India: Good Faith Negotiations And Mediation: A Missed Opportunity So Far

Last Updated: 2 December 2019
Article by Indranil D. Deshmukh and Samhita Mehra

It has become increasingly common for parties to adopt multi-tiered dispute resolution clauses in agreements. A typical multi-tiered dispute-resolution clause requires parties to first attempt to resolve a dispute amicably – for instance, by engaging in friendly discussions, submitting to mediation or undertaking good faith negotiations – before the commencement of arbitration proceedings. There has been much ado about the enforceability of such clauses and whether they should be considered void due to vagueness: how does one engage in "friendly discussions", and what exactly are "good faith negotiations", when a presumably acrimonious dispute has already arisen between parties?

Despite this ambiguity, courts have increasingly found tiered dispute-resolution clauses to be enforceable. In fact, with a view to combat rising pendency in courts, these principles have been extended to the initiation of litigation as well. The Commercial Courts Act, 2015 (CCA) was amended last year to state that any suit that does not contemplate urgent interim relief cannot be instituted without the plaintiff having exhausted the remedy of pre-institution mediation and settlement.1 A similar model is also followed in a number of other countries, including the UK, Italy, Greece and Turkey, where it has been successful in encouraging dispute resolution through mediation.2

However, there appears to have been only superficial acceptance of such alternatives, with a mechanical approach being adopted to the implementation of tiered dispute resolution clauses as simply a pre-arbitral check-box to be ticked.3 Under the rules governing mandatory mediation under the CCA, the opposing party has the right to refuse mediation, and parties in India have traditionally preferred adjudication to mediation, as evinced from the disuse on provisions under Section 89 of the Code of Civil Procedure, 1908, which provides for settlement of disputes outside court, or the conciliation provisions under the Arbitration and Conciliation Act, 1996. It has also been argued that the amendment to the CCA has not come with sufficient institutional and attitudinal reform to meaningfully encourage parties towards mediation.4 This, in toto, reflects a myopic view of non-adversarial dispute resolution processes.

Advantages of Good Faith Negotiations

There are considerable advantages to settling a dispute by way of mediation, discussions or negotiations. Not only is the process likely to be swifter, more procedurally flexible and cost-efficient than a traditional arbitration or litigation, but also parties have intimate knowledge of the facts of the case and are in the best position to reach a negotiated settlement that is commercially beneficial to both parties.5 While courts and arbitral tribunals are empowered to pass enforceable awards, and arbitration is increasingly viewed as an opportunity to have a dispute heard by a tribunal well-versed in the technicalities and complexities of commercial conflicts, the fact remains that arbitrators and judges are guided and constrained by legal principles, not commercial considerations. On the other hand, the parties involved in the dispute are familiar with their commercial goals and trade-offs they can make. Parties are also not limited to conventional judicial remedies but can reach more innovative solutions that satisfy their practical requirements.

Further, closed-door negotiations are likely to have a limited impact on the parties’ business relationship in other respects, as opposed to drawn-out and frequently publicised adversarial proceedings before the courts or an arbitral tribunal. Settlement negotiations offer far greater privacy than either arbitrations or litigation. While settlement negotiations may require parties to disclose sensitive information to be meaningful, upfront agreement that the negotiation should be confidential and conducted on a without-prejudice basis may be helpful in avoiding any setbacks arising from such disclosures.

Potential Concerns in Relation to Good Faith Negotiations

A disadvantage of mediation / negotiations can be that a settlement agreement may not be enforceable on its own. However, in a positive sign, the newly-designated Chief Justice of India, Justice S.A. Bobde, has called to make pre-litigation mediation mandatory and, significantly, to give the settlement agreement arrived at the force of a judicial decree.6

An initiative such as the one taken by the Singapore International Arbitration Center (SIAC) along with the Singapore International Mediation Center (SIMC) is also useful in this regard. SIAC provides for an arb-med-arb procedure, wherein a mediated settlement is sought to be achieved as a first step in a dispute that has been referred to arbitration. In the event that parties are able to reach a settlement through the mediation process, the settlement is recorded as a consent award, which is generally accepted and enforceable as an arbitral award, subject to local requirements as may be prescribed. Where parties are not able to reach a settlement, they may continue with the arbitration proceedings. As such, this procedure formalises the attempt at conducting post-dispute negotiations while also giving greater enforceability to the settlement agreement reached therein.7

