Letter of Interest does not Create Vested Rights

Source: Supreme Court 

Why in News? 

The bench of Chief Justice Surya Kant and Justices Ujjal Bhuyan and N Kotiswar Singh in the case of State of Himachal Pradesh & Anr. v. M/s OASYS Cybernatics Pvt. Ltd. (2025) upheld the Himachal Pradesh government's decision to cancel a Letter of Interest issued to a private company for supply of electronic Point-of-Sale devices for the Public Distribution System.

What was the Background of State of Himachal Pradesh & Anr. v. M/s OASYS Cybernatics Pvt. Ltd. (2025) Case? 

• The Himachal Pradesh government issued a Letter of Interest (LoI) in September 2022 to a private company for supplying electronic Point-of-Sale (ePoS) devices for its Public Distribution System (PDS). 
• The LoI remained in effect for eight months before being cancelled in June 2023. 
• The company challenged the cancellation before the High Court, arguing it was arbitrary and citing substantial investments made in preparing for the contract. 
• The High Court interfered with the State's decision and restored the contractual obligations of the company. 
• The LoI contained several pre-conditions including successful compatibility testing with National Informatics Centre (NIC) software and live demonstration requirements. 
• The company failed to conclusively meet these technical preconditions stipulated in the LoI. 
• Aggrieved by the High Court's intervention, the State of Himachal Pradesh appealed to the Supreme Court.

What were the Court's Observations? 

• The Court observed that a Letter of Interest (LoI) is merely a "promise in embryo" that can mature into a contract only upon satisfaction of stipulated preconditions or upon issuance of a Letter of Acceptance (LoA). 
• Referencing Dresser Rand S.A. v. Bindal Agro Chem Ltd. (2006), the Court stated that a letter of intent merely indicates a party's intention to enter into a contract in future and is not intended to bind either party ultimately. 
• The Court acknowledged that the cancellation letter was "laconic" and lacked stated reasons, but held that these deficiencies were only procedural and did not render the decision arbitrary. 
• Since the company failed to conclusively meet technical preconditions such as NIC software compatibility testing and live demonstration, no binding contractual rights accrued to the vendor. 
• The Court found no improper motive, favouritism, or collateral purpose in the cancellation decision, noting that it led to a fresh tender open to all rather than an award to another bidder. 
• Referencing Tata Cellular v. Union of India (1994), the Court recognized that the State's decision to cancel a tender or restart the process is itself an aspect of public interest, and the decision to re-tender fell within the zone of permissible discretion. 
• The Court rejected the company's legitimate expectation argument, stating that the doctrine presupposes a clear and unambiguous representation by the State, while the conditional terms of the LoI expressly warned that the process was still provisional.

Court's Directions: 

The Supreme Court allowed the appeal and issued the following directions: 

• The High Court's judgment was set aside and the State's decision cancelling the Letter of Intent dated September 2, 2022 was upheld, though the Expression of Interest issued immediately after cancellation was also set aside. 
• The State was granted liberty to issue a fresh tender for supply, installation and maintenance of ePoS devices, and the respondent company shall be free to participate subject to uniform eligibility and prescribed conditions. 
• The State was directed to hold a Fact-Finding Enquiry in association with the respondent company to ascertain details of ePoS machines, components, or allied services supplied, and reimburse verified costs on the principle of quantum meruit within three months. 
• All machinery, devices, technology, or software infrastructure handed over or used during pilot or demonstration stages shall vest in the State free of encumbrances, subject to payment of cost and installation expenditure to the company. 
• No further claim for loss of profit, expectation, or consequential damages shall survive, with relief confined to equitable reimbursement for tangible assets or work actually appropriated by the State.

What is a Letter of Interest (LoI)? 

About: 

• A Letter of Interest (LoI) is a preliminary document in the procurement process that indicates a party's intention to enter into a contract with another party in future. 
• It is not intended to bind either party ultimately to enter into any contract. 
• An LoI is essentially a "promise in embryo" that requires fulfillment of certain conditions before it can mature into a binding contract. 
• The issuance of an LoI does not create any vested or enforceable rights in favor of the recipient. 

LoI vs Letter of Acceptance (LoA): 

• A Letter of Interest represents only a conditional and provisional stage in the contracting process. 
• It typically contains pre-conditions that must be satisfied before any binding obligation arises. 
• A Letter of Acceptance (LoA), on the other hand, represents final and unconditional acceptance. 
• Only upon issuance of an LoA or satisfaction of all stipulated preconditions does an LoI mature into an enforceable contract. 
• Until the threshold of final acceptance is crossed, the recipient of an LoI has no vested contractual rights. 

Legitimate Expectation in Context of LoI: 

• The doctrine of legitimate expectation presupposes a clear and unambiguous representation by the State, followed by reliance and detriment. 
• When an LoI contains conditional terms and explicit disclaimers, it negates the existence of any clear assurance that a contract will be finalized. 
• Investments made by a party after receiving an LoI, when the LoI expressly warns of provisional nature, cannot give rise to legitimate expectation. 
• The doctrine cannot be invoked to override explicit conditional terms in an LoI. 

State's Right to Cancel LoI: 

• The State has discretion to cancel a Letter of Interest when pre-conditions are not met. 
• The decision to cancel and re-tender is an aspect of public interest, particularly in public procurement. 
• Cancellation is permissible when prompted by non-compliance with technical requirements or policy considerations. 
• The absence of improper motive, favouritism, or collateral purpose supports the validity of cancellation. 
• Procedural deficiencies in the cancellation letter (such as lack of detailed reasons) do not necessarily render the cancellation arbitrary if substantive grounds exist. 

Quantum Meruit Principle: 

• Even when an LoI is validly cancelled, the principle of quantum meruit may apply to prevent unjust enrichment. 
• Quantum meruit allows for equitable reimbursement for tangible assets or work actually appropriated by the State. 
• This reimbursement is limited to verified costs and expenses for goods or services actually supplied and used. 
• However, claims for loss of profit, expectation damages, or consequential damages do not survive under this principle.