Alternate Dispute Redressal System (ADR): Arbitration Guidelines

Syllabus: Polity: Judiciary

•Source: Live Law, IE*

Context: The Department of Expenditure under the Ministry of Finance released guidelines for using arbitration and mediation in domestic public procurement contracts.

More about the Guidelines:

Aim: Guidelines aim to streamline the dispute resolution process for domestic procurement by government entities and address unique challenges in arbitration.

Key Points:

• Avoid the automatic inclusion of arbitration in large contracts.

• Restrict arbitration to disputes below Rs 10 crores.

• Prefer institutional arbitration when used.

• Adopt mediation under the Mediation Act, 2023, for high-value matters.

What is Arbitration?

Arbitration is a quasi-judicial method of resolving disputes outside the courts, where the parties to a conflict agree to submit their issues to an impartial third party (the arbitrator) who makes a decision that is binding. It is often chosen for its faster resolution process, confidentiality, and the ability to select an expert in the relevant field.

• It is a type of Alternate Dispute Resolution (ADR), governed by the Arbitration and Conciliation Act, 1996 (amended in 2021).

What is ADR?

Alternate dispute resolution (ADR) refers to the means by which disputes are settled outside the traditional court system. In India, modes of ADR include arbitration, negotiation, mediation, and Lok Adalats.

What is Mediation?

It is an alternative dispute resolution (ADR) method in which a neutral third party, known as a mediator, helps parties in a dispute reach a mutually agreeable resolution. Mediation is considered a more cost-effective, efficient, and less adversarial method compared to traditional court litigation.

Why has the government shifted its policy against Arbitration?

• Government’s Distrust in Arbitrators: The government perceives that arbitrators often lack integrity and collude with private parties, resulting in unfavourable awards that are hard to challenge.

• The disadvantage of Transferable jobs: Government officials’ transferable jobs may limit their deep knowledge, putting them at a disadvantage against private parties in arbitration.

• Issue of Informal nature: The informal, binding nature of arbitration can lead to errors and misapplication of the law. Many arbitration decisions are challenged in high courts, failing to ease the courts’ burden.

• Decision-Making Ability of Officials: Government officials, facing multiple layers of accountability and scrutiny, are unlikely to agree to any decision which might be unpopular with the government.

• Vivad se Vishwas – II Scheme: The 2023 scheme shows the government’s preference for settlements (rather than arbitration), often proposing significant discounts on arbitral awards.

Potential Implications of the Guidelines:

• Deter Foreign Investors: Restrictions on arbitration, especially for high-value disputes, may deter foreign investment.

• Ease of Doing Business: Complicates business operations; India ranked low in ‘Enforcing Contracts’ (163rd in 2019, World Bank).

• Arbitration Hub Vision: Challenges India’s ambition to be an international arbitration hub.

• Diminished Investor Confidence: Unpredictable legal frameworks may erode investor confidence.

• Infrastructure Development: Shift to court adjudication could delay projects and increase costs.

• Contractual Uncertainty: Removing arbitration clauses introduces uncertainty in business contracts.

• Potential for Corruption: Settlement negotiations may increase corruption due to a lack of transparency.

• Stifling Innovation: A slow dispute resolution system can hinder startups and innovation.

• Overburdening Courts: The overburdened Indian courts are ill-equipped for complex commercial disputes, leading to prolonged litigation despite efforts to expedite processes.

Other challenges with India’s ADR mechanism are:

Challenges | Description

Lack of Government Support | Uneven growth and limited support for ADR in different regions.

Lack of funding for ADR centres, especially in smaller cities.

Need for greater government backing to promote ADR mechanisms.

Insufficient Infrastructure | An inadequate number of ADR centres even after 27 years of the Arbitration and Conciliation Act, 1996.

Lack of funding hampers the establishment of ADR facilities in small towns.

Accessibility issues due to the concentration of ADR centres in cities.

Court Interference | Frequent interference of courts in arbitral and ADR proceedings.

Over-interference affects the autonomy of ADR mechanisms.

