Exclusionary Clauses and Party Autonomy: Re-Reading Bharat Drilling Through Beckfield Drilling

[Mansi is a student at Hidayatullah National Law University, Raipur.]

Exclusionary clauses are contractual provisions by which one party seeks to exclude or limit the liability for categories of claims. In public infrastructure contracts, such clauses bar claims for delay, idle labour, escalation etc. 

The Supreme Court of India (SC) recently referred its decision of Bharat Drilling v. State of Jharkhand (Bharat Drilling) to a larger bench. Bharat Drilling has often been cited for the proposition, that an arbitral tribunal is not bound by an exclusionary clause. However in State of Jharkhand v. The Indian Builders (Indian Builders), a coordinate bench of the SC, has expressed reservations about this understanding.  This referral reopens the debate whether exclusionary clauses merely regulate inter se rights, or also constrain an arbitral tribunal’s authority to award damages. At the same time, the SC in ONGC v. G&T Beckfield Drilling (Beckfield Drilling) has affirmed an interpretive approach while deciding a contractual bar on the award of interest.

This piece argues Bharat Drilling can be defended through the interpretive logic adopted in Beckfield Drilling. Bharat Drilling does not undermine the principle of freedom of contract. Its ruling reflects a reluctance in treating broadly worded exclusionary clauses as a bar on power to award damages. It is argued that courts should adopt a stricter approach to exclusionary clauses for two reasons, first, the statutory foundation of remedies under the Indian Contract Act 1872 (ICA); and second, the standard-form nature of public contracts, where meaningful bargaining power is often absent. 

The Law on Exclusionary Clauses

In Ramnath International Construction, the SC upheld the setting aside of award which awarded compensation for delay, when the contract contained a no-claim clause barring such compensation and limited the remedy to extension of time (EOT). Similarly, in ONGC v. WIG Bros. Builders, it was held that the tribunal exceeded its jurisdiction by awarding damages despite an express bar that limited the remedy to mere extension of time. A reasonable inference from the logic behind these decisions is that once parties had contractually agreed to forego compensation and agree only to EOT, the tribunal was bound to give effect to that bargain. 

In Bharat Drilling, the contractual clause in question barred certain claims for compensation arising from delay and departmental conduct. The High Court had set aside the arbitral award on the ground that these claims were contractually prohibited. The SC restored the award, but without articulating the reasoning or analysing the clause. However, over time, it came to be cited for the proposition that exclusionary clauses bind only the parties and not the arbitral tribunal. Therefore, in Indian Builders, the SC has the issue to a larger bench for determination. Against this backdrop, the decision of Beckfield Drilling, though rendered in the context of a clause barring award of interest assumes significance. 

The Ruling of Beckfield Drilling

In this case, the clause barred the payment of interest by ONGC to the contractor in delayed or disputed payments The arbitral tribunal nevertheless awarded pendente lite interest, which was subsequently challenged. 

Interestingly, the court did not treat the existence of a no interest clause as dispositive. After analysing decisions such as Sayyed Ahmed, Reliance Cellulose, Tehri Hydro, the court noted that while parties are free to contract out of interest, such exclusion, in order to operate on the arbitral tribunal as well, must be clear to that effect. The clauses in Sayyed Ahmed and Tehri hydro were cast in sweeping terms, “no claim for interest or damage…. in any respect whatsoever.” By contrast, the clause in Beckfield Drilling was narrower, “No interest shall be payable by ONGC on any delayed claim..” It did not employ a language extinguishing all claims for interest. Therefore, the court held that a clause “merely barring award of interest on delayed payment by itself will not be readily inferred as a bar to award pendente-lite interest by the arbitral tribunal.” In the absence of language evincing an intention to bind the arbitrator, the tribunal’s power under Section 31(7) of the Arbitration and Conciliation Act 1996 (A&C Act) remained intact. 

