Case Note & Summary
The State of Jharkhand appealed against the judgment of the Jharkhand High Court which allowed a Section 37 appeal under the Arbitration and Conciliation Act, 1996, restoring an arbitral award that had been partially set aside by the Civil Court. The dispute arose from a contract between the State and Indian Builders Jamshedpur. The Arbitral Tribunal, by award dated 19.04.2007, allowed certain claims including claim no. 3 (underutilised overheads), claim no. 4 (loss due to underutilised tools, plants and machinery), and claim no. 6 (loss of profit). The Civil Court set aside these claims under Section 34, holding that they were specifically prohibited by contractual clauses 4.20.2 and 4.20.4, which barred claims for idle labour, idle machinery, and business loss. The High Court, however, restored the award on these claims solely by relying on the Supreme Court's decision in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand and Ors. (2009) 16 SCC 705, without any independent analysis of the contractual clauses. The State argued that Bharat Drilling did not lay down a binding proposition that excepted clauses apply only to the employer and not to the Arbitral Tribunal, and that the decision was per incuriam. The respondent supported the High Court's decision. The Supreme Court examined the contractual clauses and found that the High Court had not considered them. It noted that Bharat Drilling had not examined similar contractual clauses and had merely set aside the High Court order without detailed reasoning. The Court observed that contractual clauses limiting claims are based on freedom to contract and party autonomy, which is central to the Arbitration Act. To obviate uncertainty and for a clear declaration of law, the Court referred the question of whether an excepted clause or prohibited claim binds the Arbitral Tribunal to a larger bench for reconsideration and authoritative decision.
Headnote
A) Arbitration Law - Excepted Clauses - Prohibited Claims - Party Autonomy - The issue is whether contractual clauses that prohibit certain claims (e.g., idle labour, business loss) bind the Arbitral Tribunal or only the employer. The Supreme Court, noting that Bharat Drilling (supra) did not examine the specific contractual clauses and may have been misinterpreted, referred the matter to a larger bench for authoritative decision on the applicability of excepted clauses to arbitral tribunals. (Paras 1-8) B) Arbitration Law - Section 34 and Section 37 - Setting Aside Award - The High Court under Section 37 restored the arbitral award on claims 3, 4 and 6 solely relying on Bharat Drilling without analyzing the contractual clauses. The Supreme Court found this approach erroneous as Bharat Drilling did not lay down a binding principle on the issue. (Paras 6-8)
Issue of Consideration
Whether the decision in Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand and Ors. (2009) 16 SCC 705 correctly holds that an excepted clause or a prohibited claim in a contract applies only to the employer and not to the Arbitral Tribunal.
Final Decision
The Supreme Court referred the matter to a larger bench for reconsideration and authoritative decision on the question of whether an excepted clause or prohibited claim in a contract applies only to the employer and not to the Arbitral Tribunal. The appeals are to be placed before the larger bench.
Law Points
- Excepted clauses in contracts bind the Arbitral Tribunal
- Party autonomy under Arbitration Act
- Section 34 and Section 37 of Arbitration and Conciliation Act
- 1996
- Interpretation of prohibitory claim clauses
