Arbitration, heralded as a jewel in the crown of dispute resolution process and envisioned as a forerunner of an all-new era of speedy and efficient justice delivery as opposed to the age-old time-consuming adversarial system, is once again under the radar of governmental scrutiny.
Appreciating the stark realities that are often plaguing the present arbitration procedure, the government of India, through the Ministry of Finance, Department of Expenditure, Procurement Policy Division has now published an Office Memorandum (‘OM’) on ‘Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement’, on June 3, 2024. The OM can be seen as a continuation of the government’s schemes titled ‘Vivad se Vishwas’ or the Mediation Act, 2023 – attempting to control arbitration and litigation arising therefrom.
Although arbitration as an alternate dispute resolution mechanism was initially packaged as a speedy, convenient, less expensive and swifter process, the reality has turned to be quite the contrary as propounded by the OM.
Such a view stems from the meticulous gathering of data (in terms of number of on-going arbitrations, arbitrator’s fees, number of sittings, claim and counter-claim, Awards faced, challenges made, etc.), recent developments like the Mediation Act, 2023 and Court decisions, clubbed with experience down the years, which necessitated a re-examination of the arbitration in totality.
The expected benefits of arbitration have been crusaded against the actual experience where:
Arbitration is taking longer time besides being very expensive.
Reduced formality of judicial procedure is leading to wrong decisions, perceptions of wrong doing and collusion, closed door setting/ lack of transparency, impropriety of arbitrators and little accountability for wrong doings/ decisions.
Benefit of finality of decisions or reliving burden on Courts has not been achieved – instead layers of litigation added.
Unrealistic claims and counter-claims are filed.
Commercial and sensible practical approach kept in backseat due to presence of arbitration clause.
The arbitration experience is further made complicated and far from its desired aim when one of the parties is a government entity or agency. Notably, the system of decision making for a government entity involves accountability – the need to act fairly without arbitrariness. As such, it leads to multiple levels of scrutiny in decision making. Often acceptance of an adverse Award when judicial avenues are not exhausted is deemed improper, affecting the theory of finality of Award. Such decision becomes all the more difficult at the altar of varying decisions for similarly placed contractors who are not involved in the arbitration. The most crippling handicap faced by the government entities and its undertakings affecting arbitration is the transferable nature of posts of officers – personal knowledge of the new officer in place “may not be as deep as of the opposing private party.”
In the above backdrop, the OM serves as a guideline for arbitration as well as mediation for domestic public procurement contracts. Broadly, ‘public procurement’ means purchasing goods, services and works by public authorities or civil service organizations using public funds. The OM provides the following:
Arbitration, as a mode of dispute resolution, should not be included in a procurement contract/ tender, especially in large contracts in a routine manner.
If arbitration clause is included, it “may” be restricted to disputes with a value less than ₹10 crores. If such clause is incorporated, specific mention must be made in the bid conditions/ conditions of contract that “in all other cases, arbitration will not be a method of dispute resolution in the contract.”
The cap of ₹10 crores as dispute value, may be relaxed only upon “careful application of mind” and “recording of reasons” and upon approval of concerned Secretary or an officer not below the level of Joint Secretary (in respect of government Ministries/ Departments, attached/subordinate offices and autonomous bodies) or the Managing Director (for CPSEs/ PSBs/ Financial Institutions).
Institutional arbitration may be given preference to ad-hoc arbitration.
Guidance contained in General Instructions on procurement and Project Management dated October 19, 2021 should be kept in mind and every decision against government/ public sector enterprises should not be appealed in a routine manner – challenge must be resorted to “only when the case genuinely merits going for challenge/ appeal and there are high chances of winning.”
Disputes are to be avoided and/ or amicably settled where possible using contractual mechanisms – decision to be pragmatic considering overall public interest while keeping legal and practical realities in view.
Encourages the adoption of the Mediation Act, 2023.
Where necessary, for matters of “high value”, High-Level Committee to be formed enabling decision by a “high ranking body at arms-length from the regular decision-making structure."
Allows re-negotiating long term contracts in “rare situations”, for example, major unforeseeable event taking place, so as to avoid disputes in public interest.
If disputes not covered by arbitration clause and where mediation or other contractual methods are unsuccessful, Courts should be approached.
While the animosity towards arbitration is clearly casted, the OM’s exclusion guidelines is shrouded by uncertainty in as much as what may constitute a “large contract” or “long term contract” is still in the shadows. Although capping of disputes earmarked for arbitration has been attempted, it is again uncertain as to how the value of ₹10 crore will be calculated or which contracts are not considered to be under the “routine” category for inclusion of an arbitration clause. With respect to mediation as well, the “high value” for reference to High Level Committee is kept open to interpretation and so is the “rare situations” in long duration works contract permitting the re-negotiation of contracts in public interest. Most importantly, PSUs enter into umpteen commercial transactions, where arbitration clauses are pre-existing. The natural concern which arises as a result of the OM and which should be taken care of is - what would be the effect of the guideline on existing contracts with erstwhile standard arbitration clauses where no dispute has arisen yet or where arbitration has been invoked or there are on-going arbitrations where the value of dispute is above ₹10 crores. In all probability, in all such cases, the OM may not be applicable since it will require change in the existing arbitration clause unless such clause is so widely drafted to inculcate all changes in law along with mandates of the government. Most importantly, clarification on whether the OM is mandatory like the Vivad se Vishwas schemes or discretionary is to be seen.
Nonetheless, the OM is indeed a reflection of the government’s efforts to bring transparency in dispute resolution and ease of doing business while curtailing the burden on Courts. It is also a laudable effort to simultaneously address the huge losses being incurred in the public exchequer due to the exponential rise of arbitral awards obtained through oblique means.
About the authors: Amit Meharia is the Managing Partner of MCO Legals (Meharia & Company). Paramita Banerjee is a Legal Head and Tamoghna Chattopadhyay is an Associate at the firm.
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