By Justice T.N.C. Rangarajan
Former Judge, High Court of Andhra Pradesh.

Cost benefit analysis is a method of evaluating the relative merits of alternative courses of action in order to achieve efficient allocation of resources. It is a way of identifying, portraying and assessing the factors which need to be considered in making rational economic choices. It is not a new technique. In principle, it entails little more than adjusting conventional business profit-and-loss calculations in evaluating alternative courses of action by objective criteria, benefits and constraints.

CBA is a widely varying technique which ranges from simple comparison of directly and readily measurable financial factors to multifaceted techniques that incorporate tangible and intangible factors within a framework of system type or purpose

Formal cost-benefit analysis is in principle a rigorous, quantitative, and data-intensive procedure, which requires identification of all nontrivial effects, categorization of these effects as benefits or costs, quantitative estimation of the extent of each benefit or cost associated with an action, translation of these into a common metric such as money, discounting of future costs and benefits into the terms of a given period of time, and summary of all costs and benefits to see which is greater.

It is a valuable tool, but by definition it cannot incorporate certain important aspects which cannot be reduced to numbers into the analysis.

Benefit-Cost Analysis (BCA) is a systematic, quantitative method of assessing the life cycle costs and benefits of competing alternative approaches. This includes determining which one of the alternatives is best.

A Cost-Effectiveness Analysis (CEA) is a simplified BCA, which can be done when either the benefits or the costs are the same for all alternatives. The analysis is greatly simplified because the best alternative is either the one with the most benefits (when the costs are the same for all alternatives) or the one with the lowest cost (when the benefits are the same for all alternatives).

CBA consists of three basic steps:

1. Identification of the costs and benefits attributable to a project;
2. Measurement of those costs and benefits;
3. Computation of the net value.

The first stage of a cost/benefit analysis involves the identification of the costs and benefits which are associated with the project. In principle, CBA demands that the perspective of all stakeholders be reflected in the analysis of a proposal. This demand, however, places the analyst in an invidious position, because it asks the impossible - the appreciation and encapsulation of many ideas, some of which are quite foreign to the analyst's frame of reference, and uncertainty as to whether and how much each particular interest is really affected. It is difficult to determine the boundaries of the effects of the project.

The nature of costs and benefits differs fundamentally: Costs are both inputs to, and arise from a project; whereas benefits can only arise from project. Any negative benefits that result from a project have to be regarded as costs.

Costs may be divided into two classes, direct and non-direct or as being hard or hidden. Direct or hard costs are those directly attributable to the project, and which are easily captured by accounting procedures. Hidden costs are more difficult to identify and quantify, but still need to be attributed to the investment for measurement purposes. Hidden or indirect costs include human and organizational costs. A benefit can be seen as an advantage or good that accrues from a project. The identification of costs and benefits of a project are difficult at best.

Once the costs and benefits that are associated with a project are identified some measurement of them must be made. This brings forth a whole set of challenges. The key issue relating to the measurement of costs and benefits is tangibility. Tangible or hard measures are those that can be readily expressed in financial terms. In the case of factors that are less tangible (soft) and which are difficult or meaningless to express in financial terms, it is nonetheless desirable that reasonable efforts be made to quantify their impact. The difficulties that arise in measuring the less tangible costs and benefits has often led to their exclusion from the analysis. It has, however, been recognized that the most significant costs or benefits of a project may well lie in these factors. Other important issues concerning the measurement of costs and benefits include the treatment of opportunity costs, i.e. "the benefits foregone from not having done something else with the resources" and the treatment of 'joint' costs and benefits, where attribution of costs and benefits across multiple projects is difficult. Appropriate and meaningful measurement of the costs and benefits attributable to a project is vital to the effective allocation of scarce resources.

In the matter of resolving civil disputes, the traditional remedy available was only the civil court. Though arbitration and even native resolution processes like panchayats were available, they did not get much attention as an effective alternative to the court. But after the advent of the Constitution, the High Courts have been burdened with writ petitions and increasing load of government cases. Following the successful resolution of tax cases by the Income Tax Appellate Tribunal, efforts have been made to farm out other government and statutory litigation to specialized Tribunals without much success. The Legal Services Authorities Act has even formalized the Lok Adalat as a means of expediting the disposal of long pending cases. The world over, Alternate Dispute Resolution has attracted great attention as a possible solution for dissipating the court's workload.

General litigation is conducted in very formal stages.

• Lawyer's notice
• Plaint
• Designated court
• Summons to the defendant
• Proof of service of summons
• written statement
• examination of parties
• discovery and proof of documents
• framing of issues
• examination of witnesses
• adjournments
• arguments
• judgment and decree

Each stage is beset with technical rules of procedure and rules of evidence.

Arbitration can be as informal as litigation in the court is formal. Most of the procedure can be tailor- made to fit the needs of the parties.

By choice the parties are empowered by the relevant sections of the e Arbitration and Conciliation Act 1996 to make it a fast track by

• simplifying the process of appointing the arbitrator (Sec 11)
• simplifying the challenge procedure (Sec 13)
• curtailing hearing if an arbitrator is replaced(Sec 15)
• curtailing interim measures (Sec 17)
• scheduling the hearing (Sec 19)
• choosing a convenient place (Sec 20)
• choosing the conversant language (Sec 21)
• restricting the content of pleadings (Sec 23)
• restricting the length of hearings (Sec 24)
• adopting default procedures (Sec 25 )
• getting expert assistance (Sec 26)
• settlement by conciliation during hearing (Sec 30)
• avoiding cost by dispensing with reasons (Sec 31)
• reducing the time for correction of mistakes (Sec 33)

We may tabulate the various aspects of the two procedures this way.

TABLE OF COSTS

TABLE OF BENEFITS

This comparison is obviously incomplete as intangible benefits are not taken into account.

