Chapter D4
Rule 4: Avoiding costly annihilations
There are essentially only two ways to look at any war, even if it’s a legal war. The first view sees war as a bipolar win-lose fight to the finish, leaving in the end a victor on one side and the vanquished on the other. For much of human history, this has been the story sold to those about to die at least when the war starts. I suppose every king determined to fight a war needed to take an extreme polarized position just so he could whip up enough emotion to create the momentum needed to get him a win. You can argue that the more inflexible the polarization, the easier it is to sell the idea that no compromise is possible. When the only choice is to win or die, almost everyone will fight truly to their fullest potential. Perhaps this is why till the arrival of the modern era, these polarized positions focused on either religion, or race or just personality.
The modern era brought a new polarizing position: the concept of pure political ideology as a driver for war. Nations have doggedly sold to their citizens the idea that there is no solving the essential ideological dispute between warring parties till one or the other is vanquished. In selling this story, the public has been led to believe that political conflicts are really about ideological clashes (a.k.a clashes of civilizations!). This idea is of course severely flawed. It is possible to demonstrate, even in the European twentieth century context, that this is untrue. Besides, we are interested in war theory because we are interested in legal wars, and legal wars are not ideological in origin. There are serious practical difficulties too. One of the main problems with the bipolar view is that to get an absolute victor at the end of the war, the parties have to be pretty unequal to begin with. Other things being equal, two near equal parties slanging it out will end up with two equally damaged parties but no spectacular result. So, what’s the fighting all about? And how does it make commercial sense for any businessman to engage in such a war?
The other view of war, the kind we explore here, is also in a sense a product of another historic experience. This view emerges from the practical reality on the ground. In the modern world of business, a number of nearly equal players (nations) fight in the market (battlefield) for positions of primacy (political dominance), trying to find a way to be business (wealth) away from their competitors (enemies). With so many people fighting for the same turf, it is dangerous for any player to spend too many resources in warring against any one other player. Wars extract a heavy price. You suffer damage, your resources are spent and you become weaker. If you allow yourself to become weaker, another competitor, who has been a bystander so far, will drive in and destroy you. In a world of ‘dynamic’ political instability, it is more important to remain strong than it is to defeat the weak. Holding on to what you have is far more important than grabbing what you can.
Now, if holding on to what you have is more important than what you can grab, wouldn’t you limit the quantity of resources you would invest in attacking your enemies? Why do I say this? First, there is the absolute cost of war. Fights to the finish demand that you commit far greater resources to the business of killing your enemy than you do to the fundamental business of running your business, securing its stability, prosperity and progress. If you key managers are collecting material for your court cases, sitting in lawyer’s offices, or attending court hearings, who is focused on production, marketing, sales, profits and enhancement of shareholders value? In the long run, a business that focuses too much on legal wars will always experience some drop in busines performance. In short, wars extract a price and not only in direct terms. There is too the indirect price of lost opportunity to be paid and that is a much higher price. It makes no sense to do it, except to achieve some very defined goals that only a war will bring. These goals have to be limited, not something as all-consuming as destroying you enemy.
Perhaps the most compelling reason to fight wars only with limited goals is the effect your behavior, your attitude and your goals has on your enemy. A fight to the finish forces your enemy to fight for its survival, rather than just avoid losing ground, part of its market, etc. The greater the threat of destruction you take to your enemy, the harder your enemy fights to avoid being run over. As your murderous intent becomes more apparent to your enemy, the more its resistance rises. When this happens, you will find that as the war plays out, you need to expend more and more resources and energy to achieve progressively smaller and smaller victories. Soon, the costs become unacceptably high, and you have to either call a truce or yourself become bankrupt. The art of litigation is the art of making appropriate cost-benefit analysis and in ensuring that the cost of war is not greater than the benefit.
To put it in a nutshell, the true goal of a legal war is to subjugate your enemy till he gives in to your reasonable short to medium term commercial goals: it is never to destroy your enemy. The best warrior is not the one who fights and wins all the time but the one who wins all the time without (or with very little) fighting. This is not difficult to do. Many of the cases we have discussed so far have shown how smart litigants limit their goals and try to achieve them as cheaply and quickly as possible. Let us now look at another case where these same considerations came into focus, and how a strategy was found keeping these central principles in mind. This case found place in my third book ‘Legal Confidential’ so let me approach it from a more legalistic viewpoint.
The E&D Case
Back in the 1980’s, a large Indian company put out a global Tender requesting bids to construct a hydro power project in a remote Himalayan valley. The project’s owner planned to generate electricity from the gushing waters of a large river flowing around a large plateau, losing height rapidly. If the owner could build a weir across the river at the north end of the valley and reroute its waters into a tunnel across and under the plateau, it would emerge dramatically higher than the river on the southern end of the valley. At this point, steeply inclined head race water bearing tubes could power a series of turbines and generate electricity.
The owner had studied the feasibility of this project for many years. It knew the ground. To shorten the time it took to get the project off the ground, the Tender went ahead and disclosed that sub surface soil conditions beneath the plateau were stable. Relying on these representations, a global consortium consisting of some six companies, who called themselves E&D, bid for and won the tender.
Work proceeded quickly after the award of the tender. To deliver the project in record time, the contractor imported a state-of-the-art tunnel-boring machine, commonly called a ‘TBM’. TBM’s are large custom-built machines, the length of three or more railway coaches, built to very quickly bore through rock and earth to project specifications. They are generally shipped by sea in knocked down condition and assembled at site. The cost of the TBM is generally built into the project cost because there is no practical way to dismantle it after use and sell it elsewhere at a realistic cost.
