UNDERLINING THAT the arbitration processes are expensive and time-consuming, and that there are “perceptions of wrong-doing including collusion” about arbitrators, the Union Finance Ministry has recommended restricting arbitration clauses in government contracts to disputes of less than Rs 10 crore.

“Arbitration as a method of dispute resolution should not be routinely or automatically included in procurement contracts/tenders, especially in large contracts,” said a June 3 office memorandum by the Department of Expenditure’s Procurement Policy Division.

The memorandum has been circulated to all ministries in the government of India, including the departments of public enterprises and financial services, and to all states as well.

The new set of recommendations come even as there is an increased push from the judiciary in favor of arbitration and to make India one of the top international destinations for commercial arbitration. Arbitration is no longer an “alternative”, Chief Justice of India DY Chandrachud had said addressing the United Kingdom Supreme Court on June 6. “It is in fact the preferred method of seeking commercial justice,” he had said.

Elaborating how the process has grown, CJI Chandrachud had said that “imposing courtrooms designed to bear the insignia of the sovereign power of the State are being replaced by swanky meeting rooms where parties engage in dialogues over complex commercial matters.” He said it was time for countries like India to create and promote a culture of commercial arbitration.

Festive offer

In its memorandum, the Department of Expenditure said, “The process of arbitration itself takes a long time and is not as quick as envisaged, besides being very expensive too. The reduced formality, combined with the binding nature of decisions, has often led to wrong decisions on facts and improper application of the law.”

The directive also said the arbitral process which is “intended to be final with very limited further recourse, is also exposed, particularly in matters of high financial value, to perceptions of wrong-doing including collusion.”

Top government lawyers have also been advocating arbitration. Solicitor General Tushar Mehta said Saturday at the London International Disputes Week that the architecture of the Arbitration Act has checks and balances to prevent deviations from the rule of law.

Anirudh Krishnan, partner at AK law Chambers, a boutique law firm that specializes in arbitration, told The Sunday Express that excluding arbitration on the basis of a perceived concern over the quality of the regime would amount to missing the wood for the trees. “The solution would be to further improve an arbitration regime which has already seen considerable improvement post 2015,” he said.

However, two big setbacks for the government in arbitrations — the Antrix Corporation case and the Delhi Metro case — have raised concerns within the bureaucracy. In a protracted litigation involving ISRO’s commercial arm Antrix, an arbitration process had awarded $562 million in damages, along with interest in favor of Bengaluru-based firm Devas Multimedia. To enforce the award, Devas attempted to liquidate the assets of Air India, then the national carrier in foreign jurisdictions.

In April this year, an extraordinary Supreme Court ruling ensured that the Delhi Metro Rail Corporation did not have to pay nearly Rs 8,000 crore arbitral award in 2017 to the Delhi Airport Metro Express Private Limited (DAEML), an Anil-Ambani owned Reliance Infrastructure firm. .

Arbitrations are governed under the Arbitration and Conciliation Act, 1996 which was enacted as a solution for moving commercial litigation away from overburdened courts.

“Adjudication by the courts is a remedy which always exists wherever there is no arbitration clause. However, another alternative to arbitration is mediation, which is a process whereby parties attempt to reach an amicable settlement of their dispute with the assistance of a third person (mediator) who does not have the authority to impose a settlement upon the parties to a dispute. ,” the Department of Expenditure memorandum said. Under mediation, both parties will have to reach a mutual agreement, failing which the case goes to trial.

“While it is very encouraging to see the government prioritize mediation, it however cannot be at the cost of arbitration. The mediation process does not guarantee a resolution and disputes will then have to go to courts. Dealing with high-stakes commercial matters in overburdened courts is why arbitration was developed in the first place. The move, now, is in effect one step forward, two steps back, in India’s efforts to foster a favorable environment for resolution of commercial disputes,” said Raghav Seth, Counsel at AZB & Partners.