South Eastern Coalfields Ltd. vs M/S S. Kumars Associates Akm(Jv) on 23 July, 2021


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Supreme Court of India

South Eastern Coalfields Ltd. vs M/S S. Kumars Associates Akm(Jv) on 23 July, 2021

Author: Sanjay Kishan Kaul

Bench: Sanjay Kishan Kaul, Hemant Gupta

                                                                                    Reportable

                                      IN THE SUPREME COURT OF INDIA
                                        CIVIL APPELLATE JURISDICTION


                                         CIVIL APPEAL NO.4358 OF 2016


                         SOUTH EASTERN COALFIELDS LTD. & ORS.                    ... Appellants


                                                        Versus

                         M/s. S. KUMAR’s ASSOCIATES AKM (JV)                     ...Respondent


                                                  JUDGMENT

SANJAY KISHAN KAUL, J.

1. South Eastern Coalfields Ltd., appellant no.1 is a Government

company registered under the Companies Act, 1956. The

appellant no.1 floated a tender for the work of “Hiring of HEMM

and allied equipments including digging machines fitted suitable

slump breaker for excavating overburden (including drilling in all

kinds of strata/overburden) loading into tipples, transportation,

unloading the extra waited material and silt, dumping dozing
Signature Not Verified

Digitally signed by
Charanjeet kaur
scrapping/removal bands preparation/maintenance of haul road
Date: 2021.07.23
15:27:00 IST
Reason:

water sprinkling and spreading of material at the site shown and

[1]
as per direction of the management/Engineer In Charge of Patch-

D, Mahan I OCM of Bhatgaon Area” on 23.06.2009. Bids were

received and respondent was the successful bidder. In view

thereof a Letter of Intent (‘LoI’) was issued bearing No.2415

dated 05.10.2009 awarding the contract for a total work of

Rs.387.40 lakh. The LoI stated as under:

i. A direction was made to the respondents to mobilize

equipment for executing the work to handle minimum

allotted Cu.m. per day and “commence the work

immediately.” Towards the said objective the

respondent was directed to report to the Chief General

Manager, Bhatgaon Area for “immediate

commencement of work.”

ii. 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.

iii. Sign the Integrity Pact before entering into the

agreement in accordance with the tender document.

iv. The work order would be issued and the agreement

would be executed at the Area Office.

[2]
v. The date of commencement of work may be intimated

to the issuing office and agreement may be concluded

within 28 days as per the provisions of the tender

document.

2. The respondent, in pursuance of the LoI, mobilized resources

at site and a measurement team was sent by appellant no.1 as

intimated vide letter dated 09.10.2009. On 28.10.2009, the

appellant issued a letter of site handover/acceptance

certificate, which was to be taken as the date of

commencement of the work.

3. The respondent apparently faced difficulties soon thereafter

and the letter dated 05.12.2009 of the respondent records that

though the work was started in all earnest and considerable

quantity of overburden had been removed, the truck mounted

drill machine employed by the respondent suffered a major

breakdown. The work, thus, had to be suspended for reasons

beyond the control of the respondent. The endeavour to

rectify the position or arrange alternative machinery did not

work out and the letter states that the purchase of new

machines was expected only after about three months. The

[3]
contractual relationship apparently deteriorated as on

09.12.2009, the appellants issued a letter alleging breach of

terms of contract and rules and regulations applicable by the

respondent. The appellant further asked the respondent to

show cause as to why penal action be not initiated of – (a)

termination of work; (b) blacklisting of the respondent

company; and (c) award of execution of work to other

contractor at the cost and risk of the respondent.

