Audit Of Arbitration Awards In J&K: A Long-Overdue Accountability Mechanism

The Delhi Government's recent directive to audit all arbitration awards above ₹1 crore passed against government departments in the last 20 years is a watershed moment in public accountability. The Public Works Department (PWD), Water Department, and Irrigation & Flood Control Department have been ordered to submit detailed records of such cases. This measure aims not only to review potential misuse of public funds but also to identify officials whose negligence or collusion may have caused massive financial losses to the exchequer.

At its core, this initiative reflects a growing recognition that arbitration in India, while originally conceived as a faster, business-friendly dispute resolution mechanism, has often failed the State when the departments are the parties involved. Instead of reducing litigation and facilitating economic efficiency, poorly managed arbitration cases have translated into significant burdens on public finances.

The Purpose and Contradiction in the Arbitration Ecosystem

Arbitration was introduced into India's legal and commercial landscape as a means to unburden the judiciary from protracted commercial disputes, and to promote India as a global hub for commercial dispute resolution, thereby improving its Ease of Doing Business rankings. Globally, arbitration is seen as a preferred mechanism due to its speed, flexibility, and enforceability. India too has repeatedly amended its Arbitration and Conciliation Act, 1996 to align with global standards and promote institutional arbitration.

Yet, the ground reality paints a different picture. In the absence of a robust regulatory and monitoring framework, arbitration has, in numerous instances, resulted in colossal losses to the public exchequer. In numerous cases, particularly where government departments are respondents, arbitration has become a tool of exploitation rather than resolution. Weak internal systems, absence of monitoring, lack of trained officers, and negligence by counsels have resulted in astronomical awards being passed against the government. Many of these awards remain unchallenged within the statutory limitation period, making them final and binding. The financial impact is aggravated by the fact that arbitral awards often carry interest rates ranging between 18–24%, which multiplies the liability manifold over years of departmental delay.

Contradictory Government Approach

The contradictions in India's approach to arbitration have been striking. On international platforms, the Union Law Minister, Arjun Ram Meghwal, has repeatedly asserted India's commitment to strengthening arbitration, positioning the country as a global hub for dispute resolution. In contrast, on the domestic front, several states and agencies, including the Delhi Government's PWD, have started removing arbitration clauses from contracts altogether. This reflects a crisis of confidence, while the government acknowledges arbitration as an engine of economic progress abroad, it struggles to trust the system at home.

Such inconsistency not only weakens India's global standing but also leaves contractors and departments entangled in a cycle of disputes, delays, and financial losses.

The case for Audit in Jammu & Kashmir

The Union Territory of Jammu & Kashmir (J&K) presents a classic case of why audits of arbitration awards are urgently needed. Departments such as PWD, PMGSY, Jammu & Kashmir Economic Reconstruction Agency (JK ERA), Jal Shakti (PHE), PDD, JKPDCL, and JKPCC are routinely engaged in arbitrations with contractors. These disputes typically arise out of delayed payments, encumbrance-ridden sites, non-availability of timely forest or environmental clearances, non-acquisition of project sites and arbitrary departmental actions, suspensions of work and importantly not making proper and timely reply to the issues raised by the contractors.

A 20-year audit of all arbitration awards above ₹1 crore against J&K government departments would serve multiple purposes:

1. Fixing Accountability of Officials

• Awards often arise because officials fail to provide encumbrance-free sites, delay approvals, or remain silent while contractors execute additional work without sanction.
• In one shocking case, a contractor constructed a double-lane bridge instead of the sanctioned single-lane bridge. During arbitration, the then Chief Engineer admitted under oath that he had given verbal approval, treating it as equivalent to administrative sanction. The award was passed against the department, yet no accountability was fixed on the officer concerned.

2. Fixing Accountability of Government Counsels

• Many cases have suffered because departments failed to file timely or proper statements of defence or raise viable counterclaims.
• In some cases, absurd counterclaims such as demanding ₹20 lakhs for “use of rainwater” by the contractor or ₹70 lakhs for “inconvenience caused to students” for timely non-construction of the bridge by the contractor, only inflated the arbitrator's fee without strengthening the government's case.
• More seriously, awards have gone unchallenged within the prescribed time under Section 34 of the Arbitration Act, rendering them final. This dereliction has cost the government crores in avoidable liability.

3. Accountability of the Law Department

• Departments often await legal opinions before challenging awards. Delays in receiving such opinions have resulted in missed limitation periods.
• In some cases, the Law Department misadvised deductions (e.g., mobilization advances) from awards under execution, even though no such claims were raised in the original arbitration. This not only displayed legal inconsistency but also invited further judicial censure.

Catalogue of Mismanagement in J&K

The depth of mismanagement in handling arbitration matters in J&K is alarming.

Lost Records: Vital documents like measurement books, bills, and agreements have gone “missing” from the departments in several cases. In some instances, they surfaced only after directions for registration of FIRs were given by the Administrative Secretary of the department.

