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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