Mediating Joint Venture Disputes
Mediating Joint Venture Disputes
Mediation has shown itself to be a powerful tool for bringing a speedy and effective end to cross-border disputes while preserving the commercial relationship between them
India has been on an unabated growth trajectory - supported by a GDP of nearly US$ 11.5 trillion (S$15.9 trillion), India is also the world's third largest economy after China and the United States, according to 2019 International Monetary Fund estimates. Rising affluence and growing urbanization in India has attracted investors who are keen to tap on India's elite and affluent households - two of the fastest-growing income segments in the country, expected to double to 16% of the population by 2025. The rapid growth of India has not stopped despite the COVID-19 pandemic. Indeed, the authors continue to observe increasing number of investments in tech-related start-ups in India by foreign venture capital funds and institutional investors and also the shift in supply chains with more companies looking to set up their manufacturing plants and factories in India, even in the last 6 months.
It is therefore not surprising that for two consecutive financial years, Singapore has been the top source of foreign direct investment ("FDI") into India, accounting for about 30 per cent of FDI inflows in 2019 to 2020.1 In the last financial year, India attracted a staggering US$ 16.23 billion in FDI from Singapore.2 This increase in investments is further buttressed by the support from various tax treaty amendments that Singapore and India have signed in recent years, such as the revised Avoidance of Double Taxation Agreement in late 2016. This has created an environment well-suited for investments and joint venture partnerships between Singaporean and Indian businesses. This article seeks to focus on joint venture companies as typically, such joint ventures involve the long-term cooperation and synergy of commercial parties, each bringing different but complementary skill sets to the table. For instance, one party (usually the international party) may be equipped with the technical know-how, industry expertise, design thinking, positive branding or funding, while the other party (usually the local party) leverages on its contacts, operations and local commercial acumen (and navigation of Indian politics and complex laws and regulations) to help the joint venture project expand in the local and / or regional market.
However, joint venture projects carry the possibility of dispute arising between partners. Such disputes may be aggravated by the cross-border nature of joint ventures and arise if there are shareholder deadlocks (or parties holding 50:50 shareholdings as a result of equal partnerships) or arise due to the different legal and cultural backgrounds of parties. Whilst parties generally conduct due diligence on the counterparty before entering any agreement, disputes may still arise in the course of their relationship and it is therefore imperative that parties agree on a quick and effective form of dispute resolution in their contracts. In this context, mediation has shown itself to be a powerful tool for bringing a speedy and effective end to such disputes between parties, while preserving the commercial relationship between them.
THE EVOLUTION OF MEDIATION
Mediation has undoubtedly attained mainstream popularity, as an effective and cost-efficient solution to resolving disputes. Mediation is popular in Singapore, and is well supported by the appropriate infrastructure and institutions. The Singapore International Mediation Centre ("SIMC") maintains a panel of over 65 international mediators from 14 jurisdictions who are experienced in cross-border dispute resolution, including seven mediators active in India.3 The Singapore Mediation Centre ("SMC") with a panel of mediators with wide-ranging expertise, boasts a settlement rate of 70%, where 90% of these matters are resolved within one working day.4
The uptake of mediation as a means of dispute resolution was marked by a significant milestone, when the Singapore Convention on Mediation ("Convention") attracted signatories from 46 countries in 2019. Subsequently, the Singapore Convention on Mediation Act 2020 came into force on 12 September 2020 and has 53 signatories which include the United States, China and India. Under the Convention, settlement agreements have been given teeth - the Convention provides a uniform efficient framework for the recognition and enforcement of mediated settlement agreements that resolve international corporate disputes. With the Convention, businesses can rely on mediation as an appropriate dispute resolution option for their cross-border transactions, with greater certainty and assurance that their mediated outcomes are enforceable, which translates to savings in time and legal costs. Under the Convention, parties to a joint venture may thus be assured that any settlement they enter into can be recognized and enforced with the same degree of finality as a court judgment. Indeed, businesses seeking enforcement of a mediated settlement agreement across borders under the Convention can do so by applying directly to the courts of countries that have signed and ratified the treaty, instead of having to enforce the settlement agreement as a contract in accordance with each country's domestic process.
Increasingly, the authors have observed mediation increasingly being included in multi-tiered dispute resolution clauses in various investment and joint venture agreements. Very often, parties will agree in a dispute resolution clause to submit a dispute for resolution by mediation, failing which the parties can choose to arbitrate. The Arb-Med-Arb protocol, created by the Singapore International Arbitration Centre and SIMC, goes one step further in combining the advantages of arbitration and mediation. The Arb-Med-Arb protocol is an innovation that allows parties to submit the dispute to mediation
shortly after commencement of the arbitration (the mediator will not be one of the arbitrators appointed in the case). If the mediation is unsuccessful, the parties can pick things up where they left off in the arbitration process. The opportunity to mediate while arbitration proceedings are ongoing increases the likelihood of settlement. This is because the commencement of arbitration raises the tempo and adds impetus to the parties to reach a commercial resolution of their dispute. However, the mediation takes place during the preliminary stages of the arbitration, when parties' positions may still be relatively fluid and may not have been set in stone. This allows enough flexibility for dynamic commercial negotiations to facilitate a settlement. A successful mediation can also lead to a result that satisfies both parties and preserves the working relationship between them. Any settlement agreement can then be recorded as an arbitral award and enjoy close to universal enforceability under the New York Convention.
To illustrate our points above, it will be helpful to consider the following case of an Indian joint venture dispute which was successfully settled via mediation.
The case study involves a joint venture dispute that arose out of a complex investment agreement between a Finnish and Indian company. The dispute resolution clause in the joint venture agreement was a multi-tiered clause that provided for mediation prior to arbitration. Over the course of four years during the subsistence of the joint venture, several disputes arose between the parties. Notably, the relationship between the parties had broken down considerably and parties were eager to put a quick end to their disputes. Crucially, the parties seriously engaged in the mediation with the genuine aim of resolving their differences, instead of treating it as a formal step prior to the commencement of arbitration. With the right frame of mind, and mutual commitment to reaching a commercial deal that would assuage both parties, mediation proved to be a swift and effective method of satisfactorily resolving the dispute between the parties.
This case illustrates how parties can arrive at a commercial resolution if they take full and proper advantage of mediation and its benefits. A robust and commercially savvy mediator can then help parties navigate their disputes and hone in on their goals.
According to the World Bank's Ease of Doing Business index, India climbed to the 77th spot in 2018, up an impressive 23 positions from 2017. Notwithstanding these improvements, making a foray into a new market like India may prove intimidating at the outset for foreign parties. Often, market entrants may prefer to enter a consortium or joint venture agreement to tap into India's growing market. It is therefore advisable for foreign parties in this position to insert mediation as part of a tiered dispute clause in their agreements. As mentioned above, mediation can serve as a platform for parties across borders to explore creative yet practical ways to settle their disputes without having to compromise their own respective commercial interests. Importantly, parties can avoid protracted and costly litigation, and a complete breakdown of the relationship between them. The availability of mediation, with the strengthened enforceability offered by the Convention, would allow parties to enter into joint ventures with confidence, and relative peace of mind.
The authors acknowledge and thank Ms. Shao Min Lim (Associate of the Firm) for her contributions to the article.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.