1996 JTR(SC) 1477
1997 AIR(SC) 66 ; 1996 AIR(SCW) 4219 ; 1996 4 CLT(SC) 68 ; 1997 1 ICC 180 ; 1996 8 JT 351 ; 1997 1 RCR(Civ) 282 ; 1996 6 Scale 678 ; 1996 10 SCC 405 ; 1996 Supp6 SCR 368 ; 1996 2 UJ 699 ; 1996 KHC 1289 ; 1996 2 KLT(Online) 1191 ; 1996 7 Supreme 23
1996(7) Supreme 23
SUPREME COURT OF INDIA
M.M. Punchhi & Sujata V. Manohar, JJ.
Rajasthan Co-operative Dairy Federation Ltd. -Appellant
versus
Shri Maha Laxmi Mingrate Marketing Service Pvt. Ltd. & Ors. -Respondents
Civil Appeal No. 2679 of 1992
Decided on 17-9-1996
Counsel for the Parties :
For the Appellant : Sudhir Gupta, Shahil Rezvi and Aruneshwar Gupta, Advocates.
For the Respondents : H.N. Salve, Sr. Advocate, S.V. Deshpande, Advocate.
IMPORTANT POINT
When the reasons for cancellation of the Letter of Intent are clearly set out in the cancellation letter and are germane to the decision not to enter into a contract, the act of cancellation of the Letter of Intent cannot be considered as arbitrary action.
Act Referred :CONSTITUTION OF INDIA : Art.226, Art.133, Art.136
(A) The present appeal involves the interpretation and application of the Constitution of India provisions, specifically Article 226 (writ jurisdiction of High Courts), Article 133 (appellate jurisdiction of High Court in civil matters where value exceeds specified amount), and Article 136 (special leave to appeal). These provisions frame the scope of judicial review available to the appellant against the High Courts order setting aside the cancellation of a Letter of Intent, particularly concerning the principles of administrative action, conditions precedent in contract formation, and the doctrine of natural justice in a commercial appointment context.
(B) Key legal principles include that a Letter of Intent creates only an executory relationship, not a binding contract; conditions precedent must be fulfilled before a contract is formed; an offeror may revoke an offer where acceptance is conditional and not completed; the doctrine of audi alteram partem does not apply until a legal relationship exists; mala fides cannot be inferred from rational and documented commercial justifications; and parties incurring preliminary expenses in anticipation of a contract are not entitled to recovery if the other party rightfully declines to proceed.
Facts of the case:
The appellant invited applications for selling agents, received seventy, and issued a Letter of Intent to one respondent conditioned on submission of an irrevocable bank guarantee and execution of an agreement by a fixed date. The respondent failed to meet these conditions, made an unauthorized advertisement claiming sole agency, and did not submit the guarantee. The appellant cancelled the Letter of Intent, which was challenged successfully by writ petition. The High Court held the cancellation mala fide and violative of natural justice, a finding the appellant now appeals.
Findings of Court:
The High Court was incorrect in implying mala fides from the appellants rational commercial concerns. The cancellation letter clearly stated the conditions precedent, which were not fulfilled, providing valid and relevant grounds for revocation. The doctrine of audi alteram partem was inapplicable as no legal bond existed. The respondents claim of incurred expenses lacked evidentiary support in this proceeding. The appeal lies primarily on questions of law arising from erroneous invocation of natural justice doctrines.
Issues:
Whether the appellant was entitled to revoke the Letter of Intent on the stated conditions; whether the High Court correctly imported audi alteram partem and mala fides doctrines; whether a writ petition is maintainable for recovery of pre-contract expenses; and whether the cancellation was arbitrary or legally justified.
Ratio Decidendi:
A party to a proposed contract must fulfill conditions precedent before a binding relationship arises; where obligations are not complied with, the offeror may legitimately revoke the offer; the absence of a legal relationship precludes the application of natural justice doctrines; and reasons for cancellation that are rational, contemporaneous, and documented cannot be condemned as mala fide merely because they attract political questioning.
Result:
The appeal is allowed, the High Courts judgment and order are set aside, the writ petition is dismissed, and no order as to costs is made.
(A) The present appeal involves the interpretation and application of the Constitution of India provisions, specifically Article 226 (writ jurisdiction of High Courts), Article 133 (appellate jurisdiction of High Court in civil matters where value exceeds specified amount), and Article 136 (special leave to appeal). These provisions frame the scope of judicial review available to the appellant against the High Courts order setting aside the cancellation of a Letter of Intent, particularly concerning the principles of administrative action, conditions precedent in contract formation, and the doctrine of natural justice in a commercial appointment context.
