Mere Allegation That No-Claim Certificate Was Obtained Under Financial Duress & Coercion Doesn’t Lead To Arbitrable Dispute: SC [Read Judgment]

Mere Allegation That No-Claim Certificate Was Obtained Under Financial Duress & Coercion Doesn’t Lead To Arbitrable Dispute: SC [Read Judgment]

Setting aside an arbitration reference order issued by the High Court, the Supreme Court held that the party should not have been permitted to raise arbitration dispute after accepting full and final payment of the contractual amount.  The Court observed that mere allegation that no-claim certificate has been obtained under financial duress and coercion, without there being anything more to suggest the same, does not lead to an arbitrable dispute.

The matter arose out of a contract awarded by the ONGC. The company, which was awarded the contract, issued a no claim certificate on accepting full and final payment after the execution of work. However, the no claim certificate was later withdrawn by the company stating that it was issued under duress and coercion in order to get payment. The company contended that several of its running account bills remained uncleared, and it had to incur several other additional expenses on account of causes attributable to ONGC. Hence, the company sought initiation of arbitration proceedings. On refusal of ONGC to accede to arbitration request, the company approached the high court under Section 11 of the Arbitration and Conciliation Act, and the high court referred the matter to arbitration.

The reference made by the high court was challenged by ONGC in Supreme Court contending that arbitration reference should not have been made when the other party had recorded full discharge and satisfaction of the contract. On the other hand, the company contended that if a party who has executed the discharge agreement or discharge voucher alleges that execution of such document was on account of fraud/coercion/undue influence practiced by the other party then such discharge of the contract by such agreement would be rendered void and cannot be acted upon.

Situations where a party disowns the discharge and satisfaction of contract subsequently on grounds of coercion/fraud are not unknown to law and were dealt with in Union of India and Others v Master Construction Co (2011) 12 SCC 349 and New India Assurance Co Ltd v Genus Power Infrastructure Ltd  (2015) 2 SCC 424. It was held in the said decisions that in genuine cases, it can be said that arbitrable disputes arise in such situations, and the matter could be referred to arbitration if a prima facie case is made out. However, a bald plea of fraud, coercion, duress or undue influence is not enough and the party who sets up such a plea must prima facie establish the same by placing materials. In RL Kalathia & Co v State of Gujarat (2011) 2 SCC 400, wherein it was observed that very often public sector undertakings have an upper hand and they demand issuance of no dues certificate for releasing payment.

Summing up the precedential decisions, the bench comprising Justice RK Agrawal and Justice Amitava Roy observed as follows:

When we refer to discharge of a contract by an agreement signed by both the parties or by execution of a full and final discharge voucher/receipt by one of the parties, we refer to an agreement or discharge voucher which is validly and voluntarily executed. If the party which has executed the discharge agreement or discharge voucher, alleges that the execution of such discharge agreement or voucher was on account of fraud/coercion/undue influence practised by the other party and is able to establish the same, then obviously the discharge of the contract by such agreement/voucher is rendered void and cannot be acted upon. Consequently, any dispute raised by such party would be arbitrable.

However, the bench also added that in case the party is not able to establish such a claim or appears to be lacking in credibility, then it is not open to the courts to refer the dispute to arbitration at all.

Here, on facts, the court found that the dispute raised by the company was not genuine.  On scanning the correspondences between parties, the court noted that the company had not raised any dispute or claim earlier. The conduct of the company showed that “no-claim certificate” was given by it voluntarily. It was found that the company accepted the amount voluntarily and the contract was discharged voluntarily.

We are of the opinion that there is nothing on record to prove that the said Certificate had been given under duress or coercion and as the Certificate itself provided a clearance of no dues, the contractee could not now turn around and say that any further payment was still due on account of the losses incurred during the execution of the Contract. The story about duress was an afterthought in the background that the losses incurred during the execution of the Contract were not visualised earlier by the contractee, the bench observed. Hence, the Supreme Court held that the high court ought not to have referred the parties to arbitration.

Read the Judgment Here