Context:

• 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:

Case 1: Power Producers Association of India v. Union of India and Ors.

• May 31, 2018 order of the Allahabad High Court 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.

Case 2: Rameshwar and Ors v. State of Haryana and Ors (2018)

• In this case, 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, builders and 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.
• Supreme Court 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.

Case 3: Uddar Gagan Properties Ltd v. Sant Singh & Ors (2016)

• In this case, 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.

Failure of Judiciary:

• 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.
• 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.

Judicial and Infrastructure Projects:

• Several infrastructure projects are being held up due to judicial interventions in the bidding process.
• Courts have failed to 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.
• Court’s intervention has led to delay in project, escalating its cost far more than any possible gains from ruling in favour of the lowest price bidder.
• There are instances where Judiciary didn’t opt for help of experts to assess the construction and maintenance cost rather it went on to interpret a contract and cut into its terms if found not right or reasonable.

Discouraging Investment:

• 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.

Shivashakti Sugars Limited v. Shree Renuka Sugar Limited and Ors (2017)

• In this landmark judgment, Judiciary admitted the role of economic reasoning in adjudication. It also 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 associated 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.

The Way forward:

• Economic analysis of the law and disputes is a welcome move; however courts should not go overboard.
• Treating economic growth and the revenue of the state as public purposes is walking on a slippery slope.
• While adjudicating such cases, judiciary should consider a cost-benefit analysis of a different kind.
• Infringement of individual rights should 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.

Source:TH