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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.