INTRODUCTION
Governments, like private companies, need to buy goods and services to operate. Public procurement is the process where governments and state-owned enterprises purchase from the private sector. Since it uses a significant amount of taxpayers’ money, strict procedures are followed to ensure fairness, efficiency, transparency, and minimal waste of resources.
In public procurement contracts between private organizations and the government, arbitration clauses are often included to resolve disputes. For example, arbitration as a dispute resolution mechanism was used in the recent case of DMRC v. DAMEPL, among others.
However, on June 3, 2024, the Department of Expenditure under the Ministry of Finance released Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement. In these guidelines, the government has discussed the negative aspects of arbitration in disputes related to procurement contracts.
In this article, we will delve into the guidelines and the government’s reasoning behind its issuance. Furthermore, we will critically analyse both the guidelines and the government’s rationale, exploring whether the decision is the right one and examining the effect of these guidelines not just on procurement contracts but on arbitration as a whole.
UNDERSTANDING THE GUIDELINES
The guidelines state that the government (and its agencies) is subject to scrutiny and is accountable to the Parliament. Therefore, its decisions must be fair. Accepting an adverse arbitration award without exhausting judicial options is often seen as improper. Furthermore, the government is concerned that, due to frequent officer transfers, its knowledge may be less detailed than that of private parties in an arbitration. This disadvantage could lead to unfair outcomes.
The guidelines also state that Arbitration can be slow and expensive. Additionally, the government believes that the less formal nature of arbitration can lead to errors and a poor application of the law, particularly in high-value cases where perceptions of wrongdoing are more likely. Arbitrators are also not held to the same standards as judges.
Another concern of the government is the lack of public scrutiny in arbitration proceedings, which can reduce accountability. Additionally, arbitral decisions are frequently challenged in court, increasing litigation rather than decreasing it as originally intended.
The guidelines further propose mediation as an alternative to arbitration in procurement contract disputes. Mediation involves a neutral third party who helps the parties settle without imposing a decision. The guidelines also promote negotiation as a dispute-resolution method.
However, the government has not entirely rejected arbitration as a method of dispute resolution in procurement. Instead, it has proposed limiting arbitration to disputes under Rs. 10 crores unless specifically approved by government authorities. Additionally, the guidelines suggest forming high-level committees to review and approve settlements in high-value disputes. The committee would include a retired judge, a retired high-ranking officer, and/or a technical expert. Furthermore, in rare cases, renegotiation of long-term contracts may be possible due to unforeseen events.
ANALYSIS
While it is commendable for the government to promote mediation and negotiation as modes of dispute resolution, the reasoning behind the restrictions on arbitration for procurement contracts is not satisfactory.
Firstly, the guidelines state that while accountability is to the parliament, they are also accountable to the public since they are using public money, and an adverse award without exhausting judicial options would be improper as public money would be utilised to settle the award. While the concern about using public money and accountability is valid, restricting arbitration solely because of the possibility of an adverse award appears unreasonable. There will always be a party in litigation or arbitration where the decree or award, respectively, goes against them, but that is not a reason to restrict a dispute resolution mechanism. Furthermore, there are judicial options under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 (“A&C Act”). Additionally, after the development of DMRC (supra), the parties can also approach the Supreme Court using the Special leave petition and Curative petition.
Additionally, the guidelines expressed concern about the binding nature of awards given by improper application of the law. This concern is also legitimate as the Indian courts have inclined towards the idea that mere erroneous application of the law is not a ground to set aside the arbitral award. However, this was done to prevent the arbitral award from getting stuck in litigation and to ensure that the arbitration process can achieve finality. The application of law is subjective and can be interpreted by parties for their benefit. Since it is subjective, it would result in parties frequently approaching the court on the grounds that the law was not applied correctly, which would defeat the objective of arbitration to minimize the role of courts and ensure the speedy resolution of disputes.
Secondly, the guidelines raise questions regarding the ability of arbitrators to judge cases, adding that arbitration is slow and expensive. While arbitrators may not fully match the standards of judges, the argument is irrational because the arbitrator is chosen by mutual consensus of the parties. The government, as a party to the arbitration, has a say in selecting the arbitrator. If the government is dissatisfied with the standard of the arbitrator, it can request the Supreme Court, the High Court, or any person or institution designated by such courts under Section 11(6) of the A&C Act to appoint an arbitrator, who is often a retired judge, senior advocate, or another experienced individual.
Furthermore, the guidelines seek to promote mediation because it involves a neutral third party. However, arbitration also relies on a neutral party to adjudicate disputes. They additionally propose the formation of a high-level committee (“HLC”) consisting of a retired judge, a retired high-ranking officer, and/or a technical expert to facilitate mediation and negotiation between parties. However, requiring all negotiated solutions and mediation agreements to undergo HLC scrutiny might be problematic. This is because the government appoints the committee, raising concerns about potential bias in favour of the government. A more neutral approach to dispute resolution would be desirable for the private party, which is arbitration, as they will have their say in choosing the neutral party, i.e., the arbitrator.
Additionally, contesting that the slowness and expense of arbitration are reasons to restrict arbitration in procurement contracts is also not a perfect argument. While it is true that arbitration may take time, it is a far more commonly used dispute resolution mechanism in India, comparatively quicker than court proceedings and has less pendency period.
Lastly, even if the arbitral award is contested in court, it may not take as much time in courts as rightly stated by the Singapore Court of Appeal in the Anupam Mittal case –
“The process of the arbitration in itself could be beneficial to the parties in that it will compel them to collect and test their evidence and legal arguments and give them a strong indication of the strength of their respective cases.”
This implies that the parties will already be prepared for the case and can argue effectively in front of the courts, which helps save time and ensures smoother proceedings.
CONCLUSION
While promoting mediation and negotiation is commendable, the government’s recent guidelines on arbitration in public procurement contracts present a puzzling situation. The guidelines appear arbitrary, and their reasoning does not strongly support the government’s position.
Furthermore, while these guidelines only apply to domestic procurement contracts, the restrictions placed on arbitration raise concerns about India’s commitment to alternative dispute resolution. The same concern regarding the guidelines was stated by the Arbitration Bar of India (ABI) and the Indian Arbitration Forum (IAF) in their request for the withdrawal of the guidelines. The ABI and IAF stated that the memorandum’s potential to stifle confidence in India’s arbitration regime, particularly in light of recent judgments like Cox and Kings, NN Global and initiatives aimed at making India an arbitration hub.
At a time when India is advocating for India to promote arbitration, guidelines suggesting that arbitration is expensive, time-consuming, and arbitrators’ standards are unreliable, and cases like DMRC v. DAMPL, may hinder India’s progress towards achieving the status of an arbitration-friendly nation.
This blog is written by Shubham Singh, 4th Year Student at National Law University Odisha