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No-claims certificates: court rules on survival of arbitration clauses - International Law Office

International Law Office

Litigation - India

No-claims certificates: court rules on survival of arbitration clauses

June 28 2011

Background
Facts
Decision
Comment


Background

In Union of India v Master Construction Co(1) the Supreme Court recently considered whether, after furnishing no-claims certificates and receiving payment for a contractor's final bill, any arbitrable dispute between the parties survives or whether the contract can be considered discharged. The court ruled that in such cases the consequences of discharge of the contract must be considered and decided by the chief justice (or his designate) under Section 11 of the Arbitration and Conciliation Act 1996.

Facts

M/s Master Construction Company was awarded a contract by the Union of India for the provision of accommodation and certain essential technical buildings to be erected and installed at Bhatinda. The first phase of the work was due to be completed by July 20 1996 and the second phase by January 20 1997. Condition 70 of the agreement between the parties provided the mode for dispute resolution and differences between the parties through arbitration.(2)

The work was completed by the respondent belatedly on August 31 1998 and the completion certificate was issued on September 9 1999. The respondent furnished no-claim certificates on April 3 2000, April 28 2000 and May 4 2000. The final bill was signed on May 4 2000. The payment for final bill was released to the respondent on June 19 2000, and the bank guarantee of Rs2.1 million was released on July 12 2000. Immediately after release of the bank guarantee on July 12 2000, the respondent wrote to the appellants withdrawing no-claim certificates and lodged certain claims.

The chief engineer (Bhatinda) declined to entertain the claims of the respondent on the grounds that the final bill had been accepted by the respondent after furnishing the no-claim certificates and no claim under the contract remained. The respondent passed the decision to the engineer in chief (Army Headquarters, New Delhi) and requested that it be referred for resolution by an arbitrator.

As no arbitrator had been appointed by the appellants, the respondent made an application under Section 11 of the Arbitration and Conciliation Act before the civil judge (Senior Division) of Bhatinda. The judge dismissed the application. Dissatisfied with this decision, the respondents issued a writ petition before the Punjab and Haryana High Court; this was also dismissed.

The respondent then challenged the High Court's order by filing a special leave petition before the Supreme Court. The court disposed of the petition by directing that the application filed by the respondent under Section 11 of the act should be placed before the chief justice of the Punjab and Haryana High Court for his decision. The Supreme Court also set aside the orders of the High Court and the lower court.

Thereafter, the chief justice decided on the application filed by the respondent under Section 11(6) of the act(3) and passed the order which had been impugned by the appellant by means of a special leave petition to the Supreme Court.

Decision

The appellants' challenge against the order of the High Court was two fold:

  • that no arbitrable dispute existed between the parties, as full and final payment had been received by the respondent voluntarily after submission of no-claim certificates and the final bill; and
  • in any case, in exercise of his power under Section 11(6), the chief justice (or his designate in the proceedings) should have given due regard to the arbitration clause and appointed the arbitrator under such terms.

The respondent contended that its position throughout proceedings had been that no-claim certificates were given by the respondent under financial duress and coercion, as the appellants had arbitrarily withheld the payment. It also submitted that whether the no-claim certificates were given voluntarily or under financial duress must be decided by the arbitrator alone; this was why the chief justice, exercising his jurisdiction under Section 11(6), had rightly referred the disputes between the parties to the arbitrator.

The Supreme Court noted that the controversy presented in the petition did not concern whether an arbitration agreement existed between the parties, but whether the disputes could be considered for arbitration.

