Letter Of Intent A 'Promise In Embryo'; Doesn't Create Vested Rights Until Preconditions Are Met : Supreme Court

Holding that a Letter of Interest (LoI) does not confer any enforceable or vested rights until all stipulated pre-conditions are fulfilled, the Supreme Court upheld the Himachal Pradesh government's decision to cancel an LoI issued to a private company for the supply of electronic Point-of-Sale (ePoS) devices for its Public Distribution System (PDS).

“an LoI (Letter of Interest) creates no vested right until it passes the threshold of final and unconditional acceptance. 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 (Letter of Acceptance).”, observed a bench of Chief Justice Surya Kant and Justices Ujjal Bhuyan and N Kotiswar Singh.

The dispute stemmed from the cancellation of an LoI in June 2023, after it had been in effect for eight months. The company had challenged the cancellation as arbitrary, citing its substantial investments in preparing for the contract before the High Court, which subsequently interfered with the State of Himachal Pradesh's decision to cancel the LoI issued in the Respondent's favour, and restored the contractual obligations of the Respondent company.

Aggrieved by the High Court's decision, the State appealed to the Supreme Court.

Setting aside the High Court's decision, the judgment authored by CJI Kant referenced Dresser Rand S.A. v. Bindal Agro Chem Ltd. (2006) 1 SCC 751, where it was held “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.”, to state that LoI represents only an intention to enter into a future contract, contingent upon fulfillment of conditions.

Although the Court acknowledged that the cancellation letter was “laconic” and lacked stated reasons, it held that the deficiencies were only procedural and did not render the decision arbitrary upon finding that the company had failed to conclusively meet these technical preconditions, such as requiring successful compatibility testing with the National Informatics Centre (NIC) software and a live demonstration, among other things.

The Respondent company didn't fulfil the conditions, and therefore, no binding contractual rights accrued to the vendor, the court said, adding that “we cannot hold that the decision to cancel was actuated by any improper motive. There is no allegation, nor any evidence, of favouritism or collateral purpose. The cancellation led only to a fresh tender, open to all, rather than an award to another bidder behind closed doors.”

“This Court has consistently recognised that the State's decision to cancel a tender or restart the process is itself an aspect of public interest. The present decision to re-tender—prompted by non-compliance and the desire to ensure NIC compatibility—falls squarely within that zone of permissible discretion.”, the court observed, referencing Tata Cellular v. Union of India, (1994) 6 SCC 651.

Legitimate Expectation Doctrine Inapplicable in Public Contracts

The respondent-company had argued that after being issued the LoI and investing crores in manufacturing devices, it had a legitimate expectation that the contract would be formalized. The Court rejected this argument, stating that “the principle of legitimate expectation also does not come to the aid of the Respondent-company. That doctrine presupposes a clear and unambiguous representation by the State, followed by reliance and detriment. The conditional terms of the LoI negate the existence of any clear assurance; rather, they expressly warned that the process was still provisional. To invoke legitimate expectation against an explicit disclaimer would be to transform the doctrine from a shield against arbitrariness into a sword against caution — a proposition no Court can endorse.”

Accordingly, the appeal was allowed with the direction to the State to (a) conduct a fact-finding verification of goods and services already supplied, (b) reimburse the verified, actual costs to Respondent within three months; and (c) treat all verified assets as vested in the State.

"i. The appeal is allowed. The Impugned Judgment and order passed by the High Court in CWP No. 4081 of 2023 is set aside. The decision of the Appellant-State cancelling the Letter of Intent dated 02.09.2022 stands upheld. However, the Expression of Interest issued immediately after cancelling the LoI in favour of Respondent-company is set aside;

ii. The Appellant-State shall be at liberty to issue a fresh tender for supply, installation and maintenance of ePoS devices for Fair Price Shops across the State forthwith, in accordance with law and the applicable financial and procurement rules, apart from the requisite technical specifications. The Respondent-company shall be free to participate in such tender process, subject to uniform eligibility and compliance with the prescribed conditions;

iii. The Appellant-State is further directed to hold a Fact-Finding Enquiry in association with the Respondent company and ascertain the details of the ePoS machines, components, or allied services produced or supplied under the cancelled LoI and their utilisation or taking over by the Department during the pilot or demonstration stages. Thereafter, the Appellant-State shall assess the value and costs of installation of such machines, components or services and reimburse such verified cost and expenses on the principle of quantum meruit, to make good the losses suffered by the Respondent-company. This entire exercise is directed to be complied with in a period of three months;

iv. All machinery, devices, technology, or software infrastructure handed over, integrated, or otherwise used during such pilot or demonstration stages pursuant to the LoI upon shall vest in the Appellant-State free of encumbrances, subject to payment of cost and installation expenditure to the Respondent-company, and/or subject to any reimbursement payable as above. The State may retain and deploy such assets for public use or dispose of them in accordance with the applicable policy; and

v. It is clarified that no further claim for loss of profit, expectation, or consequential damages shall survive. The relief granted herein is confined to equitable reimbursement for tangible assets or work actually appropriated by the Appellant-State."

Cause Title: State of Himachal Pradesh & Anr. versus M/s OASYS Cybernatics Pvt. Ltd.

Citation : 2025 LiveLaw (SC) 1142

Click here to download judgment

Appearance:

For Petitioner(s) : Mr. P. Chidambaram, Sr. Adv. Mr. Arman Roop Sharma, Adv. Mrs. Shimpy Sharma, Adv. Mr. Mohd. Aman Khan Afghani, Adv. M/s Ram Sankar & Co, AOR Mr. Ram Sankar, Adv.

For Respondent(s) : Mr. Sanjeev Bhushan, Sr. Adv. Mr. Subhash Chandran K.r, AOR Mr. C. D. Negi, Adv. Ms. Krishna L R, Adv. Mr. Anirudh Kp, Adv. Mr. Bineesh K, Adv. M/s Krs Associates, Adv.