Clarifying Prohibitory Claim Clauses and the Limited Precedential Value of Bharat Drilling in Arbitration: Commentary on State of Jharkhand v. The Indian Builders Jamshedpur (2025 INSC 1388)

I. Introduction

The Supreme Court of India’s decision in The State of Jharkhand v. The Indian Builders Jamshedpur, 2025 INSC 1388 (Civil Appeal Nos. 8261–8262 of 2012, decided on 5 December 2025), is a significant reference order in arbitration law. Though it does not finally decide the underlying commercial dispute, it tackles an issue of recurring importance: the legal effect of “prohibitory claim clauses” (sometimes loosely called “excepted clauses”) in government contracts, and the correctness of the earlier decision in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand, (2009) 16 SCC 705.

At the heart of the case lies a common feature of public works contracts: clauses that categorically bar certain heads of claim, such as:

claims for idle labour and idle machinery; and
claims for business loss or loss of profit.

The arbitral tribunal in this matter nevertheless awarded amounts under precisely such prohibited heads. The Civil Court (under Section 34 of the Arbitration and Conciliation Act, 1996) set aside those parts of the award. The High Court, in appeal under Section 37, restored the award solely on the strength of Bharat Drilling, treating that judgment as conclusive authority that such bars apply only to the employer/department and do not constrain the arbitral tribunal.

The Supreme Court has now:

expressly held that Bharat Drilling is not an authority for the broad proposition that prohibitory claim clauses limit only the employer and not the arbitral tribunal;
criticised the High Court’s mechanical reliance on Bharat Drilling without examining the contract; and
referred the correctness of the ratio in Bharat Drilling to a larger Bench for reconsideration, emphasising party autonomy and the centrality of contractual terms in arbitration.

This judgment therefore marks a doctrinal turning point in how Indian arbitration law will treat “no-claim” or prohibitory clauses in contracts, particularly in government and infrastructure contracts.

II. Summary of the Judgment

1. Factual and Procedural Background

The State of Jharkhand (appellant) and The Indian Builders Jamshedpur (respondent) were parties to a works contract that contained, among others, the following key clauses:

4.20.2: No claim for idle labour, idle machinery, etc. on any account will be entertained…

4.20.4: No claim shall be entertained for business loss or any such loss.

A dispute arose which was referred to arbitration. By an award dated 19 April 2007, the arbitral tribunal allowed, inter alia, the following claims:

Claim No. 3: Underutilised overheads;
Claim No. 4: Loss due to underutilised tools, plants and machinery (essentially idle machinery and related losses);
Claim No. 6: Loss of profit.

The State challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”). The Civil Court (Sub-Judge-1, Jamshedpur) held that claims 3, 4 and 6 were barred by clauses 4.20.2 and 4.20.4 and accordingly set aside the award to that extent.

The contractor appealed under Section 37 of the Act to the High Court of Jharkhand. The High Court, by judgment dated 11 May 2012, allowed the appeal and restored the award as regards claims 3, 4 and 6, relying almost entirely on this Court’s decision in Bharat Drilling.

The State of Jharkhand then appealed to the Supreme Court.

2. Issues Considered

Although the appeal arose out of a specific arbitral award, the Supreme Court chose to focus on the broader legal question:

Whether Bharat Drilling is authority for the proposition that a contractual bar on certain claims (an “excepted” or “prohibitory” claim clause) limits only the employer/department and does not bind the arbitral tribunal; and
What is the correct approach of arbitral tribunals and courts to such prohibitory claim clauses in light of party autonomy under the 1996 Act.

