Presently, the business world is abuzz with discussions on Vivad se Vishwas II (Contractual Disputes) (“Scheme”). The highly anticipated one-time settlement scheme for contractual disputes, to clear the backlog of old cases. For almost 7 years now, the Central Government has been wary about the cash flow concerns of the companies in the construction sector and the resultant downfall of India’s rankings in the World Bank’s Ease of Doing Business rankings.
In past, both Central and State Governments have developed various similar amnesty schemes for resolving direct and indirect tax disputes where relaxations were given to the assessees. All these schemes were fervently accepted by the assessees and resulted in a large revenue collection for the government.
In the last decade, it was observed that an increasing number of infrastructure projects were being subjected to prolonged litigations. Many of these were arbitrations, whose awards were invariably challenged and took years to attain finality. This caused a severe liquidity crunch for the contractors as it blocked the execution of the projects and stressed their balance sheets. It created a ripple effect in the financial ecosystem of India and reduced competition, investment, ease of doing business with the Government, etc.
In this context, NITI Aayog established a Task Force on Conciliation Mechanisms in March 2021 for formulating policies on Conciliation Mechanisms for Speedy Settlement / Resolution of Disputes between Government Organizations and Private Parties. The Task Force circulated its report on 09 December 2021, observing that dispute resolution for contracts between Government and private entities is critical “not only to facilitate an overall pro-business approach but also to attract private investment in the country and to encourage private investors to establish and continue long and short-term contractual association with the Government and not be wary of it”.
Based on the above report, the Central Government formulated the Scheme to clear the backlog of old litigation cases by effectively settling pending disputes. The Central Government aims to resolve about 500 cases, involving a capital of almost ₹1trillion through the Scheme.
Any Contractor having an award against or in favor of a Procuring Entity can apply for settlement under the Scheme. Procuring Entities include Central Ministries and Departments, Central Government Autonomous Bodies, Public Sector Banks and Financial Institutions, Central Public Sector Enterprises, Union Territories without legislature, and organizations with 50% Central Government shareholding.
However, the Scheme shall not be applicable to entities with 50% of the shareholding of the Central Government which choose to opt out of it; entities with less than 50% shareholding of the Central Government; all the State Ministries and their departments; and Departments and agencies of Union Territories having legislatures i.e., Puducherry, Jammu, and Kashmir and NCT of Delhi.
Pertinently, the Scheme is applicable only to domestic awards, granting only monetary relief and not specific performance. Additionally, no prior settlement must have been reached between the parties and the amount claimed must be below ₹5,00,00,00,000
Any arbitral award (under challenge or not) passed on or before 31 January 2023, shall be settled at 65% of the awarded amount. Further, any Court Award where parties have approached the court directly or after an arbitral award passed on or before 30 April 2023, shall be settled at 85% of the awarded or the claim amount whichever is less.
The Scheme provides for appealing interest rates as well. Pre-reference and pendente-lite interest shall be payable at the rate specified in the award. However, simple interest at 9% per annum (irrespective of the rate granted in the award) shall be payable as post-award interest, on the net amount (after deducting any money already paid), from the 30th day of settlement unless the longer payment period is specified in the award.
Claims can be submitted through online portals on the websites of Government e-Marketplace (GeM) or IREPS (as applicable) from 15 July 2023 to 31 October 2023. With the date of applications on the horizon, the Contractors must be on their toes to determine the feasibility of the Scheme. Although a welcome move, the Contractors must be mindful of some issues which may affect the recovery rate under the Scheme.
Firstly, there is an ambiguity in the definitions of a Court Award and an Arbitral Award. Both the definitions appear to include an Arbitral Award which is under challenge. On one hand, the term Court Award includes all cases where parties have ‘approached the courts’ and on the other, an Arbitral Award includes awards that ‘may be under challenge’.
Further, there is no provision for modification of the claim lodged by the Contractor, in case of any miscalculations, etc. In order to make any changes to the claim, the Contractor may have to approach the writ court to make any changes to the settlement claim which is a time-consuming process and could prove to be counter-productive for the Scheme.
The author urges the Central Government to consider these very imminent challenges which would inevitably be faced by the Contractors and bring consequent changes to the Scheme.
Additionally, the Scheme provides for verification of the claim by the Procuring Entity but does not suggest the scope of such verification. It should ideally be limited to verifying the existence of the arbitral award, the satisfaction of the eligibility criteria of the Scheme, and the calculation of the claim amount.
Notably, although the dispute would be finally settled, the Settlement Agreement would not decide any issue under the dispute. In fact, once the settlement is arrived at, the Contractor would be bound to withdraw any other litigation related to the dispute, even if it does not pertain to the issue finally settled between the parties. Hence, the Contractor would lose any further opportunity to address any such outstanding legal issues and proclaim its rights.
Further, another potential problem that may be faced by the Contractors would be enforcement of the Settlement Agreement in case the same is breached by the Procuring Entity. In fact, in case of such a breach, the Contractor would be left with litigation to enforce the Settlement Agreement to recover a reduced award.
Although the Scheme appears to be very straightforward, it contains latent peculiarities which could considerably reduce the amounts recovered by the Contractor. Hence, it becomes vital for the counsels of the Contractors to provide sound legal assistance in reviewing whether such settlement is worth its while or not; Calculations of the awarded amount at the time of filing the claim; Offer of the Procuring Entity; Drafting of the proper withdrawal application seeking liberty to revive the petition in case the settlement does not actually see the light of the day; Terms of the settlement agreement; Enforcement of the settlement agreement in case of breach by the procuring entity, and other issues which may arise in the course of settlement.
Yogendra Aldak is a Partner and Rashi Srivastava is a Senior Associate at Lakshmikumaran & Sridharan.