MGO clauses are valid infrastructure cost recovery mechanisms and do not require proof of actual damage.

The parties entered into a 25-year Gas Sale and Purchase Agreement (GSPA) in 2011 for the supply of coal bed methane (CBM gas)

Clause 5.2 of the GSPA contained a "Minimum Guaranteed Offtake" (MGO) provision, requiring the Buyer (SRMB) to pay for 80% of the contracted quantity regardless of consumption, provided the Seller (GEECL) was ready to supply

In 2014, SRMB sought a waiver of the MGO clause, which GEECL refused; subsequently, SRMB failed to renew a mandatory bank guarantee, leading GEECL to suspend supply

SRMB terminated the agreement on July 07, 2014

GEECL initiated arbitration, claiming MGO dues and damages. The Arbitral Tribunal awarded GEECL Rs. 58,50,45,169 plus interest, holding the termination illegal

SRMB challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, but the challenge was dismissed by a Single Judge on September 05, 2024

SRMB then appealed under Section 37

1. Whether the respondent-claimant failed to discharge its duty to mitigate losses as contemplated under Section 73 of the Indian Contract Act

2. Whether the respondent proved actual damages or loss to justify the MGO award, given its reported business profits

3. Whether the arbitral award was perverse for ignoring relevant financial evidence (CARE/CRISIL reports) and relying on extraneous observations from the Competition Commission

The court primarily applied Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996, which restrict judicial interference to cases of patent illegality or perversity where the arbitrator’s view is not even a "possible view"

It relied on Sections 73 and 74 of the Indian Contract Act, 1872, regarding compensation for breach

The court adopted the principle from Bihar State Electricity Board v. Green Rubber Industries and Shaila Bala Ray v. Darjeeling Municipality, which establishes that "minimum charge" or MGO clauses are intended to ensure a return on capital expenditure and infrastructure maintenance rather than being simple liquidated damages

It further applied the rule from Prafulla Ranjan Sarkar v. Hindusthan Building Society Ltd., stating the burden of proving a failure to mitigate loss lies on the party in breach

The court rejected the mitigation argument because it was not raised before the Arbitral Tribunal and the appellant failed to provide evidence of what reasonable steps the respondent omitted

Regarding the proof of loss, the court reasoned that CBM gas has no spot market and cannot be stored; if not consumed, it must be flared

The court found that even if the respondent’s overall business was profitable, the flaring of gas (evidenced by the appellant’s own exhibits) proved an actual loss of the specific bargain

The court determined that the MGO clause serves as a "long-term insurance" for grid infrastructure costs and does not require mathematical proof of future loss

Finally, the court held that the non-consideration of CARE/CRISIL reports did not render the award perverse, as general profitability reports were not "vital evidence" capable of overturning the respondent's contractual entitlement to MGO payments

The court held that the Arbitral Tribunal took a plausible view of the contract and the nature of the CBM gas industry

It concluded that MGO clauses are valid mechanisms for infrastructure cost recovery and that overall profitability does not preclude a claim for damages arising from a specific breach of a supply contract

The prayer for stay of the judgment was refused