Contractual Limits on Arbitral Power: The Supreme Court’s Reconsideration of Bharat Drilling
1. Introduction
Whether or not arbitral tribunals may award claims that are expressly barred by the contract is a question that Indian arbitration jurisprudence has repeatedly struggled with. Despite arbitration being rooted in party autonomy, over the past fifteen years, Indian courts have, at several occasions, enabled tribunals to bypass no-claim clauses on grounds of equity.
Much of this confusion can be attributed to the Supreme Court’s decision in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand (2009) which interpreted no-claim clauses as binding on the employer only and not on the arbitral tribunal.
In its decision dated December 5, 2025, the Supreme Court in The State of Jharkhand v. The Indian Builders, Jamshedpur, referred Bharat Drilling to a Larger Bench. The referral recognizes that the current approach has deviated significantly from the very intent of the Arbitration and Conciliation Act, 1996, which treats party consent and minimal judicial intervention as central to the arbitral process. In practice, this approach has allowed arbitrator overreach, thus making the State vulnerable to financial risks from awards on barred claims.
This article traces the origins of this controversy, examines the reasoning underlying the 2025 referral and reflects on its broader administrative and economic implications.
2. The Bharat Drilling Error and the Doctrinal Conflict it Generated
The dispute that triggered the 2025 referral was the result of an arbitral award in which the tribunal granted claims that were expressly prohibited by the clauses of a government contract. These included claims for idle labour, idle machinery, and loss of profits. The Civil Court acting under Section 34 of the Arbitration and Conciliation Act, 1996 set aside these claims for violating the contractual terms. However, the Jharkhand High Court, relying upon the Court’s earlier decision in Bharat Drilling, restored the award without undertaking a clause by clause analysis of the aforementioned contract. Aggrieved by this, the State of Jharkhand appealed to the Supreme Court stating that the ratio of Bharat Drilling was being applied “regularly and wrongly, to interpret prohibitory claim clauses in all Government contracts”.
It was this mechanical reliance on Bharat Drilling that led the Supreme Court to identify a doctrinal error in the 2009 judgment. In Bharat Drilling, the Supreme Court compared contractual prohibitions on claims with the tribunal’s statutory power to award interest under Section 31(7) of the Arbitration and Conciliation Act, 1996, citing The Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age. However, in the 2025 ruling, the Bench clarified that drawing such an analogy was incorrect. The power to award interest flows from statute and applies unless the parties agree otherwise. In contrast, contractual prohibitions reflect the consent of the parties and define the limits of the tribunal’s jurisdiction. By equating contractual prohibitions with statutory powers, Bharat Drilling led tribunals to view no-claim clauses as limitations on the employer alone, and not on their own jurisdiction. The 2025 Bench corrected this approach by reaffirming that arbitral authority is derived from, and limited by the agreement between the parties, and therefore, clear contractual bars cannot be disregarded.
3. Reasserting Contractual Supremacy in Indian Arbitration
In addition to correcting the specific doctrinal error, the 2025 referral reflects a broader judicial attempt to restore contractual primacy in Indian arbitration. Ever since the 2015 amendments to the Arbitration Act, the Supreme Court has consistently emphasised party autonomy as a guiding principle. The Supreme Court, in Cox and Kings Ltd v. SAP India Pvt Ltd, while examining the group of companies doctrine, reaffirmed that arbitral jurisdiction must be grounded in party consent. More recently, while dealing with unilateral appointment of arbitrators in government contracts in Central Organisation for Railway Electrification (CORE), the Court held that the procedural framework chosen by the parties must be strictly adhered to.
This emphasis on party autonomy is also embedded in the statutory framework of the Arbitration and Conciliation Act, 1996. Section 5 establishes the principle of minimal judicial intervention and acknowledges that arbitration derives its legitimacy from party control rather than adjudicatory discretion. Consequently, an arbitral tribunal is a creature of contract, deriving its authority solely from the agreement between the parties. Although Section 16 upholds the Kompetenz–Kompetenz principle and allows tribunals to rule on their own jurisdiction, this power operates only within the contractual limits consented to by the parties.
The 2025 referral situates contractual prohibitions squarely within this framework. This implies that clauses that exclude certain claims do not simply limit liability, but also define the scope of disputes the parties have agreed to submit to arbitration. If the tribunal’s jurisdiction comes from the contract, it follows that express no-claim clauses set the outer limits of that jurisdiction. The tribunal’s task is therefore to enforce these limits, not to override them on equitable considerations.
