Sunday, May 1, 2016

Messer Holdings: Supreme Court Refuses to Decide on the Enforceability of Share Transfer Restrictions

As we have previously discussed on several occasions (here and here), the question of enforceability of share transfer restrictions in Indian companies has been a vexed one. Although the Bombay High Court has sought to bring about some resolution of the issues in its leading judgments of Messer Holdings v. Shyam Madanmohan Ruia and Bajaj Auto Ltd. v. Western Maharashtra Development Corporation Ltd., and Parliament has sought to clarify the position in the proviso to section 58(2) of the Companies Act, 2013, several ambiguities continue.

In this background, it was reasonable for one to anticipate clarity from the Supreme Court in the appeal that was preferred from the Messer Holdings judgment of the Bombay High Court. A couple of weeks ago, the Supreme Court delivered its judgment in Messer Holdings Ltd. v. Shyam Madanmohan Ruia. However, not only did it refuse to answer the questions of law posed before it, but it also criticized the parties for unreasonably taking up valuable time of the court. Hence, no further guidance has come forth from the Supreme Court on the question of the validity and enforceability of share transfer restrictions in Indian companies.

In this case, the Supreme Court considered different appeals from four separate suits preferred by the parties, all relating to a series of transactions involving restrictions on transfer of shares. The detailed facts of the case are not entirely relevant for the discussion in the present post. One suit stood withdrawn. Certain others were affected by a settlement agreement subsequently entered into between the relevant parties. The Supreme Court found that no dispute survives on the transfer restrictions in view of the settlement agreement between the parties, and hence the suits are to be dismissed without any cause of action. Consequently, all interim orders passed by various courts in earlier proceedings also lapse.

The Court came down heavily on the parties as follows:

40. We make it clear that we are not deciding by this order, the existence or otherwise of any right or its enforceability in the … shares of [the company] …. It is open to them to establish their right in [the suit]. The defendants in the [suit] are at liberty to raise every defence available in law and fact to them.

41. A great deal of effort was made both by [the parties] to convince the court that in view of the protracted litigation between the parties this court should examine all the questions of rights, title and interest in these shares between the various parties as if this were the court of first instance trying these various suits.

43. The net effect of all the litigation is this. For the last 18 years, the litigation is going on. Considerable judicial time of this country is spent on this litigation. The conduct of none of the parties to this litigation is wholesome. The instant [special leave petitions] arise out of various interlocutory proceedings. … We believe that it is only the parties who are to be blamed for the state of affairs. This case, in our view, is a classic example of the abuse of the judicial process by unscrupulous litigants with money power, all in the name of legal rights by resorting to halftruths, misleading representations and suppression of facts. Each and every party is guilty of one or the other of the above-mentioned misconducts. It can be demonstrated (by a more elaborate explanation but we believe the facts narrated so far would be sufficient to indicate) but we do not wish to waste any more time in these matters.

44. This case should also serve as proof of the abuse of the discretionary Jurisdiction of this Court under Article 136 by the rich and powerful in the name of a ‘fight for justice’ at each and every interlocutory step of a suit. Enormous amount of judicial time of this Court and two High Courts was spent on this litigation. Most of it is avoidable and could have been well spent on more deserving cases. …

45. We therefore, deem it appropriate to impose exemplary costs quantified at Rs.25,00,000.00 (Rupees Twenty Five Lakhs only) to be paid by each of the three parties ... The said amount is to be paid to National Legal Services Authority as compensation for the loss of judicial time of this country and the same may be utilized by the National Legal Services Authority to fund poor litigants to pursue their claims before this Court in deserving cases.

In the light of these observations, it is not clear as to what effect this would have on the judgment of the Bombay High Court in the Messer Holdings case in so far as its holdings on the position of law on share transfer restrictions are concerned. But, since the Bombay High Court adopted a similar approach in the Western Maharashtra Development Corporation case, the law as set forth in that case will in any event hold good, at least as of now.

Some Ambiguities in the Rules on Downstream Investments

[The following guest post is contributed by Ajay G. Prasad, who is a Senior Associate with Kochhar & Co, Bangalore. Views expressed in this post are personal and do not reflect the views of the firm.]

