Saturday, August 30, 2008

Speedier Enforcement of Large Contracts on the Anvil

Business Standard reports that the Government is considering a new law for the faster enforcement of high-value business contracts. This is to enhance the environment in India for business transactions. The principal driver behind this move is stated to be the low scores India has received on this count in the Doing Business Report published annually by the World Bank. The Business Standard states:

“The Centre had taken notice of the World Bank’s Doing Business Report 2007, which said that it takes as many as 1,420 days in India to implement a financial contract. The report had given India an overall ranking of 177 in the report, a rank that remained unchanged in 2008.

Three indicators — the number of procedures, time taken to settle commercial disputes and the cost of litigation — determine how efficient a country’s commercial contract enforcement is. On all three counts, India scored poorly when compared with China and even Pakistan.


The cost of settling a financial dispute between buyers and sellers in a commercial transaction is nearly 40 per cent of the disputed claim, with a large portion of this amount going into paying legal fees.”
This is not the first time that specialised processes have been set up for enforcement of specific types of contracts. Other examples include the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. If precedent is anything to go by, we can only expect the proposed new law to have a long short-title – no pun intended!

Precedent also reveals that such legislations are susceptible to constitutional challenges as we have seen with the previous two. Hence, care must be taken by the lawmakers to ensure that the provisions are designed and drafted in a manner that withstands scrutiny against the backdrop of the Constitution in order to further the legislative goal.

1 comment:

Somasekhar Sundaresan said...

Here is a piece I wrote in the Business Standard edition dated July 7, 2008 (Without Contempt column)

NEW LAW TO EXPEDITE COMMERCIAL DISPUTE RESOLUTION

By Somasekhar Sundaresan

The Indian judicial dispute resolution system is fast becoming an anachronism in the sectors of commerce and investments. Even participants in the administration of the system such as lawyers and judicial staff would advise their personal friends to think a hundred times before litigating. It is a common to joke that if one initiates litigation, it would be the grandchildren who would get the ultimate benefit.

This is hardly the backdrop for India being regarded as an effective jurisdiction for timely and effective enforcement of commercial disputes. Little wonder that the Arbitration and Conciliation Act, 1996 was introduced with the hope that it would speed up resolution of commercial disputes. However, the arbitration bar comprises lawyers from the court litigation ecosystem, and so are arbitral tribunals largely drawn from retired members of the judiciary.

The consequence: an extremely ineffective and ridiculously slow “alternate” dispute redressal system that is hardly a real alternative. Adjournments take place in units of several months and even the basic discipline of court timings falls by the wayside.

If disputes in commercial contracts that have a limited tenure can take years to resolve, one would wonder what the “India story” is all about. That India has attracted investments despite such a sad state of affairs with dispute resolution only goes to underline how much more India could progress if the legal system gets its act together.

It is in this context that a proposal of the government to write a law to carve out a “commercial division” in various high courts has to be appreciated. The proposal entails defining “commercial disputes” as disputes involving transactions of trade and commerce such as those relating to interpretation of mercantile and commercial documents and agreements. It is also proposed to bring in intellectual property disputes within the scope of commercial disputes.

To hear such disputes, it is proposed that every high court would constitute a “commercial division” comprising one or more division benches (benches comprising more than one judge) that would resolve only commercial disputes. While all new commercial disputes would be heard only by such commercial divisions of high courts, all existing and pending proceedings before the high courts relating to commercial disputes would stand transferred to the commercial divisions.

Even disputes pending before lower courts would stand transferred to the high court, provided the value of the subject matter of the dispute is lower than the applicable pecuniary value limit. Every dispute of a value of Rs. 1 crore would automatically go the commercial division, but the chief justices of high courts would be given flexibility to raise the bar subject to the restriction that they cannot draw the line above Rs. 5 crores. In other words, should any dispute have a value of above Rs. 5 crores, they are bound to be heard only by the division benches of the commercial division.

The moving of proceedings to the commercial division courts having exclusive jurisdiction is not the highlight of the proposed law. What is more important is the fast track procedure proposed. While the Code of Civil Procedure would indeed be applicable, the proposed law would entail a special procedure to expedite commercial dispute resolution.

Every plaint in a suit involving a commercial dispute would have to be accompanied by, among others, affidavits of persons providing evidence, a draft of issues likely to arise in the dispute, a list of interrogatories and an application for production and discovery of documents considered necessary, demonstrating the relevance. The defendants would be obliged to file a written statement and a counter-claim, if any, within one month of the receipt of the plaint. Within 15 days of the written statement being filed in response, the plaintiff would have a right to seek permission to file a rejoinder. If permitted, such rejoinder would have to be filed within one month.

The commercial division courts may nominate designated persons as court commissioners to record statements in cross-examination of witnesses – judges’ time would be freed. The law would provide for case management conferences with the parties to fix time periods and limits for various filings and pre-agreed stipulated time limits for oral arguments. Most importantly, all appeals from the commercial division benches would lie only in the Supreme Court of India.

If such law comes in, the cheese will move. Not just for the judiciary but also, more importantly for advocates. It will be time to place the cards on the table and to have disputes resolved transparently and expeditiously. Indeed, such a law would make current practices of arbitrators look anachronistic.