Contractual Damage Caps Inapplicable Where Fundamental Breaches and Reciprocal Failures Render Absolute Limits Commercially Absur d

The Petitioner (PWD) and Respondent (KTIPL) entered into an EPC Agreement in December 2014 for road infrastructure projects

Under the contract, PWD was obligated to provide Right of Way (ROW) for 90% of the project length within 15 days of receiving performance security

PWD failed to provide the ROW for over 45 months, leading to significant project delays

After the 18-month execution period expired and KTIPL invoked arbitration, PWD terminated the contract on October 25, 2018

An Arbitral Award dated April 14, 2023, granted damages to KTIPL, holding that the contractual 1% cap on damages did not apply due to PWD's fundamental breach

PWD challenged the award under Section 34 of the Arbitration and Conciliation Act, specifically contesting the calculation of damages beyond the 1% cap and the award of 18% compound interest

1. Whether the Arbitral Tribunal was justified in awarding damages exceeding the 1% cap stipulated in Clause 4.1.5 of the Agreement

2. Whether the award of interest at 18% per annum compounded with quarterly rests was in violation of the contract and Section 31(7) of the Arbitration and Conciliation Act

The court applied Section 28(3) of the Arbitration and Conciliation Act (post-2015 amendment), which mandate that tribunals "take into account" the terms of the contract rather than strictly adjudicating "in accordance with" them

It relied on the "Business Efficacy Test" as articulated in Nabha Power Ltd. v. Punjab SPCL, which allows courts to interpret commercial terms to avoid absurdities

Regarding damages, it cited Simplex Concrete Piles (India) Ltd. v. Union of India, which held that contractual clauses cannot prohibit the award of reasonable damages for breach under Section 73 of the Indian Contract Act

For interest, it applied Section 31(7) of the Arbitration Act, which binds the tribunal to any prior agreement on interest rates between the parties, as interpreted in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. regarding the court's power to modify or set aside interest

The court found the tribunal's decision to bypass the 1% damage cap was a "plausible view" because the cap was interlinked with PWD's foundational obligation to provide ROW within 15 days

Applying the business efficacy test, the court reasoned that restricting damages to 1% for a 45-month delay caused by the employer would lead to an "absurd outcome" and allow PWD to benefit from its own wrong

The court held that under the amended Section 28(3), the tribunal is not a "hidebound" slave to specific clauses but must reconcile reciprocal promises

The court found the award of 18% quarterly compound interest "patently illegal"; it noted that the tribunal wrongly adopted an interest rate from Clause 19.2.7 (applicable to KTIPL's defaults) and ignored Clause 19.9.2 (applicable to PWD's defaults) while also unilaterally shifting from simple to compound interest

This violated the "unless otherwise agreed" proviso of Section 31(7)(a)

However, it partially allowed the petitions by quashing and setting aside the award of interest (pre-arbitration, pendente lite, and post-award)

The court held that the issue of the interest rate remains arbitrable and can be resolved through fresh arbitration as the primary award was otherwise upheld; no order was made as to costs