Acres of contention

The judiciary doesn’t seem to fully appreciate the economic consequences of its judgments

June 19, 2018 12:15 am | Updated 12:15 am IST

The number of legal disputes involving property, contract, labour, tax and corporate laws is bound to increase with an expanding economy. How they are adjudicated by courts not only has direct consequences for the disputants, but also shapes the behaviour of individuals and entities involved in production, commerce and banking. Judicial findings also influence decision-making of government agencies, which are major actors in a developing economy. Yet, the Indian judiciary doesn’t seem to fully appreciate the economic consequences of its judgments.

Case studies

A case in point is a May 31, 2018 order of the Allahabad High Court — Independent Power Producers Association of India v. Union of India and Ors . The court has ruled that bankruptcy proceedings cannot be started against a power company unless the company is a wilful loan defaulter. It did not factor in the issue of viability of the project. As such, the ‘wilfulness’ condition is hard to prove. Nonetheless, the ruling is one of the less problematic ones.

Consider another judgment, this time from the Supreme Court (SC) in Rameshwar and Ors v. State of Haryana and Ors (2018). Here, the dispute involved 688 acres of land for which the then Haryana government had issued an acquisition notification in 2007. As soon as the notification was issued, developers started approaching owners to buy their land. Since the official compensation was going to be meagre, many owners sold their land at throwaway prices. Later, the government decided to drop the acquisition plan. By then, hundreds of acres had been purchased by builders through such deals. In flagrant disregard for the rules, the State authorities not only approved the land deals but further obliged the builders with regulatory approvals. Unsurprisingly, the SC held the State’s decision a fraud, acted out through an unholy nexus between the officials and the builders.

As the owners sold their land under duress and on unconscionable terms, the land should have been restored to them by declaring the deals infructuous. However, the SC handed over the land to the State government.

In Uddar Gagan Properties Ltd v. Sant Singh & Ors (2016) , at dispute were 280 acres of land under acquisition in 2005. The land was illegally transferred to developers through dubious deals approved by the then Haryana government. Here too, the SC handed over the land to the official agency that was an active partner in the fraud. Farmers were forced to accept paltry compensations.

Through such judgments, the judiciary has failed not only to protect the legitimate rights of owners, but also to provide economic justice enshrined in Article 38 of the Constitution. Moreover, the court has transferred land, a precious economic resource, from those who own, need and use it to governments who do not need it by their own accord. Transfers have been forced for a cause known neither to the beneficiary governments nor to the judiciary. It is due to the perverse incentives created by such judgments that government agencies abuse laws and are sitting on a massive stock of unused land, which would have been put to more productive use by its owners.

Several infrastructure projects are being held up due to judicial interventions in the bidding process. Courts should realise that the quality of infrastructure assets and the technical capability of contractors to deliver them are serious issues. The mere difference in prices demanded by the bidder may or may not be a decisive factor. On the contrary, the court’s intervention can delay the project, escalating its cost far more than any possible gains from ruling in favour of the lowest price bidder.

Courts’ interpretation of concession contracts also seem to be unmindful of consequences for future user-fee based projects. In the Delhi-Noida-Direct flyway case (2016), the Allahabad High Court struck down an explicit contract term dealing with the calculation of costs and profit for the private partner. The court held it to be “arbitrary and opposed to public policy”, and the profit to the company as “super-normal”. In this case, the problem is not the contract terms but their manipulation. With the help of experts it is possible to assess construction and maintenance costs for road projects. Rather than setting aside an explicit contract term, the court should have ordered a transparent implementation mechanism. Moreover, the government authority should be held accountable for dereliction of duty in not raising and settling the issue with the help of experts.

Sure, courts should interpret a contract and cut into its terms if found unconscionable. However, this should be done sparingly and after meeting high standards, especially for contracts awarded through competitive bidding. Otherwise, judicial interventions can undermine the sense of security that comes from signing contracts, thereby discouraging investment.

A public good

The adjudication process can serve as a public good. By clarifying the law it can reduce legal uncertainty. This in turn reduces legal disputes and costs associated with investments and other economic decisions. Consequently, economic activities get promoted. Casual and unpredictable adjudication has the opposite effect.

Fortunately some judges seem to have taken note. Shivashakti Sugars Limited v. Shree Renuka Sugar Limited and Ors (2017) is a landmark judgment delivered by justices A.K. Sikri and A.M. Sapre. It not only admitted the role of economic reasoning in adjudication, but pushed for the inter-discipline between law and economics to serve the developmental needs of the country. In situations where alternative views are possible or wherever discretion is available, the two judges have argued for the view which subserves the country’s economic interest. They have exhorted the courts to avoid outcomes which can have adverse effects on employment, growth of infrastructure, the economy or the revenue of the State.

An economic analysis of the law and disputes is welcome but courts should not go overboard. First, treating economic growth and the revenue of the state as public purposes is walking on a slippery slope. Second, even for genuinely public purposes, economic efficiency cannot justify the trampling of legal or economic rights at stake. Adjudication of such cases requires a cost-benefit analysis of a different kind. Infringement of individual rights can be considered only if it is absolutely necessary. The situation should be such that public purpose cannot be achieved without putting limitations on individual rights. Moreover, the degree of infringement should be minimum to realise the purpose. It should not cut too deep. Finally, infringement should follow the proportionality principle — the social benefit must be commensurate with the seriousness of the infringement.

Ram Singh is Professor, Delhi School of Economics

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