State of Himachal Pradesh & Anr. Vs OASYS Cybernetics Pvt. Ltd. (Supreme Court of India)
LoI Creates No Enforceable Right; Cancellation Upheld but State Directed to Reimburse Quantum Meruit Costs
This appeal concerned the legality of the State of Himachal Pradesh’s cancellation of a Letter of Intent (LoI) issued to OASYS Cybernetics Pvt Ltd for supplying and maintaining upgraded ePoS devices under the Public Distribution System. After four rounds of tendering between 2021–2022, the Respondent emerged as the sole technically qualified bidder, and an LoI was issued on 02.09.2022. The LoI, however, expressly made award of contract conditional upon compatibility testing with NIC software at Hyderabad, live demonstrations, and submission of detailed cost break-ups. The Respondent claimed it undertook training, integration development, and manufacturing of devices, alleging the State induced performance for months and abruptly cancelled the LoI on 06.06.2023 without notice or reasons. The State asserted persistent non-compliance with mandatory preconditions and additional concerns about antecedent blacklisting.
The High Court quashed the cancellation as arbitrary and restored the LoI. Before the Supreme Court, the State argued that an LoI creates no contractual rights and that compatibility and cost-submission requirements were repeatedly breached. The Respondent justified its performance and alleged the cancellation was mala fide.
The Supreme Court held that as per settled law (Dresser Rand, Rajasthan Cooperative Dairy Federation, Level 9 Biz), a Letter of Intent is only a precursor to a contract and confers no enforceable rights unless conditions are fulfilled and a Letter of Acceptance or formal agreement is executed. The Himachal Pradesh LoI was manifestly conditional; the binding contract had not materialised. The Respondent’s unilateral manufacture of devices and preparations “put the cart before the horse” and did not amount to fulfilment of LoI-mandated testing and demonstrations. The High Court erred by treating preparatory steps as contractual compliance and by overlooking that the State consistently treated the LoI as provisional.
On the challenge of arbitrariness, the Court examined whether the cancellation was irrational or mala fide under the Tata Cellular/Jagdish Mandal standards. The allegation of blacklisting was rejected as the supposed past debarment related to a predecessor entity, had already been adjudicated in earlier litigation, and was not a subsisting disqualification under the tender clause. However, the Court upheld the second ground—persistent non-compliance with essential LoI conditions—as a legitimate and reasonable basis for cancellation, germane to ensuring NIC compatibility and technical integrity in a welfare-critical system. No mala fides or favouritism was established; the State opted for re-tendering rather than benefitting another bidder. The cancellation thus fell within lawful administrative discretion.
While upholding the State’s right to cancel the LoI, the Court recognised that the Respondent had incurred tangible expenditure in pilot devices, integration components, and training. Invoking equitable principles of quantum meruit, the Court directed the State to quantify and reimburse verified costs for machinery, components or services actually utilised or appropriated during pilot stages and to take over such assets.
In conclusion, the High Court’s judgment was set aside. The LoI cancellation was upheld; the fresh EOI issued immediately after cancellation was quashed; a fresh tender was permitted; reimbursement on quantum meruit was made mandatory; and all claims for loss of profit or expectation damages were barred.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
Leave granted.
