Disputes From Performance-Linked Incentive (Pli) Scheme Contracts Being Referred To Arbitration
1. Introduction: PLI Scheme and Contractual Nature
The Performance-Linked Incentive (PLI) Scheme is a policy initiative of the Government of India to encourage domestic manufacturing and investment. Although introduced through policy notifications, once a company is approved and enters into a PLI agreement, the relationship becomes contractual in nature.
These contracts typically contain:
Eligibility criteria
Performance benchmarks
Incentive calculation mechanisms
Conditions for disbursement
Dispute resolution clauses, often including arbitration
2. Nature of Disputes under PLI Contracts
Disputes generally arise on issues such as:
Non-release or partial release of incentives
Disagreement on performance calculations
Retrospective policy changes
Alleged breach of scheme guidelines
Delay in approvals or payments
Termination or withdrawal of PLI benefits
Since these disputes arise after execution of a contract, they are treated as commercial disputes, not mere policy disagreements.
3. Arbitrability of PLI Scheme Disputes
Key Legal Position:
PLI disputes can be referred to arbitration if:
There exists a valid arbitration clause
The dispute arises from contractual obligations
The matter does not involve pure sovereign or policy functions
Indian courts have consistently held that government contracts are not immune from arbitration merely because one party is the State.
4. Distinction Between Policy Decisions and Contractual Obligations
| Policy Decisions (Non-Arbitrable) | Contractual Obligations (Arbitrable) |
|---|---|
| Framing or amending PLI schemes | Incentive payment disputes |
| Withdrawal of scheme prospectively | Calculation of eligible incentives |
| Macro-economic policy | Breach of agreed conditions |
Once the government steps into a commercial contract, it acts as an ordinary contracting party.
5. Role of Arbitration Clauses in PLI Contracts
Most PLI agreements include:
Arbitration under the Arbitration and Conciliation Act, 1996
Seat of arbitration in India
Governing law as Indian law
Courts generally enforce these clauses unless:
The dispute involves fraud of serious nature
The issue affects public policy at large
6. Jurisdiction of Arbitral Tribunals
Arbitral tribunals can decide:
Whether performance targets were met
Whether incentives were wrongly denied
Interpretation of PLI agreement clauses
Compensation for breach or delay
However, tribunals cannot rewrite government policy, only interpret contractual terms.
7. Important Case Laws
1. Vidya Drolia v. Durga Trading Corporation (2020)
Principle:
The Supreme Court clarified the test of arbitrability, holding that disputes arising from contractual rights, even involving statutory elements, are arbitrable unless expressly barred.
Relevance to PLI:
PLI disputes are contractual and commercial, hence arbitrable.
2. ABL International Ltd. v. Export Credit Guarantee Corporation (2004)
Principle:
The Court held that State actions under contracts are subject to judicial and arbitral scrutiny, and cannot hide behind policy immunity.
Relevance:
Incentive denial under PLI cannot be justified merely by labeling it a “policy decision”.
3. NHAI v. Sayedabad Tea Company Ltd. (2020)
Principle:
Even where contracts involve public infrastructure and government authorities, arbitration clauses must be respected.
Relevance:
PLI contracts, being commercial agreements, must follow agreed arbitration mechanisms.
4. Gujarat State Civil Supplies Corp. v. Mahakali Foods Pvt. Ltd. (2022)
Principle:
Government corporations entering commercial contracts are bound by arbitration clauses like private parties.
Relevance:
The government, while implementing PLI, acts as a commercial entity.
5. Union of India v. Master Construction Company (2011)
Principle:
Claims relating to payments, incentives, or compensation under government contracts are arbitrable.
Relevance:
PLI incentive payment disputes squarely fall within this category.
6. State of Karnataka v. Shree Rameshwara Rice Mills (1987)
Principle:
The State cannot be a judge in its own cause in contractual matters.
Relevance:
Government authorities cannot unilaterally decide PLI disputes without allowing arbitration.
7. Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011)
Principle:
Commercial disputes involving rights in personam are arbitrable.
Relevance:
PLI incentive claims affect individual companies, not public rights.
8. Conclusion
PLI scheme contracts, once executed, acquire a commercial and contractual character.
Disputes arising from performance evaluation, incentive disbursement, or breach are arbitrable.
Courts consistently uphold arbitration clauses in government contracts, including incentive-based schemes.
The State is bound by the same standards of fairness, accountability, and contractual discipline as private parties.
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