Holding

The ratio in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand is not authoritative and must be reconsidered by a larger bench.

Summary

The State of Jharkhand appealed a High Court order that restored an arbitral award allowing claims that the civil court had struck down as prohibited by specific contractual clauses. The High Court had relied on the Supreme Court’s decision in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand, holding that excepted or prohibitory clauses apply only to the employer and not to the arbitral tribunal. The Supreme Court examined the contract’s clauses, emphasized that party autonomy governs the applicability of such clauses, and observed that Bharat Drilling did not analyse the contractual terms and misapplied the principle of interest under the Arbitration Act. It further noted that the ratio in Bharat Drilling is inconsistent with later decisions on arbitral powers and interest awards. Consequently, the Court held that the Bharat Drilling ratio must be reconsidered and directed the matter to be placed before a larger bench for authoritative clarification.

Issues considered

The applicability of excepted or prohibitory claim clauses in government contracts to arbitral tribunals versus the employer.
Whether the ratio in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand is binding for interpreting such clauses.
The need for a larger bench to reconsider the Bharat Drilling decision for clarity and consistency.

Legislation cited

Arbitration and Conciliation Act, 1996s. 31(7), s. 34, s. 37

Headnote

Issue for Consideration Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand and Ors. (2009) 16 SCC 705, if requires to be referred to a larger bench for reconsideration and authoritative decision in order to obviate uncertainty and for clear declaration applicability of prohibited claims in a contract. Headnotes† Arbitration and Conciliation Act, 1996 – Arbitral Tribunal allowed certain claims of the respondent-claimant but the Civil Court set aside the claims 3, 4 and 6 on the ground that they were specifically prohibited under

Subjects

Excepted clauseProhibited claimProhibitory clauseArbitrationParty autonomyBharat DrillingLarger benchContractual clause interpretationSection 34Section 37

Judgment

[2025] 12 S.C.R. 417 : 2025 INSC 1388

The State of Jharkhand
v.
The Indian Builders Jamshedpur
(Civil Appeal No(s). 8261-8262 of 2012)
05 December 2025
[Pamidighantam Sri Narasimha and
Atul S. Chandurkar, JJ.]

Issue for Consideration
Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of
Jharkhand and Ors. (2009) 16 SCC 705, if requires to be referred
to a larger bench for reconsideration and authoritative decision
in order to obviate uncertainty and for clear declaration of law as
regards applicability of prohibited claims in a contract.

Headnotes†
Arbitration and Conciliation Act, 1996 – Arbitral Tribunal allowed
certain claims of the respondent-claimant but the Civil Court
set aside the claims 3, 4 and 6 on the ground that they were
specifically prohibited under the contract between the parties –
Appeal filed by the respondent, allowed by the High Court on
the ground that the issue arising for consideration is covered
by decision of this Court in Bharat Drilling and thus, allowed
the claims barred under the contract restoring the arbitratal
award – Challenge to – Plea of the State that the decision in
Bharat Drilling is being applied, regularly and wrongly, to interpret
prohibitory claim clauses in all Government contracts and thus,
there is a compelling necessity to clarify the position of law:
Held: Bharat Drilling is not an authority for the proposition that an
excepted clause or a prohibited claim in a contract applies only to
the employer and not to the Arbitral Tribunal – High Court did not
examine the contractual clauses and proceeded to dispose of the
appeal under the impression that the issue is conclusively covered
by the decision of this Court in Bharat Drilling – In Bharat Drilling,
the Court has not examined the contractual clauses that have fallen
for consideration herein – Contractual clauses that limit claims
are founded on freedom to contract – They are agreements that
crystalise informed choices of parties – Applicability of excepted
or prohibitory clauses would primarily depend upon the agreement
between the parties, which alone is the guiding principle for the
418 [2025] 12 S.C.R.

