In Dresser Rand S.A.Supra, the contract was to come into force
upon receipt of the LoI by the supplier. The Supreme Court
recognized the well settled principles of law that a LoI merely
indicates party’s intention to enter into a contract with the
other party in future and is not intended to bind either party
ultimately to enter into a contract. In this behalf observations
in an earlier judgment in Rajasthan Coop. Dairy Federation
Ltd. v. Maha Laxmi Mingrate Marketing Service (P) Ltd. (1996) 10 SCC 405
were referred to at page 773 para 39, which reads as under:
“The letter of intent merely expressed an intention to enter
into a contract. ….There was no binding legal relationship
between the appellant and respondent No.1 at this stage
and the appellant was entitled to look at the totality of
circumstances in deciding whether to enter into a binding
contract with respondent No.1 or not.”
This was, however, followed by a caveat that it could also not
be disputed that a letter of intent may be construed as a letter
of acceptance if such intention is evident from its terms. It is
not uncommon in contracts involving detailed procedure, that
in order to save time, a letter of intent communicating the
acceptance of the offer is issued asking the contractor to start
the work with a stipulation that the detailed contract would be
drawn up later. Though such a letter may be termed as a letter
of intent, it may amount to acceptance of the offer resulting in
a concluded contract between the parties. This is a matter to
be decided with “reference to the terms of the letter.” It was
further observed that where the parties to a transaction
exchanged letters of intent, the terms of such letters may have
negative contractual intention but where the language does not
have negative contractual intention, it is open to the courts to
hold that the parties are bound by the document and the courts
would be inclined to do so where the parties have acted on the
document for a long period of time or have expended
considerable sums of money in reliance on it. {Para 11}
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.
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.4358 OF 2016
SOUTH EASTERN COALFIELDS LTD. Vs M/s. S. KUMAR’s ASSOCIATES AKM (JV)
AUTHOR: SANJAY KISHAN KAUL, J.
Dated: July 23, 2021.
1. South Eastern Coalfields Ltd., appellant no.1 is a Government
company registered under the Companies Act, 1956. The
appellant no.1 floated a tender for the work of “Hiring of HEMM
and allied equipments including digging machines fitted suitable
slump breaker for excavating overburden (including drilling in all
kinds of strata/overburden) loading into tipples, transportation,
unloading the extra waited material and silt, dumping dozing
scrapping/removal bands preparation/maintenance of haul road
water sprinkling and spreading of material at the site shown and
as per direction of the management/Engineer In Charge of Patch-
D, Mahan I OCM of Bhatgaon Area” on 23.06.2009. Bids were
received and respondent was the successful bidder. In view
thereof a Letter of Intent (‘LoI’) was issued bearing No.2415
dated 05.10.2009 awarding the contract for a total work of
Rs.387.40 lakh. The LoI stated as under:
i. A direction was made to the respondents to mobilize
equipment for executing the work to handle minimum
allotted Cu.m. per day and “commence the work
immediately.” Towards the said objective the
respondent was directed to report to the Chief General
Manager, Bhatgaon Area for “immediate
commencement of work.”
ii. The respondent was called upon to deposit Performance
Security Deposit for a sum total to 5% of annualized
contract amount within 28 days from the date of receipt
of the LoI as per the provisions of the tender document.
iii. Sign the Integrity Pact before entering into the
agreement in accordance with the tender document.
iv. The work order would be issued and the agreement
would be executed at the Area Office.
v. The date of commencement of work may be intimated
to the issuing office and agreement may be concluded
within 28 days as per the provisions of the tender
document.
2. The respondent, in pursuance of the LoI, mobilized resources
at site and a measurement team was sent by appellant no.1 as
intimated vide letter dated 09.10.2009. On 28.10.2009, the
appellant issued a letter of site handover/acceptance
certificate, which was to be taken as the date of
commencement of the work.
