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Last Updated : Oct 30, 2019 10:37 AM IST | Source: Moneycontrol.com

Policy | Efficient judicial system key to enforcing contracts

Judicial reforms essential if India is to get into the top 50 nations in Ease of Doing Business

Representative image
Representative image

Abhijit Kumar Dutta

India is showing remarkable consistency in maintaining its poor standard in enforcing contracts!

According to the World Bank’s Doing Business Report for 2020, which was released on October 24, India has managed to retain its 163rd rank among 193 countries in honouring business contracts. In 2018, it had secured the same rank.

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What is of more concern is the fact that ever since the World Bank started this exercise of ranking countries according to their relative ease of doing business, India has not shown much improvement in the area of contract enforcement, which is one of the 10 criteria that is considered for arriving at the overall rank of a nation.

While this does not in any way take the credit away from India for improving its overall rank to 63 this year from last year’s 77, it does highlight one of the weaknesses that is holding back India from joining the top 50 nations in terms of ease of doing business. Other than enforcement of contracts, the World Bank report shows that India needs to improve in areas such as registration of property, ease of starting a business and ease of paying taxes to move up the ladder in terms of doing business.

In fact, World Bank president David Malpass, who was in New Delhi on October 26, voiced a similar view at a press conference when he said, “There can be more progress in land permits and in enforcement of contracts”. Malpass feels that if India has to be competitive in the global market it needs to ensure that business contracts are honoured.

It has been observed that there is a significant disregard for upholding commercial contracts in the country. Interestingly, contract enforcement is not just a challenge with other private sector entities but also with the government. In many cases, government contracts get modified or nullified, post the signing of the deal, leading to significant damage to shareholder value. A very recent example of a government U-turn on a contract will perhaps make the point clear: after signing power purchase agreements with renewable energy developers, the Andhra Pradesh government, under the leadership of Y.S. Jaganmohan Reddy, now wants the green power plants to lower the contracted tariff and is holding back the dues to them. Such a volte-face does not help in encouraging existing or prospective investors.

But why is it easy to go back on commercial deals in our country? One of the main reasons is that the judicial system is perhaps not equipped enough to legally enforce such contracts. That the government is well aware of the problem is evident from the fact that the first volume of the Economic Survey of 2017-18 devoted a full chapter on the issue. The Survey acknowledged that the next hurdle to overcome in the ease of doing business “is addressing pendency, delays and backlogs in the appellate and judicial arenas”.

Pendency and delays happen mainly because our high courts are overburdened with cases. Moreover, economic and commercial cases are usually complex, require economic expertise in their handling and disposal and, hence, require more judicial time. In some instances, however, this increased overload is due to the expansion of discretionary jurisdictions by courts, without any countervailing measures that either balance the scope of other jurisdictions or improve overall administration and efficiency. Then there is the burden of original side jurisdiction under which a high court, and not the relevant lower court, becomes the first stop for some commercial cases. The problem is much the same with the Supreme Court with the added burden of special leave petitions (SLPs). The provision for such pleas allows any party to approach the apex court of the country directly from any court or tribunal. Initially invoked only under exceptional circumstances, SLPs are now an overwhelming feature of practice in the Supreme Court, slowing the process of resolution of cases.

Alternative and speedier forms of dispute resolution like mediation and arbitration, though popular in other countries, are yet to become viable options in India.

It is obvious that pendency, delays and injunctions are overburdening courts and severely impacting the progress of economic cases through the different tiers of the appellate and judicial arenas. As the Economic Survey of 2017-18 observed, such delays are “hampering dispute resolution and contract enforcement, discouraging investment, stalling projects…”.

The government and the courts need to work together for both large-scale reforms and incremental improvements to combat a problem that is “exacting a large toll from the economy”. In fact, the Survey had suggested a number of steps that could better equip the judicial system to handle commercial cases.

The government should take note of these suggestions and carry out the judicial reform measures at the earliest opportunity. After all, it is an efficient judicial system that can effectively ensure the enforcement of contracts, which, in turn, can propel India into the top-50 league of nations in terms of doing business.

(Abhijit Kumar Dutta is a freelance writer. Views are personal.)

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First Published on Oct 30, 2019 10:37 am
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