The right of first refusal cannot be exercised after making a counter-offer to the seller: Delhi High Court

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the Delhi High Court ruled that a party cannot demand its “right of first refusal” after having made a counter-offer to the seller.

The single bench of Judge Anup Jairam Bhambhani held that when the party who has obtained the right of first refusal (RoFR) makes a counter-offer, the seller becomes authorized to sell the goods in question to third parties.

The Court further held that the court, in the exercise of its powers under section 9 of the A&C Act, cannot grant interim measures of the nature of specific enforcement when it comes to undoubtedly and obviously of the essential claim and relief that the Claimant will seek in the arbitral proceedings.

The Court also observed that the court would not grant binding injunctions at the interlocutory stage when contested rival arguments have yet to be decided.

Facts

The parties entered into a framework gas sales contract dated 30.05.2001. Simultaneously, Gujarat Gas Ltd (claimant) entered into a gas sales agreement (Gujarat Gas GSC) with Vedanta (respondent #1) for the purchase of gas. Similarly, Apraava Energy Pvt. ltd. (Respondent #4) also entered into a similar agreement (Apraava Energy GSC) with Respondent #1.

The MGSC, which was a three-party agreement in the nature of a framework contract that served as the single operational interface for the nomination and delivery of gas sold to Claimant under the Gujarat Gas GSC and Respondent No. 4 under the part of the Apraava Energy GSC; the intention and purpose being that upon the termination of Apraava Energy, the Petitioner would be entitled to acquire all of the gas allocated to Respondent no. 4 by means of a “step-in” exercising its right of first refusal under Article 9(b) of the MGSC.

A dispute arose between the parties when respondent no. 1 terminated the contract with respondent no. 4 and launched a call for tenders to sell the said volume of gas to third parties. The petitioner applied to the High Court for interim relief under section 9 of the A&C Act, asking to restrain respondent 1 from allocating the gas to third parties.

The dispute of the parties

The applicant filed the application for interim relief on the following grounds:

  • That upon termination of the GSC Apraava Energy, it was incumbent upon Respondent 1 to inform the Petitioner so that he could “step in” to acquire the gas under the agreement by exercising his right of first refusal . However, the Respondent breached its contractual obligation.
  • Respondent #1 further violated its contractual obligation by launching a tender for the allocation of gas to third parties on which the petitioner had the right of first refusal, thus depriving him of his contractual right.
  • Respondent #1 breached Section 9(b) of the MGSC which entitled the petitioner to receive the entire volume of gas intended for sale to Respondent #1. 4 under the Apraava Energy GSC if the agreement has been terminated.
  • The email of 20.02.2022 from respondent no. 1 did not comply with the requirement of Article 9 of the MGSC because it only stated that the parties were only discussing the termination of the agreement and that Respondent 1 was required to inform the Petitioner of the final termination of the agreement to trigger the process of gas acquisition by the petitioner.
  • The petitioner was receiving an additional volume of gas available with respondent no. 1 under the MCSG after respondent no. 4 having stopped the purchase.
  • However, later, the Respondent refused to supply the additional volume of gas to the Applicant on the grounds that the Applicant had not given his acceptance within two months of the communication issued notifying the termination of the agreement with the Respondent. no. 4.
  • Section 11(i) of the MGSC and Section 17.10 of the Gujarat Gas GSC oblige the parties to continue to perform their obligations under the contract notwithstanding any dispute which may have arisen between them. Therefore, an interim order should be issued enjoining the defendant not. 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 #1 duly informed the petitioner of his intention to terminate the Apraava Engercy GSC and invited the petitioner to exercise his right to take the entire volume of gas at the price of Gujarat Gas GSC.
  • However, the Applicant did not accept the Respondent’s offer and made a counter-offer to purchase the gas at a lower price. Therefore, the counter-offer amounted to a rejection and a denial of the right to first rejection under Article 9(b) of the MSCG.
  • The petitioner himself violates Article 9(d), which provides for a two-month period to exercise the right of first refusal, as well as Article 9(f)(ii), which provides that if the petitioner intends to purchase the entire quantity of gas attributed to Respondent 4, this would be at the price of Gujarat Gas GSC.
  • The additional gas supplied to the petitioner was purely ad hoc basis that had nothing to do with the termination of the agreement with Respondent no. 4.
  • Respondent #1 had sent a reminder email to the Petitioner to exercise his right of first refusal, but the Petitioner did not respond to said communication.
  • The relief sought by the petitioner cannot be granted under Article 9 of the request for interim measures, as it would amount to the specific performance of a contract.

Analysis by the Court

The Court observed that under Section 9(b), Respondent no. 4 is obliged to inform the petitioner of his intention to terminate the agreement with respondent no. 4 and the petitioner has the right to purchase the quantity which would become unused at the end of the Apraava Energy GSC provided that the petitioner accepts the offer two months after this notification.

The Court held that respondent no. 1 had duly informed the Petitioner of its intention to terminate the GSC Apraava Energy, however, in response to the said communication, the Respondent agreed to purchase the reserve quantity at a lower price, therefore, the Petitioner did not issue full acceptance but made a counter-offer, therefore the petitioner cannot be said to have accepted the offer for the alternative gas. In addition, respondent no. 1 had sent a reminder email to confirm the supply of additional gas to which the petitioner did not respond.

The Court considered that the additional gas supplied to the claimant was purely ad hoc to dispose of the reserve gas for the time being, which is apparent from the correspondence exchanged between the parties. Moreover, the argument that the petitioner was receiving the additional gas under s. 9(b) is contrary to his argument that respondent no. 1 did not notify him of the termination of the agreement with respondent no. 4.

The Court held that the respondent ordering no. 1 to continue to supply the additional gas to Claimant under the MGSC would amount to ordering Respondent to specifically perform the contract and this will no doubt be the essential claim and remedy that Claimant will seek in the arbitral proceedings.

The Court further held that relief from an order enjoining Respondent no. 1 to sell the volume of unused gas to a third party can only be by issuing a binding injunction enjoining him to perform the obligations that the applicant wishes to impose on him, which he contests. Courts have historically frowned upon the issuance of such binding injunctions at the interlocutory stage when disputed rival claims have yet to be decided.

Accordingly, the Court dismissed the application.

Deal Title: Gujarat Gas Ltd. vs. Vedanta Ltd and Ors., OMP(I)(COMM) 125 of 2022

Date: 12.05.2022

Counsel for the applicant: Mr. Parag P. Tripathi, lead lawyer with Mr. Piyush Joshi, Mr. Srinivasan Ramaswamy, Ms. Vatsla Bhatia and Ms. Manali Joshi, lawyers.

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

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