Letters of Intent and the Formation of Contracts under Indian Law

Letters of Intent and the Formation of Contracts under Indian Law

Introduction

In contemporary commercial practice, parties frequently exchange “letters of intent” (LoIs) in order to expedite projects while a formal contract is negotiated. The juridical status of such documents is, however, fraught with uncertainty. Indian courts have repeatedly been called upon to decide whether an LoI is merely an unenforceable statement of future intent or whether it can, in given circumstances, crystallise into a binding contract. This article undertakes a systematic analysis of the governing statutory framework, synthesises key Supreme Court and High Court authority, and proposes a doctrinal test for determining the enforceability of LoIs in India.

Statutory Framework

The Indian Contract Act, 1872 (ICA) does not employ the term “letter of intent”, yet the enforceability of such documents must be examined through the orthodox elements of contract formation set out in the ICA:

  • Offer and acceptance – ss. 2(a)–2(b), 7;
  • Acceptance by conduct – s. 8;
  • Intention to create legal relations – s. 10 (via “free consent” and lawful object);
  • Certainty of terms – s. 29;
  • Consideration – s. 2(d).

Where an LoI satisfies these elements, Indian courts may treat it as a concluded contract notwithstanding the absence of a formal agreement. Conversely, an LoI that negates contractual intention or is expressly made “subject to contract” will not be enforceable.

Jurisprudential Evolution

Early Recognition of the Problem

The Supreme Court in Centax (India) Ltd. v. Vinmar Impex Inc.[1] encountered an LoI in an international sale, but the matter turned largely on banking instruments. Nevertheless, the decision hinted that preliminary documents could in certain circumstances bind the parties. A more comprehensive discussion emerged in Rajasthan Cooperative Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service (P) Ltd.[2], where the Court held that the LoI was condition precedent to the execution of a distribution agreement; failure to furnish a bank guarantee meant no contract came into existence. This case established the foundational proposition that an LoI “merely expressed an intention to enter into a contract” unless the terms unequivocally indicated acceptance.

Consolidation in Dresser Rand

The watershed decision is Dresser Rand S.A. v. Bindal Agro Chem Ltd.[3]. After scrutinising the General Conditions of Purchase, the letters of intent and subsequent conduct, the Supreme Court held that no arbitration agreement existed because the LoIs did not incorporate the arbitration clause nor evidence consensus ad idem. Key principles distilled were:

  • An LoI ordinarily indicates future intent and is not binding;
  • An LoI may operate as acceptance where (i) language is clear and unqualified, (ii) material terms are settled, and (iii) parties have acted upon it;
  • Courts must conduct a “holistic analysis” of text and surrounding circumstances.

Post-Dresser Rand Clarifications

Subsequent Supreme Court cases have consistently applied, and refined, these principles:

  1. State of U.P. v. Combined Chemicals Co. (P) Ltd.[4] – reiterated that LoIs are generally non-binding but may ripen into contracts if they constitute clear acceptances.
  2. Rishi Kiran Logistics (P) Ltd. v. Kandla Port Trust[5] – in public-procurement context, held that LoI did not create promissory estoppel; it remained contingent on statutory approvals.
  3. H.P. Housing & Urban Development Authority v. Universal Estate[6] – deposit of 10 % bid amount pursuant to tender conditions did not itself evidence acceptance; authority retained discretion.
  4. South Eastern Coalfields Ltd. v. S. Kumar’s Associates AKM (JV)[7] – offered the most recent comprehensive restatement: an LoI “merely indicates a party’s intention… No binding relationship emerges at this stage,” yet courts may construe it as a contract where the intention to do so is “clear and unambiguous.”

Analytical Matrix for Determining Enforceability

Synthesising the above cases, an LoI can be adjudged enforceable when four cumulative criteria are met:

  1. Unconditional Language of Commitment. Expressions such as “this contract will come into force upon receipt of this letter” (as in Dresser Rand) are probative, but the entire document must be read to detect disclaimers or subject-to-contract clauses.
  2. Consensus on Essential Terms. Price, quantity, scope of work, time for performance and dispute-resolution mechanism must be expressly or impliedly settled. Unresolved “major terms” point to an executory intention (ICA s. 29).
  3. Performance or Detrimental Reliance. Significant expenditure or commencement of work pursuant to the LoI – e.g., mobilisation in South Eastern Coalfields 2021 – is persuasive evidence of acceptance under ICA s. 8. However, courts will still scrutinise whether such performance was at the recipient’s risk or expressly invited by the issuer.
  4. Absence of Contradictory Tender Conditions. In government tenders, the Notice Inviting Tender (NIT) often stipulates that contract is concluded only upon execution of a “Formal Agreement.” Such stipulations generally defeat any argument that an LoI is itself binding, unless the LoI expressly overrides the NIT.

