Execution Of Agreement, In Bid Document As Condition Precedent; Failure To Execute, Not A Concluded Contract: Bombay High Court
The Bombay High Court has ruled that where reference to a future contract is made in the tender documents and in the Letter of Intent (LoI) issued to a successful bidder, in such terms which shows that the parties do not intend to be bound until the said contract is signed between them, there is no concluded contract between them which can be specifically enforced. The Court...
The Bombay High Court has ruled that where reference to a future contract is made in the tender documents and in the Letter of Intent (LoI) issued to a successful bidder, in such terms which shows that the parties do not intend to be bound until the said contract is signed between them, there is no concluded contract between them which can be specifically enforced.
The Court observed that the terms and conditions specified in the bid documents were only broad guidelines and that the final terms and conditions were yet to be agreed upon by the parties. Thus, holding that the agreement to enter into an agreement in the future cannot be specifically performed, the court ruled that there was no concluded contract arrived at between the parties which was binding on them.
The Division Bench of Justices R.D. Dhanuka and Kamal Khata added that the terms and conditions of the contract, which were not agreed by and between the parties, cannot be drafted by the Court or the arbitrator for incorporating them in the agreement. The Court ruled that it cannot re-write a contract or suggest any conditions of a contract to be incorporated, by passing an order against the parties.
The respondent- Middle Class Friends Co-operative Housing Society Limited, invited bids for carrying out redevelopment of the respondent society's building. The appellant/developer- Kalpataru Limited submitted its bid, which was accepted. The appellant was awarded a Letter of Intent (LoI) by the respondent. After the respondent issued a Termination Notice to the appellant, terminating the LoI, the appellant invoked the arbitration clause contained in the tender document.
The appellant filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act) for interim measures before the Bombay High Court, seeking specific performance of the contract allegedly agreed upon by the parties. The Single Judge observed that there was a reference made in the tender documents and in the LoI with respect to the execution of a development agreement and therefore, the said agreement was an essential requirement and not an idle formality. Thus, it ruled that in the absence of the said development agreement arrived at between the parties, there was no concluded contract executed between them. The Single Judge thus dismissed the petition.
Against this, the appellant filed an appeal under Section 37 of the A&C Act before the Division Bench of the Bombay High Court.
The appellant Kalpataru Limited submitted before the High Court that it was entitled to an order of specific performance, including an order directing the respondent to execute a formal development agreement in its favour.
The appellant argued that all the terms and conditions agreed upon between the parties were already forming a part of the tender documents issued by the respondent society. Further, it contended that the tender document, the LoI and the correspondences exchanged between the parties culminated into a concluded and binding contract between them.
It added that the parties had already taken steps towards the redevelopment work; therefore, there was a concluded and binding contract between them.
The respondent- Middle Class Friends Co-operative Housing Society, submitted that the Single Judge rightly came to the conclusion that the tender document and the Letter of Intent (LoI) only represented a basic understanding and that a formal agreement recording a detailed understanding between the parties was supposed to follow. Thus, it contended that there was no concluded contract between the parties and that the execution of the development agreement was not a mere formality.
The Court held that the power under Section 9 of the A&C Act is not totally independent of the well-known principles governing the grant of interim injunction that generally govern the courts.
The Court observed that the LoI recorded the basic understanding between the parties in respect of the redevelopment work and that it contemplated the execution of the development agreement. Further, the tender document specified that the respondent society, after acceptance of the bid, was required to enter into a development agreement with the selected bidder within 180 days. The bench noted that as per the tender document, the terms and conditions specified in the bid documents were only broad guidelines and that the final Terms and Conditions were to be agreed upon by the parties before execution of the development agreement.
While holding that the parties were required to carry out detailed negotiations and discussions before finalizing the contents of the development agreement, the court took into account that no agreement was reached between the parties on all the contents of the development agreement.
Further, the Court noted that the respondent society could not proceed with the redevelopment work and accordingly terminated the LoI because the development agreement could not be finalized, despite the parties exchanging a number of drafts of the development agreement.
The bench held that the relevant clauses of the tender document prima facie indicated that the tender bid or the correspondences exchanged between the parties or the LoI, individually or collectively, did not constitute a concluded contract. It added that the execution of the development agreement was not an empty formality but was a condition precedent for a concluded contract.
The Court observed that the appellant sought a mandatory order against the respondent to execute the development agreement in its favour, while pleading that it was willing and ready to execute the contract on such terms and conditions, as may be framed by the Court or the arbitrator. Dismissing the appellant's plea for specific performance, the Court added that the terms and conditions of the contract, which were not agreed by and between the parties, cannot be drafted by the Court or the arbitrator for incorporating them in the development agreement. The bench ruled that the Court cannot re-write a contract or suggest any conditions of contract to be incorporated, by passing an order against the parties.
Referring to the decision of the Apex Court in Kollipara Sriramulu versus T. Aswatha Narayana (1968), the Court reiterated that the fact that the parties refer to the preparation of an agreement by which the terms agreed upon are to be put in a more formal shape, does not prevent the existence of a binding contract between them. However, the Court added that there are cases where the reference to a future contract is made in such terms that shows that the parties do not intend to be bound until a formal contract is signed between them. Further, it is the intention of the parties and the special circumstances of each case, which must be considered.
Also, the bench observed that the Supreme Court in Kollipara Sriramulu (1968) had laid down that where the signing of a further formal agreement is made a condition or term of the bargain, if no such formal agreement is approved and signed between the parties, there can be no concluded contract between them.
"If according to the petitioner, the bid document or the Letter of Intent itself had concluded the contract, exchange of draft development agreement for various suggestions or modifications or various crucial terms required to be incorporated would not have been exchanged between the parties. These conditions were required to be discussed, agreed and to be entered into in the development agreement which were admittedly not finalized. In our view, the execution of the development agreement has been contemplated under various provisions of the Tender Document and Letter of Intent. In our view, such execution of the development agreement was not an empty formality but was a condition precedent for arriving at concluded contract", the High Court said.
Holding that the agreement to enter into an agreement in the future cannot be specifically performed, the Court ruled that there was no concluded contract arrived at between the parties which was binding on them.
Thus, the Court held that prima facie, the appellant had not made out a case for grant of specific performance in view of the fact that there was no concluded contract between the parties. Therefore, it ruled that interim measures in aid of final relief were rightly rejected by the Single Judge.
The Court thus dismissed the appeal.
Case Title: Kalpataru Limited versus Middle Class Friends Co-operative Housing Society Limited
Citation: 2022 LiveLaw (Bom) 410
Dated: 20.10.2022 (Bombay High Court)
Counsel for the Appellant: Mr. Navroz Seervai, Senior Counsel with Mr. Sharan Jagtiani, Senior Counsel, Ms. Gulnar Mistry, Mr. Saket Mone, Mr. Subit Chakrabarti, Mr. Shreyash Shah, Mr. Suneet Tyagi and Mr. Dinesh Parmar i/b M/s. Vidhii Partners
Counsel for the Respondent: Mr. Pravin Samdani, Senior Counsel with Dr. Birendra Saraf, Mr. Aseem Naphade, Ms. Madhu Gadodia, Mr. Deepak Deshmukh, Ms. Swati Singh, Mr. Shashank Trivedi and Mr. Shreyash i/b M/s. Naik Naik & Co.