The Centre’s move comes after a 15-day public consultation ended on 3 November, where stakeholders suggested various amendments to expedite dispute resolution.
“Now that public consultations are over, we will have more internal meetings and discussions…we will discuss some SC judgements that have come,” one of the officials mentioned above said, requesting anonymity, adding that the ministry will also discuss stakeholder inputs on the law.
An email query to the law and justice ministry did not elicit a response till press time.
For perspective, in arbitration cases of government vs private parties, the government chooses one arbitrator from a panel it creates and asks the private party to choose another arbitrator from the same panel. These two arbitrators, empanelled by the government, would choose a third arbitrator also from the same panel.
Also read | Calls to reduce court intervention in Arbitration Act amendment as consultation window closes
The top court struck down this practice as it could result in arbitrators being biased. The court noted that when one party, particularly a government entity, has the sole authority to appoint an arbitrator, it creates a power imbalance that undermines the fairness of the arbitration process.
The initially proposed draft amendment to the Arbitration and Conciliation Act—to rename the Act to the Arbitration Act—published on 18 October, did not include provisions to cut the government’s arbitration costs. High costs of arbitration have led to multiple state-run firms paring their exposure to arbitration.
Mint earlier reported that Oil India Ltd and ONGC (Oil and Natural Gas Corporation) Ltd had decided to only arbitrate matters where the disputed value is below ₹10 crore, hence reducing the state-run firms’ exposure to arbitration, following a finance ministry nudge.
Recently, the state government of Karnataka also withdrew compulsory arbitration clauses citing financial burden, aligning with a June advisory from the Union finance ministry asking PSUs as well as state governments to reduce arbitration costs.
Also read | Pushed by finance ministry, ONGC to cut down on arbitration, use IIAC services
The finance ministry advisory also asked government entities to consider resolving disputes using mediation, or by moving courts of law. As per the advisory, mediation is less expensive than arbitration.
The government advised its entities to litigate in courts because arbitration was becoming a costly affair and a dent on the public exchequer.
The Supreme Court’s judgement came about three weeks after the draft amendment was published, notably after the public consultation window had closed. In the last judgement delivered by former chief justice D.Y. Chandrachud, the top court clipped the powers of public sector undertakings (PSUs) to appoint arbitrators unilaterally, to protect the principles of natural justice.
The judgement came as arbitration became a burden on the public exchequer due to constant appeals and challenges to unfavourable arbitral awards in cases where the government was party, adding legal costs.
Arbitration vs mediation
To be sure, dispute resolution in India is either done in courts—litigation—or by using out-of-court mechanisms such as arbitration and mediation.
Arbitration involves both parties asking a third party to resolve the dispute, ending in a zero-sum game, where one party wins and the other loses.
Mediation, however, ends in a non-zero-sum game, where both parties come to a common consensus regarding the issue. Arbitral awards are binding in courts, while mediators cannot impose the settlement on the parties.
Also read | Centre plans to revive IIAC, adds incentives for maritime arbitration and MSMEs
Issues can be resolved via arbitration in any place that parties choose, while following any laws the parties want to. For instance, two parties can resolve a dispute in Singapore while following Indian laws.
The Arbitration and Conciliation Act passed in 1996 has been the key law on the domain and has been amended thrice before the current amendment was proposed. Mediation was buttressed legislatively by passing the Mediation Act in 2023.
An expensive proposition
The Union finance ministry informed the Lok Sabha in July this year that nearly 60% of all arbitrations involving major PSUs NTPC Ltd and NHAI Ltd had been challenged and taken to higher authorities.
Additionally, the government also received unfavourable final awards weighing thousands of crores in multiple arbitration cases, making the dispute resolution mechanism an expensive affair for the state. For instance, in the Delhi Metro Rail Corporation (DMRC) case, the government was set to pay an award of ₹7,600 crore to a private body Delhi Airport Metro Express Pvt. Ltd.
Also read | Law ministry seeks arbitration data of last 24 years from all ministries
In another matter—Hindustan Construction Co. vs Union of India—in 2019, the top court noted that PSUs had paid over ₹3,000 crore in arbitration dues from 2008 to 2019.
Legal experts opined that the country’s arbitration ecosystem was at risk as the government, the country’s biggest disputant, was reducing the use of arbitration for dispute resolution, especially at a time when India is aiming to be a global arbitration hub.
Expert views
The Arbitration Act amendment should have provisions regarding the costs of resolving disputes, said former law secretary T.K. Viswanathan. Viswanathan said that party autonomy was a fundamental fixture of out-of-court dispute resolution, and that parties could only make an informed choice about arbitration if they knew the costs upfront.
“Party autonomy, which is the foundation of an arbitration agreement, mandates the informed consent of parties who must be told upfront the likely costs involved, as well as the arbitrators’ fees and the procedure that will be followed. If parties feel it is not affordable, they should have the option to opt out, or seek legal recourse, or mediate,” he said, adding that parties should also find out the time that an arbitrator can devote to the matter at the time of entering into an agreement.
The fourth schedule in the existing Arbitration Act dictates the arbitrators’ fees, based on the disputed value. For instance, if the value of dispute is up to ₹5 lakh, the arbitrators’ model fees are ₹45,000. This schedule, however, has been omitted entirely in the proposed amendment.
A robust dispute resolution mechanism where parties have faith in awards is critical to increase the ease of doing business in the country, as it was one of the criteria in the World Bank’s Doing Business Report. The report analysed the business regulations that firms had to follow in 190 economies but was discontinued in 2021.
While India’s rank in the Doing Business Report improved from 142nd in 2014 to 63rd in 2020, the scores for dispute resolution saw a marginal rise. For instance, India’s score for enforcing contracts—indicating the dispute resolution ecosystem—was 41.2 in 2019 and remained the same in 2020.
To be sure, in case of a private party vs private party arbitration, both parties mutually appoint arbitrators. If they want to choose a sole arbitrator, they must come to a consensus or ask the court to appoint one for them. If they want to choose an arbitral tribunal of, say, three persons, then each party nominates one arbitrator, and then the two arbitrators jointly nominate a third arbitrator.
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