A thorough examination of the memorandum reveals that its concerns about the arbitral process may stem from deficiencies in ad hoc arbitration rather than arbitration itself.
Over the past decade, India has seen a growing shift towards arbitration as the preferred method for resolving commercial disputes. Successive amendments to the Indian Arbitration Act in 2015, 2018, 2019, and 2021 have aimed to align domestic legislation with global best practices.
Former Chief Justice DY Chandrachud, in an address to the English Supreme Court, emphasized the need for a “robust institutionalisation of arbitration” to “further the culture of arbitration” in India and the Global South. In line with this vision, the Indian Government’s draft Arbitration and Conciliation (Amendment) Bill, 2024, seeks to encourage institutional arbitration and minimize judicial interference in arbitral proceedings.
Amidst this pro-arbitration momentum, the Ministry of Finance’s office memorandum dated June 3, 2024, outlining guidelines for arbitration in domestic public procurement contracts, stands out as a notable deviation. The memorandum re-evaluates the role of arbitration in government contracts, cautioning that arbitration “should not be routinely or automatically included in procurement contracts/tenders, especially in large contracts.”
This stance has drawn criticism, particularly from the Arbitration Bar of India and the Indian Arbitration Forum, which jointly addressed a letter to the Union Minister of Finance, expressing concerns that the memorandum contradicts the government’s stated objective of promoting arbitration as an alternative dispute resolution mechanism.
While such concerns are not entirely unwarranted, a closer analysis of the memorandum suggests that its apprehensions about the arbitral process may stem from flaws in ad hoc arbitration rather than arbitration as a whole.
The memorandum highlights three key issues in arbitration—due process concerns, prolonged timelines and costs, and the lack of finality in arbitral proceedings. Notably, institutional arbitration offers solutions to each of these challenges, as explored below.
Due Process Concerns
The memorandum raises concerns about the “reduced formality” in arbitration and the “perceptions of wrongdoing, including collusion,” noting that “arbitrators are not necessarily subject to the high standards of selection applied to the judiciary and judicial conduct.” However, these criticisms do not hold in the context of institutional arbitration.
Institutional arbitration ensures oversight through an independent secretariat or court of arbitration, which supervises the appointment of arbitrators, monitors their conduct, and provides mechanisms for challenging and replacing arbitrators when necessary. Institutions also mandate comprehensive disclosures regarding an arbitrator’s independence and impartiality, both before and throughout the proceedings. Additionally, in cases where parties cannot agree on the constitution of the tribunal, institutions are well-equipped to make impartial appointments, ensuring a fair and transparent process.
In essence, institutional arbitration not only ensures rigorous vetting of arbitral tribunals before their formation but also maintains safeguards to uphold arbitrator independence and impartiality throughout the proceedings.
Thus, while the memorandum’s concerns about informality and due process issues in arbitration are valid, they primarily highlight the shortcomings of ad hoc arbitration, which lacks a dedicated independent oversight body. By doing so, the memorandum inadvertently underscores the necessity of institutional arbitration to uphold the integrity of dispute resolution in government contracts.
Time and Cost Efficiencies
The memorandum also claims that the government’s “actual experience” as an arbitrating party has been unsatisfactory, citing concerns that arbitration “is not as quick as anticipated and is also very expensive.” While this may reflect the government’s particular experiences, the time and cost advantages of arbitration over litigation in India are widely recognized. In contrast, adding more complex commercial disputes to an already overburdened judiciary is not a commercially viable solution.
It is well established that the legal fees associated with prolonged dispute resolution far exceed other costs. The ICC Commission’s Report on Controlling Time and Costs in Arbitration reveals that, on average, 83% of arbitration costs are legal fees, 15% are arbitrator’s fees, and 2% are institutional charges. Since the costs for arbitrators and institutions are typically capped, while legal fees escalate from the notice stage through to award enforcement, it is clear that focusing on reducing institutional and arbitrator costs overlooks the greater expense: legal fees. The real savings come from adopting faster dispute resolution processes that do not require extended engagement of legal counsel.
Here, established institutions offer significant cost savings. By providing clear, pre-set rules and procedures, they ensure arbitration proceedings move forward efficiently. For example, under the ICC Rules, an arbitral tribunal must issue its final award within six months of establishing its terms of reference, with extensions only granted by the ICC Court of Arbitration. Cases with smaller disputes may even benefit from expedited procedures, offering even shorter timelines.
Institutions also promote time and cost efficiencies in other areas, such as setting deadlines for submitting draft awards. For instance, unless there are exceptional circumstances, a three-member ICC tribunal is expected to submit a draft award within three months of the last substantive step in the proceedings, with arbitrators’ fees reduced if this timeline is not met.
Such structured timelines and procedures are typically absent in ad hoc arbitration unless the parties agree to them—an agreement which often involves significant negotiation and, consequently, higher legal costs. Furthermore, without an administering institution, disputes over procedural matters may end up back in domestic courts, further escalating both time and costs.
Lack of Finality
Finality is a cornerstone of arbitration. An arbitral award is statutorily “final and binding on the parties and persons claiming under them respectively.” Yet, the memorandum questions why “the benefit of finality… has not been achieved,” suggesting that rather than reducing litigation, arbitration has become an additional layer, creating more litigation and delaying final resolution.
While a dissatisfied party is free to challenge the arbitral process in court, the Indian judiciary’s increasingly pro-enforcement, non-interventionist stance is positive for the finality of arbitral awards.
However, this judicial approach addresses only the supply side of the memorandum’s concerns. The larger issue is on the demand side—specifically, the tendency to challenge an “adverse award when judicial avenues have not been fully exhausted” simply because the outcome does not satisfy one of the parties. This reflects a deeper mistrust in arbitral outcomes, a problem partially mitigated by institutional mechanisms that ensure due process in arbitration, as discussed earlier.
Institutional arbitration plays a crucial role in ensuring finality. Institutions review or scrutinize awards for enforceability, ensuring that tribunals properly address the claims of both parties and provide adequate reasoning for their decisions. A well-reasoned, scrutinized decision is less likely to provoke challenges in post-arbitration court proceedings. For instance, in 2023, the ICC Court did not approve 42 draft awards in their first review (8% of the total drafts scrutinized), demonstrating how institutional scrutiny can minimize post-arbitral litigation. In ad hoc arbitration, each of these awards might have sparked additional court challenges—an example of the memorandum’s concerns about the lack of finality.
Ultimately, until India fully embraces institutional arbitration, its arbitration system will remain tethered to ad hoc procedures. The memorandum itself acknowledges the need for change, suggesting that “where arbitration is to be resorted to, institutional arbitration may be given preference.” Viewed in this light, many of the memorandum’s criticisms reflect the current state of the Indian arbitration market. In fact, the solutions to these concerns make a compelling case for expanding institutional arbitration to resolve commercial disputes in India.
