Jump to:
- Summary of new guidelines for contracts of domestic procurement
- What the new guidelines mean for arbitration in India
- Government's approach towards arbitration
- Specific peculiarities where the government is a disputant in arbitration
- Adjudication and mediation as alternative methods of dispute resolution
- Key impact on businesses
- Key takeaways
In June 2024, the Indian government introduced new Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement,1 signaling what appears to be a shift away from arbitration as a preferred method of dispute resolution for contracts of domestic procurement where the Government (or a Government entity or agency) is a party except in low value disputes, in favor of other methods of dispute resolution.
How might this shift impact the dispute resolution landscape in India, and how might this affect businesses looking to enter or expand within the Indian market?
Summary of new guidelines for contracts of domestic procurement
Comprehensive guidelines have been issued for contracts of domestic procurement by the Government and by its entities and agencies. A few key points are outlined below.
On arbitration
- Arbitration should not be routinely or automatically included in procurement contracts or tenders, especially in large contracts.
- Arbitration may be restricted to disputes with a value less than RS 10 crore (or approximately USD 1.2 million). For higher value disputes, including arbitration clauses should be a carefully considered and reasoned decision approved by senior authorities.
- Where arbitration is used, institutional arbitration is preferred where appropriate (considering the cost of the arbitration and the value involved).
- Decisions to challenge or appeal should not be taken in a routine manner, but only when the case genuinely merits a challenge or appeal and there are high chances of succeeding.
On mediation
- Government departments / entitles/ agencies are encouraged to adopt mediation under the Mediation Act 2023 and /or negotiated amicable settlements for resolution of disputes, and Government departments / undertakings, may where they consider appropriate e.g., in high value matters, constitute a high level committee (HLC) for dispute resolution.
- Mediation agreements need not be routinely or automatically included in procurement contracts or tenders. The absence of a mediation agreement in the contract does not preclude pre-litigation mediation and such a clause may be incorporated where it is consciously decided not to do so.
For disputes not covered in an arbitration clause and where the alternative methods are unsuccessful, these should be adjudicated by the courts.
What the new guidelines mean for arbitration in India
The new guidelines on arbitration and mediation relate to contracts for domestic public procurement. Specifically, these refer to contracts where the Indian government (or a government entity / agency) is a party. Companies should also note that these guidelines are not directly applicable to low value disputes; where the quantum of the dispute does not exceed RS 10 crore or approximately USD 1.2 million.
Arbitration may remain the preferred method of dispute resolution for private sector parties
The new guidelines do not detract from the applicability and advantages of arbitration as a method of dispute resolution in covering a wide range of contractual matters, including disputes between private sector parties where the Government or a public sector undertaking is not involved.
Don't rule out arbitration entirely for contracts of domestic procurement
For contracts of domestic procurement where the Government (or a Government entity or agency) is a party, arbitration may or should still be included in some cases. Parties should consider whether it is appropriate (or preferred) to provide for arbitration as a method of dispute resolution in their contracts, having regard to the quantum of any potential dispute, and negotiate accordingly based on their requirements and circumstances.
Companies should be mindful that the norm of RS 10 crore is with reference to the value of the dispute (and not the value of the contract, which may be higher). For arbitration clauses covering potential disputes with a value exceeding RS 10 crore, parties should expect that the necessity for approvals from senior officials may introduce a degree of delay and potentially complicate contractual negotiations.
There are several key advantages to seeking arbitration as compared with litigation in the courts of India. Firstly, arbitration typically offers a faster resolution for disputes. Secondly, arbitration allows for persons other than judges, including technical experts to act as arbitrators, which is ideal particularly for disputes which are highly technical in nature. Thirdly, the decisions of arbitrators are final and grounds for challenge in courts are limited.
— Nandakumar Ponniya, Principal, Singapore
Government's approach towards arbitration
The new guidelines come following the enactment of the Mediation Act 20232 and Indian court decisions, which appear to have necessitated a re-examination of the Government's approach towards arbitration vis-à-vis other methods of dispute resolution, such as mediation and litigation.
