Business Laws

‘LoI not a contractual relationship’

Vasanth Rajasekaran | Updated on September 19, 2021

It is common in complex projects of large proportions that a letter of intent is awarded to have the contractors moving   -  Getty Images/iStockphoto

Pre-conditions for bringing a contract to life must be ensured, fulfilled properly

In a recent decision in South Eastern Coalfields Ltd. & Ors. Vs M/s. S. Kumar’s Associates AKM (JV)1, the Supreme Court held that mere issuance of a Letter of Intent (LoI) would not create a binding contractual relationship amongst the parties.

The Apex Court observed that where the mandatory obligations to bring the contract to life were not performed by a party, the letter of intent would not bind them. The present article briefly examines the findings of the Supreme Court.

A LoI was issued to the respondents (AKM) on October 5, 2009, awarding the contract for the work. The LoI required the respondent to mobilise equipment and commence the work immediately and further sign an integrity pact. The respondent under the LoI was also called upon to deposit a performance security deposit for a sum total of 5 per cent of annualised contract amount within 28 days from the date of receipt of the LoI.

The Respondent, in pursuance of the LoI, mobilised its resources and began the work after having received a letter of site handover from the company. Soon thereafter, the work had to be suspended for reasons beyond the control of the respondent. On December 9, 2009, the appellants issued a letter alleging breach of contract and rules and regulations applicable by the respondent. Thereafter, the work was awarded to another contractor at a higher price at the cost of the respondent.

Writ petition

Therefore, appellants issued a letter seeking an amount of ₹78.07 lakh to the respondent. The respondent filed a writ petition under Articles 226 and 227 of the Constitution of India seeking quashing of the termination letter and the recovery letter. The Division Bench of the Chhattisgarh High Court opined that there was no subsisting contract inter se the parties.

The High Court opined that there could not be a valid contract amongst the parties as it was subject to the completion of certain formalities by the respondent, which were never completed, i.e. furnishing of performance security. Consequently, the appellant was within its rights to cancel the award of work and forfeit only the bid security. Aggrieved by the decision of the High Court, the appellant filed a Special Leave Petition before the Supreme Court.

‘Negative’

The Supreme Court held that it could not be said that a concluded contract had been arrived at by the parties. It was observed that none of the mandates required to bring the contract to life was fulfilled except that the respondent mobilised its equipment. The respondent neither submitted the performance security deposit nor did it sign the Integrity Pact.

Thus, the moot point in the instant matter was whether the mobilisation of equipment at site would amount to concluding the contract inter se the parties. The Apex Court held that the answer would be in the negative.

The Supreme Court while coming to this conclusion relied upon the decision in Dresser Rand S.A. Vs Bindal Agro Chem wherein it was held that a LoI merely indicates a party’s intention to enter into a contract with other party in future and is not intended to bind either party ultimately to enter into a contract.

It is common in complex projects of large proportions that a LoI is awarded to have the contractors moving. However, the instant matter narrates a cautionary tale to such contractors.

It should be ensured that the pre-conditions for bringing a contract to life are fulfilled properly. Moreover, where letters of intent are issued to parties, it would be prudent to examine the terms to determine whether a binding contractual relationship is established or not.

(The author is a lawyer with Phoenix Legal, a law firm)

Published on September 19, 2021

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