Arbitrary Arbitrations

Why is it that CFO’s don’t ask searching questions about all the ‘legal’ clauses we lawyers insert into commercial contracts? I mean stuff like Force Majeure, Representation and Warranties, Indemnities, Termination, Arbitration clauses… Is it because it’s very remote and unlikely to come to pass? Is it because it’s all mindless gobbledegook anyway? Or is it because legal stuff is the next best thing to a holy cow in the life and times of the average CFO and therefore off limits? Whatever it is, this much is true: in my 33 years of law practice, some of the highest fees I ever got paid were for fixing problems arising out of contracts with bad termination clauses! At the same time, some of the biggest legal bills that my clients ever paid were for thoughtlessly inserting arbitration clauses into agreements.

Let me stop here and make sure I have your attention. Every arbitration my firm does has three arbitrators because, in our low trust society, no one wants to risk the plot on just one. At least two out of three arbitrators in every case we handle are retired high court judges. No significant arbitration that we have handled in the last ten years has lasted less than five years and perhaps 30 hearings, not including the adjournments. Any lawyer worth having before a retired high court judge takes you down Rs. 50,000 a hearing plus the price of the pre hearing conference. The lawyers who brief this lead lawyer charge as much. Each of the arbitrators will also charge Rs. 50,000 a sitting. Then there is venue cost, travel costs, secretarial costs and what else besides. Any which way you look at it, we are talking about an entry level burn rate of Rs. 2 lakhs a hearing for midsize local cases. If you need to fly your lawyers out of town, your burn rate just tripled. If you assume 30 hearings as typical, every arbitration clause you sign is going to cost you Rs 60 lakhs or more! I’d say you have reason to ask some very searching questions about what you are signing.

The problems with arbitrations in India are of course numerous and complex. Because arbitrators are largely ex-judges, arbitrations mimic court cases with protracted procedures and endless delays. You don’t get there faster because you are not in court. In truth, you can never be sure that you won’t start arbitration by going to court. As I candidly described in my recently published book Bullshit Quotient: decoding India’s corporate, social and legal fine print, we are governed in India by the Buffalo School of Jurisprudence by which he who wields the stick is the owner of the asset. Parties rush to court to get stay orders the moment the dispute begins. It is only after the interim status has stabilized that everyone settles down to a leisurely arbitration in a swanky environment at extortionist cost.

The swanky bit doesn’t help at all. Court Fees are fixed but arbitration costs are not. The daily wages model secures that no player in the game truly wants the sinecure to end. Given the average age of the tribunal and the energy levels of the bar, hearings are a leisurely ‘cuppa tea’ interrupted with frequent trips to the cookie jar on the side table. The hearings, such as they are, are interrupted even more often by a succession of boring and prolonged ‘hamare zamaane main’ stories about shenanigans in the munsif magistrate’s court or was it the sub judge third class in 1960, or was it 1953?

There is too the mind set with which the dramatis personae approach arbitrations. Arbitration is something you do when you don’t have anything else to do. Dates get fixed on long weekends, after court hours, during vacations, between vacations, between weddings, outside pregnancies and so forth. It’s an entertaining game – this date fixing – with complex negotiations but the end game still looks like long jumping super rabbits in red capes on steroids coming down to touch base on life’s calendar in two and three day clusters every few months. On any given date, no one remembers what happened the last time around.

Truth be told, a sombre environment of purposefulness does not always inform the proceedings. On the contrary, the dominant emotion may well be one of entitlement and privilege. We have never had arbitration where the arbitrators did not care at all about which class of airline seat they were transported, which brand of hotel they were booked in, which quality of room they were checked into, what quality of speciality cuisine they partook in and what other facilitations were offered as a matter of course. We have been asked to purchase brand new very expensive designer leather bags for arbitrators so that they may carry the arbitration papers with dignity. We have been asked to provide companion tickets to wives, and worse, secretaries too. We have been asked to arrange show tickets for arbitrators. We have paid for landline calls to relatives in America from the suites of high end hotels when we could have lent our mobile phones to the same august personality and saved tens of thousands of rupees. There is a whole environment of subtle extortion out there that CFOs will do well not to resist.

The brew thickens because arbitrators are not always young, energetic people who are impatient to delivery quick effective justice to the parties. The Constitution of India retires its judges at an age because it believes that every human being has a Best Before Date. This is not true of arbitrations. By the time you see an end to your arbitration, you could just as easily have a geriatric arbitrator with a Teflon mind to which nothing sticks writing an incomprehensible award that bears no relationship to the arguments made before him. How do you discount this business risk?

At the best of times, it’s the slow boat to a possible award out there but the biggest problem is that it doesn’t end because someone received an award. Indian courts are more enthusiastic than most others to intervene in arbitrations after the award has been made. I don’t blame the courts at all: quite the contrary. Indian arbitrators do some very strange things. I have a case where arbitrators have ‘punished’ a client with an additional potential liability of Rs. 250 Crores because the client’s lawyer had to leave the venue early to address a part heard before the Supreme Court.

The upshot of all this is that you inevitably get a leisurely and very expensive arbitration that is then followed by a prolonged and equally expensive litigation. I often get asked what we need to do to fix the problem. The simple logic of the situation would require you to write fixed times and fixed fees into your arbitration clauses. That is easier said than done. The claim could be a rupee or it could be Rs. 100 Crores? How will you define the cap? It’s the same problem with time. The complexity of the issues determines the time you need. And what happens if you don’t get an award in time? The arbitration is superseded, you make a fresh start in courts and any timeline you agree on becomes meaningless? Considering that you will end up in court anyway, isn’t it smart to dispense with all the buffet spreads and exotic malts you are going to pay for during your arbitration enroute to the final frontier in court and cut to the chase?

Originally Published in Legal Eagle on October 2012


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