Chapter A5
The Four-Fold Path in Indian Courts
Darwinism is a theory of biological evolution first proposed by the English naturalist Charles Darwin (1809–1882) and then developed further by a varied group of his successors. At its core is the proposition that all organisms evolve through ‘natural selection’. Every species contains within its members minute variations which either increase or impair that member’s ability to compete for survival in its environment. The more appropriate a specimen is to the environment it lives in, the more likely it is to do well in it and therefore out-complete other specimens who are less appropriate to that environment.
In the century since Darwin’s passing, Darwinism as a concept has been used to both understand and justify a variety of social and political processes. Cultural evolutionists for instances have argued that humans adapt to their environment much faster than biological evolution because we are able to pass on information about the environment and how to deal with it over generations through teaching and imitation. Indeed, they argue that through such cultural evolution, we actively create new environments!
I would argue that something similar is at work as we confront the Four Noble Truths of the Justice Machine. Let me put it this way: we know the Justice Machine has certain properties and works in a certain way. People who adapt themselves to work in harmony with these properties find that they take better legal decisions. Such people thrive. People who are ignorant about the Justice Machine, or refuse to adapt to it, march to the beat of an inappropriate drummer. Such people often run afoul of the law. If they get into any kind of trouble, the Justice Machine fails to help them. The solution is simple: to get on in the world, you must understand and accept the Four Noble Truths and adopt behaviour that would optimize your ability to resolve legal problems in your favour.
I call the rules governing this adapted behaviour the Four-Fold Path.
The Four-Fold Path
Rule 1 Adapt business method to harmonize with the Justice Machine
A story is often told of that irrepressible American soldier George S Patton giving this timeless advice to the Third Army during the Second World War in 1944, and I quote:
“No bastard ever won a war by dying for his country. He won it by making the other poor dumb bastard die for his country”.
We have already noted Noble Truth No. 1 which states that the Justice Machine punishes the victim of a legal injury. This is not deliberate. It is the inevitable consequence of the ideological foundation on which the Justice Machine is built. The question then is this: given what this animal is, what are we to do? It’s simple really. If you live and work in India, you must modify your behaviour so that you never need to approach the Justice Machine as an injured victim. It makes far more sense to go about your business using methods through which your counter party ends up injured. Let him knock on the doors of the Justice Machine and seek redress against your actions. In practice, this means that you live pre-emptively. If someone is going to hurt you, hurt him first.
This has immediate application in the world of business. We know that the Justice Machine takes forever to decide a simple case of an unpaid debt. It is true that as a creditor, you are likely to win and you may get interest on the outstanding. Still, the rate of interest is bound to be lower than the interest you pay to your banker on your business loans. It makes no sense for you to ever put yourself in a position where you would be a creditor in any commercial transaction. In India, the secret of a successful business life is the ruthless management of credit risk. You simply never allow your credit risk to exceed your available working capital. If you run out of cash to run your business, your business will fail and it was be very difficult for you to raise more capital.
This compulsion changes business behaviour? If you can at all help it, you simply never supply goods unless you are paid in advance. I am remodelling my home as I write this chapter and every supplier wants to be paid before he will deliver goods to the construction site. If you don’t have the bargaining power to demand payment in advance, you have to supply the goods or services in instalments and collect on your ‘running bills’. Although you may still take a bad debt, at least your credit risk is limited. This is not enough of course. Your buyer can always place bits and pieces of his total order on half a dozen shops and then default everywhere. You also need a hook on him. Withholding supply of critical parts is one such hook. Making part supplies of items not freely available is another. In the construction industry, if you supply ceramic tiles, you would supply part of a particular design and then hold back further supplies till you received payment for the first part of the supply. You would only supply the last of the tiles after you receive full payment.
What if you can’t supply the goods in part? You are not out of options. You can demand collateral security before you part with possession of the goods. Do please carefully mark my words. We need to remember the Buffalo School of Jurisprudence. It matters little who ‘owns’ the goods: what matters is who has possession of the goods. If you have possession, you can always fight off a claim as an unpaid seller. The law says something else but by the time your buyer gets the Justice Machine to apply the law to the case, everybody will be dead. In circumstances where you unable to hold on to possession of the goods, you would ask for counter guarantee or similar. In all cases, you have to be sure to not end up on the injured side of the equation. If you do, you can be sure that it will be a very long time before the Justice Machine will help you find your redress.
In a nutshell then, you must anticipate your business associate and break the contract on your terms before he does. Whatever happens after that, it is vital that you let him go to court and suffer the misery of cranking up the Justice Machine.
The Four-Fold Path
Rule 2: Manoeuvre to get misbalanced commitments.
