Recalibrating The State’s Role

**Pragya Mittal

The notification issued by the Delhi Public Works Department (‘PWD’) removes arbitration as a dispute resolution mechanism from all future contracts and mandates litigation instead. While no justification has been provided for this removal it is impliedly pursuance of the “Guidelines for Arbitration and Meditation in Contracts of Domestic Public Procurement” (‘Guidelines’) issued by the Ministry of Finance (‘Ministry’) in June 2024. These Guidelines seek to limit the routinely insertion of arbitration clauses. Certain concerns arise from the premise on which the government justifies its shift from arbitration and meditation and the treatment of the two as alternatives. This especially becomes an issue given that mediation, as a dispute resolution mechanism, remained in its nascent stages in India and lacks the structure and enforceability. While existing literature criticises and analyses the justifications and guidelines issued by the Ministry, this paper contributes to the same by proposing a collaborative approach. The author views the push for mediation as a dispute resolution mechanism as a positive development, however, it should not be accompanied with an exclusion of arbitration. The proposed approach draws on established practices in Global Oil and Gas Sector and other jurisdictions, while being adapted to suit the Indian Context.  

INTRODUCTION

Disputes concerning government procurement contracts have posed challenges to the judicial system, due to inherent difficulties, public interest connotations, and large volume. Public procurement is the process by which governments and state-owned businesses make purchases from the private sector. Accordingly, strict protocols are followed to guarantee justice. Thus, to arrive at cost-efficient and amicable resolution mechanisms, arbitration has been considered as an alternative to litigation. However, recent policy developments indicate abrupt shifts. 

In June 2024, the Ministry of Finance (‘Ministry’) introduced the “Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement,” (‘Guidelines’) attempting to restructure dispute resolution in government procurement contracts having the effect of limiting arbitration and giving preference to mediation. Citing alleged deficiencies in the arbitration regime sweeping changes were proposed. Yet it failed to provide sufficient legal reasoning for thresholds and approval requirements introduced. Following these guidelines, PWD of Delhi issued a notification eliminating arbitration as a method of resolving disputes in all upcoming contracts, signalling a dramatic and contentious change in policy.  

The Arbitration Bar of India and the Indian Arbitration Forum, expressed strong concerns in a letter addressed to the Ministry. It criticises the Guidelines for contradicting the government’s stated intent to promote arbitration and reduce court burdens, arguing that the shift undermines commitments to ensure India emerges as a Global Arbitration Hub. 

The contribution of this paper is the proposition of collaborative mechanism which treats arbitration and as complementary processes. While recognising the merit of promoting mediation, the paper argues that sidelining arbitration causes concern. Instead, it advocates for a model in which arbitration is retained and structurally improved while being supplemented by mediation. In formulating this proposal, the paper draws inspiration from practices in the global oil and gas industry.

Part II critiques the justifications proposed for excluding arbitration, while also discussing inconsistency in the government’s approach. This section further considers recent judicial developments criticising the government’s actions in arbitration proceedings to contextualise the sudden shift. Subsequently Part III, analyses the Guidelines themselves, interrogating the arbitrariness of the thresholds and approval mechanisms they introduce. It also discusses the limitations of treating mediation and arbitration as mutually exclusive. Lastly, in Part IV the author proposes an alternative structure which integrates both mediation and arbitration. Part V concludes with key observations and remarks. 

CRITIQUING THE PREMISE OF THE GUIDELINES 

I. THE CLAIMED FAILURES OF ARBITRATION 

The Guidelines provide a rationalization based on a string of perceived deficiencies in the government’s experience with arbitration. Although arbitration theoretically has much to offer in terms of speed, convenience, technical know-how, and finality, the Ministry contends that these advantages have failed to materialize in reality. Arbitration has been found to be time-consuming, expensive, and susceptible to dubious results, with awards often being challenged in court, thus defeating the purpose of curbing litigation. 

These apprehensions, combined with accusations of secrecy, unaccountability, and abuse of the arbitration mechanism, constitute the asserted justification for diverting toward mediation. An examination of these reasons, however, indicates several oversimplifications and gaps that undermine the rationale of the government’s premise.

As per the Ministry, arbitration is not quick and cost-effective as originally envisaged, however this also applies to mediation. It did not consider the shortcomings such as informality and the lack of expertise amongst mediators as well as judges. Experts note that omitting arbitration from government contracts will only delay dispute resolution more. It has been recommended that the government should promote institutional arbitration which has scheduled timelines to review the process and accountabilities, which addresses the concerns of delay and inefficiencies.

Another problem identified by the Ministry is that the arbitrators are not subjected to the same level of scrutiny during selection as judges are. However, a known advantage of arbitration is that arbitrators are selected with the mutual agreement of the party to arbitration. The government, as a party to the arbitration, has a say in selecting the arbitrator. If it is dissatisfied with the available choices or the qualifications of a proposed arbitrator, it may invoke Section 11(6) of the Arbitration and Conciliation Act (‘The Act’) which allows the Supreme Court (‘SC’), High Court, or their designated institutions or individuals to appoint an arbitrator. Moreover, under Section 26 the Act the arbitral tribunal may appoint independent experts to provide opinions on technical or complex matters, placing arbitration in an even more advantageous position than litigation when it comes to handling specialized disputes.