Referring to an earlier decision of the Supreme Court in National Insurance Company v Bhogara Polyfab Pvt Ltd,(4) with regard to the jurisdiction of the chief justice under Section 11 of the act, the Supreme Court quoted in approval the following:

"The Chief Justice/his designate exercising jurisdiction under Section 11 of the Act will consider whether there was really accord and satisfaction or discharge of contract by performance. If the answer is in the affirmative, he will refuse to refer the dispute to arbitration. On the other hand, if the Chief Justice/his designate comes to the conclusion that the full and final settlement receipt or discharge voucher was the result of any fraud/coercion/ undue influence, he will have to hold that there was no discharge of the contract and consequently, refer the dispute to arbitration. Alternatively, where the Chief Justice/his designate is satisfied prima facie that the discharge voucher was not issued voluntarily and the claimant was under some compulsion or coercion, and that the matter deserved detailed consideration, he may instead of deciding the issue himself, refer the matter to the Arbitral Tribunal with a specific direction that the said question should be decided in the first instance."

Relying on the law laid down in Bhogara, the Supreme Court ruled that if a party that has executed a discharge agreement or discharge voucher alleges that the execution of such document was on account of fraud, coercion or undue influence practiced by the other party, and if that party establishes the same, then such discharge voucher or agreement is rendered void and cannot be acted upon. Consequently, any dispute raised by such party would be arbitrable. The court also held that a claim for arbitration cannot be rejected solely on the grounds that a settlement agreement or discharge voucher has been executed by the claimant. The court stated that such dispute must be decided by the chief justice (or his designate in the proceedings) under Section 11 of the act or by the Arbitral Tribunal.

The court further stated that in a case where the claimant contends that a discharge voucher or no-claims certificate was obtained by fraud, coercion, duress or undue influence, but the defendant contests such a claim, the chief justice must investigate whether, prima facie, the dispute is genuine. It further stated that where the dispute raised by the claimant concerning the validity of the discharge voucher, no-claims certificate or settlement agreement appears to be lacking in credibility, it may not be necessary to refer the dispute for arbitration in the first place. A bald plea of fraud, coercion, duress or undue influence is not sufficient to establish arbitration; the party who sets up such a plea must provide evidence to the chief justice. If the chief justice finds merit in the allegation of fraud, coercion, duress or undue influence, he or she may then decide on the case himself or herself, or leave it to a decision of the Arbitral Tribunal.

In the case under discussion the court ruled that the certificates issued by the respondent left no doubt that, upon receipt of the payment, there had been a full and final settlement of the respondent's claim under the contract. The court noted that the payment of the final bill to the respondent was also not disputed. Furthermore, as regards financial duress or coercion, the respondent was unable to prove the same prima facie. The court held that a mere allegation that no-claim certificates had been obtained under financial duress and coercion, without evidence to prove such action, does not lead to an arbitrable dispute. This was further evident from the conduct of the respondent in issuing the no-claims certificates voluntarily. The Supreme Court therefore set aside the order of the Punjab and Haryana High Court.

Comment

This judgment seeks to reinforce the position that furnishing no-claims certificates voluntarily leaves no scope for arbitrable disputes to be determined between the parties, even if such a no-claims certificate was claimed to be given under duress. The plea of duress and coercion has to be rightly supported by the claimant. The judgment seeks to curtail the practice of unnecessarily opening up disputes to arbitration.

For further information on this topic please contact Bishwajit Dubey or Tamal Mandal at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 41590700), fax (+91 11 26924900) or email (bishwajit.dubey@amarchand.com or tamal.mandal@amarchand.com).

Endnotes

(1) Civil Appeal 3451/2011 (arising out of SLP(C) 8162/2017), decided on April 25 2011; (2011) 5 SCALE 165.

(2) Clause 70 of IAFW 2249:

"Arbitration-All disputes, between the parties to the Contract (other than those for which the decision of the C.W.E. or any other person is by the Contract expressed to be final and binding) shall, after written notice by either party to the Contract to the other of them, be referred to the sole arbitration of an Engineer Officer to be appointed by the authority mentioned in the tender documents…"

(3) Section 11(6) of the Arbitration and Conciliation Act 1996 on the appointment of arbitrators reads as follows:

"Where, under an appointment procedure agreed upon by the parties:

(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure,

a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment."

(4) 2009 (1) SCC 267.


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