Supreme Court on Binding Nature of a Letter of Intent

 

INTRODUCTION

 

On today’s show, we will talk about the case of South Eastern Coalfields Ltd. and Others v. S. Kumar's Associates AKM (JV), 2021 SCC OnLine SC 486, wherein the Court discussed whether a Letter of Intent executed between the parties to enter into a Contract could be construed as binding or not. 

FACTS

 

The brief facts of the case are that a Works Contract relating to excavation and mining, was sought to be entered into between the Appellant and the Respondent, in furtherance to which a Letter of Intent dated 05.10.2009 was executed between the parties.

 

Subsequently, on 28.10.2009, the Respondent got all its equipments and machineries at the Works Site and commenced its work. However, on 05.12.2009, while performing the work, the Truck mounted Drill Machine of the Respondent suffered a major breakdown and the work got suspended for reasons beyond the control of the Respondent. The Respondent sought three months’ time for purchase of new machines. But, on 09.12.2009, a Show Cause Notice was issued by the Appellant to Respondent alleging breach of contract.

 

Thereafter multiple correspondences and notices were exchanged between the parties and on 16.07.2010, the Appellant issued a Notice to the Respondent seeking compensation of Rupees Seventy-Eight Lakhs being the differential in the contract value between the respondent and the new contractor. This Notice seeking compensation was challenged by the Respondent before the High Court of Chhattisgarh and the High Court of Chhattisgarh passed the impugned Order dated 07.11.2012 holding that there was no valid contract between parties and only forfeiture of bid security was permitted but the additional amount in award of contract to another contractor as compared to the respondent was held to be not recoverable. Hence, the Appellant appealed against the Order dated 07.11.2012 before the Hon’ble Supreme Court.

 

Now, let us understand the observations by the Supreme Court.

 

OBSERVATIONS BY THE COURT

Firstly, the Supreme Court observed that the Letter of Intent between the parties merely indicated the intention to enter into a contract with each other at a future point of time and a Letter of Intent could be construed as binding if such an unambiguous intention is evident from its terms.

 

Secondly, the Court noted that in the present case, the period of execution of contract was one year whereas the Respondent worked only for a month and no money was paid for the work already done. According to the Court, the Respondent clearly failed to comply with its obligations stipulated under the Letter of Intent. However, neither any Performance Security Deposit was furnished by the Respondent, nor any formal Work Order was issued by the Appellant in favour of the Respondent. So, whether there exists a valid contract or not in the present case remains doubtful.

 

Thirdly, the Court perused Clause 29.2 of the NIT (Notice Inviting Tender) that stipulated that “the notification of award will constitute the formation of the contract subject only to furnishing of the Performance Security/Security Deposit.” The Court also perused Clause (ix) of the NIT that explained what constitutes a contract. According to Clause (ix), the Contract “includes the NIT, the acceptance of the tender, the formal agreement to be executed between the parties post contractor furnishing all the documents and the bid security amount.” Thus, only a Letter of Intent is not sufficient be relied upon and the Contract must be wholly executed in order to allege its breach. 

 

HELD BY THE COURT

Therefore, upon cumulative consideration, the Court was of the view that the High Court of Chhattisgarh that the only thing that the Appellant can do is to forfeit the bid security amount and refund the balance amount to the Respondent. Any recovery of differential value of the contract awarded to the Respondent and to the new Contractor was held to be not recoverable. Hence, the appeal preferred by the Appellant was dismissed.

 

Those were the observations by the Court. So, what are my concluding remarks?

 

CONCLUDING REMARKS

I concur with the interpretation of the Hon’ble Supreme Court only in cases where a Letter of Intent mentions in unambiguous terms that it would be binding, can it be contended that there has been breach of a contract. A Letter of Intent is what it is. It merely signifies the intent of the parties to enter into an agreement and it is akin to an acceptance of an invitation to offer and not the offer itself.