Exchange control rules on downstream investment form an important aspect to consider in M&A transactions. As per the foreign direct investment policy (“FDI Policy”) of the Department of Industrial Policy & Promotion (the “DIPP”), the expression “downstream investment” means indirect foreign investment by one Indian company into another Indian company (either by way of purchase of shares or by way of fresh allotment of shares).

Until Press notes 2, 3 and 4 were issued by the DIPP in 2009, there was considerable ambiguity surrounding the treatment of such indirect foreign investment. Although the issuance of these press notes sought to clear the ambiguity, the DIPP unwittingly gave room for further uncertainty by creating new classes of companies called “operating companies”, “investment companies” and so on. As a result, stakeholders were required to apply the downstream rules contained in these press notes after determining which category a given company fell. This was a difficult exercise to undertake.

Fortunately, the DIPP did away with most of these differentiations through the FDI policy released in April 2011. Ever since, the downstream investment rules are being continuously pruned. Press note 12 of 2015 read with the amendments to the FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (the “2016 FEMA Amendment”) dated 15 February 2016 has further liberalized these rules. But despite numerous attempts of the Government and the Reserve Bank of India (RBI) to fine tune these rules, I submit that some issues and ambiguities persist. I provide a few illustrations below.

Ambiguity in the expression “foreign investment” as appearing in paragraph of the FDI Policy

Chapter 3.10 of the FDI Policy specifies that (for the purpose of that chapter) the expression “foreign investment” would have the same meaning as in Paragraph 4.1. Paragraph 4.1 does not contain a specific definition of foreign investment. It however specifies that foreign investment into an Indian company comprises both direct foreign investment (i.e. a non resident entity directly investing in an Indian entity) and indirect foreign investment (i.e. one Indian company /LLP with foreign investment investing in another Indian company/LLP). It goes on to state that for the purpose of counting foreign investment in an Indian company/entity, all of the direct foreign investment by a non-resident would be counted towards foreign investment. As far as counting indirect foreign investment goes, the same would be counted towards calculating foreign investment if the investing Indian company/entity is either owned or controlled (or both) by non-residents.

Be that as it may, paragraph of the FDI Policy specifies that foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian companies will require prior Government / Foreign Investment Promotion Board approval, regardless of the amount or extent of foreign investment (emphasis supplied). The ambiguity arises when one compares the aforesaid language to the language and intent of paragraph 4.1 (which clearly mentions that indirect foreign investment by Indian companies owned and controlled by resident Indian citizens would not be counted towards foreign investment). What then is the intent of using the expression “regardless of the amount or extent of foreign investment”? Does it mean that only for the purpose of paragraph even indirect foreign investment by companies which are owned and controlled by Indian companies and / or Indian citizens would be counted towards foreign investment? That should clearly not be the case (and presumably, the intent).

Therefore, a couple of possible solutions could be to either amend the definition of the expression “foreign investment” or delete the language  “regardless of the amount or extent of foreign investment” (which was emphasized above).

No guidance around the meaning of the expression, “domestic market”

The downstream investment rules of the FDI Policy specify that: (i) an Indian company undertaking downstream investment would have to bring in requisite funds from abroad and not leverage funds from the domestic market (emphasis supplied); (ii) this would however not preclude downstream companies with operations from raising debt in the domestic market; and (iii) downstream investment through internal accruals are permitted. The 2016 FEMA Amendment defined the expression “internal accruals” for the very first time in the context of these rules to mean profits transferred to the reserve account after payment of taxes.

The expression “domestic market” used in the rules has created some uncertainty as there is no regulatory guidance as to what is the meaning of the same. This is particularly so in transactions which involve one Indian company (say “X”, owned and controlled by non-residents or owned or controlled by non-residents) lending to an Indian subsidiary company (say “Y”) for the purpose of Y making investment in another unrelated Indian company (say “Z”).

