Posted: Release Date – 12:45 AM, Wed – Nov 9th 22
by T Muralidharan
Former Supreme Court Justice Nageshwar Rao recently suggested that the business community must carefully prepare commercial contracts and settle between them, rather than litigating, overburdening an already overburdened court. That’s a reasonable idea, since court decisions take a long time.
There are two ways to resolve litigation issues in commercial contracts. First, courts must punish frivolous lawsuits, especially lawsuits by governments and government entities, which are the largest litigants. Second, the cost of delaying the enforcement of an arbitration order must be enormous. We will discuss both methods.
the first method
The largest litigants are governments—state and central—and their related agencies and institutions. According to a 2018 report by the Vidhi Center for Legal Policy, “Although there is no verifiable data, various sources, including a recent document from the Department of Law and Justice, suggest that governments, including public sector businesses and other autonomous agency, involved in approximately 46% of court cases”
GoIs and even state governments have two rules—one for themselves and one for others. Typical example – if you pay GST late, then you need to pay 18% interest. But when the GST department returns your money, they only pay 6% interest. To make matters worse, the government doesn’t want to pay any interest when it delays payments.
The point is, government agencies have nothing to lose, or government officials are more concerned about CAG audits and CBI cases and therefore more willing to be safe and litigated. The private partner must respond to lawsuits, often taking years to get justice. Enforcement of the court order is an even bigger nightmare. When the government loses, it often goes unpunished for government officials who deliberately recommend frivolous lawsuits in the first place. How do we ensure that the government is seen as a business party rather than a privileged party?
* Responsibility of the court
In fact, courts must hold governments to stricter standards than private entities. This is because the government first made laws through the legislature. Second, the government has a large number of legal advisers whose only job is to provide correct legal advice. These legal advisors are paid by citizens and they are obliged to provide citizens with correct advice. If they gave wrong advice, why shouldn’t they be held accountable? Why shouldn’t courts be critical of government legal officials when courts are so often critical of government officials?
Let me give you an example. Our organization has a contract with the Department of Posts (DoP). They unilaterally stopped the payment and we contacted the Telangana Micro and Small Business Promotion Council and obtained an arbitration order under the MSMED Act. The arbitration order is for the payment of principal and interest under the MSMED Act. Despite knowing that the Facilitation Council had clearly verified and resolved the issue, the DoP brought a false claim to the Telangana High Court regarding the Facilitation Council’s jurisdiction. It was granted an ex parte interim injunction because the judge was moved by the government lawyer’s argument and believed in good faith that the government lawyer would not mislead the court.
The injunction took two years to lift, and the court upheld the arbitration order without imposing any restrictions or even costs on the DoP. The DoP deliberately paid only the principal and delayed the payment of interest despite knowing that it must be paid under the MSMED Act 2006. What is the legal counsel’s responsibility to the DoP in this situation?
Why should courts treat DoPs as privileged parties in commercial contracts? Shouldn’t it limit the DoP’s deliberately misleading the courts and wasting public money with frivolous lawsuits? Shouldn’t the court insist that the DoP pay legal costs and pay the fine? More importantly, shouldn’t the DoP’s legal counsel be penalized for advising the DoP to pay only the principal even after obtaining a court order?
* Penalty legal team
The weapon the government uses is to delay payments and deliberately initiate court action to delay payments. The government will not increase the cost of litigation. It is not used to pay interest, so the delay cost is considered zero.
The job of a government lawyer is to avoid litigation when there is no case. Courts must pass limits on wrong advice from the government’s legal team. The government must be required to pay all costs and pay damages for wrongful lawsuits. This practice can reduce unnecessary litigation.
Recently, a judge from the Jabalpur bench of the MP High Court paid Rs 1 lakh to the accused and Rs 50,000 to the Covid Relief Fund as a delay in enforcement by the National Promotion Board. We need more orders like this.
The second method
* Arbitration and Conciliation Act 1996
Arbitration proceedings are intended to be an explicit procedure and generally do so, especially under the MSMED Act 2006. But the enforcement of the arbitration order, especially if the order is against the government, is a nightmare. In fact, the MSMED Act of 2006 was one of the first regulations to provide statutory interest with a penalty rate of three times the RBI rate. Interest rates are also specified in the regulations. The court complied with this rule.
In a classic case, the NHAI ended up disbursing almost Rs 4.5 lakh to a private company in 2019 to prevent the settlement of a bill of only Rs 2 lakh eight to nine years ago, according to an article published by a leading English-language daily , but only after the private company won an arbitration award and two cases in the Delhi High Court. Since registration under the MSMED Act 2006, the company is entitled to a 27% interest. This must serve as a case study for legal counsel to a government entity.
* ACA 1996 Amendments
It is time to amend the Arbitration and Conciliation Act 1996 or ACA to provide for mandatory payment of interest and penalties for frivolous actions under the ACA, on par with the 2006 MSMED Act. This would be a great addition to Ease’s Doing Business initiative.
This will prevent government authorities and even private groups from adopting delaying tactics. In addition, this would enable quick enforcement of arbitration orders, as delays would become expensive for the party who must obtain the benefit of the award.This Amendment Will Kill Two Birds With One Stone – Delaying Arbitration Proceedings Under ACA and Delaying Enforcement of Arbitration Orders Under ACA