Govt hits the brakes on road arbitration extensions to reduce delays and costs

Mint reported on 25 June that NHAI has faced many such disputes in recent years, leading to a drop in highway project awards from 6,300 km in FY22 to about 4,000 km in FY25. Arbitration claims against NHAI have swelled to nearly ₹1 trillion as of March, which is roughly 40% of NHAI’s total liabilities, underscoring the financial strain from unresolved conflicts. In July 2024, the finance ministry said in a Lok Sabha disclosure that about 60% of arbitral awards in cases related to public sector units (PSUs) such as NHAI Ltd and NTPC Ltd were challenged.

Now, according to an internal communication in the ministry of road transport and highways (MoRTH), which Mint has seen, the union government has asked regional officials to seek MoRTH’s approval before giving extensions to arbitrators or asking a court to extend the arbitration period beyond two years. MoRTH expects these changes to improve the efficiency and certainty of dispute resolution in highway and infrastructure projects.

Ministry’s approval required

Under Indian law, an arbitration may last up to two years, provided there are no delays from intervening courts. Once an arbitrator is appointed, arguments from both sides must be completed in six months. Once this is done, the arbitrator must make a decision in a year. In case the arbitrator fails to do so, both parties can seek another six-month extension.

Now, MoRTH has hit the brakes on this extension. It has asked all regional officials to seek approval from the union government a month before the extension has to be made. There are two parts to this – extending the time period for the arbitral award by six months, and extending the appointment of the arbitrator for that period.

Under the law, the arbitrator’s term ends when the two-year period, as explained above, lapses. But the clock stops ticking when a party asks a court to extend the term of the arbitrator, thus creating two separate applications.

MoRTH has now asked regional officers to seek its approval for extensions of the arbitral award period at least one month in advance, and for extensions of the arbitrator’s appointment at least two months in advance.

Any extension beyond the two-year period must be ratified by a court, under the law. MoRTH has decided that a detailed application, citing justifiable causes, must be prepared and filed on behalf of NHAI before going to court for a further extension. Proposals for court applications must reach the MoRTH headquarters at least two months before the expiry of the party-led extension period, said the first person quoted above.

“The circular also addresses persistent delays in processing extension requests, which often lead to procedural complications, unnecessary litigation, and stalled dispute resolution,” said the second person.

Arbitration delays aren’t restricted to NHAI disputes and are an India-wide phenomenon. “One way to restrict delays is to prescribe strict timelines for arbitration awards and time-bound enforcement of such awards without further judicial review. All of this will require changes to existing laws,” said kuljit Singh, partner and national leader, infrastructure, EY India.

Queries sent to MoRTH and NHAI remained unanswered at the time of publishing.

Mediation over arbitration

The union government has been wary of using arbitration to resolve disputes of late. In June 2024, the finance ministry asked the union and state governments, as well as their agencies and public sector units, to halt arbitral disputes valued under ₹10 crore and choose mediation instead. This permeated all tiers of the government, and now major PSUs including NHAI choose mediation over arbitration, Mint reported on 1 October.

“As per a ministry of finance circular dated 03.06.2024, incorporation of mediation clauses in its contracts is under active consideration. Highway contracts are expected to include mediation provisions,” NHAI told Mint earlier, adding that mediation is being promoted as it is faster and cheaper.

Mediation is non-adversarial and ends with both sides winning some and losing some, while arbitration ends with one party winning and the other losing.

“Delays in arbitration and frequent challenges to awards are very much an issue for NHAI as they can lead to inflated and prolonged financial exposure, and block projects. They can also weaken NHAI’s budgetary and risk planning,” said Shiv Sapra, partner at Kochhar & Co., a law firm in New Delhi. The government’s decision to require prior approval may reduce uncertainty and enable quicker resolution, he added.

Delays in resolving such disputes could also damage India’s reputation for contract enforcement among potential investors, said Chinmay Bhosale, an advocate practising in the Bombay High Court. “Prolonged arbitrations keep funds blocked, sour contractor relationships, and often lead to cascading project delays and mounting interest costs,” said Bhosale.

“Early central review forces regional offices to build stronger cases upfront, weeding out weak challenges that would likely fail in court anyway, thus improving the quality of litigation and reducing frivolous appeals,” Bhosale added.