LETTER OF INTENT IS NOT A CONTRACT: SUPREME COURT REFUSES ARBITRATION IN ABSENCE OF CONCLUDED AGREEMENT

INTRODUCTION
In Maharashtra State Electricity Distribution Company Ltd. (MSEDCL) & Ors. v.
R.Z. Malpani, 2026 INSC 342, decided on 9 April 2026, the Supreme Court of
India, comprising Justice J.K. Maheshwari and Justice Atul S. Chandurkar,
clarified a crucial principle in arbitration law: A Letter of Intent (LoI), by itself, does
not create a binding contract or an arbitration agreement unless the intention to be
bound is clear and complete.
The Court set aside the High Court’s Order appointing an arbitrator, holding that in
the absence of a concluded contract and valid incorporation of an arbitration clause,
reference to arbitration is impermissible.

BRIEF FACTS
The dispute arose out of a Tender floated by MSEDCL for civil and interior works
across Maharashtra. The Respondent participated in the bidding process and was
issued a Letter of Intent (LoI) accepting its bid. Pursuant to the LoI, the Respondent
furnished bank guarantees and completed certain preliminary formalities.
However, no formal work order was issued, nor was any final agreement executed
between the parties. Despite repeated requests, the work never commenced and
eventually the Respondent terminated the arrangement and invoked arbitration
based on the arbitration clause contained in the tender documents.
The High Court, exercising jurisdiction under Section 11 of the Arbitration and
Conciliation Act, 1996, appointed an arbitrator. This Order was challenged before the
Supreme Court.

ISSUES OF LAW

The Supreme Court considered whether a valid arbitration agreement existed
between the parties, particularly in the absence of a concluded contract and whether
a general reference to tender documents in a Letter of Intent is sufficient to
incorporate an arbitration clause.

ANALYSIS OF THE JUDGMENT
The Court began by reiterating that the scope of judicial intervention at the stage of
Section 11 is limited to examining the prima facie existence of an arbitration
agreement. However, even within this limited scope, the Court found that the present
case fell within the rare category where no such agreement existed on the face of
the record.
A central aspect of the Judgment is the Court’s analysis of the legal nature of a
Letter of Intent. Relying on settled precedents, the Court held that an LoI is ordinarily
a preliminary step indicating intention to enter into a contract and not a binding
agreement in itself. Whether an LoI results in a concluded contract depends on the
intention of the parties, which must be gathered from the terms of the document and
surrounding circumstances. In the present case, the LoI clearly contemplated that a
formal work order and agreement would follow and therefore did not create any
binding legal relationship.
The Court further noted that essential steps necessary for formation of a contract,
such as issuance of a work order and execution of a formal agreement, were never
completed. The mere furnishing and renewal of bank guarantees by the Respondent
were held to be preliminary acts and insufficient to establish a concluded contract.
Another crucial aspect of the Judgment is the distinction between “reference” and
“incorporation” of an arbitration clause. The Court held that a general reference to
tender documents in the LoI does not automatically incorporate the arbitration clause
contained therein. For such incorporation to take place, there must be a clear and
specific intention to adopt the arbitration clause as part of the contract. In the present
case, the LoI merely referred to the tender conditions in general terms and did not
specifically incorporate the arbitration clause.
The Court also clarified that even though arbitration law favours minimal judicial
interference and promotes referral to arbitration, this principle cannot be applied

mechanically. Where it is evident, even at a prima facie level, that no arbitration
agreement exists, courts are justified in refusing to refer the dispute to arbitration.

CONCLUSION
The Supreme Court allowed the Appeal and set aside the High Court’s Order
appointing an arbitrator, holding that in the absence of a concluded contract and
valid incorporation of an arbitration clause, no arbitration agreement can be said to
exist.
The Judgment reinforces two foundational principles of arbitration law: first, that
consent remains the cornerstone of arbitration and second, that a Letter of Intent is
merely a step towards a contract and not the contract itself unless clearly intended
otherwise. It serves as an important reminder that arbitration cannot be invoked on
the basis of incomplete or inchoate arrangements, particularly where the parties
have not yet entered into a binding legal relationship.

SARTHAK KALRA
Senior Legal Associate
The Indian Lawyer & Allied Services

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