3. Core Holdings

The Supreme Court held and observed that:

The High Court erred in treating Bharat Drilling as conclusively covering the issue and in restoring the award merely by citing that case without analysing the contract (para 6, 8).
Bharat Drilling does not lay down any general principle that a contractual bar on certain claims binds only departmental authorities and not the arbitral tribunal. The relevant argument was not examined in detail, and the Court simply referred to Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age, (1996) 1 SCC 516 (“Port of Calcutta”), an interest case, and decided on the facts (para 7).
Contractual clauses that bar or limit heads of claim are founded on freedom of contract and party autonomy; they represent the parties’ “informed choices” and are central to the arbitral tribunal’s mandate (para 8–9, citing Central Organisation for Railway Electrification (“CORE”) and Pam Developments Pvt Ltd v. State of West Bengal).
The jurisprudence on interest under Section 31(7) of the Act (including Port of Calcutta and related decisions) stands on a different footing from prohibitory claim clauses concerning substantive claims (para 10–11). Reliance on interest cases to decide the effect of prohibitory claim clauses is therefore inappropriate.
The approach adopted in Bharat Drilling is not in tune with the principles later articulated in COX AND KINGS LTD. v. SAP INDIA PVT. LTD., CORE, and In Re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act, 1996 and the Stamp Act, 1899 (para 11).
Given widespread reliance on Bharat Drilling in government contract arbitrations, and to avoid uncertainty, the Court has referred the ratio of Bharat Drilling to a larger Bench for authoritative reconsideration and clear declaration of law (paras 1, 12).

The Supreme Court thus did not finally dispose of the appeal on merits; instead, it has turned the case into a vehicle for revisiting the broader legal question before a larger Bench.

III. Detailed Analysis

A. Factual Matrix and the Contractual Prohibitory Clauses

The specific contract clauses at issue are straightforward and categoric:

4.20.2: No claim for idle labour, idle machinery, etc. on any account will be entertained…

4.20.4: No claim shall be entertained for business loss or any such loss.

On a plain reading:

Clause 4.20.2 bars any claim seeking compensation for:
- wages of labour that has remained idle, and
- machinery, tools or equipment that have remained idle,
“on any account”.
Clause 4.20.4 goes further and bars any “business loss or any such loss”—a formulation broad enough to include loss of profit or loss of opportunity attributable to delay or disruption.

Yet the arbitral tribunal allowed:

Claim 3: underutilised overheads — conceptually close to idle establishment costs and overhead labour,
Claim 4: loss on account of underutilised tools, plants and machinery — effectively idle plant/machinery, and
Claim 6: loss of profit — squarely a “business loss”.

The Civil Court, in its Section 34 review, accepted the State’s objection that these heads of claim were expressly prohibited by clauses 4.20.2 and 4.20.4 and set aside that part of the award. This is exactly the approach later endorsed, on principle, in Pam Developments (quoted in para 9 of the present judgment).

The High Court, however, did not engage with the text, scope or effect of these clauses. It simply noted Bharat Drilling and, assuming that it controlled the issue, restored the award as to claims 3, 4 and 6. This mechanical reliance on precedent, without contractual analysis, is the first point of criticism by the Supreme Court in the present case.

B. Precedents Cited and Their Influence

1. Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand (2009) 16 SCC 705

The controversy turns on how Bharat Drilling has been understood in practice.

In that case:

There were contractual clauses limiting certain claims.
It was argued before the Supreme Court that such a contractual bar should be construed as applying only to the department in its administrative capacity and not as disabling the arbitral tribunal from adjudicating those claims.
The Court did not, however, undertake any sustained analysis of that proposition. Instead, it referred to Port of Calcutta (an interest case) and, on that basis, restored the arbitral award.

Over time, Bharat Drilling came to be cited for a broad, generalized rule: a prohibitory claim clause in a government contract limits the department’s internal processing of claims, but does not restrict the arbitral tribunal’s jurisdiction or power to award such claims. This is the reading the High Court adopted in the present case.

The Supreme Court in State of Jharkhand v. Indian Builders rejects that understanding:

It notes that the argument was not examined in detail.
The Court in Bharat Drilling did not analyse the contractual clauses in depth.
It simply referred to an interest case and proceeded to restore the award.

Accordingly, the present Bench concludes that Bharat Drilling “does not lay down any law” on the specific proposition that a prohibitory claim clause binds only the department and not the arbitral tribunal (para 7). This is a direct and important narrowing of the precedential scope of Bharat Drilling.

2. Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age, (1996) 1 SCC 516 (“Port of Calcutta”)

This is a pre-1996 Act decision concerning the power of an arbitrator to award interest in the face of contractual restrictions. The Court there:

Recognised that an arbitrator could award interest unless expressly barred by contract;
Adopted a relatively strict construction of “no interest” clauses; and
Was operating under the regime of the Arbitration Act, 1940, where no statutory provision like Section 31(7) existed.

Bharat Drilling had relied on Port of Calcutta to support the conclusion that certain contractual bars did not oust the arbitrator’s power. The present judgment holds that this reliance is misplaced when the question concerns prohibitory claim clauses on substantive heads of claim, as opposed to interest:

Interest is now a subject of an express statutory provision, Section 31(7) of the 1996 Act (discussed below).
Cases like Port of Calcutta and subsequent interest jurisprudence cannot be mechanically transplanted to the context of substantive claim prohibitions.

3. Central Organisation for Railway Electrification (CORE), 2024 INSC 857; 2024 SCC OnLine SC 3219

The Court relies on CORE to re-emphasise the doctrine of party autonomy in arbitration. The quoted passage (para 8 of the present judgment) underscores several themes:

Arbitration fundamentally rests on the parties’ freedom to choose their dispute resolution mechanism and to design the arbitral process.
Party autonomy is described as the “brooding and guiding spirit” and the “backbone” of arbitration.
The Arbitration Act repeatedly uses formulations such as “unless otherwise agreed by the parties” and “failing any agreement” to prioritise the parties’ contractual arrangements.
Arbitrators are bound by the procedures and terms agreed upon by the parties.

By citing CORE, the Court situates prohibitory claim clauses squarely within the sphere of party autonomy: such clauses are manifestations of the parties’ freedom to allocate risk and to define the scope of possible claims.

4. Pam Developments Private Limited v. State Of West Bengal, (2024) 10 SCC 715

This case is heavily relied on (para 9) to illustrate how courts should approach prohibitory claim clauses. The Court in Pam Developments held:

The High Court, in its Section 37 review, correctly examined the contract and found that awarding any amount towards idle machinery, etc., was explicitly prohibited under the special terms and conditions.
The arbitral tribunal, by contrast, had not even referred to the contractual provisions.
It was the arbitrator’s duty to examine and follow the contract, as “contract is the foundation of the legal relationship”.
The High Court thus did what the arbitrator should have done, and its interference with the award was upheld.

The present judgment invokes Pam Developments to reinforce three points:

Prohibitory claim clauses must be read and given effect to by arbitral tribunals.
Awarding prohibited heads of claim, without even engaging with the relevant clauses, is a serious error.
Court interference under Sections 34 and 37 is justified where the award ignores clear contractual bars.

5. Interest Jurisprudence under Section 31(7) and Pam Developments (on Interest)

Interestingly, Pam Developments is also cited for its comprehensive synthesis of interest jurisprudence under Section 31(7) (para 10 and its sub-points 23.1–23.6). The key propositions summarised there include:

Under the 1940 Act, arbitrators’ power to award interest (pre-reference, pendente lite and post-award) was judicially evolved despite no specific statutory provision.
Under that regime, clauses prohibiting interest were strictly construed, and arbitrators were generally allowed to award interest unless there was an express, specific bar.
Under the 1996 Act, Section 31(7)(a) confers power to award interest from the cause of action to the award date, subject to party agreement (“unless otherwise agreed by the parties”).
This represents a statutory reinforcement of party autonomy: if the agreement bars interest, the arbitrator’s power is curtailed.
The grant of pre-reference interest, in particular, may depend on contract, statute (e.g., Interest Act, 1978) or mercantile usage.

The present judgment uses this analysis to underline a vital distinction (para 11):

Issues concerning interest are governed by an explicit statutory framework (Section 31(7)), layered on top of the contract.
Issues concerning prohibitory claim clauses for substantive heads of claim are rooted primarily in contract and party autonomy, without an analogous statutory overlay granting a default power.
Therefore, analogies drawn from interest cases (like Port of Calcutta) to justify ignoring prohibitory claim clauses on substantive claims are doctrinally unsound.

