Introduction
The Supreme Court’s decision in State of Jharkhand v. The Indian Builders Jamshedpur¹, marks a significant moment in the evolution of Indian arbitration jurisprudence relating to excepted matters and prohibitory claim clauses, particularly those found in government and public-sector contracts. The judgment does not decide the merits of the contractual claims, instead, the Court pursues a broader institutional objective, such as, clarity, predictability, and doctrinal coherence in the interpretation of contractual clauses that bar certain claims from being raised or adjudicated by an arbitral tribunal.

The Court expresses serious concern that its earlier order in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand², has been widely misinterpreted by courts and arbitral tribunals to suggest that prohibitory clauses bind only the employer (State) and not the arbitral tribunal, thereby permitting arbitral tribunals to entertain claims that the underlying contract expressly bars. Because this misinterpretation has introduced uncertainty and doctrinal inconsistency, the Supreme Court has referred the matter to a larger bench for authoritative reconsideration.

The judgment consequently becomes an important precedential bridge between earlier jurisprudence, which sometimes blurred the distinction between excepted matters and arbitral powers, and emerging jurisprudence emphasizing party autonomy, contractual fidelity, and minimal judicial interference.

Factual Background
The dispute arose from a government works contract between the State of Jharkhand (“Appellant”) and M/s The Indian Builders, Jamshedpur (“Respondent”). The contract contained a set of prohibitory claim clauses, the most relevant being:

• Clause 4.20.2: No claim for idle labour, idle machinery, etc. on any account will be entertained.
• Clause 4.20.4: No claim shall be entertained for business loss or any such loss.

These clauses are common in public works contracts, aimed at containing financial exposure arising from project delays, suspension of work, or administrative lapses.

A dispute emerged, which led to the arbitration. The arbitral tribunal allowed several claims, including:

1. Claim No. 3 - underutilised overheads
2. Claim No. 4 - loss due to underutilised tools, plant, and machinery
3. Claim No. 6 - loss of profit due to delays

The Appellant challenged the award under Section 34³ of the Arbitration and Conciliation Act, 1996 (“A&C Act, 1996”), arguing that these claims were contractually barred. The court accepted this contention and set aside the award on these claims. However, on Section 37⁴ of the A&C Act, 1996 under the appeal, the High Court reversed the Civil Court’s decision and restored the award, relying entirely on Bharat Drilling (Supra).

This uncritical reliance by the High Court forms the fulcrum of the Supreme Court’s concern.

The High Court’s approach: A mechanical application of Bharat Drilling
The High Court’s reasoning was brief. It observed that the issue was "squarely covered" by Bharat Drilling (Supra), and without examining the contractual clauses, the nature of the claims, or the distinction between excepted matters and arbitral jurisdiction, it restored the arbitral award.

The Supreme Court, upon perusing the High Court judgment, noted:

• There was no discussion of Clauses 4.20.2 and 4.20.4.
• There was no analysis of whether the arbitral tribunal could override explicit contractual prohibitions.
• The High Court appeared to assume that Bharat Drilling established a broad principle that all prohibitory clauses apply only to the employer, not the arbitrator, thereby allowing tribunals to entertain claims notwithstanding contractual restrictions.

This prompted the Supreme Court to initiate a corrective process, not by deciding the merits, but by clarifying the underlying legal principles.

Supreme Court’s intervention

1. The Court’s Prima Facie View on Bharat Drilling
   The Court observed that Bharat Drilling (Supra) did not engage in a substantive examination of contractual prohibitory clauses.
   
   Thus, applying Bharat Drilling as an authority for the broad proposition that contractual prohibitions do not bind arbitral tribunals was erroneous.
   
   The Court held that Bharat Drilling:
   1. Did not lay down any legal principle on the issue at hand.
   2. Is at best an order on facts.
   3. Cannot be relied upon as a binding precedent for interpreting prohibitory claim clauses.
   
   
2. Contractual prohibitory clauses and party autonomy
   The Court emphasized that party autonomy is the “brooding and guiding spirit” of arbitration, citing Central Organisation for Railway Electrification V. M/s ECI SPIC SMO MCML (JV) A Joint Venture Company⁵ (“CORE”), Parties are free to:
   1. Define the scope of arbitrable claims.
   2. Exclude certain claims from arbitration.
   3. Bind the arbitral tribunal to specific contractual limitations.
   When the arbitrator disregards express prohibitory clauses, it undermines contractual autonomy.
    
3. Duty of Arbitral Tribunals and Courts under Section 34 and Section 37 of the A&C Act, 1996
   Citing Pam Developments Pvt. Ltd. v. State of West Bengal⁶, the Court reiterated that an arbitral tribunal must carefully examine the contract before granting any relief, and that courts exercising jurisdiction under Sections 34⁷ and 37⁸ of the A&C Act 1996 are duty-bound to ensure that an award does not depart from the parties’ agreed terms. An award that grants claims expressly barred by the contract cannot stand, and must be set aside. In this context, the Supreme Court held that the High Court failed to undertake this essential scrutiny, resulting in a clear error.