Interaction with Related Doctrines

Earnest Money and Forfeiture

Even where an LoI is non-binding, parties frequently pay earnest money. Kailash Nath Associates v. DDA[8] demonstrates that forfeiture of such money under s. 74 ICA requires either breach by the depositor or proof of loss. If no concluded contract exists, forfeiture is vulnerable to challenge on both contractual and constitutional (Art. 14) grounds.

Restitutionary Consequences

When an LoI does not mature into a contract, yet one party has conferred benefits, restitutionary relief may be available. The Supreme Court’s discussion of unjust enrichment and interest in South Eastern Coalfields Ltd. v. State of M.P.[9] underscores the court’s readiness to order restitution to avoid inequity, even absent a contract.

Arbitration Agreements

Because arbitration is purely consensual (s. 7, Arbitration & Conciliation Act, 1996), the absence of a binding LoI usually precludes arbitration – the precise holding in Dresser Rand. Parties desiring arbitration must therefore ensure clear incorporation of the clause in any preliminary document.

Comparative and Academic Perspectives

English authorities, heavily relied upon by Indian courts, articulate the same principle: letters of intent “may, of course, negative contractual intention; but, on the other hand, where the language does not … it is open to the courts to hold that the parties are bound.”[10] Chitty notes that courts are “particularly inclined” to find binding effect where parties have expended “considerable sums of money.” Indian jurisprudence has internalised this reasoning, but retains a stricter stance in public-sector contracting owing to constitutional discipline under Articles 14 and 299.

Policy Considerations and Best Practices

  • Drafting Clarity. Commercial actors should expressly state whether the LoI is intended to be binding, and if so, on which terms. Use of a “subject to contract” clause remains the safest method to avoid unintended contractual liability.
  • Government Contracts. Procuring entities should preserve discretion by aligning LoI language with tender conditions and by refraining from directing substantive performance prior to execution of the formal agreement.
  • Risk Management. Parties commencing performance on the strength of an LoI should secure interim agreements regarding payment, indemnity and dispute resolution to mitigate the risk of non-enforceability.

Conclusion

Indian law exhibits a balanced approach towards letters of intent. While the default presumption treats an LoI as non-binding, the courts will not allow form to defeat substance where the parties’ words and conduct evince a clear intention to be bound and essential terms are settled. The four-fold analytical matrix proposed herein, grounded in Supreme Court authority, offers a principled method for practitioners and adjudicators to navigate the contractual liminality of the LoI. Ultimately, contractual certainty is best advanced not by judicial extrapolation but by careful drafting and deliberate allocation of pre-contractual risks.

Footnotes

  1. Centax (India) Ltd. v. Vinmar Impex Inc., (1986) 4 SCC 136.
  2. Rajasthan Cooperative Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service (P) Ltd., (1996) 10 SCC 405.
  3. Dresser Rand S.A. v. Bindal Agro Chem Ltd., (2006) 1 SCC 751.
  4. State of Uttar Pradesh v. Combined Chemicals Co. (P) Ltd., (2011) 2 SCC 151.
  5. Rishi Kiran Logistics (P) Ltd. v. Board of Trustees of Kandla Port Trust, (2015) 13 SCC 233.
  6. Himachal Pradesh Housing & Urban Development Authority v. Universal Estate, (2010) 14 SCC 253.
  7. South Eastern Coalfields Ltd. v. S. Kumar’s Associates AKM (JV), (2021) 9 SCC 166.
  8. Kailash Nath Associates v. Delhi Development Authority, (2015) 4 SCC 136.
  9. South Eastern Coalfields Ltd. v. State of Madhya Pradesh, (2003) 8 SCC 648.
  10. Chitty on Contracts, 28th ed., vol. 1, para 2-115; relied upon in Dresser Rand, supra.