Ease of doing business: Why India is faltering in enforcing contracts

To move the ease of biz needle up, experts say there is need to adopt a multi-pronged approach

Though India continues its upward march in the ease of doing business rankings — climbing up to 63rd place in the latest edition — the country continues to remain a laggard (at 163rd place among 190 countries) when it comes to enforcement of contract.

The reason why India falters on this front is not hard to figure out, say experts. “This is a direct reflection of the state of India’s judiciary. Moving up the ranks is proving to be challenging. It shows how reforming the functioning of the judiciary in India is so complex,” says Surya Prakash B S, programme director at Daksh, a research agency measuring judicial performance.  

On an average, it takes four years to resolve a commercial dispute in India — as against 164 days in Singapore, the top-ranked nation, in terms of dispute resolution. In fact, India figures among the bottom five countries, in terms of time taken for enforcement of contracts.

To move the needle forward, experts say there is need to adopt a multi-pronged approach. This includes strengthening the capacity of the judiciary to implement the provisions of the Commercial Courts Act on priority basis. Aspects such as making arbitration and pre-trial hearings mandatory, adopting the latest case management practices and technological tools, and training of dedicated judicial officers could make a significant difference, add experts.

First and foremost, the focus of the government has to be on improving judicial infrastructure, not just land and buildings, but the number of judges at all levels.

“We simply do not have the number of judges needed to serve a one and a quarter billion population,” says Rajat Sethi, partner, S&R Associates, a legal and advisory firm. It is important to recognise that judicial bandwidth is a critical and scarce resource — India has 19 judges per million citizens.

Experts point out that over the last four-five years, there have been some measures to strengthen contractual enforcement in the country. This has largely centred on strengthening existing laws, carving out commercial courts, and advocating alternative dispute mechanisms like arbitrations.

However, all such initiatives were hamstrung by slackened pace at which the disputes get resolved in India, say experts.

“Reforms will work only after we invest in creating a robust judiciary and staff, courts with adequate number of judges, which are commensurate with the number of cases getting filed,” says Sanjeev Kapoor, partner in law firm, Khaitan & Co, adding, “This is the missing piece which has not been addressed by the government yet.”

What also works against India is that there is no time-bound procedure to hear cases of breach and enforcement of contracts, points out Lalit Kumar, partner at J Sagar Associates. Time-bound disposal of cases, like the way it happens in the United States, will ensure contracts are enforced in a timely manner, adds Kumar.

Interestingly, in 2017, the Ministry of Law & Justice set up a dedicated task force to monitor key metrics around enforcement of contract. An outcome of this move was the enactment of the Commercial Courts Act that was meant to expedite the trial of commercial disputes. However, this measure is yet to move the needle when it comes to improving India’s position in ease of doing business as far as contract enforcement is concerned.

Ameen Jauhar, senior resident fellow, Vidhi Centre for Legal Policy, points out that the execution of decrees issued by commercial courts is getting embroiled in protracted legal proceedings, which is an issue not addressed by the Commercial Courts Act. “The government must make the execution of decrees time-bound and expeditious,” adds Jauhar.

Surya Prakash agrees that a beginning was made with the setting up of commercial courts, but their implementation has not been thought through.

Industry bodies and trade associations could play a role in sensitising their members on the sanctity of contracts. However, Shailendra Kumar Singh, partner, Infrastructure & Projects, Advaita Legal, highlights the need for governments — Centre and the states — and public sector undertakings to be made more accountable for honouring contracts.

The government is the biggest litigant in the country. Most experts agree that courts and tribunals need to discourage frivolous litigations through heavy penalties. They also stress the need for training of judicial officers. “Unless there is an appreciation of the context and the commercial reality, decision-making will be more academic and less effective,” says Sethi.