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: Civil Appeal No. 53 of 1961

Decision Date: 9 May 1963

Coram: Raghubar Dayal, J.R. Mudholkar

In this case, the Court recorded that the General Manager of a Railway had invited tenders for the supply of jaggery to the railway grain shops. Paragraph two of the tender specified the quantity required and gave the dates for delivery. That paragraph also contained a note stating that the administration reserved the right to cancel the contract at any stage during its term without calling upon the outstanding amount for the unexpired portion of the contract. Under paragraph eight, the successful tenderer was required to pay a security deposit to ensure proper fulfillment of the contract. Paragraph nine provided that a formal order for supply would be placed after the security deposit referred to in paragraph eight had been received. The respondent submitted a tender for the supply of fourteen thousand maunds of jaggery as mentioned in the tender. By a letter dated 29 January 1948, the Deputy General Manager accepted the tender and indicated that an official order would be placed on the respondent upon receipt of the security deposit. In a further letter dated 16 February 1948, the Deputy General Manager reiterated the acceptance of the tender, subject to the respondent’s acceptance of the terms and conditions printed on the reverse of that letter. Those terms required delivery of three thousand five hundred maunds each on 1 March, 22 March, 5 April and 21 April 1948 respectively. At the end of the terms and conditions, a note reiterated that the administration reserved the right to cancel the contract at any stage during its tenure without calling upon the outstanding amount for the unexpired portion of the contract. By a letter dated 8 March 1948, the Deputy General Manager informed the respondent that the balance quantity of jaggery outstanding against the order dated 16 February 1948 was to be treated as cancelled and that the contract was closed. The respondent instituted a suit for recovery of damages alleging breach of contract. The appellant, relying on the stipulation that the administration could terminate the contract at any stage, raised that provision as a defence. The Court held that, on a true construction of the contract, the condition mentioned in note 2 of the tender and in the letter dated 16 February 1948 referred only to a right of the appellant to cancel an agreement for supplies of jaggery for which no formal order had been passed by the Deputy General Manager and that it did not apply to supplies for which a formal order specifying a definite amount and definite delivery dates had already been placed.

The Court explained that once a formal order was issued for the supply of jaggery, specifying a definite quantity, a definite delivery date or a short delivery period, that order became a binding contract. Under such a contract the respondent was obligated to supply the jaggery according to the terms of the order, and the Deputy General Manager was required to accept the jaggery delivered in compliance with that order. The Court cited the decision in Chatturbhuj Vithaldas Jasani v. Moneshwar Parashram, reported in 1954 S.C.R. 817, as authority for this principle.

The matter before the Court was an appeal in civil appellate jurisdiction, titled Civil Appeal No. 53 of 1961, arising by special leave from a judgment and decree dated 9 August 1956 of the Madras High Court in O.S. Appeal No. 64 of 1952. The appellant was represented by counsel for the Union of India, while counsel for the respondent also appeared. The judgment was delivered on 9 May 1963 by Justice Raghubar Dayal.

The facts giving rise to the appeal were as follows. The Dominion of India, as owner of the Madras and Southern Mahratta Railway, invited tenders for the supply of jaggery to its railway grain shops. The respondent submitted a tender to supply fourteen thousand imperial maunds of cane jaggery during February and March 1948. The tender form contained a note in paragraph 2 indicating that the administration reserved the right to cancel the contract at any stage without calling up the outstanding quantity on the unexpired portion of the contract. The Deputy General Manager of the Railways accepted the tender by letter dated 29 January 1948, requesting the respondent to remit a security sum of Rs. 7,900 and stating that an official order would be placed upon receipt of the payment. In a subsequent letter dated 16 February 1948, the Deputy General Manager reiterated acceptance of the tender subject to the respondent’s acceptance of the printed terms and conditions, which included a delivery programme of three thousand six 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. The same letter again noted that the administration reserved the right to cancel the contract at any stage without calling up the outstanding quantity on the unexpired portion. The delivery dates were later slightly altered by a letter dated 28 February 1948. By a further letter dated 8 March 1948, the Deputy General Manager informed the respondent that the balance quantity of jaggery would be treated as cancelled and the contract closed.

In this case the respondent argued that the order dated 16 February 1948, which was later treated as cancelled, should not have been set aside, but the railway administration insisted that it retained the right to cancel the contract at any stage, as expressly provided in the terms. The respondent’s protests were ignored, and the railway administration maintained its position that the cancellation clause gave it unfettered authority to terminate the contract without providing a reason or liability for damages. 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 administration could cancel the contract whenever it chose, without being required to pay any compensation. On appeal, the High Court held that the clause reserving the right to cancel was void, and because the trial Court had not decided the question of damages, the High Court remanded the matter for determination of that issue. The Union of India subsequently obtained special leave to appeal the decree.

