The department of expenditure, in its June 2024 advisory, had stated that arbitration was expensive and time-consuming compared to mediation and litigation. Major state-run firms shying away from arbitration may dampen the hopes of India’s goal of becoming an arbitration hub, as the government is widely known as the biggest disputant in the country.
Mint earlier reported that state-run firms Oil India Ltd and ONGC Ltd have reduced their exposure to arbitration, and the Delhi Public Works Department has said it will not arbitrate in future contracts.
Arbitration vs mediation
An arbitration clause is a commonly used dispute resolution clause. All contracts, agreements, and even treaties have dispute resolution clauses, which direct parties on how to resolve any issue. While arbitration is adversarial and binding on parties, mediation focuses on getting parties together to a singular consensus and is non-binding.
“While the finance ministry’s guidelines rightly aim at curbing delays and inefficiencies in public procurement disputes, the de-emphasis on arbitration in favour of mediation and litigation merits caution,” said Pragya Ohri, partner, HSA Advocates. “Mediation, inherently non-binding, lacks enforceability and often collapses in adversarial settings and when the stakes are high. This may result in an increased caseload for the already overburdened courts of the country,” said Ohri.
“Arbitration may not be flawless, but it remains preferable to the morass of prolonged litigation. Litigation, with the Government as the largest litigant, suffers notorious delays, often stretching into decades,” Ohri at HSA Advocates added.
Queries emailed to NHPC on 9 May, and NTPC and EIL on 17 May did not elicit a response till press time.
NHPC contractor claims
According to NHPC Ltd’s FY24 annual report, the company benefited from the central government’s ‘Vivaad Se Vishwaas’ scheme, where long-pending arbitrations were settled mutually by parties. Also, the state-run hydropower giant reduced the number of contractor claims against itself by settling matters in favour of the company.
The company’s contingent liabilities decreased by 9.62% year-on-year to ₹9,265 crore as of 31 March, 2024 “mainly due to contractors claim settled under the Vivad se Viswas II Scheme (contractual disputes) notified by the Government of India ( ₹676.32 crore) and reduction in contractors claims due to arbitration awards settled in favour of the company ( ₹755.85 crore),” NHPC’s FY24 annual report said.
Under the Vivad se Viswas II (contractual disputes) scheme, government entities can settle arbitral dues with contractors after an arbitral award or court judgement has been given, or when the dispute is being resolved.
For court judgements passed before April 2023 and for arbitral awards passed before January 2023, government entities could settle the dispute by paying 85% and 65% of either the disputed amount or the amount stated by the adjudicating court or arbitral tribunal.
Also Read: Supreme Court could reshape arbitration. Businesses are watching.
NTPC, EIL arbitration expenses
Meanwhile, India’s largest thermal power generator NTPC Ltd has decreased its provisions for arbitral awards by a little over ₹625 crore in FY24, according to the company’s annual report.
In the same year, the power generator’s income from arbitration cases has risen to about ₹143 crore compared to ₹33.92 crore the year before. Also, its expenses on arbitration cases have reduced to ₹125 crore in FY24 from ₹155 crore in FY23, according to the report.
Commercial and employee-related claims against Engineers India Ltd have also reduced in FY24 to ₹229.75 crore from FY23’s ₹262.55 crore, its annual report for FY24 said.
EIL’s FY24 annual report also dictated the facts of a case where a contractor claimed a hefty ₹400 crore from the company, and the company filed a counterclaim for about ₹120 crore. In this period, the contractor’s creditor also filed an insolvency plea against the contractor. While the insolvency plea did not go through, it illustrated another example of how state-run firms challenges to arbitral awards impact private contractors.
In a 2019 Supreme Court case of Hindustan Construction Company and others vs Union of India, contractors urged the court to ask public sector undertakings (PSUs) to comply with arbitral awards instead of challenging them as contractors were facing consistent insolvency scares from creditors.
In July 2024, a Lok Sabha disclosure by the finance ministry said a study showed that over 60% of all arbitration awards involving NTPC Ltd and the National Highways Authority of India were challenged in court.
“In all these cases, the government is compelled to spend on both arbitration as well as on litigation,” minister of state for finance Pankaj Chaudhary told the Lok Sabha.
Feasible mechanism
The unchanged arbitration regimes of various state firms suggest that Indian arbitration remains the only feasible dispute resolution mechanism, especially for commercial disputes.
India’s arbitration regime, governed by the 1996 Arbitration and Conciliation Act, is at a tipping point. After being amended thrice before, the law is currently being amended for the fourth time in a massive push for institutional arbitration.
Previous high-level committee reports by Supreme Court judge B.N. Srikrishna and former law secretary T.K. Viswanathan have suggested that widespread reforms are necessary for India to become an arbitration hub, and there is a need to focus on institutional arbitration over ad-hoc arbitration.
Also Read: Law ministry to start work on plugging gaps in arbitration law, as directed by Supreme Court
Ad-hoc arbitration refers to cases where parties appoint an arbitrator, who then decides the rules of procedure. In an institutional arbitration, however, the rules of procedure are set by the institution providing the arbitration facilities, making the process more streamlined.
Implementing new dispute resolution guidelines can be time consuming and resource-sensitive, said Arush Khanna, partner at Numen Law Offices in New Delhi.
“There is also the fact that the amendments to the arbitration act are imminent, which, once implemented, are likely to assuage the concerns and trust deficit that the government undertakings are having towards arbitration,” he told Mint.
“The proposed amendments aim to make institutional arbitration the norm rather than the exception, which in spirit, aligns with the finance ministry guidelines, which also encourage institutional arbitration, albeit in a restrictive manner,” he added.