Whether Award Of Damages Despite Clauses Explicitly Excluding Award Of Damages Are Patently Illegal
INTRODUCTION
1. The drafters of commercial contracts, especially infrastructure contracts, often incorporate exclusion of liability clauses to have the effect of immunizing either or both parties to the contract from the liabilities in case of a contractual breach. Clause 17 of the ‘FIDIC contract for building and engineering works designed by the Employer’ labeled ‘Risk and Responsibility’ is an example of such a clause. It reads as follows:
Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than as specifically provided in the contract1.
JURISPRUDENCE
2. The jurisprudence on limitation and/or exclusion of liability clauses can be traced back to the Law Commission India’s 103rd Report, 1984 on ‘Unfair terms in contract’,2 wherein standard form contracts concerning the mass production of standardized products and exclusion of liabilities was discussed. A text book example of such standard form contracts includes boilerplate disclaimers on the back of tickets issued by transportation businesses relieving them from any liability in case of damage or misplacement of luggage.3
3. The Courts of law have since scrutinized and solidified the jurisprudence on ‘validity of exclusion clauses’ in a string of cases that have decided both in favor and against the motion. The cases holding validity and enforceability of the exclusion/limitation clauses include Ramanath International Construction v. Union of India;4 Ch. Ramalinga Reddy v. Superitending engineer;5 Associate Engineering Co. v. Government of Andhra Pradesh;6 Oil and Natural Gas Corporation v. Wig Brother Builders and Engineers Pvt. Ltd.;7 Union of India v. Sanjeev Builders8. Whereas, adversely deciding on the validity and enforceability of exclusion/limitation clauses have been laid down in the cases of, M/s Simplex Concrete Piles (India) Ltd. v. UOI;9 Asian Techs Ltd. v. UOI;10 Associated Construction Vs. Pawanhans Helicopters Pvt. Ltd.11 MBL Infrastructures v. Delhi Metro Rail Corporation.12
4. A recent development in the conundrum came in the case of M/s Plus 91 Security Solutions v. NEC Corporation India Pvt. Ltd.13 wherein the Division bench of the High Court of Delhi while giving affect to the autonomous will of the contracting parties to exclude i) Indirect, special or consequential loss or damage; ii) any loss or damage due to loss of goodwill iii) loss of revenue or profit arising from the Memorandum of Understanding14 (‘MOU’) upheld its validity.
M/S PLUS 91 SECURITY SOLUTIONS V. NEC CORPORATION INDIA PVT. LTD. FACTUAL MATRIX
5. Plus 91 is a registered partnership firm and NEC is a private limited company incorporated in India. Both parties entered into an MOU on 25.09.2014. The MOU was cosigned for jointly submitting proposals for systematic Integration projects and the parties operated this way for over 15 projects, where the parties would submit the proposals together and upon being awarded the project, formulating a formal agreement codifying the project specific responsibilities and liabilities of each party. Clause 10 of the MOU15 debarred either of the parties from claiming damages accruing from the MOU.
6. The Airport Authority of India (‘AAI’) on 23.10.2018 invited proposals for developing a pilot E-Boarding Biometric System. NEC approached Plus 91 to jointly work for securing the bid of the said AAI project in exchange of assured purchase orders amounting to approximately 84 crores. It was Plus 91’s claim that on the assurance of NEC, it made significant contributions in the formulation of a comprehensive proposal to secure the RFP works issued by AAI.
7. After considering the bids, AAI awarded the project to NEC. NEC took the position that they were successful in securing the contract without any assistance of Plus 91. On 14.05.2020, Plus 91 issued a legal notice to NEC claiming the issue of purchase orders pertaining the AAI project and vide letter dated 29.06.2021 invoked arbitration alleging that NEC took undue advantage of Plus 91’s Industry expertise, claiming a sum of Rs.1,32,60,00,000/- under Section 70 of the Indian Contract Act, 1872.
Award of the Arbitral Tribunal
8. Basis the evidence on record, the Tribunal concluded in favour of Plus 91, finding that MOU explicitly provided for the scope of work of an appropriate value of ₹84,30,79,040/- and NEC was liable for damages. In making its decision, Arbitral Tribunal rejected NEC’s claim that Clause 10 of the MOU debarred either of the parties from claiming damages accruing from the MOU.
9. The Tribunal placed reliance on the judgment in M/s Simplex Concrete Piles (India) Ltd. v. UOI16, which holds that any terms of a contract placing a blanket prohibition over claiming rightful damages in defiance of Section 73 and ergo ultra vires in terms of Section 23 of the Indian Contract act, 1872; rendering it illegal/invalid/ unenforceable.
Section 34 Application
10. That the Impugned award was challenged by NEC in a Section 34 application primarily on the ground that the Tribunal misinterpreted the terms of the contract and awarded damages while operating outside the ambit specified by the terms of MOU. This contention was accepted by the Single Judge, who perused the Clause 10 of the MOU in context of other clauses of the MOU and concluded that the parties had no intention of making definitive obligations owed to each other. That in the opinion of the Single Judge, the MOU was only a statement of intent and agreement to enter into a project specific definitive agreement and thus, concluded that the application of the precedent laid down in M/s Simplex Concrete Piles (India) Ltd. v. UOI was misplaced.
