Corporate Strategy for Litigation Management: Perspectives of In-House Counsel*
Neha Munjral
Shelly Saluja
Introduction
The corporate litigation domain in India has undergone a sea of change in the last couple of years. Steps have been taken to alleviate the obvious challenges faced by litigants in India, in terms of time, cost, and energy diverted in resolving disputes.
The 2017–2018 Economic Survey of India tabled in Parliament, urgently called for the need to address the issues of pendency, delays, and backlogs in the appellate and judicial arenas towards ease of doing business. While India jumped to the 100th rank in the World Bank’s Business Report 2018, the country continues to lag on the indicator on enforcing contracts, which form the basis of any commercial relationship between two companies.1
The present chapter will provide an overview of how long delays in our judicial system have a direct impact on companies in several ways. We will analyse possible approaches to risk assessment and risk mitigation and strategies employed when cases arise. We will also delve into whether strategy needs to be tailored differently depending on the size of the dispute, the size and importance of the counter-party, and whether the counter part is a government or a private player. Lastly, the article will focus on how engagement of cross functional stakeholders within a company along with the legal/ contracts team is essential to have a pro-active and pro-settlement approach to litigation management.
Impact of Litigation and Judicial Delays on Corporates
It is often assumed that multinational companies (MNCs) have deep pockets and risk appetite to withstand the time and cost of judicial delays as a part of ‘doing business in India’. However, longdrawn legal battles affect the smooth functioning of companies, even large multinationals, in numerous ways. At the epicentre lies the uncertainty of the time that it will take for a high stakes dispute to lead to a favourable order and/or a cash-in for a company. This could be especially crucial if the matter involves an outstanding payment from a customer that is owed to a company during difficult financial conditions or if it affects the working capital cycle or liquidity of a company or affects its ability to continue to do business.
While, on the one hand, there is a long lead cycle on recovery from litigation, on the other, running a high stakes litigation or arbitration disrupts and diverts a company’s attention from its day-to-day business. Running a litigation or arbitration requires the time and attention of not just in-house counsel, but also core business executives, technical teams, finance teams, secretarial teams, amongst others. While the in-house legal team would be largely in charge of running the litigation on a daily basis, including hiring and instructing outside lawyers and solicitors, as many of the cases are fact-based, yet for drafting the pleadings and providing evidence for hearings, the business executives need to be heavily involved and participate. For example, in large EPC contracts (engineering, procurement, and construction contracts) there is a possibility of disputes arising out of performance guarantees, wherein lawyers will have to work in tandem with the technical/projects team, having specialised technical knowledge, to ascertain where the performance guarantees are met and where the faults have arisen. A sizeable effort will also be expended in managing communications and relationships with third parties. This could include the counterparty itself, if the counterparty is a strategic customer or vendor with whom the company has continuous dealings. Relationship management could also be required to resolve fallouts with other customers, regulators, investors, and even the media, if the matter has a particularly high impact on the financials or reputation of the company. In fact, there may also be disputes in certain sectors (particularly infrastructure) which may adversely impact the ability of a company to participate in future tenders. For example, in government tenders or tenders sought by public sector undertakings (PSUs) wherein the companies are required to make disclosures regarding any ongoing litigation/dispute with the ministry or the particular PSU or with any other PSU of that state.
Material disputes also require regular reporting and assessment of the stakes involved and possible liability entailed for the company, especially in case of a listed company, to controllers, auditors, board of directors, and regulators. Furthermore, MNCs have structural reporting to global stakeholders. All of this adds to the diversion of a company’s resources from its core business.
The long pendency of commercial matters in Indian courts implies that there is a multi-fold increase in the time and energy consumption required to keep a close watch of cases on a periodic basis. It also blocks the ability of a company to make decisions when the counterparty is a customer or vendor with whom there is an existing relationship. Costs also multiply over the years, and include direct costs of outflow of legal fees, continuous accrual of interest over the claim (if the claim is against the company), and indirect costs, such as bank guarantee charges if the company is required to provide a bank guarantee to secure an interim award. It is in this landscape of delays and uncertainty that in-house legal teams need to devise the company’s strategy towards dispute resolution. The work of an in-house counsel often starts at a pre-litigation stage. A legal notice received by the company, will more often than not, be directly sent to the in-house counsel or tax department for a reply. However, if an in-house counsel is wellintegrated into the business, business executives may approach in-house counsel for advice just when things are beginning to sour in a relationship with a customer, a vendor, or a regulator. It is often at this stage that the pros or cons of each communication from the company to the counter party need to be thought through. A commercial legal strategy can be of immense help in safeguarding the company’s interests and the achievement of a company’s goals.
Litigation Management and Approach Taken by Corporates
Once a legal notice for dispute is sent or received, the approach to be taken depends on various factors. The most important factor in devising the litigation strategy is whether a company is prosecuting or is being prosecuted; in other words, whether the company is a plaintiff/appellant or is it a defendant/ respondent. In-house counsel should be the first point of contact in both the aforesaid scenarios. Prior to initiating a litigation/arbitration against an opposite party, companies must put in place a standard operating procedure to assess the following factors:
- The financial and the reputational stakes involved/impacted;
- Estimate of costs involved;
- Estimated time to be spent;
- Probability of winning or losing;
- The effect of the liability ensued or impact of adverse findings against the company; and
- Points of contact in the business.
