No Claim Certificates And The Evolving Scope Of Judicial Inquiry Under Section 11 Of The Arbitration And Conciliation Act, 1996

Introduction 

“No Claim Certificate” or “No Due Certificate” refer to a Condition Precedent placed by the Employer before the Contractor for the release of their payment. 

Construction and Infrastructure Projects are complicated and often run over and above the schedule, Contractor incurs huge losses due to delays, usually caused by the employer. In such situations, the employer presents a “No Claim Certificate” to the Contractor to be signed before release of their payment. The Contractor caught in a cash flow crunch signs the dotted lines in order to get their payment released, which are sometimes underestimated figures. Subsequently, Weeks or Months later, the Contractor raises dispute claiming, “Economic Duress” or “Coercion” while signing the “No Claim Certificate”. The Employer on the other hand takes the defence of “Accord & Satisfaction”; claiming that the Contract was discharged as soon as the Certificate was signed and Bills were cleared accordingly. 

This paints a volatile picture; it becomes difficult for Courts to determine the truth. In the high-stakes world of Indian Infrastructure and Construction Contracts, the conclusion is often messier than the execution, keeping in mind Contractual Independence and Party Autonomy, Courts have over the years evolved their approach from an emphatic Contractor friendly approach to a stricter approach in order to prevent undue hardship of pursuing costly Dispute Resolution even after valid conclusion of a Contract. 

Evolution of the Apex Court’s stance 

Pre 2015 Amendment Era: 

The Respondent in the matter of National Insurance Company Ltd. v. Boghara Polyfab P. Ltd.1 was the insured in a fire policy. An incident occurred and there was an insurance claim, the Insurance Company issued an undated “discharge voucher-in-advance” acknowledging receipt of the amount mentioned in the voucher. The Respondent caught in a dire financial condition signed the voucher, subsequently the payment was released. Thereafter, the respondent lodged a complaint with the Insurance Regulatory and Development Authority (IRDA) and also issued Notice invoking Arbitration, the Appellant refused appointment of Arbitrator. The respondent then approached the Hon’ble Bombay High Court under Section 11 of the Arbitration and Conciliation Act, 1996 (Act). The High Court allowed the Petition appointing an Arbitrator. The Appellant then approached the Supreme Court, where the dispute was, ‘Whether, after issuing full and final discharge can a party raise a dispute for reference to Arbitration?’ 

The Hon’ble Supreme Court acknowledged the commercial reality of the Indian Business world, that parties are often forced to sign receipts to release admitted dues. The Court observed that the practice of demanding undated “full and final settlement” voucher as a condition for payment was “unfair, irregular and illegal”. The Court highlighted that if the alleging party can prima facie establish fraud or coercion, the dispute remains arbitrable, and the Court may refer the Parties to Arbitration after being convinced of a prima facie case of fraud or coercion. 

While, “Boghara Polyfab” judgment opened the doors for claims of duress, the Hon’ble Supreme Court was concerned with the abuse of such plea, in the matter of, Union of India and Others v. Master Construction Company2. In this case, the Respondent Contractor completed the construction work in August 1998. The Employer asked the Contractor to submit “No-Claim Certificate” which was signed and submitted in May 2000. The final payment was released in June 2000, but the bank guarantee was not released till July 2000. Thereafter, the Contractor immediately withdrew the “No Claim Certificate” on the same day as the bank guarantee was released and lodged certain claims before the Employer which were refuted by the Employer. The Contractor constrained by this approached the Hon’ble Punjab & Haryana High Court under Section 11 of the Act for appointment of Arbitrator which was accepted and Arbitrator was appointed. The UOI then appealed before the Hon’ble Supreme Court contending that “No-Claim Certificate” effectively discharged the contract and there was no valid arbitrable dispute. 

The Hon’ble Supreme Court held that the plea of “duress” cannot be abused, it introduced a stricter filter known as the “bald plea”. The Court held that a “bald plea” of coercion is not enough, the Party must prima facie prove to the Chief Justice or his/her designate under Section 11 that there was “fraud” or “coercion”. The Court observed that the cost of Arbitration is relatively huge, an innocent party which has concluded the contract under law cannot be burdened with such huge costs merely because of bald allegations. The Court in this case ruled that the Contractor’s conduct of waiting till the full payment and the Bank Guarantee was released for raising such disputes proved that the discharge was voluntary. 

