Contractual freedom is not absolute, and prohibited claims arising out of party autonomy should not be treated as incontestable, writes advocate Pareekshit Bishnoi
Party autonomy is a cardinal jewel of contractual law and is likewise seen as a glittering jewel of arbitration law. This autonomy gives parties the ability to voluntarily define their contractual terms. In the context of arbitration law, this liberty allows the parties to even choose the procedural and the governing law of their choice. In short, party autonomy gives the choice to parties to agree or disagree, to include and exclude certain rights or obligations while entering into a contract.
Since parties can agree to exclude certain facets from the contract, i.e. the jurisdiction of a forum or the right to raise claims such as idle labour or loss of profit, contractual clauses to this effect are known as excepted clauses or prohibitory clauses. When a clause prohibits a party from raising certain claims such as loss of profit, variation claims, idle labour, etc., which that party would otherwise have the right to raise, these are generally referred to as excepted claims or prohibited claims.
Party autonomy is, however, always competing against and being counter-balanced by the “public policy” of the time and country. The former cannot override the latter, and adjudicatory forums often endeavour to bring harmony between the two. One such instance of public policy versus party autonomy arises while considering the question of whether the court or an arbitral tribunal can award excepted or prohibited claims.
Party autonomy wins
As far back as 1955, in Seth Thawardas Pherumal v Union of India, the Supreme Court upheld a clause barring a claim for idle labour. Similarly, in decisions such as Sri Chunilal V Mehta and Sons Ltd v The Century Spinning and Manufacturing Company Ltd (1962), and Ramnath International Construction Pvt Ltd v Union of India (2007), clauses limiting the liability to a certain fixed sum and clauses incorporating specific or alternative reliefs against specific breaches, i.e. extension of time in case of delay, have been recognised as valid and enforceable by adjudicatory authorities. More recently, in 2024, Delhi High Court in Plus 91 Security Solutions v NEC Corporation India Private Limited, 2024 SCC OnLine Del 5114 upheld the setting aside of the award of damages for loss of profits, since the same was prohibited under the contract. The said decision is presently pending adjudication before the Supreme Court.
Wins for public policy
On the contrary, Bharat Drilling & Foundation Treatment Pvt Ltd v State of Jharkhand and Ors (2009) is often cited to argue that an arbitral tribunal can award excepted claims. Citing Bharat Drilling, the Supreme Court, in Asian Techs Limited v Union of India & Ors (2009), reiterated that the arbitrator is not barred from entertaining claims for delay.
Delhi High Court, while expounding the legal position on the issue in Simplex Concrete Piles (India) Ltd v Union of India (2010), noted the conflict between Ramnath International and Asian Techs. It aligned with the approach of the latter, finding that the clause prohibiting the contractor from raising claims arising from the delay caused by the employer/Union of India was hit by the element of public policy under section 23 of the Indian Contracts Act, 1872 (ICA).
Current legal position
However, recently, the Supreme Court, in State of Jharkhand v The Indian Builders Jamshedpur (2025), stressed party autonomy in relation to prohibited claims and referred the issue of whether the arbitral tribunal can award claims prohibited in a contract between the parties to a larger bench. The court also observed that Bharat Drilling was not an authority on the proposition.
While highlighting party autonomy, the Supreme Court observed that “contractual clauses that limit claims are founded on freedom to contract. They are agreements that crystallise informed choices of parties”. The court found further support from Pam Developments Private Limited v State of West Bengal (2024), where the Supreme Court, while upholding a part of the judgment of the high court, observed:
“In fact, the high court did what the arbitrator should have done. Examine what the contract provides. This is not even a matter of interpretation. It is the duty of every arbitral tribunal and court alike and without exception, for contract is the foundation of the legal relationship. Having considered the above-referred clauses in the contract, the high court came to the conclusion that awarding any amount towards idle machinery, etc., is prohibited under the ‘special terms and conditions’ of the contract … the high court, exercising jurisdiction under section 37, did its duty, and we are of the opinion that the conclusions of the high court are correct and cannot be interfered with.”
Personal analysis
It may be noted that while referring the issue to the above-mentioned larger bench, the Supreme Court suggested a preliminary inclination that prohibited claims are permissible, considering the existence of “party autonomy”. Although, the issue is sub judice (under judicial consideration), in the author’s opinion, it requires close examination beyond the contours of party autonomy, i.e. through the lens of “public policy” as encapsuled under sections 23 and 28 of the ICA, and in the absence of phrases such as “unless otherwise provided by the parties” in section 73 of the ICA.
Firstly, section 23 of the ICA provides that an agreement defeating a provision of law or opposed to public policy is unlawful and void. In the above-mentioned case, Delhi High Court, in Simplex, had already found clauses prohibiting a contractor’s claims despite the employer’s delay as void under section 23 of the ICA.
The court further observed that the right to claim damages under section 73 of the ICA has a public interest and public policy element, and hence cannot be waived. The same view was echoed in MBL Infrastructures v Delhi Metro Rail Corporation (2023).
Secondly, it may be noted that, like section 23, section 28 of the ICA also has a public policy element. It declares that every agreement that absolutely restricts a person from “enforcing his/her rights under or in respect of any contract” in courts of law is “void to that extent”.
A contract may give rise to single or multiple rights and obligations. For instance, one litigation may principally involve a claim just for recovery of money, whereas a construction dispute may involve multiple claims such as defects, variation claims, idle labour, loss of profit, etc. Since a contract can give rise to multiple claims, an absolute contractual prohibition from raising any one claim, unless statutorily allowed, would fall foul of section 28 of the ICA.
In cases where the principal relief sought by a party is singular, i.e. recovery of money, a contractual bar on claiming the same would amount to effectively barring any relief or remedy. The fact that section 28 only declares the infected clause – “to that extent” – as void itself shows that the provision anticipated and safeguards against such mischief.
Third, it is pertinent to note that section 31(7) of the Indian Arbitration Act allows parties to bar the claim of interest through the phrase “unless otherwise agreed by the parties”. Similarly, sections such as 43, 131, 137, 146, 163, 165, 170, 171, 174, 202, 221 and 230 of the ICA recognise party discretion through phrases such as “in the absence of any contract to the contrary”, or “in the absence of an express contract”. However, unlike them, the legislature did not use the phrase “unless otherwise agreed by the parties” in section 73 of the ICA, possibly due to public policy considerations as indicated in Simplex.
Finally, while examining the invalidity of contractual clauses, the courts have often examined the nature of the contract, i.e. whether it is a standard form contract, and the nature of the party, i.e. whether a corporate entity or an individual. Alongside, the courts have subjected party autonomy to the test of principles such as inequality in bargaining power and abuse of dominant position to assess reasonability.
Conclusion
It is difficult to countenance a blanket proposition that once an agreement prohibits or excepts certain claims, the courts or arbitral tribunals cannot award any relief in respect of those claims. The same is neither desired nor required. In disputes being adjudicated through arbitration, it is true that section 28 of the Indian Arbitration Act states that, “while deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract”.
However, taking the terms of a contract into account does not mean being bound by them, much less without public policy considerations.
To iron out the conflict, it appears apt to suggest that clauses prohibiting certain claims should be examined by courts or arbitral tribunals, as the case may be, on the facts and circumstances of each case through the test of public policy, as provisioned under sections 23, 28 and 73 of the ICA, and principles such as inequality in the bargaining power and the abuse of dominant position.
Pareekshit Bishnoi is an advocate practising before the Supreme Court and Delhi High Court, and the founder of Litigating Hand, a legal aid organisation.
