India: Binding Value Of Letter Of Intent – An Analysis

INTRODUCTION

It is not uncommon in commercial contracts involving detailed procedures, that in order to save time, a Letter of Intent (hereinafter, LoI) communicating the acceptance of the offer is issued asking the contractor to start the work with a stipulation that the detailed contract would be executed later. Though such a letter may be termed as an LoI, it may amount to acceptance of the offer resulting in a concluded contract between the parties.

Generally, LoI is not a binding contract between the parties, and it merely indicates the intention and willingness of parties to enter into the contract in the future, however, in some cases it can be considered similar to a binding contract and may be construed as a letter of acceptance if such intention is evident from its unambiguous terms and conduct of the parties.

LoI is awarded prior to the execution of a formal contract between the parties. For instance, in the tendering process, an LoI is awarded to the lowest bidder informing them about their selection for the award of the contract and describes the preliminary understanding of the parties who intend to enter into a contract in the future.

THE BONE OF CONTENTION

A contractor would be in a dilemma if it has started incurring expenses towards the completion of the project from the award of LoI but before the execution of the final contract. If the authority cancels the LoI during this intermediate phase, then the question that arises is who is liable to bear such expenses? The recovery of expenses can be undertaken only when the LoI was binding on parties in the first instance. There are two likely scenarios which could arise in this situation, firstly that the terms of the LoI were clear that the same is a binding document and secondly, there might be a situation where there is no term in the LoI which can show that it was meant to be a binding document.

In such circumstances, even the recourse to arbitration is generally not available to the parties as the tendering documents are in the draft stage and not signed and executed, suggesting that there is no contract between the parties. The parties then only have the recourse of approaching the courts under section 11 of the Arbitration and Conciliation Act, 1996 for the appointment of an Arbitrator which translates to higher legal expenses and consumption of valuable time in proceedings. There is a wide and sometimes even conflicting jurisprudence on the issue of the binding value of LoIs which is discussed by the authors in this article.

EXISTING JURISPRUDENCE ON THE ISSUE

LOI WHEN NOT BINDING

In Rajasthan Cooperative Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service Pvt. Ltd. and Ors,¹ an LoI was issued by the Appellant in favour of the Respondent appointing them as the selling agent for marketing dairy products. However, certain disputes arose between the parties and the contract was not signed as on the agreed date and the appellant cancelled the LoI as the same was conditional on the Respondent adhering to certain conditions precedents to entering into the contract. Considering the circumstances leading to the cancellation of the LoI, the Hon'ble Supreme Court held that if the conduct of the Respondent did not inspire confidence in the Appellant, they were well within their rights to decline entering into any legal relationship with the Respondent. It was held that the LoI merely expressed an intention to enter into a contract and given that the stipulations of the same were not met, there was no binding relationship between the parties at such stage.

Further, in Dresser Rand SA v. Bindal Agro Chem Ltd,² the Hon'ble Supreme Court referred to Rajasthan Cooperative Dairy Federation Ltd (supra) to note that a LoI merely indicates a party's intention to enter into a contract with the other party in the future and is not aimed at binding either party to ultimately enter into a contract.

However, in paragraph 40, the Apex Court observed that an LoI can undoubtedly be construed as a letter of acceptance in case the intention to that effect is evident from its terms. Importantly, the bench has further noted that in contracts involving detailed procedure, a LoI communicating the acceptance of the offer is issued directly to the contractors to start the work with a stipulation that the detailed contract would be drawn up later. The same is done to save time and on account of urgency to commence work. Therefore, the case essentially sets the tone of the dicta that albeit LoI is termed as a letter of intent, it can "amount to acceptance of the offer resulting in a concluded contract between the parties....is a matter to be decided with reference to the terms of the letter".³

In South Eastern Coalfields Ltd. and Ors. v. M/S S Kumar's Associates AKM (JV),⁴ the Hon'ble Supreme Court concluded that there was no concluded contract inter se between the parties. Considering the mandates of the LoI requiring the Respondent to adhere to the stipulations therein, the Court noted that except for mobilizing equipment at site the Respondent did not fulfil the remaining mandates. The Performance Security Deposit and Integrity Pact was not submitted and as a consequence, work order was not issued and there was no contract, therefore. The Court further held that mobilization at the site would not amount to a concluded contract between the parties. Reference was made to Dresser Rand (supra) and Rajasthan Coop.

Dairy Federation (supra) to note that LoI merely indicates a party's intention to enter a contract with the other party in the future. There is no binding relationship between the parties at this stage and the totality of the facts and circumstances must be considered. However, most importantly, the Apex Court further noted that LoI will amount to a binding contract if such an intention is evident from its terms and such intention must be clear and unambiguous.

