Union of India vs Maddala Thathiah

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 9 May, 1963

Coram: J. R. Mudholkar, K. Subba Rao, Raghubar Dayal

In this case, the Court recorded that the appeal had been granted special leave and involved the Union of India and Maddala Thathiah. The judgment was delivered on 9 May 1963 by Justice Raghubar Dayal, who sat with Justices J. R. Mudholkar and K. Subba Rao. The factual background described that the Dominion of India, as the owner of the Madras and Southern Mahratta Railway, issued a public invitation for tenders to supply jaggery to its railway grain shops. The respondent responded by submitting a tender to deliver fourteen thousand imperial maunds of cane jaggery during February and March 1948. In the tender form a paragraph set out a clause stating, “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 un‑expired portion of the contract.”

The Court explained that the Deputy General Manager of the Railways sent a letter dated 29 January 1948 accepting the tender and requesting the respondent to remit a security sum of Rs 7,900. The acceptance letter indicated that upon receipt of the security, an official order would be issued. A subsequent letter dated 16 February 1948 reiterated the acceptance but conditioned it on the respondent’s agreement to the terms and conditions printed on the reverse side of that letter. Those terms specified a delivery programme of three thousand five hundred maunds on 1 March 1948, three thousand five hundred maunds on 22 March 1948, three thousand five hundred maunds on 5 April 1948 and three thousand five hundred maunds on 21 April 1948. At the conclusion of the conditions, the same reservation of the right to cancel the contract at any stage without calling up the outstanding quantity was repeated. The delivery dates were later adjusted by a further letter dated 28 February 1948. On 8 March 1948, the Deputy General Manager wrote to inform the respondent that the balance of jaggery still pending under the order dated 16 February 1948 would be treated as cancelled and that the contract was thereby closed. The respondent’s protests were rejected, the railway administration maintaining that the cancellation clause gave it unfettered authority to terminate the contract. Consequently, the respondent instituted suit against the Union of India seeking damages for breach of contract. The trial court dismissed the suit, holding that the railway could cancel the contract without reason and was not liable for damages. The High Court subsequently ruled that the clause reserving the right to cancel was void and, in view of the trial court’s reasoning, remanded the suit for further determination.

In the appeal, the Union of India challenged the decree of the High Court, which, after having ruled that the clause reserving the right to cancel the contract was void, remanded the suit for determination of damages. The Union had filed the appeal after obtaining special leave. The Union advanced two principal submissions. First, it asserted that a proper construction of the contractual terms showed that the Union had consented to purchase only such quantity of jaggery as it might require, with an upper limit of fourteen thousand imperial maunds, and therefore it bore no enforceable duty to buy the entire stipulated amount. Second, the Union contended that the respondent had expressly accepted the clause permitting the Union to terminate the contract at any stage during its tenure, and that the clause was a valid and binding provision forming part of the contract, thereby giving the Union a right to discharge or determine the agreement at its discretion.

The respondent, by contrast, argued that the contract represented a complete agreement for the supply of a definite quantity of fourteen thousand maunds of cane jaggery, to be delivered on the dates specified in the order dated sixteen February 1948 and subsequently amended by the letter dated twenty‑eight February 1948. The respondent maintained that the clause invoked by the Union was repugnant to the contract as a whole and, even if it were valid, the Union could rescind the contract only on the basis of a good and reasonable ground and not arbitrarily.

