Bhagwandas Goverdhandas Kedia v Girdharilal Parshottamdas & Co (1966)

Sections 3 and 4 were drafted in 1872, when a message travelled by runner, rail or telegraph. The postal rule they embody — acceptance binds the proposer the moment it is "put in a course of transmission" — makes sense only because there is a gap between sending and arrival. The telephone closed that gap, and this case decides what becomes of ss. 3 and 4 when it does. It fixes the place where a contract is made, and so which court has jurisdiction; it adopts the English rule in Entores; and it contains a dissent by Hidayatullah J which is, on the statutory text, the stronger judgment.

Girdharilal Parshottamdas & Co carried on business at Ahmedabad. Bhagwandas Goverdhandas Kedia carried on business at Khamgaon, in what is now Maharashtra. Both were in the cotton-seed cake trade.

The negotiation was conducted not by letter but on a long-distance trunk telephone call. From Ahmedabad, Girdharilal made an offer to purchase a quantity of cotton-seed cake. At the Khamgaon end, Kedia spoke words of acceptance into the telephone, and Girdharilal heard them at Ahmedabad. The goods were never delivered.

Girdharilal sued for damages in the City Civil Court at Ahmedabad. Kedia raised a preliminary objection that had nothing to do with the merits: that court, he said, had no jurisdiction, because no part of the cause of action had arisen there. The contract had been made at Khamgaon — where the acceptance was spoken — and that was where he must be sued.

Everything therefore turned on one question of pure contract law. The trial court held it had jurisdiction; Kedia appealed to the Supreme Court on the preliminary point.

1. Where a proposal is accepted by telephone, is the contract complete when the acceptance is spoken, as with a posted letter, or only when it is heard?
2. At which place, therefore, is the contract made?
3. Do ss. 3 and 4 cover instantaneous communication, or are they confined to post and telegraph?

For Kedia the argument rested on the plain words of s. 4: "The communication of an acceptance is complete as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor." A man who speaks into a telephone launches his words irrecoverably at the instant of utterance; he cannot recall them. The statutory test was therefore satisfied at Khamgaon.

For Girdharilal it was said that s. 4's first limb is a special rule made necessary by the post; that the general principle of contract is consensus; and that where parties are in direct and instantaneous communication there is no reason to displace it. Entores Ltd v Miles Far East Corporation (1955) was directly in point.

By a majority the appeal was dismissed. The contract was made at Ahmedabad, where the acceptance was heard, and the Ahmedabad court had jurisdiction.

Shah J, for the majority, reasoned as follows. The general rule is that a contract is complete when the acceptance is intimated to the offeror. The postal rule is an exception, enacted in s. 4 because of the necessities of the post, where the acceptor loses control of the letter and the parties are in the hands of a third agency. Section 4, he said, "does not imply that the contract is made qua the proposer at one place and qua the acceptor at another place." And, decisively, the draftsman could not have contemplated the telephone, which had not then been invented; the words of the section should therefore be confined to communication by post. Entores was approved and applied.

The dissent of Hidayatullah J

Hidayatullah J (later Chief Justice) took the opposite view, and his reasoning deserves to be set out because MU examiners frequently ask for it.

He accepted that "the law was framed at a time when telephones, wireless, Telstar and Early Bird were not contemplated", but denied that this licensed the court to cut the section down. The language of s. 4 is flexible enough to cover telephonic communication, and a court applying a code is not free to ignore the words the legislature used merely because it did not foresee the instrument.

Applying the section as written: when the words of acceptance are spoken into the telephone they are put in a course of transmission to the offeror so as to be beyond the acceptor's power — he cannot recall them. Communication is complete as against the proposer at that moment, and because it is instantaneous the contract arises immediately. On his analysis the contract was made at Khamgaon and the Ahmedabad court had no jurisdiction.

Why the dissent matters. First, it is textually faithful. India has a codified law of contract. Section 4 lays down a single test — putting the acceptance in a course of transmission out of the acceptor's power — and does not distinguish between media. The majority must read into the section a limitation ("by post only") that is not there, on the strength of what the draftsman must have imagined.

Second, it produces a single rule. The majority's rule is technology-dependent: post is governed by despatch, telephone and telex by receipt, and every new medium must be classified before parties know where their contract was made.

Third, it anticipates the modern problem. "Instantaneous" fits the telephone and telex, where each party knows at once whether the message got through. It fits email badly: an email may sit on a relay, be delivered to a server the addressee will not open for hours, or vanish into a spam folder. Completion on receipt is easy to state and hard to apply when nobody is at the other end.

