Government Contracts and Arbitration Risk: Lessons from Recent Judgments on Arbitrator Appointments

Government contracts in India have historically followed a standard format, especially in sectors like construction and infrastructure. These contracts often include arbitration clauses that give appointment power to departmental authorities. For decades, this system functioned without serious disruption; that reality has now changed.

In our experience, disputes arising out of government contracts are now facing a new category of challenge. The focus is no longer only on contractual breaches, but on whether the arbitration process itself was legally valid. The Omni Projects case is a clear example of this shift, where a standard CPWD clause resulted in the entire award being set aside.

Before 2024, courts often showed some degree of accommodation toward government arbitration mechanisms.

In Indian Oil Corporation Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520, the Supreme Court upheld clauses allowing government officials to act as arbitrators, provided there was no direct bias.

Similarly, Union of India v. Parmar Construction Company, (2019) 15 SCC 682, recognized the validity of departmental appointment mechanisms.

Even where concerns existed, courts often allowed arbitration to proceed and addressed bias issues on a case-by-case basis. This approach reflected the practical realities of public contracts.

The jurisprudence began shifting with TRF Ltd. and Perkins, which questioned the fairness of unilateral appointments. However, the real transformation occurred with later decisions that removed any residual flexibility. In Haryana Space Application Centre v. Pan India Consultants (P) Ltd., (2021) 3 SCC 103, the Supreme Court reiterated that statutory ineligibility cannot be bypassed.

Then came Bharat Broadband, which clarified that the waiver must be explicit. Finally, Bhadra closed the door on implied waiver and participation-based validation.

The arbitration clause in the Omni Projects case was a standard CPWD clause allowing appointment by a departmental authority. Such clauses are widely used across government contracts.

The Court held that:

• The appointment was unilateral
• There was no express written waiver
• Participation did not cure the defect

As a result, the award was set aside. This has serious implications because thousands of contracts still operate under similar clauses.

In our experience, government contracts are particularly vulnerable because they rely on standardized clauses that have not kept pace with evolving law and practically, what we have seen is that departments continue to appoint arbitrators internally, assuming that long-standing practices remain valid. A common mistake clients make, especially contractors, is not objecting early to such appointments. However, even if they do not object, the law now allows them to challenge the award later. This creates uncertainty and prolonged litigation.

Both government authorities and contractors need to adapt quickly, For government entities, the safest approach is to move away from unilateral appointment clauses and adopt neutral mechanisms.

For contractors, the strategy should be more cautious. If faced with a unilateral appointment, they should:

• Raise objections at the earliest stage
• Consider approaching courts under Section 11
• Avoid silent participation without legal evaluation

At the same time, if both parties wish to proceed with the same arbitrator, they must execute a clear written waiver after disputes arise.

The implications go beyond individual cases, Infrastructure disputes often involve large claims and long timelines, If arbitration awards are repeatedly set aside due to appointment defects, it undermines the efficiency of dispute resolution. In our experience, this has already started affecting how disputes are negotiated and resolved and parties are becoming more cautious and legally aware at the contract drafting stage itself.

The law governing arbitration in government contracts has undergone a fundamental shift and this is the transition from a flexible, practice-driven approach to a strict statutory regime is now complete. The Omni Projects case and the Supreme Court’s rulings make one thing clear and Neutrality in arbitrator appointment is no longer optional. It is mandatory.

In our experience, parties who adapt early to this shift will avoid unnecessary litigation and protect the enforceability of their awards and those who continue with outdated practices risk losing not just cases, but the entire arbitration process itself.