Home case analysis Union of India vs. Maddala Thathiah (1966)

Union of India vs. Maddala Thathiah (1966)

September 3, 2024

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This article is written by Harshit Kumar. This is a detailed analysis of the case of the Union of India vs. Maddala Thathiah (1966). The case focuses on the principles of contract law related to the tender and the acceptance of a standing offer and how such a contract is discharged after acceptance. This discussion underscores the significance of clarity in the contractual terms and the obligations it puts on the parties once the offer of tender is accepted. We will see how the Supreme Court deals with the issue of the enforceability of the cancellation clause in the contract and what directions it gives.

Introduction

Under contract law, for the formation of a legally binding contract the principles of offer and acceptance form the foundation. An offer is a statement of intent for entering a contract on some specific conditions which is made on a common understanding and with an intent that it will be a binding contract upon acceptance. On the other hand, an acceptance is an unqualified affirmation of approval given to the conditions specified during the offer. Effective and clear communication of the offer and acceptance is required between the parties (offeror and offeree). A contract is formed when an offer is accepted, subject to the fulfillment of all the specified conditions.

Tender is one part of this principle, it is an invitation to offer made to do or to abstain from doing an act, and this binds the party who is making the offer to perform its obligations for the party to whom the offer is made. When a tender of goods is accepted, it becomes a standing offer and a contract can only be formed when an offer is made on the basis of the tender. Both the parties to the contract have the right to revoke the tender, a tenderer has the right to revoke it same as the party who can refuse to place any order. However, if the tenderer has promised not to revoke the tender for consideration, or if any provision restricts him from doing so, he cannot revoke the tender, which means that the tender is irrevocable.

The case of Union of India vs. Maddala Thathiah (1966) is a significant ruling in contract law concerning the principle of tender and acceptance. This case shows the importance of clarity in the terms of the contract and the necessity of fulfilling the obligations of the parties that are enshrined in the contract. The decision impacts how one understands the procedure of tender and the enforceability of the cancellation clause in the agreement.

Facts of the case

Tenders were invited by the Dominion of India, who were the owners of Madras and Southern Mahratta Railways, to supply jaggery in the railway’s grain shop. A tender was submitted by the respondent to supply 14,000 imperial maunds of cane jaggery during February and March 1948. The tender form had a note in para 2 that mentioned the quantity required and the dates of delivery. The note was,

“This administration reserves the right to cancel the contract at any stage during the tenure of the contract without calling up the outstandings on the unexpired portion of the contract.”

The offer of the respondent was accepted by the Deputy General Manager of the railways through a letter dated 29/01/1948. The respondent was asked to remit a security deposit of Rs. 7900 and it was said that the official order would be placed with the respondent after the receipt of the remittance. Later, in a letter dated 16/02/1948, the Deputy General Manager reaffirmed that the tender would be accepted if the respondent agreed to the terms and conditions given in the reverse of the letter. The term of delivery was mentioned in the following way:

Delivery of 3500 maunds on 01/03/1948.
Delivery of 3500 maunds on 22/03/1948.
Delivery of 3500 maunds on 05/04/1948.
Delivery of 3500 maunds on 21/04/1948.

The note had the cancellation clause as well. Later via a letter dated 28/02/1948, the dates of delivery were slightly changed.

The Deputy General Manager by his letter dated 08/03/1948 informed the respondent about the cancellation of the order of jaggery outstanding against the order dated 16/02/1948, and the contract was cancelled.

The respondent filed a suit against the Union of India, praying for the recovery of the damage that was caused due to the breach of the contract. The case was dismissed by the trial court saying that the railway administration had held the right to cancel the contract at any stage without giving any reason and without making itself liable to pay any damages. This was taken as an appeal to the High Court, where it was ruled that the clause that reserved the right of cancellation of the contract to the appellant was void and since the trial court had not resolved the issue of damages, it remanded the suit for disposal after deciding on the issue.

The Union of India (appellant) took an appeal under Article 136 of the Constitution of India, against the decree of the High Court after obtaining the special leave.

