ALTERNATIVE DISPUTE RESOLUTION GROWING IN INDIA

UNCLAS SECTION 01 OF 05 MUMBAI 000042

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SUBJECT: ALTERNATIVE DISPUTE RESOLUTION GROWING IN INDIA

REF: 09 MUMBAI 431

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1. (SBU) Summary. With the majority of civil litigation cases
taking over a decade to resolve through the Indian courts,
businesses in Mumbai increasingly pursue alternative means for
resolving contractual difference quickly and cheaply. The
business community has devised Alternative Dispute Resolution
(ADR) mechanisms outside the courts, including arbitration,
mediation, and community-based dispute resolution.
International firms, however, still prefer foreign venues rather
than India. Arbitration is not a complete panacea, however, as
parties and even the arbitrators can delay the process for
financial gain. End Summary.



Delay in Commercial Litigation Weighs on Businesses

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2. (SBU) The Indian courts are overburdened and underfunded and
litigation often takes a decade or more to conclude (see reftel
A). Judicial delays harm business development, create
uncertainty, and tie up capital that might otherwise be used
productively. For the average plaintiff, the dread of a long,
expensive legal battle gives defendants leverage to force an
advantageous settlement, Attorney Zulfiquar Memon noted. Those
who can afford the best attorneys may be able to push their
cases through the system in three to five years, according to
attorneys Congenoff spoke with, but Attorney Zia Mody, a partner
in the firm AZB & Partners, noted that many cases languish in
the courts once a party has secured an interim order freezing
assets. (Note: This is similar to a temporary restraining
order or preliminary injunction in the U.S. End Note.) Abhi
Abhimanyu, the General Counsel of DSP Merrill Lynch, and other
lawyers told Congenoffs that parties may become amenable to
settlement once an interim order freezes their assets, but many
face protracted litigation with no resolution for years.




3. (U) The legal framework in India is partially to blame for
the lack of swift resolution of cases. Mumbai High Court Judge
Roshan Dalvi explained that court rules in India do not have
procedures for accelerated judgment in civil cases which would
enable a judge to swiftly determine a matter. (Note: In
contrast, the U.S. legal system has "judgment on the pleadings"
-- a determination at the outset of a case that, as framed, the
pleadings do not state a legal cause of action -- or "summary
judgment" -- a decision reached by the court without trial where
facts are undisputed. End Note.) Although Union Law Minister
Veerappa Moily has proposed such mechanisms to expedite judicial
resolution (ref A),Dalvi said she does not see accelerated
judgment gaining acceptance among the judges any time soon
because they are reluctant to declare a winner and a loser,
preferring that the parties reach a settlement on their own
where possible. The Law Commission of India similarly noted in
its November 2008 report looking at the burgeoning problem of
dishonored check cases, that "Litigation as a method of dispute
resolution leads to a win-lose situation leading to growth of
animosity between parties, which is not congenial for a peaceful
society."



India Turns to Out-of-Court Processes for Dispute Resolution

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4. (SBU) To grapple with judicial delays, civil society in India
resorts to creative solutions ranging from progressive forums,
such as formal arbitration, to archaic "time-honored" means,
such as private debt collectors and village councils, to resolve
disputes. In India, "private debt collectors" are widely used
to obtain payment on behalf of lenders or vendors. Debt
collectors charge a fee of 20-30 percent of the amount
collected, and often obtain payment by threatening the debtor or
the debtor's family. Civil Rights attorney Yogesh Kamdar said
that the construction industry is most noted for using such

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"strong-arm" tactics as they have so much invested in a single
project that non-payment by a debtor could put them out of
business.




5. (U) In India, the practice of informal dispute resolution is
not new; rural villagers have long taken their disputes to the
village council, known as the "panchayat," rather than seek
justice in far away courts with procedures too complex for the
common man. The central government's Ministry of Law and
Justice is formalizing this system by establishing Gram
Nyayalaya, or village tribunals, to provide a cost-effective,
grassroots level forum for settling disputes. In small towns
and cities, "Lok Adalats" or "People's Courts" address consumer
complaints and public grievances, similar to the panchayat
format. The Lok Adalat is comprised of three members who meet
once a month. Cases pending in court can be transferred to the
Lok Adalat, if both parties agree, and results in a binding an
enforceable award. Prathamesh Popat, an attorney who also
serves as an arbitrator and mediator with the Indian Merchants
Chamber of Commerce (IMCC),said that disputes between
government-owned companies are often taken directly to the Lok
Adalat and courts can transfer cases to the Lok Adalat for
informal resolution. Popat noted that the government is the
biggest litigant in India and is named in 60 percent of the
cases filed in court, mostly disputes between governmental
agencies or government-owned enterprises. According to Popat,
the government officers involved in inter-agency litigation feel
compelled to reach a compromise before the Lok Adalat as it is
chaired by a retired judge or other highly-respected person.
Union Law Minister V. Moily recommends that all
intra-governmental disputes be submitted to an administrative
tribunal instead of to the courts as a major step to reducing
the back log in the courts.



