The Arbitration Retreat: A short-sighted policy move?

A policy shift could have significant economic repercussions

By Prashant Narang 

The Indian government's recent move to restrict arbitration in public contracts to disputes under Rs 10 crore isn't merely a shift in policy—it represents a significant retreat that demands rigorous scrutiny.

This move was recently followed by a public interest litigation (PIL) challenging the decision, highlighting the controversy surrounding the new policy. While the courts may not be the ideal forum to address this issue, it touches on broader concerns of public accountability, echoing what some scholars refer to as a "culture of justification."

The Finance Ministry’s memorandum, which lacks empirical support, raises serious concerns. Instead of relying on data, the policy is based on broad assumptions about arbitration’s failures. This is more than a procedural oversight—it reflects a deeper flaw in the policymaking process. How can a decision with such wide-ranging economic implications be justified without concrete evidence?

This policy shift, made without sufficient empirical backing, risks undermining India's dispute resolution framework and could have significant negative impacts on the country's investment climate and economic growth.
Numbers Don't Lie

There’s no doubt that arbitration challenges extend the time it takes to resolve disputes. A study by researchers at Trustbridge Rule of Law Foundation reveals that a Section 34 challenge adds an average of 3.6 years, and a Section 37 challenge adds 5.8 years to the process. Over 60% of arbitration awards in National Highways Authority of India (NHAI) and NTPC cases are challenged in court, according to Minister of State for Finance, Pankaj Chaudhary.

Yet, this statistic doesn’t tell the full story. As per the same researchers at Trustbridge, courts reject 90% of government challenges while overturning 56% of awards that favour the government. This indicates that the courts exercise minimal intervention, but the bureaucratic tendency to challenge unfavourable rulings drags the process out.

The real issue is not arbitration itself—it’s the bureaucratic impulse to contest every decision, even when courts are likely to uphold the original award. The guidelines acknowledge this problem, attributing it to a misplaced sense of propriety, and a lack of expertise due to the transferrable nature of bureaucratic jobs.

To address these concerns, the guidelines propose promoting institutional arbitration and adopting an empirically grounded framework for contesting arbitral awards—a promising step. However, one has to wonder why the government didn’t push for these solutions earlier, rather than severely restricting arbitration.

Moreover, the memorandum criticizes arbitration as being “informal” and prone to “wrong decisions”, "collusion", and “impropriety”—claims made without any supporting evidence. If the quality of arbitrators in high-value disputes was a concern, the government could have prioritized institutional arbitration sooner, rather than relying on ad hoc arbitrators.

The Mediation Puzzle

Instead of arbitration for larger disputes, the government proposes mediation and court litigation. Mediation could precede arbitration, allowing unresolved issues to move forward without defaulting to litigation. However, a recent XKDR study shows that 96-98% of parties decline mediation and mandating mediation merely delays litigation by an additional 3-5 months.

While the guidelines cite successful mediation models in sectors like oil and gas, these examples aren’t publicly available for scrutiny or replication. Transparency would help verify whether mediation is truly a viable alternative.

Courts: The Grass Isn't Greener

The shift toward courts for resolving high-value disputes is a classic example of the “Nirvana Fallacy.” This is when an imperfect system is abandoned in favor of a supposedly ideal solution, without recognizing the flaws of the alternative.

Data from commercial courts, which are being touted as a better option, tell a different story.  A study by researchers at Vidhi Centre for Legal Policy reveals that the disposal rate of commercial disputes is extremely low, with reforms implemented in only 18% of cases in the best-performing courts. A paper (2020) by Centre for Law & Policy Research also highlights that after the Commercial Courts Act, the disposal rate of commercial disputes plummeted from over 88% to between 44% and 64%. Courts, it seems, are ill-prepared to handle the load that arbitration currently manages.

Economic Ripple Effects

This policy shift could have significant economic repercussions. At a time when India is aiming to attract foreign investment and improve its ease-of-doing-business rankings, sidelining arbitration—a globally recognized dispute resolution mechanism—sends the wrong signal. This move could slow the flow of investments and stall critical projects needed for India’s economic growth.

Ironically, while the government cites arbitration costs as a concern, it has provided no data comparing the costs of litigation to arbitration. When asked in Parliament, the Finance Ministry admitted that no such comparative data existed. This lack of transparency points to a troubling trend of making decisions first and finding the evidence later, rather than the other way around.

Charting a Course Correction

The solution is clear: transparency and data-driven policymaking. The government should gather and release all relevant data on dispute resolution. This isn’t just a suggestion—it’s essential for informed decision-making. Only with a clear understanding of the facts can we have a meaningful discussion about the best ways to resolve disputes.
This issue doesn’t belong in the courts through Public Interest Litigation; it belongs in public debates, think tanks, and academic circles. We need to understand why the government is retreating from arbitration after years of refining the system. The focus shouldn’t only be on the high rate of arbitration challenges, but also on the bureaucratic incentives that lead to unnecessary litigation.

In the end, the government faces a choice: will it embrace transparency and evidence-based policymaking, or continue down this opaque path? The answer will reveal its true commitment to accountable governance, ease of doing business, and the rule of law.

(Prashant Narang is a researcher at Trustbridge Rule of Law Foundation.)

Views are personal, and do not represent the stand of this publication.