To resolve the parties’ contentions, the Court found it necessary to ascertain the true nature of the contract that gave rise to the litigation. The relevant conditions of the tender were set out in paragraphs two, eight and nine of the tender documents. Paragraph two stipulated that fourteen thousand imperial maunds of cane jaggery were required for the months of December 1947 and January 1948, to be delivered in equal lots of one thousand seven hundred and fifty maunds each, commencing on ten December 1947 and completing on thirty‑first January 1948. The paragraph further noted that the administration reserved the right to cancel the contract at any stage during its tenure without calling up the outstanding quantities on the unexpired portion of the contract. Paragraph eight required the successful tenderer to pay a security deposit equal to five percent of the tender value, to be paid in cash, without interest, in addition to the earnest money already paid to the Paymaster and Cashier of the Railway at Madras. The paragraph expressly disallowed the use of cheques or drafts for the security deposit and, in the case of contracts for the supply of gingelly oil, provided that the security deposit would be arranged only after ninety days from the date of the last supply against the order. Paragraph nine provided that a formal order for supply would be placed on the successful tenderer only after the administration received the receipt issued by the Paymaster and Cashier for the security deposit referred to in paragraph eight.

The Court observed that the tender required the undersigned to present the receipt issued by the Paymaster and Cashier of the Railway as evidence of the security deposit described in paragraph 8. Paragraph 12 of the tender stipulated that any supplies found to be of unacceptable quality could be rejected. Paragraph 13 set out the penalties applicable when supplies were not delivered on the dates specified in the Official Order or when an acceptable replacement for any rejected consignment was not provided within the prescribed time. The penalty provision authorized the administration to take one or more of the following actions: (a) purchase from the open market, at the risk and expense of the supplier, goods of the quality contracted for, to the extent due; (b) cancel any outstanding obligations under the contract; and (c) forfeit the security deposit. The Court then turned to the facts. The respondent had offered to supply the required quantity of jaggery during the period in which it was needed and had expressed readiness to comply with all terms and conditions of the tender. In its letter, the respondent agreed to supply the jaggery at the rate specified in that correspondence. The tender was accepted by a letter dated 29 January 1948. While the offer and its acceptance created an agreement, the Court held that the agreement did not become a legally enforceable contract because the tender did not specify a precise date for delivery; it mentioned only a delivery period. Consequently, the agreement could be described, as argued by the appellant, as a contract in the ordinary sense governing the terms for the jaggery supply, but it did not constitute a definitive order for a specific quantity of jaggery on a specific date. Paragraph 9 of the tender required a formal order to be placed only after the respondent had both paid the security deposit required by paragraph 8 and furnished the receipt for that deposit to the Deputy General Manager, Grain Shops. Interpreting the note in paragraph 2 of the tender, the Court concluded that it allowed the cancellation of this loosely termed agreement at any stage during its tenure without invoking the outstanding obligations for the unexpired portion of the contract. The Court further explained that the language used in the note, particularly the phrase “tenure of the contract,” indicated that the contract was of a continuing nature and could be terminated at any time between the acceptance of the tender and the final delivery date of 31 March 1948, which was the last day for fulfilling the jaggery delivery obligations under the contract.

The Court explained that the clause allowing cancellation stipulated that, upon cancellation, the appellant would not call up any outstanding obligations for the portion of the contract that remained unfulfilled. In other words, the phrase meant that the appellant would not order the supply of jaggery that was scheduled to be delivered during the period from the date of cancellation up to 31 March 1948. The Court then turned to Paragraph 13, which dealt with penalties. It observed that Paragraph 13 distinguished between the outstanding quantities under the contract and the purchase of goods that the respondent had failed to supply. The penalty provision became operative when supplies were not made on the dates specified in the official order, or when an acceptable replacement for a whole or part of any rejected consignment was not provided within the prescribed time. Clause (a) of Paragraph 13 contemplated a penal action whereby the appellant could purchase, at its own risk and expense, goods of the contracted quality in the open market to the extent due, either because the respondent failed to supply the goods or failed to replace rejected goods that had initially been supplied in accordance with an order. Clause (b) of Paragraph 13 envisaged an additional penal action in the form of cancellation of any outstanding quantities under the contract. The Court held that such a cancellation could only pertain to the balance of supplies that had been agreed but not yet delivered. If the language had been intended to cover goods for which an order had already been placed but whose delivery dates had not yet arrived, the clause would have required different wording.

