SOUTH EASTERN COALFIELDS LTD. & ORS. versus M/S. S. KUMAR’S ASSOCIATES AKM (JV) on 23 July 2021

1. South Eastern Coalfields Ltd., appellant no.1 is a Governmentcompany registered under the Companies Act, 1956. The appellant no.1floated a tender for the work of “Hiring of HEMM and allied equipmentsincluding digging machines fitted suitable slump breaker for excavatingoverburden (including drilling in all kinds of strata/overburden) loadinginto tipples, transportation, unloading the extra waited material and silt,dumping dozing scrapping/removal bands preparation/maintenance ofhaul road water sprinkling and spreading of material at the site shownand as per direction of the management/Engineer In Charge of Patch-D, Mahan I OCM of Bhatgaon Area” on 23.06.2009. Bids were receivedand respondent was the successful bidder. In view thereof a Letter ofIntent (‘LoI’) was issued bearing No.2415 dated 05.10.2009 awardingthe contract for a total work of Rs. 387.40 lakh. The LoI stated asunder:

i.A direction was made to the respondents to mobilizeequipment for executing the work to handle minimumallotted Cu.m. per day and “commence the workimmediately.” Towards the said objective the respondentwas directed to report to the Chief General Manager,Bhatgaon Area for “immediate commencement of work.”

ii.The respondent was called upon to deposit PerformanceSecurity Deposit for a sum total to 5% of annualized contractamount within 28 days from the date of receipt of the LoIas per the provisions of the tender document.

iii.Sign the Integrity Pact before entering into the agreementin accordance with the tender document.

iv.The work order would be issued and the agreement wouldbe executed at the Area Office.

v.The date of commencement of work may be intimated tothe issuing office and agreement may be concluded within A

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A28 days as per the provisions of the tender document.

2. The respondent, in pursuance of the LoI, mobilized resourcesat site and a measurement team was sent by appellant no.1 as intimatedvide letter dated 09.10.2009. On 28.10.2009, the appellant issued a letterof site handover/acceptance certificate, which was to be taken as theBdate of commencement of the work.

3. The respondent apparently faced difficulties soon thereafterand the letter dated 05.12.2009 of the respondent records that thoughthe work was started in all earnest and considerable quantity ofoverburden had been removed, the truck mounted drill machine employedCby the respondent suffered a major breakdown. The work, thus, had tobe suspended for reasons beyond the control of the respondent. Theendeavour to rectify the position or arrange alternative machinery didnot work out and the letter states that the purchase of new machineswas expected only after about three months. The contractual relationshipapparently deteriorated as on 09.12.2009, the appellants issued a letterDalleging breach of terms of contract and rules and regulations applicableby the respondent. The appellant further asked the respondent to showcause as to why penal action be not initiated of – (a) termination ofwork; (b) blacklisting of the respondent company; and (c) award ofexecution of work to other contractor at the cost and risk of theErespondent.

4. Communications in this behalf continued to be exchanged andvide letter dated 12.12.2009, the appellants brought to the notice of therespondents that they failed to submit the performance security depositwhich was required to be submitted within 28 days from the date of theFreceipt of the LoI as per the terms of the tender. Another show causenotice was issued on 15.12.2009 intimating to the respondent that theappellants were left with no option except to terminate the work awardedto the respondent and get it executed by other contractor at the risk andcost of the respondent in terms of clause 9.0 of the General Terms &Conditions of the Notice Inviting Tenders (‘NIT’) giving a ten days’Gtime to the respondent to respond. It appears that there was no responseand on 23.12.2009, once again, a notice of termination was issued. Therespondent objected to the same, stating that the work could not beexecuted at their risk and cost as the General Terms & Conditions werenever part of the NIT but form the part of the contract which was neverHexecuted inter se the parties. In substance, the respondent objected to the invocation of the clause for the work to be carried out at their riskand cost. The appellant could not rely on clause 9.0 of the General Terms& Conditions. The final termination of work was carried out vide letterdated 15.04.2010.

5. It appears that thereafter the work was awarded to anothercontractor at a higher price and on account thereof a letter dated16.07.2010 was issued by the appellants to the respondent seeking anamount of Rs.78,07,573/- being the differential in the contract valuebetween the respondent and the new contractor.

