Execution of valid contracts is a prerequisite to creation of any legally binding rights and obligations among
the executing parties. However, before moving on to detailed definitive contract(s), parties often enter into a letter
of intent so as to agree and specify upfront the key terms of the proposed transaction. The idea is to identify and
address any major commercial issues between the parties, and at the same time demonstrate their commitment
to the transaction.
What then is the legal effect of a letter of intent? Executed at a pre-contractual stage, is it a legally binding
document or is it only a means to capture and reflect the intention of the parties on the basic structure of the
transaction?
It is a well settled legal position under Indian laws that an agreement to ‘enter into an agreement’ is neither
enforceable nor does it confer any rights upon the parties. It is also a well settled principle of law that a letter of
intent generally indicates a party’s intention to enter into a contract with the other party in future. A letter of intent
is not intended to bind either party ultimately to enter into any contract. Such non-binding letter of intent can
however also take a hybrid form where parties agree to be bound by certain identified provisions such as
confidentiality; exclusivity; costs/expenses; governing law/jurisdiction etc.
Ordinarily, if a letter of intent or any other contractual document expressly confirms that no contractual
obligations are created between the parties, then there is an assumption that no valid and binding contract has
been created between the parties. However, if the language of the letter of intent or such contractual document is
not clear in this regard, then the question of whether a binding contract has been concluded thereby or not remains the subject matter of judicial assessment on a case to case basis. During such assessment, the intention of the
parties, the nature of the transaction, the language employed in the letter/document, subsequent conduct of the
parties and ancillary facts and circumstances, usually need to be looked at.
For instance, in Rajasthan Co-op Diary Federation Ltd Vs. Maha Laxmi Mingrate Marketing Service Pvt.
Ltd.1
, the Supreme Court observed as under:
“The Letter of Intent merely expresses an intention to enter into a contract…….. There was no binding
legal relationship between the appellant and the respondent 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
1 or not.”
The Hon’ble Punjab and Haryana High Court observed in a case2 with respect to binding nature of letters
of intent that, if various steps had been taken for awarding the contract and considerable amounts spent, then a
legitimate expectation was created that in the absence of any adverse factor, the contract would be awarded.
Also relevant is the case of Dresser Rand S.A. vs. Bindal Agro Chem Ltd. and K.G. Khosla Compressors
Ltd3
, in the specific facts whereof, one of the disputing parties had invited global tenders for supply of various
equipment and materials, and the other disputing party (viz., the bidder) had sent a letter offering to supply the
same. Resultantly, letters of intent were issued in favour of the bidder. However, later, the bidder was informed
that the tenderer would instead purchase the tendered equipment and materials from a third party, thus giving rise
to a dispute between the tenderer and the bidder. One of the issues considered by the Hon’ble Supreme Court of
India while adjudicating the dispute was whether the letter of intent was a contract binding the parties and it
observed as under:
“…it clear that the letter of intent is only a prelude to the purchase order and not itself the purchase
order… …Clause (M) made it clear that the Letters of Intent were being issued subject to
necessary approvals being given by the Authorities of the Indian
Government. These provisions clearly indicate that the Letters of Intent were only a step leading
to purchase orders and were not, by themselves, purchase orders……It is now well-settled that
a Letter of Intent merely indicates a party’s intention to enter into a contract with the other party
in future. A Letter of Intent is not intended to bind either party ultimately to enter into any contract.4
”
Further, by necessary implication, non-binding or conditional agreements/letters of intent remain subject
to revocation at the instance of either party, or automatic cancellation upon non-fulfilment of the condition(s) on
which their performance is contingent.
Also, specifically with respect to letters of intent issued by Government authorities, such letters may be
cancelled by the concerned authorities if there is a supervening public interest involved. To this end, reference may be drawn to the Hon’ble Supreme Court of India’s observations in the case of Madhya Pradesh Mathur and Ors.
v. DTC and Ors, (2006) 13 SCC 7065
, reproduced below:

“…once public interest is accepted as the superior equity which can override individual equity the
principle would be applicable even in cases where a period has been indicated for operation of
the promise. If there is a supervening public equity, the Government would be allowed to change
its stand and has the power to withdraw from representation made by it which induced persons
to take certain steps which may have gone adverse to the interest of such persons on account of
such withdrawal. Moreover, the Government is competent to rescind from the promise even if
there is no manifest public interest involved, provided no one is put in any adverse situation which
cannot be rectified…the Government could change its industrial policy if the situation so
warranted and merely because Resolution was announced for a particular period, it did not mean
that the government could not amend and change the policy under any circumstances.”

