Rookie’s Reflection: Government’s Mediation Move — A Tactic Rooted in Old-Fashioned Misconceptions About Arbitration

On 3-6-2024, the Department of Expenditure under the aegis of the Ministry of Finance, came out with an office memorandum (OM) listing out the guidelines 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 companies¹. They key points are:

1. Arbitration should not be used routinely in large contracts and may be restricted to disputes with a value less than Rs 10 crores. Further, inclusion of arbitration clauses in disputes with a value exceeding the same, should be based upon careful consideration and approval of:

   (i) In respect of government ministries/departments, attached/subordinated 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.

   (ii) Managing Director in respect of CPSEs/PSBs/financial institutions, etc.

2. Institutional arbitration should be given preference over ad hoc arbitration.

3. Arbitral decision should be challenged based on serious review of merits and higher chances of winning. Otherwise, disputes should be settled amicably.

4. Mediation as per the Mediation Act, 2023² should be encouraged and where the matters are of high value, the government entities may constitute High-Level Committees (HLC) including a retired Judge and a retired high-ranking officer and/or technical expert. The government entities may either:

   (i) negotiate directly with the other party and place a tentative solution before the HLC; or

   (ii) conduct mediation and then place the tentative mediated agreement before the HLC; or

   (iii) use the HLC itself as the mediator.

Analysis

As there are two sides of a coin, the reaction to this OM is divided too. On one side, it is being touted to be a watershed moment for the Mediation Act, 2023 which may lead to faster processes and less expenses being spent in the dispute resolution procedure. On the other hand, it is being called an irrational shift built upon a primitive view of arbitration as a practice.

As a nascent learner of the subject, I feel the OM is regressive and bizarre. It is shocking to see how there are two worlds existing within the system, one which is at fore front of it all in the public glare to make India an arbitration friendly regime, an “arbitration hub” and the other, clearly giving the opposite signals and taking steps as this OM to indirectly push for litigation.

It is disheartening to see a mindset where:

1. “Acceptance of an adverse award when judicial avenues are not exhausted is often perceived to be improper by various authorities, despite the ‘finality’ envisaged in theory”³

   Arbitration as a mechanism is not new and even after so many years, the kind of trust one expects from a government entity is not just there. Mechanisms of such nature require mutual trust upon an adjudicatory authority which both parties themselves appointed to adjudicate a dispute. When there is a serious lack of trust, the outcome is for everyone to see now. Even the matters that have been dealt with utmost fairness by the Arbitral Tribunal are challenged without any second thought. In this day and age, not challenging an award is “improper”.

2. Officers in government undertakings are transferable and the new one’s knowledge “may not be as deep as of the opposing private party”⁴

   Through this, it is clearly visible how anything and everything under the sun is being put in the umbrella to get rid of arbitration in large-ticket matters. Government entities have all kinds of resources ranging from training programs, access to experts, record-keeping facilities, procedural safeguards and the list goes on. But here we are looking at a logic of sweeping generalisation where it is assumed that all the new officers would be incompetent to understand the dispute, while clearly disregarding the institutional continuity of the government entity.

3. “Reduced formality” in arbitration is apparently leading to “improper application of the law”⁵

   Observations of such a nature clearly bring out an archaic mindset where it is still perceived that formality in a proceeding is the noble stamp of fair decision-making and anything that may be evolved, is not worth the trust and effort. This unwillingness to embrace advancements and evolution of the field needs serious review.

4. “Little accountability” regarding “impropriety” on the part of arbitrators leads to wrong decisions⁶

   When one generalises a mechanism useless because there is something improper in the same, it becomes clear that there is more to it than what is meeting the eye.

Through such notions, the OM categorically marks a departure from arbitration as a sought-after mechanism and enters the fora of promoting mediation, where the OM while justifying the use of mediation, defines it as a “process whereby parties attempt to reach an amicable settlement of their dispute with the assistance of third person (mediator) who does not have the authority to impose settlement upon the parties to a dispute”.⁷ Through this definition of mediation, the picture somehow gets clearer where I strongly feel that arbitration is being berated throughout just because the “finality” it brings to the issue which can be imposed as if it were a judgment/decree/order of the court, whereas, in mediation, there is no finality and imposition. The government entities would get an opportunity to engage in negotiations without committing to any binding resolution, leading to less incentive to settle disputes hence, a stalling tactic after all leading us back to where we started i.e. litigation, which will eventually wear the private parties out and hence, a win-win for the government entities.