Letter of intent does not equal a binding agreement

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In the recent Honshu Buildcon and Ors v North Delhi Municipal Corporation case, Honshu received a show cause notice from NDMC, alleging it had a direct connection with certain defaulter companies that violated the terms and conditions of a notice inviting tender (NIT) asking Honshu to explain why its application for participation in an e-auction should not be cancelled along with further actions. Honshu replied that its directors and shareholders had no direct relation with the defaulter companies, and asked NDMC to withdraw the show cause notice. NDMC refused the request and cancelled Honshu’s letter of intent. This prompted Honshu to file a writ petition before Delhi High Court alleging that the cancellation was arbitrary and mala fide.

The court while dismissing the petition observed that Honshu merely denied the grounds of the show cause notice, without countering them substantially, particularly in light of bank statements that clearly indicated a strong financial relationship between Honshu and a list of blacklisted companies. The court held that when the state invites tender bids, it ought to adhere to the terms of the NIT, and ideally not waiver from complying with the conditions set forth. With regards to the cancellation of the letters of intent initially issued to Honshu, the court observed that a letter of intent merely indicates a party’s intention to enter into a contract with the other party and is not intended to bind either party ultimately to enter into any contract.

The court further observed that the cancellation of letters by NDMC and rejecting the tender bids could not be accepted as arbitrary and mala fide as such actions were based on justifiable grounds due to the violation of the conditions of the NIT by the petitioners such as non-deposit of security money and request for “adjustments” not provided for in the NIT, in the case of Honshu, and engaging in business relationships with blacklisted companies. This observation was made particularly in light of the linkages found through bank statements, common email identities of some of the entities, common premises and, in some cases, common directors or individuals controlling the entities.

The dispute digest is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.