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Validity of No Claim Certificate / Discharge Voucher issued by Contractors

Introduction :
In general, the Government Contracts require submission of No Claim Certificate by
Contractors, as a pre-condition to release payments due under final bill. In some other
cases, the Contractors are compelled to sign No Claim Certificate / Discharge Vouchers to
accept much lesser amounts as full and final settlement than what they consider due to
them under the Contract.

The Contractors, almost invariably, are under tremendous pressure for release of the
amounts due to meet liabilities arising from execution of the Contract. Legal recourse to
resolution of the dispute would take inordinately long time and, in many cases, Companies
may not survive to see end of such litigation. The only choice the Contractor is left with is to
atleast secure release of whatever sums Employer is willing to pay. The Contractor,
therefore succumbs to the pressure and issues Discharge/No Claim Certificate, accepting
the payments offered by the Employer. After receiving the payment, the Contractors have
often approached Courts pleading that such No Claim / Discharge Voucher was issued
under coercion /duress/ undue influence and seek to revive claims under the main Contract.

This article discusses, in brief, the impact of such no claim / discharge vouchers on claims
of Contractor under the discharged Contract.

Impact of Discharge Voucher / No Claim Certificate

When a Contract is fully performed, there is a discharge of the Contract by performance and
the Contract comes to an end. Whether the Contract has been discharged by performance
or not, is a mixed question of fact and law and if there is a dispute in regard to that question,
the dispute is arbitrable. However, we are dealing with a situation, where both Parties to a
Contract confirmed in writing that, the Contract has been fully and finally discharged by
performance of all obligations and there are no outstanding claims or disputes by way of
issuance of No Claim Certificate / Discharge Voucher.
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The discharge of the Contract, when given in such a manner and acted upon by both the
Parties proves conclusively that, the Parties agree to settlement of all the existing disputes
by the Agreement formulated in the receipt. The Parties abandon their respective rights
under the existing Contract in consideration of the acceptance by the Parties of a new
Agreement in the form of Discharge / No Claim Certificate.

When such an accord and satisfaction takes place, the prior rights of the Parties are
extinguished. Such rights, in fact, are exchanged for the new rights and the new agreement
becomes a new departure and the rights of the Parties are fully represented by such new
Agreement. Certainly, the Party having entered into such an agreement for extinguishment
of their rights under previous Contract cannot raise any dispute again to arbitration or any
other forum, in respect of the Discharged Contract.

Validity of the Discharge Certificate / No Claim Certificate

As discussed in the previous para, No Claim Certificate / Discharge Certificate by mutual
consent of the Parties results in a Substituted Agreement in place of the Original Agreement
discharged by the Parties.

Indisputably, in order for this new Agreement, between the Parties, to be valid and
enforceable, the Agreement has to satisfy the requirements of the Indian Contract Act.
Section 10 of the Contract Act defines What Agreement are Contracts?
All Agreements are Contracts, if they are made by the free consent of Parties, competent to
Contract for a lawful consideration and with a lawful object and are hereby expressly
declared to be void.

Therefore, for an enforceable Contract, free consent of the Parties is the first and foremost
requirement.

Section 13 of the Contract Act defines Consent as follows :

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Two or more persons are said to consent, when they agree upon the same thing in the
same sense.

Free consent is further defined in Section 14 of the Contract Act.

Consent is said to be free, when it is not caused by:

1) Coercion, as defined in Section 15 or
2) Under Influence, as defined in Section 16 or
3) Fraud, as defined in Section 17 or
4) Mis-Representation as defined in Section 18 or
5) Mistake subject to the provisions of Sections 20,21 and 22

Consent is said to be so caused, when it would not have been given but for the existence of
such coercion, undue influence or misrepresentation or mistake.

Validity of the Substituted Agreement, therefore, will come into question in case any of the
Parties is able to establish that the consent of the Party was caused by any of the factors
mentioned under Section 14 of the Act. In such a case, No Claim Certificate/ Discharge
Agreement between the Parties will be held invalid and the terms of the original Contract
will be revived. It will then be open for the Parties to assert and enforce their respective
rights and obligations under the Contract, which was intended to be discharged.

