Ajar Rab*

The Government of India’s shift from arbitration to mediation for disputes over INR 10 crores in public procurement, announced in June 2024, has sparked a debate among stakeholders. This article explores the underlying issues that led to this shift, despite the government’s ongoing promotion of arbitration. The article identifies key challenges in the Indian arbitration landscape, such as prolonged proceedings, high costs, improper application of law, and lack of accountability among arbitrators. While the Mediation Notification addresses these concerns within government contracts, the article argues that these issues are pervasive across Indian arbitration. The piece calls for introspection and collaboration among stakeholders to address the systemic problems, rather than merely addressing the symptoms, to bolster India’s position as an international arbitration hub.

Introduction

The Ministry of Finance, Government of India, in a surprise announcement on June 3, 2024 shifted from arbitration to mediation for resolution of disputes over INR 10 Crores relating to public procurement (“Mediation Notification”). While the binding nature, authority of the signatory and many other legal questions remain about it, many have lauded this move, and some have expressed concern. This post is neither for nor against the Mediation Notification. On the contrary, it tries to delve a little deeper to find the fault lines that have prompted this attempt to shift, especially when the government and courts (see here and here) are actively promoting arbitration. The intent behind this piece is not to criticize anyone but more to reflect as a community of stakeholders involved in arbitration with a deliberate and common intent of making India an international hub for arbitration.

Arbitration, as a mechanism of dispute resolution gained popularity due to its advantages over traditional court litigation, namely (a) speed, (b) expert adjudication, (c) party autonomy, (d) finality, and (e) ease of enforcement. However, there is always a gap between the cup and the lip. These theoretical advantages mean little if the procedures and practices adopted by tribunals, courts, and parties do not act in furtherance of these objectives. While most nations struggle with similar problems, addressing the mismatch of these expectations at the earliest would bolster India’s place in international arbitration.

The Mediation Notification lists the problems for the failure of arbitration in cases of disputes in procurement contracts against government entities. Though one can criticize the reasons, they do represent, more like a kaleidoscope, the symptoms of larger underlying problems. Though the Mediation Notification addresses these issues in the context of the government entities, the same issues are systemic and prevalent across arbitrations in India.

Most stakeholders of the Indian arbitration community would concur that the Mediation Notification rightly identifies that arbitration proceedings in our country suffers from (a) being long and expensive, (b) improper application of law, (c) collusion, (d) lack of expert adjudication, (e) unrealistic claims being alleged and even awarded, (f) lack of finality and effective enforcement, and (g) lack of accountability of arbitrators. Each of these sub-heads deserves attention and careful reflection by all stakeholders:

Arbitration is Long

It is often said that “An arbitration is only as good as the arbitrator”. However, most arbitral tribunals today comprise arbitrators from a “limited pool”, who often lack any formal training in the arbitral process. Section 19 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) vests ample power in the arbitral tribunal to lay down effective and efficient procedures. Unfortunately, the lack of formal training in arbitral procedure, the utter disregard of the existing case load of an arbitrator, coupled with conducts of parties and counsel delays proceedings.

The idea of holding a case management conference and laying down a detailed Procedural Order No. 1 (“PO1”) is fairly uncommon in domestic arbitrations. Barring a few good arbitrators, in most ad hoc arbitrations, the case management conference is an ideal ceremony of simply having tea and ascertaining the potential claim value and the advance fee to be deposited in the arbitrator’s account, instead of deciding the procedural aspects. Neither counsels, nor parties insist on a discussion about the procedural framework for the proceedings. The timelines for submission of pleadings are also often agreed without any discussion of the consequences if any party delays, especially deliberately. Such an agreement would not only expedite proceedings but also limit challenges to the award.

In exceedingly rare instances do the arbitrators make any use or reference to the IBA Rules on Taking of Evidence or the Prague Rules on Conduct of Efficient Proceedings or even the amendments to the Civil Procedure Code, 1908 (“CPC”) for commercial suits. As a viable option, the simple adoption of the principles contained in Order XI of the CPC can effectively reduce the time for pleadings and submission of documents. Similarly, the use of Redfern Schedule or agreement on the procedure for the production of documents or discovery is manifestly absent from most PO1’s issued by domestic arbitrators.

Arbitration is Expensive

Compounded by the frustrating length of proceedings and guerilla tactics borrowed by counsels and parties from court proceedings is the issue of cost. Some arbitrators have devised novel mechanisms to subvert the intent of Schedule IV of the A&C Act, primarily by charging the so-called “administrative expenses” per hearing. There are frequent examples, and even horror stories among practitioners, of the ‘administrative expenses’ being more than the arbitrator’s fee, even though the arbitration proceedings were being held in the drawing room or chamber of the arbitrator itself. Any objections to the said arrangement will not only attract the ire of the arbitrators but could even lead to a warning of contempt as in the matter of ONGC v. Afcons.

Some arbitrators also insist on the physical appearance of the parties and hold physical hearings for filing of pleadings or routine procedural matters to justify the ‘administrative expenses.’ In pro-arbitration jurisdictions, such hearings would likely result in a challenge to the arbitrator for the conduct of inefficient proceedings, making them personally liable for negligence.[1]

Improper Application of Law, Collusion, Lack of Expert Adjudication and Award of Unrealistic Claims

The three concerns raised in the Mediation Notification about improper application of law, collusion and lack of expert adjudication, all stem primarily from the choice of arbitrators. There is little or no consideration of the actual experience or technical expertise of the arbitrator in party-appointed or court-appointed arbitrators. Whenever a party does propose an expert’s name, quite often the other party opposes, or a government department simply does not respond on the misplaced presumption of bias. This bias is only compounded by a misreading and misapplication of the jurisprudence on unilateral appointments.

