Government Shifts from Arbitration to Litigation, Is this a step in right direction?

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Government of India and some of the state governments have recently decided to remove arbitration from the contracts and as a result, any dispute between Employer and Contractor will now be settled directly in the court. Is this a step in right direction?

[Rajneesh Jindal]

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The objective to remove the Arbitration Clause by some Govt. Departments like Delhi PWD, may be due to the facts that the Arbitration Awards are mostly challenged by the losing party in Courts. The losing party when it is a Govt. Department has to pay at least 75% of the Arbitral Award Amount before raising the matter to Court. So, the objective of the Arbitration is not usually achieved. The step to remove the Arbitration clause if seen wrt the practice prevailing and the Awards challenged sounds right. The Arbitration can give better results if the qualification and the expertise of at least 2 of 3 Arbitrators wrt dispute is ensured and a reasonable Award is given by the Arbitral Tribunal.

[Hukam Chaudhary]

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No, this may not be the right decision by central and provincial governments. The whole idea behind ADR has been to reduce court cases , have faster and cost effective resolution to the disputes. This is a fact that most of the arbitration awards are challenged though per legal provisions limited ground is available for challenge. System improvement is needed and not system abandoning itself.

Lot of work had been done on creating mediation echo system in the country during the last two decades learning from global experience , Government also came out with Mediation Act 2023 and conciliation has been replaced with mediation but act is yet to be notified fully. Entire ADR echo system needs urgent action for having competent professionals and institutions for handling arbitration efficiently. Following is needing urgently to ensure better working in this field:
Notification of all sections of mediation act 2023 .
Draft Arbitration and Conciliation Bill 2024 to modernize arbitration landscape is to be got passed from parliament.
Establishment of Arbitration council and Mediation council.

[Santhanam Krishnan]

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In the last decade, India has been keen to position itself as a global arbitration hub. The Modi Government has spoken about promoting arbitration and other ADR mechanisms. Parliament has amended the Arbitration and Conciliation Act, 1996 several times in attempts to bring the legislation in line with global trends. The 2019 amendments to the Act relaxed the rule prescribing a 12-month timeframe for awards in international commercial arbitration. Most recently, a 2024 amendment bill proposes to further promote institutional arbitration by defining an “arbitral institution” and enhancing its powers. -excerpt from

https://www.scobserver.in/journal/supreme-court-review-2024-mostly-friendly-towards-arbitration/-

Two more articles on the subject should be of interest-links below

https://thewire.in/law/india-judiciary-pending-cases-supreme-court

https://www.thehindu.com/opinion/op-ed/the-real-indian-arbitrator-needs-to-stand-up/article69498429.ece

Summary of various opinions on Litigation

One more problem area is the delays in litigation especially by the Government.

Vikram Kirloskar says in TOI -Industry has repeatedly raised the issue of delayed payments from various government entities which has even resulted in business failure in some cases. While the government has initiated payments in a few cases, the issue runs deeper than initially expected. Many cases are stuck in arbitration that are yet to be settled.

One retired IRS officer says-. When budgetary revenue targets are not achievable, inflated Demand Notices are served and Notices issued at lower levels. When the matter comes up for adjudication, such frivolous demands are confirmed (as 20% monetary rewards are tagged to such action) at every stage. If the Customs and Excise Tribunal drops the demand, SLP is filed in higher Courts where the matter is kept pending for years. When the Supreme Court quashes the Demand(especially in cases involving interpretation of words in classification issues of a product), Govt issues an Ordinance affecting retrospective legislation. There is no finality in tax matters and Rules/Notifications are couched in such a way, two interpretations are possible.

Arvind Panagriya wrote in TOI-“The second objection would be that confronted with a deadline, government would unjustly and arbitrarily deliver negative decisions on applications. But since such arbitrary decisions will be subject to challenges in courts,*” government will have to take into account the cost of repeated court challenges and consequent loss of reputation. *” A related objection is the symmetric possibility that negligence on the part of a particular government official would result in the expiry of deadline and therefore automatic approval of unworthy applications. Allowing the relevant office to seek a stay on or reversal of decision in the court of law in such cases can alleviate this problem. One may argue that recourse to courts would simply shift the delays from bureaucracy to courts. But this is unlikely. *Officials responsible for unjustified negative decisions or unworthy positive decisions by default that end up in courts would attract the ire of their superiors and risk future promotions. ”

