INTRODUCTION
PART I
Since the addition of arbitration clauses in standard forms of contracts in infrastructure projects and works contracts, many construction disputes have ended before arbitral tribunals. These disputes were initially governed by the relatively inefficient Arbitration Act of 1940. However, post the 1996 amendment, the mechanism was further simplified and streamlined wherein the new arbitration statute was based on the UNCITRAL Model Law. This led to a sustained increase in the number of successful arbitrations in disputes emanating out of construction contracts.
To avoid unfavourable awards and reduce the number of disputes going before dispute resolution forums, employers in various cases, came up with the practice of demanding a no-claim certificate/undertaking as a prerequisite for settling the final bill and for the issuance of payments. Once in receipt of such a document, an employer would aver before the arbitral tribunal that all the claims of the contractor have been extinguished and hence the arbitral tribunal had no jurisdiction in the dispute. Even the courts may not entertain the matter, since the undertaking for no-claims acts as an estoppel against the claimant from pursuing his claims. Clauses for such undertakings were introduced in construction contracts mainly to safeguard the employer from late start or claims due to delays attributable to the employer's nominated sub-contractors. These clauses initially originated in government contracts but are now being adopted by private players too.1
In practice, there are two types of undertakings for no-claims - voluntary and involuntary. Whether such an undertaking for no-claims is voluntary or not, is a question of fact that the tribunal/court must determine. In simple words, a voluntary undertaking is one where the contractor acknowledged the receipt of the amount paid to him and stated that he was unconditionally withdrawing his claim. On the other hand, an involuntary undertaking is a document stating that the party is relinquishing their right to make a claim, but it is not furnished willingly or as a result of a mutual agreement. Generally, Arbitral Tribunals have preferred that the agreement voluntarily entered between the parties must be given effect, although such agreements may contain patently unfair clauses. This view is preferred on the premise that where parties willingly, and of their own accord, have agreed to certain stipulations in the contract, then they must be honoured.2
Economic Coercion in undertakings for no-claims
'Economic duress is a recognised ground for setting aside a contract, however, simply commercial pressure is not sufficient to make a contractual term invalid. The commercial pressure must be shown to compel the victim to enter a contract against his free will and they must not be left with any alternative course available when confronted with the alleged coercive acts. In determining whether the economic duress was sufficient to vitiate consent, the following questions become material- whether the person allegedly coerced did or did not protest. Whether he had an alternative course affording him an adequate legal remedy? he was independently advised? Whether he takes steps to mitigate his disadvantage?'
However, what happens in a works contract is that one of the parties, usually the employer, has a disproportionate and uneven negotiating power. This often enables the employers to extract these undertakings for no-claims from contractors by exploiting their disadvantageous position. However, the controversy regarding undertakings for no-claims becomes convoluted when the employer demands the same in exchange for providing an Extension of Time, even when the delays are attributable to the employer himself.
The question of economic coercion depends on factors like the 'nature of the relationship between the contracting parties, the inequality in the bargaining power/position of the parties, the dominant position that a party may enjoy, the nature of the transaction, remedies available under the contract'. These factors would be considered to determine if the issuance of an undertaking for no claim was voluntary in nature or not. Although the mere presence of these factors cannot lead to the automatic interference that the issuance of the same was involuntary, however, how these factors play out in a given case and how far they affect the decision-making ability of the issuer, is to be ascertained by the arbitral tribunal depending upon the peculiar facts and circumstances of the case, although the question of prime importance would be on whom does the liability for causing delay circles back to.3 ''What happens when there is an Extension of time, particularly, when the Contractor is not responsible for the delay, is that the Contractor has to keep the machinery, tools and labour idle which he would have employed elsewhere4'. Often when a controversy regarding an undertaking for no-claims subsists, it is accompanied by a period of intense confrontation between the parties, thus resulting in strained business relations. This may result in the eventuality of payments due to the contractor being held up or price escalation or bonus for early completion being denied. The Contractor is then bound to work with strained liquidity, often seeking loans to keep the work in progress.5
The contractors are forced to accept whatever amount is paid to them owing to a plethora of reasons such as the complexities of the construction contracts, the pressure to meet the growing liabilities in lieu of execution of construction and other monies. To ease their pains of payment and alleviate some of their financial burden, the contractors accept discounted payments without much demurral. However, on issuance of such undertakings for no-claims, the contractors risk the closure of the arbitration avenue to them. Thus, the contractor gets stuck between a rock and a hard place. If the contractor chooses not to furnish such an undertaking for no claim, he loses out on whatever payment he is to receive and if he complies with such a demand, he closes all doors to redressal.
