Abstract

“On June 3, 2024, India’s Ministry of Finance issued an office memorandum (OM) shifting from arbitration to mediation for resolving domestic public procurement disputes. Criticizing arbitration’s inefficiencies and adversarial nature, the OM limits arbitration to disputes under ₹10 crores, favoring mediation and negotiation for higher-value conflicts. It introduces a High-Level Committee for high-value disputes and emphasizes mediation under the Mediation Act of 2023. This policy shift raises concerns about its impact on dispute resolution efficacy, potentially deterring foreign investment and affecting India’s arbitration reputation. The OM’s effectiveness in enhancing dispute resolution while balancing investment interests remains debated.”

KEY WORDS: Arbitration, Mediation, Public Procurement, and Dispute Resolution.

Introduction

Recently, on June 3, 2024^[1], the Procurement Policy Division of the Department of Expenditure, Ministry of Finance issued an office memorandum (“OM”) providing guidelines denouncing and restricting arbitration and promoting mediation for domestic public procurement disputes. The OM solely addresses disputes relating to domestic ‘public procurement’, which involves the acquisition of works, goods, or services by government entities or agencies, “either directly or through contracted procurement services^[2].”

The OM critiques the government’s growing reliance on arbitration due to its inefficiency, adversarial nature, and tendency to lead to further litigation despite the finality of arbitration awards under the “Arbitration and Conciliation Act, 1996^[3].” The guidelines reflect a policy of non-tolerance of arbitration by the Ministry in matters of public procurement, and has diluted the pro-arbitration stance of the government and the judiciary. Interestingly, these guidelines emerged right after the former Chief Justice of India, Dr. D. Y. Chandrachud advocated for building a strong culture of commercial arbitration, deeming it no longer an “alternative”, thereby, hinting at its indispensability.

As such, the central question that follows is whether mediation can bridge the inefficiencies associated with arbitration and prove to be a game-changer with respect to large public procurement disputes.

Overview of the Office Memorandum

The OM applies to “tenders and bids” by the Government and its entities, including Central Public Sector Enterprises (“CPSEs”), Public Sector Banks (“PSBs”), and government companies.

The guidelines in the OM seek to restrict arbitration in large Public Procurement Contracts (“PPCs”). It recommends limited reference to arbitration for disputes up to ₹10 crores in domestic PPCs entered into after June 3, 2024. For public procurement disputes involving more than ₹10 crores, approval from the concerned Secretary of the Ministry/Department or the Managing Director of CPSEs, PSBs or Financial Institutions (“FIs”) would be required. The OM also gives due preference to institutional arbitration considering the cost relative to the dispute’s value.  However, the use of “may” in the wording of the guidelines suggests that these guidelines are directory and not mandatory in nature, and should not vitiate arbitration proceedings conducted in non-compliance with the guidelines.

Through the OM, government departments, entities, and agencies are encouraged to use mediation under the Mediation Act, 2023^[4] and seek negotiated settlements for resolving disputes. In cases involving high value, they may establish a High-Level Committee (“HLC”) for dispute resolution, comprising retired judges, high-ranking officers, and/or technical experts. The HLC may facilitate direct negotiation and proposal submission to HLCs, review mediated agreements, or act as the mediator itself if needed. The OM ascertains that the absence of mediation clauses/agreement would not preclude ‘pre-litigation mediation’^[5] and further recommends that disputes not covered by an arbitration clause and that cannot be resolved through the above-described measures be resolved through court proceedings.

Arbitration versus Mediation

States are increasingly open to using arbitration to resolve public procurement disputes, due to several factors. Firstly, public procurement involves urgent supply needs where delays from lengthy court proceedings are impractical.

Secondly, specialized knowledge in public procurement can be better addressed by arbitrators that have expertise in this field, rather than generalist courts. Confidentiality in procurement contracts is also a concern, better preserved in arbitration, which is inherently private. Moreover, arbitration facilitates adjudication of contracts involving foreign entities through international tribunals, which are more accessible and specialized than national courts. Finally, arbitration allows for flexibility in understanding market dynamics and economic conditions beyond legal frameworks governing these contracts.

Despite its advantages, the OM flags that arbitration has proven to be contentious and inefficient in practice. It states that arbitration involving government contracts often falls short of expectations for several reasons, such as lengthy and costly arbitration processes; reduced formality and binding decisions; incorrect factual conclusions; misapplication of laws; concerns about potential collusion and perceptions of wrongdoing; limited oversight; bias; impropriety; delayed materialization of final arbitral awards, and inflated claims and counterclaims.

As a recourse, the OM recommends mediation, where parties seek amicable settlements with the assistance of a third party. The provisions of the Mediation Act regarding the relative effectiveness of mediation have not yet been evaluated and these expectations may not be met in the process of mediation either. In comparison, the provisions for interim reliefs and the appointment of mediators in the Mediation Act are more open to interpretation than those in the Arbitration and Conciliation Act. Further, while the Arbitration and Conciliation Act elaborately sets out grounds for the appointment of an arbitrator in its Fifth Schedule^[6], the Mediation Act lacks such guiding principles.