6. COX AND KINGS LTD. v. SAP INDIA PVT. LTD. (2024) 4 SCC 1; and In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Stamp Act, 1899, 2023 SCC OnLine SC 1666

These two decisions are part of a broader trend where the Supreme Court has been:

Re-examining earlier case law to ensure doctrinal coherence; and
Re-centring party autonomy and minimal judicial interference as the core principles of Indian arbitration law.

By noting that Bharat Drilling is “not in tune” with principles articulated in these recent decisions (para 11), the present Bench signals that:

Arbitration jurisprudence is being carefully harmonised, especially on foundational questions like jurisdiction, validity of arbitration agreements, and the role of statutory constraints (e.g., stamping, interest); and
Bharat Drilling, as currently understood and applied, is an outlier that requires re-consideration by a larger Bench.

C. The Court’s Legal Reasoning

1. Centrality of Party Autonomy and the Contract

The judgment repeatedly stresses that contractual clauses limiting or excluding claims are expressions of party autonomy:

They are “founded on freedom to contract” and “crystallise informed choices of parties” (para 8).
The arbitral tribunal’s guiding principle is the agreement between the parties (para 9).
As observed in Pam Developments, examining “what the contract provides” is “not even a matter of interpretation”; it is a basic duty of every arbitral tribunal and court, because “contract is the foundation of the legal relationship” (para 9).

Under Section 28(3) of the 1996 Act (though not expressly cited in the judgment), arbitral tribunals are statutorily required to decide in accordance with the terms of the contract. The judgment’s emphasis is entirely consistent with this statutory directive.

2. Error in Treating Bharat Drilling as Binding Authority

The Court carefully analyses how Bharat Drilling dealt with the issue:

The argument that the bar applied only to the department, and not to the arbitral tribunal, was noted but not analysed.
The Court then referred to Port of Calcutta, primarily an interest case, and without scrutinising the contract clauses in detail, restored the award.

From this, the present Bench concludes:

Bharat Drilling did not establish a legal principle regarding the effect of prohibitory claim clauses on arbitral jurisdiction or powers.
It was, at most, a fact-specific decision that should not have been treated as a general precedent to override clear contractual prohibitions.

Thus, when the High Court in the present case restored the award “without any other discussion or analysis” and under the impression that the issue was conclusively covered by Bharat Drilling, it misapplied precedent (para 6, 8).

3. Distinguishing Interest Cases from Prohibitory Claim Clauses

The Court’s doctrinal move is to separate two categories of clauses:

Interest clauses (including “no interest” clauses), governed substantially by Section 31(7) of the Act; and
Substantive prohibitory claim clauses (e.g., “no claim for idle labour”, “no claim for business loss”), which define the scope of recoverable claims.

On interest, Section 31(7) provides:

A default power for the arbitrator to award interest from the date of cause of action to the date of award, unless otherwise agreed by the parties (clause (a)).
A default rule on post-award interest unless otherwise directed (clause (b)).

Hence, the arbitrator’s power to award interest is a mix of:

Statutory authorization; and
Contractual limitations or permissions.

In contrast, for prohibitory claim clauses relating to substantive claims:

There is no equivalent statutory grant of default power comparable to Section 31(7).
The arbitrator’s mandate is primarily derived from the contract (read with the arbitration agreement).
Party autonomy dictates that if the parties agree not to entertain certain heads of claim, the arbitral tribunal must respect that allocation of risk and cannot create an entitlement that the contract has consciously excluded.

On this conceptual basis, the Court holds that relying on interest cases such as Port of Calcutta to dilute or sidestep prohibitory claim clauses is doctrinally incorrect (para 10–11).

4. Need for Larger Bench Reconsideration of Bharat Drilling

The Court recognises two practical and doctrinal realities:

Prohibitory claim clauses of the type in question are ubiquitous in government contracts across India.
Bharat Drilling has been invoked “regularly and wrongly” (para 3) to interpret such clauses as non-binding on arbitral tribunals.

To “obviate uncertainty” and to ensure “clear declaration of law” (para 1, 12), the Court holds that:

The ratio of Bharat Drilling requires reconsideration.
The matter must go to a larger Bench of appropriate strength, to be constituted by the Chief Justice of India.

