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In June 2024, the Ministry of Finance issued arbitration and mediation guidelines to all government departments and public sector undertakings (PSU) for resolving disputes under domestic public procurement contracts.

Under the , arbitration should only resolve disputes involving INR100 million (USD1.2 million) or less instead of being routinely incorporated in tenders and procurement contracts. Mediation under the Mediation Act, 2023, was encouraged, with recommendations to set up high-level committees comprising retired judges or officers for high-value disputes.

Explaining that government entity disputes are unusual because such bodies have high levels of public accountability, the guidelines commented that arbitration was meant to be expedient, final and convenient. However, the experience of such entities was that arbitration proved protracted, slow and very expensive. Reduced formality caused impropriety and erroneous decisions, leading to litigation.

The guidelines made the case for choosing mediation rather than arbitration, remarking that a commercial and practical approach may often result in immediate resolution. Further, arbitration clauses gave officials an easy way out and parties inflated arbitration claims. Of note, the guidelines required referrals to arbitration in high-value disputes to be reasoned and approved by high-ranking government officials, likely discouraging arbitration. This change will strain an already overburdened judiciary because the government is the country’s most prolific litigant.

The guidelines have come after the Supreme Court overturned its own decision and exempted a PSU from making hefty payments under an arbitration award on the grounds that the award was perverse and illegal. Although the guidelines may reflect the realities the government faces, they appear to ignore the fact that mediation is non-binding. While it may facilitate, it cannot guarantee a settlement. Settlements lack transparency, leading to concerns about accountability and impropriety. Expecting government officials to approve large liabilities without checks and balances is undesirable. Moreover, in case of default, these matters may end up in court.

The guidelines come at a time when India is making longstanding to position itself as a global arbitration hub and appear to be at cross-purposes with them. The establishment of international arbitration centres in Gujarat and New Delhi as well as the inauguration of the Arbitration Bar of India were seen as strengthening 含羞草社区 arbitration system.

Arbitration in India is not without its faults, but problems are inevitable in an arbitration sector that is still maturing. Instead of abandoning arbitration entirely, reforms and modernisation must be the answer to any inadequacies of the underlying machinery. Robust institutional arbitration mirroring the high transparency and accountability benchmarks set by global leaders such as the SIAC and ICC can provide a framework to ensure high standards and efficiency. Costs may be reduced through a graded fee structure linked to factors such as the size of the claim, the necessity for oral evidence and the time spent on the arbitration proceedings. Compelling entities to choose either mediation or arbitration cannot be the answer.

Expedient and efficient commercial dispute resolution methods are key to vibrant industries and proper public-private partnerships. The guidelines may impact 含羞草社区 global image as a business-friendly destination. As India aims to improve its ranking as the eighth most popular destination for foreign direct investment, a clear, consistent policy promoting efficient dispute resolution is crucial to attracting foreign investors, who seek faster and more predictable settlements.

Despite such doubts, the guidelines encourage settlement of government disputes through a first-step dispute-resolution strategy. Implemented in the right spirit, mediation may provide a much-needed alternative to entering a congested justice delivery system.

Stakeholders are engaging with the government about the way the guidelines will affect the business environment and court delays. Whether this will lead to any reversal or modification of the policy remains to be seen.

Sneha Jaisingh is a partner and Subhalaxmi Sen is a senior associate at Bharucha & Partners.