The appellant advanced two principal contentions. First, it maintained that a proper construction of the contract terms showed that the appellant had agreed only to purchase such quantity of jaggery as it might require, up to a maximum of 14,000 maunds, and therefore it was not bound to buy the entire quantity. Second, the appellant argued that the respondent had expressly accepted the cancellation clause, making the clause valid, binding, and a contractual provision that allowed the appellant to terminate the contract at any stage with respect to any outstanding obligations. The appellant contended that the stipulation was a legitimate and enforceable term providing for the discharge or determination of the contract.

The respondent, on the other hand, contended that the contract was a complete agreement for the supply of a definite quantity of jaggery—specifically 14,000 maunds—on the dates specified in the order of 16 February 1948 and, subsequently, in the letter of 28 February 1948. The respondent argued that the cancellation clause was repugnant to the contract and, even if it were valid, the appellant could rescind the contract only on a good and reasonable ground and not arbitrarily.

To resolve these opposing arguments, it was necessary to ascertain the true nature of the contract that gave rise to the proceedings. The relevant conditions of tender were set out in paragraphs 2, 8 and 9 of the tender document and read as follows: “2. Quantity required and described dates of delivery.-14,000 imperial maunds of cane jaggery are required for the months of December 1947 and January 1948 and should be delivered in equal lots of 1,750 imperial maunds each commencing from 10th December 1947 and completed on 31st January 1948. Note: 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. 8. Security deposit.-Five percent … 9. Placing of order.-A formal order for supply will be placed on the successful tenderer only on the undersigned being furnished with the receipt issued by the Paymaster and Cashier of this Railway for the security deposit referred to in paragraph 8.” The Court recognized that these clauses formed the basis for determining whether the cancellation provision was enforceable and whether the appellant was obligated to purchase the full quantity of jaggery.

According to the tender specifications, the successful tenderer was required to pay a security deposit equal to five per cent of the tender value. The deposit was intended to guarantee proper performance of the contract and it bore no interest. The deposit had to be paid in cash, in addition to the earnest money that had already been handed over to the Paymaster and Cashier of the Madras Railway, together with the official receipt for that earlier payment. The tender explicitly rejected cheques and drafts as a mode of payment for the security deposit. For contracts involving the supply of gingelly oil, the deposit was to be arranged only after a period of ninety days had elapsed from the date of the last supply made against the order. Paragraph 9 further stipulated that a formal order for supply would be issued to the successful tenderer only after the undersigned had received the receipt from the Paymaster and Cashier confirming that the security deposit required by paragraph 8 had been paid. Paragraph 12 provided that any supplies judged to be of unacceptable quality could be rejected. Paragraph 13 set out the penalty regime and read as follows: “13. Penalties.-When supplies arc not effected on the dates as laid down in the Official Order or when acceptable replacement of the whole or part of any consignment which is rejected in accordance with paragraph 12 is not made within the time prescribed the administration will take penal action against the supplier in one or more of the following ways (a) Purchase in the open market at the risk and expenses of the supplier goods of quality contracted for, to the extent due; (b) Cancel any outstandings on the contract and; (c) Forfeit the security deposit.”

The respondent submitted an offer to deliver the specified quantity of jaggery during the period required and indicated willingness to comply with all the terms and conditions of the tender. The respondent also agreed to supply the jaggery at the rate stated in his letter, and the tender was accepted by a letter dated 29 January 1948. While this exchange created an agreement for the supply of a definite quantity of jaggery within a defined period, the Court observed that the agreement fell short of a complete legal contract because it did not fix a specific date for delivery; only a delivery window was mentioned. Consequently, the Court held that the acceptance of the tender did not constitute the issuance of a formal order for any particular quantity of jaggery on a particular date. Under paragraph 9, a formal order could be placed only after the respondent had paid the security deposit as required by paragraph 8 and had produced the receipt issued by the Paymaster and Cashier to the Deputy General Manager, Grain Shops. Therefore, the note in paragraph 2 of the tender could not be treated as a binding contract until those conditions were satisfied.

