Supreme Court Refers Bharat Drilling for Reconsideration; Holds Excepted/Prohibitory Clauses Bind Arbitral Tribunals and Are Founded on Party Autonomy

Case Name: State of Jharkhand v. Indian Builders, Jamshedpur
Citation: 2025 INSC 1388
Date of Judgment/Order: 05 December 2025
Bench: P.S. Narasimha, J.; Atul S. Chandurkar, J.

Held: The Supreme Court held that the High Court erred in restoring an arbitral award without examining contractual clauses that expressly barred the very claims allowed by the tribunal. The Court concluded that the judgment in Bharat Drilling—often cited to argue that excepted or prohibitory clauses restrict only the employer and not the arbitral tribunal—does not correctly state the law and requires reconsideration by a larger bench. The Court clarified that party autonomy is the “brooding and guiding spirit” of arbitration, and contractual stipulations barring specific categories of claims must bind arbitral tribunals unless contrary to statutory provisions.

Summary: The arbitral tribunal had allowed claims for idle labour, idle machinery, underutilised overheads, and loss of profit—even though the contract expressly prohibited such claims under Clauses 4.20.2 and 4.20.4. The Civil Court set aside these claims under Section 34, holding that the tribunal ignored explicit contractual bars. On appeal under Section 37, the High Court restored the award solely relying on Bharat Drilling, without examining the contract. Before the Supreme Court, the State argued that Bharat Drilling had been mistakenly interpreted for years as diluting party autonomy in the face of prohibitory clauses. The Court examined the scope of excepted and prohibited claims, referring to CORE, Pam Developments, Cox & Kings, and other precedents affirming that arbitral tribunals must adhere to the contract. It highlighted that Bharat Drilling neither analysed the clauses nor laid down any principle and instead relied on Port of Calcutta, a case dealing only with grant of pendente lite interest under Section 31(7)—a materially different issue. Because tribunals must respect contractual limitations, and because the High Court had bypassed necessary analysis, the matter required clarification by a larger bench.

Decision: The Supreme Court referred Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand to a larger bench for authoritative reconsideration. It held that excepted/prohibitory claim clauses must be interpreted strictly in line with party autonomy and cannot be bypassed by arbitral tribunals. The judgment directed the Registry to place the matter before the Chief Justice for constitution of an appropriate larger bench. No opinion was expressed on the merits of the underlying claims beyond identifying the legal error.