Delhi High Court Sets Aside ₹2.60 Cr. Damages Award Against Som Shiva Impex For Lack Of Loss Assessment

The Delhi High Court on 13 October set aside a Rs. 2.60 crore arbitral damages award against Som Shiva Impex Limited in favour of the National Research Development Corporation (NRDC), holding that damages for breach of contract cannot be awarded without assessing the actual loss suffered.

Justice Subramonium Prasad held that the arbitrator had rejected NRDC's royalty claim because the technology was never commercialised but had nevertheless calculated damages using the unpaid royalties without determining whether NRDC had suffered any loss. He said:

“In the present case, the Arbitrator has not given nominal damages. A perusal of the Award indicates that the learned Arbitrator has proceeded to award damages on failure of transfer of technology by the Petitioner to the Respondent by and after 10.06.2020, i.e. the date on which the Petitioner was under a contractual obligation to transfer the technology on failure to commercialise the product. On this limited aspect, there are no observations rendered by the learned Arbitrator as to whether any loss has been suffered by the Respondent herein."

The dispute arose from a project undertaken by Som Shiva to develop a specialised elastomer compound using a modified polycarbonate and Nylon 6 blend.

On 12 October 2011, Som Shiva entered into a Tripartite Agreement with the Department of Scientific and Industrial Research (DSIR) and NRDC, along with a separate Royalty Agreement with NRDC. DSIR sanctioned Rs. 2.70 crore towards the project cost of Rs. 7.74 crore and disbursed Rs. 2.40 crore between 2011 and 2015.

Under the agreements, Som Shiva was required to pay annual royalties equivalent to 26% of the disbursed funds for five years upon commercial production, sale or captive use of the technology. Clause 11(e)(ii) required Som Shiva to transfer the technology within 60 days if it failed to commercialise the product within four years of project completion.

The project was completed on 11 April 2016. Som Shiva paid Rs. 64.74 lakh towards the first royalty instalment on 30 December 2016, allegedly under protest.

In 2018, Som Shiva informed NRDC and DSIR that rising raw material costs and insufficient demand had made commercialisation unviable. Maintaining that it had neither commercially produced nor used the technology, Som Shiva refused to pay further royalties.

NRDC and DSIR initiated arbitration, claiming Rs. 3.82 crore towards royalties, interest and GST. On 23 July 2021, the Delhi High Court appointed former Justice G.P. Mittal as the sole arbitrator.

In an award dated 29 September 2022, the arbitrator rejected NRDC's royalty claim for lack of commercialisation but held Som Shiva liable for failing to transfer the technology by 10 June 2020. The arbitrator awarded NRDC Rs. 2,60,83,200 in damages, calculated using four unpaid royalty instalments and GST, along with interest at 11% for a specified period and 10% during and after the arbitration. The arbitrator rejected Som Shiva's counterclaim for a refund of Rs. 64.74 lakh and adjusted that payment against the damages.

Som Shiva challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing that the arbitrator had awarded damages without proof of actual loss, contrary to Section 73 of the Indian Contract Act, 1872. NRDC and DSIR contended that Som Shiva's failure to transfer the technology had deprived NRDC of opportunities to license it to third parties.

The Court found that the arbitrator had calculated damages by relying on unpaid royalties without assessing the loss caused by the failure to transfer the technology. It also noted that the award did not address the requirement under Section 73 to consider whether the aggrieved party had taken reasonable steps to mitigate its losses. The Bench observed:

“While it is within the power of the learned Tribunal to award compensation/damages, however, the same cannot be done without taking into consideration whether loss has been suffered or not. Nothing in the Award discloses that loss has been suffered and the same has been assessed by the Learned Arbitrator.”

Accordingly, the High Court set aside the damages award of Rs. 2,60,83,200, the accompanying interest and the adjustment of Rs. 64.74 lakh, while granting NRDC and DSIR liberty to seek the constitution of an arbitral tribunal under Section 11 to establish their damages claim.

Appearances for petitioner (Som Shiva Impex Ltd.): Senior Advocate Rajshekhar Rao, Advocates Malak Bhatt and Sukanya Joshi.

Appearances for respondents (National Research Development Corporation & Department of Scientific and Industrial Research): Advocates J.M. Kalia, Siddhartha Shukla and Dhruv Kalia.