The tender contained a clause stating that the agreement, referred to loosely as a contract, could be cancelled at any time during the “tenure of the contract” without calling up the outstandings on the unexpired portion of the contract. The Court observed that the expressions used in that clause all lead to the same meaning. The phrase “tenure of the contract” indicates that the contract was intended to be of a continuing character, possessing a sort of tenure. Accordingly, the contract could be terminated at any point within that tenure, meaning it could be cancelled at any time between the acceptance of the tender and the final delivery date of 31 March 1948, which was the last date for delivering the jaggery under the contract. The clause further explained that, upon cancellation, the appellant would not call up the outstandings on the unexpired portion of the contract. The Court explained that this wording could be understood only as “without ordering the supply of jaggery which was to be delivered within the remaining period of the contract,” i.e., the period from the date of cancellation up to 31 March 1948. Paragraph 13, which dealt with penalties, distinguished between outstandings on the contract and the purchase of goods that the respondent had not supplied. The penalty provision became operative when supplies were not made on the dates specified in the official order, or when an acceptable replacement for any wholly or partially rejected consignment was not provided within the prescribed time. Clause (a) of paragraph 13 envisaged penal action by purchasing, at the supplier’s risk and expense, goods of the contracted quality from the open market to the extent due, either because of a failure to supply or a failure to replace rejected goods that had been supplied in compliance with an order. Clause (b) of paragraph 13 envisaged an additional penal action in the form of cancellation of any outstandings on the contract. Such a cancellation could apply only to the balance of supplies that had been agreed upon but not yet delivered. The Court noted that if the expression were intended to cover goods for which an order had already been placed but whose delivery date had not yet arrived, a different wording would have been more appropriate.

The appellant’s letter dated 29 January 1948, which communicated acceptance of the tender, instructed the respondent to remit a specified sum as a security deposit and stated that, upon receipt of a remittance advice, an official order would be placed. This corresponded to the order contemplated in paragraph 9 of the tender. Subsequently, in a letter dated 16 February 1948, the Deputy General Manager reiterated in paragraph 1 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 of the tender. The Court observed that the tender had already been accepted, and therefore there was no occasion to reopen the question of whether the tender had been accepted, nor was there any need to re‑inform the respondent about the acceptance. The Court further noted that the subsequent communication did not introduce any fresh conditions for acceptance, as the tender had been accepted earlier and the terms were already set.

The Court observed that once the tender had been accepted, there was no justification for requiring a further acceptance by the respondent to the same terms and conditions, nor was there any occasion to impose fresh conditions on a tender that had already been accepted. Paragraph 2 of the Deputy General Manager’s letter, dated 16 February 1948, set out a clear order for the dispatch and delivery of the consignment to the Assistant Controller of Grain Shops. That letter specified that the total quantity of fourteen thousand maunds would be supplied in four equal instalments, each instalment to be delivered on a predetermined date. Apart from this schedule, the only additional term in the letter was the 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 unexpired portion of the contract.” The Court noted that this clause was identical in wording to the note appearing in paragraph 2 of the original tender and that it must be given the same meaning, namely that it applied only to that portion of the goods for which no formal order had yet been placed. The Court explained that, had the clause been intended to refer to the cancellation of specific orders, the language would have been different; it would have spoken of a right to cancel orders concerning the delivery of consignments and would have provided that any orders for supplies scheduled after the date of cancellation would stand cancelled, or that the appellant would not be bound to take delivery of consignments scheduled for delivery after such cancellation. The Court found that nothing in the letter indicated that the formal order already placed was subject to this condition. Rather, the condition related to the acceptance of the tender, as set out in paragraph 1 of the letter. The Court further observed that the order had been placed on a printed form that could also be used for ordering part of the commodity that the tenderer had agreed to supply, which explained the presence of the particular recital in the letter. However, the Court held that this recital could not affect the present case, where the railway administration had unequivocally placed an order for the entire quantity of the commodity covered by the tender. Referring to the Deputy General Manager’s letter of 8 March 1948, which communicated the cancellation of the contract, the Court noted that the letter expressly stated that the balance quantity of jaggery outstanding against the order dated 16 February 1948 was treated as cancelled and that the contract was closed. That letter clearly distinguished between the order and the contract, with the contract defined as the agreement consisting of the offer to supply jaggery and its acceptance by the Deputy General Manager. Consequently, the Court concluded that the condition in question applied only to supplies for which no formal order had been placed and did not affect the binding order already issued.

In this case, the Court observed that the reference found in the note to paragraph two of the tender and in the letter dated February 16, 1948, concerned a power held by the appellant to cancel an agreement for the supply of jaggery when no formal order had been issued by the Deputy General Manager to the respondent. The Court explained that this provision did not extend to supplies of jaggery for which a formal order had already been placed, an order that specified the exact quantity of jaggery to be supplied and also fixed either a precise delivery date or a clearly defined short period for delivery. Once such an order was placed, the Court held, the order itself became a binding contract. This contract required the respondent to deliver the jaggery in accordance with the terms set out in the order, and it simultaneously required the Deputy General Manager to accept the jaggery that was delivered pursuant to that order.

