The Way Forward: An Analysis of India’s New Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement

Author: Saloni Jaiswal*, Kabir Duggal**

I. Introduction

On June 3, 2024, the Government of India’s Ministry of Finance (Department of Expenditure’s Procurement Policy Division) issued an office memorandum entitled Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement (“Guidelines”), which outline new recommendations for arbitration and mediation procedures in domestic public procurement contracts. The Guidelines seek to re-examine the Indian government’s approach to arbitration as compared to mediation and litigation. Issued inter alia in view of the recent enactment of the Mediation Act of 2023, recent court decisions involving challenges to arbitration awards, as well as other challenges posed by the government’s own experiences, the Guidelines apply to the government, its entities and agencies, including central public sector enterprises (CPSEs), public sector banks (PSBs), and government companies involved in contracts for domestic procurement.

A cornerstone of India’s alternative dispute resolution mechanisms, arbitration offers many advantages. It enables disputants to avoid traditional litigation in the courts, which can be expensive and lengthy. And because of the fewer formalities involved in the arbitration process, it offers parties a more convenient, swift, and sound way to resolve disputes. At the same time, arbitration also has its disadvantages. Given the scope and value of the disputes at hand, especially when it comes to international commercial disputes and disputes involving government entities, arbitration may require significant time and resources. Therefore, arbitration may not be a pragmatic and efficient solution in certain situations.

In the past several decades, India has increasingly become a hub for foreign and domestic investment. India has also become a universal center for arbitration. Following the Indian Arbitration and Conciliation Act of 1996, arbitration has gone through fundamental changes. In particular, the 2024 Guidelines signal a landmark moment in arbitration in India. The Guidelines signal the Indian government’s proposed shift from arbitration to mediation—a process by which parties seek to reach an amicable settlement of a dispute on their own with the assistance of a third party, as opposed to arbitration, where an arbitrator is selected to resolve the parties’ dispute—in government procurement contracts. Furthermore, the Guidelines seek to restrict arbitration to low-value disputes.

The 2024 Guidelines have invited varying responses by legal practitioners, government officials, and other stakeholders. This blog post seeks to discuss the new Guidelines, briefly outline the history of international arbitration in India and recent amendments, and offer a brief commentary and analysis of the proposed Guidelines.

II. Historical and Current Views of Arbitration in India

A. History of International Arbitration in India

International arbitration has a long history in India. In 1958, India became a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and ratified the New York Convention in 1960. In 1961, India enacted the Foreign Awards (Recognition and Enforcement) Act to give effect to the New York Convention. While domestic arbitrations were once governed by the Arbitration and Conciliation Act of 1940, this was later repealed and replaced by the Arbitration and Conciliation Act of 1996 (“Indian Arbitration Act”). At its core, the Indian Arbitration Act seeks to “consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto.”

Since its enactment, the Indian Arbitration Act has gone through various amendments over time, in 2015, 2018, 2019, 2021, culminating in the 2024 Guidelines. Other policies – namely the National Litigation Policy of 2010 – have sought to encourage other forms of dispute resolution, emphasizing the need to reduce litigation in the courts given that the Indian government is the biggest litigant in the courts’ ongoing proceedings. In addition, the Insolvency and Bankruptcy Code of 2016, the Commercial Courts Act of 2015, and the recent enactment of the Mediation Act of 2023 have also played a fundamental role in the evolution of arbitration as a form of alternative dispute resolution in India.

B. Current Views on Arbitration

 Currently, international arbitration is central to India’s dispute resolution mechanisms. In fact, making India the hub for international arbitration was one of the “pioneering initiatives” of Prime Minister Narendra Modi’s administration. In 2019, the Union Cabinet chaired by Prime Minister Modi passed the New Delhi International Arbitration Centre (NDIAC) Bill in order to set up an autonomous body for institutional arbitration and to acquire and transfer the operations of the International Centre for Alternative Dispute Resolution (ICADR) to New Delhi International Arbitration Centre (NDIAC).

