Efficient Contract Enforcement, A Critical Key to Unlocking India’s Economic Potential

Efficient Contract Enforcement, A Critical Key to Unlocking India’s Economic Potential

Introduction: Why Contract Enforcement Matters

Efficient contract enforcement is not merely a legal technicality — it is a cornerstone of economic competitiveness and investment confidence. Without a reliable system for resolving commercial disputes, both domestic and international investors face heightened risks, delayed returns, and reduced willingness to commit resources.

In the case of India, the stakes are particularly high. Conservative estimates indicate that legal uncertainty and procedural delays impose a direct cost of around 1.5–2% of GDP every year. However, the hidden, opportunity cost — largely from deferred investments — is at least three times greater. In other words, slow and unpredictable dispute resolution is not only draining economic productivity but is also deterring potential capital inflows that could fuel growth and job creation.

Lessons from Global Leaders in Contract Enforcement

Countries with robust economic performance, such as the United States, have not left contract enforcement to chance. They have developed sophisticated judicial and arbitration systems over decades.

The US, for instance, has large-scale specialized arbitration institutions. The US Supreme Court upholds arbitration strongly, supported by the Federal Arbitration Act, which ensures that enforcement of arbitral awards is efficient and predictable. Several states, such as New York and Delaware, operate dedicated commercial divisions staffed by judges with commercial law expertise. These courts are backed by effective case management systems that prevent backlogs.

For cross-border disputes, the US also has mechanisms that are recognized and enforced globally, making it an attractive jurisdiction for multinational businesses.

India has attempted similar reforms, especially between 2014 and 2018, by passing the Commercial Courts Act and amendments to the Arbitration and Conciliation Act. Institutions such as the Mumbai Centre for International Arbitration (MCIA) were established to improve efficiency. These reforms helped reduce the average time for contract enforcement from 1,445 days to 626 days in Delhi and Mumbai.

However, progress has slowed since 2019. Several initiatives, like the Mediation Act, have been implemented, but the pace of real improvement has lagged. India still faces major challenges in providing swift, affordable, and reliable mechanisms for dispute resolution — especially for smaller businesses.

The Persistent Barriers

Despite earlier reforms, India continues to face structural hurdles:

1. Endemic Court Delays – Indian courts handle vast caseloads, and procedural inefficiencies mean that even commercial disputes can drag on for years.

2. Lengthy Appeals Process – Multiple layers of appeal prolong resolution times, allowing losing parties to delay enforcement.

3. Weak Arbitration Culture – While arbitration institutions exist, they are often underutilized. Micro, small, and medium enterprises (MSMEs) rarely access arbitration due to high costs or lack of awareness.

4. Public Sector Delays – Government agencies and public sector undertakings (PSUs), among the largest litigants in India, frequently prolong disputes by appealing even weak cases.

5. Limited Access to Specialized Forums – Specialized commercial benches exist but are not universally accessible, particularly for smaller or regional disputes.

These weaknesses have allowed investors to bypass Indian forums altogether, preferring to include clauses in contracts that designate arbitration in jurisdictions like Singapore or the United Kingdom, both of which are renowned for procedural quality and predictable enforcement. However, such options are expensive and out of reach for many Indian businesses.

Proposed Steps for Overcoming the Challenges

The article’s authors propose a series of measures to modernize and strengthen India’s dispute resolution system:

1. Strengthen Institutional Capacity

Both Union and state governments should strengthen independent financial institutions for commercial dispute resolution, with access to experienced judges, professional case managers, and modern case tracking systems.

2. Narrow the Grounds of Appeal

Legislative reform should reduce the scope for appeals in commercial disputes. The grounds for appeal must be restricted to specific, well-defined criteria to prevent frivolous litigation.

3. Adopt Pro-Arbitration Policies

The judiciary should actively adopt a pro-arbitration stance, strengthening awards rather than reopening them unnecessarily. Courts should limit interference unless there is clear evidence of procedural misconduct or violation of fundamental principles.

