Ministry Of Finance Pushes For Mediation Over Arbitration In Domestic Public Procurement Contracts

The Department of Expenditure under the Ministry of Finance, Government of India, has recently released guidelines delineating the use of arbitration and mediation in domestic public procurement contracts. The guidelines recommended the restriction of arbitration to disputes with a value less than Rs. 10 crore. Further, it states that government departments/ entities/ agencies should adopt mediation under the Mediation Act, 2023 and/ or negotiate amicable settlements for resolution of disputes. The guidelines issued by the Deputy Secretary (Procurement Policy) state that arbitration gained prominence as an alternative mechanism for resolving disputes which of advantages such as prompt adjudication and access to specialized technical expertise. Acknowledging the benefits of arbitration, the guidelines recognize its potential to expedite resolution timelines and streamline decision-making processes. However, it states certain shortcomings within the arbitration framework. “recent developments, namely the enactment of the Mediation Act, 2023 and Court decisions, combined with the experience gained over many years have necessitated a re-examination of the Government's approach towards arbitration vis-avis other methods of dispute resolution, such as mediation and litigation.” One of the primary challenges encountered in arbitration involving government entities lies in the intricate nature of governmental decision-making processes. Governmental actions are subject to rigorous scrutiny and accountability standards, which can pose challenges in accepting arbitration awards that deviate from established practices. Moreover, the guidelines emphasise the transitory nature of government personnel which can hinder the continuity of institutional knowledge. The guidelines emphasize a need to explore alternative dispute resolution mechanisms, particularly mediation, as a means for collaboration and amicable solutions. “Adjudication by the courts is a remedy which always exists wherever there is no arbitration clause. However, another alternative to arbitration is mediation, which is a process whereby parties attempt to reach an amicable settlement of their dispute with the assistance of a third person (mediator) who does not have the authority to impose a settlement upon the parties to a dispute. There are successful models of mediation/ conciliation being practiced in certain Government entities, for example in the oil and gas sector. Section 48 of the Mediation Act, 2023 allows the Government or any Government entity or agency to frame schemes or guidelines for resolution of disputes through mediation or conciliation, and in such cases, a mediation or conciliation may be conducted in accordance with such schemes or guidelines.” To further enhance the efficacy of dispute resolution mechanisms, the guidelines recommend the establishment of high-level committees comprising retired judges and technical experts. These committees are tasked with scrutinizing proposed solutions and ensuring alignment with broader public interests. Additionally, it states that provisions should be made for renegotiating contract terms in exceptional circumstances, subject to rigorous evaluation by designated high-level committees. The following guidelines are issued for contracts of domestic procurement by the Government and by its entities and agencies (including Central Public Sector Enterprises [CPSEs], Public Sector Banks [PSBs] etc. and Government companies): Arbitration as a method of dispute resolution should not be routinely or automatically included in procurement contracts/ tenders, especially in large contracts. As a norm, arbitration (if included in contracts) may be restricted to disputes with a value of less than Rs. 10 crore. This figure is with reference to the value of the dispute (not the value of the contract, which may be much higher). It may be specifically mentioned in the bid conditions/ conditions of the contract that in all other cases, arbitration will not be a method of dispute resolution in the contract. Inclusion of arbitration clauses covering disputes with a value exceeding the norm specified in sub-para (ii) above, should be based on careful application of mind and recording of reasons and with the approval of: In respect of Government Ministries/ Departments, attached/ subordinate offices and autonomous bodies, the Secretary concerned or an officer (not below the level of Joint Secretary), to whom authority is delegated by the Secretary. In respect of CPSEs/ PSBs/ Financial Institutions etc., the Managing Director. In matters where arbitration is to be resorted to, institutional arbitration may be given preference (where appropriate, after considering reasonableness of the ...

Ministry Of Finance Pushes For Mediation Over Arbitration In Domestic Public Procurement Contracts

Rajesh Kumar

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