PART II
Undertakings for no-claims and Section 28 of Indian Contract Act, 1872
'Section 28 of the Indian Contract Act, 1872 bars agreements that impose fetters on a party from initiating legal proceedings or enforcing its rights or reduce the period within which such party may enforce its rights'.6 This is based on the well-known legal principle that no man can exclude himself from the protection of the courts by contract. This provision follows the general common law rule recognised in English courts, which prohibits all agreements purporting to oust the jurisdiction of the courts. The essence of an adjudication by an Arbitral tribunal is the existence of a dispute between the parties. Dispute essentially entails assertion of right by one party and repudiation thereof by the other. The A & C Act also provides only for the Arbitration of 'disputes'7 between the parties. Thus, the absence of a dispute which is a sine qua non for institution of arbitration proceedings, renders the arbitral tribunal exceeding its jurisdiction.8
When an undertaking for no claims is furnished by the contractor, the employer often argues that the claims of the Contractor are dead since the rights under the contract to claim damages are waived, and consequently, the Contractor is Estopped from claiming compensation for alleged losses. Alternatively, it is also contended that the disputes between the parties have reached a full and final settlement, and pursuant to the settlement, a party cannot invoke arbitration and treat the settlement as non-est9. Superficially, this practice seems to be valid considering the doctrine of estoppel; however, in the case of a construction dispute amenable to arbitration, this approach can potentially cause colossal financial losses to contractors. Since it is a fundamental policy of law that no man can exclude himself from the protection of the court,10 the extinguishment of a dispute by way of an undertaking for no claim that can potentially lead to the unavailability of the arbitration tribunal is thus violative of Section 28 of the ICA. This is because once a party has properly complied with the statutory requirements to enforce one's rights, then those rights cannot be curtailed by way of an undertaking for no claim, and the same shall be violative of section 28 of ICA.11 In short, an agreement for curtailing a party's rights by way of relinquishment of remedies comes within the mischief of section 28.
A contractor extinguishing his right to claim damages by furnishing an undertaking for no claims is vulnerable to procedural abuse by the employer, resulting in the defeat of the cause of economic justice. Such an undertaking for no claim is usually sought when one of the parties is in a superior bargaining position. By taking such an undertaking that extinguishes the right of a contractor to claim damages, an employer standing in a superior bargaining position can achieve something which could not have been achieved in the usual currency of the contract. In other words, an extremely undesirable consequence becomes permissible i.e., the abrogation and extinction of the rights of a contractor in a contract. Prima facie, such a position appears to be highly anomalous. By providing for the extinction of a right, the parties are indirectly curtailing the right of a party to approach the appropriate forum for the adjudication of their claims. If the law does not allow the same consequence to be imposed by a formal agreement, more importantly, the law should not allow it to be imposed by way of a de facto agreement in the form of an undertaking. Where parties cannot contract a provision for quantification of damages to be final and not subject to adjudication in violation of Section 28,12 similarly, a contractor's claim for damages cannot be allowed to be reduced to nil indirectly by demanding an undertaking for no-claim in exchange for granting time extension.
In an interesting case of Secretary to Government Public Works (D) Department v. Oriental Structural Engineers Pvt. Limited,13 before the Hon'ble High Court of Kerala, there was an impugned supplementary agreement between the parties that stipulated that the Contractor shall not seek any liquidated damages in exchange for the department providing an extension of time. The Arbitral Tribunal held the same to be invalid and violative of Section 28 of the Indian Contract Act, 1872. The Respondent averred that there was a give-and-take between the parties in the supplementary agreement, with the Respondent giving up his right to impose liquidated damages for the Claimant's alleged default in completing the work in exchange for an undertaking for no claims in the prolonged contract period. The Arbitral Tribunal held that since the Respondent Department has shown no evidence to prove that the Claimant was solely or concurrently responsible for the delays, the supplementary agreement executed between the parties was violative of section 28 as it restrained the right of the Contractor from raising his Claims even in the absence of any fault attributable to them. The Hon'ble High Court also upheld the award of the Arbitrator under S. 37 of the Act. Since an undertaking for no claims sought in exchange for granting an extension of time resembles a supplementary contract owing to the presence of a consideration, the ratio decidendi in Secretary To Government Public Works(D) Department v. Oriental Structural Engineers Pvt. Limited can also be extended to it. In another recent case of MBL Infrastructure Ltd v. DMRC,14 before the Hon'ble High Court of Delhi, the Court held that if a clause in an agreement curtails the right of an injured party to claim damages, then the same is prohibitory in nature and violates the fundamental policy of Indian Law. It also held that a contractual provision of this kind would not fetter the power of the arbitral tribunal to grant compensation by way of unliquidated damages. The Court held that an Arbitrator could rightfully grant unliquidated damages if there were delays and defaults attributable to an employer, even if the agreement stipulates that the extension of time shall be the only remedy available to a contractor.
