Synopsis

The Public Works Department (PWD) challenged an arbitral award that had rejected a clause in an Engineering Procurement and Construction contract limiting aggregate damages to 1% of the contract price. The arbitrator held that this cap would not apply because the PWD had fundamentally breached its reciprocal obligation to provide 90% of the Right of Way (ROW) within 15 days, causing delays that extended the project from 18 months to over 45 months. The High Court upheld the arbitrator’s interpretation, applying the business efficacy test and noting the amendment to Section 28(3) of the Arbitration Act, which requires the tribunal to “take into account” the terms of the contract rather than decide strictly “in accordance with” them. However, the court set aside the award of interest at 18% compounded quarterly, holding that the arbitrator had ignored the interest provisions agreed by the parties. The court partially modified the award, leaving the damages intact but sending the interest issue back for fresh arbitration.

1. Heading of the judgment

High court of judicature at bombay ordinary original civil jurisdiction

Arbitration petition no. 262 of 2024 (with arbitration petition no. 264 of 2024 and arbitration petition no. 263 of 2024)

Public works department government of maharashtra national highway division pwd (petitioner) vs. Khare and tarkunde infrastructure pvt. ltd. (respondent)

Coram: hon’ble mr. justice somasekhar sundaresan

Core Law: Arbitration and Conciliation Act, 1996 – Section 34 – Section 28(3) – Interpretation of contract – Damages cap – Business efficacy test – Interest under Section 31(7) – Partial modification of award.

Court: High Court of Judicature at Bombay (Ordinary Original Civil Jurisdiction)
Coram: Hon’ble Mr. Justice Somasekhar Sundaresan (Single Judge)
Date of Judgment: June 12, 2026 (Reserved on March 30, 2026)
Case Nos.: Arbitration Petition No. 262 of 2024 (and connected petitions)

2. Legal framework

Major laws and provisions involved:

• Arbitration and Conciliation Act, 1996 – Sections 34 (setting aside arbitral award), 28(3) (rules applicable to substance of dispute – “take into account” the terms of the contract), 31(7) (interest in arbitral awards)

• Indian Contract Act, 1872 – Sections 23, 28, 54, 55, 73 (unconscionable clauses, breach of contract, compensation for loss or damage)

• Business efficacy test / officious bystander test – implied terms in commercial contracts

Subject matter of the judgment:

Whether an arbitral award can ignore a clause that caps total damages at 1% of the contract price when the employer’s failure to provide the Right of Way (ROW) has made performance impossible for an extended period; and whether the award of interest at 18% compounded quarterly is contrary to the parties’ agreement under Section 31(7)(a).

Key legal principles applied:

• Section 28(3) – “take into account” vs. “in accordance with”: The 2015 amendment to the Arbitration Act changed the requirement from deciding disputes “in accordance with” the terms of the contract to “taking into account” the terms of the contract. This gives arbitral tribunals greater leeway to interpret contracts contextually, especially when strict application would lead to absurd results.

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