Navigating Disputes in Public Sector Undertakings: Challenges, Complexities, and Strategic Pathways to Resolution
- Introduction
The Indian Public Sector Undertakings (“PSUs”) have been, and are, the foundational pillars of India’s growing economy, which consistently thrives the infrastructure growth, government spending, creating employment, encouraging social welfare, all of which substantially contributes to the country’s GDP (gross domestic product). Given their expansive commercial and operational footprint, PSUs find themselves entangled in a multitude of transactions, commercial contracts, and high-stake disputes, either before the courts, or specific tribunals, or before mediation or in arbitration. Government litigation accounts for nearly 50% of pending cases in India. In these cases, the focus remains on neutrality, procedural efficiency, and adherence to robust legal standards as the PSUs are subject to enhanced scrutiny vis-à-vis a private party.
- Handling complex disputes by or against PSUs and relative challenges
PSUs in India operate within a unique legal, operational, and regulatory framework that mandates certain compliances or internal protocols as regards doing business, awarding contracts, floating tenders, dealing with third parties, resolving disputes either through mediation, litigation, or arbitration, etc. Typically, PSUs follow the Administrative Mechanism for Resolution of CPSEs Disputes (“AMRCD”) which requires certain disputes involving government entities to be first addressed through structured inter-ministerial mechanisms. To ensure that such processes are conclusive and do not lead to protracted litigation between the parties, PSUs approach AMRCD. Additionally, in our experience, the significance of submissions and claim statement cannot be underestimated, because, clearly drafted factual and legal submissions immensely aid in facilitating early resolution.
Recent policy trends have seen a marked shift towards alternative dispute resolution (“ADR”) mechanisms, with a growing emphasis on mediation, especially in public procurement matters. Mediation is now encouraged over arbitration in the interest of expediting settlements, preserving business relationships, and minimizing reputational risks for the PSUs. Having said this, PSUs cannot avoid litigation especially in cases involving public policy, statutory interpretation, or serious allegations such as fraud and corruption. In such scenarios, courts closely scrutinize the PSUs’ actions for compliance along with principles of natural justice, transparency, and non-arbitrariness, reflecting applicability of Part III of the Constitution of India, 1950 (“Constitution”). As ADR framework evolves and internal compliance remains stringent, PSUs must adopt proactive and sophisticated dispute management strategies to balance public interest with commercial pragmatism.
- Navigating Legal Issues Involving PSUs in Indian Jurisprudence
Navigating disputes involving PSUs, whether initiated by, or against them, surely demands a nuanced appreciation of their legal status, accountability mechanisms, and the evolving landscape of Indian administrative law.
Legal representation of PSUs provides a wealth of experience in deciphering the intricate statutory frameworks and constitutional principles that govern these entities. However, recognising that PSUs are classified as ‘State’ under Article 12 of the Constitution, the private party adeptly invokes writ jurisdiction in most cases filed against PSUs to challenge, or defend against allegations of arbitrariness, or violation of fundamental rights, as established in landmark cases such as Rajasthan State Electricity Board v. Mohanlal[1].
“Therefore, these Corporations and Undertakings are subject to Part-III of the Constitution. Consequently, the Supreme Court and the High Courts have power of judicial review under Articles 32 and 226 of the Constitution.”
The Hon’ble Supreme Court in the case of Uflex Ltd. v. State of Tamil Nadu[2] opined that “the ground reality today is that almost no tender remains unchallenged. Unsuccessful parties or parties not even participating in the tender seek to invoke the jurisdiction of the High Court under Article 226 of the Constitution.”
Often PSUs face such major challenges or hurdles as mentioned below:
- Invoking Arbitration Clause and Challenging its Validity:
PSUs often encounter legal disputes arising from commercial agreements, particularly regarding the invocation and validity of arbitration clauses. In such cases, PSUs can overcome the foregoing challenge by indulging into clearly drafted arbitration clause having all ingredients mentioned explicitly and then following the arbitral process meticulously. A recurring challenge is the limited scope of judicial review under Section 11(6A) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), which restricts the court’s examination to the existence of a valid arbitration agreement and the due invocation of arbitration, without delving into the substantive merits of the dispute. However, even with the limited scope, in certain cases, courts have set aside the arbitration clauses inserted in commercial contracts entered between the PSUs and private parties, for e.g., an arbitration clause providing unilateral appointment of arbitrator by the PSUs. Certain PSU contracts still have such clauses due to which the appointment of arbitrators gets delayed or challenged. To avoid such delays, the PSUs must draft arbitration clause in accordance with the principles of impartiality and non-bias as stated in the Arbitration Act and the judicial precedents.
- Institutional Arbitration Fee Dispute in PSU Construction Contracts:
PSUs frequently encounter disputes whilst implementing institutional arbitration clauses within commercial contracts, particularly when the arbitration is to be administered by a designated forum such as the SCOPE Forum of Conciliation and Arbitration (“SFCA”). In such case, a common challenge arises when one party fails to comply with procedural requirements, such as the timely deposit of arbitral fees, which is a prerequisite for the appointment of an arbitrator under the forum’s rules. Therefore, PSUs must address the delay caused by non-compliance, as also the legal question of whether applications for arbitrator appointment under Section 11 of the Arbitration Act, are maintainable when the parties have already agreed to institutional arbitration. These procedural disputes can impede the progress of arbitration, compelling the PSUs to seek judicial intervention to ensure adherence to agreed mechanisms and to uphold the integrity of institutional processes. Such situations highlight the operational and legal complexities faced by PSUs in enforcing contractually stipulated dispute resolution procedures, especially when the opposing party’s actions or omissions disrupt the efficient commencement of arbitration proceedings.
