Introduction
The Government of India (“Government”) had announced a one-time voluntary settlement scheme through the Union Budget 2023-24 to settle contractual disputes involving the Government of India or its undertakings. This voluntary settlement process would also be applicable to disputes that have resulted in arbitral awards or court decrees or court orders upholding arbitral awards (hereinafter collectively referred to as “Award”) under challenge. The scheme is called Vivad se Vishwas II (Contractual Disputes). A draft scheme was published for circulation and was open for public comments till March 8, 2023.
The Indian government is the largest litigant in Courts and Tribunals in India. Over the years, successive governments have tried to reduce litigation cost and related expenses through its litigation policy but unfortunately the contractual disputes have not been at the forefront of such discussion. Courts and Tribunals are reeling under the pressure of large pendency of old cases thereby making the Government’s promise of access to justice and improving ease of doing business in India, more difficult to meet.
After receiving feedback from the stakeholders, the Government has released the final draft of the Vivad se Vishwas II (Contractual Disputes) scheme (“Scheme”), vide its office memorandum dated May 29, 2023 issued by the Department of Expenditure of the Ministry of Finance. The date of commencement of the Scheme is July 15, 2023 and the last date for submission of claims is October 31, 2023. This deadline may be extended in the future but only under certain circumstances as discussed hereinafter.
Applicability of the Scheme
Parties to the Dispute
For the Scheme to be applicable, one of the parties to the contract must be:
- A ministry/ department (including the attached and subordinate bodies); or
- An autonomous body of the Government; or
- A public sector bank or a public sector financial institution; or
- A central public sector enterprise (“CPSE”); or
- A union territory without legislature (would exclude Delhi and Puducherry) and all agencies/ undertakings thereof; or
- An organisation in which the Government holds 50% or more shares.
The above-mentioned entities have been referred to as “Procuring Entities” under the Scheme.
The Scheme provides an exception to organisations in which the Government’s shareholding is at least 50%. Such organisations can opt out of the Scheme at their discretion, with the approval of their board of directors.
Further, though the Government has urged union territories with legislature and state governments to adopt the Scheme, they are not included in it currently.
The parties in dispute with the Procuring Entities are referred to as “Contractors” in the Scheme. It would also include CPSEs, etc., who are contractors to the Procuring Entities. The Scheme, as mentioned above, is voluntary and would apply to only those Contractors who wish to participate in it. For the Scheme to be applicable, the Contractor need not be an award-holder. Importantly, even where the Contractor is the award/ judgment debtor, it can opt to settle under this Scheme. So, if the Contractor has suffered an Award, it can reduce its liability by opting to settle under this Scheme as per the same mathematical calculation provided below. This is indeed a welcome and bold move by the Government.
Inclusions
The Scheme is applicable:
- Only to contractual disputes including all kinds of procurement contracts, including procurement of goods, services and works.
- ‘Earning contracts’, i.e. contracts where the Government receives money in exchange for goods, services, rights, etc., as well as contracts entered under the public private partnership arrangements.
- Multiple disputes under a single contract can also be claimed under the Scheme separately.
- Only to disputes involving monetary claims.
Exclusions
The Scheme does not apply in the following:
- Awards/Court decrees that direct specific performance (either fully or partially) of the contract;
- Disputes which have not resulted in an arbitral award up to 31.01.2023 or a court decree up to 30.04.2023;
- International arbitration matters;
- Interim orders issued by either the arbitral tribunal under any of the provisions of the Arbitration Act or by the court (under Section 9 of the Arbitration Act) are not considered awards eligible to settlement under the Scheme.
- Matters where a settlement has been reached between the parties through a conciliation agreement.
Settlement Pay-out under the Scheme
Award by Court
For any award passed by the Court on or before April 30, 2023, the Scheme stipulates a settlement amount equivalent to 85% of the net amount awarded/ upheld by the court or 85% of the claim amount lodged by the Contractor under the Scheme, whichever is lesser.[1]
The Scheme clarifies that it would be applicable, irrespective of whether the decree is under further appeal or not. The Scheme would cover cases where the parties have directly approached the court or after an arbitral award is passed (under any provision of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”)).
Arbitral Award
The cut-off date for an arbitral award to be eligible to be settled under the Scheme is January 31, 2023. The amount payable for settlement in arbitral awards (including award passed by the Micro and Small Enterprise Facilitation Council or by a tribunal appointed on its reference) is pegged at 65% of the net amount awarded/ upheld or 65% of the claim lodged by the Contractor under the Scheme, whichever is lesser. The scheme would be applicable irrespective of whether the arbitral award is under challenge or appeal before a court.