Several other members of the Indian government have also expressed support for arbitration. Institutional arbitration has been voiced by those such as the former Minister of Law and Justice Kiren Rijiju, who called certain recommendations to arbitration “path-breaking” in 2023, and current Minister of Law and Justice Arjun Ram Meghwal, who, in one of his speeches in the same year, asked “Why can’t India become a hub for arbitration?” Similarly, in April 2024, the Vice President of India Jagdeep Dhankhar noted that “India has everything that [it] needs to for the emergence of a global arbitration hub.” In one of his addresses, he expressed his disapproval over using arbitration as “an additional tier in the conventional litigation ladder.” Referencing the Supreme Court of India’s decision in Delhi Metro Rail Corporation Ltd. v Delhi Airport Metro Express Pvt. Ltd., Vice President Dhankhar noted that it was now the norm to grant an arbitral award, object to the award, appeal, and then there is a “strong tendency and , which grants the Supreme Court of India curative jurisdiction over any judgment, decree, or order made by any Indian court or tribunal.

In July 2024, the Chief Justice of India (CJI) Dhananjaya Chandrachud expressed in his address to the Supreme Court of the United Kingdom that it is now “time to build a strong culture of commercial arbitration” in countries such as India. As he stated, “I firmly believe that now is the time for countries such as India to step up to the occasion to create and promote a culture of commercial arbitration. The robust institutionalization of arbitration will further the culture of arbitration in the Global South.”

In his address, CJI Chandrachud further noted that while institutions like the India International Arbitration Centre and Mumbai and Delhi International Arbitration Centers have been established, the creation of institutions is not enough. He remarked: “We have to ensure that these new institutions are not controlled by a self-perpetuating clique. These institutions must be based on the foundation of robust professionalism and the ability to generate consistent arbitral processes. Transparency and accountability, values by which the work of conventional courts is assessed and critiqued, cannot be alien to the world of arbitration . . . I hope the Indian arbitral institutions emulate the success of their global counterparts in the years to come. The substitution of courts should not result in the creation of opaque structures.” Like many others before him, CJI Chandrachud looked favorably upon the future of international arbitration in India and noted that steps were already being taken with the creation of the Arbitration Bar of India. As he stated, “The future of arbitration is already here. It is now our responsibility to live up to the emerging challenges.”

III. India’s New Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement

A. Background

The Guidelines begin by highlighting the theoretical advantages of arbitration. The Guidelines note that arbitration is expected to provide certain advantages in contrast to litigation in the courts, such as speediness, greater convenience, less formality, and finality. Even though such benefits exist, the Guidelines state that arbitration must be re-examined given the enactment of the Mediation Act of 2023 as well as other legal decisions in recent years. Furthermore, the Guidelines specifically point to the fact that there are “certain peculiarities” when the Government is a disputant. And in cases where the Government (or one of its entities or agencies) is a disputant, the Guidelines state that the “actual experience” of arbitration in such cases have been “unsatisfactory” in meeting the expected benefits of arbitration.

B. Problems of Arbitration Where the Government is a Disputant

According to the Guidelines, the dissonance between the practical realities and expected benefits of arbitration in disputes involving the government has led to several issues. First, the Guidelines state that arbitration involves inefficiencies related to time and expense, as arbitration can take a very long time and can therefore be very expensive.

Second, the Guidelines note that arbitration can lead to wrong decisions based on the incorrect application of the law due to reduced formalities and the finality of arbitration. As the Guidelines provide, “The arbitral process being contractual and intended to be final with very limited further recourse, is also exposed, particularly in matters of high financial value, to perceptions of wrong-doing including collusion.”

Third, the Guidelines state that arbitration does not meet the rigorous standards of selection as those afforded by the judiciary. In particular, the Guidelines note that arbitrators are not selected in the way that judges are selected, and that arbitration proceedings are conducted “behind closed doors and not in open court.” The Guidelines note that there is therefore “little accountability” for wrong decisions made by arbitrators, whose proceedings occur behind closed doors and could lead to wrong decisions.

Fourth, the Guidelines note that arbitration does not necessarily lead to finality. As it states, a “large majority” of arbitration decisions are challenged in the courts. Thus, “the expectation that challenge to arbitration award would be rare, has not been realized in practice.” As a result, the Guidelines find that arbitration has become “virtually an additional layer and source of more litigation,” thereby delaying final resolution of an award.

Fifth, the Guidelines state that the presence of arbitration clauses in agreements actually leads to situations where parties avoid making final decisions by allowing the dispute to reach the stage of arbitration. And because arbitration can oftentimes be an adversarial process, “realistic claims and counter-claims are often replaced by inflated claims, counter-claims or cross-claims and arbitral process many a time ends in concluding resolutions which are in-between or extreme in nature, when in reality, the intrinsic actual claims are far smaller.”