Thereafter, in another matter before the Hon’ble Supreme Court, New India Assurance Company Ltd. v. Genus Power Infrastructure3; where, the Respondent the insured following a fire incident raised certain claims before the Appellant, the surveyor assessed the claim much lower than claimed. Respondent signed a letter of subrogation accepting the payment in full and final settlement. Almost a month later the Respondent issued a Notice to the Appellant claiming that the signature was obtained under extreme “duress” and “coercion” and also the Respondent sought appointment of an Arbitrator to resolve the disputes, the Appellant replied that there was no Arbitrable dispute. The Respondent then approached the Hon’ble Delhi High Court under Section 11 of the Act for appointment of Arbitrator; the Court accepted the Respondent’s Plea. 

Aggrieved, the Appellant approached the Hon’ble Supreme Court. The Court noting its two previous judgments held that the Respondent could not prima facie prove the allegation and that the plea of “coercion” was merely a “bald plea”. The Court further highlighted that the timing of the Respondent’s disputes was questionable and that they should have raised a demur or protest soon after signing the Certificate. 

In another matter namely, ONGC Mangalore Petrochemicals Ltd. v. ANS Construction Ltd.4; the Respondent Contractor signed the “No-Claim Certificate” and received the final payment within one month of the signing. Two weeks after receiving the payment the Respondent withdrew the Certificate invoking Arbitration clause with the Claim that the Certificate was signed under Duress. The Employer refused appointment of Arbitrator. The Respondent approached the Hon’ble Karnataka High Court under Section 11 of the Act, and the High Court appointed an Arbitrator.  

Aggrieved, the Appellant approached the Hon’ble Supreme Court, the Court held that withdrawal of the Certificate was an afterthought and that the final bill was signed with mutual consent. The Court held that since the final bill was signed and discharged with mutual consent without any protest, the contract stands discharged and there is no dispute to be referred to Arbitration. 

Post 2015 Amendment Era: 

The 2015 amendment added Section 11 (6A) to the Act which limits the scope of the Supreme Court’s or the High Court’s power under this Section to only checking the validity of the Arbitration Agreement. 

The Hon’ble Supreme Court in the case of NTPC Ltd. v. SPML Infra Ltd.5 held that the above-mentioned Judgments were Statutorily Overruled. In this case, the Respondent had signed “No-Claim Certificate” and also received the final payment, but the Appellant had withheld the bank guarantees due to disputes in other projects. The Respondent filed a Writ Petition for release of the bank guarantee, during the pendency of the Writ Petition the parties signed a settlement agreement after which the Appellant released the bank guarantee and the Respondent withdrew the Writ Petition. A month after withdrawing the Petition the Respondent filed an Application under Section 11 of the Act for appointment of Arbitrator to resolve the claim that the Settlement Agreement was signed under “economic duress”. 

Aggrieved, the Appellant approached the Hon’ble Supreme Court, where the issue was “Whether the High Court under Section 11 refuse appointment of Arbitrator if there is a valid Agreement to Arbitrate”. The Court highlighted two duties of the High Court at pre-referral stage (i) To check whether there is a valid Arbitration Agreement; (ii) To check whether the disputes raised are Arbitrable. The Court instructed the use of “Eye of the Needle” test to screen out “ex-facie meritless” claims while discharging the second duty. The Court held that the Respondent’s claim in this case was barred under this test as the allegation of “economic duress” was meritless being ‘dishonest litigation’, the Court stated that the Respondent had already reaped the benefit of the Settlement Agreement and cannot now claim that such agreement is invalid. 

Paradigm Shift: 

Thereafter, the Hon’ble Supreme Court made a paradigm shift in its judgment; SBI General Insurance Company Ltd. v. Krish Spinning6 In this case the Respondent held a valid fire insurance policy with the Appellant. Following a fire incident, the Respondent claimed certain amount which was subsequently reduced by the independent assessor. The Respondent signed an “Advance Discharge Voucher” accepting the lower amount as full and final settlement. Later the Respondent invoked Arbitration, alleging that the Voucher was signed under “economic duress”. While the Appellant opposed the reference to Arbitration arguing that full and final settlement (Accord & Satisfaction) was reached discharging the Contract. The Respondent approached the Hon’ble High Court of Gujarat under Section 11 of the Act which agreed for appointment of an Arbitrator.  

Aggrieved, the Appellant approached the Hon’ble Supreme Court. The Court while dismissing the Appeal held that validity of “Accord & Satisfaction” of a Contract must be decided by the Arbitrator as he is empowered to do so under Section 16 of the Act. The Court observed that according to Doctrine of Separability even if there is “Accord & Satisfaction” of the Contract the existence of Arbitration Agreement is not negated. The Court also held that the scope of inquiry under Section 11 is only limited to prima facie existence of an Agreement to Arbitrate. The Court held the Judgment of “NTPC v. SPML” to be partly overruled emphasizing that tests like “ex-facie meritless” and “Eye of the Needle” cannot be undertaken at the stage of Section 11 application. 