The Court then examined the correspondence related to the acceptance of the tender. The appellant’s letter dated 29 January 1948 conveyed the acceptance of the tender, directed the respondent to remit a specified sum as a security deposit, and stated that an official order would be issued upon receipt of confirmation of the remittance. The Court identified this as the order contemplated by Paragraph 9 of the tender. Subsequently, a letter dated 16 February 1948 from the Deputy General Manager reiterated in its first paragraph that the tender dated 27 January 1948 had been accepted for the supply of jaggery, subject only to the respondent’s acceptance of the terms and conditions printed on the reverse side. The Court noted that the tender had already been accepted, and therefore there was no occasion to reopen the question of acceptance, to re‑inform the respondent of the acceptance, or to obtain a second acceptance of the terms and conditions. No basis existed for imposing any new conditions on a tender that had been previously accepted. In the second paragraph of that letter, the Court observed a definitive instruction for the dispatch and delivery of the consignment to the Assistant Controller of Grain Shops. The letter specified that the entire quantity of 14,000 maunds would be supplied in four equal installments, each to be delivered on a particular date. The only additional term in the letter was the statement that “This administration reserves the right to cancel the contract.”

The Court noted that the clause allowing termination “at any stage during the tenure of the contract without calling up the outstandings on the unexpired portion of the contract” was identical in wording to the note appearing in paragraph two of the tender. The Court held that this note could be interpreted only with reference to the portion of the goods for which no formal order had yet been issued. The Court explained that, had the note been intended to refer to cancellation of specific orders, the language would have been expressed differently. In such a case the note would have spoken of a right to cancel orders concerning the delivery of consignments, and it would have expressly stated that any orders scheduled for delivery after the date of cancellation would stand cancelled, or that the appellant would not be obliged to accept delivery of consignments whose delivery dates fell after the cancellation. The Court found that the letter did not contain any provision making a formal order subject to this condition. Instead, the Court said, the condition regulated only the acceptance of the tender as set out in paragraph one of the same letter. The Court further observed that the order had been issued on a printed form that could also be used to place an order for a part of the commodity that the tenderer had agreed to supply. The Court inferred that this particular recital was included because of the form’s dual purpose. The Court concluded that the recital could not have any bearing on the present dispute, where the railway administration had unmistakably placed an order for the entire quantity of the commodity for which the tender had been called. Consequently, the Court concluded that the right to cancel could not be invoked to unwind the already issued order for the full quantity.

The Court then referred to the letter issued by the Deputy General Manager on 8 March 1948, which informed the respondent of the cancellation of the contract. That letter stated that the balance of jaggery remaining to be delivered under the order dated 16 February 1948 was treated as cancelled and that the contract was thereby closed. The Court observed that the letter distinguished between an order and the contract itself. According to the Court, the contract comprised the agreement formed by the offer to supply jaggery and its acceptance by the Deputy General Manager. On this basis, the Court held that the condition noted in paragraph two of the tender, or in the February 16, 1948 letter, gave the appellant only the right to cancel an agreement for supplies of jaggery for which no formal order had been issued by the Deputy General Manager to the respondent. The Court clarified that the condition did not extend to supplies for which a formal order had already been placed, specifying a definite quantity, a definite delivery date or a short delivery period. The Court further explained that once such an order was placed, it constituted a binding contract that obligated the respondent to supply the jaggery as required and likewise obligated the Deputy General Manager to accept the delivered jaggery. Accordingly, the Court affirmed that the respondent remained bound to perform its obligations under the order and could not rely on the cancellation clause to escape performance.

