NON-REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5236 OF 2007

State of U.P. and others            ......Appellants

Versus

M/s Combined Chemicals Company Private Limited .....Respondent  

J U D G M E N T

G.S. Singhvi,  J.

1. Whether  letter  dated  16.11.1985  issued  by  the  Director  of  

Industries, Uttar Pradesh (appellant No.2) conveying acceptance of the  

bid  given  by  the  respondent  for  supply  of  200  metric  tonnes  Zinc  

Sulphate, Agriculture Grade, could be treated as an agreement executed  

by  the  parties,  whether  the  respondent  could  invoke  the  arbitration  

clause  contained  in  the  tender  document,  whether  the  Arbitrator  

appointed  by  Civil  Judge  (Senior  Division),  Lucknow  (hereinafter  

referred to as ‘the trial Court’) acted in violation of the rules of natural  

justice by declining the appellants’ prayer for adjournment and whether

the award passed by the Arbitrator is vitiated by patent error of law are  

the questions which arise for consideration in this appeal filed by the  

State of U.P. and two others against the judgment of the Division Bench  

of the Allahabad High Court, which dismissed the appeal preferred by  

the appellants against the order passed by the trial Court making award  

of the Arbitrator rule of the Court.   

2. By an advertisement dated 19.8.1985, appellant No.2 invited bids  

for supply of 2000 metric tonnes Zinc Sulphate of Agriculture Grade on  

quantity basis to meet the requirement of the Agriculture Department.  

Clause 16 of the tender form, which has bearing on this case, reads thus:

Tender Form:

“16. In  the  event  of  any  dispute  arising  out  of  or  concerning  this  Agreement  (except  as  to  any  matters  the  decision  of  which  is  specifically provided for in this Agreement), the same shall be referred  to  the  arbitration  of  an  arbitrator  nominated  by  the  Director  of  Industries, Uttar Pradesh and an arbitrator nominated by the contractor,  or in the case of the contractor or the said Director failing to nominate  an arbitrator within the time fixed in the notice to be served on him by  the said Director or the contractor, as the case may be by the arbitrator,  nominated  by  the  said  Director  or  the  contractor,  or  in  case  of  disagreement  between the said arbitrators  to  an umpire appointed by  them and the decision of such arbitrators/arbitrator/umpire as the case  may  be,  shall  be  final  and  binding  on  the  parties.   The  arbitrators/arbitrator/umpire  may from time to time with the consent of  the parties enlarge the time for making and publishing the award.”

2

3. The bid given by the respondent (Rs.5,451/- per metric tonne) was  

found to be the lowest.  The purchase committee of the Directorate of  

Industries  approved  the  same.  Thereafter,  appellant  No.2  issued  

acceptance letter dated 16.11.1985 to the respondent for supply of 200  

metric tonnes of Zinc Sulphate to the Directorate of Agriculture.  The  

relevant portions of that letter are extracted below:

“ACCEPTANCE LETTER

From Value: Rs.10,90,200/- (Rupees Ten Lacs Ninety Thousand Two Hundred only)

The Director of Industries, Stores Purchase Department, Uttar Pradesh, Kanpur.

To,

M/s. Combined Chemicals Pvt. Ltd. 15/1, 2 & 5, Industrial Estate Vidisha-464002.

Ref. No. SPS/VII-T.NO.272(G)/85 Dated:

a) This  office  tender  notice  /  enquiry  No.  272(G)/85  dated  19.8.1985

b) Contractor’s  tender  quotation  No.A-4242/A80/4GP/ZS  dated 08.08.1985

c) Indentor’s Indent No.     Dated

d) Designation  and  full  address  of  the  indentor  Director  of  Agriculture, U.P.

e) If rate contract – All Government Department and quasi- Government Departments.

3

Dear Sir,

On  behalf  of  the  Governor  of  Uttar  Pradesh,  I  accept  your  tender/quotation referred to above for the supply of stores as per details  given  in  Schedule  `A’  hereafter  subject  to  the  terms  and  conditions  specified  in  the  tender  notice/enquiry  referred  to  above  and  in  this  acceptance letter.

2. The  supply order shall be placed on you by the indenting  officer/officers  direct  giving  full  instruction  regarding  dispatch,  insurance  of  goods,  name  of  consignee,  destination, railway station, payment of bills, etc.

4. Period of Contract – Until the supply is satisfactorily completed in  accordance with the aforesaid terms and conditions.

7. Inspection – For the purpose of this contract the consignee  receipt shall be deemed as the inspection certificate unless  an inspection is stipulated before dispatch.  Ordinarily, the  decision  of  the  consignee  or  consignees  as  regards  the  acceptability  or  otherwise  of  the  stores  shall  be  final.  Defective supplier shall have to be replaced at your cost.

10. Formal Agreement – If so required, the successful tenderer  shall have to execute a formal agreement deed within the  time fixed by the Director of Industries.

12. You  are  required  to  send  a  statement  giving  details  of  order  placed on you and executed by you against this  contract together with  their value, within one month after the expiry of this contract.

