Govt Prefers Mediation Over Arbitration In Purchase Disputes

However, some of the bigger PSUs have not altered relevant clauses in their procurement templates.

Why Govt Wants To Amend Arbitration Law?

The draft Arbitration and Conciliation (Amendment) Bill, 2024, is expected to be passed in Parliament before the end of 2025, but the schedule of the parliamentary passage is yet to be finalised. The government also wants to separate arbitration from mediation by renaming the 1996 law as the “Arbitration Act”. The conciliation provisions can then be resolved under the "Mediation Act" of 2023.

Government-run industries have long settled public procurement contract disputes through arbitration. Early this year, the Finance Ministry circulated an advisory, urging PSUs to rely less on arbitration. "Experience shows that arbitration takes a long time, making it a costly process," a Finance Ministry official told The Secretariat.

The missive was meant for state-run giants like NHPC, NTPC, Engineers India Limited (EIL), and Oil India. However, some of these major PSUs are yet to make the necessary adjustments. Prominent among them are NHPC (National Hydroelectric Power Corporation), NTPC (National Thermal Power Corporation) and EIL.

Arbitration was earlier perceived to be a better process than litigation. "However, over the years, even the arbitration process, particularly for the PSUs, has turned into a long-drawn and costly affair, almost like the comparable legal process," said the official.

Many a time, the public procurement contracts of PSUs involve hundreds or thousands of crores of rupees. Ministry officials feel that any dispute, in those cases, results in huge financial and operational risks.

The government’s present nudge is to produce a shift towards alternative dispute resolution mechanisms, like mediation, reconciliation, or direct negotiation — instead of escalation in the courts or arbitration.

ONGC & Oil India First To Take The Cue

ONGC (Oil and Natural Gas Corporation) and Oil India promptly adopted the central government's suggestion on arbitration. These two have already formally announced that arbitration clauses will not be included anymore in their public procurement contracts, where the disputed amount goes beyond Rs 10 crore.

While the oil giants were quick to pay heed to the government's suggestion, the electricity giants are yet to do so. Since ONGC is India’s largest oil and gas explorer, its opting out of arbitration for big-ticket deals assumes significance and plays as a signal to the rest of the sector.

NHPC, NTPC & EIL Taking Their Time

Power sector behemoths like NTPC and NHPC, EIL (engineering consultancy), and a few other PSUs are in the process of reviewing their procurement contract templates.

Officials in NTPC and NHPC told The Secretariat that these companies are drafting new clauses. “New training processes are created for the contract managers to make them adept at alternative dispute resolution techniques,” they said.

Preference For Mediation Should Come Across Loud & Clear

The Finance Ministry’s concerns about arbitration delays and inefficiencies are legitimate. However, de-emphasising arbitration in favour of mediation and litigation needs to be taken with a pinch of salt.

The courts of India, even in corporate litigations, take too long to produce results. The government is the largest litigant in matters of public procurement. Combined, these result in inordinate delays and large financial costs.

The government wishes to rewrite the public sector playbook by removing arbitration as the default option for procurement disputes, and thereby give a boost to ease of doing business.

However, if mediation is perceived to be a better option than both litigation and arbitration, then the government’s policy signals should also transmit that message clearly.