Indian Jurisprudence On Clauses Restricting Contractor’s Claims

Introduction

Exclusion clauses are contractual clauses that bar or restrict contractors from claiming damages for employer-caused delay, idling, price escalation, loss of profit, or interest and are now a near-ubiquitous feature of public works and infrastructure contracts in India. The exclusion clauses aim to limit the contractor's right to claim compensation despite employer-caused delays, restricting remedies solely to time extensions sit at the intersection of freedom of contract and mandatory remedial norms under the Indian Contract Act, 1872. This article examines the evolving jurisprudence through recent Supreme Court and High Court decisions, revealing a complex and sometimes contradictory legal landscape.

The Supreme Court's Evolving Position

The Supreme Court has historically recognized the validity of exclusion clauses based on the principle of freedom of contract.¹ In the landmark 1955 case of Seth Thawardas Pherumal v. Union of India², the Court held that contractual clauses exonerating parties from claims arising from breach are valid and enforceable. In this case Clause 6 of the Contract provided that the Public Works Department would not be responsible for claims ‘for idle labour or for damage to unburnt bricks due to any cause whatsoever’. Since damage to unburned bricks was specifically excluded from the contract, the Supreme Court held that the contractor could not seek damages for PWD's violation. The Court underlined that parties cannot repudiate an agreement just because it no longer suits or benefits them.

Post that the Supreme Court's has had a similar approach in several cases including the  most recent case of  M/s. C & C Constructions Ltd. v. IRCON International Ltd. ³, which firmly upheld the enforceability of exclusion clauses. The dispute concerned Clause 49.5 of the General Conditions of Contract, which explicitly barred contractors from claiming damages for employer-caused delays, limiting their remedy to reasonable extension of time Despite the contractor's claims for ₹44.11 crores in damages, the Arbitral Tribunal, Delhi High Court under Section 34 and 37 appeal of the Arbitration and Conciliation Act,1996, and ultimately the Supreme Court rejected the claims based on Clause 49.5.

The Supreme Court ruled that because the contractor had repeatedly invoked Clause 49.5 for extensions of time and had given written undertaking not to make claims that are contrary its terms, it was barred from contesting the clause's validity. Justices Abhay S. Oka and Ujjal Bhuyan observed that "by conduct, the appellant was estopped from challenging the validity of clause 49.5". The Court refused to entertain arguments that the clause violated Sections 23 and 28 of the Contract Act, noting these contentions were not raised before lower courts and could not be raised for the first time in the Supreme Court.This decision reinforces the principle that limitation of liability clauses are legally valid and enforceable, particularly when parties have explicitly agreed to them during contract execution.

A reference was made to the cases of ONGC v. Wig Brothers Builders and Engineers (P) Limited⁴, where the Supreme Court held that when a contract specifically bars claims for damages on account of delay and provides only for extension of time, an arbitrator exceeds jurisdiction by awarding compensation contrary to the express prohibition and Ramnath International Construction (P) Ltd. v. Union of India⁵, where the Supreme Court upholding a similar clause held that such contractual terms are binding, and arbitrators who ignore these express bars exceed their jurisdiction.

The Contrarian Approach: Delhi High Court

In the landmark judgment of  Simplex Concrete Piles (India) Limited v. Union of India⁶, Justice Valmiki J. Mehta carved out a significant exception to the enforcement of exclusion clause  based on public policy considerations. The case posed a fundamental question that whether contractual clauses disentitle a person from claiming damages which they are otherwise entitled to under Sections 55 and 73 of the Contract Act, and can a person guilty of breach prevent the aggrieved party from claiming damages by contractual stipulation?

The Delhi High Court held that clauses barring contractors from claiming damages which they are entitled to claim by virtue of Sections 55 and 73 are void under Section 23 of the Contract Act as being violative of public policy. Justice Mehta reasoned that although laws created for the benefit of an individual may be disregarded, rights resulting from those laws cannot be disregarded when they contain elements of public interest or public policy. The Court underlined that Sections 55 and 73, which deal with breach of contract, are the core, cornerstone, and basis of the Contract Act. Allowing provisions that undermine the contract itself undermines the fundamental reason it exists and is of serious public interest.

The Simplex principle was subsequently followed and expanded in MBL Infrastructure Ltd. v. Delhi Metro Rail Corporation⁷ ,where Justice Chandra Dhari Singh delivered another significant judgment. The  Clause 8.3 of the Contract provided that delays attributable to the employer would entitle the contractor only to reasonable extension of time, with no monetary claims payable. Despite the Arbitral Tribunal's finding that DMRC was responsible for delays and had wrongfully terminated the contract, the Tribunal denied damages based on Clause 8.3.

Justice Chandra Dhari Singh held that "a clause that restricts the right of the contractor to seek damages for delay attributable to the employer is against public policy in terms of Section 23 of the Indian Contract Act". The Court ruled that such clauses are "prohibitionary in nature and against the fundamental policy of Indian Law". The Court held that exclusion clauses "are no fetter on the power of the arbitral tribunal to compensate, by way of unliquidated damages, a party that has suffered loss due to the delay attributable to the other party".

