Permanent Machinery of Arbitration for Settlement of Disputes of Public Sector Enterprises-A critical analysis

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Introduction

Permanent Arbitration Machinery (PMA) is a mechanism under Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises, Govt. of India to settle disputes arising out of commercial contracts between a Public Sector Enterprises (PSEs) and a Government Department or between two or more PSEs. PMA was established with a view to settling these disputes, expeditiously and without the intervention of Courts. The Arbitration and Conciliation Act 1996 is not applicable to the PMA proceedings. No outside lawyer is allowed to appear on behalf of either party for presenting/defending the cases. But the parties can take help of their in-house law officers.

Historical background

Based on the Supreme Court of India’s observation  that the public undertakings of Central Government and the Union of India should not file litigation in court by spending money on counsel, court fees, procedural expenses and wasting public time, a note was submitted by Department of Legal Affairs to the Committee of Secretaries in 1987, who suggested that a Permanent Machinery of Arbitration should be set up in Bureau of Public Enterprises (now Dept. of Public Enterprises) to settle all commercial disputes (excluding disputes on Income -Tax, Customs & Excise) between PSEs inter se and between a PSE and a Government Department. The same was approved by the Cabinet in its meeting held on 24.02.1989. The PMA was set up in the Department of Public Enterprises (DPE) for resolving commercial disputes between CPSEs inter-se as well as between a CPSE and a Central Government Department / Ministry / Bank / Port Trust (excluding disputes on income -tax, customs and excise) in 1989. Later on in 2004 disputes concerning railways were also excluded from the purview of PMA.

In Oil and Natural Gas Commission and Anr. v. Collector of Central Excise 1995 Supp (4) SCC 541 the Supreme Court taking note of the fact that legal proceedings of PSEs are resulting in considerable public expense and waste of valuable Court time directed Government of India to set up a Committee consisting of representatives from the Ministry of Industry and Commerce, Bureau of Public Enterprises and the Ministry of Law to monitor disputes inter se Public Sector Undertakings and with the Government to ensure that no litigation came to the Courts and Tribunals without the matter having been first examined by the Committee for grant or refusal of clearance for litigation. The Supreme Court made it obligatory for every Court and every Tribunal where such a dispute is raised to demand a clearance from the Committee in case it has not been so pleaded, and also directed that in the absence of such a clearance the proceedings would not be carried forward.

The idea behind setting up of the Committee, initially, called a ‘High- Powered Committee’, later on, called as ‘Committee of Secretaries’ and finally termed as ‘Committee on Disputes’ was to ensure that resources of the State are not frittered away in inter se litigations between entities of the State, which could be best resolved, by an empowered Committee. The machinery contemplated was only to ensure that no litigation comes to Court without the parties having had an opportunity of conciliation before an in-house committee. However, experience has shown that despite best efforts of the Committee, the mechanism has not achieved the results for which it was constituted and has in fact led to delays in litigation. Since it was observed that this mechanism has outlived its utility, in Electronics Corporation of India Ltd. v. Union of India, (2011) 3 SCC 404 the Supreme Court after noticing various flaws in the working of the Committee of Disputes ordered the recall of its previous orders.

In the intervening period, Govt. of India consolidated into a single set of guidelines the PMA for settlement of commercial disputes and the directives issued by the Supreme Court regarding the constitution of Committee on Disputes in terms of a circular issued by the Department of Public Enterprises vide order No. DPE O.M. No.DPE/4(10)/2001-PMA-GL-I dated 22nd January, 2004 which inter alia provided for creation of PMA, stated the need for creation of such a machinery, indicated the entitlement of departments/ PSEs, CPSC, banks etc. to take resort to the said machinery, fixed monetary limits, stipulated fees payable towards arbitration, provided for an appeal against the award and also provided for clearance from the Committee on Disputes. The instructions issued to PSES, CPSEs, banks etc. stipulated the incorporation of a clause in current and future contracts/ agreements which specifically excluded the application of Arbitration and Conciliation Act, 1996 to arbitrations conducted under the Permanent Machinery of Arbitration.

Jurisdiction

Any dispute or difference relating to the interpretation and application of the provisions of commercial contracts between CPSEs, Banks, Port Trusts etc. inter se, or CPSE and the Government Department/s (except a dispute or difference concerning the Railways, Income-tax, Customs and Excise duties), may be referred by either party to arbitration to the PMA.

Though the mechanism of PMA is primarily meant for Central Government Departments/organizations/enterprise, if the contract involves a Central Government Department/Organization with any State Government Department/Organization and both the parties have signed Arbitration Clause in favour of PMA, in such a situation the PMA shall entertain such dispute(s) for arbitration. It is provided that an arbitration clause, to refer any disputes to PMA, shall be incorporated in all current and future contracts/agreements entered between CPSEs, Banks, Port Trusts etc. inter se, or CPSE and the Government Department/s.

Monetary Limit

There is no monetary limit as such for making reference of disputes to the PMA. However, as both parties to the dispute are to equally pay an initial cost of Rs. 20,000 each for making reference of the dispute to the PMA which is non-refundable, there shall not be much advantage in referring disputes of a small amount of the value of less than Rs. 50,000/- to PMA.

