In a dramatic shift in the position of Indian government, the Ministry of Finance has issued an Office Memorandum dated June 3rd, 20241 ("Office Memorandum") where it has advised ministries and public sector undertakings to resort to arbitration in relatively low value matters and instead seek to adjudicate disputes through mediation or court litigation. While on one hand, the Office Memorandum encourages government departments and agencies to adopt a pro-settlement approach and resolve disputes using mediation, the push towards court litigation in high value disputes exceeding Rs.10 crore (approximately USD 1.2 million) is a 180-degree shift from all past efforts made by the government to deeply root arbitration as a quick and more convenient mechanism for resolving disputes and aligning itself with international protocols.
This turn of events is not surprising especially considering the Supreme Court's observations in the matter of Union of India and Anr. vs. Rashmi Metaliks Limited2 where the court lamented the manner in which arbitrations are conducted in India as well as the exercise of curative jurisdiction to overturn the judgement in context of an arbitral award.3
The authors believe that it is a case of a few rotten apples, especially so far as Supreme Court's comments in Rashmi Metallik's is concerned; as several steps towards the right direction have been taking up since 2015. The Office Memorandum fails to consider that litigation is neither easy nor an efficient process in India.
However, what the Office Memorandum does get right is that there is a need to strengthen civil servants' ability to make commercial calls based on commercial requirements and to protect such action in good faith rather than rendering it subject to investigative authorities. Without there being an attitudinal change in the bureaucracy, the resolution of contractual disputes would always remain time and resource consuming. Even the suggested mode – mediation – requires that the Government department would sign a settlement agreement. However, no two mediations are the same, because no two disputes are the same! Then, who will bolster our civil servants' confidence to enter into such negotiated settlements.
The Office Memorandum appears to generalize isolated bad incidents as systemic flaws of arbitration, without substantial evidence and cites issues such as time-consuming, expensive, informal, and the successive transfer of employees leading to records being lost as the basis of preferring court litigation over arbitration. Here is a brief analysis of the cited issues:-
- Timelines: The Office Memorandum ignores the 2019 amendment to Section 29A4 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") which restricts timelines for domestic arbitrations between 18 to 24 months and rather faults arbitration of being time consuming. On the contrary, the Commercial Courts Act, 2015, does not entail any such mandatory timelines for commercial suits. Although, the Department of Justice in their recent evaluations have averaged the time taken for a commercial suit in the state of Delhi to be at 744 days or Mumbai at 626 days,5 one needs to be cautious in basing conclusions on these alone. These averages assume that a trial proceeds unhindered by multiple appeals against procedural orders which are otherwise not permitted under the Arbitration Act. In any case, this average timeline data is merely suggestive of two cities (where respective High Courts have original civil jurisdiction!) and fails to account for commercial courts operating in the remote district levels of the country.
- Cost and Expenses: Under the Arbitration Act, both parties typically bear the costs in equal proportion. While the quantum of costs can barely, depending upon the experience and aptitude of the judge of the arbitrators chosen the full schedule which was legislatively introduced in the act in 2015 offer some broad guidance on the fee that could or should be charged by the arbitrators. In contrast, if the government were to litigate in all its matters, it would be liable to pay a cold freeze anywhere between 1 to 5% of the value of its claims or counter-claims, depending on respective state amendments to the Court Fees Act, 1870.6 Further, a push towards institutional arbitration may streamline costs and bring a degree of uniformity for all users.
- Procedures: The Office Memorandum accuses arbitration of having reduced formality, more prone to collusion and raises concerns about the impropriety of arbitrators. However, it fails to consider the following – (i) the parties / arbitrators have powers to customize procedures and ensure accountability; (ii) recent amendments to Arbitration Act read with Supreme Court precedents, have bolstered accountability and independence of the arbitrators; (iii) parties have option of challenging the award on the ground that it was induced or affected by fraud or corruption.
