Chapter-9: Ease of Doing Business’ Next Frontier: Timely Justice

In the last chapter of volume-1, the economic survey highlights that India jumped 30 ranks to 100 in ease of doing business recently but then stands with Pakistan, Congo and Sudan like countries in pointers such as enforcing contracts. Key points from this chapter are as follows:

Contract Enforcement Regime

What are key survey findings on contract enforcement regime in India?

India continues to lag on the indicator on enforcing contracts, marginally improving its position from 172 to 164 in the latest report, behind Pakistan, Congo and Sudan. The survey emphasises on importance of an effective, efficient and expeditious contract enforcement regime to economic growth and development. Further, one prerequisite for business and commerce is 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.

What legislative and administrative steps were taken to improve contract enforcement regime?

The government has taken a number of actions to expedite and improve the contract enforcement regime. These include scrapping of thousands of redundant legislations; rationalizing tribunals; amending the arbitration and conciliation act, 2015, passing commercial courts, commercial division and commercial appellate division of high courts act, 2015; reducing intra-government litigation; and expanding the Lok Adalat programme to reduce the burden on the judiciary. The government has also advanced a prospective legislative regime to ensure legal consistency, reducing chaos due to unpredictable changes in regulations.

Simultaneously, the judiciary has also expanded the seminal National Judicial Data Grid (NJDG) and is close to ensuring that every High Court of the country is digitized, an endeavor recognized in EODB, 2018.

Pendency in Courts

What are survey findings on the delays and pendency in Indian courts affecting its Business environment?

The Key findings of survey in this context are as follows:

• There is high occurrence of delay and pendency of economic cases in India. This is taking toll on economy in terms of stalled projects, legal costs, tax revenues and reduced investment.
• There are 1.8 Lakh economic cases pending in six prominent tribunals dealing with the economic matters. This pendency has rose sharply over times and average age of pending cases across the tribunals is 3.8 years.
• Further, the survey notes that in telecommunications and electricity related matters, the explosion in pendency of cases has resulted from the interventions by Supreme Court.
• The survey concluded that creation of tribunals did not alter the pendency at high courts nor their ability to deal with economic cases. The total backlog in High Courtsby the end of 2017 as per the National Judicial Data Grid was close to 5 million cases.
• The survey also notes that while volume of economic cases is lower than other categories, their average duration of pendency is worst i.e. 5.3 years for major high courts.
• Intervening measures like the setting up of the National Judicial Data Grid and creation of tribunals have helped, but more is needed to improve the situation.

To what extent, the expansion of Discretionary Jurisdictions in high courts is responsible for pendency of court cases?

The economic and commercial cases are generally complex and require economic expertise in their handling and disposal, and hence require more judicial time. However, the overload of cases is also because of one reason that is expansion of discretionary jurisdictions by Courts, without any countervailing measures that either balance the scope of other jurisdictions or improve overall administration and efficiency.

• For example, Articles 226 and 227 of the Constitution of India empower High Courts with carefully circumscribed writ jurisdiction.
• In practice, however, High Courts have permissively and expansively interpreted this provision over a period of time, which has resulted in a substantial increase in Article 226 cases.
• At the 6 High Courts studied, writ petition constitutes between 50-60% of the Court backlog, with average pendency fluctuating between 3-10 years.

Data available for 2008- 2013 for 5 High Courts captures the continued rise in the pendency of Writ Petitions even in recent years, which is crowding out judicial time for other cases.

To what extent, the expansion of Special Leave Petitions in Supreme Court is responsible for pendency of court cases?

The Supreme Court, like the High Courts, has less capacity to deal with mounting economic cases because of rising overall pendency. But SC, the burden comes from Special Leave Petitions under Article 136 of the Constitution of India, which empowers any party to approach the Supreme Court directly from any court or tribunal.

• Initially invoked only in “exceptional circumstances”, SLPs is now an overwhelming feature of practice at the Supreme Court.
• The rate at which the Supreme Court admits Special Leave Petitions under Article 136 of the Constitution increased from around 25% in 2008 to nearly 40% in 2016.
• In contrast, the Supreme Court of the United States of America and Canada admit 3% and 9% respectively of the cases filed before it.
• This rising tendency to grant special leave has fundamentally altered the nature of the Court and created a high level of pendency, nearly 85% of which are SLP cases.

The Court’s SLP jurisdiction does not include other cases like transfer and review petitions, each of which occupies nearly 4-6% of the Court’s docket.

Simultaneously, the share of writ cases has gone down from 7% in 1993 to under 2% in 2011

How Recourse to Injunctions and Stays is responsible for pendency?

Rising pendency also results from the injunction of cases by Courts. For example, in the case of Intellectual Property Rights (IPR) cases, injunctions have led to about 60 percent of cases being stayed, whose average pendency is 4.3 years. Common traits of IPR cases across different High Courts include lengthy interim orders, ex parte interim stays, increasing rate of pendency of cases at final arguments, and few final judgments in IPR cases.

The average age of cases waiting for final judgment is inordinately high (7.9 years), showing that more attention needs to be given to cases pending at the stage of final disposal.

How pendency and delay affects costs?

Since project costs were predominantly debt-financed, the project costs increase. Among government projects, the Ministries of Power, Roads and Railways have been the hardest hit. A similar picture is for private sector infrastructure projects. The overall impact of rising pendency at Appellate Tribunals, High Courts and the Supreme Court, coupled with the rising use of injunctions and other blunt instruments has led to spiraling legal expenses of Corporate India.

What are survey recommendations on pendency, arrears and delays in income tax department?

Pendency, arrears and delays are not just a feature of courts and tribunals, but also the Tax Departments and their multi-layered process. Survey finds that the claims for indirect and direct tax stuck in litigation (Appellate Tribunal and upwards) by the March, 2017 amounted to nearly 7.58 lakh crores, over 4.7 percent of GDP. For the Department, these numbers, especially the value of amounts involved have been rising sharply over time.

The success rate of the Department at all three levels of appeal– Appellate Tribunals, High Courts, and Supreme Court– and for both direct and indirect tax litigation is under 30%. In some cases it is as low as 12%. The Department unambiguosuly loses 65% of its cases. Over a period of time, the success rate of the Department has only been declining, while that of the assessees has been increasing.

Tax Department is the largest litigant

Survey finds that the tax department is the largest litigant. Department’s appeals constitute nearly 85% of the total number of appeals filed in the case of direct taxes, though that number seems to have improved in the case of indirect taxes. Of the total number of direct tax cases pending by March, 2017, the Department initiated 88% of the litigation at ITATs and the Supreme Court and 83% of the litigation pending at High Courts.

The survey concluded that even though the Department’s strike rate has been falling considerably over a period of time, it is undeterred, and persists in pursuing litigation at every level of the judicial hierarchy.

Since tax litigation constitutes a large share of the workload of High Courts and the Supreme Court, Courts and the Department may gain from a reduction in appeals pursued at higher levels of the judiciary.