By now, you would have understood that business in India is basically all about managing risk. In any deal between two parties, the guy who took the bigger risk is the one who ends up on the injured side of a transaction. Take the case of a contractor who agrees to rebuild your house. You give him a small advance and then you let his bills pile up. You keep delaying payment. In time, he is in the hole for millions of rupees. He risks losing this money if he fights with you. So, he reluctantly keeps building very slowly, haltingly, and you keep stalling payments, letting him have dribs and drabs of cash. A twelve-month project becomes a 36-month project. It is not efficient, but it is better to suffer delays than spend a lifetime in the embrace of the Justice Machine. In the end, you know that you have possession of the house. If the relationship breaks down completely, you will be able to hire a second guy to complete the unfinished rebuild of your house. The contractor knows this, so he slows down construction only to reduce his risk. You, on the other hand, are trying to make sure that he has more to lose than you.
Actually, everyone in India knows this instinctively, or soon learns it. I was 25 when I started private law practice. I needed a stenographer, a court clerk and a general dogsbody runabout man. People were not hard to find, at any rate, easier to find than clients. Those were the days before ‘India shining’ and jobs were hard to get. In no time, I found that all my staff members had severe family crises erupting all over the place. One had a dying mother, another a sick wife, another needed to finish his jhuggi but ran out of money and so forth. All of them basically wanted money. They promised to have these loans deducted from their salary. They were as good as their word. I would deduct a part of their salaries every month. They accepted this with good humour. Strangely though, when they had repaid about 75% of their salaries back, another crises would hit them full in the face and they needed more money. So, I would be back to deducting the second loan as well. It took me time to figure it out. They repaid loans to build credit histories and took loans to have job security. I mean how do you sack a guy who owes you money and you have no security? In time, their performances started to fall off but still the loans piled up and the monthly deductions became bigger. Then it dawned on me one day: I had a very small law practice but a substantial business in Islamic banking distributing interest free loans!
Let me not labour the point or write a book about something that even semi-literate country bumpkins fresh off the bus understand very well. When you are in a contractual commitment, you have to make sure that you are on the upside of a misbalanced commitment. One way or another, you secure that your counter party commits himself deeper into the relationship than you. There are countless variations to this theme. At the very simplest, you make sure that in any business deal, he has more money to lose than you if things don’t work out. If you can’t be sure that he has more money to lose than you, to need him to commit to something else he will lose which he values more than the money you will lose. You have to do this type of analysis at every stage of a contract’s performance. Buying a car is a one-shot deal but building a house is not. It takes two years. Over this two-year period, there will be times the owner has given more advances than there is construction and other times when the contractor has put in more work than there is money. Both parties must jostle for position, securing that they have less skin in the game than the other party.
This is a matter of practical management. What a contract says doesn’t matter that much. What matters is the reality on the ground. If the owner stops dragging his feet on regular payments to his contractor, it is often difficult for the contractor to actually stop work. He may have hired labour over a longer period. Maybe he has pay salaries whether or not the construction project progresses. He may have taken supplies of construction material from the market and he needs to pay for them. He may have rented machinery which he needs to pay for even if it is sitting idle.
The reverse is equally true. You may have a construction contract which has a ‘disputed payments’ clause. Assume this clause provides that if there is indeed a dispute, the work must continue and the dispute will be decided after the job is done. You can immediately see the incentive built into this contract. Your contractor has every reason to submit inflated invoices. He knows you must pay these inflated bills immediately and then try and claw the money back later. Why would he not do it? That’s at the heart of how the Justice Machine works. It encourages every party to engage in anticipatory dishonesty because that where the incentive of the system is.
It’s the same when we talk about business partnerships. There are of course many types of partnerships but this simple rule applies to all of them: joint ventures, unincorporated joint ventures a.k.a consortiums, registered partnerships, even LLPs. These entities differ greatly in the way they work but if you want to optimize your position, in every case, you have to ensure that you control the decision-makers. In a company for instance, decisions flow from the Board of Directors so that is what you need to control. Board control is a game of numbers. In practice, you must have the ability to nominate the majority of directors. Since directors can be removed, your position improves immeasurably if you control the shareholding too, even if it’s by only one share. If you control neither the Board of Directors nor the shareholding, you must make sure that you have operational control of the company. This is common experience in foreign owned companies: you may be the minority everywhere but as the local partner, you can still rule the roost simply by commanding total loyalty of the ops level troops.
