Supreme Court Refers 'Bharat Drilling' Judgment' To Larger Bench For Clarity Whether Prohibited Claims Bind Arbitral Tribunals

The Supreme Court on Friday referred its 2009 judgment in Bharat Drilling and Foundation Treatment Private Limited versus State of Jharkhand (2009) 16 SCC 705. to a larger bench, observing that the ruling has been repeatedly and incorrectly relied upon to dilute prohibitory clauses in government contracts.

A bench of Justice P S Narasimha and Justice A S Chandurkar said the earlier decision is not an authority for the proposition that excepted or prohibited claim clauses bind only the employer and do not restrict the arbitral tribunal. The Court said that Bharat Drilling requires reconsideration to ensure clarity and consistency in arbitration law.

The case before the Court concerned a challenge by the State of Jharkhand to a High Court judgment that restored arbitral awards on three claims which had been expressly barred under the contract. The relevant clauses stated that no claim for idle labour or machinery would be entertained and that no claim would be allowed for business loss or similar loss. While the Civil Court had set aside these claims under Section 34 of the Arbitration Act, the High Court allowed them solely on the strength of Bharat Drilling without undertaking any analysis of the contractual provisions.

The State submitted that Bharat Drilling is being routinely used to bypass contractual bars that represent negotiated limits agreed between parties. It argued that the 2009 judgment has been misunderstood as establishing that such prohibitory clauses operate only against the government department and do not restrict the powers of an arbitral tribunal. The Supreme Court accepted that this concern required examination.

The bench noted that Bharat Drilling did not contain any discussion on the contractual clauses at issue and that the judgment relied on Port of Calcutta versus Engineers De Space Age (1996) 1 SCC 516., a case that dealt only with the arbitral power to grant interest under Section 31(7) of the Arbitration Act. Since interest claims arise from statutory power and not from contractual prohibitions, the Court held that the reasoning in Port of Calcutta could not be extended to excepted claim clauses. The Court also found that the approach in Bharat Drilling was inconsistent with the principles laid down in later decisions such as Cox and Kings Limited versus SAP India Private Limited, Central Organisation for Railway Electrification, and the decision on the interplay between arbitration agreements and the Stamp Act.

Reaffirming that party autonomy is the foundation of arbitration, the Court said that arbitral tribunals must first look to the contract that defines the legal relationship between the parties. It cited its recent decision in Pam Developments Private Limited which stressed the duty of tribunals and courts to examine prohibitory clauses before awarding sums that the parties have contractually barred.

Holding that Bharat Drilling does not provide authoritative guidance on excepted claim clauses, the Court directed the Registry to place the matter before the Chief Justice of India for the constitution of an appropriate larger bench.

Case : State of Jharkhand v The Indian Builders Jamshedpur

Citation : 2025 LiveLaw (SC) 1173

Click here to read the judgment