Vivad se Vishwas II (contractual disputes): Is cure better than prevention?

In our earlier article on the Union Budget 2023, we had covered, in short, the settlement scheme named Vivad se Vishwas-II proposed to be introduced by the Indian government. In this article, we cover the scheme in detail as introduced by the government.

The Central government, in line with its earlier steps of promoting ease of doing business, settling long pending litigation, promoting fresh investments and reducing uncertainties faced by businesses, introduced the voluntary settlement scheme Vivad se Vishwas-II (contractual disputes) on May 29, 2023 to settle contractual issues between the government and private companies.

The scheme’s first edition, Vivad se Vishwas-I, presented in 2020, recorded the settlement of over 148,000 income tax cases and was a resounding success.

This scheme has been framed with the objective of settling contractual disputes of the government and government undertakings. It introduces graded standardized settlement terms which will be used based on the pendency level of the dispute.

Purpose

The scheme, as an opening statement, refers to the Department of Expenditure’s General Instructions on Procurement and Project Management and the report of Niti Aayog’s Task Force on Conciliation Mechanism, both of which emphasize on the need for the government to settle arbitral disputes with private parties to avoid large interest pay outs, encourage a pro-business environment in India and to establish the government’s image as a party that honours its contractual obligations.

As all public departments function through a faceless and hierarchal structure, there is a lack of an organized mechanism to assess and pursue litigation, leading to the government pursing litigation for several years, regardless of the merit of the case, making it the biggest litigant. This scheme avoids such a situation and ensures quicker resolution of disputes.

Application

The scheme applies to contractual disputes where one of the parties is the government or is one of the following procuring entities:

a. autonomous bodies of the government;

b. public sector banks and public sector financial institutions;

c. Central Public Sector Enterprises (CPSEs);

d. Union territories without legislature and all agencies/undertakings thereof; and

e. all organizations where the government has a minimum shareholding of 50% (these organizations can choose to opt out).

The scheme refers to the other party in dispute with the procuring entities as “contractors”.       

Eligibility

The provisions in respect of the eligibility of a dispute for settlement under the scheme are:

a. the court award/arbitral award must only be for monetary value and if it contemplates specific performance, it will not be eligible for settlement;

b. the arbitral award should have been issued on or before January 31, 2023, and the court award should have been passed on or before April 3, 2023;

c. the arbitration resulting in the award, or the court award must not be an international arbitration;

d. CPSEs who are contractors to procuring entities are also eligible to submit their disputes for settlement;

e. Interim orders passed by arbitrators or by courts under the Arbitration & Conciliation Act, 1996 will not be eligible for settlement under the scheme;

f. disputes where the court/arbitral award is against the contractor are also eligible to be submitted for settlement under the scheme.

g. disputes where a settlement has been reached through a conciliation agreement will not be eligible;

h. disputes pertaining to all kinds of procurement (goods, services etc.) will be eligible; and

i. disputes arising from “earning contracts” (contracts where the procuring entities earn money from contractors such as catering contracts on trains) and public private partnership agreements will also be eligible.

Amounts payable under the scheme

Court awards passed on or before April 30, 2023

The scheme contemplates a payout of a settlement amount of 85% of the net amount awarded/upheld by the court or 85% of the claim amount lodged by the contractor under the scheme, whichever is lesser. This will apply irrespective of whether the dispute is under further appeal and/or the parties have approached the court directly or pursuant to an arbitral award under any provision of the Arbitration Act.

Arbitral awards passed on or before January 31, 2023

The scheme contemplates a payout of a settlement amount of 65% of the net amount awarded/upheld by the court or 65% of the claim amount lodged by the contractor under the scheme, whichever is lesser. This will apply irrespective of whether the dispute is under further appeal before the court. Arbitral awards passed by the Micro and Small Enterprises Facilitation Council or by an arbitral tribunal appointed on its reference will also be included in the scheme.

Counterclaim

In cases where a counterclaim is filed and awarded, the scheme contemplates the amount payable to be 65% or 85% of the net amount awarded (net amount would be calculated by subtracting the counterclaim from the claim). 

Interest

If the awarded amount is not paid/partially paid within the time stipulated under the award (the time would be taken as 30 days if no time is stipulated under the award) then a simple interest of 9% per annum would be payable on the net amount. This post-award interest would be awarded for the period post the time stipulated to be interest-free under the award (or post 30 days if not stipulated) and till the date of the acknowledgement email (explained hereinafter). Irrespective of the interest granted under the award, the post-award interest payable under the scheme is capped at 9%. The scheme does not contemplate any provisions for pre-award and pendente lite interest.

Procedure for settlement under the scheme

Contractors can submit their claim through Government e-Marketplace (GeM). The process will thereafter proceed in the following manner:

Step 1 – The contractor, on the portal, will have to list out the eligible disputes that it wants to settle.

Step 2 – The procuring entity shall verify the claim amounts and evaluate the settlement amount under the scheme and offer the same to the contractor within two weeks of receipt of the claim.

Step 3 - The contractor shall have strict limit of 30 days to accept the offer made by the procuring entity and the time limit cannot be changed. The procuring entity may amend or withdraw the offer before the same is accepted by the contractor. Once the offer is accepted by the contractor, both parties shall receive an automatically generated acknowledgement email from the portal.

