India's Big Policy Shift: Govt Seeks Mediation, Not Arbitration For Public Enterprises

In what can be classified as the biggest policy move of the decade on the resolution of commercial disputes in India, the government wants public sector companies, agencies and departments to adopt Mediation and shun Arbitration -- a hugely chaotic move considering that 99 per cent of cases of Mediation land up in courts since it is not binding upon parties. Apart from being disruptive, the policy also reeks of discrimination between the public sector and the private sector and could be perceived detrimental for foreign investors and all those seeking to work on the public-private partnership model.

The world has set its eyes on India when it comes to precedents with regard to settling commercial disputes. An ugly precedent was set recently by the Supreme Court (SC) when it overturned its own judgement in a commercial dispute between Delhi Rail Metro Corporation (DMRC) and Delhi Airport Metro Express (DAMEPL), in a fifth layer of appeal through a Curative Petition - a concept of appeal unheard around the world in commercial matters. In such a scenario when the government wants Mediation to replace Arbitration for settling commercial disputes by public enterprises, it could further maligned India's image in the business community.

Although India became a signatory to the Singapore Convention on Mediation, on August 7, 2019, it is yet to be ratified. Therefore, the Mediation Act does not adopt the Singapore Convention on Mediation, akin to the adoption of the ‘United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards,' under the Arbitration and Conciliation Act, of 1996. The Singapore Convention contemplates and provides a framework for cross-border enforcement of settlement agreements resulting from international mediation.  Also, the various sections of India's Mediation Act 2023 are yet to be notified by the government.

Despite the above-mentioned shortcomings, the Ministry of Finance on June 3, issued guidelines for the public enterprises asking them to adopt Mediation. The guidelines say, "Arbitration as a method of dispute resolution should not be routinely or automatically included in procurement contracts/ tenders, especially in large contracts. Government departments/ entities/ agencies are encouraged to adopt Mediation under the Mediation Act, 2023 and/ or negotiate amicable settlements for resolution of disputes."

A Straw That Can Break India's Creaking Judicial Infrastructure

This is a marked shift in the policy of the current government, which for the past 10 years made persistent efforts to strengthen the framework for Arbitration in India and even revised the laws for it. But the sudden change of heart now is likely to explode India's creaking judicial infrastructure, which is already reeling under a massive overload. The policy may also render most retired judges of the High Courts and Supreme Court jobless in a big way since they presided over all the arbitration proceedings. Further, a shutdown of Arbitration centres started by the current government in Hyderabad, Mumbai, Delhi and other places cannot be ruled out as most public sector companies opt for Mediation.

FICCI, CII and ASSOCHAM, India's three large trade and industry bodies, have maintained a stoic silence on the new government policy despite knowing that it will vitiate the public-private partnership model.

Mediation And Legal Options

Once mediation fails, civil court appeals are the only option left for the parties in dispute. For the matter to reach finality in the Apex court, it will have to pass through 4-6 layers of appeals in various other courts. There is no guarantee that the SC judgement will be final as there will always be heightened fears of the losing party bringing a Curative Petition as seen in the DMRC matter.

Originally, the DMRC had lost the Rs 8000 crore case that was presided over by a division bench of SC. But after the SC judges who had issued their orders retired, DMRC pressed the Apex court to hear its Curative Petition. Nearly 18 months after rejecting a review petition in the DMRC matter, a wider bench of the SC overturned its own decision in favour of the party that had lost the review petition appeal. The DMRC case took more than a decade to reach the level of review petition but in a sheer blow to the Doctrine of Finality, the SC in a commercial matter entertained a Curative Petition, the most narrow lane of legal jurisprudence reserved only for the rarest of rare cases.

In such a scenario, the Finance Ministry has only muddied the waters further by asking public enterprises to adopt Mediation, which is not legally binding on the parties. Unlike Arbitration, Mediation has a wider scope for judicial intervention.

Instead of cutting the bureaucratic red tape, the government has only added another layer to it. The new guidelines on Mediation say that government departments, entities and agencies constitute a High-Level Committee (HLC) for dispute resolution that includes a retired judge, a retired high-ranking officer and/ or a technical expert.

The guidelines also say that the composition of HLC is purely indicative and not prescriptive. In cases where such a body is constituted, the government department entity/ agency may either negotiate directly with the other party and place a tentative proposed solution before the HLC. The other option is to conduct Mediation through a mediator and then place the tentative mediated agreement before the HLC. Also, the HLC itself can be a mediator - bureaucratic red tape galore.

Gone with the wind is Prime Minister Narendra Modi's dream of making India an international hub for Arbitration on commercial disputes - all arbitration matters will simply move to Singapore and the UK. A classic case of cancerous policy making.