Introduction
The recent memorandum issued by the Ministry of Finance, Government of India titled guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement (“Guidelines”) has stirred controversy due to its restrictive stance. The prohibition on arbitration in cases in which a disputed amount is valued at over INR 10 crores, is viewed as a setback to India’s ambition to establish a robust arbitration ecosystem. The Arbitration Bar of India and Indian Arbitration Forum have voiced their concerns and submitted a representation to the finance minister, emphatically highlighting the potential repercussions of this policy.
The Guidelines provide for mediation as a dispute resolution mechanism instead of arbitration in disputes amounting to more than INR 10 crores. The reason for this is said to be the rigorous scrutiny and accountability standards of governmental actions, which may pose challenges in performing or enforcing these arbitration awards due to establishment administrative practices. Moreover, the Guidelines emphasise the transitory nature of government personnel which can hinder the continuity of knowledge of the arbitration case.
These guidelines can undermine the broader aspirations of India to become an international arbitration hub, which forms the focus of this article. To explore this, the author will first analyse the guidelines in the context that mediation will not be an appropriate mechanism to resolve the dispute due to the dominant position of government. Secondly, the author will discuss the international framework regulating arbitration in government contracts and lastly the author will lay down a possible roadmap for effective arbitration.
The Misguided Step
The Guidelines providing for mediation instead of arbitration can be said to be a safeguarding measure undertaken in order to evade accountability. These Guidelines can be seen as measures to avoid accountability as they create a framework that can heavily favour interests of government entities. There may be apprehensions of a system where the government can more easily manage disputes as the High-Level Committee to be constituted for mediation may be biased due to vacuum on the procedure for appointment of committee members and composition provided is merely indicative and not prescriptive. Also, the supreme court recently indicated issues of fairness, reasonableness and transparency in government contracts which raises further doubts. Hence, the government could shield itself from external scrutiny, thereby reducing the bar upon transparency and accountability in the execution of public procurement contracts. In contrast, the arbitration process offers expediency, convenience, technical expertise, and finality which is essential for quick resolution of the disputes in public procurement contracts in order to prevent inconvenience to the public authority as well as the supplier or any other party to the contract.[1] Since public interest is represented by these procurement contracts which requires that the resolution of disputes should be faster than the ordinary contracts. Hence, expedited procedures or fast track arbitrations in public procurement contracts can be efficient in comparison to the litigation in court.
The effectiveness of the arbitration for settlement of disputes between government entities was highlighted by the Custom, Excise and Gold Tribunal Delhi in ONGC v. Collector of Central Excise by referring to the Supreme Court order in civil appeal in which it opines that the disputes between the Union of India and Public Sector Undertakings would result in a waste of public money and time and therefore, should not be brought before the Court. In the aftermath of this judgement, the Government envisaged a permanent machinery for arbitration which was later substituted by the Administrative Mechanism for the resolution of CPSEs disputes(AMRCD) which mandates insertion of arbitration clause in commercial contracts between government entities. The AMRCD provides for two-tier dispute resolution wherein first the matter will be referred to a committee consisting of secretaries of administrative ministries/departments and upon unsolved even after the above committee it will be referred to cabinet secretary whose decision shall be binding and final. Furthermore, various initiatives of the Government such as the National Litigation Policy, 2010 aims to reduce the Government’s litigation by emphasizing arbitration as an alternate dispute mechanism. All these policies of the Government indicate that the benefits of the arbitration mechanism are not only limited to the private parties, but also extend to the Government. Hence, the recent Guidelines should have recognised the potential of the arbitration in the public procurement contracts.
Another problem associated with the Guidelines is that the current mediation regime in India does not provide an effective remedy for the resolution of disputes in public contracts as the Mediation Act 2023 gives good leverage to the Government to decide the scheme or guidelines for the resolution of disputes through mediation. However, this power of the Government will provide them with the power to decide the framework within which mediation proceedings will be conducted, the timeline, etc. as Section 48 of the Act clearly mentions that this power will be exercised when central government or state government or it entities is a party thus giving them an upper hand in the mediation. Additionally, the memorandum clearly states that mediation shall be governed in accordance with the schemes or guidelines formulated by the government for the purpose of mediation. Hence, it may be inferred that the High-Level Committee will moreover be constituted dominantly by government and thus concern of biasedness remains prominent. .