The Court then referred to its earlier decision in Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram, which dealt with an arrangement between the Central Government and the bidi manufacturer Moolji Sickka & Company. In that case, the arrangement required the firm to sell, and the Government to purchase, two brands of bidis from time to time. The contention before the Court was that this arrangement constituted a contract for the supply of goods within the meaning of the statutory provision. The Court noted that the contract was embodied in four letters, but emphasized that, apart from setting out the terms on which the parties were ready to do business, the letters did not create a contract until an order was actually placed and accepted. The Court stated: “But except for this the letters merely set out the terms on which the parties were ready to do business with each other if and when orders were placed and executed. As soon as an order was placed and accepted a contract arose. It is true this contract would be governed by the terms set out in the letters but until an order was placed and accepted there was no contract.”

The Court additionally cited the commentary in the fifth edition of Cheshire & Fifoot’s “Law of Contract,” page 36, which explained that a tender is unquestionably an offer, but the critical question is whether the corporation’s acceptance of the tender creates a legally binding contract. The commentary identified two possible scenarios. In the first scenario, the corporation declares that it will definitely require a fixed quantity of goods—such as an advertisement for 1,000 tons of coal to be supplied during the period from 1 January to 31 December. In that situation, the Court explained, the corporation’s acceptance of the tender is a legal acceptance that establishes an obligation: the trader is bound to deliver the 1,000 tons, and the corporation is bound to accept that quantity, even if delivery is to be made in installments as demanded. This analysis supported the Court’s conclusion that a formal order converting a tender into a specific, quantified demand creates a binding contractual relationship.

In this case the Court observed that, although the acceptance of the respondent’s tender by the Deputy General Manager could, on the face of it, constitute a contract in the strict legal sense, the Court chose not to treat it as such because the tender itself contained clauses—specifically paragraphs eight and nine—that required the furnishing of a security deposit and the issuance of a formal purchase order before a binding contract could arise. The Court therefore concluded that the mere acceptance by the Deputy General Manager did not satisfy the conditions stipulated in the tender for the creation of a contractual relationship.

The Court then referred to the analytical framework presented by Cheshire and Fifoot, quoting the authors’ explanation of the alternative scenario: “Secondly, the corporation advertises that it may require articles of a specified description up to a maximum amount, as, for instance, where it invites tenders for the supply during the coming year of coal not exceeding 1,000 tons altogether, deliveries to be made if and when demanded, the effect of the so‑called ‘acceptance’ of the tender is very different. The trader has made what is called a standing offer. Until revocation he stands ready and willing to deliver coal up to 1,000 tons at the agreed price when the corporation from time to time demands a precise quantity. The ‘acceptance’ of the tender, however, does not convert the offer into a binding contract, for a contract of sale implies that the buyer has agreed to accept the goods. In the present case the corporation has not agreed to take 1,000 tons, or indeed any quantity of coal. It has merely stated that it may require supplies up to a maximum limit.” The Court further noted the authors’ statement that “in this latter case the standing offer may be revoked at any time provided that it has not been accepted in the legal sense; and acceptance in the legal sense is complete as soon as a requisition for a definite quantity of goods is made. Each requisition by the offeree is an individual act of acceptance which creates a separate contract.” Applying this analysis, the Court held that the arrangement between the parties fell within this second category. Consequently, the reservation of a right to cancel an outstanding contract, as set out in the note below paragraph two of the tender form, was consistent with the nature of the agreement that arose from the respondent’s offer being accepted by the appellant. The similar reservation appearing in the formal order dated 16 February 1948 referred only to contemplated supplies for which no specific orders had yet been placed. Because the contract was construed as a series of separate standing‑offer acceptances, the Court found it unnecessary to examine the appellant’s additional argument that the cancellation clause constituted a substantive term of the contract and was therefore valid. The respondent contended that any clause that effectively destroyed the contract in accordance with its own earlier terms would be void, as it would leave nothing binding on the appellant. The Court affirmed its opinion that the respondent’s contention was correct, thereby obviating the need to resolve the appellant’s further claim.

In this matter, the Court carefully examined the order that had been issued by the High Court. After that examination, the Court stated that the order of the High Court was correct. The appellate jurisdiction of the Court required it to consider whether the earlier decision contained any legal or factual mistake, and the review showed that the earlier decision was consistent with the applicable law and with the material on record. No deficiency was discovered that would justify reversing the order, and therefore the Court found no reason to overturn that order. Because the Court found the High Court order to be proper, it held that there was no ground for further proceeding against it. Consequently, the Court decided to dismiss the appeal that had been brought before it. In addition, the Court ordered that the costs of the appeal be paid by the party who had filed the appeal. By dismissing the appeal and directing the payment of costs, the Court brought the proceedings to an end. The dismissal of the appeal meant that the matter returned to the state as decided by the High Court, and the order regarding costs imposed a financial liability on the appellant for having pursued the appeal unsuccessfully. The final effect of the Court’s decision was that the appeal was dismissed and the costs were awarded against the appellant, leaving the decision of the High Court in force and binding on the parties.