Former judge of the Supreme Court Justice Nageshwar Rao recently suggested that the business community must prepare commercial contracts carefully and settle amongst themselves instead of litigating and thereby over-burdening the already over-burdened courts. This is a sound idea because it takes a long time before the courts adjudicate.
There are two ways to address the issue of litigation in commercial contracts. First, courts must penalise frivolous litigation, especially by government and government entities, since they are the largest litigant. Second, the cost of delaying execution of an arbitration order must be huge. We will discuss both these approaches.
The FIRST APPROACH
* Penalty
The largest litigant is the government – State and Central – and its associated bodies and PSUs. According to a 2018 report published by Vidhi Center for Legal Policy, “Though no verifiable data is available, various sources, including a recent document by the Ministry of Law & Justice, state that the government, including public sector undertakings and other autonomous bodies, are party to around 46% of court cases”
The GoI and even State governments have two rules – one for themselves and one for others. The classic example is – if you delay GST payment, then you pay 18% interest. But when the GST department refunds your money, they will pay only 6% interest. Worse still, the government does not want to pay any interest when it delays payments.
The point is, government bodies have nothing to lose, or the government officials are more worried about the CAG audit and CBI case and hence prefer to be safe and litigate. The private party must respond to the litigation, often running into several years before justice is delivered. The execution of the court order is a bigger nightmare. When the government loses the case, often there is no penalty on the government officials who deliberately recommended frivolous litigation in the first place. How do we make sure that the government is treated just as a commercial party and not as a privileged party?
* Accountability of Courts
The courts, in fact, must hold the government to a stricter standard than a private entity. This is because the government through the legislature made the law in the first place. Second, the government has a plethora of legal advisers whose only job is to provide the right legal advice. These legal advisers are paid by the citizens, and they have an obligation to citizens to provide the right advice. If they give wrong advice, why shouldn’t they be held accountable? When the courts regularly pass strictures against government officers, why should the courts not pass strictures against legal officers of the government?
Let me give you an example. Our organisation signed a contract with the Department of Posts (DoP). They stopped the payment unilaterally and we approached the Telangana Micro and Small Enterprises Facilitation Council and got an arbitration order as per the MSMED Act. The arbitration order was to pay the principal with interest as per the MSMED Act. The DoP approached the Telangana high court with the wrong claim on the jurisdiction of the facilitation council despite knowing that this was explicitly verified and addressed by the facilitation council. It got an ex-parte interim injunction order because the judge was moved by the argument of the government counsel, in good faith that the government counsel will not mislead the court.
It took two years for the injunction to be lifted and the court upheld the arbitration order but did not pass any strictures or even costs on the DoP. The DoP deliberately paid only the principal and is still delaying payment of interest despite knowing that the interest is mandatory as per the MSMED Act, 2006. In this case, what is the accountability of the legal advisers to DoP?
Why should the court treat the DoP as a privileged party in a commercial contract? Shouldn’t it pass strictures against the DoP for willingly misleading the court and wasting public money with frivolous litigation? Shouldn’t the court insist that the DoP pay for the legal costs and also pay a penalty? More importantly, shouldn’t the DoP legal advisers be penalised for advising the DoP to pay only the principal even after getting the court order?
* Penalising Legal Team
The weapon the government uses is a delay in payments and deliberately initiating court proceedings for delaying the payment. There is no incremental litigation cost to the government. It is unused to pay interest and hence believes that there are zero costs of delays.
The job of the government counsel is to avoid litigation when there is no case. Courts must pass strictures against the government legal team for wrong advice. The government must be asked to pay all the costs and pay compensation for wrong litigation. This approach can reduce unnecessary litigation.
Recently, a single-bench in Jabalpur Bench of MP High court levied a cost of Rs 1 lakh to be paid to respondents and Rs 50,000 to be paid to the Covid relief fund as a penalty for delaying the execution of the arbitral order issued by the State Facilitation Council. We need more such orders.
The Second Approach
* Arbitration and Conciliation Act, 1996
The arbitration procedure is intended as an express procedure and often it achieves this purpose, especially under the MSMED Act, 2006. But the implementation of the arbitral order, especially if the order is against the government, is a nightmare. In fact, the MSMED Act, 2006, was one of the first statutes to provide for statutory interest, at a penal interest rate of 3X the RBI rate. The interest rate is also stipulated under the statute. Courts adhere to this stipulation.
In a classic case, according to an article published by a leading English daily, NHAI ended up releasing nearly Rs 4.5 crore in 2019 to a private firm for holding back the clearing of bills of barely Rs 20 lakh, eight to nine years earlier, but only after the private firm won the arbitration award and also two cases in the Delhi high court. The firm was entitled to get 27% interest since it was registered under the MSMED Act, 2006. This must be made a case study for legal advisers to government entities.
* Amendment to ACA 1996
It is time The Arbitration and Conciliation Act, 1996, or ACA, was amended to provide for compulsory interest payment with a penalty for frivolous litigation under ACA, and on a par with MSMED Act, 2006. This will be a great addition to the Ease of Doing Business initiatives.
This will discourage government authorities and even private parties from delay tactics. In addition, this will enable quick enforcement of arbitral orders because delays become expensive to the party which has to receive the benefits under the award. This one amendment will kill two birds with one stone – delay in arbitral proceedings under ACA and delay in execution of arbitral orders under ACA
