Dispute Resolution in India in a Post-Covid19 World: Drastic Times call for Drastic Measures

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These are scary times. Drastic measures are called for in drastic times. If anything short of such measures are taken, economies will collapse. India is no exception. Legal services should not stand as a hurdle but should facilitate and innovate. 

This post, based on a presentation given a few days back, puts forth a vision for dispute resolution in the Indian economy hit by the Covid19 crisis. The presentation can be accessed from here. The presentation was for a specific industry but is applicable to all other commercial activities, be it construction, infrastructure, services, sale or other commercial activities. 

How to deal with Contracts Post-Covid19?

• Amicably sort out issues with the objective of completing projects ASAP
• Provide for Amicable Dispute Resolution Solutions to make contracts viable
• To bring to an end contracts made unviable post-Covid19

Accelerated Dispute Resolution Processes in a Covid19 World

• Speedy, Inexpensive and Effective dispute resolution
• Fixed time ~ 3 months & Fixed costs ~5- 6 lakhs
• Completely Virtual
• Construction Dispute Specific
• Neutral
• Interim Measures: Extension of BGs & Preservation- Completion of Project should be the objective
• Three modes: Accelerated Conciliation, Mediation & Arbitration
• Checklists/ Formats for use in Dispute resolution to be fixed

Accelerated Conciliation

• A finance, technical and a legal expert in each Panel
• Fixed fee of Rs 5- 6 lakhs for the entire panel
• Virtual & Time limit of three months
• No external counsels
• Specific disputes to be agreed between the parties and referred
• Common statement of facts and points of disagreement
• Proceedings to be confidential except as to costs
• In case of rejection of Settlement Proposal, costs of conciliation & subsequent legal proceedings to be on Indemnity basis, if unsuccessful.

Accelerated Mediation

• Professional Mediator well-versed in Construction Disputes
• Virtual & Time limit of three months
• No external counsels
• Specific disputes to be agreed between the parties and referred
• Common statement of facts and points of disagreement
• Proceedings to be confidential except as to costs
• For party rejecting the last settlement offer, costs of mediation & subsequent legal proceedings to be on Indemnity basis, if unsuccessful.

Accelerated Arbitration

• Fixed Costs: Not more than Rs. 5- 6 lakhs net for each dispute
• A finance, technical and a legal expert in each Tribunal
• Time limit of three months
• Documents only/ Expedited (S. 29B ACA 1996)
• Specific disputes to be agreed between the parties and referred
• Common statement of facts and points of disagreement reg. facts/ law
• Power to decide on the basis of commercial sense, equity, etc.
• Strict implementation of Loser Pays principle for Costs

Movement Away from Fee based on Claims to Fee based on Workload

• Fee based on quantum of claims is not a scientific way of compensating the tribunal
• Fee based on work load is more scientific
• Many measures could be worked out but the number of pages criterion seems to be the best starting point.
• Need to fix a base fee: 
• Rs. 1 lakh per 5,000 pages to be read; Rs. 2 lakhs for 10,000 pages and so on.

[In putting forth these ideas, this blawgger makes no claim of originality. The suggestions here are based on developments around the world, including the CIArb-CEDR pandemic dispute resolution services and the BIICL's "breathing space" concept notes.]

Stereotyping & Setting Aside Arbitral Awards: Why East Asia was Correctly Decided

Why are cliches a problem? They are an issue because they amount to stereotyping. What is a stereotype? It is regarded as an over-generalised belief about something. In India, there is an over-generalised beliefs that arbitral awards should not be set aside at all. That is not correct. 

"Nonsense" A decision with scant regard for contract or law cannot pass off as an arbitral award. [Note that the word "nonsense" is being used here to signify how rude and bad it looks. A pleading drafted by a foreign law firm used the term "nonsense" on a contention by the other side. What happened to courtesy? But then, for some, whatever foreign law firms, especially of the first world, do is gospel truth and good to emulate!- another stereotype. Litigation or arbitration is not a fish market with disputing parties hurling choicest of abuses against each other. One has to show grace and courtesy in submissions.]

Almost a decade back, while discussing the case of Sumitomo Heavy Industries v ONGC, we had argued in this blog as follows:

"Though the SC's decision seems to be reasonable, it is sad that the court did not consider the law on the liability of a contractual party to bear increase in costs due to change of law during the currency of the contract. This is the problem with arbitration. The courts are forced to rule on whether the award was perverse or not rather than consider what should actually be the law on the issue. The main issue is taken outside the realm of the court. Essentially what the court has stated here is that Article 17.3 could either be narrowly construed like the Division Bench wanted it to be or broadly constructed as was done by the arbitrator. But what is the true law?" (emphasised)

In the same year, we did another post titled "Norm Creation (ADR) and Arbitration" (2010). A summary of the post is important to understand the context of this post and is as under:

• The judiciary performs the important function of amplificiation of law. Amplification of law refers to the judiciary’s functions of filling the gaps that the statute leaves, making law in the absence of a statute, resolving contradictions in statutes and updating the law after taking into consideration the latest developments (such as those of technology, etc).
• This function of amplification of law does not take place in private arbitration for a few reasons. One reason is that there are no incentives for the arbitral tribunal to produce precedents as there exists difficulty in establishing property rights over them.
• The second problem with private arbitration is that the absence of review on merits of the award may lead to the production of inconsistent decisions on the same question of law leading to uncertainty of law. This would mean that parties would never predict outcomes of disputes and this would discourage settlement of disputes. The law in such a situation will be indeterminate and inaccurate.