3. The respondent apparently faced difficulties soon thereafter
and the letter dated 05.12.2009 of the respondent records that
though the work was started in all earnest and considerable
quantity of overburden had been removed, the truck mounted
drill machine employed by the respondent suffered a major
breakdown. The work, thus, had to be suspended for reasons
beyond the control of the respondent. The endeavour to
rectify the position or arrange alternative machinery did not
work out and the letter states that the purchase of new
machines was expected only after about three months. The
contractual relationship apparently deteriorated as on
09.12.2009, the appellants issued a letter alleging breach of
terms of contract and rules and regulations applicable by the
respondent. The appellant further asked the respondent to
show cause as to why penal action be not initiated of – (a)
termination of work; (b) blacklisting of the respondent
company; and (c) award of execution of work to other
contractor at the cost and risk of the respondent.
4. Communications in this behalf continued to be exchanged and
vide letter dated 12.12.2009, the appellants brought to the
notice of the respondents that they failed to submit the
performance security deposit which was required to be
submitted within 28 days from the date of the receipt of the
LoI as per the terms of the tender. Another show cause notice
was issued on 15.12.2009 intimating to the respondent that the
appellants were left with no option except to terminate the
work awarded to the respondent and get it executed by other
contractor at the risk and cost of the respondent in terms of
clause 9.0 of the General Terms & Conditions of the Notice
Inviting Tenders (‘NIT’) giving a ten days’ time to the
respondent to respond. It appears that there was no response
and on 23.12.2009, once again, a notice of termination was
issued. The respondent objected to the same, stating that the
work could not be executed at their risk and cost as the
General Terms & Conditions were never part of the NIT but
form the part of the contract which was never executed inter
se the parties. In substance, the respondent objected to the
invocation of the clause for the work to be carried out at their
risk and cost. The appellant could not rely on clause 9.0 of the
General Terms & Conditions. The final termination of work
was carried out vide letter dated 15.04.2010.
5. It appears that thereafter the work was awarded to another
contractor at a higher price and on account thereof a letter
dated 16.07.2010 was issued by the appellants to the
respondent seeking an amount of Rs.78,07,573/- being the
differential in the contract value between the respondent and
the new contractor.
6. The respondent filed a writ petition under Articles 226 & 227
of the Constitution of India seeking quashing of the
termination letter dated 15.04.2010 the recovery order dated
16.07.2010. The writ petition was contested by the appellants
who filed their counter affidavit. In terms of the impugned
judgment dated 07.11.2012, the Division Bench of the
Chhattisgarh High Court opined that there was no subsisting
contract inter se the parties to attract the general terms and
conditions as applicable to the contract. Various clauses of the
NIT were referred to and it was opined that there could not be
a 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. We
may notice at the stage of admission of the writ petition and
issuing notice, the respondent was directed to deposit a sum of
Rs.10 lakh vide order dated 04.08.2010 and subject to the
same the endeavour to recover any amount from the
respondent was stayed. Thus, in the final order it was
mentioned that after deducting the bid security amount, the
balance amount out of Rs.10 lakh was to be refunded to the
respondent.
7. The appellant filed Special Leave Petition against the said
order and notice was issued on 08.02.2013. The direction to
refund the balance amount of Rs.10 lakh after deducting the
bid security amount was stayed till further orders. Leave was
granted on 13.04.2016.
Submissions of the Appellants
8. The substratum of the case of the appellants is based on a plea
that the requirement of deposit of performance security limited
to 5% of annualized contract amount within 28 days as well as
the requirement to sign the Integrity Pact before entering into
the agreement was not a pre-condition to the execution of the
agreement but a “condition subsequent”. By starting the
execution of the work from 28.10.2009, learned counsel
submitted, there was acceptance of the award of the work by
the respondent. In fact, the respondent vide letter dated
05.12.2009 acknowledged that they had removed considerable
amount of overburden and, thus, it is their own case that they
had carried out substantive work after mobilization of the
resources immediately after the issuance of LoI. Thus, the
absence of formal execution of the contract did not make a
difference to the claim of the appellants arising from the
breach of contract.
