Telephonic offer and acceptance under the Indian Contract Act, 1872.

In this landmark judgement, the Supreme Court of India considered the aspect of telephonic conversation in the making of a contract. The main point of consideration was when would the acceptance be deemed to be complete. Read this analysis to find out the answer!
TITLEBhagwandas Goverdhandas Kedia Vs. M/S Girdharilal Parshottamdas
CITATION1966 AIR 543
COURTSupreme Court of India
JUDGES/CORAMJustice J.C. Shah
DATE OF JUDGEMENT30.08.1965

INTRODUCTION

The instant case is important for understanding the operation and applicability of offer and acceptance made under India Contract Act, 1872. An offer can be made at one geographical point while the acceptance can be communicated from another geographical location. This leads to myriad of layers of confusion and uncertainty regarding the place of contract. It is essential for every valid contract to determine the place where the contract was made. Many other elements within the contract would depend on the place of contract. Every proceeding, judgment, reference and liability can arise depending upon the place of the contract.

Another essential aspect is the communication of offer and acceptance and determination of whether a contract has been conveyed for an agreement by both parties. The case at hand highlights Section 2, 3, 4, place of formation of contract and postal rule. Based on where the contract was entered into originally, jurisdiction can be ascertained as to which court is fit to decide on the matter arising out of breach of contract. 

FACTS

            The facts of the case are as follows: In the immediate case, the plaintiffs made an oral offer on phone from Ahmedabad for the purchase of cotton seed cake from the defendants. The defendants accepted this offer on phone at Khamgaon. Later, the defendants failed to supply the requisite cotton seed cake. Consequently, the plaintiffs sued the defendants for a breach of contract. Plaintiffs demanded compensation for their monetary loss, amounting to Rs.31,150. The suit was filed at Ahmedabad. The defendants contended that the Ahmedabad Court had no jurisdiction on the ground that the contract was completed by the acceptance of offer on a telephone, at Khamgaon. On the other hand, the plaintiffs contended that the contract was struck when the acceptance was communicated to him (when he heard the acceptance through telephone) at Ahmedabad and therefore, the suit was within the jurisdiction of the Ahmedabad Court. The Supreme Court, after considering the facts and evidence of the case held that the contract was made at Ahmedabad where the acceptance was communicated and the part of action for an action for the breach of contract in this case had arisen within the jurisdiction of the Ahmedabad Court.  

ISSUES

The main issues in the case were:

  1. Which court had the jurisdiction to try the case under Indian Contract Act, 1872.
  2. The question of ‘when’ the contract was complete is to be examined and finalized. This would help in fixing the liability of a party to another.

SUMMARY OF COURT DECISION AND JUDGEMENT

On the issue of jurisdiction, the Trial Court took cognizance of the fact that the plaintiffs had made an offer from Ahmedabad by a long distance telephone to the defendants to purchase the goods. The defendants had accepted the offer at Khamgaon. The goods under the contract were to be delivered at Khamgaon and payment was also to be made at Khamgaon. The Court pointed that the contract was to be performed at Khamgaon and only because the offer was made from Ahmedabad, Ahmedabad Court could not be invested with the jurisdiction to entertain the suit. However, the Trial Court held that when a contract is made by conversation on telephone, the place where acceptance of offer is intimated to the offeror, is the place where the contract is made, and therefore the Civil Court at Ahmedabad had jurisdiction to try the suit.

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The defendants filed a revision application requesting the court to proceed on the merits against the order. The High Court of Gujarat rejected the said application in limine. The defendants further preferred an appeal against the order with special leave. They contended that in the case of a contract by conversation on telephone, the place where the offer is accepted was the place where the contract was made and the Court alone had the jurisdiction within the territorial jurisdiction of which the offer is accepted and the acceptance is spoken into the telephone instrument. 

Upon examining the nature of the contract entered into by phone, the Supreme Court observed, that in case of a telephonic conversation, in a sense that parties are in the presence of each other, each party is able to hear and perceive the voice of the other party. There is an instantaneous communication of speech intimating offer and acceptance, rejection or counter-offer. Intervention of an electrical impulse which results in the instantaneous communication of messages from a distance does not alter the nature of the material of conversation so as to make it analogous to that of an offer and acceptance through post or by telegraph. Post office acts as an agent between the offeror and the offeree. But in the case of telephonic phone call, the intervention ends when the two parties are connected telephonically and can hear each other instantaneously.

