When Punjab Pays Twice: Hidden Cost Of How State Arbitrates

This is not an isolated case. It is the everyday arithmetic of how the Government of Punjab, like much of the Indian State, deals with arbitration. And it is a quiet financial bleed that deserves the public's attention far more than it currently receives.

A crisis hiding in plain sight

The numbers on the ground tell their own story. By early 2025, thirty of the thirty-eight ongoing national highway projects in Punjab — projects worth over forty-two thousand crore rupees in total — were either stalled or crawling at glacial speed. The National Highways Authority of India (NHAI) terminated three contracts worth more than three thousand three hundred crore. The Centre cancelled rural road projects under PMGSY-III worth eight hundred crore for missing tender deadlines. Behind every cancelled or delayed project sits a contractor who has hired men, brought in machines, paid for materials, and is now stuck — unable to work because the State has not handed over an encumbrance-free site, has not got forest clearance, has not shifted utilities, has not done what only it can do.

When that contractor files his claim, he is not being opportunistic. He is doing what the law entitles him to do under Section 73 of the Indian Contract Act. He claims for prolongation, idling of equipment, prolonged bank guarantees, loss of profit. These claims, in matter after matter, run into many times the original contract value. The disputes are not really being created by the contractors. They are being manufactured by the dysfunction of the State itself.

The peculiar problem of being the State

The State is not just another litigant. When a private company loses an arbitration, its directors take a commercial call: pay up, settle, or fight. They have skin in the game. When the Government of Punjab loses, none of the officers involved bear any personal financial consequence — but each one bears a different kind of risk. If they accept an unfavourable award, the Comptroller and Auditor General might question them years later. If they settle a claim, a successor might second-guess the figure. If they recommend not challenging the award, someone, somewhere, will ask why “legal battles were surrendered.”

So what does the bureaucracy do, perfectly rationally? It contests everything. It concedes nothing. It files Section 34 challenges as a matter of routine, often after the legal opinion of the State's own law officers advises against it. It lets the courts sort it out — even when “the courts sort it out” means another decade of litigation while interest piles up.

Add to this the well-known reality of officer transfers. The executive engineer who signed the contract is rarely the one defending the arbitration. The defending officer has neither memory of the dispute nor any stake in its outcome. His only objective is to ensure no one can later say he was lax. The result is poor file management, missing documents, missed timelines, and procedural defaults that sink otherwise winnable cases.

The Punjab and Haryana High Court has noticed this pattern. In Knight Frank (India) v. Punjab Heritage, the Court observed that the State approaches courts in arbitration matters as a matter of routine causing obstruction, and that this should not happen. The observation is correct. But it has not changed how the State behaves, because the incentives within the bureaucracy have not changed.

The PIRA experiment

In 2017, Punjab tried something bold — and, in this writer's view, legally questionable. The Punjab Infrastructure (Development and Regulation) Act was amended to insert Section 6(1A). For infrastructure disputes involving claims of five crore rupees or more, the Chairman of the Punjab Infrastructure Regulatory Authority — or his nominee — would be “deemed” to be the sole arbitrator, regardless of what the contract said.

The provision is well-intentioned. The thought, presumably, was that having a senior, knowledgeable Chairman handle these high-value disputes would bring consistency and quality to a fragmented system. But three problems have not been answered.

First, the Chairman of PIRA is appointed by the State government. PIRA itself is created by the State. The infrastructure projects belong to the State. By a statutory fiction, an arbitrator linked to one of the parties is being imposed on the other. The Supreme Court's rulings in TRF Limited and Perkins Eastman, and most recently the Constitution Bench in the Central Organisation for Railway Electrification case, have made it clear that an interested party cannot have unilateral say over who arbitrates. A statutory provision that achieves the same outcome by legislative fiat is on even shakier ground.

Second, the State may point to the Micro, Small and Medium Enterprises Development Act, 2006, where statutory arbitration is allowed to override the parties' agreement. But that comparison breaks down on first principles. The MSME framework exists to protect a vulnerable supplier from a powerful buyer — including the government. Section 6(1A) does the opposite. It uses the same statutory technique to protect the State from the contractor. The Supreme Court has upheld statutory override of party autonomy where the purpose is to shield the weak. It has never upheld it as a way to fortify the strong.

Third, the implementation has been farcical. In February 2024, the Government of Punjab had to issue an office memorandum acknowledging that since the Chairman and members of PIRA had not been appointed, parties would have to approach the High Court for the appointment of arbitrators. The very mechanism the State had created to streamline appointments was now itself a source of delay. In multiple cases, the Chairman of PIRA retired mid-arbitration, and parties have had to scramble to the High Court to reappoint him. So much for institutional certainty.

The national mood is shifting

While Punjab has been preoccupied with PIRA, the rest of the country has been quietly walking away from arbitration with the State.

In June 2024, the Ministry of Finance issued a watershed Office Memorandum. It told government departments to stop routinely inserting arbitration clauses in procurement contracts. Where arbitration was used at all, it should generally be limited to disputes valued under ten crore rupees. For larger disputes, mediation under the Mediation Act, 2023, was to be encouraged. The Memorandum was unusually candid: arbitration with the government, it said, has been slow, expensive, and rarely final. Awards get challenged on both sides. It has become an additional layer of cost rather than an alternative to litigation.

