Poonam Verma Sengupta, Partner, and Ananya Kumar, Partner, J. Sagar Associates
The Indian construction industry plays an important role in the country’s economic growth. It often presents complex disputes arising from large-scale infrastructure projects. These disputes usually involve time and cost overruns and breaches of contractual obligations, demanding a specialised resolution mechanism. To date, arbitration has been the preferred mechanism for resolving such disputes.
Potential and pitfalls
Last year, on June 3, 2024, the Ministry of Finance (MOF) issued an office memorandum titled “Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement” (MOF memorandum). The MOF memorandum, somewhat against the grain, issued certain guidelines regarding contracts for domestic procurement by the government, its entities and its agencies (including central public sector undertakings [CPSUs], public sector banks and government companies).
In these guidelines, the memorandum noted that arbitration had certain benefits, such as speed, convenience, technical expertise and finality. However, it also noted the government’s experience with arbitration, stating that it was unsatisfactory because the arbitral process was time-consuming and expensive. The reduced formality of arbitration, combined with the binding nature of decisions, often led to wrong decision-making and improper application of the law. The likelihood of impropriety in arbitration was substantially higher, given the fact that proceedings were conducted behind closed doors and by individuals who were not necessarily subject to the high standards of selection that are applicable to the judiciary. Moreover, the benefit of finality was not being achieved due to the large number of challenges to arbitral awards, and the existence of arbitration clauses in contracts deterred amicable resolution of issues at the outset.
From a review of the guidelines, the proposal to avoid arbitration in public procurement contracts was also motivated by the stated peculiarities involved when the government was a disputant. The guidelines stated that since there were multiple levels of scrutiny before and after decisions are taken, the acceptance of an adverse award without exhausting judicial avenues was often perceived as improper by various authorities, despite the finality envisaged in theory. It was difficult to accept arbitration awards if they differed from the practice followed for other similarly placed contractors who were not in arbitration. Additionally, because government officers and their undertakings were transferrable, the personal knowledge of an officer involved in an arbitration matter might not be as deep as that of the opposing private party, which puts the government at a disadvantage when presenting its case before arbitrators.
The MOF memorandum, therefore, concluded (among other things) that arbitration should not be the routine or automatic method for dispute resolution in large procurement contracts and tenders, where the term “large” was identified with disputes that were over Rs 100 million. Rather, it was proposed that recourse must first be made to mediation under India’s newly enacted Mediation Act, 2023. In case of failure of dispute resolution through mediation, adjudication should be left to the courts.
The MOF memorandum is already under challenge before the Delhi High Court in a public interest litigation (PIL), W.P. (C) No. 12599 of 2024, filed by “Infrastructure Watchdog”, and the high court has directed the Ministry of Law and Justice to file its response to the petition.
Mapping policy gaps 
For the purpose of this article, let us assume that the challenge fails and the PIL in question is dismissed. In that case, the outcome would be that government contracts would no longer contain an arbitration clause. Rather, recourse would first be mediation (or, perhaps, conciliation) and, if this fails, civil suits would be filed before appropriate courts, depending on pecuniary and territorial jurisdiction.
Therefore, the first question that arises is whether the MOF memorandum, while recommending mediation as the initial avenue for dispute resolution in infrastructure and construction contracts, has considered the contextual efficacy of the process. Moreover, do the peculiarities faced by the government as a disputant suddenly disappear in cases of mediation?
One of the primary “issues” stated to be faced by the government is the unwillingness to accept the finality of an arbitral award because judicial avenues have not been exhausted. Mediation, though statutory, is an alternative dispute resolution mechanism and not a judicial process. Therefore, this
issue remains.
This first point can be countered by contending that a successful mediation results in a bipartite settlement and that, therefore, resorting to the judicial process is automatically obviated. However, this leads to another concern – who, within the government, will be willing to sign off on a settlement that results in payments being made to a contractor, for instance, on account of damages or additional costs?