ANALYSIS

In the landmark case of, Adams v. Lindsell[1], an offer was made by defendants by post to sell certain goods. Though the plaintiffs duly posted his acceptance, it reached the defendants nearly after a week when the latter had already sold the goods to a third party. Court ruled that when parties are not in each other’s presence and when they communicate in long distance by either post or telegram, both parties get bound by contract as and when the acceptor puts the letter of acceptance in the course of transmission to offeror so as to be out of his power to recall.

In Baroda Oil Cakes Traders case[2] and cases cited therein, a similar rule had 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 authorized, 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. The defendants contend that the same rule applies in the case of contracts made by a conversation on telephone.

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Below are the four pertinent questions concerning the case at hand. Answers to these questions would better our understanding of the concept and the reasoning behind the Supreme Court’s decision in the present case.

  1. The court’s decision was appropriate and the case was decided correctly. The judgment of the case holds that the acceptance of the offer was sufficiently conveyed though the telephone call. The moment proposer heard the offer being accepted through the telephone, the contract was held to be formed and there was no time window for any revocation of the contract.
  2. However, the court’s decision was not in conformity with the contemporary Contract law in India in context of telephonic conversations. The Indian Contract Act was introduced in 1872. This was before the age of technological breakthroughs. There were no phones or fax machines. The reasoning of this case is consistent with the other cases as discussed above. An offer is said to be communicated when the offeree receives such offer through some external manifestation of the proposer’s will to offer a contract.
  3. The court did justify its reasoning adequately. It explained that a bargain is said to be struck and the contract is completed when the acceptance is put into a course of transmission by the offeree by posting a letter or dispatching a telegram or a telephone call. The Supreme Court rightly stated that in a case of a telephonic conversation, the position was the same as in the case where the parties were in the presence of each other. The rule of contract through post did not apply to such contracts. In case of acceptance sent by post, the contract is concluded when the letter of acceptance is posted. Whereas in a case of acceptance by phone, the contract is deemed to be complete when the offeror hears the acceptance at his end rather than when the acceptor speaks the words of acceptance. Therefore, in this case the interpretation of law is correct and just. The court however missed the point regarding the absence of telephones during 1966 in India. Nevertheless, it does not weaken the merit of the case.
  4. The policy implication of this decision is difficult to be make out considering the fact that this case was heard in 1966. The Indian Contract Act, 1872 has been amended a lot of times since 1966. Carving out an alternative approach to have public policies committed towards this area is a far-fetched notion.
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The ratio decidendi of this case elucidates upon the legality of Section 4 of the Indian Contract Act, 1872.  According to Section 4, the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. 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; as against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete, as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge. In the instant case the intimation of acceptance was communicated over a telephone call which meant that the plaintiff had heard it instantaneously.

The draftsmen of the Indian Contract Act did not suppose the possibility of contracts being struck over long-distance telephone calls but the courts have to follow what is convenient with the existing laws. In this case, the Court reasoned that acceptance was conveyed as soon as the offeror heard the intimation, thereby forming the contract.

There is substantial dissent in aforementioned context. Not many telephones permeated the Indian sub-continent during the time frame within which this contract was entered into by both parties. Even the Indian Contract Act, under Section 4 states that the communication of acceptance is complete as against the proposer only when it is put into course of transmission to him. The drafstmen of this Act alluded at Post Offices and letters, not telephonic calls. In case of a telephone call the voices are heard instantly without any delay. When there is no delay, the contract is formed the very next second of the offeree’s communication of his intimation. Moreover, on excluding the aspect of convenience, legally the place of formation of contract should have been Khamgaon.

CONCLUSION

The judiciary widely refers to this judgment. The case deals with Sections 2, 3 and 4 of the Indian Contract Act in a strict legal manner. No matter how instantaneously, the place of formation of the contract is crucial for determination of jurisdiction. This case will most certainly have some influence on future cases. It cleared the dilemma around the place of contract . Cases of such nature should also reconsider the timeline of the events when the contracts had taken place to avoid variance between ‘Law’ and ‘Applicability’.

–END OF CASE COMMENT–


[1] 1 B. & Ald. 681

[2]  AIR 1954 Bom 491, (1954) 56 BOMLR 575, ILR 1954 Bom 1137