“Arbitration is great. Just not for us,” says the Government

The authors critically analyze the "Guidelines for Arbitration and Mediation in Contracts for Domestic Public Procurement" issued by the Ministry of Finance, Department of Expenditure.
Economic Laws Practice - Naresh Thacker, Alok Jain, Ria Dalwani
Economic Laws Practice - Naresh Thacker, Alok Jain, Ria Dalwani

“Making India a hub of international arbitration”­ ­– This motto has been regurgitated in every arbitration conference in India. It has been the pioneering initiative of the Prime Minister, voiced by members of the legislature on innumerable occasions, endorsed by the office of the vice-president and supported by the Chief Justice of India. In part, this endeavor has been pursued through the amendments to the Arbitration and Conciliation Act in 2015 and 2019, through progressive judicial decisions and through the freshly minted Arbitration Bar of India.

However, an office memorandum issued by the Ministry of Finance, Department of Expenditure, titled “Guidelines for Arbitration and Mediation in Contracts for Domestic Public Procurement” sheds light on how the government truly perceives arbitration.

Regressive recommendations in respect of Arbitration

While the memo has the laudable objective of promoting mediation, in doing so, it lashes out at arbitration. The memo recommends:

i. Arbitration clauses should not be routinely used, especially in large contracts.

ii. If used, they may be restricted to disputes with a value less than ₹10 crores with a specific stipulation that in all other cases, arbitration will not be a method of dispute resolution.

Questionable rationale behind these recommendations

We examine the rationale behind these recommendations which are a result of the government’s purported experience of arbitration.

i. The memo states that if contracts have arbitration clauses, government officials avoid settling the matter and instead let the disputes be decided by arbitration.

The true reason why government officials are loathe to attempt settlements is the threat of a vigilance investigation in the event the settlement is ‘favorable’ to the private party. Empowering, rather than emasculating, these officials would resolve this issue. Deleting arbitration clauses would only result in these officials letting disputes be decided by courts.

ii. The memo records that arbitration is expensive and not as expeditious as envisaged.

Innumerable studies prove that arbitration, when efficiently administered, is a cost-effective expeditious ADR mechanism. The authors’ experience is that the efficiency of arbitrations involving the government is far worse than in disputes inter-se private parties. This is because of several factors:

(a) Despite having promoted several arbitral institutions, the government’s penchant for ad hoc arbitration leads to cost and time overruns.

(b) In the authors’ experience, the inability of the government to abide by the agreed schedule is a regular feature in arbitrations involving the government. At an average, arbitrations involving government as a party take twice the time spent in an arbitration inter se private parties.

(c) Also, the alarming regularity with which the government seeks and is granted adjournments are contributory factors. Arbitral tribunals, in domestic ad hoc arbitrations, are often lenient when the government is a party.  

iii.  The memo records that arbitrators are not subjected to the same level of scrutiny or standards of conduct as members of the judiciary and hence there is little accountability.

This observation is baffling because:

(a) Arbitrators are appointed by the government itself, or by mutual consent, failing which they are appointed by courts.

(b) The government tends to appoint retired judges as arbitrators.

In fact, owing to the government’s propensity to unilaterally appoint arbitrators or create a narrow pool of ex-officers as arbitrators, the courts have often had to ensure independent and impartial appointments. Also, the concern as to the quality of arbitrators can be addressed if the government considers the pool of experienced arbitration practitioners.

iv. It is suggested that the transfer of concerned government officials leads to a handicap in the effective presentation of the government’s case in arbitrations.

This concern is not alien to litigations when juxtaposed against arbitral proceedings. In fact, due to the flexibility of the arbitral tribunal to record evidence at venues other than the seat [Section 20(3), Arbitration and Conciliation Act, 1996], in the authors’ experience, arbitration has proven beneficial to the government.

v. The memo suggests that the reduced formality in arbitration, combined with the binding nature of decisions, has often led to wrong decisions on facts and improper application of law.

Citing the finality of the arbitral award and limited scope of challenge, the memo questions the accountability of awards and arbitrators. This demonstrates a deep distrust in an established form of dispute resolution; a view that is archaic and misplaced. Promoting arbitration also involves acknowledging and abiding by the narrow scope of challenge. Questioning the fundamental principles that limit the scope of interference with arbitral awards, given that the country is party to international conventions, is taking a hammer to the clock, not simply turning it back.

vi. The memo suggests that the finality of arbitral awards has not been achieved and the challenges thereto have virtually added a layer to the litigation.

