India: Application Of Amended Provision Under The 2015 Amended Act, Impact Of No Dues Certificate And Exhaustion Of Remedies Under Arbitration Agreement

Last Updated: 2 May 2019
Article by AMLEGALS  

Union Of India v. Parmar Construction Company

In this case, the respondents were registered contractors with the railway establishment and undertaking work contracts of various kinds.

They raised a demand for escalation cost and the interest accrued thereon because the date of the completion of the project was delayed as alleged due to breach of obligations by the appellants and the scheduled date of completion had to be extended.

There also existed an impact of the rise in the prices of the raw material and the project became impossible to be completed by the respondent contractors.

Hence, a request was made to the appellants to either pay the enhanced escalation price otherwise the respondent contractors would not be in a position to conclude the contract.

On the acceptance for payment of the escalation costs, respondent contractor completed the project work and raised final bills in the prescribed predetermined format which also included no dues certificate.

Subsequently, the Respondent disputed the payment of the escalated cost, and in terms of the clause of arbitration in the agreement, they sent a notice for arbitration invoking clause 64(3) of GCC.

The Appellant declined the same taking shadow of the fact that no dues certificate had already been furnished by the Respondent.

This led the respondent contractor to approach the High Court by filing an application under Section 11(6) of the Act.

The request for referring the dispute to arbitration was received by the appellants much prior to the enforcement of the Amendment Act, 2015 which came into force, w.e.f. 23rd October, 2015.

ISSUES BEFORE THE SC

The issues that came for consideration before the Hon'ble Apex Court were:

  1. Whether the arbitration agreement stands discharged on acceptance of the amount and signing no claim/discharge certificate?
  2. Whether the High Court was justified in invoking amended provision under the 2015 Amended Act?
  3. Whether it was permissible for the High Court under Section 11(6) of the Arbitration Act, 1996 (prior to the Amendment Act, 2015) to appoint third party or an independent Arbitrator when the parties have mutually agreed for the procedure vis à vis the authority to appoint the designated arbitrator?

OBSERVATION

First Issue

To conclusively determine the first issue, the Court referred to Clause 43(2) of the Contracts signed by the Respondents, where they have to furnish a "No Claims Certificate" in advance of the final bills being examined by the Railway Authorities.

The Court also took note of all the cases that the Appellant cited and categorized them into two categories:

  1. Full and Final Settlement
  2. No Claims Certificate as a condition precedent.

The Court stated that the cases falling under Category 2 shall apply to this case and disputes in such cases have been held arbitrable.

The Court in their concluding remarks to the issue held that the arbitral disputes subsisted even when a no claims certificate was provided as the respondents were asked to furnish the same in advance and them being small scale contractors did not have any bargaining power against the appellants.

The Court thus finally held that the Contract was not discharged merely by furnishing a "No Claims Certificate" and all the contentions of the Respondent were opened to be examined in arbitral proceedings.

SECOND ISSUE

To determine the second issue in question, the Court examined Section 1(2) of the Amendment Act, 2015 and Section 21 and Section 26 of the Principal Act (pre-amendment act).

The Court was of the view that the Amendment Act, 2015 has come into force on 23rd October 2015, and hence shall not apply to the current proceedings since the appeal in the Court with regards to appointment of arbitrator was pending before the concerned date of 23.10.2015. 

Hence, the Court opined that the Principal Act, before the amendments of 2015 will be made applicable for all applications and requests arising out of this dispute.

THIRD ISSUE

To conclusively determine the third issue, the Court examined Section 11(6) of the Principal Act (pre-amended Act) in detail.

After detailed analysis of the above-mentioned section and relying on many case-laws cited by the Appellant, the Court came to the conclusion that emphasis has been given by the Court in all relied cases to resort to the agreed terms and conditions by both the parties. Although the name in the arbitration agreement is not mandatory but emphasis should always be on the terms of the arbitration agreement to be adhered to.

The Court thus quashed and set aside the High Court's orders of appointment of an independent arbitrator and asked the Appellants to appoint arbitrator according to the agreed clauses of the Contract.

CONCLUDING VIEW

In the present case the Court held that a No Claims Certificate asked to be provided in advance will not subsist the claims to be non-arbitrable. The Respondent can argue for all their contentions against the Appellant in an arbitration.

The Court also held that the applicability of the Amended Act of 2015 should not be taken into consideration. Providing for the same, the court stated: "In the instant case, the request was made and received by the appellants in the concerned appeal much before the Amendment Act, 2015 came into force.

In our considered view, the applications/requests made by the respondent contractors deserves to be examined in accordance with the principal Act, 1996 without taking resort to the Amendment Act, 2015 which came into force from 23rd October, 2015."

The Court further held that emphasis is supposed to be given to the procedure laid down under the Terms and Conditions of the Contract, agreed by both the parties.

Emphasizing on the same, the Court held the following:

"44. To conclude, in our considered view, the High Court was not justified in appointing an independent arbitrator without resorting to the procedure for appointment of an arbitrator which has been prescribed under clause 64(3) of the contract under the inbuilt mechanism as agreed by the parties.

45. Consequently, the orders passed by the High Court are quashed and set aside."

REASON OF JURISPRUDENCE

The Court heavily relied on the case of National Insurance Company Limited Vs. Boghara Polyfab Private Limited [2009(1) SCC 267] where the Court in that case laid down an illustrative list of instances that might be beneficial for authorities in taking a decision as to whether in a given situation where no claim/discharge voucher has been furnished what will be its legal effect and whether any arbitral dispute subsists to be examined by the arbitrator in such a situation.

Para 52(iii) of the above – mentioned case was found to be absolutely relevant in our case by the Court. The para quoted under the judgment was as under:

"(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."

The same principles were applied by the Court to state that a no claim certificate will not bar the Respondents from further contending in an arbitration proceeding.

AMLEGALS REMARKS

In the present case, the Court has put reliance on many cases to re-emphasize the following: 

One The benefits of Amendment Act of 2015 cannot be taken by every arbitration or related court proceeding. The Amendment Act clearly states the threshold date to be 23.10.2015 and that needs to be strictly followed. Amended provisions of the 2015 Act shall not be applied to Court proceedings that have been pending before 23.10.2015.

Second The respondents in this case are petty contractors with no bargaining power and are compelled to accept furnishing of no claims certificate in advance of the final bills to be paid by the Appellants. Hence, they must be provided with an opportunity to contend their case in front of an arbitral tribunal for the correct dispute resolution mechanism.

Third – The procedure agreed upon by both the parties under the arbitration agreement must be taken into consideration by the Court when exercising their powers under Section 11 for appointment of an arbitrator.

To conclude, the Courts must be aware of keeping the arbitration agreement above their jurisdiction and the intention of the parties must be respected. The applicability of the Amendment Act of 2015 also should be kept in perspective before giving a retrospective application of the same.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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