No Claim Certificates in Indian Construction Arbitration: Balancing Coercion and Discharge
A no claim certificate is a written declaration given by the contractor stating that no further claims, demands, or disputes remain against the employer. Under Indian construction contracts, no claim certificates serve to prevent disputes and frivolous litigation related to extensions of time, variations, and payments, but their final binding effect remains contentious. Courts have spent considerable time examining the validity of a ‘no-claim certificate’ or ‘no dues certificate’ or ‘discharge vouchers’ (“NCC”) on the principles of discharge of a contract or “accord and satisfaction” against claims of fraud, coercion, undue influence and necessitas non habet legem (necessity knows no law). However, there is an imperative need to distinguish between an NCC issued for final payments (“Final Payment”) and an NCC issued in lieu of an extension of time (“EOT” or “Time Extension”) by a contractor.
Arbitral tribunals and courts must consider the (a) validity, (b) evidentiary value and (c) binding effect of the NCC in these two distinct situations. These questions also affect issues of jurisdiction and the determination of a ‘dispute between the parties’ as well as the effect of an NCC akin to ‘interim waiver’ or final discharge under the FIDIC Red Book.
However, most current jurisprudence addresses an NCC issued at the time of Final Payment. There is almost negligible jurisprudence distinguishing the issuance of an NCC for Time Extension.
NCC Against Final Payment
Most of the precedents have examined this issue where a contractor, having issued a NCC for release of Final Payment has subsequently chosen to bring a claim contending that the contractor was constrained or coerced to issue the NCC. In Chairman and MD, NTPC Limited v. Reshmi Constructions, Builders and Contractor, and Ambika Construction v. Union of India, the Supreme Court came to the conclusion that the issuance of a NCC would not be an absolute bar to a contractor raising claims which are genuine. A similar view was taken in RL Kalathia and Co. v. State of Gujarat, where the court held that, if there is an acceptable claim, the court cannot reject the same on the ground of issuance of a NCC.
A contrary view was taken in ONGC Mangalore Petro-chemicals v. ANS Construction, where a clear and unconditional NCC or “full and final” settlement receipt constituted a valid discharge of the contract, extinguishing the right to arbitrate. The Supreme Court held that a mere allegation that the NCC was obtained under financial duress is insufficient to trigger an arbitrable dispute without prima facie evidence. In a similar line of cases starting from National Insurance Company Limited v. Boghara Polyfab Private Limited and Union of India v. Master Construction Company Ceremony, the Court focused on the voluntary execution of a discharge voucher and cautioned against the “make-believe” or any “afterthought” of the claim of coercion.
NCC for Time Extension
While the jury is still out on whether an NCC can operate as a complete bar on the contractor bringing claims after the contract stands discharged and final payment has been made, the second category of an NCC requires a more nuanced deliberation. A contractor may submit an NCC along with an application seeking EOT and also requesting that no liquidated damages (“LD”) be levied. In lieu of an NCC, the employer, instead of terminating the contract and giving it to someone else, usually grants the EOT, on the commercial wisdom that the cost of re-tendering would be higher. Relying on the NCC, it is commercially prudent and financially efficient to grant the EOT for the employer as it assures the employer that the contractor will not subsequently claim additional costs on account of prolongation, overheads, loss of profitability, etc. In such instances, it is vital that the tribunals and the courts carefully examine (a) the employer’s conduct and (b) a contemporaneous protest by the contractor.
a. Employer’s Conduct
While examining the employer’s conduct, the tribunals and the courts must pay attention to (a) whether the NCC is a pre-printed form or part of the tender documents signifying the lack of commercial negotiation, reservation of rights or the declaration of no-claims being voluntary or (b) whether it has been given to the contractor, subsequently, i.e., without being part of the contractual documents. In both instances, an NCC not being a part of the contractual documents, may make a plea of financial duress or coercion credible, depending on the facts of each case, as was evident in the case of Government of NCT of Delhi v. R.S. Sharma Contractors (P) Ltd. and Union of India v. Master Construction Company Ceremony.