Interestingly, many reputed commentators on arbitration law have highlighted the above aspects. In a lecture titled "Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration", Right Hon. The Lord Thomas of Cwmgiedd, Lord Chief Justice of England and Wales (2016)  highlighted how arbitration had the potential in bring about uncertainty in commercial law by taking away cases from national courts. The lecture merits reading.

In short, arbitration law's limited error correction function creates a potentially uncertain position in law. An award would not be set aside if two plausible views in the case as to contract interpretation are possible. But what is the correct interpretation? In a jurisdiction like India where law as applied to facts is nascent, especially in the context of contract law, courts perform an important function of amplification of law and making the law more certain. This is the reason why a sort of balance is maintained in purely domestic arbitrations by retaining the ground of patent illegality in Section 34(2A). This function is important. In the past, the Supreme Court has donned the role of error corrector and decided on the correctness of arbitral awards. See, for instance, National Highways Authority of India v. Progressive-MVT (JV) 2018(2) Arb LR 111 (SC). (see this post)

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The decision in SEAMEC v OIL (2020) has to be seen in the same light. A contention similar to the one made in the arbitral award and upheld: that increase in diesel prices is a change in law is most common in construction arbitrations. Those practising on that side of commercial law would vouch that a Contractor- Claimant is sure to bring a claim on this count if there is an escalation or a change of law or a force majeure clause. Although not a construction arbitration, in this case, the Claimant brought about a similar contention. There seems to be no Supreme Court decision directly on whether such increases in diesel prices amount to force majeure or change of law or entitle the Contractor for escalation. See, for instance, Lift and Shift India Pvt. Ltd. vs. Central Warehousing Corporation (06.03.2017 - DELHC) : MANU/DE/0543/2017. [See also, The State of Bihar vs. Hardeo Singh (11.02.2019 - PATNAHC) : MANU/BH/0174/2019, Atlanta Limited and Ors. vs. Executive Engineer, Road Development and Ors. (04.05.2018 - BOMHC) : MANU/MH/1148/2018.]

Given the importance of the issue, the Supreme Court took the correct approach in settling the law once and for all. [Note that the law applied by the Supreme Court was the one prior to the 2015 amendments]. Although the court did not expressly state so, the effect of the court's judgment settles this vexatious issue. That the SC decided on an area which was uncertain is clear from the outcomes of the proceedings before the tribunal (which held that increase in price of diesel amounted to change of law for which the Contractor could claim compensation) and the High Court (where it was held otherwise). The High Court had also committed the error of conflating the basis of change of law clause with the force majeure clause, which the Supreme Court corrected.

The SC held that fluctuations in price of certain items which a prudent contractor would have to take into consideration while bidding cannot be brought within the scope of the change of law clause unless specific language pointed out to such an inclusion (Para 30) and that the "liberal" construction afforded by the Tribunal to Clause 23 to hold that change in the price of diesel was a change in law was incorrect.

The law is now certain. No more can unscrupulous persons bring about a claim for increase in diesel prices under the change of law clause. Had this clarity not been there, what would have happened? In almost every dispute under works contracts with a change of law or a general escalation clause (which does not encompass increase in diesel prices), Contractors would have brought about a claim on account of increase in diesel prices. The marginal cost of defending an additional claim and of deciding an additional claim would be incurred by the parties. Imagine if such costs are incurred in several arbitrations arising out of works contracts all over India. It could potentially run to crores of rupees. Now, because to the clarity afforded by the Supreme Court, an unscrupulous Contractor or an advocate would think twice before making a claim on account of change in diesel prices. Even if made, the Tribunal would (and is obligated to) award costs on the other side for such bogus claims.

Thus, it is submitted that the SC had rightly set aside the arbitral award. We found many write-ups on the decision, especially from law firms, simply parroting that the SC was not correct in setting aside the arbitral award or similar cliches. There should be deference to the arbitral process but that deference is only for the purpose of facilitating commercial dispute resolution. Such deference cannot be at the cost of certainty in law. Legal certainty affords clear direction to future course of conduct. 

Parties should expend their money on value creation rather than bickering on such issues merely because one party wants to "take a chance" to see if the tribunal can award the claim and because the (uncertain) law allows her to do so. 