Furthermore, Section 49 of the Mediation Act, 2023 which provides that consent of the competent authority of government or any of its entities or agencies, public bodies, corporations, and local bodies, etc. is necessary for the finality of the settlement arrived out of mediation is unfavourable towards the parties. Since, the Government officials often hesitate to sign the mediated settlements due to the fear of scrutiny and potential vigilance inquiries (as highlighted by the representation of ABI and IAF). Thus, there remain questions about the possibility of the Government authorities giving their consent in a settlement. The Guidelines also provide for the formation of the high-level committee (“HLC”) which can also act as a mediator. Hence, any possibilities of the Government’s aim of promoting mediation to reduce the burden of the Court may fail as the ultimate recourse left in case of non-settlement mediation processes is the Court which will further burden the Courts. Thus, the government’s approach of restricting arbitration and opting for mediation in significant contracts is a misguided step.
The Brazil and Peru Arbitration Ecosystem: An Inspiration for India
The Brazil and Peru arbitration ecosystem is robust and offers insights for the countries to follow its landscape. The state entities are efficiently engaged in arbitration as a method for dispute resolution which can be witnessed by the fact that arbitration with Brazilian state entities accounted for almost 20% of all the cases in the country.[2] The Brazil Arbitration legislations contain a comprehensive set of ADR mechanisms for resolution of disputes arising due to public procurement contracts.[3] The Brazilian Government Contracts Act 2021, Article 138 and Articles 151-154 provides for the arbitration between state entities which offers a linear path for the effective commercial and contract-based arbitration with state parties in general, including government contracts.[4] The practice of Brazilian parliament is an inspiration for India for two reasons. First, the arbitration of public procurement contracts will help in building the public trust and facilitation of trade effectively as the case in Brazil.[5] Second, the Arbitration and Conciliation Act, 1996 lacks procedure for arbitration as a dispute resolution mechanism in public procurement contracts including government contracts. So, the Brazilian landscape will provide a roadmap for an effective arbitration environment for India.
Similarly, the mandatory arbitration as dispute resolution mechanism in public procurement contracts in Peru has benefited its economy because domestic and foreign investment has increased significantly. Also, the research of the PUCP highlights that duration in resolution of disputes in public procurement contracts through arbitration was less than a year in approximately 70% of cases and in only 6% cases it was beyond 24 months. Due to this short time period in resolution, the investors are incentivised to do business in the state.
India can adopt the measures adopted by Brazil and Peru for an effective arbitration ecosystem and to overcome the problem of the rigorous scrutiny and accountability standards of governmental actions as reasoned by the government. Additionally, these concerns of scrutiny and accountability are rejected by the fact that the ADR methods are very common in international practice as provided in Section 33.214 of the United States Federal Acquisitions Regulations (FAR).
The Possible Roadmap for Effective Arbitration
The Guidelines, restrictive stance is challenging and requires certain changes. There is a need to adopt a mechanism which could promote the process of arbitration for effective and expedited redressal of disputes out of procurement contracts to save wastage of public time and money. The government, rather than restricting arbitration for can go for the hybrid model in arbitration involving private parties and the government or Public Sector Enterprises, namely Med-Arb (mediation-arbitration) which would lessen the burden to a great extent. This hybrid model will be a combination of two dispute redressal methods which may be further developed as one, where an arbitrator is allowed to act as a mediator the parties have made their submissions, and try to narrow down the dispute and facilitate in resolving it. The Med-Arb Model is a low-risk strategy as it provides the parties a stronger position as they have the option to go for arbitration if mediation doesn’t result in resolution of the disputes.
