How to Avoid Litigationin Business Relationshipsin India
YogitaPant,Advocate, PartnerAnilChawlaLaw Associates LLPwww.indialegalhelp.com
Copyright – AnilChawlaLaw Associates LLP
(Guide for Entrepreneurs, Business Persons, Directors and Chief Executive Officers)
Why avoid Litigation?
Litigation is a waste of time, money and energyLitigation consumes Top Management Attention – the most scarce resourceLitigation is inherently unpredictable. You may lose even though you have a strong case.India is especially notorious regarding judicial delaysAlmost every major case in India travels up to Supreme Court, which means a very-very long and expensive processEven when you win a case, you lose a relationshipReputation as a litigation-inclined party scares away potential associates and collaborators
Why does litigation happen?
MiscommunicationPoorly drafted contract documentDifferent interpretations of the parties as to the agreed termsDifferent understandings of the parties as to the lawBad intentions of one party (or both parties)In Government and large organizations – someone does not want to take a decision and wants a court order to save his / her backEgoGreedRevengeLawyers and law officers are not interested in avoiding litigation. They earn their bread, butter and power from litigation.
Fundamental Principles of Litigation Avoidance
Prevention is better than cureAlways nip trouble in the budA bird in hand is better than ten in thebush(Rs. 100,000 settlement at the moment is better than a claim of Rs. 1000,000)Discretion is the better part of valor(There are times when avoiding an argument / suit is the wise and brave thing to do)Choose the battles you fight(Losing a few battles is good)Cut your losses as quickly as possible.(Do not throw good money after bad)Do use a lawyer, but do not leave everything to the lawyer(Lawyers, like all human beings, may be biased or stupid or crooked or negligent or all of these)
Actionable stages for litigation avoidance
Choosing with whom to do businessCourtship stage – getting to know each otherEngagement – laying the foundation for futureMarriage - cementing relationship with a contractWorking togetherFirst signs of discordFull-blown dispute needing interventionSeparation, Divorce, Claims and Counter-claims
More care at the initial stages leads to the latter stages being smooth and painless. Professional assistance committed to avoid litigation can add value at each stage. Always avoid consulting a litigation lawyer. As Warren Buffett says, “Never ask a barber if you need a hair cut”.
Choosing the right person
No lawyer / court / contract can protect you from a professional scoundrelA criminal is a dangerous person. Never think that you can outsmart a criminal with the help of your lawyer etc.Always look at past record including litigation history of your potential partner / associate / supplier / customerGet as many references as possibleIf a person / proposal looks very attractive, get suspiciousAppearances are deceptive. Do try to look below the surface.Get professional help in conducting background checks, due diligence etc. to improve your chances of avoiding a fraudsterNever ignore small worrisome signs
Be honest, sincere and forthright – remember your straightforwardness will inspire other person to do the sameIf your sixth sense smells dishonesty, false appearance, big promises of the moon or a shady person, drop the relationship without a second thoughtLet interaction take place with multiple persons at various levels of the two organizations – sometimes lower staff will detect shadiness better than top managementIf possible, create formal structured avenues for multiple level interactionsTop management must avoid falling in blind love – this gives wrong signals to juniors who start singing love-songs to please bosses
Engagement – foundation laying
Often defined by a MOU (Memorandum of Understanding) or Letter of Intent or some such documentDocuments like MOU have low legal enforceability so avoid excessive exposure at this stageMOU should lay roadmap for future, defining roles and responsibilities; also agree on milestones to be achieved before taking relationship to next levelMOU should define next level of relationshipMOU should have an easy exit route for both parties – painlessly and without bitternessMOU should be crisply worded, unambiguous and have minimum gray areas
Marriage - cementing the relationship
