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BOMBAY HIGH COURT SAYS THAT CONTRACTUAL CAP ON DAMAGES CANNOT REWARD EMPLOYER’S FUNDAMENTAL BREACH

Overview

In this case, the Bombay High Court examined the scope of judicial interference with an arbitral award arising out of Engineering, Procurement and Construction(EPC) contracts executed between Public Works Department (PWD), Government of Maharashtra, and Khare and Tarkunde Infrastructure Private Limited (KTIPL). The dispute reached the Court through petitions filed under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an arbitral award that granted damages and interest in favour of the contractor.

The principal issue before the Court was whether the Arbitral Tribunal was justified in refusing to apply a contractual clause, limiting the damages to 1% of the contract value and whether the award of interest at 18% per annum compounded quarterly was consistent with the contractual provisions agreed upon by the parties. 

 

Facts of the Case

The parties entered into EPC contracts in December 2014, for the construction of roads, bridges, and railway overbridges across different projects. Under the agreement, the PWD was required to provide at least 90% of the Right of Way within the prescribed time period after the appointed date, so that construction could begin.

However, the required land was not acquired in time and PWD failed to fulfil this contractual obligation. As a result, the contractor remained mobilised at the project site for nearly 45 months, although the projects were originally scheduled to be completed within 18 months. Despite these delays, the contracts were terminated only in October 2018, after arbitration had already been invoked.

The Tribunal held that the delays were attributable to PWD and awarded damages in favour of KTIPL. It also granted interest at 18% per annum with quarterly compounding.

The PWD approached the Bombay High Court under Section 34 of the Arbitration and Conciliation Act 1996.

 

Legal Issues

  1. Whether the contractual clause restricting damages to 1% of the contract value was binding by the employer's breach.
  2. Whether the Arbitral Tribunal could depart from the contractual limitation and damages while interpreting the agreement.
  3. Whether the Tribunal was justified in awarding interest at 18% per annum compounded quarterly despite specific contractual provisions governing interest.
  4. Whether the award suffered from patent illegality requiring interference under Section 34 of the Arbitration and Conciliation Act 1996.

 

Decision

The Bombay High Court partly allowed the petitions. It upheld the Tribunal’s award on damages but the award of interest was set aside.

It was held that the Tribunal had reasonably interpreted the agreement while refusing to mechanically apply the 1% cap on damages. Since the PWD had failed to provide the required Right of Way for a prolonged period, enforcing the contractual cap in such circumstances would have produced an unreasonable commercial result and rewarded the party responsible for the delay. The Tribunal’s interpretation was found to be consistent with the requirement under Section 28(3) of the Act to take the terms of the contract into account while giving the agreement commercial efficacy.

However, the Court found the award of interest to be patently illegal. The agreement specifically prescribed different interest rates for different situations, including payment delays by the PWD and delayed repayment of advance payments by the contractor. By awarding 18% interest with quarterly compounding based on the contractor’s costs, the Tribunal effectively rewrote the contractual bargain. Accordingly, the Court quashed only the interest portion of the award while upholding the remaining findings and left the issue of interest for fresh arbitration between the parties.

 

Case Reference: - Arbitration Petition No. 262 - 264 of 2024 (SJB, Before Somasekhar Sundaresan, J.)