The Supreme Court clarifies that a Letter of Intent (LoI) is conditional and does not create enforceable or vested rights until all stipulated preconditions are fulfilled, reinforcing the limits of bidder expectations in public procurement.
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NEW DELHI: The Supreme Court of India recently delivered a landmark judgment in the case concerning the cancellation of a Letter of Intent (LoI) issued for the supply and maintenance of Aadhaar-enabled ePoS devices in Himachal Pradesh’s Public Distribution System (PDS). The case highlights the delicate balance between government discretion in public procurement and the protection of bidders’ legitimate expectations.
Background
Himachal Pradesh aimed to modernize its PDS by introducing enhanced electronic Point-of-Sale devices with biometric and IRIS scanning capabilities, fully integrated with Aadhaar and electronic weighing scales. M/s OASYS Cybernetics Pvt. Ltd., which had previously supplied devices under a 2017 contract, emerged as the sole technically qualified bidder in the fourth tender conducted in 2022.
The State issued a Letter of Intent (LoI) on 2 September 2022, setting a monthly rental rate of ₹1,050 per device. However, the LoI was explicitly conditional. It required the respondent to:
- Conduct compatibility testing of devices with the NIC software
- Provide a live demonstration at the Directorate in Shimla
- Submit a detailed cost breakup, including MRP
- Execute a formal agreement only after completing all prerequisites
The LoI clearly stated that it was a “provisional communication” and did not itself constitute a binding contract.
Despite ongoing correspondence, reminders, and partial implementation, the Department cancelled the LoI on 6 June 2023 without providing a reason. Aggrieved, OASYS approached the High Court of Himachal Pradesh, which held the cancellation as arbitrary and violative of natural justice, directing the continuation of the LoI.
Issues
The Supreme Court identified two primary issues in this appeal:
- Nature of the Letter of Intent (LoI)
- Whether the LoI dated 02.09.2022 created any binding or enforceable rights in favor of the respondent company.
- Or, whether it was merely a conditional, pre-award communication, subject to fulfillment of stipulated prerequisites such as compatibility testing with NIC software, live demonstrations, cost disclosures, and formal agreement execution.
- Legality of the Cancellation Letter
- Whether the State’s decision to cancel the LoI on 06.06.2023 was arbitrary, unreasoned, or violative of the principles of natural justice.
- Whether the cancellation warranted judicial interference, or if it fell within the State’s lawful administrative discretion in public procurement
Arguments Before the Supreme Court
For the State:
The State contended that the LoI was conditional and non-binding, and the respondent failed to satisfy the prerequisites, including NIC compatibility testing, live demonstrations, and cost disclosures. Further, a complaint regarding the respondent’s predecessor’s past blacklisting, though stale, was cited to reinforce concerns about vendor integrity. The State argued that the cancellation was a lawful exercise of administrative discretion, aiming to ensure technological reliability, transparency, and fair competition.
For the Respondent:
OASYS argued that the LoI had acquired substance through eight months of substantial reliance. It had invested heavily, manufactured over 5,000 devices, set up infrastructure, and conducted training. The respondent contended that the cancellation was arbitrary, non-reasoned, and contrary to principles of natural justice, and that the blacklisting complaint was irrelevant since it pertained to a predecessor entity.
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Supreme Court Observations
Nature of the LoI
The Supreme Court first clarified the legal nature of an LoI:
“A letter of intent merely indicates a party’s intention to enter into a contract in future. It is not intended to bind either party ultimately.”
Dresser Rand v. Bindal Agro Chem Ltd.
The Court observed that the LoI of 2 September 2022 was conditional, requiring testing, demonstration, and cost submission. Since these conditions were unfulfilled, no contractual rights had accrued to OASYS.
On Cancellation
Regarding the cancellation, the Court emphasized:
“Administrative correspondence during evaluation does not amount to duplicity. The final decision must only be traceable to reason, not whim.”
The Supreme Court rejected the blacklisting argument, noting that any prior disqualifications had already expired and had been addressed in previous proceedings. The Court also observed that the State’s concerns regarding non-compliance and NIC compatibility were bona fide and relevant.
Furthermore, it clarified that any expectation of a contract arising from the LoI does not override the State’s discretionary power to cancel the LoI in the public interest.
Legal Principles Highlighted
The Court emphasized that a conditional LoI does not equate to a binding contract, and that substantial reliance alone cannot create enforceable rights if the stipulated preconditions remain unmet.
Additionally, the exercise of administrative discretion in tenders must be guided by reason, relevance, and fairness, and the principle of legitimate expectation applies only when there is an unambiguous representation.
Supreme Court Conclusion and Directions
The Supreme Court allowed the appeal and set aside the High Court’s order. Key directions included:
- Upholding the LoI cancellation and setting aside the subsequent Expression of Interest issued in OASYS’s favor.
- State permitted to issue a fresh tender for ePoS devices, ensuring fair competition and compliance with technical specifications.
- Fact-finding enquiry to reimburse OASYS for assets, devices, and services provided during pilot/demo stages, based on quantum meruit.
- No further claims for loss of profit or consequential damages would survive.
The Court emphasized that public procurement in the PDS sector directly affects vulnerable citizens, and timely, transparent execution is paramount.
The Supreme Court clarified that Letters of Intent are conditional and do not create enforceable contractual rights. The State’s cancellation of the LoI was held lawful, as it was guided by reason, public interest, and compliance concerns, including NIC compatibility for Aadhaar-enabled ePoS devices. The judgment underscores that bidders’ expectations cannot override tender conditions and highlights the need for procedural fairness in public procurement, especially in welfare-focused digital projects.
Case Title:
State of Himachal Pradesh & Anr. vs. M/s OASYS Cybernatics Pvt. Ltd.
SLP (C) No. 6531/2025
READ JUDGMENT
