INTRODUCTION
The hon'ble Supreme Court of India in its judgment titled South Eastern Coalfields Ltd. and Ors. Vs. S. Kumar's Associates AKM (JV)1 examined a challenge against the judgment dated 07.11.2012 (impugned judgment) passed by the Chhattisgarh High Court, whereby the Division Bench comprising of Justice Sanjay Kishan Kaul and Justice Hemant Gupta (as His Lordships then were) delved upon the important issue of whether a letter of intent amounts to a valid contract.
BRIEF FACTS
South Eastern Coalfields Ltd. (Appellant No. 1), a government company, floated a tender for carrying out certain mining works on 23.06.2009. S. Kumar's Associates AKM (JV) (Respondent) was the successful bidder and a Letter of Intent (hereinafter referred to as LoI) was issued to it on 05.10.2009 for a total work of Rs. 387.40 lakhs. In terms of the said LoI, the Respondent was to mobilize equipment for executing works and commence the works immediately. The other terms included deposit of Performance Security within 28 days from the receipt of the LoI, sign the integrity pact and sign the agreement within 28 days as per the tender document.
The Respondent mobilized its resources at site and on 28.10.2009, the Appellant No. 1 issued a letter of site handover/acceptance certificate (letter), which was to be considered as date of commencement of works. However, even though the works commenced, the same could not be completed as some machinery suffered a breakdown and work had to be suspended for reasons beyond the control of the Respondent. The endeavor to rectify the position or arrange alternative machinery did not work out and the letter stated that the purchase of new machines was expected only after about three months. On 09.12.2009, the Appellants issued a communication alleging breach of terms of contract by the Respondent and asked Respondent to show cause as to why the work should not be terminated and their company not to be blacklisted. After exchange of multiple communications, the Appellants intimated the Respondent that they had to terminate the contract and get it executed by other contractor at the risk and cost of the Respondent in terms of the general terms and conditions of the notice inviting tenders (NIT). The Respondent objected to the invocation of the said terms for the work to be carried out at their risk and cost since the said terms and conditions were a part of the contract which was never executed inter se the parties. However, the Appellants terminated the contract on 15.04.2010 and awarded it to another contractor and further sought the cost difference in contract value from the Respondent.
The Respondent filed a writ petition under Article 226 & 227 of the Constitution of India seeking quashing of the final termination letter dated 15.04.2010 and the Appellant's letter seeking recovery of the differential amounts. The Appellants filed their counter affidavit. Vide the impugned judgment, the division bench of the Chhattisgarh High Court observed that there was no contract executed between the parties so as to attract the general terms and conditions. After examining the terms of the NIT, the hon'ble High Court observed that the execution of a valid contract required completion of certain formalities by the Respondent which were never completed. Hence, the Appellant was justified in cancelling the award of work, however, the recovery of additional amount in award of contract to another contractor as compared to the Respondent was held not recoverable. The High Court had at the stage of admission and issuance of notice directed the Respondent to deposit a sum of Rs.10 lakh and subject to the same, the recovery of amounts from the Respondent was stayed. The impugned judgment stated that the balance amount after deduction of the bid security amount was to be refunded to the Respondent.
The Appellant filed the present special leave petition against the said order and notice was issued on 08.02.2013. Furthermore, the refund of the balance amount was stayed till further orders.
