Wellman Hindustan Limited. v. N.C.R Corporation

S.C JAIN, J.— The facts giving rise to this interim application are that the applicants are carrying business, inter alia, as manufacturers/dealers software, micro—chip encapsulation, textiles and other a ducts in India. The respondent is a foreign company in corporated in USA having its world head quarters at South Patterson, Boulvard, Dayton, Ohio, U.SA The a respondent manufactures computer software, hardware, ATMs and other products. In view of the large potential in Indian market, the respondent was desirous of estabilishing joint venture in India for manufacture of its various hardware and software products in India. In or about middle of 1985, one Jim Baker of United States.

Consulate at Bombay approached the applicant with information that the respondent was looking for a joint venture partner for producing, marketing and servicing its hardware and software products in India. The applicant showed keen interest in entering into arrangements with the respondent. Mr Jim Baker along with his assistant visited the applicant's facilities to assess suitability of the applicant as a joint venture partner for such manufacture of hardware and software in India. By letter dated 23.7.1985, the applicant was informed by the respondent that the respondent has selected the applicant as one of the companies proposed for the joint venture. After exchange of series of letters, personal visits and discussions and after evaluating track record and performance of the applicant and the business plan prepared by the applicant, the respondent informed the applicant that the applicant was selected as partner for the respondent's joint venture for manufacturing, marketing and servicing NCR products in India and entered into international distributorship agreement on 9.6.86 granting to the distributor right of license to market and service of NCR product in certain territories designated by NCR.

Besides this, on 10.6.1986, a letter of intent was duly executed between the parties with a view to jointly establish a company in India with 60% equity participation by Wellman (applicant) or its nominee and 40% by the NCR (respondent) or its nominees to manufacture, and market the product of the respondent. The essential terms and conditions of the joint venture amongst others, which were agreed to between the parties, Were as under:—

(i) The plaintiffs and the defendants shall jointly incorporate a limited compoany and through the said compoany shall manufacture, sell and service the products of the defendants known as NCR. The equity participation in the company was to be 60% of the plaintiffs and 40% of the defendants. The parties shall establish (a company in India and with equity of 40% owned by NCR or NCR nominees and 60% owned by Wellmnan (plaintiffs) or Wellman nominees- to manu facture, market and service NCR products.

(ii) The consideration approved by the Govt. of India would be paid to the defendants by the joint venture company.

(iii) The defendants will give technology to produce their products to the plaintiffs alone and not to any other party, as a joint venture partner. Defendants shall not take any other party as their joint vewnture partner in India.

(iv) Pending requisite approvals of Govt of India, the plaintiffs will immediately be appointed by the defendants as their exclusive distributors in India for sales and services of the products of defendants and after approvals were obtained/received and joint venture was constituted, the distributorship would be transferred to the new joint venture company, which was to be incorporated as stated above.”

As per the averments made by the applicant, pursuant to the aforesaid agreement of joint venture they took various steps in complying with the terms of this agreement and the parties had acted on those terms for a long period of time and the applicant had spent considerable amount of money in this regard. According to the applicant this fact was also admitted by the respondent that significant efforts had been put up by the applicant as a result extensive work was done and well developed approach plan was evolved. However, for the reasons of their own, the respondent wanted to wriggle out/resile from the joint venture on the plea that they did not want to risk investing six million dollars in India. The respondent however, offered the following options for consideration of the applicant:—

(i) Wellman to continue as a distributor, allow existing license and approvals of Government of India to expire and if Government policy improves, to re-evaluate the joint venture project.

(ii) To recruit third party as an additional partner in the joint venture with the necessary infrastructure to lower the risk of proceeding with the venture, as approved by the Government of India.

(iii) NCR India Ltd. would become a manufacturing joint venture only and to leave the marketing/sales to others, who will buy the products from the Joint venture.

