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PETITIONER:

RAJASTHAN CO-OPERATIVE DAIRYFEDERATION LTD.

Vs.

RESPONDENT:

SHRI MAHA LAXMI MINGRATE MARKETINGSERVICE PVT. LTD & ORS.

DATE OF JUDGMENT: 17/09/1996

BENCH:

MANOHAR SUJATA V. (J)

BENCH:

MANOHAR SUJATA V. (J)

PUNCHHI, M.M.

ACT:

HEADNOTE:

JUDGMENT:

J U D G M E N T

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:

<SLS>

"(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."

<SLE>

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

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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

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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.