- Criminal Liability and Regulatory Challenges in Petroleum Product Transportation by PSUs:
Specifically, PSUs operating in the oil, gas and petroleum sector often face complex legal challenges arising from allegations of pilferage and adulteration during the transportation of petroleum products. Often, in such cases, the PSUs initiate criminal proceedings against the transporters appointed by the PSU, more particularly, when regulatory authorities detain vehicles and seize products for investigation under various statutes. These disputes highlight the operational risks most of the PSUs encounter in managing third-party logistics, the reputational impact of criminal allegations and so on. In such cases, robust monitoring and compliance mechanisms are imperative to prevent and address irregularities in the supply chain, especially, when the transporters challenge such actions before the concerned authorities or in arbitrations, etc.
- Vendor Blacklisting Dispute and Arbitration Clause Enforcement in PSU Contracts:
PSUs frequently encounter disputes arising from the blacklisting of vendors for alleged contractual and operational misconduct. In such instances, a substantial number of vendors challenge blacklisting orders before the writ courts, invoking the Constitution, for alleging procedural lapses or unjust treatment. These types of legal disputes often, inter alia, deal with whether the PSU has followed due process, including issuing a show cause notice and whether it had provided an opportunity for a personal hearing prior to imposing an order for blacklisting and so on. Based on our experience, in such cases, PSUs need to be careful of procedural diligence in course of enforcing disciplinary measures against vendors. Moreover, upholding contractual dispute resolution mechanisms is indispensable to defend their (PSUs) actions before the concerned authorities.
- Contractual Disputes and Increased Burden of Proof:
PSUs by their character of being this big, government-backed entities, wielding lots of influence and power also puts them in a disadvantageous position during legal disputes. The PSUs during contractual dispute, often, have a higher burden of proof than their counterparts. Time and again, the Courts have, in cases of contractual disputes involving ambiguity, applied the principle of contra proferentem; essentially, this means that in scenarios of ambiguity the Courts shall decide against the party that has framed the contract. Often it is the PSUs who may have drafted the contract and or who takes the dominant lead on all the commercial and legal clauses. Moreover, PSUs do come under the umbrella of “State”, and hence, the doctrine of ‘privity of the contract’ gets challenged, which often allows third parties being non-signatories to the contract to sue the PSUs.
- Allegations of Undue Influence And Restrictions During Negotiations:
Referring to the above-mentioned perception of the PSUs, id est the assumption of PSUs being in a superior bargaining position compared to the others, in practicality ends up reducing the negotiating
power of the PSUs. Time and again, cases have been initiated against the PSUs citing undue influence exercised by them under Section 16 and Section 19A of the Indian Contracts Act, 1872. In such a scenario, the onus of proof is on the stronger or larger party to showcase that their conduct is fair and that there was no exercise of any undue influence. Therefore, during the process of negotiations, the PSUs should be extra cautious and maintain balance, as any terms that are more favourable for the PSUs than the counterparty can be challenged in the court citing undue influence.
- Employment Disputes:
The typical, employment disputes are yet another pressing challenge which often gets overlooked for the PSUs, id est disputes involving personnel issues – whether hiring, firing, promotion, suspension, etc. The purview of service matters also extends to the PSUs on account of being recognised as a ‘State’, and PSUs are governed under various service rules and regulations. Therefore, any decision related to the personnel is susceptible to scrutiny by invoking writ jurisdiction or filing of public interest litigations. Whereas, for private companies, the Courts adjudicate relying on their jurisprudence and the Courts do not interfere with the commercial or operational efficiency invoked by the management of the private company.
- Pressure to Launch and Continue Litigation:
In a lot of instances, the offices of the PSUs have an inherent pressure to file a new litigation case, or to continue with the ongoing case without having any scope for settlement. Thereafter, often there is an additional pressure to challenge majority of the unfavourable decision of the Court, whether it is meritorious or not. This happens due to various factors like organisational policies, legal policies, reputational risks, performance expectations, fears of disciplinary actions, etc.
- Age-Based Tie-Breaker Policy Challenge in PSU Tender Process:
PSUs frequently face legal challenges to the fairness and constitutionality of their tendering policies, especially when selection criteria—such as age-based preferences in the event of a tie—are alleged to be discriminatory or in violation of Article 14 of the Constitution. In such situations, in our experience, reasonableness and objectivity of their procurement processes is imperative to be proven to ensure balancing of operational efficiency with the need to uphold principles of equality and non-arbitrariness. Accordingly, these necessitate careful alignment of internal policies with constitutional mandates and judicial precedents, while managing the risk of litigation from dissatisfied bidders.
- Analysis and Conclusion
Handling PSU disputes in India underscores the importance of a multidisciplinary approach, combining legal acumen, procedural expertise, strategic negotiation, and ego management. As PSUs are subject to enhanced scrutiny vis-à-vis private parties, ensuring procedural propriety in internal redressal along with a compliance with evolving principles specified under judicial precedents is imperative to ensure operational efficiency to maintain profitability and increased competition from private players in the market.
This Update has been prepared by Neerav Merchant and Kritika Sethi who can be reached at [email protected] and [email protected] respectively. This Update is only for informational purposes and is not intended for solicitation of any work. Nothing in this Update constitutes legal advice and should not be acted upon in any circumstance.
[1] AIR 1967 SC 1857.
[2] (2022) 1 SCC 165.