Court’s Decision
The Bombay High Court partly allowed the Section 34 petitions filed by the Public Works Department, Government of Maharashtra, National Highways Division, challenging an arbitral award dated April 14, 2023 in favour of Khare And Tarkunde Infrastructure Pvt. Ltd.
The Court refused to interfere with the arbitral tribunal’s finding that the 1% cap on damages under Clause 4.1.5 of the contract could not be mechanically applied in the peculiar facts of the case, where PWD had failed to provide the required Right of Way for an inordinately long period and had kept the contractor mobilised for nearly 45 months in a project meant to be completed within 18 months.
However, the Court interfered with the award of interest. It held that granting interest at 18% per annum compounded quarterly for pre-arbitration, pendente lite and post-award periods was contrary to the contractual bargain between the parties and patently illegal. The Court therefore partially quashed the arbitral award only to the extent of the grant of interest, while upholding the award on all other aspects. The parties were left at liberty to refer the issue of interest back to arbitration.
Facts
The dispute arose out of Engineering, Procurement and Construction contracts executed between the Public Works Department and Khare And Tarkunde Infrastructure Pvt. Ltd. in December 2014. The project involved road infrastructure work divided into three packages, including construction of major and minor bridges and road overbridges. The total value of the three packages was approximately Rs. 148.51 crores.
The Letters of Acceptance were issued in December 2014. PWD declared January 27, 2015 as the Appointed Date. Under the contract, the project was to be completed within 18 months from the Appointed Date, making July 26, 2016 the scheduled completion date.
A core contractual obligation of PWD was to provide at least 90% of the Right of Way within 15 days from the date of execution of the agreement, subject to receipt of performance security. The balance Right of Way was to be provided within a maximum of 150 days from the Appointed Date.
However, the contractor repeatedly complained that the Right of Way had not been handed over. The Court noted that correspondence between the parties showed that even the required 90% Right of Way had not been provided. In fact, the land required for handing over the Right of Way had not been acquired, making its handover impossible.
The contractor sought extension of time, and PWD itself recommended extensions and payment of maximum damages on more than one occasion. Despite this, formal extensions were not granted and remained pending for approval from the Ministry of Road Transport and Highways.
On October 1, 2018, the contractor invoked arbitration. Shortly thereafter, on October 25, 2018, PWD terminated the contract.
The arbitral tribunal passed an award in favour of the contractor. PWD challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.
Issues
- Whether the arbitral award was liable to be set aside because it did not mechanically apply Clause 4.1.5, which capped aggregate damages at 1% of the contract price.
- Whether the arbitral tribunal had rewritten the contract by holding that the damages cap would not apply in the peculiar facts of the case.
- Whether the award of interest at 18% per annum compounded quarterly was contrary to the contract and Section 31(7) of the Arbitration and Conciliation Act.
- Whether the Section 34 Court could partially interfere with the award only on the issue of interest while preserving the rest of the award.
Petitioner’s Arguments
PWD argued that Clause 4.1.5 of the contract was clear and categorical. It stated that aggregate damages payable under Clauses 4.1.4, 8.3 and 9.2 could not exceed 1% of the contract price. PWD submitted that this clause was a non-obstante provision and represented the final contractual bargain between the parties.
According to PWD, the arbitral tribunal had noticed the clause but failed to apply it. It was argued that by granting damages beyond the 1% cap, the tribunal effectively rewrote the contract.
PWD further submitted that the tribunal wrongly relied upon judgments that were not applicable to the facts of the case. It argued that an arbitral tribunal cannot go beyond the express terms of the contract.
On interest, PWD argued that the tribunal had awarded 18% per annum compounded quarterly despite the contract containing specific provisions on interest. PWD relied on Clause 19.9.2, which provided for interest at base rate plus 2% calculated at quarterly rests in case of delayed payment by the authority. It submitted that the tribunal wrongly adopted 18% interest and compounded it quarterly, making the award patently illegal.
Respondent’s Arguments
The contractor argued that the Right of Way was the very foundation of performance under the contract. Without the handover of the site, the contractor could not be expected to complete the work within the stipulated 18 months.
It was submitted that PWD failed to provide 90% of the Right of Way within 15 days, as required under the contract. The contractor remained mobilised for nearly 45 months before termination, even though the project was supposed to be completed within 18 months.
The contractor argued that applying the 1% damages cap in such facts would be unconscionable, arbitrary and contrary to the basic principles of the Indian Contract Act. It would allow PWD to benefit from its own wrong and escape liability despite serious and prolonged breach.
The contractor also relied on case law to support the proposition that a clause restricting damages cannot be applied in a manner that defeats the right of an innocent party to receive reasonable compensation for breach.
Analysis
The Court held that the arbitral tribunal had not ignored Clause 4.1.5. Instead, it had considered the clause in the larger context of the contract and the conduct of the parties.
The Court emphasised that PWD’s obligation to provide 90% Right of Way within 15 days was foundational. The entire 18-month completion timeline was premised on timely availability of the site. If that foundational obligation was not fulfilled, the rest of the contractual framework could not be applied in isolation.
