LAW OF CONTRACT –I

MOOT PROBLEM (JAN.-MAY, 2020)

MOSAIC EATERY LTD V.S. ARUN

Arun runs a fast food outlet under a franchise agreement with a firm called Credibility Groups. The
franchise agreement is about to come to an end, and Arun approaches a representative of Mosaic
Eatery Ltd, the rival of Credibility Groups, with a view to reaching a new franchise agreement, for a
three year period, with Mosaic Eatery. Mosaic Eatery’s representative, Naresh, tells Arun that
Mosaic Eatery Ltd would like to have an outlet in the area, and Arun and Naresh commence
negotiations. When the negotiations are nearing completion, but before the parties have reached
complete agreement, Credibility Groups asks Arun if he will agree to renew his franchise contract
with them. When Arun tells Naresh of this, Naresh advises Arun that Mosaic Eatery Ltd are
committed to the prospective contract with Arun, and that they will sign a contract “as soon as the
technicalities are sorted out”. Reassured by this, Arun informs Credibility Groups that he does not
wish to renew his contract with them. Credibility Groups then grants a franchise to another outlet,
“Six Sense”, in the same area as that of Arun. A week later, Naresh tells Arun that Mosaic Eatery Ltd
have changed their minds, and no longer want to grant Arun a franchise.

If Arun had operated to be a Mosaic Eatery Ltd franchisee for three years, it is estimated that he
would have made a profit of Rs. 500,000. If he had remained with Credibility Groups, he would have
made about Rs 300,000. Operating independently, he will make only Rs. 70,000 net profit.
Confidently expecting a contract with Mosaic Eatery Ltd, Arun has spent Rs.10,000 on new logos for
his shop which are of no use now on Mosaic Eatery Ltd declining the contract.

Arun concedes that his conversation with Naresh did not in itself give rise to a contract between Arun
and Mosaic Eatery Ltd. Nevertheless, he sues Mosaic Eatety Ltd, claiming that because of his
gentlemanly reliance – at lest on a legitimate expectation - on the promise of Naresh (a) Mosaic
Eatery Ltd is now estopped from denying the franchise or (b) Mosaic Eatery Ltd’s promise is
otherwise actionable at common law. D. Maheshwari J. finds in favour of Arun, relying on Walton
Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, and awards him damages of Rs. 350, 000. The
High Court dismisses Mosaic Eatery Ltd’s appeal. Mosaic Eatery now appeal to the Supreme Court
on the grounds that:

1. Arun cannot rely on the doctrine of estoppel, because (a) there was no pre-existing contractual
relationship between Mosaic Eatry Ltd and Arun, and (b) estoppel can only be used as a
shield, and not as a sword; and
2. Arun’s calculations of damages are all wrong. He appears to have suffered no loss beyond Rs.
10, 000 but even if Mosaic Eatery are liable in damages to Arun, the damages awarded should
compensate Arun for Rs.70,000, viz the reduction in profit caused by his withdrawal from the
agreement with Credibility Groups, plus the Rs. 10, 000 incurred in expenses, and not his
expectation of interest of Rs 350, 000.
A proposal, when accepted, becomes a promise 1 and Every promise and every set of

1. promises, forming the consideration for each other, is an agreement 2. In present case
the defendant approaches a representative of Mosaic Eatery Ltd with a view to reaching a
new franchise agreement, for a three year period, with Mosaic Eatery 3 this forms a valid
offer or valid proposal moreover Naresh, tells defendant that Mosaic Eatery Ltd would like to
have an outlet in the area, and they commence negotiations 4 this forms implied acceptance
and thus they are stopped from denying it. Pre-Contract negotiations are considered as the
real intention of the parties.
2. The principles on which the doctrine of promissory estoppels is based are justice and good
conscience. It was evolved by equity to prevent injustice. The fundamental proposition of
promissory estoppel is that when one party with the intention of creating legal relationship
makes a promise with another party and that party acts on it, that promise should be
binding for the party who is making it. It will not be allowed to go back from its words.
Because reverting from the words will be against equity. In present case the representative
of the Mosaic Eatery that is Naresh advised the defendant that Mosaic Eatery Ltd are
committed to the prospective contract with the defendant, and that they will sign a contract
“as soon as the technicalities are sorted out”, which means that there was a intention of
creating a legal relationship and a promise was made to the defendant and he had acted on

1
Sec 2(b) of The Indian Contract Act,1872
2
Sec 2(e) of the Indian Contract Act, 1872
3
Facts
4
Ibid
the same by informing Credibility Groups that he does not wish to renew his contract with
them as he was reassured by the advice given by the representative of Mosaic Eatery.