Public Procurement Contracts in India: A Case for a Nuanced Approach towards Arbitrability

Rudra Singh Krishna and Dhruv Maheshwari are fourth-year B.A. LL.B. (Hons.) students at WB NUJS, Kolkata.

Key Words: Public Procurement, non-arbitrability, legality of executive order

Introduction

The Government, through a notification passed by the finance ministry in 2024, introduced far reaching changes in the Indian Arbitration landscape relating to public procurement. The notification titled "Guidelines for Arbitration & Mediation in Contracts of Domestic      Public Procurement," stated that arbitration should be limited to disputes of a value of less than 10 crore. The reasons for this monumental shift in policy was ostensibly based on the expensive nature of arbitration, questionable quality of arbitrators and the fact that awards are invariably challenged in courts, hence making arbitration a very expensive and time-consuming additional step in the process.

While international practice      regarding non-     arbitrability of public procurement disputes exists, the same has been legislatively/judicially narrowed by their respective countries. In India's case, owing to there being no definition of public procurement, a wide variety of disputes have been made non-     arbitrable by this order.

This piece aims to analyze this order through the tests of arbitrability laid down by the Supreme Court in the Vidya Drolia case and carve out a category of public procurement disputes which are arbitrable. By understanding the basis of arbitrability  it is argued that a rationale for differentiation between arbitrable and non-arbitrable aspects of public procurement may be found. The piece also questions the procedural validity of making such a wide number of disputes non-     arbitrable through an executive order and not through an amendment in the Act.

Executive orders cannot violate the statute

The present executive order constitutes an unprecedented development in the Indian Arbitration landscape. For the first time, such far reaching changes have been introduced through an executive order instead of the legislative/judicial way. The New York Convention and the model law are silent on the aspect of arbitrability which many commentators have interpreted to afford leeway to the national laws to come up with their own standards. Many jurisdictions have done the same and many others have left it to be decided by the Courts on a case-by-case basis following some judicially developed principles. India comes in the latter category where a catena of cases from Booz Allen to Vidya Drolia and beyond formulate the jurisprudence on the subject.

The general rule regarding executive orders is that      they must be subject to the statute and they cannot alter the rights given under it.  Section 8 of the Indian Arbitration & Conciliation Act mandates the Court to refer the parties to arbitration "unless it finds that prima facie no valid arbitration agreement exists". This limits the power of the Court to refuse reference on the sole ground of invalidity of arbitration agreement and not to an executive direction limiting arbitrability based on value of the dispute. Thus, if the circular is interpreted to be legally binding, a ground of non-arbitrability is introduced in the legislation which was nonexistent earlier.

Furthermore, one of the tests for non-arbitrability as laid down in the Vidya Drolia case is that there is an implicit non arbitrability in case of special statutes. This assumes that it is the legislature which formulates the statutes and their special dispute resolution mechanism ousting the jurisdiction of the arbitrator. Hence, the executive does not have the prerogative on this subject.

International Practice also favors a legislative/judicial approach towards non-arbitrability. Jurisdictions like the U.K., Singapore and U.S.A have legislatively laid down the classes of disputes which are non-arbitrable. In this instance, Russia proves to be an instructive case since, prior to 2016, there was a blanket ban on all disputes relating to public procurement. However, in 2016, the government passed a law making a certain class of disputes (those coming under Law 223 FZ) arbitrable.    

Public Procurement Disputes should not be made blanketly non-arbitrable

The circular released by the Finance Ministry makes all disputes above the value of 10 crore (dispute value not the contract value) non-arbitrable. This goes against existing practise of non-arbitrability based on subject matter of the dispute. This section analyzes the rationale behind the Court declaring a dispute non-arbitrable and sees whether the same applies blanketly to cover all types of Public Procurement disputes. A prerequisite for the same is  that  clarity be shed as to which types of disputes  are covered under public procurement which is discussed below.

Definition of Public Procurement Disputes

As mentioned in the introduction, India has no central legislation covering public procurement and a patchwork of guidelines, rules and state statutes cover the same. The term procurement has been described in the Procurement Manuals in a broad manner 

"Acquisition by way of purchase, lease, license or otherwise, either using public funds or any other source of funds (e.g. grant, loans, gifts, private investment etc.) of goods, works or services or any combination thereof, including award of Public Private Partnership projects"

Furthermore, the terms services and works has also been described in a broad manner

“Any activity, sufficient in itself to fulfil an economic or technical function, involving construction"

 "The term “Works” includes (i) civil works for the purposes of roads, railway, airports, shipping-ports, bridges, buildings, irrigation systems, water supply, sewerage facilities, dams, tunnels and earthworks; and so on"

This entails that the term procurement is wide and the guidelines may bring under the purview of non-arbitrability contracts entered by the government like power purchase agreements, concession agreements for development of highways, ports, railways, turnkey contracts and various other important infrastructural contracts. Furthermore, issues arising from tenders may also be rendered non-arbitrable.

The following subsection analyzes the jurisprudence of the court to find a theoretical basis of non-arbitrability and see if all disputes arising from public procurement are covered under it.

