Mere General Reference To Tender Documents Does Not Incorporate An Arbitration Clause Into The Contract

Introduction

In a recent ruling¹, the Supreme Court examined whether a Letter of Intent (LOI), read together with tender documents containing an arbitration clause, was sufficient to constitute a concluded contract and a valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996. The appeal arose from an order of the Bombay High Court appointing a sole arbitrator under Section 11 of the Act. The Supreme Court analysed the legal effect of the LOI, the scope of judicial scrutiny at the referral stage under Section 11, and the principles governing incorporation of arbitration clauses by reference.

Brief Facts of the Case

The Maharashtra State Electricity Distribution Company Limited (MSEDCL/ Appellant) floated a tender in August 2021 for civil and interior renovation works across various Consumer Facilitation Centres in Maharashtra. The Respondent participated in the tender process by submitting the required bid and earnest money deposit. Subsequently, MSEDCL issued a Letter of Intent (LOI) dated 16 November 2022 accepting the respondent’s bid and entrusting the work to it. Pursuant to the LOI, the Respondent furnished the requisite security deposit through bank guarantees and complied with subsequent requests relating to the bank guarantee documentation. However, despite repeated representations by the Respondent, MSEDCL neither issued the work order nor handed over the project sites for commencement of the work.

After waiting for a considerable period, the Respondent terminated the arrangement in August 2024, alleging failure on the part of MSEDCL to enable commencement of the work. The Respondent thereafter invoked Clause 23 of the tender documents, seeking reference of disputes to arbitration and claiming compensation. MSEDCL rejected the invocation on the ground that neither the tender documents nor the LOI resulted in a concluded contract or a valid arbitration agreement. Although MSEDCL subsequently cancelled the tender and refunded the earnest money deposit and security deposit, the Respondent approached the Bombay High Court under Section 11 of the Arbitration and Conciliation Act, 1996. The High Court appointed a sole arbitrator, leading MSEDCL to challenge the order before the Supreme Court.

Contentions of the Parties

The appellants contended that no concluded contract ever came into existence between the parties and, consequently, no arbitration agreement satisfying the requirements of Section 7 of the Arbitration and Conciliation Act, 1996 existed. They argued that the LOI was merely a preliminary communication expressing an intention to enter into a contract in the future and was expressly contingent upon issuance of a detailed work order and execution of a formal agreement. It was further submitted that even if the LOI were treated as creating a legal relationship, its general reference to the tender documents was insufficient to incorporate the arbitration clause contained therein. According to the MSEDCL/Appellant, incorporation of an arbitration clause under Section 7 requires a specific reference demonstrating an intention to make the arbitration clause part of the contract.

The Respondent, on the other hand, argued that the High Court’s order appointing an arbitrator was justified because the existence of an arbitration agreement could be gathered from the combined reading of the tender documents, the Respondent's bid and the LOI accepting the bid. It was submitted that the Respondent had acted upon the LOI by furnishing and repeatedly renewing bank guarantees and that the correspondence exchanged between the parties established a concluded contractual relationship. The Respondent further contended that under Section 7(4)(b) of the Arbitration Act, a formally executed contract is not necessary for the existence of an arbitration agreement and that issues concerning formation of the contract should be left for determination by the arbitral tribunal under Section 16 of the Act in accordance with the principle of Kompetenz-Kompetenz.

Analysis of the Court

The Supreme Court first reiterated that after the insertion of Section 11(6A) and the subsequent judicial developments, the scope of inquiry at the stage of appointment of an arbitrator is confined to examining the prima facie existence of an arbitration agreement. The Court observed that while Courts should ordinarily lean in favour of arbitration, they are nevertheless required to ascertain whether such an arbitration agreement exists on a prima facie basis. Examining the present case, the Court found that the High Court had incorrectly recorded that MSEDCL had not disputed the existence of an arbitration agreement. On the contrary, the correspondence placed on record clearly demonstrated that MSEDCL had consistently maintained that there was no concluded contract and, therefore, no arbitration agreement between the parties.

On the merits, the Court held that the LOI in the present case was merely a promise to make a promise and not a binding contract in itself. The tender documents contemplated that a formal agreement would be executed with the successful bidder and that a detailed work order would subsequently be issued. Neither of these steps ever occurred. The Court observed that the submission and renewal of bank guarantees constituted only compliance with preliminary requirements and did not create contractual obligations or a binding legal relationship. Further, the Court held that the LOI merely made a general reference to the tender documents and did not specifically incorporate the arbitration clause contained therein. Since, Section 7(5) requires a specific incorporation of an arbitration clause contained in another document, the Court concluded that no arbitration agreement existed between the parties. Accordingly, the Supreme Court set aside the High Court’s order appointing the arbitrator and allowed the appeal.

Conclusion

The Supreme Court reaffirmed that while judicial interference at the Section 11 stage must remain minimal, Courts are nevertheless required to satisfy themselves regarding the prima facie existence of an arbitration agreement before referring disputes to arbitration. The decision clarifies that a Letter of Intent (LOI), unless intended to create a binding contractual relationship, does not by itself amount to a concluded contract, and that a general reference to tender documents is insufficient to incorporate an arbitration clause without a specific indication to that effect. The judgment therefore reinforces the distinction between preliminary contractual negotiations and enforceable arbitration agreements under the Arbitration and Conciliation Act, 1996.

Footnote

^{1 Maharashtra State Electricity Distribution Company Limited (MSEDCL) & Ors. V/s R Z Malpani [SLP (C) No. 36889 OF 2025]}

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