2006 Supreme(SC) 29

2006(1) Supreme 212
Supreme Court of India
(From Delhi High Court)
Arun Kumar and R.V. Raveendran, JJ.
Dresser Rand S.A. —Appellant
versus
M/s. Bindal Agro Chem Ltd. & Anr. —Respondents
Civil Appeal No. 8357 of 2003
With
Civil Appeal No. 8358 of 2003
Decided on 12-1-2006
Counsel for the Parties :
For the Appellants : F.S. Nariman, Sr. Advocate, P.H. Parekh, Ashok Pratap, Sameer Parekh, Ms. Shakun Sharma Advocates (for M/s. P.H. Parekh & Co.).
For the Respondent No. 1 : Rajeev Dutta, Sr. Advocate, R. Nedumaran, Uday Kumar, Ms. Namrata Chopra and Rajiv Rufus Advocates.
For the Respondent No. 2 : Dr. A.M. Singhvi, Sr. Advocate, Joy Basu and B.K. Satija Advocates.

Important point
A Letter of Intent merely indicates a party’s intention to enter into a contract with the other party in future. A Letter of Intent is not intended to bind either party ultimately to enter into any contract.

Headnote:Foreign Awards (Recognition and Enforcement) Act, 1961—Section 3—Stay of proceedings—Challenge to arbitrability—Arbitration agreement—Dispute regarding—Respondents, BINDAL and KGK have filed suit for declaration that there exists no arbitration agreement between itself and appellant, DR—Interim Applications filed under Order 39 Rules 1 and 2 CPC seeking a temporary injunction to restrain appellant from proceeding with the arbitration—DR filed application in suit under Section 3 of Foreign Awards Act for staying further proceeding in respondents suits alleging that there was an arbitration agreement between itself and BINDAL and KGK—Agreement between BINDAL and DR for supply of equipments and materials for its Fertilizer Project—Revision 4 containing changes agreed in the Standard General Conditions of Purchase of BINDAL—Representative of BINDAL delivered two letters described as ‘Letters of Intent’ issued on letter head of KGK stating the intention to place an order—Letters of Intent also contained terms relating to price, manner of making payment of price, opening of Letter Guarantee, date of delivery, and consequences of not opening Letter of Credit by the stipulated date—However, no purchase order was issued nor any Letter of Credit was opened by BINDAL—DR sent notices to BINDAL and KGK stating that inaction of BINDAL and KGK to be treated as repudiation of the contract—Appellant, DR intended to refer the disputes relating to the ‘agreement’ to the International Chamber of Commerce, Paris for resolution by arbitration—ICC issued a notice to BINDAL and KGK in regard to lodgment of the said claim by DR—Whether there is an ‘agreement in writing’ under which parties have agreed to submit their differences to arbitration—(No)—Whether BINDAL and KGK were estopped from contending that there was no arbitration agreement—(No).

       Held : Parties agreeing upon the terms subject to which a contract will be governed, when made, is not the same as entering into the contract itself. Similarly, agreeing upon the terms which will govern a purchase when a purchase order is placed, is not the same as placing a purchase order. A prelude to a contract should not be confused with the contract itself. The purpose of Revision No. 4 dated 10.6.1991 was that if and when a purchase order was placed by BINDAL, that would be governed by the "general conditions of purchase" of BINDAL, as modified by Revision No. 4. But when no purchase order was placed, neither the `general conditions of purchase’ nor the arbitration clause in the `General Conditions of Purchase’ became effective or enforceable. Therefore, initialling of `Revision No. 4 by DR and BINDAL on 10.6.1991 containing the modifications to General Conditions of Purchase, did not bring into existence any arbitration agreement to settle disputes between parties. (Para 28)

       The circumstances in which the Letters of Intent dated 12.6.1991 by KGK ‘surfaced’ is strange and illogical if not mysterious. It is admitted by DR that at no point of time, it held any negotiation or discussion or exchanged correspondence with KGK in this matter. The case of DR is that BINDAL was corresponding and negotiating with it for purchase of certain types of compressors for its Shahjahanpur Fertilizers Project; that neither BINDAL nor KGK ever informed DR that KGK was the agent/consultant of BINDAL; and that the modifications to ‘General Conditions of Purchase’ were discussed and finalized on 10.6.1991, as per Revision No. 4 initialled by the representatives of DR and BINDAL. In the circumstances, there appears to be no logical reason for two letters of intent being prepared and issued on the letterhead of KGK on 12.6.1991 out of the blue, particularly when no representative of KGK was present during discussions on 12.6.1991 nor were the Letters of Intent signed by anyone on behalf of KGK in the presence of DR’s representatives. According to DR, the representative of BINDAL handed over the Letters of intent issued on the letterhead of KGK stating that though the Letters of intent were issued by KGK, the compressors were for BINDAL and payment and performance will be the BINDAL. No one has chosen to explain why the letters of intent were not issued by BINDAL or why the letters of intent were issued by KGK. What is strange is the acceptance of such letters of intent by DR without protest and without insisting that the letters of intent should be issued by BINDAL or at least that BINDAL should confirm in writing that the KGK was issuing the letters of intent on its behalf. If BINDAL had delivered the letters of intent prepared on the letterhead of KGK instead of its own, clearly it was with some ulterior motive. But we are not considering the business ethics of BINDAL nor the negligence on the part of DR in not insisting upon something in writing from BINDAL to show that Letters of Intent of KGK were issued on its behalf. The question for consideration is whether there is an arbitration agreement in the Letters of Intent. (Para 30)

       It is now well-settled that a Letter of Intent merely indicates a party’s intention to enter into a contract with the other party in future. A Letter of Intent is not intended to bind either party ultimately to enter into any contract. (Para 34)

       It is no doubt true that a Letter of Intent may be construed as a letter of acceptance if such intention is evident from its terms. It is not uncommon in contracts involving detailed procedure, in order to save time, to issue a letter of intent communicating the acceptance of the offer and asking the contractor to start the work with a stipulation that the detailed contract would be drawn up later. If such a letter is issued to the contractor, though it may be termed as a Letter of Intent, it may amount to acceptance of the offer resulting in a concluded contract between the parties. But the question whether the letter of intent is merely an expression of an intention to place an order in future or whether is a final acceptance of the offer thereby leading to a contract, is a matter that has to be decided with reference to the terms of the letter. (Para 34)

       Even if we assume that the Letters of Intent were intended to contracts for supply of machinery in accordance with the terms contained therein, it may only enable DR to sue for damages or sue for the expenses incurred in anticipation of the order and opening of LC. But that will not be of any assistance to contend that there was an arbitration agreement between the parties. (Para 37)

       Thus, neither the General Conditions of Purchase forming part of Invitation of Bid nor Revision No. 4 dated 10.6.1991, nor the Letters of Intent dated 12.6.1991 contain any arbitration agreement. There is also no other document or correspondence which can be read as containing a provision that can be interpreted as an agreement to resolve disputes by arbitration. We are, therefore, of the view, though for slightly different reasons, that the decision of the learned Single Judge and the Division Bench of the High Court holding that there is no arbitration agreement, does not suffer from any infirmity. (Para 40)

       The fact that at some point of time, BINDAL or KGK had stated that they would appoint an Arbitrator will not come in the way of their demonstrating that there is no arbitration agreement when the matter comes up before the court under section 3 of the Foreign Awards Act. Therefore, there is no question of either waiver or acquiescence. (Para 44)