The Supreme Court has clarified that Bharat Drilling cannot be treated as an authority for the view that contractually barred claims bind only the employer and not arbitral tribunals, and has referred the issue to a larger bench for authoritative settlement of the law.
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NEW DELHI: In a significant development for Indian arbitration law, the Supreme Court has referred its 2009 decision in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand to a larger bench for reconsideration. The Court has clarified that Bharat Drilling is not an authority for the proposition that excepted or prohibited claim clauses in contracts bind only the employer and not the Arbitral Tribunal.
The reference was made in Civil Appeal Nos. 8261–8262 of 2012, decided on 5 December 2025, by a Division Bench comprising Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar.
Background of the Case
The appeal arose from a dispute between the State of Jharkhand and Indian Builders, Jamshedpur, under the Arbitration and Conciliation Act, 1996.
- The Arbitral Tribunal allowed certain monetary claims in favour of the contractor.
- The Civil Court, exercising jurisdiction under Section 34, set aside Claim Nos. 3, 4, and 6, holding that these claims were expressly barred by the contract.
- The Jharkhand High Court, in a Section 37 appeal, restored the arbitral award solely by relying on Bharat Drilling (2009), without examining the contractual clauses.
Aggrieved, the State of Jharkhand approached the Supreme Court.
The dispute arose from specific clauses in the contract between the parties. Clause 4.20.2 prohibited claims for idle labour, idle machinery, or similar inefficiencies, while Clause 4.20.4 barred claims for business loss or any consequential loss.
The arbitral claims under challenge, relating to underutilised overheads, idle tools and machinery, and loss of profit, fell squarely within the scope of these prohibitions, forming the core issue before the courts.
Supreme Court’s Observations
1. Misapplication of Bharat Drilling
The Supreme Court noted that Bharat Drilling was being regularly and wrongly applied to government contracts to bypass prohibitory clauses.
Crucially, the Court observed:
- Bharat Drilling did not analyse the relevant contractual clauses
- It proceeded on a bare assertion that such bars apply only to the department, not the arbitrator
- It relied on Port of Calcutta v. Engineers-De-Space-Age, a case dealing with interest, not prohibited claims
2. Party Autonomy is the Foundation of Arbitration
Reaffirming settled principles, the Court emphasised that:
“Contractual clauses that limit claims are founded on freedom to contract. They are agreements that crystallise informed choices of parties.”
Relying on CORE v. Central Organisation for Railway Electrification, the Bench reiterated that:
- Party autonomy is the ‘brooding and guiding spirit’ of arbitration
- Arbitrators are bound by the terms of the contract
- Courts and tribunals cannot rewrite contracts under the guise of equity
3. Excepted Clauses Bind Arbitral Tribunals
The Court clarified that:
“Applicability of excepted or prohibitory clauses would primarily depend upon the agreement between the parties, which alone is the guiding principle for the Arbitral Tribunal.”
This approach aligns with earlier precedent, including Pam Developments Pvt. Ltd. v. State of West Bengal, where the Supreme Court held that:
- Arbitrators cannot award claims expressly prohibited by contract
- Courts must enforce contractual limitations strictly
4. Interest Claims vs Prohibited Claims: A Clear Distinction
The Bench drew a sharp distinction between:
- Claims for interest, governed by Section 31(7) of the Arbitration Act, and
- Contractually barred claims, governed purely by party agreement
The Court held that reliance on interest-related jurisprudence (such as Port of Calcutta) to justify barred substantive claims was legally unsound.
According to the Supreme Court, the approach in Bharat Drilling is inconsistent with modern arbitration jurisprudence, including:
- Cox and Kings Ltd. v. SAP India Pvt. Ltd.
- CORE v. Central Organisation for Railway Electrification
- In Re: Interplay Between Arbitration Agreements and Stamp Act, 1899
Given the confusion caused by its repeated misuse, the Court held that clarity and consistency in law demand reconsideration.
The Bench directed:
“We direct the registry to place our judgment and order before the Hon’ble Chief Justice for appropriate orders for placing the matter before a larger bench of appropriate strength.”
Case Title:
The State of Jharkhand v. The Indian Builders Jamshedpur
CIVIL APPEAL NOS. 8261-8262 OF 2012
READ JUDGMENT
