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After years of government narrative about turning India into an arbitration hub, the ministry of Finance has reversed course, asking departments to seek other solutions. Freny Patel reports

Astorm is brewing in 含羞草社区 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 – 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 含羞草社区 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 含羞草社区 state-owned power generation company, 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.