Government Policy on arbitration

Source: This post “Government Policy on arbitration” is created based on the article Why Centre should not junk arbitration to settle disputes, published in Indian Express on 14^th June 2024.

UPSC Syllabus Topic: GS Paper 2 – Governance –

News: Recently, finance ministry suggested to exclude arbitration clauses from future contracts involving government or government-controlled entities, except for disputes of a value less than ₹10 crore.

This decision marks a departure from the government’s long-standing effort to promote India as a hub for arbitration for resolving disputes outside the traditional court system.

This new policy also encourages government departments to amicably settle disputes in the public interest, without denying genuine claims of the other party.

For easy settlements, the government agencies will constitute “high-level” committees. It will compose of former judges/retired senior officials to vet or approve such settlements. If settlement efforts do not work out, the dispute will be left to the courts for adjudication.

What is the rationale given by government?

Due to lack of integrity, arbitrators often collude with private entities and give them a favourable decision. Further more it is difficult to dislodge the decision by arbitrator, given the availability of few options after that.

What is the significance of arbitration in Dispute Resolution?

Efficiency and Workability: Arbitration, despite its imperfections, is often more workable than court litigation. It provides a faster, more flexible, and specialized mechanism for resolving disputes, which is particularly beneficial in complex infrastructure projects.

Global Standards: Arbitration is a widely accepted method of dispute resolution globally, used in various jurisdictions to ensure neutrality, expertise, and expediency. India’s move away from arbitration could affect its standing in the international business and legal community.

Project Cost: Without arbitration, resolving disputes through the court system could lead to significant delays and increased costs, making projects less bankable and attractive to investors.

Court Overload: The court system is already overburdened and ill-equipped to handle complex commercial disputes effectively. Arbitration provides a more viable alternative to litigation.

What are the issues in the present suggested mechanism?

Bias and Impartiality: Arbitrators are meant to be independent and impartial. The government’s expectation for arbitrators to favor its stance undermines the arbitration process’s sanctity.

Trust in Officials: While, it is deciding against the arbitrators, many of whom are selected from the former judges, it is forming a committee with officials and former judges to negotiate.

Settlements lack the transparency and accountability inherent in arbitration awards, which follow a judicial process and can be challenged on grounds such as bias or corruption.

Decision making ability of officials: Government officials face multiple layers of accountability and potential scrutiny, making it unlikely they will agree to significant liabilities.

Vivad se Vishwas – II Scheme: The 2023 scheme demonstrates the government’s preference for settlements over honoring arbitral awards, often proposing significant discounts on awarded sums.

What should be done?

Reconsideration of Policy: The government should reconsider its decision to exclude arbitration clauses and focus on improving the arbitration framework.

Strengthening Arbitration: Enhancing the arbitration process, including timely appointment of arbitrators and enforcement of awards, can make arbitration a more robust dispute resolution method.