New guidelines for dispute resolution in public procurement contracts

On 03 June 2024, the Department of Expenditure under the Ministry of Finance, Government of India, issued guidelines for using arbitration and mediation in domestic public procurement contracts (available here). These guidelines aim to streamline the dispute resolution process, making it more efficient and cost-effective while addressing the unique challenges faced by government entities.

The guideline identifies several issues with the current arbitration process in domestic public procurement contracts:

1. Arbitration takes a long time and is expensive, contrary to its intended benefits.
2. The reduced formality in arbitration may lead to incorrect decisions on facts and improper application of law.
3. Awards are frequently challenged in courts, adding to litigation instead of reducing it from India’s overburdened courts.
4. The adversarial nature of arbitration can lead to inflated claims and counterclaims.

Keeping these factors in mind, the following guidelines have been issued for domestic procurement contracts by the government, its entities, and agencies (including Central Public Sector Enterprises, Public Sector Banks, etc.):

1. Arbitration should not be routinely included in procurement contracts or tenders, especially for large contracts.
2. Arbitration, if included, should be limited to disputes valued at less than INR 100 million. This value pertains to the dispute, not the contract. It should be clearly stated in the bid documents that arbitration is not a dispute resolution method for higher-value disputes.
3. For disputes exceeding the INR 100 million threshold, including arbitration clauses should be carefully considered and approved by:
   • The Secretary or a delegated officer (not below the level of Joint Secretary) for government ministries, departments, attached/subordinate offices, and autonomous bodies.
   • The Managing Director for Central Public Sector Enterprises, Public Sector Banks, financial institutions, etc.
4. When arbitration is used, institutional arbitration should be preferred, considering the cost relative to the dispute’s value.
5. Government departments/entities should challenge the award based on the merit and likelihood of success.
6. Government entities should aim to amicably settle disputes using contract mechanisms and take pragmatic decisions in the long-term public interest, without avoiding responsibility or denying genuine claims.
7. Mediation under the Mediation Act, 2023, and negotiated settlements are encouraged. For high-value disputes, a High-Level Committee (HLC) may be formed, including:
   • A retired judge.
   • A retired high-ranking officer and/or technical expert.
8. In cases where HLC is constituted, the Government may use the HLC as a mediator, or can negotiate directly or through a mediator before placing the tentative proposed solution / mediated agreement before the HLC.
9. In rare, long-duration contracts where unforeseen events necessitate re-negotiation between the parties, the re-negotiated terms should be reviewed by a suitably constituted HLC before approval.
10. Mediation agreements should not be routinely included in procurement contracts. However, the absence of a mediation agreement would not preclude pre-litigation mediation.
11. Disputes not covered by arbitration and unresolved by the above methods should be adjudicated by the courts.

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