Counterclaim
The Scheme provides that in case there is a counterclaim (Y) in a dispute, and the same is successful along with the claim (X), then the calculation of the settlement amount would be the net amount awarded (X-Y).
Post-Award Interest
If the Award is not paid or is partially paid within the time stipulated under it (if no time period is provided under the Award, the default time period which is interest free shall be 30 days), a simple interest of 9% per annum would be payable on the settlement amount, accounting for the partially paid amount. The interest would be payable for the period beyond the stipulated date in the Award till the date of acknowledgement email (discussed later). The Scheme also restricts the post award rate of interest at 9%, notwithstanding the rate mentioned in the Award. It is to be noted that the Scheme does not interfere with the pre-reference and pendente lite interest and the same would be as mentioned in the Award.
Procedure for Processing of Claims
Contractors are required to submit their claims through the Government e-Marketplace or other relevant portals (“Portal”). Within two weeks of the receipt of the claims, the Procuring Entity will have to evaluate the settlement amount as per the Scheme and offer it to the Contractor.
Thereafter, the Contractor shall respond to the offer strictly within thirty days from the date of the offer. The Procuring Entity would be entitled to amend/ withdraw the offer before it is accepted by the Contractor. Once the offer is accepted, an acknowledgement email shall be sent to both the parties by the Portal. In case the Contractor has accepted the offer, the Contractor may withdraw it within forty-five days (or longer if permitted by the Procuring Entity) from the date of acknowledgement email, by filing an application for withdrawal of the case before the court.
Execution of the settlement agreement based on format annexed with the Scheme (“Settlement Agreement”) and payments pursuant thereto are required to be done only after the permission to withdraw the case from the court has been obtained by the Contractor and the same has been uploaded on the Portal. In cases where the Procuring Entity is required to withdraw the case, then subject to other aforementioned conditions being fulfilled, the Settlement Agreement will be executed within thirty days of submission of the withdrawal application, without awaiting formal court permission. Payment will be made within thirty days of the execution of the Settlement Agreement by the relevant party.
The Settlement Agreement would have the same effect as the settlement agreement drawn after a successful conciliation under the Arbitration Act. The Contractor is responsible for the payment of applicable stamp duty on the Settlement Agreement.
In case a Contractor is unwilling to accept a Procuring Entity’s offer, the ongoing litigation would continue.
Any court order passed after the cut-off date, i.e. April 30, 2023, and before the settlement under the Scheme would not affect the status of the dispute under the Scheme. The only exception will be if the court passes such a post cut-off date award in favour of the Procuring Entity. In that case, the Procuring Entity must send a revised offer as per the court award. The above-mentioned procedure and timelines for the offer and acceptance of the offer shall be followed again for the revised offer sent by the Procuring Entity. The Procuring Entity’s revised offer can only be sent before an acknowledgement email is generated by the Portal (which is generated after the acceptance of offer by the Contractor) as once an acknowledgment email is generated, it must be honoured and any court order issued after such acknowledgement email ought to be ignored for the purposes of this Scheme.
Discretion to reject offer available only if claim exceeds 500 Crores.
The Scheme provides that in case the claim amount is INR 500 crore or less, Procuring Entities are bound to accept it, subject to the claim satisfying other conditions of the Scheme. If, however, the claim amount exceeds INR 500 crore, the Procuring Entity may choose to reject the settlement request by the Contractor. However, such rejection must be reasoned and reviewed and the reasons for rejection must be recorded in writing. Contractors can reduce their claim to fall under the INR 500 crore limit, under the Scheme.
Conclusion
The Government’s move to provide a framework to settle contractual disputes and reduce pendency of such cases in Courts and Tribunal is a welcome step in the right direction. However, considering the delays that are generally associated with the Government and public sector undertakings, the success of the Scheme would depend on timely consideration and acceptance of settlement proposals made under the Scheme. The exclusion of arbitral awards/court orders in International Arbitration matters from the Scheme is surprising since the inclusion of the same would have been in line with the Government’s ease of doing business in India initiative. The Government needs to consider a broader framework which would allow other deserving claims including in matters involving foreign parties for quick settlement and resolution.
For further information, please contact:
Indranil Deshmukh, Partner, Cyril Amarchand Mangaldas
indranil.deshmukh@cyrilshroff.com
[1] For instance, a court award allows a claim of INR 200 (X) and a counter claim of INR 100 (Y). The net amount would be INR 100 (X-Y). The claim under the scheme would be for 85% of the net amount, i.e. INR 85. Interest would be applicable on the net amount. Similar calculations would ensue for arbitration awards as well except only 65% of the net amount can be paid, instead of 85%.