This Judgment fundamentally altered how “No-Claim Certificates” and “Accord & Satisfaction” are handled at pre-referral stage. Whether the Certificate was signed under duress or the Settlement is valid or not are questions of merit, which must be decided by the Tribunal itself as it is empowered under Section 16 of the Act. Even if the Claims are ex-facie frivolous or dishonest the Court cannot refuse to appoint an Arbitrator if there exists a valid Arbitration Agreement.  

The 2025 Era: 

However, even if the above cited Judgments are overruled, the substantive law laid down regarding the validity of “No-Claim Certificates” and how allegations of fraud, coercion or economic duress must be dealt with in situations where there exists “Accord & Satisfaction” of the Contract can be made applicable to the Arbitral Tribunal dealing with such cases.  

On these lines there is another Judgment passed by the Hon’ble Supreme Court; C&C Construction Ltd. v. IRCON International Ltd.7, In this case, The Respondent Contractor unable to complete the project on time requested extension of time which was granted by the Appellant employer but with penalties. Subsequently, the Contractor requested for waiver of the penalties for which the Employer agreed but simultaneously required the Contractor to submit undertakings that the Contractor will not raise any Claim other than escalation due to delay. Two years after signing such undertaking the Contractor invoked Arbitration clause claiming damages for delay. The Tribunal under Section 16 rejected such Claim being against the Agreement between the Parties. In Appeal, the Hon’ble Delhi High Court’s both Single and Division Bench upheld the Tribunal’s decision refusing to set aside the Award. 

Aggrieved, the Contractor approached the Hon’ble Supreme Court whereby, the Court held that the Contractor was “estopped” from claiming damages on account of its own conduct of signing the undertakings. The Court ruled that the Contractor on its own accord, waived its Right to Claim damages and acted upon it and also reaped the benefit of the undertaking. Hence, the Contractor cannot now “approbate and reprobate” or blow “hot & cold” with the terms and conditions of the Undertaking. 

Hence, there are two parts to this evolution which must be understood: Firstly, from the judgment of “Krish Spinning” it is derived that only the Arbitral Tribunal can decide this issue, Secondly, the Judgments in “C&C Construction” “NTPC v. SPML” “Boghara Polyfab” “Master Construction” and “Genus Power” all dictate how the issue is to be determined. 

Conclusion 

Considering the evolution of the Judiciary from “Boghara Polyfab” to the overruling of “NTPC v. SPML” by “Krish Spinning” the current legal position can be summarised in four basic points: 

1. Pre-referral stage- The Courts in this stage are barred from considering the merits of the dispute, however the Claims might be ex facie meritless in the eyes of the Court. 
2. Presumption of validity- The Arbitral Tribunal will be tasked with determining the validity of “No Claim Certificate” and it will presume that the Contract has been concluded and satisfied. 
3. Burden of Proof- The Contractor alleging “economic duress” or “coercion” is burdened with proving such allegation before the Tribunal. “Bald Pleas” would not live. As can be seen from “Master Construction Company” and “New India Assurance Company” judgments. 
4. Estoppel- A Contractor signing a document of “Accord & Satisfaction” must understand that if they reap any benefit from such document, they are “estopped” from claiming any damage allegedly caused by the same document. As can be seen from “C&C Construction” judgment. 

The evolution of the Judiciary’s view on “No-Claim Certificate” leads to a conclusion that Silence is fatal for the Claim but not for reference. The Judgment in “Krish Spinning” has flung the door open for Arbitration, but that does not ensure a complete win as the Contractor still needs to prove their allegations before the Tribunal. Hence, signing a document in the present and disputing it later will lead to rejection of Claims. Contractors should not sleep over their Rights; Protest must be registered immediately during or after the signing of the “No-Claim Certificate” in order to protect their Rights. 

The Courts have over the years evolved from a liberal more Contractor friendly approach to a stricter approach, where Courts acknowledge the validity of an Agreement between the Parties and have asked the alleging party to establish their prima facie case. Recent Judgments such as “C&C Construction” have provided a robust shield to the Employers who hold a signed “No-Claim Certificate”. 

In Conclusion, the Hon’ble Supreme Court has acknowledged that “bald pleas” cannot be used as an excuse to escape signed settlements and drag the Employer through lengthy and costly process of Litigation and Arbitration even if they have proved to the Court “Accord & Satisfaction”. 

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