Finance minister Nirmala Sitharaman announced a voluntary settlement scheme called Vivad se Vishwas-2 in her budget speech to settle contractual disputes between the government and private parties when an arbitral award is challenged in a court. The scheme with standardised terms is set to be introduced soon.
What is the scheme about?
Government entities such as the National Highways Authority of India frequently engage private contractors for various works, the terms of which are defined in a contract between them. The contract usually has a clause that enables parties to approach an arbitrator in case of a dispute, which are usually monetary in nature.
Arbitration is a mechanism to resolve disputes between parties without having to initiate a case in the court. A neutral person is appointed to adjudicate the dispute and the judgment of an arbitrator is legally enforceable.
Although it is cheaper than a regular court case, an arbitral award can be appealed in court. So while arbitration can end in a matter of months, the challenge to an arbitration order in court can take years before it is finally over. In the process, the benefit of the arbitration order can get nullified.
Since the government is India’s largest litigator, many cases challenging arbitration awards of various amounts are pending in courts across the country. The Vivad se Vishwas-2 scheme aims to provide a quicker exit from litigation in cases where an arbitration order is challenged in court.
The scheme offers a settlement mechanism, where the government entity and the private party can put an end to the case by signing a standard contract. The contract will contain details such as which party gets money to settle the dispute. It will also state that both parties have agreed to withdraw all court cases pertaining to the contract against each other.
In 2020, the government announced the first version of Vivad se Vishwas to reduce legal disputes related to income tax. As per the statistics available, more than 148,000 cases were solved with the recovery of about 54 percent of the amount under litigation. The scheme started on March 17, 2020, and closed on March 31, 2021.
Not suitable for large amounts:
Lawyers said that while the scheme encourages arbitration by providing finality in proceedings, it may not be suitable for disputes where the amount at stake is high. In terms of government contracts, a small dispute is one where the amount disputed is not more than a few crore rupees. A large dispute is one where the amount in dispute runs into thousands of crores of rupees.
An example of a large amount is the Delhi Metro Rail Corporation case where an arbitral award of about Rs 4,600 crore was made in favour of Delhi Airport Metro Express Private Ltd. in 2017.
Since arbitration proceedings can be started irrespective of the amount in dispute, an arbitral award may grant a party anything from thousands of rupees to thousands of crores.
Contractual disputes where an award is rendered and challenged are as diverse as they can get. Standardised settlement terms, as indicated in the budget speech, may not be attractive in disputes involving large amounts, noted Sumit Rai, a lawyer from Mumbai.
“In my experience, such standardised schemes will be counterproductive; private parties with a potentially weaker case may settle whereas most parties with a large award in their favour are unlikely to agree to such non-negotiable terms,” he said.
Rai suggested that such disputes can be settled if sector-specific committees are set up to study proposals and send recommendations for settlement after discussions with private parties.
Will the government opt for the scheme if the settlement amount is lower?
Jatin Pore, a partner at DSK Legal, said, “It appears that the dispute (between contracting parties and government/government undertakings) can be settled under the scheme by the arbitral award holder accepting a haircut (lower financial settlement).”
He said that while settlement in case of purely monetary claims could be fairly straightforward, one will have to see how the scheme will operate where the arbitration grants non-monetary relief. Pore said the extent to which the scheme will cover cases where the government/government bodies are victorious in arbitration will have to be seen.
“It would be interesting to see what the government/government undertaking would do in case the arbitral award is in favour of the non-government party and the government/government undertaking challenges the award,” said Shashank Agarwal, a lawyer at the Delhi High Court.
Encouraging arbitration
Still, a section of lawyers said a scheme like this will encourage arbitration as an alternative dispute mechanism because it can end long-pending disputes where an arbitration order has already been passed.
Sandeep Bajaj, managing partner at PSL Advocates & Solicitors, noted that the scheme has the potential to encourage arbitration as a set mechanism to settle contractual disputes.
“It will help prolonged proceedings come to an end sooner than expected. Since settlement of disputes is the essence of arbitration, not letting matters drag on for months in court proceedings where it has nothing to gain is certainly encouraging to litigants in arbitration,” he said.
Almost every arbitral award which is passed against the government or its undertakings is invariably challenged in court, according to Shri Venkatesh, managing partner at SKV Law Offices.
“It remains to be seen whether the true purport of the mechanism of the arbitration, i.e. speedy and effective relief to the litigants, can be met with this initiative or not because the very stated objective is being lost in decision making and in seeking execution of award.”
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