On 03.06.2024, Government of India, Ministry of Finance, issued an Office Memorandum^[1] which send “shock waves” to certain portion of legal community engaged in arbitration. The OM, in a nutshell, mentioned that:

1. None of the advantages that arbitration was expected to provide-Speed, Convenience, Technical Expertise, and Finality, were being achieved. Arbitration had simply become an additional layer and source of more litigation.

2. Government as a disputant is subject to large number of constraints such as limited personal knowledge of the officers involved in arbitration, transfer etc. which puts it at a disadvantage during arbitration.

3. Arbitration clause in contracts in Government contracts may be restricted to disputes less than ₹10 crore.

4. All other cases should be resolved through mediation/negotiations through a High-Powered committee of the ministry empowered to take decisions.

Following this OM, Government agencies started removing arbitration clause from their contracts with NHAI taking the lead. This, when seen in conjunction with enactment of Indian Mediation Act 2023 and GoI notification of Establishment of Mediation Council of India (while Arbitration Council of India incorporated vide 2019 amendment of Arbitration Act has still not been notified) gives an indication that GoI is serious moving towards mediation as preferred mode of ADR.

The OM of 2024 led to vociferous criticism from the legal community and the arbitrators. The major criticism was :

1. Government is resorting to removing arbitration because Government agencies are losing most cases in arbitration.

2. How can India hope to become centre for International Arbitration when its Government is removing arbitration from its own contracts?

3. This is a keen jerk reaction by the Government which was catalyzed due to DAMEPL -DMRC[2] case where the DMRC had to go in for curative petition to get the arbitration award annulled.

The solution offered by almost the entire legal fraternity was - Make Institutional Arbitration mandatory.

For most of us who have served in Government agencies and have been keeping track of the arbitration scenario in India, especially in infrastructure disputes, this step had been in the offing since long. Enactment of The Arbitration and Conciliation Act 1996 and its subsequent amendments to make arbitration more speedy, effective and appealing, should have led to greater confidence of parties in Arbitration. The slowly eroding lack of faith in domestic arbitration, especially in infrastructure disputes which form the largest segment of domestic arbitration, stems from three reasons.

1. Ethics and Professionalism.

a) Lack of Impartiality and Fairness of Party Nominated Arbitrators: In a three-member Arbitral tribunal, irrespective of which party has nominated the arbitrator, the arbitrator is expected to display impartiality and fairness. However, over time, most arbitrators started behaving like “agents” of the nominating party. In one of the panel discussions conducted by Kolkata Port Trust, the chairman of the Conciliation and Settlement Committee caustically mentioned that there seems to be shopping of arbitrators happening in the system^[3]

b) Deliberately Prolonging Arbitration Proceedings– Fee mechanism of arbitration gave a perverse incentive to prolong the arbitration proceedings and have a greater number of sittings, since the fees is based on number of sittings. A simple matter of prolongation claim which should have been completed in few sittings, would take 18 months.

c) Charging Exorbitant Fees-In certain cases, the fees of Arbitral Tribunal exceeded the total value of claims and counterclaims admitted !

2. Poorly Reasoned Awards.

This is especially relevant for construction arbitration where there are plethora of poorly reasoned awards clearly displaying lack of interdisciplinary knowledge. Some examples are:

a) “This is a case which is neither black nor white as the claimant and respondent are both responsible for delay in completion. Hence, I assess half the delay on part of each of them”.(IRCON v CR Sons^[4])

b) “The contractor mentioned in the construction program that the Employer will construct the approach road and maintain it. Therefore, even though the ITB says that the approach road is responsibility of the contractor, it becomes the Employer's responsibility now to construct and maintain it since the Employer did not raise any objection on the Program of the contractor.” (NE Electric vs Patel Engineering^[5])

c) “Extension of Time (EOT) and Delay Damages have no correlation! Delay Damages in the form of Liquidated damages are not controlled by EOT”! (Consolidated Consortium Construction Ltd v Software technology Park^[6])

These awards, while not displaying the most appropriate understanding and interfaces between legal, commercial and engineering aspects, did not fall under the category of being “blatant illegality/lack of reasoning /against Public policy” and hence could not be set aside by the court in Section 34 appeals. Courts have repeatedly mentioned that “It is possible that with the same evidence the court may have arrived at a different conclusion, but that on its own is not sufficient reasons to set aside an arbitral award”.

3. Lack of Utilization of Technical Expertise.

One of the aims of Arbitration was utilization of technical expertise by nominating technical arbitrators for disputes of technical nature. This was not happening in domestic arbitrators since 80% or more arbitrators are retired judges.

Let's examine all the criticisms put forth against this OM.

a) Arbitration is globally accepted. Why is Indian Govt not accepting it?

While arbitration is favored for international contracts, most countries are moving away from arbitration for their domestic construction disputes to other faster and cost effective DRMs such as 28-day Statutory Adjudication. In UK, only 3% of domestic construction disputes go for arbitration.

b) How will India become hub of international arbitration when Govt is removing arbitration from its domestic contracts?

Has the fact that in UK, less than 3% of its domestic construction disputes go into arbitration, made UK a less attractive destination for international arbitration? Attractiveness of a destination as a hub of international arbitration depends upon many factors such as ease of enforcement, clarity of provisions of governing and procedural law etc. and has nothing to do with a government favoring or not favoring domestic arbitration.

c) Litigation is more expensive.