9. The distinction between a ‘condition precedent’ and a
‘condition subsequent’ was pleaded to be the crux of the issue
and had not been appreciated by the High Court. To support
his contention learned counsel referred to two judgments: (a)
Jawahar Lal Burman v. Union of India1 and (b) Dresser
Rand S.A. v. Bindal Agro Chem Ltd. & Anr.2
10. In Jawahar Lal Burman3 case the factual matrix was that the
tender was accepted by the respondent therein, which was
alleged to have concluded the contract. The respondent’s case
therein was that the contract was governed by the general
conditions of contract which included an arbitration
agreement. The Supreme Court inter alia examined whether
there was a concluded contract between the parties or not. The
tender submitted was on a condition that on the acceptance of
the tender, the contractor shall deposit the security deposit, at
the option of the Secretary, Department of Supply, within the
1 (1962) 3 SCR 769
2 (2006) 1 SCC 751
3 Supra
period specified by him. A further condition stipulated that if,
on being called upon to deposit the said security, the
contractor fails to provide security within the period, such
failure would constitute a breach of contract entitling the
opposite party to make other arrangements at the risk and
acceptance of the contractor. The contractor sought to argue
that the acceptance letter changed the pre-existing position and
made the security deposit a condition precedent to the
acceptance itself and, thus, there was no concluded contract.
We may notice that in the relevant letter issued by the
awarding party in this regard, calling upon the security deposit
of 10% to be deposited it was clearly mentioned that “the
contract is concluded by this acceptance and formal
acceptance of tender will follow immediately on receipt of
treasury receipt.” This Court, thus, discussed the ramification
of this sentence vis-à-vis the clause stating “subject to your
depositing 10% as security”. In construing the true effect of
the clause such requirement of deposit of security was held not
to be a condition precedent as the letter, as well as the
conditions of the tender, clearly stated that the contract was
concluded by its acceptance. Section 7 of the Indian Contract
Act, 1872 requires the acceptance of an offer to be absolute
and unqualified and not conditional. In the facts of the case
the acceptance was found to be unconditional and the steps
were taken as the contract was intended to be executed
expeditiously relating to delivery of coconut oil which had to
be supplied within 21 days. The security deposit was, thus,
opined to be a subsequent condition.
11. In Dresser Rand S.A.Supra, the contract was to come into force
upon receipt of the LoI by the supplier. The Supreme Court
recognized the well settled principles of law that a LoI merely
indicates party’s intention to enter into a contract with the
other party in future and is not intended to bind either party
ultimately to enter into a contract. In this behalf observations
in an earlier judgment in Rajasthan Coop. Dairy Federation
Ltd. v. Maha Laxmi Mingrate Marketing Service (P) Ltd. (1996) 10 SCC 405
were referred to at page 773 para 39, which reads as under:
“The letter of intent merely expressed an intention to enter
into a contract. ….There was no binding legal relationship
between the appellant and respondent No.1 at this stage
and the appellant was entitled to look at the totality of
circumstances in deciding whether to enter into a binding
contract with respondent No.1 or not.”
This was, however, followed by a caveat that it could also not
be disputed that a letter of intent may be construed as a letter
of acceptance if such intention is evident from its terms. It is
not uncommon in contracts involving detailed procedure, that
in order to save time, a letter of intent communicating the
acceptance of the offer is issued asking the contractor to start
the work with a stipulation that the detailed contract would be
drawn up later. Though such a letter may be termed as a letter
of intent, it may amount to acceptance of the offer resulting in
a concluded contract between the parties. This is a matter to
be decided with “reference to the terms of the letter.” It was
further observed that where the parties to a transaction
exchanged letters of intent, the terms of such letters may have
negative contractual intention but where the language does not
have negative contractual intention, it is open to the courts to
hold that the parties are bound by the document and the courts
would be inclined to do so where the parties have acted on the
document for a long period of time or have expended
considerable sums of money in reliance on it.
