No Claims Certificate 99 Problems in Commencing Disputes? — No Claims Certificate is Not One of Them!

An NCC is often contemplated in construction contracts or insurance contracts and is to be issued/signed as a final step when all dues pending towards the work delivered by the contractor are paid by the employer, or when the claim made by the insured party is paid by the insurer.

Introduction

A no dues certificate or a no claim certificate (NCC), as the name suggests, is a document that evidences no dues/claims pending from the Receiver to the issuer. An NCC is often contemplated in construction contracts or insurance contracts and is to be issued/signed (for convenience collectively referred to as issued/issuing) as a final step when all dues pending towards the work delivered by the contractor are paid by the employer, or when the claim made by the insured party (large companies with manufacturing units in most cases) is paid by the insurer. Sometimes, however, an NCC may be sought by an employer as the basis for providing some concession. In the course of business, a contractor may feel compelled to sign an NCC in order to secure immediate payment, yet later seek to raise claims on the very same issues alongside other outstanding claims. What have courts said in such circumstances? Does an NCC mean the end of the road for a contractor or an insured, or is there wiggle room? We examine these issues and dissect the law around NCCs in this piece.

Although seemingly simple and logical, the issuing of an NCC and the consequent extinguishing of all dues and claims has been the root cause of multiple disputes, where contractors/insured parties (for convenience collectively referred to as “issuer”) after issuing the NCC have still invoked arbitration and raised claims on the employer/insurer (for convenience collectively referred to as “Receiver”). The primary considerations in the disputes being whether or not the NCC was voluntarily issued, and the circumstances under which it was issued.

The issue continues to plague both construction and insurance contracts as these contracts, in almost all cases, are based on set formats which are rarely negotiated owing to the uneven power equation.

Once disputes between an issuer and a Receiver arise pursuant to the issuance of an NCC and payment of amounts, the stand taken by the Receiver is that, on the receipt of the NCC, no dues remained pending towards the issuer and therefore no claims can arise as the contract between the parties stood discharged. The counter argument typically taken by the issuer is that the NCC was issued under coercion and duress as payments from the Receiver were kept on hold and the financial obligations of the issuer (worker wages, interest of any loans obtained, amounts payable for material) were rising and the issuer had no real choice but to issue the NCC to get paid whatever amounts the Receiver was offering as final payment.

Method of analysis

As this article will analyse through case laws, the parties take this stand in almost all cases and adapt their arguments depending on the stage at which the claim is contested.

1. Pre-arbitration and during arbitration— If the claim is contested either at the stage of invocation of arbitration or during the arbitration, the Receiver makes the plea that NCC was issued, voluntarily and without coercion, acknowledging no dues remained pending and therefore the contract between the parties stood discharged by accord and satisfaction.

At both these stages, the issuer counters the arguments of the Receiver by taking the plea of coercion and duress in issuance of NCC.

2. Post arbitration— At the stage of challenge to the award the Receiver takes the plea that there was no evidence to show duress and coercion and in the given facts: (a) the view taken by the arbitrator is impossible and such that no reasonable person could arrive at it, or (b) that the finding of the Arbitral Tribunal is based on no evidence.

The courts, over time, have dealt with each case on the basis of the facts of that case, reiterating that there is no straitjacket formula to adjudge whether or not the NCC was issued under duress or coercion, and if the claims of an issuer are extinguished after the NCC is issued.

However, there are certain clear principles that emerge from these cases for deciding disputes in relation to issue of an NCC and the consequent extinguishment of claims of a party. We explore these principles and the factual situations under which these were established.

