Arbitration Bar Of India Calls For Withdrawal Of Government's New Arbitration Guidelines On Procurement Contracts

The memorandum, issued by the Department of Expenditure, advises against the routine inclusion of arbitration clauses in government procurement contracts for large-scale contracts. It suggests that arbitration should only be employed for disputes with a value less than ₹10 crores. For all other cases, it proposes that arbitration should not be considered a method of dispute resolution.

In a detailed representation to the Finance Minister, Nirmala Sitharaman, the ABI and IAF highlighted their concerns. They referred statements from the Prime Minister and other senior government officials advocating for the promotion of arbitration as a preferred dispute resolution mechanism. They stated in their representation that the memorandum contradicts the government's previous efforts to create a robust arbitration ecosystem in India.

The ABI and IAF have pointed out that the memorandum's suggestions appear to undermine various measures taken by the government to promote arbitration. They stated Prime Minister and the Minister of Law and Justice have emphasized the importance of arbitration in enhancing the ease of doing business in India. This new guideline, however, seemed to reverse this intent.

While the memorandum suggests mediation as an alternative, the ABI and IAF point out that mediation's non-binding nature poses challenges. Government officials often hesitate to sign mediated settlements due to fear of scrutiny and potential vigilance inquiries. This fear could lead to ineffective mediation outcomes and ultimately push disputes back to overburdened courts.

The representation stated:

“…… the Memorandum does not adequately assess the non-binding nature of mediation. The Memorandum itself recognizes that decision-making in the government involves accountability and scrutiny. Despite that, the Memorandum fails to consider that, fearing a vigilance enquiry, no government official is willing to sign a mediated settlement if it results in large payouts to private parties.”

The representation stated that the memorandum's preference for litigation over arbitration is expected to exacerbate the already heavy caseload of Indian courts. The complexity and volume of disputes, especially in sectors like infrastructure, could result in prolonged litigation processes, stretching over several years. This delay, it stated, could further deter investment and commercial activity.

To address the concerns raised, the ABI and IAF proposed several measures. They recommended encouraging the introduction of clauses that allow for both mediation and arbitration (Med-Arb) in government contracts to maximize dispute resolution efficiency. Additionally, they suggested in their representaition permitting officials to present settlement proposals without fear of backlash and establishing independent committees to review these proposals.

The ABI and IAF also advocated for incorporating standardized arbitration clauses from reputable institutions in government contracts to ensure consistency and fairness. Promoting the use of institutional arbitration, which provides oversight and accountability, can ensure that arbitrators are selected based on expertise and impartiality. They further recommended setting up committees of independent experts to review arbitral awards and provide recommendations on whether they should be challenged.

The representation was signed by Gourab Banerji, Senior Advocate and President of Arbitration Bar of India.