Step 4 – The contractor, after accepting the offer, will have 45 days (or longer if permitted by the procuring entity) from the date of the acknowledgment email to file an application for withdrawal of the case before the court. Once the contractor uploads proof of withdrawal being permitted by the court, if applicable, then a settlement agreement as prescribed under the scheme would be signed between the parties and amounts would be paid to the contractor. The Scheme provides that a settlement agreement shall have the same effect as a settlement agreement signed after conciliation under the Arbitration Act. However, with the introduction of The Mediation Act, 2023, this would mean a mediated settlement agreement under The Mediation Act.

In case the procuring entity has to withdraw the case, it may file an application for withdrawal within 45 days and execute the settlement agreement within 30 days thereafter without waiting for formal permission from the court. The settlement amount shall be paid by the contractor/procuring entity within 30 days of the execution of the settlement agreement. The stamp duty payable on the settlement agreement will always be paid by the contractor. This provision may appear to be onerous, however considering that the process ensures speedy recovery of amounts, such payment is a reasonable bargain.

Step 5 - Should the contractor not accept the offer, the ongoing litigation shall continue between the parties. The scheme provides that any reduction of the claim amount by the parties during the settlement process will not be quoted in any future litigation, making the whole process without prejudice.

Court awards when settlement procedure under the scheme is ongoing

Court awards that are passed after the cut-off date of April 30, 2023, and before the settlement is concluded, will have no bearing on the status of the dispute/settlement. However, if the court award is in favour of the procuring entity resulting in reduction of the settlement, then the procuring entity may revise its offer in terms of the court award. This revised offer must be sent before the acknowledgement email is automatically generated by the portal. If the acknowledgement email is already generated, then the procuring entity must not revise the offer and the settlement agreement will be entered in terms of the original offer.

Mandatory nature of the scheme

The scheme appears to be mandatory for procuring entities, for disputes where the claim amount is below ₹500 crore. This would reduce pending government litigation.

The intent of the scheme to have disputes settled is clear from the fact that it mandates the procuring entity to provide reasons and seek approval of its Secretary (CEOs in case of CPSEs) in the event that it does not accept the settlement request for a claim above ₹500 crore.

Further, a decision to reject a settlement request must not be taken in a routine manner and a committee must be constituted to review such cases on the basis of legal and practical aspects, and financial implications of pursuing the litigation rather than settling it. The committee, before taking a decision, must be satisfied that pursuing the litigation is more beneficial as compared to settling it. This shows that the government has actively sought to get rid of the decision-making process by a faceless and hierarchal structure that has resulted in years of pending litigation.

Analysis

Prevention before cure

The Scheme is a positive step from the government and if implemented effectively, it would ensure clearing of the backlog of pending cases. However, it still does not address the root cause of the government being the largest litigant in India, which is non-standardised decision making by public officers due to lack of knowledge of legal procedures, and a biased assessment of situations. In effect, even though the Ssheme does provide a cure for long-pending litigation and excessive expenditure by government entities in defending weak cases, it still lacks a prevention mechanism for such disputes.

Therefore, to get rid of this root cause and to boost investor confidence, the government needs to take steps to prevent disputes from arising in the first place. Appointment of an independent board or an independent legal practitioner to assess the viability of a claim and to advise on further course of action is a measure that the government can consider implementing.      

Lack of clarity

The scheme lacks clarity on the use of the term “court award”. The term, though used in multiple places, is not defined in the scheme. The draft scheme published on February 8, 2023 for comments of stakeholders, had ongoing litigation as a settlement category (which is removed in the scheme) and the term used therein was “court orders”. The word “orders” has been replaced by “awards” in the scheme without providing an explanation. Possibly the word refers to court orders or judgments in a Section 34 or Section 37 proceeding under the Arbitration Act.

Absence of practical considerations

a. A party may not choose to settle under the scheme owing to the large haircut/reduction on the amount proposed to be paid (if the claim amount is ₹500 crore, then the haircut/reduction, if going under the “court award” category, would be ₹75 crore);

b. The scheme does not provide a rationale for treating an “arbitral award” and a “court award” differently and providing different settlement amounts (85% and 65%) under the categories. Considering an arbitral award and a court award in the present situation are similarly placed, the percentage of the settlement amount should be the same.

Implementation

The government has already implemented the scheme on GeM, and contractors can now set out the eligible disputes that they aim to settle. Government-owned entities like Oil and Natural Gas Corporation (ONGC) and National Thermal Power Corporation (NTPC) were some of the first procuring entities to constitute an internal task force to implement the dcheme.

The scheme is also proposed to be implemented by the Ministry of Road Transport and Highways of India. The scheme was introduced in May 2023, with the claim submission period being July 15 to October 31, 2023, which is further extended to December 31, 2023. Once the term of the scheme concludes, the government will be able to assess the success of the same and accordingly formulate any future schemes that it may introduce for reducing pending litigation. The aforesaid practical considerations and clarity issues may also be addressed by the government in such future scheme.

Shalaka Patil is a Partner in Disputes Resolution team at Trilegal while Ankit Pathak is a Senior Associate at Trilegal.