Government Entities Permitted To Pay Contractors In Case Of Challenge Against Arbitration Awards
Contractors prepare the opening of a sliding glass door inside a new home. (Photographer: Daniel Acker/Bloomberg)

Government Entities Permitted To Pay Contractors In Case Of Challenge Against Arbitration Awards

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In a boost to the construction sector, the Union Cabinet on Wednesday said the government entities will be permitted to pay 75 percent of arbitral amount to contractors against bank guarantees in cases where the entities have challenged the arbitration awards.

The measures approved by the Cabinet Committee on Economic Affairs would help in ensuring that the remedies of challenge/appeal are resorted to in a prudent and judicious manner, and in furthering the objective of infusion of liquidity into the construction sector.

"Where a government entity has challenged an arbitral award, resultant of which the amount of the arbitral award has not been paid, 75 percent of such award will be paid by the government entity to the contractor/concessionaire against a bank guarantee only for the said 75 percent and not for its interest component," said Finance Minister Nirmala Sitharaman at a press briefing.

The CCEA also decided that government entities will take the decision to initiate proceedings for setting aside of the arbitral award, and any appeal thereto, with the opinion of the Attorney General for India, the Solicitor General for India or the Additional Solicitor-General for India.

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"Challenge of the award, in most cases, defers the payment of the arbitral award pending the decision in challenge/appeal, which process then takes years to attain finality," said an official release.

This is seen to cause severe liquidity constraints in the construction sector as the large sums of money raised by contractors/ concessionaires for execution of projects get blocked -- stressing their balance sheets.

The foregoing then causes a ripple effect throughout the financial ecosystem, directly impacting the repayment of debt to lenders, leading to increasing non-performing assets in their balance sheets.

To address the issue, the CCEA had, pursuant to a proposal put forward by NITI Aayog, in 2016, approved various short-term and long-term measures including for government entities to pay 75 percent of the award against a bank guarantee.

"However, this policy decision of interim payment of 75 percent has been falling short of its intended objective of infusion of liquidity into the construction sector on account of insistence on bank guarantee for the interest component, should the subsequent court order require refund of the amount paid by the government entity," the release said.

As a result of which, contractors/concessionaires continue to be marred by financial stress, ultimately affecting the entire commercial ecosystem and the broader economy.

The measures approved by the CCEA would now help in ensuring that the remedies of challenge/appeal are resorted to in a prudent and judicious manner, and in furthering the objective of infusion of liquidity into the construction sector, it added.

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