Background
Globally, arbitration is recognized as an effective alternative to traditional dispute resolution through courts, especially when dealing with complex, high-value contracts. It is expected to result in expeditious, cost effective and binding resolution of disputes, with least court interventions. Arbitrators often chosen by the parties, can be experts in relevant fields. The decision of arbitrators is final and can be challenged on very limited grounds. In spite of the advantages of arbitration, recently the Public Works Department of the Government of NCT, has deleted[2] removal of the arbitration clause from all future contracts.

It makes all contracts with PWD, subject to the exclusive jurisdiction of Courts in Delhi. This follows the guidelines[3] of Government of India ("GoI") issued last year that had removed arbitration clause in large government contracts. This article critically examines the implications such directives.

Statutory Framework for Arbitration:

In India, arbitration as an alternative dispute resolution mechanism, finds statutory backing in Arbitration and Conciliation Act (Act). Arbitration in India, however, remained riddled with many shortcomings, such as:

• Delays in the process of appointing the arbitrator;
• The actual dispute resolution;
• Challenges to arbitral awards;
• Undue interference of courts in the arbitration process;
• The ability of any party to unilaterally appoint arbitrator leading to the perception of arbitrator's lack of neutrality;
• Increased costs, among others.

The Act was amended in 2015, 2019 and 2021, to promote neutrality, reduce delays, regulate costs, and improve enforceability of awards, reflecting India's ambition to become arbitration-friendly.
 

Proposed National Litigation Policy

In June 2024, the Ministry of Law & Justice, GoI began a review of the litigation system in India, with an aim to reduce pendency of litigation involving the Government, under a National Litigation Policy. Public statements were made that there would be focus on arbitration to increase the ease of doing business and to make India an arbitration hub.
 

2024 Guidelines

In June 2024, the Ministry of Finance Department of Expenditure Procurement Policy Division, GoI issued guidelines for contracts of domestic procurement by the Government and by its entities and agencies. Contrary to the objective of the Act, its amendments and proposed national litigation policy, the said guidelines instruct that:

• Arbitration should not be routinely or automatically included in procurement contracts/tenders, especially in large contracts;
• Arbitration (if included in contracts) be restricted to disputes with a value less than Rs. 10 crore.

Now PWD, Delhi Government has followed the suit.
 

The Rationale for Avoiding Arbitration

GoI listed the following as the reasons for avoiding arbitration:

• The arbitration process consumes a long time;
• It is very expensive;
• Since the arbitration process has reduced formality and the decisions of arbitrators are binding, often wrong decisions are taken on facts and by improper application of law, against which there is only limited further recourse;
• There are perceptions of wrongdoings including collusion;
• The high standards of selection applied to the appointment of judicial officers and their conduct is not applicable to arbitrators. There is hardly any accountability of arbitrators, who make wrong decisions;
• The majority of arbitration decisions are challenged by both parties in the court and thus there is no finality. Instead of reducing litigation, arbitration has become a course of more litigation and the objective of relieving burden on courts, has not been achieved.
   

Justifications for the Guidelines

The GoI offered the following justifications for its guidelines:

• Acceptance of an adverse award, without exhausting judicial resources available against the same is perceived to be improper by various authorities, even though the arbitration awards are envisaged to be final.
• The Government is expected to act fairly and without arbitrariness, which makes it difficult for the Government to accept arbitration awards, if different practice was followed for other similarly placed contractors who were not involved in arbitration.
• The officers serving the Government and its agencies are transferable which may result in absence of personal knowledge of an officer actually involved in arbitration and this handicaps the Government in presenting its case before arbitrator.
• Inter alia, the enactment of the Mediation Act, 2023 necessitated a re-examination of the Government's approach towards arbitration vis-à-vis other methods of dispute resolution, such as mediation.

Critique of the Approach
At the outset, the effort of GoI to shun arbitration in contracts involving the Government/its agencies evidence GoI's lack of confidence in the arbitration system and results in negative messaging to the businesses/investors, who perceive arbitration as an expeditious and effective and therefore preferred recourse for dispute resolution. Excluding arbitration from large procurement contracts, which often involve highly technical and sector-specific disputes, and require specialised expertise in their resolution, which arbitration can provide, is a step backward.