Alternative Dispute Resolution Taking Hold in India

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6. (U) Successful businesses with professional management
largely prefer to use alternative dispute resolution methods
(ADR) rather than litigate in court. India formalized ADR in
the 1996 Arbitration and Conciliation Act (ACA),which provides
the over-arching structure for various ADR mechanisms. The Act
follows the Model for Commercial Arbitration drafted by the
United Nations Commission on International Trade Law (UNCITRAL)
in 1985. According to the Act, a case may be subject to
arbitration, rather than litigation in a court, based upon a
contract signed by the parties before or after the dispute
arose. Under the ACA, the parties choose their own arbitrators,
either Indian or foreign nationals. The arbitrators may use
mediation or conciliation techniques to get the parties to come
to an agreement, if not precluded by the parties' agreement.
The ACA also authorizes the arbitrator(s) to award costs,
including attorneys' fees, and the costs of the arbitrators and
expert witness fees as part of its determination of the matter.
Costs incurred for renting a private venue are normally shared
by the parties, according to Memon. Popat, who heads the IMCC's
arbitration forum, suggests that all commercial contracts should
have a clause for ADR to prevent the courts from being clogged
with commercial disputes.





Ad Hoc and Institutional ADR forums

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7. (U) Arbitration can be arranged ad hoc by the parties or
through institutions which provide the forum and arbitrators.
The most common mechanism for ADR among Indian commercial
litigants is ad hoc arbitration, where each party selects an
arbitrator and the two designees pick a third, trusted person to

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complete the panel of arbitrators to hear the case. Retired
High Court judges, seen as experienced and neutral, are often
selected as arbitrators; they also command top fees, according
to observers. However, Popat noted that ad hoc arbitration is
often time consuming and costly because sessions are scheduled
for just a couple of hours each day, prolonging the case and
increasing lawyers and arbitrator's fees. In contrast,
institutional arbitration has defined rules in place, fees are
lower and the arbitrators can be "reigned in" by the
institution, he argued. Popat, however, acknowledged that
institutional arbitration is rare, as it requires the consent of
both parties or the institution has to be specifically named in
the parties' contract. For these reasons, legal experts
explained, most Indian attorneys prefer ad hoc arbitration,
selecting their own arbitrators, rather than submitting the
dispute to an institutional arbitration forum where they would
be limited in the choice of arbitrators and lose some autonomy
over the pace of the case.




8. (U) Nonetheless, the number of institutions offering dispute
resolution services is growing:



--The Indian Merchants Chamber of Commerce (IMCC) has hosted an
arbitration forum since 1985, offering a panel of legal and
technical experts as arbitrators and several meeting rooms that
can be used for arbitration. Popat noted that in using an
institutional forum like the IMCC, the parties know the fees
will be fixed, motivating arbitrators to move the case to
conclusion quickly, as opposed to private arrangements where the
arbitrators are paid hourly or daily fees. The IMCC claims that
none of its arbitration awards have been challenged in court.
However, statistics provided by IMCC indicate they have hosted
only 50 arbitrations in the past 5 years and Popat acknowledged
that the recent law making issuing a bad check a criminal
offense has significantly reduced demand for IMCC's ADR
services. (Note: A special fast-track court is being
established in Mumbai to handle dishonored check cases to
resolve them quickly. End Note). The IMCC is working on a
memorandum of understanding to become the venue of choice for
disputes among members of the textile industry's professional
association.



--The Indian Council of Arbitration (ICA) provides a private
forum for dispute resolution, either in New Delhi or in its
regional offices in Mumbai, Kolkata or Chennai. The ICA has
assembled a panel of arbitrators including attorneys, retired
judges, accountants, engineers and other experts whose knowledge
may be critical to resolving technical disputes. The ICA also
provides the venues for the hearings, which can be costly in
privately-arranged arbitrations. According to the ICA website,
the Union Ministry of Commerce recommended ICA as the venue of
choice in all government contracts for public works in 1999 and
from time to time continues to recommend the ICA forum.



