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Right To First Refusal Cannot Be Exercised After Making A Counter-Offer To The Seller: Delhi High Court

Ausaf Ayyub
13 May 2022 4:27 PM GMT
Right To First Refusal Cannot Be Exercised After Making A Counter-Offer To The Seller: Delhi High Court
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The High Court of Delhi has held that a party cannot demand its 'Right to First Refusal' after making a counter-offer to the seller.

The Single Bench of Justice Anup Jairam Bhambhani has held that when the party that has been given the right to first refusal (RoFR) makes a counter-offer, the seller becomes entitled to sell the subject goods to the third parties.

The Court further held that the court while exercising powers under Section 9 of the A&C Act cannot grant interim relief in the nature of specific performance when it will undoubtedly and obviously be the essential claim and relief that the petitioner will seek in the arbitral proceedings.

The Court also observed that the court would not grant mandatory injunctions at the interlocutory stage when disputed rival contentions are yet to be decided.

Facts

The parties entered into a Master Gas Sales Contract dated 30.05.2001. Simultaneously, Gujarat Gas Ltd (petitioner) entered into a Gas Sales Agreement (Gujarat Gas GSC) with Vedanta (Respondent No.1) for the purchase of gas. Similarly, Apraava Energy Pvt. Ltd. (Respondent No. 4) also entered into a similar agreement (Apraava Energy GSC) with Respondent No. 1.

The MGSC, which was a tripartite agreement in the nature of an umbrella contract that served as a single operational interface for nomination and delivery of gas sold to petitioner under the Gujarat Gas GSC and to Respondent No. 4 under the Apraava Energy GSC; the intent and purpose being that on the termination of Apraava Energy, the petitioner would have the right to acquire the entire gas allocated to respondent no. 4 by way of a 'step-in' exercising its right to first refusal under Article 9(b) of the MGSC.

A dispute arose between the parties when respondent no. 1 terminated the agreement with respondent no.4 and proceeded to issue a tender to sell the said volume of gas to third parties. The petitioner approached the High Court for interim measures under Section 9 of the A&C Act praying for restraining respondent no.1 from allocating the gas to third parties.

The Contention Of Parties

The petitioner filed the application for interim reliefs on the following grounds:

  • That upon the termination of the Apraava Energy GSC it was incumbent upon the respondent no.1 to notify the petitioner so that it could 'step-in' to acquire the gas under the agreement exercising its right to first refusal. However, the respondent has failed to discharge its contractual obligation.
  • Respondent no. 1 has further breached its contractual obligation by issuing a tender for the allocation of gas to third parties over which the petitioner had the right to first refusal thus, depriving it of its contractual right.
  • Respondent no.1 is in breach of Article 9(b) of MGSC that entitled the petitioner to receive the entire volume of gas meant for sale to respondent no. 4 under the Apraava Energy GSC if the agreement was terminated.
  • The email dated 20.02.2022 issued by respondent no. 1 was not in compliance of the requirement of Article 9 of the MGSC as it only conveyed that the parties were only discussing the termination of the agreement and that respondent no.1 was bound to notify the petitioner upon the final termination of the agreement to trigger the process of acquisition of gas by the petitioner.
  • The petitioner was receiving additional volume of gas available with the respondent no. 1 under the MCSG after the respondent no. 4 having stopped the purchase.
  • However, later the respondent refused to supply the additional volume of gas to the petitioner on the ground that the petitioner did not give its acceptance within two months of the communication issued notifying the termination of the agreement with respondent no. 4.
  • Article 11(i) of the MGSC and Article 17.10 of the Gujarat Gas GSC bind the parties to continue to perform their obligations under the contract notwithstanding any dispute that may have arisen between them, therefore, an interim order ought to be issued directing the respondent no. 1 to continue to supply the increased gas, pending consideration of the disputes by the arbitral tribunal.

The respondent opposed the application on the following grounds:

  • Respondent no. 1 has duly notified the petitioner of its intention to terminate the Apraava Engercy GSC and called upon the petitioner to exercise its right to take the entire volume of gas at the price of Gujarat Gas GSC.
  • However, the petitioner did not accept the offer of the respondent and proceeded to make a counter-offer to buy the gas at a lower price. Therefore, the counter-offer amounted to rejection and negation of the right to first rejection under Article 9(b) of the MSCG.
  • The petitioner itself is in breach of Article 9(d) which stipulates a two-month timeline to exercise the right to first refusal and it is also in breach of Article 9(f)(ii) which provides that if the petitioner intends to purchase the entire quantity of the gas allocated to respondent no.4, it would be at the price of Gujarat Gas GSC.
  • The additional gas supplied to the petitioner was purely on an ad-hoc basis that had no relation whatsoever with the termination of the agreement with respondent no. 4.
  • Respondent no. 1 had sent a reminder email to the petitioner to exercise the right to first refusal, however, the petitioner failed to reply to the said communication.
  • The relief sought by the petitioner cannot be granted under Section 9 application for interim reliefs as the same would amount to the specific performance of a contract.

Analysis By The Court

The Court observed that under Article 9(b) , the respondent no. 4 is required to notify the petitioner of its intention to terminate the agreement with respondent no. 4 and the petitioner is entitled to buy the quantity which would become spare upon the termination of the Apraava Energy GSC provided the petitioner accepts the offer two months from such intimation.

The Court held that the respondent no. 1 had duly notified the petitioner of its intention to terminate the Apraava Energy GSC, however, in response to the said communication, the respondent agreed to buy the spare quantity at a lower price, therefore, the petitioner did not issue an unqualified acceptance but made a counter-offer, therefore, the petitioner cannot be said to have accepted the offer for the spare gas. Moreover, respondent no. 1 had sent a reminder email to confirm the supply of additional gas to which the petitioner did not respond.

The Court held that the additional gas supplied to the petitioner was purely on an ad-hoc basis to dispose of the spare gas for the time being which is evident from the correspondence exchanged between the parties. Moreover, the argument that the petitioner was receiving the additional gas under Article 9(b) is contrary to its argument that respondent no. 1 did not notify it regarding the termination of the agreement with respondent no. 4.

The Court held that directing respondent no. 1 to continue to supply the additional gas to the petitioner under the MGSC would amount to directing the respondent to specifically perform the contract and that will undoubtedly be the essential claim and relief that the petitioner will seek in the arbitral proceedings.

The Court further held that the relief of an order restraining respondent no. 1 from selling the spare volume of gas to any third party can only be by the issuance of a mandatory injunction requiring it to perform the obligations sought to be foisted upon it by the petitioner, which it disputes. Courts have consistently frowned upon issuance of such mandatory injunctions at the interlocutory stage when disputed rival contentions are yet to be decided.

Accordingly, the Court dismissed the application.

Case Title: Gujarat Gas Ltd. v. Vedanta Ltd and Ors., O.M.P.(I)(COMM) 125 of 2022

Citation: 2022 LiveLaw (Del) 444

Date: 12.05.2022

Counsel for the Petitioner: Mr. Parag P. Tripathi, Sr. Advocate with Mr. Piyush Joshi, Mr. Srinivasan Ramaswamy, Ms. Vatsla Bhatia & Ms. Manali Joshi, Advocates.

Counsel for the Respondents: Mr. Kapil Sibal, Sr. Advocate with Mr. Sandeep Sethi, Sr. Advocate with Ms. Ranjana Roy Gawai, Ms.Vasudha Sen & Ms. Aayushi Singh, Advocates. Mr. Jafar Alam & Mr. Saahil Kaul, Advocates for R-4.

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