Mere Issuance Of Letter Of Intent Without Formal Work Order Does Not Create Concluded Contract Or Arbitration Agreement: Supreme Court

"It is settled law that a letter of intent does not, in and of itself, create a legal relationship or contractual obligations until there is a clear, unambiguous final acceptance by the parties," Supreme Court of India, in a significant ruling dated April 09, 2026, held that a mere Letter of Intent (LOI) does not create a binding legal relationship or a concluded arbitration agreement if it is not followed by a formal work order or agreement.

A bench comprising Justice J.K. Maheshwari and Justice Atul S. Chandurkar observed that an LOI in such circumstances is merely "a promise to make a promise and not a promise itself," setting aside a Bombay High Court order that had appointed an arbitrator based solely on the issuance of an LOI.

Maharashtra State Electricity Distribution Company Limited (MSEDCL) floated a tender for civil works, and R Z Malpani (Respondent) emerged as the successful bidder, receiving an LOI in November 2022. However, MSEDCL never issued a formal work order or handed over the construction sites, prompting the respondent to terminate the contract and invoke the arbitration clause present in the general tender documents. The Bombay High Court appointed a sole arbitrator ex-parte under Section 11 of the Arbitration and Conciliation Act, 1996, leading MSEDCL to file the present appeal before the Supreme Court.

The primary question before the court was whether the issuance of a Letter of Intent, without the execution of a formal agreement or work order, results in a concluded contract. The court was also called upon to determine whether a general reference to tender documents in an LOI amounts to the statutory incorporation of an arbitration clause under Section 7(5) of the Arbitration and Conciliation Act, 1996.

Scope Of Inquiry Under Section 11 Is Limited

Relying on the precedent set in SBI General Insurance Co. Ltd., the Supreme Court reiterated that a referral court's jurisdiction under Section 11 is strictly confined to examining the prima facie existence of an arbitration agreement. The bench clarified that substantive questions must be left to the arbitral tribunal under Section 16, reflecting the doctrine of Kompetenz-Kompetenz. However, the court cautioned that in the rarest of rare cases where no arbitration agreement exists even on a prima facie view, the application must be rejected.

High Court Erred In Finding Admission Of Contract

The bench noted that the Bombay High Court's finding that MSEDCL had not disputed the existence of the arbitration agreement was "prima facie erroneous and stares at the face of the record." The Supreme Court observed that the appellant had taken a specific plea at the very first instance. MSEDCL had clearly stated in its reply to the arbitration notice that the LOI could not bind either party and did not constitute a valid, concluded contract.

Letter Of Intent Is A "Promise To Make A Promise"

Examining the legal character of a Letter of Intent, the court held that an LOI is generally a precursor to a contract and not the contract itself. Relying on the OASYS Cybernatics judgment, the bench noted that a binding legal relationship does not come into existence until an offer is accepted unconditionally. The court observed that the LOI in the present case laid down preliminary conditions merely in contemplation of a future work order.

"Therefore, what needs to be distinguished is whether the intent of the parties is to make a 'promise' or a 'promise to make a promise'."

Submission Of Bank Guarantees Not Enough For Concluded Contract

The respondent argued that the submission and subsequent renewal of bank guarantees proved the existence of a concluded commercial contract. The bench firmly rejected this, explaining that the mere completion of preliminaries cannot form a binding legal relationship unless specified in the tender specifications. The court highlighted that the tender framework expressly required an agreement to be entered into, and since the sites were never handed over and no work order was issued, no agreement had concluded.

"In our view, this is a case of ‘reference’ and not ‘incorporation’. There is no mention of any arbitration or dispute resolution clause in the LOI itself, neither does it purport specific incorporation thereof..."

General Reference Does Not Incorporate Arbitration Clause

The court then addressed the doctrinal distinction between the "incorporation" and "reference" of an arbitration clause. Citing Section 7(5) of the 1996 Act and the precedent in NBCC (India) Ltd., the bench emphasized that an arbitration clause from another document can be incorporated into a contract only by a specific and explicit reference to that exact clause. The court held that a general, sweeping reference to tender conditions is wholly insufficient to import a dispute resolution clause into an LOI.

No Valid Arbitration Agreement Existed

Since the LOI only contained a general reference to the tender specifications without specifically mentioning the dispute resolution clause found in Clause 23 of the Special Conditions of Contract, the court ruled that it failed the statutory requirement for incorporation. The bench concluded that without a concluded contract and without specific incorporation of the arbitration clause, there was no arbitration agreement between the parties even on a prima facie assessment.

The Supreme Court allowed the appeal and set aside the impugned order of the Bombay High Court that had appointed the sole arbitrator. The judgment firmly establishes that an arbitration clause cannot be invoked based on an unconsummated Letter of Intent that merely contains a general reference to tender documents.

Date of Decision: 09 April 2026