Whether Arbitral Tribunal can grant a prohibited claim in a contract – Larger Bench to decide

Whether a prohibited claim in a contract applies only to the employer and not to the Arbitral Tribunal – Matter to be decided by larger bench of Supreme Court

In a recent judgment, the Hon’ble Supreme Court has held that in Bharat Drilling case 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

ABCAUS Case Law Citation:
4911 (2025) (12) abcaus.in SC

In the instant case, State Government had challenged the order of the High Court pertaining to an arbitration award.

In the instant case, the contract between the State and the claimant carried a clause prohibiting claim for idle labour, idle machinery or for business loss. The Arbitral Tribunal allowed certain claims prohibited by the contract clauses but the Civil Court set aside such claims the ground that they were specifically prohibited under the contract between the parties.

Aggrieved by the decision of the Civil Court, the claimant filed Section 37 appeal under Arbitration and Conciliation Act, 1996. The High Court allowed the claim in view of the decision of the Hon’ble Supreme Court in Bharat Drilling case that an excepted clause or a prohibited claim in a contract applies only to the employer and not to the Arbitral Tribunal.

The State submitted 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 the Apex Court in Bharat Drilling.   The State expressed a serious concern that the decision in Bharat Drilling is being applied, regularly and wrongly, to interpret prohibitory claim clauses in all Government contracts.

It was submitted 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.

The Division Bench of the Hon’ble Supreme Court opined that Bharat Drilling case 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.

The Division Bench opined that as the 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, the judgment in Bharat Drilling, relying on another judgment of the Apex Court dealing with the principle of grant of interest pendente lite, was not appropriate. Further, the approach adopted in Bharat Drilling was not in tune with the principles laid down by the Apex Court in the recent decisions.

Accordingly, their Lordships held that the ratio of Bharat Drilling requires to be reconsidered and directed the registry to place the judgment before the Hon’ble Chief Justice for placing the matter before a larger bench of appropriate strength. 

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