A big, broken contract

A big, broken contract
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First Published: Tue, Jul 06 2010. 08 40 PM IST

Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint
Updated: Tue, Jul 06 2010. 08 40 PM IST
It is useful to compare Essar Oil Ltd’s ongoing arbitral proceeding against state-owned United India Insurance Co. Ltd with another incident at a later date involving the same insurer.
The event related to Essar Oil’s claim took place in 1998. What stands out is the long delay in settlement. A few years ago, ONGC Ltd lodged a claim following damage at an offshore rig, which was settled quickly. In both cases, the Indian insurer was United India, but an important difference was that the world’s perception of India had begun to change.
Illustration: Jayachandran/Mint
Large industrial policies such as Essar Oil’s advance loss of profit are reinsured abroad and the policy terms follow a template. For sure, a quick settlement in Essar Oil’s case was delayed partly on account of a technical dispute between the reinsurer and the company. But the manner in which the negotiation between the parties over settlement was played out subsequently, suggested that the case, to an extent, was affected by the world having a poor opinion of India.
Essar Oil’s case was adversely affected by, among other things, the reinsurer’s fear of collusion between United India and Essar Oil. In a way, the fear of collusion also said a lot about what the international reinsurance industry thought of the Indian insurance industry. An attempt was even made to limit contact between the insurer and insured to neutralize the possibility of collusion after the claim had been lodged.
The arbitration proceedings in Mumbai may be pegged on a fundamental difference of opinion on technical aspects, but the sub-plot of the long story is really a commentary on the global perception of business practices in India.
Much has changed since for both Indian insurers and Indian companies. We are unlikely to see a repeat of long delays and procrastination on the part of reinsurers again. There is too much of business at stake. And it cuts both ways. The probability of collusion is far greater in a market of limited size where a handful of companies call the shots. Today, there are many more players in the market.
The arbitration proceedings should settle differences on the technical aspects of the case. But the process and the logic underpinning the outcome will be important on account of the novelty of the case in India. As the economy undergoes structural changes, there will be more such cases, which should make this arbitration case a touchstone.
Has the Essar-United India dispute hit India’s reputation? Tell us at views@livemint.com
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First Published: Tue, Jul 06 2010. 08 40 PM IST