14. In the case of rate of contract order shall be placed by the officer  of  various  Government  Department  directly.   In  the  case  of  quasi- Government Departments, such as Local Bodies and Municipal Boards,  etc. the orders shall be placed this office.

Please acknowledge receipt. Yours faithfully,

Sd/- For and on behalf of the Governor.

Uttar Pradesh.

4

Accompaniment Forms. No.475(I)/SPS VII-T.NO.272(G)/85 of dated 16.11.1985 Copy forwarded (1) Director of Agriculture, U.P., Lucknow.

(1) He  will  please  place  a  supply  order  on  the  firm  immediately  giving  detailed  instructions  regarding  dispatch,  insurance  of  goods,  name of consignee, destination, railway station payment bills, etc.  If the  supply  is  not  effected  in  time  he  will  please  report  to  this  office  immediately about the delay in supplies.

SCHEDULE `A’

Description Unit Price Per unit

Quantity No.

F.O.R.

SPECIFICATIONS. For M.T. @Rs.5451/- 200 M.T.

Destination.

(Rs. Five Thousand Four hundred and Fifty One only)

Qty. Two hundred Metric Tonnes only.

ZINC SULPHATE AGRICULTURE, GRADE ISI Mark with IS: 8249-1976

• The price  shall  remain  firm till  the  supply  is  completed  satisfactorily.  This contract  shall  exclusively be governed  by the terms and conditions mentioned in the Acceptance  letter, Tender Form and the Agreement Forms.  No other  condition shall be acceptable.

• Agreement form must be received to this office within 15  days from the date of issue of this Acceptance Letter.

• The  contract  is  being  made  for  and  on  behalf  of  the    Governor of U.P.”

(emphasis supplied)

4. The respondent  deposited the  security  money and dispatched a  

signed agreement  to the Directorate  of  Agriculture  for completion of  

5

other  formalities.   It  also  sent  letters  to  appellant  No.3  for  issue  of  

supply  order,  but  the  latter  did  not  respond  apparently  because  the  

lowest rate of Rs.4,500 per metric tonne quoted in response to another  

tender notice issued by appellant No.2 for supply of Zinc Sulphate on  

rate  contract  basis  was  substantially  less  than the  rate  quoted by  the  

respondent and, therefore, the purchase committee decided to postpone  

implementation of the acceptance letter dated 16.11.1985.   

5. When the respondent learnt about the aforesaid decision, it served  

a notice upon the appellants and then filed a petition under Section 20 of  

the Arbitration Act,  1940 (for short, ‘the Act’) for appointment of an  

Arbitrator to decide the dispute relating to supply of 200 metric tonnes  

of  Zinc  Sulphate.    The  same  was  registered  as  Regular  Suit  No.  

244/1998.  In the written statement filed on behalf of the appellants, it  

was pleaded that the petition was not maintainable because no contract  

had been executed between the parties and no order for supply of the  

goods was placed with the respondent because the other firm had quoted  

much lower rate.

6. By  an  order  dated  28.3.1989,  the  trial  Court  overruled  the  

objections raised on behalf of the appellants and held that a contract was  

indeed executed between the parties for supply of Zinc Sulphate.  The  

6

trial Court then referred to clause 16 of the tender form and directed the  

parties  to propose name of their  respective Arbitrator  within 20 days  

with the rider that if they fail to do so, then the Court will appoint an  

Arbitrator.   

7. The appellants did not nominate the Arbitrator.  Therefore, by an  

order  dated  20.5.1989,  the  trial  Court  appointed  Shri  Dipak  Seth,  

Advocate as an Arbitrator.    

8. The Arbitrator fixed 6.8.1989 for preliminary hearing but no one  

appeared on behalf of the appellants.  The respondent filed statement of  

claim for award of compensation to the tune of Rs.42,92,015.90 along  

with  cost  of   Rs.25,000/-.     The details  of  the claim lodged by the  

respondent are reproduced below:

“A. The  Respondents  agreed  to  purchase  goods  @  Rs.5,451/-  per  metric tonne against production cost of 1985 at Rs.4,674/- per tonne.  The production cost diminished to Rs.2,895/- per tonne, consequently,  the Respondents by breaking contract put the claimant to a direct loss of  Rs.5,11,200.00.

B. The price quoted by the claimant at Rs.5,451/- per tonne to the  Respondents but on account of price variation in the market, where price  slumped  from Rs.6,200/-  to  Rs.3,900/-  per  tonne.   The  respondents,  therefore, inflicted loss at Rs.2,300/- per tonne by breaking the contract.  The claimant entitled to rs.4,60,000/- on that account.

C. That the claimant’s tender in question to the respondents was it’s  first major transaction after unit establishments and in view of pretended  urgency, stipulation and regarding immediate supplies etc. the claimants  

7

procured raw material, engaged workmen to utilize full capacity of the  unit  by availing maximum drawing powers against working facilities.  Total quantity required under the agreement was produced under explicit  intimation to the respondents.

The  on  account  of  respondent’s  failure  to  accept  delivery  and  consequent non-payment of agreed price, the claimant had to incur the  following direct losses namely:-

(a) Amount  of  interest  to  M.P.  Financial  Corporation  from  01.10.85  to  20.09.89  on  its  loan  worth  Rs.29,50,000/-  @  12.5% per annum.

