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India must do homework before commercial contracts, no room for fuzziness in art of the deal

A lax attitude to contract negotiations, leading to careless drafting and non-application of mind, may have come back to bite India in international courts & trade disputes.

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The Chinese have a recognised tactic in negotiations: Accept something in principle, then do nothing in practice. Or make a commitment they have no intention of honouring. Later, provoke a conflict or breakdown — or create new facts on the ground — for fresh assertions, and renewed negotiations to extract more concessions. Negotiation is thus a continuous process; there is no end point. Those familiar with the history of India’s border negotiations with Beijing know how consistently this has been put into practice, down to the present day. While the tactic has worked against India, it may or may not work in the South China Sea. Yet Beijing has been able to game the rules set by the World Trade Organization (WTO), and coerced global companies into abiding by its edicts, using market access as a lever.

India has tried similar tactics, with less happy results. Either it is not as smart as China, or it has less clout. The result is a string of setbacks in one international arbitration forum and court after another (Vodafone, Cairn, Devas, Amazon, and so on), even as the WTO has repeatedly ruled against India in trade disputes. Action has followed for the seizure of Indian assets overseas. As embarrassing headlines on such seizures proliferate, the government has scrambled to respond. It has used Indian courts to try and nullify arbitration awards given under investment guarantee agreements (IGAs), while also offering handshake deals to close out on disputes. More tellingly, a few years ago the government quietly cancelled some 58 IGAs that it had signed since the 1990s in order to encourage foreign investment. (Vodafone had fought its tax case under the IGA with Holland.) Coercive regulatory action has also been tried.

This raises the obvious question: Are there basic lacunae in the country’s business/ legal/ political practice that need to be addressed? If every defence contract leads to charges of pay-offs, leading to the blacklisting of suppliers, you start running short of suppliers — as has indeed happened for some weapons systems. If competitive defence tendering has become all but impossible, pre-selection becomes the default choice. Yet, one of the charges in the Devas context was that no bids had been invited.

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It is possible that a government used to arbitrarily changing the terms of engagement with its own citizens may assume subliminally that a written contract is not the final word — leading possibly to careless drafting, or non-application of mind. What follows is an inadequate perception of costs, should things go wrong. The revenue from the Devas contract was Rs. 1,000 crore; the damages awarded total Rs. 15,000 crore. (Does anyone still want to argue against the concept of notional loss?)

It was no different with Enron. Those who negotiated the power project deal with that sharpie company had not internalised that gas-based power stations could easily achieve much higher capacity utilisation levels than coal-based ones. Hence, a contract that offered stratospheric returns at what were assumed to be difficult-to-achieve capacity utilisation levels was in effect far too generous, with dreadful implications (potential bankrupting of the Maharashtra State Electricity Board). Cancellation became inevitable. So did costs.

What sometimes follows the initial error is more bungling, or farce. In the Devas case, the government’s reason for cancelling the contract (force majeure) was different from what the Supreme Court has now declared (fraud). The BJP lionised G. Madhavan Nair, chairman of Antrix, when the previous government charge-sheeted him for unwarranted gains to Devas; and admitted him as a member of the party. Now that it sees fraud, will it dump Mr Madhavan Nair?

The issue may well be that the written word, too, has cultural and power-balance context. Some may view a contract as the beginning of a relationship, while more litigious cultures treat it as the defining word, to be parsed as convenient. Yet others may view it as a temporary tool of convenience. Indeed, positions may change with shifts in the power balance. Hence the role of armies of lawyers in contract negotiations, and in WTO forums — often catching Indian negotiators unprepared. As cumulative experience should teach us, fuzzy approaches have costs. So, do your homework before signing, not after.

By special arrangement with Business Standard

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