Kiran Raj

The Supreme Court of India Division Bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar, hearing an appeal by the State of Jharkhand against an arbitral award in favour of The Indian Builders Jamshedpur, held that its 2009 decision in Bharat Drilling and Foundation Treatment Private Limited versus State of Jharkhand is not authority for the view that excepted or prohibited claim clauses bind only the employer and leave the arbitral tribunal unconstrained. Noting that Bharat Drilling has been repeatedly invoked to soften prohibitory clauses in government contracts, the Bench referred that judgment to a larger Bench for reconsideration, stating that a definitive ruling is required to secure clarity and consistency in arbitration law governing such contractual restrictions.

The case arises from a works contract between the State of Jharkhand and The Indian Builders Jamshedpur for execution of construction works. Disputes emerged regarding monetary claims raised by the contractor, including amounts towards underutilised overheads, losses from underutilised tools, plants and machinery, and loss of profit. These claims were advanced despite clauses in the contract stating that no claim would be entertained for idle labour, idle machinery or business loss

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The disputes were referred to arbitration. By an award dated 19 April 2007, the arbitral tribunal allowed certain claims of The Indian Builders Jamshedpur under these heads. The State of Jharkhand challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, contending that claims 3, 4 and 6 were barred by clauses 4.20.2 and 4.20.4 of the agreement. The Civil Court accepted the State’s objections and set aside those parts of the award.

The Indian Builders Jamshedpur then filed an appeal under Section 37 before the High Court of Jharkhand. The High Court restored the award on the basis that the controversy was covered by the Supreme Court’s earlier order in Bharat Drilling, without undertaking an independent examination of the prohibitory clauses in the contract.

The Court observed: "It is quite evident from the order impugned before us that the 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 (supra)."

It further stated: "Contractual clauses that limit claims are founded on freedom to contract. They are agreements that crystalise informed choices of parties." Referring to Central Organisation for Railway Electrification, the Court quoted: "The basis of any arbitration is the freedom of the parties to agree to submit their disputes to an individual or to a panel of individuals whose judgment they are prepared to trust and obey. Party autonomy is fundamental to international commercial arbitration because it allows the parties to design the arbitration proceedings to suit their needs and commercial reality. Party autonomy has been described by this Court as the ‘brooding and guiding spirit’ and ‘backbone’ of arbitrations. The principle of minimum judicial interference supplements the autonomy of parties by prohibiting courts from interfering in arbitral proceedings unless mandated by the law. This principle respects the autonomy of the parties to mutually chart the course of the arbitral proceedings."

The Court recorded: "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." Citing Pam Developments Private Limited, it reiterated: "This submission is persuasive, but the contract clauses speak for themselves. In fact, the High Court did what the arbitrator should have done. Examine what the contract provides. This is not even a matter of interpretation. It is the duty of every Arbitral Tribunal and court alike and without exception, for contract is the foundation of the legal relationship."

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Distinguishing interest-related clauses, the Court stated: "As 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, we are of the opinion that the judgment in Bharat Drilling (supra), relying on the judgment of this Court in Port of Calcutta (supra), dealing with the principle of grant of interest pendente lite, is not appropriate."

Concluding the Court directed:  “In view of the above discussion and in order to ensure clarity and consistency, we are of the opinion that the ratio of Bharat Drilling requires to be reconsidered. In this view of the matter, 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.”

Advocates Representing the Parties

For the Petitioners: Mr. Rajiv Shankar Dwivedi, learned counsel appearing for the State of Jharkhand

For the Respondents: Mr. Manoj C. Mishra, learned counsel appearing for the respondent

Case Title: The State of Jharkhand v. The Indian Builders Jamshedpur
Neutral Citation: 2025 INSC 1388
Case Number: Civil Appeal Nos. 8261-8262 of 2012
Bench: Justice Pamidighantam Sri Narasimha, Justice Atul S. Chandurkar