Desire to forge a medium / long term relationship - essential prerequisiteHighly advisable to have a legally enforceable and binding document, which makes clear every aspect of the relationshipRoles and responsibilities defined in MOU should be revisited, analyzed, modified (if so felt) and more sharply definedOften such a marriage leads to the birth of a baby or a Joint Venture (JV). In such cases define the structure of the new JV.Be extremely clear about who brings what and who gets what in terms of money, manpower, resources, expertise, control etc.Document defining the relationship is important, but it is like a lock on your house – good for decent people but no protection against hardened criminals
Marriage Document Essentials
Document may be Agreement / Contract / Partnership Deed or some other formMust be meticulously drafted detailing roles, responsibilities as well as do’s and don'ts at each stage of business cycleInvestments and Shares in benefits / profits must be clear and explicitTry to imagine all possible scenarios and reactions to the developmentsDo think of divorce at the time of marriage – include dispute resolution and exit route for all partiesPost separation scenario should be agreed and penned down
Simple language with no jargon– remember, a court does not understand jargonCover all possible aspects and scenariosAvoid “Standard” Agreement formats as each relationship is uniqueAvoid complex document that you cannot understandAsk a third person with NO knowledge of law to read the draft document; If he / she finds it difficult to understand, simplify it till a common person with reasonable intelligence can make sense of itTry to create a “Win-Win” relationshipTry to be fair and just in spirit as well as wordsDo use professional help, but remember – A relationship is too important to be left to a lawyer(since lawyer is the one to benefit when the relationship falls apart)
Define who in your organization is responsible for taking the relationship forward – prime mover of the relationshipDelegate roles and responsibilities (as defined in Agreement) internally – let the other side also knowCommunicate and encourage communication at multiple levels internally as well as with the other sideCreate structures for communication, coordination and monitoringStress on schedules – delays are the first signs of brewing troubleAnalysis of delays to be taken up at highest level mutuallyKeep smelling for ego clashes and nip such clashes in the budDo not push disagreements under the carpet – handle them with diplomacy, tact and firmness as soon as they appear.Understand and appreciate the other side’s concernsAlways be willing to lose a battle to win a war(Winning arguments is futile)
First signs of discord
Delays in decisions / actionsUnfulfilled commitments / promisesEgo clashes at junior / mid-management levelJokes in the grapevine making fun of other side officersSmall skirmishes on trivial issues are too frequentBasic assumptions that led to the relationship have turned wrongCommunications have fallen to very low level or show stiffness
Get to the root of the problem. Either solve the problem or redefine the relationship. In extreme cases, amicable exit from the relationship at this stage may be the best option.
Full-blown dispute needing intervention
It is never too late to try for an amicable settlementTry to use someone who can bring about informal reconciliationIf the agreement provides for formal reconciliation process, start the process in right earnestIf reconciliation fails, go for arbitration if agreement has arbitration clause. Arbitration is a semi-judicial process.A settlement with / without reconciliation cannot be challenged; Arbitration award can be and is often challenged in High Court.Arbitration + Appeal in High Court + Appeal in Supreme Court can take up to fifteen years. So keep trying for settlement at each stage of the process.
Separation, Divorce, Claims and Counter-claims
Remain focused on businessLook ahead into futureDo not let the failures of past leave bitterness in your mindDo not let negative emotions like revenge cloud your decisionDo a cost-benefit analysis of any action(s) while including cost of management time and opportunity lost during litigationDrop the claim if the cost of getting a claim is more than the claimInstead of monetary claims, focus primarily on salvaging intangibles like your reputation, goodwill, relationships, brand value, intellectual property rights, peace of mind etc.
Be verycareful in choosing the partieswith whom you do businessSpend time tofind moreabout your potential associate / partnerStart with someactivities that build mutual understandingand confidenceMove into long-term ordeeper involvement with cautionAt each stage of relationship, prepareclear documentsthat leave no room for misunderstandingWhile in the relationship, take allpossible care to avoid derailmentIf things go wrong, try foramicable resolutionof problemsIf amicable resolution not possible, try forexit by mutual consent
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