In this context, I have come across several stakeholders who tend to concentrate only on the word “domestic” to the exclusion of “market” and argue that investment by Y into Z is not permitted under the automatic route (i.e. without Government / FIPB approval). Typically, they interpret “domestic market” to mean “domestic source”. However, in my view the intent of the policy is not to prohibit such downstream transactions; or make them subject to the approval route. The intent is to regulate transactions where Y, instead of obtaining a loan from its holding company X, raises funds from a bank or a financial institution or a non-banking financial company to fund the acquisition. As per Black’s Law Dictionary, “market” means: (i) place of commercial activity in which goods, commodities, securities, service, etc. are bought and sold; (ii) a public time and appointed place of buying and selling; also purchase and sale. The rules also use the expression “raise debt”. Typically, the word “raise” means raising a loan in the debt market or through a bank or financial institution.

Based on the above, I submit that from an exchange control law perspective, the intent is not to prohibit lending by a holding company to a subsidiary company for making investments. The reason X is lending to Y is on account of the relationship that they share. Hence, it should be covered under the automatic route. In this connection, one needs to also examine the legality of these transactions from an Indian Companies Act, 2013 perspective. That is a different topic and not part of the scope of this post.

Confusion around using the escrow mechanism

Exchange control laws permit parties to an FDI transaction to set up an escrow account with an authorized dealer bank wherein consideration payable on account of transactions may be deposited in the escrow account for a period of six months. This is allowed under the automatic route (i.e. without taking special RBI permission). In case the parties intend that escrow to be operational beyond six months, they need to obtain special RBI permission. Recently, some relaxations have been made available in this respect. Where parties to a transaction so agree, an escrow account, wherein not more than twenty five percent of the total consideration is deposited, can be operational for a period up to eighteen months without taking special RBI permission.

While the above rules seem clear enough, when it comes to their application in a downstream investment scenario, things get slightly muddied. The relevant language in the downstream investment section of the FEMA Regulations specifies five [(a) to (e)] conditions, none relating to opening an escrow account to undertake downstream investments. Therefore, when it comes to opening an escrow account for downstream investment, one would assume that parties are not required to comply with the rules relating to escrow (even the recently released FEMA Deposit Regulations seems to suggest the same).

However, some stakeholders (including a few authorized dealer banks) have taken a view that since downstream investment is indirect foreign investment, an escrow account for the purpose of facilitating downstream transactions should also be subject to the same rules. As there is no express regulatory guidance on this, most transactions are structured after taking the inputs of the authorized dealer banks (who in turn would have obtained some sort of comfort from the RBI after presenting all the facts to the RBI, mostly on a no-names basis). In the absence of clear regulatory guidance, the RBI’s approach may have been based on transaction-specific facts (and slightly ad-hoc). In my view, having clarity on this issue would go a long way in avoiding this case to case approach currently being adopted.

It is hoped that the new FDI policy (scheduled to be released soon by the DIPP as per past precedents) would address some of these issues.

- Ajay G. Prasad

Wednesday, April 27, 2016

Due Diligence in Corporate Transactions and Insider Trading Laws

In corporate transactions involving shares of listed companies, the ability to conduct a detailed due diligence is constrained by laws that regulate insider trading. In a paper titled “Due Diligence in Share Acquisitions: Navigating the Insider Trading Regime”, I seek to examine this issue in detail. The abstract of the paper is as follows:

The goal of this paper is to unpack the underlying friction between the need to facilitate due diligence in share acquisition transactions that could place inside information in the acquirer’s hands, and at the same time to ensure that such information is not misused by the acquirer to the detriment of the other shareholders, a matter that insider trading regime regards as sacrosanct. In analysing and seeking to resolve this tension, this paper draws upon examples from three jurisdictions, namely the United Kingdom (UK), Singapore and India. The core argument of this paper is that from a theoretical perspective the due diligence objective of acquirers can be reconciled with the goals of the insider trading regime in order to preserve the interests of the target shareholder as long as certain restrictions are placed on the conduct of the acquirer.

A more general background note on insider trading regulation in India is available here, as part of the NSE CECG Quarterly Briefing series.

SEBI’s Inconsistent Orders on Similar Securities Law Violations

[The following guest post is contributed by Supreme Waskar, who is a corporate lawyer]

By way of its order dated April 20, 2016 in the matter of M/s. Krishna Enterprises & M/s. Rajesh Services Centre (“Appellants”), the Securities Appellate Tribunal (SAT) observed that the Securities and Exchange Board of India (SEBI) is inconsistent in levying penalties for similar violations.