Rs.11,06.250/-

(b) Amount of interest paid to the  State  Bank  of  Indore  @  16.5%  per  annum  quarterly  rest.

Rs. 7,26,750/-

(c) Staff workmen of the claimant remained idle for  the  period  01.10.85  to  30.9.1988 when  the  Unit  was declared sick and financial institution agreed  to  nurse  but  the  claimant  had to  pay salary  and  wages amounting to Rs.4,23,075.90.

Consequently,  the  respondents  are  liable  to  compensate the claimant.

D. That  on  account  of  business  completely  during  01.10.85  to  30.09.88, the claimant also suffered loss of direct profit much loss at  Rs.777.00 per tonne of install capacity and still could utilize 60% the  said capacity.  The respondents are, therefore, liable to compensate to  the extent of rs.9,79,020.00.

E. That  the  claimant  are  to  pay  interest  to  M.P.  Financial  Corporation and State Bank of Indore at the rate not less than 12% per  annum compoundable quarterly, therefore, till the respondents actually  pay the above said sums, the said respondents are liable to compensate  to the extent of amounts claimant may suffer on these accounts.

The claimant, therefore, prays for the following reliefs against the  respondents jointly, severally or in alternative:

8

(A) That by an award, the claimant be declared entitled to recover and  receive Rs.42,92,015/- towards and on account of compensation for loss  suffered due to breach of contract and the respondents, jointly, severally  or in alternative be directed to pay the same within a time fixed for the  purpose.

(B) Rs.25,000/- be awarded towards costs of these proceedings and,

(C) The respondents be directed to compensate the claimants in  lieu  of the amounts realized by the MPFC and State Bank of Indore till date  of actual payment in full of the amount claimed above.”

9. On 1.10.1981, Shri B.K. Bajpai, Accountant in the office of the  

Director of Agriculture,  appeared before the Arbitrator and sought 15  

days’ time to intimate the fate of the appeal filed against order dated  

28.3.1989, which was pending before the High Court.  On the next date  

of hearing i.e., 1.11.1989, Shri Irshad Hussain appeared on behalf of the  

Director  of  Agriculture  and  made  a  request  for  adjournment  on  the  

ground that appellant Nos. 1 and 2 were intending to file an application  

for stay of proceedings pending before the Arbitrator.  However, no stay  

order appears to have been passed by the High Court in the pending  

appeal.   Therefore,  the  Arbitrator  passed  an  ex  parte  award  dated  

17.11.1989  and  allowed  the  respondent’s  claim  to  the  extent  of  

Rs.23,44,200/- with interest at the rate of 6% per annum from the date of  

the award till the date of payment.  Soon thereafter, the respondent filed  

Regular Suit No.537 of 1989 for making the award rule of the Court.  

9

The appellants filed objections and reiterated their plea that no contract  

had  been  executed  between  the  parties.   They  also  pleaded  that  the  

Arbitrator  had  committed  an  error  by  refusing  to  adjourn  the  matter  

ignoring that the appeal filed against order dated 28.3.1989 was pending  

before  the  High  Court.   The  trial  Court  rejected  the  objections  and  

passed order dated 25.11.2004 whereby the award of the Arbitrator was  

made rule of the Court.   

10. When First Appeal No. 165/1989 filed by the appellants against  

the first order of the trial Court was taken up for hearing, it was brought  

to  the  notice  of  the  High  Court  that  the  Arbitrator  has  already  

pronounced the award.  After taking cognizance of this fact, the Division  

Bench of the High Court dismissed the appeal as infructuous with liberty  

to the parties to challenge the award on any legally permissible ground.   

11. The appellants challenged trial Court’s order dated 25.11.2004 in  

First  Appeal  No.533 of  2005.  While admitting the appeal,  the  High  

Court stayed execution of the award subject to the condition of deposit  

of Rs.10 lacs.  Accordingly, the appellants deposited the amount, which  

was withdrawn by the respondent.     

1

12. By the impugned judgment, the High Court finally dismissed by  

the  appeal.    The  appellants’  objection  to  the  appointment  of  the  

Arbitrator on the ground that no contract had been executed between the  

parties was overruled by the High Court by relying upon the judgments  

of this Court in  Union of India and others v. N.K. Private Ltd. and  

another (1973) 3 SCC 388,  Sardar Sucha Singh v. Union of India  

(1987) Supp. SCC 127 and J.K. Jain and others v. Delhi Development  

Authority and others (1995) 6 SCC 571.  The High Court also rejected  

the  appellants’  plea  that  refusal  of  the  Arbitrator  to  adjourn  the  

proceedings to  await  the  result  of  the first  appeal  filed against  order  

dated 28.3.1989 amounted to violation of the rules of natural justice and  

held that in the absence of a stay by the High Court, the Arbitrator was  

entitled to proceed with the matter and the appellants did not have any  

legitimate cause to abstain from the arbitration proceedings.

