Arbitration has long been a cornerstone of dispute resolution in India, with its roots tracing back to the Arbitration Act of 1899 which applied to the Presidency towns of Bombay, Chennai, and Calcutta. The subsequent enactment of the Code of Civil Procedure in 1908 provided for dispute resolution as a mode of dispute resolution which eventually led to the Arbitration Act of 1940. Arbitration was designed to offer a less formal and quicker alternative to court-based dispute resolution, seen as a revolutionary step toward reducing the judiciary’s burden and fostering a more business-friendly environment.
Over the decades, India has refined its dispute resolution laws to align with commercial needs and promote ease of doing business. The Arbitration and Conciliation Act of 1996 (Arbitration Act) marked a significant shift by aligning Indian practices with the UNCITRAL Model Law on International Commercial Arbitration, laying the foundation for conciliation and globally harmonised arbitration laws.
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Evolution of arbitration law
India’s arbitration law has evolved significantly to meet the growing demands of commerce. The Arbitration and Conciliation (Amendment) Act of 2015 emphasised party autonomy and the finality of arbitral process, thereby limiting court interference to avoid delays and expedite the process. These reforms bolstered India’s reputation as a conciliation-friendly jurisdiction, attracting both domestic and international parties.
In 2017, a high-level committee recommended strengthening institutional mediation over ad-hoc arbitral process to encourage parties to choose India as the seat of arbitral process. Building on this, NITI Aayog’s 2021 report on Online Dispute Resolution further promoted institutional arbitration, culminating in the launch of the Arbitration Bar of India in 2024.
Ministry of finance notification of June 3, 2024
While the government has consistently promoted arbitral process, particularly institutional arbitration, a recent notification dated June 3, 2024, from the Ministry of Finance issued guidelines for arbitration/mediation in domestic public procurement contracts. Key recommendations include:
- Arbitration should not be routinely adopted or automatically included in procurement contracts/tenders.
- Arbitration should be restricted to disputes with a claim value of less than ₹10 crores.
- For claims over ₹10 crores, arbitral process may be included only with approval from the Secretary (in government ministries/departments) or the Managing Director (in CPSEs/PSBs/Financial Institutions).
- Institutional arbitration should be preferred over ad-hoc arbitral process.
- Decisions to challenge arbitral process awards should not be automatic but based on a merit analysis of each case, with a strong likelihood of success before the concerned court.
- Mediation under the Mediation Act of 2023 should be adopted for amicably resolving disputes.
While the recommendation to prioritise mediation is commendable, it is voluntary and not binding. Consequently, parties still have the option of pursuing court-based dispute resolution or, alternatively, arbitration.
Rationale for shifting away from arbitration
The Ministry’s notification highlighted several issues with arbitral process.
Timeliness: Arbitrations involving the government or government-owned companies often take longer than anticipated, undermining the goal of a speedier resolution.
Cost: Arbitral process has proven to be an expensive process for government entities.
Finality: Many arbitral awards were challenged under Section 34 of the Arbitration Act, delaying the final resolution of disputes.
Decision-making: It was observed that the inclusion of an arbitral process clause allowed officers in government companies to avoid making decisions by letting disputes go to arbitral process. However, it’s important to note that arbitration is a facet of party autonomy. Parties in ad-hoc arbitrations can determine timelines, costs, and other parameters, addressing most concerns. Institutional arbitration, in particular, can mitigate these issues.
Furthermore, data shows that court-based dispute resolution tends to be more time-consuming than arbitral process. The rise of Online Dispute Resolution (ODR) options, such as WeVaad, has facilitated the resolution of disputes—ranging from as little as ₹50,000 to ₹700 crores—within 90 days.
IRDAI direction on dispute resolution
The shift away from arbitral process is not limited to public procurement. The IRDAI’s circular dated October 27, 2023, removed arbitral process for policies under the retail line of business. For commercial policies, arbitral process agreements are to be entered into separately if the parties prefer. The rationale cited for this move was the availability of alternative dispute resolution mechanisms like the Insurer’s Grievance Redressal, IRDAI Ombudsman, and consumer courts for retail policyholders. However, with 27% of cases in consumer courts related to the insurance sector and delays common, arbitral process could still provide a faster alternative.
Despite advancements in arbitral process, the government has increasingly emphasised mediation as the preferred alternative dispute resolution mechanism. The Mediation Act of 2023 strengthens the process, ensuring greater adoption and enforcement of settlements reached through mediation. Mediation offers several advantages.
Speed and Efficiency: Mediation typically resolves disputes more quickly than arbitral process or litigation.
Cost-effectiveness: Mediation is less costly, avoiding many fees incurred in arbitral process or litigation.
Confidentiality: Like arbitral process, mediation is private, which can be crucial for businesses concerned about public disclosures.
Preservation of Relationships: Mediation’s collaborative approach helps maintain business relationships that could be damaged in adversarial proceedings. However, mediation may not suit all types of disputes, especially those requiring a legal precedent or involving significant power imbalances. Its success largely depends on the willingness of both parties to resolve the dispute, and it does not provide finality if mediation fails.
The government’s shift from arbitral process to mediation reflects a nuanced approach to balancing efficiency, cost, and effectiveness. While arbitral process has long served as a cornerstone of India’s dispute resolution framework, recent guidelines from the Ministry of Finance and IRDAI indicate a pivot toward mediation, particularly in public procurement and insurance disputes.
This transition is driven by the need for quicker, cost-effective resolutions and a desire to maintain business relationships through collaborative dispute resolution methods. Mediation offers significant benefits, including speed, lower costs, confidentiality, and preservation of relationships. However, challenges remain, such as its voluntary nature and unsuitability for certain types of disputes.
A balanced approach, combining mediation with arbitration, presents a more comprehensive solution. Mediation can serve as the first step for amicable dispute resolution, while arbitral process ensures finality if mediation fails. This dual-path strategy offers the best of both worlds, creating a robust dispute resolution framework that supports India’s business-friendly environment and improves its global ease of doing business ranking.
(Dr Navneet Sharma is Director General, CUTS Institute for Regulation and Competition. Ms Kritika Sethi is co-founder of WeVaad.)