Tunneling work now proceeded quickly but just four kilometers into the boring process, the TBM struck a fossil valley. Fossil valleys are areas beneath the earth that were at some point in time surface valleys. Over eons, the valleys been filled up with mud and had then been buried under rock and rubble. Fossil valley enclosed in a periphery of rock and stone are commonly found at great depths in young mountains such as the Himalayas. Now, if the owner had told E&D that there may be a fossil valley under that plateau, E&D would have ordering a TBM capable of boring through mud and automatically lining the tunnel with steel plates. E&D relied on soil tests claimed by the owner and assumed that there was no need to buy a TBM with tunnel cladding capability. This proved fatal to E&D’s plans for the construction of the tunnel.
As soon as the TBM struck the fossil valley, a sea of mud filled the tunnel, burying the TBM and killing several workmen. Within hours, this sea of oozing mud had filled a kilometer of tunnel. Work came to a grinding halt. What was to be done? Who was to say how wide and deep the fossil valley was? There was no practical way to remove the millions of tons of mud. Even if they could remove the mud, they would have to drag out their TBM, order a new one with cladding capability and deploy it quickly in order to deliver the project on time. No TBM manufacturer could deliver a machine in less than half a year and then there would be transportation and erection time to contend with. The costs would be prohibitive and the losses would pile up.
E&D now started to read the fine print in the contract. The owner had said the sub surface soil was stable: wouldn’t it have to pay E&D for all this extra work? Is it ever that simple? The tender said the owner had tested the soil. Conversely, the Letter of Intent ultimately issued to E&D said all risks associated with sub-surface conditions would be borne by E&D. In legal terms, this meant no one could be certain if E&D would be able to collect the extra construction cost or get extra time to finish the job. Mulling over the problem, E&D decided there were only two options open to it.
Its first option was to complete the project. To do this, it needed two extra years to deliver the job. Would the owner give them this extra time? Who could say? There were legal ways to do it. E&D could declare Force Major, claim extra time and go to arbitration if this demand was resisted. But the real problem was not extension of time, it was money. E&D was looking at a project cost overrun of 50% or more. Could such a humungous claim be made? Indian law did have the law to make it possible – the principle is called Quantum Meruit, meaning reasonable payment for extra work done – but how could anyone get any owner to shell out the cash without a long and expensive arbitration. This kind of legal activity takes years, and still all the energy, resources and money spent on the task never comes back.
E&D’s second option was to get out. It could institute arbitration, raise an endless procession of legal issues, stall the work and basically hold the owner to ransom. Eventually, the owner would have to choose between winning the case while stalling the project indefinitely or letting E&D walk away at minimal loss and find someone else to build the project. It was a simple choice. Businesses exist to make money. Both options available to E&D meant some losses. For sure it could prove a point and cost the Owner dear for its negligence in testing sub surface conditions. Was that its priority? Did E&D really want the owner to pay hundreds of crores in damages and suffer a devastating annihilation? A quick exit was really the only choice.
Fortunes of course favor the wise. E&D was fortuitous. Insurgency flared up in the area soon after the tunneling disaster. A spate of violent incidents created an environment of fear and neurosis. Insurgents successively blew up facilities around the project. Sniper fire was directed at E&D’s camp and several villagers were killed. It was a godsend opportunity.
Since E&D had already decided to get out as quickly as possible, it immediately declared “Political Force Major”. How could it build a project in near warlike conditions? Performance of contractual obligations was now truly impossible. This master stroke radically rewrote the story. Did the owner want to give E&D successive extensions till the insurgency was repressed? Most insurgencies in India have lasted 30 years or more: how long would this one run? The game and changed. The owner quickly re-thought its strategy. It was a choice between letting E&D off the hook and having a project in reasonable time or, holding E&D’s feet to the fire and having no project for 30 years. Did the owner want to quickly make and sell electricity, or publicly beat up foreigners? What made better commercial sense?
The owner made the sensible choice. It asked E&D to cut its losses and leave with no strings attached. There would be no claims on either side and no arbitration. E&D took the offer and parties signed on it. Thus, E&D extracted itself from the situation without engaging in costly annihilation.
Before I close discussion on this case, a few points are in order. You could argue E&D’s exit was a stroke of luck, not good strategy. I would beg to differ. In my repeated experience, most warring parties get similar opportunities from time to time but they don’t take them. They don’t take them because they think their objective is to beat their enemy into total submission. In this case, it was all too easy for E&D to ask the arbitrators to decide if an owner can claim the sub soil conditions were good and yet make a contractor pay for its own stupidity? When two documents both created by the Owner contradict each other, who should get the benefit of doubt: the Owner or the contractor? As a lawyer, I would have loved to help interpret the law on the issue but what would that have done for my client?
Bear in mind also that even if the insurgents had never become active in this area, E&D would have had other opportunities to win without engaging in costly annihilation. For instance, India’s Quantum Meruit law provides that if the contractor believed that extra work needs to be done for the project to be successful, the owner must either pay for this work or assume the risk of a failed project because it won’t allow this work to be done. Since the owner was not a bottomless pit of cash, making demands of ‘extra work’ could have put pressure on the owner and led to a settlement anyway.
The point here perhaps is that it is always possible to develop strategies to avoid costly annihilation but it takes a wise litigant to look for them. To find the right strategic solution, the astute litigant never forgets that the greatest victory is the one that is achieved without fighting.