13. Smt.  Shobha  Dikshit,  learned  senior  counsel  appearing  for  the  

appellants referred to various clauses of the tender form and acceptance  

letter dated 16.11.1985 and argued that no contract can be said to have  

come into existence between the parties because the agreement was not  

signed as per the requirement of Article 299 of the Constitution and the  

High Court committed serious error by treating the acceptance letter as a  

contract.   Learned senior  counsel  pointed out  that  an agreement  was  

1

required  to  be  executed  and  signed  by  the  parties  in  the  proforma  

prescribed for the purpose, but no such agreement was either executed  

or signed and, therefore, the conclusion recorded by the trial Court and  

the High Court that a contract had been executed between the parties is  

legally unsustainable.  Mrs. Dikshit further argued that the award of the  

Arbitrator  is  vitiated  because  it  is  totally  devoid  of  reasons  and  the  

Courts below committed serious error by refusing to annul the same.  

Mrs. Dikshit referred to the award of the Arbitrator to show that after  

reproducing  the  claim  made  by  the  respondent  and  making  a  bald  

reference to the affidavit filed on its behalf, the Arbitrator straightaway  

accepted the claim to the extent of Rs.23,44,200/- and submitted that  

such award cannot be treated as an award in the eye of law.  In support  

of her arguments, the learned senior counsel relied upon the judgments  

of this Court in Punjab SEB v. Punjab Pre-Stressed Concrete Works  

(2002) 9 SCC 740 and Dresser Rand S.A. v. Bindal Agro Chem Ltd.  

(2006) 1 SCC 751.   

14. Shri  Rishi  Agarwalla,  learned  counsel  appearing  for  the  

respondent argued that a contract will be deemed to have been executed  

between  the  State  Government  and  the  respondent  because  the  

acceptance  letter  was  issued  in  the  name of  the  Governor.   Learned  

counsel  submitted  that  once  the  acceptance  of  the  tender  was  

1

communicated,  the contract became complete and the respondent was  

entitled to invoke the arbitration clause.  In support of his argument, the  

learned counsel relied upon the judgments in  Sardar Sucha Singh v.  

Union of India (supra),  Smita Conductors Ltd. v. Euro Alloys Ltd.  

(2001) 7 SCC 728, Nimet Resources Inc. v. Essar Steels Ltd. (2000) 7  

SCC 497 and UNISSI (India) (P) Ltd. v. Post Graduate Institute of  

Medical Education and Research (2009) 1 SCC 107.

15. We have given our serious thought to the respective arguments.  

A reading of letter dated 16.11.1985 shows that the same was issued for  

and  on  behalf  of  the  Governor  of  Uttar  Pradesh.   In  the  opening  

paragraph of the letter, appellant No.2 indicated that the bid given by the  

respondent  was  being  accepted  on  behalf  of  the  Governor  of  Uttar  

Pradesh.  At the end of that letter and Schedule `A’ appended thereto, it  

was  clearly  mentioned  that  the  contract  was  being  made  for  and  on  

behalf of the Governor of Uttar Pradesh.  The contents of paragraphs 4,  

7,  12  and  14  show that  the  appellant  Nos.  1  and  2  had  awarded  a  

contract to the respondent for supply of 200 metric tones Zinc Sulphate  

of Agriculture Grade for a total price of Rs.10,95,200/- and the terms  

and conditions mentioned in the acceptance letter, tender form and the  

agreement forms were treated as part of the contract.  The schedule of  

supply was also indicated in the acceptance letter.   Clause 10 of  the  

1

terms  and conditions  embodied  in  the  acceptance  letter  did  speak of  

formal agreement,  but  the same was to be executed only if  required.  

Undisputedly, the respondent completed all the formalities inasmuch as  

it deposited the security money and dispatched a duly signed agreement  

to the Directorate of Agriculture, which was to take the supply of Zinc  

Sulphate,  and also sent letters  for placing the supply order.   Thus,  a  

contract had come into existence between the parties and the fact that  

the Director of Agriculture did not sign the formal agreement sent by the  

respondent cannot lead to an inference that the contract had not been  

executed.  This view is consistent with the plain language of Section 5  

of the Sale of Goods Act, 1930, sub-section (1) whereof lays down that a  

contract of sale is made by an offer to buy or sell goods for a price and  

the acceptance of such offer.  That sub-section further lays down that the  

contract  may  provide  for  the  immediate  delivery  of  the  goods  or  

immediate payment of the price or both, or for the delivery or payment  

by  instalments,  or  that  the  delivery  or  payment  or  both  shall  be  

postponed.  Sub-section (2) of Section 5 lays down that subject to the  

provisions of any law for the time being in force, a contract of sale may  

be made in writing or by word of mouth, or partly in writing and partly  

by word of mouth or may be implied from the conduct of the parties.

1

16. In this case, the bid given by the respondent amounted to an offer  

to  sell  goods  i.e.,  Zinc  Sulphate  of  Agriculture  Grade  at  the  rate  of  

Rs.5,451/- per metric tonne, which was duly accepted by the competent  

authority by issuing letter dated 16.11.1985.  Therefore, the argument of  

Mrs.  Dikshit  that  contract  had not  been executed between the parties  

merits rejection.  The judgment of this Court in Dresser Rand S.A. v.  