4. Communications in this behalf continued to be exchanged and

vide letter dated 12.12.2009, the appellants brought to the

notice of the respondents that they failed to submit the

performance security deposit which was required to be

submitted within 28 days from the date of the receipt of the

LoI as per the terms of the tender. Another show cause notice

was issued on 15.12.2009 intimating to the respondent that the

appellants were left with no option except to terminate the

work awarded to the respondent and get it executed by other

contractor at the risk and cost of the respondent in terms of

clause 9.0 of the General Terms & Conditions of the Notice

Inviting Tenders (‘NIT’) giving a ten days’ time to the

respondent to respond. It appears that there was no response

[4]
and on 23.12.2009, once again, a notice of termination was

issued. The respondent objected to the same, stating that the

work could not be executed at their risk and cost as the

General Terms & Conditions were never part of the NIT but

form the part of the contract which was never executed inter

se the parties. In substance, the respondent objected to the

invocation of the clause for the work to be carried out at their

risk and cost. The appellant could not rely on clause 9.0 of the

General Terms & Conditions. The final termination of work

was carried out vide letter dated 15.04.2010.

5. It appears that thereafter the work was awarded to another

contractor at a higher price and on account thereof a letter

dated 16.07.2010 was issued by the appellants to the

respondent seeking an amount of Rs.78,07,573/- being the

differential in the contract value between the respondent and

the new contractor.

6. The respondent filed a writ petition under Articles 226 & 227

of the Constitution of India seeking quashing of the

termination letter dated 15.04.2010 the recovery order dated

16.07.2010. The writ petition was contested by the appellants

who filed their counter affidavit. In terms of the impugned

[5]
judgment dated 07.11.2012, the Division Bench of the

Chhattisgarh High Court opined that there was no subsisting

contract inter se the parties to attract the general terms and

conditions as applicable to the contract. Various clauses of the

NIT were referred to and it was opined that there could not be

a valid contract inter se the parties as it was subject to

completion of certain formalities by the respondent, which

were never completed, i.e. furnishing of the performance

security; and the consequence was that the appellant was

within their rights to cancel the award of work and forfeit the

bid security. Thus, only the forfeiture of bid security was

upheld while the endeavour of the appellants to recover the

additional amount in award of contract to another contractor as

compared to the respondent was held not recoverable. We

may notice at the stage of admission of the writ petition and

issuing notice, the respondent was directed to deposit a sum of

Rs.10 lakh vide order dated 04.08.2010 and subject to the

same the endeavour to recover any amount from the

respondent was stayed. Thus, in the final order it was

mentioned that after deducting the bid security amount, the

balance amount out of Rs.10 lakh was to be refunded to the

[6]
respondent.

7. The appellant filed Special Leave Petition against the said

order and notice was issued on 08.02.2013. The direction to

refund the balance amount of Rs.10 lakh after deducting the

bid security amount was stayed till further orders. Leave was

granted on 13.04.2016.

Submissions of the Appellants

8. The substratum of the case of the appellants is based on a plea

that the requirement of deposit of performance security limited

to 5% of annualized contract amount within 28 days as well as

the requirement to sign 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 counsel

submitted, there was acceptance of the award of the work by

the respondent. In fact, the respondent vide letter dated

05.12.2009 acknowledged that they had removed considerable

amount of overburden and, thus, it is their own case that they

had carried out substantive work after mobilization of the

resources immediately after the issuance of LoI. Thus, the

[7]
absence of formal execution of the contract did not make a

difference to the claim of the appellants arising from the

breach of contract.

9. The distinction between a ‘condition precedent’ and a

‘condition subsequent’ was pleaded to be the crux of the issue

and had not been appreciated by the High Court. To support

his contention learned counsel referred 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 Burman3 case the factual matrix was that the

tender was accepted by the respondent therein, which was

alleged to have concluded the contract. The respondent’s case

therein was that the contract was governed by the general

conditions of contract which included an arbitration

agreement. The Supreme Court inter alia examined whether

there was a concluded contract between the parties or not. The

tender submitted was on a condition that on the acceptance of

the tender, the contractor shall deposit the security deposit, at

the option of the Secretary, Department of Supply, within the

1 (1962) 3 SCR 769
2 (2006) 1 SCC 751
3 Supra

[8]
period specified by him. A further condition stipulated that if,

on being called upon to deposit the said security, the

contractor fails to provide security within the period, such

failure would constitute a breach of contract entitling the

opposite party to make other arrangements at the risk and

acceptance of the contractor. The contractor sought to argue

that the acceptance letter changed the pre-existing position and

made the security deposit a condition precedent to the

acceptance itself and, thus, there was no concluded contract.

