No Claim Certificate Issued under Economic Coercion or Duress

Most of the contracts involving governments or government bodies require the contractors to issue a No Claim Certificate (“NCC”) to release the final bill amounts. In many cases, this would result in the employer claiming discharge of contract by accord and satisfaction and contractors being denied of their legitimate claims. Similarly, insurance companies often ask the insured to issue ‘discharge vouchers’ in order to release the insurance amount.

Thus, this issue has reached before courts on numerous occasions and courts have consistently held that if the NCC is issued under economic coercion or duress the same will not preclude the aggrieved party from raised further claims.

As observed by the Hon’ble Supreme Court in NTPC Ltd. v. Reshmi Constructions, Builders & Contractors[1], the public sector undertakings would have an upper hand where a contractor has made huge investment [and] 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.

The Supreme Court in Reshmi Constructions, discussed the law of discharge by accord and satisfaction in detail. The Court observed that the public sector undertakings would ordinarily release the money only if the contractor issues a “No-Demand Certificate” is signed. The Court referring to the maxim ‘necessitas non habet legem’, noted that a person may sometimes have to succumb to the pressure of the other party to the bargain who is in a stronger position.

Referring to various precedents, the Supreme Court held that normally an accord and satisfaction by itself would not affect the arbitration clause and that whether there was discharge of the contract by accord and satisfaction or not is an arbitrable dispute. Thus, even after issuance of an NCC a party may invoke arbitration to make out and prove before the arbitrator that he issued the NCC under duress from the other party who is in a stronger position. The Court in effect laid down that the ‘no-claim’ clauses in the contract would not be an absolute bar to the contractors raising further claims after issuance of NCC and that each case is required to be considered on its own facts.

In New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd.[2], the Supreme Court held that bald plea of coercion is not sufficient. The party pleading coercion should prove the plea with supporting material for a court to hold that the accord/satisfaction or no-dues certificate was involuntarily given.

Ambica Construction v. Union of India[3] was a case where unless a discharge certificate was given in advance, payment of bills were generally delayed. The Supreme Court held that although the contract between the parties provided for NCC, the same is meant to be a safeguard as against frivolous claims after final measurement. The Court relying on Reshmi Constructions held that it can no longer be said that a NCC clause in the contract would be an absolute bar to a contractor raising claims which are genuine, even after the submission of such no-claim certificate.

In Associated Construction v. Pawanhans Helicopters Ltd.[4] the Supreme Court reproduced and relied extensively on the communications exchanged between the parties prior to issuance of the NCC to hold that the contractor was compelled to issue a “no-dues certificate” under duress.

In National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.[5], the Supreme Court gave extensive illustrations as to when claims are arbitrable and when they are not, when discharge of contract by accord and satisfaction are disputed. Two of the illustrations given by the Court with regard to issuance of NCC reads as follows:

52. […]

(iii) A contractor executes the work and claims payment of say rupees ten lakhs as due in terms of the contract. The employer admits the claim only for rupees six lakhs and informs the contractor either in writing or orally that unless the contractor gives a discharge voucher in the prescribed format acknowledging receipt of rupees six lakhs in full and final satisfaction of the contract, payment of the admitted amount will not be released. The contractor who is hard-pressed for funds and keen to get the admitted amount released, signs on the dotted line either in a printed form or otherwise, stating that the amount is received in full and final settlement. In such a case, the discharge is under economic duress on account of coercion employed by the employer. Obviously, the discharge voucher cannot be considered to be voluntary or as having resulted in discharge of the contract by accord and satisfaction. It will not be a bar to arbitration.

(iv) An insured makes a claim for loss suffered. The claim is neither admitted nor rejected. But the insured is informed during discussions that unless the claimant gives a full and final voucher for a specified amount (far lesser than the amount claimed by the insured), the entire claim will be rejected. Being in financial difficulties, the claimant agrees to the demand and issues an undated discharge voucher in full and final settlement. Only a few days thereafter, the admitted amount mentioned in the voucher is paid. The accord and satisfaction in such a case is not voluntary but under duress, compulsion and coercion. The coercion is subtle, but very much real. The “accord” is not by free consent. The arbitration agreement can thus be invoked to refer the disputes to arbitration.

The above two illustrations clearly demonstrate the cases of dominant parties imposing economic coercion or duress to obtain involuntary NCC. Courts have consistently held that such NCC obtained by economic coercion or duress will not bar the aggrieved party from invoking arbitration for further claims.

The Supreme Court in Union of India v. Parmar Construction Co.[6] held,

[W]e 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 railway establishments/appellants without any justification reduce the claim unilaterally and take a defence of the no claim certificate being furnished which as alleged by the respondents to be furnished at the time of furnishing the final bills in the prescribed format.

The court noted that the contractors who entered into contract for construction works with the railway establishment cannot afford to take any displeasure from the employer, the amount under the bills for various reasons which may include discharge of his liability towards the bank, financial institutions and other persons, indeed the railway establishment has an upper hand. In such situations, the court held, a rebuttable presumption could be drawn that when a no claim has been furnished in the prescribed format at the time of final bills being raised with unilateral deductions made even that acceptable amount will not be released, unless no claim certificate is being attached to the final bills.

The court noted that the facts of the case cover illustration at para 52(iii) of Boghara Polyfab (P) Ltd. where the contractors are left with no option and being in financial duress compelled to accept the amount paid. The court held that the discharge voucher prima facie cannot be said to be issued voluntary and that there was no discharge of the contract by accord and satisfaction.

In Oriental Insurance Co. Ltd. v. Dicitex Furnishing Ltd.[7] the Supreme Court referred to the illustration at paragraph 52(iii) of Boghara Polyfab to hold that an aggrieved party can be the victim of economic coercion which results in its signing a document which discharges the other party of its obligations. In such cases, the dispute beween the parties can be referred to arbitration.

In the recent case of Ircon International Limited v. GPT-Rahee JV[8] the Delhi High Court upheld the arbitrator’s conclusion that the NCC issued in order to get withheld amounts released will not preclude the contractor from making further claims.

In view of the above decisions of the Supreme Court of India, it is now well settled that issuance of NCC per se will not preclude an aggrieved party from initiating arbitration for further claims. Before the arbitrator, the aggrieved party may claim that he is a victim of economic coercion or duress before the arbitrator. However, a bald plea of coercion or duress is not sufficient. The party pleading coercion or duress has to establish the same with supporting evidences. The arbitrator has to analyse the NCC in view of the surrounding circumstances including the communications exchanged between the parties.

[1] (2004) 2 SCC 663 : 2004 SCC OnLine SC 27 [2] (2015) 2 SCC 424 : (2015) 2 SCC (Civ) 130 [3] (2006) 13 SCC 475 : 2006 SCC OnLine SC 1239 [4] (2008) 16 SCC 128 : 2008 SCC OnLine SC 807 [5] (2009) 1 SCC 267 [6] (2019) 15 SCC 682 : (2020) 2 SCC (Civ) 390 : 2019 SCC OnLine SC 442 [7] (2020) 4 SCC 621 : (2020) 3 SCC (Civ) 202 : 2019 SCC OnLine SC 1458 [8] O.M.P. (COMM) 273/2021, Judgement Delivered on 25 March 2022