Key takeaways

• The new guidelines do not detract from the applicability and advantages of arbitration as a method of dispute resolution (as compared to litigation in the courts in India) in covering a wide range of contractual matters, including disputes between private sector parties where the Government or a public sector undertaking is not involved.
• For contracts of domestic procurement by the Government and by its entities and agencies, it is not the case that arbitration may not (or should not) be included (including in large contracts). Parties should consider whether it is appropriate (or preferred) to provide for arbitration as a method of dispute resolution in their contracts, having regard to the quantum of any potential dispute, and negotiate accordingly based on their requirements and circumstances. In this regard, parties should be mindful that the norm of Rs. 10 crore is with reference to the value of the dispute (and not the value of the contract, which may be higher). For arbitration clauses covering potential disputes with a value exceeding Rs. 10 crore, parties should expect that the necessity for approvals from senior officials may introduce a degree of delay and potentially complicate contractual negotiations.

In more detail

On 3 June 2024, the Ministry of Finance, Department of Expenditure (Procurement Policy Division) issued an office memorandum titled "Guidelines for Arbitration and Mediation in Contracts for Domestic Public Procurement".

Key points

Arbitration as a method of dispute resolution

The memorandum discusses the role of arbitration in covering a whole range of contractual matters, including disputes between private sector parties where the Government or a public sector undertaking is not involved. It is acknowledged that arbitration is expected to provide a number of advantages compared to litigation in Courts:

• Speed: Arbitration is expected to result in quicker resolution of disputes
• Convenience and Technical Expertise: Arbitration provides greater convenience and less formality, and enables persons other than judges (including technical experts) to act as Arbitrators. This may improve the quality of factual decision making, especially on technical issues.
• Finality: The decisions of the Arbitrators are final and grounds for challenge in courts are very limited.

Recent developments and Government's approach towards arbitration

The enactment of the Mediation Act 2023 and Indian court decisions have necessitated a re-examination of the Government's approach towards arbitration vis-à-vis other methods of dispute resolution, such as mediation and litigation.

Government (or Government entities or agencies) as disputants

It is observed that the Government (or Government entities or agencies) as disputants have certain peculiarities:

• The system of decision-making in Government involves accountability to Parliament and the Government has to act fairly without arbitrariness. Accepting an adverse award without exhausting judicial avenues is often perceived to be improper by various authorities.
• The need for fairness and non-arbitrariness makes it difficult to accept arbitral awards if they vary from the practice followed for other similarly-placed contractors who are not involved in the arbitration.
• The personal knowledge of an officer involved in an arbitration may not be as deep as an opposing private party, as officers in Government and its undertakings are transferable. This puts the Government at a disadvantage when presenting its case.

Experience of arbitration in Government contracts

According to the memorandum, the actual experience of arbitration in respect of contracts where the Government (or a Government entity or agency) is a party has been unsatisfactory in many cases. It is lamented that arbitration is lengthy and expensive, there have been erroneous decisions and improper application of the law, the intended finality of arbitration has not been achieved (as a large number of arbitration decisions have been challenged in the Courts), and there are inflated claims which complicate the resolution process.

Adjudication by the courts and mediation as alternative methods of dispute resolution

Adjudication by the courts remains an option in the absence of an arbitration clause. Another alternative to arbitration is mediation, a process whereby parties attempt to reach an amicable settlement of their dispute with the assistance of a mediator. It is noted that there are successful models of mediation or conciliation being practised in certain Government entities and the Mediation Act 2023 allows the Government (or any Government entity or agency) to frame schemes or guidelines for resolution of disputes through mediation or conciliation, and mediation or conciliations may be conducted in accordance with such schemes or guidelines. 

Specific guidelines for contracts of domestic procurement

The following guidelines have been issued for contracts of domestic procurement by the Government and by its entities and agencies:

• Arbitration should not be routinely or automatically included in procurement contracts or tenders, especially in large contracts.
• Arbitration (if included in contracts) may be restricted to disputes with a value less than Rs. 10 crore (approximately USD 1.2 million). For higher value disputes, including arbitration clauses should be a carefully considered and reasoned decision approved by senior authorities.
• Where arbitration is used, institutional arbitration is preferred where appropriate (considering the cost of the arbitration and the value involved).
• Decisions to challenge or appeal should not be taken in a routine manner, but only when the case genuinely merits a challenge or appeal and there are high chances of succeeding.
• Government departments/entitles/agencies should avoid and/or amicably settle as many disputes as possible using available mechanisms.
• Government departments/entitles/agencies are encouraged to adopt mediation under the Mediation Act 2023 and/or negotiated amicable settlements for resolution of disputes, and Government departments/undertakings, may where they consider appropriate e.g., in high value matters, constitute a high level committee (HLC) for dispute resolution.
• There may be rare situations in long duration works contracts, where due to unforeseen major events, public interest may be best served by a re-negotiation of terms, subject to approval by a high-level committee.
• Mediation agreements need not be routinely or automatically included in procurement contracts or tenders. The absence of a mediation agreement in the contract does not preclude pre-litigation mediation and such a clause may be incorporated where it is consciously decided not to do so.
• For disputes not covered in an arbitration clause and where the methods outlined above are unsuccessful, these should be adjudicated by the courts.
• General or case-specific modifications in the application of these guidelines may be authorised by the Secretary concerned or an officer not below the level of Joint Secretary for government ministries, departments, and autonomous bodies, or the Managing Director for Central Public Sector Enterprises

Conclusion

The rationale behind the latest recommendations and the specific guidelines issued have been and will likely continue to be the subject of scrutiny. This is understandably so, given that the latest guidelines appear to recommend modes of dispute resolution other than arbitration (at least insofar as large or high value contracts of domestic procurement by the Government and by its entities and agencies are concerned). These guidelines may add a layer of complexity to contract negotiations and doing business in India, particularly in relation to concerns that the application of these guidelines may be extended to procurement contracts involving foreign investors. Whilst some might welcome the added clarity and predictability (with the clear procedures and thresholds set out in the guidelines) as well as a less adversarial environment (with the promotion of mediation (over arbitration), the restrictions on arbitration (especially for higher value disputes in excess of Rs. 10 crores) may concern foreign investors who are inclined towards arbitration as their preferred method of dispute resolution (not least because of its finality and neutrality).

For the time being, the new guidelines do not detract from the applicability and advantages of arbitration as a method of dispute resolution (as compared to litigation in the courts in India) in covering a wide range of contractual matters, including disputes between private sector parties where the Government or a public sector undertaking is not involved. However, for contracts of domestic procurement by the Government and by its entities and agencies, parties may now need to consider whether it is appropriate to provide for arbitration as a method of dispute resolution in their contracts, having regard to the quantum of any potential dispute, and negotiate accordingly.

* * * * *

This client alert is being provided as general information and does not constitute legal advice. Baker & McKenzie does not practice Indian law and where Indian law advice is needed, we work closely with top India-qualified lawyers. We'd be happy to discuss your needs in India. For more information, please contact Ashok Lalwani and Mini vandePol.

* * * * *

© 2024 Baker & McKenzie.Wong & Leow. All rights reserved. Baker & McKenzie.Wong & Leow is incorporated with limited liability and is a member firm of Baker & McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "principal" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as "Attorney Advertising" requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.