Arbitration, as the favoured mechanism for resolving disputes arising from government and quasi-government contracts, is soon going to be a thing of the past, except where the value of the dispute in relation to a contract – band not the value of the contract itself – is less than INR 10 crore, or where, in respect of higher value disputes, it is considered necessary to go in for arbitration ‘based on careful application of mind and recording of reasons and with the approval of specified officers’.
These directives, contained in a six-page office memorandum (OM) issued by the Procurement Policy Division of the Department of Expenditure, Ministry of Defence, on June 3, 2024, are applicable to the central ministries and departments, their attached and subordinate offices, autonomous bodies, central public sector enterprises, public sector banks, and financial institutions.
Arbitration will be replaced by a complex system of mediation for resolution of contractual disputes but where the mediation fails to settle the dispute, it will have to be adjudicated by the courts. This move comes as a surprise at a time when efforts were being made to make India a hub for arbitration.
It also brings into question the efficacy of arbitration as an ‘alternative dispute resolution’ mechanism, especially as the OM says in no uncertain terms that, notwithstanding the expected benefits of arbitration, the government’s experience in many cases has been unsatisfactory. There may be some truth in this, but whether mediation is an appropriate remedy is a moot point.
The OM lists out three advantages that were expected from arbitration as a mechanism for dispute resolution: speed, procedural convenience and availability of technical expertise to resolve the dispute, and finality of the arbitral awards. In the government’s experience, however, all these advantages have been chimerical.
As per a new rule, which came into force from June 3, 2024, arbitration will be replaced by a complex system of mediation for resolution of contractual disputes
As for speed, despite Section 29A of the Arbitration and Conciliation Act, 1996, introduced in 2015, which imposes a specific time limit for delivering the arbitration award, the process stretches on and on, for one reason or the other. As the OM rightly points out the entire process is very expensive. Nobody can question that, but it is in respect of the other two expectations that the government’s experience seems to have been particularly disturbing.
The OM proclaims that the procedural flexibility, ‘combined with the binding nature of decisions, has often led to wrong decisions on facts and improper application of the law’, with a very limited further legal recourse being available to challenge the arbitral award. This has given rise to ‘perceptions of wrong-doing including collusion’, particularly in high value disputes, hinting that it could be because the arbitrators are not necessarily subject to the high standards of selection which are applied to the judiciary and judicial conduct. The fact that the arbitration proceedings are held behind closed doors and not in the open court also does not help any.
Apparently, the benefit of finality of arbitration awards has also not been achieved, as a large number of awards are being challenged in the courts, despite there being very limited grounds for mounting a challenge under Section 12 of the Arbitration and Conciliation Act, 1996, by the party unhappy with the award. Arbitration has, therefore, become an additional layer in the process of dispute resolution, adding to the burden of the courts rather than reducing litigation.
What seems to sum up the government’s disenchantment with arbitration is the censorious observation that there have been ‘judicial decisions regarding impropriety on the part of the arbitrators and there is little accountability for such wrong decisions’ taken by the arbitrators.
This is a very harsh commentary on arbitration as an alternative dispute resolution mechanism, which is what it was supposed to be. Some of the problems faced by the government could possibly be because the government and quasi-government contracts normally provide for ‘ad-hoc’, and not ‘institutional’, arbitration. It is unclear if this was considered before taking the extraordinary decision to forsake arbitration as the preferred mechanism for dispute resolution.
Ad-hoc arbitration is conducted by one or more arbitrators appointed by the parties on a case-by-case basis. It is comparatively less expensive than institutional arbitration, but the proceedings are vulnerable to delays if one of the parties does not co-operate, for example, by refusing to agree on the appointment of a particular arbitrator.
As if these guidelines weren’t ambiguous enough, the OM further provides for general or case-specific modifications in their application, leaving the field wide open to decide on the modality of mediation and acceptance of the negotiated settlement, thus undermining uniformity in application of the norms for mediation
Reputed institutions like the International Court of Arbitration – ICC, Singapore International Arbitration Centre, and London Court of Arbitration, on the other hand, conduct the institutional arbitration. Established long ago, these institutions have experienced arbitrators on their panel who conduct arbitration as per well-defined rules and, most importantly, are held in high esteem in the commercial world.
