Contractual damage caps may be waived to give business efficacy where fundamental breaches render adherence absurd.

The Petitioner (PWD) and Respondent (KTIPL) entered into EPC contracts in 2014 for road infrastructure projects with a completion period of 18 months from the "Appointed Date"

PWD was obligated to provide 90% of the Right of Way (ROW) within 15 days of the agreement

Despite PWD declaring the Appointed Date as January 27, 2015, the ROW was not handed over, causing massive delays

KTIPL remained mobilized for 45 months

When KTIPL invoked arbitration on October 1, 2018, PWD terminated the agreement

An Arbitral Award dated April 14, 2023, granted damages to KTIPL, ignoring a contractual 1% cap on damages and awarding 18% compound interest

PWD challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996

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 contrary to the contract and Section 31(7) of the Act

The court applied Section 28(3) of the Arbitration and Conciliation Act (as amended in 2015), which requires tribunals to "take into account" terms of the contract rather than strictly adjudicating "in accordance with" them

It relied on the "Business Efficacy Test" as established in Nabha Power Ltd. v. Punjab SPCL, which allows courts to interpret commercial contracts to avoid absurd results

Regarding damages, it applied Section 73 of the Indian Contract Act, 1972, and principles from Simplex Concrete Piles (India) Ltd. v. Union of India, holding that clauses cannot prevent the award of reasonable damages for breach

For interest, it applied Section 31(7) of the Act, which mandates that the tribunal's discretion is fettered if the parties have "otherwise agreed" on interest

The Court upheld the Arbitral Tribunal’s decision to bypass the 1% damage cap (Clause 4.1.5) by applying a holistic and purposive interpretation.

The Tribunal reasoned that the cap was predicated on PWD fulfilling its foundational obligation to provide 90% ROW upfront

Since PWD’s default was total and led to a 45-month mobilization for an 18-month project, applying the 1% cap would lead to an "absurdity" and allow PWD to profit from its own wrong

However, regarding interest, the Court found the Tribunal's approach "patently illegal"

The Tribunal had ignored the specific interest rate agreed upon in Clause 19.9.2 (Base Rate + 2%) and instead imported an 18% rate from a different clause (Clause 19.2.7), while also adding quarterly compounding which was not part of the bargain

It upheld the award concerning the quantum of damages, finding the Tribunal's interpretation of Clause 4.1.5 reasonable and consistent with business efficacy

it quashed and set aside the award of pendente lite and post-award interest, holding that the Tribunal exceeded its jurisdiction by ignoring the specific contractual interest provisions

The Court ruled that under the principles of Gayatri Balasamy, the interest portion could be severed, leaving the parties free to re-arbitrate the interest rate dispute