In an office memorandum dated June 3, the government outlined new guidelines for arbitration and mediation in contracts related to domestic public procurement. While the memorandum ostensibly promotes mediation, it explicitly signals a shift away from arbitration for government undertakings. Consequently, once the current pipeline of arbitration cases dries out, future contracts are likely to resort to litigation through the traditional court system, thereby significantly increasing the burden on an already stretched legal system.
Despite representations from industry bodies and the Arbitration Bar of India advising against this memorandum, it appears, at least for the time being, to be a fait accompli.
This decision will have significant negative repercussions for private litigants, both individuals and companies, for India’s ranking in the “Ease of Doing Business” index, for Foreign Direct Investment (FDI), and for the legal system as a whole. This decision will put additional pressure on the already overburdened courts, likely causing delays in final outcomes and increasing court interference. The appeals process will become more extensive, with the potential for evidence to be re-evaluated at the first appeal stage, prolonging the resolution of disputes. Moreover, given that the government will be one of the disputants, it is likely that litigation will frequently travel all the way to the Supreme Court.
The landmark 2015 amendments were aimed at establishing India as an international arbitration hub. The energy in the legal market, both domestic and international, was palpable. Until 2018, the market remained upbeat. With minimal judicial interference, India seemed well on its way. However, repeated calls for third-party funding legislation and opening the Indian market to foreign lawyers went unheeded. Legislatively, the baffling regression of reforms was evident with each subsequent amendment in 2018, 2019, and 2021, culminating in the present setback of the 2024 memorandum.
Curiously, at the heart of these amendments is the concern that matters are being resolved too quickly. The main objective of the 2015 amendments was to reduce the time taken in courts. It is baffling that the very reform that improved India’s “Ease of Doing Business” ranking would be reversed for being too successful!
Another incorrect perception being bandied about is that arbitrations are being lost due to the inferior quality or perceived corruption of arbitrators. The fact is, we are speaking in two voices on this issue. On one hand, we tout India as an arbitration hub, emphasising the high-quality talent available here. On the other hand, we criticise our own arbitrators, expecting the international community to somehow buy into our contradictory narrative and bring all their arbitrations to India despite confusing guidelines on their entry. If we don’t trust our own arbitrators, why would the international community?
The real issue, which no one is willing to address, is that one party often pays their lawyers poorly which ends up facing a highly qualified team of lawyers on the other side. Arbitrations are not lost because of corrupt arbitrators; they are lost due to bad facts and poor-quality legal representation. Even in cases of poor quality/corrupt arbitrators, the solution is to tackle the issue through accreditation and training, not by banning arbitration and tarnishing an entire community.
While the international arbitration community awaits clarity on the confounding rules for their entry, Indian arbitration was surviving due to a robust domestic arbitration market. With the government’s exit from arbitration, the market is fast spiralling towards doom. Large domestic private parties will opt for a foreign seat, leaving smaller disputes between private parties to be arbitrated in India. It is not surprising that there is significant despondency within the Indian legal market, especially among arbitration practitioners.
While this paints a bleak picture, there may be a slim ray of hope: An increase in commercial court litigation. Although there will be a pressing need to enhance capacity, infrastructure, and training to efficiently manage the exponential increase in the volume of cases and trial management, this shift could lead to the development of robust jurisprudence in areas such as damages, indemnities, discovery, and trial principles. India needs to expand its law on damages, and parties should push for more frequent use of indemnities. Litigants must encourage lawyers to think creatively and utilise the underdeveloped tort law in Indian jurisprudence. The increased volume of commercial litigation will also create a demand for skilled trial lawyers adept in litigation, damages, and cross-examination, ultimately strengthening the overall legal ecosystem. All of this will, of course, require substantial investment by the Government of India.
It appears that Indian arbitration is dead for now. While the immediate future for India’s arbitration industry seems grim, there is a glimmer of hope in the potential for long-term improvements in the country’s legal infrastructure and the development of jurisprudence in commercial law.
The writer is a practising advocate and founder of JusContractus, India’s only all-women law firm specialising in commercial law and disputes