Supreme Court Reports

Arbitral Tribunal – The judgment in Bharat Drilling, relying on
the judgment of this Court in Port of Calcutta, dealing with the
principle of grant of interest pendente lite, is not appropriate –
Further, the approach adopted in Bharat Drilling is not in tune
with the principles laid down by this Court in the recent decisions
of Cox and Kings Ltd. v. SAP India Private Ltd. CORE and In Re:
Interplay Between Arbitration Agreements Under Arbitration and
Conciliation Act, 1996 and Stamp Act, 1899 – In order to ensure
clarity and consistency, the ratio of Bharat Drilling requires to
be reconsidered – Bharat Drilling referred to a larger bench for
reconsideration and authoritative decision – Registry to place the
present judgment and order before the Hon’ble Chief Justice for
appropriate orders for placing the matter before a larger bench of
appropriate strength. [Paras 1, 8, 9, 11]

Case Law Cited
Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of
Jharkhand and Ors. (2009) 16 SCC 705 – requires to be
reconsidered.
Board of Trustees For The Port of Calcutta v. Engineers-De-
Space-Age [1995] Supp. 6 SCR 327 : (1996) 1 SCC 516; Central
Organisation for Railway Electrification (CORE), 2024 INSC
857 : [2024] 11 SCR 2173 : 2024 SCC OnLine SC 3219; Pam
Developments Private Limited v. State of West Bengal [2024]
8 SCR 615 : (2024) 10 SCC 715; Cox and Kings Ltd. v. SAP
India Private Ltd. [2023] 15 SCR 621 : (2024) 4 SCC 1; Interplay
Between Arbitration Agreements Under Arbitration and Conciliation
Act, 1996 and Stamp Act, 1899 [2023] 15 SCR 1081 : 2023 SCC
OnLine SC 1666 – referred to.

List of Keywords
Excepted clause; Prohibited claim in a contract; Prohibitory clauses;
Claims barred under the contract; Bharat Drilling referred to a
larger bench for reconsideration.

Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No(s). 8261-8262
of 2012
From the Judgment and Order dated 11.05.2012 of The High Court
of Jharkhand at Ranchi in AA No. 17 of 2007 and AA No. 24 of 2007
[2025] 12 S.C.R. 419

The State of Jharkhand v. The Indian Builders Jamshedpur

Appearances for Parties
Advs. for the Appellant(s):
Rajiv Shankar Dwivedi, Ms. Tulika Mukherjee, Beenu Sharma,
Venkat Narayan.
Adv. for the Respondent(s):
Manoj C. Mishra.

Judgment / Order of the Supreme Court

Judgment

1. In view of our opinion that Bharat Drilling & Foundation Treatment
Pvt. Ltd. v. State of Jharkhand and Ors1 is not an authority for the
proposition that an excepted clause or a prohibited claim in a contract
applies only to the employer and not to the Arbitral Tribunal, for
the reasons to follow, in order to obviate uncertainty and for clear
declaration of law, we are referring Bharat Drilling (supra) to a larger
bench for reconsideration and authoritative decision. The context in
which we have referred the matter to a larger bench is as follows.
2. State of Jharkhand is in appeal against the judgment of the High
Court of Jharkhand allowing Section 372 appeal under Arbitration
and Conciliation Act, 19963. The appeal was filed by the respondent-
claimant against the judgment of the Civil Court4 setting aside the
arbitral award allowing the objections filed by State under Section 34.
By its award dated 19.04.2007, the Arbitral Tribunal allowed certain
claims but the Civil Court set aside the claims 3, 4 and 6 on the
ground that they were specifically prohibited under the contract
between the parties.
3. Mr. Rajiv Shankar Dwivedi, learned counsel appearing for the State
of Jharkhand has made a short submission that the High Court
committed a serious error in allowing the appeal on the ground that
the issue arising for consideration is covered by decision of this
Court in Bharat Drilling (supra). Mr. Dwivedi has expressed a serious

1 (2009) 16 SCC 705.
2 In Arbitration Appeal No. 17 of 2007 dated 11.05.2012.
3 Hereinafter referred to as the ‘Act’.
4 Sub-Judge-1, Jamshedpur in Misc. Arbitration Case No. 01/2004 dated 19.04.2007.
420 [2025] 12 S.C.R.