It is not difficult to fathom the misplaced thought process behind having a court-appointed arbitrator. First, having an arbitrator appointed by the court may limit challenges on jurisdiction or at least, operates as estoppel. Second, if a retired judge of a High Court or the Supreme Court is appointed, the setting aside will lie before the Commercial Court or the High Court, and the judges hearing such setting aside applications will be reluctant to set aside awards passed by their seniors and superiors.

In the words of Justice Kaul, “tribunals should not be a refuge for retired lawyers or judges but a place for experts.” This lack of expert adjudication results in misconstruing applicable provisions of law. Most arbitration awards against government entities, especially in government contracts, are passed based on unproven formulae such as Hudson, Emden or Eichleay. Despite there being ample jurisprudence on the requirement of proof, seldom do tribunals venture into such analysis.

Similarly, most Engineering, Procurement and Construction (“EPC”) contracts are viewed solely from the prism of the Indian Contracts Act, 1872, without any reference to the Sale of Goods Act, 1930, for the supply component. Hardly any distinction is made based on commercial realties of a lump-sum contract, or an item-rate contract which relies on government-approved rates that are inclusive of profit percentages. Yet unrealistic amounts are awarded as a loss of profit. Likewise, there is a presumption of wrongdoing by the government entity which brings a belated counterclaim. The appreciation of commercial reasons or tender processes and procedures is hardly considered or even argued.

Given the common law training, the domestic arbitrator rarely plays an inquisitorial role in examining witnesses or indulges in any fact-finding. Arbitration was never intended to be a purely adversarial process. These reasons ultimately result in exorbitant and unreasonable awards which government departments are forced to challenge, leading to dilution of finality and enforcement.

Lack of Finality and Enforcement

As a matter of great shame, the Singapore International Commercial Court set aside an award passed by an Indian arbitrator for being “copy-pasted”. It is familiar to read domestic arbitration awards which merely reiterate parties’ submissions and add a concluding paragraph without any analysis or reasons and are consequently challenged on these grounds.

It is also no secret that sometimes contractors are encouraged to invoke arbitration since any amicable settlement without arbitration would raise eyebrows for the officers involved. Most disputes in government contracts are created and claims are inflated only to be paid by government departments “as per the award”. These awards are then challenged for the sake of a challenge and a settlement is reached with contractors to waive the interest. However, no attention or scrutiny is paid to the inflated principal amount paid in the award.

Unfortunately, most arbitration jurisprudence today emanates from the courts in metropolitan cities. In the non-metros, a setting aside application is admitted as a matter of right without any hearing on admission. Subsequently, objections and rejoinders are invited leading to frustrating delays for the claimants who are forced to file interim applications for deposit of a certain percentage of the award and withdraw partial amounts to reap the fruits of the award. After the recent amendment introducing fraud and corruption as grounds for an unconditional stay, nearly all setting aside applications raise such allegations. The courts hearing the setting aside applications rarely consider the pleas taken by the parties during the arbitration proceedings or the rights granted under the A&C Act to challenge the arbitrators. Unfortunately, Section 4 of the A&C Act dealing with the waiver of the right to object is often rendered otiose.

The recent interference of the Supreme Court (which may be criticized for several other reasons) in a curative petition is a testament to the blind application of upholding or setting aside awards without any scrutiny by the lower courts. The Court understood the importance of upholding the integrity of arbitration proceedings and rectifying the unjust outcomes, questioning the finality of these arbitral awards.

Lack of Accountability

Tied to the concept of finality is the question of accountability. Why should parties face the loss of time and cost due to perverse and unintelligible awards being passed by arbitrators? In most jurisdictions, such conduct would lead to a claim against the arbitrator. However, there is an absolute dearth of accountability of arbitrators in our country, primarily due to the common law misconception of arbitrators being equivalent to judges. While international jurisprudence has taken leaps in making arbitrators liable for misconduct and gross negligence[2], there is hardly any case being filed under Section 42-B of the A&C Act against arbitrators. It is an open secret that no court in India will admit a case against another judge. Therefore, despite repeated allegations of bias and even corruption against arbitrators, such arbitrators continue to be appointed, especially by finance companies.

If one carefully considers the above, one may paint a very pessimistic picture of arbitration in India. However, there are always exceptions and positives. The unfortunate part is that all stakeholders, whether it be parties, counsels, arbitrators, or courts, are equally guilty of condoning these practices. The aim to ensure that these practices are called out and opposed.

While the Mediation Notification is also a deliberate move to disincentivize arbitration against the government by forcing contractors to approach the courts, similar to India’s approach under the Bilateral Investment Treaties, the current approach to arbitration requires a collaborative effort to change. If the government has shifted focus, it is a good opportunity to openly reflect and discuss the underlying causes for the increasing aversion to arbitration instead of simply looking to cure the symptoms ailing the arbitration landscape in India.

[1] Dr. iur. Ajar Rab, Immunity of Arbitrators: Time for the Model Law to Take a Stand (2022) 11(2) International Arbitration Law Review 130.

[2] ibid.

*(Dr.) Ajar Rab, Founding Partner, ANR LAW LLP, Dehradun. The author would like to thank Ms. Disha Gandhi, Fourth Year Student at the National Law University, Jodhpur for her research assistance and his colleagues at his office for their valuable comments and suggestions.