A distinguishing feature of Mediation is perhaps, that the Mediator is a mere facilitator. This means that the chances of parties reaching an agreed solution may be low, and there is a risk of parties not honoring their promises and withdrawing from agreements. This uncertainty might deter domestic companies from doing business with public enterprises.

The Act states that mediated settlement agreements must be enforced or challenged in a competent court or tribunal. While essential for making these agreements final and enforceable, judicial intervention could delay the quick resolution of disputes, similar to issues seen in the contemporary arbitration regime. Thus, contrary to what is envisaged, mediation would not lead to lesser court intervention or litigation.

In the debate between arbitration and mediation, a promising approach could be to combine the best of both worlds by the integration of Med-Arb clauses. Here, parties agree upfront on the procedure, including a binding outcome, before attempting to resolve their dispute with the assistance of a mediator.

Office Memorandum on Dispute Resolution: Balancing Progress and Potential Pitfalls

The OM marks a notable change in the government’s strategy for handling disputes in public procurement contracts. A more productive and cooperative environment might result from giving mediation and practical dispute resolution processes priority. Restricting arbitration could, however, deter foreign investment and interfere with corporate operations, particularly for high-value disputes. As India’s appeal as a global economic hub to continue growing, it is imperative that these rules strike a balance with the needs and expectations of international stakeholders.

The Law Commission’s 246th report^[7] emphasizes how important arbitration is for attracting foreign capital. In addition, in keeping with India’s objective of encouraging investment and economic progress, modifications to the Arbitration and Conciliation Act were made in 2015^[8], 2019^[9], and 2021^[10] with the aim of accelerating contract enforcement and reducing court backlogs.

As a result, India’s ranking on the World Bank’s ‘Ease of Doing Business’ index^[11] increased dramatically, going from 142nd in 2014 to 63rd in 2019. The aforementioned progress can be ascribed to the refinement of the arbitration process, in addition to the execution of programs like as the Insolvency and Bankruptcy Code, 2016 (“IBC”), the Goods and Services Tax Network (“GSTN”), and digitization endeavors.

India’s ranking in ‘Enforcing Contracts’ was ranked 163rd by the World Bank in 2019^[12], which is quite low even with these developments. Ten to fifteen years is the typical length of a commercial dispute in India. This is mostly because of protracted court cases, a scarcity of judges, and many adjournments at the district court and high court levels. From ₹4.5 lakh crores in 2014 to ₹12 lakh crores in 2023, the value of commercial conflicts increased. These difficulties only touch on a small percentage of the generalized problems with dispute settlement, and the dwindling use of arbitration provisions presents a serious risk to the industry’s potential for expansion.

Scope of Mediation of Public Procurement Disputes under the Mediation Act, 2023

In India, mediation is becoming a favored method to resolve public procurement disputes due to its efficiency and cost-effectiveness. Disputes in public procurement contracts usually start when bidders contest the decisions made by the contracting authorities. Mediation offers a quick and confidential resolution, protecting public funds and allowing public servants to focus on their primary responsibilities. It balances the interests of the public and private entities, and thus preserves business relationships with providers, which is crucial in markets with limited suppliers, making mediation a practical choice^[13].

Section 2(iv) read with Section 48^[14]  of the Mediation Act makes it applicable to the Government/Public Sectors Undertakings. According to Section 48 of the Act, the Government or any of its agencies or entities may create plans or guidelines for the mediation or conciliation of disputes; in such instances, mediation or conciliation may be carried out in conformity with the plans or guidelines. Section 49^[15] states that, in cases involving the Central or State Government or their agencies, any settlement agreement must receive prior written consent from the competent authority before being signed.

A Critique of the Office Memorandum

The OM initially lauds arbitration for its efficiency but undermines its own stance by advocating mediation as a replacement, which lacks the finality essential for resolving disputes definitively. This shift appears motivated by a desire to shield the government from adverse outcomes rather than fostering a fair and predictable dispute resolution framework. While the OM suggests promoting amicable settlements, it inadvertently encourages traditional litigation, contradicting its stated goal of reducing litigation.  More so, the voluntary nature of mediation risks agreements being disregarded, undermining the enforceability and integrity of outcomes, which arbitration awards typically uphold.

The DMRC ruling^[16], which expanded the reach of court intervention during the award enforcement phase, has cast a shadow over the finality of arbitral awards in recent times. Moreover, the Arbitration & Conciliation Act also allows challenge to Arbitral Award. This reflects that arbitration is not detrimental for public procurement disputes and that there is a system of checks to prevent an arbitrary award from being enforced against the Government. Thus, there is no need for completely doing away with arbitration^[17].

