Chapter D1

Rule 1 - Match magnitude of engagement to resources

Imagine that you are a very angry individual setting out to pick a fight with your brother. It may be about who gets the better part of your jointly inherited family home. It may be about who gets the roof rights. It may even be about one brother wanting to sell out his portion of the house to a stranger rather than sell it to his brother. Whatever it is, you can be sure that a lot of unpleasant words have been exchanged before either of you thought about going to court. When you start to think about going to court, you drivers are very probably a boiling cauldron of emotional excess. Your decision to go or not go to court then is driven by considerations other than those that will determine the outcome of this kind of drastic action.  Does that really make sense? How is your behavior different from the guy who cuts off his leg because his ankle really hurts?

The truth is that there is no room for emotional baggage in the decision to go to court. In the end, this is about the value of the property or roof rights, maybe today, maybe in ten years’ time. It’s really about money. Once you start to accept that, you realize that you should stop thinking about all the emotional trauma you have experienced during your disagreement with your brother and think about this problem in the same way that (let’s say) a faceless corporation does. In the commercial world, legal wars are ultimately a game of economics: a simple matter of cost and benefit. There is no conflicts of culture or philosophies here: legal wars are a tool to achieve commercial ends.

Consider the typical high stakes litigation in the corporate world, be it a simple Joint Venture Agreement or a complex infrastructure project. Such typical contracts provide for arbitration. Although the legislature has worked hard to make arbitration as painless as possible, the justice machine still offers a variety of opportunities for delay and sloth. To avoid these problems, many companies have opted out of the Indian arbitration law and agreed to use various international arbitration solutions such as ICC and SIAC. There exist in India today literally hundreds of thousands of international contracts which are being performed in India, are governed by Indian laws, but still, should a dispute arise, parties have agreed to settle their disagreements by arbitration under foreign rules in London, New York, Zurich, Singapore, Hong Kong, et al. Is this a solution to the problems of the Justice Machine?

Let me tell you about my latest experience. I invoked arbitration under Singapore rules in 2018 for a client. I was asked to deposit about Rs. 2 Crores immediately. I did so. SIAC then asked the opposite party to do the same. The opposing party refused on the ground that the arbitration was premature. SIAC now asked me to deposit the other party’s share of costs as well. I deposited that money as well. It looked like the machine would now crank up into action. Instead, the opposite party invoked a separate arbitration and deposited their fees. SIAC now asked me to deposit an equivalent sum of money in this second arbitration even though both arbitrations came out of the same Joint Venture Agreement and were substantially about the same subject!

My client was in a rage and I struggled to absorb the tsunami. Is SIAC in the business of resolving business disputes or is it in the business of promoting multiple arbitrations on the same subject to maximize its own profitability? I bore the brunt of the outrage, patiently explaining the legal issues even as I sympathized with the client. In the back of my mind was another thought: its all very well to want a private island in the north Atlantic off the coast of Africa, but can you afford it?

It isn’t only about fees payable to SIAC or LCIA etc. Suppose you agree to conduct your arbitration in London using arbitrators from neutral countries. We had one of those in 2018 too. This was an arbitration between an Indian and a Tanzanian entity. The arbitrators were from Germany, Australia and Russia. The hearings were held in London. What would such an arbitration typically require?

Let me talk now of optimal solutions. Because it was subject to Tanzanian laws, we needed Tanzanian legal experts. Its true Tanzanian law is a cut copy paste job of the Indian contract law but who wants to take a chance? Since the hearings were to be held in London, local procedural law applied and we needed that very expensive Sterling denominated expertise too! That’s three sets of lawyers! Since single lawyers do not conduct major International litigation, we are really talking about three law firms in three countries! All these people needed to read the same papers, research in the areas specific to them, travel up and down to the venue of arbitration, communicate with each other, travel to confer, and so forth. That is serious money. If you don’t have the money for that kind of thing, wouldn’t you do well not to start a legal fight?

Does this mean then that if you haven’t the money and manpower, you can never fight a legal war? The answer has to be a resounding no. Not everyone fighting a legal war has a bottomless war chest. Cases are won by empty pockets too. Entire infrastructure projects in the Himalayas have been stopped dead in their tracks by a well-conceived Public Interest Litigation. Many small companies take on international giants and win. How do they do it?

Its possible to give several answers to that question. For a start, you can’t make an assessment of resource depth in a vacuum. Lack of resources is not a major problem if your enemy is no better off! Even if the enemy is stronger than you, you have strategic options where you are able to optimize the use of your resources while the enemy is not. Better still, you could find a strategy where substantial resources are unnecessary. It comes down to managing the magnitude of engagement to match your resources. For instance, a smart company can go for a quick kill followed by a settlement. As a general principle, the aim here would be to pre-empt the opponent by quickly getting some sort of status quo order. You would look for a way to freeze the status in a way where the enemy has no ability or desire to continue the fight. If you don’t get that result, you can also freeze the status in a way where the enemy is not able to shake the status quo. As he bleeds, his motivation to settle with you rises.

