Despite the strong recommendations of the Honourable Justice Sri Krishna Committee of 2017; despite successive amendments to the Arbitration Act, 1996 from 2015 to 2022 during the two terms of Prime Minister Modi’s Government; despite establishment of International Arbitration Centres by the Government of India in Gujarat and New Delhi, and finally despite the recommendations of the committee led by former law secretary Dr T.K. Viswanathan which was constituted in 2023 by the Ministry of Law and Justice, the Department of Expenditure, Ministry of Finance, has taken a decision on 3 June advising all Government ministries and departments to tone down their dispute resolution approaches while looking at the option of Arbitration for a court managed litigation.

It could not be said to be a sudden political decision, for there is practically no political party functioning while newly elected parties are mulling to form a new government. It is not known how the bureaucratic set-up could muster the strength in such a situation to advise their subordinates to be careful in resorting to arbitration, but the circular released by the Government of India strongly conveys against the inclusion of an arbitration clause in public contracts. Ironically enough, just two days after the release of the Government’s directive, the Chief Justice of India said in the United Kingdom that “arbitration is no longer an ‘alternative.’

It is, in fact, the preferred method of seeking commercial justice.” He added that the shift is driven by the desire of parties to distance themselves from domestic court systems and resolve their disputes through a neutral, third-party arbitrator. The CJI pointed out that the courts in India are overburdened despite high courts disposing of 2.15 million cases and the district courts disposing of 44.70 million cases in 2023, and added that arbitration could be a preferred solution to resolve commercial and other civil disputes. Arbitration is a process in which the parties involved in a dispute consent to submit their dispute to one or more arbitrators, who subsequently render a binding decision on the case. The parties elect to pursue arbitration as a private dispute resolution process rather than litigating in court.

The Ministry of Finance in its directive stated that arbitration should not be routinely included in procurement contracts or tenders issued by the government and its various entities as a dispute resolution method. The government has further stated in its memorandum that arbitration should be used to resolve disputes arising from procurement contracts, but only for those valued at less than Rs 10 crore. The arbitration clause may only be incorporated into the contract after a comprehensive examination of the matter, which is supported by documented justification, if this approach is necessary to resolve disputes exceeding Rs 10 crore.

The office memorandum further describes the arbitration process in unequivocal terms by saying, “The process of arbitration itself takes a long time and is not as quick as envisaged, besides being very expensive too. The reduced formality, combined with the binding nature of decisions, has often led to wrong decisions on facts and improper application of the law. The arbitral process being contractual and intended to be final with very limited further recourse, is also exposed, particularly in matters of high financial value, to perceptions of wrong-doing including collusion. lt is noteworthy that arbitrators are not necessarily subject to the high standards of selection which are applied to the judiciary and to judicial conduct.

Further, proceedings are conducted behind closed doors and not in open court. There have been judicial decisions regarding impropriety on the part of arbitrators and there is little accountability for such wrong decisions, if taken by arbitrators.” It further states “The benefit of finality has also not been achieved. A large majority of arbitration decisions are being challenged in the Courts both by the Government (or its entity or agency) and by the opposite party, when the decision of the arbitrators is not to the satisfaction of either party. The expectation that challenges to arbitration awards would be rare, has not been realised in practice. Therefore, instead of reducing litigation, it has become virtually an additional layer and source of more litigation, delaying final resolution. The objective of relieving the burden on Courts has generally not been achieved.” The intended finality, which is frequently not realised in practice, also has an impact on potential civil and criminal actions related to the subject matter of the disputes.

The memo says that in numerous instances, a commercial and practical approach, if implemented, may indeed result in a peaceful resolution of the issues at the threshold. However, the arbitration clause’s existence enables officers to avoid making a decision by allowing the dispute to proceed to arbitration. Afterwards, the adversarial process frequently results in inflated claims, counterclaims, or cross-claims replacing realistic claims and counterclaims. The arbitral process frequently concludes with resolutions that are in-between or extreme in nature, despite the fact that the intrinsic actual claims are significantly smaller.

The office memo states that the instructions are advisory in nature and that decision makers must exercise caution when drafting contractual agreements while advising subordinate offices and other government offices. The memorandum, which spans six pages, provides sufficient guidance to justify the decision to forgo arbitration in favour of mediation. It does so by employing language that invokes protection. However, our bureaucrats are adequately equipped to interpret the nuances of unforeseen vigilance inquiries, safeguard their reputations, and discard arbitration. Now, the inquiry is exceedingly straightforward and unambiguous. Should government offices opt for arbitration over court litigation or defer to the expertise of the upper echelons of the bureaucracy? So why should we engage in a campaign to promote the idea that India is becoming a global centre for arbitration? Responses that are explicit are required.

(The writer is former International Senior Advisor, United Nations Development Programme)