Understanding Excepted Matters in Indian Arbitration: A Three-Fold Contractual Framework

This article examines the doctrine of excepted matters in Indian arbitration law and proposes a three-fold classification based on the contractual basis for excluding disputes from arbitral jurisdiction. It distinguishes between matters expressly excluded from arbitration, contractually barred claims, and matters reserved for determination by a designated authority. It also explores whether objections to excepted matters can be waived after arbitral proceedings have commenced.

The doctrine of excepted matters is one of the most important, yet often misunderstood, concepts in Indian arbitration law. Arbitration is based on party autonomy the parties decide which disputes will be resolved through arbitration. Equally, they can also decide that certain disputes will not be decided by an Arbitral Tribunal. This is commonly seen in government and infrastructure contracts, especially those of Central Public Works Department (CPWD), Railways, Oil and Natural Gas Corporation (ONGC) and other public sector undertakings. Such contracts often provide that the decision of the Engineer-in-Charge, Superintending Engineer or Project Director on certain issues shall be “final and binding”, or they may expressly prohibit claims such as interest or particular forms of compensation. The Supreme Court and various the High Courts in a catena of judgments have repeatedly recognised the validity of such contractual provisions. However, the judgments do not expressly classify excepted matters into different types. This article argues that a close reading of the judgments show that the excepted matters operate in different ways depending on the wording and structure of the contract. This distinction is important because it explains why courts have treated different contractual clauses differently while applying the doctrine of excepted matters. It also helps answer important questions that frequently arise in arbitration, such as whether a plea of excepted matter can be raised at a later stage, whether parties can waive such an objection, and whether an arbitrator can decide a matter that the contract has reserved for another authority.

What are excepted matter?

The Arbitration and Conciliation Act, 1996 does not define the expression ”excepted matters.” The doctrine has been developed through contractual drafting and judicial interpretation, particularly in construction and infrastructure contracts involving government authorities and public sector undertakings. In simple terms, excepted matters are disputes or claims which, by virtue of the contract, are kept outside the jurisdiction of the Arbitral Tribunal. Since an arbitrator derives jurisdiction only from the arbitration agreement and is bound to decide disputes in accordance with the terms of the contract under Section 28(3), Arbitration and Conciliation Act, he cannot adjudicate matters that the parties have contractually excluded from his authority. These clauses have to be viewed within the lens of principal of party autonomy. This principle is not only confined to the freedom to refer disputes to arbitration but also includes the freedom to exclude certain disputes from the arbitral process altogether. Parties are therefore entitled to structure their arbitration agreement in a manner that identifies which disputes are arbitrable and which disputes are reserved or excluded. Excepted matter clauses are an expression of this contractual autonomy.

Further, it is important to note that this category does not extinguish the substantive right of a party. The underlying dispute may still exist and may be capable of being pursued before a competent court, if otherwise maintainable. The exclusion is only from the arbitral forum, because that is what the parties have contractually agreed. The Supreme Court has consistently held that an Arbitral Tribunal cannot travel beyond the terms of the contract or grant relief contrary to contractual stipulations. Therefore, the doctrine of excepted matters is essentially a recognition of the contractual limits on an arbitrator’s jurisdiction. Although courts have repeatedly upheld excepted matter clauses, the judgments do not expressly classify them into different categories. On a reading of the jurisprudence, however, excepted matters appear to operate in three distinct forms, depending on how the contract excludes the Arbitral Tribunal’s jurisdiction.

