The article examines the Office Memorandum issued by the Ministry of Finance, which provides guidelines for arbitration and mediation in contracts related to domestic public procurement.

Arbitration, celebrated as a cornerstone of efficient dispute resolution and envisioned as a pioneer of a new era of swift and effective justice delivery compared to the traditional adversarial system, has once again come under governmental scrutiny. Recognizing the challenges often faced in current arbitration processes, the Government of India, through the Ministry of Finance, Department of Expenditure, Procurement Policy Division, has recently issued an Office Memorandum (OM) titled Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement[i] on June 3, 2024. This OM represents a continuation of the governments initiatives such as Vivad se Vishwas and the Mediation Act, 2023, aimed at managing arbitration and associated litigation.

These guidelines are issued primarily in response to several factors: the enactment of the Mediation Act, 2023[ii]; the government's extensive experience with arbitration involving government contracts; the unique challenges the government faces as a litigant; the significant costs associated with arbitration proceedings; and the frequent challenges to arbitral awards. The aim is to streamline dispute resolution processes, particularly in public procurement, by promoting mediation where possible and ensuring arbitration clauses are used judiciously and efficiently. This initiative seeks to reduce financial burdens on public resources while enhancing the effectiveness and fairness of resolving disputes involving governmental entities.

Supreme Court Ruling:
Recently, the Supreme Court of India made a significant ruling in Delhi Airport Metro Express Private Limited (DAMEPL) vs state-owned company Delhi Metro Rail Corporation (DMRC)[iii] highlighting the prolonged process of enforcing domestic arbitral awards in the country. In April, the Court utilized its constitutional powers to overturn a previous decision, resulting in the annulment of an arbitral award related to a longstanding dispute over a major transport project in Delhi. This decision mandated the refund of funds previously awarded through arbitration and enforced by the courts.

In parallel, while the guidelines impose stricter controls on arbitration, they also promote alternative dispute resolution methods for parties engaged in public sector contracts. Encouraging mediation and negotiated settlements, especially for high-value disputes, government entities are empowered to form high-level committees (HLCs). These committees may include retired judges, senior officials, or technical experts to facilitate mediation processes or review mediated settlement agreements directly negotiated between parties. Thus, the guidelines aim to foster efficient dispute resolution while addressing complexities inherent in public sector contract disputes.

Skepticism Towards Arbitration Prompts Consideration Of Alternative Dispute Resolution Methods
Initially hailed as a swift, cost-effective alternative for dispute resolution, arbitration has failed to live up to these expectations, as highlighted in the Office Memorandum (OM). This perspective is rooted in comprehensive data analysis, including ongoing arbitration cases, arbitrator fees, hearing frequencies, claims and counterclaims, awards issued, challenges lodged, and recent legislative developments such as the Mediation Act of 2023 and judicial decisions. Accumulated experience over the years has necessitated a thorough reassessment of arbitration practices.

Arbitration, once touted for efficiency and cost-effectiveness, faces substantial challenges in practice. Proceedings have become prolonged and costly, contrary to expectations. The informal nature of arbitration has raised concerns about decision accuracy, potential misconduct, and perceptions of bias due to closed-door settings and limited transparency. Achieving finality in arbitration decisions and reducing court burdens has proven elusive, often resulting in additional litigation layers. Unrealistic claims and counterclaims further complicate resolution efforts. The prevalence of arbitration clauses can sometimes hinder a pragmatic approach to dispute resolution. These issues highlight the need for careful consideration and potential reforms to ensure arbitration serves as a reliable alternative to traditional litigation.

Arbitration involving government entities or agencies poses unique complexities and often strays from its intended objectives. These entities must uphold accountability standards, leading to rigorous scrutiny in decision-making. Accepting adverse awards without exhausting judicial remedies is viewed as improper, undermining the perceived finality of arbitration outcomes. Inconsistent decisions affecting similar contractors not party to arbitration further complicate matters. Government entities also contend with challenges like turnover in officer posts, which can create knowledge gaps compared to more stable private counterparts, impacting arbitration proceedings.

For Companies With International Operations:
For multinational corporations operating in India, establishing a clear and robust dispute resolution strategy from the beginning is essential. The recent guidelines emphasize that international businesses engaging with Indian public sector projects or entities must meticulously assess their dispute resolution clauses. Given the restrictions on arbitration for high-value disputes, these companies must now consider alternative avenues such as mediation and negotiated settlements early in the process.

Otherwise, they may find themselves navigating litigation within the Indian judicial system. This underscores the importance of proactive planning and careful consideration of dispute resolution mechanisms when dealing with Indian public sector involvement.

In June 2023, the Indian government established a panel headed by former law secretary TK Vishwanathan[iv] to propose reforms to the 1996 Arbitration and Conciliation Act. The objective was to reduce the strain on judicial resources and enhance Indias standing as a global hub for arbitration. In their report released in February, Vishwanathan and the committee stressed the importance of party autonomy in arbitration proceedings.