Issues involved

Whether the railway administration have the right to cancel the contract without the liability of damages?
Whether the contract was for a definite quantity of 14,000 maunds of jaggery or only for such quantity as the railway administration required?
Whether the clause reserving the right to cancel the contract to the railway administration was valid or not?
Whether the railway administration could rescind the contract arbitrarily or only for good and reasonable grounds?

Contentions by the parties

Arguments by the appellant

Following arguments were given by the appellant:

The railway administration was not required to buy the complete 14000 mounds of jaggery, it should be interpreted as allowing the railway administration to purchase only the required amount of the jaggery up to a maximum of 14000 maunds. This means that they had no obligation to purchase the total mentioned quantity of jaggery.
The terms of the contract did not create any binding obligation to supply the complete amount because the administration had restricted the cancellation rights to itself, that it can cancel the contract at any stage and that will not make the administration liable to pay any damages for the remaining quantity.
The respondent explicitly agreed to every clause of the contract including the cancellation clause, that gave the power to the administration to cancel the contract at any stage without attracting any penalty.
The clause was a legitimate clause and enforceable, it was not repugnant to the contract.

Arguments by the respondent

Following arguments were given by the respondent:

The contract was for the supply of a definite amount of jaggery, 14000 maunds. This order was to be delivered in four installments on the specified dates given by the letter dated 16/02/1948 which were slightly changed by a letter dated 28/02/1948.
The contract was binding once the order was placed. It amounted to a binding contract that required the respondent to supply the jaggery and the administration to accept the order. The cancellation order did not apply to the supplies covered under the formal order.
The respondent agreed to every clause of the contract including the quantity and the delivery schedule. Therefore, by placing the formal order the administration was bound to accept it in accordance with the order terms.
The clause was not a legitimate clause and was repugnant to the contract.

Legal concepts involved in Union of India vs. Maddala Thathiah (1966)

Formation and interpretation of contract

The formation of a contract under Indian law is governed by the Indian Contract Act 1872. The essential elements that form a lawful contract are offer, acceptance, consideration, intention to create a legal relation, lawful consent, and capacity of the party to contract.

Section 2(a) defines an ‘offer’, it provides an offer or a proposal is an act of a person which shows the willingness of that person to do or to abstain from doing something with an intention to obtain assent.

Section 7 deals with the acceptance of an offer. It provides that the acceptance must be absolute and qualified. It also provides that the acceptance must be expressed in a usual and reasonable manner until and unless there is any specified manner that is provided in which it should be expressed.

Section 2(d) defines a ‘consideration’ as something in return for a promise which also must be lawful.

Section 25 provides that any agreement without consideration is void except in certain cases:

It is valid if it is written and registered under any law applicable and it is based on natural affection and love between close relatives.
It is valid if there is a promise involved to compensate someone who has already voluntarily done something for the promisor or fulfilled a legal obligation.
It is valid if there is a written and signed promise to pay, partially or whole, a debt that the creditor could have enforced but for the law for the limitation of suits.

Section 14 defines ‘free consent’, it provides that consent is said to be free when it is free from coercion, undue influence, fraud, misrepresentation, and mistakes.

Section 11 describes the capacity of the party to contract, it provides that any person who is of the age of majority as per the law, to which he is subject, and is of sound mind is competent to make a contract.

There is no Section under Indian Contract Act 1872 that explicitly defines intention to create a contract but that is determined through the interpretation of the agreement. If there is a lawful offer and lawful acceptance and both are clearly conveyed to each party that reflects the intention of both parties to create a contract.

In this case, the railway administration invited tenders for the supply of 14000 maunds of jaggery, the respondent submitted a tender offer to supply the required amount of jaggery on the specified dates, also agreeing to all the terms of the contract, this formed an offer. The Deputy General Manager through his letter asked the respondent to submit the security fees. After the submission of the security fees the respondent was given specific dates on which he had to supply the jaggery to the administration, at this stage the contract was a binding contract.

Interpretation of the contract depends on the intention of the parties to make a legal relationship along with the language of the contract and the purpose of the contract.

