Indian government's arbitration and mediation guidelines: More reasons for institutional arbitration?

Over the past decade, India has witnessed an increasing momentum towards arbitration as the preferred means of commercial dispute resolution. Successive amendments to the Indian Arbitration Act in 2015, 2018, 2019 and 2021 have each aimed to align legislation with global best practices.

Former Chief Justice DY Chandrachud addressed the English Supreme Court on the need for “robust institutionalisation of arbitration” to “further the culture of arbitration” in India and the Global South. The Indian Government’s draft Arbitration and Conciliation (Amendment) Bill, 2024 similarly seeks to promote institutional arbitration in India and reduce judicial intervention in arbitral proceedings.

Amidst this wave of pro-arbitration optimism, the Ministry of Finance's office memorandum dated June 3, 2024, detailing guidelines for the use of arbitration in domestic public procurement contracts, is an ostensible outlier. The memorandum purports to re-examine the utility of arbitration as the preferred means of dispute resolution in government contracts, suggesting that arbitration “should not be routinely or automatically included in procurement contracts/tenders, especially in large contracts”.

This has attracted criticism, most notably from the Arbitration Bar of India and the Indian Arbitration Forum, which addressed a joint letter to the Union Minister of Finance expressing grave concerns that the memorandum did not “align with the stated intent of [the] government to promote” arbitration as a means of alternate dispute resolution.

While such criticism is not entirely misplaced, a careful perusal of the memorandum elucidates that each of its misgivings regarding the arbitral process may reflect shortcomings in ad hoc arbitral proceedings, rather than arbitration per se.

The three key issues regarding arbitral processes raised by the Memorandum concern due process, increased time and costs, and the lack of finality in arbitral proceedings. Providing solutions to each of these are the very strengths of institutional arbitration as examined below.

Highlighting the “reduced formality” and “perceptions of wrong-doing including collusion” in arbitral proceedings, the memorandum notes that “arbitrators are not necessarily subject to the high standards of selection which are applied to the judiciary and to judicial conduct”. These criticisms do not hold water in an institutional arbitration context.

Institutions typically have an independent secretariat and/or court of arbitration, which supervise the appointment of arbitrators, their conduct during the proceedings, and have provisions to decide challenges and replace the arbitrators where necessary. Institutions ensure that the necessary disclosures regarding an arbitrator’s independence and impartiality are made both prior to and following any appointment to the arbitral tribunal. Further, in the absence of party agreement regarding the constitution of the arbitral tribunal, institutions are best placed to appoint arbitrators. In other words, institutional processes ensure that not only are arbitral tribunals evaluated prior to their constitution, but also arbitrators remain independent and impartial over the course of the proceedings.

Therefore, the memorandum’s concerns regarding the lack of formality and concomitant due process issues, while legitimate, speak to weaknesses of ad hoc arbitration proceedings due to the absence of a standing independent administering body. In doing so, it (rightly) exposes the need for institutional arbitration to safeguard the integrity of dispute resolution processes in government contracts.

The Memorandum also asserts that the government’s “actual experience” as an arbitrating party has been unsatisfactory because arbitration “is not as quick as envisaged, besides being very expensive too”. Given that the time-cost benefits of arbitration over litigation in India are widely recognised, inundating an already overburdened judiciary with more complex commercial disputes is not a commercially minded solution.

In any event, it is well documented that legal fees incurred over protracted dispute resolution proceedings far outweigh other costs incurred. The ICC Commission’s Report on Controlling Time and Costs in Arbitration shows that typically in an arbitration, 83% of the costs incurred are legal fees, 15% are arbitrator’s fees, and 2% are institutional charges given that the fees of the arbitrators and the institution are capped whereas legal fees start from the notice stage until the award enforcement. Evidently, economising on expenses incurred on institutional services and arbitrator costs, as against legal fees, misses the wood for the trees. Far greater gains are to be made by adopting quicker dispute resolution processes that do not require counsel to be engaged for years if not decades.

This is where sophisticated institutions afford cost savings as they provide pre-established rules and procedures which ensure the arbitration proceedings proceed in a timely manner. Under the ICC Rules for example, an arbitral tribunal must render its final award within six months of the establishment of its terms of reference. This time limit may only be extended by a decision of the ICC Court of Arbitration in view of, among other things, a longer procedural timetable established by the arbitral tribunal in consultation with the parties. Cases involving low amounts in dispute attract the application of expedited procedures which provide even shorter timelines for rendering final awards.

Institutions also provide time/cost efficiencies in respect of time limits within which arbitral tribunals are expected to submit draft awards for scrutiny. For example, barring extenuating circumstances, a three-member ICC arbitral tribunal is expected to submit a draft award within three months of the last substantive step of the proceedings, failing which the ICC Court reduces arbitrators’ fees in view of the delay.

Notably, such features are unavailable in ad hoc arbitration, unless parties reach an agreement on these matters. While possible in theory, in practice, the incentives of opposing parties rarely align once dispute resolution proceedings are commenced. Agreeing to each aspect of the arbitral procedure requires significant negotiation and therefore higher legal costs. Further, in the absence of an administering institution, parties are often left to return to domestic courts to resolve disputes about the agreed procedure, which only further increase time and costs incurred.

Finality is a defining feature of arbitration. An arbitral award is statutorily “final and binding on the parties and persons claiming under them respectively”. If so, why, according to the memorandum, has “the benefit of finality […] also not been achieved” and “instead of reducing litigation, [has arbitration] become virtually an additional layer and source of more litigation, delaying final resolution”?

While a disgruntled party is free to initiate court proceedings to contest arbitral processes, the Indian judiciary’s increasingly pro-enforcement and non-interventionist approach towards arbitration bodes well for the finality of arbitral awards.

However, a stricter judicial attitude only addresses the supply-side of the memorandum’s concerns. The greater concern lies on the demand-side i.e., the urge to challenge “an adverse award when judicial avenues are not exhausted” because “decisions of the arbitrators are not to the satisfaction of either party”. This speaks to a lack of trust in arbitral outcomes, a concern partly addressed by institutional mechanisms that preserve due process in arbitration proceedings as discussed above.

The greater contribution towards ensuring finality in arbitration proceedings comes from institutions which review or scrutinise awards for enforceability. In this capacity, institutions not only ensure that arbitral tribunals address the parties’ respective claims in the award, but also either grant or dismiss them with adequate reasoning in every instance among other checks. A scrutinised, reasoned adverse decision should tame the losing party’s appetite to try their luck in post-arbitral court proceedings. Notwithstanding, the scrutiny process may afford greater protection to an arbitral award once challenged in local court. By way of example, in 2023 alone, the ICC Court did not approve 42 draft arbitral awards in the first instance (8% of the total draft awards scrutinised that year). Under ad hoc procedures, each of these awards would potentially have attracted post-arbitration court proceedings - further examples of the memorandum’s concerns with the lack of finality.

Ultimately, until recent moves towards increasing institutionalisation bear fruit, the Indian arbitration experience will remain tied to ad hoc proceedings. The memorandum itself acknowledges a need for change as it states, “where arbitration is to be resorted to, institutional arbitration may be given preference”. Seen in this light, much of the memorandum’s concerns regarding arbitration reflect the structure of the arbitration market in India. In fact, solutions to the memorandum’s concerns make an effective case for the increased use of institutional arbitration for the resolution of commercial disputes in India.

Arpan Banerjee is a Deputy Counsel at the ICC International Court of Arbitration.