The referral further harmonises Indian arbitration law with prevailing international practice. In jurisdictions such as England and Singapore, arbitral tribunals follow a strict contractual approach that prevents arbitrators from disregarding exclusion clauses unless they violate statute or public policy. Even under international commercial arbitration, based on the UNCITRAL Model Law, the determination of jurisdiction is predicated upon the consent of the parties. In this context, India’s post-Bharat Drilling approach represented a departure from international practice, allowing equity-based considerations to dilute clear contractual limits on arbitral power. The 2025 referral signals a return to this consent-based model and thus sustains the position of India as a jurisdiction aligned with Model Law principles.
4. Public Procurement and Fiscal Governance: Broader Implications
The 2025 referral also has important implications for public sector contracting and fiscal governance. Government contracts often contain “no-claim” or “excepted” clauses as tools for mitigating risks and achieving more predictable budgets. However, the misapplication of Bharat Drilling to bypass these bars has created substantial, unbudgeted liabilities, as is evident in several recent cases.
In infrastructure and procurement disputes, large awards for idle machinery, overheads, or lost profits, despite being contractually excluded, have contributed to this fiscal unpredictability. In Union of India v. M/S Chiraj Stock & Security Pvt. Ltd., the Delhi High Court upheld an arbitral award of nearly ₹8 crore with interest, despite the claims being excepted by the contract. Similarly, in K.S.Baburaj & Anr. v. Union of India, the Madras High Court restored awards amounting to over ₹1.69 crore by bypassing the Railways’ contractual protections. A similar approach was undertaken by the Delhi High Court in MBL Infrastructures v. DMRC.
These instances are indicative of how the current legal landscape forces government entities to incur liabilities they specifically sought to exclude. For departments falling under fiscal responsibility norms such as FRBM (Fiscal Responsibility and Budget Management), such unbudgeted payouts may disrupt the accuracy of budgetary allocations. This uncertainty affects not only financial planning but also confidence in arbitration as a reliable dispute resolution mechanism.
This backdrop helps explain the emergence of several notable administrative developments such as the Ministry of Finance’s 2024 “Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement.” The Ministry, through these guidelines, advised departments to adopt a cautious approach in resorting to arbitration in disputes exceeding ₹10 crore and suggested alternatives such as mediation or litigation. Following these guidelines, the Public Works Department (PWD) in Delhi issued a notification in early 2025 removing arbitration clauses from future tenders and introducing procedural safeguards for handling awards arising under existing contracts. In July 2025, in an effort to undertake a systematic review of financial exposure arising from arbitration, a follow up order directed infrastructure departments to compile records of arbitrations that resulted in awards exceeding ₹1 crore. These measures indicate not a mere procedural adjustment, but a degree of institutional withdrawal from arbitration.
Against this policy landscape, the Supreme Court’s 2025 referral assumes particular importance. By emphasising that express contractual prohibitions define the limits of arbitral jurisdiction, the Court’s referral could help create a more predictable environment for dispute-resolution. This would enable procurement agencies to better anticipate potential liabilities.
5. Conclusion
Bharat Drilling’s referral to a Larger Bench is a corrective milestone in the development of India’s arbitration jurisprudence. The referral seeks to resolve the confusion created by the 2009 judgment by distinguishing between powers derived from statute and jurisdiction arising from the parties’ contract. It also clarifies that prohibitory clauses form the jurisdictional boundary of the arbitral process and therefore, arbitrators cannot rely on equitable considerations to adjudicate claims which the parties have expressly excluded. This newfound clarity reconciles Indian arbitration law with international best practices and reinstates the contractual certainty necessary for public contracting.
Beyond doctrinal clarity, the referral also carries important fiscal and administrative implications. In recent years, there has been a loss of confidence in arbitration as a viable dispute resolution mechanism for government entities due to excessive financial burden imposed by arbitral awards on state governments. However, by intervening the Court seeks to ensure that public funds are not exposed to liabilities the government explicitly refused to undertake.
Ultimately, the Larger Bench’s decision will determine whether Indian arbitration privileges contractual autonomy and fiscal discipline, or continues to accommodate equity-based departures from express contractual limits. The stakes are therefore not merely doctrinal but institutional, affecting both the credibility of arbitration and integrity of public finance. Until this issue is conclusively settled, the referral serves as a reminder to tribunals and courts to exercise caution in relying upon past decisions like Bharat Drilling.
*Tanvesha is a student from Institute of Law, Nirma University.