By Arnav Mathur.
Arnav Mathur is a Research Scholar at the Milon K. Banerji Arbitration Centre.
In State of Jharkhand v. Indian Builders Jamshedpur [2025 SCC OnLine SC 2717] (“Indian Builders”), the Hon’ble Supreme Court of India examined the prevailing law on the effect of contractual prohibitory clauses in arbitral proceedings. The Hon’ble Supreme Court has held that the law articulated in Bharat Drilling and Foundation Treatment Pvt. Ltd. v. State of Jharkhand [(2009) 16 SCC 705] (“Bharat Drilling”) warrants reconsideration.
The Hon’ble Supreme Court observed that the reasoning in Bharat Drilling does not sit comfortably with the principles subsequently articulated by it in Cox and Kings Ltd. v. SAP India Private Ltd., and In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Stamp Act, 1899. In view of this apparent doctrinal inconsistency and the need for a clear and authoritative statement of the law, the Supreme Court has referred the matter to a larger bench for reconsideration.
To understand the controversy, a short recap of Bharat Drilling is required. In Bharat Drilling the contract at issue contained express clauses excluding certain heads of claim – for example, claims for idle machinery and loss of profit. The arbitral tribunal nonetheless awarded those heads; a civil court set those parts of the award aside as being contractually barred. On appeal, the Supreme Court had restored the award, reasoning (in part) by drawing analogies to precedents about the grant of interest under Section 31(7) of the Arbitration and Conciliation Act, 1996 (“Act”). Over time, several courts have treated Bharat Drilling as authority for the broader proposition that prohibitory or excepted clauses in a contract bind only the employer and do not necessarily constrain the arbitral tribunal.
In Indian Builders, under the construction contract between the State of Jharkhand and Indian Builders, Clauses 4.20.2 and 4.20.4 purported to bar claims for idle labour/machinery and for business loss respectively. The tribunal, inter alia, awarded, sums for under-utilised overheads, loss due to underutilised tools, plant and machinery, and loss of profit. In Section 34 proceedings filed by the State of Jharkhand before the Civil Court-I, Jamshedpur, the Civil Court, while otherwise upholding the Award set aside claims awarded under the abovementioned heads as the same were contractually prohibited. The claimant filed an appeal against the judgment of the Civil Court under Section 37(2) of the Act. The Jharkhand High Court allowed the appeal under Section 37(2) of the Act and restored the Award, relying chiefly on Bharat Drilling and without conducting a detailed analysis of the contractual clauses themselves. The State appealed, contending that Bharat Drilling was fact-specific, and should not be read as a sweeping precedent for all government contracts. This is the question the Supreme Court has now directed to a larger bench for authoritative reconsideration.
Firstly, the Supreme Court faulted the High Court for relying on Bharat Drilling without actually analysing the contract clauses in the case before it. The Supreme Court held that the High Court had not examined the contractual clauses and proceeded under the impression that the issue was conclusively covered by the decision of Bharat Drilling. The Supreme Court therefore treated the High Court’s approach as inadequate, where a contract contains express exclusions, a court or tribunal must engage with those clauses on their terms instead of treating an earlier decision as a blanket rule.
Secondly, the Supreme Court emphasised the centrality of party autonomy and the contractual bargain. Contractual clauses that limit claims are founded on freedom to contract. They are agreements that crystalise informed choices of parties. The Supreme Court invoked recent authorities to underline that party autonomy is the “brooding and guiding spirit” of arbitration and that the agreement between the parties is the primary guide for a tribunal when assessing whether particular heads of claim fall within the scope of the contractually agreed dispute-resolution mechanism.
Thirdly, the Supreme Court drew a distinction between jurisprudence about interest (Section 31(7)) and disputes about substantive exclusion/prohibitory clauses. The Supreme Court found that Bharat Drilling had relied on Port of Calcutta v. Engineers–De–Space–Age (a case about interest) and therefore imported reasoning from a materially different context. The Supreme Court stated, “issues relating to payment of interest arising under Section 31(7) of the Act stand on a different footing from that of contractual clauses excepting or prohibiting certain claims.” Therefore, the Supreme Court concluded that reasoning appropriate to interest awards cannot be uncritically transposed to justify allowing claims the contract expressly forbids.
Lastly, having identified these defects, the Supreme Court concluded that Bharat Drilling cannot be treated as laying down a general rule that prohibitory clauses bind only the employer and not the arbitral tribunal. The Supreme Court therefore referred the issue to a larger bench for reconsideration. This was done to obtain an authoritative decision to obviate uncertainty and for clear declaration of law.
The reconsideration of Bharat Drilling is significant because prohibitory and “no-claim” clauses are a standard feature of government and public-works contracts. These clauses are intended to allocate risk ex ante and to limit exposure to specific heads of loss such as idle labour, idle machinery, or loss of profit. The widespread reliance on Bharat Drilling by tribunals and High Courts to dilute or bypass such clauses has created uncertainty and undermined contractual predictability in public procurement disputes.
At a doctrinal level, the reference reinforces the centrality of party autonomy. If parties have consciously agreed to exclude certain claims, allowing tribunals to disregard those exclusions risks rewriting the contract under the guise of arbitral discretion. The Supreme Court observation that contractual limits “crystallise informed choices of parties” signals a clear concern that Bharat Drilling has been used to erode the sanctity of contract, contrary to the modern arbitration framework.
Until the larger bench settles the issue, Indian Builders serves as a caution against treating Bharat Drilling as a blanket authority and shows the need for tribunals and courts to engage closely with the language of the contract, giving due weight to party autonomy and the risk allocation expressly agreed between the parties.
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