Letter Of Intent Is A Precursor And Not Concluded Contract To Justify Requirement U/S 7 Arbitration Act: Supreme Court
The Court held that without ad idem on a binding relationship, an LOI remains a “promise in embryo” and confers no right to seek arbitration.
The Supreme Court while setting aside a Bombay High Court judgment, has held that a Letter of Intent (LOI) which is contingent upon the future issuance of a work order and execution of a formal agreement does not constitute a concluded contract, thereby precluding the existence of an enforceable arbitration agreement. The Bench said that on a mere prima facie view of the matter, there is no existence of arbitration agreement, and accordingly, it set aside the appointment of the arbitrator.
On the principle that an LOI is merely a precursor to a contract and not the contract itself, the Court emphasised that a general reference to tender documents in such a provisional communication cannot satisfy the requirements of Section 7 of the Arbitration and Conciliation Act, 1996. It clarified that unless parties are ad idem on a final binding relationship, the 'promise in embryo' contained in an LOI does not mature into a juridical entitlement to seek arbitration.
Justice J.K. Maheshwari and Justice Atul S. Chandurkar observed, “…the terms of the tender itself have never been worked upon by the Respondent. The Work Order was never issued by the Appellant and the sites were never handed over by the Appellant. The Respondent has submitted bank guarantees pursuant to the LOI, which at best is a preliminary requirement as a precursor to the Work Order being 39 issued. As discussed above, the LOI in the instant case was indicative of a preliminary document in course of the contract and was not intended to be an end-all-be-all contract between the parties, it did not create contractual obligations or legal relationship between them”.
Senior Advocate Vikas Singh appeared for the appellant and Advocate Abhijit A. Desai appeared for the respondent.
The Appellant, Maharashtra State Electricity Distribution Company Limited (MSEDCL), floated a tender in 2021 for civil and interior works across various centers. The Respondent, R Z Malpani, emerged as the successful bidder, leading the Appellant to issue a Letter of Intent (LOI) on November 16, 2022.
Although the Respondent furnished bank guarantees as security deposits, no formal work order was issued, nor was a standard proforma agreement executed as required by the tender's instructions. Ultimately, the Respondent terminated the "contract" due to non-issuance of work orders and invoked the arbitration clause found in the tender documents.
MSEDCL cancelled the tender and refunded the security deposits in September 2024, maintaining that no valid contract or arbitration agreement had been formed. The Respondent subsequently filed an application under Section 11 of the 1996 Act before the Bombay High Court.
In an ex-parte order dated October 1, 2025, the High Court appointed a sole arbitrator, finding that the LOI resulted in a concluded contract and that MSEDCL had not denied the arbitration agreement’s existence in its initial reply.
Now, the Court found the High Court’s findings prima facie erroneous as the record showed MSEDCL had specifically contested the existence of a concluded contract at the first instance. The Court analysed Section 7(5) of the Act, noting that while an arbitration agreement can be incorporated by reference, it must be into a "contract" that is in writing.
“In our view, this is a case of ‘reference’ and not ‘incorporation’. There is no mention of any arbitration or dispute resolution 37 clause in the LOI itself, neither does it purport specific incorporation thereof from the tender documents. As such, the arbitration clause contained in the Tender documents could not be said to have been incorporated in the LOI to evince the existence of an arbitration agreement between the parties on its conjoint reading with the Tender documents”, it noted.
Placing reliance on State of Himachal Pradesh v. OASYS Cybernatics Pvt. Ltd. 2025 SCC OnLine SC 2536, the Court observed that the LOI was contingent, stating it was issued only to enable "preliminaries" until a detailed work order was released.
“It goes without saying that the scope of inquiry at the stage of Section 11 is extremely limited and only pertains to an examination about prima facie existence of an arbitration agreement. Judicial non-interference in the arbitration process is the sacrosanct principle which guides alternative dispute resolution and Courts must be highly circumspect in interfering at the referral stage, especially since there is no appeal available in the 1996 Act against an order under Section 11. The Arbitral Tribunal, in exercise of its jurisdiction under Section 16 must be left to decide on its jurisdiction”, the Bench noted.
“…The Courts should follow the principle of ‘When in doubt, do refer’ and lean towards referring matters to arbitration when the arbitration agreement is prima facie existent. However, it is only in the rarest of rare cases where even on a prima facie view, without going into disputed facts between the parties, there appears to be no existence of arbitration agreement between the parties, the Court can reject the application for appointment of an arbitrator and reference of the parties to arbitration”, the Bench noted further.
Accordingly, while allowing the appeal, the Court granted the Respondent liberty to pursue other alternative legal remedies as may be available.
Cause Title: Maharashtra State Electricity Distribution Company Limited (MSEDCL) & Ors. v. R Z [Neutral Citation: 2026 INSC 342]
Appearances:
Appellants: Vikas Singh, Sr. Adv., Samir Malik, Tushar Mathur,. Mahip Singh Sikarwar,. Snehal Kaila, Yachana Gupta, Deepeika Kalia, Deepanshu Shakargaye, Sudeep Chandra, Khushi, Samir Malik, AOR, Advocates.
Respondent: Abhijit A. Desai, Satyajit A. Desai, Parth Johari, Parth Kumar Singh, Satya Kam Sharma, AOR, Advocates.