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Arbitration Challenges in Government Contracts

Arbitration Challenges in Government Contracts

Competitive tendering in the construction, engineering, and logistics sectors of the UT of J&K holds immense importance. These projects not only hold great public importance, but significant public funds are allocated to them. However, beneath the surface of these initiatives lie multifaceted challenges. The root of these challenges often lies in the initial bidding phase, where proposed bidders must adhere to certain Qualifications. With the award of a project to one contractor, challenges and disputes are raised by unsuccessful bidders, often attributing the decision to alleged connivance within the State Department, in the selection process. This situation creates a divergence between initial bidding approximations and the final selection of the winning bidder, leading to conflicts and court litigation between state departments and participating bidders.

On the flip side, once the contract is awarded to a contractor, the state entity holds the authority to assert that the procedures employed by the contractor during contract performance constitute a breach of contract or that the performance of the contractor falls short of the parameters stipulated in the agreement. Factors like force majeure, court interventions, changes in project requirements mid-way or the department’s failure to make partial payments can further complicate the matters. Such situations not only aggravate the challenges faced by both parties but also contribute to a significant extension of the contract timeline. This extended contract timeline, coupled with the challenges of delayed resolution and payments, introduces a ripple effect on project dynamics. The prolonged uncertainty can strain the contractor’s financial stability, impacting their ability to execute the project operations and fulfil contractual obligations. Additionally, the lingering issues, contribute to an atmosphere of apprehension, affecting the overall collaboration between the contracting parties and thus, results in disputes commonly subject to arbitration. 

Arbitration clauses, a common feature in government contracts, introduce their own set of complexities. The inclusion of government-nominated arbitrators, raises legitimate concerns about impartiality. The recourse for challenging such appointments or dealing with unresponsive or overburdened Govt. appointed arbitrators involves a detour through the courts, consuming valuable time and resources. The Supreme Court, while recognizing the well-established principle that appointment is required to be done as per the terms and conditions of the contract, held that if circumstances exist, an independent arbitrator may be appointed as an exception to the general rule if there is reasonable apprehension of bias and impartiality. In cases where the parties cannot mutually agree on an arbitrator, they are compelled to invoke 

Section 11(6) of the Arbitration and Conciliation Act, 1996, for the appointment of an arbitrator through the court, a process that typically extends over several months. This delay, not to mention the subsequent initiation of arbitration proceedings, significantly undermines the purpose of opting for arbitration as a quick and efficient dispute resolution mechanism. Moreover, the courts are engaged in lengthy inquiries into the validity and effect of the arbitration agreement/clauses before referring parties to arbitration, which severely delays the matter. Recent amendments aim to streamline this process; however, in practice, parties can file multiple applications and delay proceedings, both before and after the closure of arbitration proceedings. Even if these applications are ultimately dismissed on merit, the process of filing applications, serving the other side, hearing applications, and seeking an order on these applications is used by the parties to buy time in a judicial system that is significantly overburdened.

In this intricate web of challenges, the importance of robust arbitration mechanisms cannot be overstated. The intervention of the court cannot be eliminated, as those are statutorily enshrined under the Arbitration and Conciliation Act. The comprehensive solution to the array of issues discussed in the article lies in fully embracing and resorting to institutional arbitration. Institutional arbitration not only addresses concerns related to bias, non-performance by contractors, payment-related issues, and delays in government contracts but also introduces a systematic framework. Typically, institutional arbitration has its own rules that govern the procedure that would be followed. The Government of J&K has recently established the Institutional Arbitration Centre, namely the Jammu and Kashmir International 

Arbitration Centre (JKIAC), which could prove beneficial to counter such issues. The advent of institutional arbitration, exemplified by the J&K International Arbitration Centre (JKIAC), brings a structured
approach to dispute resolution. With a diverse panel of experts covering fields such as law, medicine, engineering, information technology, town planning, etc. to assist in the arbitral proceedings, JKIAC may provide a cost-effective alternative to protracted court battles. For dealing with the arbitration proceedings in the Centre, the Jammu and Kashmir International Arbitration Centre (Arbitration Proceedings) Rules, 2020 have been framed by the High Court. Despite these massive developments, most arbitrations in J&K are still conducted on an ad hoc basis. To fully leverage the benefits of institutional arbitration, suggested arbitration clauses in government contracts explicitly mentioning institutions like JKIAC in the following format may prove beneficial:

“Any dispute, difference, or claim arising out of, in connection with, or relating to the present contract or the breach, termination, or invalidity thereof shall be referred and settled under the Jammu & Kashmir International Arbitration Centre (Arbitration Proceedings) Rules, 2020, by one or more arbitrators appointed by its rules”.

In the framework of institutional arbitration, the administration of Arbitration falls under the purview of the Arbitration Institution. The institution’s panel of arbitrators typically comprises experts from various fields and this setup empowers parties to nominate an arbitrator possessing the requisite skills, experience, and expertise for a quick and effective dispute resolution process. The institution retains the right to refuse an appointment, on request, if it deems the nominated Arbitrator lacks the necessary competence or impartiality. Arbitration institutions oversee the entire arbitration process, starting with notifying the defending party about the Claimant’s request for Arbitration and extending the notification of the arbitral award to all involved parties. Institutional arbitration, therefore, offers a structured, impartial, and cost-effective alternative, providing support and expertise throughout the arbitration process. The recent legislative amendments, particularly in 2019, signal a shift towards institutional arbitration as a preferred mode, aiming to expedite resolution and reduce court interference.

In conclusion, achieving effective dispute resolution in J&K government contracts demands equilibrium. Addressing the aforementioned issues necessitates a comprehensive approach, including streamlined dispute resolution mechanisms, timely payments, and a proactive review of compensation policies in situations not attributable to the contractor. At a broader level, a thorough understanding and adherence to contract requirements, project timelines, and payment provisions by the contractors is essential for successful contract execution. Proactive identification of variations, coupled with transparent communication and timely responses from the departments, significantly contribute to the seamless operation of government contracts. The careful construction of arbitration clauses, along with the integration of institutional frameworks such as JKIAC (Jammu and Kashmir International Arbitration Centre), emerges as a key strategy for unlocking smoother and more efficient contract execution and dispute resolution in the dynamic landscape of the UT of J&K.

The authors, Adv. Romaan Muneeb, Partner at “Malik and Romaan Law Offices, Srinagar, J&K,” along with Associate Adv. Areeba Ahad, are lawyers at the J&K High Court. The authors can be reached at malikandromaan@gmail.com