Recently, the Delhi High Court observed as it delved into a construction-contract dispute shaped by prolonged delays, a contested no-dues certificate, and a late-stage claim for escalation. The matter turned on two pivotal questions - whether the certificate truly closed the door on further claims, and whether an arbitrator could grant escalation despite a categorical contractual bar. The Court’s analysis cuts to the core of voluntariness, economic pressure, and the boundaries of arbitral authority. Read on to see how these issues were unpacked and what they reveal about the contours of contractual finality and arbitral discretion.
Brief Facts:
The case stemmed from a civil works contract awarded by the Petitioner to the Respondent for construction at a Power Grid substation in Tamil Nadu. Although the project had a defined completion period, the works were finished more than two years late, and no liquidated damages were imposed. After completing the work, the Respondent submitted its final bill. The Petitioner sought certain compliances and a no-dues certificate before releasing payment, while the Respondent maintained that its obligations were already fulfilled. The Respondent eventually issued the certificate, received the final payment, and immediately claimed that the certificate had been given under financial pressure, an assertion the Petitioner denied.
The respondent then invoked arbitration, alleging that the delay resulted from the petitioner’s late issuance of drawings. The sole arbitrator rejected most claims but allowed compensation for escalation loss along with interest. The Petitioner has challenged this limited award under Section 34 of the Arbitration and Conciliation Act.
Contentions of the Petitioner:
The Petitioner argued that the award grants escalation despite an express contractual bar, particularly since steel was supplied free of cost. It maintains that the arbitrator ignored this threshold objection and effectively rewrote the contract. The Petitioner stated that the Respondent issued a no-dues certificate after reconciliation of accounts and never sought escalation during execution or in the final bill. According to the Petitioner, the certificate was voluntary, left no dispute outstanding, and should have been examined first. It also contended that the percentage-based escalation and interest awarded are unsupported and contrary to the agreement, rendering the award legally untenable.
Contentions of the Respondent:
The Respondent claims the no-dues certificate was issued under economic pressure, as payment would not have been released otherwise, and therefore does not bar its claims. It submitted that the delay resulted from the Petitioner’s late issuance of drawings, and the arbitrator rightly granted compensation for escalation under the applicable contractual clause. The Respondent maintained that extensions without financial implications do not defeat a damages claim and that the award is based on a proper appreciation of the contract and evidence, warranting no interference under Section 34 of the Arbitration and Conciliation Act.
Observation of the Court:
The Court examined the validity of an arbitral award, focusing on two central issues - the effect of a "No Dues Certificate" on subsequent claims and the grant of damages for price escalation despite contractual prohibitions. The Court emphasized that the issue of whether furnishing a "No Dues Certificate" precluded the respondent/claimant from raising claims was a "mixed question of law and fact," requiring the Arbitrator to consider the partie's divergent pleadings and determine if the certificate was issued voluntarily or under duress/coercion.
The Court reiterated while referring to the case National Insurance Co Ltd. v. Boghara Polyfab Pvt. Ltd., that "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."
Further, the Court clarified while referring to the case Union of India and Others v. Bharat Enterprise, that "If the final bill cannot be overridden by any factors known to law then the clauses relied upon by the appellants in this case would operate. There is no finding by the Arbitrator that the final bill and the no claims certificate were vitiated."
The Court found the arbitral award deficient, observing that despite noting "the final bill dated 19.09.2011 has been signed by the claimant without even a whiff of protest," the Arbitrator failed to render a specific factual finding on voluntariness versus duress, rendering the award "clearly unreasoned." This violated the principle that arbitrators must address core jurisdictional issues affecting maintainability of claims.
The Court examined the award of damages for “loss suffered due to escalation of rates” at 10% of the work value and noted that Clause 6(a) expressly barred any price escalation “for the contractual or extended period whatsoever the reason may be.” While recognising that K.N.Sathyapalan v. State of Kerala permits escalation in exceptional circumstances, the Court held that such relief must reflect contractual terms and be supported by evidence. In this case, the claim identified no specific items, increases, or cost impact and rested on a mere “sweeping statement.” The arbitrator’s conclusion that “10% as escalation charges claimed by the claimant are reasonable,” without any supporting material, was found wholly unsubstantiated and reduced the award to an ad-hoc determination.
The Court thus highlighted the statutory mandate under Section 34 of the Arbitration and Conciliation Act for setting aside awards that are unreasoned, lack evidentiary support, or ignore contractual terms, ensuring arbitral decisions align with principles of fairness, legality, and public policy.
The decision of the Court:
In light of the foregoing discussion, the Court allowed the petition and set aside the impugned arbitral award to the extent it grants Rs.72,90,719/- as damages for escalation of rates.
Case Title: Bharat Heavy Electrical Limited & Anr Vs. M/S Koneru Constructions
Case No.: O.M.P (COMM) 255/2020
Coram: Hon'ble Mr. Justice Sachin Datta
Advocate for the Petitioner: Sr. Adv. Sanjeev Anand, Advs. Pallav Kumar, Dibya Nishant, Khushbu Dwivedi, Farheen Pensale
Advocate for the Respondent: CGSC Monika Arora, Sr. Adv. Dharmesh Misra, Advs. Raghav Tiwari, Prateek Gupta, Subrodeep Saha, Radhika Kurduka
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