Arbitrability of claims after issuing a No Claim Certificate in Construction Contracts

In the construction industry, especially where contracts are awarded by the Public Sector Utilities in India (“PSUs”), it is a prevalent practice to insist for a No-claim certificate (“NOC”) and/or No due Certificate from the Contractors before clearing the final bill/payment. The Contractors, who are rarely in a bargaining position and always in urgent need of money, succumb to the pressure and issue a NOC to get the final Bill cleared.

In most cases, the contractors approach the courts/arbitral tribunals after the settlement of the final bill claiming either damages for the loss suffered by them or compensation for the additional work carried out by them. The moment any such dispute is raised, the PSU’s promptly rely on the NOC issued by the Contractor itself and contend that all claims have been settled and the contract stands discharged. Thus, effectively barring even submission of the claims to arbitration.

The Supreme Court (“SC”) has taken judicial note of such practice and strongly deprecated it in Chairman & M.D., N.T.P.C. Ltd vs M/S. Reshmi Constructions and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd amongst others. The SC in Reshmi Constrictions taking note of the prevalent practice held,

“…….where a contractor has made huge investment, he cannot afford not to take from the employer the amount under the bills, for various reasons which may include discharge of his liability towards the banks, financial institutions and other persons. In such a situation, the public sector undertakings would have an upper hand. They would not ordinarily release the money unless a ‘No Demand Certificate’ is signed. Each case, therefore, is required to be considered on its own facts.”

VALIDITY OF NO-OBJECTION CERTIFICATE:

In all such cases where the NOC was issued before the settlement of final bills, the contractors take a standard defence that it was issued under economic duress/coercion/fraud/undue influence and hence, not valid. 

The SC in National Insurance has held that in such circumstances, the Courts must look into the validity of the NOC i.e. the Court must look into whether a contractor has issued the NOC voluntarily and not under fraud, undue influence or coercion. Thus, the Chief Justice/his designate in each case has to examine the averments made in the Petition and also the evidence available on record before referring the claims to arbitration.  The SC went on to give illustrations of cases where the claims can/cannot be referred to arbitration and the relevant illustrations are as follows:

“……….(ii) A claimant makes several claims. The admitted or undisputed claims are paid. Thereafter negotiations are held for settlement of the disputed claims resulting in an agreement in writing settling all the pending claims and disputes. On such settlement, the amount agreed is paid and the contractor also issues a discharge voucher/noclaim certificate/full and final receipt. After the contract is discharged by such accord and satisfaction, neither the contract nor any dispute survives for consideration. There cannot be any reference of any dispute to arbitration thereafter.

(iii) A contractor executes the work and claims payment of say rupees ten lakhs as due in terms of the contract. The employer admits the claim only for rupees six lakhs and informs the contractor either in writing or orally that unless the contractor gives a discharge voucher in the prescribed format acknowledging receipt of rupees six lakhs in full and final satisfaction of the contract, payment of the admitted amount will not be released. The contractor who is hardpressed for funds and keen to get the admitted amount released, signs on the dotted line either in a printed form or otherwise, stating that the amount is received in full and final settlement. In such a case, the discharge is under economic duress on account of coercion employed by the employer. Obviously, the discharge voucher cannot be considered to be voluntary or as having resulted in discharge of the contract by accord and satisfaction. It will not be a bar to arbitration.

…………(v) A claimant makes a claim for a huge sum, by way of damages. The respondent disputes the claim. The claimant who is keen to have a settlement and avoid litigation, voluntarily reduces the claim and requests for settlement. The respondent agrees and settles the claim and obtains a full and final discharge voucher. Here even if the claimant might have agreed for settlement due to financial compulsions and commercial pressure or economic duress, the decision was his free choice. There was no threat, coercion or compulsion by the respondent. Therefore, the accord and satisfaction is binding and valid and there cannot be any subsequent claim or reference to arbitration.

Thus, from the aforementioned decision, it is clear that if a Contractor contends that he had issued the NOC under duress/ undue influence, the same has to be pleaded and proved before the Court in a Petition under Section 11(6) and only if the Court concludes that the NOC was issued under duress/undue influence, can it refer the dispute to arbitration.Further, the SC, in Union of India v. Parmar Constructions relying on National Insurance has gone to that extent of holding that,

A rebutable presumption could be drawn that when a no claim has been furnished in the prescribed format at the time of final bills being raised with unilateral deductions made even that acceptable amount will not be released, unless no claim certificate is being attached to the final bills.

However, these judgements were either given before the 2015 Amendment or in the context of the pre-amended law. Hence, an analysis of the position post 2015 Amendment is taken up to examine if the same parameters set by National Insurance continues to hold the field.

POSITION POST 2015 AMENDMENT:

The 2015 Amendment to the Arbitration and Conciliation Act, 1996 (“The Act“) introduced Section 11(6A), which restricts the Court’s jurisdiction, notwithstanding any previous judgement/decree/order to merely examining the existence of an arbitration agreement”. Thus, barring the Court’s foray into issues of arbitrability, limitation or any other concomitant issues.

While interpreting the amended Section 11(6A), the SC in Duro Felguera S.A. Vs. Gangavaram Port Limited held that post amendment, the Court’s jurisdiction is limited only to examining the existence of an arbitration agreement. Further, Justice Kurian Joseph delivering a concurring judgement observed,

“From a reading of Section 11(6A), the intention of the legislature is crystal clear i.e. the Court should and need only look into one aspect- the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple – it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.”

Therefore, it can be argued that post amendment to Section 11, the Court/s cannot look into the validity of the NOC or any other issues relating to arbitrability of the dispute. On finding a valid arbitration agreement between the parties, the dispute has to be referred to arbitration and only the arbitrator has the jurisdiction to decide on all such issues.

However, the effect of Section 11(6A) and the SC’s judgement in Duro Felguera has been diluted by the Supreme Court in United India Insurance Co v. Antique Art Exports Pvt. Ltd.

NULLIFYING THE EFFECT OF SECTION 11(6A):

In United India Insurance Co., the SC rejected the argument that after introduction of Section 11(6A) and in view of Duro Felguera, a court under Section 11(6A) cannot look into any other issue except the existence of an arbitration agreement. The SC held that courts perform a “judicial function” under Section 11(6A) and not merely an “administrative function”. Further, it characterised the SC’s judgement in Duro Felguera as a “general observation” and therefore, an obiter dictum which is not binding on it despite the Division Bench in Duro Felguera, as stated hereinabove, delivering two separate judgments categorically holding Section 11(6A) to be limiting the jurisdiction of the Court to mere examination of the existence of an arbitration agreement. The SC has once again undone what the legislature intended to do by the amendment and has reverted back to the pre-amendment position of SBP & Co v. Patel Engineering. Thus, the abysmal situation of arbitration law & practice in the country is partly due to the fact that whatever the legislature proposes (by an amendment), the Supreme Court dismisses (by a judgement).

CONCLUSION:

In view of the fact that SC in United India Insurance has not explicitly overruled Duro Felguero and that both the judgements are given by a bench of the same strength, though far fetched, it can still be argued that post amendment, the SC cannot look into the validity of the NOC and has to merely refer the matter to arbitration where the arbitration clause has been invoked after the 2015 Amendment to the Act.

Published by Hemanth Rao

I am an Advocate practicing in the High Court of Karnataka at Bangalore.

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