With the government being India’s largest litigator, the Department of Expenditure (DoE) has said that pursuing contractual disputes against private parties in courts/arbitration results in huge financial losses to the government.
According to the DoE, a large majority of cases challenging arbitration awards are decided in favor of the private party and the disputed amount becomes payable at a higher rate than the government’s cost of funds.
Bearing this in mind, 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.
This is the second version of the scheme. The first version, which was introduced in 2020, resulted in the resolution of more than 148,000 income tax cases, with recovery of about 54 percent of the amount under litigation.
What is the scheme about?
Government entities such as the National Highways Authority of India (NHAI) 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 going to 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 an arbitration can end in a matter of months, the challenge to an arbitration order in court can take years before it is finally decided. In the process, the benefit of a speedy arbitration order gets nullified.
What is the rationale of the scheme?
Research by NITI Aayog has revealed that a critical aspect of improving the ease of doing business is making it easy to enforce contracts.
Which government entities are covered under the scheme?
The scheme will apply to disputes where one of the parties is the government of India, or any of its ministries and departments attached to ministries. The following government entities are covered by the scheme:
a) All autonomous bodies of the government of India.
b) Public sector banks and public sector financial institutions.
c) All central public sector enterprises.
d) Union territories, the National Capital Territory (NCT) of Delhi, and all UT / NCT government agencies/undertakings.
e) All organisations like Metro (railway) corporations, where the government of India has 50 percent shareholding.
What disputes are covered under the draft scheme?
a) Disputes where claims are raised against central government entities along with some state government or private entity are not eligible under the scheme.
b) Only disputes regarding financial claims against central government entities are eligible. Disputes which don’t have a monetary component are not eligible.
c) Disputes involving government entities where litigation is pending as on September 30, 2022, provided the government entity has knowledge of the litigation, are eligible.
What percentage of the disputed amount is payable?
According to the draft scheme
a) If an arbitration order in favour of the private party is upheld by the court: 80 percent of the net amount granted in the award, along with interest from the date of the dispute till the date of the court order.
b) If an arbitration award has been passed in favour of the private party: 60 percent of the amount awarded, along with interest from the date of the dispute till the date of the arbitration award.
c) Ongoing litigation where the contracted work has stopped: 30 percent of the net disputed amount, without interest.
d) Ongoing litigation where the contracted work is in progress: 20 percent of the disputed amount, without interest.
The draft scheme also specifies the procedure for applying through the Government e-marketplace (GeM) portal and the various steps involved in a settlement. The final scheme is expected to be published in March 2023.
