Letter Of Intent Is Not A Binding Contract Unless Such An Intention Is Evident From Its Terms: Supreme Court

 A Letter of Intent is not a binding contract unless such an intention is evident from its terms, the Supreme Court observed while dismissing an appeal filed by South Eastern Coalfields Ltd, a Government company.

The bench comprising Justices Sanjay Kishan Kaul and Hemant Gupta observed that such intention must be clear and unambiguous as LoI normally indicates a party's intention to enter into a contract with the other party in future.

The case arises out of a Letter of Intent issued by the company to the respondent firm while awarding the contract for a total work of Rs.387.40 lakhs. The firm filed writ petition before the High Court seeking quashing of the termination letter and the recovery order issued to them. The High Court held that there was no valid contract inter se the parties as it was subject to completion of certain formalities by the respondent, which were never completed, i.e. furnishing of the performance security; and the consequence was that the appellant was within their rights to cancel the award of work and forfeit the bid security. Thus, only the forfeiture of bid security was upheld while the endeavour of the appellants to recover the additional amount in award of contract to another contractor as compared to the respondent was held not recoverable, it was held.

Upholding the High Court judgment, the Apex court bench observed that no concluded contract had been arrived at inter se the parties. Mobilization at site by the  would not amount to a concluding contract inter se the parties, the bench added.

"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. ", the bench observed.

All it can do is to forfeit the bid security amount , the Court said while dismissing the appeal. 

Case: South Eastern Coalfields Ltd vs. S. Kumar's Associates AKM (JV)
Coram: Justices Sanjay Kishan Kaul and Hemant Gupta
Citation: LL 2021 SC 325

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