Finally, in any business structure, some key functions give disproportionate ‘power’ to the man who holds that lever. From a purely ‘legal’ standpoint, two of the most key functions in a company are the Company Secretary and the Finance Manager. Why do I say this? The law has no respect for the truth, whatever that means. The law respects pieces of paper. You can call night the day so long as you can produce the paperwork. I can stand in front of the pension officer, scream my name and claim I am not dead but it means nothing. I need a piece of paper from someone very ‘respectable’ to say I am me (A gazetted officer?) and I need an expert (a doctor??) to certify that I am not dead. I can be married and live openly as man and wife with a lady but to truly ‘prove’ the marriage, I need a piece of paper manufactured by a petty bureaucrat! When you have the Company Secretary on your side, you control the company’s ‘history’ and every truth about it.
The Finance Manager is of equal importance. Businesses survive on money. The Finance Manager, the authorized signatory, the man who keeps the accounts including the cheque books and cash: these are the people who make it possible for the company to function. If you take away the money, your company will fall apart in no time. Employees will rebel and leave. Suppliers will refuse to supply raw material. Electricity and water supply will be disconnected. You know this story.
As you can see, this rule has more applications than I am capable of writing books about. In the end though, it’s very simple: when you have control of a partnership or your partner has more to lose than you, the Justice Machine will ensure that you win.
The Four-Fold Path
Rule 3: Live the ‘low trust’ life
When I transformed my career in 1992 to learn the ropes in ‘corporate law’, my first European client was a Nordic company. They wanted to bid for mobile telephony licenses in the country. Regulations at the time required foreign investors to have Indian partners. Writing joint venture agreements became quite the flavor of the month. For the most part, foreigners understood these businesses, and were putting in the money. It was easy for them to negotiate substantial management control over these companies. The problem was they didn’t understand India, or Indians. They also did not have enough ‘boots on the ground’. In practice, they depended a great deal on their Indian partners. My Nordic client didn’t mind at all. Isn’t that what local partners are for?
That is not how the Indian minority partners saw it. The Indians were coming from a License-Permit Raj. They saw themselves as renteers: quota holders with superior entitlements! They didn’t want to put money into these ventures but they wanted complete management control. I watched this process with utter fascination. They came up repeatedly with the most incredibly convoluted reasons why my clients must invest ever increasing sums into the JVs while yielding exponentially greater managerial powers to the Indians. I would reason with my client, only to find that my client would not accept my cynical interpretation of these demands. It seemed to be something congenital. If I told them someone was lying, they would ask me to prove it. Eventually, it dawned on me that Nordic people will believe almost anything you tell them because almost no one up there lies in the ordinary course. They were (and remain) a truly ‘high trust’ society in the finest sense. The problem was that they were functioning in India, which is not quite that. That generated wide errors of judgment.
What do we make of trust levels in society? High trust societies are those who’s actors follow broadly understood norms of behavior and are transparently governed by the rule of law. In such societies, members behavior is predictable and fair with the result that each member accumulates substantial social capital. A low trust society on the other hand is one where the norms of behavior are opaque, or groups refuse to agree on what constitutes acceptable behavior. It then becomes difficult for individuals to accumulate social capital. Worse, low trust societies are often riddled with nepotism and corruption. Much modern writings on this subject take their inspiration from Francis Fukuyama’s 1995 book ‘Trust: Social Virtues and Creation of Prosperity’.
The distrustfulness of low trust societies creates wide ranging consequences. These societies are often kinship based so it becomes difficult to trust institutions, and that includes the judicial system, especially the criminal administration of justice. Norms of corporate compliance and governance are difficult to enforce. Redressal mechanisms against arbitrariness in public life and dishonesty in private life are often dysfunctional.
I need not tell you which category India belongs to. This means that contractual relationships are always hostile. You do not sign a contract and naturally expect that your counterparty will perform it. You expect to be disappointed. Your contractual counter party is never a friend. You watch constantly for a backstab. You don’t focus on getting your contractual obligation done and delivered: you focus on not being betrayed. Worse of all, because you know you can be backstabbed at any time, you are always ready and willing to backstab your counterparty in anticipation. The result of all this distrust is a society where nothing is predictable. Life becomes a different kind of adventure, and a very unpleasant one. You go to work and have no idea what the day will bring. You may find that the man who is to brief you on your work for the day has decamped with your confidential data and there is no simple solution. The man who was to close a deal and bring you the good news has poached the client and taken the business elsewhere. The man who promised to deliver goods to you by the afternoon has filed a criminal complaint against you in the local police station instead. You learn to be paranoid.
