1. Appeal against High Court order restoring arbitral award claims despite contractual prohibitory clauses — challenge to the applicability of a precedent regarding such clauses. (Para 2 )
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2025 Supreme(SC) 2004
SUPREME COURT OF INDIA
Pamidighantam Sri Narasimha, Atul S. Chandurkar, JJ.
The State of Jharkhand – Appellant
Versus
The Indian Builders Jamshedpur – Respondent
Civil Appeal Nos. 8261-8262 of 2012
Decided On : 05-12-2025
Advocates appeared:
For the Appellant(s) : Mr. Rajiv Shankar Dwivedi, Adv. Ms. Tulika Mukherjee, AOR Mr. Beenu Sharma, Adv. Mr. Venkat Narayan, Adv.
For the Respondent(s): Mr. Manoj C. Mishra, AOR Mr. Vishesh Jain, Adv. Mr. Chandan Kumar, Adv. Mr. Rajesh Gupta, Adv.
For the Appellant(s) : Mr. Rajiv Shankar Dwivedi, Adv. Ms. Tulika Mukherjee, AOR Mr. Beenu Sharma, Adv. Mr. Venkat Narayan, Adv.
For the Respondent(s): Mr. Manoj C. Mishra, AOR Mr. Vishesh Jain, Adv. Mr. Chandan Kumar, Adv. Mr. Rajesh Gupta, Adv.
IMPORTANT POINT
Arbitration – Applicability of excepted or prohibitory clauses would primarily depend upon the agreement between the parties, which alone is the guiding principle for Arbitral Tribunal.
Headnote:
Arbitration and Conciliation Act, 1996 – Section 31(7) – Arbitration – Applicability of excepted clause or a prohibited claim in a contract – Contractual clauses that limit claims are founded on freedom to contract – They are agreements that crystalise informed choices of parties – Applicability of excepted or prohibitory clauses would primarily depend upon the agreement between the parties, which alone is the guiding principle for Arbitral Tribunal – Issues relating to payment of interest arising under Section 31(7) of Act stand on a different footing from that of contractual clauses excepting or prohibiting certain claims – In order to ensure clarity and consistency, ratio of Bharat Drilling, (2009) 16 SCC 705 requires to be reconsidered – Matter referred to larger Bench. (Paras 8, 9, 11 and 12)
Facts of the case:
State of Jharkhand is in appeal against the judgment of the High Court of Jharkhand allowing Section 372 appeal under Arbitration and Conciliation Act, 19963. The appeal was filed by the respondent-claimant against the judgment of the Civil Court4 setting aside the arbitral award allowing the objections filed by State under Section 34. By its award dated 19.04.2007, the Arbitral Tribunal allowed certain claims but the Civil Court set aside the claims 3, 4 and 6 on the ground that they were specifically prohibited under the contract between the parties.
Findings of Court:
High Court has not examined the contractual clauses extracted hereinabove and has proceeded to dispose of the appeal under the impression that the issue is conclusively covered by the decision of this Court in Bharat Drilling.
Result : Matter referred to larger Bench.
Legal Category Hierarchy
Table of Contents
2. Whether contractual bars against specific claims apply only to the employer or also bind the Arbitral Tribunal. (Para 3 , 5 )
3. Party autonomy is fundamental; contractual clauses limiting claims reflect informed choices and must be examined by the Tribunal; interest claims under Section 31(7) differ from general prohibitory clauses. (Para 8 , 9 , 10 , 11 )
4. Contractual clauses limiting claims are based on party autonomy and bind the Arbitral Tribunal, distinguishing such prohibitions from statutory powers to grant interest. (Para 8 , 9 , 11 )
5. Matter referred to a larger bench for reconsideration and authoritative decision on the ratio of Bharat Drilling. (Para 1 , 12 )
6. Do contractual clauses prohibiting certain claims bind the Arbitral Tribunal?
Yes. Contractual clauses limiting claims are founded on party autonomy and represent the informed choices of the parties. The Arbitral Tribunal is bound by the agreement, which serves as the guiding principle for the proceedings. (Para 8 , 9 )