Re-reading Bharat Drilling through Beckfield Drilling

Applying the reasoning of Beckfield to exclusionary clauses leads to a similar conclusion.  Just as a mere contractual bar on interest does not extinguish the tribunal’s statutory power under Section 31(7), a bar on compensation or damages cannot be assumed to curtail arbitral authority. The operative question must be whether the clause expressly evinces an intention to bind the arbitral tribunal itself. In the absence of a clear language, the tribunal’s power to adjudicate claims arising breach remains intact. Moreover, similar to Section 31(7), the power of an arbitral tribunal to award damages has a statutory basis in Sections 73 and 74 of the ICA and is therefore not a mere creature of the contract

Properly understood, Bharat Drilling does not (and cannot) say that exclusionary clauses are incapable of binding arbitral tribunals. The ruling is undeniably thin in its reasoning for want of analysis of the clause. To that extent, the criticism of Bharat Drilling is well-founded. However, when viewed through the interpretative lens of Beckfield Drilling, the outcome in Bharat Drilling becomes defensible, if not inevitable. Beckfield Drilling makes explicit what Bharat Drilling left implicit: that a contractual bar does not curtail arbitral powers unless the contract clearly manifests so. 

In Indian Builders, SC found fault with Bharat Drilling’s reliance on Port of Calcutta, since the latter dealt with the grant of pendente lite interest. With respect, this attempt is unpersuasive. The distinction appears to rest primarily on the statutory basis of interest under the A&C Act. However, the power to award damages is no less statutory in nature, flowing directly from Sections 73 and 74. Therefore, if statutory backing is the touchstone, damages stand on an equal footing with interest. To say otherwise, merely because grant of interest has its roots in Section 31(7) would be adopt an unduly formalistic distinction. Moreover, if the enforceability of exclusionary clauses is under scrutiny, their effect cannot logically vary depending on the forum of adjudication. A differentiation would introduce two incompatible standard, one for arbitration and another for litigation, a result inconsistent with the foundation premise that arbitration is a substitute for, not an exception to, adjudication under law.  

Party Autonomy in Exclusionary Clauses: Absolute or Bounded by Public Policy?

The concern articulated in Indian Builders, that reliance on Bharat Drilling may erode party autonomy, a central feature to arbitration, is not completely misplaced. Arbitration is founded on consent, and arbitral tribunals draw their authority from the contract between the parties. 

However, ICA has never treated party autonomy as an unqualified principle. In LIC v. CERC, the SC held that where contractual terms unreasonable, unfair or irrational, courts must examine the relative bargaining power of the parties. The court recognised that in standard-form contracts, the weaker party has no real opportunity to negotiate and is left with no option but to sign. Consent in such cases is often formal rather than meaningful. This concern is of particular salience in contracts involving State instrumentalities. As LIC v. CERC emphasises, such entities are constitutionally obliged to act in a manner that is fair, just, reasonable and in public interest. Therefore, contractual clauses that immunise them from breaches must withstand closer judicial scrutiny.  

It is pertinent to note that waiver of statutory rights must be intentional, informed and must not implicate public interest. As held in All India Power Engineer Federation v. Sasan Power Limited, waiver under Section 63 of the ICA is permissible if the such right is private in nature. The test, as envisaged in Lachoo Mal, Indira Bai, and Krishna Bahadur is that where public interest is involved, courts will not give effect to contractual waivers since they affect the public at large and not merely the contracting parties. This distancing assumes importance in the context of exclusionary clauses in public infrastructure contracts where enforcing them would amount to contractual arrangements inconsistent with substantive law and public policy. This has also been reflected in Simplex Concrete Piles v. UOI that such exclusionary clauses defeats public policy enshrined in Section 23 of the ICA. 

Conclusion

This referral raises a more foundational question in contract law and arbitration: what occupies a higher pedestal, absolute party autonomy or entitlement to a legal remedy upon breach?

Beckfield tells us that arbitrators’ powers are not extinguished lightly. If the award of interest, recognised expressly under Section 31(7) of the A&C Act cannot be taken away in absence of clear and unambiguous language binding the tribunal as well, it is difficult to argue that the power to award damages, that also has a statutory backing, stands on a weaker footing. To permit its exclusion through broadly worded or boilerplate clauses, without an inquiry into parties’ intent and fairness, risks hollowing out the remedial core of contract law itself.

This tension also exposes the limits of the often-invoked open eye doctrine; the assumption that parties who sign contracts do so with full knowledge and free consent. While this presumption may hold well in negotiated commercial contracts between equals, its application becomes deeply problematic in public infrastructure contracts. Contractors dealing with State instrumentalities, at least in India, rarely have an opportunity to negotiate the terms of a standard form tenders.

Arbitration cannot be reduced to a forum where contractual terms automatically silence statutory remedies. Party autonomy deserves respects where it reflects sincere consent. The task before the larger bench is to strike a principled balance so that autonomy does not come at the cost of justice.