Ministry Of Finance Pushes For Mediation Over Arbitration In Domestic Public Procurement Contracts

The guidelines issued by the Deputy Secretary (Procurement Policy) state that arbitration gained prominence as an alternative mechanism for resolving disputes which of advantages such as prompt adjudication and access to specialized technical expertise. Acknowledging the benefits of arbitration, the guidelines recognize its potential to expedite resolution timelines and streamline decision-making processes. However, it states certain shortcomings within the arbitration framework.

“recent developments, namely the enactment of the Mediation Act, 2023 and Court decisions, combined with the experience gained over many years have necessitated a re-examination of the Government's approach towards arbitration vis-avis other methods of dispute resolution, such as mediation and litigation.”

One of the primary challenges encountered in arbitration involving government entities lies in the intricate nature of governmental decision-making processes. Governmental actions are subject to rigorous scrutiny and accountability standards, which can pose challenges in accepting arbitration awards that deviate from established practices. Moreover, the guidelines emphasise the transitory nature of government personnel which can hinder the continuity of institutional knowledge.

The guidelines emphasize a need to explore alternative dispute resolution mechanisms, particularly mediation, as a means for collaboration and amicable solutions.

“Adjudication by the courts is a remedy which always exists wherever there is no arbitration clause. However, another alternative to arbitration is mediation, which is a process whereby parties attempt to reach an amicable settlement of their dispute with the assistance of a third person (mediator) who does not have the authority to impose a settlement upon the parties to a dispute. There are successful models of mediation/ conciliation being practiced in certain Government entities, for example in the oil and gas sector. Section 48 of the Mediation Act, 2023 allows the Government or any Government entity or agency to frame schemes or guidelines for resolution of disputes through mediation or conciliation, and in such cases, a mediation or conciliation may be conducted in accordance with such schemes or guidelines.”

To further enhance the efficacy of dispute resolution mechanisms, the guidelines recommend the establishment of high-level committees comprising retired judges and technical experts. These committees are tasked with scrutinizing proposed solutions and ensuring alignment with broader public interests. Additionally, it states that provisions should be made for renegotiating contract terms in exceptional circumstances, subject to rigorous evaluation by designated high-level committees.

The following guidelines are issued for contracts of domestic procurement by the Government and by its entities and agencies (including Central Public Sector Enterprises [CPSEs], Public Sector Banks [PSBs] etc. and Government companies):

1. Arbitration as a method of dispute resolution should not be routinely or automatically included in procurement contracts/ tenders, especially in large contracts.
2. As a norm, arbitration (if included in contracts) may be restricted to disputes with a value of less than Rs. 10 crore. This figure is with reference to the value of the dispute (not the value of the contract, which may be much higher). It may be specifically mentioned in the bid conditions/ conditions of the contract that in all other cases, arbitration will not be a method of dispute resolution in the contract.
3. Inclusion of arbitration clauses covering disputes with a value exceeding the norm specified in sub-para (ii) above, should be based on careful application of mind and recording of reasons and with the approval of:

1. In respect of Government Ministries/ Departments, attached/ subordinate offices and autonomous bodies, the Secretary concerned or an officer (not below the level of Joint Secretary), to whom authority is delegated by the Secretary.

2. In respect of CPSEs/ PSBs/ Financial Institutions etc., the Managing Director.

4. In matters where arbitration is to be resorted to, institutional arbitration may be given preference (where appropriate, after considering reasonableness of the cost of arbitration relative to the value involved).
5. In matters covered by arbitration/ court decisions, the guidance contained in General Instructions on Procurement and Project Management dated 29.10.2021 should be kept in mind. In cases where there is a decision against the government/ public sector enterprise, the decision to challenge/ appeal should not be taken in a routine manner, but only when the case genuinely merits going for challenge/ appeal and there are high chances of winning in the court/ higher court.
6. Government departments/ entities/ agencies should avoid and/ or amicably settle as many disputes as possible using mechanisms available in the contract. Decisions should be taken in a pragmatic manner in overall long-term public interest, keeping legal and practical realities in view, without shirking or avoiding responsibility or denying genuine claims of the other party.
7. Government departments/ entities/ agencies are encouraged to adopt mediation under the Mediation Act, 2023 and/ or negotiated amicable settlements for resolution of disputes. Where necessary, e.g. matters of high value, they may proceed in the manner discussed below:

1. Government departments/ undertakings may, where they consider appropriate e.g. in high value matters, constitute a High-Level Committee (HLC) for dispute resolution which may include:

1. A retired judge.

2. A retired high-ranking officer and/ or technical expert.

2. In cases where a HLC is constituted, the Government department/ entity/ agency may either

1. negotiate directly with the other party and place a tentative proposed solution before the HLC; or

2. conduct mediation through a mediator and then place the tentative mediated agreement before the HLC; or

3. use the HLC itself as the mediator.

3. This will enable decisions taken for resolving disputes in appropriate matters to be scrutinized by a high-ranking body at arms-length from the regular decision-making structure, thereby promoting fair and sound decisions in public interest, with probity.

8. There may be rare situations in long duration works contracts where, due to unforeseen major events, public interest may be best served by a renegotiation of the terms. In such circumstances, the terms of the tentative re-negotiated contract may be placed before a suitably constituted High Level Committee before approval.
9. Approval of the appropriate authority will need to be obtained for the final accepted solution. Section 49 of the Mediation Act, 2023 is also relevant in this regard.
10. Mediation agreements need not be routinely or automatically included in procurement contracts/ tenders. The absence of a mediation agreement in the contract does not preclude pre-litigation mediation. Such a clause may be incorporated where it is consciously decided to do so.
11. Disputes not covered in an arbitration clause and where the methods outlined above are not successful, should be adjudicated by the courts.

Click Here To Read/Download Guidelines