ARGUMENTS OF PARTIES
It was the case of the Appellants that the requirement of depositing performance security and signing of the integrity pack were not conditions precedent for execution of contract but conditions subsequent thereto. Therefore, by starting the works after mobilization of resources immediately after issuance of LoI, the Respondent had accepted the award of work and thus, the absence of formal execution of the contract did not make a difference to the claim of the Appellants arising from the breach of contract. The learned counsel pleaded that the distinction between condition precedent and condition subsequent had not been appreciated by the hon'ble High Court and he relied upon the judgments of Jawahar Lal Burman v. Union of India2 and Dresser Rand S.A. v. Bindal Agro Chem Ltd. and Anr.3
Per contra, the counsel for the Respondent firstly discussed relevant paragraphs of the judgment of Dresser Rand S.A4 referring to the meaning of LoI and thereafter relied upon another judgment of Bhushan Power & Steel Ltd. v. State of Odisha5 to argue that the nomenclature of the letter would not be the determinative factor but the substantive nature of the letter would determine whether it can be treated as an LoI, which as per the legal dictionary means a preliminary understanding between the parties who intend to make a contract or join together in another action. Furthermore, the counsel relied upon various clauses of the NIT to substantiate his argument that after acceptance of tender and on execution of contract, work order had to be issued which had also not been issued as the preliminaries were not complied with. He referred to the LoI to show that nothing was done in pursuance thereto except mobilization of the resources and commencement of the work, and that by itself could not be said to be a concluded contract. In fact, seeing the ground realities, the Respondent found that it was not feasible to execute the contract and, thus, walked away from it, the consequence of which could only be the forfeiture of the bid security amount as directed by the impugned order. Moreover, the Respondent had not been paid by the Appellant for whatever work was executed.
ISSUE IN QUESTION
- Whether a LoI amounts to a valid concluded contract?
OBSERVATIONS AND CONCLUSIONS OF THE SUPREME COURT
On consideration of the facts and circumstances, the court opined that no concluded contract had been arrived at between the parties. The court further observed that none of the mandates were fulfilled except that the Respondent mobilized the equipment at site, handing over of the site and the date of commencement of work was fixed vide the letter dated 28.10.2009 and the Respondent neither submitted the Performance Security Deposit nor signed the Integrity Pact. Consequently, the work order was also not issued nor was the contract executed. The court observed, "Thus, the moot point would be whether mobilization at site by the Respondent would amount to a concluding contract inter se the parties. The answer to the same would be in the negative."
The court further went on to observe that the issue whether a concluded contract had been arrived at inter se the parties was dependent on the terms and conditions of the NIT, the LoI and the conduct of the parties and that in normal parlance, an LoI merely indicated a party's intention to enter into a contract with the other party in future. It was no doubt possible to construe a letter of intent as a binding contract if such an intention was evident from its terms. But then the intention to do so ought to be clear and unambiguous as it took a deviation from how normally a letter of intent had to be understood.
The court further discussed and distinguished the case laws relied upon by the Appellants and observed that in both those cases, it was unequivocally mentioned about the event/time of conclusion of contract. However, in the case at hand, the Respondent had worked at the site for a little over the month, facing certain difficulties and it was immaterial whether the same was of the own making of the Respondent or attributable to the Appellants. No amount was paid for the work done. The Respondent failed to comply with their obligations under the LoI. It was not merely a case of the non-furnishing of Performance Security Deposit but even the Integrity Pact was never signed, nor work order issued on account of failure to execute the contract. Hence, none of the judgments relied upon by the Appellants were applicable to the case at hand.
On the basis of the aforementioned observations, the court concluded that the only remedy available to the Appellants was to forfeit the bid security amount and also directed to deduct the same out of the sum deposited by the Respondent and refund the balance amount to the Respondent.
ANALYSIS AND CONCLUSION
Quite often, the LoI is awarded to contractors so that they begin with mobilization of assets on site, especially in complex and high-stake projects. However, the above judgment comes as a precautionary warning for such contractors. Contractors must be very careful regarding the terms and conditions which are required to be fulfilled prior to executing a valid contract. Moreover, the parties should be prudent enough to examine whether as per the terms and conditions, a binding contractual relationship has been established or not. This will not only save time and cost in terms of unwarranted litigations but also speed up the process of implementation and execution of such projects.
Footnotes
1. Civil Appeal No. 4358 of 2016, decided on 23.07.2021
2. (1962) 3 SCR 769
3. (2006) 1 SCC 751
4. Id.
5. (2017) 2 SCC 125
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