The Court’s analytical framework
The Supreme Court explains that excepted matters involve issues reserved for departmental decision-making, while prohibitory clauses bar specific claims altogether and leave no room for adjudication by any forum. The Court notes that it has arisen from conflating interest-related precedents with clauses excluding substantive claims, from overstating the scope of Bharat Drilling, and from overlooking that parties may validly restrict claim heads within the bounds of public policy. The Court’s analysis thus shifts the focus back to contractual fidelity rather than arbitral discretion.

The Court’s clarification on interest jurisprudence: Why Trustees for the Port of Calcutta v. Engineers-De-Space-Age judgement is inapplicable
The judgment underscores that Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age ⁹and the jurisprudence on interest stand on a fundamentally different footing from the law on excepted or prohibitory claim clauses. Section 31(7) of the A&C Act, 1996 itself confers the power to award interest, and in the absence of an express bar, such interest may even be implied from law or commercial usage. Prohibitory clauses in government contracts, such as those excluding claims for idle labour or business loss, derive not from statute but from the parties contractual bargain. The Court therefore cautions that precedents concerning interest cannot be conflated with those dealing with barred claims, as the two doctrines rest on distinct legal foundations.

The Doctrinal Foundations: How recent cases strengthen the Supreme Court’s view
The Court situates its reasoning within a broader judicial trajectory shaped by recent decisions such as Cox and Kings Ltd. v. SAP India Pvt. Ltd.¹⁰, which reaffirmed that arbitration is fundamentally a creature of contract and that the parties’ stipulations govern jurisdiction, procedure and available remedies. This approach is strengthened by CORE judgement, where party autonomy was described as the backbone of arbitration. The same philosophy is evident in In Re: Interplay Between Arbitration Agreements and the Stamp Act¹¹, in which the Court reiterated the need for strict adherence to statutory and contractual preconditions and cautioned against judicial interference that alters the contractual framework. Collectively, these precedents establish a clear jurisprudential movement that places contractual terms at the centre of arbitral dispute resolution.

The Decision: Reference to larger bench
The Supreme Court ultimately refrained from deciding the correctness of the High Court’s restoration of the arbitral award. Instead, it adopted an institutional perspective, concluding that the issue raised was of far-reaching significance and therefore unsuitable for a narrow fact-based determination. The Court observed that the persistent judicial reliance on Bharat Drilling (Supra) despite the absence of any real examination of contractual prohibitory clauses in that earlier order had created systemic doctrinal uncertainty. To eliminate such uncertainty and restore coherence in arbitration law, the Court held that the ratio in Bharat Drilling must be reconsidered by a larger bench. The Registry was directed to place the matter before the Chief Justice of India for constitution of an appropriate bench. This move signals the Court’s recognition that widespread misunderstandings surrounding excepted matters and prohibitory clauses cannot be cured through incremental adjudication, but require authoritative clarification at the highest institutional level.

Implications for Government Contracts and Arbitration
The judgment is poised to influence the handling of government contracts and arbitration proceedings in several important ways. Drafting precision will now assume greater significance, since contractual clauses excluding certain claims are likely to be construed with heightened strictness.

Government entities and private contractors alike will have to pay closer attention to the clarity and comprehensiveness of such clauses, recognizing that arbitral tribunals may treat explicit exclusions as binding constraints. This development also places a more rigorous obligation on arbitral tribunals to engage directly with contractual language when awarding relief. Tribunals must justify their departures, if any, through careful reasoning rather than equitable considerations.

Significance and the road ahead
By foregrounding contractual prohibitory clauses and reinforcing the primacy of the parties’ agreed terms, the Supreme Court shifts the centre of gravity towards contractual certainty. This judgement is surely in the right direction and the message is clear that the arbitral power is not inherent but derivative, it flows from the agreement, and the arbitrator cannot rewrite or override that agreement merely because perceived equities favour the contractor.

The judgment reinforces contractual certainty and disciplines arbitral tribunals, emphasizing the necessity of respecting explicit contractual bars on claims.

Be the aforementioned as it may, the judgment also raises concerns about excessive deference to contractual restrictions, particularly in the context of government contracts that often contain one-sided clauses imposed on contractors with limited bargaining power. A rigid enforcement approach may inadvertently disadvantage such contractors and inhibit valid claims arising from delays or administrative inefficiencies.

Therefore, until the larger bench settles the law definitively, courts and tribunals may continue to face uncertainty regarding the precise boundaries between enforceable prohibitory clauses and those that may be overridden in the interests of justice or public policy. This transitional uncertainty, though temporary, underscores the importance of the forthcoming authoritative ruling.

By - Arush Khanna and Akarsh Pandey