Supreme Court Clarifies Limits of Incorporation of Arbitration Clauses in LOIs

The Hon’ble Supreme Court of India, in Maharashtra State Electricity Distribution Company Limited & Ors. v. R Z Malpani (Civil Appeal arising out of SLP (C) No. 36889 of 2025, judgment dated April 9, 2026), set aside the order of the Bombay High Court appointing an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, holding that no valid arbitration agreement existed between the parties.

The dispute arose from a tender floated by the Appellant for civil and interior works across Maharashtra. The Respondent’s bid was accepted through a Letter of Intent (LOI) dated November 16, 2022, following which the Respondent furnished bank guarantees and undertook preliminary steps. However, no work order was issued and no formal agreement was executed. Despite repeated requests, the project did not materialise, leading the Respondent to invoke arbitration under Clause 23 of the tender documents.

The Appellant opposed the invocation, contending that no concluded contract had come into existence and that the LOI, at best, represented an intention to enter into a contract. It was further argued that the general reference in the LOI to tender documents was insufficient to incorporate the arbitration clause contained therein.

The Bombay High Court, exercising jurisdiction under Section 11, appointed a sole arbitrator, holding that the LOI constituted acceptance of the bid and that the arbitration agreement could be discerned from the tender documents and correspondence.

Before the Supreme Court, the principal issue was whether, on a prima facie examination, a valid arbitration agreement existed.

The Supreme Court reiterated that the scope of judicial scrutiny at the Section 11 stage is confined to examining the prima facie existence of an arbitration agreement. While courts must ordinarily adopt a pro-arbitration approach and defer contentious issues to the arbitral tribunal, they may refuse reference in cases where no arbitration agreement exists even on a prima facie basis.

On merits, the Court held that the LOI did not result in a concluded contract. It observed that a letter of intent is ordinarily a precursor to a contract and signifies an intention to enter into a binding arrangement in the future, unless it clearly manifests an intention to create legal relations. In the present case, the LOI expressly contemplated the issuance of a detailed work order and execution of a formal agreement—steps that were never undertaken. Accordingly, no binding contractual relationship came into existence.

The Court further held that even assuming a contractual relationship, the arbitration clause contained in the tender documents could not be said to have been incorporated into the LOI. It clarified that under Section 7(5) of the 1996 Act, incorporation of an arbitration clause from another document requires a clear and specific reference demonstrating the parties’ intention to incorporate such clause. A mere general reference to tender conditions does not satisfy this requirement and amounts only to a reference, not incorporation.

The Court also noted that the High Court erred in observing that the Appellant had not disputed the existence of an arbitration agreement, as the record clearly indicated otherwise.

In the absence of both a concluded contract and a valid arbitration agreement, the Supreme Court held that the threshold requirement for reference under Section 11 was not satisfied. The appeal was accordingly allowed and the order appointing an arbitrator was set aside.