Pre-arbitration and during arbitration

Once an issuer sends a notice invoking arbitration after issuing an NCC on the same claims that may have been purported to have been given up by way of the NCC, the Receiver counters the same by contesting the invocation on the basis that after the NCC was issued by the issuer, the contract stood discharged and no dues/claims survive. As no dues/claims survive, there is no dispute to be arbitrated upon. In situations where an Arbitral Tribunal is not constituted and the issuer approaches the Court under Section 11, Arbitration and Conciliation Act, 1996 (Arbitration Act), typically the opposite party (a Receiver) contends that given the claim of the issuer is extinguished, no dispute survives and without the existence of a dispute there would be nothing to arbitrate. Prior to the judgment of the Supreme Court of India in Interplay Between Arbitration Agreements under Arbitration Act, 1996 & Stamp Act, 1899, In re¹, (In re Interplay) the courts when determining in Section 11 proceedings whether or not to refer parties to arbitration, for example, in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.² and Union of India v. Master Construction Co.³, would apply the principle of discharge of the contract by accord and satisfaction and reject any reference to arbitration. However, in the In re Interplay case, the Supreme Court delineated the scope of enquiry in a petition under Section 11, Arbitration Act and emphasised that only the prima facie existence of an arbitration agreement is to be looked into by the appointing court and nothing else. As a result of the narrow ambit, even the issue of existence of a dispute, post the issuance of an NCC is now within the ambit of the Arbitral Tribunal only.

This issue arose in the landmark decision of the Supreme Court in SBI General Insurance Co. Ltd. v. Krish Spg.⁴ (Krish Spg.) where Krish Spinning, the insured, had signed a discharge form and accepted a certain settlement amount for two fire incidents from SBI General Insurance (the insurer), and then proceeded to invoke arbitration claiming that the discharge form was signed under coercion and undue influence as it needed the money. As State Bank of India (SBI) denied the claim and refused appointment of an arbitrator citing full and final settlement of all claims, Krish Spinning approached the High Court seeking appointment of an arbitrator, which came to be granted by the High Court. SBI challenged this order before the Supreme Court. The primary issue before the Supreme Court was whether the execution of a discharge voucher, which was claimed to be a full and final settlement, barred the invocation of arbitration. The Supreme Court relying on the judgment in the In re Interplay case⁵ held that:

117. …it is clear that the scope of enquiry at the stage of appointment of arbitrator is limited to the scrutiny of prima facie existence of the arbitration agreement, and nothing else.⁶

And the Court further expressly dismissed the argument that “jurisdiction of the referral court when dealing with the issue of ‘accord and satisfaction’ under Section 11 extends to weeding out ex facie non-arbitrable and frivolous disputes”. While the ultimate effect of the discharge form in the arbitration will be a matter of evidence and trial, at least when it comes to referring disputes to arbitration, an NCC has not stopped an arbitral reference at the Section 11 stage.

Building upon this approach, the Supreme Court in its recent decision in Arabian Exports (P) Ltd. v. National Insurance Co. Ltd.⁷ (Arabian Exports) reiterated the limited scope of judicial interference in cases of settlement of disputes by way of NCC at the stage of appointment of an arbitrator in a Section 11 petition and proceeded to expand the discussion to delineate the distinction between negotiated settlements and settlements with an NCC. The court observed that:

35. …In the first category there would be cases where there is bilateral negotiated settlement of pending disputes, such settlement having been reduced to writing either in the presence of witnesses or otherwise. …

36. In the second category of cases, there would be “no-dues/claims certificate” or “full and final settlement discharge vouchers” insisted upon and taken, either in a printed format or otherwise, as a condition precedent for release of the admitted dues. In the latter group of cases, the disputes are arbitrable.