• Cost savings from preventing management focus being diverted.
• Opportunity cost of using such savings on other business ventures
• Disputes being dealt with quickly and controlled by the parties themselves.
• Overall less costly form of settling disputes.
• Encouraging business people to develop business solutions to business problems.
• Allowing for more creative remedies and outcomes compared with litigation.
• Providing a self-regulatory approach to deal with disputes.
• Reducing the risk of bad publicity flowing from disputes and concomitant low morale.
• The benefits of confidentiality that most dispute resolution processes provide.
• Reduction of stress with concomitant health benefits for all parties.
• Business relationships or employer-employee relationships, that might otherwise be irretrievably damaged through the acrimony, that frequently characterizes litigation, can be preserved.
• Disputes can be resolved privately and without setting future precedent.
• Complicated facts can be sifted through and considered with the assistance of industry experts instead of non-expert, lay juries.
• International disputes can be resolved according to ground rules the parties agree upon in advance, thereby avoiding the uncertainty inherent in being subjected to the jurisdiction of foreign courts.

INFORMED CHOICE

The analysis so far indicates that the direct costs of arbitration may not in most cases be substantially less than the cost of formal litigation. But definitely the hidden costs could be reduced. The comparison of the benefits give a different picture. While the benefits of litigation is cut and dried, there are substantial side benefits in following the arbitration track provided it is done in a proper way. We can therefore take it that the from the point of view of costs the alternatives are no different and therefore try the more simplified cost effectiveness analysis.

COST EFECTIVENESS ANALYSIS

The cost analysis shows that while the court has a ready made infrastructure the parties may have to meet the expenses of such infrastructure for an alternative process unless they are able to use existing premises, secretarial assistance etc. in their own business. Though for accurate comparison they have to be costed, it may be assumed that there is a trade off between the court fees for the formal court and the fees and expenses paid to the arbitrator. When we turn to the benefit side and evaluate the merits of the two procedures, we find that there are enormous non monetary benefits in choosing arbitration.

WHAT ARE THE BENEFITS OF ARBITRATION

The twin benefits are essentially time and money. A satisfactory solution is an added bonus

Time: If the parties co-operate disputes can be resolved in no time. But if any one of the parties is not interested in solving the problem even arbitration proceedings can be dragged on for years. It is not unusual for parties in court to raise issues of jurisdiction and procedure and stall the proceedings.

Money: For many routine business disputes, litigation procedures are simply too cumbersome and slow to produce cost-effective results. For instance, the discovery process provides for the discovery of all information likely to lead to the discovery of admissible evidence and could become burdensome. The principles of natural justice could be perverted to drag on the case for years by asking adjournments time and again.

Results: Even complex cases involving many parties and huge stakes are also suited to resolution using ADR. Some of the largest and most difficult disputes have been resolved through court-ordered mediation. The Union Carbide case is a case in point. These were cases the parties themselves doubted could ever be settled, given the stakes or emotions involved. Yet, as with most disputes, even highly charged, incredibly complex disputes can be resolved through negotiations when both of the parties appreciate the risks of losing control over the result. The use of ADR to resolve all pending litigation is now encourages by the Lok Adalats.

GLOBAL EXPERIENCE

Various studies on negotiations, including an important study by Roger Fisher and William Ury of the Harvard Negotiation Project, confirm that the later in the process settlement is reached, the higher the cost. As the parties dig in their heels, attempting to justify, prove, and bolster their respective positions, they consume more and more time and expense preparing for trial, and the cost of settlement invariably rises. Resolution through ADR frequently enables the parties to eliminate or minimize the expenses of litigation and reach an acceptable resolution earlier in the process. In an ADR process 80 percent of the relevant information can be obtained for 20 percent of the cost. When L'Ambience Plaza construction collapsed in Bridgeport, Connecticut and within 20 months of the disaster, a process that involved five judicial bodies, more than 44 plaintiffs, approximately 40 potential defendants, several government agencies and nearly 200 attorneys, represents a dazzling display of the potential impact of the sophisticated use of ADR in complex cases. The success of ADR in resolving complex cases was noted by the American Bar Association's Standing Committee on Dispute Resolution. A survey among the Fortune 500 companies in America found that

• 66% of those who have used the ADR policy for specific cases report that savings have resulted.
• Twenty-four companies estimated legal cost savings totaling $24,015,000.
• Individual company estimates range from "none" to "unquantified but substantial" to "$6-7 million"

CAVEATS

The greater benefits from arbitration can be reaped only if two conditions are met. The first and foremost is the choice of the arbitrator. It is a trite saying that arbitration is only as good as the arbitrator. So unless the parties are able to identify an arbitrator who is fair and sincerely motivated to find a satisfactory solution to the problem, the entire exercise may go haywire. Recently the CJI expressed his unhappiness over the habit of some arbitrators to charge high fees and also delay the matter. The second is the co-operation of the parties. Arbitration is only for those who want to settle their disputes. It is not for those who know they are wrong and want to put off the evil day or want to make the most of their own wrong. Thirdly the benefits could be had only if the resolution process is properly designed even at the stage of drafting the arbitration clause in the contract. Parties to any big project or commercial transaction should pay attention to the arbitration clause and draft it in such a way that disputes during the course of the contract may be resolved by mutual discussion and if necessary by an on-going arbitration process with a named arbitrator. Time and money can definitely be saved if the arbitration clause is designed to get the benefits of choosing the alternative to the court. In simple terms we may say that arbitration is choosing a fast track private court instead of the ready available public court. Privatization can work only if it is not sabotaged by one of the parties or the arbitrator.

Let me conclude with the quotation from John F. Kennedy:

"We must seek, above all, a world of peace; a world in which peoples dwell together in mutual respect and work together in mutual regard."