Here is a great example of this strategy in the Ecological Solutions case. Arrayed on one side was a Government sponsored charitable institution. It was ruled by bureaucrats so it had great clout in the corridors of power but that came with great inertia and a lack of personal stakes. If the charity lost money, who really cared? On the otherside of the battlefield stood an enterprising businessman from the hospitality industry, a charming man called Khanna. It was an unequal battle between entities with widely different skill sets.

The Ecological Solutions case

Back in the 1970, ecology and environmental preservation became quite the flavor of the month. Everyone understood that a good environment is many things: air, water, soil, amongst others. It was also understood that what we put into the earth, and what we take out, determines our fate as well. A variety of players destroyed the environment, even as a variety of other players had an embedded interest in preserving it. When environmental degradation in India crossed into the red zone in the 1990s, a group of intellectuals sat down to brain storm together.

Eventually, they concluded that the Government could never hope to effectively address ecological issues without a cross disciplinary advisory think-tank. The Government needed to put together such a think tank and populate it with institutions who were already addressing environmental issues. These specialists needed to be relocated into a single institutional area, under the administrative control of a Government sponsored registered society. This proximity, they hoped, would increase synergy and bring better focus.

In due course, a not-for-profit society was registered and the Government allotted prime land in the heart of town to it. To no one’s surprise, a Board of Governors was created, and then packed with bureaucrats. Fortunately, an enterprising bureaucrat was appointed as the secretary of the society and given the freedom he required to make the Ecological Solutions Center (or ESC) happen. It was a promising start.

This Secretary was something of a visionary. He believed that think tanks do not work well suffocated in musty government offices or paying through their nose for exclusive conference halls at extortionist dollar pegged prices. It was illogical for societies seeking holistic solutions to environmental issues to work from ugly aesthetically demeaning building. He wanted ESC, and all its ‘participating institutions’, to be located in pristine surroundings, with its own residential and conference facility. As his ideas grew and developed, he had a whole hospitality facility in contemplation.

Clearly, he was the right man in the right place for the right job. In no time, he had cajoled, persuaded, pushed, and hustled scores of environmental and sustainable development groups, institutions and companies to join as ‘participating members’, come up with the money and finance the ESC. A leading architect of the day designed a beautiful building and its construction proceeded quickly.

However, the hospitality facility left him with a problem he could not himself tackle. Since he was a bureaucrat, not a hotelier, he did not know how to manage the hospitality facility and had to find someone to do it for him. ESC issued a Notice Inviting Tender asking for help and a variety of experienced players, including some hotel chains, responded enthusiastically. Should he award the contract to these high-end players? They had the domain expertise, but did they have the right attitude? High-end hotel chains have a certain perspective on their brands. If he gave the contract to one of them, he could end up with a 5-star hotel, too expensive for most people who solve ecological problems through voluntary action often financed by donated funds.

Enter Khanna, a fiery young man with dollops of inspiration and zeal. He ran a small hotel in the city but he had a head full of wonderful ideas. Eventually, they struck a deal. In sum, ESC would bear the capital cost of the hospitality facility to Khanna’s design and specification. In turn, Khanna would operate the facility and share the upside with ESC. Parties signed a contract and Khanna went into overdrive.

Everyone now waited with baited breath for the inauguration of this upwardly mobile and very fashionable facility with a sexy social mission offering a good time at a realistic price. Then it fell apart. One year into the construction phase, the honeymoon ended. Someone in ESC tooth combed the fine print in the contract and found it was heavily loaded in Khanna’s favor. The Muck hit the fan.

To explain it in a nutshell, contracts are ultimately not about rights and liabilities alone: they are also about who carries unquantifiable future risk. This is an important point, and one not always well understood even by lawyers. Every major construction contract provides for events of Force Majeure (Acts of God) such as earthquakes and floods and pandemics which destroy a party’s ability to perform its obligations). These contracts provide for potential liabilities such as accidental injuries to third parties during construction. Such contracts provide for changes in law that alter the essential commercial deal between parties such as changes in tax laws. They also provide for changes in the economic environment such as deterioration in foreign exchange rates which destroy profits. They provide for changes in the internal political environment which impact the performance of the contract, such as a ‘swadeshi’ brigade destroying burger joints. Then there are changes in the external political environment which impact performance of the contract, like a crazy neighbor encroaching on Indian land in the middle of nowhere leading to a customs logjam for imported goods. These are risks every contract runs, but they impact parties disproportionately. If I have to supply you silk sarees, and I depend on Chinese silk, who takes the loss when Silk imports from China are banned? ESC found that it carried the entire burden of unquantifiable risk while Khanna had himself a risk-free lunch.