Matters expressly excluded from arbitration

The first category of excepted matters arises where the arbitration clause itself expressly identifies which disputes can be referred to arbitration and which disputes cannot. In such cases, the exclusion is direct and unambiguous the parties have consciously agreed that certain disputes shall remain outside the arbitral process. A classic example is found in railway contracts, where the general conditions of contract identify certain disputes as “excepted matters” and expressly keep them outside the scope of arbitration. The relevant clauses provide that disputes arising under specified provisions of the contract shall not be referred to arbitration and that the decision of the Designated Railway Authority on those matters shall be final and binding. The contractual intention is clear: although the contract contains a broad arbitration agreement, it simultaneously carves out a limited category of disputes from the arbitral process itself. The first form of excepted matters arises where the arbitration agreement itself is restricted in scope. Instead of referring every dispute arising under the contract to arbitration, the parties agree that only specified disputes may be referred, while certain identified disputes are expressly kept outside the arbitration agreement. In such cases, the exclusion flows directly from the arbitration clause itself. The Supreme Court in Indian Oil Corpn. Ltd. v. NCC Ltd.¹ explained this distinction while interpreting a construction contract containing a restricted arbitration clause. The court observed that parties are free to agree that only particular disputes shall be referred to arbitration and that disputes falling within the excluded category remain outside the arbitration agreement altogether. Consequently, where a dispute falls within the excepted category, the Arbitral Tribunal has no jurisdiction to entertain it because there is no agreement to arbitrate that dispute. The court further held that if the contract expressly excludes a dispute from the scope of arbitration, the court can examine that issue even at the stage of appointment of an arbitrator under Section 11. Where the contract makes it clear that a particular dispute falls within the excepted clause, such dispute cannot be referred to arbitration.

Contractually Barred Claims

The second category operates differently. Under this category, the dispute may generally fall within the arbitration clause, but the contract itself prohibits or bars a particular claim. In other words, the arbitrator has jurisdiction over disputes arising under the contract, but cannot grant a relief that the contract expressly forbids. The most common example is a contractual bar on interest. Many government contracts provide that no interest shall be payable on earnest money, security deposits or any amount due under the contract. Such clauses do not merely regulate the procedure for payment; they contractually eliminate the entitlement to claim interest itself. The Supreme Court in Garg Builders v. BHEL², held that parties are free to contract out of payment of pre-reference interest and that an Arbitral Tribunal is bound to respect such a contractual prohibition. Similarly, the Supreme Court in Harsha Constructions v. Union of India³, upheld a clause excluding interest and held that the arbitrator could not award interest contrary to the express terms of the agreement.

The same principle extends beyond interest clauses. It also applies to contractual provisions that prohibit escalation, price adjustment or compensation beyond what is specifically provided in the agreement. The Supreme Court’s decision in Associated Engg. Co. v. Govt. of A.P.⁴ is the leading illustration. The contractor sought escalation for napa slabs, additional payment for extra lead of water, and compensation for maintenance of haul roads. The contract specifically provided that price adjustment would be available only for enumerated items and that no other claims for price adjustment would be entertained. It also placed the responsibility for arranging water supply and maintaining haul roads entirely upon the contractor. The Supreme Court held that by granting these claims, the arbitrator had travelled beyond the terms of the contract and exceeded his jurisdiction. The significance of this category is that the contract itself creates no enforceable contractual entitlement to the prohibited claim. Since Section 28(3) requires the Tribunal to decide disputes in accordance with the contract, the arbitrator cannot create a right that the parties have expressly taken away.

Matters reserved for determination by a Designated Authority

The third, and perhaps the most frequently litigated, category consists of matters that the contract reserves for determination by a Designated Authority, such as the Engineer-in-Charge, Superintending Engineer or Project Director. These clauses generally provide that the decision of the specified authority on a particular issue shall be ”final and binding” on the parties. Liquidated damages clauses in CPWD and ONGC contracts are the most common examples of this category. The Supreme Court in New India Civil Erectors (P) Ltd. v. ONGC⁵, held that where the contract entrusted the determination of compensation for delay under Clause 2 to the Superintending Engineer and declared his decision to be final, that issue constituted an excepted matter and could not be referred to arbitration. The court reaffirmed this position in Mitra Guha Builders (India) Co. v. ONGC⁶. It held that the levy of liquidated damages under Clause 2, read with the arbitration clause, was an excepted matter because the parties had contractually agreed that the competent authority’s determination would be final and binding. Consequently, the Arbitral Tribunal had no jurisdiction to re-determine that issue. A similar distinction was recognised in GM, Northern Railway v. Sarvesh Chopra⁷, which was later relied upon by the Madras High Court in Ennore Port Ltd. v. Skanska Cementation India Ltd.⁸ The courts explained that where the contract reserves issues such as quality of work, execution, measurements or other specified determinations to a departmental authority whose decision is declared final, those determinations fall outside the arbitrator’s jurisdiction. This category differs from the previous one in an important respect. The claim is not barred altogether. Instead, the contract provides a separate contractual mechanism for deciding that issue and gives finality to the decision of the Designated Authority. The exclusion from arbitration, therefore, arises because the parties have chosen a different decision-maker for that limited class of disputes.

