After Stayzilla mess, startups advised to tweak contracts
In long-term contracts such as debt deals, the terms of the agreement contain a clause that allows for mediation in case of differences.
Industry groups aim to organise specialised forums where entrepreneurs will be guided on the best way to structure and frame contracts that minimise legal tangles, particularly when business relationships turn sour.
“It’s an attempt to have every commitment written down and specify mediation as the first resort,” said R Narayanan, president of The Indus Entrepreneurs-Chennai, an industry body which plans to run sessions to train entrepreneurs on these aspects in the coming week. “Of course, no one can mandate the mediation clause,” said Narayanan.
These moves have been triggered by the recent imprisonment of Yogendra Vasupal, founder of hotel and homestay aggregator Stayzilla, who was jailed after an advertising services vendor levelled criminal charges alleging non-payment of dues. Vasupal’s 28-day jail stint has shaken the startup community and raised awareness of the need to not just comply with rules but also build safeguards.
“Having a clause for mediation in a vendor contract can definitely go a long way in protecting oneself,” said Shanti Mohan, cofounder of crowdfunding platform LetsVenture, who termed the Stayzilla episode a “wake-up call for entrepreneurs”.
Quality legal support, even if it means a certain cash outflow, is like having a good insurance policy. “You want a good one, although you may use it only very rarely,” said Mohan.
The mediation clause facilitates the role of a private ‘mediator’ to help both parties settle differences. “Once the parties arrive at an agreement, it would be recorded as an award on agreed terms and is final and executable,” said Uma Ramanathan, managing trustee of the Foundation for Comprehensive Dispute Resolution. The concept of arbitration borders closely on mediation, except that one cannot walk out of an arbitration. Even if one party walks out, the arbiter can still pass an award against the absentee.
“Arbitration Act is there in the framework – it is a good idea. It is not cheap but fast,” said Viral Shah, co-creator of open source language Julia and coauthor of ‘Rebooting India: Realizing a Billion Aspirations’.
“It (arbitration) is usually done in a reasonably fair and neutral way. Courts may take longer,” he said.
In fact, there is a judicial option available where judges advise parties to take the mediation route — Justice S Baskaran of the Madras High Court had suggested that Stayzilla and the vendor Jigsaw take the mediation route, but the startup declined.
In long-term contracts such as debt deals, the terms of the agreement contain a clause that allows for mediation in case of differences. However short-term contracts rarely do so.
“I think the challenge is to include (mediation clauses) in short-term contracts,” said Vivek Subramanian, executive director of Fourth Partner Energy, a rooftop solar power startup.
Vasupal says mediation sends the right signals. “I definitely agree that it is a first good step to signal the right intention when problems arise but cannot prevent one party converting civil into criminal,” he said, referring to his recent experience.
Industry experts also point to civil courts being clogged with cases as a reason why people resort to extra-judicial methods to solve disputes. “Instead, people should go for low-cost mediation,” said Sharad Sharma, cofounder of software industry think tank iSPIRT, who lobbied on behalf of Vasupal.
Jigsaw, on the other hand, contends that even suggesting mediation indicates a disadvantage for vendors. “They are seeing this as a sign of trouble.
They are trying to play this as a buffer to get the vendor to let it go,” said Aditya CS, who heads operations at Jigsaw.
(Additional reporting by Mugdha Variyar and J Vignesh)