In this case, the Court interpreted the binding nature of the contract formed. The intention of the parties was clear from the tender submitted by the responder and the acceptance done through the letter dated 16/02/1948 which specified the date of delivery of the jaggery in installments, which was slightly changed by the letter dated 28/02/1948. This still didn’t form a binding contract until an order was placed for the delivery of the jaggery. As soon as the order was placed a binding contract was formed between the parties.

Discharge of contract

Discharge of the contract means the contract is coming to an end. There are several ways through which a contract is ended or terminated.

When both parties fulfill their contractual obligations as per the terms and conditions of the contract.
When both the parties agree to terminate the contract mutually.
If any unforeseen circumstances make it impossible to fulfil the contractual obligations, the contract can be discharged due to frustration.
If any of the parties breaches any term of a contract or fails to fulfill any contractual obligation. Then that party becomes liable to pay damages.
If any condition given by the law discharges the contract. Examples: the death of any party, the expiration of the time limit, incapacity of the party.

Under the Indian Contract Act 1872, Section 62 discusses the discharge of contract, this explains that a contract can be discharged by a mutual agreement between the parties, this may include either substituting a new contract for an existing one or by making some alterations in the existing contract.

In this case, the railway administration, through a letter dated 08/03/1948 cancelled the order outstanding against the order dated 16/02/1948. Which they believed had terminated the contract. The Court examined the validity of the cancellation clause that restricted the right of cancelling the contract in the hands of the administration. The Court interpreted that the cancellation could be invoked only till the order was not placed, but because the order was already placed by the administration, for the delivery of the jaggery, that made a binding contract between the parties and in this case, the cancellation could not be invoked arbitrarily.

Cancellation clause of a contract

Any cancellation clause in a contract is applicable under certain conditions

If there is a breach of contract.
If there is a misrepresentation of any material fact that influenced the other party to enter into the contract
By mutual agreement between the parties.
Because of any unforeseeable circumstances which make it impossible to fulfil any contractual obligation.
If any party terminates the contract for convenience with a notice period or paying compensation.

Section 65 of the Indian Contract Act 1872 provides that if any contract gets cancelled because it becomes void because of some reason then the party who gained any advantage under that contract must return that to the other party or make restitution.

Section 75 explains that if any party to the contract rescinds or cancels the contract because of the breach of the contract, then the party who breached the contract is liable to pay compensation.

In this case, the language of the cancellation clause restricted the cancellation rights to the hands of the administration. The Court interpreted that this cancellation clause was for a broader event, like acceptance of the tender, but not for the binding contract that was formed after placing a formal order. The administration placed a formal order with the respondent and made a formal binding contract between both parties. Therefore, the railway administration was under an obligation to accept the jaggery.

Damages for breach of a contract

Breach of contract occurs when any of the parties to the contract is not able perform any contractual duty and the innocent party suffers any loss, commonly any financial loss. The damages are paid in three forms:

If an innocent party suffers a financial loss then the breaching party is required to pay the innocent party to recover that financial loss, these are compensatory damages.
If an innocent party does not suffer any financial loss then the breaching party pays a nominal damage which is symbolic, the right of the innocent party to legal relief is affirmed.
If the contract itself had a clause specifying the amount to be paid to the innocent party by the breaching party, these are the liquidated damages.

Section 73 of the Indian Contract Act 1872 provides for the general rules to calculate the damages caused by the breach of the contract terms. It provides that the party suffering because of the breach of the contract is liable to get compensation for the losses that occurred naturally because of the breach or as per the contract terms. It allows compensation for both direct and consequential damages.

Section 74 explains that if the contract specifies a penalty sum to be paid in case of breach of the contract then the aggrieved party can claim the sum, but if the court feels that the stipulated amount is deemed a penalty and not a genuine pre-estimate of loss, then it can reduce it to a reasonable amount. It further provides that the aggrieved party can claim the damages irrespective of whether the loss is lesser or greater than the liquidated damages specified in the contract terms.

In this case, the Court observed that since a formal order was already placed by the railway administration it formed a legally binding contract between the respondent and the administration. Therefore, the cancellation of the contract by the administration, arbitrarily, resulted in the breach of the contract and hence, it was liable to pay the damages.

