Tender Process - Administration has discretion to cancel letter of intent : LOI did not create binding contractual rights

Supreme Court Upholds Himachal Pradesh's Cancellation of Letter of Intent to OASYS Cybernatics Pvt. Ltd. Supreme Court affirms conditional nature of Letter of Intent, dismisses enforceability claims, and emphasizes procedural fairness in state actions.

In a significant judgment, the Supreme Court of India has upheld the decision of the State of Himachal Pradesh to cancel a Letter of Intent (LOI) issued to M/s OASYS Cybernatics Pvt. Ltd. The LOI was related to a government tender for the supply, installation, and maintenance of electronic Point-of-Sale (ePOS) devices across Fair Price Shops in the state. 

The bench comprising Chief Justice Surya Kant, Justice Ujjal Bhuyan, and Justice Nongmeikapam Kotiswar Singh, ruled that the LOI did not constitute a binding contract, as it was contingent upon the fulfillment of specified preconditions. The LOI, issued on September 2, 2022, was intended as a precursor to a formal contract, pending successful completion of certain technical and procedural conditions by OASYS Cybernatics.

The cancellation was contested by OASYS Cybernatics, which argued that the decision was arbitrary and lacked procedural fairness. The company claimed substantial investment based on the LOI, asserting that the cancellation inflicted financial harm. However, the Supreme Court found that the preconditions of the LOI, including compatibility testing and live demonstrations, were not met by the respondent company.

The Court emphasized that while the LOI did not create enforceable rights, the state's administrative discretion in cancelling it was bound by constitutional principles of non-arbitrariness and fairness. On examining the reasons provided by the state, the Court found them to be reasonable and in line with public interest, as the actions were aimed at ensuring compatibility with national software infrastructure and maintaining transparency in public procurement.

The Supreme Court also directed a fact-finding inquiry to assess the costs incurred by OASYS Cybernatics for tangible assets or services provided during pilot or demonstration stages, ordering equitable reimbursement on the principle of quantum meruit. This directive ensures that the company is compensated for actual work or assets appropriated by the state.

The judgment underscores the importance of procedural fairness and transparency in state actions, particularly in public procurement processes, while reaffirming that an LOI does not equate to a binding contract.

Bottom Line:

Administrative discretion in cancelling a Letter of Intent (LOI) upheld, finding that the LOI did not create binding contractual rights and was conditional upon compliance with stipulated preconditions; judicial intervention limited to checking procedural fairness and non-arbitrariness in State action.

Statutory provision(s): Contract Law, Judicial Review of State Action, Tender Process, Public Interest, Relief - Equitable reimbursement on principle of quantum meruit.

State of Himachal Pradesh v. M/s OASYS Cybernatics Pvt. Ltd., (SC) : Law Finder Doc Id # 2812392