[Anany Tiwari is a fourth-year student at Hidayatullah National Law University]
Introduction
The Ministry of Finance (Department of Expenditure) has recently released guidelines titled “Guidelines for Arbitration and Mediation in Contracts for Domestic Public Procurement”, recommending the restriction of arbitration to disputes worth less than 10 crore in domestic public procurement contracts. While recognizing the advantages and potential of arbitration as an expedited mechanism of dispute resolution, the guidelines also stated the shortcomings within the arbitration framework. The guidelines highlighted the difficulties that arise when arbitration involves government entities. Government entities when they make decisions have to face intense scrutiny, and arbitration awards that do not confer to the established practices pose serious challenges in such situations. In essence, the guideline discourages the choice of arbitration as a mechanism of dispute resolution for public procurement.
The most practical reason behind the introduction of this guideline is the question of the finality of the arbitral award, as the majority of the awards are challenged in the courts to be set aside or their enforcement is challenged. If the awards given by the tribunals are to be challenged in the court and are to be litigated, then the question arises, why would the government bear the extra cost incurred in the arbitration proceedings? This guideline emphasizes the need to explore alternate methods of dispute resolution, such as mediation. The article delves into the practical consideration behind the guidelines, asses mediation as an alternative for dispute resolution, and delves into the development of arbitration as a complementary rather than as an alternate mechanism.
Practical consideration behind the guidelines
The guidelines prescribe selective use of arbitration and restrict the use of arbitration to a value below 10 crore. Still, it allows arbitration for high-value disputes, but the same would require the approval of senior officers. This implies that this guideline for public procurement does not consider arbitration to be a safe mechanism to deal with disputes that are of higher value. The practical consideration behind this approach is that the Arbitration and Conciliation Act allows judicial interventions at all the stages of arbitration, from the court recommending the parties to arbitration under section 8, interim orders while the proceedings are going on to appeals after the award is passed under sections 34 and 37. Further, an appeal can be made in the Supreme Court through Special leave petition. Recently, in the DMRC Case, it was seen that a Curative Petition under Article 142 was used to overturn an arbitral award. Such instances question the finality of the arbitral award because if the award given by the tribunal would be ultimately challenged through litigation, why not save the cost of arbitration and proceed directly through litigation? The guideline says this about arbitration “Instead of reducing litigation, it has become virtually an additional layer and source of more litigation, delaying final resolution”.
Further, in India, public procurement disputes face challenges in resolving disputes through arbitration due to the concept of “Public elements” in the judicial practice. Informal and private arbitration is hard to accept as a mechanism to resolve a dispute involving public money. When the award made by the tribunals under such disputes is brought before the court, the courts have to consider the larger public interest because the general masses would be affected by the same, and this leads to long litigation being carried in the courts.
The primacy given to the Judicial system and Mediation
The holistic reading of the guideline indicates that the judicial system and mediation are considered to be alternatives better for dispute resolution in public procurement contracts than arbitration. The reason behind the same appears to be the experience of the government with arbitration. Arbitration awards are often challenged in the courts, leading to long litigation with several rounds of reviews in various courts diluting the effectiveness of arbitration.
The importance given to litigation in this guideline is not without flaws. It has to be noted that there is no guarantee that the disputes once settled in the court would not be challenged in the higher courts, and it is common knowledge that once matters go to the judiciary it might take decades to resolve the dispute. Public procurement contracts are between government and private parties, the government enters into agreements with private entities for goods or services that the government needs with relative urgency, and arbitration in such contracts could be the most efficient to resolve the dispute quickly. With the judiciary, it might take years to resolve even the nominal disputes. It would not be very efficient to wait for the lengthy proceedings to be completed before the ordinary courts. The guideline also questions the standard of conduct of arbitrators and compares it with members of the judiciary, but it must be noted that the government mostly appoints retired judges as arbitrators. Therefore, it can be said that arbitration has the same standard of conduct as that of judicial proceedings.
Further, it should be considered that mediation is non-binding and the same can be dragged to the already overburdened courts. Usually, government officials are reluctant to sign a mediation contract if the same could lead to a large payout to the private parties. To solve this issue, the government in the guideline recommends setting up committees, but the same would not be very effective if large amounts are involved and could lead to large payouts to the private parties.
