Co-Operative Dairy Federation Ltd. Vs. Shri Maha Laxmi Mingrate Marketing
Service Pvt. Ltd & Ors  INSC 1152 (17 September 1996)
Sujata V. (J) Manohar Sujata V. (J) Punchhi, M.M. Mrs.Sujata
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:
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.
The goods will be issued to you against irrevocable bank guarantee on
furnishing from schedule bank on 15 days credit basis.... (sic).
are requested to submit irrevocable bank guarantee for an amount of Rs.15 lacs
in favour of RCDF, Jaipur.
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).
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." 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 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 statement in the advertisement.
contract was not signed on 12th of,1990. The respondent did not attend on that
and asked for some time.
irrevocable bank grantee 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 condition 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.Beside these two condition,respondent No.1 had also promised to submit to
the appellant its profit and loss account and balance-sheet for past year
before the execution of agreement. Respondent No.1 had not done so. The letter
also referred to the unauthorized advertisement issued by respondent No.1
wrongly describing itself as the sole selling agent of the appellant and stated
that in these circumstance,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.
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 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
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.
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
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.
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.
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.
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.
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 to 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
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.