HELD
11. That the Division Bench in this instant dispute while sitting on an appeal on the findings of the learned Single Judge in the Section 34 application concurred with the finding that the Tribunal erred in applying the concerned legal principles to the facts at hand. The Division bench opined that the decision to award damages on account of loss of profit is patently illegal for being plainly contrary to the express terms of the MOU. In the view of the Learned Division Bench, the mean difference between the exclusion clauses held invalid by the Courts of Law in India, including Supreme Court, was that the Clause 10 only bars the contracting parties from claiming certain losses and does not limit either party from claiming any direct expenditure or costs incurred by them under the MOU. However, the nature of the MOU being such that no consideration is exchanged between the parties and in the absence of any intention to be bound by consequences arising out of the MOU, leaves no scope for liability.
ANALYSIS
12. The exclusion clauses when examined under the provisions of the Indian Contract Act, 1872 appear to be unenforceable / invalid as Section 73 of the Act provides for damages in case of breach of mutual and reciprocal obligations. Damages may include general or normal damages arising out of usual course of breach of any obligation, and special damages arising out of consequential damages, such that is reasonably foreseeable at the time of entering into the contract.
13. In the instant case, Clause 10 of the MOU provided that “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.”
14. That any clause thereby barring the statutory right enshrined under the Section of the Indian Contract Act, 1872 ought to be violative of the public policy of India, thus making it invalid qua Section 23 that provides that any agreement giving effect to terms that are forbidden by the Indian Law and/or is of such nature that if permitted would defeat the provision of law.
15. A bare perusal of the clauses of MOU showcases that the purpose of the MOU was merely to record their express intent of forming project specific agreements if the situation arises, and thus is not a provision specifying mutual obligations that the parties wish to be bound by. It is also noteworthy that Clause 1 of the MOU provided that the parties have agreed to enter into an understanding to operate in the field of BBS at the initial stages in order to secure projects for maximization of business. This Clause read along with Clause 7 of the MOU categorically provided that both the parties shall enter into project-specific agreements that will clearly define the roles and responsibilities of both the parties.
16. In this context the following precedents provide that the Arbitral Tribunal should limit their inspection and determination to the clause of the concerned contract only. In the case of West Bengal State Warehousing Corporation and Ors. Vs. Sushil Kumar Kayan and Ors.17 the Supreme Court provided that an award can be set aside if the Arbitral Tribunal has travelled beyond the agreement between the parties, and it will be essential to examine whether the claimant can raise particular claims in front of the tribunal if there is a specific term in the contract or the law which does not permit to the parties to raise a point before the arbitrator. Similarly, in Oil and Natural Gas Corporation v. Wig Brother Builders and Engineers Pvt. Ltd.18 the Supreme Court set aside the Impugned Award as the Tribunal awarded damages to the contractor in lieu of delays attributable to the employer when the contract only provided for extension of time. In this judgment, the Supreme Court held that the Tribunal acted ultra vires to the terms of the contract and therefore, the award was liable of be set aside. In Ramnath International Construction (P) Ltd. v. Union of India19 a similar issue was considered. The Court held that Clause 11(C) of the contract set a clear bar to any claim for compensation for delays of which extensions had been granted. In this case, the Court held that such a clause amounts to a specific consent by the contractor to accept extension of time alone in satisfaction of claims for delay and not to claim any compensation. In Associated Engineering Co. Vs. Government of Andhra Pradesh and Ors20 too, the Supreme Court concluded if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error.
CONCLUSION & RECCOMENDATIONS
17. Therefore, it can be concluded that to assess the legality of the exclusion clauses, it has to be examined with the other provisions of the contract and the specific circumstances surrounding the matter that the parties agree to. In a rapidly growing dynamic economy, catering to a plethora of subject requirements, jurisprudential developments show the courts inclination to preserve the business and financial interests of the parties to a contract to give effect to the business intent. As accurately encapsulated by the Hon’ble Supreme Court in the matter of Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly21 “…In today's complex world of giant corporations with their vast infra-structural organizations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on its own facts and circumstances.”.
18. Be that as it may, the question that persists is that in a similar scenario, wherein a bonafide litigant claiming rightful losses incurred due to the breach of reciprocator obligations is defeated merely due to the inclusion of an exclusion clause in a boilerplate contract, what are the remedies available to such a litigant. The answer to this question may be found in the codifies statute of ‘Unfair Contract Terms Act, 197722’ under Singapore Laws, which was introduced to ascertain the fairness of contractual terms. This Act has been seen to be practically applied in the landmark judgements of The Singapore Court of Appeal in Singtel v Starhub23and Hong Realty Pt Ltd v Chua Keng Mong24. Notably, the 199th report of the Law Commission of India25 also calls for a novel framework of provisions to be introduced to conclusively determining the unfairness of contractual terms. Given the above, there does appear to exist a pressing need for a statutory framework to solidify the judicial framework and better equip the Courts and Tribunals to deal with the complex provisions concerning exclusion clauses in the interest of justice, equity and good conscience.
Disclaimer: This article was first published in the S&A Law Offices - 'Indian Legal Impetus' newsletter in September 2024.