Supreme Court Upholds Appellant in Revocation of Letter of Intent Case. Letter of Intent Merely Intention to Contract and Not Legally Binding; Cancellation Valid When Conditions Precedent Not Fulfilled and Conduct of Respondent Undermined Confidence.

Case Note & Summary

The dispute arose from an advertisement issued by the appellant, Rajasthan Co-operative Dairy Federation Ltd., inviting applications for selling agents for its Saras brand dairy products in specified territories. Respondent No.1, a private limited company, applied and on 1 June 1990 was issued a Letter of Intent appointing it as selling agent subject to conditions: execution of agreement on non-judicial stamp paper, submission of irrevocable bank guarantee of Rs 15 lakhs, and submission of profit and loss account and balance sheet for the previous year. The Letter of Intent required respondent to sign and return by 5 June 1990 and attend for execution of agreement on 12 June 1990. Respondent acknowledged the letter but neither signed the agreement nor submitted the bank guarantee, and instead issued an advertisement describing itself as sole selling agent, which was incorrect. The appellant protested and later, by letter dated 16 July 1990, revoked the Letter of Intent citing failure to fulfil conditions and unauthorized advertisement. Respondent filed a writ petition challenging the revocation. The High Court allowed the writ petition, holding that the reasons for cancellation were not valid, the cancellation was mala fide because of legislative assembly questions regarding respondent's relationship to the then Chief Minister, and that natural justice was violated as no hearing was given. The Division Bench of the High Court affirmed. The appellant appealed to the Supreme Court. The Supreme Court considered whether the revocation was arbitrary, whether natural justice applied, and whether a writ petition was the appropriate remedy for alleged pre-contractual expenses. The appellant contended that respondent failed to satisfy conditions precedent, including providing bank guarantee and financial documents, and had misrepresented itself as sole selling agent; therefore, the appellant was justified in withdrawing the Letter of Intent. The respondent argued that cancellation was mala fide due to extraneous political reasons and that principles of natural justice required a hearing before cancellation. The Supreme Court held that a Letter of Intent is merely an expression of intention to enter into a contract and does not create a binding legal relationship. The conditions stipulated were not fulfilled: the bank guarantee was not submitted, the agreement was not signed, and financial documents were not provided. Additionally, the respondent's unauthorized advertisement claiming sole selling agency undermined confidence. The Court found that these were valid, germane reasons for withdrawal, and extraneous circumstances could not make the decision mala fide. The High Court erred in importing the doctrine of audi alteram partem because no legal rights had crystallized at the Letter of Intent stage; the appellant was not required to give a hearing before deciding not to enter into a contract. As for respondent's claim of having incurred heavy expenses in anticipation of the contract, the Court noted that such claim involved disputed facts and could not be adjudicated in a writ petition; appropriate remedy would be a civil suit if at all. The Court did not decide whether such expenses were recoverable. Accordingly, the Supreme Court allowed the appeal, set aside the judgments of the High Court, and dismissed the writ petition, with no order as to costs.

Headnote

Issue of Consideration

Final Decision

Appeal allowed; judgment and order of High Court set aside; writ petition dismissed; no order as to costs.

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