BHAGWANDAS GOVERDHANDAS KEDIA V. M/S.

GIRDHARILAL
PARSHOTTAMDAS

Court: Supreme Court of India

Full Case Name: Bhagwandas Goverdhandas Kedia vs. M/S. Girdharilal Parshottamdas
Date Decided: 30th August 1965
Citations: 1966 AIR 543, 1966 SCR (1) 656
Judges: J.C. Shah, K.N. Wanchoo and M. Hidayatullah.
Appellant: Bhagwandas Goverdhandas Kedia
Respondent: Girdharilal Parshottamdas & Co. & Ors.

BACKGROUND

For the establishment of a contract, a proposal must be made and accepted. The contract is
considered to be established only when the acceptance of such proposal is clearly or expressly
communicated to the offeror. The earlier laws regarding contracts did not contemplate the
formation of contracts through immediate modes of communication, such as telephone, which
eases the formation of a contract between parties in different regions immediately and easily.
Therein, the issue of the place of formation of contract arises, which was resolved in this case.

FACTS

Facts: On July 22nd 1959, Kedia Ginning Factory and Oil Mills (appellant) of Khamgaon
entered into a contract over telephone to produce cotton seed cakes to M/s. Girdharilal
Parshottamdas and Co. (respondents) of Ahmedabad. The respondents started an action against
the appellant in the City Civil Court of Ahmedabad for failing to provide cotton seed cakes as
per the aforesaid agreement. The respondents argued that the cause of action for the suit started
at Ahmedabad as the appellant’s proposal to sell was accepted at Ahmedabad and the appellant
was to be paid for the goods through a bank in Ahmedabad. The appellant said that the
respondents’ proposal 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 hear the case. The City Civil Court of Ahmedabad held that it had
jurisdiction as the acceptance of the offer was communicated to the offerree at Ahmedabad and
that is where the contract was made.

ARGUMENTS

Argument of appellant:

In the case of a contract by telephone, only the court within whose territorial jurisdiction
the acceptance of offer is communicated into telephone has the jurisdiction to hear any
lawsuit regarding the contract.

Sections 3 and 4 of the Indian Contract Act (1872) are applicable in determining the
territory where a contract is made and not the judgments of UK courts.

Argument of respondents:

The making of a proposal is an element of cause of action in a case 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 the proposal is communicated to the
offerree. Hence, the court in whose territorial jurisdiction such acceptance of the proposal
was communicated can try such suit.

JUDGEMENT

Majority judgment:

A contract comes into being when an offer is accepted and the acceptance of the offer is
communicated through an external expression by speech, writing or other action which
is recognised by law. But, an exception to this rule has been made in the interest of
commercial benefit. When a contract is settled through post, the communication of
acceptance is considered to be complete when the acceptance of offer is put into a line of
transmission to the offerer. The same rule is applicable in case of a contract
communicated by telegram. Mere proposing an offer does not constitute part of the cause
of action for damages for breach of contract which has developed from acceptance of the
offer (Baroda Oil Cakes Traders v. Purshottam Narayandas Bagulia and Anr. AIR1954
Bom 491). Though sections 3 and 4 of the Contract Act talk about the communication,
acceptance and cancellation of a proposal and acceptance respectively, the Act does not
explicitly deal with the location where a contract is made and in confirming the same, the
interpretation clauses in section 2 of the Act must be considered.

In the case of a telephone conservation, the contract is only complete when the response
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 universally
recognized rule based on the theory of consensus ad idem is that the contract is made in
the region where the acceptance is communicated. The Indian Contract Act (1872) did
not foresee the formation of contracts through an immediate mode of communication
such as telephone. The exception to commercial convenience applicable to contracts
formed via post is not applicable to contracts made through telephone. Therefore, the
Hon’ble Court held that the trial Court was fair in taking that element of the cause of
action arose within the jurisdiction of the Civil City Court. Ahmedabad, where acceptance
of the offer 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 written in England and English
common law infiltrates 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 normally an acceptance must be
communicated to the proposer to make a binding contract and the contract is completed
at the location where the acceptance is received and not at the place where it is
communicated into the telephone. In cases of contracts by telegram, a different rule
applies 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 location where the acceptance
takes place represents the location where the contract is made. Acceptance over the
telephone is of the same effect as if the person accepting it had acted so by posting a letter,
or by sending off a telegram from that location”. 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 listened to and understood, there is a binding contract and, in
such cases, the only issue is as to the location where the contract can be said to be made.
The acceptance was put in the direction of transmission at Khamgaon and under the words
of the Contract Act, it is tough to say that the contract was made at Ahmedabad where
the acceptance was heard and not at Khamgaon where it was communicated. Section 4 of
the Act says in its language a contract through telephone. Hence, the contract was
completed at Khamgaon where the acceptance was communicated.

RATIO

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 give a direction as to
where the contract was completed at Ahmedabad, and the acceptance was heard in
Ahmedabad or Khamgaon or where the acceptance was communicated. The judges took
a logical action in reaching a conclusion, and they took into consideration various foreign
rules, such as in the majority of European countries and the U.S., the rule is, the location
where the acceptance of a contract is spoken, the acceptance should be taken into
consideration. Hence, the judges depended upon 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.”
 ANALYSIS

In this case, the court resolved the issue of the location of the emergence of the cause of
action in a suit for breach of contract made over telephone. Here, the court also explained
the rules regarding the communication, acceptance and rejection of a proposal and
acceptance with respect to a contract made over the telephone. The decision additionally
explained that the rule of communication and acceptance of offer appropriately applicable
to contracts made through post would not be appropriately applicable to contracts made
over the telephone.