LI Network
Published on: December 30, 2023 at 12:45 IST
The Delhi High Court has established that an arbitral tribunal does not possess the authority to grant damages for breaching a Memorandum of Understanding (MoU), particularly when the MoU acts as a preliminary agreement for a definitive contract and contains a clause absolving liability for breaches.
Justice Manoj Kumar Ohri’s bench underscored that awarding damages for a breach of an agreement isn’t permissible when the MoU functions solely as an exploratory step for future contractual dealings without any financial implications and incorporates a clause expressly disallowing monetary claims for breaches.
The case revolved around an RFP issued by the Airports Authority of India (AAI) for Managed Service Providers in 2018, leading to a contract awarded to the petitioner in 2019.
The petitioner sought the respondent’s assistance in identifying Original Equipment Manufacturers (OEMs) for the project and despite entering an MoU, no quotations were accepted. The MoU, dated 16.05.2019, included Clause 10, prohibiting either party from making financial claims related to the MoU.
Disputes arose when the respondent claimed damages for an alleged breach of the MoU during arbitral proceedings, citing assistance provided regarding pre-bid queries and sourcing OEMs.
Challenging the arbitral award under Section 34 of the A&C Act, the petitioner raised objections based on the MoU’s lack of consideration and the inapplicability of an agreement that was void.
The Court scrutinized the MoU’s clauses, determining it was an exploratory arrangement lacking financial consideration. It highlighted that no work was assigned under the MoU, merely indicating the parties’ intent to potentially enter definitive agreements in the future.
Regarding Clause 10, the Court emphasized its collaborative intent without binding commitments, contrary to the tribunal’s reliance on a prior judgment (Simplex Concrete Piles, 2010 SCC OnLine Del 821), highlighting the disparity between the clauses’ intent and applicability.
The Court concluded that the tribunal misapplied legal precedents and set aside the award, underscoring the inability to grant damages for a breach of an MoU acting as a precursor to a definitive contract, especially when no financial implications exist, and a clause disavowing liability for breaches is in place.