6. The respondent filed a writ petition under Articles 226 & 227of the Constitution of India seeking quashing of the termination letterdated 15.04.2010 the recovery order dated 16.07.2010. The writ petitionwas contested by the appellants who filed their counter affidavit. Interms of the impugned judgment dated 07.11.2012, the Division Benchof the Chhattisgarh High Court opined that there was no subsistingcontract inter se the parties to attract the general terms and conditionsas applicable to the contract. Various clauses of the NIT were referredto and it was opined that there could not be a valid contract inter se theparties as it was subject to completion of certain formalities by therespondent, which were never completed, i.e. furnishing of theperformance security; and the consequence was that the appellant waswithin their rights to cancel the award of work and forfeit the bid security.Thus, only the forfeiture of bid security was upheld while the endeavourof the appellants to recover the additional amount in award of contractto another contractor as compared to the respondent was held notrecoverable. We may notice at the stage of admission of the writ petitionand issuing notice, the respondent was directed to deposit a sum of Rs.10lakh vide order dated 04.08.2010 and subject to the same the endeavourto recover any amount from the respondent was stayed. Thus, in thefinal order it was mentioned that after deducting the bid security amount,the balance amount out of Rs.10 lakh was to be refunded to therespondent.

7. The appellant filed Special Leave Petition against the said orderand notice was issued on 08.02.2013. The direction to refund the balanceamount of Rs.10 lakh after deducting the bid security amount was stayedtill further orders. Leave was granted on 13.04.2016.

Submissions of the Appellants

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A8. The substratum of the case of the appellants is based on a pleathat the requirement of deposit of performance security limited to 5% ofannualized contract amount within 28 days as well as the requirement tosign the Integrity Pact before entering into the agreement was not a pre-condition to the execution of the agreement but a “condition subsequent”.By starting the execution of the work from 28.10.2009, learned counselBsubmitted, there was acceptance of the award of the work by therespondent. In fact, the respondent vide letter dated 05.12.2009acknowledged that they had removed considerable amount of overburdenand, thus, it is their own case that they had carried out substantive workafter mobilization of the resources immediately after the issuance ofCLoI. Thus, the absence of formal execution of the contract did not makea difference to the claim of the appellants arising from the breach ofcontract.

9. The distinction between a ‘condition precedent’ and a ‘conditionsubsequent’ was pleaded to be the crux of the issue and had not beenDappreciated by the High Court. To support his contention learned counselreferred to two judgments: (a) Jawahar Lal Burman v. Union of India[1]and (b) Dresser Rand S.A. v. Bindal Agro Chem Ltd. & Anr.[2]

10. In Jawahar Lal Burman[3] case the factual matrix was thatthe tender was accepted by the respondent therein, which was allegedEto have concluded the contract. The respondent’s case therein was thatthe contract was governed by the general conditions of contract whichincluded an arbitration agreement. The Supreme Court inter aliaexamined whether there was a concluded contract between the partiesor not. The tender submitted was on a condition that on the acceptanceof the tender, the contractor shall deposit the security deposit, at theFoption of the Secretary, Department of Supply, within the period specifiedby him. A further condition stipulated that if, on being called upon todeposit the said security, the contractor fails to provide security withinthe period, such failure would constitute a breach of contract entitlingthe opposite party to make other arrangements at the risk and acceptanceGof the contractor. The contractor sought to argue that the acceptanceletter changed the pre-existing position and made the security deposit acondition precedent to the acceptance itself and, thus, there was no 1 (1962) 3 SCR 7692 (2006) 1 SCC 751H3 Supra concluded contract. We may notice that in the relevant letter issued bythe awarding party in this regard, calling upon the security deposit of10% to be deposited it was clearly mentioned that “the contract isconcluded by this acceptance and formal acceptance of tender will followimmediately on receipt of treasury receipt.” This Court, thus, discussedthe ramification of this sentence vis-à-vis the clause stating “subject toyour depositing 10% as security”. In construing the true effect of theclause such requirement of deposit of security was held not to be acondition precedent as the letter, as well as the conditions of the tender,clearly stated that the contract was concluded by its acceptance. Section7 of the Indian Contract Act, 1872 requires the acceptance of an offerto be absolute and unqualified and not conditional. In the facts of thecase the acceptance was found to be unconditional and the steps weretaken as the contract was intended to be executed expeditiously relatingto delivery of coconut oil which had to be supplied within 21 days. Thesecurity deposit was, thus, opined to be a subsequent condition.

11. In Dresser Rand S.A.[4], the contract was to come into forceupon receipt of the LoI by the supplier. The Supreme Court recognizedthe well settled principles of law that a LoI merely indicates party’sintention to enter into a contract with the other party in future and is notintended to bind either party ultimately to enter into a contract. In thisbehalf observations in an earlier judgment in Rajasthan Coop. DairyFederation Ltd. v. Maha Laxmi Mingrate Marketing Service (P)Ltd.[5] were referred to at page 773 para 39, which reads as under:

“The letter of intent merely expressed an intention to enter into acontract. ….There was no binding legal relationship between theappellant and respondent No.1 at this stage and the appellant wasentitled to look at the totality of circumstances in deciding whetherto enter into a binding contract with respondent No.1 or not.”

