IMPORTANT POINT
When the reasons for cancellation of the Letter of Intent are clearly set out in the cancellation letter and are germane to the decision not to enter into a contract, the act of cancellation of the Letter of Intent cannot be considered as arbitrary action.

Headnote:CONTRACT-Appellant, Cooperative Dairy Federation issued advertisement inviting applications for selling agents for its products-Letter of Intent issued in favour of respondent No. 1 for appointing him as selling agent of appellant-Conditions stipulated in Letter of Intent not fulfilled by respondent No. 1-Conduct of respondent No. 1 was otherwise not such as would generate confidence-Appellant was entitled to withdraw Letter of Intent-There was no binding legal relationship between appellant and respondent No. 1 at this stage.
Held : 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. (Para 5)

JUDGMENT

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 :

"(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."

2. 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 not release any 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 statements in the advertisement.

3. The 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 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 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; 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 and loss account and balance-sheet for the past year before the execution of the agreement. Respondent No. 1 had not done so. The letter also referred to the unauthorised advertisement issued by respondent No. 1 wrongly 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 of the same date to the same effect was also sent to respondent No. 1.

4. 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 appella

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1996 Supreme(SC) 1477

IMPORTANT POINTWhen the reasons for cancellation of the Letter of Intent are clearly set out in the cancellation letter and are germane to the decision not to enter into a contract, the act of cancellation of the Letter of Intent cannot be considered as arbitrary action.

IMPORTANT POINT
When the reasons for cancellation of the Letter of Intent are clearly set out in the cancellation letter and are germane to the decision not to enter into a contract, the act of cancellation of the Letter of Intent cannot be considered as arbitrary action.