1. Tender for supply of goods — Acceptance of tender — Formal order for definite quantity and dates — Cancellation of balance quantity — Suit for damages for breach of contract. (Para 1 , 2 , 3 )
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1963 Supreme(SC) 170
SUPREME COURT OF INDIA
J.R.Mudholkar : K.Subba Rao : Raghubar Dayal
Union Of India
Versus
Maddala Thathaiah
Case No. : 53 of 1961
Date of Decision : 5/9/63
Advocates Appeared: Gosain K.L. : Menon P.D. : Sanyal H.N. : Sastri A.V.Viswanatha : Shastri M.S.K.
Advocates:
A.V.VISHWANATHA SASTRI, H.N.SANYAL, K.L.GOSAI, M.S.K.Shastri, P.D.MENON
A.V.VISHWANATHA SASTRI, H.N.SANYAL, K.L.GOSAI, M.S.K.Shastri, P.D.MENON
A general cancellation clause in a tender agreement applies to the overall standing offer but does not permit the cancellation of a formal order already placed for a definite quantity on specific dates, as such an order creates a binding contract.
Headnote:(A) Law of Contract - Tenders and Formal Orders - Cancellation Clause - Binding nature of specific orders - A clause reserving the right to cancel a contract at any stage without calling up outstandings applies to the general agreement or standing offer, but not to a formal order placed for a definite quantity on definite dates (Paras 12, 15, 19).
(B) Standing Offer - Acceptance of a tender may establish the terms on which parties are ready to do business, but it does not necessarily create a binding contract for the entire quantity until a formal order is placed and accepted (Paras 6, 16, 18).
(C) Binding Contract - Once a formal order is placed specifying a definite quantity to be supplied on definite dates, it constitutes a binding contract, making it incumbent upon the supplier to deliver and the purchaser to accept the goods (Para 15).
Facts of the case:
A tender was invited for the supply of a specific quantity of a commodity. The tender contained a note reserving the right of the administration to cancel the contract at any stage without calling up outstandings on the unexpired portion. After the tender was accepted, a formal order was placed for the entire quantity to be delivered in four installments on specific dates. Subsequently, the administration cancelled the balance quantity and closed the contract. The supplier instituted a suit for damages resulting from the breach of contract.
Findings of Court:
The court found that the cancellation clause in the tender and the subsequent letter referred to the right to cancel the general agreement for supplies for which no formal order had been placed. It did not apply to supplies for which a formal order had been issued specifying a definite amount and a definite date for delivery.
Issues: Whether a general cancellation clause in a tender agreement allows the administration to cancel a formal order already placed for a definite quantity on specific dates.
Ratio Decidendi: The court distinguished between a standing offer (the tender agreement) and a binding contract (the formal order). While the general agreement (standing offer) could be cancelled under the reserved right, a formal order for a specific quantity on specific dates creates a binding obligation on both parties. The language of the cancellation clause refers to the overall tenure of the agreement and not to the cancellation of specific, binding orders already placed.
Result: Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Validity of cancellation clause — Whether contract was for a maximum limit or a definite quantity — Whether cancellation could be arbitrary after a formal order was placed. (Para 4 )
3. Distinction between a general agreement to supply and a formal order — Interpretation of cancellation clauses in standing offers versus specific requisitions for definite quantities. (Para 5 , 6 , 7 , 8 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18 , 19 )
4. Cancellation clauses in tender agreements govern general arrangements but cannot override a binding contract created by a formal order for a definite quantity on specific dates. (Para 15 , 19 )
5. Appeal dismissed with costs. (Para 21 )
6. When does the acceptance of a tender for the supply of goods create a binding contract?
If the tender specifies a definite quantity to be supplied, acceptance creates a binding obligation. If it specifies a maximum limit with deliveries as demanded, it is a standing offer; a binding contract arises only when a requisition for a definite quantity is made. (Para 17 , 18 )
7. Does a clause reserving the right to cancel a contract at any stage apply to formal orders already placed?
No. Such a clause refers to the right to cancel the general agreement for supplies for which no formal order has been placed. Once a formal order specifying a definite quantity and date is issued, it becomes a binding contract. (Para 12 , 15 , 19 )
8. How should the term outstandings on the contract be interpreted in the context of supply tenders?
It refers to the balance of supplies agreed upon under the general arrangement but not yet specifically ordered, rather than goods for which a formal order has been placed but the delivery date has not yet arrived. (Para 8 , 12 , 14 )
RAGHUBAR DAYAL, J.
(1) THE facts giving rise to this appeal, by special leave, are these :
(2) THE Dominion of India, as the owner of the Madras and Southern Mahratta Railway, represented by the General Manager of that railway, invited tenders for the supply of jaggery to the railway grain shops. The respondent submitted his tender for the supply of 14,000.00 imperial maunds of cane jaggery during the months of February and March 1948. The tender form contained a note in paragraph 2 which was meant for the quantity required and thedescribed dates of delivery. This note was : `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 Deputy General Manager of the Railways, by his letter dated 29/01/1948, accepted this tender. The letter asked the respondent to remit a sum of Rs. 7,900.00 for security and said that on receipt of the remittance, official order would be placed with the respondent. In his letter dated 16/02/1948, the Deputy General Manager reiterated the acceptance of the tender subject to the respondents acceptance of the terms and conditions printed on the reverse of that letter. Among these terms, the terms of delivery stated : Programme of delivery to be 3,600 maunds on 1/03/1948 ; 3,500 maunds on 22/03/1948; 3,500 on 5/04/1948; and 3,500 maunds on 21/04/1948. At the end of the terms and conditions was a note that the administration reserved 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 date for the delivery of the four installments were slightly changed by a subsequent letter dated 28/02/1948.
(3) BY his letter dated 8/03/1948, the Deputy General Manager informed the respondent that the balance quantity of jaggery outstanding on date against the order dated 16/02/1948, be treated as cancelled and the contract closed. The protests of the respondent were of no avail as the railway administration took its stand against the stipulation that the right to cancel the contract at any stage was reserved to it. Ultimately, the respondent instituted the suit against the Union of India for recovering damages resulting from breach of contract. The trial court dismissed the suit holding that the railway administration could cancel the contract without giving any reason whenever it liked, without making itself liable to pay any damages. The High court held that the clause reserving the right in the appellant to cancel the contract was void and in view of the trial court having not decided the issue about damages, remanded the suit for disposal after dealing with that matter. It is against this decree that the Union of India has filed this appeal after obtaining special leave.
(4) THE contentions raised for the appellant are two. One is that on a proper construction of the terms of the contract, the appellant had agreed to but only such quantity of jaggery as it might require, up to a maximum of 14,000.00 maunds and therefore there was no enforceable obligation to purchase the entire quantity. The other contention is that the respondent had expressly agreed to the impugned clause and that therefore the appellant was at liberty to terminate the contract at any stage of the duration of the contract with respect to the outstanding obligations under it. The stipulation is valid and binding on the parties and it amounted to a provision in the contract itself for its discharge or determination. On the other hand it is contended for the respondent that the contract was a complete contract of the supply of a definite quantity of jaggery viz., 14,000.00 maunds, on the dates mentioned in the order dated 16/02/1948, to start with, and ultimately on the dates mentioned in the subsequent letter dated February 28, and that the stipulation relied on wa