While the Ministry argues that arbitration has failed to achieve finality, this is an oversimplified assertion which shifts the blame from the conduct of the parties to the mechanism itself. An empirical study of arbitration-related cases before the Delhi High Court revealed that the Government was party to 73 per cent of the cases. 

This disparity shows that the Government’s litigation strategy is the major contributor to the alleged failure of finality. Private parties decide whether to challenge an award based on relatively clear economic reasons and cost-benefit considerations, but the same is not true for government officials. They have no personal economic consequence and face little accountability, making them more likely to adopt a “let the courts decide” approach. 

Moreover, the SC’s recent decision of Gayatri Balasamy v. ISG Novasoft Technologies Ltd., held that while Sections 34 and 37 of the Act allow for limited judicial intervention, courts now possess a narrow and exceptional power to modify arbitral awards. Thus, the perceived failure to reduce litigation stems from misuse of legal remedies, not the inadequacy of arbitration.

Lastly, the Ministry’s argument that simply having arbitration clauses encourages inflated claims misreads arbitration. The problem lies not with arbitration, but the lack of internal accountability amongst government officers. Moreover, the assertion is anecdotal and not substantiated. Arbitral tribunals consist of experienced professionals applying high standards of admissibility for assessing claims and quantum of claims. Inflated or excessive claims are often rejected or significantly reduced by the tribunal itself.

Thus, the issues identified by the Ministry suffer from either certain internal inconsistencies or have workable solutions to them. These reasons do not offer a valid ground to reject arbitration. Instead of excluding the mechanism, certain modifications can be made to the regime to tackle the concerns. 

II. DOUBLE STANDARDS IN POLICY STRUCTURES  

A close examination of the Government’s arbitration policy shows some tension between the professed commitment to arbitration and the limitations imposed by the Guidelines. Concerted effort has been made to position the country in the future as a hub for international arbitration, demonstrated by the establishment of the New Delhi International Arbitration Centre, ministerial and formal declarations, and endorsement from the Chief Justice of India. Yet, the Guidelines tell another story. 

There has been a change in the attitude of the judiciary regarding arbitration, particularly in the context of the unilateral appointment of arbitrators by Public Sector Undertakings (‘PSUs’). The practice of PSUs maintaining their own pre-selected panels of arbitrators, though administratively convenient, was considered by the judiciary to raise serious concerns. 

Certain decisions like TRF Ltd. v. Energo Engineering Projects Ltd. and Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd., reflect a judicial concern with the risk that pre-designated arbitrator panels created and directed by PSUs risk damaging the independence and impartiality pillar of arbitration. This jurisprudential shift was followed by the executive branch rethinking arbitration in government contracts.

This shift raises certain questions about whether the Guidelines are based on a genuine commitment to procedural reform or is, instead, a strategic response aimed at tackle disputes. The lack of substantive reasons to exclude arbitration, coupled with the emerging concerns around bias in arbitrator panels selected by the PSUs, suggests that the shift to mediation may, in effect, shield government agencies from independent and binding adjudication. If not accompanied by structural reforms and institutional independence, this could compromise India’s credibility as a jurisdiction that supports fair and efficient resolution of commercial disputes, potentially affecting its aspiration to emerge as a leading seat in the international arbitration regime.

RETHINKING THE PUSH FOR MEDIATION: STRUCTURAL AND PRACTICAL ISSUES

This section critically analyses the Ministry’s prescriptions: first, the Rs. 10 Crore threshold for excluding disputes from arbitration is arbitrary and the requirement of prior approvals to include arbitration clauses invites bureaucratic gatekeeping and second, treating arbitration and mediation as interchangeable alternatives is flawed, especially given mediation’s nascent development and uncertain future.  

I. ARBITRARY THRESHOLDS AND BUREAUCRATIC GATEKEEPING  

A major concern with the Guidelines is that it restricts arbitration disputes to values lower than Rs. 10 crore while also requiring prior approvals before adding arbitration clauses to contracts above that value. These provisions serve to deter arbitration in general while creating a procedurally ambiguous framework. 

The selection of this figure seems arbitrary. There is no evidence base or policy rationale as to why this is considered as an appropriate cut-off. High-value public contracts exceeding this amount are complex. Ironically, those are precisely the type of disputes where arbitration’s efficiency, flexibility, and knowledge and expertise areas are most beneficial.

In addition, it is problematic that arbitration clauses for disputes exceeding Rs. 10 crore can only be put in place after the approval of governmental functionaries. This may serve to implement a gatekeeping mechanism providing bureaucrats with discretion. The Guidelines are silent on the factors which will be considering resulting in uncertainty as to whether approvals will be granted. This creates a risk of inconsistent implementation of the approval which undermines the principle of party autonomy.