The Appellants were held guilty of aiding and abetting Edserv Softsystems Ltd. in siphoning off its IPO proceeds, whereby under section 15HA of the SEBI Act, 1992, the adjudicating officer (AO) imposed penalty on each of the Appellants of Rs.10 lakhs for violating section 12A(b)&(c) of the SEBI Act and Rs.10 lakhs for violating Regulation 3(c)&(d) of the SEBI (Prevention of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”).

The AO found that the violation of section 12A(b)&(c) of the SEBI Act and violation of regulation 3(c)&(d) of PFUTP Regulations are two independent violations and accordingly imposed penalty under Section 15HA for two violations separately whereas in the case of  Kejas Parmar vs. SEBI (2014),[1] the AO had held that where there is violation under section 12A(b)&(c) and also violation under regulation 3(c)&(d) of PFUTP Regulations, then both the provisions have to be read together and in such a case common penalty ought to be imposed under Section 15HA of SEBI Act.

Accordingly, SAT has remanded the matters to the file of AO for fresh decision on merits and in accordance with law. The orders passed by the AOs promote the development of the securities market and are in the interests of the securities market. If the orders passed by the AO are not in public interest, then under Section 15I (3) of the SEBI Act, SEBI is empowered to review the orders passed by the AO. Passing conflicting orders does not promote the development of the securities market and would not be in the interests of the securities market.

- Supreme Waskar

[1] (Appeal No.188 of 2014)

Monday, April 25, 2016

Taxing E-Commerce through State entry tax laws - a short-term revenue maximisation strategy

[The following is an article published in Business Standard today on the recent trend of taxing E-Commerce through entry tax – authored by Sudipta Bhattacharjee, Principal - Tax Controversy Management, Advaita Legal (views are personal). The final concluding paragraph was not part of the published article, and has been added for the sake of completeness.]

Taxing E-Commerce through State entry tax laws - a short-term revenue maximisation strategy

Growth and potential of e-commerce in India have been extensively commented upon, and unfortunately, this has led to state governments yearning for a share of this pie.

The initial forays of state governments to tax e-commerce through the VAT route met with stern opposition in Karnataka and judicial censure from the High Court in Kerala. In the last year or so, state governments seem to have changed strategy and decided to extract their pound of flesh from e-commerce by making a variety of hasty amendments to their entry tax legislations (and in the process, often leaving the said amendments vulnerable to challenge on various legal/constitutional grounds).

To illustrate:

> West Bengal mandated courier/logistics companies making such deliveries in the state to register themselves and generate waybills through an official portal only after making a mandatory pre-deposit of entry tax, even though the entry tax legislation there was stayed earlier by the Calcutta high court. This coercive practice was recently stayed by the high court.

> Bihar amended its legislation to make all goods couriered in the state liable to entry tax at the hands of e-commerce logistics/courier companies. Assam also amended its entry tax legislation empowering the commissioner to issue notification prescribing a procedure for collection of entry tax on entry of goods made through online purchase/e-commerce and also for collection of entry tax from a person other than an importer but on behalf of the importer. The constitutional validity of these amendments in Bihar and Assam is vulnerable to challenge. In fact, the amendments in Bihar have already been challenged and the matter is listed for final hearing before the Patna HC on May 4.

> Uttarakhand, similarly, amended the Uttarakhand entry tax legislation to prescribe a 'simple procedure' for collection of entry tax on entry of goods made through online purchases and issued a notification thereunder. The notification mandated a 10 per cent entry tax. However, the amended section in the entry tax legislation neither has clarity as to the 'taxable person' nor does the notification issued thereunder prescribe a procedure as mandated by the amended section in the entry tax legislation. Recently, the Uttarakhand High Court granted an interim stay against entry tax on goods purchased through e-commerce based, inter alia, on foregoing grounds and will hear this matter again the near future. Despite sub judice status, the Uttarakhand government has further amended the entry tax legislation (with effect from March 31, 2016) probably to deal with the arguments raised before the high court in the aforementioned litigation.