(iv) Plaintiff should go out of the joint venture i.e out of NCR India Ltd and that NCR will take a new partner who has necessary infrastructure in the joint venture wherein the defendants will have 40% equity and the new partner 60%.”

All these options were challenged by the applicant being wrongful, illegal, arbitrary and unjust and calculated attempt on the part of the respondent to back out of the contract and to induct some other person as a partner to the joint venture. However, the applicant expressed its willingness to consider options (ii) and (iii). The applicant received a FAX dated 16.5.1989 mentioning that NCR remains committed to its objective to re-enter the market of India through direct investment and the applicant and the respondent had decided to aggressively pursue options (ii) and (iii) The intention of the respondent that in the event neither of the said options were acceptable to the applicant or the respondent, then either party would be free to cease continued participation and to investigate independent collaboration with others. This action on the part of the respondent was challenged by the applicant being illegal and arbitrary. Notice was also sent to terminate the international distributorship agreement. These acts of the respondent have been challenged by the applicant by filing this suit for mandatory injunction directing the respondent to perform and carry out the contracts of joint venture and technical collaboration as mentioned above and implement, carry out and execute the same for manufacture, marketing and servicing of respondent's products and to restrain the respondent from inducting any other party as their joint venture partner in substitution of the applicant or otherwise from manufacturing, marketing and servicing their products known as NCR products and subsidiary products in India and also from entering into agreement with any third party with regard to technical collaboration or to associate any person in relation to their products in India for manufacturer, marketing sale and servicing thereof.

In this suit this application for ad interim injunction has been moved.

The respondent contested this application and filed written reply pleading, inter alia, that distributorship agreement has been validly terminated as provided under clause 16 of the agreement and even otherwise suit for specific performance and injunction does not lie. It is alleged that the respondents have a right to induct a third party as their joint venture partner and/or associate for manufacturing, marketing and servicing of their products. It is denied that the said act of the respondent is illegal or malicious. The respondents are within their right to enter into a colloboration agreement with any party. The respondents have a right to shelve the joint venture plan with the applicant as the letter of intent clearly provides that it does not create any legal binding obligations between the parties.

Sat Pal, J. before whom this matter was earlier pending, in the presence of the counsel for the parties passed a restraint order on 26.6.92 restraining the respondents from signing any agreement with any other party in India for joint venture/distribution. This order is sought to be vacated by the respondent.

The learned counsel for the applicant argued that pursuant to the aforesaid agreemnt of joint venture contained in the letter of intent dated June 10, 1986 the respondent in or about July, 1986 made announcement in press conference at Bombay that the applicants were appointed as new distributors and joint venture partner; the joint venture to be 60 per cent owned by the applicant and 40 per cent owned by the respondent for manufacturing marketing and servicing NCR products in India. In July, 1986, the respondent made representation to Dr Sheshagiri, Addl Secretary, Govt of India, Department of Electronics in respect of NCR Wellman plan for joint venture. According to the learned counsel for the applicant, this agreement was duly acted upon by the parties and in pursuance thereof the following acts were done:—

(i) As per mutual agreement between the plaintiffs and defendants, a company name NCR (INDIA) Pvt. Ltd was incorporated on 31.8.1988 The plaintiffs got the name approved from the Registrar of Companies and pending some of the approvals of Govt of India, the promoters share in the company were issued in the name of the partners of M/s Crowford Bayley and Co., Solicitors, Bombay.

(ii) In mutual consultation, several sites in Delhi, Bangalore and Pune were considered and visited by the representatives of both the plaintiffs and defendants. Ultimately, a 3 acre plot situated in Electronic city developed by Electronics Development Corporation Ltd. at Bangalore was mutually selected and the same, as mutually agreed upon, was purchased in the name of the plaintiffs. As also mutually agreed upon, the plaintiffs paid the cost of the land (plot No. 47) of Rs 5,10,000/- fixed/demanded by the said development Corporation.

