Trilegal Shalaka Patil and Surbhi Shah
India July 19 2024
Over the last several years, there has been a distinct, collective effort in India- be it by the judiciary or the legislature- to increase efficiency in dispute resolution and facilitate arbitration by having a “pro-arbitration” or “arbitration-centric” approach. In a number of decisions of the Supreme Court itself[1], most recently in the seven-judge bench decision reversing N. N. Global Mercantile Private Limited v. Indo Unique Flame Limited and Ors., this emphasis on arbitration, party autonomy and judicial non-interference is evident.
The government has also taken several policy steps to increase the focus on arbitration towards making India an “arbitration hub”[2], and recently, the Chief Justice of India delivered a lecture at the Supreme Court of the UK on the rise of commercial arbitration in India and even stated that arbitration was no longer simply an alternative form of dispute resolution but was in fact the preferred method of seeking commercial justice”[3]
In light of such an arbitration-focused approach, a recent policy development has come as a surprise to the arbitration community. On June 3, 2024, the Ministry of Finance through its Department of Expenditure Procurement Policy Division introduced the new Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement (“Guidelines”).
With a view to reevaluate the utility of arbitration as the preferred dispute resolution mechanism in all government contracts, these Guidelines recommend an upheaval of the current arbitration-centric approach in light of the government’s “unsatisfactory” experience with arbitration, and mandate streamlining the dispute resolution process by looking at more viable alternatives to arbitration. This is intended to be in consonance with the larger governmental mandate of resolving long-pending disputes speedily, and in line with the settlement scheme introduced last year under the Union Budget, 2023 named Vivad se Vishwas- II for settlement of contractual disputes involving the government by utilising graded standardized settlement terms. This scheme is covered in more detail here.
Most notably, these Guidelines, amongst other things, mandate that arbitration should be restricted to disputes with a value of less than INR 10 crore. It is not clear why such a bright line threshold for having arbitration in government contracts has been introduced, and in fact instead of facilitating dispute resolution, is bound to create some amount of uncertainty for foreign investors as the implications of this policy on the “ease of doing business” in India become clearer with time.
The rationale in the Guidelines for the Government’s unsatisfactory experience with arbitration
The Guidelines speak of the issues that the Government has been facing with having arbitration as the dispute resolution mechanism in its contracts with private parties.
i. Arbitration is time-consuming and expensive;
Our comment: This is not an unfair criticism of arbitration at all. Arbitration has several expensive elements- arbitrator fees, lengthy submissions, expert evidence, costs of conducting hearings including costs for the venue, flights, transcription services. Further, although arbitration is meant to be a time-bound process of dispute resolution, this is not always practically the case, and it may still end up being a fairly lengthy and extensive process, though perhaps not as time-consuming as proceedings before a court.
ii. The reduced formality of the procedure, the binding nature of the award and the increased finality of the decision, may result in awards that are incorrect on facts and that have improperly applied the law, especially since arbitrators are not necessarily subject to the high standards of selection that are applied to the judiciary and are able to avoid accountability for impropriety or wrong decisions.
Our comment: While it is true that arbitration may not have as stringent a procedure to be followed as court proceedings, it is not necessarily true that arbitrators are not subject to the high standards of selection as those that are applied to the judiciary. Most arbitrators are retired judges of the High Court or Supreme Court, and in case of awards that are incorrect on facts, it is not as if there is no scope of challenge available. Under Section 34 of the Act the ground of patent illegality is available to set aside a perverse arbitral award, in case there is a fundamental error in the award that goes to the root of the dispute and is so unfair and unreasonable that it shocks the conscience of the court- for example- an award passed in violation of the provisions of the Indian Contract Act, 1872 has been set aside on the ground of patent illegality.[4]
Even in Delhi Metro Rail Corporation v. Delhi Airport Metro Express Private Limited[5], in a much-criticized judgment, the Supreme Court utilized its exceptional power in a curative petition to undertake a detailed merits-based review of an arbitral award to unravel a final Supreme Court judgment and proceeded to annul the award. While this decision has been considered to be a blow to the finality of arbitral awards, challenging awards rendered incorrectly is possible, now more than ever.
iii. There is a general tendency by government agencies/officers as well as private parties to challenge arbitral awards before courts when the decision rendered is not to the satisfaction of either party. A large majority of awards are challenged and therefore, the finality associated with arbitration is not being achieved. Therefore, instead of reducing litigation, arbitration has become a virtual additional layer in the dispute resolution process, delaying final resolution, and increasing the burden on courts.
