In the commercial transaction “ Letter of Intent (LOI) ” and “Letter of Acceptance” are interchangeably used. In common practice both are treated equally, but legally there is notable difference between the two terms. Letter of Intention is a merely an intention of party to place an order, and normally not a binding contract, unless the parties acted under the same for a long time. On the other hand “Letter of Acceptance” connotes the acceptance of an offer and the same is normally binding.
Now the pertinent question arises whether an LOI is a binding contract or not. Answer to this question is not as simple. Whether the LOI would be construed as a valid contract or not depends upon the terms of the LOI and conducts of the parties.
If it is made clear in the LOI that the letter of intent is only a prelude to the purchase order/ work order and not itself the purchase order/work order. This would mean that the person issuing the Letters of Intent wanted concurrence of certain things to the terms contained in the Letter of Intent so that it can place an order in terms of the conditions mentioned in the Letters of Intent.
It is now well-settled that a Letter of Intent merely indicates a party's intention to enter into a contract with the other party in future. A Letter of Intent is not intended to bind either party ultimately to enter into any contract. This Apex Court while considering the nature of a Letter of Intent, observed as under in Rajasthan Co-operative Dairy Federation Ltd. V. Maha Laxmi Mingrate Marketing Service Pvt. Ltd. [1996 (10) SCC 405]
"The letter of intent merely expressed an intention to enter into a contract. ... There was no binding legal relationship between the appellant and Respondent at this stage and the appellant was entitled to look at the totality of circumstances in deciding whether to enter into a binding contract with Respondent or not."
Chitty on Contracts (Para 2.115 in Volume 1- 28th Edition) observes that where parties to a transaction exchanged letters of intent, the terms of such letters may, of course, negative contractual intention; but, on the other hand, where the language does not negative contractual intention, it is open to the courts to hold the parties are bound by the document; and the courts will, in particular, be inclined to do so where the parties have acted on the document for a long period of time or have expended considerable sums of money in reliance on it.
In Great Offshore Ltd. vs. Iranian Offshore Engineering and Construction Co.( 2008) 14 SCC 240), Apex court observed as under:
“In construing whether or not a particular agreement does or does not amount to a contract, the court would look for the intention of the parties, the nature of the transaction, the language employed in the informal agreement and other relevant circumstances. None of these is conclusive in itself. ... The fact that the parties contemplate that the letters or an informal agreement would be superseded by a more formal one, does not prevent it from taking effect as a contract. If the letter of intent is acted upon, especially for a length of time, the court is likely to hold the parties bound by the contract [See Mulla, Indian Contract and Specific Relief Acts, 13th Edition at pages 317-318]”
In Dresser Rand S.A. v. M/s. Bindal Agro Chemical Ltd. & Another, (AIR 2006 SC 871 ) a two-Judge Bench of Apex Court emphasized that whether letters of intent rise to the level of being a contract hinges on the terms of the letter itself. It is no double true that a Letter of Intent may be construed as a letter of acceptance if such intention is evident from its terms. It is not uncommon in contracts involving detailed procedure, in order to save time, to issue a letter of intent communicating the acceptance of the offer and asking the contractor to start the work with a stipulation that the detailed contract would be drawn up later. If such a letter is issued to the contractor, though it may be termed as a Letter of Intent, it may amount to acceptance of the offer resulting in a concluded contract ... . But the question whether the letter of intent is merely an expression of intention to place an order in future or whether is a final acceptance of the offer thereby leading to a contract, is a matter that has to be decided by reference to the terms of the letter.
In McDermott International Inc vs Burn Standard Co. Ltd ( 2006) 11 SCC 181, it was observed by the Apex Court as “ It is trite that the terms of the contract can be express or implied. The Conduct of the parties would also be a relevant factor in the matter of construction of a Contract.
On a concluding note we can say the Letter of Intention can be a contract when the parties have acted on the same for a long period of time or have expended considerable sums of money in reliance on it.
Azeez Nazar Sabri
LLM ( Business Laws)