37. Mere execution of a full and final settlement receipt or a discharge voucher cannot be a bar to arbitration even when validity thereof is challenged by the claimant on the ground of fraud, coercion or undue influence.⁸

In the Arabian Exports case the appellant, a meat exporter, suffered extensive loss when its factory was flooded in the 2005 Maharashtra rains. Although it claimed over Rs 5.7 crores under two insurance policies, the insurer delayed settlement for more than three years and ultimately tendered a standardised discharge voucher for only Rs 1.88 crores. The appellant pleaded that it signed the voucher under severe economic distress and pressure from banks and creditors. The respondent, on the other hand, pointed out that the appellant’s contentions had no evidentiary backing to it. Specifically, they contended that the “appellant has not produced any document to even prima facie show that the appellant was being pressurised by the respondent to enter into a settlement”.⁹ Much like the court in the Krish Spg. case¹⁰, the court was of the opinion that a determination on whether the appellant signed the NCC out of economic duress or not would be within the purview of the Arbitral Tribunal. Without addressing the scope of the Section 11 court, this decision establishes that even when a discharge or a NCC has been issued, the matter may still be referred to arbitration for adjudication, leaving questions such as economic duress to be determined by the Arbitral Tribunal.

Therefore, pursuant to the decision of the Supreme Court in the In re Interplay case¹¹ and the Krish Spg. case it is no longer open to a court exercising jurisdiction under Section 11, Arbitration Act to ascertain whether the contract between the parties stood discharged by accord and satisfaction after the issuance of NCC. The Section 11 court has to now restrict its examination to the issue of whether there exists an arbitration agreement and leave the rest to the Tribunal’s determination.¹²

However, the ground of discharge of the contract by accord and satisfaction after issuance of the NCC is still available to the Receiver during arbitration proceedings. The issue ultimately concerns the arbitrator’s jurisdiction to decide the dispute between the parties, and the finding of the arbitrator on the issue would decide whether the arbitration would go ahead or the arbitrator will not have the jurisdiction. The issuer in order to counter the argument would have to provide evidence of coercion/undue influence/fraud, etc. in issuance of the NCC. In order to understand the examination undertaken by arbitrators while reaching the conclusion of whether or not there was a valid discharge of the contract and if claims and dues survive, it is imperative to review the judicial treatment of the argument of discharge by accord and satisfaction at the stage of reference to arbitration.

Discharge of contract by accord and satisfaction

The Supreme Court has clarified the principle of accord and satisfaction, explaining that a contract may be discharged through mutual agreement when the parties substitute the original obligations with new ones or accept modified performance in place of the original terms. In the words of the Supreme Court:

27. …The agreement by which the original obligation is discharged is the accord, and the discharge of the substituted obligation is the satisfaction. A contract can be discharged by the same process which created it, that is, by mutual agreement. A contract may be discharged by the parties to the original contract either by entering into a new contract in substitution of the original contract; or by acceptance of performance of modified obligations in lieu of the obligations stipulated in the contract.

This Results in discharge of the contract which means that both parties have met their obligations under the contract, and nothing survives that can be enforced.

Therefore, once the contract is discharged nothing survives in terms of the alleged dispute raised by the issuer that needs to be arbitrated upon. Therefore, a Receiver takes the defence that the contractor had issued the NCC and the contract stood discharged and there is no arbitrable dispute.

The Supreme Court in New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd.¹³, was dealing with a matter where Genus Power had availed an insurance policy of about Rs 91 crores from New India Assurance securing its manufacturing unit against fire. Pursuant to a fire explosion in an adjoining Indian Oil Corporation Terminal causing extensive damage to the manufacturing unit of Genus Power, it raised an insurance claim with New India Assurance. New India Assurance, to assess the loss caused, appointed a surveyor who assessed the loss as about Rs 6 crores. In Genus Power’s own assessment, it had suffered losses to the tune of about Rs 28.79 crores. A few months after the surveyor filed his final report, Genus Power signed a letter of subrogation on a stamp paper accepting about Rs 6 crores in full and final settlement of its claim under the insurance policy. Three weeks thereafter Genus Power issued a notice to New India Assurance stating that the letter of subrogation was signed under duress, coercion and undue influence and it invoked arbitration and sought to appoint its nominee arbitrator. New India Assurance responded denying an arbitrable dispute on the ground that Genus Power had signed the letter accepting monies towards full and final settlement of its claim. In the meantime, Genus Power filed a Section 11 petition before the High Court stating that it had accepted the amounts because of extreme financial difficulty, duress and coercion. The High Court after considering submissions of both parties appointed the arbitrator observing that New India Assurance can raise its objection before the Arbitral Tribunal.

