Introduction
In a landmark policy decision, the Ministry of Finance issued new guidelines giving preference to mediation over arbitration for resolving disputes that may arise in public procurement contracts where the parties involved are the government entity on the one hand and the private contractor on the other. This is rationalised to make dispute resolution more cost-effective and provide amicable outcomes by mediating public procurement disputes. However, this has sparked a contentious debate concerning the implications of its enforceability, fairness, and transparency regarding the disputable resolution of disputes in public procurement contracts. This blog aims to assess the efficacy and critically examine the Ministry of Finance’s announcement supporting mediation as an alternative to arbitration.
Although mediation and arbitration are alternative forms of dispute resolution, they differ in the formality and finality of the decisions rendered out of the process. While arbitration is more formal because it involves a legal process where an arbitrator issues a binding decision, mediation is less formal, non-binding and generally a form of negotiation between the parties facilitated by a mediator. In public procurement, with disputes delaying public projects, the Ministry of Finance advocates mediation to reduce costs and hasten resolution. However, this comes with a trade-off - mediation lacks the binding, enforceable nature of arbitration, thereby leading to prolonged disputes and the risk of a protracted process if the parties fail to reach a final agreement. Thus, balancing cost and legal certainty is essential.
Power Imbalances in Public Procurement Disputes
The core concept of mediation is a mutually acceptable ‘settlement’ between parties, compared to arbitration, which is ‘adjudicated’ by the arbitrator to provide justice. Parties in mediation, by its informal nature, are actively at the helm of controlling the process and the outcome. Though this flexibility can be advantageous in some situations, it can prove disadvantageous in situations where there is a power imbalance, such as in the present case between the government and a private entity. This might lead to unfair settlement terms as an outcome of the mediation. The Ministry’s assertion that mediation is fair in public procurement disputes frequently ignores the inherent power disparities between smaller contractors and the government. In the case of public procurement, with the government having the nature of resources and authority, mediation would likely only tend to perpetuate or even aggravate those power disparities, which may compromise the fair and equitable resolution of disputes. This provision imposes mandatory mediation and dispute settlement at the risk of unfair settlement terms.
The objective of providing justice is reinforced by the existence of robust mechanisms for challenging the adjudicatory decisions of the court and arbitrator on the question of merits as well as procedure. This mechanism ensures fair adjudication even in case of disparate bargaining power. On the other hand, mediation as a consensual process works on an entirely different paradigm. Section 28 of the Mediation Act 2023 only allows limited challenges to the settlement agreements on grounds such as fraud, corruption, impersonation, or the subject matter being unfit for mediation. These limited grounds would not account for situations where the process or settlement agreement is affected by such inequalities of bargaining power. Thus, mediation as a process would be unable to ensure a fair and just dispute resolution with the government as one of its parties.
Further, according to the Guidelines, government approval of settlement agreements involving public entities under Section 49 of the Mediation Act is mandatory, which presents a burdensome factor in the mediation process. This provision imposes an additional level of authority upon the government entity in dispute and thus disrupts the balance of power. It is likely that this power under Section 49 may be applied arbitrarily to reject reasonable settlement offers not entirely in the government’s favour, thus providing unfair leverage for public bodies. This runs opposite to the underlying principles of mediation: mutual assent and freedom from constraints imposed by external influence. The requirement is likely to discourage non-governmental parties from pursuing public procurement opportunities.
Compromised Neutrality and Fairness
The risk of power imbalances affecting the mediation process is further accentuated by the provision which enables a high-level committee to be appointed as mediator in disputes it deems fit, which has been a critical blow to mediation’s neutrality. This is even more complicated with mandatory mediation provided in matters above 10 crores, probably falling within the “high value” category. As a result, the government would have justification to appoint these committees in most mediations, intending them to serve as mediators. This leaves a very wide balance of power because the government exercises control over the dispute and the process of resolving this dispute. In the pretext of gaining an unfair advantage in mediation, the government can constitute a high-level committee, with this intention masked by the criteria of high-value matters exceeding 10 crores. In such cases, the high-level committee being appointed as a mediator will lead to glaring contravention of the provisions under the Mediation Act, which contain provisions such as Section 10 addressing the principle of no conflict of interest by the mediator and Section 16, relating to the duty of a mediator to assist the parties to settlement.
Further, this also may result in an unfair negotiation balance since the High-Level Committee (“HLC“) may prioritise public sector interests rather than appropriately assessing the claims of private contractors. In such cases, the best solution would be to involve independent, third-party mediators who have no association with any party and can provide unbiased appraisals. This also leads to possibilities of coercive contracts and built-in conflicts of interest between parties. The provisions under the Mediation Act, contain provisions such as Section 10 which addresses the principle of no conflict of interest by the mediator and Section 16, relating to the duty of a mediator to assist the parties to settlement. In cases of the high-level committee being appointed as a mediator, it leads to glaring contravention of these provisions.
Myth of Mediation’s Efficiency
Some of the other reasons the government has resorted to moving away from arbitration as a preferred option are its reduced formality and the binding nature of the awards. However, mediation, the option preferred by the government, suffers from those limitations to a greater extent.
While mediation is more time-efficient compared to arbitration, this claim does not come into effect in practice. The non-cooperative parties involved in complex public procurement matters lead to a slowing down of the mediation process, thus resulting in arbitration or even litigation. The technical disputes arising out of infrastructure matters due to the mediation’s non-binding nature may result in negotiations without a definitive resolution. Even though enforceability is still a great concern in public procurement disputes, the Finance Ministry plans to declare that mediation is a good alternative for arbitration. The outcomes of mediation depend on voluntary compliance, in contrast to arbitration, whose awards are enforceable and binding under the Arbitration and Conciliation Act of 1996. This lack of enforcement might be problematic in complicated public contracts with large monetary stakes. The lack of binding resolutions in time-sensitive public procurement projects involving public funds could cause delays, potentially compromising project delivery and public trust.
The Ministry’s claim that the mediation model has worked well in sectors like oil and natural gas fails on a few counts. The Vivad se Vishwas scheme is a settlement mechanism introduced by the Government that fails to address the complex interpretation and ambiguity of tax laws as it provides a blanket settlement approach.
International Best Practices
Arbitration has been one of the most favoured methods for dispute resolution because of its binding nature and enforceability under international conventions such as the New York Convention, especially on complex technical issues involving large-scale projects within UAE, Asia, and Australia. Institutions such as International Chamber of Commerce (“ICC”) in the UK and France play an important role in resolving energy disputes through arbitration. The possibility of cross-border enforceability positions arbitration as essential for multi-jurisdictional projects. This cross-border enforceability position makes arbitration particularly attractive for public procurement contracts where the stakes are high, and the government involvement necessitates a reliable dispute resolution mechanism across jurisdictions. This global trend, with Singapore, emerging as a popular international arbitration hub. Many businesses, particularly Asian-based companies, choose Singapore International Arbitration Centre (“SIAC”) for its structured and reliable dispute resolution process.
Even though mediation is acquiring huge prominence and will develop further in the future, arbitration remains the first choice for practitioners regarding large-scale projects. This is so because arbitration has well-developed global precedents, established practices and enforceable outcomes.
Conclusion
The guidelines issued by the Ministry preferring mediation for public procurement contracts address the concerns about costs incurred and delays in time. Hence, to balance these cases, the Finance Ministry should consider reframing the guidelines by retaining arbitration as an option for higher-valued disputes or cases where enforcement and fairness are of the highest concern. In light of these major drawbacks, the government ought to redefine its guidelines mandating arbitration over mediation which would ensure fairness, transparency and integrity in public procurement contracts and disputes arising out of it.
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