The Supreme Court in a recent judgement of South Eastern Coalfields Ltd. & Ors. vs M/s S. Kumar's Associates AKM (JV) held that for a document to be of a binding nature, the intention of the parties has to be looked upon. The court observed that for a Letter of Intent (LOI) to be a legally binding contract, the intent of the same must be clear and unambiguous, as evidenced by its terms. It stated that an LOI simply expresses a party's intention to engage into a contract with the other party in the future. Likewise, in another recent case of Bhimrao Ramchandra Khalate (Deceased) Through L.Rs. vs Nana Dinkar Yadav (Tanpura) & Anr , the Supreme Court ruled that the parties' intentions must be considered while determining whether a transaction is an absolute sale or a mortgage by conditional sale.

Questions of law for adjudication:

1.Whether an LOI executed between the parties can be construed as a binding contract?
2.Whether a Deed is of Absolute Transfer or Mortgage by Conditional Sale?

Background:

South Eastern Coalfield Case - In this case, South Eastern Coalfields Limited (Appellant) floated a tender for the work and S Kumar's Associates AKM (Respondent) was the successful bidder. An LOI was issued dated 5 October 2009 by awarding the contract for work. LOI had a clause which stated that- ``The Respondent was called upon to deposit Performance Security Deposit for a sum total to 5% of annualized contract amount within 28 days from the date of receipt of the LOI as per the provisions of the tender document``. The Respondent mobilized the resources, but the effort was halted due to circumstances beyond the Respondent's control. The Appellant addressed a letter stating that they would award the work to another contractor at the risk and cost of the Respondent. Due to non-performance, the Appellant elected to terminate the contract on 23 December 2009 and again on 15 April 2010 (Termination Letters). The work was given to a different contractor at a higher price than agreed upon with the Respondent and thus the Appellants sent a letter requesting Rs. 78,07,573/- (Recovery Order) from the Respondent. The sum in question was the difference between the Respondent's and the new contractor's work values. The Respondent filed a writ petition at the Chhattisgarh High Court seeking to quash the Termination Letters and Recovery Order sent by the Appellants. The High Court held that there was no existing contract between the parties to bind them to the contract's general terms and conditions. The Appellants preferred a special leave petition before the Supreme Court.

Supreme Court View: The Supreme Court stated that the terms and circumstances of the LOI, and the actions of the parties are all factors in determining whether a contract is consummated. It concluded that mobilization at site by the Respondent would not amount to a concluding a contract inter se the parties. LOI merely indicates the intention of the parties to enter into a contract in future. At this point, there is no binding link between the parties, and the totality of the facts must be assessed in each situation.

Bhimrao Ramchandra Khalate case - Bhimrao Khalate (Plaintiff) being the owner of agricultural land (Land) in Village Khunte borrowed Rs 3000/- from Defendant No 1 on 22 February 1969 by executing 'conditional sale deed' as a security for the loan amount. The Defendant No 1 refused to re convey the Land and transferred the same in favour of his brother (Defendant No 2). Thus, the Plaintiff filed a suit for redemption of property and possession on 5 April 1989. The Plaintiff claimed that the 'conditional sale deed' was in the nature of mortgage even though it was titled as the conditional sale. The clauses of the conditional sale deed stated that the defendant was bound to give back the possession to the plaintiff within one year from the date of conditional sale deed.

The Judgment: It was observed by the Supreme Court that the intention of the parties has to be seen when the document is executed. The plaintiff had borrowed a sum of Rs. 3,000/- for his family costs, and the defendant is obligated to retransfer the land if the amount is paid within one year, according to the entire interpretation of the conditional sale deed. The loan advance and repayment are both part of the same instrument that establishes a debtor-creditor relationship. This is covered by the proviso in Section 58(c) of the Transfer of Property Act, 1882. Accordingly, the Supreme Court set aside the order passed by the lower courts which dismissed the suit for redemption against the defendants and further directed the Appellant to pay or deposit the mortgage amount within three months of the receipt of copy of the order.

MHCO COMMENT:

The Supreme Court of India has clarified and reiterated that the intention of the parties is paramount and should be looked at while understanding the nature of any contract. We believe that these judgments are a welcome step from the Apex court, to clear the ambiguity with respect to the intention of parties.

This update was released on 24 Aug 2021.

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