One of the most recurring issues in construction contracts, typically in public-works contracts, is the validity of ‘no-claim, no-damages’ clauses (‘exclusion clauses’), which take away the right of a contractor to claim compensation, in the event the contract is delayed by the employer.
Instead of compensation arising out of delay, Exclusion Clauses restrict the right of the contractor to seek only an extension of time.
We examine the validity of such Exclusion Clauses, and their treatment by Courts in India and abroad.
The first question which naturally arises is why contractors agree to such an unfair bargain. The answer perhaps lies in the report of the Law Commission of India on ‘unfair terms in contract’, which observes that “he has to accept the giant organisation’s offer, whether he likes the terms or not” [Chapter 2, 103rd Report of the Law Commission of India dated May 1984]. In our experience, such exclusion clauses are found not only in contracts awarded to smaller contractors but also in those awarded to market leaders. However, these contracts are often awarded through a tender process, leaving contractors with little opportunity to negotiate terms.
Section 73 of the Indian Contract Act, 1872 (‘Contract Act’) entitles an aggrieved party to claim compensation for loss or damage arising from a breach of contract. Further, under Section 55, where time is not of the essence, which is generally the case in construction contracts (even when there is an express provision to the contrary), the remedy for delay is limited to a claim for damages. Therefore, exclusion clauses may effectively deprive a contractor of its sole statutory remedy.
Courts in India have taken divergent views on the validity and consequences of Exclusion Clauses owing to various factors. The authors place these conflicting approaches in three separate buckets, along with some illustrative decisions:
(a) Freedom of Contract: In this bucket, the Courts have held the parties to be bound by the contract and its Exclusion Clause.
The Supreme Court in Seth Thawardas Pherumal v. Union of India [(1955) 1 SCC 372] construed an exclusion clause which barred a specific claim pertaining to damage to kaccha bricks, arising due to any reason whatsoever as being a contractual provision which “expressly relieves the Union Government of all liability under this head of claim”. The Supreme Court’s reasoning was grounded in its observation that the contractor “cannot go back on his agreement simply because it does not suit him to abide by it.”
In Oil and Natural Gas Corporation v. Wig Brothers Builders and Engineers Private Limited [(2010) 13 SCC 377], the Supreme Court, while upholding the contractor’s right to an extension of time, held that the contractor was not entitled to damages, and the “arbitrator exceeded his jurisdiction in ignoring the said express bar contained in the contract."
(b) Public Policy: In this approach, the courts have refused to enforce the exclusion clause, holding that a party guilty of breach cannot restrict the enforcement of a statutory remedy.
In Simplex Concrete Piles (India) Ltd. v. Union of India [2010 SCC OnLine Del 821], the Delhi High Court held that a clause taking away the contractor’s statutory rights under Sections 55 and 73 of the Contract Act is directly hit by Section 23, thereby rendering the exclusion clause void. The Court held:
“It is inconceivable that ... performance is at the will of a person without any threat or fear of any consequences of a breach of contract. ... the entire commercial world will be in complete turmoil... the same will defeat the very basis of existence of the Contract Act.”
In MBL Infrastructures Limited v. Delhi Metro Rail Corporation [2023 SCC OnLine Del 8044], the Delhi High Court was hearing a challenge to an arbitral award. The award, despite finding that the employer was guilty of delay, held that the employer was “not bound... to compensate the Claimant for delayed performance of the Contract.”
The High Court set aside the award, concluding that such an Exclusion Clause (i) is hit by Section 23 of the Contract Act since “a clause which restricts the right of the party to claim damages... is contrary to the fundamental policy of Indian law”, and (ii) cannot take away an arbitrator’s statutory power to award damages or compensation under Section 73 of the Contract Act.
(c) Conduct-based Compensation: Under this third approach, courts generally uphold exclusion clauses (or do not examine their validity) and determine the contractor’s entitlement to compensation based on its conduct—namely, whether the contractor accepted the Exclusion Clause while seeking extensions of time or, alternatively, expressly reserved its right to claim damages contemporaneously with the delays.
Where the parties’ conduct entitles the contractor to claim damages.