To me, being distrustful is not the worst of it. The real problem is when such things happen to you, there is no simple way to fix it. If you go to the police, you find most of them exhausted with overwork with no time to help you. Others are looking for a reason to help you. The Justice Machine is overflowing with cases and judges are snowed under work. The system is slow and slothful, making justice hard to get. Think about this. If the Justice Machine worked the way it should, you wouldn’t worry about betrayals and broken contracts. You know you have a solution. All you have to do is to approach a court and viola, it’s all fixed. But in India, that option is not open to you. You are forced to modify your behavior. You do this taking into account the dysfunction in the Justice Machine. Bluntly put, Social Darwinism has arrived at your door: the environment has shaped you, exactly as the Social Darwinists say it does.
The good news is that you are doing the right thing. That is the third noble truth!
The Four-Fold Path
Rule 4: Criminalize every dispute
It begins with the Buffalo School of Jurisprudence. The Justice Machine is designed to preserve the status quo till the courts have had time to weigh all the issues and come to a decision on who is right. The Justice Machine usually takes years if not decades to decide who is right. This is alright if you are in possession of the buffalo and can drink the milk while this leisurely process plays out. But what if you are not in possession? Will you allow your neighbour to milk the buffalo and enjoy the kheer while you sit next door fuming for several decades? How are you going to break out of this logjam?
India has always had its share of informal social institutions which help resolve disputes at least partly because we have long been an under-governed country. Throughout the British period, and especially after the 1857 wars, our colonial overlords did not want to mess with our beliefs and passions. They were here to extract our resources, period. So long as they achieved their commercial objectives, they were happy to leave us alone. There were exceptions of course. Sometimes, they just couldn’t stomach some of our bizarre behaviour – the thugs and sati come immediately to mind – but 150 years after they took over, the colonists left the country largely as they had found it. Even after they left, many of our social institutions survived substantially unchanged. Haryana’s khap panchayats would be a very good example. This ended in the early 1990s. Modern mass communication triggered a paradigm shift in the power of our social institutions. Cable TV led to a ‘globalization’ of our cultural touchstone. The proliferation of mobile service accelerated that trend. Our population is more mobile today and this has loosened its social moorings too. As the situation stands today, a panchayat for instance has a weak persuasive influence, but it does not have the ‘power’ to resolve social conflict.
Normally, as societies evolve and modernize, legally prescribed institutions replace traditional ones. This is only possible when a robust legal system is able to enforce the rule of law. In this, the Justice Machine has failed us, leaving a vacuum. Over the last few decades, this vacuum has been filled by a robust alternate industry which has mushroomed across the police stations of the country. The trend has been most visible in areas where the Justice Machine is at its weakest: in militant infested areas, in Maoist areas, in areas overrun by insurgency, and so forth. This is how it works. If you don’t have twenty years to spare to collect on an unpaid debt, you pay a visit to the local cop station and have a word with the boss. A policeman has no ‘jurisdiction’ to help you collect a debt but if you can show him a way to contrive a crime, he has the jurisdiction to ‘investigate’ this crime and come up with a solution.
The difference between a good faith unpaid loan and cheating is not that great. If your debtor took a loan with intent to return it but now finds he can’t pay you back, it’s a ‘civil’ debt. On the other hand, if he took a loan with no intention of paying you back, then it’s a crime. The difference is only in the intention. How is intention to be investigated and discovered? Intention is a state of mind and our law of crimes makes no attempt to define it. The law doesn’t have a can opener to look into a man’s mind. In practice, the police can assume the best or worst of intentions and proceed as they please.
There is a further twist here. Cheating is generally a minor offense and cannot be used as a ‘dispute resolution’ crime. If you can find a way to combine the ‘facts’ of the case and manufacture a more serious offense like ‘fraud’ or ‘breach of trust’, the police have the power to arrest your debtor instantly. That threatens his personal security. He then has to go to court and apply for bail. If he fails, he cools his heals in jail. Therein lies the beauty of this dispute resolution mechanism. All you need to do is find some sort of legal basis to threaten your debtor with arrest. This usually creates enough motivation for him to settle your debt very quickly. Allow me to clarify that you don’t need to make out a case that an objective person (like a judge) would consider a crime. You need to contrive a case that ‘may’ look like a crime. Bear in mind that if something looks like a crime, the Justice Machine will take twenty years to decide if it is indeed a crime. In the meantime, the ‘accused’ will suffer an onerous process. He has to find a way to stay out of jail and if that fails, get himself bailed out of jail. He then has to go to court for every hearing, and personally attend the case. He will attend perhaps 100 hearings before the case is decided. If he misses a hearing, warrants for his arrest will issue and he will need to get bail again. When the case is eventually decided, the loser will file an appeal and the whole machine will crank up again. About the only way to deal with a case like this is to settle it as soon as possible, if you have the money.