> Himachal Pradesh has also made amendments to its entry tax legislation similar to that of Uttarakhand and is likely to be exposed to similar legal/constitutional challenges.

> Gujarat has not only amended the definition of 'importer' ('taxable person' under entry tax) to include e-commerce players, but has gone a step further to mandate that e-commerce players qualifying as 'importer' shall "collect the (entry) tax from the person for whom such facilitation has taken place".

> Rajasthan, Odisha and Mizoram have also joined this bandwagon.

Given that the very constitutional validity of levying entry tax by state governments is under examination by the larger bench of the Supreme Court, this approach by the states appears to be driven solely by short-term revenue maximisation devoid of any long-term tax policy consideration; especially, given the avowed consensus of most state governments towards introduction of the Goods and Services Tax (GST) by 2017, which will subsume entry tax.

Thus, e-commerce companies will incur huge expenditures to tweak their IT systems/logistics to deal with entry tax in various states (with some states casting responsibility to pay entry tax on ultimate buyer and some on e-commerce courier/logistics companies) and then again re-customise to deal with the GST in 2017.

Also, fastening entry tax liabilities upon the marketplace players will push 'marketplace' players to assume responsibilities that probably transcend the limited role envisaged for such players in the recent Press Note 3 of 2016.

Last but not the least, there is no reasonable basis to treat sales through the mode of online/mobile platform in a different manner than sales through traditional modes. Such an arbitrary distinction in fact stifles E-Commerce and curtails consumers’ choices. Given the strong legal/Constitutional and policy arguments against such disruptive taxation, State Governments ought to refrain from attempts to fasten E-Commerce marketplace players (who are nothing but service providers) with VAT and/or entry tax liability.

Thursday, April 21, 2016

Pothier’s Mailbox: Misunderstanding the Moment of Contract Formation under the Contract Act

(The following guest post is contributed by Shivprasad Swaminathan, who is Associate Professor at the Jindal Global Law School)

The argument
The law on the moment of contract formation applied by the courts in India and endorsed by the scholarly literature rests on a mistaken understanding of s. 4 of the Indian Contract Act, 1872. Courts and scholars in India have treated the postal acceptance rule—that the contract is concluded at the moment of posting—and the revocation rule—that an acceptance can be revoked at any time before it comes to the knowledge of the offeror—as analytically distinct. This post argues that they are not, and that the revocation rule presupposes that the contract is not concluded until the time the acceptance comes to the knowledge of the offeror. The point of the phraseology s.4, it will be argued, was to put it out of the power of the offeror to revoke his offer once the acceptance has been dispatched; and not to conclude the agreement at the moment of dispatch. Two Scottish cases which jostled with the doctrinal implications of Robert Pothier’s will theory—which formed the basis for the English locus classicus on the postal rule, Adams v Lindsell (1818)—and deliberately deviated from the English law, provided the blue-print for s. 4, namely, Dunmore v Alexander (1830) and Dunlop v Higgins (1848), will be invoked to lend theoretical and historical support to the argument.

Pothier and the English Law
The law on acceptance in England has orbited around the early nineteenth century decision, Adams v Lindsell [(1818) 1 B & Ald 681] which established the so-called dispatch rule of acceptance: the dispatch of an acceptance completes contract formation. A fortiori, revocation of the acceptance by a more expeditious means than the one carrying the acceptance was not an option. In English law, the rule has not been extended to instantaneous modes of communication, and has been contained to communications by post alone as a result of which the dispatch rule is now synonymous with the “postal rule”. The rule in Adams v Lindsell, Brian Simpson suggests, was inspired by Robert Joseph Pothier’s Traite des Obligations (A.W.B.  Simpson, ‘Innovation in Nineteenth Century Contract Law’ (1975) 91 LQR 247, 261). On Pothier’s ‘will theory’ all that was required was a concurrence of wills—if a subjective meeting of wills there was, it hardly mattered whether or not there was a communication thereof. Adams v Lindsell confirmed that “what mattered in contract formation was not communication, but a subjective meeting of the minds.” (M. Lobban, ‘Formation of Contracts, Offer and Acceptance’ in W. Cornish et al eds. Oxford History of Laws of England XII 336).