12. The terms of LoI were adverted to, more specifically clause
(L) therein, which stated that “this contract will come into
force upon receipt of this letter of intent by supplier.” In the
different clauses the LoI were referred to as “this order” and
“this contract” and it was, thus, argued to that the LoI be
treated as purchase orders. The Court harmoniously construed
the terms of the LoI to find that the effect of the LoI was that
if the purchase orders were placed and LCs were opened the
supplier was bound to effect supplies within the stipulated
time at the prices stated in the LoI. It was not interpreted as a
work order despite the wording utilized in the LoI.
Submissions of the Respondent
13. Learned counsel for the respondent, on the other hand, first
sought to emphasise the aspect discussed in para 39 of the
judgment in Dresser Rand S.A.6 case, which opined what an
LoI was by referring to the earlier view of this Court in
Rajasthan Coop. Dairy Federation Ltd.7 case. He further
sought to refer the judgment of this Court in Bhushan Power
& Steel Ltd. v. State of Odisha8 and drew our attention to what
an LoI was. The nomenclature of the letter would not be the
6 Supra
7 Supra
8 (2017) 2 SCC 125
determinative factor but the substantive nature of the letter
would determine whether it can be treated as an LoI, which as
per the legal dictionary means a preliminary understanding
between the parties who intend to make a contract or join
together in another action. Some earlier precedents were also
referred to.9 In fact the judgment in Dresser Rand S.A.10 case
was also referred to therein, more specifically paras 39 & 40.
The LoI in question was held not to be a binding contract
more specifically because entering into a lease license with
prospective licensee would require “previous approval” of the
Central Government. The LoI was held to amount to only an
intention to enter into a contract which would take place after
all other formalities are completed.
14. In order to substantiate his pleas, learned counsel for the
respondent referred to various clauses of the NIT and the LoI.
The relevant clauses in the tender document referred to are as
under:
“29. Notification of the award and signing of agreement:
29.1 The bidder, whose bid has been accepted will be
notified of the award by the employer prior to expiration of
9 Rishi Kiran Logistics Private Limited v. Board of Trustees of Kandla Port Trust
and Others (2015) 13 SCC 233
10 (supra)
the bid validity period by cable, telex and facsimile
confirmed by registered letter. This letter (hereinafter and
in Conditions of Contract called the “Letter of
Acceptance”) will state the sum that the Employer will pay
the Contractor in consideration of execution and
completion of the Works by the contractor as prescribed by
the Contract (hereinafter and in the Contract called “the
Contract Price”).
29.2 The notification of award will constitute the
formation of Contract, subject only to the furnishing of a
Performance Security/Security Deposit in accordance with
clause 30.
29.3 The agreement will incorporate all agreements
between the employer and the successful bidder within 28
days following the notification of award along with the
letter of acceptance.
30. Performance Security/Security Deposit
30.1 Security Deposit shall consist of two parts:
a. Performance Security to be submitted at award of
work and
b. Retention Money to be recovered from running bills.
The Security Deposit shall bear no interest.
30.2 The performance Security should be 5% of
annualized value of the contract amount and should be
submitted within 28 days of receipt of LOA by the
successful bidder in any of the form given below:
- A Bank Guarantee in the form given in the bid
document.
- Govt. Securities, FDR or any other form of deposit
stipulated by the owner.
- Demand Draft drawn in favour of the South Eastern
Coal Fields Ltd. on any Schedule Bank payable at its
Branch at……….
The bid security deposit in the form of Bank
Guarantee shall be duly discharged and returned to the
contractor. The bid security deposited in the form of
demand draft shall be adjusted against the initial security
deposit.
If the performance security is provided by the successful
bidder in the form of bank guarantee it shall be issued
either:
a. at bidder’s option by a nationalized/scheduled Indian
bank, or
b. by a foreign bank located in India and acceptable to
the employer,
c. the validity of the bank guarantee shall be for a
period of one year or ninety days beyond the period of
contract, whichever is more.
Failure of the successful bidder to comply with the
requirement as above shall constitute sufficient ground for
cancellation of the award of work and forfeiture of the bid
security.