At this point, there is an impression I need to correct. It’s not as if this dispute resolution mechanism is a scam being run mainly by crooked cops looking for an alternative sources of side income. Let me create a scenario for you and you can then tell me how often you have entertained the same thoughts. You hear about this case: the victim of a crime claims he was cheated. The cops are not doing anything about it. How often have you thought to yourself: I bet the cops have been corrupted! Why else are they doing nothing about it? What is a good cop to do? If he doesn’t investigate it, he is dubbed a crook. So, he investigates these allegations. He may or may not find anything but if he doesn’t, will you ask again: is this cop on the take? Why is he so determined to let the real crook off the hook? I could ask you why you think the ‘real crook’ is indeed crooked. You will probably tell me there is no smoke without a fire. The investigating cop understands human nature. Doesn’t it make more sense for the good cop to simply pass the buck to the next guy upstairs? If I was that cop, that’s what I would very likely do.
When faced with a contrived case, the logical thing for an honest cop to do is to frame a weak charge sheet and kick the problem upstairs to the magistrate. After the usual legal delays, the magistrate will decide if he wants this prosecution to continue or to throw it out. Bear in mind that throwing out the allegations is taking a bold decision while letting it continue is letting the law ‘take its own course’. If he doesn’t want to be accused of corruption, he will decide nothing and let the case continue. Playing it safe is frequently the same as letting the injustice continue and that is more often than not what happens in the criminal courts. The real problem is our attitude. Because we are a low trust society, Indians take a perverted attitude to all decisive action. We assume everyone who does his job has an agenda till otherwise proven. The judiciary is not free of this bias. Indeed, the judiciary has coined a phrase to personify this. They call it ‘acting with unseemly haste’, meaning if you decide something, you are up to something. So, the Justice Machine grinds on.
It’s not as if mere indecision leads to injustice. We have plenty of cases where glory hunters and celebrity bashers have filed successive cases against the same person regarding the same basic grievance in a succession of courts around the country. Back in the late 1980s, the celebrated artist M.F. Hussain produced a serious of paintings depicting a variety of Indian divinities in a state of undress. Where that leaves Konark and Khajuraho, I cannot say. In truth, I would not go so far as to call them depictions of Indian divinities. They were little more than tasteful line drawings of ladies in various stages of undress. He chose to give them names of Indian Divinities and thus began a saga that resulted in dozens of criminal cases against him for offending religious sentiment, promoting enmity between people and so forth.
By 2000, he had been hounded to a point where the Supreme Court was compelled to intervene. It consolidated these cases from Madhya Pradesh, Maharashtra and Bihar to a single court in Delhi. Subsequently, the Delhi High Court quashed these complaints but by then, other glory seeks were on it again with new criminal cases. The artist was forced to flee the country for the Middle East. As late as March 2006, a lawyer filed a case against the painter in the Hardwar district court for outraging religious sentiments, promoting enmity between different religious groups, selling obscene material and disturbing national integrity. Predictably, the Magistrate immediately issued a bailable warrant. When the artist could not be served in Dubai, the Magistrate attached his son’s flat in Bombay. This saga ended with Hussain’s death in 2011. What’s not to love about using criminal courts to settle civil disputes?
Given the ‘power’ criminal law gives to its investigators, why doesn’t everyone use this alternate route to resolve their commercial disputes? The reasons are many. Some cases are simply too complex to be capable of being reduced to simple crimes which the police can fit into their scheme of things. The logistic problem is much greater though. The police in India are thoroughly overworked. They live and work in poor conditions, suffer long hours of work on their feet, need to spend vast amounts of time in court proving the cases they cracked, have little support by way of forensics, laboratories, expert finance people, etc. If you want the police to act on your case, you have to have infinite patience and dogged determination. You need to spend a lot of time waiting, and more time supporting the ‘investigation’. You have to meet a lot of people, bring serious influence to bear on the situation, and then engage in lots of favour trading with the people who help you. The process is not transparent and costs are usually not predictable. Most people don’t have the stomach for this kind of thing.
The real problem though is that this alternative is not designed to deliver justice however you define it. It is doubtless a service, and it comes at a negotiated price, but who gets to access it depends on who gets to the service provider first and using what influence. The service is designed to deliver a result to the person seeking it, but it is will likely be an unjust result. This is the road to anarchy, not order. India of course is not on the road anymore; this alternate route to justice is common place. As a nation, we have already arrived at anarchy!
With these governing overriding thoughts in mind, let us now turn to examine the rules by which we may optimize results we may possibly achieve by using the Justice Machine.