Context

• On June 3, the Finance Ministry of India unveiled a policy decision that marks a significant departure from decades of promoting the country as an arbitration hub.
• The government has now decided to exclude arbitration clauses from future contracts involving government or government-controlled entities, with some exceptions.
• It is important to analyse this policy shift because it raises several concerns and appears fundamentally flawed for several reasons.

The Government’s New Policy on Arbitration

• The new policy is set out in the form of an Office Memorandum and provides that the government departments/ entities/ agencies should amicably settle as many disputes as possible.
• These entities will solve disputes in overall long-term public interest, keeping legal and practical realities in view, without shirking or avoiding responsibility or denying genuine claims of the other party.
• To facilitate amicable settlement, the government agencies will constitute high-level committees composed 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.

Major Reason Behind the Policy Shift: Government’s Distrust in Arbitrators

• The core rationale behind this policy change is the government's perception that arbitrators often lack integrity and collude with private parties, leading to unfavourable awards that are difficult to challenge legally.
• However, this distrust overlooks the foundational principles of arbitration, where arbitrators are expected to be independent and impartial, resolving disputes based on merits rather than government preferences.
• The assumption that adverse decisions indicate compromised tribunals fails to acknowledge the possibility that governmental agencies might simply be failing to meet their legal obligations.

Why the Government’s Policy Change Argument is Fundamentally Flawed

• Lack of Accountability and Transparency in the New Policy
  • If the government does not trust arbitrators as such (though it usually nominates former Supreme Court or High Court judges as arbitrators), why would it repose greater trust in its officials in negotiating a settlement?
  • It matters little that the settlement is approved by a high-level committee (comprising inter alia of former judges) as it is and will remain a voluntary, administrative decision.
  • A mediator (if involved) cannot advocate any particular position and they can only facilitate (and not recommend) any settlement.
  • In terms of transparency and accountability, a settlement can never rest on an equal footing with an award which is issued following a judicial process and by a process known to law.
• Underestimation of Complexities Involving a Dispute Settlement
  • The policy's reliance on amicable settlements underestimates the complexities involved in negotiating substantial disputes.
  • Government officials are bound by stringent rules and answerable to multiple authorities, including courts and investigative agencies.
  • The fear of potential scrutiny or allegations of arbitrariness and discrimination may deter officials from agreeing to significant liabilities, thereby hindering effective settlement of disputes.
  • The 2023 Vivad se Vishwas – II scheme exemplifies this issue, where the government proposed a substantial discount on awarded sums rather than honouring arbitral decisions, indicating a lack of commitment to fair and equitable settlements.
• Courts' Inadequacy for Commercial Disputes
  • According to the new policy if settlement negotiations fail, the policy leaves disputes to the courts.
  • However, Indian courts are notoriously overburdened and ill-equipped to handle complex commercial disputes efficiently.
  • The 2015 Amendment to the Arbitration Act aimed to expedite award challenges within a year, yet in practice, these challenges can linger for about five years.
  • Original suits involving substantial stakes, extensive documentation, intricate facts, and expert testimony would exacerbate this problem, leading to prolonged litigation and further burdening the judicial system.

Implications of India's Shift from Arbitration to Court Adjudication

• Diminished Investor Confidence
  • Investors, both domestic and international, seek predictable and reliable legal frameworks to safeguard their investments.
  • Arbitration, with its structured yet flexible procedures, provides a relatively quick and efficient means to resolve disputes.
  • By moving away from arbitration, India risks eroding investor confidence as the legal process becomes more uncertain and protracted.
  • The potential for lengthy and unpredictable court battles may deter investors, who might perceive the legal environment as increasingly hostile or unreliable.
• Slowdown in Infrastructure Development
  • India has ambitious plans for infrastructure development to support its growing economy and meet the needs of its population.
  • Major infrastructure projects often involve complex contracts and significant financial stakes, making disputes almost inevitable.
  • Arbitration has been a preferred method for resolving such disputes due to its efficiency and the expertise of arbitrators familiar with commercial and technical aspects.
  • The shift to court adjudication could delay the resolution of disputes, leading to stalled projects, increased costs, and missed deadlines.
• Increased Costs and Resource Allocation
  • The judicial system in India is already burdened with a backlog of cases.
  • Introducing a large volume of commercial disputes into this system will exacerbate the problem, leading to longer resolution times and increased costs for all parties involved.
  • Companies may need to allocate more resources to legal battles, diverting funds that could have been used for expansion, innovation, or other productive activities.
  • The increased litigation costs can also make India a less attractive destination for businesses, further hampering economic growth.
• Impact on Contractual Relationships
  • Contracts are the foundation of commercial relationships. The predictability and enforceability of contractual terms are crucial for businesses.
  • Arbitration clauses in contracts provide a clear and reliable mechanism for dispute resolution.
  • By removing arbitration clauses, the government introduces uncertainty into contractual relationships.
  • Businesses may become more cautious in their dealings with government entities, potentially leading to less collaboration and innovation.
  • The trust deficit can result in higher risk premiums, making projects more expensive and less viable.
• Potential for Increased Corruption
  • The reliance on court adjudication and settlement negotiations conducted by government officials may inadvertently increase the potential for corruption.
  • Settlement processes lack the transparency and structured oversight inherent in arbitration.
  • Decisions made behind closed doors without the rigor of judicial or arbitral scrutiny can lead to perceptions, or even instances, of bias and unfair practices.
  • This can further damage the business environment, making it less attractive to honest investors and entrepreneurs.
• Stifling Innovation and Entrepreneurship
  • A slow and unpredictable dispute resolution system can stifle innovation and entrepreneurship.
  • Startups and innovative enterprises often operate with limited resources and cannot afford prolonged legal battles.
  • The efficiency of arbitration can be crucial for these entities, allowing them to resolve disputes swiftly and focus on growth and development.
  • By removing arbitration, the government risks creating a hostile environment for startups, potentially stifling the innovation that is essential for economic dynamism and competitiveness.

Conclusion

• The government's decision to abandon arbitration in favour of amicable settlements and court adjudication is misguided and counterproductive.
• This policy not only fails to address the root concerns but also introduces new challenges that will hinder India's economic and infrastructural development.
• A swift reversal of this short-sighted policy is imperative to ensure a robust and reliable dispute resolution framework that supports the country's growth ambitions.