Reference to arbitration after final settlement

By Madhu Sweta and Amit Mishra, Singhania & Partners
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In the case of Union of India and Ors v Master Construction Co, the Supreme Court has held that in proceedings under section 11(6) of the Arbitration and Conciliation Act, 1996, where a party pleads that a discharge voucher or no-claim certificate has been obtained by fraud, coercion, duress or undue influence, and the other side contests this, a bald plea is not enough for referral to arbitration.

The party that makes the allegation must place material before the chief justice or designate to prima facie establish the plea. If the chief justice or designate finds merit in the allegation, they may decide the issue or leave it to be decided by the arbitral tribunal. If the plea is found to be an after-thought, make-believe or lacking in credibility, the matter must end then and there.

Madhu Sweta Partner Singhania & Partners
Madhu Sweta
Partner
Singhania & Partners

Background

The petitioner awarded a contract to the respondent contractor in September 1995. The contractor furnished no-claim certificates and the final bill was signed in May 2000. The contractor withdrew the no-claim certificates in July 2000 and lodged certain claims against the petitioner. The chief engineer declined to entertain the claims on the ground that the final bill had been accepted by the contractor after furnishing no-claim certificates and so no claim existed under the contract.

The contractor asked the petitioner to refer the disputes between the parties for resolution to an arbitrator. As no arbitrator was appointed by the petitioner, an application under section 11 of Arbitration and Conciliation Act was filed by the contractor. A civil judge dismissed the application in January 2003.

The dismissal was challenged by a writ petition filed before the High Court of Punjab & Haryana. The division bench of the high court dismissed the writ petition in May 2004. The contractor challenged the high court’s decision by filing a special leave petition before the Supreme Court.

The Supreme Court, in January 2006, set aside the order passed by the high court and lower court and directed that the application filed by the contractor be placed before the chief justice of Punjab & Haryana High Court. The chief justice, in December 2006, held that all disputes between the parties had to be referred to arbitration and appointed a sole arbitrator. The petitioner challenged this by a special leave petition to the Supreme Court.

The controversy

The issue relates to whether after furnishing no-claim certificates and receiving payment of the final bill as submitted by the contractor, any arbitrable dispute between the parties survived or the contract stood discharged.

Amit Mishra Associate Singhania & Partners
Amit Mishra
Associate
Singhania & Partners

The petitioner contended that no arbitrable dispute existed between the parties as full and final payment had been received by the contractor voluntarily after submission of no-claim certificates and the final bill.

The contractor argued that the no-claim certificates were submitted under financial distress and coercion, as the petitioner had arbitrarily withheld the payment and so the contract was not fully performed. Further, this issue must be decided by an arbitrator alone.

The petitioner heavily relied on the decision of Supreme Court in the case of Boghara Polyfab Private Limited, where the court carved out the legal position with regard to jurisdiction of the chief justice or designate in proceedings under section 11. The court held that whether a contract has been discharged by performance is a mixed question of fact and law, and if there is a dispute over this the question is arbitrable.

The court, however, noted an exception to this proposition. Where the parties to the contract confirm in writing that the contract has been fully and finally discharged by performance of all obligations and there are no outstanding claims or disputes, courts will not refer any subsequent claim or dues to arbitration.

It was further held that a claim for arbitration cannot be rejected merely or solely on the ground that a settlement agreement or discharge voucher has been executed by the contractor and that such a dispute will have to be decided by the chief justice or designate in the proceedings under section 11 or by the arbitral tribunal.

Conclusion

After considering the exception carved out in the Boghara Polyfab case, the Supreme Court allowed the appeal. It was held that the chief justice or designate must look into whether the dispute is bona fide and genuine.

The Supreme Court has rightly limited the scope to refer disputes to arbitration. The decision will save the parties from incurring unnecessary cost of arbitrations for disputes which have already been put to rest by the conduct of the parties.

Madhu Sweta is a partner and Amit Mishra is an associate at Singhania & Partners, which is a full-service national law practice. The firm has offices in New Delhi, Noida, Bangalore, Hyderabad and Mumbai.

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