IL&FS crisis: Success of PPPs rests on prevention and resolution of dispute

The resolution of disputes between the Infrastructure Leasing & Financial Services Limited (IL&FS) group and government entities is seen as a way forward for the liquidity-strapped infrastructure financier and builder. Such a move is intended to bring in cash flow, thereby easing the task for the government-appointed board that took control of the group on October 1. 

IL&FS and the National Highways Authority of India (NHAI) are likely to opt for an out-of-court settlement in a couple of cases entangled in the arbitration process. IL&FS has arbitration claims worth around Rs 70 billion with the NHAI. Though discussions are currently on in the two cases where IL&FS went to court over lower arbitration compensation, clearly a dispute resolution is problematic despite the government putting in place a scheme in December 2016, under which the NHAI is required to release 75 per cent of the amount awarded by the arbitrators. 

Contracts signed between two parties usually have a provision for arbitration so that disputes can be settled outside of courts in a faster manner. An arbitration agreement is a mutual resolution between the parties.  However, Ramesh K Vaidyanathan, managing partner, Advaya Legal, argues arbitrators being paid for the number of sittings creates a vested interest in prolonging proceedings, except for those who are in demand.

But, Ajay Bhargava, partner, Khaitan & Co, does not agree. He says arbitrators do not have any personal interest in the matter. “Delay is not occasioned because of them. However, in the case of three-member tribunals, getting available dates from all the members remains a challenge," says Bhargava.   

Since the award of the legal cost is nominal and not actual, there isn’t any disincentive for the parties not to challenge. Vaidyanathan says the slow pace of the judicial process encourages parties to delay matters and offers no incentive for settlement. He also points out to lack of oversight in the case of ad-hoc arbitrations compared to institutional arbitrations. Disputes in infrastructure projects can be complex and require high-level expertise and extensive documentation. While there is also lack of specialist arbitrators, technology adaptations for some of the procedural aspects are low. 

Naresh Thacker, partner, Economic Law Practice, says disputes in infrastructure projects usually take longer to be resolved through any dispute resolution mechanism. Claims can range from delays in handing over land to concessionaires (contractors), time overrun in construction, rejection of price escalation and change in scope of work claims, premature termination, and offloading of work to a third party, among others.   

According to Thacker, the problem is systemic; the traditional mindset is to approach arbitration is akin to an elaborate judicial procedure adopted in the civil courts. “This behaviour is reflected not just in the dilatory approach of the contractor/concessionaire and the NHAI, but also that of lawyers and arbitrators,” says Thacker.

The most common approach is of taking time extensions without a just cause, protraction of proceedings due to the excessive workload on the lawyers or arbitrators and resorting to court intervention. 

Bhargava says there is no bar for the parties to settle potential disputes; even after the arbitration commences, the parties can discuss matters and resolve. “When it comes to private parties, we have seen a rise in settlement discussions pre and during the arbitration,” he says. Even during arbitral proceedings, a settlement is legally permissible under Section 30 of the Act.  

Yet, almost all cases go in for appeals in courts, especially the cases related to government companies.  

Disputes in an ongoing contract lead to financial problems. “Payments get withheld and bank guarantees are invoked. This leads to cash flow issues, impacting day-to-day operations and non-payment to third-party vendors,” says Bhargava. He, however, says there is a clause for the continuation of the project work in most projects, even if some dispute under the contract is referred to arbitration unless the issue arises on account of termination or abandonment of the contract.   

The government amended the arbitration law and introduced a time-bound resolution mechanism in 12 and 18 months. Thacker says prior to the 2015 amendments and the proposed 2018 amendments to the Arbitration and Conciliation Act, 1996, the arbitrations would run for several years at a stretch. He suggests management-level negotiations or conciliation through a committee of independent experts.  

Thacker says courts need to take a proactive stance to support adjudicatory mechanism through arbitration, especially where PSUs are concerned. “A sympathetic attitude towards PSUs make them commercially non-responsive and a drain on the system.”  

To a large extent, the success of public-private partnerships rests on both the prevention and resolution of the dispute. If IL&FS cases indeed get resolved outside of courts, they could set a precedent and put the onus on both the government organisations like the NHAI and private entities to carry the contract in its true spirit.

Breaking the impasse: What experts suggest
 

• Stress on management-level negotiations or conciliation through a committee of independent experts
• Courts need to take a proactive stance to support the adjudicatory mechanism through arbitration, especially where PSUs are concerned
• The onus is on both govt organisations and private entities to carry out the contract in its true spirit
• There is a need to offer incentives for quicker settlement of disputes