This was, however, followed by a caveat that it could also not bedisputed that a letter of intent may be construed as a letter of acceptanceif such intention is evident from its terms. It is not uncommon in contractsinvolving detailed procedure, that in order to save time, a letter of intentcommunicating the acceptance of the offer is issued asking the contractorto start the work with a stipulation that the detailed contract would bedrawn up later. Though such a letter may be termed as a letter of intent, 4 Supra 5 (1996) 10 SCC 405

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Ait may amount to acceptance of the offer resulting in a concluded contractbetween the parties. This is a matter to be decided with “reference tothe terms of the letter.” It was further observed that where the partiesto a transaction exchanged letters of intent, the terms of such lettersmay have negative contractual intention but where the language doesnot have negative contractual intention, it is open to the courts to holdBthat the parties are bound by the document and the courts would beinclined to do so where the parties have acted on the document for along period of time or have expended considerable sums of money inreliance on it.

12. The terms of LoI were adverted to, more specifically clauseC(L) therein, which stated that “this contract will come into force uponreceipt of this letter of intent by supplier.” In the different clauses theLoI were referred to as “this order” and “this contract” and it was, thus,argued to that the LoI be treated as purchase orders. The Courtharmoniously construed the terms of the LoI to find that the effect ofDthe LoI was that if the purchase orders were placed and LCs wereopened the supplier was bound to effect supplies within the stipulatedtime at the prices stated in the LoI. It was not interpreted as a workorder despite the wording utilized in the LoI.

Submissions of the RespondentE

13. Learned counsel for the respondent, on the other hand, firstsought to emphasise the aspect discussed in para 39 of the judgment inDresser Rand S.A.[6 ]case, which opined what an LoI was by referringto the earlier view of this Court in Rajasthan Coop. Dairy FederationLtd.[7] case. He further sought to refer the judgment of this Court inFBhushan Power & Steel Ltd. v. State of Odisha[8] and drew our attentionto what an LoI was. The nomenclature of the letter would not be thedeterminative factor but the substantive nature of the letter woulddetermine whether it can be treated as an LoI, which as per the legaldictionary means a preliminary understanding between the parties whointend to make a contract or join together in another action. Some earlierGprecedents were also referred to.[9] In fact the judgment in Dresser Rand 6 Supra7 Supra 8 (2017) 2 SCC 1259 Rishi Kiran Logistics Private Limited v. Board of Trustees of Kandla Port Trust andOthers (2015) 13 SCC 233H10 (supra)

S.A.[10] case was also referred to therein, more specifically paras 39 &40. The LoI in question was held not to be a binding contract morespecifically because entering into a lease license with prospectivelicensee would require “previous approval” of the Central Government.The LoI was held to amount to only an intention to enter into a contractwhich would take place after all other formalities are completed.

14. In order to substantiate his pleas, learned counsel for therespondent referred to various clauses of the NIT and the LoI. Therelevant clauses in the tender document referred to are as under:

“29. Notification of the award and signing of agreement:

29.1 The bidder, whose bid has been accepted will be notified ofthe award by the employer prior to expiration of the bid validityperiod by cable, telex and facsimile confirmed by registered letter.This letter (hereinafter and in Conditions of Contract called the“Letter of Acceptance”) will state the sum that the Employer willpay the Contractor in consideration of execution and completionof the Works by the contractor as prescribed by the Contract(hereinafter and in the Contract called “the Contract Price”).

29.2 The notification of award will constitute the formation ofContract, subject only to the furnishing of a Performance Security/Security Deposit in accordance with clause 30.

29.3 The agreement will incorporate all agreements between theemployer and the successful bidder within 28 days following thenotification of award along with the letter of acceptance.

30. Performance Security/Security Deposit 30.1 Security Deposit shall consist of two parts:

a. Performance Security to be submitted at award of work and

b. Retention Money to be recovered from running bills.

The Security Deposit shall bear no interest.

30.2 The performance Security should be 5% of annualized valueof the contract amount and should be submitted within 28 days ofreceipt of LOA by the successful bidder in any of the form givenbelow:

- A Bank Guarantee in the form given in the bid document.

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- Govt. Securities, FDR or any other form of deposit stipulated bythe owner.

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- Demand Draft drawn in favour of the South Eastern Coal FieldsLtd. on any Schedule Bank payable at its Branch at……….

