Delhi Public Works Department drops arbitration
New Delhi: The Delhi Public Works Department (PWD), which is instrumental in the development of infrastructure in the national capital, has decided to move away from arbitration to resolve disputes in future contracts.
The department said any dispute arising in the future will be resolved through litigation in Delhi courts, according to an order dated 21 April. Mint has seen a copy of the order.
The decision follows an advisory issued by the finance ministry in June 2024, which asked all government entities—including departments, public sector undertakings (PSUs), and state agencies—to reduce their reliance on arbitration in public procurement contracts.
The advisory cited high costs and delays associated with arbitration, and encouraged the use of mediation or court litigation instead.
It also suggested that government entities should not engage in arbitration in public procurement contracts disputes where the value of the dispute was above ₹10 crore. It called for a case-by-case decision on whether to engage in arbitration when the disputed value was over ₹10 crore.
Since then, several PSUs such as Oil India Ltd and ONGC Ltd have amended their contracts to reflect the advisory. The Karnataka government also removed arbitration clauses from its contracts choosing to resolve all disputes via litigation in courts.
An email query to the chief engineer and the special secretary about Delhi PWD’s decision did not elicit a response till press time.
Resolving disputes
An arbitration clause is a commonly used dispute resolution clause. All contracts, agreements, and even treaties have dispute resolution clauses by Delhi Public Works Department, which direct parties on how to resolve any issue between the parties.
The government, the biggest disputant in the country, has not had a very successful track record in arbitration matters. A July 2024 Rajya Sabha disclosure by the union finance ministry said about 60% of the arbitral awards in case of PSUs such as National Highways Authority of India (NHAI) and NTPC Ltd were challenged, resulting in significant legal costs for the government.
NHAI’s pending claims under arbitration totalled ₹88,100 crore in FY23, a Rajya Sabha committee report said, adding that the figure was “worrisome”.
Arbitration was created as a method of out-of-court dispute resolution that is faster than litigation, a major advantage for commercial disputes in India, where courts are battling a massive pendency of over 60 million lawsuits.
The Delhi Public Works Department the country’s biggest disputant, cutting down its exposure to arbitration assumes importance as the quality of dispute resolution is an integral factor in the ease of doing business within the country. It also reflects the investment friendliness of a country, as dispute resolution mechanisms were a part of the World Bank’s now discontinued Doing Business report, which measured the ease of doing business in each country.
While India’s overall score in the index improved to 71 in 2020 from 67.5 the year before in the Doing Business report, its score on contract enforcement—which measures dispute resolution efficiency—remained the same at 41.2 in the 2019 and 2020 Doing Business reports.
“Business may not look at this (PWD’s move) positively from a domestic or international perspective as it is indicative of pushing the dispute resolution process to our age old traditional ways,” said Gauhar Mirza, partner, Cyril Amarchand Mangaldas.
While the PWD Delhi Public Works Department immediate recourse may be to adopt mediation, businesses who may seek contracts with the Delhi Public Works Department are likely to think this decision goes against India’s intent to become a hub for arbitration, he added.