THE DISPUTED RESOLUTION MECHANISM: INDIA’S PANICKED RETREAT FROM ARBITRATION

(Ananya Srivastava and Divyansh Bansal are Second Year Students at National Law University, Jodhpur.)

Excerpt

This blog examines the recent rollback of arbitration in India, from the Ministry of Finance’s 2024 guidelines to Delhi PWD’s 2025 blanket ban. It critiques the ad-hoc withdrawal, highlights the risks of eroding investor confidence and proposes evidence-based reforms to safeguard and promote India as an arbitration hub, which is grounded in national and international practices.

Keywords: Arbitration, PWD, Draft Arbitration Bill, Dispute Resolution.

Introduction

In India, arbitration is promised in reform speeches, praised in court judgments, but quietly erased in government contracts. It has taken decades for successive governments and courts to design and amend rules, empower institutions and proclaim India’s ambition to become a global arbitration hub. Yet, in the span of a year, a sequence of developments has exposed how quickly such proclamations can fall apart when fiscal anxieties, bureaucratic incompetence and contractual disputes collide.

Unfolding the Timeline

The first signal emerged in June 2024, when the Ministry of Finance [“MoF”] issued guidelines [“Guidelines”] for arbitration and mediation in domestic public procurement contracts. The intent appeared to be curbing, not limiting, arbitration. Arbitration was recommended only for disputes below Rs. 10 crore, with higher-value disputes routed to mediation or High-Level Committees. Arbitration was portrayed as costly and ineffective, but not expressly rejected.

Some PSUs rushed to implement these guidelines, including the first ones being Oil India and ONGC, while others still remain sceptical. Even so, the intention is to continue arbitration with caveats, and not abandon it altogether.

Weeks later, the Arbitration Bar of India wrote to the Union Finance Minister, warning that the guidelines undermined the government’s pro-arbitration policy, would deter investment, and shift disputes back to an overburdened judiciary.

In July 2024, these contentions were raised in Parliament, questioning the rationale behind the guidelines and the amount of money being spent on arbitration vis-à-vis litigation disputes by the government. The MoF responded that the guidelines stemmed from an “unsatisfactory experience” in high value arbitration involving the government. However, they maintained that the guidelines still remained “flexible” and “continued to permit arbitration for high value disputes,” while encouraging Government entities to adopt mediation. Crucially, the MoF conceded that no comprehensive data comparing arbitration and litigation costs was maintained. The only thing they offered to support their claim was a sample study of NHAI and NTPC wherein more than 60% of arbitral awards were challenged in Courts, thus prompting the Government to spend on both arbitration and litigation. However, no data supporting this study was disclosed. This suggests that the very basis of these guidelines seems to be based on an incomplete premise. This weak evidentiary basis appeared to harden political mood, prompting state-level responses.

In November 2024, Karnataka withdrew its 2014 circular mandating arbitration government contracts. The state’s Minister for Law and Parliamentary Affairs, Mr. H.K. Patil, mentioned that the clause was “heaping financial strain on the state” and to substantiate this claim - he mentioned an example where the state had to cough up Rs. 200 crore to satisfy a contractor’s claim. However, he noted that the government will arbitrate wherever necessary.

This contrasts sharply with the Delhi PWD’s April 2025 notification [“PWD notification”], which abandons the cautious approach and imposes a blanket ban by deleting arbitration clause entirely from “future contracts” and confining disputes to Delhi courts via Clause 25 of the amended General Conditions of Contracts. This move departs even from the MoF’s cautious approach and reverses a decade-long pro-arbitration trajectory, without any disclosed evidentiary basis.

The procedural flaw is evident: The Delhi Government sought decades of arbitration-loss data only in July 2025, months after the ban was imposed – suggesting arbitration was banned before assessing whether such a measure was warranted.

This context sets the stage for critiquing the Guidelines and exposing the procedural and strategic failures underlying PWD’s ban, while proposing evidence-led alternatives.

The Justifications on Paper vs. The Reality on the Ground

The PWD notification advances numerous reasons for moving away from arbitration, relying on the Guidelines’ assertion government contractual disputes should prefer mediation or litigation over the time-consuming arbitration route. This claim, however, overlooks practical realities and rests on two linked fallacies.