Partial Payments: Departments often make partial payments of awards, letting interest accrue unchecked. For example, in one case, a principal award of ₹56 lakhs snowballed into a liability exceeding ₹1.5 crore due to interest accrual.

Stamp Duty Evasion: Several awards were executed without contractors paying requisite stamp duty, leading to further loss to the exchequer.

Execution Chaos: Departments delay raising fund demands with administrative departments, by which time accrued interest far exceeds the sanctioned amount, perpetuating a vicious cycle.

Defective and Contradictory Tender Clauses: The Pathological Clauses, A Hidden Culprit

A less discussed but equally critical factor amplifying arbitration disputes is the presence of defective, contradictory, or confusing clauses in tender documents and contract agreements.

• Ambiguous Contractual Obligations: Many tender documents fail to clearly define timelines, payment obligations, and scope of work. For instance, while one clause may provide that extensions of time shall be “deemed granted” upon certain circumstances, another clause may require formal approval, thus creating contradictions that contractors exploit in arbitration.
• Contradictory Dispute Resolution Mechanisms: Several government contracts contain overlapping provisions, some mandating first exhausting internal dispute redressal mechanism, while others refer directly to arbitration. Such inconsistencies create jurisdictional confusion and provide contractors with grounds to challenge preliminary objections of the department.
• Absence of Risk Allocation: Properly drafted contracts allocate risks (such as delays in site clearance, non-availability of materials, or force majeure events). In J&K and elsewhere, many contracts leave these issues vague, enabling contractors to claim damages for events which, under a well-drafted contract, would have been excluded.
• Ill-Defined Variation and Escalation Clauses: Contractors frequently rely on loosely worded clauses permitting “additional work” or “price escalation.” Where tenders and agreements lack precise caps or approval mechanisms, arbitrators have upheld contractor claims for amounts far exceeding the original contract value.
• Standard Clauses Removed or Altered: In several instances, departments have unilaterally removed essential protective clauses (such as caps on liquidated damages or limits on interest liability), exposing the government to disproportionate financial risk.

These drafting defects are not mere technicalities. They lie at the heart of arbitral awards where government departments find themselves unable to defend claims effectively. The lack of consistency in contracts across departments also means that contractors, familiar with these loopholes, tailor their claims accordingly.

Therefore, as part of the proposed audit of arbitration awards above Rs.1 crore, it is essential to also conduct a parallel review of tender and contract formats. Standardization, legal vetting, and periodic revision of contractual templates must be institutionalized to prevent recurrence of such disputes.

The Interest Trap: A Financial Black Hole

The most crippling aspect of arbitral awards against the government is the relentless accrual of interest. What begins as a moderate claim often multiplies several-fold due to statutory or contractual interest. At 18–24% annually, a liability of ₹5 crore can balloon to ₹15–20 crore within a few years of bureaucratic delay. This not only drains resources but also undermines public trust in governance.

Unless systemic reforms check these delays and enforce strict timelines, the government will continue to bleed money not on legitimate claims but on interest accrued due to its own inaction.

Proposed Reforms for J&K

To restore credibility and protect public money, the following reforms should accompany the audit:

1. Creation of Arbitration Monitoring Cells in every major department with trained officers to track cases from initiation to execution.

2. Mandatory reporting system, where departments submit quarterly status updates on arbitration cases, including financial exposure and pending actions.

3. Time-bound decision-making on whether to challenge awards, with fixed responsibility on officials and counsels for delays.

4. Performance-based evaluation of government counsels, linking their continuation on legal panels to measurable outcomes.

5. Digital contract management systems ensuring all project records like agreements, bills, measurement books are digitally preserved and accessible.

6. Special training modules for engineers and departmental officers on contract management and dispute avoidance.

7. Legislative mandate requiring audit of arbitration awards exceeding a fixed threshold (₹1 crore) every five years.

Conclusion: Audit as a First Step, Not the Last

The Delhi Government's move to audit arbitration awards above ₹1 crore is a model that J&K must urgently replicate. For two decades, taxpayers' money has been eroded not merely by contractors' claims but by administrative inefficiency, poor legal strategy, and lack of accountability.

A comprehensive audit will serve two key functions first, it will quantify the actual losses to the exchequer; second, and more importantly, it will help fix responsibility on erring officials and counsels. But the audit must not remain a one-time exercise. It should be institutionalized as a recurring mechanism, ensuring that every five years, a public report on arbitration liabilities is placed before the legislature.

Arbitration is not the adversary but Mismanagement is. If properly regulated, arbitration can still serve as a vital instrument of commercial dispute resolution. But if neglected, it will remain a financial black hole. For Jammu & Kashmir, therefore, the choice is clear: either conduct a 20-year audit now and introduce systemic reforms or continue losing crores of public money year after year to interest, inefficiency, and indifference.

Author is an advocate at  Jammu & Kashmir and Ladakh High Court. Views are personal.