Enforcement of Contract in India
Contracts are essential for any business activity, as they define the rights and obligations of the parties involved in a transaction. However, contracts are only as good as their enforceability, which depends on the legal system and the dispute resolution mechanism available in a country. In this blog post, we will discuss the current state of contract enforcement in India, the challenges faced by businesses and investors, and the possible ways to improve it.
The legal framework for contract enforcement in India consists of two main statutes: The Indian Contract Act, 1872 (ICA) and The Specific Relief Act, 1963 (SRA). The ICA lays down the general principles of contract law, such as offer and acceptance, consideration, capacity, consent, performance, breach, and remedies. The SRA provides for specific performance of contracts, injunctions, and declaratory decrees as alternative remedies to damages. Apart from these statutes, there are other laws that govern specific types of contracts, such as the sale of goods, partnership, arbitration, consumer protection, etc.
The main mode of contract enforcement in India is through litigation in civil courts. However, this process is often plagued by delays, costs, and uncertainties. According to the World Bank's Ease of Doing Business Report 2020, India ranks 163rd out of 190 countries in enforcing contracts. The report estimates that it takes an average of 1,445 days (almost four years) to resolve a commercial dispute in India, compared to 590 days in South Asia and 120 days in OECD high-income countries. The cost of enforcing a contract in India is also high at 31% of the claim value, compared to 16.8% in South Asia and 21.5% in OECD high-income countries. Moreover, the quality of judicial processes in India is low at 9.1 out of 18 points, compared to 11.9 in South Asia and 14.4 in OECD high-income countries.
The reasons for this poor performance are manifold. Some of them are:
- Lack of adequate infrastructure and manpower in courts: There are about 19 judges per million people in India, compared to 111 in OECD high-income countries. There are also shortages of courtrooms, staff, equipment, and facilities.
- Complex and outdated procedural laws: The Code of Civil Procedure, 1908 (CPC) and The Evidence Act, 1872 govern the procedure and evidence in civil cases. However, these laws are often cumbersome and rigid, leading to unnecessary formalities and technicalities.
- Frequent adjournments and appeals: The CPC allows parties to seek adjournments for various reasons, such as the absence of witnesses or lawyers, lack of documents or evidence, etc. This leads to prolonged trials and a backlog of cases. The CPC also allows parties to file multiple appeals at different levels of courts, which adds to the delay and cost.
- Ineffective alternative dispute resolution (ADR) mechanisms: ADR mechanisms such as arbitration, mediation, conciliation, etc., are supposed to provide faster and cheaper ways of resolving disputes outside courts. However, these mechanisms are not widely used or trusted by parties due to various factors such as lack of awareness, expertise, enforceability, etc.
Given these challenges, there was an urgent need to improve contract enforcement in India to boost business confidence and investment climate. Necessary Steps included:
- Strengthening the infrastructure and capacity of courts: There is a need to increase the number of judges and court staff, provide adequate training and resources to them, upgrade the courtrooms and facilities with modern technology and equipment.
- Simplifying and reforming the procedural laws: There is a need to amend the CPC and other relevant laws to make them more user-friendly and flexible. Some of the reforms could include reducing or limiting adjournments and appeals; introducing case management systems; allowing electronic filing and service of documents; encouraging pre-trial conferences and settlement; streamlining evidence rules; etc.
- Promoting and facilitating ADR mechanisms: There is a need to create awareness and trust among parties about the benefits and advantages of ADR mechanisms; provide incentives and support for using them; ensure their quality and credibility; enforce their outcomes; etc.
- Enacting a dedicated law for commercial courts: There is a need to enact a separate law for establishing specialized commercial courts at different levels with exclusive jurisdiction over commercial disputes.
Commercial Courts Act 2015 - What Changed?
The Commercial Courts Act, 2015: An Overview and Analysis
The Commercial Courts Act, 2015 (the Act) is a landmark legislation that aims to provide a speedy and efficient resolution of commercial disputes in India. The Act was enacted with the objective of improving the ease of doing business in India and attracting more foreign investment by creating a conducive legal environment for commercial transactions.
The Act establishes a hierarchy of courts and tribunals to deal with commercial disputes of specified value, which is not less than one crore rupees or such higher amount as notified by the central government. The Act also introduces several amendments to the Code of Civil Procedure, 1908 (the CPC) to streamline the procedure and timelines for commercial litigation.
The Act provides for the constitution of the following forums for adjudicating commercial disputes:
- Commercial Courts: These are courts at the district level, except in those districts where the high court exercises ordinary original civil jurisdiction, i.e., Delhi, Bombay, Calcutta and Madras. The state governments are empowered to constitute commercial courts after consultation with the concerned high court.
- Commercial Appellate Courts: These are courts at the district level, which have jurisdiction to hear appeals from the orders and decrees of commercial courts. The state governments are empowered to designate such appellate courts after consultation with the concerned high court.
- Commercial Division: This is a division in the high court having ordinary original civil jurisdiction, which will exercise jurisdiction over all commercial disputes of specified value arising within its territorial limits. The chief justice of the high court will nominate judges to constitute the commercial division.
- Commercial Appellate Division: This is a division in all high courts, which will hear appeals from the orders and decrees of commercial division and commercial courts. The chief justice of the high court will nominate judges to constitute the commercial appellate division.
The Act also provides for mandatory pre-institution mediation and settlement of commercial disputes, unless urgent interim relief is sought by any party. The mediation process will be conducted by authorities under the Legal Services Authorities Act, 1987, and will be completed within three months from the date of application. If the mediation is successful, the settlement agreement will have the same effect as an arbitral award under the Arbitration and Conciliation Act, 1996.
The Act also introduces significant changes to the CPC in its application to commercial disputes, such as:
- Limiting the scope of amendments to plaints and written statements;
- Imposing strict timelines for filing written statements, completion of discovery and inspection, framing of issues, etc.;
- Allowing summary judgment for claims that do not require oral evidence;
- Providing for case management hearings and imposing costs for adjournments;
- Empowering courts to order payment of deposits for grant of injunctions or stay of orders;
- Enhancing the pecuniary jurisdiction of high courts for appeals from decrees of commercial courts or commercial divisions;
- Providing for expeditious disposal of appeals by commercial appellate courts and commercial appellate divisions within six months from the date of filing.
The Act is expected to bring about a paradigm shift in the resolution of commercial disputes in India by ensuring timely and effective enforcement of contracts and rights. The Act also seeks to align India's legal framework with international best practices and standards for commercial litigation. The Act is a welcome step towards improving India's ranking in the World Bank's Ease of Doing Business Index, which measures various aspects of business regulation, including enforcing contracts.
However, the success of the Act will depend largely on its implementation by the state governments, which are responsible for constituting and designating commercial courts and appellate courts. The Act also requires adequate infrastructure, manpower, and training for the smooth functioning of these forums. Moreover, the Act will have to withstand judicial scrutiny on various constitutional and legal issues that may arise in its application.
The Commercial Courts Act, 2015 is a progressive legislation that has the potential to transform India's commercial dispute resolution system. However, it will require concerted efforts from all stakeholders, including the judiciary, executive, legislature, bar, and business community, to ensure its effective implementation and realization of its objectives.
