Delhi HC Sets Aside Award Over Arbitrator's Failure to Assess No Dues Certificate Voluntariness

In a significant ruling for arbitration practitioners, the Delhi High Court has set aside an arbitral award, underscoring the arbitrator's duty to explicitly address the voluntariness of a "No Dues Certificate" when duress is alleged. The decision in BHEL v. Koneru Constructions (O.M.P. (COMM) 255/2020), delivered by Justice Sachin Dutta on November 26, 2025, highlights the perils of unreasoned awards under Section 34 of the Arbitration and Conciliation Act, 1996 (ACA). This judgment serves as a reminder that mixed questions of law and fact, such as the validity of settlement documents, cannot be glossed over, potentially reshaping how arbitrators handle post-completion claims in construction contracts.

The case arose from a long-delayed civil works project, where the arbitrator awarded escalation damages despite a purportedly voluntary No Dues Certificate issued by the claimant. By failing to resolve conflicting claims on whether the certificate was given under economic duress, the award was deemed deficient, liable to be set aside. Legal professionals will find this ruling particularly instructive, as it reinforces the need for arbitrators to provide specific findings on pivotal issues, ensuring awards withstand judicial scrutiny.

Background of the Dispute

The dispute traces back to a 2006 work order issued by Bharat Heavy Electricals Limited (BHEL) to M/s Koneru Constructions (Koneru) for civil works related to Power Grid Corporation of India Ltd. The contract stipulated completion by December 16, 2007, but Koneru finished the project only on June 30, 2010—over 30 months late. Upon completion, Koneru raised a final bill of Rs. 58,93,917. After deductions, BHEL informed Koneru on September 19, 2011, that the net payable amount was Rs. 53,76,147, requesting a No Dues Certificate in full and final settlement.

Koneru issued the certificate on September 21, 2011, and received payment on September 29, 2011. However, the very next day, Koneru objected, claiming the certificate was issued involuntarily due to financial hardship and economic duress caused by BHEL's withholding of payment. In December 2012, Koneru invoked arbitration, raising claims including escalation damages for the delay.

The sole arbitrator rejected most claims but awarded Koneru 10% of the executed value as escalation damages—amounting to Rs. 72,90,719 plus 18% interest. BHEL challenged this under Section 34 of the ACA, arguing the voluntary No Dues Certificate barred further claims.

This backdrop illustrates a common scenario in construction arbitration: delays leading to escalation claims, often complicated by final settlement documents. The court's intervention emphasizes that such certificates are not ironclad if voluntariness is contested, requiring arbitrators to delve into evidence.

Parties' Contentions

BHEL's counsel argued that the award violated "basic notions of justice and morality." They contended the No Dues Certificate was voluntarily issued, supported by correspondences showing due deliberations on the final bill. BHEL emphasized that Koneru failed to prove duress, coercion, or undue influence, asserting the contract was discharged via "accord and satisfaction." Once a voluntary certificate is given, no arbitrable dispute remains, they urged, citing precedents like Chairman and MD, NTPC v. Reshmi Constructions (2004) 2 SCC 663.

On the other hand, Koneru's counsel maintained the certificate was issued under duress, as payment was withheld, preventing "accord and satisfaction." They argued there was no negotiated agreement; the certificate followed BHEL's format amid economic pressure. Claims were not extinguished, and the arbitrator rightly awarded escalation for abnormal prolongation.

These contentions spotlight a core tension in commercial arbitration: balancing finality in settlements against claims of coercion. BHEL's position aligns with the principle that voluntary waivers preclude subsequent litigation, while Koneru's highlights how power imbalances in payments can undermine such waivers.

Court's Key Observations and Reasoning

Justice Sachin Dutta framed the central issue as whether the No Dues Certificate precluded Koneru's arbitration claims—a mixed question of law and fact demanding the arbitrator's analysis of pleadings and evidence. The court noted: "The Arbitrator is required to consider the divergent factual positions contended by the parties in their pleadings and failure to do so would make the award liable to be set aside under Section 34, Arbitration and Conciliation Act."

Reviewing the award, the bench observed implied negation of duress claims, such as the arbitrator's remark that the final bill was "signed by the Claimant without even a whiff of protest." However, no explicit finding addressed voluntariness, despite precedents requiring such determinations. The court critiqued the award's lack of factual resolution, stating: "Having given a 'No Dues Certificate' voluntarily, Koneru is not entitled to raise even a genuine claim thereafter."

Drawing from Reshmi Constructions , the judgment clarified that a voluntary certificate bars claims, but duress allegations necessitate a voluntariness finding. Absent this, the award was "clearly unreasoned," warranting setting aside the escalation portion. The petition was allowed, with costs on Koneru.

This reasoning underscores Section 34's scope: courts can intervene for patent unreasonableness, not mere disagreement. By mandating findings on voluntariness, the court promotes transparency in arbitration, preventing awards that evade scrutiny.

Legal Implications and Precedents

This ruling amplifies the arbitrator's role as a fact-finder on settlement validity, aligning with judicial trends emphasizing reasoned awards. Under Section 34(2)(b)(ii) ACA, awards contrary to public policy—including unreasoned ones—face challenge. The decision echoes Associate Builders v. DDA (2015) 3 SCC 49, which identifies unreasonableness as a public policy ground.

For construction law, it cautions against relying solely on No Dues Certificates without verifying context. If duress is pleaded, arbitrators must evaluate evidence like payment delays or unequal bargaining. Failure risks award invalidation, prolonging disputes and escalating costs—critical in high-stake infrastructure projects.

The judgment also navigates "accord and satisfaction" under Contract Act, 1872, Section 63, where settlements discharge obligations unless vitiated by coercion (Section 15). Legal practitioners must now advise clients on documenting voluntariness explicitly, perhaps via affidavits or independent witnesses, to fortify certificates.

Broader implications touch commercial certainty: voluntary waivers promote finality, but unchecked duress claims could reopen settled contracts. The court balances this by requiring proof, deterring frivolous challenges while protecting against abuse.

Impact on Legal Practice and Arbitration Landscape

For arbitrators, the message is clear: address all material issues, especially contested facts like duress. Partial or implied findings suffice not; explicit reasoning is paramount to survive Section 34 petitions. This may increase award lengths but enhances enforceability, reducing judicial interference—a goal of the 1996 ACA amendments.

Litigators in commercial disputes must prioritize pleadings on voluntariness, gathering corroborative evidence early. In construction, where delays are rife, parties should negotiate escalation clauses with clear settlement mechanisms, minimizing post-facto disputes.

The ruling's timing, amid India's arbitration push via the 2021 amendments, reinforces minimal judicial intervention only for egregious flaws. It may influence Institutional Arbitration Centres to train arbitrators on handling mixed questions, fostering India as an arbitration hub.

Stakeholders like BHEL—public sector undertakings—benefit from validated settlement finality, streamlining project closures. Conversely, contractors like Koneru gain leverage to challenge coerced waivers, promoting equitable bargaining.

Conclusion: A Call for Rigorous Arbitration Standards

The Delhi High Court's decision in BHEL v. Koneru is a pivotal affirmation of arbitration's integrity. By setting aside the award for overlooking the No Dues Certificate's voluntariness, it ensures arbitrators cannot sidestep key disputes, upholding justice's foundational tenets.

As arbitration evolves in India's commercial ecosystem, this judgment urges a meticulous approach: reasoned, evidence-based awards that withstand scrutiny. For legal professionals, it is a toolkit—reminding that while arbitration offers speed, it demands substance. Future cases may test these boundaries, but for now, voluntariness stands as a litmus test for settlement validity.