Supreme Court of India: Whether the Arbitration Agreement Stands Discharged on Acceptance of the Amount and Signing ‘No Claim’/Discharge Certificate

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In Union of India (UOI) vs. Parmar Construction Company decided on 29 March 2019, the Supreme Court of India addressed the issue of whether the arbitration agreement stands discharged on acceptance of the amount and signing ‘no claim’/discharge certificate. The Court inter-alia held that the arbitral dispute subsists, and the arbitration clause has not been discharged on signing ‘no claim’/discharge certificate. Detailed case analysis given below:

Factual Matrix

The Respondent (Contractor) was allotted construction work by the Appellant. Dispute arose in respect of payment of extended work completed by the Constructor. Prior to that the Constructor had already signed a ‘no claim’ certificate. The Appellant refused to pay for the extended work and the Contractor demanded appointment of an arbitrator as per the construction contract to resolve this dispute.

The Appellant paid no heed and therefore, the Constructor filed an application before the High Court under Section 11(6) of the Indian Arbitration Act, 1996 (1996 Act) for appointment of an arbitrator. It is noteworthy that this application was filed much before the Amendment Act, 2015 came into force (i.e. 23rd October 2015 which had expended the horizons of independence and neutrality of arbitrator.

Note: As per the settled law in India, the Arbitration Amendment Act, 2015 (Amendment Act, 2015) which came into force on 23rd October 2015, does not apply to the arbitral proceedings which has commenced in accordance with the 1996 Act before the coming into force of Amendment Act, 2015, unless the parties otherwise agree.

The High Court allowed the application and appointed a retired judge as the Sole arbitrator which was contrary to the specific requirement stipulated in the arbitration clause. As per the arbitration clause only the Gazetted officer of the Appellant can be appointed as the Sole arbitrator. But in defiance to this condition, the High Court appointed a retired judge as the Sole arbitrator keeping in view the independence and neutrality of arbitrator as envisaged under Section 12(5) of the Amendment Act, 2015 as per which an employee of the Appellant becomes ineligible to be appointed as Arbitrator.

The High Court further observed that the amended provisions of Amendment Act, 2015 will apply to the pending proceedings and mere furnishing of ‘no claim’ certificate would not take away the right of the parties and it is open for adjudication before the arbitrator. This decision was challenged before the Supreme Court in the present proceedings.

Arbitration Clause

64.(3) Appointment of Arbitrator :

64.(3) (a)(i) In cases where the total value of all claims in question added together does not exceed Rs. 25,00,000 (Rupees twenty five lakh only), the Arbitral Tribunal shall consist of a Sole Arbitrator who shall be a Gazetted Officer of Railway not below JA Grade, nominated by the General Manager. The sole arbitrator shall be appointed within 60 days from the day when a written and valid demand for arbitration is received by GM.

Parties Contentions

The Appellant contended

  • that Section 12 came into force by the Amendment Act, 2015 w.e.f. 23rd October 2015 and the request to refer to the arbitration was received by the Appellants much prior to the Amendment Act, 2015;
  • that once the ‘no claim’ certificate has been signed by the Contractor, he cannot be permitted to urge that he gave the ‘no claim’ certificate under any kind of financial duress/undue influence.

The Respondent contended

  • that final bills are not being released to the Contractor without a ‘no claim’ certificate being furnished in advance which is financial duress and undue influence by the Appellant;
  • that ‘no claim’ certificate in itself cannot be considered to be the basis to non-suit the request made in appointing an arbitrator to independently examine the dispute arising under the terms of the agreement.

Judgement

The Court held that in the instant case, the request was made and received by the Appellant much before the Amendment Act, 2015 came into force. Therefore, the application made by the Contractor deserves to be examined in accordance with the 1996 Act without taking resort to the Amendment Act, 2015 which came into force from 23rd October, 2015.

The Court also noticed that it cannot be oblivious of the ground realities that where a petty/small contractor has made investments from his available resources in executing the works contract and bills have been raised for the escalation cost incurred by him and the Appellant without any justification reduces the claim unilaterally and take a defence of the ‘no claim’ certificate being furnished which as alleged by the Contractor to be furnished at the time of furnishing the final bills in the prescribed format;

Further in Courts view, the Contractor with whom no option has been left and being in financial duress to accept the amount tendered in reference to the final bills furnished and from the discharge voucher which has been taken to be a defence by the Appellant prima facie cannot be said to be voluntary and has resulted in the discharge of the contract by accord and satisfaction as claimed by the Appellant.

Therefore, the Court held in favour of Contractor by holding that the arbitral dispute subsists, and the contract has not been discharged. Further, all the contentions in this regard are open to be examined in the arbitral proceedings.

The Court also held that the High Court was not justified in appointing an independent arbitrator without resorting to the procedure for appointment of an arbitrator (i.e. appointment of the Gazetted Officer of the Appellant) which has been prescribed under arbitration clause as agreed by the parties. Consequently, the Supreme Court set aside the order passed by the High Court and directed the Appellant to appoint an arbitrator within the terms of the arbitration clause.

My Comments

The instant case reinforces the ground reality and plight of the contractor. Though a contractor cannot be compelled to give ‘no claim’ certificate upon the demand of the other party to the contract. However, practically it is seen that on completion of works, the employer often insists that the contractor should give such certificate. In such situation, if the contractive gives the certificate, he forfeits his right to make further claims but if he does not do so, then the final payment is withheld. This case comes in aid of such contractors by which such certificate is deemed to have been given under duress or coercion.

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