Govt’s arbitration litigation a huge burden on India. Raise the bar for appeal

It is not clear whether the arbitration route has reduced the propensity of the government, or the private entity for that matter to litigate once it loses its case.

File photo of minister Arjun Ram Meghwal | Commons

The Ministry of Law and Justice has requested for comments on the Arbitration and Conciliation Act 1996. These comments will act as inputs for the committee set up to examine the working of arbitration law in India and recommend reforms to the Act. An important element of the arbitration framework is how it intersects with litigation by the government. The committee should consider ways in which the text of the Act can be amended to dissuade the government from litigating when it loses in arbitration.

The Arbitration framework

When there is a dispute between two parties, they can either go to court, or choose to go to arbitration. The choice is often embedded in the contract itself. The parties appoint a neutral arbitrator who hears both and passes an award that is binding. The idea behind opting for arbitration is faster resolution. This also ends up reducing the burden on courts.

When the government of India signs a contract with a private contractor to provide a service (for example, constructing a road), it also agrees to subject itself to arbitration. Under the Indian Act, either party can appeal the arbitration award only on certain specific grounds — these are outlined in Section 34 of the Act. This was done to ensure that the arbitration award is final, and it doesn’t give birth to a scenario of appeals and counterappeals going up to high court and then Supreme Court.

However, the Act allows one to appeal the decision under Section 34, under Section 37 of the Act to try and avoid the enforcement of the award.

Government litigation and arbitration

Does the government use arbitration to resolve contractual disputes? A study that looked at cases in the Delhi High Court in the period between 1 January 2007 and 30 September 2020, found that almost 70 per cent of the cases filed under Section 34 of the Arbitration Act were original miscellaneous petitions (OMPs) — challenges to the enforcement of arbitration awards.

According to the authors, these petitions are generally filed for three reasons: seeking directions from the court for the appointment of an arbitrator where either party to the dispute fails to appoint one; seeking interim relief during arbitration proceedings and seeking extension of timelines for conducting the arbitration. Arbitration clearly is important for dealing with issues related to contract performance between business and government.

It is, however, not clear whether the arbitration route has reduced the propensity of the government (or the private entity for that matter) to litigate once it loses its case. The same study also found that a large number of cases filed by the government against businesses fall in one category: challenges to arbitration awards passed in disputes arising in procurement contracts.

Another study that focused on only NHAI orders in the Delhi High Court in the 2007-2020 period, found that arbitration related matters are nearly 70 per cent of the sample of case orders they studied. Our own analysis of NHAI orders in the Delhi High Court in 2018 and 2019 suggests that most appeals were not limited to procedural or public policy grounds, but sought a review on merits, erroneous application of the law, or re-appreciation of evidence. And while the court is, in general, unwilling to interfere with the arbitral award, these petitions do take up adjudication resources of the court.

Reform suggestions

Private parties also often litigate, but the direct costs are borne by them and not the tax-payer. It is, therefore, important to focus on the litigation by the government. The extent to which changes in the Arbitration Law can reduce government litigation in court are limited.

The larger policy change has to come from the government itself. However, one could use the opportunity of raising the bar of appealing when one loses in arbitration. For example, the law requires the court to hear every petition under Section 34 or Section 37 (1) (c) of the Act and decide the same on merits. The committee could consider a prima facie satisfaction test where the court may dismiss the petition unless the petitioner proves a prima facie case on merit.

The committee may also consider the imposition of a mandatory pre-deposit of fees before the petitioner can institute proceedings. Another possibility is to at least omit Section 37(1)(c) so that the award may be enforced without further appeals.  This will reduce the cost of dispute resolution since the case would have already gone through two forums – arbitration and a Section 34 appeal. As suggested earlier, these will not solve the problem in its entirety, but will at least make a dent—reducing the number of appeals after arbitration.

When making these changes, it is important to remember that the law applies to entities other than government. Arbitration is being used extensively today, including for things such as loans between banks and individual borrowers. In trying to find a solution for government’s litigation burden, we should not make it more difficult for private parties to appeal. As well, if appeal is to be made more difficult, the quality of the arbitration process has to be more robust for it to be acceptable to both parties. To the extent that the text of the law can be one more tool to reduce litigation by the government, it should be deployed. This can lead to significant gains to the economy.

Renuka Sane is research director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. Views are personal. She tweets @resanering

(Edited by Anurag Chaubey)