The Supreme Court of India has held that contractual clauses which prohibit certain claims—such as claims for idle labour, idle machinery, or business loss—cannot be ignored by arbitral tribunals. These clauses reflect the party autonomy that forms the foundation of arbitration under the Arbitration and Conciliation Act, 1996.
The Court observed that the High Court of Jharkhand wrongly relied on Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand without examining the specific terms of the contract. That ruling has been frequently misapplied to suggest that such “excepted” clauses restrict only the employer and not the arbitrator.
Given the confusion and inconsistent application of Bharat Drilling, the Bench has referred the legal issue to a larger bench for an authoritative decision.
🏛️ Case Background
- Appeal: State of Jharkhand vs. The Indian Builders Jamshedpur (Civil Appeal Nos. 8261–8262 of 2012)
- Issue: Whether claims barred by contract could still be granted by an arbitral tribunal.
- Disputed claims:
- Underutilised overheads
- Idle tools, plants, machinery
- Loss of profit / business loss
The contract expressly prohibited such claims:
“No claim for idle labour, idle machinery… will be entertained”
“No claim shall be entertained for business loss or any such loss.”
The arbitral award granting these claims was set aside by the Civil Court but later restored by the High Court on the basis of Bharat Drilling.
⚖️ Supreme Court’s Key Findings
- Party Autonomy is Paramount
Arbitration is rooted in freedom to contract. Arbitrators must honour contractual restrictions on claims. - Arbitrators Cannot Bypass Prohibitory Clauses
Contract is the foundation of legal relationship — if the contract bars a claim, the tribunal has no jurisdiction to allow it. This principle affirmed through reliance on decisions like Pam Developments Pvt Ltd. v. State of West Bengal. - Bharat Drilling Does Not Lay Down a Clear Legal Principle
- The ruling there was not a detailed examination of prohibitory clauses.
- It mainly involved grant of interest, which is governed by Section 31(7) — a different issue altogether.
- Confusion Must Be Resolved
Since Bharat Drilling is being frequently misapplied, the Court stressed the need for doctrinal clarity and thus referred the matter to a larger bench. 4
📍 Practical Impact
| Area | Impact |
|---|---|
| Public Works & Govt. Contracts | Strengthens enforceability of “no-claim” clauses |
| Arbitration Strategy | Parties must evaluate whether a claim is contractually barred before filing |
| Judicial Review | Greater scrutiny under Section 34 & 37 when tribunals ignore contractual limits |
| Future Precedent | Final position awaits larger bench ruling |
🧾 Final Direction
The matter is placed before the Hon’ble Chief Justice for constitution of a larger bench to reconsider the correctness of Bharat Drilling and to ensure uniform and certain legal interpretation