Lack of avenue to opt out makes government contracts inequitable

By Shreya Sircar and Jyotsna Punshi, Bharucha & Partners

Public sector enterprises, and other government entities (government) regularly execute commercial contracts with private entities or private contracting parties. These contracts often follow bids submitted in response to government tenders, and usually contain standard terms that leave the private contracting parties no room for negotiation except in the limited aspects of pricing and quantum.

Most tenders put out by the government contain standard form agreements to be executed at the start of the project, the terms of which, including dispute resolution provisions, have been unilaterally drafted. Typically, such a dispute resolution mechanism is not based on an internal analysis of its viability or suitability in the context of the relevant contract. In fact, the standard form agreements are drafted following manuals prepared by the Ministry of Finance, which mandate arbitration in the event of disputes arising between the government and a private contracting party. Private contracting parties only have the choice of executing the standard form commercial agreements as drafted by the government or not participating in the project at all.

To remedy this inequity, guidance may be found in foreign jurisdictions such as the United States, where courts have increased their scrutiny of the enforcement of mandatory arbitration clauses in commercial contracts. US courts are exploring the fairness of prescribed dispute resolution mechanisms with opt-out clauses, that is clauses in the agreement under which parties may opt out of arbitration in inequitable contractual relationships. Such clauses are increasingly being used to create balance and fairness in contractual relationships. Incorporating opt-out clauses in contracts does not mean that parties are automatically excluded from subsequently submitting a dispute to arbitration.

In the US case of Suarez v Uber Technologies Inc, Uber filed a motion to arbitrate certain disputes with their drivers based on an arbitration clause in their contracts that included a class-action waiver. Each contract also contained an opt-out clause. The drivers contended that the arbitration clause was unconscionable. However, the US District Court held that that the arbitration clause in question was not procedurally unconscionable, as the contracts gave the drivers the right at the time of contract signing and 30 days thereafter, to opt out of the arbitration provision.

In comparison, the government in India continues to baulk at giving private contracting parties the option on a case-by-case basis to refuse arbitration. Private contracting parties are therefore in a take it or leave it position and are prevented from exploring alternate dispute settlement routes such as mediation or conciliation. Even though commercial contracts with the government provide for pre-arbitration amicable resolution, these clauses are ineffectual. In fact, it is evident from a bare reading of these clauses that they are largely inequitable as the prescribed process ordinarily envisages the setting up of committees presided over by members who are directly or indirectly under the control of the government. This, in turn, impinges on party autonomy and control, the hallmarks of a sound dispute resolution mechanism.

A mandatory arbitration clause may not always be the preferred mode of settling disputes as arbitration proceedings can be time and cost intensive, involve the expenses of witnesses, the costs of technical advice, discovery costs, stamp duty on awards, and so on. Indeed, depending on the costs involved, private contracting parties may be inclined to opt out of ad hoc arbitration and pursue institutional arbitration instead to ensure procedural and logistical convenience.

Private contracting parties should endeavour at the pre-contractual stage to identify potential disputes and mitigate against them by engaging in meaningful discussions and negotiating with the government over proposed projects. Additionally, more effective engagement between the government and private contracting parties would enable all parties to tailor contract provisions to the relevant projects. This approach is also consonant with, among other matters, the fundamental principles of transparency, fairness, and accountability, which are the foundations of commercial contracts and law.

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