Reproduced is an extract from the SC ruling on the Sahara case.- 150. The Indian judicial system is grossly afflicted, with frivolous litigation. Ways and means need to be evolved, to deter litigants from their compulsive obsession, towards senseless and ill-considered claims. One needs to keep in mind, that in the process of litigation, there is an innocent sufferer on the other side, of every irresponsible and senseless claim. He suffers long drawn anxious periods of nervousness and restlessness, whilst the litigation is pending, without any fault on his part. He pays for the litigation, from out of his savings (or out of his borrowings), worrying that the other side may trick him into defeat, for no fault of his. He spends invaluable time briefing counsel and preparing them for his claim. Time which he should have spent at work, or with his family, is lost, for no fault of his. Should a litigant not be compensated for, what he has lost, for no fault? The suggestion to the legislature is, that a litigant who has succeeded, must be compensated by the one, who has lost. The suggestion to the legislature is to formulate a mechanism, that anyone who initiates and continues a litigation senselessly, pays for the same. It is suggested that the legislature should consider the introduction of a “Code of Compulsory Costs”.

Government departments will rarely accept Arbitration awards which go against it.It will be interesting if data is collected on how many such awards were accepted without appealing to the Courts.This, inspite of the fact the Arbitration Act puts stringent conditions for going to Courts – like the award is bad in Law on the face of it etc. Babus are afraid of Vigilance and audit making adverse comments later on such issues.

Government should frame a policy for future as suggested by SC to avoid such unnecessary litigation by the Government..Perhaps it is the legal adviser in the Ministry who has to take the larger blame for misleading the Government?

In the light of the same ,the latest OM on limiting arbitration to cases below Rs 10 crores may attract criticism.Though it rightly emphasises mediation route,unless some disincentives for going for unnecessary litigation,this laudable initiative will be a disaster.

[Ngwa Martin Che]

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Arbitration has existed for over ten centuries and practiced in national and international transactions as one of the Alternative Dispute Resolution (ADR) methods. Bringing it into practice in India, the government knew it has a great role in its justice system and machinery, especially in resolving family and business/commercial disputes. Analyzing carefully the relevance of arbitration resolutions to normal court resolutions, it’s clear that arbitration is speedy, more confidential, less stressful, less costly and less formal. It’s also friendly and fair, and relies more on fairness and equity precepts, not on the law. The key problem with arbitration centers on “enforcement”. My proposal to the government of India is to strengthen the power of arbitration to operate as e legal institution, or council, rather than abandon it in favor of court proceedings/litigations.
By Ngwa Martin Che

[Rakesh Kumar Agarwal]

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No, I think the government is lost in trying to find its way out of the issues plaguing contract management by its departments. We have seen the losing party always invokes Sec 34 of the act and see if it can recover the lost ground. The dilution of the act comes from the governments thinking which was echoed by the Solicitor General of India recently about the impartiality and competence of the AT which handle disputes involving Indian Government and PSUs (sigh!!)

The core issue here is lack of contract administration and management capacity at the field and institutional level of departments coupled with lack of adherence to “readiness criteria” of bids awarded which puts the government departments on back foot in case of disputes. Not to mention about lack of convergence of the bid document provisions and the various delivery mechanism adopted!!

[Arvind Vijay]

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In my opinion its a step in right direction.
Potential Advantages of Shifting to Litigation are:
1. Transparency and Public Accountability
Litigation in public courts is typically more transparent than arbitration, which is often private and confidential.
Governments may prefer court-based processes to reassure the public about fairness and avoid perceptions of secrecy.

2. Precedent and Legal Development
Court rulings create binding precedents, which help develop consistent legal interpretations.
Arbitration decisions are usually non-precedential, limiting their value for guiding future behavior.

3. Preservation of Sovereignty
Governments may feel arbitration (especially in international or investor-state disputes) erodes their regulatory autonomy.
Litigation in domestic courts may reinforce national legal authority.

4. Cost Considerations
Arbitration can be more expensive than litigation, particularly for complex disputes with high arbitrator fees.
Courts are publicly funded and may be less costly for the state.

However there are some Potential Disadvantages of Moving Away from Arbitration are:

1.Flexibility and Speed
Arbitration is often faster and more flexible, allowing parties to choose procedures and schedules.
Litigation can be slow due to procedural delays and court backlogs.

2. Expertise
Arbitrators are often subject-matter experts, especially in complex commercial or technical areas.
Judges may lack the same industry-specific knowledge, especially in niche fields like construction, IP, or investment law.

3. Global Investor Sentiment
Foreign investors often prefer arbitration because it avoids potentially biased domestic courts.
A move toward litigation may discourage foreign investment or be seen as a hostile signal to global markets.

