A Case for Adopting ‘Law & Economics’ in Indian Commercial Jurisprudence

[By Madhav Goel]

The author is an Advocate, Supreme Court of India, Delhi High Court & Tribunals.

 

Introduction

An increasing proportion of litigation happening across Indian Courts, including the Hon’ble Supreme Court of India, is commercial and economic in nature. The manner in which the Courts interpret and apply commercial and economic laws, to myriad situations, affects how India Inc. does business. Be it insolvency, arbitration, intellectual property, or tax, the list is endless. The regulatory framework in each of these areas, affected by the legislature and the executive making the law, and the judiciary interpreting and applying it, has a direct and indirect impact on the “ease of doing business”. It determines how well the free market welfare state model that India has come to adopt post-1991 works for the collective interest and economic growth of Indian society.

The need for economics to infuse judicial decision making – law is no longer an autonomous discipline

Given the wide-ranging impact that judicial decisions have on India’s business environment, it is important to reflect on whether judicial decision-making is approaching the practice and interpretation of commercial laws in a manner conducive to that ultimate, collective goal. What does that mean? Judicial interpretation has generally treated law to be an autonomous discipline, i.e., the legal discipline has its own set of rules for analysing and interpreting the law, and reliance on other disciplines for this exercise is unnecessary. Indian jurisprudence especially, continues to treat law as an autonomous discipline. While that has been the Indian approach, the world over, things are changing, and changing fast. Law is no longer treated as a purely autonomous discipline but is one that is considered to learn from and derive from other disciplines such as sociology, philosophy, history, and economics. While its core principles remain unchanged, it is no longer considered immune from learning from these other disciplines.

In the context of commercial laws, the need for legal interpretation to learn from economics is extremely crucial, i.e., the adoption of ‘Law & Economics’ as a tool of interpretation is critical in ensuring that laws are applied in a manner that helps achieve their underlying objectives. Unfortunately, while the knowledge of economics is considered important to law practitioners and regulators and the knowledge of law is important for an economist, the relationship between law and economics has never been given the consideration it deserves. Why should it be given such importance? The aim of these laws is to further economic goals – regulation and promotion of competition in the free market, healthy business practices, and efficiency. When that is accepted, why should the interpretation of the law continue to have a siloed, technical and legalistic approach?

Instances of textual interpretation ruining the legislative objective

The judiciary’s legalistic approach to interpreting commercial laws has often led to problematic situations arising for India Inc. Commercial laws have often received interpretation that is textually correct but has the effect of turning the law’s intent upside down, thereby defeating its very objective. As a consequence, the legislature has often had to intervene by amending the law and revamping the entire legal framework, thus leading to greater uncertainty of the law. Let us take, for example, the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”). The Code, and the issues arising therefrom, have captured the bulk of the time and imagination of the Indian legal system in recent years. However, increasingly, there have been judgements of the Hon’ble Supreme Court, and consequently the Hon’ble National Company Law Appellate Tribunal and the Hon’ble National Company Law Tribunals that have gone against core principles of the IBC, for example, the decision to confer discretion on the Hon’ble National Company Law Tribunal to admit or reject applications by financial creditors to initiate corporate insolvency resolution processes of defaulting corporate debtors in spite of the existence of ‘debt’ and ‘default’, or the decision to give secured creditor status to the Government in respect of dues owed to it in certain cases in clear contravention of the waterfall mechanism. Each of these decisions fails to factor in and learn from basic principles of finance and insolvency economics, thus creating a framework that defeats the objectives it sought to achieve. By adopting a textual approach to statutory interpretation, rather than a purposive approach with its foundation in Law & Economics, the Hon’ble Apex Court has given greater fodder to its critics that question the judiciary’s expertise to suitably understand and interpret commercial and economic legislation. The fact that the Hon’ble Apex Court has erred in these instances is evident from the fact that industry-wide criticism has been supplemented by the Government of India’s decision to mend the Code suitably in order to undo the effect of these judicial decisions.

