This article is written by Shobhna Vijay.
Emirates Trading Agency LLC (hereinafter referred to as ‘the respondent’), on the basis of preceding correspondence, presented a draft agreement regarding the supply of phosphoric acid within a specified time period, to Vedanta Limited (hereinafter referred to as ‘the appellant’). This draft agreement, dated 26.10.2007, came with a covering letter appended to it, and required the appellant to sign, stamp and return the same to the respondent in confirmation. The respondent had done so in the wake of a bid that it had placed for a tender published by the Bangladesh Chemical Industries Corporation (hereinafter referred to as ‘the BCIC’). The appellant had signed a backup support agreement with the respondent for providing phosphoric acid in case the tender was awarded to the respondent.
On receiving the draft agreement, dated 26.10.2007, the appellant made a counter-proposal, with regard to the quantity and the time period for supply. The covering letter was not signed, stamped and returned to the respondent. On 13.04.2008, the BCIC forfeited the performance guarantee of the respondent in addition to which pecuniary liabilities were imposed.
The respondent sued the appellant for breach of contract, in lieu of the draft agreement dated 26.10.2007, in the Principal District Court, Thoothukudi wherein damages was awarded to the respondent. The first appeal by the appellant was dismissed by the High Court. In a special leave petition, liberty was granted to approach the High Court in review jurisdiction. Liberty was further granted to approach the Supreme Court, if aggrieved. The High Court dismissed the review application and hence, the Supreme Court was approached.
- Whether there existed a concluded contract between the parties or matters rested at the stage of a proposal and a counter-proposal.
- Whether the conduct of parties and the exchange of correspondence preceding the draft agreement amount to acceptance of the proposal.
- Whether the backup support agreement is binding on the appellant.
- Whether the appellant is liable to pay damages for breach of contract.
When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.
Acceptance must be absolute: In order to convert a proposal into a promise, the acceptance must — (1) be absolute and unqualified.
Compensation for loss or damage caused by breach of contract: When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
In the present case, the respondent presented a draft agreement dated 26.10.2007, to the appellant for the purchase of 3 x 10,000 MT phosphoric acid for supply to the BCIC during November and December 2007. This draft agreement required the appellant to sign, stamp and return the covering letter as acceptance. The same was not done and instead, a counter-proposal for the supply of 3 x 9500 MT (max) between the period of January to March 2008 was sent back.
The counter-proposal differed in relation to two major criteria, the quantity of supply and the time period in which it was to be supplied. In Haji Mahomed Haji Jiva v. E. Spinner, Sir Jenkins, C.J. observed that any departure from the terms of the proposal or any qualification vitiates the acceptance. In other words, an acceptance with variation is no acceptance; it is simply a counter-proposal. Counter-proposals are ‘without prejudice’ meaning thereby that the offeree’s obligations remain unaffected and that the offeree is not bound by the original proposal.
In the present case, the presence of a counter-proposal implies that there was no ‘assent thereto’, which is required to turn a proposal into a promise, as provided under Section 2(b) of the Indian Contract Act, 1872. Furthermore, alteration in the material terms of the proposal indicates that there was no ‘absolute and unqualified acceptance’ as required under Section 7 of the Indian Contract Act, 1872 and hence, no concluded contract can be said to have come into existence. Matters merely rested at the stage of a proposal and counter-proposal.
The respondent’s counsel argued that in a commercial contract as in this case, the conduct of the parties plays an important role in determining whether there existed a concluded contract or not. The council reiterated that the concurrent findings by the earlier courts had established a concluded contract on the basis of the conduct and exchange of correspondence between the parties.
In Bhagwati Prasad Pawan Kumar v. Union of India, it was observed that conduct amounts to acceptance only if the facts of the case disclose that there was no reservation in signifying acceptance. On the other hand, if the evidence discloses that the offeree had reservations about accepting the proposal, his conduct will not amount to acceptance of the proposal. Furthermore, unless the language of the correspondence unequivocally and clearly indicates that the parties were ad idem to the terms, no binding contract can come into existence.
In the present case, the presence of a counter-proposal indicates reservations about accepting the proposal and implies that the parties were not ad idem to the terms of the proposal, and hence, the conduct of the parties and the exchange of correspondence preceding the draft agreement does not amount to acceptance of the proposal.
There existed a contract between the respondent and the BCIC as the former’s bid had been accepted by the latter in relation to the delivery of phosphoric acid. The appellant had signed a backup support agreement with the respondent for providing phosphoric acid in case the tender was awarded to the respondent. This agreement, however, was not binding on the appellant as it stated that the parties intended to enter into a contract if the bid was accepted, but the same would be subject to ‘coming to common ground’ with respect to the terms of the formal proposal.
Since the terms of the proposal were not approved of by the appellant, as is evident from the presence of a counter-proposal, the backup support agreement was only a provisional arrangement and hence, is unenforceable and is not binding on the appellant. Therefore, the forfeiture of performance guarantee and the imposition of pecuniary liabilities by the BCIC are at the respondent’s own cost.
The respondent sought damages for breach of contract. The Principal District Court and the High Court both placed great importance on the correspondence exchanged between the parties before the draft agreement and hence on a presumptive reasoning, decreed that the respondent could claim damages for breach of contract.
Both the courts, however, did not consider the presence of a counter-proposal which ipso facto implies a rejection of the original proposal. Under Section 73 of the Indian Contract Act, 1872, the existence of a concluded contract is a sine qua non in a claim for damages arising out of breach of contract. In the present case, the presence of a counter-proposal negates the presence of a concluded contract. Therefore, the claim under Section 73 of the Indian Contract Act, 1872 is not maintainable.
This case in its entirety is about the concept of counter-proposal and its effects on the initial proposal. It was observed that when a counter-proposal is made, it nullifies the original proposal and substitutes it with a new proposal. The quantity and duration of supply, therefore, remained in the realm of uncertainty and were never agreed upon so as to give rise to a concluded contract. The course of conduct and the correspondence preceding the draft agreement disclose that the appellant had reservations about accepting the proposal and that the parties were not ad idem, and hence, will not amount to acceptance. Moreover, the backup support agreement was not binding on the appellant as it was subject to the approval of the terms of the formal contract which could not be reached. Thus, as per the facts of the case and also in the light of the aforesaid provisions of the Indian Contract Act, 1872, the draft agreement cannot be said to be a concluded contract. Matters merely rested at the stage of a proposal and a counter-proposal. Consequently, in absence of a concluded contract, the claim under Section 73 of the Indian Contract Act, 1872 is not maintainable and the appellant is free from liability.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: