On 5 December 2025, the Supreme Court of India took a significant step to confront persistent confusion in arbitration law by referring the controversial 2009 judgment in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand (2009) 16 SCC 705 to a larger bench. The reference arises out of a deeper legal question — whether prohibitory or excepted clauses in government contracts bind an arbitral tribunal or only the contracting employer/party. The Court observed that the earlier ruling has been “repeatedly and incorrectly relied upon” as authority to dilute contractual prohibitions and restrict the enforceability of express bars on claims, particularly in public procurement and government contracts.
This development not only impacts arbitration jurisprudence but also strikes at the heart of party autonomy — a core principle underpinning the Arbitration and Conciliation Act, 1996 (“the Act”).
Background: The Case Before the Supreme Court
The matter before the Supreme Court — The State of Jharkhand v. The Indian Builders, Jamshedpur (Neutral Citation: 2025 INSC 1388) — originated from a dispute over an arbitration award between a government entity and a contractor. The arbitral tribunal had granted certain heads of claims that were expressly prohibited under the contract (such as claims for idle labour, idle machinery, and loss of profits).
When the Civil Court under Section 34 of the Arbitration Act set aside those claims for being contractually barred, the claimant appealed under Section 37. The High Court restored the award mainly by relying on the Bharat Drilling judgment.
Aggrieved by the High Court’s reliance on Bharat Drilling, the State of Jharkhand appealed to the Supreme Court, asserting that the Apex Court’s 2009 judgment did not establish that contractual prohibitions apply only to the employer and not to the arbitral tribunal — especially when the former did not examine such clauses.
What Bharat Drilling (2009) Held
To understand the controversy, a brief recap of Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand (2009) 16 SCC 705 is necessary:
- The contract contained clauses excluding certain heads of claim (idle machinery, loss of profit, etc.).
- The arbitrator awarded such claims, and the Civil Court struck them down as being barred by contractual terms.
- The Supreme Court held that certain claims could still be entertained by arbitral tribunals despite contractual bars, essentially by drawing on precedents relating to statutory interest under Section 31(7) of the Arbitration Act.
- Over time, lower courts, especially High Courts, treated Bharat Drilling as authority for the proposition that “prohibitory or excepted clauses bind only the employer and not the tribunal itself”.
However, the Apex Court’s decision did not directly examine or interpret the contractual prohibitions in depth, but rather applied legal reasoning from interest awards to broader contractual clauses — a point that has attracted criticism.
Why the Supreme Court Referred Bharat Drilling to a Larger Bench
In the fresh 2025 order, a Division Bench of Justice P.S. Narasimha and Justice A.S. Chandurkar observed that:
📍 Bharat Drilling is not authority for the sweeping proposition that contractual prohibitions bind only the employer and not the arbitral tribunal.
📍 The High Court below failed to examine contractual clauses and instead relied solely on Bharat Drilling to justify restoration of the award.
📍 Contractual clauses that limit claims are founded on freedom to contract and should guide arbitral tribunals.
📍 Issues relating to interest under Section 31(7) of the Act — which Bharat Drilling drew on — are fundamentally different from contractual prohibitions.
Given these foundational concerns, the Bench felt that the ratio in Bharat Drilling requires reconsideration ”to obviate uncertainty and for clear declaration of law”. Accordingly, it ordered that the matter be placed before the Chief Justice of India for constitution of an appropriate larger bench.
Key Legal Questions to be Reconsidered
The larger bench reference will likely consider critical issues that have long troubled arbitration and contract law scholars:
✅ 1. Do Prohibitory Clauses Bind Arbitral Tribunals?
This is the central question: whether express contractual prohibitions on certain heads of claims must be respected by arbitral tribunals, or if tribunals can still entertain such claims based on broader legal principles or precedents like Bharat Drilling.
✅ 2. What is the Correct Role of Party Autonomy?
The Arbitration Act strongly endorses party autonomy — parties are free to agree on the scope of arbitration, including what claims can be adjudicated. The bench will need to decide whether tribunals should override clear contractual bars in the name of statutory principles or jurisprudential rationales.
✅ 3. How Should Courts Apply Precedent in Contract Interpretation?
The apex court must clarify whether and how Bharat Drilling should be applied in future cases, especially where contractual terms explicitly bar certain claims.
Impact on Indian Arbitration Law
The larger bench referral marks a pivotal moment for arbitration jurisprudence in India:
✅ Clarity for Government Contracts: Many government contracts include detailed prohibitory clauses. The larger bench direction signals that contractual terms cannot be bypassed casually.
✅ Consistency Across Lower Courts: A larger bench ruling will help bring uniformity in decisions across High Courts, which have been divided on Bharat Drilling’s applicability.
✅ Respect for Party Autonomy: The decision may reinforce the principle that tribunals must honour the express terms agreed by the parties, unless statutory law demands otherwise.
✅ Guidance for Practitioners: Lawyers advising on contracts — especially in public procurement — will get clearer guidance on drafting prohibitory clauses and anticipating how tribunals might treat them.
Conclusion
The Supreme Court’s referral of Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand to a larger bench highlights the judiciary’s willingness to revisit and refine arbitration law in India to ensure clarity, consistency, and respect for contractual intent. By addressing whether prohibitory clauses bind arbitral tribunals, this reference could reshape the landscape of government contracts and arbitration practice. For now, the arbitration community awaits the larger bench’s composition and detailed deliberations on this fundamental legal issue.
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