The hybrid model is an effective and streamlined approach in comparison to standalone arbitration or mediation proceedings as it provides a framework to resolve the specific issues that need to be addressed in arbitration proceedings as some issues may be resolved during the mediations itself. The recent SMU SIDRA survey report 2020 data reveals that respondents preferred to opt for hybrid model over standalone mediation due to the concern surrounding the finality and enforcement of mediation settlement agreements. The hybrid mechanism also addresses the concern of the government regarding rigorous scrutiny and impropriety on the part of arbitrator as the same individual assumes the roles of mediator as well as arbitrator which allows for a deeper understanding of the dispute, helping in thorough scrutinising of the dispute. The viability of the Med-Arb mechanism can be highlighted by the fact that as per the global arbitration review, the Secretary General of the China International Economic and Trade Arbitration Commission (“CIETAC”), Yu Jianlong in an interview pointed out that 20% to 30 % of CIETAC’s caseload is resolved through the above model each year. The Government should realise the feasibility and viability of the Med-Arb model as a dispute resolution method given the flexibility, cost, and time effectiveness and faster redressal of disputes.
Furthermore, a specialised body such as arbitration institutions can be established to perform the core functions related to the disputes arising out of government contracts which involves rigorous scrutiny and accountability standards of government actions. The India is constantly pushing for an effective arbitration landscape which can be ascertained from the establishment of various arbitration institutions such as Indian council of Arbitration, Nani Palkhivala Arbitration Centre, Delhi International Arbitration Centre, Mumbai Centre for International Arbitration, Indian Arbitration and Mediation Centre in Hyderabad, and most recently the establishment of Permanent Court of Arbitration office in Delhi. These institutions can also be assigned the task to adjudicate the matters related to procurement contracts as they are already equipped with enough resources and experience. Further, the Indian Dispute Resolution Centre (“IDRC”) is responsible for providing alternate dispute resolution services through arbitration and mediation to government ministries, departments, organisations, and public sector undertakings. IDRC can function as an institution or a stakeholder to provide a highly professional, efficient, and institutional environment for resolution of disputes that may arise out of procurement contracts amounting to more than INR 10 crores, in a time bound and cost effective manner. The specialised institutions for the redressal of disputes in a time bound and cost-effective manner will promote the arbitration ecosystem in India.
Conclusion
It is imperative for the Government to revisit the Guidelines as it seriously impacts the current arbitration ecosystem and impedes the growth of India as an international arbitration hub. These Guidelines may add a layer of complexity to contract negotiations and doing business in India, particularly in relation to concerns about the application of these Guidelines and about the possibility of it being extended to procurement contracts involving foreign investors. The government through an effective mechanism in place such as hybrid model of mediation and arbitration (Med-Arb) for dispute resolution, which will be a cost effective, flexible and efficient redressal mechanism and through formation of specialised arbitration institutions, can deal with the problem of rigorous scrutiny and accountability in procurement contracts. The multi-year delay due to prolonged litigation in disputes arising out of these contracts will restrict commercial and investment activity, especially in the infrastructure sector. The establishment of specialized institutions and hybrid model for dispute resolution will foster trust in the investors and attract more investment contracts. Ultimately, not doing so, could impact the ease of doing business in India thereby creating hindrances for India to become an international arbitration hub.
[1] Jaunis Gumbis & Migle Dereskeviciute, ‘Arbitration and Disputes Arising out of Public Procurement Contracts – Incompatibility or Regularity’ (2013) 3 YB on Int’l Arb 83
[2] César Augusto Guimarães Pereira and Leonardo F. Souza-McMurtrie, ‘The development of arbitration involving State Partiesin Brazil: comparative remarks with Latin America’, in João Bosco Lee and Flavia Foz Mange (eds), Revista Brasileira de Arbitragem, (© Kluwer Law International; Kluwer Law International 2022, Volume XIX, Issue 75), pp. 36 – 58.
[3] Ibid.
[4] Ibid.
[5] Ibid.
Author(s)
Harshit Pathak
Student at DNLU, Jabalpur
Ishita
Practicing advocate at the MP and CG High Court