Such a rigorous process of an early case assessment may also involve seeking legal opinions from external legal counsel depending on the criticality of the outcome and the subject matter of the dispute. At the heart of the early case assessment often lies a central question—is the time and expense of running a legal dispute offset by a tangible financial/ legal/reputational advantage for the company? A good to high probability of winning a high-stake matter may lead the company to initiate or go ahead with dispute resolution as per the provisions of the contract. On the flip side, if an objective assessment reveals low to medium probability of a win or a good chance of a liability accruing for the company, or that the benefits of a win may be offset by the time and cost involved in litigating or arbitrating a matter, a company may just decide to settle the matter through discussions with the counterparty. This is also the rationale of commercial contracts often providing for provisions to amicably settle matters through escalation to higher authorities of the parties or through an independent party, such as an independent engineer (a FIDIC2 mechanism) or technical expert. These provisions provide a formal contractual window to parties to settle their disputes, before approaching a legal forum.
The company may also have an approval mechanism prior to either finalising a settlement or initiating a litigation or arbitration. Often, in MNCs, this could involve a multi-tiered approval process that is required to be followed. An important part of pre-litigation work in a company involves identifying the key business contacts which the in-house counsel will work with, both during the early assessment phase and through the litigation or arbitration. This becomes important, as often the experience is that once a litigation or arbitration comes to the in-house counsel, the counsel becomes the owner. However, in order to be effective, the counsel, whether in-house or outside, will need solid business partnerships to run the dispute effectively. The soundness of this multi-stakeholder partnership becomes critical to the success of a litigation or arbitration when dealing with complicated contracts which may involve technical or factual questions, as much as legal nuances. It also helps maintain the cost ownership of the litigation or arbitration.
A special segment of disputes facing companies is when the counterparty is a government entity, including a public-sector company. MNCs are usually averse to litigating or arbitrating with the government. Unless the stakes involved are critical, companies usually prioritise maintaining their relationship with government entities over disputes on ongoing projects, especially if government entities are strategic customers. Government entities, on the other hand, do not appear to be amenable to settling, particularly if claims and counterclaims are involved, due to the inherent fear of allegations of corruption or an investigation by the Central Vigilance Commission. In such a scenario, a proactive approach to prevent situations or minor issues from escalating into full-fledged disputes becomes crucial to working smoothly with government customers. Equally important is maintaining flawless communication and management of documents/ records for potentially contentious matters.
Once litigation or arbitration is initiated, a good litigation strategy often entails regular reviews and revaluation of pending cases of a company. Another aspect is ensuring the handover of matters in a seamless manner, not just if an in-house counsel is leaving employment but also if there is change of gear of any of the business executives involved in a matter. Frequent changes may impair the ability of a company to effectively fight a dispute and may significantly escalate the time involved in litigation as a new resource may have to comprehend and reassess a case from the scratch, breaking the flow and continuity in the litigation management.
Engaging with External Counsel
Another big aspect of litigation management is the appointment of outside legal counsel for matters. Once the case is instituted or the trial commences, the external lawyers/law firms play a very significant role in handling litigation/ arbitration; all the phases of the case from drafting the pleadings, filing, appearances, evidences, and appeal processes have to be efficiently handled by them. Hence, while engaging an external lawyer, a company begins to shortlist the lawyer/law firm keeping in view the nature of the dispute. External law firms or lawyers are shortlisted based on the expertise it/they have in a particular area of law, the volume of matters handled by them in the specific area of law, the expertise/strength of the firm/lawyer in representing his/her clients before the specific court, tribunal, or any judicial/quasijudicial body, their understanding of the business and the commercial requirements of the litigant company, their reputation, and their track record in the market. Certainly, a long association of a law firm/lawyer with a company eases the chances of being re-associated and re-engaged for any new dispute that arises. Additionally, the cost of engaging the counsel over long periods of time vis-à-vis the significance of the matter for the company becomes an important factor which determines which outside counsel is appointed by a company. It is, therefore, important that a legal budget is identified upfront for a matter, both with business counterparts as well as outside counsel so that companies can effectively assess costs on a per hour/per hearing basis (also keeping in view the non-effective hearings).
Conclusion
The litigation management approach described in this chapter centres around the philosophy of proactive dispute prevention. It is a direct result of the long years and increasing costs that corporates are encountering when pushed to litigate or arbitrate and may somewhat appear to be antithetical to the interests of outside counsel who are naturally more interested in their legal fees. There are two central pillars of this approach. One, is that the legal/contracts team must be well integrated into the commercial business decisions and dealings of the company rather than being mere advisors or litigation managers. This will ensure that the legal/contracts team can guide the company through potentially difficult situations with the view to prevent them from escalating into disputes. Second, litigation management must involve a cross-functional approach with decision making, interactions and inputs being obtained from the best qualified subject matter experts in the company.
With the changing face of the Indian corporate law regime and also with the tangible steps taken by the government in reforming the corporate judicial setup of India by influx of various legislations, the role and responsibilities of in-house counsel managing the company’s litigation have intensified in terms of scope, pace and reporting requirements. To ensure a company’s long-term sustainability in light of the long delays in our judicial system, an effective and an efficient litigation management is a sine qua non.
Notes
* Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any company and any of its branches or subsidiaries; further, they do not reflect the official policy or position of any entity the author has been or will be affiliated with.
- Economic Times. 2018. ‘Cut Pendency in Litigation to Improve Business Rating: Survey’, available online at https://economictimes.indiatimes.com/articleshow/62694346.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst (accessed on 29 November 2018).
- FIDIC - Fédération Internationale Des Ingénieurs-Conseils (International Federation of Consulting Engineers).