Excepted or prohibited claim clauses in contracts bind arbitral tribunals, and their applicability must be determined strictly from the parties’ agreement

The Supreme Court of India has held that the applicability of excepted or prohibited claim clauses in a contract depends entirely on the agreement between the parties and that such clauses are binding on arbitral tribunals. The Court clarified that an arbitral tribunal cannot grant claims that are expressly barred under the contract, and courts reviewing arbitral awards must examine the contractual provisions rather than rely mechanically on precedent.

While examining the correctness of a High Court judgment that restored an arbitral award by relying solely on an earlier Supreme Court decision, the Court expressed serious doubt about the legal proposition attributed to that decision. Finding that the earlier ruling in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand did not lay down any clear principle on the issue, the Court referred the matter to a larger Bench for authoritative reconsideration to avoid uncertainty in arbitration law.

Case Background

The dispute arose out of a works contract between the State of Jharkhand and Indian Builders Jamshedpur. The contract contained specific clauses prohibiting certain categories of claims, including claims for idle labour, idle machinery, underutilised overheads, loss due to underutilised tools and machinery, and business loss or loss of profit.

Disputes were referred to arbitration, and by an award dated 19 April 2007, the Arbitral Tribunal allowed several claims in favour of the contractor, including claims that were alleged to be expressly barred under the contract. The State challenged the award on the ground that the tribunal had granted prohibited claims.

What The Lower Authorities Held

The Civil Court, while dealing with objections under Section 34 of the Arbitration and Conciliation Act, 1996, accepted the State’s contention and set aside the arbitral award insofar as it allowed claim nos. 3, 4, and 6. The Civil Court held that these claims were specifically barred by the contractual clauses and therefore could not have been granted by the Arbitral Tribunal.

The contractor appealed under Section 37 of the Act. The High Court of Jharkhand allowed the appeal and restored the arbitral award in respect of the barred claims. The High Court did so by placing reliance on the decision of the Supreme Court in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand, without independently examining the contractual clauses.

The Court’s Reasoning

The Supreme Court examined whether the High Court was justified in restoring the arbitral award solely on the basis of its understanding of the decision in Bharat Drilling, without analysing the contractual provisions that expressly prohibited the claims.

The Court noted that the High Court’s judgment contained no discussion of the relevant clauses of the contract. Instead, the High Court proceeded on the assumption that the issue was conclusively covered by Bharat Drilling.

Role of contractual clauses

The Supreme Court emphasised that arbitration is founded on party autonomy and that the contract is the source of the arbitral tribunal’s jurisdiction. An arbitral tribunal derives its authority from the agreement and is bound by the terms of the contract.

The Court observed that clauses which prohibit or except certain claims reflect informed choices made by the parties while entering into the contract. Such clauses cannot be ignored on the assumption that they bind only one party and not the arbitral tribunal.

Misreading of Bharat Drilling

The Court carefully examined the earlier decision in Bharat Drilling and found that it did not analyse the contractual clauses in question. The argument that contractual bars apply only to the employer and not to the arbitral tribunal was noticed but not examined or decided in that case.

The Supreme Court therefore held that Bharat Drilling could not be treated as laying down a binding legal principle on the applicability of excepted clauses. Treating it as a conclusive authority, without examining the contract, was a serious error.

Importance of examining the contract

The Court reiterated that it is the duty of every arbitral tribunal and every court reviewing an arbitral award to examine what the contract provides. This exercise is not a matter of interpretation in the abstract but a necessary step to determine the scope of arbitral jurisdiction.

Where the contract expressly prohibits certain claims, granting such claims would amount to rewriting the contract and undermining party autonomy.

Statutory Interpretation

The Supreme Court examined the scheme of the Arbitration and Conciliation Act, 1996, particularly Sections 34 and 37, which govern judicial interference with arbitral awards. The Act recognises party autonomy as a foundational principle and limits judicial intervention to clearly defined grounds.

The Court held that contractual clauses excluding or prohibiting claims operate within this statutory framework. An arbitral tribunal is bound by the procedures and limitations agreed upon by the parties, and courts must respect those contractual boundaries while exercising jurisdiction under Sections 34 and 37.