New India Assurance challenged the order before the Supreme Court on inter alia the following grounds that:

1. the letter of subrogation was a detailed agreement and the same was finalised and signed after negotiations, and

2. the respondent was a financially sound company, and it was improbable that such a company would feel financially constrained and feel coerced.

Genus Power resisted this on the ground that the destruction of its manufacturing unit had caused extreme financial hardship. The Supreme Court after considering the submissions of both parties allowed the appeal while holding that: 1) a bald plea of fraud, coercion, duress or undue influence will not be enough and party setting up the plea must prima facie establish the same,¹⁴ and 2) a protest or demur was not raised right after signing of the subrogation letter but raised after a period of three weeks indicating that the discharge was not owing to undue influence but owing to a voluntary accord (payment of the insurance amount) and satisfaction (payment of the amount calculated by the surveyor and acceptance of the same by Genus Power)¹⁵. Accordingly, the Supreme Court set aside the High Court’s order referring the parties to arbitration.

Therefore, during arbitration the Tribunal must ascertain whether or not the assertion of coercion and undue influence is backed by evidence. Factors like: 1) the time difference between receiving the amount towards satisfaction and raising the claim for additional payment, 2) the financial health of the issuer, 3) if the issuer was dependant on the money to be received for its survival, and 4) whether the issuer registered his protest in writing, are factors that weigh in with the arbitrator.

Registering protest — the “without prejudice” acceptance of claim amounts

The question of whether an NCC or discharge voucher conclusively bars further claims has been considered multiple times by both Arbitral Tribunals and courts. Over time, judicial pronouncements have grappled with the constant tussle between the sanctity of an NCC or a similar certificate and allegations of coercion, undue influence, or economic duress. In this section we examine the landmark judgment of the Supreme Court in NTPC Ltd. v. Reshmi Constructions, Builders & Contractors¹⁶ (NTPC v. Reshmi Constructions) where the Court examined whether an issuer’s protest, contemporaneously registered after issuing an NCC under financial duress, could sustain the invocation of arbitration. The dispute in NTPC v. Reshmi Constructions arose when Reshmi Constructions, after completing a project for National Thermal Power Corporation (NTPC), submitted a pre-final bill which NTPC did not accept and in turn it insisted on a final bill. The NTPC then prepared its own final bill and included a “no demand certificate” in it and NTPC informed Reshmi Constructions that if it wanted to get paid it must sign the no demand certificate. As Reshmi constructions had to get paid a large sum and it was under financial stress as it had to pay its workers, bankers, creditors, suppliers, etc. it succumbed to NTPC’s demand and signed the no demand certificate. However, on the same day Reshmi Constructions addressed a letter to NTPC registering its protest and clearly stating that it was coerced into signing the no demand certificate and it had signed the same “without prejudice” to all its rights and claims whatsoever in respect of its final bill. As NTPC denied all claims basis on the “no demand certificate”, Reshmi Constructions approached the Subordinate Judge’s Court which rejected its application for appointment of an arbitrator. Pursuant to this, Reshmi Constructions approached the Kerala High Court which allowed the application. NTPC challenged the High Court’s order before the Supreme Court. The Supreme Court while taking into account factors like: 1) the invoice prepared by Reshmi Construction was not accepted by NTPC and NTPC printed its own invoice with the no demand certificate which came to be issued by Reshmi Constructions, 2) Reshmi Constructions owed several dues to its financiers, creditors, workers, etc., 3) it had on the same day of receipt of the amounts registered a protest and claimed additional amount, and 4) in its protest letter, Reshmi Construction very clearly stated that it had received the amounts and issued the no demand certificate under coercion and undue influence and “without prejudice” to its rights and claims held that:

27. Even when rights and obligations of the parties are worked out, the contract does not come to an end inter alia for the purpose of determination of the disputes arising thereunder, and, thus, the arbitration agreement can be invoked. Although it may not be strictly in place but we cannot shut our eyes to the ground reality that in the cases 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.

