RAJASTHAN CO-OPERATIVE DIARY FEDERATION LTD.versusSH. MAHA LAXMI MINGRATE MARKETING SERVICE PVT. LTD. AND ORS.

A       RAJASTHAN CO-OPERATIVE DIARY FEDERATION LTD.
                               v.
             SH. MAHA LAXMI MINGRATE MARKETING
                   SERVICE PVT. LTD. AND ORS.

                                SEPTEMBER 17, 1996
B
             (M.M. PUNCHHI AND SUJATA V. MANOHAR, JJ.]

        Constitution of India, 1950: A1ticles 226, 136-Writ Petition-Disputed
  questions of fact-Maintainability of-Govemment Co11tract---Letter of Intent
C issued infavour of contractor-Contractor did not fulfil conditions stipulated
  in Letter of I11tent-Subsequently, Letter of Intent cancel/ed---Colltractor i11-
  cu1Ted heavy expenses in anticipation of contract-Held: whether contractor
  incu1Ted heavy expenses in allticipation of contract and was entitled to recover
  the same were disputed questions offact-Such disputed questions offact
D could neither be examined by High Court in writ petition nor by Supreme
  Court in appeal.

          Administrative Law :

          Natural justice-Pre-decisional hearing--Govemment Contract---Letter
E' of Intent issued in favour of contractor-Letter of Intent specified submission
    of i1Tevocable bank guarantee of Rs. 15 lakhs within a stipulated date,
    execution of agreement within that date and submission of profit and loss
    account and balance sheet for the past year before execution of agree-
    ment-Contractor did ll'Jt fulfil conditions but issued advertisement inco1Tect-
    ly describing itself as sole selling agent Letter of Intent ca11ce/led without giving
F   opportunity of healing to contractor--Held : cancellation of letter of Intent
    not arbitrary-Reasons being gennane to the decision to cancel Letter of
    Intent, extraneous circumstances could not be relied upon to hold decision
    ma/a fide--l11 the circumsta11ces of the case;.pre-decisional hearing was not
    required to be given.
G         A Letter of Intent was issued by the appellant in favour of respon-
    dent No. 1 for appointment as selling agent of appellant's products. The
    conditions stipulated in the Letter of Intent were submission of an ir-
    revocable bank guarantee of Rs. 15 lakhs within a specified date, execution
    of an agreement within that date, submission of profit and loss account
H   and balance sheet for the past year before execution of the agreement.
                                            368
           RAJ. CO-OP. DIARY FEDERATION LID. v. M.I...M MICTG. SERV!CEPVf. LID.   369

However, respondent No. 1 did not fulfil the conditions of the Letter of A
Intent but issued an advertisement in which respondent No. 1 incorrectly
described itself as the sole selling agent of the appellant. For these reasons
the appellant cancelled the Letter of Intent.

       Respondent No. 1 filed a ~it petition before the High Court chal-
lenging the revocation of the Letter of Intent. The High Court allowed the · B
petition on the ground that the appellant had acted arbitrarily with mala
fide intention and had violated the principles of natural justice in not
giving a hearing to respondent No. 1 before cancelling the Letter of Iiltent.
Being aggrieved the appellant preferred the present appeal.
                                                                                        c
      On behalf of respondent No. 1 it was contended that in anticipation
of entering into a contact with the appellant,"(espondent No. 1 incurred
heavy expenses and that respon~ent No. 1 wa~ entitled to recover them
from the appellant.

      Allowing the appeal, this Court                                                   D

       HELD 1.1. 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               E
sole selling agent when to its knowledge, there was no intention of appoint-
ing respondent No. 1 as the sole selling agent, these are valid circumstan-
ces 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 letter of intent has been cancelled it cannot be
considered as arbitrary action on the part of the appellant violative of any            F
Fundamental Rights of respondent No. 1. [373-A-C]

      1.2. 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, the extraneous circumstances relied on by G
respondent No. 1 cannot make the decision mala fide. [373-D]

      1.3. The doctrine of audi alteram partem cannot also be imported 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            H
    370                   SUPREME COURT REPORTS (1996) SUPP. 6 S.C.R.

