Restrictive Clauses In Construction Contracts: Lawful Bargain Or Unlawful Exclusion?

While commercial practice provides parties considerable freedom to structure their contractual obligations and remedies, such autonomy is not absolute. The Act proceeds on the fundamental principle that a breach resulting in loss or damage must ordinarily be compensated. Sections 55 and 73 of the Act give effect to this principle by entitling the aggrieved party to claim compensation in the form of damages for any loss arising from non-performance, delay or breach. On the other hand, Sections 23 and 28 of the Act function as limiting principles. Section 23 declares any agreement to be void in nature whose consideration or object is opposed to public policy or is regarded by the courts as immoral, while Section 28 on the other hand renders unenforceable any agreement that limits or abridges a party from enforcing his rights. However, the courts in India have not adopted a uniform position with respect to clauses that contractually restrict a party's right to claim compensation. While one line of judicial pronouncements has affirmed the validity of such clauses, recognising the freedom of parties to consensually allocate risk and circumscribe liability, a contrary line of decisions has refused to give them effect, on the basis that provisions which extinguish a party's entitlement to compensation for breach are irreconcilable with the foundational principles of the Act and must therefore fail in law.

The Supreme Court in the matter of UOI v. Chandalavada Gopalakrishna Murthy, Civil Appeal Nos. 926–927 of 2002, held that where a contract contains an express clause stipulating that delay on the part of the employer whatsoever would not entitle the contractor to any damages or compensation, and that EOT would be the sole remedy, such a clause must be given full effect and that once EOT is granted in terms of the contract, the contractor is precluded from claiming monetary compensation for delay. In arriving at this conclusion, reliance was placed upon the judgement of Ramalinga Reddy v. Superintending Engineer, Civil Appeal No. 5528-29 of 1994, and General Manager, Northern Railway v. Sarvesh Chopra, Civil Appeal No. 1791 of 2001, wherein the Supreme Court categorised contractual claims into two broad classes first being those claims which are expressly barred under the contract i.e. clauses that stipulates that amounts “shall not be payable” or that “no claim whatsoever will be entertained”, and are commonly referred to as “no claim”, “no damage”, or “no liability” clauses, rendering such claims not entertainable at all. Secondly, those claims which are required to be decided by a designated authority under the contract, whose decision is agreed to be final and binding, and therefore fall outside the scope of arbitration. It was thus held that claims falling within either of the above two categories are non-arbitrable in nature.

Furthermore, the Supreme Court in the matter of ONGC v. Wig Brothers Builders & Engineers Pvt. Ltd., Civil Appeal No. 8817 of 2010, placing reliance on the judgement in Ramnath International Construction (P) Ltd. v. UOI, Civil Appeal No. 3167-3168 of 2005, held that no claim clauses restricting the contractor's remedy to EOT for employer caused delay, are enforceable and that by accepting the EOT, the contractor is deemed to have consented to discharge the employer of all outstanding claims. As a matter of fact in C&C Constructions Ltd. v. IRCON International Ltd., 2025 LiveLaw (SC) 148, the Supreme Court enunciated that clauses which have the tendency to constrict the claims for delay which have been caused by the employer should be given complete effect keeping in mind that the parties have them agreed to such a clause. Various High Courts have further consistently followed suit, with the Delhi High Court in L&T Ltd. v. Rail Nigam Ltd., 2025 LiveLaw (Del) 760, and M/s Raj Kishan & Company v. NTPC Ltd. O.M.P. No. 333 of 2004, the Bombay High Court in Maharashtra State Electricity Board v. Sterlite Industries (India) Ltd., Appeals Nos. 836 and 837 of 1997 in Arbitration Petitions Nos. 147 and 145 of 1993, and the Karnataka High Court in L&T Ltd. v. Bangalore Metro Rail Corporation Ltd. COMAP No. 526 of 2022, all collectively establishing three principles i.e. - first, that restrictive clauses are strictly enforceable; second, that the unconditional acceptance of an EOT by a contractor under such restrictive clause amounts to a waiver of claims for damages; and third, that where parties have contractually agreed upon a measure of damages, the statutory remedy under the Act stands excluded. It has been further held that a mere reservation of rights or issuance of notice is insufficient to be free from an express contractual bar on claiming damages.