--The Singapore International Arbitration Center (specializing
in construction litigation) allows the parties to choose their
own venue, with SIAC providing the arbitrators, or the hearings
may be conducted SIAC's offices in Singapore. Popat said
international construction firms prefer to use the SIAC because
of its specialization in a technical field and it is trusted as
a neutral forum.



-- Popat also explained that trade associations in India, such
as the Clothing Manufacturers Association and the Grain
Association, have their own informal arbitration forums which
resolve disputes in five days.





Small Religious Communities Offer Dispute Resolution Services

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9. (U) The high cost of litigation has led some communities to
develop ADR alternatives for their members. Sects within the
Ismaili Shia community in Mumbai - mostly Dawoodi Bohras and
followers of the Aga Khan known for their business acumen-- have
internal ADR mechanisms. According to Saifee Surka, a Bohra
scholar, Bohras can submit disputes between members to the
community's leader, Syedna Mohammad Burhanuddin, in an informal
forum, upon which he will make a binding determination. The Aga
Khans established the Regional Conciliation and Arbitration
Board (RCAB) and the appellate forum, the National Conciliation
and Arbitration Boards (NCAB). According to Aga Khan member
Firdoshali Kassam Karachi, a Mumbai attorney in private
practice, "more than 12,000 cases relating to matrimonial,
commercial, property and partnership disputes have been resolved
through the process of conciliation, mediation or arbitration at
the RCAB and NCAB level in India since 1988." Karachi said the
Aga Khans use a negotiated settlement approach based upon a
reading of the Quran in which Mohammed proclaimed that those who
seek peace will find a solution to their disputes. Both dispute
resolution mechanisms are available to the adherents of the
faith without charge, without the need for lawyers, and with a
relatively short turnaround of a few months, according to
members of each sect.



ADR Cannot Save Litigants from Obstinate Parties

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10. (U) ADR is not a complete panacea to avoid delays inherent
in the Indian judicial system. Several attorneys have warned
that attorneys, or even the arbitrators, can prolong arbitration
hearings to earn higher fees and a party who stands to lose the
case may delay resolution to avoid payment. Where one of the
parties refuses to name an arbitrator, the courts may intervene
to order parties to comply with their arbitration agreement.
Indian courts may also intercede to determine the initial
question of whether a dispute is subject to arbitration, or the
jurisdiction for the arbitration, if disputed. Poorvi Chothani,
founder and managing member of LawQuest, a Mumbai-based general
practice firm, said that even though a contract's Arbitration
Clause states that foreign law applies, Indian courts will apply
Indian procedural rules unless the contract specifically states
otherwise.




11. (U) While generally enthusiastic about ADR for their
business clients, attorneys complained that the arbitration
awards can be appealed in court, which can delay final
resolution of the matter for years. Another shortcoming of
arbitration, critics argue, is that if the losing party refuses
to abide by the decision of the arbitrators, enforcing the award
through the court could delay recovery for years. (Note: In the
U.S., enforcement of a judgment against a recalcitrant defendant
is normally an expedited process which can be completed in less
than six months. End Note.) Arbitration is, therefore, a useful
tool only among those who will abide by the arbitrators'
decision, attorneys noted. Attorneys told Congenoff that they
often advise companies to obtain business interruption insurance
- and hope that the insurance companies pay if business is
disrupted.





International Firms Prefer Foreign Venue

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12. (SBU) To avoid the delays inherent in the Indian judicial

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system, most international corporations insist that every
contract they sign provide for arbitration in a foreign venue,
according to Krishan Singhania, who represents multi-national
clients such as Federal Express. While onerous to Indian
businesses that have no presence in the foreign locale, the
international companies are reluctant to be subject to the
Indian judicial system with its inordinate delays and reputation
for corruption. Whether the foreign venue clause is ultimately
enforceable depends upon how well the contract is drafted,
Singhania said.



Comment

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13. (SBU) In the face of long delays in resolving commercial
disputes, Mumbai-based businesses and entrepreneurs have
developed creative solutions to avoid the courts. While India
has a burgeoning customer base that entrepreneurs want to
access, it remains a commercial environment fraught with
potential pitfalls that investors and businesses need to
consider. Mandatory arbitration clauses and the availability of
international forums for ADR have made doing business in India
more feasible. India's efforts to tackle the problems of
overloaded courts and corruption within the judiciary will
further improve the business climate, but it is unclear when
these objectives will materialize.
FOLMSBEE