Prolonged litigation often result in a vicious cycle, by creating incentives for more wrongs and hence more cases, leading to such clogging of the judicial system that any recovery becomes virtually impossible. To understand the need for urgently repairing such systems, one only needs to compare the economic outcomes with that of stealing, and bring out that they are very similar for the society.
We all know that stealing is bad. So are, of course, other crimes and all other kind of illegal activities. In fact we are so primed to think of something as good or bad in terms of its legality or otherwise that if someone asked us as to why stealing is bad, most of us would reply by pointing out to the legal provisions that prohibit it and prescribe a legal sanction against it. However, legal sanction or punishment becomes applicable only if a thief is caught. What if the legal system is unable to catch him, or even he is caught, to prosecute him? Will it make stealing a socially amenable activity? Surprisingly, that is how a person stealing thinks.
The other explanation regarding why stealing is wrong, would be that it is immoral. This is a very good explanation, one that has always been upheld, by the society as well as by the courts.
Unfortunately, there is a small problem here too. In 21st century, no one is exactly sure as to what is moral and what is not. One of the reasons for this confusion could be that morality is a function of time and place. Slavery was not considered immoral in medieval Europe nor was child labor considered immoral in eighteenth century when textile industrial units were being set up in Manchester and Lancashire. Even a brief overview of how our preference have changed with time in respect of sex and abortion, would be enough to bring out the lack of universally acceptable standards of morality.
From the perspective of social welfare, we must understand this question by analyzing how it affects the overall welfare of the society. In fact, not only this one, but every other question on what the society should aim for must always be determined by taking into account its impact on social welfare. The modern society is primarily constituted by a political equilibrium between its members and the economic processes that determine its production and consumption. Thus, it would be appropriate to analyze the impact of a questionable activity in terms of its political and economic outcomes.
The political aspect of stealing relates to the fact that the very basis of society is a kind of social contract between all members that they would refrain from encroaching on each other’s life, liberty and possessions. This implicit understanding lies at the very basis of our society, and is essential for the sustenance of the social harmony. When a person steals, he violates this implicit social contract and weakens it as an institution. It can trigger others also to similarly violate the self refrain and if a lot of people start doing the same, we can say goodbye to the society as we know it. It will make everyone worse off, so we must avoid that situation.
The economic rationale for considering stealing as undesirable is even clearer. Stealing involves labor and time, which have a significant opportunity cost. The person who indulges in it is looking at maximizes his own individual returns, but ignores the economic consequences of his successful actions on overall economic activity. These consequences arise by reducing the incentive for production (since it is vulnerable to stealing by others) and increasing the incentive for stealing (since it is considered safe enough). When that happens, more and more members of the society will give up production and instead, resort to stealing, thereby reducing the total production of the economy. The net result would be that everyone, including the successful thieves will become worse off, and keep on becoming further worse off, until stealing is controlled by the society, voluntarily through reasoned agreements or by imposition of an effective sanction and punishment through the State.
Several countries suffer from the problem of prolonged, often unending litigation. Mostly it happens when countries have adopted sophisticated legal systems developed in other countries without really adopting them to the realities of their own society. This is often the case with erstwhile colonies, where such systems persist and continue as colonial legacies. In most such countries, laws are often too complex, with legislation and a large number of case laws existing in such a manner that it becomes a highly specialized subject, which can only be handled by a small legal fraternity.
Unfortunately, this also leads to a perverse incentive, wherein the counsels and advocates, who are agents of the litigant (principal), can have a tendency of preferring their own interests over that of their principle. The result could be a vicious cycle of prolonged litigation, where the sheer number of ongoing cases prevents quick resolution and the perverse incentives created by unresolved cases lead to addition of a lot more cases than may have been there in an efficient judicial system.
In economic terms of its economic impact, there are stark similarities between stealing and prolonged litigation.
Like stealing, a lot of factors of production like skilled labor (in the form of counsels and judges), infrastructure, time and resources of litigants, witnesses and government resourced financed by taxes collected from people, are absorbed in the litigation process. In such cases, there are several other ways as well in which the resources of the economy or the factors of production are either absorbed or prevented from getting deployed in the production process. Take for instance, the premises of the courts, its maintenance, electricity consumed, which exemplify the factors of production that are absorbed.
Equally important could be the uncertainty that arises regarding resources that are disputed. For instance, if there is prolonged litigation about ownership of land, both disputing parties will seek to prevent the other from using it, and in such cases, the Court generally grants their request, keeping all use of land in abeyance till the matter is settled. Similar is the case of under-trials who are kept under judicial custody in jail, and thereby prevented from deploying their labor and skills in any productive activities. In case of business or tax disputes, the enterprises may be forced to maintain reserves for contingent liabilities that may result from litigation, and for several years, may not be able to make appropriate use of them.
Thus, the primary economic outcome of prolonging litigation is an obstruction in the deployment of factors of production in productive activities. But that is not all. Additional negative outcomes can also result from the perverse incentives that are created by prolonged litigation. For instance, take a case where a property dispute has arisen, wherein the party that is at fault and knows that it is likely to lose the case, keeps on taking measures that will prolong the litigation and delay the eventual outcome. Given the time value of money, differing of awards in such cases would usually be good for the defaulter and bad for the aggrieved. This will create incentives for the aggrieved party to settle without prolonged litigation for a smaller compensation than it could have got if due process of law may have been followed.
Prolonged litigation, thus creates a certain kind of lawlessness and creates perverse incentives that are not very different from that created by stealing. In prolonged litigation, the defaulter can gain an advantage at the cost of the aggrieved. To understand it more clearly, if we presume that the litigation is delayed till infinity, the defaulter wins even if the case remains undecided. For the aggrieved, it would amount to a fresh injury, since in addition to the loss it had suffered in the original wrong, it has lost further resources and time, which is an additional loss over and above the original one.
One of the challenges in curbing the prolonging of litigation is the stakeholder position of the legal fraternity. Most modern legal matters are so complex that even in the case of clear open and shut cases, a party cannot proceed without the services of a legal practitioner. Most legal practitioners are wise enough to get their contract with the litigating party designed in a manner that protects their interests. In many cases, prolonging the legal case can even bring additional remuneration to them. In such a scenario, the net economic outcome of prolonging litigation is a transfer of resources from parties to their counsels.
It may sound strange and ironical, but the fact is that there exist a lot of similarities between the economic outcomes of stealing and prolonging of litigation.
In stealing the economic outcome is a transfer of resources from the owner to the thief, which amounts a loss for the owner. For the thief, however, it does not come free of cost, since he has to deploy a lot of labor and time in it. The net result is that factors of production, i.e. time and labor of thief that could have also been deployed in a productive process and resulted in adding value for society, are absorbed only in a process of transfer. In other words, factors of production of society are lost without producing anything in return.
In prolonging of litigation, there is a similar use of factors of production that are used up in the process of additional litigation (that could have been avoided) without producing any good. In addition, the delay in finalization of litigation causes a transfer of resources from the aggrieved to the defaulter in terms of time value of the delayed compensation. The net economic outcomes are rather similar to that of stealing.
In addition, prolonging of litigation also creates perverse incentives in society that are similar to that of stealing. It creates incentives for illegal activities and reduces the disincentive of legal sanction that makes people comply with law.
There seems to be a good reason why we should not be willing to tolerate prolonging of litigation, and try to prevent it with as much effort and urgency as we try to prevent stealing!
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