Non-arbitrability

The Supreme Court in the Booz Allen case introduced an important distinction between arbitrable and non-arbitrable disputes. Here, the Court held that disputes where the affected person has a right in personam are arbitrable whereas disputes involving a right in rem are non-arbitrable. This distinction was carved out owing to the erga omnes effect of the decision on rights in rem and inability the tribunal as a  private method of dispute resolution to pass such a decision.

Vidya Drolia went a step further by stating that subordinate rights in personam arising from rights in rem are arbitrable. In other words, it is to be seen if the dispute deals with the contractual aspects or it has implication in the public domain.

The second aspect of non-arbitrability introduced in the Booz Allen case dealt with special exceptions decided specifically by the legislators to be non-arbitrable. As discussed above, this emphasis on the right of Parliament to make laws declaring non-arbitrability itself questions the basis of the application of the executive order. Despite that, this aspect envisaged that some categories of disputes were non-arbitrable simply because arbitration was not suited for their resolution. Vidya Drolia provided further clarity regarding this where the Court held that the mere presence of a special statute governing the subject is not enough and it must be clearly shown as to why the issue is non arbitrable.

Even where the right is in personam, the same will not be arbitrable when there exists an implicit prohibition in the statute which confers special rights to be adjudicated by courts or public fora. This was evident when the Supreme Court in Vidya Drolia overturned the case of HDFC Bank v. Satpal Singh Bakshi while noting that arbitrating disputes under the Debt Recovery Act despite the presence of a section prohibiting waiver of jurisdiction of the debt recovery tribunal, is illegal.

The third class of disputes held to be non-arbitrable as per the Vidya Drolia case are the disputes dealing with the Sovereign Functions of the state. Here it is important to bring out two discrepancies which may arise because of blanketly including public procurement disputes within sovereign functions.

1) The sovereign aspect of public procurement is limited to the procedure for public procurement

The various rules and laws governing public procurement constitute lex specialis when it comes to public procurement procedures. However, the same cannot be conflated with commercial disputes arising out of public procurement contracts once they are awarded. The Supreme Court of India has repeatedly held that it is the prerogative of the Government to ensure that a fair and impartial process is followed for public procurement and the guidelines have been laid down in furtherance of the same.

The decision passed by the Supreme Court in MTNL v. Canara Bank provides clarity in this regard. The case was regarding arbitrability of disputes between CPSE's  interests      or between CPSE's and government department/s. Here, it had been argued that the creation of the Administrative Mechanism for Resolution of Disputes (AMCRD) for the resolution of the aforementioned classes of disputes made them non-arbitrable. Holding against the same, the Court observed that the AMCRD provided a settlement mechanism, which though preferable did not completely exclude arbitration.      This holding promotes the principle of party autonomy to resolve disputes through arbitration. By implication,  it may be argued that it also bars the present circular which does not even propose a separate dispute settlement mechanism.

 2) In arguendo, even if some disputes arising out of  post contract procedures are      considered sovereign, the same cannot extend to all types of public procurement disputes. 

Public Procurement covers a vast array of activities, ranging from routine supply contracts of goods and services to highly complex infrastructure projects and strategic contracts. A construction contract involving standard commercial practices cannot be treated at the same footing as one relating to core national security issues hence a rigid approach should not be followed. The sovereign nature of a function depends on the nature of the act itself rather than the purpose for which it was performed. The Supreme Court has recognized this fundamental principle in several cases. This entails that actions which are inherently commercial in nature, i.e. which may be undertaken by a private individual (eg. building a road) despite being for a public purpose falls      outside the ambit of sovereign functions. Whereas actions which are inherently sovereign in nature, i.e. levying taxes fall within this ambit.

In this regard, the decision of the Delhi High Court in Union of India v. Reliance Industries Limited & Ors., proves instructive. The case dealt with a Production sharing agreement (PSC) for natural gas exploration. While setting aside the arbitral award, the Court held that private parties carrying state functions through commercial contracts cannot avoid judicial scrutiny when the contract involves resources of national importance. This decision emanated from an interpretation of the public trust doctrine under Article 297 of the constitution stating that the Government of India holds the natural resources as a trustee for the people. Thus, even commercial transactions involving subject matter of national importance may be non-arbitrable.

Conclusion

A blanket ban on arbitrability of public procurement is unwarranted. Regarding transparency concerns, the model ICC clause on arbitration with government entities may be looked at which substantially reduces/waives confidentiality requirements. The Kelkar Committee recommended setting up a special tribunal for dealing with infrastructure cases of high commercial value which may have an impact on the national interest. The same was advocated by the Supreme Court when it recognizes the inherent unsuitability for arbitration for different kinds of disputes. However, a blanket ban on arbitration serves no purpose except reducing investor confidence and increasing challenges towards making India a global hub for arbitration. Hence, a legislative amendment clearly delineating the classes of disputes which relate to sovereign functions of the state/impact public policy or national interest will clear the air regarding non-arbitrability of public procurement disputes.