34. Integrity Pact
SECL has signed MOU with M/s. Transparency
International India for implementation of integrity pact in
contracts for works valued at Rs.1.00 crore and above. The
integrity pact document to be signed by the bidders is
enclosed vide Annexure “D”. Submission of integrity pact
document duly signed, stamped and accepted is mandatory
for this tender and is integral part of the tender document.
In case this is not submitted the tender may be considered
as not substantially responsive and may be rejected.
Section 3: Conditions of contract/General Terms and
Conditions
1. Definition: ix. The “Contract” shall mean the notice
inviting tender, the tender as accepted by the company and
the formal agreement executed between the company and
the contractor together with the documents referred to
therein including general terms and conditions, special
conditions, if any, schedule quantities with rates and
amount, schedule of work.
2.0 Contract Documents
i. Articles of agreement,
ii. Notice inviting tender,
iii. Letter of Acceptance of tender indicating deviations,
if any, from the conditions of contract incorporated in the
bid/tender document issued to the bidder,
iv. Conditions of contract including general terms and
conditions, additional terms and conditions, special
conditions, if any etc. forming part of agreement,
v. Scope of works/Bills of quantities and
vi. Finalised work programme.”
15. Learned counsel laid great emphasis on clause 29.2 aforesaid,
which provided that notification of award will constitute the
formation of contract, “subject only” to the furnishing of a
Performance Security/Security Deposit in accordance with
clause 30. The agreement to be executed was to incorporate
all the terms inter se the parties. The consequence of not
furnishing the security deposit was specified in clause 30.2 at
the end, i.e., it was to constitute sufficient ground for
cancellation of the award work and forfeiture of the bid
security. In terms of clause 34 requiring Integrity Pact
document to be submitted duly signed, the consequence of not
doing so was that the tender was to be considered as not
substantially responsive and may be rejected. Lastly under
Section 3, the Conditions of contract/General Terms and
Conditions where it was defined in clause (ix) that a contract
would mean the NIT and the formal agreement to be executed
between the appellants and the respondent together with the
documents referred to therein indicating the general terms and
conditions, special conditions, if any, schedule quantities with
rates and amount, schedule of work.
16. It was further contended that after acceptance of tender and on
execution of contract, work order had to be issued which had
also not been issued as the preliminaries were not complied
with. The LoI was also referred to in the aforesaid context to
show that nothing was done in pursuance thereto except
mobilization of the resources and commencement of the work,
and that by itself could not be said to be a concluded contract.
In fact, what was submitted by learned counsel for the
respondent was that seeing the ground realities, the respondent
found that it was not feasible to execute the contract and, thus,
walked away from it, the consequence of which could only be
the forfeiture of the bid security amount as directed by the
impugned order, an aspect assailed by the respondent by filing
a cross appeal. The respondent has not been paid by the
appellant for whatever they may have done.
17. A reference was also made to the judgment in State of
Madhya Pradesh And Anr. v. Firm Gobardhan Dass Kailash
Nath11 where in respect of a tender for Government sale initial
deposit of 25% of purchase price was an essential precondition
for acceptance or sanction of tender was not
complied with. It was held that taking into consideration what
was required to enter into a contract, i.e., in writing and in
prescribed form and 25% amount not being deposited, it could
not be said that any concluded contract was arrived at between
the parties.
11 AIR 1973 SC 1164 :: (1973) 1 SCC 668
Conclusion
18. A consideration of the matter in the conspectus of the
aforesaid pleas leads to a conclusion that it cannot be said that
a concluded contract had been arrived at inter se the parties.
19. We have already reproduced aforesaid the terms of the letter of
award and what it mandated the respondent to do. None of the
mandates were fulfilled except that the respondent mobilized
the equipment at site, handing over of the site and the date of
commencement of work was fixed vide letter dated
28.10.2009. Interestingly this letter has been addressed to the
Sub Area Manager of the appellant by the office of the
appellant. The respondent, thus, neither submitted the
Performance Security Deposit nor signed the Integrity Pact.
