For the formation of a contract, an offer must be made and accepted. The contract is deemed to be complete only when the acceptance of such offer is expressly or impliedly communicated to the offeror. The earlier laws regarding contracts did not envisage the formation of contracts through instantaneous modes of Communication such as telephone, which facilitate the formation of a contract between parties in different territories instantaneously. Therein, the question of the place of formation of contract arises, which was decided in this case.
On July 22nd 1959, Kedia Ginning Factory and Oil Mills (appellant) of Khamgaon entered into a contract over the telephone to supply cottonseed cakes to M/s. Girdharilal Parshottamdas and Co. (respondents) of Ahmedabad. The respondents commenced an action against the appellant in the City Civil Court of Ahmedabad for failing to supply cottonseed cakes as per the agreement above. The respondents contended that the cause of action for the suit arose at Ahmedabad as the appellant’s offer to sell was accepted at Ahmedabad, and the appellant was to be paid for the goods through a bank in Ahmedabad. The appellant contended that the respondents’ offer to purchase was accepted at Khamgaon; the delivery and payment of the goods were also agreed to be made in Khamgaon, and the City Civil Court of Ahmedabad did not have jurisdiction to try the suit. The City Civil Court of Ahmedabad held that it had jurisdiction as the acceptance of the offer was intimated to the offeree at Ahmedabad, and that is where the contract was made. The appellants filed a revision application in the High Court of Gujarat, which was rejected. Then, the appellants preferred an appeal to the Supreme Court with special leave.
Contentions of appellant:
In the case of a contract by telephone, only the court within whose territorial jurisdiction the acceptance of an offer is spoken into telephone has jurisdiction to try any suit regarding the contract.
Sections 3 and 4 of the Indian Contract Act (1872) are applicable in determining the place where a contract is made and not the decisions of UK courts.
Contentions of respondents:
The making of an offer is a part of the cause of action in a suit for damages for breach of contract. Hence, the court in whose territorial jurisdiction such offer was made can try such suit.
The contract is formed where the acceptance of an offer is intimated to the offeree. Hence, the court in whose territorial jurisdiction such acceptance of the offer was intimated can try such a suit.
A contract comes into existence when an offer is accepted, and the acceptance of the offer is intimated through an external manifestation by speech, writing, or other act recognized by law. However, an exception to this rule has been made in the interest of commercial expediency. When a contract is negotiated through the post, the Communication of acceptance is deemed to be complete when the acceptance of an offer is put into a course of transmission to the offerer. The same rule is applicable in the case of a contract by telegram. The mere making of an offer does not form part of the cause of action for damages for breach of contract, which has resulted from the acceptance of the offer (Baroda Oil Cakes Traders v. Purshottam Narayandas Bagulia and Anr. AIR1954Bom491). Though sections 3 and 4 of the Contract Act speak about the Communication, acceptance, and revocation of a proposal and acceptance, respectively, the Act does not expressly deal with the place where a contract is made, and in determining the same, the interpretation clauses in section 2 of the Act must be taken into consideration.
In the case of telephone conservation, the contract is only complete when the answer accepting the offer is made[ Denning LJ in Entores Ltd. v. Mills Far East Corporation, (1955) 2 Q.B.D. 327]. In the majority of European countries and the US, the generally accepted rule based on the theory of consensus ad idem is that the contract is made in the district where the acceptance is spoken. The Indian Contract Act (1872) did not envisage the formation of contracts through an instantaneous mode of Communication such as telephone. The exception of commercial expediency applicable to contracts formed via post does not apply to contracts made through telephone. Hence, the Hon’ble Court held that the trial Court was right in taking that a part of the cause of action arose within the jurisdiction of the Civil City Court. Ahmedabad, where acceptance was communicated by telephone to the respondents. The appeal was dismissed with costs.
Dissenting Opinion by Justice Hidayatullah:
Though the Contract Act is applicable in India, it was drafted in England, and English common law permeates it.In Entores Ltd. v. Mills Far East Corporation, it was held that a contract made by telephone is complete only where the acceptance is heard by the proposer [offeror in English common law] because generally an acceptance must be notified to the proposer to make a binding contract and the contract emerges at the place where the acceptance is received and not at the place where it is spoken into the telephone. In cases of contracts by correspondent or telegram, a different rule prevails, and acceptance is complete as soon as a letter of acceptance is posted, or a telegram is handed in for dispatch.
In Carrow Towing Co. v. The Ed Mc William, (46 D.L.R. 506), it was held: “Where a contract is proposed and accepted over the telephone, the place where the acceptance takes place constitutes the place where the contract is made. Acceptance over the telephone is of the same effect as if the person accepting it had done so by posting a letter or sending off a telegram from that place”. In an old English case, Newcomb v. De Roos [(1859) 2 E & E 271], Hill J. observed: “Suppose the two parties stood on different sides of the boundary line of the district: and that the order was then verbally given and accepted. The contract would be made in the district in which the order was accepted.”
Where the speech is fully heard and understood, there is a binding contract and in such a case, the only question is as to the place where the contract can be said to be completed. The acceptance was put in the course of transmission at Khamgaon, and under the words of the Contract Act, it is difficult to say that the contract was made at Ahmedabad, where the acceptance was heard and not at Khamgaon where it was spoken. Section 4 of the Act covers in its language a contract through telephone. The decision in Entores case was based on interpretation of common law, whereas in the instant case, the interpretation of statutory law is in question. Hence, the contract was completed at Khamgaon, where the acceptance was spoken.
It was reasoned that the acceptance was put in the course of transmission at Khamgaon, but nothing is specified in the Indian Contract Act,1872 which can provide a direction as to where the contract was made at Ahmedabad, and the acceptance was heard in Ahmedabad or Khamgaon OR where the acceptance was spoken. The judges took a logical step in coming to a conclusion, and they took into consideration various foreign rules, such as in the majority of European countries and countries in the U.S., the rule is, the place where the acceptance in a contract is spoken, the acceptance should be taken into consideration. Hence, the judges relied on this rule as well as various cases like In Carrow Towing Co. v. The Ed Mc William, (46 D.L.R. 506), it was held: “Where a contract is proposed and accepted over the telephone, the place where the acceptance takes place constitutes the place where the contract is made.
In an old English case, Newcomb v. De Roos [(1859) 2 E & E 271], Hill J. observed: “Suppose the two parties stood on different sides of the boundary line of the district: and that the order was then verbally given and accepted. The contract would be made in the district in which the order was accepted.”
The court chose the subject of the spot of the starting point of the reason for activity in a suit for a break of the agreement made over phone. Here, the court likewise explained the guidelines regarding the correspondence, acknowledgment, and denial of proposition and acknowledgment concerning an agreement made through phone or through any instantaneous communication. The decision further explained that the standard of correspondence and acknowledgment of offer pertinent to contracts made through the post would not be material to contracts made via phone. In a very laymen’s language, this case deals with “where have you heard and how have you heard the fact.” This case deals with sections 2, 3, and 4 of the Indian Contract Act 1872, which deals with the interpretation of basic terms used in contract law, Communication, acceptance, and revocation of proposal and Communication when complete. The most astonishing thing in the case is that the plaintiff and respondent were not fighting for the primary purpose, i.e., cottonseed cake. Instead, they were fighting for the courts in which the case should be heard. In this case, justice Hidayatullah gave dissenting judgment as he disagrees with the majority. He also proposes four different types of conditions in which the acceptance could be heard. However, at last, the court follows the precedent judgment Entores Ltd v Miles Far East Corporation , from which they agreed that the case should be heard at Ahemdabad.