Unfortunately, Arbitration is far more expensive in India than litigation, due to exorbitant fees of the arbitral tribunal which has to be paid by the parties and the expenditure in the court following the Section 34 appeal that invariably follows.

d) Courts will face additional burden of cases which overburdened courts of India cannot handle.

When more than 90% arbitration awards are going into appeal to courts, where is the additional burden? The OM of Government of India has clearly explained this aspect.

e) Only Govt agencies are appealing against arbitration awards.

In recent cases of L&T v RVNL^[7], L&T v BMRC^[8] and C&C v IRCON^[9] and old case of L&T v Geodesic^[10]; the private parties filed appeals. Any party which loses in arbitration in India files for appeal under Section 34. There is no doubt that Government agencies are losing majority cases and therefore filing the greater number of appeals; but that is due to various constraints faced by Public sector agencies, which have been elucidated in the OM.

f) Litigation will be more time consuming .

With 90% cases going for appeal and average time for enforcement of arbitration award being 10-15 yrs, will there be any impact on time?

Benefits of having Dispute resolution process as elucidated in the Government of India OM:

The clear benefits of the OM are:

a) Mediation settlement will be truly final and binding. In case a mediation settlement succeeds, there is very little scope of appeal since it is a willing settlement.

b) Less costs. Less costs since mediation in India is paid on success fee basis and

Percentage of settled claim, as compared to Arbitration which is paid on number of sittings (thereby incentivizing the Arbitrator to have more sittings),and percentage of claim cost and not settled costs).

c) Faster Process. Faster process since time limit for mediation is 6 months which cannot be extended (under Indian Mediation Act 2023) whereas time limit for Arbitration is almost 18 months and most cases exceed that considerably.

d) Evidence may be reappreciated by the Higher Courts. In case litigation has to be

resorted on failure of mediation, the higher court acts as appellate court of both facts and law. It can reconsider the evidence, reassess witnesses/documents, disagree with the trial court's factual findings, and substitute its own conclusions (which is not feasible in an arbitration appeal under Section 34).

What other solutions are possible ?

1. Making institutional arbitration mandatory.

This can make arbitration desirable and efficient provided the Arbitral Institutes get their act in order. Some of the shortcomings of Arbitral Institutes in India are:

a) Empaneling arbitrators based on their position in industry/Government without quality checks, vetting and training.

b) No checking/vetting of arbitral awards and warnings to arbitrators for poor quality awards/plagiarism.

c) Handing over majority arbitration cases to few “favored arbitrators” while 80% arbitrators have no cases in hand

Current and former Chief Justices of India and Singapore have mentioned in various forums in India, that arbitral institutions cannot remain passive case administrators. They must assume responsibility for institutional integrity including professionalism and consistency in arbitral processes, transparency and accountability, arbitrator training, ethical standards and mechanisms for addressing misconduct.

2. Statutory Adjudication.

28-day interim binding statutory adjudication legislated by “Construction law/ Security of Payment acts/equivalent acts) have proved to be very effective in UK, Australia, Singapore, New Zealand, Ireland, Malaysia and Canada.

However, in India , in the absence of robust institutional checks, these are likely to have suffer from similar shortcomings as domestic arbitration.

The question is not whether India should or is abandoning arbitration. It is not, and it should not. The moot question is why have the country's largest users/clients of arbitration lost confidence in it.

The Government's OM should be seen more as a warning to work towards better awards, more accountability and stronger institutions.

References: 

1. Government of India, Ministry of Finance, Department of Expenditure, Procurement Policy Division Office memorandum dated 03.06.2024. Subject- Guidelines for Arbitration and Mediation in Contracts for Domestic Public Procurement-reg.↑

2. Delhi Metro Rail Corporation Ltd. vs Delhi Airport Metro Express Pvt. Supreme Court of India ,10 April 2024, Curative Petition. ↑

3. Maritime Public Private Partnership Conclave 2022 on August 17–18, 2022 hosted by The Federation of Indian Chambers of Commerce & Industry (FICCI) and Syama Prasad Mookerjee Port (Kolkata Port Trust) ↑

4. Ircon International Ltd. vs C.R. Sons Infra Projects Ltd; High Court of Delhi O.M.P.(COMM) 287/2018 & IA 8886/2018 ↑

5. The North Eastern Electric Power Corporation Limited Vs. M/s Patel Engineering Limited; High Court of Meghalaya, 30.05.2023. ↑

6. Consolidated Construction Consortium Limited vs Software Technology Parks of India; Supreme Court of India, Civil Appeal No. 5383 Of 2024. ↑

7. Larsen & Toubro Limited vs Rail Vikas Nigam Limited 01 July 2025, High Court of Delhi. ↑

8. M/S Larsen and Toubro Limited vs M/S Bangalore Metro Rail Corporation 20 May 2025, High Court of Karnataka ↑

9. M/s. C & C Constructions Ltd. vs IRCON International Ltd, Supreme Court of India Civil Appeal No. 6657 of 2023 ↑

10. Larsen And Toubro Limited vs Geodesic Techniques Private Limited on 21 October, 2021,Karnataka High Court

    Author is a visiting professor at National Law University Delhi and Senior Legal Advisor of Construction Industry Arbitration Council. Views are personal.