The transferable nature of the officers in government jobs also means that the personal knowledge of an officer may not be as deep as of the opposing private party. This handicaps the government when presenting its case before arbitrators.
Our comment: There is some merit to this criticism as well. Parties may find it easier to challenge any arbitral award, take a what’s-there-to-lose approach, than hold themselves back from any avenue of challenge against an adverse order. Any indecision is resolved in favour of litigating further as that may be considered to be a more risk-averse approach. Often there may not be enough incentive for parties to not approach courts in appeal/challenge and this has increasingly become par for the course. There have also been some studies conducted on the issue of bureaucratic risk-aversion within the government that makes officers prone to adopting a more litigious approach as they do not want to be perceived as not having acted in the best interests of the government.[6]
iv. Since the existence of an arbitration clause makes it easy for officers to avoid taking a decision by letting the dispute go to arbitration, realistic claims and counter-claims are often replaced by inflated claims/counter-claims which results in resolutions that are in-between or extreme in nature, when in reality, the intrinsic actual claims are far smaller.
Our comment: We are of the opinion that it is not a matter of routine for parties to make inflated claims/counter- claims. The robust cost regime under Section 31A of the Arbitration and Conciliation Act, 1996 may discourage the filing of such inflated claims/counter-claims. Under Section 31A(3)(a) and (c), the conduct of the parties is one of the factors for determining how costs ought to be imposed, along with whether the party has made a frivolous counterclaim leading to delay in the disposal of the arbitral proceedings. As per Sections 31A(2)(a) and (3)(b), the general rule for imposing costs is that the unsuccessful party shall be ordered to pay the costs of the successful party, and that in determining costs, one of the circumstances to be considered is whether a party has succeeded partly in the case.
Therefore, this would in fact, make arbitration a regime where inflating claims may be harder than in proceedings before a court where typically, costs are not granted to the succeeding party or imposed upon the party making inflated claims.
In case of institutional arbitrations, where the rules of the arbitral institution bind parties, often the fees to be paid to the arbitrator are determined on a sliding scale i.e., in case of inflated claims, the fees would also increase exponentially.[7] This is another reason why parties may be dissuaded from filing inflated claims.
The recommendations in the Guidelines
In light of the above, and with a view to transition from an arbitration-centric approach to more alternative forms of dispute resolution, the Guidelines recommend the following approach:
- Restriction on arbitration in government procurement contracts: Arbitration should not be routinely included in such contracts, especially in large contracts. If included, arbitration should be restricted to disputes with a value less than INR 10 crore– this figure is with reference to the value of the dispute and not the value of the contract which may be higher. In such cases, institutional arbitration is to be preferred (after considering the reasonableness of the cost relative to the value involved).
If arbitration is to be included in disputes more than INR 10 crore, then the same would only be permitted after careful application of mind and recording of reasons and after taking the approval of the relevant authorities i.e.,
- In respect of Government Ministries/Departments, attached subordinate offices and autonomous bodies, the Secretary or an officer (not below the level of Joint Secretary), to whom authority is delegated by the Secretary.
- In respect of CPSEs/PSBs/Financial Institutions etc., the Managing Director.
Comment: We observe that it is unclear why specifically for larger disputes, arbitration is not the preferred choice. It is also not clear why the bright-line standard of INR 10 crore is considered appropriate.
It will be interesting to note how foreign investors will perceive this, as not letting all disputes above 10 crore go to arbitration at all is definitely a disruptive and chaotic move. It is also not clear on what basis or as per what criteria can an approval be given by the Secretary of the concerned government department, or by the relevant authority as stated in the Guidelines. Instead of increasing transparency and decreasing bureaucratic red tape in dispute resolution, these Guidelines only seem to be increasing the opacity of these decisions.
c. General instructions on Procurement and Project Management dated October 29, 2021 to be followed: In cases where there is a decision against the government/public sector enterprise, the decision to challenge/appeal should not be taken in a routine matter, but only when there is a genuine merit in the case for challenge/appeal and high chances of winning in court.
Comment: We observe that these general instructions discuss the pitfalls of the casual approach to making appeals in arbitration matters and recommend that the procuring entity should monitor the success rate of appealing against arbitration awards. There should be a clear delegation of authority to empower officials to accept arbitration/court orders. A special board/committee should be instituted to review any case before an appeal is filed against an order. Such a review should be on legal merits as well as the practical chances of success, and also consider the costs involved before any go-ahead is given.