(iii) In pursuance of clause 11 of Agreement dated 10.6.1986 the plaintiff started distributing the products manufactured by the defendants under the said international distributorship agreement.

(iv) The plaintiffs also entered into confidentiality agreement on 16th June, 1987 with the defendants in terms of the clause 13 of the Agreement.

(v) In pursuance of clause 16, the additional terms and conditions relating to the royalty, user fees, etc were discussed which are indicated in the application made to the Government of India for its approval.

(vi) The defendants also forwarded to the plaintiffs information dated 17th September, 1987 about the special took, and equipments which were necessary to assemble and manufacture the products of the defendants in terms of clause 18 of the agreement.

(vii) In pursuance of the said agreement, necessary applications were made to the Government of India to seek its approval,. The said applications were prepared by the defendants and the particulars and details required to be stated therein were furnished by the plaintiffs as demanded by the defendants. By telex dated 3.9.1986 the defendants sought permission of the plaintiffs to file in the name of the plaintiffs an application for industrial license with the Govt of India for the proposed joint venture after its finalisation by the defendants. As desired by the defendants, the plaintiffs filed the application for the grant of industrial license to the Govt of India on 25th Nov, 1986.

viii) In the meantime, the plaintiffs were advised by the defendants by their telex dated 11.9.1986 to engage Indian market Research Bureau(IMRB) to commence market research for which the defendants agreed to bear and pay 50% of the cost which would ultimately be adjusted in accordance with the equity participation in the joint venture company,. The plaintiffs accordingly engaged the said IMRB and obtained market research report as required by the defendants. The plaintiffs contributed fifty per cent cost for obtaining such reports.

(ix) On 18th January, 1987 the plaintiff received from the Ministry of Industries Govt of India a letter rejecting the said application on the ground that excessive amount of fees were demanded by the defendants for Tower series of products. The said letter was shown to the defendants representative who was at Bombay at that time. After discussions with him and the defendants the revised composite application for industrial license cum collaboration was submitted to the Ministry of Industries for approval of government of India. The said application was sent along with the plaintiff's letter dated 24th March, 1987.

(x) The plaintiffs say that in the meantime the defendants requested the plaintiffs to begin work of recruiting new staff for joint venture as it was likely that joint venture would come into being very soon., The plaintiffs and the defendants did not want to lose any business opportunity during the period of approval of industrial license from the Governnment of India. The plaintiffs recruited new staff and appointed personnel and gave training to them at their huge expenses.”

It has been further pointed out by the counsel for the applicant that the Ministry of Industries took some time to approve the foreign collaboration and industrial license for joint venture. However, after a lot of follow up, approval was given on June 26, 1987 and June 29, 1987. As the respondent felt that export obligations imposed by the Govt. of India should be reduced, the applicant vide its letter dated August 13, 1987 requested the Department to reduce the export obligations and after follow up by the applicant the Govt of India vide letter dated April 14, 1988 approved the reduction on export obligation to 10% only.

The learned counsel for the applicant argued that the letter of intent has become an agreement because the parties had acted upon this agreement for a long period of time and they have spent considerable amount on it. Saying of the respondent at this stage that it would not be financial viable for the NCR to enter this venture does not lie in the mouth of the respondent. It appears that they want to back out of their contractual obligation when the applicant had put in great labour besides spending a lot of money in the follow up in terms of the agreement dated 10.6.86 Prima facie case is in favour of the applicant and the balance of convenience is also in favour of the applicant who shall suffer irreparable loss and injury if the ad interim injunction is not allowed to continue.