The International Chamber of Commerce encourages parties to attempt a negotiated settlement in other ways. For instance, the ICC Rules of Arbitration provide for a manner of fee concession when parties attempt to resolve their dispute under the ICC Mediation Rules prior to initiating arbitration.8 Additionally, one of the recommended case management techniques under the ICC Rules of Arbitration recommends, "informing the parties that they are free to settle all or part of the dispute either by negotiation or through any form of amicable dispute resolution methods such as, for example, mediation under the ICC Mediation Rules".9

Another fundamental concern that arises when negotiations are mandated as a pre-arbitration step and not voluntarily undertaken of their own accord, is the difficulty in bringing both parties to the table to engage meaningfully and in good faith with each other during the negotiations. Given that a dispute has already arisen between parties, there is likely to be a trust deficit. However, a few simple approaches can be helpful in indicating to the other party a willingness to negotiate.

Enforcing "Good Faith"

Put simply, negotiating in good faith would require a party to act in a way that is likely to yield an agreement.10 This could include inter alia initiating communications in a timely manner and responding to counterparties within a reasonable time frame, sending negotiators with the authority to make decisions and not mere mouthpieces, and demonstrating a willingness to make reasonable concessions – for instance, by engaging seriously with proposals and making clear counter-proposals.11

It would also be important to approach the negotiation as a collaborative process as opposed to a purely competitive one. Most disputes involve a number of issues that can be negotiated, but which different parties may prioritise differently. As such, there is likely to be scope for each party to integrate various sources of value through tradeoffs based on their individual priorities. Incrementally, sharing information focusing on the trade-offs the party is willing to make can be an indicator of good faith and incentivise the counter-party to reciprocate likewise.12 Agreeing upon an objective standard to be used as the basis of the negotiations – for instance, market practice or industry standards, legal precedent, or scientific evidence, as may be suitable – may also help provide a more objective standard against which to measure each party's stance.13

While the increasing acceptability of multi-tiered dispute-resolution clauses and attempts at undertaking pre-litigation negotiations is a welcome step, it will not be meaningful without the bona fide efforts of parties to actually attempt to reach a settlement. In the absence of good faith, such negotiations will remain simply a missed opportunity.

Footnotes

1 Section 12A, Commercial Courts Act, 2015

2 https://barandbench.com/mandatory-mediation-commercial-courts-act/, https://www.thehindu.com/opinion/op-ed/settling-disputes-out-of-court/article24049676.ece

3 https://barandbench.com/mediation-section-12a-commercial-courts-act/

4 http://mediationblog.kluwerarbitration.com/2018/09/01/mandatory-pre-institution-commercial-mediation-india-premature-step-right-direction/?doing_wp_cron=1574668632.9689979553222656250000

5 http://lawcommissionofindia.nic.in/adr_conf/chandrachud3.pdf

6 https://economictimes.indiatimes.com/news/politics-and-nation/commercial-disputes-should-go-through-mediation-first-bobde/articleshow/72048517.cms?from=mdr

7 http://siac.org.sg/model-clauses/the-singapore-arb-med-arb-clause, http://simc.com.sg/dispute-resolution/arb-med-arb/

8 Article 2 of Appendix III to the ICC Rules of Arbitration provides that "When an arbitration is preceded by proceedings under the ICC Mediation Rules, one half of the ICC administrative expenses paid for such proceedings shall be credited to the ICC administrative expenses of the arbitration."

9 https://iccwbo.org/publication/arbitration-rules-and-mediation-rules/

10 http://www.sscnet.ucla.edu/polisci/faculty/boneill/goodfaith5.pdf

11 https://dpc.sa.gov.au/__data/assets/pdf_file/0013/34600/DSD_AARD_HERI_Guideline-5-Negotiating-in-good-faith.pdf

12 https://www.pon.harvard.edu/daily/negotiation-skills-daily/value-creation-in-negotiation/

13 https://www.pon.harvard.edu/daily/dispute-resolution/principled-negotiation-resolve-disagreements/

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