4. Enforceability
Arbitral awards are widely enforceable under the New York Convention (over 160 countries).
Court judgments may be harder to enforce internationally due to lack of reciprocal enforcement treaties.

[Kanwalpreet Kanwalpreet]

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I believe that no decision is perfect. Any decision only reflects reaction to or preparation for forces being applied by the current situation and expected forces in foreseeable future. Ofcourse the perception of forces is biased by past experiences. While evaluating the situation with regards to arbitration in India, practical experience cannot be overlooked for theoretical concepts of ADRs. The instruction of Govt. of India clearly and very pointedly highlights the reason why the policy has been reviewed. The fact is that Sec. 34 of the Arbitration Act, which should have been used rarely, as the arbitrators are selected by the parties themselves, is probably used as commonly as The Arbitration Act itself. The aim is reasonable, timely and economical dispute resolution. I firmly believe that the arbitration in India has broadly failed on all these aspects. In principle the Arbitral Tribunal is selected by parties themselves, however, many tribunals still insist on evidence through affidavits and following other rules of evidence and Civil Procedure while dealing with the parties who created the tribunal itself. Conversely, given the number of times Sec. 34 is invoked, there seems to be no faith amongst the parties in the tribunal created by themselves. Therefore, to me, the very basic requirement of parties agreeing to get the dispute addressed by someone (tribunal) in whom both repose faith, which is the bedrock for ADR, is seemingly absent in India.

It is, in my view, theoretically wrong to equate court system with arbitration. Arbitration is a mutually acceptable process of dispute resolution following a process parties agree to, whereas the court follows a strict system for providing justice (not limited only to dispute resolution). So conceptually, again in my biased understanding, an unstructured, flexible and mutually agreed dispute resolution system should be for the disputes where the amount in dispute is not high. Disputes of high value should ideally not be permitted to be settled through an imperfect process.

Another argument that the system should be improved rather than being rejected, is a double edged argument. Even the Commercial Court system should be improved and not rejected for Arbitration.

I believe that the need is for an efficient dispute resolution mechanism. That may be Courts or ADRs. Given that even an unreasonble arbitral award gets the protection of Sec. 34 points to weakness of arbitration and not its strength. Therefore, in my view the instruction of Government of India, under discussion, is appropriate in the given circumstances.

[Santhanam Krishnan]

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India’s judicial delays have come under sharp focus due to the enormous case backlog—over 5 crore cases pending across the Supreme Court, High Courts, and district courts. This crisis undermines the public’s trust in the legal system, as highlighted by President Droupadi Murmu’s reference to the ‘black coat syndrome’. The issue has resurfaced in light of systemic problems such as judicial vacancies, ineffective case management, and poor infrastructure, especially at the district level, where civil cases face the longest delays. The situation has sparked urgent calls for reform, improved judge strength, and the expansion of alternative dispute resolution mechanisms like Lok Adalats, which have successfully resolved over 27.5 crore cases since 2021.

[Santhanam Krishnan]

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Extrated from the article-29th July 2025 The Hindu Op-edJustice on hold India’s courts are clogged

[AMIT KUMAR]

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Court route is lengthy and require indefinite time and resources. There may be challenges because of limited knowledge of legal experts on technicality of the matter. Arbitration method is internationally accepted. Court has limited jurisdiction, and it will not apply on parties outside India. Lack of Institutional capacity, contract management experts and poor drafting of contract clauses are root cause for arbitration which is required to be improved. There is scope for reform of Arbitration mechanism.

• This reply was modified 8 months, 1 week ago by AMIT KUMAR.

[Amit Kumar Gupta]

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Time is essence , arbitration is alternatuive choice (ADR) to resolved dispute at a faster time , whereas litigation which is leghty, costly court procuedural processes. In contrast arbitration process is cheaper as compared to Litigation process.

Now , the question rigth here | Are we aiming to work in complex governace/justice system.

The role of goverenment shift from Arbitration to Litigation depends on number of social & technical factors.Fair & transparent arbitration process are mostly sought by the agrieved parties but the big player often coercieved or collude with the Arbitator to declare impartial judgement in their favour .

So , the shift from Arbiration to Litigation are not desireable considering time consuming processes & inflated cost but will be treated as right direction where impratial judgement are of major concern.

• This reply was modified 6 months, 3 weeks ago by Amit Kumar Gupta.
• This reply was modified 6 months, 3 weeks ago by Amit Kumar Gupta.

[Nandita Lahiri]

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Efficient dispute resolution is not about choosing courts or arbitration—it is about choosing the right tool for the right dispute.

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