Learned counsel for the respondent countered the argument of the counsel for the applicant and submitted that this letter of intent cannot be said to be agreement which can be specifically enforced. The letter of intent is not a contract per se. According to him to constitute a binding contract, there must be a concluded contract as one which settles everything and leaves nothing to be settled between the parties. According to the learned counsel, prima facie, there is no concluded contract where there is an informal agreement which expressly requires the subsequent execution of a formal contract. In this case, there are certain conditions which are to be fulfilled before the concluded contract has to be arrived it. He drew my attention to clause 26 of this letter of intent dated June 10, 1986 wherein it has been mentioned that this letter of intent is intended to set forth in writing the present and mutual intentions of the parties hereto as respects the subject matter of this document. It is not intended to and does not create any legally binding obligations between the parties. No obligations of any type of nature whatsoever shall arise unless and until, a definite legal agreement is negotiated and executed between the parties. According to the learned counsel all the terms of this letter of intent have not been complied with and therefore this letter of intent cannot take the place of a concluded contract. When there is no concluded contract, no suit for specific performance or mandatory injunction lies. He also argued that terms of such letters of intent negative the contractual intentions. He also argued that by the subsequent conduct of the applicant it is apparent that there was no joint venture agreement between the parties and it was to be entered into later on as per the terms of the letter of intent. That agreement was never entered into and this suit of the applicant is, therefore, not maintainable. He further argued that the distribution agreement entered into between the parties has been validly terminated by giving 180 days notice. This agreement came to an end on June 15, 1992. As far as the joint venture agreement is concerned, the respondent had informed the applicant by letter dated April 12, 1990 that it has been decided by NCR not to implement the joint venture plan and has decided to suspend the same. The respondent has a right to shelve the joint venture plan with the applicant as the letter of intent clearly provides that it does not create any legal, binding obligations between the parties and does not create any obligation unless and until a definite agreement is negotiated and executed between the parties.

What is a “letter of intent” and what is its significance are questions which need answer. In literal sense, as defined in Blacks' Law Dictionery, “A letter of intent is customarly employed to reduce to writing a preliminary understanding of parties who intend to enter into contract, or who intend to take some other action”.

Chitty on Contract (twenty-sixth Edn) para 116 on page 114 describes ‘letter of intent’ as under:—

Letter of intent: There is as yet no clear authority on the legal effect of the practice whereby the parties to a transaction exchange “letters of intent” on which they act pending the preparation of formal contracts. The terms of such letters may, of course, negative contractual intention. But where this is not the case, it would be open to the courts to hold the parties bound by the terms of such letters, especially if the parties had acted on those terms for a long period of time or if they had expended considerable sums of money in reliance on them……”

In Turriff Construction Ltd. v. Regalia Knitting Mills (1971) 222 E.G 169, letter of intent was subject matter of interpretation and it was held to be collateral contract to pay for the preliminary work. Wilson Smithett & Co (Sugar) Co. v. Bangladesh Sugar Industries Ltd. [1986] 1 Lloyd's Rep.378, letter of intent was held to be having contractual significance.

Principles of English law which is summarised in the judgment of Parker. J in Hatzfeld Wildenburg v. Alexander reported in 1933 P.C 29 also applies in India. Parker, J. stated:

“It appears to be well settled by the authorities that if the documents or letters relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether the execution of the further contract is a condition of term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case there is no enforceable contract either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract. In the latter case there is a binding contract and the reference to the more formal document may be ignored.”

The law as it stands is that a term of a letter of intent may of course negative the contractual intention but it would be open to the courts to hold the parties bound by the terms of such letters, especially if the parties had acted on these terms for a long period of time or if they had expended considerable sums of money in reliance on them.

In this case the applicants have alleged in the plaint that pursuant to the letter of intent dated 10.6.86 the defendants made announcement in press conference in Bombay (India) that the applicants were appointed as new distributors and joint venture partner, the joint venture to be 60% owned by the applicants and 40% owned by the defendants for manufacturing, marketing and servicing NCR products in India. In July, 1986, the defendants also made representation to Dr Sheshagiri, the Addl Secretary to the Govt of India, Department of Electronics in respect of NCR Wellman plan for joint venture. A company by the name of NCR (India) Pvt. Ltd. was incorporated on 31.8.1988 The applicant got the name approved from the Registrar of companies and pending some of the approvals of Govt of India, the promotors share in the company were issued in the name of partners of M/S Crawford Boyley and Co, Solicitors Bomnbay. Three acre plot of land in Electronic city developed by Electronics Development Corporation Ltd at Bangalore was mutually selected and the same was purchased in the name of the applicants, as mutually agreed upon and the plaintiffs paid costs of the land amounting to Rs 5,10,000/-. In pursuance of clause 11 of the agreement dated 10.6.86, the plaintiffs stated distributing the products manufactured by the defendants under the said agreement.

