Contractual Clauses barring State of Contractor Claims no bar to Arbitrator's Power: SC

The Supreme Court has held that contractual prohibitions barring state departments from entertaining specific contractor claims do not fetter the jurisdiction of an arbitrator to grant relief for losses suffered. Reaffirming the strict boundaries of judicial interference in arbitral matters, the Supreme Court has set aside a High Court judgment that invalidated reasoned arbitral awards on the ground of contractual prohibitions.

A bench comprising Justice Markandey Katju and Justice Asok Kumar Ganguly allowed a batch of civil appeals challenging the common order of the High Court of Jharkhand. The Apex Court restored three arbitral awards issued in favour of the contractor while outlining the limits of judicial intervention under Section 37 of the Arbitration & Conciliation Act, 1996.

Court's Rationale On Contractual Prohibitions And Arbitral Awards

The Supreme Court observed that contractual provisions barring the department from entertaining certain claims do not automatically restrict the scope of arbitration. Distinguishing precedents cited regarding interest claims, the Apex Court emphasized that statutory provisions governing interest payments operate on a different footing than principal damages. The Bench observed that "It has been held by this Court in the case of Ispat Engineering & Foundary Works, B.S. City, Bokado Vs. Steel Authority of India Ltd., B.S. City, Bokado (2001) 6 SCC, 347 (para 4) that the scope of interference by the Court with a reasoned award is very limited."

Addressing the state's reliance on precedents dealing with interest prohibitions, the bench noted that Section 31(7) of the Arbitration & Conciliation Act, 1996 explicitly allows parties to agree otherwise on interest, making such precedents inapplicable to principal claim disputes.

Background

The dispute arose out of three contracts between the contractor and the State of Jharkhand. Due to differences between the parties, the matters were referred to an arbitrator, who rendered three separate awards dated September 30, 2000. These awards were made Rule of Court by the Sub-Judge, Hazaribagh, on January 8, 2002.

The State of Jharkhand preferred appeals under Section 37 of the Arbitration & Conciliation Act, 1996 before the Jharkhand High Court. The High Court partly allowed the appeals, holding that the claims awarded by the arbitrator were barred under contractual clause 1.21, which restricted departmental entertainment of claims for idle labour, machinery, business loss, or delays.

Challenging the Jharkhand High Court's ruling, the appellant relied on Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age ( "(1996) 1 SCC 516": 1995 CaseBase(SC) 662) to contend that departmental restrictions under contracts do not bind arbitrators. Conversely, the State placed reliance on Sayeed Ahmed & Co. Vs. State of U.P & Ors. under the Arbitration & Conciliation Act, 1996. The Supreme Court distinguished Sayeed Ahmed & Co. Vs. State of U.P & Ors. as it related strictly to interest claims under Section 31(7) of the Arbitration & Conciliation Act, 1996, whereas the current dispute pertained to principal amounts. Relying on Ispat Engineering & Foundary Works, B.S. City, Bokado Vs. Steel Authority of India Ltd., B.S. City, Bokado ( "(2001) 6 SCC, 347 (para 4)": 2001 CaseBase(SC) 2484), the Supreme Court held that the High Court erred in interfering with the reasoned awards. Consequently, the Supreme Court set aside the High Court's judgment and restored the arbitral awards in full.

Case Details:
Case No.: Civil Appeal No. 10216 of 2003 with Civil Appeal Nos. 10217/2003 and 10214/2003
Case Title: Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand & Ors.

Source: 2009 CaseBase(SC) 974