Is a Letter of Intent (LOI) always a binding contract?

No. An LOI can operate as a binding contract only when the parties act in a way that shows they treat it like a final deal—clear terms plus conduct consistent with a concluded contract.

What role did acquiescence play in this case?

If parties participate in arbitration without timely objection, they may be taken as accepting the process. The dispute here tested whether such conduct bound them to continue.

Did the arbitration clause arise from the LOI itself?

The parties argued about whether a valid arbitration agreement existed in writing. Courts focused on whether there was a written agreement that could trigger Section 3 of the Foreign Awards Act.

Which court finally heard the appeals?

The Supreme Court of India heard the appeals from orders of the Delhi High Court.

What practical lesson should businesses take?

Be careful with LOIs. If you sign and then act as if a full contract exists, a court may treat the LOI as binding. Keep arbitration terms clear and in writing.

Dresser Rand SA v. Bindal Agro Chem Ltd. (2006)

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Quick Summary

This case is about two things: (1) can a Letter of Intent (LOI) work like a binding contract, and (2) does joining arbitration without protest tie the parties to continue? A Swiss supplier, Dresser Rand SA, and an Indian buyer, Bindal Agro Chem Ltd., signed an LOI for compressors. The supplier started production. Later, the buyer refused delivery and questioned arbitration, saying the LOI was not a final contract and there was no binding arbitration agreement.

Courts examined whether there was a written arbitration agreement for a stay under Section 3, Foreign Awards (Recognition and Enforcement) Act. The appeals came to the Supreme Court from the Delhi High Court’s orders (14 Feb 2002; 4 Mar 2003).

Issues

Does acquiescence in arbitration proceedings bind parties to continue with arbitration?
Did a binding agreement arise from the arbitration clause said to be within or linked to the LOI?

Rules

An LOI can be treated as a binding contract when:

Its terms are clear enough for performance; and
The parties’ conduct shows they accepted it as a concluded deal (they act as if the contract exists).

For a stay under Section 3 of the Foreign Awards Act, there must be a written arbitration agreement between the concerned parties.

Facts (Timeline)

Timeline image

LOI Signed: Dresser Rand SA (Swiss supplier) and Bindal Agro (Indian buyer) sign an LOI for 100 compressors at EUR 10 million, delivery in 6 months.

Performance Begins: Dresser Rand starts manufacturing based on the LOI.

Parallel Intent: Bindal allegedly sends an LOI to KGK (another supplier) for two machines. Dresser Rand questions being excluded.

Denial & Refusal: Bindal denies the KGK action attributed to it and finally refuses to take delivery, saying the LOI is not binding.

Litigation: Dresser Rand sues, claiming the LOI is a binding contract and seeks payment.

Counter Move: Bindal and KGK approach the Delhi High Court for an injunction against arbitration, asserting no arbitration agreement between them.

Appeals: Orders of 14 Feb 2002 and 4 Mar 2003 from Delhi High Court lead to appeals before the Supreme Court of India.

Case timeline: LOI, performance, refusal, litigation, appeals

Arguments

Appellant: Dresser Rand SA

The LOI was clear and signed; both sides acted on it. It worked like a concluded contract.
Production started relying on the LOI—conduct shows acceptance.
Arbitration should proceed; Section 3 stay applies if a written arbitration agreement exists.

Respondents: Bindal Agro & KGK

The LOI was only an expression of intention, not a final, binding contract.
No binding written arbitration agreement among all concerned parties.
Courts should restrain arbitration by injunction since consent to arbitrate is missing.

Judgment

Judgment image

The Supreme Court dealt with appeals from the Delhi High Court’s orders. The key question was whether a written arbitration agreement existed so that a stay under Section 3 of the Foreign Awards Act could operate. The Court noted that where parties have signed an agreement, courts first verify the existence of such a written agreement in order to invoke arbitration machinery or stay court proceedings.

On the LOI point, the Court treated conduct as important: when parties sign an LOI and then perform in line with it, the LOI may function like a contract. On the arbitration point, mere participation can suggest acceptance, but the foundation remains a valid written arbitration agreement between the relevant parties.

Illustration of court judgment principles applied in the case

Ratio Decidendi

When an LOI is signed and parties act on it, courts may treat it as a binding contract.
For a stay under Section 3, there must be a written arbitration agreement; participation is relevant but cannot replace the need for such writing between the parties in question.

Why It Matters

Businesses often use LOIs to move fast. This case warns: if you sign and then perform, the LOI may bind you. Also, if you step into arbitration without protest, you risk being held to it—provided there is a valid written arbitration agreement. Clear drafting and consistent conduct are crucial.

Key Takeaways

LOI + Conduct = Contract: Clear LOI terms + performance can equal a concluded contract.
Arbitration Needs Writing: Section 3 stay requires a written arbitration agreement.
Act Carefully: Joining arbitration without timely objection may be treated as acceptance.
Drafting Tip: Put the arbitration clause in the signed document and name all parties.

Mnemonic + 3-Step Hook

Mnemonic: “LOI-ACT” — Letter, Obligation, Intent → Acts Create Terms.

Letter: Signed LOI with clear terms.
Acts: Parties perform as if bound.
Arbitration: Needs a written agreement; participation supports—but cannot replace—writing.

IRAC Outline

Issue: (i) Whether acquiescence binds parties to arbitrate; (ii) Whether a binding agreement arose from/with an arbitration clause.

Rule: LOI can be binding if conduct shows a concluded contract; Section 3 requires a written arbitration agreement.

Application: LOI was signed; supplier performed; buyer refused and contested arbitration. Courts tested if a written arbitration agreement existed among the parties for Section 3 stay.

Conclusion: Conduct can elevate an LOI to a contract; arbitration hinges on a valid written agreement—acquiescence helps but does not replace the writing requirement.

Glossary

Letter of Intent (LOI): A document showing intention to enter a contract; may become binding if parties act on it like a final deal.
Acquiescence: Accepting a process by conduct, for example, taking part in arbitration without timely objection.
Section 3 (Foreign Awards Act): Provision on staying court proceedings when there is a valid written arbitration agreement linked to a foreign award.

FAQs

No. It becomes binding when the terms are clear and the parties’ conduct shows they treated it like a concluded contract.

Conduct such as appointing arbitrators, filing pleadings, or arguing the merits without objecting can show acceptance—subject to a valid written arbitration agreement.

Section 3 allows courts to stay suits when a written arbitration agreement exists. The core dispute was whether such a written agreement bound these parties.

Place a clear arbitration clause in a signed contract and name all parties who must be bound. Avoid relying on an LOI alone if you do not want it to be binding.