Therefore, a consistent leitmotif in these decisions is that courts often enforce what the parties have agreed. If the parties have accepted clauses that limit, restricts or exclude damages, whatsoever, courts usually uphold them. The idea is that parties are free to decide how risk is shared, and courts should not interfere with that bargain. Nonetheless, several courts have also arrived at a contrary conclusion in certain cases.

The Supreme Court in the matter of Associated Construction v. Pawanhans Helicopters Ltd., Civil Appeal No. 3376-3377 of 2008, observed that restrictive clauses which bars a party from claiming compensation for delays are to apply only for the duration originally agreed upon by the parties, and not beyond. Once the contract period is extended i.e. an EOT has been granted, then such clauses cannot automatically continue to bar claims. The Apex Court further in the matter of Asian Techs Ltd. v. UOI, Civil Appeal No. 311-312 of 2003, the held that clauses cannot be applied in a way that restricts a contractor compensation where the delay is caused by the employer.

Similarly the Delhi High Court in the matter of M/s Simplex Concrete Piles (India) Ltd. v. UOI, CS(OS) No.614A/2002, held that clauses which completely prevent a party from claiming damages, even when breach is proven, may go against the basic principles of the Act i.e. contractual terms cannot substitute substantive rights in any manner. The Delhi High Court further in the matter of MBL Infrastructure Limited v. DMRC, O.M.P (COMM) 311 of 2021, relying upon the judgement in Simplex (supra), held that clauses that restrict a party's right to claim damages are restrictive clauses and defeat the very purpose of the Act. The Court further held that under Sections 55 and 73 of the Act, an aggrieved party has a statutory right to claim damages, which cannot be contractually curtailed and that such clauses offend public policy under Section 23 of the Act.

Furthermore, a different approach to restrictive clauses is seen in the judgment of the Division Bench of Madras High Court in the matter of K.S. Baburaj v. Union of India, O.S.A. Nos. 388 of 2011 and 43 of 2012, wherein the Court was asked to consider Clause 17(iii) of the GCC which explicitly prevented any claim for damages or compensation due to delay attributable to the Railways, and the contractor's remedy was only limited to EOT. The court that held that such a restrictive clause was invalid and awarded damages to the contractor, the arbitrator having already made a finding that the delay and the termination of the contract were attributable to the Railways; thus, such a clause cannot negate Sections 55 and 73 of the Act. In this context, the Court relied on a series of cases Asian Techs Ltd. (supra), Bharat Drilling and Foundation Treatment Pvt. Ltd. v. State of Jharkhand, Civil Appeal No. 10216 of 2003, and K.N. Sathyapalan v. State of Kerala, Civil Appeal No. 4806 of 2000, to uphold that restrictive clauses cannot divest an arbitral tribunal or a court of its power to award damages where actual loss has been suffered by the contractor as a consequence of employer-caused delays or breaches. However the apex court has expressed apprehension over the broad application of Bharat Drilling (supra), referring the matter to a larger bench in State of Jharkhand v. The Indian Builders Jamshedpur, 2025 Live Law SC 1173, which remains pending

The Delhi High Court further in the matter of UOI v. Chiraj Stock & Security Pvt. Ltd., O.M.P. (COMM) 417 of 2018, held that restrictive clauses cannot absolutely bar claims where the delay stems from the employer's conducts and that such claims remain arbitrable notwithstanding any such clause. The Calcutta High Court further in the matter of State of West Bengal v. M.R. Builders, FMAT 495 of 2019 held that no-claim clauses are not absolute bars where delay is attributable to the employer. The Court reasoned that, such clauses operate only within the normal contractual period, and cannot be used by the employer to avoid liability for its own breaches and stated that where the employer is responsible for delay, the contractor is entitled to compensation for consequences of such delay.

Therefore from the conspectus of the above it can be said that enforceability of restrictive clauses in contracts continues to remain uncertain, reflecting an ongoing tension between freedom of contract and statutory safeguards. While courts have upheld such clauses as legitimate expressions of risk allocation, they have equally refused enforcement where they operate to extinguish liability entirely. Until legislative clarity emerges, judicial outcome continues to turn on the facts of each case.

Author is an Advocate. Views are personal.