(emphasis added)

28. Further, necessities non habet legem is an age-old maxim which means necessity knows no law. A person may sometimes have to succumb to the pressure of the other party to the bargain who is in a stronger position.

29. We may, however, hasten to add that such a case has to be made out and proved before the arbitrator for obtaining an award.

While the observations in NTPC v. Reshmi Constructions¹⁷ were made at the Section 11 stage and therefore carry the character of obiter dicta, they remain highly instructive. The Supreme Court’s reasoning signals a clear recognition that duress or coercion in signing an NCC is a legally cognizable concern. Importantly, the Court emphasised that the issuance of an NCC does not, by itself, terminate the contract or extinguish the arbitration agreement. Instead, the dispute resolution clause continues to operate, allowing the Arbitral Tribunal to examine whether the NCC was procured voluntarily or under compulsion. The takeaway, therefore, is that the existence of an NCC does not automatically bar arbitration; the Tribunal retains jurisdiction to decide whether genuine consent was present, and arbitration may proceed if coercion is established.

Post arbitration

This section examines the limited scope of judicial interference with arbitral findings under Section 34, Arbitration Act, particularly in disputes involving issuance of NCCs. As established through multiple judicial pronouncements, whether an NCC was issued voluntarily or under coercion is a pure question of fact, squarely within the domain of the Arbitral Tribunal. The courts, at the stage of challenge, are confined to reviewing whether the Tribunal’s findings are perverse and arrived at by ignoring material evidence, considering irrelevant material, or defying logic to the point of irrationality.

It is settled law that:

82. …The scope of interference by the Court under Section 34 of the 1996 Act, with findings of fact rendered by the Arbitral Tribunal, is all but completely foreclosed. It is only where the “finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse”, then, the finding, merits intervention under Section 34 as being “perverse”.¹⁸

Therefore, the scope of intervention at the stage of challenge to an arbitral award is limited to examining: 1) if the view taken by the Arbitral Tribunal is impossible or such that no reasonable person could arrive at it, and 2) the finding of the Arbitral Tribunal is not based on evidence or ignores material evidence.

Two recent judgments of the Delhi High Court, that take into account multiple judicial pronouncements on the subject and throw light on the nature of the examination involved at the stage of challenge to the award under Section 34, Arbitration Act.

1. Union of India v. Vishva Shanti Builders (India) (P) Ltd.¹⁹ — Vishva Shanti was granted a construction contract. Post completion Vishwa Shanti submitted its final bill along with NCC which was part of the bill as contemplated under the contract. Union of India cleared only the undisputed part of the bill. On receipt of the bill amount Vishwa Shanti raised a further claim. As the claims were disputed by Union of India, an arbitrator came to be appointed who awarded Vishwa Shanti’s certain claims in respect of the final bill. Union of India challenged the award under Section 34, Arbitration Act on inter alia the grounds that the arbitrator failed to appreciate that Vishwa Shanti had already issued the NCC, and it had provided no evidence of any protest registered thereafter. Vishwa Shanti countered the above by stating that it had issued the NCC under coercion, duress and pressure as Union of India had held Vishwa Shanti’s payments. The High Court rejected Union of India’s challenge while holding inter alia that all objections raised by Union of India on the issue were adequately addressed by the arbitrator and the arbitrator’s conclusion that Vishwa Shanti had signed the NCC under protest was supported by evidence including a letter addressed by Vishwa Shanti wherein it had clearly recorded its protest at the time of receiving payment against the final bill, while reserving its right to pursue arbitration for the balance amount. The Court further observed that pressure, coercion, and undue influence must be inferred from the specific facts and circumstances of each case and in the present case several factors pointed to such influence.

