Dispute Resolution: Indian Ports Association forms a conciliation and settlement committee

Major ports have been entering into different types of contracts with terminal operators under public-private part­nership (PPP) concession agreements for building new assets that will be operated under the build-operate-transfer model, while existing assets will be operated under the operation and maintenance (O&M) model. Major ports ha­ve also entered into contracts with various stakeholders such as service providers for O&M services within the port; civil contractors and equipment suppliers for building civil structures or mechanical and electrical works; other contractors for navigation, conservancy and administration; and consultants for techni­cal/co­mmercial/administrative services. Like others sectors, ports are also often unable to settle disputes on their own and litigation is ne­eded to resolve disputes through courts.

For dispute resolution, the default option is litigation in courts of law and arbitration. Jud­ge­ment/Award and going beyond consensus are two alternative dispute resolution mechanisms. Judgement/Award involves an external party making an impartial decision while the disputing parties make a brief claim and counterclaim without mutual settlement. Currently, there are around 300 cases pending in courts of law and arbitration for major ports. One ef­fect of such pending cases is the creation of a moral hazard through the abuse of the legal process, which is basically forum shopping by affected parties to delay outcomes, thereby impacting the ability to take remedial action. An­­other effect is the senior management’s time being used up, resulting in a decline in the time available for productive and critical work. Further, when assets in disputes lie unused for a long period of time, their quality and future performance standards may degrade.

Formation of CSC

In October 2021, the Indian Ports Association for­med the Conciliation and Settlement Com­mittee (CSC). It comprises five independent ex­perts with experience in ports, PPP, public policy, administration, finance and law. Unlike an alternative arbitration proceeding, where both parties present statements of claims/de­f­ence, ar­gu­ments/counterarguments, rejoinde­rs and written submissions, aided by lawyers; the CSC is a settlement forum where mutual give and ta­ke is essential, rather than the strict legal positi­on of the parties. Therefore, the parties are expected to be brief and to the point before the settlement forum and view the exercise in the spirit of conciliation/settlement similar to PPP.

There is a stipulated timeline for the closure of any case. If no settlement takes place, both parties can request extension. If no settlement is reached even then, the proceedings of the CSC will cease. Also, the conciliators are not bound by the Code of Civil Proce­dure, 1908 (5 of 1908) or the Indian Evidence Act, 1872 (1 of 1872). The settlement agreement will have the same status and effect as an arbitral award under Section 30 of the Ar­bitration and Conciliation Act, 1996.

The CSC follows a success fee model, which implies that the fee will be paid only if the proceedings/case leads to signing of a settlement agreement. Thus, there is a fee on the settled am­o­unt and not on the disputed amount.

Port authorities, investors and contractors are increasingly opting for CSC due to the be­nefits of faster, transparent, consultative and credible processes. The CSC provides a balance between commercial prudence, propriety of procedures and governance, and honouring contractual commitments. The subjects of disputes that are resolved and dealt with by the CSC are wide-ranging, from delayed settlement of arbitration awards, to defining and implementing performance standards, to port au­tho­rities’ ability to honour assured business volumes and/or support project infrastructure to the concessionaire. Other issues include pre­paredness and resources of the concessionaire, tariff and royalty implications in the chan­ging competitive landscape and equitable closure of contracts that have become obsolete with the passage of time. In summary, the ca­ses referred to the CSC are becoming increasingly multilayered.

Cases of dispute

PPP in the port sector dates back to 1997. Cur­rently, there are around 40 PPP terminals operating across major ports. During October 2021-December 2022, 29 cases were referred to the CSC, of which 21 were referred by major ports. As of January 19, 2023, settlement agreemen­ts have been signed for 11 cases, while settlements for eight cases have been agreed upon verbally. For the remaining 10 cases, the resolution process is ongoing. The average time of dispute settlement for the aforesaid 11 projects is about 89 months.

The CSC has undertaken detailed due diligence of the PPP projects in dispute. This in­volved studying the process that led to the aw­ard of the concession, and conducting an in­ten­se review of technical issues in constructi­on, operations and management. It is also im­portant to consider the contractual framework, communication between the parties, and each party’s separate acts, decisions and eve­n­ts following the award of the contract. This in­cludes engaging domain experts to obtain de­ep in­sights into specific cases, examining and evaluating alternative scenarios and implications for each stakeholder by iterations and dis­cussi­ons with the stakeholders.

Key issues and challenges

Over time, the competitive landscape of major ports has undergone a paradigm shift from a market controlled by terminal operators to a ma­rket controlled by users. Non-major ports have also come up with aggressive business pl­a­ns aided by investor-friendly concessions. Over the decades, the share of major and non-major ports has changed significantly. However, static concession agreements executed in the sellers’ market, with aggressive assumptions on traffic/tariff/assured markets, call for recalibration in the buyers’ market, especially when traffic and tariff are in a state of free fall, with too many competing terminals and ports.

The objectives of stakeholders are not alig­ned with each other. Port authorities aim to at­tract high traffic volumes and revenue shar­es while minimising downside risks. Mean­whi­le, private operators demand commercial tariff rates and shareholder returns commensurate with the risks they face.

Evaluating counterparty performance (au­thority/operator) under the concession agreement can be challenging, particularly if the agreement is not comprehensive. Further, the evaluation of operator performance becomes complex if the port authority has delayed/de­fa­ulted in meeting its reciprocal commitments (such as connectivity and draft requirements).

Settlements are more than just compensation. They may require the realignment or cancellation of contracts that affect the risk-re­ward balance between the port authority and operator. Settlements should aim for pareto optimality, ensuring that no stakeholders are left contractually worse off than before while taking into account market dynamics and stakeholder conduct. It is not acceptable for settlements to be determined solely by administrative fiat, which may ignore market realities.

There is no precedent/template to guide the CSC. Each case of bidding and subsequent events is different and each case calls for customised resolutions defying a template-driven approach. Further, there may be some market changes that the port authority, operator, or lender could not have reasonably foreseen.

In sum

Going forward, the CSC initiative appears promising and well positioned for resolving disputes. The risk-reward matrix in contracts has been realigned, and time is of the essence in the CSC mechanism. This places increasing pressure on port authorities, private investors and contractors to provide information, hold internal meetings and communicate expectations clearly. Based on the CSC’s positive experience, it is clearly possible to resolve disputes equitably and objectively in a time-bound manner, leading to the satisfaction of the contracting parties. w

Based on remarks by Gopal Krishna, Chairman, CSC, Ministry of Ports, Shipping, and Waterways, and Balasubramanian, Member-CSC for PPP, Indian Ports Association