The following show that the guidelines lack justification:

1. The government argues that the process takes a long time and is very expensive. It cites limited recourse against wrong decisions; perceptions of wrongdoing/collusion; lack of high standards of selection and conduct and accountability for wrong decisions; and frequent challenge of decisions of arbitrator.
   
   These are however not unique to arbitration involving Government and its agencies, but would equally apply to arbitration between private parties. In spite of these drawbacks, arbitration continues to enjoy the confidence of contracting parties. Therefore, GOI should endeavour to eliminate shortcomings, rather than avoiding arbitration.
    
2. The further justification supplied by GoI viz. acceptance of adverse awards by authorities may be perceived as improper, does not appear to be logical. If the Government officials are perceived as failing to accept reasonable settlements, being afraid of potential vigilance actions, the correct recourse would be to enable and empower the concerned officials to accept reasonable settlements by laying appropriate guidelines and requiring approval of an independent committee involving higher officials having technical and legal expertise.
    
3. Similarly, the reason that the Government finds it difficult to accept arbitration awards if a different practice was followed for other similarly placed contractors, who were not involved in arbitration, also lacks conviction. In case the Government for justifiable reasons decides to accept a particular arbitration award without taking further recourse, nothing prevents it from extending the same treatment to other contractors who are similarly placed, but were not involved in arbitration.
    
4. The next justification offered about the transferability of Government officials as a result of which officers involved in arbitration may lack personal knowledge, is also misplaced. Firstly, arbitration matters which involve disputes arising from written contracts, and its performance and non-performance based on written communications/reports, may not require personal knowledge of a given officer.
   
   Secondly, nothing prevents the Government/its agencies from summoning the services of the concerned officer having personal knowledge for attending the arbitration. Thirdly, the problem of unavailability of a given officer is not unique to Government contracts and in private sectors also on account of attrition often the individual officer having personal knowledge may not be available for arbitration.
    
5. Mediation though is a welcome dispute resolution mechanism, the same cannot be a substitute for arbitration. In case of failure of mediation, the parties would be driven to court litigation.
    
6. Even though the guidelines seek to curb arbitration only in domestic contracts involving Government/its agencies, it cannot be disputed that the Government remains the largest single litigant. Several major infrastructure projects undertaken on PPP basis like Highways, Metro Rails, Airports and Seaports involve stake and disputes much in excess of Rs.10 crores.
   
   Driving such disputes to regular courts which are already overburdened and often lack expertise, is not likely to help either to expedite the dispute resolution or cut the costs involved. In fact, the courts are unable to resolve challenges to arbitral awards within the statutorily recommended period of one year. The courts cannot be expected to conduct the entire trial that could be subjected to an arbitral process, particularly in disputes involving complexity and volume of records.
   
   Further, the decision of the court at first instance would be subject to appeals, revisions and reviews at different stages and at different levels which will add to the delay in dispute resolution. The prolonged litigation or mediation process, especially when coupled with an eventual resort to the courts, could lead to even higher costs for all parties involved

Opposition to guidelines
The GoI guidelines were opposed widely. Arbitration Bar of India and the Indian Arbitration Forum had issued a representation[4] to the Ministry of Finance expressing their concern. It was reported that a Public Interest Litigation[5] was filed challenging the guidelines. However, GoI did not recall the guideline.

Way forward
The prudent course for GoI and Delhi Government would be to review and recall their guidelines and directions. The arbitration mechanism should be strengthened and guidelines for the responsible and effective conduct of arbitration involving the Government and its agencies, need to be framed. This would restore the confidence of businesses/investors in India as an investor friendly destination having a robust arbitration ecosystem.

End Notes:

1. A legal practitioner - linkedin.com/in/smitasinghadvocate
2. Delhi Public Works Department drops arbitration in future contracts, opts for litigation: Mint 23 April 2025: https://www.livemint.com/news/india/delhi-public-works-department-pwd-arbitration-future-contracts-litigation-nhai-arbitration-public-procurement-contracts-11745383063948.html
3. Official Memorandum No.F. 11212024-PPD issued by Government of India Ministry of Finance Department of Expenditure Procurement Policy Division dated 03 June 2024
4. https://www.scconline.com/blog/post/2024/06/24/arbitration-bar-of-india-requests-ministry-finance-withdraw-memorandum-arbitration/
5. https://www.linkedin.com/posts/prosoll-law_legalopinion-legalperspective-commercialdisputes-activity-7239891400828317697-3tOs/

Written By: Smita Singh