Criticizing The Government Memorandum Dated 03.06.2024: A Roadblock To Arbitration

Criticizing The Government Memorandum Dated 03.06.2024: A Roadblock To Arbitration

The Government of India recently released an Office Memorandum dated 03.06.2024 (hereinafter, “the Memorandum”) on Arbitration and Mediation in Public Procurement Contracts. The said Memorandum has blown a whiff of turbulence in the legal community specially when the Government itself is promoting India as a hub of Arbitration. The Memorandum comes with certain new-fangled assumptions, falling in the extremities of logic and reason. The essence that the Memorandum emanates is to push entities to pursue mediation as a mode of dispute settlement mechanism. While the objective looks sensible, the way it has been projected seems problematic and disdained.

For convenience and clarity, following are the takeaways from the Memorandum of the Government of India (exact wordings of the Memorandum retained herewith for accuracy):

a. Arbitration is based on an explicit provision in a contract and is not a judicial process.

b. Arbitration is ‘expected’ to provide several advantages as compared to litigation, viz. (i) Speed, (ii) Convenience and Technical Expertise and (iii) Finality.

c. Notwithstanding the expected benefits of arbitration, the actual experience of arbitration has been unsatisfactory in meeting the expectations.

d. Considering such fallacies in the scheme of Arbitration, another alternative to arbitration is mediation.

Based on the reasons enlisted above, the Memorandum prescribes certain guidelines enumerated below:

a. Arbitration should not be routinely included in large procurement contracts.

b. Arbitration may be restricted to disputes with a value less than Rs. 10 crores.

c. Arbitration clauses covering disputes with value exceeding Rs. 10 crores shall be based on careful application of mind and with the approval of senior officials of the government entities as prescribed Clause 7(iii)(b) of the Memorandum.

d. Disputes not covered in arbitration clause and where methods outlined in the memo are not successful, then dispute should be adjudicated by courts.

The said Memorandum has been published by the Government of India when arbitration is increasingly preferred for resolving commercial disputes by the parties. Indian Government has been promoting arbitration and including the same in almost all the contracts as preferred mode of dispute resolution. In fact, various officers of the Government have lauded the benefit of arbitration over the traditional Judicial System and promotes India as hub of Arbitration. The continuous amendments and reforms in the Arbitration Act, the constitution of Arbitration Bar of India and various institutions are some indications of Government’s approach towards Arbitration. Recently, during the inauguration of the Arbitration Bar of India, the Hon’ble External Affairs Minister S. Jaishankar talked about the significant steps that India has been taking to bolster its stand in the international economic market.¹ Igniting the flame of ‘Viksit Bharat’, the learned diplomat expressed arbitration as a cornerstone of modern dispute resolution, and how it is a notable factor in attracting foreign direct investment in India.

Yet, days after this ethos was spoken about at the public forefront, the Indian Government rolled out this Memorandum denigrating the significance of arbitration. The Memorandum enlists the shortcomings of conducting Arbitration in India, however, lacks relevant background check and being devoid of some very crucial components to be borne in mind before concluding what it encompasses.

At the outset, the Memorandum has merely made some stark assumptions in attacking arbitration as a mechanism for dispute resolution, only to form a bedrock for an alternative means, that is, mediation. Further, should mediation fail, the Memorandum guides the Government agencies to adopt Judicial mechanism for resolution of disputes. However, what the Memorandum misses out to address is that in a majority of Government Contracts, the dispute resolution procedure encompasses conducting conciliation before invoking arbitration. As such, what the Memorandum should have rather suggested was to mandatorily make Mediation a step for resolution of dispute(s) followed by arbitration.

The conventional notion for several years has been that arbitration is superior to litigation because of the elements of confidentiality, cost savings, quicker results and flexibility. What the Memorandum has done is that it has raised a question – whether the promise of arbitration is real or illusory. The answer to this cannot directly be either of the two. It is real, and at times, it has been illusory. However, this does not and shall not mean an imposition of a restriction so impulsive and thoughtless.

Several assertions in the Memorandum have been projected in a bad light. Going by chronology, the first takeaway is that arbitration is an explicit provision in a contract and not a judicial process. This is indeed correct; but what here is hazy is that how is that a problem? The foremost ethos of the Indian arbitration statute is the element of independence and party autonomy, and an explicit provision in a contract allowing parties to decide upon the methodology of their arbitration is what makes this mechanism time effective. Arbitration, being a by-product of consensus between the contracting parties, offers a scope to appoint experts aligning with the nature of the dispute as arbitrator(s). Additionally, parties remain free to formulate the process involving discovery and examination of witnesses, thereby emanating a scope of a quick progress of resolution. The fees of the arbitrator(s) can also be fixed as per the fourth Schedule of the 1996 Act, which provides definitiveness to the duration of the mandate of the tribunal. As such, there is no gainsaying the fact that arbitration does offer the elements of speed, expertise and finality. Plus, if not arbitration, then the lack of certainty of speed and finality, as alleged by the Memorandum, can also plague both mediation and litigation.

It is also not out of place to mention that despite being formalized, mediation cannot be exclusively said to be equipped with handling complex matters of disputes with high stakes. It is a good thing that arbitration has an adversarial model, and the same ensures that parties behave in accordance with certain set of rules and procedures. Contrarily, mediation does not offer this surety, especially in cases of recalcitrant parties who are reluctant to be open and reasonable.

The choice of either of the three mechanisms includes a perceived need for a definitive resolution. The allegation that the provisions in the 1996 Act allowing for challenging an Award result in more litigation looks unsound. Not only arbitration, but every statute offering a different recourse to resolution ends in Court adjudication, if the need arises; be it company law disputes, insolvency and bankruptcy dispute, environmental disputes et al. The simple answer to this is that no individual or entity shall be precluded from exercising his or her right of recourse to the law. The author has no hesitation in asserting that appointment of arbitral tribunals does in fact contribute to steering away traffic from Courts. Rather, the issues of delay and costs as alleged for arbitration apply more to litigation; and for mediation, there is no definite answer as to whether such issues which exist therein too or not.

It is also noticeable that the Memorandum reveres mediation to an extent that it has completely omitted to address one crucial question: what if the dispute is not resolved post mediation? It is only logical to assume that the Memorandum has placed an assumed faith in mediation for resolution of disputes. Yet, a failure thereof would again open doors for litigation, which as per the Memorandum itself, is a matter of problem.

The Arbitration Bar of India in its considered opinion has requested the Government to roll back the Memorandum at puts India’s pro-arbitration hub at a backfoot. This article concluded on the very same note. The contemporary times are witnessing the growth of arbitration in India in its full swing, and upsetting the paradigm at this juncture can harm in several arenas. Such a mandate can irk investors and frighten contractors to bid for large infrastructure projects, thereby affecting the quotient of ease of doing business. Further, government entities, who already possess an upper hand in such business relations, could get rendered unfettered and dictate their own terms which at several events would be one-sided and biased, thereby leading to more disputes.

Disclaimer: This article was first published in the S&A Law Offices - 'Indian Legal Impetus' newsletter in June 2024.