Friendly fight: Mediation gains ground in PSU contracts for dispute resolution

New Delhi: Public sector undertakings (PSUs) are beginning to insert mediation clauses in their contracts, in a shift away from their usual reliance on arbitration, as they look for quicker, less expensive, and more amicable ways to resolve their commercial disputes, two people aware of the development said.

Infrastructure agencies such as the National Highways Authority of India (NHAI) Ltd, which has about a trillion rupees worth of claims undergoing arbitration, have also started using mediation clauses in certain contracts, the people cited earlier, who work on PSU disputes, said on the condition of anonymity.

"PSUs, especially those in the infrastructure sector, are increasingly adopting mediation for dispute resolution. This includes organizations such as NHAI, among others," the first person said.

"As per Ministry of Finance Circular dated 03.06.2024, incorporation of mediation clauses in its contracts is under active consideration. Highway contracts such as EPC, HAM and BOT (Toll) etc. are expected to include mediation provisions," NHAI said in response to Mint's queries. NHAI also added that mediation is being promoted for faster and cost-effective resolution.

Engineering, procurement and construction (EPC), hybrid annuity model (HAM), and build, operate, transfer (BOT) are contract models used in infrastructure development to distribute risks and responsibilities between public and private parties.

Arbitration decline

Earlier, arbitration clauses were predominant across contracts. But mediation is now being used proactively, especially in long-pending disputes that can be settled amicably, according to lawyers.

Arbitration and mediation are both out-of-court dispute resolution methods, where a third party agreed by the two disputing sides decides the course of action. The key difference is that arbitration is adversarial—for one party to win, the other has to lose. On the other hand, mediation is non-adversarial, and both parties can compromise and come to a consensus on the issue.

Earlier, arbitration was followed as the primary course of action in commercial disputes due to the high pendency of matters in Indian courts. Mediation allows parties to come to a consensus, reducing the need for appeals and challenges. Therefore, it is being used as the preferred means to resolve disputes. Mediation allows parties to resolve the dispute faster than arbitration.

The shift from arbitration and litigation towards mediation follows a June 2024 finance ministry advisory asking all government bodies to use mediation over arbitration. Disputes where the government is a party make up roughly 50% of all disputes in the country, according to law firm Aquilaw.

Government officials have typically been unwilling to concede a dispute, even partially, due to fear of future repercussions. “In a lot of instances, the offices of the PSUs have an inherent pressure to file a new litigation case, or to continue with the ongoing case without having any scope for settlement. Thereafter, often there is an additional pressure to challenge a majority of the unfavourable decision of the court, whether it is meritorious or not,” said a July 2025 research report released by Aquilaw on PSU disputes in the country.

"This happens due to various factors like organizational policies, legal policies, reputational risks, performance expectations, fears of disciplinary actions, etc," said the report.

But with mediation in contracts, this approach is slowly changing. "With a more developed approach and acceptance of mediation across the board, the initial resistance of government officials may fade away," said Gauhar Mirza, partner, Saraf and Partners. The main reason for this resistance was that there was no methodological concept of dispute resolution. With the involvement of the department and with appropriate approvals in place, the officers will be well-shielded from any future repercussions, said Mirza.

Mirza also said that now, PSUs are mediating long-pending construction-related disputes where the issue is non-payment of dues or where the project is stalled.

Mediation is faster than arbitration, as it requires both sides to come to a consensus, instead of one party winning and the other losing. Once both parties come to an agreement after mediation, the agreement can be treated as a contract and then executed by a court of law, according to the Mediation Act, 2023.

The 2023 law on mediation was the first time the government decided to regulate the alternative dispute resolution (ADR) method. The law sets up the mediation ecosystem in the country, and aims to promote institutional mediation and expedite the enforcement of mediated settlements.

ADR methods are those used to resolve disputes outside the courts, including arbitration and mediation.

PSUs also do not have the upper hand in Indian jurisprudence, as they have a higher burden of proof than their counterparts. In cases where there is ambiguity, courts often decide against the party which has framed the contract, which is PSUs in most cases.

The government is also proactively working on forming the Mediation Council of India (MCI), secretary in the department of legal affairs of the law and justice ministry Anju Rathi Rana said in an event in New Delhi in July. The MCI is a body of officials to regulate mediators and mediation institutions.

Faster resolution

Faster dispute resolution assumes importance as enforcement or execution of contracts is a key criteria to attract investment from domestic and foreign investors. ADR mechanisms help reduce pendency in courts. As of date, more than 29 million criminal cases and nearly 6 million civil suits are pending in India's district courts, according to data from the National Judicial Data Grid (NJDG).

NJDG data also showed that more than 457,000 of these pending cases are delayed due to frequent appeals.