The future of dispute resolution in government procurement contracts
The Ministry of Finance, Government of India, on 3 June 2024 issued an Office Memorandum (‘Memorandum’) discouraging arbitration as an alternate dispute resolution mechanism in large procurement contracts issued by the Government or Government owned companies and its entities and agencies.
Problems perceived by the government in the current system
In an effort to streamline and enhance the dispute resolution mechanisms specifically tailored for domestic contracts related to public procurement in India (‘Domestic Public Procurement Contracts’), the government intends to re-examine its approach towards arbitration as opposed to mediation or litigation.
Despite the advantages of arbitration, namely quicker resolution of disputes, greater flexibility, use of technical experts in adjudication, as well as finality of arbitral awards and limited grounds of challenge, the Government highlighted certain issues in the current regime being:
a) The private nature of the process, combined with the appointment of arbitrators who are not selected in a manner similar to judges, has created mistrust in the system. Instances were found of improper behaviour of arbitrators who do not face any accountability;
b) The rising trend to inflate claims and counterclaims in a dispute being arbitrated was found to have increased the complexity of what was once considered a straightforward issue;
c) Although finality was meant to be a defining feature of arbitration, it was observed that the routine challenging of a large number of awards, particularly the decisions rendered against the Government or public sector enterprise, was undermining the intended objective of achieving timely resolution of a dispute; it was also not resulting in any reduction in the backlog of cases pending in court;
d) Concern regarding the casual challenge of arbitral awards before courts, was previously expressed by the Government in the General Instructions on Procurement and Project Management dated 29 October 2021 as well.
The arbitration process, vis-à-vis Domestic Public Procurement Contracts, was therefore found to be not as expeditious as was originally envisaged.
Proposed Alternatives by the Government
Restrictive use of arbitration:
a) The Memorandum suggests that, due to the reasons stated above, specific clauses excluding arbitration may be incorporated in the contract conditions. If at all arbitration is to be adopted, it should be restricted to smaller disputes, with a claim value of less than INR 10 Cr. For disputes exceeding this amount, justifiable reasons for adopting arbitration need to be furnished, and approval for the same must first be obtained from the respective Government Ministry/department, the attached offices, autonomous bodies, the concerned Secretary, any such officer as has been delegated by the Secretary or the Managing Director of the Public Sector Bank/Financial Institution.
b) Institutional arbitration is to be favoured over ad-hoc arbitration whenever possible.
Mediation and High-Level Committee
a) As opposed to arbitration, the Memorandum places a strong emphasis on mediation as a dispute resolution mechanism under the Mediation Act, 2023 as the preferred method for resolving disputes arising from Domestic Public Procurement Contracts. It encourages parties to firstly attempt amicable settlement of disputes, failing which, the Memorandum introduces a structured framework for mediation. It suggests that parties attempt mediation as an initial step promoting faster and more amicable resolution of disputes.
b) The Government had, in its previous General Instructions on Procurement and Project Management dated 29 October 2021, advised setting up a special board/committee that would evaluate a dispute on terms of merit as well as likelihood of success before an appeal is filed against any decision rendered. Similar sentiment has been reiterated in the present Memorandum which recommends the appointment of a High-Level Committee (‘HLC’), to oversee the mediation process. Such a HLC would be composed of retired judicial or technical members only.
Litigation
Where the dispute is not covered under an arbitration agreement, and if despite attempting to settle the dispute through the methods enumerated above, such settlement is not reached, the parties should take recourse to litigation.
Potential impact on the landscape of dispute resolution in public procurement contracts in India
1. While the issuance of the Memorandum by the Ministry of Finance marks a significant step towards improving the dispute resolution mechanisms in Domestic Public Procurement Contracts, challenges may arise in the uniform adoption and implementation of the same by all involved parties. At the very outset, private contractors would be unwilling to forego arbitration, due to concerns about time and the cost implications of the alternatives like litigation.
2. Further, the Government recommends amicable resolution through negotiation and encourages its agencies to settle disputes without “avoiding responsibility or denying genuine claims.” However, placing unwavering faith in the ability of parties to resolve disputes without prioritizing self-interest is fundamentally misguided. Settlement would be time consuming because of the bureaucracy and inability to take effective decisions by Government officials.
3. Although advocating the use of mediation is a welcome move towards ensuring fairness and reducing escalation of disputes related to Domestic Public Procurement Contracts, it does not address concerns about the private manner in which such disputes are adjudicated, nor the lack of high standards in selecting potential mediators.
4. The composition of the proposed HLC seems to be modelled on an arbitral tribunal, raising questions as to how it is better suited to improve the dispute resolution process over an arbitral tribunal. The recommendation for constitution of the HLC to negotiate or mediate a dispute, gives rise to similar concerns of fairness and impartiality, since the ambiguous wording of the Memorandum raises doubts as to the contractor’s role (if any) in appointment of the HLC members.
5. Arbitrators or arbitral tribunals appointed by Government departments/ undertakings have been held, time and again, by the Supreme Court as ineligible to adjudicate disputes under the Arbitration and Conciliation Act, 1996 and therefore the proposal of constituting a HLC by the Government without any involvement of the Contractor, would be contrary to the settled position of law.
6. The rationale of the Government in proposing arbitration for resolution of disputes less than INR 10 Cr and proposing mediation or negotiation through a HLC for disputes more than INR 10 Cr, takes away the rights of a private contractor to have disputes resolved through arbitration.
7. In order to bring in transparency in the dispute resolution process, the HLC ought to be substituted with institutional arbitration which may be better equipped to address these issues. Institutional arbitration may provide the support of a recognised body which could create a system of checks and balances which is paramount for complex, high-stakes disputes involving public sector entities.
8. Moreover, the guidelines apply to Domestic Public Procurement Contracts of the Government and all its agencies, who have been advised to comply with these guidelines to reduce the time and cost associated with litigation in courts. However, in the event the methods suggested above are not successful in resolving the disputes, contractors would be left with no option but to seek redress through the courts, thereby increasing the burden on the judiciary and taking us back to the system which plagued Indian courts for decades.
9. This Memorandum comes at a time when the judiciary has been actively promoting greater use of arbitration in commercial contracts, signalling a shift in Indian public policy towards a policy favouring arbitration. However, with the new government guidelines, it remains uncertain whether India would be able to foster a pro-arbitration environment.
10. The Government may have had the right intention to address some of the concerns pertaining to Domestic Public Procurement Contracts, but the resultant solution to confine arbitration as an acceptable dispute resolution mechanism to claims of less than INR 10 Cr is highly questionable and has sparked significant debate.
11. Where on the one hand, the infrastructure industry is poised for massive growth, and the number of construction contracts are expected to rise, this unexpected move by the Government is out of touch with reality and needs a quick reversal.
12. The Arbitration Bar of India has already expressed concern over this decision and has urged the Government to withdraw the Memorandum. Industry players are simultaneously in the process of making representations to the Government to reconsider this Memorandum. Ultimately, a nuanced approach that considers both the benefits of arbitration and the potential of mediation will be essential for achieving sustainable improvements in dispute resolution mechanisms in public procurement contracts across the country.
Yigal Gabriel
Meherasp Mistry
Principal Associate at Khaitan & Co, Mumbai
meherasp.mistry@khaitanco.com
Ananya Krishnan