Hindrance to the flexibility and freedom of parties in ADR.

Execution Process | Parties often need to approach courts for execution after ADR awards.

Counteracts the goal of a streamlined dispute resolution process.

Lack of Skilled Professionals | Limited availability of skilled arbitrators, negotiators, and mediators.

Lack of specialized institutions for training in ADR skills.

Unskilled professionals can lead to unsuccessful ADR outcomes.

Limited Remedies and Appeal | Narrow scope for appeal after the ADR award, offering few remedies.

Parties may feel restricted in pursuing justice through ADR.

Lack of Awareness | Widespread lack of awareness about ADR mechanisms in society.

Potential for Coercion | In cases where one party is more influential, there’s a risk of coercion.

Inability to Reach Mutual Agreement | – Despite efforts by negotiators/mediators/arbitrators, parties may be unwilling to agree.

What should be done to improve Arbitration?

• Reconsideration of Policy: The government should rethink excluding arbitration clauses and instead enhance the arbitration framework.

• Strengthening Arbitration: Improving the arbitration process, including timely arbitrator appointments and award enforcement, can enhance its effectiveness.

Measures to Promote ADR:

• Strengthening Legal Frameworks: Ensure laws support ADR, making mediated agreements enforceable and integrating ADR into the judicial system.

• Enhancing Awareness and Education: Conduct awareness campaigns and educational programs about ADR benefits and processes.

• Improving Training and Certification: Develop comprehensive training for mediators/arbitrators, establish certification processes, and integrate ADR training into education curriculums.

• Role of Technology: Utilize AI, big data, Machine Learning, and blockchain in legal processes, especially for blockchain-driven arbitration processes for smart contracts.

• Government’s Shift to Mediation: Establish ADR centres, particularly mediation centres, within government departments to resolve disputes. For example, the Maharashtra Mediation and Conciliation Centre in India resolves disputes involving government departments.

Additional Points:

Key features of the Mediation Act, 2023

Key Feature | Description

Pre-litigation Mediation | Parties must attempt mediation before approaching the court/tribunal; courts can refer parties to mediation anytime.

Disputes not Fit for Mediation | Claims against minors, criminal prosecutions, and rights affecting third parties; list amendable by central government.

Applicability | The Act applies to mediations in India: involving only domestic parties, or involving at least one foreign party in a commercial dispute, or if specified in the mediation agreement.

Mediation Process | Confidential proceedings must be completed in 180 days (extendable by another 180 days); withdrawal is allowed after two sessions.

Mediators | Appointed by parties or mediation service provider; mediators must disclose conflicts of interest.

Mediation Council of India | Will be established by the central government; and includes a chairperson, two full-time members, three ex-officio members, and one part-time member.

Functions of the Council | Registration of mediators, recognizing mediation service providers and institutes.

Mediated Settlement Agreement | Final, binding, and enforceable like court judgments; can be challenged on grounds of fraud, corruption, impersonation, or unsuitability for mediation.

Community Mediation | For resolving disputes affecting local peace and harmony; It will be conducted by a panel of three mediators.

The Mediation Act, 2023 is a progressive legislation for peaceful dispute resolution in India. The NITI Aayog (2021) has observed that the model of compulsory mediation up to a few sessions has been successful in countries such as Italy, Brazil, and Turkey. The new act will lead to more out-of-court settlements and reduce the pendency in courts.

Insta Links:

• Reforming arbitration law

• Bills & Acts – Arbitration Laws in India

Mains Links:

What are the major changes brought in the Arbitration and Conciliation Act, 1996 through the recent Ordinance promulgated by the President? How far will it improve India’s dispute resolution mechanism? Discuss. (UPSC 2015)

Prelims Link:

With reference to Lok Adalats, which of the following statements is correct? (UPSC 2010)

(a) Lok Adalats have the jurisdiction to settle the matters at the pre-litigation stage and not those matters pending before any court

(b) Lok Adalats can deal with matters which are civil and not criminal in nature

(d) None of the statements given above is correct

Ans: D