Constitutional / Policy Context

Although the dispute arose within the framework of arbitration law, the Supreme Court situated its reasoning within the broader policy of party autonomy and minimal judicial intervention, which underpins the Arbitration and Conciliation Act, 1996. The Court reiterated that arbitration is a consensual dispute resolution mechanism, and the jurisdiction of an arbitral tribunal flows entirely from the contract between the parties.

The Court emphasised that contractual freedom includes the freedom to exclude or prohibit certain categories of claims. Such exclusions represent a conscious allocation of risk and responsibility agreed upon by the parties at the time of contracting. Courts and arbitral tribunals are not empowered to disregard these choices on equitable considerations or perceived unfairness.

The judgment reinforces the principle that judicial intervention in arbitral awards must remain confined to the limits prescribed by statute and contract, failing which the foundational premise of arbitration as an alternative dispute resolution mechanism would be undermined.

Binding Nature of Excepted and Prohibited Claims

The Supreme Court clarified that excepted or prohibited claim clauses operate as substantive limitations on arbitral jurisdiction. Where the contract expressly bars certain claims, the arbitral tribunal lacks authority to adjudicate upon or grant such claims.

The Court rejected the notion that such clauses bind only the employer or contracting authority and not the arbitral tribunal. It held that this interpretation misconceives the nature of arbitration, as the tribunal is bound by the same contractual framework that governs the parties.

The Court observed that permitting arbitral tribunals to grant claims expressly barred by the contract would amount to rewriting the agreement and negating the principle of party autonomy.

Error in the High Court’s Approach

The Supreme Court found that the High Court had committed a serious error by restoring the arbitral award without independently examining the contractual provisions. By relying solely on its understanding of the decision in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand, the High Court failed to discharge its duty under Section 37 of the Arbitration and Conciliation Act.

The Court held that judicial review of arbitral awards necessarily involves examining whether the award conforms to the contract. A court cannot abdicate this responsibility by assuming that a prior decision has conclusively settled the issue, particularly where the prior decision does not analyse the relevant contractual clauses.

Such an approach, the Court held, leads to uncertainty in arbitration law and risks inconsistent outcomes in similar contractual disputes.

Need for Authoritative Clarification

A crucial aspect of the judgment is the Supreme Court’s decision to refer the issue to a larger Bench. The Court expressed concern that the decision in Bharat Drilling had been repeatedly cited as authority for the proposition that excepted claim clauses do not bind arbitral tribunals, despite the absence of any detailed analysis in that judgment.

The Court held that continuing reliance on such an understanding without authoritative clarification would perpetuate confusion. Given the recurring nature of disputes involving excepted clauses in government contracts, a clear pronouncement by a larger Bench was considered necessary.

The reference underscores the Court’s recognition that certainty and predictability are essential for the effective functioning of arbitration as a dispute resolution mechanism.

Why This Judgment Matters

This judgment is significant for reaffirming that contractual terms are central to arbitral adjudication. It cautions arbitral tribunals against granting relief in disregard of express contractual prohibitions and reminds courts of their duty to scrutinise awards against the contract.

For parties to government and infrastructure contracts, the decision highlights the enforceability of excepted claim clauses and the importance of carefully negotiating and drafting such provisions.

The judgment also serves as a corrective against mechanical reliance on precedent and emphasises the need for contextual and contractual analysis in arbitration-related litigation.

Final Outcome

The Supreme Court set aside the judgment of the High Court of Jharkhand restoring the arbitral award in respect of the prohibited claims.

The Court referred the question regarding the binding nature of excepted claim clauses on arbitral tribunals to a larger Bench for authoritative determination, directing that the matter be placed before the Hon’ble Chief Justice of India for appropriate orders.

Case Details

• Case Title: State of Jharkhand v. Indian Builders Jamshedpur
• Citation: 2025 INSC 1388
• Court & Bench: Supreme Court of India; PAMIDIGHANTAM SRI NARASIMHA J. and ATUL S. CHANDURKAR J.
• Date of Judgment: 5 December 2025