Interpreting a Letter of Intent: South Eastern Coalfields v S Kumar Associates AKM [Civil Appeal 4358 of 2016]
The Supreme Court has held that a Letter of Intent (LOI) cannot be construed as a binding contract unless an intention to bind is clear from its terms and the conduct of the parties.
Main Facts
South Eastern Coalfields (SEC) issued a tender for excavation works. This was awarded to S Kumar Associates AKM (AKM) and an LOI was issued. The terms of the tender document and the LOI provided for the completion of certain formalities by AKM and, thereafter, a work order would be issued and the parties would enter into an agreement.
AKM mobilised resources at the site but faced difficulties and was unable to perform the work. SEC issued a notice of termination and awarded the project to a different contractor at a higher price. SEC also issued a recovery notice seeking the difference in price from AKM.
AKM filed a writ petition before the Chhattisgarh High Court to quash the termination and recovery notices. The High Court held that there was no valid contract between the parties as the contract was subject to the completion of certain formalities which were never completed. As there was no contract, there could be no termination and no recovery. SEC appealed to the Supreme Court.
Findings
SEC argued that the requirements under the LOI were not a pre-condition to the execution of the contract, but a "condition subsequent", and by commencing work AKM had accepted that a contract had come into existence such that the absence of a formally executed contract was immaterial. AKM argued that the mere commencement of work does not amount to a binding contract, especially since the terms of the LOI had not been satisfied.
The Supreme Court held that an LOI merely indicates a party's intention to enter into a contract and no binding relationship is concluded by an LOI, unless an unambiguous agreement is clear to see from the terms of the LOI. In order to determine whether a contract had been concluded in this case, reference would need to be made to the terms of the tender document, the LOI and conduct of the parties. Since AKM had not complied with the LOI and the tender document terms, no binding agreement had come into existence. In the material part, the Supreme Court held as follows:
"We would like to state the issue whether a concluded contract had been arrived at inter se the parties is in turn dependent on the terms and conditions of the NIT, the LoI and the conduct of the parties. The judicial views before us leave little doubt over the proposition that an 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. It 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...".
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