Arbitral Tribunal's Decision To Award Damages For Loss Of Profit Is Patently Illegal If It Contradicts Contract: Delhi High Court

The bench held that:

“It is essential to maintain the bargain entered into between the parties. The parties agreed that they would not be liable for (i) any indirect, special, or consequential loss or damage; (ii) any loss or damages due to loss of goodwill; and, (iii) loss of revenue or profit arising from or in connection with the MOU. If the MOU is accepted as a binding agreement, this is clearly a part of the bargain struck by the parties. Disregarding the said stipulation would in effect amount to rewriting the bargain between the parties.”

Brief Facts:

The matter pertained to a dispute which involved a Memorandum of Understanding (MOU) between Plus91 Security Solutions (Appellant) and NEC Corporation India Private Limited (Respondent). The Arbitral Tribunal found that NEC breached the MOU by failing to award work valued at ₹84,30,79,040/- to Plus91. The Tribunal, while rejecting Plus91's evidence on potential profits, estimated that 10% of the work's value would reasonably represent the lost profits and thus awarded ₹8,43,07,904/-. This award was made despite Clause 10 of the MOU, which excluded liability for indirect, special, or consequential losses including lost profits.

Upon NEC's challenge under Section 34 of the Arbitration and Conciliation Act, 1996, the Single Judge of the High Court set aside the award.

The Single Judge held that the Arbitral Tribunal misinterpreted the MOU. The Judge found that the MOU was intended as a preliminary agreement to explore potential collaborations rather than a binding commitment to specific contractual obligations. Consequently, the Judge held that the Arbitral Tribunal's award was vitiated by patent illegality as it contradicted the clear terms and intent of the MOU.

Plus91 dissatisfied with the Single Judge's decision challenged the decision and argued that the Arbitral Tribunal's interpretation of the MOU was within its jurisdiction and should not have been overturned. It contended that the Tribunal's view was at least a plausible interpretation of the contract, if not the correct one, and the Single Judge erred in supplanting the Tribunal's findings with his own.

Observations by the High Court:

The High Court noted that the MOU indicated that the parties decided to establish a working relationship to jointly pursue an opportunity under the Request for Proposal (RFP) issued by the Airports Authority of India (AAI). They decided to record their understanding formally. Clause 1 of the MOU specified that the parties agreed to work together in the field of Biometric Boarding System (BBS) and would regularly share prospects to maximize business through this relationship. Additionally, the parties agreed that once a project was identified, they would collaborate from the initial stages to find an optimal solution.

The MOU had a term of one year from the date of signing with the possibility of extension through mutual written agreement. Clause 3 of the MOU mandated that each party would maintain confidentiality regarding all data or information shared by the other party. Clause 7 reiterated that specific agreements would be required for any joint projects, specifying roles and responsibilities. Clause 8 stated that any matters, terms, and conditions not covered in the MOU would be discussed and settled in good faith.

Clause 10 of the MOU limited liability stated that neither party would be responsible for indirect, special, or consequential losses or damages, including loss of goodwill, revenue, or profit. Clause 11 allowed either party to terminate the agreement if the other party breached the MOU with NEC having the right to terminate without cause by giving thirty days' notice.

The High Court noted that the MOU did not refer to any appendix or additional terms and conditions. Despite this, the Arbitral Tribunal held that an unsigned Annexure-A which was circulated as part of draft exchanges between the parties, was a binding part of the MOU. The Tribunal based its conclusion on testimony and electronic communications including extensive cross-examination of one Mr. Pradeep Kushwaha which indicated that NEC followed an elaborate procedure before entering into agreements. The Tribunal found that Annexure-A was vetted at various levels within NEC and thus formed part of the MOU.

The question before the High Court was whether the MOU obligated NEC to issue purchase orders amounting to ₹84,30,79,040/-. Recital (c) of the MOU suggested that the parties intended to establish a working relationship to jointly pursue the AAI RFP opportunity. Clause 1, the operative term, indicated that the parties agreed to collaborate in the BBS field and would work together from an early stage to develop optimal project solutions.

A plain reading of Clause 1, the High Court held, revealed no express agreement to issue purchase orders for specific work; it only indicated intent to collaborate and enter into future project-specific agreements. Clause 7(i) and 7(iii) reiterated that the parties would act as independent contractors, with no binding commitments made on behalf of the other party.

The bench held that Clause 10's limitation on liability must be interpreted in the context of the MOU which did not indicate any accrued rights in favor of either party for any specific project. The Single Judge held that the MOU merely recorded an intent to enter into project-specific agreements once identified. It held that Annexure-A, indicating potential parts of the AAI project to be undertaken by Plus91, did not constitute a definitive agreement as it lacked specific terms and conditions.

The High Court concurred with the Single Judge and held that the Arbitral Tribunal misread the MOU terms as obliging NEC to issue purchase orders. While the construction of a contract falls within the arbitrator's jurisdiction and a plausible interpretation is generally upheld, the High Court held that the Tribunal's decision to award damages for loss of profit was vitiated by patent illegality.

The High Court noted that it is important to maintain the original bargain between the parties, which expressly agreed not to be liable for indirect, special, or consequential losses, including loss of goodwill, revenue, or profit.

The High Court held that the Arbitral Tribunal lacks jurisdiction to award interest if the contract expressly forbids it. It held that contractual agreements barring specific damages or interest must be honored, aligning with Section 28(3) of the Arbitration Act, which mandates tribunals to consider the terms of the contract.

The High Court held that Clause 10 of the MOU only exempted certain damages, such as loss of revenue or profits, but does not preclude compensation for direct costs incurred.

Therefore, the High Court upheld the Single Judge's decision to set aside the impugned award for patent illegality.

Case Title: M/S Plus91 Security Solutions Vs Nec Corporation India Private Limited (Erstwhile Nec Technologies Private Limited)

Case Number: FAO (OS)(COMM) 36/2024

Mr Jayant Mehta, Senior Advocate with Ms Ritu Bhalla, Mr Arindam Ghose, Mr Ankit Jain, Ms Nikita Sethi and Ms Kaveri Rawal, Advocates.

Mr Ramesh Singh, Senior Advocate with Mr Aashish Gupta and Ms Chandni Ghatak, Advocates.

Date of Judgment: 29.07.2024