Cessation of LOI due to Change in the Business Structure Without Prior Permission is Valid

FACTS:

In the case of Md. Musir Ahmed v. Indian Oil Corporation. Ltd [WPA 17594] decided on August 16, 2023, by the High Court of Calcutta, the first petitioner was selected for the distributorship of LPG cylinders by the Indian Oil Corporation through a draw of lots, and the Letter of Intent (LOI) was also issued in his favour on April 24, 2019. After the issue of the Letter of Intent, the first petitioner entered into a partnership with the second petitioner to run the LPG distributorship and the partnership deed between the petitioners was executed on February 9, 2021, without obtaining the requisite approval from the Indian Oil Corporation. This was in direct violation of Clause 5.4 of the Letter of Intent which stated that prior approval was required for any change in the nature of the distributorship from that which existed at the time of application. Consequent to the withdrawal of the LOI via a rejection of the petitioner’s representation made on July 19, 2022, the petitioners filed a writ petition. In the petition, a Co-ordinate Bench directed the Indian Oil Corporation to consider the representation of the petitioners and to pass a reasoned order after giving the petitioners an opportunity to be heard. Following this order, the Indian Oil Corporation rejected the representation of the petitioners after due consideration and recalled the LOI. Aggrieved by this rejection the petitioners filed the present petition before the High Court of Calcutta.

ISSUE:

Whether the change in the distributorship structure from a proprietorship to a partnership without prior approval as stipulated in the LOI is a mere irregularity or a substantial illegality leading to the cessation of the LOI?

JUDGEMENT:

In deciding the matter, the Court noted that under Clause 5.4 of the LOI, it was explicitly stated that the petitioner was not permitted to induct anyone as their partner or make a change in the constitution of the proposed distributorship without obtaining prior approval of the Corporation. The Court also observed that the restrictive clause in the LOI stipulates that if the distributor wanted to change the nature of his business from proprietorship to partnership, prior approval of the Corporation was necessary. Thus, the partnership deed which was executed before even making a representation of the same to the Corporation, was in clear violation of this Clause.

Further, the Co-ordinate Bench directed that the decision taken by the Corporation should be grounded in the existing policy of the Indian Oil Corporation which dealt with the reconstitution of partnership deeds. This existing policy is what is laid down in the conditions of the Letter of Intent and therefore the decision of the Indian Oil Corporation in rejecting the representation of the petitioners was carried out in the manner specified by the order.

Thus, the High Court of Calcutta held that the change in the nature of distributorship from a proprietorship to a partnership without obtaining prior approval from the Indian Oil Corporation was a violation of the terms laid down in the LOI and therefore, the cessation of the LOI was valid.