Law and Economics

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In the jurisprudence of the Economic Approach to Law, there are various theories propounded by the jurists, e.g., The Positive Theory or Normative Theory etc. However, here, we are limiting the discussion to that facet which relates to economic impact of a judicial decision. Even in those cases where economic interest competes with the rights of other persons, need is to strike a balance between the two competing interests and have a balanced approach[SHIVASHAKTI SUGARS LIMITED VS SHREE RENUKA SUGAR LIMITED & ORS. MAY 09, 2017]

Introduction 

1. The judicial wing, while undertaking the task of performing its judicial function, is also required to perform its role in this direction. It calls for an economic analysis of law approach, most commonly referred to as Law and Economics . In fact, in certain branchesof law there is a direct impact of economics and economic considerations play predominant role, which are even recognised as legal principles. Monopoly laws (popularly known as Antitrust Laws‘ in USA) have been transformed by economics. The issues arising in competition laws (which has replaced monopoly laws) are decided primarily on economic analysis of various provisions of the Competition Commission Act. Similar approach is to be necessarily adopted while interpreting bankruptcy laws or even matters relating to corporate finance, etc. The impress of economics is strong while examining various facets of the issues arising under the aforesaid laws. In fact, economic evidence plays a big role even while deciding environmental issues. There is a growing role of economics in contract, labour, tax, corporate and other laws. Courts are increasingly receptive to economic arguments while deciding these issues. In such an environment it becomes the bounden duty of the Court to have the economic analysis and economic impact of its decisions.

2. However, on the application of law and while interpreting a particular provision, economic impact/effect of a decision, wherever warranted, has to be kept in mind. Likewise, in a situation where two views are possible or wherever there is a discretion given to the Court by law, the Court needs to lean in favour of a particular view which subserves the economic interest of the nation. Conversely, the Court needs to avoid that particular outcome which has a potential to create an adverse affect on employment, growth of infrastructure or economy or the revenue of the State. 

3.  law and economics traces back to the period of Jeremy  Bentham 3 , i.e. 18th century, in the last few decades, interplay between law and economics has gained momentum throughout the world. Indian judiciary has resorted to economic analysis of law on ad hoc basis. Time has come to consider the interdiscipline between law and economics as a profound movement on sustainable basis. These are the additional relevant considerations which have weighed in our mind in adopting a particular course of action


Supreme Court Directions on Economic matters

Raunaq International Limited v. I.V.R. Construction Ltd. & Ors., (1999) 1 SCC 492, this Court cautioned the High Courts not to easily grant interim stay while dealing with the writ petitions where challenge is to award of tender by the Government in favour of a party, highlighting the fact that even commercial transactions of State or public body may involve element of public law or public interest and grant of such interim stay may delay the approach, and in turn escalate the cost thereof, which may not be in public interest. Relevant paragraphs from the said judgment read as under:-

“11. When a writ petition is filed in the High Court challenging the award of a contract by a public authority or the State, the court must be satisfied that there is some element of public interest involved in entertaining such a petition. If, for example, the dispute is purely between two tenderers, the court must be very careful to see if there is any element of public interest involved in the litigation. A mere difference in the prices offered by the two tenderers may or may not be decisive in deciding whether any public interest is involved in intervening in such a commercial transaction. It is important to bear in mind that by court intervention, the proposed project may be considerably delayed thus escalating the cost far more than any saving which the court would ultimately effect in public money by deciding the dispute in favour of one tenderer or the other tenderer. Therefore, unless the court is satisfied that there is a substantial amount of public interest, or the transaction is entered into mala fide, the court should not intervene under Article 226 in disputes between two rival tenderers. [Emphasis supplied]

