The Supreme Court has referred the correctness of its 2009 decision in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand and Ors to a larger bench. The Court expressed the opinion that Bharat Drilling “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.”
The Division Bench comprising Justice Pamidihantam Sri Narasimha and Justice Atul S. Chandurkar observed that a reference was necessary “to obviate uncertainty and for clear declaration of law” regarding the enforceability of contractual clauses that prohibit specific claims in arbitration.
Background of the Case
The appeal, titled The State of Jharkhand v. The Indian Builders Jamshedpur (Civil Appeal Nos. 8261-8262 of 2012), challenged a judgment of the High Court of Jharkhand.
The dispute originated from an arbitral award dated April 19, 2007, where the Arbitral Tribunal allowed certain claims in favour of the respondent-claimant. Specifically, the Tribunal granted relief for:
- Claim No. 3: Underutilised overheads.
- Claim No. 4: Loss due to underutilised tools, plants, and machinery.
- Claim No. 6: Loss of profit.
The State challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996. The Civil Court (Sub-Judge-1, Jamshedpur) set aside the award regarding these specific claims, holding that they were expressly prohibited under the contract between the parties.
The relevant contractual clauses cited were:
- Clause 4.20.2: “No claim for idle labour, idle machinery, etc. on any account will be entertained…”
- Clause 4.20.4: “No claim shall be entertained for business loss or any such loss.”
Aggrieved by the Civil Court’s order, the respondent filed an appeal under Section 37 of the Act. The High Court allowed the appeal and restored the arbitral award for the disputed claims. The High Court did not discuss the specific contractual prohibitions but relied solely on the Supreme Court’s decision in Bharat Drilling.
Arguments
Mr. Rajiv Shankar Dwivedi, learned counsel for the State of Jharkhand, submitted that the High Court committed a serious error. He argued that the decision in Bharat Drilling is being applied “regularly and wrongly, to interpret prohibitory claim clauses in all Government contracts.” He urged the Court that even if it did not interfere with the facts of the specific case, there was a “compelling necessity to clarify the position of law.”
Mr. Manoj C. Mishra, learned counsel for the respondent, supported the High Court’s judgment, relying on the existing precedent.
Court’s Analysis and Observations
The Supreme Court examined the rationale in Bharat Drilling, noting that the decision in that case had proceeded on the argument that a contractual bar “is applied only to the department and not to the Arbitral Tribunal.” Bharat Drilling had relied on the decision in Board of Trustees For The Port of Calcutta v. Engineers-De-Space-Age (1996).
The Bench distinguished the present issue from Port of Calcutta, observing that the latter dealt with the payment of interest, which is governed by Section 31(7) of the Act and stands on a “completely different footing.”
The Court observed:
“Contractual clauses that limit claims are founded on freedom to contract. They are agreements that crystalise informed choices of parties.”
Citing the recent decision in Pam Developments Private Limited v. State of West Bengal (2024), the Court reiterated that the contract is the foundation of the legal relationship and that “it is the duty of every Arbitral Tribunal and court alike and without exception” to examine what the contract provides.
The Court further held:
“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.”
The Bench expressed the view that the approach adopted in Bharat Drilling is “not in tune with the principles laid down by this Court” in recent decisions, including Cox and Kings Ltd. v. SAP India Private Ltd. (2024) and Central Organisation for Railway Electrification (CORE) (2024), which emphasize party autonomy.
Decision
Finding that Bharat Drilling required reconsideration to ensure “clarity and consistency,” the Supreme Court referred the matter to a larger bench.
The Court ordered:
“In view of our opinion that Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand and Ors 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… we are referring Bharat Drilling (supra) to a larger bench for reconsideration and authoritative decision.”
The Registry was directed to place the judgment before the Chief Justice of India for appropriate orders regarding the constitution of the larger bench.
