Look Before You Sign The Dotted Line!

Anirudh Wadhwa highlights the risks involved for the unwary small and middle sized Indian businesses that select international arbitration over national court machinery for resolution of disputes. He says the rage for signing the dotted line comes with its own list of associated risks and costs and therefore a more informed choice should be made

In a recent survey conducted by PricewaterhouseCoopers (PWC), it was revealed that 73 per cent of in-house lawyers for the top 150 American companies support international arbitration over trans-national litigation as the preferred method of dispute resolution¹. Sadly, what the survey does not reveal is the justifiable fear of small and medium sized business houses against the dangers of international arbitration.

It is true that international arbitration provides certain distinct advantages over trans-national litigation through its flexible process and the wide enforceability of awards, yet there are many hidden risks, particularly for the unwary. Increasingly, corporations in India too, either voluntarily or under pressure from their foreign counter-parts, are choosing international arbitration over national court machinery for resolution of disputes. This rage for signing the dotted line comes with its own list of associated risks and costs that should not be overlooked. It is the purpose of this article to highlight these risks so that domestic parties can understand the full implications of their decision and therefore make a more informed choice.

The Issue
Many Indian companies, including the small and mid-sized, now have dealings with foreign counter-parties. While negotiating contracts, parties are typically more interested in the commercial terms including price, payment schedules and other business considerations. These contracts include, usually upon the insistence of the foreign party, a rather ‘innocuous’ clause providing for arbitration in an exotic location under the auspices of an institution like the ICC/LCIA etc.

Big businesses that can afford to foot the bills of such arbitration have nothing to lose and all to gain by entering into such a contract. International arbitration provides them with benefits of speedier remedies, flexibility in procedure, world-wide enforceability of awards and privacy, to name a few. The other party may be similarly tempted to sign the agreement without carefully evaluating the price-tag for arbitrating a dispute under the contract. However, extreme caution is to be exercised by a small or medium business house when it signs up such an agreement².

It is important that parties realise exactly what they are getting into when they sign any contract. The dispute resolution clause looks fairly innocuous, but when companies are faced with a notice of arbitration from ICC Paris and asked to shell out 10-15 per cent of the claimed amount as ‘provisional advance’, it is only then that they realise what they have entered into. Since the arbitration agreement is binding, there is no way whatsoever that one of the parties can choose to opt out of the arbitral procedure, as is most often the case, they find it too expensive. Such disputes are routinely becoming a common strategy adopted by disgruntled foreign JV partners or associates to simply harass and pressurise their Indian counterparts. Many cases come up before the courts that reveal such a situation. But in light of the strict non-interventionist policy adopted in arbitration cases, the Indian courts have had to raise their hands in defeat many-a-times.

Problems of High Cost
The biggest problem associated with international arbitration for small and medium sized businesses is the high cost³. The initial costs of international arbitration can be killing enough to bring any small business house to its knees. Imagine this: for a $200,000 dispute, a typical ICC arbitration before a three member arbitral tribunal in a foreign jurisdiction will cost $41,900 (costs calculated as per ICC rules). Add to this the arbitrator’s miscellaneous expenses of say $10,000-15,000, another $20,000-30,000 for counsel charges, $10,000-20,000 or so for sending the company representatives and witnesses to the arbitration venue and back, and so on and so forth. One is potentially looking at a possible figure of 50 per cent of the disputed amount as the cost associated with the effective conduct of the arbitration. 25 per cent to 30 per cent of this is usually to be paid as a “provisional advance”.

Although, it has been argued and accepted that arbitration clauses which are overly harsh are unconscionable and hence unenforceable,⁴ this line of defense is unavailable where the contract is not in an employment or consumer setting but is purely commercial⁵.

The costs associated with international arbitration may prove to be prohibitively expensive for a small or medium business. In some cases, the party may be unable to foot even the travel costs to the venue of arbitral proceedings for its witnesses and lawyers, however, no party can shut its eyes to the impending arbitral proceedings in the face of the extremely serious consequences this can have. Time limits are critical to the effective conduct of arbitration. All laws based on the UNCITRAL Model Law and all institutional arbitral rules provide for the tribunal to either terminate the proceedings or proceed ex parte, once proper notice is served and a party does not present itself within the short time period required to initiate the proceedings⁶.

Further, since there are limited grounds of challenge to the arbitral award, a company will be best off trying to pursue its case vigorously before the arbitral tribunal, since it may not be able to challenge the award before the national courts in the absence of any irregularities in the decision making process. Moreover, as the case will necessarily be decided on the merits of the dispute by arbitrators, who may themselves be prone to error, no amount of spending can ever guarantee a favourable award. Imagine spending $100,000 to try and possibly get a disputed amount of $200,000, which might again be open to challenge before the national courts. All this is usually enough to give a small Indian business a big heart attack!

