Arbitration pros' resist govt.'s advisory favouring mediation. Plan to take up the matter with the government

The memo, issued by the Department of Expenditure’s Procurement Policy Division in the Ministry of Finance earlier this month, had suggested government bodies and companies to focus on mediation, out-of-court settlements, or even litigation in matters related to public procurement contracts where the disputed amount was above ₹10 crore, instead of going for arbitration.

Further, the directive applies only to government agencies and public sector undertakings (PSUs) in procurement contracts, and not to private parties engaging in such contracts.

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Created to promote out-of-court dispute resolution mechanisms in the country, the ABI's resistance towards the government's policy suggestion comes days after newly re-appointed law minister Arjun Ram Meghwal promised to make India an arbitration hub when he took charge of the office, a few weeks ago. 

"We are deeply concerned about these guidelines as they do not take into account the success story of arbitration in India, including that for the Government of India," said Shashank Garg, secretary, Arbitration Bar of India.

Dispute arises

The ABI is in the process of sending a representation to the government to seek the withdrawal of the memorandum and offer a consultation with experts for any course correction that is required, Garg added. The ABI began operations in May this year to create a pan-India entity of arbitration practitioners.

The advisory issued by the government suggests shutting the door on arbitration as an effective mode of dispute resolution, while favouring mediation, Garg said. This raises concerns about the future of the fledgeling arbitration ecosystem in the country, according to Garg.

Arbitration, as well as other methods of alternate dispute resolution (ADR) are integral to the Indian legal system, as they help in reducing the pendency of cases in courts and promote ease of doing business. 

The government memo, issued on 3 June, titled "Guidelines for Arbitration and Mediation in contracts of Domestic Public Procurement", stated that the government needs to re-examine arbitration in the country after its experience in the domain over the years.

"Arbitration as a method of dispute resolution should not be routinely or automatically included in procurement contracts/ tenders, especially in large contracts," said the 3 June advisory. The government's experience with arbitration has been unsatisfactory because it takes too long and is very expensive, it added.

The alternate method

The government memo also highlighted mediation as an alternate dispute resolution mechanism. It encouraged government departments, agencies and enterprises to leverage the mediation mechanism under the Mediation Act, 2023, and negotiate amicable settlements to resolve disputes.

Email queries sent to the Department of Legal Affairs under the Ministry of Law and Justice as well as to the Department of Expenditure in the Ministry of Finance were not answered immediately.

The decision to cut down arbitration costs for PSUs is an indicator of accountability within the system, said experts. "This is not a blind decision. PSU expenses on arbitration are done using taxpayer money. Therefore, they are accountable to the people," said Dr T.K. Viswanathan, former law secretary. 

"The government should justify this decision to reduce arbitration with adequate data," added Viswanathan, who led a panel on arbitration reforms and submitted a report in February this year.

The Union government has been promoting arbitration as a method to resolve disputes by amending the Arbitration and Conciliation Act, 1996, in 2015, 2019, and 2021, to suit the evolving needs of businesses and litigants, as per Rajya Sabha disclosures. It has also promoted mediation and conducted Lok Adalats (people's courts) to promote ADR mechanisms.