(B) Key legal principles include that a Letter of Intent creates only an executory relationship, not a binding contract; conditions precedent must be fulfilled before a contract is formed; an offeror may revoke an offer where acceptance is conditional and not completed; the doctrine of audi alteram partem does not apply until a legal relationship exists; mala fides cannot be inferred from rational and documented commercial justifications; and parties incurring preliminary expenses in anticipation of a contract are not entitled to recovery if the other party rightfully declines to proceed.
Facts of the case:
The appellant invited applications for selling agents, received seventy, and issued a Letter of Intent to one respondent conditioned on submission of an irrevocable bank guarantee and execution of an agreement by a fixed date. The respondent failed to meet these conditions, made an unauthorized advertisement claiming sole agency, and did not submit the guarantee. The appellant cancelled the Letter of Intent, which was challenged successfully by writ petition. The High Court held the cancellation mala fide and violative of natural justice, a finding the appellant now appeals.
Findings of Court:
The High Court was incorrect in implying mala fides from the appellants rational commercial concerns. The cancellation letter clearly stated the conditions precedent, which were not fulfilled, providing valid and relevant grounds for revocation. The doctrine of audi alteram partem was inapplicable as no legal bond existed. The respondents claim of incurred expenses lacked evidentiary support in this proceeding. The appeal lies primarily on questions of law arising from erroneous invocation of natural justice doctrines.
Issues:
Whether the appellant was entitled to revoke the Letter of Intent on the stated conditions; whether the High Court correctly imported audi alteram partem and mala fides doctrines; whether a writ petition is maintainable for recovery of pre-contract expenses; and whether the cancellation was arbitrary or legally justified.
Ratio Decidendi:
A party to a proposed contract must fulfill conditions precedent before a binding relationship arises; where obligations are not complied with, the offeror may legitimately revoke the offer; the absence of a legal relationship precludes the application of natural justice doctrines; and reasons for cancellation that are rational, contemporaneous, and documented cannot be condemned as mala fide merely because they attract political questioning.
Result:
The appeal is allowed, the High Courts judgment and order are set aside, the writ petition is dismissed, and no order as to costs is made.
JUDGMENT
Mrs. Sujata V. Manohar, J.-The appellant, Rajasthan Co-operative Dairy Federation Ltd., issued an advertisement inviting applications for selling agents for its various products for the territories of Rajasthan, Punjab, Haryana, Himachal Pradesh and Delhi, on or about 19th of November, 1988. Seventy applications were received by the appellant. Ultimately, on 1st June, 1990, a Letter of Intent was issued by the appellant in favour of respondent No. 1 for appointing respondent No. 1 as the selling agent of the appellant for marketing of Saras Brand Dairy Products, inter alia, on the following terms :
"(1) that you will sign an agreement on non-judicial stamp paper of Rs. 5 with RCDF and this arrangement will be enforceable from the date legally executed contract has come into being.
(2) ........
(3) .........The goods will be issued to you against irrevocable bank guarantee on furnishing from schedule bank on 15 days credit basis....(sic).
You are requested to submit irrevocable bank guarantee for an amount of Rs. 15 lacs in favour of RCDF, Jaipur.
This letter duly signed by you must reach GM(M&P) by 5th of June, 1990 and call on us for execution of the agreement on 12.6.1990 (sic).
You are also requested to take preparatory action for starting work with effect from 21st June, 1990 and also submit us immediately the market plan for taking further action at your end."
2. Respondent No. 1, by its letter of 1st of June, 1990, acknowledged receipt of the Letter of Intent. The letter also noted that the agreement was to be signed on 12th of June, 1990 and that respondent No. 1 was going ahead, inter alia, with arranging an irrevocable bank guarantee from a scheduled bank. The letter contained a request to the appellant to release an advertisement announcing the appointment of respondent No. 1 as the selling agent. The appellant, however, did not release any such advertisement. Respondent No. 1, however, issued an advertisement in which respondent No. 1 incorrectly described itself as the sole selling agent and further wrongly indicated that it was also the sole selling agent for Polypack Milk. The appellant protested against wrong statements in the advertisement.