Thus, once it has been ascertained that an employer has caused the delay leading to the prolongation of the contract period, the Arbitrator must award damages to the Contractor and shall not refuse the same merely because the provisions of the agreement prohibit it. Thus, where the parties cannot be illegally restricted by way of an agreement from claiming damages, the position of law shall not be any different when determining the validity of an undertaking for no claims, for if the undertaking is sought in exchange for granting an extension of time, the same resembles a contract as it fulfils the condition provided u/s 2 (c) and (d) of the ICA. However, this de facto agreement in the form of an undertaking is hit by S. 28 of the ICA and is thus invalid and unenforceable on that score alone.
ALTERNATIVE PERSPECTIVES TO THE VALIDITY OF UNDERTAKINGS FOR NOCLAIMS
Treating Right To Claim Damages As Immutable Rule Of Contract Law
A default rule in legal theory, is a rule of contract law that can be overridden by a contract or any other legally binding/effective agreement, whereas an immutable rule will have precedence over the terms of the contract. In other words, the default rules of contract law are amenable to modification by the parties, by way of an agreement, but mandatory rules shall be enforceable, even if the parties to a contract try to override/modify them.15 Immutable rules curtail the freedom of the parties to contract. It is suggested that treating the contractual right to seek damages in case of losses, as an immutable rule of contract law is justified, for if unregulated contracting be allowed for curtailing this right, it would end up being catastrophic and cause huge economic hardship because the weaker parties whether internal or external to the contract, are unable to adequately protect their interests. Hence, the tribunals must disregard such clauses of a contract that violate the immutable rule to claim damages for losses.
Duty of Good Faith
While performing a contract, it is also the duty of a party to discharge all its contractual obligations in good faith. What this means is that a party must avoid all actions or omissions that are inconsistent with 'common standards of decency, fairness, and reasonableness' or avoid any conduct which violates 'the agreed-upon common purposes and justified expectations' between the parties. Where a contract seems to provide one party with a degree of discretion in the performance of the contract, sufficient enough to deprive the other of a substantial proportion of the consideration of the contract, then in that case the intention of the parties to be bound by an enforceable contract raises an implied obligation of good faith to observe reasonable limits in exercising that discretion, consistent with the purpose of the parties or purposes in contracting16. In a works contract, where an employer is in a position of demanding an undertaking for no claims from the contractor in exchange for granting an Extension of time, then there is an implicit duty on the Employer to act in good faith. Parties with disproportionate discretionary powers are bound by an implied duty to observe reasonable limits. Thus, the tribunals must ensure that the issuance of such a document aligns with the intended purposes of the contract and upholds fundamental fairness and reasonableness.
State's Obligation under Article 14: Citizen's right to equality is State's Duty to be fair and just
The demand for an undertaking for no claims, in exchange for approving the request for an extension of time, is arbitrary and against all notions of equality and fairness. The State is not immune from its duty to be fair and just under the Constitution even if it enters commercial contracts under Article 299 of the Constitution. Article 299 of the Indian Constitution only provides the formality which binds the government to a contractual liability and does not provide the substantive law with regard to the Government's contractual liability, which is subject to the general laws of the land. The government cannot claim to have a special immunity while discharging its obligations under a contract.17 An Arbitrary act is implicitly 'unequal both according to political logic and constitutional law' and thus violates Article 14 of the Constitution. Article 14 strikes at arbitrary State action and ensures fairness and equality of treatment. Thus, the government departments, while demanding such an undertaking, cannot stretch the concept of 'party autonomy to an extent where it violates the fundamental rights under the Constitution'.18
Amendment to S.28 of Arbitration and Conciliation Act, 1996: Arbitrator's power to ignore unfair terms of contract
The provisions of the Arbitration and Conciliation Act, 1996 clearly stipulate that the Arbitrator shall be bound to adjudicate a dispute as per the contract.19 Arbitrators have often declined to give effect to unfair terms of a contract20 despite the absence of such an express power under the Act. This has been done even when there is a clear injunction against an arbitrator deciding ex aequoet bono/amiable compositeur u/s 28(2) of the Act, although there is sufficient leeway for arbitrators to interpret a Construction/Works Contract under Section 28(3) since it provides that apart from the contract, the Arbitrator shall take into account 'Trade Usages applicable to the transaction'. The Courts have often upheld such awards. However, it shall be desirable if the arbitrators are provided with express powers under Section 28 by way of an amendment to the Act to ignore unfair terms of a contract, including the likes of a document similar to an undertaking for no-claims, that are extracted by disproportionate and unfair use of power by a dominant party.