Bindal Agro Chem Ltd. (supra) on which reliance has been placed by  

Mrs. Dikshit is distinguishable.  The factual matrix of that case show  

that the respondent had sent a telex to the appellant asking it whether it  

would be interested in supplying various equipments including synthesis  

gas compressors, process air compressors, refrigeration compressors and  

CO2  compressors for fertilizer project.  By another fax dated 5.4.1991,  

the respondent asked the appellant to send quotation to be followed by a  

formal bid for synthesis  gas compressors and CO2 compressors.   The  

representatives of the two parties met  and discussed the technical details  

in regard to performance of the synthesis gas compressors.  Thereafter,  

the  appellant  gave  its  comments/modifications  to  the  terms  and  

conditions  of the respondent.   In June 1991, further  negotiations and  

discussions took place between the parties.  At that stage, the respondent  

gave two letters  to  the appellant  which were described as “letters  of  

intent” issued on the letterhead of K.G. Khosla Compressors Ltd.  These  

letters also contained terms relating to price, manner of making payment  

1

of  price,  opening  of  letter  of  guarantee,  date  for  delivery  and  

consequences of not opening letter of credit by the stipulated date.  On  

receipt of the letters of intent, the appellant is said to have made inquiry  

as  to  why  the  same  were  issued  in  the  name  of  K.G.  Khosla  

Compressors Ltd.  After getting explanation from the respondent, the  

appellant’s  representative  counter  signed  the  same.   However,  the  

respondent neither placed any purchase order nor issued confirmation  

that  the  letters  of  intent  were  issued  in  the  name  of  K.G.  Khosla  

Compressors  Ltd.  on  its  behalf.   In  December  1991,  the  respondent  

informed the appellant that it was not possible to accept the synthesis  

gas  compressors  turbine  manufactured  by  the  latter.   After  further  

correspondence, the appellant indicated its intention to refer the disputes  

relating to agreement to the International Chamber of Commerce, Paris.  

Thereupon, the respondent filed suit in the Delhi High Court for grant of  

a  declaration  that  there  was  no  arbitration  agreement  between  the  

parties.   The  respondent  also  applied  for  injunction.   K.G.  Khosla  

Compressors Ltd. also filed similar suit.  A learned Single Judge of the  

High Court allowed the applications for temporary injunction filed by  

the respondent and K.G. Khosla Compressors Ltd.  The Division Bench  

of the High Court dismissed the appeals filed by the appellant.  While  

considering  the  question  whether  there  was  an  arbitration  agreement  

1

between  the  appellant  and  the  respondent,  this  Court  extensively  

referred to the contents of the letters of intent and observed:

“Clause ‘C’ of letters of intent provides that the purchase order shall be  subject to the “General Conditions of Purchase” included in the inquiry,  as  amended  by  dr’s  comments  thereto,  Revision  4  dated  10-6-1991.  Therefore,  the  General  Conditions  of  Purchase  which  contains  the  arbitration clause, are not made a part of the letters of intent nor are the  letters of intent made subject to the General Conditions of Purchase. The  letters of intent merely provide that if and when the purchase order is  placed, the purchase order will be subject to the General Conditions of  Purchase,  as modified by Revision 4.  Therefore,  the point  of time at  which the General Conditions of Purchase will become applicable, is the  point when the purchase order is placed and not earlier. Consequently,  clause  27.4.2  of  the  General  Conditions  of  Purchase  containing  the  arbitration clause would become applicable and available to the parties  only  when  the  purchase  order  was  placed  and  not  earlier.  The  term  “purchase order” has a specific meaning and connotation. The purchase  order is the “agreement entered into between bindal and the prospective  supplier as recorded in the purchase order form (prepared in the form of  Attachment VII to the General Conditions of Purchase) signed by the  parties,  including  all  attachments  and  annexures  thereto  and  all  documents  incorporated  by  reference  therein  together  with  any  subsequent  modifications  thereof  in  writing”.  Admittedly,  no  such  purchase  order  was  placed  by either  bindal  or  anyone  authorised  by  bindal. It is also evident from clause I of the letters of intent that the  purchase order was to be issued simultaneously with the letter of credit.  Clause  M made  it  clear  that  the  letters  of  intent  were  being  issued  subject  to  necessary  approvals  being  given  by  the  authorities  of  the  Indian Government. These provisions clearly indicate that the letters of  intent  were  only a  step  leading  to  purchase  orders  and were  not,  by  themselves, purchase orders. Therefore, issue of the letters of intent by  kgk, assuming that it was done on behalf of bindal, did not mean that the  General  Conditions  of  Purchase  which  contains  the  provision  for  arbitration became a part of the letters of intent or became enforceable.  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.  This  Court  while  considering  the  nature  of  a  letter  of  intent, observed thus in Rajasthan Coop.  Dairy Federation Ltd. v. Maha  Laxmi Mingrate Marketing Service (P) Ltd.: (SCC p. 408, para 7)

1

“The  letter  of  intent  merely  expressed  an  intention  to  enter  into  a  contract.  …  There  was  no  binding  legal  relationship  between  the  appellant and Respondent 1 at this stage and the appellant was entitled  to look at the totality of circumstances in deciding whether to enter into  a binding contract with Respondent 1 or not.”