Further, where a contract provides that a specified authority shall determine whether a particular event, breach, or default has occurred, and shall also determine the consequences flowing from that finding, and further declares that such determination shall be final and binding, the contractual reservation may extend to the entire decision-making process. The authority’s function is therefore not confined to calculating or quantifying an amount; it first determines the existence of liability and then decides the relief or consequence arising from that liability. Accordingly, where the contract reserves both the determination of liability and the determination of its contractual consequences to a Designated Authority, and accords finality to that decision, the entire exercise may constitute an excepted matter and fall outside the Arbitral Tribunal’s jurisdiction.

Can the plea of excepted matter be raised at a later stage?

A practical question that frequently arises in arbitral proceedings is whether the plea that a dispute is an excepted matter can be raised after the arbitration has commenced. If a party participates in the proceedings without objecting to arbitrability, can it subsequently contend that the dispute was contractually excluded from arbitration, or would such an objection merely be an afterthought? The Delhi High Court considered this issue in DSIIDC v. H.R. Builders⁹. The court observed that the employer had participated in the arbitral proceedings on the merits of the dispute and did not raise the objection that Clause 2 constituted an excepted matter at the appropriate stage. It therefore held, on the facts of the case, that the objection was an afterthought and stood waived. However, this judgment gives rise to a larger question. The doctrine of waiver ordinarily operates against the party that fails to raise a timely objection. The more fundamental question is whether such waiver can also operate upon the Arbitral Tribunal and permit it to decide a matter that the contract has reserved for another authority. A strict contractual reading suggests that the answer should be in the negative. The jurisdiction of an Arbitral Tribunal does not arise from the conduct of the parties during the proceedings; it arises from the arbitration agreement read with the contract. Section 28(3), Arbitration and Conciliation Act obliges the Tribunal to decide disputes in accordance with the terms of the contract. If the contract declares that the determination of a particular issue by a Designated Authority shall be final and binding, the Tribunal must first give effect to that contractual limitation before assuming jurisdiction. Viewed from this perspective, waiver may prevent a party from raising a procedural objection at a later stage, but it does not necessarily enlarge the substantive jurisdiction of the Arbitral Tribunal. The Tribunal remains bound by the contract irrespective of whether the parties invoke the excepted matter clause at the earliest opportunity.

Conclusion

Excepted matters are ultimately a reflection of the contractual nature of arbitration. An Arbitral Tribunal does not have unlimited powers; its jurisdiction is defined by the agreement between the parties. Where parties choose to exclude certain disputes, prohibit specific claims, or give final authority to a Designated Officer, those contractual terms determine what the Tribunal can and cannot decide. A close reading of the jurisprudence shows that excepted matters operate in different ways depending on the wording of the contract. They may arise through an express exclusion from the arbitration clause, through a contractual bar on a particular claim, or through a clause that reserves a specific determination to a Designated Authority. Understanding these different forms makes the doctrine easier to apply in practice. The more difficult questions arise when the boundaries of these clauses are tested. Issues such as whether a “final and binding” clause is enough to exclude arbitration, whether it covers both the determination of liability and its consequences, and whether a plea of excepted matter can be defeated by waiver continue to be debated. Ultimately, excepted matters should not be seen as mere technical objections raised during arbitration. They define the contractual limits of an Arbitral Tribunal’s jurisdiction. If arbitration is based on party autonomy, that autonomy includes not only the choice to arbitrate disputes, but also the choice to keep certain disputes outside the arbitral process. Respecting those contractual limits is essential to preserving both the parties’ agreement and the integrity of arbitration.