Sourcing from India: Settling trade disputes

This article is an excerpt from Sourcing From: India, a series of reports that provides buyers sourcing information from alternative manufacturing hubs in Asia. To read the entire article, click here.

The Sourcing From series is produced by the Hinrich Foundation, a development organization that aims to promote sustainable global trade by, among others, helping create jobs in emerging Asia. It also produces industry-specific sourcing reports through Online Developing Country Sourcing.

Trade disputes are common in India, but they can be minimized or avoided with extra care. Going through the process of settling trade disputes can be a frustrating experience and wise buyers not willing to spend both time and money on disputes that could take years to resolve would rather choose other options to settle the disagreement.

Trade disputes arise from various reasons. Even if both parties involved have acted conscientiously and in good faith, problems can emerge. The very complexity and multifaceted nature of an international sales contract, involving a number of provisions, such as transportation, banking, insurance etc., presents many opportunities for misunderstanding. Quality standards and their interpretation differ from country to country as do commercial practices. However, such problems usually can be minimized and court cases should be avoided at all costs.

Problem areas

Non-shipment or delay in shipment - A delayed or canceled shipment is a major cause of concern to the foreign buyer. Direct financial loss can be avoided if payment of the letter of credit depends on the supplier meeting the specified shipment date, unless the goods go adrift during shipment, which is beyond the control of the supplier and would likely be the subject of a dispute with the shipper or an insurance claim.

A good relationship between the buyer and supplier or having a reliable agent monitor the production process is necessary to avoid this problem. The supplier or agent can inform the buyer that the shipment could be delayed to enable the buyer to adjust the planned sales schedule.

Price hikes - Foreign exchange fluctuations provide another potential cause of trouble. Unforeseen hikes in the cost of imported components may leave the manufacturer little choice but to renegotiate the price of his finished goods at a later stage. This is reasonable and if there is any doubt, it can be checked to a certain extent by the importer. Careful selection of the supplier in the first instance should help avoid problems. But if price hikes are unable to be adjusted, a victim may find legal action is the only course for him as an attempt to recover lost potential profits or to be re-compensated for a damaged reputation.

Shortages - For many small items bought in international transactions there is often a negligible difference between the quantity ordered and the quantity shipped. Depending on what kind of goods they are, a small difference is usually acceptable. The maximum percentage acceptable to the buyer can be specified in the contract.

Inferior quality, specification differences, defective packing - If the consignment is in the right quantity but suffers from quality problems such as color decay, damage, dents, stains, substandard ingredients, deterioration in quality or defective packaging, the answer should lie in the contract. The contract should specify a period of time (30 days, for example) during which a claim should be made. A safeguard against these difficulties is to have the consignment tested or inspected before shipment, although this does not necessarily cover all contingencies.

Conciliation

Conciliation is the settling of a dispute through an impartial third party and is the cheapest and usually most beneficial option in a long-term trading relationship. Conciliation allows for fast resolution of conflicts.

The Indian government has many options available for conciliation service. The commercial representatives located abroad are responsible for mediating disputes between Indian exporters and foreign buyers. If they cannot reconcile the parties, other third-party groups, such as local chambers of commerce, industry and trade associations and other government agencies are consulted to resolve the issue at hand. If this fails, the representative will provide legal information on available arbitration and litigation options.

Arbitration

Arbitration may be more time-consuming but is effective, and is considered the next best option. The Indian Council of Arbitration (ICA), an autonomous body under the Department of Commerce, is the primary vehicle for settling disputes that cannot be amicably resolved by the third party.

Arbitration is the most common means of solving trade disputes in India and offers a practical substitute for court proceedings. To avoid lengthy legal entanglements, it is now universally accepted for a buyer to detail every point of discussion on the contract and insert an arbitration clause into it. The clause should state that both parties would be willing to take a case, should one arise, to the arbitration court. This standard clause gives the basis for arbitration proceedings to take place should a dispute arise.

It is recommended that a "future-dispute clause" be inserted in all business contracts. In addition to giving the buyer and seller the assurance of a speedy and just settlement of failure disputes, it also allows the parties to continue conducting business together in other areas while a particular disputed item is receiving attention from an arbitration body.

Litigation

The last option is litigation, which is to be avoided unless the aggrieved party has several years and a lot of money to spend on the matter.

ICA and other government trade-related bodies can provide the buyer with a list of legal firms and recommendations of whom to see if arbitration is impossible. But be warned, India’s courts are overworked, understaffed and slow-moving. According to the World Bank, India ranks as the sixth-slowest country in the world based on the number of days it takes to resolve a dispute.