Binding Value Of Letter Of Intent ' An Analysis

Published date08 December 2022
Subject MatterCorporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Arbitration & Dispute Resolution, Trials & Appeals & Compensation
Law FirmS&A Law Offices
AuthorJagrati Maru and Shivam Gour

INTRODUCTION

It is not uncommon in commercial contracts involving detailed procedures, that in order to save time, a Letter of Intent (hereinafter, LoI) communicating the acceptance of the offer is issued asking the contractor to start the work with a stipulation that the detailed contract would be executed later. Though such a letter may be termed as an LoI, it may amount to acceptance of the offer resulting in a concluded contract between the parties.

Generally, LoI is not a binding contract between the parties, and it merely indicates the intention and willingness of parties to enter into the contract in the future, however, in some cases it can be considered similar to a binding contract and may be construed as a letter of acceptance if such intention is evident from its unambiguous terms and conduct of the parties.

LoI is awarded prior to the execution of a formal contract between the parties. For instance, in the tendering process, an LoI is awarded to the lowest bidder informing them about their selection for the award of the contract and describes the preliminary understanding of the parties who intend to enter into a contract in the future.

THE BONE OF CONTENTION

A contractor would be in a dilemma if it has started incurring expenses towards the completion of the project from the award of LoI but before the execution of the final contract. If the authority cancels the LoI during this intermediate phase, then the question that arises is who is liable to bear such expenses? The recovery of expenses can be undertaken only when the LoI was binding on parties in the first instance. There are two likely scenarios which could arise in this situation, firstly that the terms of the LoI were clear that the same is a binding document and secondly, there might be a situation where there is no term in the LoI which can show that it was meant to be a binding document.

In such circumstances, even the recourse to arbitration is generally not available to the parties as the tendering documents are in the draft stage and not signed and executed, suggesting that there is no contract between the parties. The parties then only have the recourse of approaching the courts under section 11 of the Arbitration and Conciliation Act, 1996 for the appointment of an Arbitrator which translates to higher legal expenses and consumption of valuable time in proceedings. There is a wide and sometimes even conflicting jurisprudence on the issue of the binding value of LoIs which is...

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