In Asian Techs Limited v. Union of India [(2009) 10 SCC 354], the Supreme Court found the employer’s delay in performance to be egregious and specifically identified ten separate instances which made it “apparent that the delay in the execution of the contract was solely due to the fault of the [employer]”. Further, the Court noted that the contractor agreed to carry out the work beyond the contracted period on specific assurances given to it that revised rates of work would be decided. Therefore, the employer’s objection to the contractor’s claim for further compensation was rejected. (See also, K.N. Sathyapalan v. State of Kerala [(2007) 13 SCC 43])
Where the contractor is estopped, by conduct, from claiming damages.
Recently, in C&C Constructions Ltd. v. IRCON International Ltd. [(2025) 4 SCC 234], the Supreme Court upheld and enforced the exclusion clause on, inter alia, the grounds that the contractor, (i) had relied upon the Exclusion Clause, and sought several extensions of time in terms of it, and (ii) had, when seeking extensions, expressly undertaken not to make any claim for damages against the employer. Therefore, the Court concluded that the contractor “was estopped from challenging the validity of Clause 49.5”.
A foundational decision on exclusion clauses is the judgment of the Supreme Court in General Manager, Northern Railway v. Sarvesh Chopra [(2002) 4 SCC 45]. There, the employer (Northern Railway) had engaged the contractor to construct bored piles for the widening of a railway bridge. When the contractor sought to refer its claims for idle machinery, establishment costs, and price escalation to arbitration, the employer resisted the contractor’s claim on the ground that such claims were ‘excepted matters’, i.e., outside the scope of arbitration, in view of the contract’s Exclusion Clause.
The Court upheld the validity of exclusion clauses, but qualified that finding: a contractor may bring a claim for damages, despite an Exclusion Clause prohibiting such a claim, when any one of the following pre-conditions is fulfilled, (i) where the contractor repudiates the contract under Section 55 of the Contract Act, (ii) where the employer gives an extension of time by entering into a supplemental agreement or by making it clear that escalation of rates or compensation would be permissible, or (iii) where the contractor puts the employer on notice that compensation must be paid, and the employer accepts performance by the contractor.
It is important to note that the third pre-condition, identified in Sarvesh Chopra, has held sway in later decisions, including KN Sathyapalan (supra) and (more recently) the decision of the Karnataka High Court in Larsen and Toubro Limited v. Bangalore Metro Rail Corporation Limited [MANU/KA/1643/2025].
Sarvesh Chopra (supra) is valuable for another reason altogether. Before turning to Indian law, the Supreme Court examined the treatment of exclusion clauses in American jurisprudence, noting that the United States was the jurisdiction in which these clauses originated. Drawing on ‘Hudson’s Building and Engineering Contracts’, the Court recorded that American courts had developed a settled set of exceptions permitting a contractor to recover damages despite an Exclusion Clause, in four situations:
“(i) where the delay is of a different kind from that contemplated by the clause, including extreme delay,
(ii) where the delay amounts to abandonment,
(iii) where the delay is a result of positive acts of interference by the owner, and
(iv) bad faith.”
The American exceptions may provide Indian courts with a clear, fact-based approach to enforcing exclusion clauses in a commercially reasonable manner. While exclusion clauses, being a contract between the parties, should ordinarily be enforced, they should not protect an employer who has caused extreme or uncontemplated delay, abandoned the works, or acted in bad faith or in deliberate interference with the contractor.
The present uncertainty in Indian jurisprudence regarding exclusion clauses undermines the attractiveness of public-works and construction contracting in India. If left untouched, exclusion clauses have a serious proclivity for abuse by employers. A clear, exception-based rule of the kind applied in the United States would serve both the employer and the contractor. Contractors would be held to be bound by the contract they executed, and employers would not be able to benefit from their own delays.
Until a clear answer appears, either by statute or judgment, a contractor’s safest course of action remains the third pre-condition identified in Sarvesh Chopra (supra): (i) document the employer’s delay, and (ii) reserve its claim for damages in writing, on each occasion the contractor accepts an extension of time.
About the authors: Angad Varma and Toyesh Tewari are Partners, Agastya Sen is a Senior Associate at Dua Associates.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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