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 it 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.  Chitty  on  Contracts (para  2.115  in  Vol.  1,  28th  Edn.)  observes  that  where parties to a transaction exchanged letters of intent, the terms of  such letters may, of course, negative contractual intention; but, on the  other hand, where the language does not negative contractual intention,  it  is  open  to  the  courts  to  hold  that  the  parties  are  bound  by  the  document; and the courts will, in particular, be inclined to do so where  the parties have acted on the document for a long period of time or have  expended considerable sums of money in reliance on it.  Be that as it  may.”

17. A  carful  reading  of  the  above  noted  judgment  shows  that  the  

letters of intent issued on behalf of the respondent were never intended  

to be treated as a binding contract between the parties.  There was no  

indication in the letters of intent about acceptance of the offer made by  

the  appellant.   Therefore,  this  Court  held  that  no  agreement  was  

executed between the parties for purchase of the goods.   

1

18. Reverting to the present case, we find that the bid given by the  

respondent was unequivocally accepted by the competent authority and  

the letter of acceptance was issued for and on behalf of the Governor by  

treating it to be a contract.  Thus, there was substantial compliance of  

Article 299 of the Constitution.    The execution of formal agreement  

was optional and was not  sine qua non for supply of the goods by the  

respondent.  In our view, if the acceptance letter is read along with other  

documents in the light of the conduct of the parties, it becomes clear that  

an agreement was executed between the competent  authority  and the  

respondent.

19. The  next  point  which  merits  consideration  is  whether  the  

arbitration clause contained in the tender form was a part of the contract  

and  the  respondent  could  invoke  the  same  for  determination  of  the  

damages allegedly suffered by it on account of failure of appellant No.3  

to  place  order  for  supply  of  Zinc  Sulphate.   In  this  context,  it  is  

necessary to bear in mind that tender of the respondent was accepted by  

the competent authority subject to the terms and conditions specified in  

the tender notice and the acceptance letter.  In the schedule appended to  

the acceptance letter, it was clearly mentioned that the price shall remain  

1

firm till the completion of supply and the contract will be exclusively  

governed by the terms and conditions mentioned in the acceptance letter,  

tender form and the agreement forms.  This shows that the terms and  

conditions  mentioned  in  the  tender  form were  treated  as  part  of  the  

contract  for  supply  of  200  metric  tonnes  Zinc  Sulphate  by  the  

respondent to appellant No.3.  Clause 16 of the tender form provided for  

reference of any dispute arising out of or concerning the agreement to  

the  arbitration  of  an  Arbitrator  nominated  by  appellant  No.2  and  an  

Arbitrator nominated by the respondent.  Therefore, the respondent was  

entitled  to  invoke  the  arbitration  clause  and  the  trial  Court  did  not  

commit any jurisdictional error by entertaining the petition filed by the  

respondent under Section 20 of the Act.

In  Smita  Conductors  Ltd.  v.  Euro  Alloys  Ltd. (supra),  this  

Court referred to Article II Part 2 of the New York Convention, which is  

pari materia to Section 7 of the Arbitration and Conciliation Act, 1996  

(for short, ‘the 1996 Act’) and observed:

“What needs to be understood in this context is that the agreement to  submit to arbitration must be in writing. What is an agreement in writing  is  explained  by  Para  2  of  Article  II.  If  we  break  down Para  2  into  elementary parts, it consists of four aspects. It includes an arbitral clause  (1) in a contract containing an arbitration clause signed by the parties,  (2) an arbitration agreement signed by the parties, (3) an arbitral clause  in a contract contained in exchange of letters or telegrams, and (4) an  arbitral agreement contained in exchange of letters or telegrams. If an  

2

arbitration clause falls in any one of these four categories, it must be  treated as an agreement in writing.”

In Nimet Resources Inc. v. Essar Steels Ltd. (supra), the Court  

observed as under:

“If the contract is in writing and the reference is made to a document  containing arbitration clause as part of the transaction [, which] would  mean that the arbitration agreement is part of the contract. Therefore, in  a matter where there has been some transaction between the parties and  the  existence  of  the  arbitration  agreement  is  in  challenge,  the  proper  course for the parties is to thrash out such question under Section 16 of  the Act and not under Section 11 of the Act.