Fees

The Arbitration cost in respect of a commercial dispute settled through the PMA is required to be shared equally by the concerned disputing parties. The parties to a dispute will be required to make an initial deposit of Rs. 20,000/-, when a prima-facie case of dispute is established and the same is approved for referring to the Arbitrator of PMA for settlement. This initial cost will be adjusted to the final cost of Arbitration. The Arbitrator will work out the final cost of Arbitration based on the amount of dispute as per the following formula:

  1. 40,000 or 1% of the disputed amount up to Rs. 50,00,000, whichever is higher, to be equally shared by the parties.
  2. 50,000 + ½% of the disputed amount of above Rs. 50,00,000 but up to Rs. 5 crores to be equally shared by the parties.
  3. 2.5 lakh + ¼% of the disputed amount beyond Rs. 5 crore to be equally shared by the parties.

Compromise

In case both the parties decide to settle the dispute mutually before the Award is published, they can be allowed to do so.  In such case, the initial cost (Rs. 20,000 paid as a deposit by each of the parties) shall be forfeited and the case will be finally closed on receipt of details of the settlement arrived at by the parties in writing.  In case the parties do not provide requisite details, the Arbitrator may decide to publish the Award and in such a situation the parties will be required to pay the arbitration fee worked out by the Arbitrator.

Nature of Award

The Arbitrator shall make his award within six months after entering upon the reference or after having been called upon to act by notice in writing from any party to the arbitration agreement or within such extended time as the parties may allow.  The Arbitrator shall make a speaking award and the Award may be published on plain paper.

Interim Awards

The Arbitrator may also if he thinks fit, make an interim award. However, there shall be no appeal against interim awards and both the parties will have to wait for the final award by the arbitrator.

Exparte Award

The Arbitrator may make exparte Award when a party(ies) fail to furnish the particulars required from them, and/ or do not appear in person in spite of being given two chances to do so.  Even in that case, the parties shall be bound to meet the cost of arbitration equally.

Appeal

The Award of the sole Arbitrator under the PMA shall be binding upon the parties to the dispute, unless, any party aggrieved by such award make a further reference for setting aside or revision of the award to the Law Secretary, Department of Legal Affairs, Ministry of Law & Justice, Government of India. The decision of the Law Secretary/Special Secretary/Additional Secretary shall bind the parties finally and conclusively.

Drawbacks of PMA

The award made in terms of the Permanent Machinery of Arbitration being outside the provisions of the Arbitration and Conciliation Act, 1996 would not constitute an award under the said legislation and would therefore neither be amenable to be set aside under the said statute nor be enforceable as a decree lawfully passed against the judgment debtor.

The Supreme Court in a recent judgment in Northern Coalfields Ltd vs Heavy Engineering Corp.Ltd dated 13th July 2016 has held that “an arbitral award under the Permanent Machinery of Arbitration may give quietus to the controversy if the same is accepted by the parties to the dispute. In cases, however, a party does not accept the award, as is the position in the case at hand, the arbitral award may not put an end to the controversy. Such an award being outside the framework of the law governing arbitration will not be legally enforceable in a court of law……. Remedies which are available to the Government on the administrative side cannot substitute remedies that are available to a losing party according to the law of the land. The appellant has lost before the arbitrators in terms of the Permanent Machinery of Arbitration and is stoutly disputing its liability on several grounds. The dispute regarding the liability of the appellant under the contract, therefore, continues to loom large so long as it is not resolved finally and effectually in accordance with law. No such effective adjudication recognised by law has so far taken place. That being so, the right of the appellant to demand such an adjudication cannot be denied simply because it happens to be a Government owned company for even when the appellant is a government company, it has its legal character as an entity separate from the Government. Just because it had resorted to the permanent procedure or taken part in the proceedings there can be no estoppel against its seeking redress in accordance with law. That is precisely what it did when it filed a suit for declaration that the award was bad for a variety of reasons and also that the contract stood annulled on account of the breach committed by the respondents.”

Conclusion

The above judgment of the Supreme Court poses several questions on the efficacy and legitimacy of PMA as a mechanism for settlement of disputes between the instrumentalities of the state. If the PMA does not have statutory backing, in times to come, after participating in the PMA proceedings, more losing parties will question the legitimacy and authority of the awards passed by PMA. It is high time that Govt. of India revisit the PMA guidelines to give it more teeth and statutory backing.

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About maheshspeak

I write randomly on law, jurisprudence, polity, travel, food and anything else interesting. You can also visit my personal homepage at maheshsreenivasan.com
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2 Responses to Permanent Machinery of Arbitration for Settlement of Disputes of Public Sector Enterprises-A critical analysis

  1. Jacob Oommen says:

    Good to know, Mahesh… Keep on sharing such information… Good Luck

    Liked by 1 person

  2. Jayashankar says:

    Very well written Mahesh. Keep writing and sharing

    Liked by 1 person

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