Judgement in Union of India vs. Maddala Thathiah (1966)

The Apex court ruled in favour of the respondent by explaining that, the restriction of the cancellation right in the hands of the railway administration was not valid and the cancellation of the contract by the administration arbitrarily was void. Thus, the administration was liable to pay the damages to the respondent to recover the loss he suffered due to cancellation.

The Court explained that the tender offer made by the respondent was an offer to supply 14000 maunds of jaggery, the railway administration through its letter dated 16/02/1948 accepted the tender offer by specifying the amount of the jaggery to be delivered in four installments and the date of delivery of the four installments, this was enough to understand that a formal order was already placed by the administration and that made a legally binding contract. Therefore, the administration was bound to accept the complete quantity of 14000 maunds for the respondent. So, the order was not for the amount that was required but for the complete quality of 140000 maunds.

To support its decision the Court referred to the case of Chatturbhuj Vithaldas vs. Moreshwar Parashram (1954), in this case, the arrangement was to supply two brands of bidis to the Government by Vithaldas. The contract that was formed was not through a single signed paper but through a series of letters between the parties. The main issue was whether these series of letters formed a legally binding contract. The Supreme Court observed that the series of letters were not making any binding contract, even if the parties had expressed intention to do business, until and unless a formal order was placed. The letters merely set forth the terms of potential transactions. The Court concluded that a tender is an offer but it is an invitation to do business, a binding contract is formed when the tender is accepted and a formal order is placed.

The reservation of the cancellation rights in the hands of the administration was not valid because the contract was a legally binding contract as soon as the order was placed. Therefore, the administration did not have the right to cancel the contract arbitrarily without paying any damages to the respondent.

The railway authority did not have any right to rescind the contract arbitrarily once the formal order for jaggery was placed.

Analysis of the judgement

The Apex Court focused on the major principles of the contract law:

Nature of the tender: The Court observed that the tender that was submitted by the respondent was for the delivery of 14000 maunds of jaggery. The tender form included the required quantity and dates of delivery. In addition to that the form also included a clause that reserved the cancellation rights in the hands of the administration at any stage during its tenure without calling up outstanding obligations on the unexpired portion of the contract.
Standing offer: The Court observed that there was no standing order in this case. The respondent’s tender was an offer for the supply of 14000 mauds of jaggery, which was accepted by the administration by a letter dated 29/01/1948. However, this did not make any binding contract because a formal order was not placed through that letter but the respondent was asked to remit a security deposit of Rs. 7900, and only after that a formal order would be placed. Later by the letter dated 16/02/1948 a formal order was placed with the specified quantity required to be delivered on the specified date, and this made a binding contract.
Acceptance of tender: It was observed that the administration accepted the tender offer through a letter dated 29/01/1948. However, there was still a condition required to be fulfilled to get the offer accepted completely through a formal order which was the remittance of a security deposit of Rs. 7900 by the respondent.
Communication of acceptance: The Court observed that the acceptance of the tender offer was conveyed by the administration through a letter dated 29/01/2024 which included the acceptance and the condition of the remittance of the security deposit. Later through the letter dated 16/02/2024 a formal order was placed with a specified quantity of jaggery to be delivered on specified dates.
Formation of a binding contract: The Court observed that a binding contract was formed between the administration and the respondent as soon as the administration accepted the tender offer and placed a formal order for the delivery of the jaggery.
Discharge of the contract: The Court observed that after the binding contract was formed between the parties, no such condition occurred that could have caused the discharge of the contract by the administration, that too arbitrarily.
Restriction of cancellation rights: The Court observed that the restriction of cancellation rights in the hands of the administration was not valid and it had no arbitrary right to cancel the contract at any stage after a formal order was placed which formed a legally binding contract.
Distinction between the application of the cancellation clause on the agreement and the contract: The Court differentiated between the application of the cancellation clause on the agreement which was the acceptance of the tender, but this was not applicable to a legally binding contract formed after a formal order was placed.
Cases that referred to the principles set in this case: The case of Union of India vs. Maddala Thathiah (1966) was referred to in the case of Cummins Diesel Sales Service (India) Ltd. vs. The Director General of Supplies and Disposals (1980). The Delhi High Court, while referring to the principle set in the Maddala case about the nature of the tender observed that the calling for a tender and its acceptance without specifying anything further will not make a legal contract. It was further observed that as soon as a specific order is issued under an accepted tender, then it becomes an enforceable contract.

