When Peter Douglass developed a trade show in Delhi for a small company based in Minnesota, he expected the project would face setbacks. And it did–everything from corrupt customs agents to last-minute scheduling nightmares. He didn’t expect the Indian joint-venture partner would walk off with the proceeds after the event.
“They said conditions changed, and [they] wouldn’t honor the agreement,” says Douglass, now president of Intersection Marketing Services in St. Cloud, Minn. “Our contract included an arbitration clause, but it said disputes would be heard in Delhi. So we could either spend untold thousands of dollars on arbitration in India or write it off to life experience.”
The company chose the latter and learned a valuable lesson: A contract in India is just a piece of paper, easy to sign but difficult to enforce.
“There’s an elastic concept of representations and covenants in India,” says Ajay Raju, a partner with Reed Smith in Philadelphia and co-manager of the firm’s India practice. “What an American might consider a binding contract, an Indian might consider a baseline for negotiation. It’s easy to enforce contracts in the U.S., but not in India. So you have to inject a litigation premium into your deal up front.”
In this country of a billion people the courts are buried under a Himalayan scale mountain of cases.
Statistics tell the tale: 13 judges serve every million people in India, compared to 107 judges for each 1 million people in the U.S. As a result Indian courts now are slogging through nearly 30 million cases–and if current trends continue, the mountain will continue growing.
“The Indian court system is very heavily loaded,” says Ram Vasudevan, cofounder of SQ Global Solutions, a legal outsourcing firm with offices in the U.S. and Hyderabad, India. “With the compounding effect of hearings and multiple appeals, a trial takes a long time.”
Even a typical contract enforcement case can take years, and an employment termination case might bounce around the Indian court system for decades before it’s finally resolved (see “Labor & Employment,” p. 64). “My Indian colleagues say karma applies to litigation. What you don’t resolve in this life, you’ll face in the next,” says Richard G. Goetz, formerly associate general counsel for international business at Ford Motor Co. and now a partner with Dykema Gossett.
Such protracted delays not only cause inconvenience and legal costs, they also spawn corruption, as petitioners resort to paying bribes or exerting political influence to move their cases to the front of a seemingly endless queue. In a 2005 survey, Transparency International and the New Delhi-based Centre for Media Studies found nearly half of respondents confessed to bribing court officials, lawyers and even judges–not only to obtain favorable outcomes, but frequently just to get a case listed on the docket.
On the other hand, parties seeking injunctive relief can get reasonable service from the courts. “Injunctions go the top of the pile and get dealt with more quickly,” Goetz says. “Once you get temporary relief, the matter goes to the bottom of the pile and starts working its way up. But temporary relief may be all you need.”
Such an approach might work for some patent infringement cases, for example, or other types of cease-and desist orders.
But for common issues in contract law, alternative dispute resolution (ADR) offers the only rational solution for companies to protect their legal rights in India.
Since the federal government adopted its new arbitration law in 1996, arbitration has grown into a de rigueur process in Indian justice.
The Arbitration & Conciliation Ordinance established the United Nations arbitration model–the U.N. Commission on International Trade Law (UNCITR AL) rules–as India’s standard. That brings India’s arbitration processes into harmony with the rest of the world, at least in theory.
Arbitration and other ADR
approaches are readily available in India, with many retired judges serving as arbitrators and mediators for specific legal areas. But that doesn’t necessarily mean arbitration is a slam-dunk solution. “Arbitrators in India go through a laborious procedure,” Raju says. “The 1996 act was supposed to clean up the arbitration rules. But the reality is far removed from what the legislation promised to do. Sessions are done on nights and weekends, during three-hour periods.
The costs can be tremendous.”
Some recent Supreme Court decisions have further muddied the arbitration waters in India (see “Arbitration Setback”). By interpreting the 1996 act broadly, the court opened the door for losing parties to drag arbitration processes into Indian courts.
“Now, from a public-policy standpoint, arbitration isn’t a reliable means to resolve disputes in India,” Raju says. “An Indian court can intervene and exercise broad powers to undo all the work of the arbitration process.” U.S. companies can minimize the risk of court interference with choice of law and arbitration provisions in contracts that explicitly remove disputes from Indian jurisdiction. Most such clauses specify venues in Holland, the U.K. or the U.S. But increasingly companies are invoking the laws and arbitration systems of Singapore–which Indian partners might find more convenient and culturally neutral than European or American jurisdictions.
“India recognizes if it’s going to play on the world economy, it has to use world rules,” Goetz says.
Know Your Bedmate
Even as arbitration processes become more widely accepted in India, legal disputes still pose serious risks and costs for U.S. companies.
“An arbitration award can make you feel good,” Goetz says. “But at the end of the day you are relying on local courts and agencies to help you collect your award. The other party may be a big player in the local area, and enforcement can be a problem.”
Contract terms can provide additional leverage by requiring that the losing party in a dispute pay the winner’s legal costs.
And in some circumstances, escrow or letter-of-credit requirements can establish financial accountability. Ultimately, however, the most important way for U.S. companies to avoid litigation risks in India is to conduct exhaustive due diligence before entering a cross-border agreement (See “Mergers & Acquisitions,” p. 58).
“If you plan to be in the market long term, do lots of due diligence on partners, vendors and potential customers and markets,” Douglass says. “Most people have good intentions, but there’s a difference between good intentions and following through on obligations.”
The 1996 Arbitration & Conciliation Ordinance strengthened arbitration systems in India, but recent Indian Supreme Court actions have weakened arbitrators and awards–even for disputes heard offshore.
Bhatia International v. Bulk Trading S.A. (2002)
The court intervened in an arbitration proceeding in Paris, saying Indian courts held jurisdiction unless the agreement specifically excluded it.
Oil & Natural Gas Corp. v. SAW Pipes Ltd. (2003)
The court applied an expansive interpretation of the 1996 act, finding a petitioner can challenge an arbitration award by claiming it’s “patently illegal” or an “error of law.”
SBP & Co. v. Patel Engineering (2005)
When the chief justice appointed an arbitrator for the disputing parties, the court said the judge also could decide preliminary questions, including whether a valid arbitration agreement existed.