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Courts should revise penalty upwards, compound it

Harsh Roongta 

Our judicial system is clogged with many cases and one of the reasons for cases to drag on for long is the perverse incentive for the 'at-fault' party to delay matters as much as possible

Recently, the Supreme Court awarded compensation of Rs 6 crore in a medical negligence case. The media was full of stories that at last our judiciary is giving judgements that actually put a more realistic value on human life. One report said the actual payment would go up to Rs 11 crore after interest. This is what caught my attention.

By Indian standards, Rs 11 crore is a big amount but clearly the highest court in the land has determined that the correct compensation for the loss suffered by the claimant was Rs 6 crore. This loss was suffered in 1998 and the compensation was to be paid in 2013, a good 15 years later. Again, by Indian standards it is a reasonably quick judgement, given the tortuous and long court processes every case has to go through.

If the intention was to make good the loss, it will be clear the claimant has got only half the amount the court itself has indicated he suffered.

Here is how this works out. If the claimant had been paid the money in 1998 itself and put in the money in State Bank of India's (SBI) fixed deposit, it would have mounted to Rs 19 crore in 2013, even at the conservative interest rate that Indian banks pay. The figure of Rs 11 crore in 2013 is equivalent to a deposit of Rs 3.50 crore in 1998. Effectively, the long delay caused by court processes and the inadequate interest for that delay has cost the claimant almost 50 per cent of the rightful claim amount. The main reason for this is the fact that the court has reportedly allowed six per cent per annum simple interest. While the interest figure itself is low, the real culprit for the loss to the claimant is the fact that even this low interest rate is applied on a simple basis.

This kind of interest means more the delay, the more the 'at fault' party gains and the claimant loses even if the case is ultimately decided in his favour.

Clearly though the court found the claimant's case justified, its routine stance on interest still resulted in the claimant getting only half the amount he was found entitled to and the 'at fault' party benefited from the 'unintended' largesse.

Today, consumer courts are clogged with insurance and real estate cases. Most real estate cases before the consumer courts are decided in favour of the consumer but the builder has no problem in paying. Imagine you had booked a 1,000-sq ft flat in the Borivali area of Mumbai in 1995 for Rs 10 lakh, for which you made the full payment but the flat was never delivered. If the consumer court decides in your favour and orders refund of the entire amount along with interest at nine per cent (simple interest), you would get back only Rs 26 lakh. Whereas, if the same interest rate of nine per cent a year was compounded, you would get back Rs 47 lakh. Though the money you would get would still not be sufficient to buy the same flat, the compensation on a compounded basis is definitely higher.

In fact, if the court decided this was a blatant case of cheating by the developer and you deserved an interest rate of 15 per cent compounded annually, you would get back Rs 1.24 crore, sufficient to buy the flat even today. Given that the penalty is calculated on a simple interest basis, the party at fault gains by delaying the matter because the more the delay, the less he will have to effectively pay.

Can you imagine an insurance company that will deny a justified claim if it knew that it will have to pay interest at 15 per cent a year compounded, when the case is decided in favour of the consumer? The moment the interest rate asked to pay is higher and is compounded, you can bet such cases will be quickly settled out of court.

Our judicial system is clogged with many cases and one reason for cases to drag on for long is the perverse incentive for the 'at fault' party to delay matters as much as possible. If our judges could go through a crash course on personal finance and adopt two rates of interest - one could be the State Bank of India (SBI)'s fixed deposit rate and another commercial rate (say, SBI fixed deposit rate plus four-five per cent) and, more important, make sure the interest rate is on an annual compounding basis, we will see less blatant cases coming to court and clogging the path of the more deserving. Even an announcement that the interest rate will be awarded for even currently pending cases unless settled out of court by a fixed date, could start a trend of 'out of court' settlement in at least the more blatant cases.

While this might not necessarily result in justice delivered faster, at least justice delayed will not be justice denied.

The writer is CEO,

First Published: Sun, November 17 2013. 21:46 IST