The jurisprudence on Letter of Intent (LoI) has long oscillated between commercial expectation and enforceable obligation. While businesses often rely upon LoIs to mobilise resources and initiate preparatory action, courts have consistently emphasised that an LoI is neither a contract nor a guarantee of one unless specific legal thresholds are met.
The Supreme Court of India, in State of Himachal Pradesh & Anr. v. OASYS Cybernetics Pvt. Ltd. (2025), revisited this question in the backdrop of a digital public distribution system tender and conclusively held that a Letter of Intent — without fulfilment of pre-conditions and execution of an agreement — does not create contractual rights.
Introduction — Why the Letters of Intent Debate Matters
LoIs are ubiquitous in commercial and governmental contracting. They serve as instruments of preliminary assurance, enabling contractors to undertake preparation, mobilise labour, and invest capital in anticipation of the final agreement. Yet when disputes arise — particularly where State agencies later withdraw or cancel such communications — the question emerges:
Does a LoI create enforceable rights, or merely express future intention?
The 2025 Supreme Court judgment answers this question emphatically and with authority, holding that a LoI remains a “promise in embryo” unless matured into a concluded contract through satisfaction of stipulated conditions and formal acceptance.
The ruling is doctrinally significant because it reconciles commercial expectations with constitutional control on executive action, balancing freedom of contract with public interest.
Background of the Dispute
The case arose from the Himachal Pradesh Government’s attempt to modernise its Public Distribution System through upgraded ePoS devices for Fair Price Shops. The tender underwent four cycles between 2021 and 2022, during which OASYS Cybernetics emerged as the sole technically qualified bidder in the final round. A Letter of Intent was issued on 02.09.2022.
However, the LoI was expressly conditional. The vendor was required to:
- Demonstrate device-software compatibility at NIC Hyderabad,
- Provide a live demonstration to the Department,
- Offer cost/MRP break-ups,
- Execute the agreement only after successful fulfilment of all prerequisites.
For nearly eight months, correspondence continued, with the State seeking compliance and the vendor claiming partial implementation. When the contract remained unresolved, the State cancelled the LoI on 06.06.2023, prompting the High Court to restore the LoI — a decision that ultimately reached the Supreme Court.
Issues
The Supreme Court formulated two central issues for determination:
| Issue | Question Before the Court |
|---|---|
| Issue 1 | Does an LoI create binding contractual rights before pre-conditions are fulfilled? |
| Issue 2 | Was the cancellation arbitrary or violative of natural justice? |
Nature of a Letter of Intent — Not a Contract, but a Prelude
The Court reaffirmed long-standing contract law, holding that an LoI indicates a proposal to negotiate or formalise a contract in future. It does not itself constitute acceptance, unless:
- All stipulated conditions are satisfied, and
- a final agreement or Letter of Acceptance (LoA) is executed.
Thus:
A Letter of Intent is not enforceable as a contract unless it is unconditional and acts as acceptance.
The Court drew strength from a catena of precedents:
| Case | Principle Laid Down |
|---|---|
| Rajasthan Cooperative Dairy Federation (1996) | LoI does not create binding obligations until acceptance is completed. |
| Dresser Rand (2006) | LoI conveys intention, not concluded consensus. |
| Level 9 Biz Pvt. Ltd. (2024) | No enforceable rights arise from LoI unless explicitly converted into acceptance. |
This chain reflects judicial continuity — and the present ruling reinforces that commercial reliance cannot replace contractual finality.
Why the LoI in This Case Created No Contractual Right
The Court held that the OASYS LoI remained incomplete because:
- Preconditions were unsatisfied — neither testing nor live demonstration nor cost break-up was conclusively provided.
- No contract was executed, despite extended correspondence.
- No final award letter or LoA was issued.
Therefore, the vendor possessed only a commercial expectation, not a legal entitlement.
The Court described such rights as not vested but incipient, conditional, contingent, and revocable.
Can a Party Still Claim Rights Based on Reliance? — The Court Says No
The respondent argued that it spent resources, built devices, and conducted trials relying on the LoI — hence cancellation was unfair. But the Court rejected this, holding:
Preparatory expenditure before contract formation is undertaken at one’s own risk. Commercial readiness does not substitute legal consent.
The Court did, however, direct reimbursement under quantum meruit, ensuring equity without converting expectation into enforceable contract rights.
Was Cancellation Arbitrary? — State Power Upheld
Even though no contractual rights existed, the Court emphasised that government cannot act whimsically. Administrative discretion must satisfy Article 14. The Court examined the cancellation on two grounds pleaded by the State:
| Ground | Court’s Finding |
|---|---|
| Alleged prior blacklisting | Invalid — expired years before tender; also previously adjudicated. |
| LoI pre-conditions not fulfilled. | Valid ground. The vendor did not furnish full compliance despite repeated requests. |
Accordingly, cancellation was held not to be arbitrary, and State discretion was upheld.
Final Holding
- No contractual right flows from an LoI unless pre-conditions are fulfilled and acceptance is formalised.
- Cancellation of the LoI was legally valid and non-arbitrary.
- Vendor is entitled only to reimbursement of actual expenditure (quantum meruit), not loss of profits.
Conclusion
The Supreme Court, through this landmark ruling, has settled an oft-contested legal dilemma:
A Letter of Intent is not enough to claim contractual rights unless it transforms into unconditional acceptance through fulfilment of all conditions.
Commercial reliance is economically relevant, but legally insufficient. Until the State issues a final acceptance, the LoI remains an embryonic promise — hopeful yet legally incomplete. Equity may award reimbursement, but it cannot fabricate a contract where none legally exists.
The judgment is a guiding mechanism for administrators, bidders, and courts alike — reinforcing clarity, discipline, and fairness in public contracting.
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