If such a mediated settlement is signed, could this possibly give rise to allegations of impropriety on the part of the decision-maker within the government machinery, or even against the mediator, who may not have been subjected to the high standards of selection that are applicable to the judiciary? This was also a concern raised in the MOF memorandum, which remains to be clarified.
No doubt, the MOF memorandum states that government officers should amicably settle as many disputes as possible, in a pragmatic manner, without shirking or avoiding responsibility or denying genuine claims of the other party. However, the removal of an arbitration clause is an immediate and objective step, whereas changing the mindset of individuals is subjective and long term.
Most government contracts already contain a clause for some form of pre-arbitral dispute resolution, whether through amicable resolution, conciliation or the establishment of a dispute resolution/dispute adjudication board. Despite the existence of these mechanisms, matters are referred to arbitration, not because they are not judicial processes, but because every officer of the government hesitates to sign a settlement under which any amount becomes payable to a contractor.
The Mediation Act, 2023 is a laudable legislation. However, in the context of dispute resolution where the government is a disputant, it will face the same challenges, if not more, as those faced in arbitration. This leads us to the second question. If mediation fails, and the parties are thereafter constrained to approach courts for the resolution of disputes, would this solve the problems faced by the government as a disputant?
As far as finality is concerned, it is worth stating that in the Indian judicial process, no decision is truly final till it has passed through appellate remedies and been subsequently examined by the Supreme Court. Were this not so, the number of appeals under Section 37 of the Arbitration and Conciliation Act, 1996, as well as special leave petitions filed in arbitration matters, would be substantially lower. Therefore, the issue of the multiplicity of proceedings remains.
This is particularly true, because an adverse arbitral award is confidential and does not set a binding precedent. However, a court’s decision on an issue serves as a precedent, and the government would, therefore, be more inclined to challenge any adverse order to avoid its applicability to other contractors who are similarly placed.
Next, would approaching a court, rather than an arbitral tribunal, assist the government in presenting its case better? If government officers are transferrable, this handicap would continue to exist even before a court. Moreover, given the potential for litigation being lengthier than arbitration, this could pose even more challenges.
It is also important to consider the effect the MOF memorandum may have on the pendency of litigation. The parties to a contract (which does not contain an arbitration clause) cannot confer jurisdiction on a court that does not otherwise have territorial jurisdiction over a dispute in terms of the Code of Civil Procedure, 1908. This would mean that disputes relating to infrastructure and construction contracts involving the government (particularly the centre and CPSUs) as a disputant would largely be contested before the Delhi High Court or by a district court where the project is situated. The likelihood that the Delhi High Court would be chosen is higher, given the logistical convenience for the government itself.
Granting territorial jurisdiction to Delhi courts could place a disproportionate burden on the judiciary, specifically the judges of the Delhi High Court. This, in turn, would result in additional time being spent on the disposal of cases. This would be further exacerbated by the fact that disputes pertaining to infrastructure and construction contracts are fact-intensive in nature and require a substantial amount of time during trial. The time allocation granted by an arbitral tribunal for conducting a trial cannot ordinarily be granted by any court, given the number of cases listed in courts on any given day.
This additional time required to resolve disputes is not a standalone concern. Contractors with genuine claims, which remain unresolved, will face substantial hardships because the infrastructure and construction sector is not asset-reliant. Rather, it is a sector that relies on cash flow from executing work. Delays in realising genuine payments and claims may, therefore, render many contractors financially unviable.
Legal view
Given all of the above, much attention will be on the outcome of the challenge pending before the Delhi High Court. This decision, if not challenged, will determine the course of action for public procurement contracts, including infrastructure and construction contracts entered into by the government and its entities/agencies. That said, regardless of the result of the challenge, the guidelines set out in the MOF memorandum may require reconsideration by the government. This is not only due to the practical issues posed by the memorandum, but also to ensure that the government does not contradict its stated intention of making India a global arbitration hub. The answer may lie not in eliminating arbitration, but in changing internal processes and mindsets.
