Does a conditional Letter of Intent in public procurement create binding contractual rights, or can its cancellation be judicially reviewed for arbitrariness?

Summary

Practical Impact

What’s New / What Lawyers Should Note

• Confirms that a LoI containing explicit technical and procedural conditions remains provisional and non-binding until all prerequisites—such as compatibility testing, live demonstration, formal agreement and cost breakdown—are satisfied.
• Affirms that cancellation of a conditional LoI is subject to Article 14 review for arbitrariness and does not require the issue of an LoA or contract to be lawful.
• Holds that reliance by a bidder on unfulfilled pre-award conditions does not convert a tentative LoI into a vested contractual right.
• Clarifies that post-hoc invocation of grounds (e.g., blacklisting complaints) previously adjudicated is impermissible and inconsistent with administrative fairness.
• Emphasises the State’s discretion to re-tender when a bidder fails to fulfil tender-document conditions, so long as the decision is reasoned and bona fide.

Summary of Legal Reasoning

1. LoI as Precursor, Not Contract
   A Letter of Intent is a provisional communication, not a concluded contract, unless all conditions precedent are satisfied (Rajasthan Cooperative Dairy Federation; Dresser Rand; Level 9 Biz).
2. Conditional Pre-Award Steps
   The LoI required (i) NICSI compatibility testing; (ii) live demonstration; (iii) formal agreement post-verification; (iv) itemised cost-breakdown. None were completed.
3. Judicial Review under Article 14
   Cancellation orders need not state reasons verbatim but must be traceable to bona fide considerations. Absence of contemporaneous reasons demands review; post-hoc justifications are tested for consistency with record.
4. Grounds for Cancellation
   • Blacklisting complaint was already adjudicated and fell outside the tender clause’s scope (Clause 5.13.1).
   • Non-compliance with explicit LoI conditions persisted despite reminders (Clause 4.9(m)).
5. Arbitrariness Test Applied
   Cancellation for non-compliance was neither irrational nor mala fide; it advanced public interest in a secure, Aadhaar-enabled PDS infrastructure (Tata Cellular; Jagdish Mandal). Legitimate expectation cannot override explicit disclaimers.
6. Conclusion
   The LoI imparted no binding rights; its cancellation was a lawful exercise of administrative discretion. High Court’s direction to enforce the LoI was unsustainable.

Arguments by the Parties

Petitioner (Appellant-State)

• The LoI was conditional, non-binding and required fulfilment of specified technical and procedural prerequisites.
• A Letter of Intent alone confers no enforceable contractual rights without a formal contract or LoA.
• The bidder failed to provide itemised cost details, complete compatibility testing and live demonstrations despite multiple reminders.
• A competitor’s blacklisting allegation—though previously litigated—justified re-tendering to safeguard transparency and technical reliability.
• Judicial interference in administrative tender decisions is confined to cases of palpable arbitrariness or mala fide.

Respondent-Company

• The State’s conduct—phased deployments, training, and negotiations—confirmed the LoI’s finality in substance.
• All preconditions were met through cost submissions, software integration, pilot deployments and training.
• Cancellation without reasons or hearing breached Article 14 and principles of natural justice.
• The blacklisting allegation was stale, concerned a dissolved predecessor entity and was irrelevant at bid submission.
• Substantial investments and manufacturing in reliance on the LoI caused serious financial prejudice, warranting equitable relief.

Factual Background

The State’s Department of Food, Civil Supplies and Consumer Affairs sought to modernise its Public Distribution System via biometric-enabled ePoS devices, issuing four successive tenders in 2021–22. Only one bidder qualified technically in the final round and received a conditional LoI on 02.09.2022 requiring compatibility tests, demonstrations and cost disclosure. The LoI remained unfulfilled and was cancelled without reasons on 06.06.2023, leading to High Court intervention and subsequent appeal to the Supreme Court.

Statutory Analysis

• Article 14, Constitution of India: arbitrariness test for state action in contract cancellations.
• Contract Law Principles: distinction between a provisional Letter of Intent and a binding contract; conditions precedent necessary for contract formation (Rajasthan Cooperative Dairy Federation; Dresser Rand).
• Tender-Document Clauses:
  • Clause 5.13.1 – bidders must declare any subsisting blacklisting as on bid-submission date.
  • Clause 4.9(m) – requirement for itemised cost-breakdown and landing price disclosure.

Procedural Innovations

• Directed a fact-finding enquiry in consultation with the bidder to quantify and reimburse costs on a quantum meruit basis for assets and services appropriated under the cancelled LoI.
• Ordered vesting in the State of all pilot-stage devices, technology and software infrastructure, subject to payment of verified installation and cost expenses, streamlining asset transfer in procurement disputes.

Alert Indicators

• ✔ Precedent Followed