A Critique of the ‘Receipt Rule’ in Indian Contract Law

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This article has been authored by Sagnik Sarkar who is a third-year law student studying at the Tamil Nadu National Law University.

Introduction

Section 4 of the Indian Contract Act, 1872 (hereinafter referred to as “Contract Act”) governs the acceptance of proposals. The acceptance of a proposal is a condition-precedent for the formation of a contract. Hence, Section 4 is fundamental to the formation of every contract. The bone of contention is when the communication of, the acceptance of a proposal, is complete as against the proposer.

Section 4 is based upon, the Postal Rule in the English Common Law of Contract. When acceptance to a proposal is dispatched via post or telegram, the acceptance is complete when it is dispatched by the acceptor— this is the Postal Rule. In English Law, the Postal Rule, true to its name, is applicable only to acceptances communicated via post or telegram. It does not apply to modes of instantaneous communication (viz. face-to-face conversations, phone calls, etc.). In such cases, the communication of an acceptance is complete when, the fact of the acceptance comes to the knowledge of the proposer, which is known as the ‘Receipt Rule’. However, the plain language of Section 4 evidently makes no such distinction— it applies the Postal Rule to all acceptances, regardless of how they are communicated.

The decision of the Supreme Court in Bhagwandas Goverdhandas Kedia v. M/s. Girdharilal Parshottamdas & Co. (1965) (hereinafter referred to as the “Bhagwandas case”) has judicially engrafted an exception to the plain language of Section 4— the majority opinion has constricted the application of the Postal Rule to acceptances communicated via, post or telegraph, alone; and has validated the application of the ‘Receipt Rule’ to acceptances communicated via instantaneous modes of communication. This ratio of the Bhagwandas case is now settled law in India.

It becomes pertinent to do a critical analysis of the reasoning of the majority in the Bhagwandas case. The majority opinion in the Bhagwandas case seems to suffer from some limitations because, it— (i) most importantly, reaches a conclusion which does violence to the plain statutory language of, Section 4 of the Contract Act; (ii) makes an unwarranted distinction between, instantaneous and non-instantaneous, modes of communication; and (iii) fails to appreciate that the justification underlying the Postal Rule is applicable to modes of instantaneous communication too.

The Interpretation Strains the Statutory Language

The majority in the Bhagwandas case have based their reasoning on the premise that the drafters of the Contract Act could not have possibly foreseen the application of Section 4 to instantaneous modes of communication, which were far from existence at the time of drafting. Thus, the majority held that Section 4 does not apply to instantaneous modes of communication— and proceeded to fill in this gap with the corresponding English case-law. This line of reasoning appears to go against the well-established principles of statutory interpretation.

The Literal Rule of Interpretation requires the Court to, at the very outset, give to the words being interpreted their plain and ordinary meaning. If the result is clear and unambiguous, the Court must not resort to any other rules of interpretation. Once the relevant words of Section 4 are given their plain and ordinary meaning, a clear and unambiguous result appears— the communication of an acceptance is complete as against the proposer, when the acceptor transmits it to the proposer such that it goes outside of the power of the acceptor. The language of Section 4 thus interpreted, subsumes within its scope, the acceptances communicated through any mode of communication. The Literal Rule excludes the possibility of applying to Section 4 any other interpretation.

In the scheme of separation of powers— the duty of the Court is, to give effect to the intention of the Legislature, not to rewrite the law. Thus, in any case, it is inappropriate for a Court to make the addition of interpretative nuances to the extent of effectively re-writing the provision itself. Unfortunately, the majority in the Bhagwandas case seems to have done just that: in fact, this argument finds support in the dissent of Justice Hidayatullah in the Bhagwandas case itself. The effect of the Bhagwandas case is, to add to Section 4 a proviso— “Provided that when an acceptance is communicated through an instantaneous mode of communication, the communication of an acceptance is complete as against the proposer, when it comes to the knowledge of the proposer.”