C. The Proposed Guidelines

In light of the aforementioned issues, the Indian government proposed the following guidelines which are to be specifically issued for domestic procurement contracts:

1. Arbitration should not be routinely used or automatically included as a provision in procurement contracts, especially in “large contracts.”
2. If arbitration is included in procurement contracts, it may be restricted to disputes that are valued at less than Rs. 10 crore (roughly 1.2 million USD). The value itself refers to the value of the dispute, not the value of the contract. It should also be clearly stated in the bid conditions of the contract that for disputes valued at more than Rs. 10 crore, arbitration will not be the method of dispute resolution.
3. For disputes that are valued at more than Rs. 10 crore, this is subject to the approval of the Secretary or an officer (not below the level of Joint Secretary) in the case of a government ministry, department, or attached subordinate offices and autonomous bodies. In the case of CPSEs or PSBs or other financial institutions, the Managing Director must grant approval.
4. Institutional arbitration is given preference over other forms of arbitration, depending on the cost relative to the value of the dispute.
5. In arbitral decisions against the government or a public sector enterprise, challenging or appealing the decision “should not be taken in a routine manner,” but only when the case “genuinely merits” appeal and there are “high chances” of winning in a higher appellate court.
6. Government departments, entities, and agencies should aim to amicably settle disputes first using the mechanisms available in the contract. Furthermore, decisions should be made pragmatically, in the long-term public interest, with legal and practical realities in view, and without denying the claims of the other parties.
7. Government departments, entities, and agencies are encouraged to adopt mediation as a dispute resolution mechanism under the Mediation Act of 2023.
8. For matters of high value, a High-Level Committee (HLC) is to be established which may include a retired judge or a retired high-ranking officer and/or technical expert.
9. Where an HLC is established, government departments, entities, and agencies may either negotiate directly with the other party before putting the proposed solution before the HLC; utilize mediation; or use the HLC as the mediator.
10. Mediation agreements do not need to be automatically included in procurement contracts. However, the absence of a mediation agreement does not preclude pre-litigation mediation.
11. Disputes that are not covered by arbitration and that are not resolved by the other proposed methods should be litigated in the courts.

IV. Response by the Arbitration Bar of India and the Indian Arbitration Forum

 Following the publication of the 2024 Guidelines, Gourab Banerji, Senior Advocate and President of the Arbitration Bar of India, addressed a letter to Nirmala Sitharaman, the current Union Minister of Finance. In this letter, he outlined the Arbitration Bar of India and the Indian Arbitration Forum’s response to the 2024 Guidelines. Beginning his letter by citing various statements made by government officials, the Arbitration Bar of India’s response letter states that the 2024 Guidelines “do not align with the stated intent of this government to promote [arbitration]” as a method of alternative dispute resolution, and that they “reverse[] the object and intent expressed by the Hon’ble Prime Minister and Hon’ble Minister of Law and Justice to promote arbitration and reduce the burden on the courts.”

 The Arbitration Bar of India’s letter (“Arbitration Bar Response”) cites various reasons as to why the 2024 Guidelines are flawed. First, the Arbitration Bar Response states that the routine or automatic inclusion of an arbitration clause in procurement contracts undermines the government’s various measures to actually promote arbitration as an alternative dispute resolution mechanism. Second, the Arbitration Bar Response states that restricting arbitration to disputes valued at less than Rs. 10 crore excludes the majority of disputes from arbitration proceedings and indubitably increases the burden on the courts. Third, the Arbitration Bar Response cites the Ease of Doing Business Index: in its most recent ranking, as of 2024, India currently ranks 63rd out of 190 countries. The Arbitration Bar Response notes that while reforms to arbitration law in 2015 contributed to an increase in India’s ranking on the Ease of Doing Business Index, the Guidelines—with its focus on promoting mediation and litigation in the courts over arbitration—would negatively impact investment, lowering India’s ranking on the Ease of Doing Business Index.

Furthermore, the Arbitration Bar Response states that while mediation is effective, the Guidelines do not adequately address the non-binding nature of mediation. Furthermore, while the Guidelines recognize that “decision-making in the government involves accountability and scrutiny,” it “fails to consider that, fearing a vigilance inquiry, no government official is willing to sign a mediated settlement if it results in large payouts to private parties.” And although the Guidelines provide that an HLC can be established to assist with the mediation process, the Arbitration Bar Response observes that the HLC’s decisions would still be non-binding, meaning that in disputes where it is decided that government must pay a significant amount to an adverse party, that decision would effectively carry little weight.

