Arbitrator Can't Allow Damages, For Breach Of MoU To Enter Into Agreement, With No Liability Clause: Delhi High Court

Justice Manoj Kumar Ohri's bench emphasized that damages cannot be awarded for a breach of an agreement when the association was merely exploratory, aimed at entering into contracts on a case-by-case basis in the future.

Facts

On 23.10.2018, the Airports Authority of India (AAI) issued an RFP for Managed Service Providers for the E-Boarding-Biometric Boarding System at four airports. The petitioner won the contract on 23.08.2019.

The petitioner requested the respondent's help in finding Original Equipment Manufacturers (OEM) for the project. The petitioner, despite not accepting respondent's quotations, entered into an MoU on 16.05.2019, aiming to secure better rates for OEMs. Clause 10 of the MoU provided that no party shall claim any damages or make monetary claims in relation to the MoU.

Disputes arose when the respondent claimed damages for the petitioner's alleged breach of the MoU. The respondent argued in arbitral proceedings that it assisted the petitioner in answering pre-bid queries, sourcing OEMs, and more.

The Arbitral Tribunal (AT) awarded damages to the respondent. Aggrieved thereby, the petitioner challenged the award under Section 34 of the A&C Act.

Grounds of Challenge

The petitioner challenged the award on the following grounds:

• That the MoU lacked consideration, rendering it void under Section 25 of the Indian Contract Act.
• That the AT enforced an agreement that was void, violating the legal principles governing contracts.
• Clause 10 of the MoU barred both parties from claiming indirect, special, or consequential damages.

Analysis by the Court

The Court examined the clauses of the MoU to hold that it was merely a facilitative agreement which lacked any financial consideration. The Court held that no work was assigned to the respondent under the MoU and the parties merely agreed to enter into definitive future agreements on case-to-case basis.

The Court held that the MoU was an exploratory association between the parties. The Court carefully interpreted Clause 10 of the MoU, emphasizing that it manifested the parties' collaborative intent without definitive commitments.

The Court held that an arbitral tribunal lacks the authority to grant damages for a breach of a Memorandum of Understanding (MoU), particularly when the MoU serves as a preliminary agreement to enter into a definitive contract. This is especially significant when the MoU entails no financial implications and includes a clause explicitly preventing any monetary liability for a breach.

The Court held that the reliance placed by the tribunal on the judgment in Simplex Concrete Piles (2010 SCC OnLine Del 821) was misplaced as in that the clause prohibited the contractor from making any claim even if it was not responsible for the delay. The Court held that clause 10 cannot be compared to such a clause as it only reinforces the intention of the parties to have no financial commitment with no corresponding claim against each other.

The Court held that the tribunal misapplied the legal ratio of the judgment in Simplex to the present case and came to an erroneous finding. Accordingly, the Court set aside the award.

Case Title: NEC CORPORATION INDIA PRIVATE LIMITED v. M/S PLUS91 SECURITY SOLUTIONS, OMP(COMM) 244 of 2023

Citation: 2023 LiveLaw (Del) 1357

Date: 18.12.2023

Counsel for the Petitioner: Mr. Ramesh Singh, Sr. Advocate with Mr. Aashish Gupta, Mr. Arjun Pall & Ms. Chandni Ghatak, Advocates.

Counsel for the Respondent: Mr. Rana Biswas, Mr.Achaintya Dwivedi, Mr. Arvindam Ghosh, Ms. Kaveri Rawal & Mr. Sunil Sharma, Advocates.

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