A   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.I, and if the conduct of respondent No.I ~s
    otherwise not such as would generate confidence, the appellant was entitled
    to withdraw the Letter of Intent. There was no biding legal relationship
B . between th~ appellant and respondent No. I 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. I or not. (373-E-F-G]

          2. The statement of respondent No. I that it incurred heavy expenses
    in anticipation of entering into a contract with the appellant has to be
C   established on evidence. A writ petition is not an appropriate proceeding
    if any claim for damages based on disputed facts is required to be estab-
    lished. This Court would also not 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. [373-H; 374-A]
D
            CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2679·of
    199i

         From the Judgment and Order dated 7.8.91 of the Rajasthan High
E   Court in D.V.C.S.A. No. 169 of 1991.

            Sudhir Gupta, Shahil Rezvi and Aruneshwar Gupta for the Appel-
    lant.

            H.N. Salve and S.V. Deshpande for Respondents.
F
            The Judgment of the Court was delivered by

        MRS. SUJATA V. MANOHAR, J. The appellant, Rajasthan Co-
  operative Dairy Federation Ltd.; issued an advertisement inviting applica-
  tions for selling agents for its various products for the territories of
G Rajasthan, Punjab, Haryana, Himachal Pradesh arid Delhi, on or about
  19th of November, 1988. Seventy applications were received. by the appel-
  lant. 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
H Products, inter alia, on the following terms~
    RAJ.CO.OP.DIARY FEDERATION LID.>< M.I...M. MICTO.SERVIC.Bi'Vr. LID. (MRS.MANOHAR,J.J   371

         "(1) that you will sign an agreement on non-judicial stamp paper A
         of Rs. 5 with RCDF ~nd this arrangement will be enforceable from
         the date legally executed contract has come into being.

       . (2) ........................................... .

         (3) ....................  L..
                                  The goods will be issued to you against ir-                    B
         revocable 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.       .
                                                                                                 c
            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                      D
         work within effect from 21st June, 1990 and also submit us imme-
         diately 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                       E
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 an adver-
tisement. Respondent No. 1, however, issued an advertisement in which                            F
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
Mille. The appellant protested against wrong statement in the advertisement.

      Tb¥ 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                        G
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 obligation as a
condition precedent to entering into a contract. The conditions, inter alia,                     H
    372                   SUPREME COURT REPORTS (1996) SUPP. 6 S.CR.

A 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 & loss account and
  balance-sheet for the past year before the execution of the agreement.
B Respondent No. 1 had not done so. The letter also referred to the un-
  authorised advertisement issued by respondent No. 1 wro_ngly 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
C 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 cf
    the Letter of Intent. The writ petition was allowed. The High Court upheid
    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
D   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
E   violated the principles of natural justice in not giving a hearing to respon-
    dent No. 1 before cancelling the Letter of Intent. An' Appeal filed by the
    ~ppellant before the Division Bench of the High Court aISo fail~d. Hence
    the appellant has come before this court by way of present appeal.

F        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 circumstan-
G ces 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
H three days of the signing of the contract. The appellant, however, is within
     RAJ. CO.OP. DIARY FEDERATION LID. v. MLM MIITG.SERVICE PVI'. LID. [MRS. MANOHAR,J.)   373

 its rights in insisting that the bank guarantee should be suhmitted before A
 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 B
 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.l or not. In these
 circumstances, if the contact 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.
                                                                                c
        Respondent No. 1 has tried to rely upon certain extraneous cir-
  cumstances 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 D
  a contract with respondent No. 1 we fail to see how thee extraneous
. circumstances can make the decision mala fide.

       The High Court was also not right in importing the doctrine· of audi
 a/teram partem in these circumstances. If the conduct of respondent No. 1                       E
 was such that it did not inspire any confidence in the appellant, the
 appellant was entitled t<;> 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 contact. If the conditions stipulated in the
 Latter of Intent were not fulfilled by respondent No. 1 and if the conduct
                                                                                                 F
 of respondent Nc>.l 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 cir-
 cumstance in deciding whether to enter into a binding contact with respon-
 dent No. 1 or not.                                                                              G

        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.l has to be established on evidence. A writ
 petition is not an appropriate proceeding if any claim for damages based                        H
   374                     SUPREME COURT REPORTS (1996) SUPP. 6 S.C.R.

A 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.

             The appeal is, therefore, allowed. The judgment and order of the
B High Court is set aside and the writ petition is dismissed. In the cir-
    cumstances, there will be no order as to costs.

    V.S.S.                                                        Appeal allowed.