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Introduction
The foundation of any contract, particularly those involving public resources, rests on the mutually agreed-upon allocation of risk. A fundamental scenario arises when government contracts contain prohibitory clauses, which explicitly bar claims for specific liabilities like idle labour/machinery or business loss. These clauses are not merely boilerplate; they represent a deliberate, negotiated boundary defining the parties’ financial exposure. Yet, for over a decade, a line of judicial precedent threatened to systematically erode this foundational principle, allowing arbitral tribunals to disregard these clear contractual limits.
In a significant and necessary intervention, the Supreme Court of India in State of Jharkhand v The Indian Builders Jamshedpur1 has referred its 2009 judgment in Bharat Drilling and Foundation Treatment Private Limited versus State of Jharkhand2 to a larger bench. The bench of Justice P. S. Narasimha and Justice A. S. Chandurkar critically observed that the Bharat Drilling ruling has been repeatedly and incorrectly relied upon to dilute prohibitory clauses in government contracts. They explicitly rejected the notion that “excepted or prohibited claim clauses bind only the employer and and do not restrict the arbitral tribunal.” This judicial re-assessment was triggered by the State of Jharkhand’s challenge to a High Court order that had restored arbitral awards on claims expressly barred by the contract. Notably, the High Court relied solely on the Bharat Drilling precedent, failing to scrutinize the actual contractual prohibitions.
The necessity for this referral stems directly from the principle of party autonomy, the very bedrock of arbitration. The Court pinpointed the error in Bharat Drilling, noting its lack of substantive discussion on the contractual clauses and its inappropriate reliance on a case concerning the statutory power to grant interest, a matter distinct from contractual bars. By directing the matter to a larger bench, the Supreme Court is seeking to restore coherence and consistency to arbitration law. This move reaffirms the core directive that tribunals must first look to the contract that establishes the legal relationship. This article will now undertake a penetrating analysis of the foundational principle of party autonomy upon which this crucial pronouncement rests, examining how the impending larger bench decision is poised to redefine the limits of arbitral authority and ensure the sanctity of negotiated contractual terms in government agreements.
Was Bharat Drilling on Solid Ground? The Misplaced Reliance on Interest Law
The Supreme Court’s scrutiny reveals a significant analytical flaw in the Bharat Drilling decision itself. What legal principle did Bharat Drilling actually establish regarding accepted claims? Upon examination, it becomes “quite evident” that the 2009 Court did not engage in a detailed analysis of the contractual clauses at all. Instead, the judgment, in setting aside a lower court order and restoring the award, proceeded by merely referencing the earlier decision of Board of Trustees For The Port of Calcutta v. Engineers-De-Space-Age3. This reliance is now deemed inappropriate because the Port of Calcutta dealt exclusively with a different area of law: the grant of interest under Section 31(7) of the Arbitration and Conciliation Act, 1996 (the ‘Act’).
As the Court clarified, the power to award interest is statutorily sourced from Section 31(7) of the Act and stands on a “completely different footing” from contractual prohibitions on specific claims. Jurisprudence on Section 31(7)(a), as articulated in Pam Developments Private Limited v. State of West Bengal4, confirms that the power to grant pre-reference and pendente lite interest is restricted the moment “the agreement bars payment of interest, even if it is not a specific bar against the arbitrator.” Therefore, extending the reasoning of Port of Calcutta (dealing with interest) to govern the entirely distinct issue of contractual “excepted or prohibitory clauses” (dealing with substantive claims) fundamentally flawed the Bharat Drilling ratio.
The core rationale for challenging Bharat Drilling lies in the foundational principle of party autonomy. If “contract is the foundation of the legal relationship,” how can an arbitral tribunal ignore its explicit terms? Citing Central Organisation for Railway Electrification (CORE), the Court reaffirmed that party autonomy is the “brooding and guiding spirit” and “backbone” of arbitrations, emphasizing that “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 Court endorsed the approach laid down in Pam Developments Private Limited, which stressed the “duty of every Arbitral Tribunal and court alike and without exception, for contract is the foundation of the legal relationship,” mandating the examination of contractual prohibitions before awarding sums. Consequently, the approach adopted in Bharat Drilling is deemed “not in tune” with the principles laid down in recent landmark decisions, including CORE (supra), Cox and Kings Ltd. v. SAP India Private Ltd5., and the ruling in In Re: Interplay Between Arbitration Agreements Under Arbitration and Conciliation Act, 1996 and Stamp Act, 18996. To “ensure clarity and consistency” and to settle the binding effect of these crucial contractual bars, the necessity for a larger bench to authoritatively settle the law is paramount.
Conclusion
The Supreme Court’s decision to refer the Bharat Drilling judgment to a larger bench is far more than a procedural step; it is a powerful affirmation of the foundational principle of party autonomy in Indian arbitration law. By highlighting the misapplication of a ruling rooted in the law of statutory interest to matters governed by contractual prohibitions, the Court is seeking to correct a doctrinal error that has, for years, permitted Arbitral Tribunals to effectively rewrite the economic terms of negotiated agreements. The Court’s stance, strongly supported by recent pronouncements like COREand Pam Developments Private Limited, champions the sanctity of the contract. The impending larger bench decision is thus poised to serve as a judicial reset, clarifying that contractual clauses which deliberately carve out certain risks—such as those related to idle resources or business loss—are binding not just on the contracting parties, but equally on the Arbitrator whose jurisdiction is derived solely from that very contract.
The future implications of this authoritative review are profound, offering a path to greater predictability and certainty in government and large-scale commercial contracts. A clear judicial pronouncement that prohibits an arbitrator from awarding a claim expressly barred by the contract will stabilize the risk allocation model for all future projects. This will encourage more informed pricing and negotiation by contractors, as they will no longer be able to bank on judicial loopholes to recover costs they explicitly agreed to exclude. By reinforcing the idea that freedom to contract implies the freedom to contractually limit claims, the Supreme Court is securing the legislative intent behind the Arbitration and Conciliation Act, 1996, which champions minimal judicial interference and maximum respect for the parties’ mutual will.
The upcoming decision will undoubtedly address the immediate ambiguity, but it will also give rise to new jurisprudential questions. Moving forward, the courts may be called upon to delineate the precise threshold for what constitutes an ‘express’ and ‘specific’ contractual bar sufficient to oust the Arbitrator’s jurisdiction. Furthermore, the interplay between these affirmed prohibitory clauses and the arbitrator’s residual power to award damages under the Indian Contract Act, 1872, particularly in cases where the breach itself nullifies the operation of the barring clause, will require careful navigation. Ultimately, the review of Bharat Drilling heralds a more mature and principle-driven era of arbitration, one where the finality of the award is upheld only when it operates within the four corners of the agreement that gave it life.
Citations
Expositor(s): Adv. Anuja Pandit