The plaintiffs also entered into confidentiality agreement on 16th June, 1987 with the defendants in terms of clause 13 of the agreement. In pursuance of clause 16, the addititonal terms and conditions relatring to the royalty, user fees etc were discussed which are indicated in the application made to the Govt of India for its approval. The defendant also forwarded to the plaintiff information dated 17.9.87 about the special tools, and equipments which were necessary to assemble and manufacture the products of the defendants in terms of clause 18.

An application for industrial licence for the proposed joint venture was moved by the plaintiff with the Govt of India on 25.11.1986 in pursuance to the said agreement. As desired by the defendant, the plaintiff engaged Indian Research Market Bureau (IMRB) to commence market research and the defendant agreed to bear and pay fifty per cent of the cost which would be adjusted in accordance with equity participation in the joint venture. The plaintiff contributed 50% cost for obtaining such reports.

The plaintiff recruited new staff for joint venture as it was likely that the joint venture would come into being very soon. Training was also given to them at huge expenses. Approval was given by the Govt of India on 26.7.87 and 29.7.87 for foreign collaboration and industrial license for joint venture respectively. The matter was taken up with the Government to reduce the export obligation at the behest of the defendants and after follow up by the applicant the Govt of India vide letter dated April 14, 1988 approved the reduction on export obligation to 10% only.

These allegations based on facts have not been controverted by the defendants meaning thereby on prima facie ground it is apparent that the parties had acted upon the terms of this letter of intent for a long period of time and they had expended considerable sums of money in reliance on them,

The plea of the learned counsel for the defendants that this letter of intent is solely intended to set forth in writing the present mental intentions of the parties hereto as respects the subject matter of the documents and it is not intended to and does not create any legal binding, obligations between the parties as contained in clause 26 of the letter does not hold good in the present circumstances of the case. An agreement is not incomplete merely because further agreement is required. Where there is an informal agreement which expressly requires or envisages the subsequent execution of a formal contract, the legal effect of that prior informal agreement depends on the intention of the parties. They may have entered into a binding provisional agreement, whilst envisaging its subsequent replacedment by a more formal one or they may evince an intention only to be bound on the execution of the formal contract the prior informal agreement being of no legal effect.

At this stage only prima facie nature of the case is to be seen and not to decide the case finally,. On prima facie grounds, the plaintiffs/applicants has a good case inasmuch as they have been able to show that the parties had acted upon the terms of the letter of intent dated 10.6.1986 for a long period of time and they had expended considerable sums of money in reliance on them. The balance of convenience is also in their favour and in case the defendants induct a third party as their joint venture partner/and or associate for manufacturing, marketing and servicing of their products, the plaintiffs are bound to suffer irrepara ble loss and injury.

Under these circumstances, I confirm the order passed by Sat Pal, J. on 26th June, 1992 restraining the defendants from signing any agreement with any other party in India for joint venture/distribution till the disposal of the suit. is confirmed.

This I.A stands disposed of accordingly. Needless to say that this order will not effect the merits of the case and it is based only on prima facie view of the matter,.

To be listed before the Deputy Registrar on 15.12.92 for completion of pleadings admission/denial of documents and thereafter it be listed before the court for framing of issues on 25.1.1993 Written statement be filed within four weeks with advance copy to the opposite counsel who may file replication within 2 weeks thereafter.