7. How does the power to grant interest differ from other prohibitory contractual clauses?
The power to grant interest is sourced from Section 31(7) of the Arbitration and Conciliation Act, 1996, placing it on a different legal footing than general contractual clauses that prohibit specific claims. (Para 10 , 11 )
8. What is the role of party autonomy in arbitration proceedings?
Party autonomy is the backbone of arbitration, allowing parties to design proceedings to suit their commercial reality. The arbitrator is bound by the procedures and agreements mutually charted by the parties. (Para 8 )
JUDGMENT :
1. In view of our opinion that Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand and Ors., (2009) 16 SCC 705. is not an authority for the proposition that an excepted clause or a prohibited claim in a contract applies only to the employer and not to the Arbitral Tribunal, for the reasons to follow, in order to obviate uncertainty and for clear declaration of law, we are referring Bharat Drilling (supra) to a larger bench for reconsideration and authoritative decision. The context in which we have referred the matter to a larger bench is as follows.
2. State of Jharkhand is in appeal against the judgment of the High Court of Jharkhand allowing Section 3 72[In Arbitration Appeal No. 17 of 2007 dated 11.05.2012] appeal under Arbitration and Conciliation Act, 19963[Hereinafter referred to as the ‘Act’]. The appeal was filed by the respondent-claimant against the judgment of the Civil Court4[Sub-Judge-1, Jamshedpur in Misc. Arbitration Case No. 01/2004 dated 19.04.2007.] setting aside the arbitral award allowing the objections filed by State under Section 3 4 . By its award dated 19.04.2007, the Arbitral Tribunal allowed certain claims but the Civil Court set aside the claims 3, 4 and 6 on the ground that they were specifically prohibited under the contract between the parties.
3. Mr. Rajiv Shankar Dwivedi, learned counsel appearing for the State of Jharkhand has made a short submission that the High Court committed a serious error in allowing the appeal on the ground that the issue arising for consideration is covered by decision of this Court in Bharat Drilling (supra). Mr. Dwivedi has expressed a serious concern that the decision in Bharat Drilling (supra) is being applied, regularly and wrongly, to interpret prohibitory claim clauses in all Government contracts. He would therefore submit that even if the Court may not interfere in the facts of this case, there is a compelling necessity to clarify the position of law. On the other hand, Mr. Manoj C. Mishra, learned counsel appearing for the respondent, supported the decision of the High Court.
4. In view of the concern expressed by Mr. Dwivedi, we agreed to examine the question of law and the principle in Bharat Drilling (supra). Before we proceed any further, it is necessary to examine the relevant clauses under the agreement, which are extracted hereinbelow for ready reference;
“4.20.0 CLAIMS:
4.20.2: No claim for idle labour, idle machinery, etc. on any account will be entertained…
4.20.4: No claim shall be entertained for business loss or any such loss.”
5. It is submitted that the Arbitral Tribunal committed a serious error in allowing claim no. 3 (relating to underutilised overheads) when that claim is barred under clause 4.20.2, claim no. 4 (relating to loss due to underutilised tools, plants and machinery) when such claim is clearly barred under contractual clause 4.20.2. Further, it is also contended that claim no. 6 (relating to loss of profit) could not have been granted in the teeth of clause 4.20.4, which specifically declares that “no claim shall be entertained for business loss or any such loss”.
6. This submission, however, found favour with the Civil Court accepting Section 3 4 objections of the State and setting aside the award on claim nos. 3, 4 and 6. When we peruse the judgment of the High Court under Section 3 7 , we find that there is no discussion whatsoever as regards to claim nos. 3, 4 and 6, except for reference and reliance on the order of this Court in Bharat Drilling (supra). Placing reliance upon Bharat Drilling (supra), without any other discussion or analysis, the High Court proceeded to restore the award as regards claim nos.3, 4 and 6.
7. As we examined the decision of this Court in Bharat Drilling (supra), we find that it was argued therein that, the contractual “bar against such claims is applied only to the department and not to the Arbitral Tribunal”. Without examining the contention in detail, the Court proceeded fur
