Introduction
In a surprising move, the Ministry of Finance issued a memorandum bearing no. F 1/2/2024 PPD on June 3, 2024 (“Memorandum”), effectively removing arbitration clauses from public procurement contracts exceeding Rs. 10 crores. This decision marks a significant shift in the government’s approach to dispute resolution over the past three decades.
The Memorandum stipulates that arbitration may be restricted to disputes valued at less than Rs. 10 crores, while disputes exceeding this threshold will require careful consideration and approval from senior officials. Instead of arbitration, the government is promoting mediation and amicable settlement.
The government’s rationale for this shift appears to stem from concerns about the integrity of arbitrators and the perceived difficulty in challenging unfavorable awards. However, this stance overlooks the fundamental principles of arbitration, such as the independence and impartiality of arbitrators, and the limited grounds for challenging awards as a deliberate feature to ensure finality. This memorandum also raises legal concerns and potential conflicts with established arbitration jurisprudence in India.
Incorrect Assumptions by the Government
In the Memorandum, the Government has made some incorrect assumptions about Arbitration, as a dispute resolution method seemingly setting the stage for promoting mediation as an alternative. However, it completely overlooks the fact that most government contracts already include a process of conciliation before arbitration is invoked. The Memorandum should have recommended making mediation a mandatory step before arbitration, rather than removing arbitration clauses altogether.
The Memorandum fails to consider that without an arbitration agreement, any unresolved mediation would lead parties to the courts, which are already overburdened and lack the resources to handle a surge of disputes that arbitration currently resolves. It is important to emphasize that courts struggle to address challenges to arbitral awards within the statutory period of 1 year. Expecting Courts to manage entire trials, which would otherwise have been part of the Arbitration process, is unreasonable and impractical. It is not out of place to mention that the infrastructure disputes, which will be particularly impacted by the Memorandum, are complex and involve extensive documentation, court proceedings in these cases, could take 10 to 15 years to conclude.
The Memorandum asserts that arbitration is unsuitable due to the frequent transfer of government officials, which impedes the effectiveness of arbitration proceedings. However, the Memorandum overlooks that this very issue persists in litigation as well. If anything, arbitration offers the flexibility more flexibility than Litigation.
Further, the Memorandum criticizes the Arbitration Act by claiming that it leads to more litigation. The reality is that every statute offers a different recourse which eventually ends in adjudication by a competent Court. The fact of the matter is that no individual or entity should be denied the right to seek legal recourse.
Conflict with Legislative Intent and Jurisprudence
The government’s memorandum appears to contradict the legislative intent behind the Arbitration and Conciliation Act, 1996 and its subsequent amendments. The Act was specifically designed to promote arbitration as an efficient dispute resolution mechanism, aligning India with international best practices.
It is important to underscore that the Memorandum was issued just days after Dr. S. Jaishankar inaugurated the Arbitration Bar of India wherein he remarked “Arbitrate in India’ is actually a facet of Make in India”.
By discouraging arbitration for high-value disputes, the government seems to be contradicting legislative and judicial efforts to enhance arbitration in India. This policy shift could potentially undermine years of development aimed at establishing India as a favorable jurisdiction for arbitration.
Infringement of Party Autonomy:
The principle of party autonomy is a cornerstone of arbitration law globally and in India. Arbitration is a product of mutual agreement between the parties involved. It allows for the selection of arbitrators who are experts suited to the specific nature of the dispute. Furthermore, the parties have the freedom to design the process thereby ensuring a more efficient and fair resolution. By unilaterally deciding to exclude arbitration clauses from high-value contracts, the government is effectively overriding the parties’ freedom to choose their preferred dispute resolution mechanism. Moreover, it raises questions about the government’s role in dictating dispute resolution mechanisms in commercial contracts, potentially overstepping into the domain of private contractual relationships. This overstepping measure will eventually increase disputes.
Conflict with International Obligations:
India is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which obliges member states to recognize and enforce arbitration agreements. The government’s policy could be viewed as inconsistent with these international commitments. In the context of international arbitration, this policy might deter foreign investors who rely on arbitration clauses as a neutral and efficient means of dispute resolution. It could potentially lead to conflicts with bilateral investment treaties that often include arbitration as a dispute resolution mechanism.
Suggestions
It is important to acknowledge that the government’s issuance of the Memorandum was not without careful consideration, and their concerns are indeed valid. However, the proposed solution presents certain challenges. In light of this, we respectfully suggest the introduction of Med-Arb clauses in all government contracts, thereby ensuring a consistent and uniform approach in all cases. Further, it is important to emphasize that merely adding the Mediation clause would not solve the problem, without ensuring that the appointed Mediators are independent, impartial, highly skilled, and accredited to fully realize the benefits of mediation. Further, the Government should also encourage officials to present settlement proposals without fear of repercussions or vigilance inquiries. It is respectfully stated that a more nuanced approach, addressing specific issues is required rather than removing arbitration clauses from all procurement contracts over the sum of Rs. 10 Cr.
Conclusion
We, in concurrence with the Arbitration Bar of India, humbly suggest the Hon’ble Minister review and withdraw the Memorandum in its current form. The Memorandum risks undoing the significant strides made since 2015, when the government introduced commendable reforms to Arbitration Law in India. Such a move would not only harm the country’s reputation as an investment-friendly destination but also undermine the progress achieved by both the legislature and judiciary in promoting the development of Arbitration in India.
References:
1. https://www.indialaw.in/blog/arbitration-and-conciliation/governments-memorandum-and-its-challenges/
5. https://www.livelaw.in/pdf_upload/representation-to-the-ministry-of-financeabi-and-iaf-545988.pdf