Suggestions
International arbitration starts making sense only when the disputed amounts are able to sustain the associated costs of such a procedure, when the parties are at an equal bargaining position and when they are able to effectively fight their cases. Small and mid-size businesses usually have small disputes, and such small stakes make the high fees of international arbitration simply unsustainable⁷. There are, however, few suggestions which must be kept in mind while negotiating the arbitration clause which will go a long way towards avoiding the pitfalls mentioned above. It is suggested that the following points may be taken note of when negotiating the dispute resolution clause:

There is no ‘uniform’ way to draft an arbitration clause, however, it is best if parties indicate clear provisions regarding costs/fees (including initial costs), situs or venue of arbitration, number of arbitrators and an appointing authority in case of a dispute, always keeping in mind the cost-effectiveness of the arbitral procedure as the underlying leitmotif.

There are a number of arbitral institutions within India, like the ICA, ICADR, Palkhivala Arbitration Centre, FACT etc. that are competent to handle all sorts of cases at a reasonable rate. If the foreign party is comfortable only with an ICC-LCIA arbitration, the India chapters of these courts can be considered, which can give administrative assistance at an affordable cost.

Even if the foreign party wants the award to be given abroad, having the venue of the arbitration proceedings within India can result in significant savings. The sittings of the tribunal can be done within the country and the arbitrators may be flown out only to finalise and sign the award.

The Indian Supreme Court has displayed a trend of accepting jurisdiction over arbitration proceedings even where proceedings are held abroad, as long as parties do not expressly or impliedly exclude Indian arbitration law⁸. In some ways, this will prove useful for domestic parties who want to avoid the costs associated with a foreign jurisdiction for getting interim relief⁹, appointing the arbitrators in case of a dispute¹⁰ or even in case of challenging the award¹¹.

It might make sense to consider a “sliding scale agreement”. Disputes below say $500,000 may be subject to ad hocarbitration in the country by an agreed upon or a court-appointed arbitrator. Any dispute over this figure will be subject to international arbitration at the desired venue and under the auspices of the specified administering body. Such a system protects the interests of both the foreign as well as the Indian party and hence may be easily adopted.

The Indian party may also push for a “fee shifting provision”. Making the losing party pay for the costs of the arbitration and legal fees will go a long way towards discouraging frivolous claims and counterclaims. This will also ensure that the genuine Indian party will not be disadvantaged because of his inability to bear the costs of arbitration.

Conclusion
It is ironical that a dispute resolution mechanism preferred for the reason that it offers limited avenues for challenging the award, and purports to offer significant cost savings, is to be guarded against for those very reasons. There is a necessary trade-off between the high forum costs associated with international arbitration and the other benefits offered by it.

This article is not intended as a diatribe against international arbitration nor does it seek to deny its well-accepted benefits. International arbitration does however have its risks, and it is important for all parties to realise the financial and legal consequences of signing up to a binding arbitral clause, especially one that can have such serious cost consequences. It is hoped that Indian companies take sound legal advice before committing themselves to an arbitration agreement and thus save themselves time, money and peace of mind.

Available at: http://www.pwc.co.uk/eng/publications/international_arbitration_2008.html
See Deborah R. Hensler, “ADR Research at the Crossroads”, 2000 J Disp Resol 71, 77 (2000).
See Lyons, “Arbitration: The Slower, More Expensive Alternative?” The American Lawyer, 107 (1985)
Brower v Gateway 2000 Inc, 676 N.Y.S. 2d 569 (1998).
See Gilmer v Interstate/Johnson Lane Corp 500 US 20 (1991).
See for instance – Section 25 to the Arbitration and Conciliation Act, 1996 which provides
“25. Default of a party
Unless otherwise agreed by the parties, where, without showing sufficient cause –
(a) the claimant fails to communicate his statement of claim in accordance with sub-section (1) of section 23, the arbitral Tribunal shall terminate the proceedings;
(b) the respondent fails to communicate his statement of defence in accordance with sub-section (1) of section 23, the arbitral Tribunal shall continue the proceedings without treating that failure in itself as an admission of the allegations by the claimant; and(c) a party fails to appear at an oral hearing or to produce documentary evidence, the arbitral Tribunal may continue the proceedings and make the arbitral award on the evidence before it.”
See Public Citizen, “Costs of Arbitration”, available at http://www.citizen.org/documents/ACF110A.PDF
Bhatia International v Bulk Trading SA (2002) 4 SCC 105.
Ibid.
Indtel Technical Services Pvt Ltd v W.S. Atkins Rail Ltd (2008) 10 SCC 308; National Agricultural Co-op Marketing Federation of India Ltd v Gains Trading Ltd (2007) 5 SCC 692; Citation Infowares Ltd v Equinox Corporation, (2009) 5 UJ 2066 (SC).
Venture Global Engineering v Satyam Computer Services Ltd (2008) 4 SCC 190.

Anirudh Wadhwa is a lawyer with an international law firm in London and is presently editing the forthcoming edition of Justice Bachawat’s Law of Arbitration. He is a graduate from the National Law School of India University. He can be reached at anirudh.wadhwa@gmail.com