Supreme Court Reports

concern that the decision in Bharat Drilling (supra) is being applied,
regularly and wrongly, to interpret prohibitory claim clauses in all
Government contracts. He would therefore submit that even if the
Court may not interfere in the facts of this case, there is a compelling
necessity to clarify the position of law. On the other hand, Mr. Manoj
C. Mishra, learned counsel appearing for the respondent, supported
the decision of the High Court.
4. In view of the concern expressed by Mr. Dwivedi, we agreed to
examine the question of law and the principle in Bharat Drilling
(supra). Before we proceed any further, it is necessary to examine
the relevant clauses under the agreement, which are extracted
hereinbelow for ready reference;
“4.20.0 CLAIMS:
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.”
5. It is submitted that the Arbitral Tribunal committed a serious error
in allowing claim no. 3 (relating to underutilised overheads) when
that claim is barred under clause 4.20.2, claim no. 4 (relating to loss
due to underutilised tools, plants and machinery) when such claim
is clearly barred under contractual clause 4.20.2. Further, it is also
contended that claim no. 6 (relating to loss of profit) could not have
been granted in the teeth of clause 4.20.4, which specifically declares
that “no claim shall be entertained for business loss or any such loss”.
6. This submission, however, found favour with the Civil Court accepting
Section 34 objections of the State and setting aside the award on
claim nos. 3, 4 and 6. When we peruse the judgment of the High Court
under Section 37, we find that there is no discussion whatsoever as
regards to claim nos. 3, 4 and 6, except for reference and reliance
on the order of this Court in Bharat Drilling (supra). Placing reliance
upon Bharat Drilling (supra), without any other discussion or analysis,
the High Court proceeded to restore the award as regards claim
nos.3, 4 and 6.
7. As we examined the decision of this Court in Bharat Drilling
(supra), we find that it was argued therein that, the contractual “bar
against such claims is applied only to the department and not to
[2025] 12 S.C.R. 421

The State of Jharkhand v. The Indian Builders Jamshedpur

the Arbitral Tribunal”. Without examining the contention in detail,
the Court proceeded further and referred to the decision of Board
of Trustees For The Port of Calcutta v. Engineers-De-Space-Age5
and set aside the order passed by the High Court and restored the
award. Mr. Dwivedi therefore contends that Bharat Drilling (supra)
does not lay down any law and that it is an order in the facts and
circumstances of the case.
8. It is quite evident from the order impugned before us that the High
Court has not examined the contractual clauses extracted hereinabove
and has proceeded to dispose of the appeal under the impression
that the issue is conclusively covered by the decision of this Court
in Bharat Drilling (supra). As has been already indicated, in Bharat
Drilling (supra), the Court has not examined the contractual clauses
that have fallen for our consideration herein. Contractual clauses
that limit claims are founded on freedom to contract. They are
agreements that crystalise informed choices of parties. Explaining
the incorporation of party autonomy in the statutory scheme of the
Act, this Court in Central Organisation for Railway Electrification
(CORE),6 explained this position:
“22. 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 is fundamental
to international commercial arbitration because it allows the
parties to design the arbitration proceedings to suit their
needs and commercial reality. Party autonomy has been
described by this Court as the “brooding and guiding spirit”
and “backbone” of arbitrations. The principle of minimum
judicial interference supplements the autonomy of parties
by prohibiting courts from interfering in arbitral proceedings
unless mandated by the law. This principle respects the
autonomy of the parties to mutually chart the course of
the arbitral proceedings.
23.The Arbitration Act has given pre-eminence to party
autonomy throughout the arbitral process. The Arbitration

5 (1996) 1 SCC 516.
6 2024 INSC 857 : 2024 SCC OnLine SC 3219.
422 [2025] 12 S.C.R.

Supreme Court Reports

Act has used phrases such as “unless otherwise agreed
by the parties”, “failing any agreement”, “the parties are
free to agree”, “failing such agreement”, and “unless the
agreement on the appointment procedure provides other
means” to recognize the autonomy of parties to determine
the arbitral proceedings. The use of the above phrases
also indicates that an arbitrator is bound by the procedures
agreed upon between the parties.”
(emphasis supplied)