The above discussions and observations also find place in another notable judgment of the Hon’ble High
Court of Gujarat6
. In the specific facts of this case, the tender issuing authority had cancelled the tender process
in which a bidder had been identified as the highest bidder, which bidder had also been issued a letter of intent
pursuant to selection of bids. The bidder challenged such cancellation by the tenderer inter alia on the ground that
since a letter of intent had been issued in its favour, the bidder was entitled to a letter of allotment and award of
the underlying contract in its favour. The Hon’ble High Court observed as under:

“The letter of intent issued by the Respondent was merely an expression of intention and
imparting an information that the Petitioner stood highest bidder and on receipt of CRZ clearance,
the formal letter of allotment would be issued. However, the Petitioner had not cooperated in the
meantime for obtaining CRZ clearance and before any formal letter of allotment is issued, the
earlier tender process stood cancelled. Even while cancelling the earlier tender process, the
Respondent Port Trust neither acted arbitrarily nor it would amount to any malafide exercise of
discretionary powers……. The Respondent is well within its rights to take such a decision in the
year 2010 keeping in mind the larger public interest…The letter of intent issued by the
Respondent Port Trust on 12.01.2006, at best, can be said to be an agreement to issue the
allotment letter and to execute the lease document in favour of the Petitioner subject to fulfilment
of certain conditions. However, in absence of issuance of allotment letter, the said letter of intent
cannot be enforced in the Court of law….. Such a letter of intent is not intended to bind either
party ultimately to enter into any contract…”

In T. S.Venkatesa Iyer’s ‘The Law of Contracts & Tenders’, it is stated:

“By giving a letter of intent, a party cannot be said to have intended to agree or do anything in order to give
rise to a binding contract.”

In Cheshire, Fifoot and Furmston’s Law of Contract (Twelfth Edition, Pg. 43), it is stated:
“A letter of intent is a very commonly employed commercial device by which one party indicates to another
that he is very likely to place a contract with him.”
It would, therefore, appear that the chances of enforcing a non-binding agreement/letter of intent are
ordinarily low. However, as discussed hereinabove, judicial determination of letters of intent remains subject to the
specific facts of each case and the provisions of the respective letters.
Parties often consider a letter of intent which sets out the crux of the transaction, a practical and easy to
enter document to assess upfront, the broad pros and cons of the transaction and arrive at broad commercial
understanding agreeable to all. So, in cases where a letter of intent is being entered into and is intended to be nonbinding, care should be taken that the letter of intent clearly states that it does not constitute any contractually
binding relationship between them. The parties also should not act upon the letter of intent (or initiate any work
pursuant to it) as if they had legally binding agreement, to avoid possible disputes in future.
It is therefore advisable for executing parties to protect their interest by entering into definitive agreement
prior to initiation of contract work to avoid long protracted litigation to prove the very legality of their contractual
arrangements.
Endnotes
1 Civil Appeal No. 2679 of 1992, Decided on 17.09.1996
2 Bhoruka Power Corporation Limited v. State of Haryana and Ors, AIR 2000 P&H 245.
3 AIR 2006 SC 871
4 Also reiterated in M/s. KaramchandThaper& Bros (C.S.) Ltd., v. M/s. M.P. Power Trading Co. Ltd 2012 ELR (APTEL) 1185; Nikhil Adhesives
Limited thro’ DharmeshbhaiDhirajbhaiPandya v. Kandla Port Trust 2011 GLH (2) 283. Also see Rajasthan Co-operative Dairy Federation Ltd.
v. MahaLaxmiMingrate Marketing Service Pvt. Ltd. AIR 1997 SC 66; Speech and Software Technologies (India) Pvt. Ltd. v. Respondent: Neos
Interactive Ltd (2009) 1 SCC 475.
5 Also see Shrijee Sales Corporation and Anr. v. Union of India 1997(89)ELT452(SC); Pawan Alloys and Casting Pvt. Ltd. v. U.P. State Electricity
Board and Ors. (AIR 1997 SC 3910)
6 Refer Nikhil Adhesives Limited thro’ DharmeshbhaiDhirajbhaiPandya v. Kandla Port Trust, 2011 GLH (2) 283.