Introduction
The Supreme Court of India, in its Judgment titled State of Himachal Pradesh & Anr. v. M/s OASYS Cybernetics Pvt. Ltd. (SLP (C) No. 6531/2025), addressed a critical issue in public procurement law. The case was decided by a Bench comprising Chief Justice Surya Kant, Justice Ujjal Bhuyan, and Justice Nongmeikapam Kotiswar Singh. The Decision examines the balance between governmental discretion in tender matters and the constitutional prohibition on arbitrariness in State action.
Factual background
The dispute arose from Himachal Pradesh’s effort to modernize its Public Distribution System (PDS) by deploying upgraded electronic Point-of-Sale (ePoS) devices at Fair Price Shops. In 2017, the Respondent, M/s OASYS Cybernetics Pvt. Ltd., had been engaged on a rental model to supply and maintain ePoS devices, an arrangement that continued for several years until its expiry. Seeking to introduce Aadhaar-enabled PDS with biometric and IRIS capability and integration with electronic weighing scales, the State invited expressions of interest and conducted several tender rounds in 2021–22.
The first two tenders failed as no bidder was found technically compliant; the third tender was scrapped to avoid a single-vendor situation, though the Respondent was technically qualified. In the fourth tender, the Respondent again emerged as the sole technical qualifier, after which the State opened its financial bid, negotiated a rental of ₹1,050 per Fair Price Shop per month, and issued a Letter of Intent (LoI) on 02.09.2022. The LoI, however, imposed conditions precedent: compatibility testing of devices with NIC software (preferably at NICSI Hyderabad), a live demonstration before the Directorate, execution of a formal agreement only after successful verification, and disclosure of MRP/landing cost and major component costs.
The Respondent acknowledged the LoI, indicated manufacturing and pilot deployment plans, and claimed successful integration and testing of weighing scales, while the Department kept seeking detailed cost break-ups and compliance with remaining conditions. During this period, the earlier 2017 contract continued and the Respondent received rental payments under that arrangement, even as a complaint from an unsuccessful bidder (Linkwell Telesystems) in January 2023 alleged past blacklisting of the Respondent’s predecessor entity in Andhra Pradesh and Madhya Pradesh. On 06.06.2023, the Department abruptly cancelled the LoI, stating only that a fresh tender would be invited, without disclosing reasons in the cancellation letter.
Court’s decision and analysis
The Supreme Court first addressed whether the LoI created enforceable rights. Relying on several settled precedents, the Court reiterated that a letter of intent, in the ordinary course, is a precursor to contract formation and not the contract itself, unless the parties clearly intend otherwise and all conditions are satisfied. It held that the LoI in this case was explicitly conditional, with a clear sequence: testing, demonstration, satisfactory verification and then final award/contract; therefore, no binding contractual rights accrued to the Respondent by mere issuance of the LoI.
Having answered the first issue against the Respondent, the Court then examined whether the cancellation decision was arbitrary or procedurally unfair. It acknowledged that the cancellation letter was laconic and did not record reasons, but clarified that reasons may be gleaned from contemporaneous records, while cautioning against post-hoc rationalizations. The Court noted that the High Court had treated the absence of reasons as virtually fatal and did not fully engage with the administrative context or the State’s justifications; it opined that a preferable course would ordinarily be to set aside such an order and remit the matter to the competent authority for a fresh, reasoned decision, though passage of time and the nature of the PDS project made remand impracticable in this case.
On substance, the Court rejected the blacklisting complaint as a valid basis for cancellation, noting that a similar contention had already been dealt with in an earlier writ and that the tender clause required disclosure of subsisting, not past, blacklisting. However, it accepted the second strand of reasoning that essential LoI preconditions, particularly full cost disclosure and demonstrated compatibility with NIC’s application, were not established on the record as having been satisfactorily completed. The Court distinguished between preparatory steps like manufacturing devices and training and strict compliance with the specified preconditions that safeguard technical integrity and financial transparency in public contracts.
Applying the limited standard of judicial review in tender matters, the Court held that the State’s decision to cancel the LoI and call for a fresh tender could not be termed so arbitrary, irrational, or mala fide that no reasonable authority could have taken it. At the same time, recognizing the Respondent’s good-faith efforts and partial performance under the State’s directions, the Court invoked the principle of quantum meruit and directed the State to undertake a fact-finding exercise to quantify and reimburse the value of devices and services actually supplied and utilized during pilot or transitional stages, within a fixed timeframe.
Conclusion
The Judgment carefully reaffirms the doctrinal distinction between a conditional letter of intent and a concluded contract in public procurement, thereby preserving the State’s freedom of contract while subjecting it to constitutional discipline against arbitrariness. It underscores that commercial expectations or unilateral investments by bidders cannot, by themselves, convert a conditional, pre-award communication into an enforceable contract when conditions precedent remain unmet. At the same time, the Court’s direction for compensation on a quantum meruit basis reflects a commitment to fairness and reliance protection in situations where bidders, acting bona fide on governmental representations, have already contributed value. The decision thus balances administrative flexibility, the need for technical and fiscal safeguards in welfare schemes like the PDS, and the imperative that State action remains rational, consistent and procedurally just, even at the pre-contractual stage.
YASH HARI DIXIT
ASSOCIATE
THE INDIAN LAWYER & ALLIED SERVICES
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