Letter of intent is not a binding contract unless such an intention is evident from its terms

In the matter of South Eastern Coalfields Limited vs M/s S. Kumar Asoociates AKM (JV) (LL 2021 SC 325) decided by the Supreme Court of India on 23.06.2021

FACTS: The appellants, a government company registered under the Companies Act, invited tender for the work of “Hiring of HEMM and allied equipments including digging machines fitted suitable slump breaker for excavating overburden (including drilling in all kinds of strata/overburden) loading into tipples, transportation, unloading the extra waited material and silt, dumping dozing scrapping/removal bands preparation/maintenance of haul road water sprinkling and spreading of material at the site shown and as per direction of the management/Engineer In Charge of Patch- D, Mahan I OCM of Bhatgaon Area” on 23.06.2009. A Letter of Intent (‘LoI’) was issued bearing No.2415 dated 05.10.2009 awarding the contract for a total work of Rs.387.40 lakh to the respondents. Notably, the LoI stated as under:

“h. The respondent was called upon to deposit Performance Security Deposit for a sum total to 5% of annualized contract amount within 28 days from the date of receipt of the LoI as per the provisions of the tender document.

The respondent apparently faced difficulties soon after beginning work and the letter dated 05.12.2009 of the respondent records the fact that the truck mounted drill machine employed by the respondent suffered a major breakdown. The work, had to be suspended for reasons beyond the control of the respondent. Subsequently, numerous show-cause notices were issued to the respondents regarding various matters including the respondent’s non submission of security amount, and how their non performance would invite termination of contract. On 15.12.2009, another notice was issued to the respondent that the appellants were left with no option except to terminate the work awarded to the respondent and get it executed by other contractor at the risk and cost of the respondent in terms of clause 9.0 of the General Terms & Conditions of the Notice Inviting Tenders (‘NIT’). On 23.12.2009, notice of termination was issued. Thereafter the work was awarded to another contractor at a higher price and on account thereof a letter dated 16.07.2010 was issued by the appellants to the respondent seeking an amount of Rs.78,07,573/- being the differential in the contract value between the respondent and the new contractor. The present respondents moved the Chhattisgarh High court’s writ jurisdiction, which in its judgment held that “only the forfeiture of bid security was upheld while the endeavour of the appellants to recover the additional amount in award of contract to another contractor as compared to the respondent was held not recoverable”. Hence, the present appellants preferred a Special Leave petition.

HELD: The Apex Court observed and held that a LoI merely indicates a party’s intention to enter into a contract with the other party in future. No binding relationship between the parties at this stage emerges and the totality of the circumstances have to be considered in each case. Further it was observed that there is no doubt possible to construe a letter of intent as a binding contract if such an intention is evident from its terms. But then the intention to do so must be clear and unambiguous as it takes a deviation from how normally a letter of intent has to be understood. NIT Clause 29.2 clearly stipulates that the notification of award will constitute the formation of the contract “subject only” to furnishing of the Performance Security/Security Deposit. Thus, it was clearly put as a pre-condition and that too to be done within 28 days following notification of the award. The failure of the successful bidder to comply with the requirement “shall constitute sufficient ground for cancellation of the award work and forfeiture of the bid security” as per clause 30.2. The petition was accordingly dismissed with the observations that no concluded contract had been arrived at inter se by the parties.