While the present Bench’s observations strongly favour giving full effect to prohibitory claim clauses as part of party autonomy, the final position will now be authoritatively settled by the larger Bench.

D. Impact and Prospective Significance

1. Immediate Doctrinal Consequences

Even before the larger Bench speaks, this judgment has several immediate implications:

Bharat Drilling is no longer good authority for the proposition that prohibitory claim clauses bind only the employer/department and not the arbitral tribunal. Lower courts and arbitral tribunals can no longer rely on it in this broad manner.
Arbitral tribunals are reminded that:
- They must read, interpret and apply contractual prohibitory clauses directly.
- Ignoring such clauses, or awarding claims in their teeth without analysis, exposes the award to challenge under Section 34 on the ground of contravention of the terms of the contract and of the Act.
Civil Courts and High Courts, when dealing with Section 34 and Section 37 proceedings, are expected to:
- Scrutinise whether the award is consistent with contractual limitations on claims; and
- Interfere where the arbitral tribunal has clearly disregarded explicit prohibitory clauses, consistent with the approach in Pam Developments.

2. Likely Arguments Before the Larger Bench

The larger Bench will likely have to address complex and sensitive issues, including:

Nature of Prohibitory Claim Clauses:
- Do such clauses merely go to the merits (i.e., the claim fails because contractually excluded), or do they define the scope of arbitral jurisdiction (i.e., the tribunal lacks power to entertain that head of claim at all)?
- The answer will affect the standard of judicial review under Section 34; jurisdictional errors are treated more strictly.
Interaction with Section 28 of the Indian Contract Act, 1872:
- Section 28 declares void agreements that absolutely restrain a party from enforcing rights through usual legal proceedings.
- A key question may be whether a clause that bars all claims under certain heads (e.g., any claim for loss of profit regardless of employer’s breach) amounts to an impermissible restraint on legal proceedings, or is simply a permissible limitation/exclusion of substantive liability.
Inequality of Bargaining Power and Public Policy:
- Government contracts are often standard-form and non-negotiable, raising questions about the “informed choice” narrative.
- A larger Bench may consider whether excessively one-sided prohibitory clauses could be struck down or read down as unconscionable or contrary to public policy.
Relationship with Section 28(3) of the Arbitration and Conciliation Act, 1996:
- Arbitrators must decide in accordance with the terms of the contract. Does this compel arbitrators always to deny claims that are expressly prohibited, or can they, in some circumstances, override or interpret them narrowly?

3. Practical Impact on Drafting and Dispute Strategy

For contracting parties, especially in infrastructure and public works:

Contract Drafting:
- Public authorities may feel emboldened to retain or even strengthen prohibitory claim clauses, anticipating that arbitral tribunals will be bound to apply them.
- Private contractors may seek to negotiate carve-outs (e.g., for employer-caused delay, fundamental breach, or termination without cause) to avoid being entirely remediless.
Arbitration Strategy:
- Claimants will need to frame claims more carefully, either:
  - outside the scope of the prohibitory language; or
  - by challenging the validity/enforceability of the prohibitory clause itself (e.g., as unconscionable or void under Section 28 of the Contract Act).
- Respondents (typically State entities) will almost invariably raise the presence of any “no claim” clause as a primary defence.
Judicial Review:
- Section 34/37 courts will more frequently confront the question whether the arbitral tribunal has honoured contractual prohibitory clauses.
- Ignoring an unambiguous clause may be characterised as “patent illegality” or as a decision contrary to the terms of the contract—grounds recognised in post-2015 amendment jurisprudence for setting aside domestic awards.

IV. Key Concepts Simplified

1. “Excepted Clause” and “Prohibitory Claim Clause”

Although the judgment uses “excepted clause” and “prohibited claim” somewhat interchangeably, two related concepts are worth distinguishing:

Excepted matters (in traditional Indian arbitration parlance):
- These are issues that the contract reserves for decision by a specific authority (e.g., the Superintending Engineer) whose decision is final and not referable to arbitration.
- They are outside the scope of the arbitration agreement itself.
Prohibitory claim clauses (“no claim” clauses):
- These clauses bar certain heads of claim entirely, e.g., “no claim for idle labour”, “no claim for loss of profit”, “no claim for business loss”.
- They typically still permit arbitration on other issues but limit recoverable relief.