More significantly, the contract was so structured that Khanna could in theory pay nothing to the Center. This is easy to do in a contract. In any profit-sharing arrangement in a company, there is going to be no profit if the contract allows the company to send all its personal for a year-long holiday to switzerland on an unlimited expense account. Similarly, there is going to be no profit if the company can choose how much of the revenue will be ploughed back into the business by buying new IT stuff or changing the hotel decor every six months). Khanna could choose if there was going to be a profit.

This discovery triggered a blame game charade and the crucifixion of the usual fall guys. All sorts of allegations of kickback and payoffs were made. The Secretary was shunted out and a new one appointed with the single point agenda of making the contract disappear. The new Secretary consulted his lawyers, they discovered a set of contractual violations by Khanna and before Khanna knew it, he had a termination notice in his hands.

Khanna was livid. It was possible to sympathize with him. He had joined the project before it had become fashionable and he had put two years into it. He saw the termination notice as ugly politics dressed to look like legal issues. He suspected the legal action was intended only to shake him down. How was he going to fight the Government on his limited resources?

The traditional legal solution facing Khanna was not going to help him. In law, any party is free to terminate any contract of service. The law does not compel parties to perform contracts of service they do not wish to perform. As a principle of law, this makes perfect sense. In practice, it has grave implications. To compensate Khanna, the court would have to order a long trial. Khanna would have to prove what damage he has suffered. Obviously, Khanna had neither the time, nor the will, or even the patience to struggle through this type of long battle. He had to find a way to stop ESC from kicking him out of the deal. H needed a ‘stay order’.

Khanna now unveiled a tried and tested technology to get a ‘stay order’ also known as ‘a conspiracy theory’. The construction of the Center had been delayed. If the inauguration of the hospitality facility was delayed indefinitely, there would be no way to avoid a public humiliation. Participating institutions had paid for the hospitality facilities, and would want it to function when they moved into the Center. If he stalled everything, the participating institutions would be livid, would pressure ESC and he will have his settlement.

Khanna filed a case, almost poetic in its simplicity. He said he had a deal and he was doing his job well. In doing this job, he had spent a lot of time, energy and money. All along, no one complained about his work. Now, suddenly, a group of destructive elements in the Center had implemented a ‘palace coup’ and wanted to throw him out for dishonest reasons. He repeated his allegation of ‘collateral motivation’ throughout his pleadings. Everyone understood he was saying this was blackmail. He asked the court to hold that the termination notice was void.

In all fairness, the ESC had a case. The deal was grossly unfair. The problem was ESC was a Government sponsored heavy weight while Khanna was a weakly positioned individual. How do you convince a court that the contract was one-sided, burdensome and grossly unfair to the strong party! That apart, in a litigation about a contract, a court is not concerned with the fairness of the contract. At least in theory, a court job is to discover the true ‘intent of parties’ and to make sure parties do what they said they would, or pay compensation for not doing it.

Naturally, when the case came up for hearing, the court’s first instinct was to pass order requiring the parties to maintain status quo. It seemed only fair.

The Center filed a long and complex defense on meaty issues. It was good stuff. It showed the absurdity of the contract as written. It showed that legally speaking, a contract of service could not be specifically enforced. It argued that Khanna could be compensated with money if he was right, but a stay order? All these were good points, but they were points to be proved at a trial. At that stage, the court was concerned with interim protection while all these complex questions were being considered. After a protracted hearing continuing for months, the court confirmed the status quo order and the Center experienced its first crushing blow.

This turned the tables for Khanna. The Center came under increasing pressure from the people who had paid for the hospitality facility. They wanted to see food and beverage, not litigation. Pressure also mounted from the bureaucrats who had conceptualized the Center. They argued that it was embarrassing that two years after signing the deal, the Center now discovered that it had been hoodwinked. Khanna’s claim of blackmail had its effect: civil servants started to wonder if there was not more to it than met the eye.

The new Secretary found his position untenable. He sued for peace. He asked for a face saver. Khanna was magnanimous in victory. The parties renegotiated the contract, and wrote a lot of new words that didn’t change the meaning too much. Most of these changes moved the unquantifiable risk to a loss sharing formula. The new contract was signed and it was back to business for the both of them. Twenty-five years after this war ended, the parties continue to cohabit happily ever after.

Thus, on a shoestring budget, Khanna won his battle.

The Ecological Solutions Center illustrates several fundamental rules of effective litigation. It is an excellent illustration of occupying the field. It is a good illustration of mastering and using the governing environment. But above all this, it is a classic illustration of how to implement a war strategy that matches the magnitude of resources to the proposed litigation. Khanna could have taken the case to its final conclusion and collected a lot of compensating without doing a day of work. That would have taken years to get and a lot of money too. Instead, he chose the limited engagement path, of keeping his contract and making small money as profit year on year. He gambled that the   Center would succumb to the pressure generated by the delay in inaugurating the hospitality facility, and it did. He kept the litigation at low key, and he won.