Be that as it may, the new scheme of things requires the government departments or undertakings, ‘where they consider appropriate, e.g. in high value matters’ to constitute a High-Level Committee (HLC) which ‘may’ include a retired judge and a retired ‘high ranking officer and/or technical expert’ for resolution of disputes. The composition mentioned in the OM is ‘indicative’ and not ‘prescriptive’.
To resolve a dispute, the departments or undertakings can negotiate directly with the other party or involve a mediator and place the tentative agreement reached after the negotiations before the HLC. The departments also have the option of using the HLC for conducting the mediation. In all these cases, however, the final acceptance of the negotiated settlement will have to be given by the ‘appropriate authority’ as envisaged in Section 49 of the Mediation Act, 2023.
‘Mediation agreements need not be routinely or automatically included in procurement contracts or tenders’ as the absence of such an agreement in the contract ‘does not preclude pre-litigation mediation’. However, the OM also says that a mediation clause ‘may be incorporated where it is consciously decided to do so’. It cannot get more open-ended and confusing than this.
Another open-ended and potentially risky clause in the OM provides that in some rare situations in long-duration works contracts, where the public interest is best served by re-negotiation, ‘the terms of the re-negotiated contract may be placed before a suitably constituted High Level Committee before approval’. The bureaucracy will be extremely reluctant to recommend more liberal terms after re-negotiation for fear of being blamed for doing so with ulterior motives.
As if these guidelines weren’t ambiguous enough, the OM further provides that general or case-specific modifications in their application may be authorised by the Secretaries or Managing Directors in the case of government departments and public enterprises respectively, leaving the field wide open to decide on the modality of mediation and acceptance of the negotiated settlement, thus undermining uniformity in application of the norms for mediation.
It is difficult to visualise how this scheme of mediation is a vast improvement over arbitration and how it will result in expeditious dispute resolution, remain free from allegations of wrongdoing, and prevent disputes from landing up in the courts. Either party to a dispute could drag its feet and delay the mediation proceedings. Constitution of the HLC could become controversial as it will be an ad-hoc committee comprising retired judges and bureaucrats who will not be answerable to anyone. What renumeration is to be paid to the HLC remains unanswered.
The scheme also leaves many other questions unanswered. What if the tentative agreement reached between the department or its appointed negotiator and the opposite party is not supported by the HLC when brought before it? What if HLC supports it but the approving authority does not agree with it, which is quite likely as the latter would be a serving officer subject to conduct rules and scrutiny by the oversight agencies? Obviously, all such cases will land up in courts, thereby defeating the very purpose of replacing arbitration by mediation.
The government’s disenchantment with arbitration is the censorious observation that there have been ‘judicial decisions regarding impropriety on the part of the arbitrators and there is little accountability for such wrong decisions’ taken by the arbitrators
Mediation, which at best can be conducted if both parties voluntarily agree to it, is also unlikely to be a quick affair. Involvelemt of judges in mediation could potentially infuse the proceedings with the trappings of the judicial process, not least because mediation is to be conducted as per the provisions of the Mediation Act, 2023. This has been the bane of arbitration as well.
Mediation as the means of settling disputes in departments like defence and railways will pose another big challenge as a very large number of contracts are signed at each echelon down the line. With the cost of raising a dispute and seeking its settlement through mediation being comparatively negligible as compared to the cost of arbitration, more and more disputes could crop up. Constituting HLCs at each level, ensuring that all negotiators and HLCs apply the same norms uniformly, and thus prevent transgressions across the entire organisation but this could pose an unprecedented challenge.
To conclude, the problem is that mediation as a mechanism for dispute resolution, as set out in the OM, seems to be prone to the same shortcomings as arbitration. In fact, given the political climate in the country, bureaucratic procrastination, overzealousness of the oversight and investigative agencies, and the need to follow the law laid down in the Mediation Act, 2023, mediation may prove to be far less effective than arbitration, besides adding to the burden of the courts.
–The writer is a former Financial Advisor (Acquisition), Ministry of Defence. The views expressed are personal and do not necessarily reflect the views of Raksha Anirveda