Consequently, the work order was also not issued nor was the
contract executed. Thus, the moot point would be whether
mobilization at site by the respondent would amount to a
concluding contract inter se the parties. The answer to the
same would be in the negative.
20. 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.12 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. This Court
did consider in Dresser Rand S.A.13 case that there are cases
where a detailed contract is drawn up later on account of
anxiety to start work on an urgent basis. In that case it was
clearly stated that the contract will come into force upon
receipt of letter by the supplier, and yet on a holistic analysis –
it was held that the LoI could not be interpreted as a work
order.
21. Similarly if we construe the documents as discussed in the
12 Dresser Rand S.A. (supra); Rajasthan Coop. Dairy Federation Ltd. (supra)
13 Supra
judgment of this Court in Jawahar Lal Burman14 case it is
unequivocally mentioned that “contract is concluded by this
acceptance and formal acceptance of tender will follow
immediately on receipt of treasury receipt.” Thus, once again,
it has been stipulated as to at what time a contract would stand
concluded even though it was later subject to deposit of the
security amount. It was in these circumstances that the
requirement of security deposit was treated not as a condition
precedent but as a condition subsequent. We have to also
appreciate the nature of contract which was for immediate
requirement of the full quantity of coconut oil to be supplied
within 21 days. It was also explicitly mentioned in the LoI
itself that any failure to deposit the stipulated amount would
be treated as a breach of contact. This is not the case here,
where the consequence was simply forfeiture of the bid
security amount, and cancellation of the ‘award’ and not the
‘contract’.
22. If we compare the aforesaid scenario in the present case, the
period for execution of the contract was one year. The
respondent worked at the site for a little over the month,
14 Supra
facing certain difficulties – it is immaterial whether the same
was of the own making of the respondent or attributable to the
appellants. No amount was paid for the work done. The
respondent failed to comply with their obligations under the
LoI. It is not merely a case of the non-furnishing of
Performance Security Deposit but even the Integrity Pact was
never signed, nor work order issued on account of failure to
execute the contract. We are, thus, of the view that none of the
judgments cited by learned counsel for the appellants would
come to their aid in the contractual situation of the present
case. The judgments referred by learned counsel for the
appellants Jawahar Lal Burman15 case and Dresser Rand
S.A.16 case, if one may say so are not directly supporting either
of the parties but suffice to say that to determine the issue
what has to be seen are the relevant clauses of the NIT and the
LoI. On having discussed the non-compliance by the
respondent of the terms of the LoI we turn to the NIT. Clause
29.2 clearly stipulates that the notification of award will
constitute the formation of the contract “subject only” to
furnishing of the Performance Security/Security Deposit.
15 Supra
16 Supra
Thus, it was clearly put as a pre-condition and that too to be
done within 28 days following notification of the award. The
failure of the successful bidder to comply with the requirement
“shall constitute sufficient ground for cancellation of the
award work and forfeiture of the bid security” as per clause
30.2. If we analyse clause 34 dealing with the Integrity Pact
the failure to submit the same would make the tender bid “as
not substantially responsive and may be rejected.”
23. We may also add that the definition of what constitutes a
contract as per clause (ix) itself 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.
24. The result of the aforesaid is that as rightly held in terms of the
impugned order all that the appellants can do is to forfeit the
bid security amount and, thus, it was so directed. Since as a
pre-condition of any coercive action against the respondent,
the High Court called upon the appellants to deposit a sum of
Rs.10 lakh in terms of the interim order dated 04.08.2010, a
direction is made to deduct the bid security amount out of the
sum of Rs.10 lakh and to refund the balance amount to the
respondent. The needful would now have to be done within
two months as in terms of the interim order of this Court dated
08.02.2013 such refund has been stayed.
25. We accordingly dismiss the appeal leaving the parties to bear
their own costs.
26. Interim order stands discharged.
……...............................…..J.
[SANJAY KISHAN KAUL]
……....................................J.
[HEMANT GUPTA]
NEW DELHI,
July 23, 2021.
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