India: Letter Of Intent Does Not Create A Binding Contractual Relationship: Supreme Court Of India

In a recent decision in South Eastern Coalfields Ltd. & Ors. v. M/s. S. Kumar's Associates AKM (JV)¹, the Hon'ble Supreme Court held that mere issuance of a letter of intent would not create a binding contractual relationship amongst the parties. The Apex Court observed that where the mandatory obligations to bring the contract to life were not performed by a party, the letter of intent would not bind them. The present article briefly examines the findings of the Hon'ble Supreme Court.

Brief Facts

In the instant matter, the first appellant (Company) floated a tender for some works. The Company received bids for the tender and respondent emerged as the successful bidder. Accordingly, a Letter of Intent (LoI) was issued on 5 October 2009 awarding the contract for the work. The LoI required the respondent to mobilize equipment and commence the work immediately and further sign an integrity pact (Integrity Pact). The respondent under the LoI was also called upon to deposit performance security deposit for a sum total of 5% (five percent) of annualized contract amount within 28 days from the date of receipt of the LoI.

The Respondent in pursuance of the LoI mobilized its resources and began the work after having received a letter of site handover from the Company. Soon thereafter, the work had to suspended for reasons beyond the control of the respondent. On 9 December 2009, the appellants issued a letter alleging breach of contract and rules and regulations applicable by the respondent. Thereafter the work was awarded to another contractor at a higher price at the cost of the respondent.

Therefore, appellants issued a letter seeking an amount of INR 78,07,573 (Rupees Seventy-Eight Lakhs Seven Thousand Five Hundred and Seventy-Three) to the respondent. The respondent filed a writ petition under Articles 226 and 227 of the Constitution of India seeking quashing of the termination letter and the recovery letter. The Division Bench of the Chhattisgarh High Court (High Court) opined that there was no subsisting contract inter se the parties. The High Court opined that there could not be a valid contract amongst the parties as it was subject to the completion of certain formalities by the respondent, which were never completed, i.e., furnishing of performance security. Consequently, the appellant was within its rights to cancel the award of work and forfeit only the bid security. Aggrieved by the decision of the High Court, the appellant filed a Special Leave Petition before the Hon'ble Supreme Court.

Held

The Hon'ble Supreme Court upon the consideration of the facts of the matter came to the conclusion that it could not be said that a concluded contract had been arrived at by the parties. It was observed that none of the mandates required to bring the contract to life were fulfilled except that the respondent mobilized its equipment. The respondent neither submitted the performance security deposit nor did it sign the Integrity Pact. Thus, the moot point in the instant matter was whether the mobilization of equipment at site would amount to concluding the contract inter se the parties. The Apex Court held that the answer would be in the negative.

The Hon'ble Supreme Court while coming to this conclusion relied upon the decision in Dresser Rand S.A. v. Bindal Agro Chem Ltd. & Anr.² wherein it was held that a letter of intent merely indicates a party's intention to enter into a contract with other party in future and is not intended to bind either party ultimately to enter into a contract. The Apex Court further relied on the decision in Rajasthan Coop. Diary Federation Ltd. v. Maha Laxmi Mingrate Marketing Service (P) Ltd.³ to add a caveat that it could not be disputed that a letter of intent could be construed as a letter of acceptance if such intention was evident from its terms. Thus, the Hon'ble Supreme Court held that the judicial views left little doubt over the moot proposition that no binding relation was created between the parties in the instant case. Accordingly, the appeal was dismissed and the decision of the High Court was upheld.

Comments

It is common in complex projects of large proportions that a letter of intent is awarded to have the contractors moving. However, the instant matter narrates a cautionary tale to such contractors. It should be ensured that the pre-conditions for bringing a contract to life are fulfilled properly. Moreover, where letters of intent are issued to parties, it would be prudent to examine the terms to determine whether a binding contractual relationship is established or not.

* The author would like to acknowledge the research and assistance rendered by Harshvardhan Korada.

Footnotes

1.South Eastern Coalfields Ltd. & Ors. v. M/s S. Kumar's Associates AKM (JV), Civil Appeal No. 4358 of 2016.

2. Dresser Rand S.A. v. Bindal Agro Chem Ltd. & Anr., 2006 1 SCC 751.

3. Rajasthan Coop. Diary Federation Ltd. v. Maha Laxmi Mingrate Marketing Service (P) Ltd., 1996 10 SCC 405.

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