The Bombay High Court has largely upheld an arbitral award in favour of Khare and Tarkunde Infrastructure Pvt. Ltd. (KTIPL) in a dispute arising out of three road infrastructure contracts with the Maharashtra Public Works Department (PWD), holding that a contractual clause capping damages at 1% of the contract value could not be mechanically enforced where the State’s own foundational obligations remained unfulfilled. The Court, however, set aside the award insofar as it granted interest at 18% per annum compounded quarterly, leaving that issue open for fresh arbitration.
Justice Somasekhar Sundaresan was dealing with petitions under Section 34 of the Arbitration and Conciliation Act challenging an arbitral award arising from contracts worth approximately ₹148.51 crore for the construction of bridges and road overbridges. The dispute arose on delays in the provision of the Right of Way (ROW), which the contract required the PWD to provide on at least 90% of the project length within 15 days of the agreement.
The contractor contended that the prolonged delay in land availability made timely completion of the project impossible. Although the works were to be completed within 18 months, the contractor remained deployed for almost 45 months before the agreement was terminated, leading to arbitration over responsibility for the delays and the resulting losses. The Tribunal awarded damages beyond the contract’s 1% liability cap and granted 18% compound interest. This led to the present appeal under Section 34 of the Act.
The PWD argued that the agreement expressly capped aggregate damages at 1% of the contract price and the arbitral tribunal had effectively rewritten the contract by refusing to apply the limitation. The contractor, however, submitted that the State had failed to provide the required ROW for years, fundamentally undermining the contractual framework and delaying project execution far beyond the agreed 18-month completion period.
Rejecting the State’s challenge, the Court noted that the project was intended to be completed within 18 months, yet the contractor remained mobilised for nearly 45 months before the agreement was terminated. The Court observed that the obligation to provide 90% of the ROW at the threshold was a foundational component of the bargain and the delays in providing the land had directly affected the contractor’s ability to perform its obligations.
The Court held that the arbitral tribunal had reasonably interpreted the contract by reading the damages clause in conjunction with the parties’ reciprocal obligations rather than in isolation. It agreed with the tribunal’s view that blindly applying the 1% cap despite prolonged non-compliance by the PWD would lead to irrational and commercially absurd consequences. The judgment observed that accepting the State’s interpretation would effectively permit it to keep the contractor deployed indefinitely while restricting damages to a nominal amount.
Justice Sundaresan also relied on the post-2015 framework of Section 28(3) of the Arbitration Act, which requires arbitral tribunals to “take into account” the terms of the contract rather than decide disputes strictly“in accordance with” the contract. The Court held that this legislative change grants tribunals greater latitude to interpret contracts in a commercially sensible manner while still respecting their terms.
On the issue of interest, however, the Court found fault with the tribunal’s decision to award 18% interest compounded quarterly for the pre-award, pendente lite and post-award periods. It held that the award was inconsistent with the parties’ contractual bargain and that the tribunal had improperly relied on the contractor’s borrowing costs to justify the rate.
Accordingly, the High Court upheld the arbitral award on all substantive findings, including the grant of damages, but partially set it aside to the limited extent of the interest component. The parties were granted liberty to refer the dispute relating to the rate of interest to arbitration afresh.