They recommended that arbitration clauses in purely domestic contracts should require informed consent from all parties involved. This ensures that domestic parties fully understand the financial implications and procedural timelines associated with arbitration before agreeing to such clauses. Additionally, the committee suggested providing parties the option to opt for mediation rather than arbitration, aiming to offer more flexible and effective dispute resolution mechanisms.

The Office Memorandum:
In the context provided, the Office Memorandum (OM) serves as a comprehensive guide for handling disputes related to domestic public procurement contracts through arbitration and mediation. Public procurement encompasses the acquisition of goods, services, and works by public authorities or civil service entities using public funds.

The OM outlines several key provisions:

• Restrictions on Arbitration: Arbitration clauses should not be routinely included in large procurement contracts. If included, they should be limited to disputes involving amounts less than ₹10 crores. Additionally, bid conditions must specify that arbitration will not be used for disputes exceeding this amount unless specifically agreed upon.
• Approval and Criteria for Higher Disputes: The ₹10 crores dispute threshold can be exceeded only after careful consideration and with documented reasoning. Approval from the relevant Secretary or a Joint Secretary-level officer (for government ministries/departments) or Managing Director (for CPSEs/PSBs/Financial Institutions) is required.
• Preference for Institutional Arbitration: Institutional arbitration is preferred over ad-hoc arbitration.
• Appeals and Challenges: Challenges against decisions impacting government or public sector enterprises should be pursued only when genuinely merited and likely to succeed, as per guidelines issued on October 19, 2021.
• Dispute Avoidance and Settlement: Emphasis is placed on avoiding disputes or resolving them amicably through contractual mechanisms, considering both legal requirements and practical realities in the public interest.
• Mediation Encouragement: The adoption of the Mediation Act, 2023, is encouraged for resolving disputes.
• High-Level Decision Making: For high-value matters, a High-Level Committee is to be formed to ensure decisions are made by a senior body independent from regular decision-making structures.
• Renegotiation of Contracts: In exceptional cases, long-term contracts may be renegotiated to prevent disputes arising from unforeseen major events affecting public interest.
• Court Recourse: Disputes not covered by arbitration or unsuccessful in mediation should be brought before the courts.

Overall, the OM provides a framework aimed at efficient and fair resolution of disputes in public procurement contracts, emphasizing proactive management, adherence to legal frameworks, and the broader public interest.

Analyzing The Om: A Breakdown:
The Office Memorandum (OM) presents a clear stance against arbitration, yet its guidelines for exclusion are muddled with uncertainty, particularly regarding what qualifies as a "large contract" or "long term contract." Despite attempts to cap arbitration disputes at ‚¹10 crore, there remains ambiguity over how this value is defined and which contracts fall outside the "routine" category for arbitration clauses. Similarly, the criteria for "high value" disputes referred to a High-Level Committee and circumstances permitting renegotiation of long-term contracts are left open to interpretation.

A significant concern arises regarding public sector undertakings (PSUs) and their numerous commercial transactions already bound by pre-existing arbitration clauses. The impact of the OM on such contractswhether it necessitates amending existing arbitration clauses or applies only to new agreementsis unclear. This uncertainty persists especially in cases where disputes have not yet arisen, arbitration is ongoing, or the dispute value exceeds ‚¹10 crores.

Despite these uncertainties, the OM reflects the government's commitment to enhancing transparency in dispute resolution and facilitating a business-friendly environment while alleviating the burden on courts. It aims to mitigate substantial losses to the public treasury caused by escalating arbitral awards obtained through dubious means. Whether the OM is mandatory akin to the Vivad se Vishwas schemes or discretionary remains a crucial point requiring clarification.

Conclusion
Implementing these guidelines earnestly holds potential benefits for both government bodies and private entities. Emphasizing mediation as the preferred method for dispute resolution could foster collaboration. By prioritizing mediation over arbitration and litigation, government agencies can efficiently resolve conflicts, saving time and costs associated with prolonged legal battles.

Encouraging mediation and settlements also reduces the likelihood of parties resorting to litigation post-arbitration, enhancing the overall efficiency of dispute resolution. This approach not only improves governmental effectiveness and accountability but also boosts public trust in government operations and procurement processes. Increased confidence in fair and prompt dispute resolution could attract more vendors and contractors to participate in government tenders.

Moreover, developing a skilled cadre of mediators and negotiators within the public sector could further institutionalize these practices over time. However, the success of these reforms hinges on their practical implementation and adherence. Only through effective application can these guidelines potentially transform dispute resolution practices and strengthen public trust in governmental processes.

End Notes:

1. Guidelines_for_Arbitration_and_Mediation_in_Contracts_of_Domestic_Public_Procurement.pdf (doe.gov.in)
2. https://legalaffairs.gov.in/sites/default/files/MediationAct2023.pdf
3. 23751_2022_1_1501_52296_Judgement_10-Apr-2024.pdf (sci.gov.in)
4. TK Vishwanathan: Centre sets up panel led by former Law Secy T K Vishwanathan to recommend reforms in arbitration law - The Economic Times (indiatimes.com)