‘Commercial disputes’ is a complex unpredictable risk that is a constant in the life cycle of large corporates. The larger a company the greater the potential for it to suffer company-wide damage in a flash through an unmitigated unexpected dispute.
While the complexity always existed, in recent years such disputes have become even more volatile given the increasing complexities in the business ecosystems. Increasing number of non-Indian commercial entities have begun getting involved in disputes in India. Myriad sectoral regulators have started examining these disputes from a regulatory standpoint, thus inevitably expanding the scope of such disputes. Technological advancements and data vulnerability have also contributed to the complexity. The single biggest lesson that has emerged in risk management is that dynamism is the key. When looking at companies’ pre-dispute strategy, the management must have regard to the long-term objectives of the company and then pick the battles which are most appropriate given the organisation goals.
As disputes take on a life of their own, mitigation and avoidance has become synonymous with continuing adaptation of dispute strategy.
Avoidance: The first pillar of risk mitigation
Litigation risks frequently emerge from day-to-day business activities, including ESG issues, employer/employee disputes. intellectual property disputes, regulatory investigations.
The first part of a sound pre-dispute strategy builds itself on planning for five areas of commercial risk at the start of the commercial relationship: transaction risk, counterparty risk, product risk, process risk and regulatory risk.
Transaction Risk and Counterparty Risk
Transactions such as large M&A, structured finance deals, real estate investments among others attract greater risk. The strategy in these would be to work on clear contractual protections, defining risks in writing at the very outset. Additionally, indemnity clauses and insurance coverage that are not in conflict with the contractual provisions, fortifies risk mitigation in such cases. It is important to remember that multiple lesser claims together could in some cases be more damaging that any one large claim by itself.
Avoidance takes a different turn in international commercial transactions where it would become imperative to formulate a complete plan of action starting from review of offshore judicial approaches for each jurisdiction associated with the transaction and business. Certain jurisdictions have unevolved judicial systems or have highly evolved intricate judicial systems, in both cases presenting difficulty in obtaining and enforcing awards. Incorporating appropriate choice-of-law, jurisdiction and arbitration clauses is the first step in reducing such uncertainty.
Product and Process Risk
At a corporate level, the first step consumer litigation would involve simplifying standard terms and conditions. Key SOPs in relation to consumer protection based industrial regulations should be created at the start – with a first-time right approach.
Exposure to product risk asks for implementing sound quality management systems, product recall and crisis management plans, clear product instructions, marketing communications involvement, warnings displayed on products, contractual terms and insurance.
Vicarious liability for product risk for offshore parents can be minimised by giving the subsidiary full operational autonomy. Planning to select local counsel to advise on inter-corporate liability will help implement requisite legal structures and procedures in such cases. Corporates should evolve internal or external mechanism of multi-disciplinary screening of decisions of which legal counsel should be an integral part.
Certain products and sectors carry the additional burden of being subject to political whims especially in developing markets with regional conflicts or unstable political strife. While doing business in off-shore jurisdictions, care must be taken to review and understand evolving taxation laws, requirement of obtaining permissions and range of red-tapism.
Protections in terms of obtaining local partner support in capital intensive business and amoritisation of risk through phasing capital expenditure – particularly real estate expenditure — is most advisable.
Resolution: Straight-forward process clauses
Fundamental strategy of management in cases where dispute is unavoidable should be to firstly steer clear of corporate litigation under unfamiliar substantive law and procedure, inconvenient location, language barriers, running out of representation options, excessive delays, restrictive or excessive awards, biased tribunals and difficult enforcement.
This would not be possible to achieve after the dispute situation arises. Hence, it is imperative at the time of drafting the relevant transaction documents to incorporate a straightforward dispute resolution mechanism in all contracts, or a combination of formal judicial or quasi-judicial and informal mechanisms. It is recommended that contracts provide for dispute resolution through arbitration or in the courts of a chosen jurisdiction. This would be applicable even where the contract provides a more informal procedure, such as mediation, as a precursor.
Most developed legal systems respect an express choice of law in a commercial contract. But if it is obvious that the choice of law was with the deliberate intention to avoid a mandatory provision, it may not be allowed. In the absence of an express choice of governing law, the court in the jurisdiction where the action was commenced will decide which law to apply to the contract according to that jurisdiction’s principles.
Coordination between local counsel and a trusted legal advisor of the organisation – someone aligned with management goals and perspectives is crucial in resolution.
Settlement and resolution through mediation particularly in non-APAC jurisdictions would be the most desired outcome without proceeding to dispute.
Obtaining guarantees from viable and substantial related parties of the contracting party in the same or different jurisdiction would be a good strategy in the event of an entry into the market through a smaller or newer entity.
Dynamism: Re-thinking and Re-aligning Strategy
Litigation management is an exercise with a life of its own. The course of the litigation or the broader context to the litigation — whichever way one looks at it — would evolve with the changing business ecosystems. Therefore, scoping out the plan is a dynamic evolutionary process.
It is advisable for businesses to periodically revisit their litigation strategies. The strategy needs to be examined to ensure that it remains applicable in the circumstances of the case and general business ecosystem in which the organisation operates. Simultaneously an examination of the viability of litigation in the commercial and operational context of the business needs to be examined by the team that has the foresight of overall business vision and growth strategy.
Elongated litigation and cash flow concerns were always strong triggers to revisit strategies but more so in the frugal post pandemic ecosystem.
Timelines and costs are also factors in themselves to pivot a change in some of the positions underpinning the original strategy.
Businesses and their legal advisors would do well to align their strategies towards avoidance as the first step, resolution and minimising effect of litigation. Constant re-evaluation of the basis of litigating in tandem with the business growth path would be most desired in the present unpredictable ecosystem.
Minimal cost through local advocates or boutique firms would go a long way in helping corporations to complete the marathon and avoid burning out in a short sprint.
Archana Balasubramanian is the founding partner of Agama Law Associates, a Mumbai-based corporate law firm which she started in 2014. She specialises in general corporate commercial transaction and advisory as well as deep sectoral expertise across manufacturing, logistics, media, pharmaceuticals, financial services, shipping, real estate, technology, engineering, infrastructure and health.Disclaimer: The views or opinions expressed are solely of the author.