India: Binding Nature Of Letter Of Intent – Dependent On Terms And Nature Of Contract

The Supreme Court in its latest judgment of South Eastern Coalfields Ltd. & Ors. v. S. Kumar's Associates AKM (JV)¹ while upholding the principle of law defined in Dresser Rand S.A. v. Bindal Agro Chem Ltd.² ("Dresser Rand") that a Letter of Intent ("LoI") merely indicates a party's intention to enter into a contract with the other party in future, however, considered other aspects which point towards the binding nature of an LoI. The court held that an important aspect to consider in deciding the binding nature of the contract along with the terms of the LoI is also the nature of the contract, time spent by the parties and consideration paid. Interestingly, the Court was also of the view that the landmark judgment of Dresser Rand did not come to the aid of either of the parties in this case. The Supreme Court was hearing a special leave petition arising out of the impugned order of the Division Bench of the Chhattisgarh High Court ("the High Court") in a writ petition filed by the respondent contractor challenging the termination letter and recovery order of the employer appellant.

Facts of the Case –

The appellant, South Eastern Coalfields Ltd., a government company ("the employer appellant"), floated a tender for the work of hiring heavy earth moving machinery and carrying out certain excavation and other works. The period for execution of the contract was a year. The respondent ("the contractor respondent") was the successful bidder and an LoI was issued in its favour. Under the said LoI the respondent contractor was directed to mobilize equipment for executing the work and to commence the work immediately; deposit Performance Security Deposit of 5% of annualized contract amount within 28 days from the date of receipt of the LoI as per the tender document; and sign the Integrity Pact before entering into the agreement in accordance with the tender document. The work order was to be issued and the agreement to be executed at the Area Office and the date of commencement of work was to be intimated to the issuing office and agreement to be concluded within 28 days as per the provisions of the tender document.

The contractor respondent mobilized resources at the site in terms of the LoI and the employer appellant issued a letter of site hand over / acceptance certificate which was also to be the date of commencement of work. The respondent contractor faced certain difficulties and the work could not be continued and the contractual relationship between the parties deteriorated. The appellant employer alleged breach of contract issued a show cause as to why penal action could not be initiated for termination, blacklisting of the respondent contractor and award of execution of work in favour of another contractor at the cost of and risk of the respondent contractor. During the ensuing correspondence between the parties, it was pointed out that the respondent contractor had not furnished the required performance bank guarantee. The respondent contractor objected to the imposition of differential cost for award to work to another contractor in terms of clause 9.0 of the General Terms & Conditions of the Notice Inviting Tenders ("NIT"). It was the respondent's case that General Terms & Conditions were never part of the NIT but form the part of the contract which was never executed inter se the parties.

The respondent contractor challenged the termination of the contract and recovery of the differential value of contract. The High Court opined that "there was no subsisting contract inter se the parties to attract the general terms and conditions as applicable to the contract" as it was subject to completion of certain formalities by the respondent, which were never completed and the consequence was that the appellant was within their rights to cancel the award of work and forfeit the bid security. The appellant employer was not able to recover the differential contract value and thus the special leave petition before the Supreme Court.

Submissions of the Appellant Employer

The appellant employer argued that the requirements of bank guarantee and signing the Integrity were "condition subsequent" and not "condition precedent" to the contract.  It also argued that execution of work (mobilization and part excavation) for certain period of time amounts to acceptance of the award of the work by the respondent contractor. Absence of formal execution of the contract is immaterial for the claims of the appellant employer. The appellant employer relied on the cases of Jawahar Lal Burman v. Union of India³ ("Jawahar Lal Burman") and Dresser Rand. In Jawahar Lal Burman, in the relevant letter issued by the awarding party calling for security deposit, it was expressly stated that "the contract is concluded by this acceptance and formal acceptance of tender will follow immediately on receipt of treasury receipt." The Court held the condition of security deposit was condition subsequent as it was clearly stated that the contract was concluded by its acceptance, which was unconditional and in consonance with Section 7 of the Indian Contract Act 1872, which requires the acceptance of an offer to be absolute and unqualified and not conditional. In Dresser Rand the contract was to come into force upon receipt of the LoI by the supplier.

Submissions of the Respondent Contractor

The respondent contractor relied upon Rajasthan Coop. Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service (P) Ltd.,⁴ discussed in Dresser Rand, in which LoI was held to amount to only an intention to enter into a contract and the contract would come into existence after all other formalities are completed in that regard. Several clauses of the NIT and LoI were referred to and in absence of bank guarantee and Integrity Pact and work order no contract could have come into existence between the parties.

Court's Opinion

The supreme Court was of the view that no concluded contract had been arrived at inter se the parties in view of the fact that none of the mandates required to be fulfilled as per the letter of award were fulfilled, except that mobilization of equipment at site, handing over of site and fixation of commencement date of work. The question was whether mobilization at site by the respondent would amount to a concluding contract inter se the parties. In the Court's opinion the answer was in the negative. It was held –

Regarding Jawahar Lal Burman the court opined the same, since the contract there was clearly stated to be concluded by the acceptance of the documents and formal acceptance of tender was to follow immediately on receipt of treasury receipt.

The Court interestingly observed that what was also relevant to decide binding nature of LoI apart from the terms of the same was the nature of the Contract. While in Jawahar Lal Burman the contract involved immediate requirement of coconut oil and failure to deposit the security amount would lead to breach of the contract, the consequence in the present contract was only forfeiture of the security amount and cancellation of the award and not the contract.

It was also immaterial that the respondent contractor could not continue the work out of its own making. It had also not claimed any amount for the work done. Thus, neither of the cases of Jawahar Lal Burman and Dresser Rand came to be the aide of either of the parties. The appeal was accordingly dismissed.

Remarks

Although the judgment has reiterated the long held legal position with respect to binding nature of the LoI, it being that the same is dependent on the terms of the LoI, the Supreme Court in the present case looked at the additional aspects of nature of the contract and the work actually carried out under the LoI and time spent by the contractor on the same.  Referring to the case of Dresser Rand, the Court also observed that a letter of intent may be construed as a letter of acceptance if such intention is evident from its terms. Where a contract involves detailed procedure, an 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 drawn up later. This may be construed as a concluded contract between the parties subject to other terms of the said letter.  

Footnotes

1 2021 SCC OnLine SC 486

2 (2006) 1 SCC 751

3 1962 AIR SC 378

4 2021 SCC OnLine SC 486

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com