Recently, on 3rd June, 2024, the Ministry of Finance issued an Office Memorandum (OM) containing guidelines for use of arbitration in contracts relating to domestic public procurement. The OM, whilst endeavoring to promote mediation has effectively directed government entities and undertakings not to incorporate or agree for arbitration as a means of dispute resolution where the value of the dispute is in excess of INR 10 crore. The OM goes a step further by directing the government entities to introduce an explicit negative covenant in their contract documents stating that “arbitration will not be a method of dispute resolution”.

Ironically, this OM comes at a time when an Expert Committee, constituted by the Ministry of Law & Justice, in an attempt to encourage institutional arbitration and make India a hub for international arbitration had submitted its report recommending reforms to the Arbitration and Conciliation Act, 1996. Moreover, as recently as last month, the Hon’ble External Affairs Minister of India, Mr. S Jaishankar, while delivering his keynote speech at the inauguration of the Arbitration Bar of India emphasized on the importance of arbitration as means for fostering economic growth and attracting foreign investment - while reaffirming the government’s commitment to make India, a premier destination for international arbitration. Amidst this progressive sentiment, the present guidelines reveal a contrasting inter-ministerial perception about arbitration. When the largest disputant in the country, promotes arbitration with one hand and opts out with the other - it does not bode well for the eco-system at large.

The primary reasons for departure have been stated to be time, costs and the quality of arbitrators. It has also been highlighted that the informal nature of proceedings have led to wrong decisions on facts and law, for which there is little accountability and legal recourse. As regards time is concerned, for domestic arbitrations, an amendment was introduced in 2015 (and then 2019) prescribing a period 12 months to conclude an arbitration, failing which the mandate of the arbitrator shall terminate. Whilst the timeline is extendable by another 6 months it is still far more expeditious than conventional court proceedings - which would often take several years to decide cases containing complex questions of fact and law. The same amendments also made the cost regime more robust wherein the unsuccessful party is liable to reimburse actual costs incurred as opposed to nominal costs in the erstwhile regime. The government’s assessment on standards of accountability and quality are not entirely unjustified. Most arbitrator appointments are still ad-hoc and the appointees are neither subjected to any objective quality standards nor are they bound by any model code of conduct. That said, the government could have adopted a more constructive approach by discussing workable solutions with the stakeholders. In fact, Section 11 (3A) of the Act provides for appointing arbitrators by designated institutions (instead of ad-hoc appointments by Courts) which are duly accredited by the Arbitration Council of India (Section 43A- 43N). However, these amendments, introduced in 2019, have still not come into force. The Expert Committee has recommended that these be notified at the earliest, while also making progressive suggestions such as constituting a standing committee of officers to examine arbitral awards so as to avoid routine challenges and prescribing a model code of conduct for arbitrators aligned with the global best practices.

Relying on the recently promulgated Mediation Act, 2023, the government is encouraging its undertakings to adopt mediation. This is a laudable initiative and reflects a non-adversarial approach qua the private sector. However, this encouragement did not require arbitration as a means to be dispensed with. There is a no statutory bar to settling a dispute by way of mediation, even if there is an arbitration clause in the contract. In fact, Section 30 of the Act itself states that it is not incompatible with an arbitration agreement for an arbitrator to encourage settlement of a dispute by mediation. Mediation and Arbitration should have been seen more harmoniously as means to encourage alternate dispute resolution, as opposed to resorting to litigation where we currently have over 5.1 crore cases pending adjudication.

While the OM confines itself to domestic contracts, it will have a cascading impact across the board (and border). Pitching for foreign investment by encouraging international arbitration whilst reposing little faith in the Indian arbitration landscape is preaching something you don’t practice. As a stakeholder, one can only hope that these guidelines are revisited and solutions paving the way for India’s pursuit of becoming a hub for international arbitration can be worked.

By - Arush Khanna