Letter of Intent merely indicates parties’ intention to enter into a contract in future; no binding relationship at this stage: Supreme Court

Read Judgement: SOUTH EASTERN COALFIELDS LTD. & ORS v. M/s. S. KUMAR’s ASSOCIATES AKM (JV)

Chahat Varma

New Delhi, July 27, 2021: The Supreme Court has held that a Letter of Intent (LoI) merely indicates the parties’ intention to enter into a contract with the other party in future and no binding relationship between the parties emerges at this stage. 

The Division Bench comprising of Justice Sanjay Kishan Kaul and Justice Hemant Gupta, while dismissing an appeal filed by South Eastern Coalfields Ltd, held that there was no concluded contract between the parties. Upholding a Chhattisgarh High Court order, the apex court stated that all that the appellants can do is to forfeit the bid security amount. 

In this case, the appellant – South Eastern Coalfields Ltd. – had floated a tender for the work of hiring of HEMM and allied equipments 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. Pursuant to this, the respondent was awarded the contract for a total work of Rs.387.40 lakh. 

Thereafter, due to some difficulties, the respondent suspended the work for reasons beyond their control. The appellants alleged breach of terms of contract and later, awarded the work to another contractor at a higher price and issued a letter seeking an amount of Rs.78,07,573/- being the differential in the contract value between the respondent and the new contractor.

A writ petition was filed by the respondent seeking quashing of the termination letter and the recovery order. The Division Bench of the Chhattisgarh High Court held that there is no valid contract inter se the parties as it was subject to completion of certain formalities by the respondent, which were never completed, and the appellant was within their rights to cancel the award of work and forfeit the bid security. Thus, 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. In the final order it was mentioned that after deducting the bid security amount, the balance amount out of Rs.10 lakh was to be refunded to the respondent.

Against the said order, the appellant filed a SLP before the Apex Court. 

The Division Bench opined that it is no doubt possible to construe a letter of intent as a binding contract, however, the intention to do so must be clear and unambiguous. The Bench observed that in the said case, none of the mandates were fulfilled except that the respondent mobilized the equipment at site, no amount was paid for the work done, the respondent failed to comply with their obligations under the LoI, the Integrity Pact was never signed and no work order was issued on account of failure to execute the contract.

Observing thus, the Bench directed to deduct the bid security amount out of the sum of Rs.10 lakh and to refund the balance amount to the respondent.