LOI WHEN BINDING

The hon'ble apex court in Mihan India Ltd. v. GMR Airports Ltd. and Ors.⁵ has said that "we do not have any hesitation to hold that letter dated 07.03.2019 is a LoA after selecting the GAL as a highest bidder and it acquired the status of the concessionaire. It was only the Concession Agreement required to be executed and there was no fault on the part of the GAL in complying with the provisions of RFP."

The courts have emphasised more on the conduct of the parties then the bare provisions of the Letter of Intent. The Hon'ble High Court of Bombay has also clarified in case of Proactive In and Out Advertising Pvt . Ltd. v. Pune Mahanagar Parivahan Mahamandal Ltd. and Ors.⁶ that once an LoI is issued and accepted by the Contractor/Supplier and has promised the Authority of furnishing bank guarantee, it is not open for the Authority issuing the LoI to cancel the tender and issue fresh tender.

The position of the Courts has been described best by the Hon'ble Delhi High Court in case of York Tech Pvt. Ltd. v. Delhi Development Authority⁷ that if an LOI issued to the contractor communicates clear and unequivocal acceptance/confirmation of bid submitted by Contractor, though it may be termed as a letter of intent, it may amount to acceptance of the offer resulting in a concluded contract between the parties. But the question whether the Letter of Intent is merely an expression of an intention to place an order in future or whether it is a final acceptance of the offer thereby leading to a contract, is a matter that must be decided with reference to the terms of the letter.

ANALYSIS AND CONCLUSION

The recent decision of the Hon'ble Delhi High Court in York tech Pvt. Ltd. (supra) comes as a respite to contractors who act on the terms of the LoIs issued to them. It has been held that once there is an unequivocal acceptance of the bid, the same cannot be rejected. An LoI amounts to a clear and unequivocal acceptance or confirmation of the bid submitted and can result into a concluded contract between the parties if the same is clear from the terms of the LoI. The bench relied on paragraph 40 of Dresser Rand (supra) to stress that where the language of a LoI does not negate contractual intention, it is open for the courts to hold that the parties are bound by the document and particularly be inclined to hold the same where parties have acted on the document for a long period of time or have incurred considerable expenses relying on the same.

LoIs are a tool through which the Employer and the Contractor can create a contractual relationship before the actual execution of the contract as there are a lot of formalities which have to be completed before an Engineering, Procurement and Construction (EPC) or Concession Agreement can finally be executed. Some of such formalities cannot be completed before the selection of the lowest bidder. For example, for seeking Environment Clearances the type of technology/machinery used by the bidder would be relevant and the Clearance can only be granted after the identification of selected bidder.

In such circumstances, it is needed that the courts interpret LoI as binding documents as the lowest bidder starts incurring costs in expectation of profits after execution of contract in terms of the projected profit margins. A longer period between the issuance of LoI and formal execution of the contract translates to higher costs to the contractor/supplier. Often the Tender is cancelled by the issuing authority due to commercial inconvenience or the availability of other options to the authority at more favourable rates. The contractors in such cases have no recourse to claim the loss of capital and expected profits due to lack of a formal contract. As such an LoI becomes a tool of abuse in the hands of the issuing authority leaving the contractor without any effective remedy.

Finance is the lifeblood of every organisation and therefore, it is advisable to parties entering into contracts and particularly, draftsmen to ensure that there are defined contours and terms in the LoI stipulating execution of works if the parties intend to enter into a future contract and that the same is binding before such incurring expenses. The recent decisions of courts highlight that it is not an absolute rule that LoI's are merely reflective of an intention to enter into a future contract, and they can culminate into binding contractual obligations when the intent of parties is clear from the terms of the document.

Footnotes

1. Rajasthan Cooperative Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service Pvt. Ltd. and Ors., (1996) 10 SCC 405.

2. Dresser Rand SA v. Bindal Agro Chem Ltd, (2006) 1 SCC 751.

3 .Id. at 40.

4. South Eastern Coalfields Ltd. and Ors. v. M/S S Kumar's Associates AKM (JV), (2021) 9 SCC 166.

5. Mihan India Ltd. v. GMR Airports Ltd. and Ors, 2022 SCC OnLine SC 574.

6. Proactive In and Out Advertising Pvt. Ltd. v. Pune Mahanagar Parivahan Mahamandal Ltd. and Ors, 2018 SCC OnLine Bom 1283.

7. York Tech Pvt. Ltd. v. Delhi Development Authority, 2022 SCC OnLine Del 3564

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.