The bid security deposit in the form of Bank Guaranteeshall be duly discharged and returned to the contractor. The bidsecurity deposited in the form of demand draft shall be adjustedagainst the initial security deposit.

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If the performance security is provided by the successful bidderin the form of bank guarantee it shall be issued either:

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a. at bidder’s option by a nationalized/scheduled Indian bank, or

b. by a foreign bank located in India and acceptable to theemployer,

c. the validity of the bank guarantee shall be for a period of oneyear or ninety days beyond the period of contract, whichever ismore.

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Failure of the successful bidder to comply with therequirement as above shall constitute sufficient ground forcancellation of the award of work and forfeiture of the bid security.

E34. Integrity Pact

SECL has signed MOU with M/s. Transparency International Indiafor implementation of integrity pact in contracts for works valuedat Rs.1 crore and above. The integrity pact document to be signedby the bidders is enclosed vide Annexure “D”. Submission ofFintegrity pact document duly signed, stamped and accepted ismandatory for this tender and is integral part of the tenderdocument.

In case this is not submitted the tender may be considered as notsubstantially responsive and may be rejected.

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Section 3: Conditions of contract/General Terms and Conditions

1. Definition: ix. The “Contract” shall mean the notice invitingtender, the tender as accepted by the company and the formalHagreement executed between the company and the contractor together with the documents referred to therein including generalterms and conditions, special conditions, if any, schedule quantitieswith rates and amount, schedule of work.

2.0 Contract Documents

i. Articles of agreement,

ii. Notice inviting tender,

iii. Letter of Acceptance of tender indicating deviations, if any,from the conditions of contract incorporated in the bid/tenderdocument issued to the bidder,

iv. Conditions of contract including general terms and conditions,additional terms and conditions, special conditions, if any etc.forming part of agreement,

v. Scope of works/Bills of quantities and

vi. Finalised work programme.”

15. Learned counsel laid great emphasis on clause 29.2 aforesaid,which provided that notification of award will constitute the formation ofcontract, “subject only” to the furnishing of a Performance Security/Security Deposit in accordance with clause 30. The agreement to beexecuted was to incorporate all the terms inter se the parties. Theconsequence of not furnishing the security deposit was specified in clause30.2 at the end, i.e., it was to constitute sufficient ground for cancellationof the award work and forfeiture of the bid security. In terms of clause34 requiring Integrity Pact document to be submitted duly signed, theconsequence of not doing so was that the tender was to be consideredas not substantially responsive and may be rejected. Lastly under Section3, the Conditions of contract/General Terms and Conditions where itwas defined in clause (ix) that a contract would mean the NIT and theformal agreement to be executed between the appellants and therespondent together with the documents referred to therein indicatingthe general terms and conditions, special conditions, if any, schedulequantities with rates and amount, schedule of work.

16. It was further contended that after acceptance of tender andon execution of contract, work order had to be issued which had also notbeen issued as the preliminaries were not complied with. The LoI wasalso referred to in the aforesaid context to show that nothing was done A

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20SUPREME COURT REPORTS

Ain pursuance thereto except mobilization of the resources andcommencement of the work, and that by itself could not be said to be aconcluded contract. In fact, what was submitted by learned counsel forthe respondent was that seeing the ground realities, the respondent foundthat it was not feasible to execute the contract and, thus, walked awayfrom it, the consequence of which could only be the forfeiture of the bidBsecurity amount as directed by the impugned order, an aspect assailedby the respondent by filing a cross appeal. The respondent has not beenpaid by the appellant for whatever they may have done.

17. A reference was also made to the judgment in State of MadhyaPradesh And Anr. v. Firm Gobardhan Dass Kailash Nath[11] where inCrespect of a tender for Government sale initial deposit of 25% of purchaseprice was an essential pre-condition for acceptance or sanction of tenderwas not complied with. It was held that taking into consideration whatwas required to enter into a contract, i.e., in writing and in prescribedform and 25% amount not being deposited, it could not be said that anyDconcluded contract was arrived at between the parties.

Conclusion

18. A consideration of the matter in the conspectus of the aforesaidpleas leads to a conclusion that it cannot be said that a concluded contracthad been arrived at inter se the parties.E

19. We have already reproduced aforesaid the terms of the letterof award and what it mandated the respondent to do. None of themandates were fulfilled except that the respondent mobilized theequipment at site, handing over of the site and the date of commencementof work was fixed vide letter dated 28.10.2009. Interestingly this letterFhas been addressed to the Sub Area Manager of the appellant by theoffice of the appellant. The respondent, thus, neither submitted thePerformance Security Deposit nor signed the Integrity Pact. Consequently,the work order was also not issued nor was the contract executed. Thus,the moot point would be whether mobilization at site by the respondentGwould amount to a concluding contract inter se the parties. The answerto the same would be in the negative.