This is not a new trend. Time and again, commercial legislation has been interpreted in India in a manner that has frustrated their purpose. Another example is the judgement of the Hon’ble Supreme Court in NAFED v. Alimenta S.A. whereby the Court refused to enforce a foreign arbitral award on the ground that it was in violation of the public policy of the country. In doing so, the Court expanded the public policy exception/defence against enforcement of foreign arbitral awards to such an extent so as to include mere violations of substantive provisions of Indian law. Consequently, the Court opened the door for arbitral award debtors to engage in speculative litigation and stave off enforcement of foreign arbitral awards by inducing the Court to engage in another review of the award on merits.The judgement, by ignoring the economic objective behind the Arbitration and Conciliation Act, 1996. The negative consequences of this approach are not limited to strictly commercial disputes, but have far reaching impact on private tort law as well. For example, rules pertaining to motor accident cases, that have otherwise proven to be efficient in the economic analysis of liability rules. However, the manner in which the Courts have interpreted the same have resulted in generating perverse incentives and unnecessary uncertainty that has led to the objective of these rules being defeated.

Another aspect of this issue is the refusal of Indian Courts to engage in an economic analysis of the consequences of their decisions, and thereby learn from it in order to improve the decision making process. For example, the decision of the Hon’ble Supreme Court to cancel/set aside the entire coal block allocation in light of the allegations of corruption had a severe impact on the energy security of the country. To date, the Court has not undertaken an analysis of the economic impacts of its decision, thus disabling itself from crafting innovative solutions that adequately deal with the issues that come to it for adjudication while ensuring that the economic interests of the country are not jeopardised. Another area is environmental law. There are numerous instances where the Courts’ decision in this arena have solved the immediate issue before it from a legal perspective, but the said decision has had a disastrous downstream impact. For example, the clamp down of the Hon’ble Supreme Court and the Hon’ble Delhi High Court on the bus system in the national capital in order to force a shift to cleaner energy has actually resulted in a decrease in the number of buses operating in the city, resulting in greater reliance on private vehicles and greater levels of air pollution. Had the Courts undertaken a continuous analysis of the economic impact of its decisions, it could have improved its decision making process that lead to more efficient and sound outcomes.

So what can be done?

It is respectfully submit that a root cause of this is the lack of an ‘economics perspective’ in the manner in which litigation is conducted in Indian Courts. Both the Bar and the Bench continue to apply strictly legal principles in interpreting these laws, without paying due consideration to the economic principles underpinning these laws. While the primary function of the judicial system is to apply legal rules while interpreting laws, it cannot continue to do so in isolation from other disciplines, including economics. Adoption of Law & Economics, i.e., the application of economic theory and method to the practice and interpretation of the law, to the exercise of interpreting commercial and business laws, will infuse a breath of fresh air to the current practices of Indian judicial decision making qua commercial and business laws. Furthermore, an economic analysis of the downstream effects of key judgements/decisions would act as a sound feedback mechanism based on statistics that would enable the Courts to improve upon its jurisprudence, instead of the citizenry hoping for corrective action from the legislature or a subsequent review by the Court (which is an extremely rare occurrence).

Two immediate reforms can be implemented. Firstly, training of judicial officers and judges manning various courts and tribunals will go a long way in enabling them to bring economic insight into their decision making process. Since judges are selected from diverse backgrounds having different subject matter expertise, it is unfair to expect them to have nuanced understanding of economic principles. Carefully curated and focused training can go a long way in alleviating this problem. Secondly, Courts can devise a system of maintaining panels of subject matter experts who can act as amicus curiae in cases that are of a technical nature. These experts can assist the Court in understanding the economics involved in the disputes that they have to adjudicate upon, and also assist the Court in analysing the desirability of the possible downstream effects of the Court’s decisions.

Concluding remarks

Unfortunately, the legislative trend in India is increasingly shifting towards the reduction or removal of the judicial system in economic regulation, a trend that is detrimental to the rule of law and is fraught with serious risks. For example, commercial sector regulators are increasingly being constituted as the judge, jury, and executioner in respect of their specific domains, such as the Securities and Exchange Board of India, the Insolvency and Bankruptcy Board of India, etc. These regulators not only make the rules regulating their respective sector, but are also acting as the judicial authority in regard to the same. A key reason for the emergence of these trends is that the stakeholders of the system feel that the judiciary lacks the requisite knowledge/expertise/experience, and tends to ignore the economic perspective while making judicial decisions. Infusion of Law & Economics to statutory interpretation will enable the Indian judicial system to play an active and constructive role in the development of the country’s business environment, much like foreign jurisdictions, and break the trend of economic legislation’s failure to deliver the desired results.

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