Authors : By Garv Sood and Agastya Shukla
Authors are 4th year law students at University Institute of Legal Studies, Panjab University, Chandigarh. They can be reached at garvsood7@gmail.com and shukla.agastya10@gmail.com.
Keywords: Arbitration, Mediation, Ministry of Finance
ABSTRACT
The Indian Finance Ministry recently issued an Office Memorandum restricting the use of Arbitration in large procurement contracts for Public Sector Enterprises, with exception, only for disputes under Rs. 10 crores.
This marks a major change in India’s policy landscape, whereby the Government has expressly moved away from Arbitration and is now favouring Mediation, despite India's ongoing efforts to become a global hub for Arbitration.
The Memorandum raises concerns about the efficiency of Arbitration, highlighting issues such as frequent delays and lack of finality of decisions. However, the article argues that this move could weaken the resolution of complex commercial disputes and exacerbate the burden on Indian courts. The piece also highlights that while Mediation has its own set of benefits, it cannot be regarded as an adequate replacement for Arbitration since it does not prescribe to an adjudicatory process.
Further, the article highlights the potential ramifications of such exclusionary exercise in the Indian Arbitration regimen, with special emphasis on Public-Private Partnerships. The article stresses on the need to strike a balance between the usage of Arbitration and Mediation to effectively harness the pros of each process whilst consciously trying to address the drawbacks.
INTRODUCTION
In a surprise move, the Ministry of Finance released an Office Memorandum (hereinafter referred to as “OM”) dated 3rd June 2024, restricting the use of Arbitration as a mode of dispute resolution in large procurement contracts for PSEs, causing shock and dismay to the legal fraternity.
In what can only be categorized as a ‘course-miscorrection’ the Government has restricted the use of Arbitration to disputes amounting to a value of not more than Rs. 10 crores and has essentially prohibited the inclusion of Arbitration clauses in all other cases thereby shifting its preferred mode of alternate dispute resolution from Arbitration to Mediation. The new guidelines come merely weeks after the establishment of the Arbitration Bar of India and in the backdrop of an increased push from the judiciary towards the vision of making India a hub of International Arbitration. Such a move is no short of what one would call an upheaval policy.
Recently, the Chief Justice of India, Dr. D.Y. Chandrachud, while addressing the United Kingdom’s Supreme Court, emphasized that Arbitration is no longer an “alternative” and that “It is in fact the preferred method of seeking commercial justice,” reflecting a virtually divergent reality, to the one in the newly proposed guidelines.
NEW GUIDELINES
The scope of the new guidelines instituted by the Finance Ministry is strictly limited to ‘Contracts for Domestic Procurement’ placed by the Government and its entities. It mandates that Arbitration clauses are not to be included automatically in these contracts. The OM further prescribes that only the contracts where the value of dispute does not exceed Rs. 10 crores (the total value of the contract can be higher), can Arbitration be opted as a means of dispute resolution. It goes to the extent of providing a clause expressly precluding Arbitration from being used as a method of dispute resolution for the purposes of the contract. By categorizing contracts based on value, the OM essentially implies that Arbitration is inefficient for high-value contracts, leading to its complete exclusion from application. This move contradicts efforts to enhance India's Arbitration framework and risks diminishing the role of Arbitration in resolving complex commercial disputes. Therefore, the practice of including Arbitration clauses in procurement orders above the dispute value threshold becomes an exception which can only be authorized by the highest offices in Government Departments and Public Sector Enterprises, and the exclusion of Arbitration as a means to solve disputes becomes the norm, thereby indicating a massive shift in the policy of the government.
However, the OM, in its entirety, is not flawed. Paragraph 7 (iv) of the OM talks about turning to Institutional Arbitration instead of Ad-Hoc Arbitrations whilst keeping the expenses involved in the same in consideration. In an effort to prevent long drawn-out battles in court, the OM further reiterates that in case of an adverse award, the government should not opt in for routine appeals. The decision to appeal should be based on application of mind to the facts and the existence of high chances of winning in the courts.
The OM primarily seeks to replace Arbitration with Mediation as the go-to ADR process. The adoption of Mediation is certainly a step in the right direction as the process focuses on amicable settlement of disputes by mutual understanding between parties. It gives the parties absolute control to decide the outcome of their dispute and in that an opportunity to protect its interests by adopting an approach which makes commercial sense. However, introducing it to replace Arbitration which is essentially adjudicatory in nature, is devoid of sound logic.
Mediation, as an ADR technique was codified by the enactment of the Mediation Act, 2023 essentially rendering Part III of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Arbitration Act”) dealing with Conciliation, otiose. The scheme of the Mediation Act is virtually identical to that of the Arbitration Act.
Akin to the Arbitration Act, the Mediation Act, in an attempt to achieve finality of Mediated Settlement Agreements (hereinafter referred to as “MSA”), makes it mandatory to enforce an MSA within a fixed time frame except for limited grounds like those of existence of fraud, corruption, impersonation etc. Therefore, the problems that we see with the Arbitration Act are bound to arise with the Mediations conducted under the Mediation Act too and similarly restricting the grounds of challenge would not prove to be enough to stop recalcitrant parties from preferring appeals and challenges to MSAs. Therefore, the rationale that finality of settlements would be achieved while opting in for Mediation is shaky at best.
