GS Paper II
News Excerpt:
The Finance Ministry recently announced that arbitration clauses will be removed from future contracts involving the government or government-controlled entities, except for minor disputes worth Rs 10 crore or less.
- The new policy, detailed in an Office Memorandum, advises government departments and agencies to settle as many disputes as possible amicably.
More about News:
- These guidelines aim to make dispute resolution more efficient and cost-effective, addressing specific challenges faced by government entities.
- To help with this amicable settlement process, the government will set up "high-level" committees made up of former judges and retired senior officials.
|
Arbitration: Arbitration is an alternative dispute resolution method for various contractual disputes, including those involving private sector parties. Advantages of Arbitration
Challenges with Arbitration:
|
Why are these changes now?
- Experts are of the view that the government’s perceived lack of trust in arbitrators is the reason behind these changes as most of the arbitration decisions go against the government.
- But the fact is that the government, its agencies and officials have fallen short in meeting their legal obligations in putting forward the case of government and cannot be trusted to do the right thing.
- Moreover, the arbitrators are rule-bound and cannot fearlessly sign off and agree to liability which can run into several hundred crores.
- The government’s current attitude can be seen from its 2023 Vivad se Vishwas – II scheme for contractual disputes, which stipulates that even when an arbitral award is rendered, the government may, instead of honouring the award, agree to a 35 per cent discount on the sum awarded by way of a settlement.
- Finally, if there is no settlement, the aggrieved party is left to the mercy of the courts. There can be no two opinions that the courts are not equipped to handle heavy commercial disputes in any sensible way.
Assessment of New Guidelines
|
Positive Impact |
Negative Impact |
|
|
Foreign Investment |
Clarity and Predictability: The guidelines offer clear procedures and thresholds for dispute resolution, which can provide foreign investors with a predictable legal framework, potentially increasing their confidence in the Indian market.
Preference for Mediation: Encouraging mediation over arbitration for high-value disputes may be seen positively by foreign investors as mediation can be less adversarial and more conducive to maintaining business relationships. |
Restrictive Arbitration Clauses: Limiting arbitration to disputes valued under Rs. 10 crores could deter foreign investors who prefer arbitration over Indian courts because of its perceived neutrality and efficiency.
Perception of Bias: Foreign investors might perceive the preference for institutional arbitration within India and the involvement of government-appointed High-Level Committees as potentially biased against non-domestic parties. |
|
Ease of Doing Business |
Streamlined Dispute Resolution: The guidelines aim to expedite dispute resolution through mediation or litigation by promoting mediation and limiting arbitration. However, this has not had much of a positive impact.
Pragmatic Approach: Encouraging pragmatic decision-making and avoiding unnecessary litigation aligns with global best practices and can improve the business climate. |
Increased Scrutiny: The necessity for approvals from high-ranking officials for arbitration clauses exceeding Rs. 10 crores may introduce bureaucratic delays, potentially complicating contract negotiations and execution.
Uncertainty in High-Value Contracts: Businesses involved in high-value contracts may face uncertainty due to the stringent conditions under which arbitration can be invoked, possibly leading to hesitations in large-scale investments. |
|
Arbitrations in India |
Promotion of Mediation: The push for mediation, especially under the Mediation Act 2023, can reduce the backlog of cases relating to arbitration and arbitration appeal in courts, leading to quicker dispute resolution. Institutional Arbitration Preference: Promoting institutional arbitration can enhance the quality and reliability of arbitration proceedings, ensuring better standards and accountability. |
Restrictive Arbitration Environment: Limiting arbitration for high-value disputes can reduce the attractiveness of India as an arbitration-friendly jurisdiction.
Challenges in Enforcement: The historical challenge of enforcement of arbitration awards in India might not be fully addressed, leading to continued hesitations by foreign investors regarding the efficacy of arbitration. |
Conclusion
Arbitrations may not be perfect, but they are clearly more workable than court litigation. To ask the private party to take its dispute to court is to turn a blind eye to reality and throw the litigant under the bus. Effective dispute-resolution methods are a necessary adjunct to economic growth.
