Contractual disputes: Is prevention preferable to cure? Vivad se Vishwas II.

Years of pending litigation have resulted from the government’s attempt to eliminate the decision-making process through a faceless, hierarchical structure.

The Indian government’s proposed Vivad se Vishwas-II settlement scheme was briefly discussed in our previous article on the Union Budget 2023. We go into great detail about the government’s introduced scheme in this article.

In keeping with its previous initiatives to facilitate business dealings, resolve long-standing legal disputes, encourage new investment, and lessen business uncertainty, the Central government launched the voluntary settlement program Vivad se Vishwas-II (contractual disputes) on May 29, 2023, to resolve contractual disputes between public and private entities.

Presented in 2020, the scheme’s first iteration, Vivad se Vishwas-I, was a great success, documenting the settlement of over 148,000 income tax cases.

The purpose of this plan is to resolve contractual disputes involving the government and government-affiliated enterprises. It presents graded standard settlement terms that will be applied in accordance with the dispute’s level of pendency.

Objective

In its opening statement, the scheme cites the General Instructions on Procurement and Project Management from the Department of Expenditure as well as the report of the Niti Aayog Task Force on Conciliation Mechanism. These sources highlight the necessity for the government to resolve arbitral disputes with private parties in order to prevent large interest payouts, promote a pro-business climate in India, and establish the government’s reputation as a party that upholds its contractual obligations.

Due to the faceless, hierarchical structure that underpins all public departments, there is no systematic system in place to evaluate and pursue legal action. As a result, the government is the largest litigant, pursuing litigation for years on end, regardless of the case’s merits. This plan guarantees a speedier resolution of disputes and prevents such a scenario.

Utilization

The scheme applies to contractual disputes where one of the parties is the government or is one of the following procuring entities:

a. autonomous bodies of the government;

b. public sector banks and public sector financial institutions;

c. Central Public Sector Enterprises (CPSEs);

d. Union territories without legislature and all agencies/undertakings thereof; and

e. all organizations where the government has a minimum shareholding of 50% (these organizations can choose to opt out).

The scheme refers to the other party in dispute with the procuring entities as “contractors”. 

Eligibility

The provisions in respect of the eligibility of a dispute for settlement under the scheme are:

a. the court award/arbitral award must only be for monetary value and if it contemplates specific performance, it will not be eligible for settlement;

b. the arbitral award should have been issued on or before January 31, 2023, and the court award should have been passed on or before April 3, 2023;

c. the arbitration resulting in the award, or the court award must not be an international arbitration;

d. CPSEs who are contractors to procuring entities are also eligible to submit their disputes for settlement;

e. Interim orders passed by arbitrators or by courts under the Arbitration & Conciliation Act, 1996 will not be eligible for settlement under the scheme;

f. disputes where the court/arbitral award is against the contractor are also eligible to be submitted for settlement under the scheme.

g. disputes where a settlement has been reached through a conciliation agreement will not be eligible;

h. disputes pertaining to all kinds of procurement (goods, services etc.) will be eligible; and

i. disputes arising from “earning contracts” (contracts where the procuring entities earn money from contractors such as catering contracts on trains) and public private partnership agreements will also be eligible.

Amounts payable under the scheme

Judgments rendered by courts by April 30, 2023, or before

The plan calls for paying out a settlement equal to 85% of the net amount that the court awards or upholds, or 85% of the amount that the contractor files a claim under the plan, whichever is lower. This will hold true regardless of whether the parties have approached the court directly, on appeal, or in response to an arbitral award made in accordance with any Arbitration Act provision.

Arbitral Decisions rendered by January 31, 2023, or before

The plan calls for paying out a settlement equal to 65% of the net amount that the court awards or upholds, or 65% of the amount that the contractor files a claim under the plan, whichever is lower. This will be applicable regardless of whether the dispute is the subject of a subsequent court appeal. The program will also incorporate arbitral awards made by the Micro and Small Enterprises Facilitation Council or by a tribunal chosen on its recommendation.

Rebuttal

The plan provides that in situations where a counterclaim is submitted and granted, the amount due will be either 65% or 85% of the net amount—which is determined by deducting the counterclaim from the claim.

Interest

A simple interest payment of 9% annually would be due on the net amount if the awarded amount is not paid or is only partially paid within the time period specified under the award (the time period would be interpreted as 30 days if no time period is specified). This post-award interest would be paid out for the duration of the time after the deadline for the award’s interest-free period (or, if no deadline is specified, after 30 days) and until the date of the acknowledgement email (described below). The post-award interest payable under the scheme is capped at 9%, regardless of the interest granted under the award. Pre-award and pendente lite interest provisions are not included in the plan.

Process for making payments under the Scheme

Contractors can use the Government e-Marketplace (GeM) to file their claim. From that point on, the procedure will go like this:

Step 1: The contractor must list all of the eligible disputes it wishes to resolve on the portal.

Step 2: Within two weeks of receiving the claim, the procuring entity must confirm the claim amounts, assess the settlement amount under the plan, and make the offer to the contractor.