20. We would like to state the issue whether a concluded contracthad been arrived at inter se the parties is in turn dependent on the terms 11 AIR 1973 SC 1164 :: (1973) 1 SCC 668H12 Dresser Rand S.A. (supra); Rajasthan Coop. Dairy Federation Ltd. (supra)

and conditions of the NIT, the LoI and the conduct of the parties. Thejudicial views before us leave little doubt over the proposition that an LoImerely indicates a party’s intention to enter into a contract with theother party in future.[12] No binding relationship between the parties atthis stage emerges and the totality of the circumstances have to beconsidered in each case. It is no doubt possible to construe a letter ofintent as a binding contract if such an intention is evident from its terms.But then the intention to do so must be clear and unambiguous as it takesa deviation from how normally a letter of intent has to be understood.This Court did consider in Dresser Rand S.A.[13] case that there arecases where a detailed contract is drawn up later on account of anxietyto start work on an urgent basis. In that case it was clearly stated thatthe contract will come into force upon receipt of letter by the supplier,and yet on a holistic analysis – it was held that the LoI could not beinterpreted as a work order.

21. Similarly if we construe the documents as discussed in thejudgment of this Court in Jawahar Lal Burman[14] case it is unequivocallymentioned that “contract is concluded by this acceptance and formalacceptance of tender will follow immediately on receipt of treasuryreceipt.” Thus, once again, it has been stipulated as to at what time acontract would stand concluded even though it was later subject to depositof the security amount. It was in these circumstances that the requirement of security deposit was treated not as a condition precedent but as acondition subsequent. We have to also appreciate the nature of contractwhich was for immediate requirement of the full quantity of coconut oilto be supplied within 21 days. It was also explicitly mentioned in the LoIitself that any failure to deposit the stipulated amount would be treatedas a breach of contact. This is not the case here, where the consequencewas simply forfeiture of the bid security amount, and cancellation of the‘award’ and not the ‘contract’.

22. If we compare the aforesaid scenario in the present case, theperiod for execution of the contract was one year. The respondent workedat the site for a little over the month, facing certain difficulties – it isimmaterial whether the same was of the own making of the respondentor attributable to the appellants. No amount was paid for the work done.The respondent failed to comply with their obligations under the LoI. It 14 Supra AB

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Ais not merely a case of the non-furnishing of Performance SecurityDeposit but even the Integrity Pact was never signed, nor work orderissued on account of failure to execute the contract. We are, thus, of theview that none of the judgments cited by learned counsel for the appellantswould come to their aid in the contractual situation of the present case.The judgments referred by learned counsel for the appellants JawaharBLal Burman[15] case and Dresser Rand S.A.[16] case, if one may say soare not directly supporting either of the parties but suffice to say that todetermine the issue what has to be seen are the relevant clauses of theNIT and the LoI. On having discussed the non-compliance by therespondent of the terms of the LoI we turn to the NIT. Clause 29.2Cclearly stipulates that the notification of award will constitute the formationof the contract “subject only” to furnishing of the Performance Security/Security Deposit. Thus, it was clearly put as a pre-condition and that tooto be done within 28 days following notification of the award. The failureof the successful bidder to comply with the requirement “shall constitutesufficient ground for cancellation of the award work and forfeiture ofDthe bid security” as per clause 30.2. If we analyse clause 34 dealingwith the Integrity Pact the failure to submit the same would make thetender bid “as not substantially responsive and may be rejected.”23. We may also add that the definition of what constitutes acontract as per clause (ix) itself includes the NIT, the acceptance of theEtender, the formal agreement to be executed between the parties postcontractor furnishing all the documents and the bid security amount.

24. The result of the aforesaid is that as rightly held in terms ofthe impugned order all that the appellants can do is to forfeit the bidsecurity amount and, thus, it was so directed. Since as a pre-condition ofFany coercive action against the respondent, the High Court called uponthe appellants to deposit a sum of Rs.10 lakh in terms of the interimorder dated 04.08.2010, a direction is made to deduct the bid securityamount out of the sum of Rs.10 lakh and to refund the balance amountto the respondent. The needful would now have to be done within twoGmonths as in terms of the interim order of this Court dated 08.02.2013such refund has been stayed.25. We accordingly dismiss the appeal leaving the parties to beartheir own costs.

15 Supra26. Interim order stands discharged.H16 Supra Devika Gujral