We may notice that in the relevant letter issued by the

awarding party in this regard, calling upon the security deposit

of 10% to be deposited it was clearly mentioned that “the

contract is concluded by this acceptance and formal

acceptance of tender will follow immediately on receipt of

treasury receipt.” This Court, thus, discussed the ramification

of this sentence vis-à-vis the clause stating “subject to your

depositing 10% as security”. In construing the true effect of

the clause such requirement of deposit of security was held not

to be a condition precedent as the letter, as well as the

conditions of the tender, clearly stated that the contract was

concluded by its acceptance. Section 7 of the Indian Contract

[9]
Act, 1872 requires the acceptance of an offer to be absolute

and unqualified and not conditional. In the facts of the case

the acceptance was found to be unconditional and the steps

were taken as the contract was intended to be executed

expeditiously relating to delivery of coconut oil which had to

be supplied within 21 days. The security deposit was, thus,

opined to be a subsequent condition.

11. In Dresser Rand S.A.4, the contract was to come into force

upon receipt of the LoI by the supplier. The Supreme Court

recognized the well settled principles of law that a LoI merely

indicates party’s intention to enter into a contract with the

other party in future and is not intended to bind either party

ultimately to enter into a contract. In this behalf observations

in an earlier judgment in Rajasthan Coop. Dairy Federation

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 a contract. ….There was no binding legal relationship
between the appellant and respondent No.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 No.1 or not.”

4 Supra
5 (1996) 10 SCC 405

[10]
This was, however, followed by a caveat that it could also not

be disputed 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, that

in order to save time, a letter of intent communicating the

acceptance of the offer is issued asking the contractor to start

the work with a stipulation that the detailed contract would be

drawn up later. Though such a letter may be termed as a letter

of intent, it may amount to acceptance of the offer resulting in

a concluded contract between the parties. This is a matter to

be decided with “reference to the terms of the letter.” It was

further observed that where the parties to a transaction

exchanged letters of intent, the terms of such letters may have

negative contractual intention but where the language does not

have negative contractual intention, it is open to the courts to

hold that the parties are bound by the document and the courts

would 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.

12. The terms of LoI were adverted to, more specifically clause

[11]
(L) therein, which stated that “this contract will come into

force upon receipt of this letter of intent by supplier.” In the

different clauses the LoI were referred to as “this order” and

“this contract” and it was, thus, argued to that the LoI be

treated as purchase orders. The Court harmoniously construed

the terms of the LoI to find that the effect of the LoI was that

if the purchase orders were placed and LCs were opened the

supplier was bound to effect supplies within the stipulated

time at the prices stated in the LoI. It was not interpreted as a

work order despite the wording utilized in the LoI.

Submissions of the Respondent

13. Learned counsel for the respondent, on the other hand, first

sought to emphasise the aspect discussed in para 39 of the

judgment in Dresser Rand S.A.6 case, which opined what an

LoI was by referring to the earlier view of this Court in

Rajasthan Coop. Dairy Federation Ltd.7 case. He further

sought to refer the judgment of this Court in Bhushan Power

& Steel Ltd. v. State of Odisha8 and drew our attention to what

an LoI was. The nomenclature of the letter would not be the

6 Supra
7 Supra
8 (2017) 2 SCC 125

[12]
determinative factor but the substantive nature of the letter

would determine whether it can be treated as an LoI, which as

per the legal dictionary means a preliminary understanding

between the parties who intend to make a contract or join

together in another action. Some earlier precedents were also

referred to.9 In fact the judgment in Dresser Rand 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

more specifically because entering into a lease license with

prospective licensee would require “previous approval” of the

Central Government. The LoI was held to amount to only an

intention to enter into a contract which would take place after

all other formalities are completed.

14. In order to substantiate his pleas, learned counsel for the

respondent referred to various clauses of the NIT and the LoI.

The relevant 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 of the award by the employer prior to expiration of

9 Rishi Kiran Logistics Private Limited v. Board of Trustees of Kandla Port Trust
and Others
(2015) 13 SCC 233
10 (supra)

[13]
the bid validity period 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 will pay
the Contractor in consideration of execution and
completion of 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 of Contract, 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 the employer and the successful bidder within 28
days following the notification 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 value of the contract amount and should be
submitted within 28 days of receipt of LOA by the
successful bidder in any of the form given below:

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

– Govt. Securities, FDR or any other form of deposit
stipulated by the owner.

