Detailed Note on Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement – Government moving away from arbitration?  

Posted On - 7 June, 2024 • By - King Stubb & Kasiva

[1]Scope: Applies to contracts of domestic procurement by the Government and its entities, including Central Public Sector Enterprises (CPSEs), Public Sector Banks (PSBs), and Government companies.[2]

Key Guidelines:

1. Routine Exclusion of Arbitration:

  •     Arbitration should not be routinely or automatically included in procurement contracts/tenders, especially in large contracts.

2. Value-based Restriction on Arbitration:

  •      Arbitration (if included) should generally be limited to disputes valued under Rs. 10 crore.
  •     This value pertains to the dispute amount, not the total contract value.
  •     Contracts should specifically state that arbitration will not be used for disputes exceeding this value.

3. Approval for High-Value Arbitration Clauses:

  •     Inclusion of arbitration for disputes over Rs. 10 crore requires:
  •     Careful consideration and documented reasons.
  •       Approval from:

        – Government Ministries/Departments: Secretary or delegated Joint Secretary.

        – CPSEs/PSBs/Financial Institutions: Managing Director.

4. Preference for Institutional Arbitration:

  •  Institutional arbitration should be preferred where suitable, considering the cost relative to the dispute’s value.

5. Guidance on Legal Challenges:

  •  Follow the General Instructions on Procurement and Project Management dated October 29, 2021.
  •  Decisions to challenge or appeal arbitration/court rulings against the government should be based on merit and high success probability, not routine.

6. Amicable Dispute Settlement:

  •  Aim to avoid or amicably settle disputes using contract mechanisms.
  •  Decisions should prioritize long-term public interest, legal, and practical realities, and not avoid responsibility or deny genuine claims.

7. Encouragement of Mediation:

  • Adopt mediation under the Mediation Act, 2023.
  • For high-value matters, consider forming a High-Level Committee (HLC) for dispute resolution, potentially including:

      – A retired judge.

      – A retired high-ranking officer and/or technical expert.

  •     Dispute resolution through HLC may involve:

      – Direct negotiation and proposal submission to HLC.

      – Mediation followed by HLC review.

      – Using HLC as the mediator.

8. HLC Role in Decision Making:

  •     HLC enables scrutiny and promotes fair decisions, independent of the regular decision-making structure.

9. Renegotiation in Long-Term Contracts:

  • For unforeseen major events in long-term contracts, renegotiation may be necessary.
  •  Terms of renegotiated contracts should be reviewed by an HLC before approval.

10. Final Solution Approval:

  • Obtain approval from the appropriate authority for final solutions.
  • Section 49 of the Mediation Act, 2023 is relevant.

11. Mediation Agreement Clauses:

  • Mediation agreements should not be automatic in contracts.
  •  Absence of a mediation clause does not prevent pre-litigation mediation.
  •  Include mediation clauses only if consciously decided.

12. Court Adjudication for Unresolved Disputes:

  •    Disputes not covered by arbitration clauses and unresolved by other methods should be settled by courts.

[1] Issued by:

Ministry of Finance, Department of Expenditure, Procurement Policy Division

Date: June 3, 2024

Office Memorandum No.: F. 11212024-PPD