Supreme Court refers Bharat Drilling judgment to larger bench, questioning interpretation that prohibited claim clauses apply only to employers. Court emphasizes party autonomy—arbitral tribunals must respect contractual terms that expressly bar claims for idle machinery, business loss, or profit.
If your contract with a government department specifically states "no claim shall be entertained for business loss or any such loss," can an arbitral tribunal still award you compensation for lost profits?
No, the arbitral tribunal cannot award prohibited claims.
The Supreme Court has clarified that contractual clauses prohibiting certain claims (like idle machinery costs or business losses) are binding on arbitral tribunals. These clauses represent the informed choices of the parties and are fundamental to contract law. The Court has referred the earlier Bharat Drilling case to a larger bench to reconsider its interpretation that such prohibitory clauses apply only to the employer and not to the arbitral tribunal.
"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."
Parties agreed to specific prohibitory clauses in their contract
Arbitral Tribunal allowed claims 3, 4, and 6 despite contractual prohibitions
Civil Court set aside prohibited claims under Section 34 of Arbitration Act
High Court restored award based on Bharat Drilling precedent
Supreme Court referred Bharat Drilling to larger bench for reconsideration
| Type of Claim | If Contract Prohibits | If Contract is Silent |
|---|---|---|
| Idle Machinery Costs | ❌ Cannot be awarded | ✅ May be awarded based on facts |
| Business Loss/Profit | ❌ Cannot be awarded | ✅ May be awarded with evidence |
| Interest on Amounts Due | ❌ Cannot be awarded (Section 31(7)) | ✅ Statutory interest applies |
| Direct Cost Overruns | ✅ Can be awarded if not prohibited | ✅ Can be awarded with proof |
A contractual provision that specifically excludes certain matters from arbitration or from being raised as claims.
A type of claim that the contract expressly states cannot be made, such as claims for idle machinery or business losses.
The fundamental principle that parties are free to agree on the terms of their contract, including what can and cannot be arbitrated.
The panel (usually 1-3 arbitrators) appointed to resolve disputes through arbitration rather than court proceedings.
Applications to set aside an arbitral award on specific grounds, such as the award dealing with disputes not contemplated by the arbitration agreement.
"Contractual clauses that limit claims are founded on freedom to contract. They are agreements that crystalise informed choices of parties. The basis of any arbitration is the freedom of the parties to agree to submit their disputes to an individual or to a panel of individuals whose judgment they are prepared to trust and obey. Party autonomy has been described by this Court as the 'brooding and guiding spirit' and 'backbone' of arbitrations."
This judgment reinforces that arbitration exists within the framework of the contract. Arbitral tribunals derive their authority from the parties' agreement and cannot award claims that the parties have expressly agreed to exclude. This protects the sanctity of contracts and ensures that parties' negotiated terms are respected in dispute resolution.
This content is for informational purposes only and does not constitute legal advice. Consult a qualified legal professional for specific legal guidance. The information provided is based on judicial interpretation and may be subject to changes in law.
Making Supreme Court judgments accessible and actionable for every Indian citizen navigating legal challenges.
This analysis decodes a complex arbitration dispute to help businesses and individuals understand their contractual rights and the limits of arbitral tribunals' powers.