According to the memorandum, the actual experience of arbitration in respect of contracts where the Government (or a Government entity or agency) is a party has been unsatisfactory in many cases.
It is lamented that arbitration is lengthy and expensive, there have been erroneous decisions and improper application of the law, the intended finality of arbitration has not been achieved (as a large number of arbitration decisions have been challenged in the Courts), and there have been inflated claims which complicate the resolution process.
Specific peculiarities where the government is a disputant in arbitration
Businesses should also be mindful of specific peculiarities of the Government (or Government entities or agencies) as disputants when contracting for domestic procurement with the Government (or Government entities or agencies). These may impact the ability to provide for and pursue arbitration:
The system of decision-making in Government involves accountability to Parliament, and the Government has to act fairly without arbitrariness. Hence, dispute resolution mechanisms that involve accepting an adverse award without exhausting judicial avenues may be perceived to be improper by various authorities.
Additionally, the need for fairness and non-arbitrariness may make it difficult to accept arbitral awards if they vary from the practice followed for other similarly-placed contractors who are not involved in the arbitration.
Adjudication and mediation as alternative methods of dispute resolution
Adjudication by the courts remains an option in the absence of an arbitration clause. Another alternative to arbitration is mediation, a process whereby parties attempt to reach an amicable settlement of their dispute with the assistance of a mediator.
Additionally, there are successful models of mediation or conciliation being practiced in certain Government entities. The Mediation Act 2023 allows the Government (or any Government entity or agency) to frame schemes or guidelines for resolution of disputes through mediation or conciliation, and mediation or conciliations may be conducted in accordance with such schemes or guidelines.
Mediation is relatively informal, confidential, less adversarial, faster, and more cost-effective. Moreover, in mediation, each party is directly involved in the negotiation process and increases the flexibility, control and participation the disputing parties have over the resolution process.
— Nicholas Tan, Associate, Singapore
Key impact on businesses
These new guidelines may add a layer of complexity to contract negotiations and doing business in India, particularly in relation to concerns that the application of these guidelines may be extended to procurement contracts involving foreign investors.
Some might welcome the added clarity and predictability (with the clear procedures and thresholds for dispute resolution set out in the new guidelines) and a less adversarial environment with the promotion of mediation as a method of dispute resolution.
Restrictions on arbitration, especially for higher value disputes in excess of RS 10 crores, may concern foreign investors who are inclined towards arbitration as their preferred method of dispute resolution (not least because of its finality and neutrality).
When considering appropriate dispute resolution mechanisms, companies should consider complications such as procuring additional approvals vis-à-vis the value of the dispute. The necessity for approvals from senior officials for disputes exceeding RS 10 crores may introduce a degree of delay and potentially complicate contractual negotiations.
— Nandakumar Ponniya, Principal, Singapore
Key takeaways
Dispute resolution guidelines will continue to be a subject of scrutiny: The rationale behind the latest recommendations and the specific guidelines issued have been and will likely continue to be the subject of scrutiny. This is understandably so, given that the latest guidelines appear to recommend modes of dispute resolution other than arbitration (at least insofar as large or high value contracts of domestic procurement by the Government and by its entities and agencies are concerned).
Building arbitration as a dispute resolution mechanism in contracts: For the time being, the new guidelines do not detract from the applicability and advantages of arbitration as a method of dispute resolution (as compared to litigation in the courts in India) in covering a wide range of contractual matters, including disputes between private sector parties where the Government or a public sector undertaking is not involved.
For contracts of domestic procurement by the Government and by its entities and agencies, parties may now need to consider whether it is appropriate to provide for arbitration as a method of dispute resolution in their contracts for domestic procurement by the Government and by its entities and agencies. In particular, parties should pay attention to contractual terms around the quantum of any potential dispute, and negotiate accordingly.
— Ashish Chugh, Principal, Singapore
Footnotes:
1. Department of Expenditure, Ministry of Finance, Government of India
This article is being provided as general information and does not constitute legal advice. Baker & McKenzie does not practice Indian law and where Indian law advice is needed, we work closely with top India-qualified lawyers. We’d be happy to discuss your needs in India. For more information, please contact Mini Menon vandePol and Ashok Lalwani.