9. Applicability of excepted or prohibitory clauses would primarily depend
upon the agreement between the parties, which alone is the guiding
principle for the Arbitral Tribunal. In similar circumstances, interpreting
the contractual clauses, this Court in Pam Developments Private
Limited v. State of West Bengal7 held as follows;
“12. This submission is persuasive, but the contract clauses
speak for themselves. In fact, the High Court did what the
arbitrator should have done. Examine what the contract
provides. This is not even a matter of interpretation. It
is the duty of every Arbitral Tribunal and court alike and
without exception, for contract is the foundation of the legal
relationship. Having considered the above referred clauses
in the contract the High Court came to the conclusion
that awarding any amount towards idle, machinery, etc. is
prohibited under the “Special Terms and Conditions” of the
contract. The arbitrator did not even refer to the contractual
provisions and the District Court dismissed the objections
under Section 34 with a standard phrase as extracted
hereinabove. The High Court exercising jurisdiction under
Section 37 did its duty and we are of the opinion that the
conclusions of the High Court are correct and cannot be
interfered with.”
(emphasis supplied)

10. Returning to Bharat Drilling (supra), we also notice that the Court
referred to Port of Calcutta (supra) concerning payment of interest,

7 (2024) 10 SCC 715.
[2025] 12 S.C.R. 423

The State of Jharkhand v. The Indian Builders Jamshedpur

which stands on a completely different footing. This is because,
jurisdiction relating to grant of interest is sourced from Section 31(7)
of the Act. Pam Developments (supra) articulates this principle in
the following manner;
“23. The power of the arbitrator to grant pre-reference
interest, pendente lite interest, and post-award interest
under Section 31(7) of the Act is fairly well-settled. The
judicial determinations also highlight the difference in
the position of law under the Arbitration Act, 1940. The
following propositions can be summarised from a survey
of these cases:
23.1. Under the Arbitration Act, 1940, there was no specific
provision that empowered an arbitrator to grant interest.
However, through judicial pronouncements, this Court has
affirmed the power of the arbitrator to grant pre-reference,
pendente lite, and post-award interest on the rationale that a
person who has been deprived of the use of money to which
he is legitimately entitled has a right to be compensated for
the same.8 When the agreement does not prohibit the grant
of interest and a party claims interest, it is presumed that
interest is an implied term of the agreement, and therefore,
the arbitrator has the power to decide the same.9
23.2. Under the 1940 Act, this Court has adopted a strict
construction of contractual clauses that prohibit the grant
of interest and has held that the arbitrator has the power
to award interest unless there is an express, specific
provision that excludes the jurisdiction of the arbitrator10
from awarding interest for the dispute in question11.

8 State of Orissa v. G.C. Roy, (1992) 1 SCC 508, para 43(i). Also see State of Orissa v. N.C. Budharaj,
(2001) 2 SCC 721; Union of India v. Krafters Engg. & Leasing (P) Ltd., (2011) 7 SCC 279 : (2011) 3 SCC
(Civ) 533
9 State of Orissa v. G.C. Roy, (1992) 1 SCC 508, paras 43 (iv) & 44.
10 Port of Calcutta v. Engineers-De-Space-Age, (1996) 1 SCC 516, paras 4 and 5; Madnani Construction
Corpn. (P) Ltd. v. Union of India, (2010) 1 SCC 549 : (2010) 1 SCC (Civ) 168; Tehri Hydro Development
Corpn. Ltd. v. Jai Prakash Associates Ltd., (2012) 12 SCC 10 : (2013) 2 SCC (Civ) 122, paras 18-20;
Union of India v. Ambica Construction, (2016) 6 SCC 36 : (2016) 3 SCC (Civ) 36 (First Ambica Construction
Case); Ambica Construction v. Union of India, (2017) 14 SCC 323 : (2018) 1 SCC (Civ) 257 (Second
Ambica Construction Case); Raveechee & Co. v. Union of India, (2018) 7 SCC 664 : (2018) 3 SCC (Civ)
711; Reliance Cellulose Products Ltd. v. ONGC Ltd., (2018) 9 SCC 266 : (2018) 4 SCC (Civ) 351.
11 State of U.P. v. Harish Chandra, (1999) 1 SCC 63.
424 [2025] 12 S.C.R.

