of communication will depend upon the nature of the offer and the circumstances in which it is made. When an offer is orally made, acceptance may be expected to be made by an oral reply, but even a nod, or other act which indubitably intimates acceptance may suffice. If the offeror receives no such intimation, even if the offeree has resolved to accept the offer a contract may not result.

But on this rule is engrafted an exception based on grounds of convenience which has the merit not of logic or principle in support, but of long acceptance by judicial decisions. If the parties are not in the presence of each other, and the offeror has not prescribed a mode of communication of acceptance, insistence upon communication of acceptance of the offer by the offeree would be found to be inconvenient, when the contract is made by letters sent by post. In Adams v. Lindsell, it was ruled as early as in 1818 by the Court of King’s Bench in England that the contract was complete as soon as it was put into transmission. In Adam case, the defendants wrote a letter to the plaintiff offering to sell a quantity of wool and requiring an answer by post. The plaintiff accepted the offer and posted a letter of acceptance, which was delivered to the defendants nearly a week after they had made their offer. The defendants, however, sold the goods to a third party, after the letter of acceptance was posted but before it was received by the defendants. The defendants were held liable in damages. The Court in that case is observed that

“If the defendants were not bound by their offer when accepted by the plaintiff’s till the answer was received, then the plaintiffs ought not to be bound till after they had received the notification that the defendants had received their answer and assented to it. And so it might go on ad infinitum”.

The rule in Adams case, was approved by the House of Lords in Dunlop v. Vincent Higgins [1848]. The rule was based on commercial expediency. It makes a large inroad upon the concept of consensus; “a meeting of minds” which is the basis of formation of a contract. It would be futile, however, to enter upon an academic discussion, whether the exception is justifiable in strict theory, and acceptable in principle. The exception has long been recognized in the United Kingdom and in other countries where the law of contracts is based on the common law of England.

A similar rule has been adopted when the offer and acceptance are by telegrams. The exception to the general rule requiring intimation of acceptance may be summarized as follows. When by agreement, course of conduct, or usage of trade, acceptance by post or telegram is authorised, the bargain is struck and the contract is complete when the acceptance is put into a course of transmission by the offeree by posting a letter or dispatching a telegram.

Defendants contend that the same rule applies in case of contracts made by conversation on telephone. Plaintiffs contend that the rule which applies to those contracts is the ordinary rule which regards a contract as complete only when acceptance is intimated to the proposer. In case of a telephone conversation, in a sense the parties are in the presence of each other: each party is able to hear the voice of the other. There is instantaneous communication of speech intimating offer and acceptance, rejection or counteroffer.

It is true that the Posts and Telegraph Department has general control over communication by telephone and especially long distance telephones, but that is not a ground for assuming that the analogy of a contract made by post will govern this mode of making contracts. In the case of correspondence by post or telegraphic communication, a third agency intervenes and without the effective intervention of that third agency, letters or messages cannot be transmitted. In the case of a conversation by telephone, once a connection is established there is in the normal course no further intervention of another agency. Parties holding conversation on the telephone are unable to see each other: they are also physically separated in space, but they are in the hearing of each other by the aid of a mechanical contrivance which makes the voice of one heard by the other instantaneously and communication does not depend upon an external agency.

In administration of the law of contracts, Courts in India have generally been guided by the rules of the English common law applicable to contracts where no statutory provision to the contrary is in force. Courts in the former Presidency towns by the terms of their respective letters patents, and Courts outside the Presidency towns by Bengal Regulation III of 1793, Madras Regulation II of 1802 and Bombay Regulation IV of 1827 were enjoined in cases where no specific rule existed to act according to “law or equity’ in the case of chartered High Courts and elsewhere according to justice, equity and good conscience – which expressions have been consistently interpreted to mean the rules of English common law, so far as they are applicable to Indian society and circumstances.

In England the Court of Appeal decided in Entores Ltd. v. Miles Far East Corporation [1955 QB]:

“… Where a contract is made by instantaneous communication e.g. by telephone, the contract is complete only when the acceptance is received by the offeror, since generally an acceptance must be notified to the offeror to make a binding contract.”

Denning L.J., who delivered the principal judgment of the Court observed:

“When a contract is made by post it is clear law throughout the common law countries that the acceptance is complete as soon as the letter is put into the post box, and that is the place where the contract is made.”

“…that the rule about instantaneous communications between the parties is different from the rule about the post. The contract is only complete when the acceptance is received by the offeror: and the contract is made at the place where the acceptance is received.”

Obviously the draftsman of the Indian Contract Act did not envisage use of the telephone as a means of personal conversation, and could not have intended to make any rule in that behalf. The question then is whether the ordinary rule which regards a contract as completed only when acceptance is intimated should apply, or whether the exception engrafted upon the rule in respect of offers and acceptances by post and by telegrams is to be accepted. If regard be had to the essential nature of conversation by telephone, it would be reasonable to hold that the parties being in a sense in the presence of each other, and negotiation are concluded by instantaneous communication of speech, communication of acceptance is a necessary part of the formation of contract, and the exception to the rule imposed on grounds of commercial expediency is in applicable.

The Trial Court was, therefore, right in the view which it has taken that a part of the cause of action arose within the jurisdiction of the City Civil Court, Ahmedabad, where acceptance was communicated by telephone to the plaintiffs.

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