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  • Writer's pictureRahul Narayan

Ministry of Finance Issues Guidelines on Arbitration and Mediation Clauses in Domestic Contracts

On 3 June 2024, the Procurement Policy Division of the Department of Expenditure, Ministry of Finance, published an office memorandum (‘OM’) issuing comprehensive guidelines for the use of arbitration and mediation in domestic public procurement contracts. This OM critically evaluates the government's increasing reliance on arbitration and assesses its effectiveness and efficiency.

 BACKGROUND

Arbitration, one of the most relied upon Alternate Dispute Resolution mechanisms, as compared to traditio­nal litigation involving lengthy court processes, has proven to be comparatively faster, more convenient and technically sound. It is a less formal and speedier process to resolve disputes. 

At the same time, the arbitration process, contrary to its initially intended purpose often requires considerable time and resources. Although designed to be a more commercially suitable, sensible and practical approach to resolve contractual disputes, in practice the process has proven to be extremely adversarial, involving inflated claims and counter claims.

Further, although less formal, the process is often coloured with impropriety and unfairness, thus is viewed as less principled. Arbitrators are not held to the same high standards as highly qualified and trained judges of traditional courts and are also not held to the same degree of accountability. Although the Arbitration and Conciliation Act, 1996 provides that awards passed by arbitrators shall be final and binding, parties dissatisfied with the same often resort to litigation, challenging such awards. Thus, subsequent litigation is often taken recourse to. 

The Procurement Policy Division of the Department of Expenditure, Ministry of Finance observes in the OM that an alternative to arbitration, is mediation. It is a process where the parties attempt to reach an amicable settlement of disputes, with the assistance of a third party. 

Thus, while noting the above and other related factors, and in view of Section 48 of the Mediation Act, 2023, the OM came to be issued, outlining guidelines for contracts of domestic procurement by the Government, its entities, agencies [including Central Public Sector Banks (‘CPSEs’), Public Sector Banks (‘PSBs’), etc.] and Government Companies.


 KEY OBSERVATIONS IN THE OM

  • Avoid routine arbitration in large procurement contracts.

  • Restrict arbitration to disputes valued below Rs. 10 crores. Include in bid/contract conditions that arbitration will not be used for dispute resolution.

  • High-Value Disputes (Above Rs. 10 crores):

  1. Require approval from the concerned Secretary or delegated officer (not below Joint Secretary) for Government Ministries/Departments and autonomous bodies.

  2. Require approval from the Managing Director for CPSEs, PSBs, Financial Institutions, etc.

  • Prefer institutional arbitration if arbitration is necessary, considering cost reasonableness.

  • Mediation and Amicable Settlement:

  1. Encourage mediation or negotiation for high-value disputes.

  2. Form a High-Level Committee (HLC) for dispute resolution if deemed appropriate.

  3. The HLC may:

- Negotiate directly and propose a solution.

- Facilitate mediation and present a tentative agreement.

- Mediate disputes directly.

- Approve re-negotiated contracts if required.

  • The final solution shall require approval from the appropriate authority, considering Section 49 of the Mediation Act, 2023.

  • Mediation Agreements:

  1. Mediation agreements do not need to be included routinely in contracts.

  2. Absence of a mediation agreement does not preclude pre-litigation mediation.


The OM clarifies that disputes not covered by an arbitration clause and unresolved by the above methods should be adjudicated by courts. The guidelines may be applied generally or on a case-by-case basis with appropriate officer approval.

 REMARKS AND TAKEAWAYS

These guidelines are the latest in a long line of policy decisions intended to reduce the amount of time government or public sector enterprises spend in dispute resolution.  

They envisage a significant turning away from arbitration in government and public sector procurement contracts -in part due to massive pre and post arbitration litigation over appointments and awards- but also on account of the wildly varying quality of arbitration awards. It is a particular indictment of ad hoc arbitration that institutional arbitration is preferred encouraged, even for disputes below the value of INR 10,00,00,000/-, for which arbitration is still encouraged. At the very least, this OM ought to prompt serious introspection among arbitration practitioners about the future of the field. If this be the view of the Indian government about arbitration in India after a decade of dramatic reform of the Act and a series of pro-arbitration judgements, any ambition to be a seat for international arbitration can only be a chimera unless there is a big change in the way arbitration is practiced.

These guidelines emphasize the strong desire of the government to encourage mediation as a means to resolve large disputes and encourage government departments and public sector enterprises to build capacity in this field by setting up HLCs. A shift in focus from the adversarial to mediated settlement is a paradigm shift and requires an overhaul of expertise and experience.

If implemented in the right spirit, these guidelines may prove to be beneficial to government and private agencies alike. Mediation may foster a cooperative environment for dispute resolution. By encouraging mediation over arbitration and litigation, government agencies can finally resolve disputes more quickly and at less expense. By reducing the reliance on arbitration, government agencies can allocate resources more judiciously, focusing on their core functions rather than prolonged dispute resolution processes. By promoting mediation and settlements, the likelihood of parties resorting to litigation after an arbitration award is reduced.

Effective and fair resolution of disputes can enhance public perception of government efficiency and accountability. This would lead to increased public trust and confidence in government operations and procurement processes and, also encourage more vendors and contractors to participate in government tenders, knowing that disputes will be handled fairly and promptly. In fact, over time, a cadre of skilled mediators and negotiators within the public sector can emerge, further institutionalizing these practices. How this pans out in practice remains to be seen.



 

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© 2024 Chandhiok & Mahajan, Advocates and Solicitors

This alert is for information purposes only and does not constitute legal advice.

 

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