Arbitral Tribunal Cannot Award Damages Specifically Excluded By Contract: Delhi HC

BW Online Bureau Jul 30, 2024

The Court emphasised that the Arbitral Tribunal is required to render a decision having regard to the terms of the agreement. It was held that in the present case, the award of damages on account of loss of profits was contrary to the terms of the agreement and thus the Award was held to be vitiated by patent illegality

A Division Bench of the Delhi High Court comprising Justice Vibhu Bakhru and Justice Tara Vitasta Ganju, recently while dismissing an Appeal held that “If the parties have agreed that a particular type of damages would not be paid, such agreement is required to be implemented.” The Arbitral Tribunal is required to render its decision having regard to such agreed term of the contract, as also provided under Section 28(3) of the Arbitration and Conciliation Act, 1996 (“Act”).

The present issue arose in the context of a specific clause in an agreement between the parties, which provided that neither party would be liable for any indirect, special or consequential loss or damages, or any loss or damage due to loss of goodwill, or loss of revenue or profit arising in connection with the agreement.

The Arbitral Tribunal had proceeded to award damages in the form of loss of profits, despite such exclusion clause.

The issue fell for the consideration of the Delhi High Court whether such clauses could be enforceable.

It was held that it is essential to maintain the bargain entered into between parties. A clause limiting liability is clearly part of the contractual bargain and the same cannot be disregarded. Disregarding the said stipulation would in effect amount to rewriting the bargain between the parties.

The Court also noted that the clause only excluded certain kinds of damages and did not bar compensation for any direct expenditure or costs incurred by the parties.

In this context, the Court emphasised that the Arbitral Tribunal is required to render a decision having regard to the terms of the agreement. It was held that in the present case, the award of damages on account of loss of profits was contrary to the terms of the agreement and thus the Award was held to be vitiated by patent illegality.

Advocates representing Appellant: Mr. Jayant Mehta, Sr. Advocate, Ms. Ritu Bhalla, Mr. Arindam Ghose, Mr. Ankit Jain, Ms. Nikita Sethi and Ms. Kaveri Rawal, Advocates.

Advocates representing Respondent: Mr. Ramesh Singh, Sr. Advocate, Mr. Aashish Gupta, Ms. Chandni Ghatak, Shardul Amarchand Mangaldas & Co., Advocates.