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Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement

Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement

On 3rd June 2024, the Ministry of Finance issued an Office Memorandum (“OM”) providing extensive guidelines for arbitration and mediation in contracts of domestic public procurement (“DPP Contracts Guidelines”). As per the OM, these guidelines have been issued considering the enactment of the Mediation Act, 2023 (“Mediation Act”) and the government’s experience with arbitration and issues therein as an alternate dispute resolution mechanism.

The OM provides various issues with the current arbitration mechanism that have necessitated the Government to re-examine the Government’s approach towards arbitration. For instance, as per the OM, arbitration is a time-consuming and expensive method of dispute resolution as compared to other alternatives. The OM also states that reduced formality during arbitration proceedings and the binding nature of the decisions have led to incorrect decisions. The OM also claims that arbitrators are not subject to the level of standards that are applied while selecting and appointing judges. The OM goes on to state that the transfer of concerned officials who have been involved in the arbitration process does not allow the Government to effectively present their case before arbitrators. Moreover, numerous arbitration awards have been challenged before the Courts which has increased the burden on the courts instead of reducing their burden as was intended. The OM also makes the observation that although the practical implications of the arbitration process were intended to be commercially viable and sensible, however, in practice, given the adversarial process involved, claims and counterclaims are often inflated instead of being realistic.

Key highlights of the DPP Contracts Guidelines are as follows:

  • Reliance on arbitration needs to be reduced in domestic public procurement contracts: As per the DPP Contracts Guidelines, arbitration should not be routinely/automatically included as a method of dispute resolution in procurement contracts/tenders.
  • Adoption of arbitration in certain cases: If arbitration is included in contracts, then, as a norm, it should be restricted to disputes (not contracts) with a value less than INR 10 crore. Further, in the contract conditions/bid conditions, it must be specifically mentioned that arbitration will not be a method of dispute resolution in all other cases.
  • Inclusion of arbitration in disputes exceeding INR 10 crore: For including arbitration clauses for disputes exceeding the value of INR 10 crore, reasons should be recorded and the approval of the concerned Secretary or an officer not below the level of Joint Secretary (for Government Ministries/ Departments, attached/subordinate offices and autonomous bodies) or the Managing Director (for Central Public Sector Enterprises/ Public Sector Banks/ Financial institutions etc.) should be sought.
  • Challenge/Appeals: In cases where there is a decision against the govt./public sector enterprise, the decision to challenge/appeal should be taken only if the case merits such challenge/appeal and if there are high chances of winning in the court/higher court and should not be resorted to in a routine manner.
  • Institutional arbitration: After considering the reasonableness of the cost of arbitration relative to the value involved, institutional arbitration may be given preference.
  • Mediation should be encouraged: The DPP Contracts Guidelines encourage the adoption of mediation under the Mediation Act and/or negotiated amicable settlements for dispute resolution for Government departments/entities/agencies. As per these guidelines, for high-value matters, a High-Level Committee (which may consist of a retired judge or a retired high-ranking officer or technical expert) for dispute resolution may be set up and the Government department/agency/entity may either negotiate directly with the other party or conduct mediation through a mediator and place a tentative proposed solution before the Committee or use the Committee as the mediator. Setting up and referring the matters to the Committee would allow scrutiny by a ‘high-ranking body at arm’s length’ and would promote fair decisions in the public interest.
  • Re-negotiation of long-duration works contracts: The DPP Contracts Guidelines suggest re-negotiating the terms of long-duration works contracts due to unforeseen major events if required to serve the public interest, and placing the terms of the tentative re-negotiated contracts before a suitable High-Level Committee before approval. Approval will need to be obtained for the final accepted solution.
  • Mediation: Mediation agreements should not be routinely/automatically included in procurement contracts/tenders. However, such a clause may be incorporated if so decided. Nevertheless, pre-litigation mediation will not be affected by the absence of the mediation agreement.
  • Adjudication by courts: Disputes will be adjudicated by courts if they are not covered in an arbitration clause and where the above-noted methods fail in resolving the disputes.
  • Modification in the application of DPP Contracts Guidelines: The Secretary concerned (or an officer not below the level of Joint Secretary to whom such authority has been delegated) can authorise general or case-specific modification to the application of the DPP Contracts Guidelines.
  • Application: The DPP Contracts Guidelines apply to contracts of domestic procurement by the Government and its entities, including Central Public Sector Enterprises (CPSEs), Public Sector Banks (PSBs), and Government companies.
Our Take

In the process of promoting mediation and other alternate dispute resolution methods, the DPP Contracts Guidelines undermine the importance of and the pivotal role played by arbitration in resolving disputes and also shed light on the Government’s unsatisfactory experience with arbitration. The DPP Contracts Guidelines state that arbitration should not be the norm or preferred mode of dispute resolution in public procurement contracts, potentially disincentivising parties to do business in India and requiring contractors and/or suppliers to carefully assess dispute resolution clauses while bidding for and entering into an agreement with the Government. These guidelines also display a level of ‘cooling-off’ of the Government’s confidence in arbitration proceedings.

The premise for this policy change from arbitration to other dispute resolution methods needs to be re-examined. As per the Government, arbitrators are not selected using similar standards that are considered for the appointment of judges. This concern not only questions the accountability of arbitrators but also disregards the fact that arbitrators are appointed with the mutual consent of the parties. It also disregards the technical expertise that arbitrators may possess in the subject matter which could be crucial for understanding and effectively deciding the matter at hand and may have been one of the factors for appointing arbitrators.  

Unlike an arbitrator who is required to take a position in a dispute, a mediator would simply facilitate settlements. By advocating mediation as the preferred method of dispute resolution, the Government hopes to ‘settle’ most of its disputes. However, the Government does not seem to have taken into account the sheer number of contracts that may require settlement and the bargaining power of the parties in such settlement discussions.

The Government has also raised a concern about the number of arbitration awards that have been challenged before the courts. This concern disregards the fact that litigation would be the only recourse available to parties if they fail to settle the matter through mediation (or any other dispute resolution mechanism). This would result in increasing the burden on the courts instead of reducing the same. The shift from arbitration to court proceedings post-mediation seems counterproductive as it would certainly not lessen the load of litigation in terms of backlog in the courts. In essence, arbitration acts as the first stage of adjudication where matters are decided before they reach the court and are subject to litigation. With this shift in policy, parties would now end up going to court in the first instance, instead of opting for alternate dispute resolution, and increase the backlog of the already backlogged courts.

Notwithstanding the above, mediation and other dispute-resolution mechanisms also have benefits that may prove to be beneficial and effective for all the parties provided that these mechanisms are implemented expeditiously and efficiently.  

While the intent to promote alternative dispute-resolution mechanisms is understandable and in the right spirit, whether the Government can take a stand discouraging the adoption of arbitration as an alternative dispute-resolution mechanism is questionable and may require re-assessment.

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