Arbitral award significant for Indian legal jurisprudence, say Ranjit Prakash and Arun Mani at HSA Advocates
The dispute arose in the backdrop of a typical EPC (engineering, procurement and construction) and supply contract in which Vestas undertook to design the project and supply turbines, which included evaluation of wind data, designing, siting and erecting the turbines, and operation and maintenance thereafter. The technology and design was dictated by Vestas and Inox relied on its representations regarding efficiency and performance of the turbines, as well as the projected generation data furnished by Vestas. Consistent with usual practice, Vestas limited its liability through contractual caveats and exceptions. This was Inox’s first wind energy project and Inox relied heavily on Vestas’ representations, including generation estimates.
Upon commissioning the project, it was found that the actual generation was significantly lower than that projected by Vestas. However, Vestas disowned any liability. The dispute culminated in an arbitration initiated by Inox claiming damages on account of the underperforming turbines. The contract and arbitration proceedings were governed by Indian law.
Inox contended that Vestas had made fraudulent misrepresentations regarding performance of the turbines and their projected generation, inducing Inox to enter into the contract. Vestas disowned liability by taking recourse to contractual caveats, including lack of any guarantees and specific exclusion clauses contained in the contract, specifically the disclaimer that their generation estimates would not constitute a guarantee or warranty.
During the arbitral proceedings, parties used evidence from globally renowned experts to re-analyse the raw wind data that was used by Vestas.
Based on this evidence and the cross-examination of the experts, Inox argued that Vestas had made grossly reckless and negligent misrepresentations regarding the generation estimates with intent to induce Inox to enter into the contract, and that Vestas deliberately concealed the core material facts regarding its basis of arriving at the generation estimates.
Vestas represented itself as an expert and knew, or ought to have known, that Inox would act on its representations.
These representations were in the nature of a warranty, which was breached. As such, the generation estimates provided by Vestas suffered from serious infirmities. Inox relied on the legal proposition that: where a person professing to have special knowledge or skill makes a representation by virtue thereof to another with the intention of inducing him or her to enter into a contract, [that person] is under a duty to use reasonable care to ensure the representation is correct. If he or she negligently gives misleading information and thereby induces the other side into a contract, he or she is liable for damages.
Once it was demonstrated through evidence that deliberate misrepresentations had been made to Inox, the contractual defence of limitation of liability was no longer available to Vestas. The arbitral tribunal, comprising senior retired High Court judges, concluded that the methodology and assumptions that Vestas had adopted for estimating the energy generation were incorrect and the energy generation estimates provided by Vestas were inflated.
The majority of the arbitral tribunal comprising of senior retired high court judges, concluded that the methodology and assumptions that Vestas had originally adopted for estimating the energy generation were incorrect and the energy generation estimates originally provided by Vestas were inflated. The majority tribunal recognised that not only had Vestas not adopted the correct methodology for projecting generation, it had deliberately obfuscated the assumptions and variables required to assess the generation. The majority tribunal found that Vestas had made fraudulent and negligent misrepresentation under the Indian Contract Act, 1872 and held them liable to compensate Inox for its losses.
The majority tribunal was also persuaded to accept that the settled law on exclusion of liability, even on account of negligence or misrepresentation, requires it to be expressly stated in the contract, in the absence of which these exclusions would not be available as a defense. In the present case, without such specific exclusions in the contract, Vestas would need to carry the burden of its misrepresentations, which were grossly negligent and reckless at the least, but were also found to be deliberate and therefore, fraudulent.
This arbitral decision is a landmark in the context of commercial contracts, particularly relating to supply of equipment, as it is the only case in recent times where the principles of fraudulent misrepresentation have been applied and contractual caveats and exclusions were ignored. The arbitral award is also unique as it provides recourse to investors that have been hit by misrepresentations.
Unlike the UK, where separate legislation has been framed for dealing with commercial misrepresentations (the Misrepresentation Act, 1967) India does not have any statutory protection for such situations. This award is therefore a particularly significant development of Indian legal jurisprudence.
HSA Advocates represented Inox in the arbitration proceedings with a team led by senior partner Ranjit Prakash, along with associate partner Arun Mani.