Firstly, it assumes that removing arbitration will deliver cheaper, faster outcomes, while evidence and logic clearly point otherwise.

According to recent data, arbitration remains the most favoured mechanism of dispute resolution, even in construction disputes involving State PWDs. A sudden shift away from arbitration and proposed diversion to litigation or mediation wouldn’t be beneficial as construction litigation in India averages over seven years, against the backdrop of more than 1.1 crore pending civil cases nationwide, with Delhi alone accounting for over two lakh cases. More than half of them have been pending for over a year and about 5,000 cases are registered on a daily basis. Such diversion would further burden courts and cause project delays, cost escalations, interest accumulation and opportunity losses.

Mediation presents similar concerns. A high proportion of mediation cases are non-starters – over 81% in Karnataka, with similar trends in Delhi and Mumbai. The Guidelines mention the comparatively informal nature of arbitration as one of the keys reasons for the shift away from it. But given the informal and non-binding nature of mediation, it is unlikely to reduce disputes reaching courts, defeating the Guidelines’ objective.

Secondly, the Guidelines misidentify arbitration as the cause of delay and expense, rather than a symptom of deeper institutional problems.

The guidelines inadvertently reveal that it is not arbitration that fails the system, but the system that fails arbitration. Paragraph 4(iii) highlights frequent officer transfers and gaps in institutional memory, while Paragraph 5(v) suggests that arbitration clauses can be used as an excuse by government officials to “let a matter go” rather than settle. But the logic dictates that deleting arbitration clauses does not remove those perverse incentives. Even if a matter goes to litigation instead, the officials will get to escape their responsibility, and subsequent possibility of scrutiny, by allowing a matter to languish in court, till they eventually get transferred or rotated to another department, and it becomes someone else’s problem to deal with the case, who eventually may choose to do the same.

The trend is also visible among the Panel Counsels appointed for the government, whose tenures may expire before the disposal of a case, necessitating another Counsel being appointed and brought up to speed. This is an inefficient process altogether, where everyone involved in the process has no incentive to be interested in its development, as their job security, compensation or benefits are simply not tied to the outcome of such cases.

These fallacies indicate that the presumptuous assertion regarding arbitration being the worse-off alternative is flawed, and if authorities are deprived of arbitration as a recourse, it could lead to huge losses in terms of time, money, investment and reputation.

This becomes pertinent to note that Delhi, being the capital of India, is the centre for a number of large and financially extensive infrastructure projects. So, disputes of this nature, if deprived of arbitration, would invariably affect Delhi’s potential as an investment hub.

The Bigger Picture: Moving Against the Current

The stark contrast between the PWD’s ban and India’s efforts at promoting national arbitration is worrisome. This is especially evident in India’s decade-long policy to develop an institutional arbitration framework and reduce judicial interference. The amendments to the Arbitration & Conciliation Act, the push for institutional arbitration centres such as GIFT-IFSC, the JPC reports of Justice BN Srikrishna and Dr. T.K. Vishwananthan, international conferences and the Judiciary’s endorsements of party autonomy indicate a shift towards arbitration for dispute redressal.

India’s arbitration reforms are aimed at attracting cross-border capital, ensuring contractual certainty and improving India’s stand in the arbitration landscape, rather than being a symbolic exercise     .

Globally, arbitration is a standard feature of complex commercial and construction contracts. The International Federation of Consulting Engineers places arbitration at the final stage in the order of dispute resolution. Furthermore, cross-border enforcement of awards, which forms an essential feature of international investments and ventures, is facilitated by treaties like the New York Convention, where India is a signatory.

Therefore, a state-level policy erasing arbitration altogether eventually creates an inconsistent legal landscape where fragmented and contradictory sub-national policies erode the faith and confidence of investors and institutions alike.

Hence, the action by the PWD secretariat is misthought and misaligned with national and international policies and norms, leading to both quantifiable and unquantifiable loss of business for the nation.