In April 2025, the Delhi Public Works Department went further still. It deleted the arbitration clause from all future works contracts. The trigger was a reported loss of nearly three hundred crore rupees in the Barapullah Phase III project alone. In January 2026, the Ministry of Road Transport and Highways followed suit for highway projects, putting all disputes above ten crore rupees outside the arbitration channel altogether — a move the National Highways Builders Federation has formally protested as commercially unworkable.

The Delhi approach is, in this writer's view, an overcorrection. To abolish arbitration because it is dysfunctional is to confuse the disease with its symptoms. The real disease is something else entirely: poor contract administration, missing files, weak officer accountability, and bottlenecked commercial courts. None of that is fixed by sending every dispute to a court that already takes three and a half years on average to dispose of a Section 34 petition — far beyond the one-year statutory mandate.

But Punjab cannot afford to ignore the direction in which the wind is now blowing.

CIAC: a real opportunity, with caveats

On 7 March 2026, the Chief Justice of India inaugurated the Chandigarh International Arbitration Centre. The proposed CIAC is supposed to offer exactly the things Punjab does not currently have: curated panels of arbitrators, monitored case management, emergency arbitration, online dispute resolution, transparent fees, and a target resolution window of twelve to eighteen months. Its location — at the doorstep of Punjab's disputes — could not be more convenient.

Yet there is a structural feature worth thinking about. CIAC is governed by the Punjab and Haryana High Court, not by the State government. This is, on balance, a strength: the Maharashtra model of compulsory institutional arbitration through the Mumbai Centre for International Arbitration succeeded precisely because the MCIA was independent of the executive. The State government there issued a Government Resolution making MCIA the default for all contracts above five crore rupees, but did not control the institution itself.

The cautionary tale is SAROD — the Society for Affordable Redressal of Disputes — set up by NHAI and the highway builders' federation in 2013. On paper, it was institutional. In practice, it was captured by NHAI officials, and 85 of its 110 empanelled arbitrators were not even law graduates. Quality collapsed. The lesson is uncomfortable but unavoidable: an institution controlled by one party produces capture, not quality. CIAC's distance from the executive is therefore a feature, not a bug.

The question is whether the Government of Punjab will be willing to route its disputes through a High Court-governed institution — particularly when it is a frequent litigant before that very Court. That requires institutional humility of a kind state governments rarely show.

The path forward

There are three things that need to happen, in order of importance.

First, fix the commercial courts. This is, paradoxically, the most important arbitration reform Punjab can make — even though it has nothing to do with arbitration itself. As long as a Section 34 petition takes three and a half years instead of one, every other reform is cosmetic. Specialist arbitration benches, dedicated hearing days, practice directions that confine the court strictly to the narrow statutory grounds of review, and the eventual implementation of the Appellate Arbitral Tribunal proposed in the 2024 Draft Amendment Bill — these would do more for the State's arbitration ecosystem than any number of new institutions. When courts work, the perverse incentive to challenge every award disappears, because a challenge that delays enforcement by a year and is likely to fail is far less attractive than one that delays it for a decade.

Second, embrace genuinely independent institutional arbitration. The Government of Punjab should issue a Government Resolution adopting the proposed CIAC for state contracts in the immediate term, and consider establishing a fully independent Punjab State International Arbitration Centre on the MCIA model in the medium term. Awards from credible institutions, with transparent appointment processes and structured case management, command a presumption of procedural integrity — narrowing the grounds on which a disappointed party can plausibly attack them.

Third, fix what happens before the dispute. This is the unglamorous but essential point. The single most effective way to reduce Punjab's arbitration liability is to stop manufacturing the disputes in the first place. Hand over encumbrance-free sites. Acquire land in time. Get forest clearances before tendering. Maintain proper handover protocols when officers transfer. Ensure that the standard general conditions of contract — already amended on the State's own initiative in late 2022 to expressly bar pendente lite interest in line with Section 31(7) of the Arbitration Act — are properly inserted in every new contract. These are not glamorous reforms. They are accounting clerks' reforms. But they are where the real money is saved.

The bottom line

The State of Punjab cannot keep treating arbitration as a problem to be managed at the back end, after disputes have arisen. The bureaucratic pathology that drives the State to challenge every award, settle nothing, and let the courts carry the burden is not going to be reformed by yet another statute. It will be reformed by changing the conditions under which officers operate — by giving them safe-harbour protections to settle in good faith, by holding them accountable for upstream contract failures, and by ensuring that when matters do reach the courts, those courts decide them within the time the law prescribes.

Section 6(1A) of the PIRA Act, however well-intentioned, is constitutionally fragile and practically dysfunctional. The 2024 Central Guidelines and the new mediation framework offer a useful direction, but mediation will remain aspirational until officers can settle without fearing the auditor's hammer years later. The Delhi PWD's blanket abolition of arbitration is a counsel of despair. CIAC offers Punjab a workable middle path — but only if the State government has the political will to commit to it.

Punjab has paid twice for too long: once for projects that arrive late and over-budget, and a second time through arbitration awards inflated by interest accumulated over years of avoidable delay. The taxpayer foots both bills. The reform agenda is clear. What remains uncertain is whether anyone in the State's corridors of power is ready to write it.

Author is a former Deputy Advocate General, Government of Punjab and Pranhita Singh is an Advocate. Views are personal.