12. When a petition is filed as a public interest litigation challenging the award of a contract by the State or any public body to a particular tenderer, the court must satisfy itself that the party which has brought the litigation is litigating bona fide for public good. The public interest litigation should not be merely a cloak for attaining private ends of a third party or of the party bringing the petition. The court can examine the previous record of public service rendered by the organisation bringing public interest litigation. Even when a public interest litigation is entertained, the court must be careful to weigh conflicting public interests before intervening. Intervention by the court may ultimately result in delay in the execution of the project. The obvious consequence of such delay is price escalation. If any retendering is prescribed, cost of the project can
escalate substantially. What is more important is that ultimately the public would have to pay a much higher price in the form of delay in the commissioning of the project and the consequent delay in the contemplated public service becoming available to the public. If it is a power project which is thus delayed, the public may lose substantially because of shortage in electricity supply and the consequent obstruction in industrial development. If the project is for the construction of a road or an irrigation canal, the delay in transportation facility becoming available or the delay in water supply for agriculture being available, can be a substantial setback to the country’s economic development. Where the decision has been taken bona fide and a choice has been exercised on legitimate considerations and not arbitrarily, there is no reason why the court should entertain a petition under Article 226.
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18. The same considerations must weigh with the court when interim orders are passed in such petitions. The party at whose instance interim orders are obtained has to be made accountable for the consequences of the interim order. The interim order could delay the project, jettison finely worked financial arrangements and escalate costs. Hence the petitioner asking for interim orders in appropriate cases should be asked to provide security for any increase in cost as a result of such delay or any damages suffered by the opposite party in consequence of an interim order. Otherwise public detriment may outweigh public benefit in granting such interim orders. Stay order or injunction order, if issued, must be moulded to provide for restitution.
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24. Dealing with interim orders, this Court observed in CCE v. Dunlop India Ltd. [(1985) 1 SCC 260] (SCR 190 at p. 196) that an interim order should not be granted without considering the balance of convenience, the public interest involved and the financial impact of an interim order. Similarly, in Ramniklal N. Bhutta v. State of Maharashtra [(1997) 1 SCC 134] the Court said that while granting a stay, the court should arrive at a proper balancing of competing interests and grant a stay only when there is an overwhelming public interest in granting it, as against the public detriment which may be caused by granting a stay. Therefore, in granting an injunction or stay order against the award of a contract by the Government or a government agency, the court has to satisfy itself that the public interest in holding up the project far outweighs the public interest in carrying it out within a reasonable time. The court must also take into account the cost involved in staying the project and whether the public would stand to benefit by
incurring such cost.[Emphasis supplied]


Theoretical Approach

Richard A. Posner in his book ‘Frontiers of Legal Theory’ explains this concept as follows:-
―Economic analysis of law has heuristic, descriptive, and normative aspects. As a heuristic, it seeks to display underlying unities in legal doctrines and institutions; in its descriptive mode, it seeks to identify the economic logic and effects of doctrines and institutions and the economic causes of legal change; in its normative aspect it advises judges and other policymakers on the most efficient methods of regulating conduct through law. The range of its subject matter has become wide, indeed all-encompassing. Exploiting advances in the economics of nonmarket behavior, economic analysis of law has expanded far beyond its original focus on antitrust, taxation, public utility regulation, corporate finance, and other areas of explicitly economic regulation. (And within that domain, it has expanded to include such fields as property and contract law). The new economic analysis of law embraces such nonmarket, or quasi-nonmarket, fields of law as tort law, family law, criminal law, free speech, procedure, legislation, public international law, the law of intellectual property, the rules governing the trial and appellate process, environmental law, the administrative process, the regulation of health and safety, the laws forbidding discrimination in employment, and social norms
viewed as a source of, an obstacle to, and a substitute for formal law.
Posner also mentioned that this interface between Law and Economics might grandly be called Economic Theory of Law‘, which is built on a pioneering article by Ronald Coase {R.H. Coase, ―The Problem of Social Cost, 3 Journal of Law and Economics 1 (1960)}:

The Coase Theorem holds that where market transaction costs are zero, the law‘s initial assignment of rights is irrelevant to efficiency, since if the assignment is inefficient the parties will rectify it by a corrective transaction. There are two important corollaries. The first is that the law, to the extent interested in promoting economic efficiency, should try to minimize transaction costs, for example by defining property rights clearly, by making them readily transferable, and by creating cheap and effective remedies for breach of contract…
The second corollary of the Coase Theorem is that where, despite the law‘s best efforts, market transaction costs remain high, the law should simulate the market‘s allocation of resources by assigning property rights to the highest valued users. An example is the fair-use doctrine of copyright law, which allows writers to publish short quotations from a copyrighted work without negotiating with the copyright holder. The costs of such negotiations would usually be prohibitive; if they were not prohibitive, the usual result would be an agreement to permit the quotation, and so the doctrine of fair use brings about the result that the market would bring about if market transactions were
feasible.[ Accepted in SHIVASHAKTI SUGARS LIMITED VS SHREE RENUKA SUGAR LIMITED & ORS. MAY 09, 2017]

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