Case at a Glance
Hindustan Petroleum advertised a retail-outlet dealership on a stretch of road in Ghazipur, selected the petitioner by draw of lots and issued a Letter of Intent requiring him to develop the site. After he filled the land and built walls, HPCL cancelled the location and the advertisement in 2021, because the stretch had been declared a national highway before the advertisement. HPCL said an LOI creates no binding right. The Allahabad High Court held that the fault lay with the authorities, applied legitimate expectation, and awarded ₹15,78,486 as compensation for his admitted investment.
HPCL’s advertisement of 25 November 2018 invited applications for a retail-outlet dealership on SH-99 between Mahavir Mandir and Bhadaura stand, District Ghazipur. The petitioner applied, was selected in a draw of lots on 1 February 2019, and received a Letter of Intent dated 2 August 2019. The LOI required the site to be developed up to road level with a retaining and compound wall before the dealership agreement. He obtained NOCs from the PWD, the Chief Fire Officer and others, and invested in land filling, walls and licences.
However, by notification of 6 March 2018 under Section 2(2) of the National Highways Act, 1956, the stretch had already been declared part of a national highway; the respondents did not dispute this. On 11 March 2021 HPCL cancelled the location and the advertisement. Relying on a clause allowing cancellation without reasons and on Boby Singh v. Hindustan Petroleum Corporation Ltd., HPCL argued that an LOI is only a ‘promise in embryo’ and creates no binding obligation.
The Key Question Before the Court
When a public sector oil company cancels a dealership after issuing an LOI and inducing investment, for reasons of its own fault, must it compensate the selected applicant?
An LOI Is Not a Contract, but Reliance on It Must Be Protected
The Court accepted that an LOI is not a firm offer, but treated it as a promise that an agreement would follow once its conditions were met. Applying Sethi Auto Service Station v. Delhi Development Authority, (2008) 10 SC CK 0091, it held that the doctrine of legitimate expectation applied because the petitioner relied on HPCL’s representation and suffered detriment. The advertisement for a location already declared a national highway was beyond HPCL’s purview, and this “cannot be a fault of the incumbent who takes part in the process of allotment.” Hence “it shall not be just for the petitioner to bear his own losses”, and “the said incumbent has to be compensated.”
For the power to award compensation under Article 226, the Court relied on Chairman, Railway Board v. Chandrima Das, (2000) 01 SC CK 0176 and on State of Rajasthan v. Vidyawati for vicarious liability, holding that compensation must be proportionate to the loss. It also noted that the petitioner lost the opportunity to pursue other livelihood. The petitioner filed a breakdown of expenses from 1 February 2019 to 11 March 2021 totalling ₹15,78,486, with photographs; HPCL’s counter-affidavit did not specifically deny the investment. The Court treated the amount as admitted.
What the Court Actually Held
- An LOI is not a concluded contract, but it is a promise on which the selected applicant may legitimately rely when asked to invest.
- Where cancellation results from the authority’s own fault, such as advertising a location already on a national highway, the applicant should not bear the loss.
- HPCL must pay ₹15,78,486 as compensation within one month of receiving a certified copy of the judgment.
- On default, simple interest at 8% per annum applies until payment; the writ petition was allowed.
Why This Judgment Matters
- It protects applicants who invest on the strength of an LOI from losses caused by the authority’s own mistakes.
- It applies legitimate expectation to public sector dealership allotments.
- It shows that unrebutted affidavits of expenditure can found a compensation award in writ jurisdiction.
What Should Advocates Take Away From the Judgment?
For Dealership Applicants
- Keep bills, photographs and an itemised statement of every expense incurred after an LOI.
- A clause allowing cancellation without reasons does not necessarily shield the company from compensating for its own fault.
For Counsel
- Plead legitimate expectation with Sethi Auto Service Station, and Article 226 compensation with Chandrima Das.
- Put the investment figure on affidavit; a general denial by the respondent may lead the court to treat it as admitted.
Key Takeaways
- An LOI is a promise, not a contract, but reliance on it counts.
- HPCL’s own error caused the cancellation.
- ₹15,78,486 must be paid within one month.
- 8% interest applies on default.
Frequently Asked Questions
Does a petrol pump LOI give a right to the dealership?
Not by itself. The Court accepted that an LOI is not a concluded contract, but held that an applicant who invested on its basis can be compensated when the company cancels for its own fault.
Why was HPCL held responsible?
Because the location it advertised had already been declared part of a national highway before the advertisement, so the defect lay with the authorities, not the applicant.
How was the ₹15.78 lakh worked out?
The petitioner filed an itemised statement of expenses from 1 February 2019 to 11 March 2021 with photographs, and HPCL did not specifically deny it, so the Court treated it as admitted.
Conclusion
The Court did not revive the dealership, which could not be set up on a national highway location, but it refused to let the applicant absorb the cost of HPCL’s mistake.
Practical takeaway: Applicants who spend money on the basis of an LOI from a public body should document every expense; if the allotment is cancelled for the authority’s fault, a writ claim for compensation can succeed.
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