Risky move: By confining arbitration to matters where the disputed amounts are less than ₹10 crore, the guidelines are likely to lead to an increase in litigation and extend dispute resolution timelines

The Ministry of Finance recently issued guidelines for arbitration and mediation in contracts for domestic public procurement. The guidelines apply to the government, its entities and agencies, including central public sector enterprises and public sector banks. With these, the government aims to steer away from relying on arbitration for resolution of high-value disputes while promoting mediation, conciliation and traditional litigation to ensure a “fair” and “efficient” resolution of conflicts.

The government asserts that the guidelines were prompted by several factors: the recent enactment of the Mediation Act, 2023, the government’s experience with arbitration in contractual disputes, the unique characteristics of the government as a disputant, costs associated with arbitration and the tendency of parties to raise post-award challenges.

The guidelines acknowledge the theoretical advantages of arbitration, which include the potential to provide quicker, more flexible and technically adept resolutions compared with traditional litigation.

However, the guidelines also seem to present a stark contrast between the theoretical benefits of arbitration and the practical realities experienced by the government. The government asserts that while arbitration is intended to be swift, in practice, it often becomes a protracted and costly affair. The reduced formality, combined with the binding nature of the decisions in arbitration, has, in the government’s experience, often led to wrong decisions. Adding to this is the fact that arbitration proceedings are conducted privately behind closed doors — which the government believes exposes to the perceptions of wrongdoing and collusion. They suggests that arbitrators are not necessarily subject to high standards of selection which apply to judicial officers.

Another critical issue highlighted in the guidelines is the persistence of litigation. In the government’s experience, many arbitral awards are contested heavily in courts, which not only delays the resolution but also incurs additional costs and resources, negating the efficiency arbitration aims to provide.

The government also recognises the unique position it occupies as a litigant. The multi-tiered decision-making process and the high degree of accountability inherent in government operations make it challenging to accept adverse arbitration awards without exhaustive judicial scrutiny.

The alternative

The government is advocating for a greater reliance on mediation as an alternative to arbitration. Mediation, as outlined in the Mediation Act, 2023, involves a neutral third party who assists the disputing parties in reaching a mutually agreeable settlement. This method is seen as less adversarial and more collaborative, which can lead to quicker decisions.

For high-value disputes, the government proposes the formation of high-level committees (HLCs), which can include retired judges, high-ranking officials or technical experts. These committees are envisioned to oversee dispute resolution, ensuring that decisions are made with a high level of scrutiny and probity.

Where arbitration remains necessary, the government recommends institutional arbitration over ad hoc arbitration — which is more structured and managed by established arbitral institutions.

Most importantly, the guidelines suggest that arbitration clauses should not be routinely included in procurement contracts, particularly for large contracts. Arbitration is to be reserved only for the resolution of disputes where the value of the sum in dispute is below ₹10 crore. By limiting arbitration to smaller, less complex disputes, the government hopes to maintain the efficiency and cost-effectiveness that arbitration theoretically offers.

Despite these shifts, the government acknowledges the critical role of the judiciary in dispute resolution. Disputes that cannot be resolved through mediation or the proposed internal mechanisms will still be adjudicated by the courts, ensuring that there is always a legal remedy available.

Pitfalls

The guidelines seem to reflect the government’s reaction to its recent experiences in high-stake arbitration matters. The recommendation to limit arbitration to disputes below a specific threshold is at odds with the government’s previously stated goal of positioning India as a global arbitration hub. This policy shift overlooks the substantial benefits that arbitration has brought to the Indian socio-economic and judicial landscape. A well-functioning alternative dispute resolution system, offering faster and more confidential resolutions, has been instrumental in enhancing foreign investment and improving them in India. The new guidelines risk undermining these achievements.

By confining arbitration to matters where the disputed amounts are less than ₹10 crore, the guidelines are likely to lead to an increase in litigation and extend dispute resolution timelines, further straining an already overburdened judicial system.

While the promotion of mediation as an alternative dispute resolution mechanism is commendable, the guidelines do not adequately address the practical issues related to mediation’s non-binding nature. Government officials, wary of accountability and potential vigilance inquiries, may hesitate to approve mediated settlements, particularly those involving significant financial compensation to private parties.

Given that arbitration is fundamentally rooted in party autonomy, the government retains the right to decide whether to engage in arbitration. This enables the government to tailor its dispute resolution strategies to align with its interests.

However, such decisions must support the broader objectives of enhancing the ease of doing business and maintaining investor confidence in India’s dispute resolution framework.

In this case, the guidelines fail to inspire confidence and could potentially mischaracterise arbitration as an unreliable method for resolving government contract disputes.

(The writers are advocates at Trinity Chambers, Delhi)

Published on June 30, 2024