3. The contract was not signed on 12th of June, 1990. The respondent did not attend on that date and asked for some time. The irrevocable bank guarantee for Rs. 15 lacs was also not submitted by respondent No. 1. The appellant, by its letter of 16th July, 1990, cancelled the Letter of Intent. In the letter, the appellant pointed out that the Letter of Intent issued to respondent No. 1 was conditional on his fulfilling certain obligations as a condition precedent to entering into a contract. The conditions, inter alia, were (1) submission of an irrevocable bank guarantee of Rs. 15 lacs by 12th of June, 1990; and (2) execution of an agreement with the appellant by 12th of June, 1990. Beside these two conditions, respondent No. 1 had also promised to submit to the appellant its profit and loss account and balance-sheet for the past year before the execution of the agreement. Respondent No. 1 had not done so. The letter also referred to the unauthorised advertisement issued by respondent No. 1 wrongly describing itself as the sole selling agent of the appellant and stated that in these circumstances, since respondent No. 1 had failed to fulfil its obligations within the stipulated period, the Letter of Intent was revoked. A telegram of the same date to the same effect was also sent to respondent No. 1.
4. Respondent No. 1 filed a writ petition challenging the revocation of the Letter of Intent. The writ petition was allowed. The High Court upheld the contention of respondent No. 1 that the reasons given by the appellant for cancellation of the Letter of Intent were not valid. The cancellation of the Letter of Intent was mala fide inasmuch as there were questions asked in the Legislative Assembly about the appointment of respondent No. 1 as a selling agent of the appellant because respondent No. 1 was not the brother-in-law of the then Chief Minister. The High Court further said that the appellant had acted arbitrarily in cancelling the Letter of Intent and had violated the principles of natural justice in not giving a hearing to respondent No. 1 before cancelling the Letter of Intent. An appeal filed by the appellant before the Division Bench of the High Court also failed. Hence the appellant has come before this Court by way of present appeal.
5. In its letter of 16th of July, 1990 cancelling the Letter of Intent issued in favour of respondent No. 1, the appellant had given several reasons for cancelling the Letter of Intent. Respondent No. 1 had not submitted to the appellant its profit and loss account and balance-sheet for the previous year as requested by the appellant. Respondent No. 1 had wrongly held itself out as the sole selling agent of the appellant. These are clearly circumstances which are relevant to the cancellation of the Letter of Intent. Also the Letter of Intent clearly set out the conditions which respondent No. 1 had to fulfil. One such condition was submitting an irrevocable bank guarantee for Rs. 15 lacs. This was also not done. Respondent No. 1 contends that it had informed the appellant that it would submit the bank guarantee within three days of the signing of the contract. The appellant, however, is within its rights in insisting that the bank guarantee should be submitted before the contract is signed. The appellant, as a prudent businessman is entitled to satisfy itself about the financial position of the party whom the appellant is appointing as its selling agent. If respondent No. 1 has not submitted the requisite documents in this connection and has held itself out as the sole selling agent when to its knowledge, there was no intention of appointing respondent No. 1 as the sole selling agent, these are valid circumstances which the appellant can take into account in deciding whether to enter into a contract and bind itself legally with respondent No. 1 or not. In these circumstances, if the contract has been cancelled it cannot be considered as arbitrary action on the part of the appellant violative of any Fundamental Rights of respondent No. 1.
6. Respondent No. 1 has tried to rely upon certain extraneous circumstances to allege mala fides on the part of the appellant in cancelling the Letter of Intent. When the reasons for cancellation are clearly set out in the cancellation letter and are germane to the decision not to enter into a contract with respondent No. 1, we fail to see how these extraneous circumstances can make the decision mala fide.
7. The High Court was also not right in importing the doctrine of audi alteram partem in these circumstances. If the conduct of respondent No. 1 was such that it did not inspire any confidence in the appellant, the appellant was entitled to decline entering into any legal relationship with respondent No. 1 as its selling agent. The Letter of Intent merely expressed an intention to enter into a contract. If the conditions stipulated in the Letter of Intent were not fulfilled by respondent No. 1, and if the conduct of respondent No. 1 was otherwise not such as would generate confidence, the appellant was entitled to withdraw the Letter of Intent. There was no binding legal relationship between the appellant and respondent No. 1 at this stage and the appellant was entitled to look at the totality of circumstances in deciding whether to enter into a binding contract with respondent No. 1 or not.
8. Respondent No. 1 contends that in anticipation of entering into a contract with the appellant, respondent No. 1 incurred heavy expenses. This statement of respondent No. 1 has to be established on evidence. A writ petition is not an appropriate proceeding if any claim for damages based on disputed facts is required to be established. We do not wish to pronounce on the question whether, in anticipation of entering into a contract, a party which incurs expenses, can recover them from the other party if that other party ultimately, rightly declines to enter into a contract.
9. The appeal is, therefore, allowed. The judgment and order of the High Court is set aside and the writ petition is dismissed. In the circumstances, there will be no order as to costs.
Appeal allowed.
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