However, if the NCC is issued by email, affidavit, or other voluntarily executed documents by the contractor, the examination must entail a determination of the contractor’s contemporaneous protest.
b. Contemporaneous Protest
If the contractor has repeatedly sent correspondence undertaking not to make future claims, especially over a period of time, the plea of coercion cannot reasonably be sustained. The issuance of such correspondences and execution of affidavits would satisfy the threshold of free and voluntary consent under the provisions of the Indian Contract Act, 1872 (“ICA”). The only exception would be if the contractor lodges its protest immediately after issuance or at the time the NCC is demanded by the employer. After receiving an EOT and a waiver of the LD, the plea of coercion is most likely an afterthought. Apart from not satisfying the ingredients of Section 14 of the ICA, it would make the contract voidable and, in such circumstances, the contractor ought to return all benefits under the contract, as per Section 63 of the ICA, an inevitable consequence often ignored by tribunals and courts.
The Need to Distinguish an NCC Issued for Final Payment and Time Extension
The problem with the current jurisprudence is that it fails to distinguish between the two instances of NCC issuance. Even in cases of release of Final Payments, the contractor is always at liberty to mark its protest. However, given the unequal bargaining power and to maintain financial stability, a contractor may be compelled to issue an NCC without a protest. Such circumstances must be tested against repeated correspondence, span of time, and the surrounding circumstances with respect to other projects or bills, or other pending claims of the contractor.
In the case of an NCC for Time Extension, the existing jurisprudence cannot be applied as the entire concept of an NCC works differently in such cases. In most Indian construction contracts, the contractor may be allowed extension of time, upon furnishing an NCC for claims of prolongation costs, overheads, loss of profit, idling etc. Permitting such claims after issuance of an NCC for Time Extension, not only renders the principles of waiver and estoppel redundant but also amounts to misrepresentation by the contractor.[1]
The employer relies on the NCC to consider the EOT and also whether the imposition of LD is justified. Given that an NCC is often demanded by a public sector undertaking, larger issues of costs related to re-tendering and issuance of new contracts for balance works must be considered by tribunals and courts. If the tribunals and courts conclude that the EOT would not have been granted, “but for” the representation by means of the NCC, whether through email, affidavit, or otherwise, the contractor should not be permitted to bring claims. This denial to bring claims is squarely based on the principles of waiver and estoppel.
Tribunals and courts must account for two critical distinctions, i.e., (a) the completion of work and final measurement and (b) the extension and currency of the contract. When the current position of law is applied to cases involving an NCC issued for Time Extension, it completely omits the vital fact that no final measurement has occurred, and that the contract and performance must continue. Therefore, the contractor makes a wilful and voluntary judgement about whether to continue with the contract, rather than the contract already being performed, for which final payment is due. Unfortunately, this pivotal distinction is often blurred. Courts tend to focus on the financial distress and the ‘ground reality’ of unequal bargaining power between the parties, usually disregarding the NCC.
Such views militate against the sanctity of a contract. An NCC is, in a sense, a settlement or a mutual agreement between the parties affirming an ‘accord and satisfaction’ of their rights and liabilities. Allowing claims without examining a contractor’s post-facto challenge to the NCC creates an imbalance. It allows the contractor to retain the benefits obtained under the NCC while simultaneously questioning its validity, without restoring such benefits to the employer.
Therefore, there is an imperative need to re-examine the jurisprudence on the validity and binding effect of an NCC and to balance the claims of coercion and discharge, depending on whether the NCC is issued for Final Payment or for Time Extension.
[1] Nathani Steels Ltd. v. Associated Constructions, 1995 Supp (3) SCC 324.
*Prof. (Dr.) Ajar Rab is the Founding Partner, ANR LAW LLP, India. The author thanks the research assistance and editorial inputs by Ms. Saumyata Tyagi, Associate, ANR LAW LLP, Dehradun and Mr. Gurmehar Bedi, Student at the National Law University, Jodhpur.