4. Improve Government Litigation Conduct

Government departments and PSUs should follow a litigation management policy that avoids appealing cases without strong legal grounds. This would not only reduce backlogs but also set an example for private litigants.

5. Expand Commercial Courts into Centres of Excellence

The Commercial Courts Act of 2015 created a foundation for specialized courts. These should now evolve into centres of excellence, staffed by experienced judges, supported by efficient case managers, and focused on high-value disputes. Such courts should aim to dispose of cases within defined timeframes.

Rationalizing the Monetary Threshold

One pressing reform is to raise the minimum value threshold for cases entering commercial courts. At present, courts are flooded with minor cases, consuming resources that should be dedicated to complex, high-value commercial disputes. By rationalizing the threshold, courts can focus their expertise on matters that have significant economic impact.

The Cross-Border Investment Angle

India has also made commitments in bilateral investment treaties (BITs) to ensure fair treatment of foreign investors, including access to impartial dispute resolution. However, the past decade has seen setbacks.

Since 2015, India has terminated over 50 BITs after facing adverse arbitration awards in high-profile international disputes. This retreat has created uncertainty for investors, who are concerned about the enforceability of contracts and investment protections.

For a country positioning itself as a manufacturing and investment hub under initiatives like “Make in India”, the erosion of investor confidence in dispute resolution mechanisms could undermine broader economic goals.

Why Reform Is Urgent

Without efficient contract enforcement, India risks:

• Losing domestic and foreign investment opportunities.

• Prolonging business disputes, which ties up capital and resources.

• Undermining its reputation as a reliable place to do business.

• Allowing well-resourced litigants to exploit delays at the expense of smaller players.

With global supply chains reconfiguring and India seeking to attract manufacturers shifting from China, this is a pivotal moment. A reformed dispute resolution ecosystem could unlock billions in new investments, accelerate GDP growth, and enhance India’s standing in the global business community.

Long-Term Vision

The transformation of India’s commercial dispute resolution system should be built on three pillars:

1. Specialization – Dedicated commercial benches with expert judges and modern case management tools.

2. Efficiency – Streamlined procedures, reduced appeals, and strict adherence to timelines.

3. Accessibility – Affordable access to arbitration and mediation, especially for MSMEs.

Such a system would not only resolve disputes faster but also act as a deterrent against contractual violations, since parties would know that enforcement is swift and certain.

Conclusion

India’s path to sustained economic growth depends not just on attracting investment but also on retaining investor confidence. Efficient contract enforcement is a crucial part of that equation. The legal system, executive bodies, and legislative institutions must work together to create a predictable, transparent, and swift dispute resolution framework.

This is not simply a matter of legal reform — it is an economic necessity. Without it, India risks missing a historic opportunity to position itself as a global hub for trade and investment. With it, India can unlock the full potential of its economy, foster innovation, and ensure that business relationships are built on trust and enforceability.

5 Q&A for Preparation

Q1: What is the estimated direct cost to India’s GDP from legal uncertainty and procedural delays in contract enforcement?
A1: The estimated direct cost is around 1.5–2% of GDP annually, with an opportunity cost at least three times greater due to deferred investments.

Q2: Name two US states known for having specialized commercial divisions for dispute resolution.
A2: New York and Delaware have specialized commercial divisions staffed by expert judges and supported by efficient case management systems.

Q3: What key reform is proposed to reduce the backlog of minor commercial cases in India’s courts?
A3: Rationalizing the monetary threshold for cases entering commercial courts, so that only higher-value disputes are heard, allowing courts to focus resources on complex cases.

Q4: What has been India’s stance on bilateral investment treaties (BITs) since 2015?
A4: Since 2015, India has terminated more than 50 BITs after facing adverse arbitration awards, raising concerns about investor protection.

Q5: List three key pillars of a long-term vision for India’s dispute resolution system as proposed in the article.
A5:

1. Specialization – Dedicated commercial benches with expert judges.

2. Efficiency – Streamlined processes and reduced appeals.

3. Accessibility – Affordable access to arbitration and mediation, especially for MSMEs.