The issue of validity of No Claim Certificate / Discharge by Mutual Agreement has been
subjected to the scrutiny of the Courts regularly and have received the attention of the Apex
Court on many occasions. The judgments of the Supreme Court on this issue fall broadly
into two categories:

In the First category of judgments, it has been held that, having received the payment under
the said Discharge Voucher, the Respondent cannot, while retaining and enjoying benefit of
the full and final payment, challenge the validity or correctness of the Discharge Voucher.
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The subsequent claims of the Claimant, therefore, cannot be referred to Arbitration. Some
of the notable judgments, which support this view are :
- State of Maharashtra vs Nav Bharat Builders , AIR 1991 (SC) 11
- P.K. Ramaiya & Co. vs Chairman and Managing Director National Thermal - Power
Corporation 1994 (1) SC A LE 1 and
- Nathani Steels Limited vs Associated Constructions

There are also a series of judgments, which hold that, where a person, on whom, the claim
is made withholds the admitted amount to coerce and compel the Claimant to accept
smaller payment in full and final settlement and give a discharge voucher. There is no
accord and satisfaction in the eye of law and the discharge voucher will not come in the way
of a genuine and bonafied dispute being raised regarding the balance of the claim and
seeking reference of such claim to Arbitration. The judgments of the Honorable Supreme
Court supporting this view are :
- Damodar Valley Corporation vs K K Kar (1974) 2 SCR 240
- Bharat Heavy Electricals Limited, Ranipur vs Amarnath Bhan Prakash
(1982)1 SCC 625
- Union of India vs L.K Ahuja and Co (1988) 3 SCR 402
- Jayesh Engineering Works vs New India Assurance Company Ltd (2010)
SCC 178
- Chairman and Managing Director NTPC Limited vs Reshmi Construction,
Builders and Contractors, AIR (2004) SC 1330 and
- Amibika Construction vs Union Of India, 2006 (12) SC ALE 149

Honorable Supreme Court in the judgment National Insurance CO Ltd vs Bhogra Polyfab
Private Limited had analyzed the previous judgments of the Supreme Court, on the issue,
apparently upholding the two positions, which appear to be contradictory.

The ratio and findings in the previous cases decided by Honorable Supreme Court fall
under the aforesaid two categories. In one category are the cases, where the Court after
considering the facts found that, there was a full and final settlement resulting in accord and
satisfaction and there was no substance in the allegations of coercion/undue influence.
Consequently, the Court held that, there could be no reference of any dispute to arbitration.
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None of the cases in this category, therefore, lay down a proposition that mere execution of
a full and final settlement receipt or discharge voucher is a bar to arbitration, even when the
validity thereof is challenged by the Claimant on the ground of fraud, coercion or undue
influence. Nor do they lay down a proposition that even if the discharge of Contract is not
genuine or legal, the claims cannot be referred to arbitration. In all the cases falling in this
category, the Court examined the facts and satisfied itself that, there was accord and
satisfaction or complete discharge of the contract and that there was no evidence to support
the allegation of coercion/ undue influence.

In the cases falling in other category, the Honorable Court has found some evidence to
support the allegation of coercion / undue influence, which caused the signing of the No
Claim Certificate or Discharge Voucher. Such cases where there was valid ground to
support such allegation then ofcourse the Court had determined that the discharge
voucher / no claim certificate would not be valid and allowed the claims under the original
Contract to be referred to Arbitration.

The position that emerges from an analysis of the judgments of the Supreme Court, as
analysed by the Honorable Supreme Court in the aforesaid judgment, is that in case there
are allegations of obtaining a full and final Discharge Voucher by fraud, coercion, undue
influence then the evidences will have to be considered as to whether there was any fraud,
coercion or undue influence. If it is found that, there was none, the Court will accept the
voucher as being in discharge of the Contract and reject the claim without examining the
claim on merits. On the other hand, if the Court finds that the Discharge Voucher had been
obtained by fraud/undue influence/coercion, it will ignore the same, examine whether the
plaintiff had made the claim on merits and decide the matter accordingly, either through
Court or refer the matter to Arbitration, as the case may be.

It, therefore, follows that in case Party, who issued the Discharge Voucher / No Claim
Certificate is in a position to establish that such Discharge Voucher / No Claim Certificate
would not satisfy the requirement of free consent under Section 14 of the Indian Contract
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Act and that the consent was obtained by fraud, coercion / undue influence then the No
Claim Certificate/ Discharge would not be a bar to reference of Claims to Arbitration.