A somewhat similar question was considered in UNISSI (India)  

(P)  Ltd.  v.  Post  Graduate  Institute  of  Medical  Education  and  

Research (supra).  The facts of that case were that in response to the  

tender floated by the respondent for purchase of pulse oxymeters, the  

appellant gave its bid.  The respondent accepted the bid and placed the  

purchase orders.  The appellants supplied the equipments, which were  

accepted by the respondent sometime in January 2001.  After two years,  

technical  committee  of  the  respondent  disapproved  the  purchase  and  

installation of the equipments.  The appellant filed an application under  

Section  11(4)(a)  of  the  1996  Act  for  issue  of  a  direction  to  the  

respondent  to  appoint  an  Arbitrator.   The  Additional  District  Judge,  

Chandigarh held that the question of appointing an Arbitrator under the  

1996  Act  does  not  arise  because  no  agreement  had  been  executed  

2

between the parties.   This  Court  entertained the appeal,  set  aside the  

order of the Additional District Judge and observed:

“Keeping  the  aforesaid  principles,  as  quoted  hereinabove,  in  the  aforesaid decisions of this  Court  in mind,  in fact  what constitutes  an  arbitration agreement between the parties, we have to examine whether  there exists an arbitration agreement between the parties or not in the  facts and circumstances of the case. Let us, therefore, consider the gist  of  the  facts  involved  in  this  case.  Tender  Enquiry  No.  2PGI/OGL/2K/6281 dated 21-12-2000 for purchase of pulse oxymeters  was  floated  by  PGI.  It  is  an  admitted  position  that  the  appellant  submitted their  tender  vide their  Offer No. UIPL/331177/00-01 dated  15-1-2001. The tender of the appellant was accepted by PGI vide their  Letter  No.  PGI/P-61/02/477/11936-51  dated  29-9-2002  for  supplying  forty-one  pulse  oxymeters  to  their  different  departments.  The  tender  documents themselves  contain an arbitration clause and by reason of  acceptance of the tender of the appellant by PGI, it must be held that  there  was  a  valid  arbitration  agreement  between  the  parties.  The  appellant supplied forty-one pulse oxymeters and the receipt thereof was  duly  acknowledged  on  behalf  of  PGI  on  the  delivery  challans.  The  service/ installation reports of the aforesaid machines were duly signed  on behalf of PGI. In the letters issued by PGI, there was an apparent  acknowledgment of supply of the aforesaid meters by the appellant and  also reference to the aforementioned tender enquiry number.

In view of the aforesaid facts and the correspondences between  the parties, particularly the tender offer made by the appellant dated 15- 1-2001 and supply order of PGI dated 29-9-2002, and, in our view, to  constitute an arbitration agreement between the parties and the action  taken on behalf of the appellant and in view of Section 7 of the Act and  considering the principles laid down by the aforesaid two decisions of  this Court, as noted hereinearlier, we are of the view that the arbitration  agreement did exist and therefore the matter should be referred to an  arbitrator for decision.”  

20. We shall now consider the remaining issues.  The appellants’ case  

is  that the Arbitrator  acted in violation of the rules of natural  justice  

inasmuch as he refused the prayer for adjournment despite the fact that  

2

the  appeal  filed  against  the  trial  Court’s  order  dated  28.3.1989  was  

pending before the High Court.  Another point made by the appellants is  

that  even though the award passed by the  Arbitrator  was  vitiated  by  

patent error of law, the trial Court overruled the objections filed on their  

behalf and the High Court casually approved the judgment of the trial  

Court.

21. It is borne out from the record that at one stage, the Arbitrator  

accepted the request made by the representative of appellant No.3 and  

adjourned the proceedings on the premise that the appeal filed against  

order dated 28.3.1989 was pending before the High Court.  However, as  

the appellants could not persuade the High Court to stay the operation of  

order dated 28.3.1989, the Arbitrator had every reason to proceed with  

the matter and pass the award.  Since the appellants did not bother to  

participate in the arbitration proceedings despite the fact that the High  

Court did not grant stay, they are to blame themselves for the ex parte  

award.   In  any  case,  the  appellants  cannot  complain  that  they  were  

denied reasonable opportunity of hearing.

22. However,  we  find  merit  in  the  submission  of  learned  senior  

counsel  appearing for the appellants that the award of the Arbitrator  

2

was vitiated by an error apparent and reasons assigned by the trial Court  

and  the  High  Court  for  refusing  to  annul  the  same  are  legally  

unsustainable.  A reading of the award shows that after adverting to the  

claim made  by  the  respondent  and  the  proceedings  held  by  him  on  

various dates, the Arbitrator referred to the affidavit of Shri A.K. Saigal,  

Managing  Director  of  the  respondent  and  passed  the  award  without  

assigning any reason whatsoever and without even recording a finding  

that the respondent had suffered loss/damages on account of the failure  

of appellant No.3 to place supply order in furtherance of the acceptance  

letter  dated  16.11.1985.   The  casual  manner  in  which  the  Arbitrator  

decided the dispute is evident from paragraph 10 of the Award, which is  

extracted below:

“10. I  have  heard  the  learned  counsel  for  the  claimant  and  the  representatives of the opposite party no.3 at length and carefully perused  the records and I am of the certain opinion that the claimant is entitled to  receive Rs.23,56,500/- from the opposite parties No.1 and 2 which said  amount  also  comprises  of  Rs.12,300/-  as  cost  of  these  proceedings  details whereof are given hereunder:-

AWARD

The claim of the claimant is allowed to the extent of Rs.23,44,200/- with  interest thereon at the rate of 6% per annum with effect from the date of  this award till the date of payment or the decree which is earlier.