Conclusion
In conclusion, the examination of issues surrounding an undertaking for no-claims in construction contracts not only unveils legal intricacies but also raises fundamental questions about fairness, equality, and the balance of power. The nexus between economic coercion, the extinguishment of claims, and the potential violation of Section 28 of the Indian Contract Act reflects a systemic imbalance in bargaining power. The proposed solutions, including recognizing the immutable right to raise claims and amending the arbitration act, underscore the need for a recalibration of the legal framework. By acknowledging the duty of good faith, invoking constitutional principles, and empowering arbitrators to counteract disproportionate powers, the paper advocates for a transformative shift towards a more equitable and just construction contract environment. The efficiency gap in India becomes evident through its pronounced and escalated Incremental Capital Output Ratio (ICOR), signaling a suboptimal utilization of resources. Additionally, the nation grapples with the economic strain imposed by exorbitant logistics costs, reflective of the pressing need to address and bridge the prevailing infrastructure deficit. Hence, the focus should be on removing red-tapism and bureaucratic hurdles to reduce the turnaround time for delivering infrastructure projects, facilitating better utilization of precious public resources. Opting for coercive steps like demanding undertakings for no-claims cannot mitigate the exorbitant costs of prolonged contract periods in the long run.
Footnotes
1. General Manager Northern Railways v. Sarvesh Chopra, 2002 AIR (Supreme Court) 1272.
2. P.C. Markanda, No Claim Certificate – No Bar For Making Claims, Markanda Advocates-Arbitration and Contracts (Feb. 27, 2024 9:29 PM), https://markandalaw.com/wpcontent/themes/twentysixteen/pdf/No-Claim-certificate.pdf.
3. Govt of NCT vs RS Sharma 2023 LiveLaw (Del) 716.
4. National Building Construction Corp. v. Natwarlal M. Patel, 2017 SCC Online Del 7774.
5. Id.
6. Archana Balasubramanian and Siddhant Marathe, India: Agreements In Restraint Of Legal Proceedings – An Overview, Mondaq (Jul. 22, 2022), https://www.mondaq.com/india/contracts-andcommercial-law/1213504/agreements-in-restraint-of-legal-proceedings--an-overview.
7. Arbitration and Conciliation Act, 1996, § 7, No. 26, Acts of Parliament, 1996 (India).
8. M/S B and T AG v. Ministry of Defence 2023 LiveLaw (SC) 466.
9. Nathani Steels Ltd. V. Associate Constructions, 1995 Supp.(3) SCC 324.
10. Rehmatunnissa Begum v Price, ILR 42 Bom 380.
11. Rajendra Singh v Seesh Pal Singh, 2014 SCC OnLine Utt 2644.
12. Bharat Sanchar Nigam Ltd. V. Motorola India Pvt Ltd, (2009) 2 SCC 337).
13. (2022) 06 KL CK 0051.
14. OMP(COMM) 311 of 2021.
15. Ian Ayrest and Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-89 (1989-1990).
16. Centronics Corporation v. Genicom Corporation Supreme Court of New Hampshire, 1989. 132 N.H. 133.
17. M/S Glock Asia-Pacific Ltd. v. Union of India 2023 LiveLaw (SC) 459.
18. Lombardi Engineering Limited v. Uttrakhand Jal Vidyut Nigam Ltd. 2023 Livelaw (SC) 958.
19. Arbitration and Conciliation Act, 1996, § 28, No. 26, Acts of Parliament, 1996 (India).
20. MBL Infrastructure, supra note 15.
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