Contract Formation and Security Deposit Legal Analysis

Delve into the intricate legal analysis conducted by the court regarding contract formation and security deposit implications in a recent case. The court’s thorough examination of the Notice Inviting Tender (NIT) terms, Letter of Intent (LoI) requirements, and the significance of security deposits sheds light on the complexities of contract law. Discover the critical factors considered by the court in determining the binding nature of agreements and the consequences of non-compliance with contractual obligations.


  • The respondent faced difficulties soon after starting the work due to a breakdown of the truck-mounted drill machine.
  • The appellants directed the respondent to report to the Chief General Manager for immediate recommencement of work.
  • A letter of site handover/acceptance certificate was issued on 28.10.2009 by the appellants, marking the commencement of work.
  • The appellants opined that there was no subsisting contract between the parties to enforce the general terms and conditions of the contract.
  • The forfeiture of bid security was upheld for the appellants.
  • The appellants were not able to recover the additional amount in the award of the contract to another contractor compared to the respondent.

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  • The petitioner argued that the absence of formal execution of the contract did not impact their claim arising from the breach of contract.
  • The petitioner claimed that the requirement to deposit a performance security and sign the Integrity Pact were ‘conditions subsequent’ and not ‘conditions precedent’.
  • The petitioner contended that by starting the execution of work, there was an acceptance of the award of the work by the respondent.
  • The Letter of Intent (LoI) was considered to be an intention to enter into a contract after all formalities are completed.
  • The tender document specified conditions regarding notification of the award and signing of the agreement.
  • A failure to provide the required security deposit within the stipulated period would constitute a breach of contract.
  • The contractor argued that the acceptance letter made the security deposit a condition precedent to acceptance, leading to no concluded contract.
  • The awarding party’s letter clearly stated that the contract was concluded upon acceptance, with formal acceptance following upon receipt of the treasury receipt.
  • The respondent decided not to execute the contract due to feasibility issues, leading to the forfeiture of the bid security amount.
  • The respondent challenged the forfeiture through a cross-appeal.
  • A reference was made to a previous court judgment on the nature of a Letter of Intent (LoI), indicating it as a preliminary understanding between parties intending to form a contract or collaborate in another action.

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  • The issue of whether a concluded contract had been reached between the parties depends on the terms of the Notice Inviting Tender (NIT) and Letter of Intent (LoI), as well as the conduct of the parties.
  • The LoI indicates an intention to enter into a contract in the future, but does not create a binding relationship between the parties.
  • To be considered a binding contract, the intention to do so in an LoI must be clear and unambiguous.
  • In this case, the respondent did not fulfill the requirements stated in the LoI, such as submitting the Performance Security Deposit and signing the Integrity Pact.
  • Failure to comply with these requirements constituted sufficient grounds for cancelling the award of work and forfeiture of the bid security.
  • The terms of the letter of award and the requirements stated in it were not fulfilled by the respondent.
  • The consequences of not furnishing the security deposit and not signing the Integrity Pact were clearly outlined in the contract terms.
  • The failure to deposit the stipulated amount was explicitly mentioned as a breach of contract in the LoI.
  • Ultimately, the failure of the respondent to comply with their obligations under the LoI led to the forfeiture of the bid security amount and cancellation of the award.
  • Section 7 of the Indian Contract Act, 1872 requires the acceptance of an offer to be absolute and unqualified.
  • The acceptance of an offer must not contain any conditions in order to be considered valid.
  • Any conditional acceptance would not be binding as it does not meet the requirements of Section 7.
  • To enter into a contract, it must be in writing and in prescribed form with a 25% amount deposit requirement.
  • The judgment stressed on when a contract is concluded, even if subject to security deposit later.
  • Security deposit was viewed as a condition subsequent, not a condition precedent.
  • A letter of intent may amount to acceptance of an offer, resulting in a concluded contract depending on its terms.
  • Courts may find parties bound by a document if they have acted in reliance on it for a considerable period.
  • The LoI mentioned the formation of the contract upon supplier’s receipt and payment terms were specified.
  • Notification of award constituted contract formation, subject to a security deposit in accordance with the contract.
  • A LoI only indicates an intention to enter into a future contract, not binding either party ultimately.
  • A LoI may be construed as a letter of acceptance if its terms indicate such intention.
  • Sometimes detailed contracts are drawn up later due to the urgency of commencing work.
  • The Security Deposit required should be 5% of the annualized contract amount and submitted within 28 days of LOA receipt.
  • Performance security can be provided through a bank guarantee issued by an approved bank within specific validity periods.
  • The particular LoI in question was not deemed a binding contract due to the requirement of ‘previous approval’ from the Central Government.
  • Failure to comply with the requirement leads to cancellation of the award work and forfeiture of bid security (as per clause 30.2).
  • Failure to submit the Integrity Pact makes the tender bid ‘not substantially responsive’ and may be rejected (as per clause 34).
  • Definition of a contract includes NIT, acceptance of tender, formal agreement, and bid security amount (clause (ix)).
  • Judgments referred by counsel not directly supporting either party but relevant clauses of NIT and LoI determine the issue.
  • Non-compliance by respondent with LoI terms discussed, now moving to NIT.
  • Notification of award forms the contract, subject to furnishing Performance Security/Security Deposit within 28 days (clause 29.2).

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  • The High Court required the appellants to deposit Rs.10 lakh before any coercive action against the respondent could be taken.
  • The bid security amount is to be deducted from the Rs.10 lakh deposit, with the remaining balance to be refunded to the respondent.
  • The appeal has been dismissed, with each party bearing their own costs.
  • The interim order has been discharged, and the necessary actions must be completed within two months as per the Court’s stay on the refund mentioned in the interim order dated 08.02.2013.


Case Number: C.A. No.-004358-004358 / 2016

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