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Contract Enforcement in India

  • Category
    Economy
  • Published
    24th Apr, 2019
  • The Department for Promotion of Industry and Internal Trade (DPIIT) is working towards pushing India to the top 50 countries in the Ease of Doing Business Index.
  • India currently ranks 77 in the World Bank's Ease of Doing Business Index, jumping from 65 place in the 2014-18 periods.

Issue

  • The Department for Promotion of Industry and Internal Trade (DPIIT) is working towards pushing India to the top 50 countries in the Ease of Doing Business Index.
  • India currently ranks 77 in the World Bank's Ease of Doing Business Index, jumping from 65 place in the 2014-18 periods.
  • DPIIT intends to improve processes related to property registration, payment and refund of taxes, enforcement of contracts and the insolvency framework.
  • India ranks below 100 on some of the above parameters.

About:

  • The importance of an effective, efficient and expeditious contract enforcement regime to economic growth and development cannot be overstated.
  • A clear and certain legislative and executive regime backed by an efficient judiciary that fairly and punctually protects property rights, preserves sanctity of contracts, and enforces the rights and liabilities of parties is a prerequisite for business and commerce.

Background:

  • Ease of Doing Business Index includes the following Indicators: - Starting a business, Dealing with construction permits, Getting electricity, Registering property, Getting credit, Protecting minority investors, Paying taxes, Trading across borders, Resolving insolvency and Enforcing contracts.
  • India's Position on Enforcing contracts indicator over the years has shown improvement from 186 in 2014 to 163 in the 2018 report.
  • However, in comparison with its BRICS counterparts and sizeable GDP based market economy, a greater room for improvement is discreetly felt.

Analysis

Importance of just and efficient contract enforcement:

  • An effective legal system provides the necessary level playing ground for smaller firms.
  • A poor legal system tends to centralize industries, wherein the firms tend to integrate with backward and forward linkages.
  • This results in concentration of wealth as consumers prefer capital-intensive large firms over smaller labour-intensive rivals.
  • This reduces employment and perpetuates inequality.
  • Another effect of a poor contract enforcement mechanisms is the spurt of informal and often illegal channels of dispute resolution.
  • These make use of local leaders and under-the-table dealings to help settle disputes.
  • Keeping aside the issue of biased and poor quality decisions, this also brings undue power into the hands of middlemen and facilitators.
  • This, in turn, creates problems such as increased corruption and the undermining of the rule of law.

These direct and indirect problems and the market inefficiency associated with them underline the need to reform the legal system. Though some measures have recently been undertaken, they fail to address the deeper issue of an overburdened and understaffed judiciary.

Why is India still lagging behind on Enforcing contracts?

  • India ranked 172nd out of 190 countries in the area of Enforcing Contracts in the World Bank’s Ease of Doing Business report 2017 with an average time of nearly 4 years required for enforcement.
  • As a further indicator of delayed justice, of the cases disposed since 2000 by district and lower courts, 81.8% took more than 5 years and 57% more than 10 years.
  • In four high courts where sufficient data was available, 87% cases were disposed of in 10-15 years, and only 5% in less than 5 years.
  • As highlighted by the Economic Survey, addressing such deep-rooted problems will only be possible through extensive cooperation between the organs of the government—“cooperative separation of powers"
  • Although the government has taken steps to improve contract enforcement, economic activity is getting affected by high pendency and delays across the legal system. The backlog in High Courts by the end of 2017 was around 3.5 million cases.
  • Delays of economic cases (company cases, arbitration cases and taxation cases) in courts are leading to stalled projects, legal costs, contested tax revenues, and consequently reduced investment. Delay in adjudication increases market uncertainty which hurts production cycle.
  • Since production cycle is slowed down, the invested amount is unable to service its debts. The Lenders, in turn, are unable to get their dues back. This aggravates to non-performing asset scenarios.
  • The entire vicious cycle is roped into a dwindling economy and leads to a stagnation in economic performance. Low savings - low investments - low job growth fails to add up, in any manner, to the productivity cycle.
  • Delay in arbitration and adjudication also escalates cost overruns, this not just hurts investor sentiments but also squeezes the public purse.
  • Since governments are duty bound to spend on public utility and other developmental aspects, they resort to an increase in fiscal deficit. This factor becomes a prime reason in boosting trade deficit - thus in the comprehensive terms - lowers the credit rating of the sovereign economy.
  • Delays in power, roads, and railways projects led to an increase in almost 60% of the project costs.

What can be done?

  • The government and the judiciary must coordinate to introduce reforms to facilitate ease of doing business.
  • Judicial capacity should be strengthened in the lower courts to reduce the burden on higher courts.
  • The tax department must limit its appeals, given that their success rate is less than 30% at all three levels of judiciary (Appellate Tribunals, High Courts, and Supreme Courts).
  • The government must increase its expenditure on the judiciary, improve the courts case management and court automation system, and create subject specific benches.

Role which the Commercial Courts, Commercial Division and Commercial Division of High Courts and acts can play:

A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of the business.

The introduction of the Pre-Institution Mediation process will provide an opportunity to the parties to resolve the commercial disputes outside the ambit of the courts.

This will be facilitated through the authorities constituted under the Legal Services Authorities Act, 1987.

The proposed amendment provides for establishment of Commercial Courts at district Judge level for the territories over which respective High Courts have ordinary original civil jurisdiction i.e. in the cities of Chennai, Delhi, Kolkata, Mumbai and State of Himachal Pradesh.

What are other the available alternative modes of dispute resolutions?

Alternative Dispute Resolution (ADR) mechanisms available to boost contract enforcement system are: - negotiation, arbitration, conciliation and mediation.

Needed reforms in Justice System?

  • The preliminary step should be to ensure that all legislation, amendments and subordinate legislation are available together in one place and searchable by subject matter.
  • Once completed, all existing individual laws can be re-arranged to make a meaningful subject-wise compilation, and permit us to assess and address problems of over regulation in a structured and coherent fashion.
  • Repeal all redundant laws
  • Changes to procedural laws in line with the principles and underlying thinking of the Commercial Division Bill.
  • Nearly 67% of litigants in civil cases are using the judicial system for land/property related cases. The difficulty in establishing ownership also holds back the economy.
  • There is thus a clear need to bring in land reforms, accompanied by modernization in the area of maintenance of land record.
  • Establish a judicial performance index. Such an index could be established to help High Courts and High Court Chief Justices keep track of performance and process improvement at the District Courts and subordinate levels for reducing delay. This would require fixing non-mandatory time frames for different types of cases as broad guidelines to benchmark when a case has been delayed.
  • There is a need to create a separate administrative cadre in the judiciary to manage the system.
  • Implement e-Courts, entail facilities such as e-cause lists, e-payments, e-filing and e-summons.

Learning Aid

Practice Question:

According to the Ease of Doing Business Index Report, enforcing a contract in India can take 1445 days and 30% of the claim value as cost. For an economy which eyes building its growth story on make in India initiative, contract enforcement laggard is a poor story. Discuss reasons for this low performance and suggest ways to improve the same.

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