NIT, the formal agreement to be executed between the parties post contractor constitutes a contract

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. This Court did consider in Dresser Rand S.A. 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.”(Para 20)

SOUTH EASTERN COALFIELDS LTD. & ORS V. M/S. S. KUMAR’S ASSOCIATES AKM (JV)

CIVIL APPEAL NO.4358 OF 2016.

Decided on July 23, 2021.

The two-judge bench comprising Justice Sanjay Kishan Kaul and Justice Hemant Gupta decided the present case. The Supreme Court dismissed the appeal and asked the appellant to refund the balance amount to the respondent within 2 months.

The appellant no1, South Eastern Coalfields Ltd. on 23.06.2009 issued a tender for a work which stated it was hiring for HEMM and equipment, which included digging machine, transportation and other necessary tools and equipment for the work. Bids were received and the respondent was the successful bidder. To which a Letter of Intent was issued bearing No.2415 dated 05.10.2009 which awarded the contract for a total work of Rs.387.40 lakh and the LOI stated few direction to the respondent including where the respondent were to mobilize equipment for executing the work and they were also asked 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.

The respondent mobilized the resources at site and with a letter of site acceptance, 28.10.2009, was the day of commencement of the work. However, the respondent soon started facing difficulties and on 5.12.2009, a letter by respondent stated that the truck mounted drill machine suffered a major breakdown and work was suspended. On 09.12.2009, the appellant issued a letter alleging breach of terms of contract and rules and regulations applicable by the respondent. On 15.12.2009, the appellant drafted a show cause notice informing 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. When receiving no response from the respondent, the appellant on 23.12.2009 issued a notice of termination, 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.

The appellant hired another contractor at higher price and asked the respondent to pay a sum of RS. 78,07,573. The respondent filed a writ petition under Articles 226 & 227 of the Constitution of India. The Division Bench of the Chhattisgarh High Court while referring to the NIT stated that it was not a valid contract between the parties and the appellant could not recover the amount but had to pay a sum of RS 10 lakh to the respondent. Aggrieved by the decision, the present appeal is before the Supreme Court.

By executing the work from 28.10.2009, the learned Counsel for the appellant claimed, it was acceptance of the award of the work by the respondent. The Counsel further argued that The terms of LoI stated that “this contract will come into force upon receipt of this letter of intent by the supplier.” The letter of intent was referred to in different clauses as "this order" and "this contract" and it, therefore, was argued that the letter should be treated as a purchase order. Despite the wording used in the letter of intent, it was not interpreted as a work order.

Learned counsel for the respondent on the other hand stated that 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.

The Court stated that, “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.” (Para 19)

The Court further stated that, “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. 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. 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.”(Para 20)

The Court concluded by stating, “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.” (Para 24)

View/Download Judgment : SOUTH EASTERN COALFIELDS LTD. & ORS V. M/S. S. KUMAR’S ASSOCIATES AKM (JV)

Utkarsh Kumar Jayaswal