On June 3, 2024, the Ministry of Finance (“Ministry”) released the ‘Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement – reg’ (“Guidelines”). Styled as mere ‘guidelines’, this office memorandum has sent shockwaves across the legal world, with the Ministry encouraging government entities/ agencies to make mediation a priority at the cost of arbitration becoming a casualty.

In this article, we analyse the framework suggested by the Ministry and the impact of these Guidelines on the Indian legal landscape.

Suggested framework in the Guidelines:

The Guidelines relate to contracts of domestic procurement to be entered into by the government and its entities/ agencies, including Central Public Sector Enterprises (“CPSEs”), Public Sector Banks (“PSBs”), government companies, etc.

Drawing from the government’s unsatisfactory past experiences with arbitral proceedings, the Guidelines caution government entities/ agencies against routinely/ automatically including arbitration as a method of dispute resolution in procurement contracts/ tenders. In fact, as a norm, it suggests that arbitrations ought to be restricted to disputes having a value of less than INR 10 crore. As regards disputes having a higher value, it requires entities to take the prior approval of the (a) Managing Director in case of PSBs, CPSEs, financial institutions, etc.; and (b) Secretary/ officer (not below the level of the Joint Secretary) to whom the authority has been delegated by the Secretary.

The Guidelines instead encourage government departments/ entities/ agencies to adopt mediation under the Mediation Act, 2023 and/or negotiated amicable settlements for resolution of disputes and sets out the mechanism which may be adopted in this regard. In support of its favor for mediation over arbitration, the Guidelines rely upon the successful models of mediation/ conciliation being practiced in certain government entities, including the oil and gas sector.

The Guidelines also come on the heels of the Ministry’s success with its ‘Vivad se Vishwas II’ scheme, launched last year to settle pending public procurement related contractual disputes of the Central Government. Through this scheme, the government received over 900 claims worth INR 20,000 crore, and successfully settled claims of more than INR 1,652 crore. One can assume that the Ministry’s success of amicably resolving disputes may have also propelled this move.

Impact of the Guidelines:

Starting with the positives, no doubt the Guidelines will help foster the adoption of mediation as an alternate dispute resolution mechanism in India. With the Mediation Act, 2023 coming into effect last year, this is a welcome move which will aid in unlocking the true potential of mediation and allow parties to arrive at a win-win resolution with no losers, in stark contrast to other adversarial dispute resolution mechanisms. Particularly from a commercial perspective the option of mediation, which seeks to provide a mutually acceptable solution through discussions, offers parties the unique opportunity to avoid conflict/hostility and retain the option of collaborating in the future. With the Guidelines encouraging departments/ entities/ agencies to take decisions in a pragmatic manner keeping in mind legal and practical realities and not denying genuine claims of the other party, it is hoped that the officers in charge will adopt a more solution-oriented approach.

Even from the perspective of arbitrations, all is not bleak. In a welcome move, the Ministry has advised entities and agencies to opt for institutional arbitration over the traditional ad-hoc approach. This is an important shift which has been long pending. Another noteworthy suggestion is the cautionary advice of not automatically challenging a decision which is against the government in a routine manner. Many a times we see government entities/ agencies pursuing a matter through various rounds of challenge before courts despite being aware of the bleak chances of success. The Guidelines provide the officer in charge the necessary policy hook to not pursue a challenge, unless the case genuinely merits a challenge and there is a high chance of winning. These are critical changes which will go a long way in restoring the faith of private entities seeking to enter into contracts with the government/ having pending disputes with government entities/ agencies. It is hoped that this shift in policy trickles down to the government’s other business operations as well and does not remain limited to only procurement contracts.

Now coming to the negatives, the biggest red flag in the Guidelines in the Ministry’s advice to restrict arbitration to disputes where the value is less than INR 10 crores (or of a higher subject to the approval mechanism set out therein). The Ministry’s suggestion to altogether exclude arbitration for other disputes is deeply concerning and severely hampers the carefully curated pro-arbitration image painstakingly created by India over the years. In fact, the newly established Arbitration Bar of India (“ABI”) concerned about the manner in which these Guidelines will impact the future of the arbitration ecosystem in India has called upon the Ministry to withdraw the same.

While the Ministry has sought to justify its approach by claiming that arbitration process ‘itself takes time and is not as quick as envisaged, besides being very expensive too’, the answer to these concerns may not necessarily be the complete exclusion arbitration as a dispute resolution mechanism option. Instead, the answer may lie in the government reassessing the manner in which it is approaching its arbitration strategy. One glaring concern in this regard would be the manner in which awards are routinely challenged by the government, an issue which has been rightly identified and addressed in the Guidelines itself.

Another concern from the perspective of mediation, is the suggestion in the Guidelines that ‘mediation agreements need not be routinely or automatically included in procurement contracts/ tenders… such a clause be may incorporated where it is consciously decided to do so.’ This suggestion dilutes the Guidelines self-propagated pro-mediation stance. Moreover, in the absence of both mediation and arbitration, parties will once again be at the mercy of Courts and be forced to engage in time-consuming Court based proceedings.

Given the above drawbacks, it is hoped that the Ministry revisits the suggestions made in the Guidelines and puts in place a more balanced framework.

Conclusion:

While the Guidelines have put the much-needed spotlight on mediation, propelling it to the top alternate dispute resolution spot as far as government procurement contracts are concerned, they have proved to be a huge blow to India’s pro-arbitration streak.

As discussed above, one cannot deny the benefits which mediation has to offer. However, these benefits ought not to be reaped at the cost of completely rejecting the option of arbitration as a dispute resolution mechanism. If the intention of the Ministry indeed was to promote mediation, the same could have equally been achieved by harmoniously using the two processes, to facilitate speedy resolution of disputes, with parties having the freedom to pursue both, instead of being forced to knock the doors of Courts if mediation fails. For instance, many commercial contracts usually require the parties to first try resolving their disputes through amicable discussions/ mediation before moving to arbitration. A similar model could also be adopted in case of procurement contracts wherein in the first instance the parties could attempt to resolve their disputes through mediation and if the same is unsuccessful parties can take recourse to arbitration.

One should also bear in mind that these are merely guidelines, and it may be open for individual entities/agencies to decide whether they want to adopt the suggested approach and the extent to which they want to implement it. However, the language of the Guidelines and the fact that they come from the Ministry, means that the approach suggested therein will be adopted by the various government entities and agencies across the country, largely in the manner set out therein. Nonetheless, it will be interesting to see the manner in which these Guidelines are adopted and implemented by the various entities in their business dealings and how private parties respond to mediation being offered as a substitute to arbitration.