Arbitration slowdown

One major concern area for Construction industry is the contractual disputes in the construction sector. It is believed that over 80, 000 crore  are locked up in many contractual disputes in this sector resulting in time and cost overruns in large number of projects in India. The present alternative dispute resolution mechanisms have provided insufficient relief to the affected agencies. A number of deficiencies in the present mechanisms require a uniform approach at least in the public procurement system. It is necessary to have an effective institutional arbitration mechanism of international standards with a view to providing an institutional mechanism for resolution of construction related disputes.

Though the alternative dispute resolution mechanisms are promoted by the government and the commercial organisations, the record of arbitration cases has not been inspiring. They are suppose to be informal, fast track alternative to the cumbersome and the expensive road to the civil courts. However, they are fallen ruts of their own and have become expensive and tedious as any other civil litigation. In the Dolphin Drilling Ltd vs ONGC case, the Supreme Court lamented that “it is unfortunate that arbitration in this country has proved to be a highly expensive and time consuming means for resolution of disputes”.

In a survey of judgements delivered by Supreme Court showed that most of the arbitration cases were seven year old when they landed in the court. There were at least 45 major judgements. Moreover, the Supreme Court’s decisions were not the end of the disputes for the parties; rather they have only been start. This is because legal obligations raised by the parties, either genuinely aggrieved or trying to delay payment, have to be addressed. The decision of the trial court is inevitably against in the High Court and then in the Supreme Court. The apex Court sorts out the legal issues and then sends back the matter to the high court or the original court or to the arbitrator. This is the beginning of arbitration, after years of legal wrangling.

By observing these realties, the Supreme Court  stated some time ago in the Guru Nanak Foundation vs Rattan Singh case that “the way in which the proceedings are conducted, and without exceptions challenged in the courts, has made lawyers laugh and philosophers weep. The proceedings have become highly technical accompanied by unending prolixity, at every stage providing a legal trap to the unwary. An informal forum chosen by the parties foe the expeditious disposal of their disputes has, been clothed with legalese of unforeseeable complexity”.

Some cases decided by the Supreme Court exemplify this comment. It was a long trek for the parties in the appeals in the SBP & Co vs Patel Engineering Ltd. Case. The contractor for the koyna hydroelectric project was signed in the year 1992 and the disputes started in 1996. The Supreme Court cleared the legal clutter only last year (2009) and allowed the arbitrator to proceed with his work afresh.

In the other example case between Shin-Etsu Chemicals vs Vindhya Telelinks Ltd. The case made several trips from the district in Madhya Pradesh to the High Court and the Supreme Court from the year 2003 and the arbitration is still not over. The Supreme Court itself noted this delay in its judgement when it said that “we are conscious of the fact the matter has been pending between the court for more than two years and relegation to an alternative remedy will further delay the consideration of the issue. But it is inevitable in the circumstances”.   

Arbitration in the Vijay Construction vs State of Kerala case of 2002 is still halfway. The Supreme Court has just set aside the order of High Court, holding that there indeed was an arbitration agreement between the parties. After this finding, Supreme Court has reverted the matter to the High Court to decide other remaining objections raised by the state government which has to pay the awarded amount to the contractors. The actual arbitration was start only after this exercise and probably after some more trips to the Supreme Court.

The legal muddle invariably sets in from start. If the parties are rich and resourceful, they raise question of interpretations of the terms of the agreement and the provision of the Arbitration and Conciliation Act 1996. That is the first journey to the court. The next common stratagem is to doubt whether there was an arbitration clause in the contract at all. Though the voluminous agreements are drafted by resourceful law firms, they do leave gaps. In any case, there are equally ingenious lawyers who can invent lacuna.

Once the courts finds that there is indeed an arbitration clause, the wrangles starts over who the arbitration should be. The party who has to pay will then raise objections to the conduct of the arbitrator, like bias and mala fide.

The arbitrators themselves are not very keen to complete their job as the assignment comes with several seven star perks, with reference to Liberham and Eradi commissions. These are only some of the hurdles in implementing the law.

There was a proposal to amend the 1996 law to make it more effective, but the proposed Bill has been in cold storage for many years now. It is said that internationals corporations are willing to choose India as a venue for arbitration, but lack of clarity in law and procedure coupled with poor infrastructure deters them. Unless these hurdles are removed, arbitration cases will continue to troop to the Supreme Court – and it has not yet disposed of appeals under the old Arbitration Act 1940.

This judgment of the Court has, amongst other things, acknowledged that arbitration in India is an expensive and time consuming dispute resolution mechanism. The very objective of providing for arbitration, which is to ensure fast and efficient disposal of disputes between the parties to the arbitration agreement, has been lost.

Parties to an arbitration agreement can now provide to avoid the onerous financial implications of multiple arbitrations under a single agreement and can instead, provide for a single onetime arbitration to be conducted at the end of the period of the agreement (or its sooner determination). This can prove to be a twin-edged sword given that a party with a legitimate claim will have no option but to wait until a certain time until they are able to invoke arbitration, thus negating the object of arbitration in the very first place. 

An arbitration agreement no longer remains a simple agreement to refer all disputes to arbitration. Over time, an arbitration agreement has evolved into a complex mechanism and an integral provision in any agreement. Care must be taken to ensure that foreseeable situations have been envisaged and necessary provisions have been made especially when there is a possibility that parties will continue to perform under the terms of the same agreement while there would be a dispute pending. Parties would now be well-advised to ensure that the arbitration clause is carefully worded and encompasses the true intention of the parties.

Three players in Judiciary

The first player is the Government. The Government is mostly at fault by not filling up vacancies which they know well in advance. The Government fails in appointing quality judges and providing proper infrastructure, including the basic things like a good library, typists, etc.

 

The second player is the lawyers. We should realize that adjournments, even if they are in favour of clients, are not in favour of the system. In a number of regulatory cases, there is no real need for appeals or adjournments. Given the huge backlog of cases, practical ways

and means need to be thought of, to solve such problems. Ethics of lawyers has also become questionable. There is a Bar Council that has to look after ethics of lawyers, but it has rarely taken action against tainted lawyers. Everything becomes customary and loses meaning.

 

The third player, of course, is the judges. Unless they display work-ethics, no recommendations can be of use to them. Fairness, speed and quality should be key values for the judiciary, as for all other sectors.