MSAs under the Mediation Act are envisaged to be on the same footing as that of an Arbitral Award i.e. they are enforceable as a decree from a court. However, there is a huge distinction between the two and that is the process by which they have been arrived at. Arbitration prescribes to an adjudicatory process wherein both Law and Facts are taken into consideration while passing a reasoned order which is binding on the parties. However, Mediation is merely a settlement between parties facilitated by a neutral third person. There are no reasons provided for a Settlement Agreement arrived at by the parties and thus challenging such documents on howsoever limited grounds becomes easier per se. Furthermore, in case of failure of Mediation, the OM specifically mandates taking the disputes to court exhibiting its preference of Litigation over opting in for Arbitration.
RATIONALE BEHIND THE MOVE
The rationale behind this shift, as given by the Government, is rooted in the larger issues faced by the system of Arbitration in India but the position portrayed by the government as a ‘disputant’ is peculiar. The basis of the government's recommendations regarding Arbitration clauses in large contracts reveals distinct systemic issues. One reason government officials often prefer Arbitration over settlements is the fear of vigilance investigations if a settlement seems too favourable to the private party. Empowering these officials with clearer guidelines and protections could help address this concern. Otherwise, eliminating Arbitration clauses altogether would likely lead to a full shift of disputes to the court system.
Studies indicate that Arbitration is a cost-effective and efficient Alternative Dispute Resolution (ADR) mechanism when properly managed. The inefficiency in government-involved Arbitrations is attributed to its preference for ad-hoc Arbitration, failure to adhere to schedules, and frequent adjournments. Instead of dismissing Arbitration altogether, a better approach would be to address and eliminate these underlying causes of failure.
The guidelines on establishing a High-Level Committee (HLC) are a welcome move, however, the spotlight must be turned to the lingering dilemma of limited scope for challenge. Some view the reduced formality and binding nature of Arbitration as leading to incorrect decisions, this perspective reflects a distrust in Arbitration and further, this leads to additional challenges, effectively adding layers to litigation rather than streamlining the dispute resolution process. Moreover, the government's critique of the quality and competence of Arbitrators appears to be flawed since it often unilaterally names Arbitrators or appoints them mutually, typically choosing retired judges of high integrity and experience.
The efficacy and enforceability of Arbitral Awards faces scrutiny, particularly in cases involving civil or criminal issues, due to the government's frequent use of fraud or corruption defences to circumvent Arbitration. Despite legal provisions clearly stating that serious fraud allegations do not automatically divest Arbitral tribunals of their jurisdiction, this practice persists. Such manoeuvres bring uncertainty into the Arbitral process and further undermine its impartial nature. Therefore, strict adherence to legal principles is paramount to safeguardthe integrity and enforceability of Arbitral Awards, thereby preserving Arbitration as a viable method for resolving intricate disputes in India.
PRACTICAL DIFFICULTIES IN THE PROPOSED REGIME
The Dispute Resolution mechanism envisaged under the OM does not seem practicable since it fails to consider the realities of both, Mediation and Litigation and instead focuses excessively, on the cons of Arbitration. This failure is evinced by the proposed plan of replacing Arbitration with Mediation when the two mechanisms are completely different in nature. If the parties fail to arrive at a consensus in Mediation proceedings, they are left at the mercy of the courts that are not equipped to handle complex commercial matters at a large scale. Courts are too overworked to even address Award challenge proceedings, which have completed one step of judicial adjudication. In such a scenario, one can fathom the chaos when disputes between parties directly end up in courts for fresh consideration, not having undergone a round of judicial adjudication.
The Government reasons that not exhausting all legal remedies available in the case of an adverse award can reflect badly on Public Servants. The same holds true for the proposed regime as well. If Mediation and Negotiation are to be preferred as modes of dispute resolution over Arbitration, how would the public servants justify signing off on liabilities which can run into exorbitant amounts, since not all negotiations can go in favour of the Government. In such a scenario, the possibility of levying allegations of impropriety is even more. Therefore, the proposed system would in turn, fall prey to its own problems.
In what one could call as a chaotic move, expelling Arbitration as a mode of dispute resolution could lead to turmoil in the Public-Private Partnerships (PPPs) model. PPPs are critical for infrastructural development in India and Arbitration is usually the chosen method for solving disputes in such contracts because it is flexible, fair, and quick in nature. Additionally, the investors and private companies could demand higher returns to cover the consequential increased risk of unresolved disputes, making the PPP projects more expensive and less attractive for the government. India has been actively positioning itself as a global Arbitration hub, aiming to attract international commercial disputes for resolution within its borders.
The decision to expel Arbitration could severely undermine this ambition by damaging the country’s credibility as an Arbitration-friendly jurisdiction. The cascading effects of the same would be witnessed in large contracts, and especially the procurement ones that often include Arbitration clauses to ensure swift settlement of disputes. The development could potentially have ramifications for India’s position on the Ease of Doing Business Index and consequently affect the willingness of private sector enterprises to work in collaboration with the Government.
CONCLUSION
The recent policy shift by the Indian government to abandon Arbitration in favour of amicable settlements and court adjudication raises significant concerns about the future of Arbitration in the country. The OM is now under scrutiny by the nascent Arbitration Bar of India. The Bar has requested the Finance Ministry to withdraw this notice, highlighting the concerns and potential negative impacts on the Arbitration landscape in the country. The needof the hour is to strike a balance between Arbitration and Mediation and not exclude the applicability of either. Despite valid concerns regarding Arbitration's integrity and effectiveness, the solution is not to completely rule out the process but to develop a more robust and transparent Arbitration system that addresses these issues while preserving the benefits thereof. This balanced approach is crucial for maintaining an effective dispute resolution framework capable of supporting India's economic growth and ambition of becoming a hub for International Arbitration.
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