Interestingly, these general instructions also take note of statistics which demonstrate that in cases where the arbitration award is challenged, a large majority of cases are decided in favour of the contractor. In such cases the amount becomes payable with interest, at a rate which is often far higher than the Government’s cost of funds, which in turn results in huge financial losses to the government. This is a very valid reason for taking the risk to pay a substantial part of the award upfront to stop the interest clock from running, subject to the result of the litigation, even if in some rare instances, the recovery of it is difficult due to the counterparty’s insolvency.
d. Mediation and the constitution of a High-Level Committee: The Guidelines encourage government departments/entities/agencies to adopt mediation under the Mediation Act, 2023 and/or negotiated amicable settlements for resolution of disputes. For matters of high value, Government departments/undertakings may, where they consider appropriate, constitute a High-Level Committee (“HLC”) which may include: i. A retired judge, ii., A retired high-ranking officer and/or technical expert.
In these cases, the government entity may either
- negotiate directly with the other party and place a tentative proposed solution before the HLC, or
- conduct mediation through a mediator and then place the tentative mediated agreement before the HLC or
- use the HLC itself as the mediator.
Further, the disputes not covered in an arbitration clause and where the above methods are not successful, should be adjudicated by courts.
Commernt: We observe that having a retired high-ranking officer of the government/technical expert on the high-level committee may not be perceived favourably by private parties who would be counterparties to disputes with the government. It may expose such a committee to allegations of bias in favour of the Governmental entity, and disincentivise private parties from agreeing to dispute resolution through such a committee.
Also, having only one high-level committee per government department may unnecessarily centralise the dispute resolution process and clog the docket of such a committee resulting in delay.
In case parties opt for mediation through the high-level committee they would have to adhere to Section 49 of the Mediation Act, 2023, which stipulates that for disputes where the government (or any of its agencies) is a party, the settlement agreement arrived at shall be signed only after obtaining the prior written consent of the competent authority of such government or any of its entity or agencies. This adds another layer of bureaucracy which may cause unnecessary delay.
On the whole, these Guidelines, mark a distinct and formal shift in the government’s approach to arbitration as a dispute resolution mechanism in its contracts. The heavy pendency in courts, as well as the tendency for arbitration to be construed as merely an additional layer in the dispute resolution process requires an approach that is balanced. While arbitration may not be the best solution for every dispute, however it remains the most viable option for most disputes, especially if the matter is highly contentious. In such instances, mediation/a high-level committee may not be useful as parties may not agree to the same.
It is also not fully clear how the working of the high-level committee will proceed as more details have not been provided by the Guidelines. It is likely that foreign investors will not welcome this move away from arbitration as it may bring in more uncertainty in dispute resolution in India. It is well known that arbitration as a form of dispute resolution is a key ingredient to the Ease of Doing Business, and any departure from arbitration or any perceived inconsistency is likely to impact India’s rankings in this list.
The strict threshold of INR 10 crore above which disputes cannot be referred to arbitration is also likely to be perceived as an arbitrary bright-line. Moreover, if mediation fails, the Guidelines recommend that the dispute be adjudicated in courts of law, an alternative that is the least favourable amongst all and brings all parties back to square one. Especially for large and complex disputes such as those belonging to the infrastructure sector, conducting the entire trial in a court of law is unrealistic and would heavily burden the already overwhelmed judiciary.
The Arbitration Bar of India and the Indian Arbitration Forum has recently issued a representation to the Ministry of Finance expressing their grave concern over the Guidelines and recommending a withdrawal of the same. Instead, some of the suggestions that have been made to address issues with arbitration are as follows:
- The introduction of Med-Arb clauses in government contracts.
- Only independent, unbiased, expert and accredited mediators ought to be appointed to maximize the benefits of mediation.
- Government officials should be permitted to present settlement proposals without fear of backlash or vigilance inquiries.
- To empower government officials, committees should be set up comprising of independent experts not in the employ of the government to examine, in a time-bound manner, settlements proposed by government officials to provide fair and fearless guidance on settling the disputes.
- The decisions of such independent committees ought to be sacrosanct and the government should carry out their instructions.
- The government should immediately withdraw from its contracts, arbitration clauses involving unilateral appointment processes.
- Also, several government contracts contain arbitration clauses where arbitrator appointment is from a narrow pool of arbitrators which often includes ex-officials. These arbitration clauses should be replaced with clauses where the appointment process should be fair and mutual.
All of these suggestions present a valid alternative approach to the one taken in the Guidelines. However, it remains to be seen whether this way forward from the arbitration community will be accepted by the government.
