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.

Epilogue
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. 

4 comments:

vswami said...

IMPROMPTU
The learned professor of the global law school, as perceived, has done a painstaking job in dealing with the subject of "postal rule"; and in the light of 'case law' cited from the archives of English and Indian judiciary.
In one's independent view, rather longstanding conviction, however, the so-called postal rule is no longer of currency and application. The simple reason is that, it has become far outdated in the context of / by reason of the glaring changes that are fast happening in the field of 'communication' , in its contextual meaning. Besides, the sanctity ideally expected to be attached to 'contract', of all kinds, itself, has come to be violently ridiculed; thanks to the commonly experienced 'inept drafting' of evidencing document and further, the shameful manner in which it is honoured by parties and enforced in law.
For an appreciation of the foregoing outlined points of view, if so interested, suggest to have at least a brief look through the material placed /thoughts shared, over a period, and readily available on a search of, besides elsewhere, this website exclusively devoted to the realm of law.

vswami said...

To ADD: 'Drafting' is undeniably the initial stage /first logical step, much anterior to the stage/step of actual 'posting' - that is, communicating the 'offer' by the first party and of the 'acceptance' by the other /second part-y (-ies), so effectively as to stand the tests of law. Should , of course, the accepting party be not just one but more, direct or indirect, then there are quite different and additional problems, galore, are obliged to be faced with and tackled in the best conceivably possible / feasible manner. For such a purpose, ‘case law’, foreign or domestic, might not be of much help or guidance; instead, it is only the past experience/ wisdom gathered through field practice, besides deciding on 'first principles' having special regard to the given case, that could supply , and be a source of, prudent guidance.

rahul sibbal said...

"The seller sued for breach" shouldn't this be the "buyer died for breach".
Second case.

Umakanth Varottil said...

@Rahul Sibbal. Presumably, you meant the buyer "sued" for breach.