Battle of the Forms: Purchase Order Terms, Counter-Offer and Liquidated Damages
On 5 April 2025 Kaveri Retail Ltd issued Purchase Order KRL/224 to Deccan Cartons for 60,000 printed cartons at ₹41.50 each (order value ₹24.90 lakh), delivery by 31 May 2025. Clause 12 read: 'This order is governed by our standard purchase terms at Annexure A (liquidated damages of 2% of the value of delayed goods per day, capped at 15% of the order value). Any additional or different terms proposed by you are rejected.' Clause 14 required Deccan to sign and return the duplicate within 10 days. Deccan signed and returned it on 12 April, but its covering letter on its own letterhead stated: 'Accepted subject to our conditions of sale: our total liability for any claim shall be limited to the invoice value of the affected lot, and delay damages shall not exceed 5% of the delayed lot value.' Kaveri did not reply. On 20 April Kaveri emailed a revised delivery schedule and a change in board grade, which Deccan followed. Kaveri accepted the first lot on 3 June. Of the last lot, 36,000 cartons arrived 18 days late; Kaveri deducted ₹2,24,100, being 15% of that lot's value of ₹14.94 lakh, from Deccan's bill. Deccan has sued for the excess. Deccan had supplied Kaveri twice earlier on the same PO terms, without any covering letter.
1. Was a contract concluded, and on whose standard terms? Apply the rules of offer, acceptance, counter-offer and acceptance by conduct, and deal with Kaveri's silence and the earlier course of dealing.
Read the worked answer
Step 1 - The PO is an offer. Clause 12 and Clause 14 prescribe the mode of acceptance; under s.7(1) of the Indian Contract Act, acceptance must be absolute and unqualified and expressed in the prescribed manner.
Step 2 - Deccan's reply is not acceptance but a counter-offer. Deccan signed the duplicate but added two new terms (liability cap at invoice value; delay damages capped at 5%). An acceptance introducing new conditions is a counter-offer, which rejects the original offer and keeps only the counter-offer alive.
Step 3 - Kaveri's silence does not accept. Silence is not acceptance unless the offeror has prescribed silence or the parties so agree; Kaveri had prescribed signed return, not silence. However, s.8 permits acceptance by performance or conduct.
Step 4 - Conduct after 20 April. Kaveri received the counter-offer, did not object to it, sent a revised schedule and specification (performance of the counter-offer's subject matter), and took delivery on 3 June without reserving rights. That conduct is acceptance of the counter-offer, and Deccan's supply was performance of it. The counter-argument is that Kaveri's 20 April email was itself a further counter-offer or an insistence on its own terms, producing a 'knock-out' where conflicting clauses cancel out and s.74 fills the gap.
Step 5 - Course of dealing. Two earlier contracts on the PO terms support an inference that the parties generally dealt on Kaveri's terms, but an established course of dealing cannot override an express counter-offer made in the very transaction in dispute.
Conclusion. The stronger view is that a contract exists on Deccan's terms, including the 5% cap; the maximum deduction is 5% of ₹14.94 lakh = ₹74,700. Kaveri's fallback is the knock-out argument plus s.74. Either way, Kaveri must refund the excess deduction of ₹1,49,400 forthwith to avoid a s.73 interest claim.
2. Assuming Kaveri's own Annexure A applies, examine whether its 2%-per-day clause capped at 15% can be enforced, and how a court would apply s.74.
Read the worked answer
Nature of the clause. Section 74 applies where a sum is named in the contract as payable on breach. It entitles the court to award only reasonable compensation not exceeding the sum named, and after the Supreme Court's decisions the trend is that the claimant must plead and prove the loss actually suffered; the named sum is a ceiling, not an entitlement.
The 2%-per-day rate. That is 730% per annum and is plainly penal in character. It cannot be enforced as written. The 15% cap is better defensible but is still only a maximum.
Proof of loss. Kaveri must prove what the 18-day delay cost it - lost festive sales, expedited printing from another vendor, penalty from its own customer. The pleadings in the file mention only the deduction; no loss documentation appears. If Kaveri proves, say, ₹1.20 lakh of expedited printing and lost margin, it recovers that, not ₹2.24 lakh.
No double recovery. Kaveri cannot claim the deduction as liquidated damages and also claim the same loss as general damages under s.73 of the Contract Act.
Interaction with the cap in Deccan's letter. If, contrary to the earlier analysis, Deccan's terms apply, the 5% figure is a limitation of liability, not a penalty. A limitation clause fixes the outer limit of remedy and is enforceable unless unconscionable or hit by s.23 or s.28. Kaveri's loss above the cap is then simply not recoverable.
Conclusion. On Annexure A, Kaveri keeps only what it proves, subject to the ₹2,24,100 ceiling; on Deccan's terms, it keeps ₹74,700. The practical advice is to refund the excess while retaining the right to sue for proven loss.
3. What is the effect of Kaveri having taken delivery of the delayed cartons on 3 June and having deducted damages from the bill, rather than rejecting the consignment? Address time being of the essence under s.55.
Read the worked answer
Time in commercial sales. Where a contract fixes a delivery date and the nature of the transaction shows that time was intended to be of the essence, s.55 applies. A dated PO with a liquidated-damages clause shows the parties contemplated delay and priced it.
Consequence of failure. If time was of the essence and Deccan failed, the contract became voidable at Kaveri's option: it could rescind, or accept the late performance and claim compensation.
The trap in the second paragraph of s.55. Where the promisee accepts performance at a time other than that agreed, it cannot claim compensation for the loss occasioned by the delay unless, at the time of acceptance, it gives notice to the promisor of its intention to claim. Kaveri's 20 April email insisting on the schedule and its subsequent debit note are evidence that it reserved its position, but a debit note raised weeks later is weaker than a written reservation at the time of taking delivery.
Rejection versus damages. By taking the cartons into stock and selling them, Kaveri did an act inconsistent with the seller's ownership, which is acceptance of the goods. Once goods are accepted, a breach of condition can only be treated as a breach of warranty, and the buyer is confined to damages.
Practical conclusion. Kaveri can no longer reject the delayed lot. To preserve the liquidated-damages claim it must show a contemporaneous reservation of rights; the LD clause itself is arguable notice of the agreed remedy, but the safer position is that acceptance without protest weakens the claim. Future POs should carry an express 'acceptance of late delivery is without prejudice to our right to recover liquidated damages' clause, and every short delivery should be recorded in the goods receipt itself.