This bureaucratic hurdle creates a chilling effect. Even if arbitration is appropriate, officials may avoid it, because there are no clear parameters as well the fear of post-facto scrutiny. Moreover, foreign investors view arbitration as protection against the uncertainty of local legal authority. This incentive is taken away as the inclusion of arbitration clause itself is at the mercy of government officials. 

II. TREATING ARBITRATION AND MEDIATION AS SUBSTITUTES 

The Guidelines describe mediation as an “alternative” to arbitration. However, mediation is in its early stages in India. While, the introduction of the Mediation Act, 2023 is expected to strengthen mediation, just as the legislations dealing with arbitration underwent multiple amendments and judicial interventions post-enactment to iron out implementational challenges, the Mediation Act is also likely to evolve through similar processes. Thus, it may be premature to incorporate it as a mechanism for resolving government procurement disputes at this stage. 

Mediation is not an adjudicative and binding process. Rather, it is a voluntary and conciliatory process. Often described as “facilitated negotiation,” it is when an independent neutral third party, the mediator, helps the parties with the dispute to reach an amicable settlement. Mediation does not impose a legally binding determination but relies on the parties’ ability and willingness to find an amicable solution. 

However, this critique must not be mistaken for a scepticism about mediation as a legitimate mechanism. The author believes that the policy emphasis on mediation is welcome. It should be treated as a positive compliment to arbitration, rather than as a substitute. 

While the policy shift toward mediation is a positive development, its promotion must not come at the cost of sidelining arbitration. Both mechanisms serve different purposes and are suited to different kinds of disputes. Their strength lies in being complementary tools within a broader dispute resolution ecosystem. To treat them as interchangeable would be to overlook their unique roles, and to risk undermining both.

WAY FORWARD: BUILDING A MODEL FROM INDUSTRY PRACTICE  

As India strives to establish a more effective dispute resolution mechanism, insights can be drawn from industry practices. Particularly in the context of government disputes, inspiration can be drawn from the global oil and gas industry. This industry has long dealt with high-value, cross-border, and technically complex disputes. These disputes, which often arise out of long-term contracts, regulatory entanglements or environmental and geopolitical concerns, require mechanisms that prioritize efficient, confidential, flexible, and preserving long-term commercial relationships. 

The global oil and gas sector has developed a layered model for the dispute resolution. The United Kingdom Continental Shelf, for example, attempts to resolve disputes using informal approaches first. The purpose of these early-stage interventions is to resolve disputes quickly, while preserving necessary commercial relationships, and avoiding the costs. If informal methods are unsuccessful, structured mediation is utilized, emphasizing neutrality, confidentiality and voluntary agreement. In this incremental model, arbitration or litigation is considered a last resort. This progressive model, which has been successful in preserving uninterrupted commercial operations and long-term partnerships in a high-stake business, serves as a model for India to aspire to.

Hybrid processes like mediation-arbitration (‘med-arb’) become important. Med-arb combines the collaborative nature of mediation with the finality of arbitration. The med-arb process begins with mediation, and if that does not lead to an agreed settlement, mediation ends and arbitration begins. The same neutral third-party acts as an arbitrator. They are already familiar with the situation and interests informing decisions and the parties’ transition to arbitration is expected to be seamless. It is recognised, that there is may be some issued. The dual role of the third party brings up concerns over confidentiality and bias for the parties since they may avoid sharing certain information in mediation which may impact the arbitrator’s decision. To tackle this, certain safeguards like assigning two different persons to the different roles and strictly delimitating how that information is revealed can help.

The formulation of this framework would need institutional support. Capacity development for mediators is important. Pilots can be launched to test med-arb models. International institutions, such as ICSID, UNCITRAL and the Energy Charter Secretariat, have developed established protocols and best practice that India can adapt. There is also the potential to learn from jurisdictions like Nigeria and the United States, both of which have begun to formalise mediation into their respective dispute resolution mechanisms alongside litigation and arbitration.

This proposed approach is not so much a replacement of arbitration with mediation as much as it is a combination of mediation and arbitration into an integrated, flexible process. Effective dispute resolution can relieve the court burden, create confidence with investors, facilitate commercial relationships and promote economic stability.

CONCLUSION

The Guidelines reflect a policy mindset which views different dispute resolution mechanism in a compartmentalised manner. When the government faced issues with arbitration, their solution was to shift focus entirely to a different mechanism. Rather, than resolving systematic issues, the reaction to isolate the process in itself is problematic. While it is important to promote mediation with institutional support, such efforts should not come at the cost of undermining arbitration. Dispute resolution methods should be seen as as complementary tools. This paper will contribute to the discussion regarding collaboration amongst dispute resolution mechanisms. India’s objective should be to establish itself as an arbitration hub while developing other mechanisms, rather than abandoning one in favour of the other. 

**Pragya Mittal is a Third Year B.A.LL.B. student at the National University of Juridical Sciences (NUJS)

**Disclaimer: The views expressed in this blog do not necessarily align with the views of the Vidhi Centre for Legal Policy.