The Supreme Court of India has set aside an order of the Bombay High Court that appointed a sole arbitrator in a dispute between the Maharashtra State Electricity Distribution Company Limited (MSEDCL) and R Z Malpani. A bench comprising Justice J.K. Maheshwari and Justice Atul S. Chandurkar held that a Letter of Intent (LOI) which contemplates the future issuance of a work order and execution of a formal agreement is merely a “precursor to a contract” and does not, by itself, create a binding legal relationship or an arbitration agreement.
Background
The dispute arose from a 2021 tender floated by MSEDCL for civil and interior work across 134 CFC Centres in Maharashtra. R Z Malpani (the Respondent) participated in the tender and was issued an LOI on November 16, 2022, accepting its bid of approximately ₹17.76 crore. Following the LOI, the Respondent submitted bank guarantees as security deposits.
However, MSEDCL never issued a formal Work Order or handed over the sites. In August 2024, the Respondent terminated the contract citing MSEDCL’s failure to hand over sites and invoked the arbitration clause (Clause 23) contained in the Special Conditions of Contract (SCC) of the Tender documents. MSEDCL subsequently cancelled the tender and refunded the deposits.
When the Respondent approached the Bombay High Court under Section 11 of the Arbitration and Conciliation Act, 1996, the High Court appointed an arbitrator, observing that the LOI resulted in a concluded contract and that MSEDCL had not denied the existence of an arbitration agreement in its initial reply.
Arguments of the Parties
Appellants (MSEDCL): Senior Advocate Vikas Singh, appearing for MSEDCL, argued that no concluded contract existed. He contended that the LOI was contingent in nature, stating that a detailed Work Order and formal agreement were to follow. He relied on State of Himachal Pradesh v. OASYS Cybernatics Pvt. Ltd. to argue that an LOI is a “promise in embryo.” Furthermore, he submitted that a general reference to tender documents in an LOI does not incorporate an arbitration clause unless specifically mentioned, citing NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd.
Respondent (R Z Malpani): Counsel Abhijit A. Desai argued that the LOI, combined with the submission and renewal of bank guarantees, evidenced a concluded contract. He maintained that under Section 7(4)(b) of the Act, an arbitration agreement can be formed through an exchange of communication. He relied on UNISSI (India) (P) Ltd. v. PGIMER to argue that when tender conditions are acted upon, a valid arbitration agreement exists.
Court’s Analysis
The Supreme Court clarified that the scope of inquiry under Section 11 is limited to the prima facie examination of the existence of an arbitration agreement. However, it noted that in “rarest of rare cases” where no agreement exists even on a prima facie view, the Court must interfere.
1. Nature of the Letter of Intent: The Court observed that the LOI specifically stated it was issued to enable “preliminaries” and that work would start only upon the issuance of a “detailed work order.”
“It is settled law that a letter of intent does not, in and of itself, create a legal relationship or contractual obligations until there is a clear, unambiguous final acceptance by the parties… it is but a ‘promise in embryo,’ capable of maturing into a contract only upon the satisfaction of stipulated preconditions.”
2. Incorporation of the Arbitration Clause: The Court examined whether the general reference to tender documents in the LOI satisfied Section 7(5) of the Act. Referring to M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., the Court held:
“The intent of the parties to incorporate the arbitration clause has to be explicitly clear and a mere general ‘reference’ to the tender conditions would not suffice… In our view, this is a case of ‘reference’ and not ‘incorporation’.”
The bench found that the High Court’s finding—that MSEDCL had not questioned the formation of the arbitration agreement—was “prima facie erroneous” as MSEDCL had specifically pleaded the non-existence of a contract in its reply dated November 4, 2024.
The Decision
The Supreme Court concluded that since the Work Order was never issued and the sites were never handed over, the LOI remained a preliminary document. It held that there was no binding legal relationship and, consequently, no valid arbitration agreement between the parties.
The appeal was allowed, and the High Court’s order appointing the arbitrator was set aside. The Respondent was granted liberty to pursue other alternative legal remedies.
Case Details:
- Case Title: Maharashtra State Electricity Distribution Company Limited (MSEDCL) & Ors. v. R Z Malpani
- Case No: Civil Appeal No(s). [___] of 2026 (Arising out of SLP (C) No. 36889 of 2025)
- Bench: Justice J.K. Maheshwari and Justice Atul S. Chandurkar
- Date: April 09, 2026