Impact of the guideline in developing India as a pro-arbitration jurisdiction
This guideline issued by the Department of Expenditure indicates the distrust that the government has in its arbitration system. If the Indian government itself does not trust its arbitration system, then how can it be expected that foreign investors and entities would trust the Indian arbitration system? The measure of restricting arbitration to 10 crores in public procurement undermines the measures taken by the government to develop India as a pro-arbitration jurisdiction. Restricting arbitration to disputes worth less than 10 crore might exclude the majority of disputes from the purview of arbitration, ultimately undermining its importance as an effective mechanism. It is often seen that countries that have a robust arbitration system often rank highly in ease of doing business. In 2015, when India revamped its arbitration system, it was seen that it climbed up rankings in the World Bank index. This guideline limits arbitration and would signal that the government itself does not trust its arbitration system, restricting the investment that flows in India. This would happen because the investors would be cautious of being involved in long litigations.
The Way Forward
Shortly after the introduction of this guideline, the National Litigation Policy (NLP) was signed by the Minister of Law and Justice. One of the objectives of this policy was to reduce the burden on the courts. Such measures by the legislature indicate their intent to promote arbitration. Similarly, the judiciary through various judicial pronouncements indicates that they want minimum judicial interference when it comes to arbitration proceedings. Recently, in M/s Halliburton India Pvt. Ltd. Vs Vision Technologies Pvt. Ltd., it was held by the Bombay High Court that the appellate jurisdiction of the high courts under section 37 of the Arbitration and Conciliation Act is limited to the cases where the lower court order was “arbitrary, capricious, perverse, or ignored settled legal principles on interlocutory injunctions”. This decision minimizes the scope of judicial intervention, which subsequently leads to an increase in the attractiveness of arbitration.
The measures taken by the judiciary and legislature reflect their intent to build arbitration as complementary to the judicial system rather than an alternate. The reforms in the Arbitration and Conciliation Act of 2015 reflect a similar intent. However, this guideline restricting the scope of arbitration to disputes worth less than 10 crore in public procurement contracts is not in that direction. We need to develop a robust arbitration system by building it as complementary to the judicial system to enhance financial investment in India and for the quick resolution of disputes, rather than relying on ordinary courts.
To develop arbitration as a complementary, there is a need to address the challenges that it faces, rather than restricting its scope like this guideline. The establishment of specialized benches of arbitration with judges that hold specialization in arbitration laws within the judicial system can be one of the effective ways that may potentially enhance the effectiveness of arbitration. This would increase the confidence of the stakeholders and would quickly resolve the disputes. Further, appointment of the lawyers who are aware of the nuances of the arbitration laws as ad-hoc arbitrators can be one of the ways through which the effectiveness of arbitration could be increased. Furthermore, the practicing lawyers are aware of the contemporary nuances and challenges in the law, they can bring in perspectives that would enhance the overall effectiveness of the arbitration.
The guideline proposes that the cases that are to be resolved through arbitration, should do so through institutional arbitration. This proposal of the guideline should be considered because fostering institutional arbitration in countries that are emerging pro-arbitration jurisdictions such as Dubai and China has resulted in them coming up as arbitration hubs. Institutional arbitration ensures uniformity, and adherence to rules and regulations leading to better oversight while arbitration is going on, which would eventually reduce judicial oversight.
The government should further establish a board that would monitor whether an arbitral award should be challenged in the courts or not. Such a committee would foster the quality of accepting adversarial arbitral awards and this would lead to avoidance of routine challenges of arbitration awards in the courts. Such a board or a committee should examine on specific parameters regarding whether to allow the challenge to courts or not, such as allowing a challenge to the arbitral award only if the same is against the established public policy.
Conclusion
“Reforming should be the goal rather than completely excluding arbitration as a form of dispute resolution”
The guideline issued by the Department of Expenditure reflects a cautious approach towards arbitration in public procurement, emphasizing the challenges and inefficiencies perceived in the current arbitration framework. However, it is essential to recognize the potential benefits of arbitration and strive towards addressing its shortcomings rather than restricting its use. By implementing reforms such as establishing specialized arbitration benches, promoting institutional arbitration, and creating oversight committees, India can enhance the effectiveness and reliability of arbitration. This approach will not only foster a more efficient dispute resolution mechanism but also strengthen India’s position as a pro-arbitration jurisdiction, attracting greater foreign investment and improving the overall ease of doing business.
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