Conclusion

The government of India abruptly decided that arbitration is ineffective for its purposes after decades of promoting India as a hub for arbitration. As a result, it plans to remove arbitration clauses from all future contracts involving the government or government-controlled entities, with the exception of minor disputes valued at Rs. 10 crores or less. This shift from arbitration to internal dispute resolution, driven by a distrust in the integrity of arbitrators and the perceived difficulty in overturning arbitral awards, is misguided and detrimental to infrastructure development, investment and economic goals. Arbitrators are meant to be impartial, and the government’s mistrust reflects a misunderstanding of adverse rulings as systemic bias rather than its own shortcomings in meeting legal standards. Replacing arbitration with administrative settlements would compromise the transparency and accountability of these adjudicatory processes. This approach also tends to overestimate the government’s capacity to resolve disputes.

Restricting arbitration to high-value disputes may lessen India’s appeal as an arbitration-friendly jurisdiction because foreign parties frequently favor arbitration due to its potential compromise of neutrality and finality. Foreign investors may continue to doubt arbitration’s effectiveness if the historical problem of the enforcement of arbitration rulings in India is not adequately resolved. In arguendo, mediation may lead to inefficient outcomes similar to arbitration, adding to the burden of an already strained judicial system and contributing to further judicial backlogs.

References

[1] Ministry of Finance, Department of Expenditure Procurement Policy Division, ‘Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement – reg.’ (Government of India 03.06.2024) <https://doe.gov.in/files/circulars_document/Guidelines_for_Arbitration_and_Mediation_in_Contracts_of_Domestic_Public_Procurement.pdf>  accessed on 30th June 2024.

[2] The Assam Public Procurement Act, 2017, available at  <https://finance.assam.gov.in/portlets/public-procurement#:~:text=Public%20Procurement%20means%20the%20acquisition,procurement%20services%20is%20entered%20into>  accessed on Jun 21, 2024.

[3] Arbitration and Conciliation Act, 1996, available at <https://www.indiacode.nic.in/bitstream/123456789/11799/1/the_arbitration_and_conciliation_act%2C_1996.pdf> accessed on December 21, 2024.

[4] The Mediation Act, 2023, available at

< https://www.indiacode.nic.in/bitstream/123456789/19637/1/A2023-32.pdf>, accessed December 21, 2024.

[5] The Mediation Act, 2023, s. 3(u) and s. 5.

[6] The Mediation Act, 2023, Fifth Schedule.

[7] Law Commission of India, Amendments to the Arbitration and Conciliation Act, 1996 (Law Com No 246, 2014).

[8] Ms. Zabeen Motorwala, “Arbitration and Conciliation (Amendment) Act, 2015 – Key Changes and Circumstances Leading to The Amendments”, Bharati Law Review, April – June 2016, pg: 261-266, (Manupatra), <ARBITRATION AND CONCILIATION (AMENDMENT) ACT, 2015 – KEY CHANGES AND CIRCUMSTANCES LEADING TO THE AMENDMENTS (Manupatra.In)> accessed 01 July 2024.

[9] AZB & Partners, “The Arbitration and Conciliation (Amendment) Act, 2019-Key Highlights”, (Mondaq, 27 August 2019), <The Arbitration and Conciliation (Amendment) Act, 2019 – Key Highlights – Arbitration & Dispute Resolution – India (mondaq.com)> accessed 02 July 2024.

[10] Ganesh Chandru, Aditi Sheth, Hrithik Merchant, “The 2021 Amendment to Arbitral Legislation in India: Is it a Step in the Right Direction?”, Vol. 7 issues 2 (2021), National Law School Business Law Review, <https://repository.nls.ac.in/cgi/viewcontent.cgi?article=1099&context=nlsblr> accessed 03 July 2024.

[11] World Bank, ‘Ease of Doing Business’ (World Bank, 2020) <https://documents1.worldbank.org/curated/en/688761571934946384/pdf/Doing-Business-2020-Comparing-Business-Regulation-in-190-Economies.pdf>.

[12] Ruetveij Pandya, Jeeta Nayak, and Abhilasha Malpani, “Contract Enforcement – Ushering In An Era Of Performance” (Mondaq, 24 January 2019), <https://www.mondaq.com/india/contracts-and-commercial-law/774622/contract-enforcement-ushering-in-an-era-of-performance>  accessed on 21 December 2024.

[13] Elizabeth Repper & Simon Taylor, ‘The use of mediation to resolve public procurement disputes’ (CONSTRUCTION BLOG 2013, 23 October 2013) <http://constructionblog.practicallaw.com/the-use-of-mediation-to-resolve-public-procurement-disputes-draft/> accessed on 27 June 2024.

[14] The Mediation Act, 2023, s 2(iv) read with s. 48.

[15] The Mediation Act, 2023, s. 49.

[16] Delhi Metro Rail Corporation Ltd v Delhi Airport Metro Express Pvt. Ltd, (2024) SCC OnLine SC 522.

[17] Mohammed Talib, ‘Indian government to encourage mediation for large public procurement disputes in India’ (Pinsent Masons, 19 June 2024) <https://www.pinsentmasons.com/out-law/news/indian-gov-encourage-mediation-large-public-procurement > accessed 3 July 2024.