Supreme Court Reports

23.3. Under the 1996 Act, the power of the arbitrator to grant
interest is governed by the statutory provision in Section
31(7). This provision has two parts. Under clause (a), the
arbitrator can award interest for the period between the
date of cause of action to the date of the award, unless
otherwise agreed by the parties. Clause (b) provides that
unless the award directs otherwise, the sum directed to
be paid by an arbitral award shall carry interest @ 2%
higher than the current rate of interest, from the date of
the award to the date of payment.
23.4. The wording of Section 31(7)(a) marks a departure
from the Arbitration Act, 1940 in two ways : first, it does
not make an explicit distinction between pre-reference
and pendente lite interest as both of them are provided
for under this sub-section; second, it sanctifies party
autonomy and restricts the power to grant pre-reference
and pendente lite interest the moment the agreement bars
payment of interest, even if it is not a specific bar against
the arbitrator.12
23.5. The power of the arbitrator to award pre-reference and
pendente lite interest is not restricted when the agreement
is silent on whether interest can be awarded13 or does not
contain a specific term that prohibits the same14.
23.6. While pendente lite interest is a matter of procedural
law, pre-reference interest is governed by substantive law.15
Therefore, the grant of pre-reference interest cannot be
sourced solely in Section 31(7)(a) (which is a procedural

12 Sayeed Ahmed & Co. v. State of U.P., (2009) 12 SCC 26, paras 14, 23, 24 : (2009) 4 SCC (Civ) 629;
Union of India v. Saraswat Trading Agency, (2009) 16 SCC 504 : (2011) 3 SCC (Civ) 499; Sree Kamatchi
Amman Constructions v. Railways, (2010) 8 SCC 767, para 19 : (2010) 3 SCC (Civ) 575; Union of
India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695, para 13 : (2015) 4 SCC (Civ) 702;
Reliance Cellulose Products Ltd. v. ONGC Ltd., (2018) 9 SCC 266, para 24 : (2018) 4 SCC (Civ) 351;
Jaiprakash Associates Ltd. v. Tehri Hydro Development Corpn. (India) Ltd., (2019) 17 SCC 786, paras
13-15 : (2020) 3 SCC (Civ) 605; Delhi Airport Metro Express (P) Ltd. v. DMRC, (2022) 9 SCC 286, paras
16-20, 24 : (2022) 4 SCC (Civ) 623.
13 Jaiprakash Associates Ltd. v. Tehri Hydro Development Corpn. (India) Ltd., (2019) 17 SCC 786, para
13.2.
14 Oriental Structural Engineers (P) Ltd. v. State of Kerala, (2021) 6 SCC 150, paras 15-18 : (2021) 3 SCC
(Civ) 548.
15 Central Bank of India v. Ravindra, (2002) 1 SCC 367, para 39 following State of Orissa v. G.C. Roy,
(1992) 1 SCC 508, para 43(v).
[2025] 12 S.C.R. 425

The State of Jharkhand v. The Indian Builders Jamshedpur

law), but must be based on an agreement between the
parties (express or implied), statutory provision (such as
Section 3 of the Interest Act, 1978), or proof of mercantile
usage16.
(emphasis supplied)

11. As issues relating to payment of interest arising under Section 31(7)
of the Act stand on a different footing from that of contractual clauses
excepting or prohibiting certain claims, we are of the opinion that the
judgment in Bharat Drilling (supra), relying on the judgment of this
Court in Port of Calcutta (supra), dealing with the principle of grant
of interest pendente lite, is not appropriate. Further, we are also of
the opinion that the approach adopted in Bharat Drilling (supra) is
not in tune with the principles laid down by this Court in the recent
decisions of Cox and Kings Ltd. v. SAP India Private Ltd.17, CORE
(supra) and In Re: Interplay Between Arbitration Agreements Under
Arbitration and Conciliation Act, 1996 and Stamp Act, 189918.
12. In view of the above discussion and in order to ensure clarity and
consistency, we are of the opinion that the ratio of Bharat Drilling
requires to be reconsidered. In this view of the matter, we direct the
registry to place our judgment and order before the Hon’ble Chief
Justice for appropriate orders for placing the matter before a larger
bench of appropriate strength.

Result of the case: Registry to place the judgment and order before
the Hon’ble Chief Justice for appropriate orders
for placing the matter before a larger bench of
appropriate strength.

†
Headnotes prepared by: Divya Pandey

16 Central Bank of India v. Ravindra, (2002) 1 SCC 367, para 39; Central Coop. Bank Ltd. v. S. Kamalaveni
Sundaram, (2011) 1 SCC 790, para 13 : (2011) 1 SCC (Civ) 331.
17 (2024) 4 SCC 1.
18 2023 SCC OnLine SC 1666.