On the one hand, the memo questions the narrow scope of challenges to arbitral awards and on the other hand, it bemoans the lack of finality. The dichotomy becomes stark when one sees the admission in the memo. The memo acknowledges that government officials, who are accountable in their decision-making process, do not accept an adverse award until all challenges are exhausted. Not challenging an award is perceived to be improper. Indeed, in the authors’ experience and as supported by studies, the government invariably challenges all adverse awards (whether tenable or otherwise) all the way to the Supreme Court. Emboldened by the recent success in the curative petition in the Delhi Airport Metro matter, the government is likely now to use all available tools at its disposal, starting from a challenge under Section 34, an appeal under Section 37, the right to file a Special Leave Petition before the Supreme Court, a review and, finally, a curative petition. To achieve the benefit of finality, the government ought to set up independent committees that scrutinize adverse arbitral awards and examine whether these awards should be challenged.

vii.  The memo also questions the efficacy of the arbitral process and the enforceability of the resultant award where there are civil/ criminal issues intertwined with the subject matter of arbitration.

Increasingly, these authors have seen the defence of fraud / collusion / corruption being brought by the government to make an end-run around the arbitral process. This, despite the law being settled that merely making allegations of fraud that are serious in nature does not denude the arbitral tribunal of its jurisdiction. Where there are both civil and criminal consequences, the arbitral tribunal does have the power to adjudicate on the former. However, the observations in the memo are unsurprising given the fact that in 2021, in the aftermath of the Devas-Antrix disputes, the government introduced an amendment to Section 36(3) of the statute with retrospective effect from October 23, 2015. Prior to the amendment, if an award-debtor wanted to challenge an award and obtain a stay against the enforcement of the award, he would have to deposit the whole or part of the award amount. Post-amendment, where the court is of the prima facie view that the arbitration agreement/ contract/ award was induced or effected by fraud/ corruption, the enforcement of the award is stayed unconditionally.

Disastrous impact

It appears that the success of arbitration as an expeditious dispute resolution mechanism has resulted in an increasing number of awards against the government within a timeframe that has overwhelmed the government machinery that was accustomed to disputes lingering in courts. Rather than introducing empowering measures as suggested by these authors, an increasingly protectionist regime is being implemented.

This memo is not new. The precursor tremors have been seen in the clever drafting of dispute resolution clauses in standard form contracts (which are generally non-negotiable). For example, one of the biggest upstream oil majors in India excludes from the jurisdiction of the arbitral tribunal all disputes valued above USD 12 million. Yet another oil major excludes non-notified claims.

The message is now clearer than ever – if these disputes were to traverse through the courts, the time spent therein would be costly, dissuading private parties from pursuing litigation. Having strongarmed the vendors/ contractors into signing standard form contracts, the government can take advantage of the position of law that pre-reference and pendent-lite interest can be contractually waived, permitting the government to stall payments to vendors/ contractors with impunity. This memo, if not withdrawn, could have serious implications especially in the infrastructure sector where there is a staggering number of contractors facing imminent insolvency on account of their cashflows being disrupted due to ongoing disputes.

Given the Prime Minister’s vision of improving India’s rankings in Ease of Doing Business, this memo could result in having the opposite effect. Both the current Chief Justice of India and the Law Minister have spoken about the need to promote a culture of arbitration. The memo seeks to stunt and reverse this growth.

Bear in mind that generations of judges have lamented the fact that the government is the biggest litigant in courts and even Law Commission of India Reports [100th and 126th Law Commission of India Reports] have remarked on the propensity of the government to pursue litigation up to the Supreme Court. Considering the non-binding nature of mediation and until the ghost of vigilance investigation is not excised, this memo is unlikely to yield meaningful mediated settlements and is more likely to inundate the already reeling judicial system.

Although the recently reelected government committed to issuing a National Litigation Policy just nine days after the issuance of this memo, these authors believe that a formal withdrawal of this memo is necessitated. A course correction in the National Litigation Policy would also be welcomed.

About the authors: Naresh Thacker and Alok Jain are Partners and Ria Dalwani is a Principal Associate at Economic Laws Practice (ELP).

If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.

Bar and Bench - Indian Legal news
www.barandbench.com