Role of Academics and Law Practice in Law Reform: A few Thoughts

Whenever the law is not entirely clear on a subject, the judge is called upon to clarify the law. When the law is clear, the judge has to apply the law to facts straightaway. But when the law is not clear, it is an entirely different ball-game:

The judge faces a lot of constraints when faced with law that is not entirely clear: the judge is burdened and constricted by the facts before her. Another constraint is the submissions made by the advocates, in aiding the court in clarifying the law. Another important constraint is the temporal constraint that the judges faces considering the sheer volume of work that the judge is called upon to do in quick time. Another constraint is the precedents. The judge is bound by the doctrine of precedents to comply with the precedent. These constraints may have the effect of the judge in not dealing with a particular facet of law. 

But how should the legal system address this problem? Precedential system is costly. It cannot be expected that a larger bench would immediately deal with that facet of law. To give an example, Bhatia International was decided in 2002. It was only a decade thereafter, in 2012, that BALCO overruled Bhatia. In that decade, Bhatia created havoc and resulted in an unclear law with lawyers making tons of money owing to the lack of clarity and parties, unfortunately, suffering. The SC in BALCO had to rely on the prospective overruling doctrine to ensure that no further confusion is created.

It is at this juncture that the academic machinery's role comes into the picture. The academician's dharma is to critically evaluate the judgement not only on the law that the judge has discussed but also on the points that that judge has not discussed. By "academician", it is not only the law university that is meant but also the law practitioner who dons the academician's role in critically evaluating the decision. 

As compared to the judge, the academician is relatively in a better position. She can sit in the comforts of a University with time on her side and a library at her beck and call. Consequently, it is the sacred duty of an academician to engage in critically evaluating the law and the judgment.  

In critiquing the law, the words of HM Seervai, quoted at the top of the Practical Academic blog, are pertinent: "If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes mus lead to the discovery of right reasons, or better reasons than I have been able to give, and the cause is served just as well."

The law practitioner's duty then begins. She is duty-bound to critically evaluate the criticism by the academician, take it and present it before the court in another case, or rarely, in the very case the court decided. It is then left to the court to examine whether the judgment was correctly decided.

India & the Drafting of the New York Convention

Western scholars and courts have looked at India with  criticism when it comes to the implementation of the New York Convention. Many Indian courts, including Bhatia International, have given reasons to those critics. Contrary to the popular perception, India had been in while the New York Convention was being conceived. India was represented by its Solicitor General, Mr. CK Daphtary. Mr. Daphtary held office as the Solicitor General of India from 1950 to 1963 and thereafter as the Attorney General of India from 1963 to 1968.

Mr Daphtary was not merely a participant in the discussions for drafting the New York Convention, he was the President of the United Nations Conference on International Commercial Arbitration held at New York in May & June of 1958. In this conference, the text of the Convention was discussed and finalised.

There was limited amount of time for the members of the Conference to finalise the Convention. They sat from 20 May 1958 to 10 June 1958 and the text of the Convention was finalised. The Conference was declared open on 20 May 1958 (about 1530 hours) at New York, the HQ of UN and the Economic & Social Council of the UN.

Mr. CWA Schurmann, the Netherlands was elected the President of the Conference. Interestingly, when the nomination for Vice-President was sought, Australia nominated Mr. CK Daphtary. Czechoslovakia and Guatemala supported the nomination. Mr. CK Daphtary was elected the First Vice-President of the Conference. There were two other Vide-Presidents elected, one from Argentina and another from Czechoslovakia. 

Mr. CK Daphtary made many interventions in the conference that were fruitful. We will discuss about this in another post. Importantly, he was also the Chairman of the Working Party No. 1, which was responsible for preparation of the drafts of Articles I and II of the Convention. Articles I and II are important provisions and form the basis of many important aspects such as arbitration agreements , recognition of arbitration agreements, and reference of disputes by judicial authorities to arbitration. See, here, for more information on these aspects.

India was one of the forty five countries that participated in the Conference, which led to the finalisation of one of the most important legal instruments in the world. Given India's humongous participation in the Conference and the consequent enactment of the Foreign Awards (Recognition and Enforcement) Act, 1961, the path that Indian courts have taken to invite criticisms is an area of research that should be looked into with greater detail.

Contrary to the popularly held belief, the New York Convention is an instrument that protects and accommodates state interests, especially in the form of arbitrability and public policy grounds, and leaves it to the states to define arbitrability and public policy the way they want. In the fervour to do justice, Indian courts have, perhaps, not decided in line with the Convention and the Foreign Awards Act/ the Arbitration and Conciliation Act to the extent they give effect to the New York Convention. This is not to say that there are no gaps in the Convention. The Convention does not address many aspects, which could potentially undermine state interests. But these are subjects of another future post.

For now, it would do well for followers of international arbitration to note India's participation and contribution to the enactment of the principal instrument of international arbitration: the New York Convention.