Is LOI ( Letter of Intent ) IS A CONTRACT?

Is LOI ( Letter of Intent ) IS A CONTRACT?

In Dresser Rand S.A. v. M/s. Bindal Agro Chemical Ltd. & Another, 2006 Vol. I Supreme Court Cases (SCC) page 751 at page 773 at paras 39 and 40, a two-Judge Bench of the Supreme Court of India emphasized that whether letters of intent rise to the level of being a contract hinges on the terms of the letter itself. It observed as under:- "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 Court while considering the nature of a letter of intent observed thus in Rajasthan Coop. Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service (Plaintiff) Ltd. [1996 (10) SCC p.408, Para 7]

“The letter of intent merely expressed an intention to enter into a contract …. There was no binding legal relationship between the appellant and Respondent 1 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 1 or not.”

It is no doubt 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 between the parties. 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 with reference to the terms of the letter. Chitty on Contracts (Para 2.115 in Vol.1, 28th Edn.) 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 that 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.”

The said proposition has been quoted with approval in the latest judgment of Supreme Court of India in “Great Offshore Ltd. Vs. Iranian Offshore Engineering & Construction Company” decided on 25.08.2008.