Editor’s Note
The switch from arbitration to mediation appears an attractive option at first glance. However, whether or not it will really address the existing shortcomings calls for an analysis of the government’s decision. The issue of shorter timelines in arriving at solutions, an affliction often encountered in the arbitration process, has not been addressed. The author delves into the new process from multiple angles.
With some exceptions, arbitration, as one of the standard clauses in most government and quasi-government contracts, will soon be a thing of the past. Disputes will henceforth be resolved through mediation in accordance with the Mediation Act of 2023 or through an ‘amicable settlement’ between the parties.
The Procurement Policy Division of the Ministry of Finance issued a notification to this effect on 3 June 2024. It applies to domestic procurement contracts involving central government ministries and departments, their attached and subordinate offices, autonomous bodies, central public sector entities, public sector banks, etc.
An exception has been made regarding disputes involving a sum of less than Rs 10 crore or where, in higher value disputes, it is considered necessary to adopt arbitration after careful application of mind and approval of the competent authority. And where it is considered necessary to resort to arbitration, institutional arbitration is to be given preference ‘after considering the reasonableness of the cost of arbitration relative to the value (of the dispute?) involved’.
As an aside, this would strengthen the demand, especially from the foreign companies, to agree to institutional arbitration in international contracts, which is costlier than ad-hoc arbitration which is presently the norm followed in most government and quasi-government contracts.
The notification mentions three expectations the government had from arbitration: speedy dispute resolution, procedural convenience and availability of technical expertise to resolve the dispute, and finality of the arbitral awards. It seems all these expectations have been belied.
Although the timeframe prescribed in Section 29A of the Arbitration and Conciliation Act, 1996, may be true, arbitration proceedings seem to take a long time to complete. This is likely due to procedural loopholes that not only militate against quick resolution but also add to the cost of arbitration. It is not known if any efforts are being made to plug those loopholes.
The government’s experience in respect of the other two expectations has been more damaging. The notification says that the procedural flexibility, ‘combined with the binding nature of decisions, has often led to wrong decisions on facts and improper application of the law’ resulting in ‘perceptions of wrong-doing including collusion’, particularly in high-value disputes.
The notification further points out that ‘the arbitrators are not necessarily subject to the high standards of selection which are applied to the judiciary and judicial conduct’ which, coupled with the fact that the arbitration proceedings are held behind closed doors and not in the open court, makes the process untransparent. Apparently, there have been instances of ‘judicial decisions regarding impropriety on the part of the arbitrators’, but there continues to be little accountability for any wrong decisions taken by them.
The benefit of arbitration awards’ finality has also not been achieved, as many awards are challenged in the courts, notwithstanding Section 12 of the Arbitration and Conciliation Act, 1996, which limits the grounds for challenge. It has resulted in arbitration becoming an additional layer in the dispute resolution process in many cases. It is a very disturbing commentary on the efficacy of arbitration, but the question is whether mediation can overcome the shortcomings besetting arbitration.
In the new scheme of things, government departments and other entities will be required to constitute High-Level Committees (HLCs) that ‘may’ include a retired judge and a retired ‘high-ranking officer and/or technical expert’. However, since this composition is only ‘indicative’ and not ‘prescriptive’, the actual composition may differ from one department to the other.
As in the case of arbitrators, mediators and HLC members are also unlikely to be subject to the same high standards of selection as those applied to the judiciary. Thus, the issue of accountability and the potential for transgressions will remain unaddressed. As in the case of arbitration, the inclusion of retired judges in the HLCs could imbue mediation with time-consuming judicial practices.
To resolve a dispute, the departments will negotiate directly or through a mediator with the other party. However, the tentative agreement reached after the negotiations will have to be placed before the HLC. The HLC can also be asked to mediate directly. In all cases, the negotiated settlement will have to be approved by the ‘appropriate authority’ as envisaged in Section 49 of the Mediation Act, 2023.
Mediation may be cheaper than arbitration, but it is not necessarily a faster route to dispute resolution. Negotiation may not even take off if there is a dispute regarding the acceptability of the mediator or the members of the HLC, who, it seems, will be appointed by the departments on terms and conditions that are not clear. This raises the question of whether retired judicial officers and high-ranking officers and experts would be happy serving on the HLCs if the remuneration and other terms and conditions are not attractive.
In any case, claims and counterclaims will have to be established before the mediator or the HLC. The tentative agreement reached after negotiation will have to be examined by the HLCs and again considered by the approving authority, who, being a serving officer, can be expected to be reluctant to approve any bold settlement which could potentially be questioned by the investigation agencies subsequently.
What makes the scheme very fluid is the stipulation in the notification that general or case-specific modification in the application of the guidelines contained therein may be authorized by the secretary of a department, any officer not below the rank of joint secretary to whom the authority is delegated in respect of ministries/departments, attached and subordinate offices and autonomous bodies. In respect of public enterprises, banks, etc. the managing directors can authorise the modification. This is quite likely to result in different yardsticks being followed in dispute resolution through mediation in different organisations.
It is difficult to say how the scheme will pan out in departments like defence and railways, where a large number of contracts are signed at various echelons down the line. Considering that the cost of raising a dispute and seeking its settlement through mediation will be far less than the cost of arbitration, more disputes could crop up.
Constituting HLCs at each level, ensuring uniform application of procedural norms, and preventing transgressions across the entire organisation would throw up new challenges for these ministries without there being any guarantee that mediation will succeed where arbitration failed as a means of resolving contractual disputes.
There are too many loose ends in the mediation scheme for it to produce quick results, remain free from allegations of wrongdoing, and prevent the aggrieved parties from rushing to the courts. Mediation cannot be forced upon an unwilling party, and there is no guarantee that a mutually acceptable settlement can be reached.
Amit Cowsish