[14]

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

The bid security deposit in the form of Bank
Guarantee shall be duly discharged and returned to the
contractor. The bid security deposited in the form of
demand draft shall be adjusted against the initial security
deposit.

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

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

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

c. the validity of the bank guarantee shall be for a
period of one year or ninety days beyond the period of
contract, whichever is more.

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

34. Integrity Pact

SECL has signed MOU with M/s. Transparency
International India for implementation of integrity pact in
contracts for works valued at Rs.1.00 crore and above. The
integrity pact document to be signed by the bidders is
enclosed vide Annexure “D”. Submission of integrity pact
document duly signed, stamped and accepted is mandatory
for this tender and is integral part of the tender document.

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


                                                        [15]
         ….          ….           ….           ….          ….

Section 3: Conditions of contract/General Terms and
Conditions

1. Definition: ix. The “Contract” shall mean the notice
inviting tender, the tender as accepted by the company and
the formal agreement executed between the company and
the contractor together with the documents referred to
therein including general terms and conditions, special
conditions, if any, schedule quantities with 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/tender document 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 of contract, “subject only” to the furnishing of a

Performance Security/Security Deposit in accordance with

[16]
clause 30. The agreement to be executed was to incorporate

all the terms inter se the parties. The consequence of not

furnishing the security deposit was specified in clause 30.2 at

the end, i.e., it was to constitute sufficient ground for

cancellation of the award work and forfeiture of the bid

security. In terms of clause 34 requiring Integrity Pact

document to be submitted duly signed, the consequence of not

doing so was that the tender was to be considered as not

substantially responsive and may be rejected. Lastly under

Section 3, the Conditions of contract/General Terms and

Conditions where it was defined in clause (ix) that a contract

would mean the NIT and the formal agreement to be executed

between the appellants and the respondent together with the

documents referred to therein indicating the general terms and

conditions, special conditions, if any, schedule quantities with

rates and amount, schedule of work.

16. It was further contended that after acceptance of tender and on

execution of contract, work order had to be issued which had

also not been issued as the preliminaries were not complied

with. The LoI was also referred to in the aforesaid context to

show that nothing was done in pursuance thereto except

[17]
mobilization of the resources and commencement of the work,

and that by itself could not be said to be a concluded contract.

In fact, what was submitted by learned counsel for the

respondent was that seeing the ground realities, the respondent

found that it was not feasible to execute the contract and, thus,

walked away from it, the consequence of which could only be

the forfeiture of the bid security amount as directed by the

impugned order, an aspect assailed by the respondent by filing

a cross appeal. The respondent has not been paid by the

appellant for whatever they may have done.

17. A reference was also made to the judgment in State of

Madhya Pradesh And Anr. v. Firm Gobardhan Dass Kailash

Nath11 where in respect of a tender for Government sale initial

deposit of 25% of purchase price was an essential pre-

condition for acceptance or sanction of tender was not

complied with. It was held that taking into consideration what

was required to enter into a contract, i.e., in writing and in

prescribed form and 25% amount not being deposited, it could

not be said that any concluded contract was arrived at between

the parties.

11 AIR 1973 SC 1164 :: (1973) 1 SCC 668

[18]
Conclusion

18. A consideration of the matter in the conspectus of the

aforesaid pleas leads to a conclusion that it cannot be said that

a concluded contract had been arrived at inter se the parties.

19. We have already reproduced aforesaid the terms of the letter of

award and what it mandated the respondent to do. None of the

mandates were fulfilled except that the respondent mobilized

the equipment at site, handing over of the site and the date of

commencement of work was fixed vide letter dated

28.10.2009. Interestingly this letter has been addressed to the

Sub Area Manager of the appellant by the office of the

appellant. The respondent, thus, neither submitted the

Performance 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 respondent would amount to a

concluding contract inter se the parties. The answer to the

same would be in the negative.

