Oil India to be first state-run firm to tighten monetary limit for arbitration cases after finance ministry’s nudge

The oil exploration company aims to reduce the number of such disputes by tightening monetary limits in procurement contracts. Oil India will roll out the changes in the procurement contracts it signs with domestic suppliers within a month.

Oil India is trying to reduce its financial burden after the amount that it set aside as contingent liabilities for arbitration and litigation cases almost doubled in FY24. While this will be the first codified limit set on arbitration in India by a government entity following the finance ministry’s push, experts said it could result in more cases ending up in already overburdened courts. 

The first step in the plan to cut down Oil India’s long-winding arbitration cases, which are a burden on its treasury, is to reduce the number of such cases by chipping away at the monetary limits in the commonly used contractual conditions, the people said.

“We are looking at following the finance ministry’s office memorandum in spirit by narrowing the possibility of taking on arbitration in procurement cases. There have been internal discussions about this, and within a month or so, we will be ready with amendments to our GCC (general conditions of contract) for domestic public procurement,” one person said on condition of anonymity.

The person said Oil India may even set a limit of less than ₹10 crore to opt out of arbitration, narrowing the limit suggested by the finance ministry.

Oil India had pending litigation and arbitration over claims worth ₹112.91 crore in FY24, almost double of ₹59.7 crore in FY23, in cases raised by contractors, according to the company’s annual reports.

These amounts are listed as contingent liabilities, which may be payable if the courts or arbitrators rule against Oil India. The company does not disclose the number of its litigation or arbitration cases.

Role of arbitration

Email queries sent to Oil India and the ministries of law and justice and finance on 9 October did not elicit a response till press time.

Arbitration is a common element in dispute resolution clauses of public procurement contracts and is used to decide how parties will resolve a feud. Setting an upper limit means government entities will not engage in arbitration when the dispute value is over ₹10 crore, as per the finance ministry advisory dated 3 June.

General conditions in contracts have long had a lower limit for arbitration. A party may resort to arbitration only when the disputed value is above a specific amount. Oil India’s decision to cut the upper limit for arbitration, however, will narrow the volume of arbitration that the government engages in.

However, with reduced arbitration, disputes related to procurement are likely to be pushed to the courts, which are already dealing with burgeoning pendency of cases, according to experts. According to the National Judicial Data Grid, Indian district courts had 5.68 million pending civil suits as of 10 October.

Experts said there is a no statutory bar to settling a dispute by mediation even if there is an arbitration clause in the contract.

“Mediation and arbitration should have been seen more harmoniously as means to encourage alternative dispute resolution, as opposed to resorting to litigation where we currently have over 5.1 crore cases pending adjudication,” said Arush Khanna, a partner at Numen Law Offices in New Delhi.

According to Shaneen Parikh, partner and head of international arbitration at Cyril Amarchand Mangaldas, the finance ministry advisory does not recognise that while it may take two to three years to get an arbitration award, the time taken to obtain judgment from a court can be anywhere from five to 20 years.

“And even after that, there is a first appeal, a second appeal, and recourse to the hon’ble Supreme Court. Therefore, by any calculation, an arbitration is quicker,” Parikh said.

Cascading impact

The government’s recusal from arbitration would also send a signal to foreign parties even though the finance ministry’s advisory confines itself to domestic contracts, according to arbitration lawyers.

“It will have a cascading impact across the board (and border). Pitching for foreign investment by encouraging international arbitration whilst reposing little faith in the Indian arbitration landscape is preaching something you don’t practice,” said Khanna. “As a stakeholder, one can only hope that these guidelines are revisited and solutions paving the way for India’s pursuit of becoming a hub for international arbitration can be worked.”

Mint reported on 24 June that arbitration professionals were irked by the finance ministry’s advisory and asked for it to be recalled.

The government’s efforts to cut down on arbitration comes against the backdrop of the law and justice ministry working to amend the Arbitration and Conciliation Act, the nation’s key law on arbitration. To be sure, the finance ministry also suggested resolving disputes using mediation instead of arbitration, months after passing the Mediation Act in 2023.

Mediation allows parties to come to an amicable consensus in a dispute, while arbitration ends with one party winning and the other losing.

Parikh added that in pushing for mediation, the finance ministry’s memorandum empowers public sector companies to settle matters instead of forcing them to arbitrate or litigate.

“Were this part of the memorandum adopted in the true spirit in which it is intended, then it could facilitate settlement and less litigation, and the settlement would be in line with the government’s general push for reduced litigation, which led to the Vivad se Vishwas II (Contractual Disputes) scheme that allowed the government to settle certain disputes with contractors,” said Parikh.

Previous Supreme Court judgements have reflected the high cost of arbitration borne by the government. In Hindustan Construction Company vs Union of India, private contractors alleged that certain state-owned companies owed them over ₹6,000 crore in arbitral awards.

While the government refuted these claims, it admitted that certain public sector companies had paid over ₹3,000 crore in arbitral awards during 2008-19.

The finance ministry told the Lok Sabha in July that a study showed that over 60% of all arbitration awards involving NTPC Ltd and the National Highways Authority of India were challenged in court.

“In all these cases, the government is compelled to spend on both arbitration as well as on litigation,” minister of state for finance Pankaj Chaudhary told the Lok Sabha.

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