Karnataka Removes Mandatory Arbitration Clause from State Tenders and Contracts, Offering More Flexibility

The Karnataka government has officially withdrawn its 2014 notification that mandated a compulsory arbitration clause in all government contracts and tenders. This move, announced on November 16, 2024, follows concerns about the financial burden the clause placed on the state’s resources.
State Law Minister HK Patil had earlier explained that the compulsory arbitration clause was withdrawn due to its significant cost implications for the state exchequer. He also highlighted that the government found engaging in arbitration discussions with private entities impractical and preferred legal routes for dispute resolution.
The new circular, issued under Section 21 of the General Clauses Act, 1897, rescinds Circular No. LAVW 273 LAC 2012(p), dated January 10, 2014, required the arbitration clause’s inclusion in government contracts and tenders.
Under the previous policy, disputes between the state and private contractors or vendors were to be resolved through arbitration as outlined in the Arbitration and Conciliation Act of 1996. With this revision, the state will no longer automatically require arbitration, and in the event of a dispute, parties will need to approach the courts for resolution through litigation. This change provides greater flexibility for government and private entities in handling contractual disputes.