20. We would like to state the issue whether a concluded contract

had been arrived at inter se the parties is in turn dependent on

[19]
the terms and conditions of the NIT, the LoI and the conduct

of the parties. The judicial views before us leave little doubt

over the proposition that an LoI merely indicates a party’s

intention to enter into a contract with the other party in

future.12 No binding relationship between the parties at this

stage emerges and the totality of the circumstances have to be

considered in each case. It is no doubt possible to construe a

letter of intent 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 takes a 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 are cases

where a detailed contract is drawn up later on account of

anxiety to start work on an urgent basis. In that case it was

clearly stated that the 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 be interpreted as a work

order.

21. Similarly if we construe the documents as discussed in the

12 Dresser Rand S.A. (supra); Rajasthan Coop. Dairy Federation Ltd. (supra)
13 Supra

[20]
judgment of this Court in Jawahar Lal Burman14 case it is

unequivocally mentioned that “contract is concluded by this

acceptance and formal acceptance of tender will follow

immediately on receipt of treasury receipt.” Thus, once again,

it has been stipulated as to at what time a contract would stand

concluded even though it was later subject to deposit of the

security amount. It was in these circumstances that the

requirement of security deposit was treated not as a condition

precedent but as a condition subsequent. We have to also

appreciate the nature of contract which was for immediate

requirement of the full quantity of coconut oil to be supplied

within 21 days. It was also explicitly mentioned in the LoI

itself that any failure to deposit the stipulated amount would

be treated as a breach of contact. This is not the case here,

where the consequence was 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, the

period for execution of the contract was one year. The

respondent worked at the site for a little over the month,

14 Supra

[21]
facing certain difficulties – it is immaterial whether the same

was of the own making of the respondent or attributable to the

appellants. No amount was paid for the work done. The

respondent failed to comply with their obligations under the

LoI. It is not merely a case of the non-furnishing of

Performance Security Deposit but even the Integrity Pact was

never signed, nor work order issued on account of failure to

execute the contract. We are, thus, of the view that none of the

judgments cited by learned counsel for the appellants would

come to their aid in the contractual situation of the present

case. The judgments referred by learned counsel for the

appellants Jawahar Lal Burman15 case and Dresser Rand

S.A.16 case, if one may say so are not directly supporting either

of the parties but suffice to say that to determine the issue

what has to be seen are the relevant clauses of the NIT and the

LoI. On having discussed the non-compliance by the

respondent of the terms of the LoI we turn to the NIT. Clause

29.2 clearly stipulates that the notification of award will

constitute the formation of the contract “subject only” to

furnishing of the Performance Security/Security Deposit.
15 Supra
16 Supra

[22]
Thus, it was clearly put as a pre-condition and that too to be

done within 28 days following notification of the award. The

failure of the successful bidder to comply with the requirement

“shall constitute sufficient ground for cancellation of the

award work and forfeiture of the bid security” as per clause

30.2. If we analyse clause 34 dealing with the Integrity Pact

the failure to submit the same would make the tender bid “as

not substantially responsive and may be rejected.”

23. We may also add that the definition of what constitutes a

contract as per clause (ix) itself includes the NIT, the

acceptance of the tender, the formal agreement to be executed

between the parties post contractor furnishing all the

documents and the bid security amount.

24. The result of the aforesaid is that as rightly held in terms of the

impugned order all that the appellants can do is to forfeit the

bid security amount and, thus, it was so directed. Since as a

pre-condition of any coercive action against the respondent,

the High Court called upon the appellants to deposit a sum of

Rs.10 lakh in terms of the interim order dated 04.08.2010, a

direction is made to deduct the bid security amount out of the

sum of Rs.10 lakh and to refund the balance amount to the

[23]
respondent. The needful would now have to be done within

two months as in terms of the interim order of this Court dated

08.02.2013 such refund has been stayed.

25. We accordingly dismiss the appeal leaving the parties to bear

their own costs.

26. Interim order stands discharged.

……………………………….…..J.
[SANJAY KISHAN KAUL]

……………………………………J.

[HEMANT GUPTA]
NEW DELHI,
July 23, 2021.

[24]



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