Acceptance under the Indian Contract Act
Pollock and Mulla note that the effect of s. 4 was not any different from the English law on the subject, except on the point of revocation—that the acceptor may revoke the acceptance by a faster means of communication since the acceptance is complete as against him only when the acceptance comes to the knowledge of the offeror. (Pollock and Mulla 2nd ed. 1909, 33). On this point, they note, the Act follows the Scottish decision of Dunmore v Alexander (1830) rather than the English law.

The courts in India proceeded on the understanding that the law on acceptance in India is broadly the same as the English law. This has meant their reading s. 4 as having incorporated the dispatch rule: that the acceptance is complete when it is put in the course of transmission. The place of posting has been held to be the place of completion of contract. (See Kamisetti Subbiah v Katha Venkataswamy (1903) 27 ILR Mad 355). This rule has also been extended to the case of telegraph (Baroda Oil Cakes v Purshottam (1954) 57 ILR Bom 1137).  When the question of instantaneous communication came up, which it did  in 1966, which is to say, only after Entores v Miles Far East Trading Corporation [[1955] EWCA Civ 3] had been decided, the Supreme Court of India yet again followed the cue of the English law. In Bhagwandas Goverdhandas Kedia v Girdharilal Parshottamdas AIR 1966 SC 543] the Supreme Court by a 2:1 majority held that s. 4 incorporated the postal rule which did not apply to instantaneous communications. The majority (Shah and Wanchoo JJ) confirmed that in the case of postal acceptance, the contract is concluded when it is posted by the acceptor, and that in cases of instantaneous communication, the contract is only concluded when the acceptance comes to the knowledge of the offeror. Hidayatullah J, in his dissenting opinion argued that there was nothing in s.4 to restrict its applicability to postal cases alone and that it was capacious enough to apply to all forms of communication including instantaneous ones. Interestingly, however, the fulcrum of agreement in the majority and dissenting opinions was the assumption that s. 4 provided that a contract is concluded when posted.

The Scots Cases and the their Contrast with English law
For Pothier, it will be recollected, as long as there was a subjective acceptance, it sufficed, and there was no need for communication. This view was also adopted by John Bell, a greatly influential nineteenth century authority on Scottish contract law (See H. MacQueen, ‘Its in the Post!’ in F. McCarthy et al eds. Essays in Conveyancing and Property Law). Two mid- nineteenth century Scots cases defied Pothier, Bell and the postal rule in Adams v Lindsell. They were Dunmore v Alexander and Dunlop v Higgins. And an appreciation of the theoretical assumptions underlying them is indispensable for understanding what s.4 of the Indian Contract Act had purported to accomplish. Pollock and Mulla correctly identified that it was Dunmore that seemed to have provided the doctrinal inspiration for s.4, but failed to draw out the implications that arose from that case.

The facts that gave rise to the dispute in Dunmore v Alexander were these. Betty Alexander was in the employment of Lady Agnew. She wrote to Countess of Dunmore offering Betty’s services. Countess of Dunmore accepted the offer by post and later sent another letter revoking the acceptance. Although Lady Agnew received the acceptance before the revocation, she forwarded the two to Betty at the same time. Betty sued for breach of a completed contract. On first appeal, Lord Newton in the Outer House held that the contract was not concluded at the moment the first letter was transmitted and that the second letter countermanded the acceptance before the conclusion of the contract.  Lord Newton held that “each party may resile so long as the offer or acceptance has not been communicated to the other party”. On second appeal, a majority of the Inner House upheld the decision. As Hector MacQueen points out:

What might have been thought to be taking place in Scotland as a result of Dunmore v Alexander was a move towards a requirement of communication between parties before statements of obligatory content could even begin to be considered binding or legally effective. (Hector MacQueen, Its in the Post!)
The next important decision, Dunlop v Higgins did not purport to shake the authority of Dunmore, at least not until the matter reached the House of Lords on appeal. A firm in Glasgow offered to sell iron to a merchant in Liverpool by letter, expecting an acceptance in due course. The buyer accepted by post on the same day, which should have, in the normal course, reached Glasgow on the next day. It, however, reached a day late due to frost. The seller instantly replied refusing to sell because the acceptance had not been received in due course. The seller sued for breach of contract. The court of Inner Session did use Adams v Lindsell, but did not find in it the proposition that posting completed the court. Instead, the court found in it the proposition that posting the acceptance merely barred the possibility of the offeror withdrawing the offer” (MacQueen, op cit). Lord Fullerton’s judgment is very instructive and retraces—and extends—the lines drawn by Dunmore.

