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Non-Binding Nature Of Agreements For Future Contract

Shashank Trivedi and Shreyash
18 Nov 2022 5:03 AM GMT
Non-Binding Nature Of Agreements For Future Contract
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The Bombay High Courtin a recent judgment dated 20 October 2022 in the matter of Kalpataru Limited vs Middle Class Friends Co-operative Housing Society Limited held that the Tender Documents and Letter of Intent (LOI) issued to the successful bidder does not amount to be a concluded contract, if there is a reference to a future contract in the tender documents and in the LOI. The Division Bench of R.D. Dhanuka J. and Kamal Khata J. added that the terms of the contract, which were not agreed between the parties, cannot be suggested by the court or the arbitrator to be incorporated into the contract. The court held that it could not rewrite the contract or suggest any terms of the contract to be incorporated by issuing an injunction against the parties.

FACTS-

The Appellant, Kalpataru Limited ("Kalpataru"), was appointed by the Respondent, Middle Class Friends Co-operative Housing Society Limited ("Society"), for the purpose of carrying out the redevelopment of the building of the respondent society.

After the appointment, Kalpataru and the Society exchanged several drafts of the Development Agreement in which Kalpataru had inserted clauses which were inconsistent with the LOI and Tender Documents. Since no Development Agreement was executed arrived despite one and half years being passed by, the society terminated the LOI and offer letter. Being aggrieved with this termination, Kalpataru filed a petition under section 9 of the Arbitration and Conciliation Act inter alia contending that the LOI, Bid Documents and correspondences exchanged between the parties is a concluded contract and hence sought specific performance of the same. This was filed since the LOI and Bid Documents contained the Arbitration Clause. The Single Bench of the High Court vide its order dated 16th December 2021 dismissed the Section 9 petition inter alia holding that there was no concluded contract between the parties. Being aggrieved with this order, Kalpataru filed an appeal under section 37 of the Arbitration and Conciliation Act before the Division Bench of the Bombay High Court.

ISSUES BEFORE THE COURT-

The main issue amongst others of this case was whether the LOI, Bid Documents and Correspondence constitute to be a concluded contract.

The Bombay High Court while upholding the order dated 16 December 2021, observed that the existence of a concluded contract between the parties can be seen on perusal of various provisions of the Tender Document and the Letter of Intent. These provisions clearly indicate that the execution of the development agreement was not an empty formality but was a 'condition precedent' for a concluded contract and since no concluding contract was arrived at, it is not binding on either party.

Further, the Bombay High Court observed that since the LOI and Bid Documents contemplate the execution of various further agreements which were to be executed after negotiations and settlement of various terms, the said LOI serves as a basic understanding between the parties and is an agreement to enter into future agreements and thus the LOI and Bid Documents cannot be specifically performed.

The Bombay High Court concluded that though there were negotiations, exchange of drafts and correspondence, these all stopped short of a concluded contract. The contract would come into existence only upon the execution of the development agreement i.e. the future contract, which was a condition precedent.

Further, it was concluded by the Bombay High Court that the Court is not empowered to create a contract for the parties by going outside the clear language used in the correspondence, except insofar as there are some appropriate implications of law to be drawn, are applicable to the facts of the present case.

The Bombay High Court concluded that as far as powers granted Section 9 of the Arbitration Act are concerned, they were conferred in aid of or as auxiliary to the final relief that may be granted. If the final relief cannot be granted in terms as prayed for, temporary relief in the same terms can hardly be even granted.

The Bombay High Court interpreted that the prayers for interim measures were rightly rejected having no prima facie case being made out by the Appellant and the conclusion arrived at by the learned Single Judge that the balance of convenience was not in favor of Kalpataru at all and greater prejudice would be caused to the Society if relief is granted to the Kalpataru under section 9 of the Arbitration Act.

Authors: Shashank Trivedi (Manager) and Shreyash (Associate) at Naik Naik & Co. Views are personal.



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