– Anuja Divadkar
– Vaishnavi Mathur
NDB Law.
On June 3, 2024, the Ministry of Finance, Government of India, introduced new guidelines specifically addressing arbitration and mediation within contracts related to domestic public procurement. These guidelines have sparked significant concern within the infrastructure sector, as they could potentially alter the approach to resolving disputes in public procurement contracts.
One major issue is the possible exclusion of technical experts from the dispute resolution process. The guidelines place greater emphasis on court adjudication rather than arbitration, which could lead to sidelining technical experts who possess essential knowledge in the infrastructure domain. Since these experts typically lack formal training in mediation, the guidelines might limit their participation as adjudicators, possibly depriving parties of crucial technical insights during dispute resolution.
Frequent delays and cost overruns are common sources of disputes in the infrastructure sector. By prioritizing court adjudication over arbitration, the new guidelines could prolong the dispute resolution process, further delaying the completion of infrastructure projects and potentially causing them to exceed their estimated costs and timelines. This concern was highlighted in the Economic Survey 2023-24, which pointed out that the lack of adequate arrangements for dispute resolution and arbitration has been a major obstacle to greater private sector involvement in the infrastructure sector.
Moreover, the guidelines introduce certain ambiguities that could create uncertainty regarding their application. For example, while the guidelines are intended to apply to ‘domestic’ procurement contracts, they do not provide a clear definition of what qualifies as a ‘domestic’ contract. Additionally, the guidelines base their applicability on the value of the dispute—defined as the sum of claims and counterclaims, minus any set-offs—rather than the overall value of the contract. Parties are required to quantify this dispute value at the time of referring the matter to arbitration, which can be a difficult task. This could lead to delays in determining the appropriate dispute resolution method, especially when the parties involved do not agree. These ambiguities could also open the door to litigation tactics by those seeking to avoid arbitration, even in cases where the dispute value is relatively small.
The Implementation of these guidelines could also undermine certain benefits that the industry currently enjoys through arbitration. For instance, a previous directive from the Cabinet Committee on Economic Affairs required government entities to pay 75% of the principal amount in an arbitralaward to the concessionaire before contesting the award. This directive was designed to provide concessionaires with partial payment while disputes were being resolved. Additionally, the “Vivad se Vishwas – II” scheme was established to reduce litigation by allowing disputes to be settled through voluntary disclosure. However, the new guidelines could diminish these benefits, making the dispute resolution process more cumbersome for industry players.
The concerns arising from these guidelines are especially pertinent given the lengthy timelines typical of infrastructure projects, which require a stable and predictable framework for resolving disputes. Since the government is often a counterparty in infrastructure projects or public procurement contracts, requiring disputes to be resolved in national courts, particularly in cases where mediation fails, could undermine investor confidence. This could create perceptions of bias or unfairness, ultimately deterring investment and increasing the perceived risk associated with infrastructure projects.
In conclusion, while the government’s new guidelines aim to address perceived issues within the arbitration process, their implementation could lead to increased reliance on court adjudication, with potentially protracted timelines for dispute resolution. This shift could weaken investor confidence and discourage private sector participation in the infrastructure sector, underscoring the need for a more balanced approach that improves the existing arbitration framework.