Step 3: The contractor will have a strict 30-day window in which to accept the offer from the procuring entity; this window cannot be extended. Prior to the offer being accepted by the contractor, the procuring entity has the right to modify or withdraw it. Both parties will receive an automatically generated acknowledgement email from the portal after the contractor accepts the offer.

Step 4: After accepting the offer, the contractor has 45 days (or more if the procuring entity allows it) from the date of the email acknowledging the offer to submit a request to the court to withdraw the case. A settlement agreement as outlined in the scheme would be signed by the parties and funds would be paid to the contractor after the contractor uploads evidence of the withdrawal being approved by the court, if applicable. A settlement agreement signed under the Scheme will have the same legal force and effect as one signed following conciliation under the Arbitration Act. Nevertheless, this would entail a mediated settlement agreement under The Mediation Act with the passage of The Mediation Act, 2023.

If the procuring entity needs to withdraw the case, it can do so by filing an application for withdrawal within 45 days and then, without waiting for official court approval, executing the settlement agreement within 30 days. Within 30 days of the settlement agreement’s execution, the contractor or procuring entity is required to pay the settlement amount. The contractor will always be responsible for paying the stamp duty that is due on the settlement agreement. This clause might seem burdensome, but given that the procedure guarantees prompt reimbursement of funds, such payment makes sense.

Step 5: The parties’ ongoing legal action will proceed if the contractor declines the offer. According to the plan, any decrease in the amount of the claim made by the parties during the settlement process will not be mentioned in any subsequent legal proceedings, rendering the entire procedure unaffected.

Court Orders while the Scheme’s settlement process is still in progress

Any court rulings made after the deadline of April 30, 2023, but prior to the settlement’s completion, will not affect the dispute’s or settlement’s status. The procuring entity may, however, modify its offer in accordance with the court award if the court award finds in its favor and reduces the settlement. Before the portal automatically generates the acknowledgement email, this revised offer must be sent. The procuring entity may not modify the offer if the acknowledgement email has already been generated, and the settlement agreement will be entered in accordance with the terms of the initial offer.

Scheme’s Mandatory Nature

It seems that the program is required of procuring entities in cases where the claim value is less than ₹500 crore. This would lower the amount of ongoing government lawsuits.

The scheme’s intention to resolve disputes is evident in its requirement for the procuring entity to give justification and obtain approval from its Secretary (CEOs for CPSEs) if it declines a settlement request exceeding ₹500 crore.

In addition, refusing a settlement request should not be done so arbitrarily. Instead, a committee should be established to consider the financial, practical, and legal ramifications of taking the case to trial rather than settling it. Prior to making a decision, the committee needs to be convinced that pursuing the lawsuit will be more advantageous than settling it. This demonstrates the government’s deliberate attempts to eliminate the decision-making process through a hierarchical and faceless structure, leading to years of unresolved legal issues.

Analysis

Prevention is preferable to treatment

The government has taken a positive step with the Scheme, which, if executed well, should guarantee the reduction of the backlog of unresolved cases. It does not, however, address the fundamental reason why the government files the most lawsuits in India, which is that public officials make biased assessments of situations and make non-standard decisions because they are ignorant of the law. Suffice it to say, the Ssheme does not prevent disputes of this kind, even though it does offer a remedy for protracted legal proceedings and excessive government spending on the defense of feeble cases.

Therefore, the government must take action to stop disputes from starting in the first place in order to eliminate this root cause and increase investor confidence. The government may want to think about appointing an impartial board or independent attorney to evaluate the merits of a claim and provide guidance on the best course of action.

Clarity is lacking

The use of the term “court award” is not made clear in the scheme. Despite being used frequently, the term is not defined in the scheme. The term “court orders” was used in the draft scheme, which was released on February 8, 2023, for stakeholder comments. The scheme removes the settlement category of ongoing litigation. In the scheme, “awards” has taken the place of the word “orders” without any justification. It’s possible that the term alludes to rulings or orders from courts in Section 34 or Section 37 arbitration proceedings under the Arbitration Act.

Lack of consideration for practical issues

a. A party might decide against agreeing to a settlement under the scheme because of the significant haircut or reduction on the amount that would be paid (for example, if the claim is for ₹500 crore, the haircut or reduction under the “court award” category would be ₹75 crore).

b. The Scheme offers no explanation for the disparate treatment of “arbitral award” and “court award,” nor for the disparate settlement amounts (85% and 65%) assigned to each category. Given that the court award and the arbitral award in this case are situated similarly, the settlement amount’s percentage ought to be the same.

Implementation

The GeM program has already been put into place by the government, and contractors are now able to list the eligible disputes they hope to resolve. Some of the first procuring entities to form an internal task force to implement the scheme were government-owned companies such as Oil and Natural Gas Corporation (ONGC) and National Thermal Power Corporation (NTPC).

It is also suggested that the Indian Ministry of Road Transport and Highways carry out the scheme. The program was unveiled in May 2023, and the deadline for submitting claims was set at July 15 through October 31, 2023, with an additional extension until December 31, 2023. After the program’s term is up, the government will be able to evaluate its effectiveness and adjust its plans for future initiatives aimed at lowering the amount of pending litigation. The government may also address the aforementioned practical considerations and clarity issues in such a future scheme.

Leave a Comment