Government Discourages Arbitration For Resolving Large Public Procurement Disputes

Arbitration as a dispute resolution method should not be routinely included in procurement contracts or tenders issued by the government and its various entities, the Ministry of Finance recently said.

Arbitration is a procedure through which the parties to a dispute agree to file their dispute before one or more arbitrators, who then make a binding decision on the case at hand. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court.

According to an office memorandum dated June 3, the government has said that if arbitration is needed to resolve disputes emanating from procurement contracts, it should be limited to those worth less than Rs 10 crore. However, if this method is required to resolve disputes worth more than Rs 10 crore, the contract can only include the arbitration clause after a thorough application of mind, substantiated with recorded reasons.

As an alternative, the government has proposed resorting to mediation. In essence, mediation is a participatory procedure in which a neutral third party assists conflicting parties in reaching a settlement agreement.

In high-value matters, the government has proposed that the undertaking involved in the dispute seek the help of a high-level committee to resolve the dispute. This committee would be constituted specifically for dealing with the dispute at hand, and the committee could include a retired judge, a retired high-ranking officer, and/or a technical expert.

In cases where this high-level committee is constituted, the undertaking involved could directly negotiate or mediate with the other party and place a tentative, proposed solution before the committee. Alternatively, the high-level committee could itself be used as a mediator.

Despite long-standing claims that arbitration is a quicker, more convenient, and less formal method of resolving disputes, recent trends have shown that this promise has not really materialised in practice.

Case in point: arbitral awards or decisions are final by its very nature. However, acceptance of an adverse award when judicial avenues are not exhausted is often perceived to be improper by various authorities, despite the ‘finality' envisaged in theory. As a result, it has become almost like an extra layer of litigation, which delays the final settlement.

The arbitration process itself takes a long time, is not as quick as anticipated, and is also very expensive. The reduced formality, combined with the binding nature of decisions, has often led to wrong decisions on facts and improper application of the law.

Moreover, arbitrators are not necessarily subject to the high standards of selection that are applied to the judiciary and to judicial conduct. Further, proceedings are conducted behind closed doors and not in an 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.

The government has said that a commercial and sensible practical approach, if resorted to, may indeed amicably resolve the issues at the threshold, but the existence of an arbitration clause makes it easy for officers to avoid taking a decision by letting the dispute go to arbitration.