Arbitration Retrograde - Is Bureaucracy Derailing The 'Arbitrate In India"' Initiative?

The evolution of the Indian alternative dispute resolution ("ADR") jurisprudence has faced numerous challenges. ADR was introduced as a ray of hope in India towards reducing the burden on the judiciary. In practice, however, it often came to be a long-drawn procedure and another stepping-stone before initiating litigation. There has been a much-needed course correction in recent years., including the recent amendments to the (Indian) Arbitration and Conciliation Act, 1996 ("Arbitration Act"), the introduction of the Insolvency and Bankruptcy Code, 2016 and the Commercial Courts Act, 2015 and the recent enactment of the Mediation Act, 2023 ("Mediation Act").

To ensure speedy resolution of commercial disputes, ADR, particularly arbitration, has been included in contracts with the Government, its agencies and entities or public sector undertakings ("PSUs") (collectively referred to as the "Government/PSU"). Dispute resolution with the Government/PSU poses unique challenges given the layers of scrutiny involved in Government/PSU decisions and accountability to the Parliament, etc.

On June 03, 2024, the Department of Expenditure, Procurement Policy Division, Ministry of Finance ("Ministry"), issued an Office Memorandum, bearing No. F. 1/2/2024-PPD ("OM"), inter alia, re-examining the Government's approach towards arbitration vis-à-vis other dispute resolution methods, such as mediation and litigation, and laying down certain guidelines for arbitration and mediation in contracts of domestic public procurement. The OM appears to have been issued in view of the recent enactment of the Mediation Act¹.

The OM conveys that despite the advantages of arbitration, it has proved to be unsatisfactory in disputes involving the Government/PSU, inter alia, for the following reasons:

1. Arbitration has not been able to reduce the burden on the courts as awards (which are perhaps 'final') are vulnerable to challenge before courts, which eventually delays the final resolution of disputes.
2. Arbitration is not only a time-consuming process but is also expensive.
3. Arbitrators are not necessarily subject to the high standards of selection, that are applied to the judiciary.
4. Government/PSU officials may not have requisite case-related knowledge of the dispute when compared to private commercial parties, thereby prejudicing the interests of the Government/PSU.
5. Oft-times, disputes can be resolved amicably; however, the mere existence of an arbitration clause in contracts incentivizes parties to resort to it.

Some of the key guidelines issued under the OM are as follows:

1. Restrictions on inclusion of arbitration clauses:
   1. Arbitration clauses should not be automatically included in procurement contracts/tenders.
   2. The OM restricts resorting to arbitration (if included in contracts) to disputes with a value less than INR 10 crore (about USD 1.2 million). The contract may mention that in all other cases (i.e., where the dispute value is more than INR 10 crore), arbitration will not be resorted to.
   3. Where the value of a dispute exceeds INR 10 crore and an arbitration clause is proposed to be included, it should be based on careful application of mind and recording of reasons with the approval of: (i) Secretary or an officer (not below the level of Joint Secretary) to whom authority is delegated by the Secretary in case of Government ministries, departments, attached/ subordinate offices and autonomous bodies; and (ii) the Managing Director in case of inter alia central public sector enterprises ("CPSEs"), PSUs and financial institutions.

2. In case arbitration is resorted to, institutional arbitration may be given preference, after evaluation of the reasonableness of the arbitration costs.

3. Decision to challenge/appeal in case of arbitration/litigation: The OM provides that the General Instructions on Procurement and Project Management dated October 29, 2021, issued by the Ministry, be adhered. The said instructions, inter alia, provide that parties may first opt for mutual discussion, mediation and conciliation. Arbitration/court awards should be critically reviewed and decision to challenge/appeal should not be taken in a routine manner, as it leads to heavy costs to the exchequer.

4. Amicable settlement and adoption of mediation: The OM encourages the Government/PSU to adopt mediation under the Mediation Act and/ or negotiated amicable settlements instead of arbitration. Where necessary, such as in cases involving disputes with high value, the Government/PSU may,
   1. Constitute a High-Level Committee ("HLC") for dispute resolution, which may indicatively include (i) a retired judge, and (ii) a retired high-ranking officer and/ or technical expert.
   2. Where HLC is constituted, the Government/PSU may either (i) negotiate directly with the other party and place a tentative solution before the HLC; (ii) conduct mediation through a mediator and thereafter place the tentative mediated agreement before the HLC; or (iii) use the HLC itself as the mediator.

5. Approval requirement: Where the Government/PSU is a party, approval of the appropriate authority is required to be obtained for the settlement agreement entered into by the parties through mediation².

6. Disputes, which are not covered in an arbitration clause and where disputes could not be resolved in view of the guidelines under the OM, should be adjudicated by the courts of India.

Comments:

1. Promoting mediation is a welcome initiative by the Government to strengthen India's legal framework for dispute resolution and has the potential to bring benefits to parties, mainly that of efficiency, speed, and autonomy in the dispute resolution.

2. Recognizing and promoting institutional arbitration as a preference where arbitration in incorporated in contracts is a step towards the right direction.

3. However, mediation cannot entirely replace arbitration or litigation in all cases, since it is voluntary. For instance, mediation is inappropriate in inter alia the following situations:
   1. Counter party will not consider it;
   2. An ad interim injunction or other urgent ad interim order to preserve an asset is required.
   3. Where a legal precedent in required.

Even today, most Government/PSU contracts have a multi-tiered dispute resolution clause which start with party consultation in the form of a committee, then friendly consultations before it is referred to arbitration/litigation.

4. Large complex cases, especially in industries such as infrastructure and similarly placed industries, require speedy resolution, expert assistance and technical understanding expertise of the dispute, which maybe better poised to be resolved by an experienced arbitrator than a local court.

5. The quality of arbitrator appointment is identified as a drawback to arbitration. However, the ability to nominate an arbitrator is one of the unique features of the arbitral process and can always be cured by ensuring the creation of uniform guidelines for the Government/PSU to calibrate their approach to arbitration, ie. for appointment, and setting mechanisms for permitting acceptance of an unfavorable award such as – if the view taken by the arbitrator is a possible view taken by a reasonable man, etc.

6. The multi-layer process of prior approvals for incorporating an arbitration clause in contract/tenders seems cumbersome and ought to derail and disincentivize parties to incorporate an arbitration clauses.

Conclusion:

The OM is in deviation with the earlier guidelines/schemes issued by the Government promoting arbitration as one of the primary recourses available to parties in case of a dispute. Recently, the Chief Justice of India, D.Y. Chandrachud has also promoted arbitration as the preferred mode for dispute resolution in India.

There is undoubtedly a role for arbitration in domestic public procurement contracts, for its benefits such as finality, technical expertise, and efficiency, and recent developments which evidence India's pro-arbitration approach. Such a role holds potential for further development, including the development of suitable scheme/guidelines/framework adapted to be fit for the purpose of effective resolution through arbitration (perhaps, institutional arbitration) in the event a mediation is unsuccessful in such contracts.

Footnotes

1. Section 2(iv) read with Section 48 of the Mediation Act, 2023, which makes the Mediation Act applicable to the Government/PSU.

2. Section 49 of the Mediation Act, 2023.

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