PWD’s decision is a wake up call - A case for arbitration
The shift from arbitration is a market signal that cannot be ignored.
In the recent five-judge bench decision of the Supreme Court in Gayatri Balasamy [1], a 4:1 majority upheld the power of courts to modify arbitral awards under Section 34 - albeit with “minimal interference”. This judicial endorsement of court intervention, comes at a particularly troubling time when a major government department has already signalled its retreat from arbitration.
Public Works Department (PWD) of the Government of India recently decided to delete arbitration clauses from its contracts. The OM dated 21.04.2025 (Office Order) further mandates that any disputes arising under future contracts be resolved exclusively through courts in Delhi.
While the decision has felt like bolt from the blue to some, it cannot be said that there were no signs in the run-up—chief among them was an Office Memorandum dated 03.06.2024, issued by the Ministry of Finance on Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement.
The Memorandum itself came close on the heels of the decision of the Supreme Court in DMRC vs. DAMEPL[2], where an arbitral award was put through four rounds of litigation (Section 34, Section 37, SLP, Review) before it was set aside in a curative petition. The recent Supreme Court decision striking down the appointment of arbitrators from a government-provided panel may have set a further cat among the pigeons.
Practitioners are concerned that the Office Order, the first major outcome of this shift in governmental view, is perhaps the last nail in the coffin, stripping arbitration altogether from future PWD contracts.
THE DIAGNOSIS
There is no denying that markets remain the ultimate arbiters of asset value and naturally gravitate toward the most efficient dispute resolution mechanisms. The PWD's strategic shift away from arbitration represents a significant market signal that cannot be ignored. The arbitration community needs to introspect the effectiveness of the current arbitration system if it wishes to remain a viable option for resolving commercial disputes.
A brief analysis of the issues raised and possible solutions is attempted below:
i) Suffers the same fate as litigation – Government feels that what was once envisaged as a time-bound, cheaper alternative to court proceedings has, in many instances, devolved into long battles stretching over years, with cost rivalling and often exceeding litigation.
Possible solution: Imposition of strict timelines as already being done under the 2015 amendment along with mandatory payment schedules in line with Schedule IV can resolve the cost and delay issues. This includes adherence to the 12-month resolution timeframe (extendable by 6 months with consent) and the structured fee payment schedule outlined in the Fourth Schedule, which links arbitrator remuneration to claim values and establishes clear payment milestones throughout the arbitration process.
ii) Accountability issues - Arbitrators, unlike judges, are not held to the same rigours of selection or oversight which raises concerns over bias, collusion, and diminished accountability, particularly in high-value disputes.
Possible solution: The answer to this is not to cop out of arbitration but to eliminate accountability concerns by encouraging institutional arbitration. Developing a group of certified professionals as arbitrators with minimum training standards and background checks can add a layer of accountability.
iii) Back in Courts - Most awards end up back in court, making arbitration yet another layer of litigation rather than a substitute for it.
Possible solution: We are already seeing a shift in jurisprudence with Courts limiting their interference in awards during Section 11 and Section 34 proceedings. Courts in 34 are aligned that automatic stays on the enforcement of arbitral awards should not be granted while a set-aside application is pending. Reform can require such stays also be subject to a conditional deposit. Provisions such as Section 19 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, which requires a supplier to deposit 75% of the awarded amount before challenging an arbitral award in a Section 34 proceeding can be explored for commercial disputes also.
iv) Mediation - Institutional mediation is being proposed as an alternative to escape the woes of arbitration.
Possible solution: Focus should be to promote med-arb by building robust mediation infrastructure instead of going through the motions of mediation as an empty formality. There is nothing to suggest that arbitration and mediation reforms cannot happen simultaneously.
The reality is that given the current framework and infrastructure, dispute resolution through traditional litigation will only lead to disappointment and continue to throw up the very issues that arbitration was meant to cure.
THE DEFENCE
If the issues faced by the PWD is lack of preparedness for advanced arbitration techniques and consequent losses, a more practical approach compared to abandoning arbitration would be to fix the leaks in its boat.
The department, like many other PSUs, can create a dedicated arbitration cell that includes a tag team of technical and legal professionals. Investment on arbitration strategies, including specialised training and preparedness, can go a long way in creating a problem-solving culture without the hassle of entering the court system. Basic contract management and diligent recording of project milestones diligently may ease the bottlenecks faced during case preparation time.
Even as the Government of India doubles down on arbitration reform through the 2024 Amendment Bill, the PWD’s recent move seems to fly in the face of this broader vision. When the government—by far the country’s largest contracting party—retracts from arbitration, it sends a disconcerting message to the business community. It runs a risk of creating a doubt in the minds of private players and investors about the quality of arbitrators and the efficacy of out-of-court dispute resolution solutions in the country.
While this area has admittedly muddled for far too long, doing away with arbitration is not the answer. This would erase years of progress in building a dispute resolution culture that supports ease of doing business. It will create disparities with progressive strides on the ADR front in other parts of the world that are known for high standards of justice delivery.
[1] Gayatri Balasamy vs. M/s ISG Novasoft Technologies Limited, 2025 INSC 605
[2] [(2024) 6 SCC 357