I find it necessary to make a distinction...between the binding effect of the acceptance when put into the post as barring the offeror from founding on the implication that it was declined, and the absolute completion of the contract. I think the posting of the acceptance by the pursuers had most certainly the first effect…But I am by no means prepared to go farther, and to say, that in the larger question of the actual completion of the contract, the mere fact of the putting of the letter of acceptance into the post-office has the same effect as if it had not only been put into the post-office, but had actually been delivered to the other party.
As Gerhard Lubbe argues, Lord Fullerton was unwilling to accept the proposition of Adams v Lindsell that ‘the expedition of the acceptance actually completed the contract’ (‘Formation of Contract’ in Kenneth Reid and Reinhard Zimmermann (eds.) A History of Private Law in Scotland Vol II (OUP 2000) 35). On his view, there, ‘was no question of a completed agreement where one party was wholly ignorant of the acceptance.’(Lubbe ibid) As to the effect of posting, his decision left no scope for doubt that posting the acceptance merely barred the possibility of the offeror withdrawing the offer.’ (Lube ibid). On appeal, the House of Lords upheld the court of Inner Session’s decision, but read Adams v Lindsell as standing for the proposition that posting constituted acceptance, before going on to apply it in the case on hand. The Lord Chancellor held that the law in England is the same as that of Scotland and relied on John Bell’s commentaries to confirm that view.

Analytical Connection between formation and revocation
The Dunmore and Dunlop cases which provide the blue print for s.4 proceed on the basis that there is an analytical connection between the moment of formation of the agreement and revocation. Revocation is possible before the acceptance comes to the knowledge of the offeror because the agreement is not complete. If revocation of acceptance is not possible in English law that is because the formation of the agreement is complete at the moment of posting. If one accepts that agreement is complete at the moment of posting, the “revocation” permitted by s.4 would have to be implausibly re-characterized as complete contracted being “avoided” by the acceptor. This implausible view was in fact taken by the Madras High Court in Kamisetti Subbiah v Venkataswamy (1903) 27 ILR Mad 355,359. This view rests on an antinomy because s.4 speaks of an acceptance being revoked, not of a contract being voidable at the option of one of the parties. The only merit of this otherwise problematic decision is that it draws out completely the logical implications of taking s.4 as incorporating the dispatch rule of Adams v Lindsell. And that, when done, provides a reductio ad absurdum of sorts, against the argument that s.4 incorporates the postal rule.

The only proper reading of s.4 is that acceptance is complete only when it comes to the knowledge of the acceptor. The point of making acceptance complete as against the offeror is not to bind him in the agreement, but rather to put it out of his power to withdraw the offer. Therefore, contra the majority and dissenting opinions in Bhagwandas, on the terms of s.4, an acceptance is always concluded only when it comes to the knowledge of the offeror—and this obviates the need of a special rule for instantaneous communication.

A rule that has been around for over two centuries comes to have an aura of non-contingency or logical necessity around it. But, if the postal rule ever had that aura, it has long since dissipated. The most persuasive justification for the postal rule is that concluding the contract at the moment of posting the acceptance, puts it out of the power of the offeror to revoke his offer. (McKendrick, Contract Law: Texts, Cases and Materials 111). But if this is the best justification, as McKendrick argues, the putative rule it supports is that of the sort found in Dunmore v Alexander, namely, that the postage of letter bars the offeror from revoking the offer. The Dunmore rule is now followed by Vienna Convention for the International Sale of Goods, Unidroit Principles of International Commercial Contract and Principles of European Contract law.