This blog explores the complexities surrounding the No Claim Certificates (NCCs) in construction contracts and examines their validity as a means of contractual discharge. It starts with what and why of NCCs and then moves to provisions of standard form contracts and judicial decisions
1. What is a No-Claim Certificate (NCC) ?
A No-Claim Certificate refers to an undertaking submitted by the contractor, stating that they would not have any claim against the employer after receiving the payment referenced in the NCC. Often, the employer seeks the submission of an NCC on a pre-printed format while finalizing the final payments under the contract. Sometimes, NCCs are also issued by contractors during the grant of an EOT or as part of supplementary agreements executed to settle pending disputes. A sample NCC reads as under:
RECEIVED the sum of Rupees …….. in full and final settlement of all the payments due to us for work executed by us under the contract agreement no….. between us and <Employer> including all amounts payable to us as per the agreement.We hereby unconditionally and without any reservation whatsoever certify that with this payment, we shall have no claim whatsoever of any description, on any account whatsoever from <Employer>, against aforesaid job executed by us.
We further declare unequivocally that with this payment we have received all the amounts payable to us and have no dispute of any description whatsoever regarding the amounts worked out as payable to us and received by us and that we shall be continued to be bound by the terms and conditions of the agreement as regards performance of the contract.
2. Why is an NCC Sought?
As evident from the sample NCC above, by issuing the NCC, the contractor certifies that:
• The payment received is the full and final settlement of all the payments under the contract.
• With this payment, the contractor would have no claim under the contract.
• The contractor has no dispute regarding the amount paid to it.
When the contractor voluntarily submits an NCC and the employer releases the agreed payment, the obligations of each party are considered complete, marking the “closure” of the contract. This stage in the contract life cycle is known as closeout or closure. In legal terms, it signifies the discharge of the contract. Therefore, employers seek an NCC as a safeguard against future claims, thereby attempting to achieve the contract’s closure.
3. Discharge of Contract
When the object of the contract is fulfilled, the liabilities of both parties come to an end, and the contract is said to be discharged. The most common mode of discharge is performance, where both parties fulfill their obligations. Other modes include the impossibility of performance (frustration), mutual agreement, or breach. Here, we focus on discharge by agreement, which is most relevant to this discussion.
When parties agree to settle their disputes on new terms (agreement), the contract is discharged on account of accord and satisfaction.
Accord refers to a new agreement substituting the original obligation.
Satisfaction is the fulfillment of the accord.
Discharge of contract through accord and satisfaction is covered under section 63 of the Indian Contract Act, which provides:
Every promisee may dispense with or remit, wholly or in part, the performance of the promisee made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.
By seeking an NCC from the contractor, employers aim to achieve the discharge of the contract through accord and satisfaction. However, as detailed further, this approach may not always yield the desired outcome.
4. Contractor’s Challenge to NCC
Contractors challenge the NCCs, alleging the absence of free consent in their submission.
Under Section 10 of the ICA, free consent is a prerequisite for a valid contract.
Consent is considered free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake (Section 14, ICA). If consent is tainted, the contract becomes voidable (can be annulled) by the aggrieved party.
Contractors allege that they were compelled by the employer to submit the NCC. The legal principle involved in such cases is ‘economic duress’, characterized as ‘an unlawful coercion to perform an act by threatening financial injury at a time when one cannot exercise free will’.
Economic duress is covered under ‘undue influence’ in the ICA (Puri Construction P. Ltd. and Ors. v. Larsen and Toubro Ltd. and Ors.).
Section 16 of ICA defines undue influence as… one where the relation subsisting between the parties is such that one of them is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.
Therefore, the contractors argue that the NCCs obtained under undue influence cannot be enforced against them.
5. Judicial Decisions
The decision of the courts weighs in on whether the contractor can prove that the NCC was not issued voluntarily.
The maxim necessitas non habet legem is often referred to in these cases, which means “necessity knows no law”.
Courts acknowledge that a person may sometimes have to succumb to the pressure of the other party to the bargain who is in a stronger position. To provide a clearer understanding, we have outlined court judgments favoring both parties.
5.1 Cases Decided in Contractor’s Favour
i. Chairman & M.D., N.T.P.C. Ltd vs M/s Reshmi Constructions, Builders & …, 2004
Employer ignored the final bill submitted by the contractor and instead forwarded a final bill prepared by them, along with a printed format of “No Demand Certificate”.
After signing this final bill and NCC, the contractor issued a protest letter on the same day, stating they submitted it because the employer had made it a pre-condition for releasing their outstanding payments.
While highlighting their financial difficulty, the contractor stated that the no-demand certificate was being issued under coercion and undue influence, and “without prejudice” to their rights to claim full payments due.
The Apex Court concluded that the contractor’s assertion of “under influence or coercion” cannot be termed as an afterthought.
ii. R.L.Kalathia & Co. vs State of Gujarat, 2011
The contractor submitted claims for payment of extra work done under the contract. These claims were submitted two years after the submission of the final bill, which he had accepted ‘under protest.’
The Apex Court, while ruling in favour of the contractor, held that if there is an acceptable claim, the court cannot reject it on the ground of issuance of “No Due Certificate”.
iii. M/s Ambica Construction vs Union of India, 2006
The contract stipulated that an NCC was to be submitted by the contractor after the final measurement of works. However, the contractor was made to submit an NCC before the completion of the work.
The court observed that it was evident payments were generally delayed unless a discharge certificate was provided in advance.
