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After years of government narrative about making India an arbitration hub, the Ministry of Finance has seemingly reversed direction, asking government departments to lessen their reliance on arbitration. Freny Patel reports

A storm is brewing in º¬Ðß²ÝÉçÇø legal landscape. New government guidelines prioritise mediation over arbitration for public sector disputes and have sparked controversy. This shift seemingly contradicts past efforts to promote India as an arbitration hub.

Arbitration was previously seen as a speedier and more convenient alternative to court battles in India. Chief Justice of India Dhananjaya Y Chandrachud championed arbitration as ¡°the preferred method of seeking commercial justice¡±, highlighting its growing popularity over traditional courts. Chief Justice Chandrachud made these remarks at the Supreme Court of the United Kingdom in early June, just days after the Ministry of Finance released its 3 June memorandum on Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement.

The Indian government has been a major proponent of arbitration, particularly in infrastructure projects, aligning itself with the international norm where arbitration is standard practice for infrastructure and construction disputes.

However, the June memorandum issued by the ministry¡¯s Department of Expenditure ¨C Procurement Policy Division strongly conveys a preference for avoiding arbitration in government contracts. While acknowledging arbitration¡¯s advantages like speed and finality, the ministry expressed reservations about cost and delays, based on its own experience.

Minister of State for Finance Pankaj Chaudhary told the parliament that ¡°more than 60% of arbitration awards are challenged in courts¡±, compelling the government ¡°to spend both on arbitration as well as on litigation¡±. Responding to the Arbitration Bar of º¬Ðß²ÝÉçÇø questions about the rationale behind the revised guidelines, the minister cited litigation spending details drawn from a sample study involving the National Highway Authority of India and º¬Ðß²ÝÉçÇø state-owned power generation company, the NTPC.

The study indicated a consistent increase in litigation costs in the past five financial years. For example, in financial year 2022-23, the government spent INR543.5 million (USD6.4 million) in legal fees, up from INR483.7 million the preceding financial year.

The ministry¡¯s six-page 3 June memo stated that ¡°the process of arbitration itself takes a long time and is not as quick as envisaged, besides being very expensive¡±. It emphasises caution, stating that appeals should only be pursued ¡°when the case genuinely merits going for challenge/appeal and there are high chances of winning¡±. The guidelines aim to tackle issues of cost, delay and lack of expertise in public sector disputes, but their efficacy and potential impacts raise significant concerns, legal experts warn.

¡°The shift towards litigation for government entities and limitations on arbitrable disputes is a setback for arbitration,¡± Alok Jain, a Mumbai-based partner in the arbitration and dispute resolution practice at Economic Laws Practice (ELP) tells India Business Law Journal.

Agreement comes from Vyapak Desai, vice president of the Arbitration Bar of India and head of the international disputes and investigations team at Nishith Desai Associates in Mumbai. ¡°With courts overburdened by over 50 million pending cases, arbitration needs strengthening, not abandonment,¡± he says. Desai says both systems have issues, but there¡¯s no question that India needs a well-functioning arbitration framework.

Nicholas Peacock, a London-based independent advocate and arbitrator, agrees that the potential advantages of arbitration are not always realised. ¡°It is incumbent [on] arbitrators to do their utmost to optimise the efficient process that the parties intended by selecting arbitration as their dispute resolution option,¡± he says.

There is significant speculation about the reasons behind the government¡¯s sudden shift.

Several legal experts cite the case of Delhi Metro Rail Corporation Ltd (DMRC) v Delhi Airport Metro Express Private Limited (DAMEPL) ¨C a high-stakes dispute where state-owned DMRC faced an INR80 billion arbitral award that favoured DAMEPL. It shook the finance ministry¡¯s trust in arbitration as a reliable method of resolving disputes.

Desai says the DMRC case ¡°was not the trigger but perhaps acted as a catalyst¡± for the ministry¡¯s change in stance. The award was later overturned by the Supreme Court, a decision that contradicts the purpose of the Arbitration and Conciliation (Amendment) Act, 2015, intended to reduce judicial intervention and position India as a favourable destination for arbitration.

New rules may hinder business

The new guidelines restrict arbitration for public sector contracts, instead favouring negotiation, mediation and high-level committees for complex disputes. They recommend excluding arbitration for claims under INR100 million. Experts warn these limitations could hinder both domestic and international businesses, with uncertainty surrounding the impact on ongoing projects.

Although the memo applies to government and the public sector, it does not bode well for the private sector, and both domestic and international companies.

The guidelines primarily affect government entities and do not directly ¡°dissuade international arbitration between private parties¡±, says Naresh Thacker, partner and head of the litigation, arbitration and dispute resolution practice at ELP in Mumbai. However, he cautions that it ¡°may not be reassuring to foreign investment in various sectors, especially infrastructure¡±.

¡°No one saw this coming,¡± says Dhruv Suri, a New Delhi-based partner with PSA. His firm has been flooded with questions from overseas clients, ¡°asking whether this government memo will impact their future contracts, and if Indian courts can conduct day-to-day virtual cross-examinations should government contracts opt for litigation¡±.

The unexpected government directive has caused confusion, uncertainty and anxiety as clients rush to understand the effects and consequences.

¡°Government disputes need to be decided through arbitration because it avoids judicial burden, delays and uncertainties that are attached to litigation,¡± says Kshama Loya, a Mumbai-based partner at Dentons Link Legal¡¯s dispute resolution practice. She agrees that strengthening the arbitration framework is crucial to ensuring that its promised efficiencies in time and cost are actually delivered.

While the new guidelines impose restrictions on arbitration, they encourage parties of public sector contracts to opt for mediation or negotiated settlements.

¡°The decisions should be made pragmatically, considering the long-term public interest and taking into account legal and practical realities,¡± says Antony Julian, a Chennai-based advocate and principal counsel at Julian Law Offices. ¡°It¡¯s important not to avoid responsibility or deny the genuine claims of the other party.¡± Although good in theory, Julian thinks it is doubtful this will be put into practice.

The suggested use of a ¡°high-level committee¡± to ensure probity in settlement negotiations and mediation is a good idea.

However, Julian fears ¡°the sheer number of commercial disputes of high value involving the government and its agencies would mean that this is effectively reduced to a perfunctory exercise, where the committee has little time to give due consideration to each dispute¡±.