The  claimant  is  also  awarded  Rs.12,300/-  being  the  cost  of  this  arbitration as per details given below:-

2

(a) Cost of non-judicial stamp for award Rs. 6,500/-

(b) Arbitration fee paid by the claimant Rs. 2,800/-

(c) Typing  and  office  expenses  for  arbitration paid by the claimant

Rs.    500/-

(d) Cost  awarded  to  the  claimant  on  account of counsels fee

Rs. 2,500/-

Total Rs.12,300/-”

23. In  our  view,  the  Arbitrator  was  duty  bound  to  examine  the  

tenability of the claim made by the respondent under different heads and  

decide  the  same by assigning some reasons,  howsoever  briefly.   His  

failure to do so constituted a valid ground for setting aside the award and  

the trial Court committed a serious error by making the award rule of the  

Court.  Unfortunately, the High Court also overlooked this lacuna in the  

award  and  approved  the  judgment  of  the  trial  Court.   In  Raipur  

Development Authority and others v. M/s. Chokhamal Contractors  

and others (1989) 2 SCC 721 (this was a case under the Arbitration  

Act, 1940), a Constitution Bench of this Court considered the question  

whether the Arbitrator is required to give reasons and held as under:

“.... We do appreciate the contention, urged on behalf of the parties who  contend that it should be made obligatory on the part of the arbitrator to  give reasons  for  the  award,  that  there  is  no justification to leave the  small area covered by the law of arbitration out of the general rule that  the  decision  of  every  judicial  and  quasi-judicial  body  should  be  

2

supported by reasons. But at the same time it has to be borne in mind  that  what  applies  generally  to  settlement  of  disputes  by  authorities  governed by public law need not be extended to all cases arising under  private law such as those arising under the law of arbitration which is  intended for settlement of private disputes.

... The trappings of a body which discharges judicial functions and is  required  to  act  in  accordance  with  law  with  their  concomitant  obligations  for  reasoned  decisions,  are  not  attracted  to  a  private  adjudication of the nature of arbitration as the latter, as we have noticed  earlier, is not supposed to exert the State’s sovereign judicial power. But  arbitral awards in disputes to which the State and its instrumentalities  are parties affect public interest and the matter of the manner in which  government and its instrumentalities allow their interest to be affected  by  such  arbitral  adjudications  involve  larger  questions  of  policy  and  public  interest.  Government  and  its  instrumentalities  cannot  simply  allow large financial interests of the State to be prejudicially affected by  non-reviewable — except in the limited way allowed by the statute —  non-speaking  arbitral  awards.  Indeed,  this  branch  of  the  system  of  dispute resolution has, of late, acquired a certain degree of notoriety by  the manner in which in many cases the financial interests of government  have come to suffer by awards which have raised eyebrows by doubts as  to their rectitude and propriety. It will not be justifiable for governments  or their instrumentalities to enter into arbitration agreements which do  not expressly stipulate the rendering of reasoned and speaking awards.  Governments and their instrumentalities should, as a matter of policy  and public  interest  — if  not  as  a  compulsion  of  law — ensure  that  wherever they enter into agreements for resolution of disputes by resort  to private arbitrations, the requirement of speaking awards is expressly  stipulated and ensured.”

The same view was reiterated in Tamil Nadu Electricity Board  

v. Bridge Tunnel Constructions  (1997) 4 SCC 121 and Punjab SEB  

v. Punjab Pre-Stressed Concrete Works (supra). In  the  second  

judgment,  the  Court  referred  to  some  of  the  earlier  judgments  and  

observed:

2

“After hearing counsel on both sides, we are of the view that the award  is liable to be set aside because when it is a non-speaking one, it is not  known whether any part of the award made by the arbitrator related to  Claim I. In our view, the price of the poles was firm and not liable to be  increased. The fact that the delivery schedule was changed cannot be a  ground to get over the clause prohibiting increase in the price of the  poles.  Once  Claim  I  is  not  tenable,  the  award  has  to  be  set  aside  inasmuch as it  is  not possible to say that the award did not relate to  Claim I.  This  is  a  sufficient  reason  for  setting  aside  the  award  and  remitting the matter back to the arbitrator.”

24. In  the  result,  the  appeal  is  partly  allowed.   The  impugned  

judgment as also judgment dated 25.11.2004 of the trial Court are set  

aside and the award of the Arbitrator is quashed.  The Arbitrator shall  

now decide  the  dispute  afresh  after  giving reasonable  opportunity  of  

hearing to the parties which shall necessarily include an opportunity to  

adduce oral and documentary evidence.

25. If  the  Arbitrator  who  passed  award  dated  17.11.1989  is  not  

available, then the parties may move the trial Court, which shall give an  

opportunity  to  them to  nominate  their  respective  arbitrators  within  a  

specified time.  If the parties fail to nominate their arbitrators, then the  

Court may appoint an arbitrator who shall pass an award after giving  

opportunity to the parties in terms of the preceding paragraph.

………………………….…J. [G.S. Singhvi]

2

        ……………………………..J.

          [Chandramauli Kr. Prasad] New Delhi January 04, 2011.

2