PLACE OF FORMATION OF A CONTRACT

PLACE OF FORMATION OF A CONTRACT

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PLACE OF FORMATION OF A CONTRACT
PLACE OF FORMATION OF A CONTRACT

Aapka Consultant Judgment Series- In this series, we are providing case analysis of Landmark Judgments of Hon’ble Supreme Court of India.

Bhagwandas Goverdhandas Kedia Vs. Girdharilal Parshottamdas and Co. and Ors.

AIR1966SC543, [1966]1SCR656

Hon’ble Judges/Coram: J.C. Shah, K.N. Wanchoo and M. Hidayatullah, JJ.

Decided On: August 30th, 1965

FACTS:

The plaintiffs, Messrs. Girdharilal Parshottam Das and Company offered to buy cotton seed cake from the defendants, Kedia Ginning Factory and Oil Mills of Khamgaon. The resultant contract was negotiated over long distance telephone and took final shape on July 22nd, 1959 as an oral contract. The defendants failed to supply the cotton seed cake which they had agreed to supply under the oral contract. An action in the City Civil Court at Ahmedabad was instituted against the defendants. It was the contention of the plaintiffs that the contract was concluded in Ahmedabad, hence the City Civil Court had jurisdiction over the matter. The defendants contended that the contract was concluded in Khamgaon, and hence the City Civil Court at Ahmedabad had no jurisdiction over the matter. Hence, the question of jurisdiction arose.

ISSUE:

Where is the contract formed, where it is concluded through instantaneous modes of communication?

JUDGMENT:

The defendants contended that in case of a contract made over a telephonic conversation, the place where the offer is accepted is where the contract is made, and the court within whose territorial jurisdiction the offer is accepted and acceptance spoken into the telephone has jurisdiction over matters pertaining to the concluded contract. The plaintiffs on the other hand argued that making of an offer constitutes a part of the cause of action and therefore the court within the jurisdiction of which the offer was made has jurisdiction over the contract. In the alternative it was argued that intimation of acceptance being essential to the formation of a contract, the contract is only concluded when the intimation is received by the offeror.

The court in no uncertain terms rejected the first contention of the plaintiffs by using case laws to demonstrate that mere making of an offer does not form part of a cause of action for damages for breach of contract. The court observed that the Indian Contract Act, 1872 does not talk of the place where a contract is made but only talks of when a contract is said to be made. The court brought about the distinction in contracts made inter presentes and contracts made inter absentes, and used ss. 2, 3 and 4 of the Contract Act to show that different rules applied to a contract made when the parties are in the presence of each other and when the parties are not in the presence of each other. When the parties are in the presence of each other, the contract is concluded when the acceptance is notified to the offeror, whereas when the parties are not in presence of each other, and the contract is being formed using non-instantaneous modes of communication, the contract is formed when the acceptance is put in the course of transmission so as to be out of the power of the acceptor.

The court observed that in the case of a telephonic conversation, the parties are in a sense in the presence of each other. There is instantaneous communication of speech intimating offer and acceptance from a professional certified in a Corporate Communication Training. The court relied on the judgment given by the English Court of Appeal in Entores Ltd. v. Mills Far East Corporation [(1955) 2 Q.B.D 327], in which it was held that in cases of instantaneous communication the contract is only complete when the acceptance is received by the offerer and the contract is made at the place where acceptance is received.

The court observed that with regard to the essential nature of a telephonic conversation, the parties are in a sense in the presence of each other and negotiations are concluded by instantaneous communication. Communication of acceptance is thus an essential part of formation of contract, and the exception to the rule imposed on the ground of commercial expediency is inapplicable.

HELD:

In cases where contract is to be concluded through instantaneous modes of communication, the contract will only be concluded when the acceptance of the offer reaches the offeree, and the exception for non-instantaneous modes of communication will not apply. Court, therefore, held that contract concluded at Ahmedabad and City Civil Court has the jurisdiction over the matter.

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