The Distinction Between Modes of Communication is Unwarranted

The majority in the Bhagwandas case distinguished, instantaneous and non-instantaneous, modes of communication based on the degree of intervention of a third party therein. Per the majority, if an acceptance is sent by post or telegram, this communication cannot be completed without the effective intervention of a third party (the Post/Telegraph Department). The majority opined that this is not the case with instantaneous modes of communication. However, for instance, when communication occurs through telephone, once the connection is established then communication between the parties is no longer dependent on the intervention of the third party (the telephone company).

This appears to be a distinction without a difference. Every time the parties do not meet physically in person, and instead correspond with each other inter absentes— there is necessarily the intervention of a third party, which facilitates communication between the parties. This intervention must last for the whole duration of the communication, because the communication itself is impossible without the continuing intervention of the third party. This is equally true of all modes of communication, be it instantaneous or non-instantaneous. The brief of the telephone company, or Zoom, or your email service, etc. does not end the moment the parties say “hello” to each other. Once the connection is established, the third party must continue facilitating the communication by maintaining the connection. This requires the continuous intervention of the third party, since it must continue to provide the technological means by which the communication has been established.

Hence, in cases of instantaneous modes of communication— it is improper to say that the intervention of the third party ends the moment a connection is established. Since this is the premise on which the majority in the Bhagwandas case distinguished the modes of communication, this distinction must necessarily collapse.

The Underlying Justification of the Postal Rule is Applicable to Modes of Instantaneous Communication Too

The intervention of a third party to facilitate communication between the parties adds possible complications. What happens if the acceptance does not reach the proposer, due to no fault of the acceptor and proposer but due to the fault of the third party? There indeed can be, and are, situations in which the acceptor correctly dispatches a communication (viz. to the correct address, with the correct fees paid, etc.) to the proposer through a third party; but the communication is garbled, or never reaches the proposer, due to some fault in the services of the third party. In such a case, the communication remains incomplete due to a factor which is beyond the acceptor’s control, namely the conduct of the third party. The object underlying the Postal Rule, is to ensure the acceptor is not held liable for a fault beyond her control. This was explicitly explained by the English House of Lords in Dunlop v. Higgins (1848) [i] the decision which confirmed the application of the Postal Rule in English Law.

The Postal Rule was developed in the context of communication by post, to deal with the problem of loss in post. With the march of technology, it was later extended to the telegraph, to deal with a similar problem of telegrams getting garbled in transit. There seems to be no reason why today, the Postal Rule should not be extended to instantaneous modes of communication (viz. phone call, text message, email, etc.). The modern, instantaneous modes of communication suffer from the same limitation which post and telegram does— they are all capable of being misdelivered, or getting garbled or lost in transit; due to no fault on part of the sender or the receiver. The modern, instantaneous modes of communication are not perfect. They arguably fail less than the older, non-instantaneous modes of communication; but they are as much prone to failure as any other mode of communication.

Hence, given a choice, it is natural that the scope of the Postal Rule should be extended to modern, instantaneous modes of communication. This is an argument which the majority in the Bhagwandas case seems to have failed to appreciate. In fact, the majority opinion does not engage with this argument at all. When the same question arose before the English Court of Appeal in Entores (1955), it refused to extend the scope of the Postal Rule to instantaneous modes of communication. Hence, it appears that similarly the English Court too in Entores failed to appreciate this argument.

Conclusion

The Bhagwandas case is now considered the leading case which settled the law on the communication of acceptances in India. It has been repeatedly confirmed, and followed, in numerous successive decisions. It is safe to say the rule in Bhagwandas case forms a cornerstone of modern Indian Contract Law— since modern contracts are increasingly being concluded through electronic means.

The Bhagwandas case seems to have stood the test of time for half a century now. However, for the reasons discussed above, the ratio of Bhagwandas case deserves to be seriously reconsidered.

[i] Dunlop v Higgins (1848) 1 HLC 381.