Honorable Supreme Court in the National Insurance case has given some illustrative
examples as to when claims are arbitral and when they are not, in case, the discharge of
Contract by accord and satisfaction is disputed. These illustrations can be a guide for the
Contractors to take appropriate steps at the time of issuing No Claim Certificate / Discharge
Voucher or in assessing the validity of No Claim Certificate/ Discharge Voucher already
Issued. The illustrations given in the National Insurance judgement are reproduced here
below:

i) a claim is referred to a conciliation or a pre-liitigation lokadalat, the Parties negotiate

and arrive at a settlement. The terms of settlement are drawn up and signed by both
the Parties and attested by the Conciliator or the members of the lokadalat. After
settlement by way of accord and satisfaction, there can be no reference to
arbitration.
ii) The Claimant makes several claims. The admitted or undisputed claims are paid.
Thereafter, negotiations are held for settlement of the disputed claims resulting in an
Agreement in writing, settling all the pending claims and disputes. On such
settlement, the amount agreed is paid and the Contractor also issues a discharge
voucher/no claim certificate /full and final receipt. After a Contract is discharged by
such accord and satisfaction, neither the Contract nor dispute survives for
consideration. There cannot be any reference of any dispute to arbitration thereafter.
iii) A Contractor executes the work and claims payment of say Rs. 10 Lacs as due in
terms of the Contract. The Employer admits the claim only for Rs. 6.0 Lacs and
informs the Contractor either in writing or orally that unless the Contractor gives a
Discharge Voucher in the prescribed format, acknowledging receipt of Rs.6.0 Lacs 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,
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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 a 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 not
rejected, but the insured is informed during discussions that unless the Claimant is
full and final voucher for a specific 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 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. Accord is not by free consent. The Arbitration Agreement can thus
be invoked to refer the dispute to arbitration.
v) A Claimant makes a claim for a huge sum by way of damages. The Respondent
disputes the claim. The Claimant, who is keen to have a settlement and avoid
litigation voluntarily reduces the claim and requests for settlement. The Respondent
agrees and settles the claim and obtains full and final discharge voucher. Here even
if the Claimant might have agreed for settlement due to financial compulsions and
commercial pressures or economic duress, the decision was his free choice. There
was no coercion or compulsion by the Respondent. Therefore, the accord and
satisfaction is binding and valid and there cannot be any subsequent claim for
reference to arbitration.

The issue has been examined yet again in a judgement of the Honorable Supreme Court
R.L.Kalathia and Co. vs State of Gujarat decided on 14 January 2011, 2011(1) SCALE 441.
In this judgement, Honorable Court referred to the National Insurance Company Limited
case, discussed herein above, and under Para 9 set out the basic principles concerning
issuance of ‘No Due Certificate’ and their validity as follows :
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1) merely because the Contractor had issued “No Due Certificate”, if there is
acceptable claim, the Court cannot reject the same on the ground of issuance of No
Due Certificate.
2) in as much as, it is common that unless the “Discharge Certificate” is given in
advance by the Contractor, payment of bills are generally delayed. Hence such a
clause in the Contract would not be an absolute bar to the Contractor raising claims,
which are genuine at a later date even after submission of such No Claim Certificate.
3) Even after execution of full and final discharge voucher/receipt by either of the
Parties, if the said party is able to establish that he is entitled to further amount, for
which, he is having adequate material is not barred for claiming such amount merely
because of acceptance of the final Bill by mentioning without prejudice or by issuing
No Due Certificate.

With the latest judgement on the subject, it appears that the issue regarding validity of the
“No Claim Certificate” issued by Contractors is now well settled. Progressive approach of
the Courts in dealing with matters of undue pressure exerted by the public officers is evident
in all the spheres and even in this case Honorable Supreme Court has taken a very positive
and pragmatic approach by allowing the Contractors to raise the claims on merits, depite
issuance of No Claim Certificate / No Due Certificate. This will go a long way in preventing
injustice at the hands of the public officers against the Contractors, who almost invariabley
coerced the Contractors to sign No Claim Certificate / No Due Certificate, despite there
being valid claims due to acts / ommission of the Employer.

It is, however, cautioned that, in case there are no evidence for coercion / undue influence
causing the issuance of No Claim Certificate / Discharge Certificate, it will be difficult for the
Parties to disregard such accord and satisfaction Agreement.

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