The Apex Court ruled that such a clause in the contract would not be an absolute bar to a contractor raising claims which are genuine, even after the submission of such NCC
5.2 Cases Decided in Employer’s Favour
i. ONGC Mangalore Petrochemicals Ltd. Vs. ANS Constructions Ltd. and Ors., 2018
The contractor issued an NCC and received payment for the final bill. Twelve days later, he withdrew the NCC, alleging coercion and duress, and submitted a claim for compensation. The contractor failed to comply with the contractual requirements of prior notice and inclusion of claims within the final bill.
The Apex Court concluded that the story about duress was an afterthought in the background and that the losses incurred during the execution of the contract were not visualized earlier by the contractor.
ii. NTPC Ltd. Vs. SPML Infra Ltd., 2023
The contractor repudiated the settlement agreement, alleging economic duress in signing it, and submitted claim for compensation. It was found that these claims were never submitted to the employer during the subsistence of the contract or finalization of the final bill.
The Apex Court refused relief to the contractor after concluding that the allegation of duress was an afterthought.
iii. M/s Sai Construction vs M/s THDC, 2019
The contractor submitted NCCs while seeking EoTs, but never served notice to claim compensation. After payment of the final bill, the contractor submitted a claim for compensation for extension, among other claims.The arbitrator concluded that the contractor’s conduct confirmed his willingness to work without any additional demands. The High Court of Delhi concurred with the arbitrator’s decision that the contractor had waived their right to claim any compensation for the EOT.
5.3 Key Takeaways
While the facts of each case will have a bearing on the outcome, however, the chances of an NCC getting invalidated are high, if the contractor can demonstrate that:
• The disputed claims were pending with the employer prior to submission of the NCC.
• The employer had made NCC a precondition for releasing pending payments.
• The contractor had lodged protest with the employer for non-payment of all his claims prior to the issue of NCC.
• The contractor had immediately withdrawn the NCC after receiving payments, alleging it was submitted under duress and undue influence. The following, although not considered essential, may further strengthen the contractor’s case:
• Before or while submitting the NCC, the contractor had alleged duress. They highlighted financial difficulties and stated that they were left with no other choice but to submit the NCC as per the employer’s demands.
• The contractor accepted the final payments ‘under protest’/’without prejudice.’On the other hand, the employer will have to prove that the NCC was issued by the contractor voluntarily on culmination of negotiations between the parties.
6. Government Guidelines and Standard Form Contracts
This section discusses the provisions regarding discharge of contract in the GoI guidelines and standard form contracts.
6.1 Public Procurement Guidelines
The DOE manual of works, at sl. no. 6.7 (Closure of Contract), stipulates that before the bank guarantee is released, a “no claim certificate” may be taken from the contractor, as per the given format. This format has been reproduced at the beginning of this post.
It is worth pointing out that NCC is not a mandatory requirement. In the foreword to these Manuals, it is mentioned that instructions containing “shall” in the Manual are mandatory; any deviation from these instructions shall require relaxation from DoE (for Ministries/ Departments, etc.) or from the Board of Directors (for CPSEs).
6.2 CPWD
Clause 9(Payment of Final Bill) of the standard GCC provides that no further claims shall be made by the contractor after submission of the final bill and these shall be deemed to have been waived and extinguished.
6.3 FIDIC Conditions
Sub-clause 14.12 (Discharge) of the 1999 Red Book provides that while submitting the Final Statement, the contractor shall submit a written discharge.
It will confirm that the total of the Final Statement represents full and final settlement of all moneys due to the contractor under or in connection with the contract.
This discharge may state that it becomes effective when the contractor has received the Performance Security and the outstanding balance of this total, in which event the discharge shall be effective on such date.
So, the discharge will not be effective till the contractor has received all the money claimed by it.
As some of the claims might be disputed by the employer, this discharge will remain ineffective till final resolution of all disputes.
6.4 NHAI
The standard EPC agreement under clause 19.14 requires the contractor to give to the employer a written discharge alongwith the Final Payment Statement for works.
The discharge shall confirm that the total of the Final Payment Statement represents full and final settlement … , which shall become effective after the payment has been made for the Final Payment Certificate.
However, clause 19.15 lists three prerequisites for the issue of the Final Payment Certificate. The absence of any disputed items of claims is one of them.
It essentially means that unless all the disputes are settled Final Payment Certificate cannot be issued, and till then, the discharge will also not be effective.
7. Conclusion
In an ideal world, upon completion of work, both parties would promptly fulfill their outstanding obligations to ensure the closure of the contract, effectively discharging it.
The issuance of a completion or performance certificate to the contractor signifies the fulfillment of the contractor’s obligations. Similarly, when the contractor’s discharge becomes effective, the employer’s obligations are considered fulfilled.
However, in reality, the process is often more complicated. Employers may delay issuing the completion or performance certificate due to remaining work or the need to rectify defects. On the other hand, contractors may postpone submitting the statement of completion or final statement out of concern for missing potential claims.
As a result, the discharge envisioned in standard-form contracts is rarely issued, and even when it is, it often remains ineffective due to unresolved disputes.
In such scenarios, employers use NCCs as a tool to discharge the contract. NCCs are intended to prevent contractors from submitting additional claims and to expedite the contract’s closure. However, contractors may feel compelled to submit NCCs, as employers often make them a prerequisite for releasing pending payments.
In cases where the contractor can demonstrate that the NCC was submitted under economic duress, it can be rendered invalid. Otherwise, NCCs typically serve as a valid discharge of the contract through accord and satisfaction.
Disclaimer: This blog is for informational and educational purposes only. The information provided should not be construed as legal or professional advice.