2. Union of India v. B.S. Sangwan²⁰ — B.S. Sangwan was granted the contract to work on a section of the rail line for Northern Railway. As certain payments that were due to B.S. Sangwan not paid by Union of India, he approached the court seeking appointment of an arbitrator. The arbitrator came to be appointed by a court order, which order was challenged by Union of India before the Delhi High Court on the ground that B.S. Sangwan had already issued a NCC and therefore there was no claim to adjudicate. The court disposed of Union of India’s while giving it liberty to raise the issue before the arbitrator. The arbitrator issued an award granting some of the claims raised by B.S. Sangwan. This award came to be challenged by Union of India on inter alia, the ground that B.S. Sangwan had already issued an NCC in terms of the contract between the parties and grant of B.S. Sangwan’s claims were contrary to the terms of the contract between the parties and therefore perverse. B.S. Sangwan resisted the challenge on the ground that NCC on the final bill was signed routinely on a printed form which was not dated and was prepared even before the amount of the final bill was known. Moreover, there was a delay of about a year between the final bill and the payment of dues putting financial pressure on B.S. Sangwan and coercing him to issue NCC. The High Court while taking note of the narrow scope of interference under Section 34, Arbitration Act proceeded to reject the Section 34 petition. The Court while rejecting the Section 34 held that the decision of the arbitrator, that the submission of the NCC had been made under economic pressure and coercion, and necessitated as the Union of India withheld processing B.S. Sangwan’s payment, did not suffer from any error of perception, nor could it be regarded as perverse or shocking to the conscience of the Court. The Court further held that the view taken by the arbitrator was at the very least plausible on the facts presented before the arbitrator.

Analysis

The enforceability of an NCC is a nuanced issue. While Receivers often rely on NCC to settle final payments and claims, the Indian Courts have recognised that an NCC is not always final and binding. Much like all other contracts an NCC also needs to meet the requirements of the Contract Act, 1872 and the most important requirement for a contract to be binding is that it should be signed voluntarily without any duress, coercion, or undue influence. The courts have over time recognised factors that must be taken into account when assessing the voluntary nature of NCC. However, the lack of a codified set of rules that an NCC must adhere to leads to multiple disputes, specially, in cases where the power dynamic is uneven between the parties and one party coerces the other to issue an NCC. While courts have successfully recognised ingredients of an NCC, it is still a challenge to ascertain if NCC was issued voluntarily in cases where the issuer is an entity that is not sophisticated and operating at a local level, such as contractors and companies working at village, town and district levels without a sophisticated battery of legal minds at their disposal. This issue arises because the voluntary nature of the NCC is a question of fact and can only be ascertained through correspondence exchanged between parties; however, these contractors and companies working at a village or town level do not maintain a flow of correspondence raising their grievances. This happens more so because these contractors and companies are at the mercy of the employer/insurer in most cases and rely on the funds received from them for survival. Given that it is not unheard for the legislature or regulators concerned to issue draft formats of documents to be entered into or signed by parties under various laws. The issue of a binding or non-binding NCC may only be resolved if the legislature or the regulator concerned issues a draft NCC and underlying rules for its signing and issuance between the parties.

The enforceability of an NCC is a tightrope walk, with outcomes turning on the facts and circumstances of each case. For the Receiver of an NCC, it must ensure that the NCC is backed by contemporaneous documentation such as correspondence, acknowledgments, or contractual provisions so that the counterparty cannot later allege coercion or undue influence. On the other hand, for the issuer, it is imperative to give careful consideration before signing and issuing an NCC. If signing becomes unavoidable for the issuer, it must accompany the NCC with records that demonstrate it was executed “without prejudice” and was non-binding. Promptly registering a protest and creating a documentary trail is critical in preserving a claim of coercion or economic duress. NCCs rarely serve as a basis for a summary dismissal of the claims. Instead, tribunals and courts look closely at surrounding circumstances and the nature of the relationship between the parties, which often proves decisive in determining whether an NCC was truly voluntary.