In the recent case of M/S Plus91 Security Solutions v NEC Corporation India Private Limited (Erstwhile NEC Technologies Private Limited)1, the Delhi High Court ruled that an Arbitral Tribunal awarding damages for loss of profits was patently illegal if the same was against the terms of the contract. The Court held that “a clause limiting the liability (of a party) is clearly a part of the contractual bargain and the same cannot be disregarded“.
The said appeal was filed by M/S Plus91 Security Solutions (“Plus91“) against the order of the learned Single Judge in NEC Corporation India Private Limited (Erstwhile NEC Technologies Private Limited) v M/S Plus91 Security Solutions2, wherein the Court set aside the arbitral award directing NEC Corporation Private Limited (“NEC“) to pay an amount of INR 8,43,07,904 (Rupees Eight Crores Forty-Three Lakh Seven Thousand Nine Hundred and Four) plus 6% (six percent) per annum payable to Plus91 as damages for loss of profits.
Under Section 73 of the Indian Contract Act 1872 (“Contract Act“), a party to a contract who suffers damage through a contract being broken is entitled to compensation for any loss or damage caused to them as a result of such breach, or which the parties know would likely result from the breach of the contract. It is to be noted that compensation under Section 73 of the Contract Act would not be granted for any remote or indirect loss that the party suffers. In order to determine if the damage suffered by a party is remote or not, it must be determined if the damage suffered is deemed to have arisen naturally, fairly and reasonably from the breach of the contract3. This is to ensure that the parties who enter into a contract are not liable for unforeseen consequences arising out of the breach of a contract.
Loss of Profit is any loss accruing to a party on account of reduction or absence of profit from the contract due to delay or breach of the contract caused by the other party. The principle herein is that the party suffering such loss shall be entitled to claim compensation for the expected profit to be received by them had the terms of the contract been successfully fulfilled. However, in the case of Bharat Coking Coal Ltd v L K Ahuja4, the Supreme Court has held that in the absence of any proof or evidence of loss of profit or possibility of an alternate use, compensation for the same cannot be provided5.
In the present case, Plus91 claimed that NEC had breached the terms of the Memorandum of Understanding (“MOU“) signed between the parties as NEC had failed to award Plus91 a contract for INR 84,30,79,040 (Rupees Eighty-Four Crore Thirty Lakh Seventy-Nine Thousand and Forty). After hearing the submissions of the parties, the Arbitral Tribunal awarded Plus91 10% (ten percent) of the value of the works as compensation for loss of profits. It is to be noted however, that Clause 10 of the MOU specifically restricts the liability of the parties and excludes liability for loss of profits. Clause 10 of the MOU states “Neither Party is liable for any indirect, special or consequential loss or damage or any loss or damage due to loss of goodwill or loss of revenue or profit arising from or in connection with this MOU”.
Pursuant to an appeal to the learned Single Judge Bench of the Delhi High Court, the learned Single Judge set aside the order of Arbitral Tribunal on the basis of patent illegality. The Court held that NEC's intent to collaborate with Plus91 was clearly established through the signature of the MOU, however, the MOU provides for the parties to enter into a specific agreement for each project. Therefore, the Court ruled that there was no definite commitment on the part of NEC to enter into an agreement.
The Delhi High Court held that while the MOU indicates that a relationship has been established between the parties for jointly pursuing the projects, the MOU specifically states that the parties will enter into a specified agreement for each project. The Delhi High Court further emphasized the need to maintain the contractual bargain between the parties and stated that “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 this MOU. If the MOU is accepted as a binding agreement, this is clearly party of the bargain struck by the parties. Disregarding the said stipulation would in effect amount to rewriting the bargain between the parties“.
The Delhi High Court referred to the case of Ch. Ramalinga Reddy v Superintending Engineer and Anr.6, wherein the Supreme Court ruled that in cases where the contract between the parties bar certain claims for damages, the same would be binding on the parties. The Delhi High Court further relied on the decision of the Supreme Court in W.B. State Warehousing Corporation & Anr. v Sushil Kumar Kalyan & Ors.7, wherein it was held that if there was a specific term in the contract or the law that doesn't permit for parties to raise a point before the arbitrator, the award passed by the arbitrator in contravention thereof shall be in excess of his jurisdiction.
Consequently, the Delhi High Court held that the award for damages on account of loss of profit is contrary to the terms of the MOU and thus, the award issued by the Arbitral Tribunal is vitiated by patent illegality.
Footnotes
1. FAO (OS) (COMM) 36/2024.
2. OMP (COMM) 244/2023.
3. Hadley v Baxendale, [1854] EWHC J70.
4. 2004 (5) SCC 109.
5. AIR 2004 SC 590.
6.(1999) 9 SCC 610.
7.(2002) 5 SCC 679.
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