In a short but tense hearing on Friday, the Supreme Court questioned why its earlier order in Bharat Drilling was being casually used to override clear contractual restrictions in government contracts. The bench, speaking with unusual candour, said the confusion had persisted long enough and must be settled by a larger bench. The matter arose from a dispute between the State of Jharkhand and a Jamshedpur-based contractor over arbitral claims that the contract itself had expressly prohibited.
Background
The case reached the Supreme Court after the Jharkhand High Court restored arbitral claims-idle labour, underutilised machinery, and loss of profit-that the trial court had struck down. These claims were blocked by two blunt contractual clauses: no payment for idle labour or machinery, and no compensation for business loss. Despite this, the High Court allowed the contractor’s appeal merely by relying on the Bharat Drilling order, without analysing the contract wording or the arbitral reasoning.
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This, the State argued, had created a dangerous trend: contractors citing Bharat Drilling as a shortcut to bypass restrictive clauses that government departments routinely use to cap financial exposure.
Court’s Observations
The bench-Justices P.S. Narasimha and Atul Chandurkar-appeared visibly concerned about how far the precedent had travelled. “The decision in Bharat Drilling is being applied, regularly and wrongly,” State counsel Rajiv Shankar Dwivedi submitted, urging the Court to intervene even if it did not disturb the factual outcome of the present case.
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The judges agreed that something had gone off-track. While discussing party autonomy in arbitration, the bench noted that prohibitory clauses in contracts are not casual decorations but negotiated limits. “Contract is the foundation of the legal relationship,” the bench remarked, adding that an arbitral tribunal must begin-and often end-its analysis with the contract itself.
Referring to the earlier ruling, the Court noted that Bharat Drilling had relied on a case about interest payments, which is governed by a different statutory framework, and therefore could not automatically apply to claims expressly barred by contract. “The bench observed, ‘The approach in Bharat Drilling is not in tune with later authoritative decisions’.”
The High Court’s order did not impress the judges either. It had, they said, simply quoted Bharat Drilling and moved on, without examining why the contract prohibited the claims or how the arbitral tribunal justified ignoring those clauses.
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Decision
Finding that the legal position on such prohibited-claim clauses had become muddled, the Supreme Court formally referred the issue to a larger bench for authoritative determination. The judgment directed the Registry to place the matter before the Chief Justice for constituting an appropriate bench. The Court did not reopen the factual dispute but made it clear that the law needs uniformity and cannot depend on a reading of a brief earlier order.
Case Title: The State of Jharkhand vs. The Indian Builders Jamshedpur
Case No.: Civil Appeal Nos. 8261–8262 of 2012
Case Type: Civil Appeal (Arbitration – Challenge to Arbitral Award)
Decision Date: 05 December 2025