The Court further reasoned that the tribunal must not refuse compensation just because the agreement forbids or does not provide for damages, and that once it determines the employer's liability for delays, it must grant damages to the contractor. Especially in cases where the employer has already terminated the contract, rendering time extensions pointless because there is no more work to be done.

The  Middle Ground : reconciling the Conflict

A more recent Delhi High Court decision in M/S Larsen & Toubro Limited v.  Rail Vikas Nigam Limited ⁸ demonstrates a nuanced middle ground. In this case  Justice Manoj Kumar Ohri held that provisions which give employers an upper hand in pursuing damages cannot be challenged under Section 34 of the Arbitration Act if those provisions were not challenged before the Arbitral Tribunal or at the time the contract was formed or carried out.

 The Court ruled that when parties do not raise objections at the proper time, it is assumed that they have knowingly included such clauses. According to this decision, contractors are under an obligation to challenge unconscionable terms at the earliest available opportunity during the negotiation, execution, or at the least before the Arbitral Tribunal of the contract, even though exclusion clauses may be scrutinized by public policy. Based on the acquiescence principle, post-award belated challenges may be deemed time-barred.

Even in cases where the Supreme Court has upheld exclusion clauses, it has recognized certain exceptions where contractors can claim compensation despite prohibitory provisions. In K.N. Sathyapalan v. State of Kerala,⁹the Supreme Court held that ordinarily, parties are bound by agreed contract terms, but when one party cannot fulfill its obligations under the contract, directly affecting the other party's work, the arbitrator has authority to compensate the second party for extra costs incurred due to the first party's failure.

The Court identified specific circumstances where compensation may be claimed despite exclusion clauses:

“(i) if the contractor repudiates the contract exercising rights under Section 55 of the Contract Act; (ii) the employer grants extension of time by supplemental agreement clarifying that escalation of rates or compensation for delay would be permissible; or (iii) if the contractor notifies that escalation or compensation must be made and the employer accepts performance despite delay and such notice.”

Similarly, in Asian Techs Ltd. v. Union of India¹⁰ , the Supreme Court held that disputes regarding who is responsible for delays and the repercussions of such delays are arbitrable matters, and arbitrators have jurisdiction to determine whether delays entitled contractors to compensation for escalation of cost. The apex court further held that the exclusion clause does not restrict the arbitrators right to award damages in case of delay on the part of the authority but merely prohibits the authority from paying damages unless directed otherwise.

Practical Implications and Future Directions

From the above  analysis it can concluded that exclusion clauses poses serious uncertainties  for both employers and contractors.  Where the Supreme Court's adherence to freedom of contract is likely to uphold well-written exclusion clauses, especially when contractors have used them without raising any issues during contract performance.

However, the public policy doctrine of the Delhi High Court, which has its roots in Simplex and MBL Infrastructure, establish a different avenue for contesting unconscionable exclusion clauses that completely extinguish the rights under Sections 55 and 73.Thus, acknowledging that strict enforcement of one-sided exclusion clauses may violate basic rights of  equity and justice in construction contracts with notable power imbalances, especially in government contracts.

The evolving landscape suggests a potential middle ground, exclusion clauses might be enforceable when fairly negotiated between parties with equal bargaining power and when they offer reasonable alternative remedies. However, courts could reject one-sided clauses in adhesion contracts that completely protect employers from the results of their breaches. This is especially true if such protection goes against basic contractual principles outlined in the Indian Contract Act. This balanced method would maintain contractual freedom while guarding against unfair practices, ultimately serving justice and fairness in construction contract disputes.

Footnotes

1 Seth Thawardas Pherumal v. Union of India, 1955 1 SCC 372; M/s. C & C Constructions Ltd. v. IRCON International Ltd, 2025 4 SCC 234; Maharashtra State Electricity Board, Bombay v. Sterlite Industries (India) Limited, AIR 2000 Bom 204 etc.

2 Seth Thawardas Pherumal v. Union of India, 1955 1 SCC 372.

3 M/s. C & C Constructions Ltd. v. IRCON International Ltd, 2025 4 SCC 234.

4 ONGC v. Wig Brothers Builders and Engineers (P) Limited, 2010 13 (SCC) 377.

5 Ramnath International Construction (P) Ltd. v. Union of India, 2007 2 (SCC) 453.

6 Simplex Concrete Piles (India) Limited v. Union of India, 2010 SCC OnLine Del 23.

7 MBL Infrastructure Ltd. v. Delhi Metro Rail Corporation, 2023 SCC OnLine Del 8044.

8 M/S Larsen & Toubro Limited v.  Rail Vikas Nigam Limited, O.M.P. (COMM) 278/2017.

9 K.N. Sathyapalan v. State of Kerala ,2007 13 SCC 43.

10 Asian Techs Ltd. v. Union of India,2009 10 (SCC) 354.

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