Missing link: Efficient contract enforcement will brighten India's prospects

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Ashish Dhawan , Amrita Agarwal We must regain reform momentum on assuring everyone access to reliable mechanisms for the resolution of commercial disputes. Legal certainty is as vital as tariff certainty. India's judiciary, executive and legislature should work together to do what's needed. Legal certainty is as vital as tariff certainty. Gift this article
Globally, efficient contract enforcement is a prerequisite for economic competitiveness. In India's case, conservative estimates suggest that legal uncertainty and procedural delays impose a direct cost of 1.5-2% of GDP each year. But the deeper wound comes from the opportunity cost—estimated to be two to three times greater—related to deferred investments. This acts as a hidden tax on enterprises.
Globally, efficient contract enforcement is a prerequisite for economic competitiveness. In India's case, conservative estimates suggest that legal uncertainty and procedural delays impose a direct cost of 1.5-2% of GDP each year. But the deeper wound comes from the opportunity cost—estimated to be two to three times greater—related to deferred investments. This acts as a hidden tax on enterprises.
Economies like the US and China that have enjoyed high investment and growth have made deliberate efforts to improve their dispute resolution systems.
For example, the US has large-scale and specialized arbitration institutions. The US Supreme Court takes a pro-arbitration stance, supported by the The Federal Arbitration Act, and its enforcement of arbitral awards is efficient.
Also, the court system focuses on building specialized expertise in the judiciary. States like New York and Delaware operate commercial divisions staffed by dedicated expert judges and backed by effective case management systems. Lastly, cross-border disputes are enforced under the New York convention and the US also has a specialized commercial court for international disputes.
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India has also made efforts in this direction, especially between 2014 and 2018, with the passage of the Commercial Courts Act, amendments to the Arbitration and Conciliation Act and establishment of institutions like the Mumbai Centre for International Arbitration (MCIA). The average time for contract enforcement dropped from 1,445 days to 626 in Delhi and Mumbai courts.
However, the reform momentum has slowed since 2019, with only a few reforms like the Mediation Act being implemented. India ranks poorly on global comparisons of contract enforcement. Thus, we urgently need to reinvigorate efforts to strengthen commercial dispute resolution mechanisms.
A major challenge is an endemic culture of appeals. This is driven partly by the wide grounds for these and inadequate court strictness. The absence of a 'loser pays' regime with stiff penalties lets frivolous challenges go unchecked. Government agencies and public sector undertakings (PSUs) remain among India's largest litigants, frequently challenging awards and judgements.
What India needs now is a second generation of reforms.
Progressive state governments and the judiciary can drive these and help create a positive investment climate. We propose the following:
Strengthen domestic institutional arbitration: Several challenges undermine the effectiveness of arbitration in India—lack of strong domestic institutions, over-reliance on ad-hoc arbitration and lack of a consistent pro-arbitration/enforcement stance by the judiciary.
Large companies and investors escape inefficiency by using arbitration institutions in Singapore or the UK, which are known for quality procedures and have a better track record of enforcement. However, these forums are expensive and not accessible to all. Micro, small and medium enterprises (MSMEs) do not have easy access to arbitration.
To overcome these barriers, first, the Union and state governments should strengthen independent domestic financial institutions with financial, case-load and branding support. Second, we need legislative reforms to narrow the grounds of appeal (e.g. public policy as grounds of appeal can be restricted or eliminated) and limit the role of the judiciary.
Third, the judiciary should adopt a more pro-arbitration stance by strengthening award finality, dedicated enforcement and penalties for frivolous appeals. Fourth, governments and PSUs should by default have domestic institutions as arbitration seats for all contracts. Such appeals should be filtered by a committee to keep out frivolous ones.
Turn commercial courts into centres of excellence: The Commercial Courts Act of 2015 marked a transformative reform. Yet, its implementation has not been effective. Many key design elements, such as structured case management, dedicated benches with expertise and threshold calibration to focus on high-value cases are either missing or inconsistently applied. Commercial courts are not seen as the final authority on complex cases, but as benches to examine all commercial cases.
Instead, they must focus on the resolution of complex high-value cases in a timely manner and with expertise. They should be thought of as centres of excellence.
Towards this, the first step would be to rationalize the monetary threshold. Current low-value thresholds result in a flood of minor cases that divert court capacity from complex, high-value commercial disputes. State governments and high courts must also invest in institutional capacity, including dedicated benches with longer tenure, trained judges, professional case managers and digital infrastructure. Further, the performance of commercial courts should be transparently benchmarked and monitored for the sake of visibility, discipline and accountability.
Rethink cross-border dispute resolution: India's current regime for resolving cross-border investment disputes is restrictive. Since 2015, India has either terminated or not renewed 68 Bilateral Investment Treaties (BITs) and we currently have less than a dozen in force. In contrast, Vietnam and China have signed over 50 BITs each over the last few decades that are still in force. Lack of BITs has substantially weakened investor protection.
As India negotiates new free trade agreements, we have a window to correct course. Key steps should include replacing inflexible exhaustion clauses with time-bound dispute resolution pathways and creating fast-track benches for enforcement of international commercial awards.
Legal certainty is as vital as tariff certainty. India's economy stands at an inflection point. To sustain its growth, we need a reliable and timely mechanism for contract enforcement.
The Indian judiciary, executive and legislature all need to come together and bring to bear the urgency and scale required for the task.
The authors are, respectively, founder CEO, and operating partner, The Convergence Foundation Topics You May Be Interested In Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.