Another case that referred to the case of Union of India vs. Maddala Thathiah (1966) was the State of Andhra Pradesh vs. Coromandel Paints and Chemicals Ltd. (1994). The Andhra Pradesh High Court referred to the nature of the tender explained in this case. It was observed that if the terms of the agreement specify that any good is to be supplied against the raiders placed in the future, it constitutes a standing order and not a binding contract. Unless a specific order is placed that specifies a definite quantity, there is no binding contract. Without a formal order, it remains a standing offer.

Conclusion

The case of Union of India vs. Maddala Thathiah (1966) provides clarity on the enforceability of the contracts in the context of public procurement. The case sets an important precedence for the understanding and application of the cancellation clause in a legally binding contract. It is a crucial case to understand the invitation of a tender and how an offer is made through it. This case is also important for understanding the difference between the tender offer and the binding contract. The Court dismissed the appeal observing that the cancellation clause was applicable only at the tender acceptance stage not after a formal order was placed, so allowing this arbitrary cancellation was against the fundamental principles of contract formation.

The Court has also distinguished between an agreement to contract and an enforceable contract, explaining that the first letter of acceptance dated 29/01/1948 was an agreement to contract and the later letter dated 16/02/1948 created a binding contract by placing a formal order. Lastly, the Court affirmed the right of the respondent to get compensation of the damages faced and the administration cannot escape this by relying on the cancellation clause. The ruling upholds the integrity of contracts in public sector activities and protects the rights of the suppliers.

Frequently Asked Questions (FAQs)

Who are the offeror and offeree?

An offeror is a person or the party who makes an offer or a proposal to another party. An offeror through an offer shows the willingness to start a legally binding contract on certain terms and conditions.

An offeree is the person or the party who accepts the offer or the proposal made by the offeror. Acceptance of the offer and agreeing to certain terms and conditions makes a legally binding contract between the offeror and the offeree.

What is a standing offer?

A standing offer is a type of offer that is made by the offeror to the offeree to enter into a contract on certain terms over a period of time. A standing offer, unlike a one-time offer which expires once accepted or rejected, remains open for acceptance for a certain period of time until it is revoked by the offeror or terminated because of the occurrence of certain circumstances that were specified in the offer. This is also known as an open offer or a continuing offer.

What is consideration?

Consideration is something of value exchanged between the parties to the contract. It can be in any form money, services, or any product. Consideration ensures that the parties are legally bound to each other to perform their contractual obligations.

What is the doctrine of frustration? What are liquidated damages?

If any unforeseeable circumstances occur which does not allow the parties to the contract to perform their contractual obligations then the doctrine of frustration discharges the parties from their legal obligations. This is explained under Section 56 of the Indian Contract Act 1872, it explains that a contract becomes void if it is impossible for the parties to fulfill their contractual obligations.

What are liquidated damages?

These are the pre-decided contractual damages that the parties to the contract agree to pay in case of any breach during the time they are entering into a contract. The amount goes to the aggrieved party by the party that breaches the contractual terms. These damages are specified within the contract.

What are direct damages and consequential damages?

Direct damages are general damages that are immediate and primary losses caused directly by the breach of contract. For example, if a supplier fails to supply the required goods as agreed and the other party has to buy them from another supplier at a higher rate, then the extra cost in the purchase of those goods is the direct damages that the supplier is required to pay to the other party.

Consequential damages are special damages or indirect damages that occur because of the breach of the contract but not the immediate result. For example, if any supplier fails to supply any goods on time and the other party loses another contract with a third party. This is indirect damage caused because of the breach done by the supplier. Then in this case the other party can claim the loss suffered.

Union of India vs. Maddala Thathiah (1966)

Introduction

Facts of the case

Issues involved