The operative parts of the OM are worth stating precisely. It states that arbitration should not be “routinely or automatically” included in procurement contracts, particularly large ones. As a norm, arbitration should be restricted to disputes valued below INR 10 crore (this refers to the value of the dispute and not the value of the contract). Inclusion of arbitration for higher-value disputes requires the approval of a Secretary-level officer (or Joint Secretary with delegated authority) for ministries and the Managing Director for Central Public Sector Enterprises and public sector banks. Where arbitration is implemented, institutional arbitration should be preferred. For high-value disputes where arbitration is excluded, the OM recommends High Level Committees composed of retired judges and retired officers, which can either mediate, receive a negotiated proposal, or act as the mediator themselves.

The OM offers reasons as to why arbitration has, in its experience, failed to deliver. Each deserves individual scrutiny:

First, the OM acknowledges that “acceptance of an adverse award when judicial avenues are not exhausted is often perceived to be improper by various authorities.” This includes accountability of the Government to the Parliament (which in turn makes them answerable as to why certain actions available under the law were not taken after an arbitral award was rendered against the Government entity). Read carefully, this is an acknowledgment that the Government tends to challenge arbitral awards as a matter of institutional culture rather than on merit, and that it considers not challenging an award to be the default improper course. This is highly problematic as the OM then treats this as a failing of the arbitration mechanism itself. This is facilitated by the Indian arbitration regime which provides for multiple manners in which a Court can intervene after the arbitral award is rendered. The finality of arbitration is not undermined by arbitration as an institution but by the policy that litigates adverse awards. The best example for the same is Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Pvt. Ltd. where a single arbitral award was subjected to proceedings under Section 34, Section 37, SLP and a curative petition, all filed by the Delhi Metro Rail Corporation, before ultimately being set aside. The recent decision in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. further expands the scope for post-award judicial intervention by recognising a limited power in courts to modify arbitral awards, which adds yet another route through which the finality of awards may be contested. The culture of the Government to challenge arbitral awards through every available procedural avenue, coupled with the Indian arbitration framework providing multiple layers of challenge undermines the finality of arbitral awards. The OM appears to proceed from the premise that adverse arbitral awards are themselves evidence of a malfunctioning arbitral process.

Second, the OM states that arbitration has become too lengthy and too costly, as much as “rivalling and often exceeding litigation.” This is a legitimate grievance in the Indian context. For example, the Law Commission, as early as August 2014, in its Report No. 46 titled Amendments to the Arbitration and Conciliation Act 1996 states that “although arbitration has fast emerged as a frequently chosen alternative to litigation, it has come to be afflicted with various problems including those of high costs and delays, making it no better than either the earlier regime which it was intended to replace; or to litigation, to which it intends to provide an alternative.” However, the OM itself, in paragraph 7(iv), recommends preferring institutional arbitration where appropriate. Institutional arbitration with expedited timelines, vetted arbitrators and structured fee schedules is the recognized global response to the cost-and-delay problem of arbitration. If institutional arbitration is the stated preference, then the policy response should be mandating institutional arbitration for large disputes rather than restricting arbitration for larger disputes. The OM holds both positions simultaneously without acknowledging the contradiction.

Third, the OM states that the “reduced formality, combined with the binding nature of decisions, has often led to wrong decisions on facts and improper application of the law.” Arbitration is flexible by design and this characteristic cannot be portrayed as a defect. The ability to depart from the rigid evidentiary and procedural rules of a court and to appoint technically qualified decisionmakers for complex matters, is precisely why arbitration is the preferred mechanism globally for complex commercial and infrastructure disputes. An increasingly difficult position to sustain is equating procedural formality with substantive correctness, which overlooks the possibility that a formally proper process may still produce an unjust outcome.

Fourth, the OM states the concern of “little accountability for such wrong decisions, if taken by arbitrators.” Notably absent from the OM’s diagnosis is any acknowledgment of the Government’s own contribution to the perceived accountability deficit. For example, the Hon’ble Supreme Court has identified structural concerns in the manner public sector entities appointed arbitrators. In Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV), the Constitution Bench observed that while PSUs may maintain a panel of potential arbitrators, they cannot compel the opposing party to select an arbitrator from that panel. If the Government believed that arbitral outcomes were being distorted by deficiencies in the arbitral process, reforming appointment mechanisms would have been a logical response. Yet the OM does not engage with this issue at all and instead treats the problem as one inherent to arbitration itself.

Fifth, the OM contends that transferable officers place the Government at an informational disadvantage in arbitration. However, this is not unique to arbitration and applies equally to litigation. Government entities possess institutional records, legal departments and external counsel precisely to address such transfers. This concern is not addressed by suggesting for an exemption of arbitration. The OM therefore treats an administrative challenge as a justification for curtailing an otherwise neutral dispute resolution mechanism.

Sixth, the OM’s preference for mediation rests on an assumption that Government officials will be willing and able to settle disputes through mediation. This assumption uncomfortably exists along with the OM’s own acknowledgement that accepting adverse outcomes is often viewed as improper when there are legal avenues to challenge the award. The incentives that discourage Government officials from accepting arbitral awards are equally capable of discouraging them from approving mediated settlements. This affects the viability of mediation.

Further, the INR 10 crore threshold warrants specific attention. The threshold reflects a misunderstanding arbitration’s comparative advantage to litigation. When compared to court litigation, arbitration often provides a better platform in large, technically complex disputes involving specialized subject matter. The OM inverts this entirely by preserving arbitration for the disputes where it is least necessary and removes it from the disputes where it is most needed.

The OM is the source from which both the PWD notification and the MoRTH circular derive their justificatory logic.