- Availability of material and witnesses: The Office Memorandum attributes the lack of government success in arbitration claims to the 'process of transfers and retirements in the government's administrative machinery' and argues that this perhaps leads to loss of institutional memory as compared to a private contractor. In the author's opinion this does not help the case of government, as in either case (and possibly even stringier in case of court litigation), the government will be compelled to produce material and witness, irrespective of whether the dispute is before an arbitrator or court. The commercial court judges, under Order XI Rule 5 of the Code of Civil Procedure, 1908 (as amended by the Commercial Courts Act, 2015) have power to compel production of same and further draw a negative inference, if not produced.
- Finality: The Office Memorandum correctly points out that more often than not, arbitral awards are subjected to challenge under Section 34 of the Arbitration Act, but the same is equally true for appeals that arise out of judgments / decrees passed in a commercial suit. In contrast, an award under the Arbitration Act can only be challenged on very limited and defined grounds, whereas a judgment in a commercial suit is not subject to any such limitations or constraints. In a commercial suit, allowance of such stringent limitations allows for broader and potentially more numerous grounds for appeal, enabling a party to continually challenge the judgment and delay the final enforcement.
The approach of the government seems overly counter-intuitive, as on one hand it intends to promote resolution of contractual disputes through arbitration, but on the same hand intends to keep itself out of its reach. In the past, the government has taken steps to appoint high level committees and bring about statutory amendments to make arbitration more effective and efficient, reduce court intervention, ensure party-autonomy and promote India as a hub of arbitration, to incentivise global community. Was this mere lip service? The approach outlined in the Office Memorandum appears to create a double standard, where arbitration is promoted for private disputes but not extended to resolve matters involving the government itself and may erode trust within the global community.
This approach could also impact perceptions within the global community, where arbitration is widely recognized as a preferred method for resolving international disputes due to its neutrality and the enforceability of awards across borders. Therefore, a move away from arbitration could be seen as regressive and detrimental to both domestic and international stakeholders seeking efficient and fair dispute resolution processes.
While the push towards a pro-settlement approach is much appreciated, the Office Memorandum appears guided by a mistrust of the arbitral process. The government and the arbitration bar should work to strengthen the existing arbitration framework by improving procedural rules, ensuring transparency, and promoting the use of skilled arbitrators with technical expertise, invest in training programs and capacity building initiatives for arbitrators, legal professionals, and stakeholders involved in arbitration. Additionally, the government and its departments need to strengthen their contract management abilities to ensure that disputes (and their reasons) are properly documented and available for scrutiny. The Government may also consider implementing the recommendations made by an expert committee headed by Shri Dr. T.K. Vishwanathan in its report dated 07.02.2024 on arbitration law which recommends a further overhaul of the Arbitration Act and may take care of some of the concerns that the government may have in respect of arbitration.
Footnotes
1 Ministry of Finance, Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement, F. 1/2/2024-PPD (Issued on June 3, 2024).
2 The Economic Times in an article published on 09.01.2024 titled 'SC irked over arbitral award against Railways, says public money cannot be allowed to go to waste', reported that Chief Justice of India, Justice D.Y. Chandrachud remarked during the hearing that, "I am not happy with the arbitral award. Let the case go before a dispassionate arbitrator and let this be heard again. If Railways lose there...then it is fine. But the arbitration process cannot be allowed to be handled like this. This is why the arbitration is getting a bad name." (para 2), https://legal.economictimes.indiatimes.com/news/litigation/sc-irked-over-arbitral-award-against-railways-says-public-money-cannot-be-allowed-to-go-waste/106995180 (Last visited July 2, 2024)
3 DMRC v. Delhi Airport Metro Express (P) Ltd., 2024 SCC OnLine SC 522.
4 The Arbitration and Conciliation Act, 1996, §29A.
5 Department of Justice, https://dashboard.doj.gov.in/eodb/reform.html (Last visited June 25, 2024).
6 Court Fees Act, 1870, Act 7 of 1870, Dt. 01.04.1870
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