Where this Road Leads

The immediate effect of the PWD notification will be further overburdening of courts, with adverse implications for India’s Ease of Doing Business [“EoDB”] rankings. Although India achieved its highest-ever overall rank of 63/190, it performs poorly in ‘Enforcing Contracts’ – an index measuring the efficiency of court based commercial dispute resolution, ranking 163/190. Abandoning arbitration would further inconvenience the system, directly contradicting the PM’s vision to placing India among the top 50 EoDB ranks. The PM and his ministers have consistently emphasised the importance of making India an arbitration hub, with the latest instance quite ironically being in June 2025 - a year after the Guidelines were released.

Lawasia, reporting on the issue, quoted several market practitioners who warned that a visible policy pivot away from arbitration is being read, beyond India’s borders, as a deterioration in contractual certainty, making projects harder to finance and less bankable for foreign sponsors. This will lead to an overall reputation loss for the country as an investment option, which is already facing declining FDI growth.

This blanket ban creates a “chilling effect” within public procurement. Officers and in-house counsel, wary of ex post scrutiny, are incentivised to avoid arbitration even where it is more efficient, leading to defensive procurement and the routine “parking” of disputes in courts until officials rotate out. Far from safeguarding public money, the ban removes discretion in cases where arbitration would protect the State’s interests and thereby discourages the risk-calibrated approach the guidelines claimed to encourage.

This approach also raises a public law concern that while the State is entitled to choose its preferred mode of dispute resolution, such an undifferentiated exclusion of arbitration across contracts of varying value, complexity, and risk profiles operates without any disclosed empirical basis or rational classification may attract scrutiny under Article 14 on grounds of manifest arbitrariness, particularly where it disrupts settled contractual expectations.

Taken together, the analysis establishes three core findings: (i) the retreat from arbitration is premised on incomplete and undisclosed evidence rather than demonstrable systemic failure, (ii) delays and fiscal exposure attributed to arbitration stem from weak institutional incentives and routine post-award challenges, not arbitration itself, (iii) a blanket exclusion of arbitration neither reduces cost nor expedites dispute resolution, but merely displaces disputes into slower and more congested fora.

A Different Way Forward

India’s strategy should not be to retreat from arbitration, but to reform how the State approaches it.

The Guidelines offer a viable middle path - retain arbitration, but with calibrated qualifications, unlike Delhi PWD’s blanket ban. The middle path, as adopted by ONGC and Oil India, permits arbitration only for disputes below ₹10 crore.

What the government needs is not fewer arbitral clauses, or the complete lack of them, but their effective utilisation. Most losses arise not from arbitration itself, but from poor incentives for government officials responsible for the case, weak representation by the panel counsel, and institutional memory gaps affecting them both.

Proposed measures: (i) dedicated arbitration defence cells within departments that keep track of institution and progress of each such      cases; (ii) performance-linked accountability for panel counsels and continuity requirements so advocacy does not lapse      when tenures end;  (iii) retention of arbitral clauses for prospective contracts, for disputes below a defined monetary threshold, with mandatory and time-bound mediation as pre-arbitral step; and (iv) as for existing contracts, clarification may be issued by the PWD to permit the parties to opt into arbitration through supplemental agreements, particularly where disputes involve technical, valuation, or delay-related claims.

Legislative reforms are also underway, which will complement these proposed institutional measures by introducing accountability for not meeting deadlines.

At the heart of these reforms, lies the Draft Arbitration & Conciliation (Amendment) Bill, 2024, which, if passed, would mark the most decisive overhaul of India’s arbitration regime in a decade. The Bill introduces strict statutory timelines: 30 days for deciding jurisdictional objections, 60 days for Section 11 applications, and another 60 for filing appeals. It creates an Appellate Arbitration Tribunal, ensuring that challenges to arbitral awards don’t clog regular courts.

Further, schemes like Vivad se Vishwas II make the execution of and appeal against arbitral awards time efficient. These changes directly respond to the inefficiencies cited by states like Karnataka as justifications for discarding arbitration and, further timely dispute resolution.

The alternative to institutional reform is predictable. It means defensive procurement, institutional amnesia, and rising investor distrust, eventually leading to a decline in India’s Ease of Doing Business standing  in the world.

A government cannot afford to disown the very dispute mechanisms it once helped build.