A three-judge Bench of the Supreme Court comprising Chief Justice of India Surya Kant, Justice Ujjal Bhuyan, and Justice Nongmeikapam Kotiswar Singh has held that a Letter of Intent (LoI) is merely a “precursor to a contract” and a “promise in embryo” which does not create any binding or enforceable rights until the stipulations and pre-conditions mentioned therein are fully satisfied. The Court set aside the judgment of the High Court of Himachal Pradesh, ruling that the State Government’s decision to cancel a conditional LoI for non-compliance with technical prerequisites was a lawful exercise of administrative discretion and not arbitrary.
The Bench, led by Chief Justice Surya Kant, allowed the appeal filed by the State of Himachal Pradesh against the decision of the High Court, which had quashed the cancellation of an LoI issued to M/s OASYS Cybernatics Pvt. Ltd. for the supply of electronic Point-of-Sale (ePoS) devices. The Apex Court held that unilateral performance by a bidder in anticipation of a contract, without fulfilling the specific pre-conditions of the LoI, does not confer a legal right. However, invoking the principle of quantum meruit, the Court directed the State to reimburse the company for the verified costs of devices and services actually utilized during the pilot or demonstration stages.
Background of the Case
The dispute arose from a tender floated by the Department of Food, Civil Supplies and Consumer Affairs, Himachal Pradesh, for the supply, installation, and maintenance of upgraded ePoS devices to modernize the Public Distribution System (PDS). After multiple unsuccessful tender rounds between 2021 and 2022, the Respondent-company (M/s OASYS Cybernatics Pvt. Ltd.) emerged as the sole technically qualified bidder in the fourth tender.
On September 2, 2022, the Department issued an LoI to the Respondent-company. The LoI was conditional and expressly subject to the “fulfilment of pre-requisites and compatibility of proposed devices with the NIC software.” Specifically, the Respondent was required to:
- Undertake compatibility testing of devices at NICSI, Hyderabad.
- Provide a live demonstration of the upgraded devices at the Directorate.
- Furnish the detailed MRP and landing cost of the devices.
- Execute a formal agreement only after the successful completion of these steps.
While the Respondent-company claimed to have manufactured over 5,000 devices and commenced preparatory training, the Department cancelled the LoI on June 6, 2023, stating that the Government had decided to invite a fresh tender.
The Respondent challenged this cancellation before the High Court. By the Impugned Judgment dated May 30, 2024, the High Court set aside the cancellation, terming it arbitrary and unreasoned, and directed the State to proceed with the LoI. The State of Himachal Pradesh approached the Supreme Court challenging this directive.
Arguments of the Parties
Arguments on behalf of the State of Himachal Pradesh:
- The State argued that the LoI was a “conditional communication” and created no enforceable obligation until a Letter of Acceptance (LoA) or contract was executed.
- It was submitted that the Respondent failed to fulfill the pre-requisites, specifically the submission of cost break-ups and successful compatibility testing with NIC software, despite repeated reminders.
- The State contended that the Respondent-company had suppressed material facts regarding the blacklisting of its predecessor entity by other States.
- It was urged that public interest in ensuring a reliable Aadhaar-enabled PDS prevailed over the bidder’s private expectation.
Arguments on behalf of M/s OASYS Cybernatics Pvt. Ltd.:
- The Respondent argued that the cancellation was “arbitrary, unreasoned, and violative of the principles of natural justice.”
- It was submitted that the company had made substantial investments, relying on the LoI, by manufacturing devices and establishing infrastructure.
- The Respondent contended that the State had “induced performance” for eight months by issuing instructions for implementation, and thus was estopped from withdrawing the LoI.
- Regarding the blacklisting, the Respondent argued that the condition applied only to subsisting disqualifications on the date of bid submission, which did not apply to them.
Court’s Analysis
1. The Nature of the Letter of Intent
The Supreme Court analyzed whether the LoI created any vested contractual rights. Referencing precedents such as Rajasthan Cooperative Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service (P) Ltd. and Dresser Rand S.A. v. Bindal Agro Chem Ltd., the Bench reiterated that an LoI is not intended to bind either party ultimately to enter into a contract.
The Court observed:
“It is but a ‘promise in embryo,’ capable of maturing into a contract only upon the satisfaction of stipulated preconditions or upon the issue of an LoA. A bidder’s expectation that such a contract will follow may be commercially genuine, but it is not a juridical entitlement.”
The Court found that the LoI in question was strictly conditional. It held:
“The tender architecture was sequential: testing, demonstration, acceptance, then execution. It was never contemplated that the LoI would operate as the contract itself.”
2. Legality of the Cancellation
The Court examined whether the cancellation was arbitrary. While acknowledging that the cancellation letter itself was “laconic” and unreasoned, the Court looked at the contemporaneous record to test the validity of the State’s justifications.
On the Issue of Blacklisting: The Court rejected the State’s reliance on the complaint regarding the Respondent’s past blacklisting. It noted that the State had defended the same tender process in earlier litigation against a rival bidder. The Court stated:
“The State, as a continuing juristic entity, is bound by its own representations in prior proceedings; its legal stance cannot oscillate with changes in political leadership.”
On Non-Compliance with LoI Conditions: However, the Court upheld the State’s second ground for cancellation—the Respondent’s failure to meet technical preconditions. The Court noted that the Respondent failed to provide the itemized cost break-up or certify compatibility with the NIC software.
Addressing the Respondent’s argument regarding their unilateral manufacturing of devices, the Court observed:
“These actions, though industrious, were undertaken unilaterally and before the conditions of the LoI were satisfied. In our considered view, such actions exemplify commercial impatience rather than contractual compliance—an instance of putting the cart before the horse.”
The Court held that the High Court erred in conflating “taking steps” with “taking the right steps.” It further stated:
“To equate unilateral readiness with contractual fulfilment is to disregard the essential discipline of tender law, which binds both sides to the terms they themselves framed.”
Decision
The Supreme Court allowed the appeal and set aside the High Court’s judgment. It upheld the decision of the State to cancel the Letter of Intent dated September 2, 2022, and granted liberty to the State to issue a fresh tender.
Directions on Relief: Recognizing that the Respondent-company had supplied devices for pilot stages and demonstration, the Court issued the following directions based on equity:
- The State shall hold a Fact-Finding Enquiry to ascertain the details of ePoS machines and services used during pilot/demonstration stages.
- The State shall assess the value and reimburse such verified cost and expenses on the principle of quantum meruit to the Respondent-company within three months.
- Upon such payment, the machinery and infrastructure shall vest in the State free of encumbrances.
- No further claim for loss of profit or consequential damages shall survive.
Epilogue: Concluding the judgment, the Court emphasized the social importance of the PDS:
“The Public Distribution System remains, for millions, the thin line between sustenance and deprivation. … Future exercises in public procurement… must thus be executed with greater institutional coherence, foresight, and accountability.”