Another issue the Arbitration Bar Response cites is the impact on investment. As the Arbitration Bar Response observes, financial institutions such as the World Bank “consider bankability of projects not simply based on commercial viability but also on the robust dispute resolution mechanisms that are available to resolve issues.” Thus, the absence of an arbitration agreement and the resulting failure to arrive at a settlement via mediation would necessarily mean that the dispute would reach the courts. And given the Indian judiciary’s already oversaturated caseload, cases that reach the courts would be subject to long and drawn-out litigation, thereby disincentivizing foreign companies from investing in India. The Arbitration Bar Response finds that a similar problem would also disincentivize domestic investment given the time-cost effect of litigation. 

The Arbitration Bar Response also finds issues with the Guidelines’ approach to arbitration. For instance, while the Guidelines find that arbitration can be prolonged and expensive, the Arbitration Bar Response finds that in comparison to litigation, the time-cost benefit analysis instead favors arbitration. The Arbitration Bar Response observes that to resolve issues regarding time and cost when it comes to arbitration, the government should wholly embrace institutional arbitration to monitor timelines and hold arbitrators accountable.

Furthermore, the Arbitration Bar Response finds that the Guidelines’ concern that arbitrators are not subject to the same selection standards as judges is entirely misplaced. Rather, as the Arbitration Bar Response notes, the government appoints retired judges as arbitrators in many instances, and where the appointment of an arbitrator by consent is not achieved as per an arbitration clause, it is the courts that appoint an independent and qualified arbitrator. To resolve this concern, the Arbitration Bar Response notes that the promotion of institutional arbitration, which would standardize selection procedures and guidelines, would serve to ensure that qualified arbitrators are appointed.

In response to the Guidelines’ view that arbitration often leads to wrong decisions and does not actually result in finality, the Arbitration Bar Response offers another view. As the Arbitration Bar Response notes, “questioning the finality of an award and its correctness is an archaic view when arbitration is a globally recognized and preferred mode of dispute resolution that renders swift and effective justice. The distrust in the arbitral process and the arbitral award is not keeping in line with global best practices.” Rather than challenging arbitral decisions, the Arbitration Bar Response suggests that the government should set up independent committees to determine whether arbitral awards should be further challenged in the courts.

Ultimately, the Arbitration Bar Response puts forth several proposals, including: encouraging the introduction of mediation-arbitration clauses in contracts; appointing only independent, unbiased, expert, and accredited arbitrators in disputes; setting up independent committees to examine settlements and provide guidance on settling disputes; removing arbitration clauses that send high-value disputes to the courts and instead, promoting a uniform and consistent approach to disputes regardless of value; incorporating model arbitration clauses of institutions in government contracts; and adopting a model code regarding the conduct of arbitration.

Overall, the Arbitration Bar Response concludes by referencing the National Litigation Policy, which the Minister of Law and Justice Ram Meghwal had signed on to shortly after the issuance of the Guidelines. Reaffirming the increasingly vital role of arbitration on the global stage, the Arbitration Bar Response ends by referring to the commitments of Prime Minister Narendra Modi, Minister of Law and Justice Ram Meghwal, and Chief Justice Chandrachud to promote arbitration in India.

V. Analysis and Remarks

The Guidelines represent a significant shift in India’s view of arbitration and mediation. The Guidelines seek to provide coherence, clarity, and predictability in India’s dispute resolution framework. Furthermore, the Guidelines are a good faith attempt to encourage institutional arbitration and mediation as means to reduce judicial backlog in the courts. However, the Guidelines have been subject to mixed reviews, with many in favor of the recommendations and others in disfavor.

To begin with, a striking feature of the Guidelines is its restriction of arbitration to disputes valued at less than Rs. 10 crore. However, this restriction poses a significant challenge for high-value disputes. Public procurement contracts tend to be high-value and complex in nature. Such is the case for industries such as manufacturing, technology, telecommunications, and textiles, all major industries in India and elsewhere, the contracts of which can far exceed Rs. 10 crore. Restricting arbitration in such cases may deter foreign investors from investing in India, making it difficult to maintain India’s role as a global arbitration hub.

