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Rajasthan Co-Operative Dairy Federation Ltd. Vs. Shri Maha Laxmi Mingrate Marketing Service Pvt. Ltd & Ors [1996] INSC 1152 (17 September 1996)

Manohar Sujata V. (J) Manohar Sujata V. (J) Punchhi, M.M. Mrs.Sujata V.Manohar,J.

ACT:

HEAD NOTE:

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." 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.

The contract was not signed on 12th of,1990. The respondent did not attend on that and asked for some time.

The 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.

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 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.

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.

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.

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.

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 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 a contract.

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.

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