In June, the Finance Ministry published its Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement. The Guidelines note that the experience of arbitration concerning government contracts has been unsatisfactory, and the expected benefits of arbitration have not been realised. Consequently, the Ministry advised that arbitration should not be automatically or routinely included in procurement contracts. It encouraged government departments or agencies to either avoid disputes or settle them amicably, including through mediation.
Unsurprisingly, the Guidelines provided a cause for reflection and taking stock of the realities of arbitrating in India. It is well-known that arbitration in India does not fully embrace many global best practices and often mimics civil litigation procedures, resulting in exorbitant costs for the parties. To this extent, the Ministry’s concerns are understandable. However, this nevertheless poses a legitimate question: Have the stakeholders been able to identify the exact ailment plaguing arbitration in India?
Ad-hoc arbitration
First, a scrutiny of the Guidelines reveals that most of the Ministry’s grievances relate not to the mechanism of arbitration per se, but to the continued prevalence of ad-hoc arbitration that is not administered by arbitral institutions.
For instance, the Guidelines note that the “process of arbitration itself takes a long time” and is “very expensive too.” This is a common grievance with ad-hoc arbitrations, in which the arbitrators have near-unlimited procedural discretion to determine the schedule of proceedings and their own costs.
However, these concerns are significantly mitigated in institutional arbitration, where the proceedings have to be conducted in accordance with detailed institutional rules that limit an arbitrator’s procedural discretion. Arbitral institutions, not arbitrators themselves, also decide the cost of arbitration in such cases as per their publicly available schedules, after considering the economic value of a dispute. The end result is increased efficiency and quality of arbitration.
Second, the Guidelines further highlight the prevalence of “wrong decisions on facts and improper application of the law,” arising from the fact “that arbitrators are not necessarily subject to the high standards of selection.” This leads to increased litigation because the award-debtor is constrained to challenge the award before already-burdened courts.
This is another criticism to which institutional arbitration can provide an effective solution. Most arbitral institutions maintain a detailed roster of specialised arbitrators of significant experience and impeccable integrity, whose performance is systemically monitored. This ensures that arbitrators who fail to meet the parties’ expectations or pose integrity-related doubts are not appointed.
It appears the Finance Ministry shares these views. The Guidelines suggest that where arbitration is to be resorted to, “institutional arbitration may be given preference.” A more viable alternative to abandoning arbitration would, consequently, be to make institutional arbitration mandatory in all government-related disputes.
Third and finally, the Ministry’s guidance to adopt “a commercial and sensible approach” and attempt to resolve disputes through mediation requires appreciation.
Instead of compelling government officers to opt between arbitration or mediation, it would be appropriate to include in government contracts multi-tiered dispute resolution clauses. Such clauses condition the government’s consent to arbitration upon a prior mandatory attempt to mediate the dispute for a predefined period. This provides the disputing parties an inescapable avenue to amicably resolve their dispute, and if no resolution is possible, preserves the fallback mechanism of arbitration.
The writer is Director-General, Indian Council of Arbitration