However, while some note that there may be an adverse impact on foreign investment, there is a “slim ray of hope” as the Guidelines could promote an increase in commercial court litigation. As lawyer Payal Chawla notes in a recent article, “[a]though there will be a pressing need to enhance capacity, infrastructure, and training to efficiently manage the exponential increase in the volume of cases and trial management, this shift could lead to the development of robust jurisprudence in areas such as damages, indemnities, discovery, and trial principles.” Furthermore, as she writes, “India needs to expand its law on damages, and parties should push for more frequent use of indemnities. Litigants must encourage lawyers to think creatively and utilise the underdeveloped tort law in Indian jurisprudence. The increased volume of commercial litigation will also create a demand for skilled trial lawyers adept in litigation, damages, and cross-examination, ultimately strengthening the overall legal ecosystem. All of this will, of course, require substantial investment by the Government of India.”

While jurisprudential development is certainly a welcome bonus, the more immediate concern is the impact the Guidelines will have on the courts. A recent article by the New York Times reported that the number of pending cases in India’s judicial system doubled over the past two decades, with more than 50 million cases currently pending in the courts. At its current rate, it would take 300 years to litigate all of these cases. In late 2023, the Times of India reported that the Supreme Court of India had added 10,000 cases to its pendency list.

While the Government seeks to ease the judicial backlog by implementing these Guidelines, the opposite may very well be the case. Instead of reducing the burden on the courts, there may be an increase in litigation as parties that fail to settle via mediation must resort to the courts to resolve their disputes. And for large, complex, and high-value cases that far exceed Rs. 10 crore, resorting to the courts would only be prolonged and expensive. Rather, arbitration might be better suited in these cases, where an experienced and technically savvy arbitrator is well-versed on such issues and can speedily resolve such disputes.

Another striking feature of the Guidelines is its focus on mediation over arbitration. As some note, the Guidelines represent a welcome initiative by the Indian government as it promotes mediation, which “has the potential to bring benefits to parties, mainly that of efficiency, speed, and autonomy in the dispute resolution.” A robust mediation process would certainly provide an incentive for foreign investors. However, arbitration also provides many—if not all—of these advantages, including other benefits such as finality and technical expertise. Furthermore, the reasons that the Governments cite as disadvantages of arbitration—namely that arbitrators are not selected according to the same standards as judges—do not necessarily hold true. Rather, arbitrators are chosen by the parties’ mutual agreement and consent. In addition, arbitrators possess technical expertise on a particular subject matter, which can be fruitful in the decision-making process.

Finally, the Guidelines’ focus on institutional arbitration is further evidence of arbitration’s advantages, including “the presence of default arbitration rules, the services from a permanent organization and a higher degree of certainty in respect of the procedural aspects of the arbitration.” Strong procedural mechanisms can be useful in addressing the substantive aspects of the arbitration process. Promoting institutional arbitration can therefore cure other issues that the Government raises, such as the quality of the arbitrator. To resolve this issue, arbitral institutions could develop uniform guidelines regarding the appointment of arbitrators—who bring with them their technical expertise—to ensure that arbitrators meet rigorous, certified standards.

VI. Conclusion

Positioning India as a global arbitration hub has been at the forefront of India’s policies for several years. For decades, the increasing use of arbitration in matters of domestic and foreign investment has transformed India’s socio-economic and judicial environments, both at the domestic and international levels. While the Guidelines seek to augment India’s current procedures regarding arbitration and mediation, there are numerous concerns surrounding the Guidelines’ proposed recommendations. Only the future will reveal how the Guidelines will practically unfold on the ground.

*Saloni Jaiswal is a third-year law student at the University of Chicago Law School. Prior to law school, she obtained her MPhil in Politics and International Studies from the University of Cambridge, an MA in Middle Eastern Studies from the University of Chicago, and a BA in Near Eastern Languages & Civilizations from the University of Chicago.

**Dr. Kabir Duggal is a Senior Fellow at the Center of International Commercial and Investment Arbitration (CICIA) at Columbia Law School, a lecturer-in-law at Columbia Law School, and an attorney in Arnold and Porter’s New York office focusing on international arbitration and public international law matters, serving as both as arbitrator and mediator.  He is also a Course Director and Faculty Member for the Columbia Law School-Chartered Institute of Arbitrators Comprehensive Course on International Arbitration.