The Court observed that Section 28(3) of the Arbitration and Conciliation Act, after the 2015 amendment, requires an arbitral tribunal to “take into account” the terms of the contract. This is different from the earlier language requiring decision “in accordance with” the contract. The Court clarified that this does not permit an arbitrator to ignore the contract, but it gives the tribunal room to interpret the contract in light of the facts, reciprocal obligations and commercial realities.
The Court found that blindly applying the 1% damages cap would create an absurd result. It would mean that PWD could keep the contractor deployed for years without providing Right of Way and still limit its liability to only 1% of the contract value. Such an interpretation, according to the Court, would make a mockery of contract law and place a premium on non-compliance.
The Court accepted that the arbitral tribunal had applied the business efficacy test correctly. It had reconciled Clause 4.1.5 with the other clauses of the contract, especially the obligation to hand over the Right of Way. The Court held that this was a plausible and reasonable interpretation, not a rewriting of the contract.
However, the Court took a different view on interest. It held that the contractual provisions on interest were specific and calibrated. Clause 19.9.2 dealt with delayed payment by PWD and provided for base rate plus 2%. Clause 19.2.7 dealt with delay by the contractor in repayment of advance payment and provided for 18% per annum.
The Court held that the tribunal could not adopt the 18% rate from the clause applicable to the contractor’s obligation and apply it against PWD with quarterly compounding. The Court further held that justifying this rate by reference to the contractor’s borrowing cost converted the award of interest into an assessment of damages.
Precedent
The Court considered several judgments on arbitral interpretation of contracts, limitation of damages, business efficacy and interference under Section 34.
The Court discussed the effect of the Supreme Court’s ruling in Ssangyong Engineering & Construction Co. Ltd. v. NHAI on Section 28(3) of the Arbitration Act and held that the arbitral tribunal’s approach was consistent with the post-2015 legal position.
The Court found that the tribunal’s reliance on Simplex Concrete Piles (India) Ltd. v. Union of India was not misplaced, as it dealt with the principle that contractual clauses cannot be interpreted in a manner that entirely defeats reasonable damages for breach.
The Court also referred to K.N. Sathyapalan v. State of Kerala, where the Supreme Court recognised that where one party’s failure to fulfil obligations directly affects the other party’s performance, the tribunal can compensate the non-defaulting party for additional costs.
On business efficacy, the Court relied on Nabha Power Ltd. v. Punjab State Power Corporation Ltd., which explains that commercial contracts must be interpreted in a manner that gives business efficacy and avoids doing violence to other parts of the contract.
On the power to partially modify or interfere with an arbitral award, the Court relied on Gayatri Balasamy v. ISG Novasoft Technologies Ltd. The Court held that while post-award interest may be modified in appropriate cases, pendente lite interest contrary to contract cannot simply be substituted by the Section 34 Court. Therefore, the interest component was severed and set aside.
Reasoning
The Court reasoned that the 1% cap under Clause 4.1.5 could apply in ordinary circumstances where the reciprocal contractual obligations were being performed. But in this case, the essential obligation of handing over 90% Right of Way within 15 days was not fulfilled.
The project was to be completed within 545 days, but the contractor was kept mobilised for 45 months. The delay in handing over Right of Way itself exceeded the original project duration. The Court found that enforcing the 1% cap in such circumstances would produce a commercially absurd and legally unfair outcome.
The Court also noted that the termination was issued only after the contractor invoked arbitration. This factual context supported the tribunal’s view that the damages cap could not be mechanically enforced.
On interest, however, the Court found that the tribunal’s reasoning was unsustainable. The parties had agreed to different rates of interest for different situations. The 18% rate applied to delay by the contractor in repayment of advance payment. The tribunal could not reverse that bargain and impose the same rate on PWD with quarterly compounding.
The Court therefore held that the award was valid on damages but patently illegal on interest.
Conclusion
The Bombay High Court partly allowed the petitions. It upheld the arbitral award on damages and rejected PWD’s argument that the 1% cap under Clause 4.1.5 had to be applied mechanically.
However, the Court quashed and set aside the portion of the award granting interest at 18% per annum compounded quarterly. The Court held that the interest issue remained arbitrable and that the parties were free to refer this limited aspect back to arbitration.
The Court disposed of the petitions with no order as to costs.
Implications
This judgment is important for infrastructure and arbitration disputes because it clarifies that a contractual damages cap cannot always be applied mechanically where the defaulting party has failed to perform foundational reciprocal obligations.
The ruling reinforces that arbitral tribunals can interpret commercial contracts holistically and apply the business efficacy test where literal interpretation would create absurd results.
At the same time, the judgment draws a clear boundary on interest. Even where damages are upheld, an arbitral tribunal cannot disregard specific contractual provisions on interest or import an interest rate from an unrelated clause.
The decision therefore balances arbitral autonomy with contractual discipline: damages were preserved because the tribunal’s interpretation was reasonable, but interest was set aside because it was contrary to the parties’ agreed bargain.