Where the parties negotiate by an instantaneous means of communication, the contract is complete only when the acceptance is received by the offeror, and is made at the place of receipt. The despatch rule in the first limb of s. 4 is confined to communications by post and telegraph.

Obiter: the observations on the historical origins of the postal rule, the general remarks about communication by wireless, and the comparative discussion of English authority beyond Entores itself.

The postal rule was settled by Adams v Lindsell (1818) and confirmed in Household Fire Insurance Co v Grant (1879). Its rationale is practical: if acceptance took effect only on receipt, the acceptor would await confirmation of arrival, the offeror would confirm the confirmation, and so on without end. Someone must bear the risk of the post, and it is fairer to place it on the offeror, who chose that mode.

Indian law took the rule but modified it. Under s. 4 posting binds the proposer only; as against the acceptor, communication is complete only "when it comes to the knowledge of the proposer". Read with s. 5, an Indian acceptor may overtake his own posted acceptance with a faster revocation. During the interval only one party is bound — an anomaly, noticed early by the Madras High Court, but it is the law.

The rule applies only where post is the contemplated mode, and not where the offer stipulates actual notice: in Holwell Securities Ltd v Hughes (1974) an option exercisable "by notice in writing" was held not exercised by posting a notice that never arrived.

In Entores, Denning LJ explained the instantaneous-communication principle with two illustrations. If I shout an offer across a river and the reply is drowned by an aircraft overhead, there is no contract at that moment; the acceptor must wait and shout again. If I make an offer by telephone and the line goes dead mid-reply, there is no contract. In both cases the acceptor knows he has not got through, and the burden is properly on him to try again. That is the key: the receipt rule applies where the acceptor knows whether his acceptance has arrived; the despatch rule where he does not.

Entores was affirmed by the House of Lords in Brinkibon Ltd v Stahag Stahl (1983), the contract being held made in Vienna where the acceptance was received. Lord Wilberforce added that no universal rule can cover all such cases: where a message is sent out of office hours, received by a machine with nobody in attendance, or passed through an intermediary, the answer depends on the parties' intentions, sound business practice and where the risk should lie. That is in substance a concession to the difficulty Hidayatullah J had identified.

Jurisdictional consequences

The point is not academic. Under s. 20 of the Code of Civil Procedure 1908 a suit may be instituted where the defendant resides or carries on business, or where the cause of action arises wholly or in part. The making of the contract forms part of the cause of action, so fixing the place of contracting fixes the forum — as it did here, the whole appeal being about which city's court would hear the case. The same question governs which State's stamp law applies and, in a cross-border transaction, may bear on the proper law in the absence of an express choice.

The interesting question is how Kedia applies to media the Supreme Court never saw.

For fax, the courts have applied it directly: fax works over a telephone connection, is instantaneous, and the normal rule applies — communication is complete when the acceptance is received by the offeror. That was the holding in Quadricon (P) Ltd v Bajrang Alloys Ltd (Bombay).

Email is harder, and India has largely taken the question out of the common law's hands.

Section 10A of the Information Technology Act 2000 (inserted in 2008) provides that where a contract is formed by communication of proposals, acceptances and revocations in electronic form or by electronic records, it is not to be deemed unenforceable merely because electronic form was used. That removes any argument about validity.

Section 13 then answers the Kedia question for electronic records. Despatch occurs when the record enters a computer resource outside the originator's control. Receipt, where the addressee has designated a computer resource, occurs when the record enters that designated resource. And — the limb that matters for jurisdiction — an electronic record is deemed to be despatched at the place where the originator has his place of business and to be received at the place where the addressee has his place of business, irrespective of where the servers sit.

So for an acceptance sent by email, the place of contracting is the offeror's place of business. The result coincides with the Kedia majority, but is reached by statute, and the deeming provision cures precisely the defect Hidayatullah J foresaw: the location of the machinery is made irrelevant.

The Supreme Court has confirmed that email exchanges can form a binding contract. In Trimex International FZE Ltd v Vedanta Aluminium Ltd (2010) all communications were by email and no formal contract was signed; the Court held the unconditional acceptance by email of an offer made by email satisfied ss. 4 and 7.

For genuinely instantaneous messaging — a call, a video conference, a chat window with visible delivery confirmation — Kedia applies unmodified: no contract until the acceptance is actually received.