The present case is concerned with the second category. The core question is: When the parties have agreed that certain types of claim “will not be entertained”, can an arbitral tribunal nevertheless grant such claims?

2. Party Autonomy

“Party autonomy” is the principle that:

Parties are free to structure their arbitration as they wish — they can choose the seat, rules, arbitrators, applicable law, and even procedural details.
They are also free to allocate commercial risk by agreeing which claims are recoverable and which are not.

The Act reflects this in numerous provisions (e.g., Sections 2, 11, 19, 20, 28, 31), often using phrases such as “unless otherwise agreed by the parties”. Courts are expected to respect this autonomy and to minimise interference, intervening only where the Act specifically permits.

3. Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996

Section 34 allows a party to apply to set aside an arbitral award on limited grounds, such as:
- incapacity or invalidity of the arbitration agreement;
- lack of proper notice or opportunity to present the case;
- the award dealing with disputes not contemplated by or beyond the scope of the arbitration agreement;
- conflict with the public policy of India; or
- “patent illegality” on the face of the award (for domestic awards).
Section 37 provides for appeals from certain orders, including:
- orders setting aside or refusing to set aside an award under Section 34.

The scheme is designed for minimal and focused judicial interference. However, when an arbitral tribunal ignores clear contractual prohibitory clauses, courts may treat that as:

a violation of Section 28(3) (failure to decide in accordance with the terms of the contract); and/or
“patent illegality” justifying setting aside the award.

4. Interest Under Section 31(7)

Section 31(7) deals specifically with interest:

Sub-section (a): The tribunal may award interest for the period from the cause of action to the date of award, unless otherwise agreed by the parties.
Sub-section (b): The sum directed to be paid by an arbitral award shall, unless otherwise directed, carry interest at 2% higher than the current rate from the date of award to the date of payment.

Thus:

The default rule is that interest is payable, as compensation for being kept out of money due.
However, party autonomy is respected: the contract can alter or exclude interest, and the arbitrator must give effect to such stipulations.

The present judgment draws a sharp doctrinal distinction between this interest framework and clauses that bar whole categories of substantive claims, underscoring that the latter are even more squarely within the domain of contractual freedom.

V. Conclusion

The Supreme Court’s decision in State of Jharkhand v. The Indian Builders Jamshedpur is a pivotal clarificatory order in Indian arbitration law. Its key contributions are:

It explicitly holds that Bharat Drilling is not authority for the broad proposition that contractual prohibitory claim clauses bind only the department and not the arbitral tribunal.
It criticises lower courts’ tendency to rely mechanically on Bharat Drilling without engaging with the text and purpose of contractual clauses.
It reaffirms that prohibitory claim clauses are rooted in freedom of contract and party autonomy and that arbitral tribunals are bound to decide in accordance with such clauses.
It underscores the doctrinal difference between:
- interest-related clauses governed by Section 31(7) and a long line of jurisprudence; and
- clauses barring substantive heads of claim, which primarily reflect risk allocation agreed by the parties.
It continues the Court’s broader project of rationalising arbitration jurisprudence—alongside decisions like Cox and Kings and the “Stamp Act–Arbitration Act” reference—by referring contentious precedents (Bharat Drilling) to larger Benches for authoritative resolution.

Although the larger Bench will ultimately decide the precise legal effect of such prohibitory claim clauses and the fate of Bharat Drilling, this judgment already sends a clear message: the contract is the foundation of the arbitral process, and arbitral tribunals and courts alike must give full, principled effect to its terms, including clauses that limit or exclude heads of claim.

In the broader legal context, this case strengthens the centrality of party autonomy and clarifies the limits of judicially-created doctrines that might otherwise dilute express contractual stipulations. It is therefore a key reference point for anyone dealing with arbitration clauses in government and commercial contracts, particularly where “no-claim” or prohibitory provisions are in play.