The order obligated the respondent to supply jaggery according to the conditions set out in the order and simultaneously imposed upon the Deputy General Manager the duty to accept any jaggery that was delivered in fulfilment of that order. The Court then referred to its earlier decision in Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram, reported in the 1954 volume of the Supreme Court Reports at page 817, which involved an arrangement between the Central Government and the bidi‑manufacturing firm Moolji Sickka & Company. Under that arrangement the firm was to sell, and the Government to purchase, from time to time two specific brands of bidis produced by the firm. The question presented before the Court was whether this arrangement constituted a contract for the supply of goods within the meaning of the relevant statutory provision. The Court observed that the alleged contract was said to be embodied in four letters. It held that, apart from stating the general terms on which the parties were prepared to transact business, those letters did not create a binding contract; a contract arose only when an order was actually placed and accepted. The Court further noted that while such a contract would be governed by the terms contained in the letters, no contract existed until an order had been placed and accepted. The Court also cited the treatise Law of Contract by Cheshire and Fifoot, fifth edition, page 36, which explains that a tender is undoubtedly an offer, but the crucial inquiry is whether the corporation’s “acceptance” of the tender amounts to a legal acceptance that creates a binding contract. The treatise directs that this issue must be resolved by examining the exact language of the original invitation to tender. It outlines two principal scenarios. In the first scenario the corporation declares that it will definitely require a precise quantity of goods, no more and no less, such as an advertisement for exactly one thousand tons of coal to be supplied during the calendar year from 1 January to 31 December. In that circumstance the corporation’s acceptance of the tender is a legal acceptance that generates an enforceable obligation. The trader becomes bound to deliver the one thousand tons, and the corporation becomes bound to accept that quantity, and the fact that delivery may be made in instalments as and when demanded does not affect the existence of the obligation. On this basis, the Court recognized that the Deputy General Manager’s acceptance of the respondent’s tender could, in a strict sense, be regarded as forming a contract. However, the Court declined to treat it as such because the tender itself, in paragraphs 8 and 9, required the furnishing of a security deposit and the issuance of a formal order before a contract could be said to arise. The treatise then describes a second scenario in which the corporation advertises that it may require articles of a specified description up to a maximum amount, for example, inviting tenders for the supply of coal not exceeding one thousand tons over the next year. In that case the tender represents a standing offer that may be withdrawn at any time before a definitive requisition is made, and only a requisition for a definite quantity creates a legal acceptance and a binding contract.

The Court explained that the offer to supply one thousand tons of coal, with deliveries to be made whenever the corporation demanded them, was a standing offer rather than a contract that became binding upon the mere acknowledgment of the tender. The trader, by making the standing offer, remained ready and willing to deliver up to the specified quantity at the agreed price until such offer was revoked. However, the Court held that the so‑called “acceptance” of the tender did not transform the standing offer into a binding contract because a contract of sale requires that the buyer have agreed to accept the goods. In the present circumstances the corporation had not agreed to take the full quantity of one thousand tons, nor any specific amount; it had only indicated that it might require supplies up to that maximum limit. The Court further observed that a standing offer could be withdrawn at any time so long as it had not been accepted in the legal sense, and that legal acceptance was complete only when the offeree made a requisition for a definite quantity of goods. Each such requisition constituted an individual act of acceptance that created a separate contract. Accordingly, the Court construed the relationship between the parties as falling within this second type of arrangement. The reservation of a right to cancel an outstanding contract, as noted in the paragraph following clause 2 of the tender form, was therefore consistent with the nature of the agreement that arose from the respondent’s offer being accepted by the appellant. A similar reservation appearing in the formal order dated 16 February 1948 referred only to contemplated supplies for which no actual orders had yet been placed and did not create a binding contract. Because of this construction, the Court found it unnecessary to consider the appellant’s additional contention that a particular stipulation formed a contractual term for the discharge of the contract and was therefore valid. The respondent argued that any term which effectively destroyed the contract under the earlier conditions was void, since it would leave nothing in the alleged contract that could bind the appellant. The Court concluded that the High Court’s order was correct, dismissed the appeal, and awarded costs to the respondent, thereby affirming the dismissal of the appeal.