WORKSHOPON

LEGANOMICS[LAW AND ECONOMICS]

OF BUSINESS REGULATORIES

BVIMRNEW DELHI

FACULTY- SUNIL BEDEKAR B.Sc. LL.M.[ ADVOCATE / PROFESOR ]

LEGANOMICS [LAW AND ECONOMICS]

OF BUSINESS REGULATORIES

“LEGANOMICS OF BUSINESS MANAGEMENT”

IS ONE OF THE MOST MODERN AND VITAL ASPECTS OF MANAGEMENT/LAW STUDIES AND IT HAS NOW BEEN INCLUDED IN THE SYLLABI IN THE LEADING UNIVERSITIES.

FACULTY- SUNIL BEDEKAR B.Sc. LL.M.

[ ADVOCATE / PROFESOR ]

BEING OBLIVIOUS TO THE OBVIOUS

THE SYLLABUS FOR MANAGEMENT STUDENTS INCLUDES THE SUBJECTS LIKE ECONOMICS, BUSINESS ECONOMICS, MANAGERIAL ECONOMICS AND ALSO BUSINESS LAW, CORPORATE LAW ETC. WHAT IS NOT INCLUDED SPECIFICALLY IS THE MOST OBVIOUSLY ESSENTIAL DISCUSSION ON “LAW AND ECONOMICS”.

THIS SUBJECT IS COMPARATIVELY A NEW SUBJECT IN INDIA. SO FAR THERE ARE NO ADEQUATE TEXT-BOOKS ON THIS VITAL SUBJECT BY ANY INDIAN AUTHORS.

ABOUT THIS WORKSHOP

This workshop is designed basically for familiarising you with the existence of certain latent economic issues in the study of business laws and not for researching on the elaborately intricate theories of the subject or finer aspects thereof.

This is a primer, and not a treatise.

Elementary knowledge of economics and

business laws is presumed / preferred.

ABOUT THIS WORKSHOP

IDEALLY, THIS WOULD BE A 12 HOURS WORKSHOP ON THIS SUBJECT, HOWEVER, TO START WITH, I AM OFFERING AN INRODUCTORY LECTURE (90 MINUTES), BEING ONLY THE INTRODUCTORY PART OF THE ENTIRE WORKSHOP, WHICH HAS BEEN SUCCESSFULLY LAUNCHED AS QUALITY IMPROVEMENT PROGRAMME, “QIP”, AT IIT KANPUR.

BUSINESS MANAGEMENT SYLLABUS

• ECONOMICS <

• MANAGERIAL ECONOMICS

• BUSINESS RELATED LAWS <

• CONTRACT LAWS <

• CORPORATE LAWS

• BUSINESS ENVIRONMENT

• BUSINESS ETHICS

• SOCIAL CORPORATE RESPONSIBILITY

• ETC.

LEGANOMICS IN INFANCEY

LIKE THE UNIVERSE IN ITS INFANCY, .. .. ..

“LEGANOMICS-LAW AND ECONOMICS” .. ..

HAD MUCH FORCE BUT NO FORM .. .. .. .. ..HOWEVER, THE ECONOMISTS REALISED

THAT EFFECTIVE PROPERTY AND CONTRACTSUAL RIGHTS ARE FUNDAMENTAL FOR ECONOMIC GROWTH AND DEVELOPMENT.

7

ASSIMILATION OF CONCEPTSASSIMILATION OF ECONOMIC CONCEPTS

BY LEGAL THEORIES – OPPORTUNITY COSTSRISK AVERSIONTRANSACTION COSTSFREE RIDINGASYMMETRIC INFORMATIONMARKET FAILURESETC.

8

ASSIMILATION OF CONCEPTS

INFUSION OF LEGAL CONCEPTS INTO

ECONOMICS-LITIGATION COSTSLIABILITY RULESDEFAULT RULESSTRICT LIABILITYRELIANCE DAMAGESTHIRD PART ENFORCESETC. 9

ORIENTATION

• Arguments in economic analysis of law do not per se involve morality aspects, although, the economic and moral dimensions may at times concur;

• All legal and commercial transactions have at their core two basic concepts, namely, the concept of property and the concept of contract and the related transaction costs.

BACKDROPTHE ECONOMIC CRISIS

The economic crisis that started worldwide in 2008 and has impacted the world economy ever since has posed challenging issues to researchers and practitioners:

How should the markets and financial institutions be regulated and governed?

Do financial institutions need more strict regulation?

.. economic terrorism ..

In a market-oriented economy .. the “ Rule of Law ” is unable to control .. economic terrorism of the Corporations, .

SYSTEMIC RISKSDAMAGE CONTROL EXERCISEShould regulation of financial institutions

be unified worldwide?

What framework of financial market regulation would be the most efficient in reducing systemic risks?

Does corporate governance have potential to significantly contribute to safeguarding against systemic risks?

BRAINSTORMING

• Which corporate governance standards effectively improve financial institutions in this respect?

• A search for a proper compromise between regulation and governance is one of the most important tasks for regulators and bank owners.

• All these issues, and related ones, … …

BUSINESS MANAGEMENT SYLLABUS

• ECONOMICS <

• MANAGERIAL ECONOMICS

• BUSINESS RELATED LAWS <

• CONTRACT LAWS <

• CORPORATE LAWS

• BUSINESS ENVIRONMENT

• BUSINESS ETHICS

• SOCIAL CORPORATE RESPONSIBILITY

• ETC.

LEGAL ECONOMICS

CONTRACT LAWTHEORIES OF CONTRACT

MODERN ECONOMIC ANALYSIS OF CONTRACT LAW

CONTRACT LAWS• LAW OF CONTRACT – CONTRACT ACT• SALE OF GOODS ACT• TRANSFER OF PROPERTY ACT• SPECIFIC PERFORMANCE ACT• NEGOTIABLE INSTRUMENTS ACT• INTERESTS ACT• TRANSPORT LAWS• INSURANCE LAWS• CONSUMER LAW• UNFAIR TRADE PRACTICES • ETC.

CORPORATE LAWS• PARTNERSHIP LAW• COMPANY LAW• SECURITIES LAW – SEBI• ENVIRONMENT LAW• TAXATION LAW• LABOUR LAW• UNFAIR TRADE PRACTICES • MONOPOLIES / ANTITRUST / COMPETITION

LAW• INTELLECTUAL PROPERTY LAW• [ TRADE-MARKS, PATENTS, COPYRIGHTS ]• ETC.

TRACING THE COMMONALITY

• FREEDOM OF CONTRACT

• REGULATION

• COST BENEFIT

• RISK ALLOCATION

• SOCIETAL COSTS

SUCCESSFUL BUSINESS• SUCCESSFUL BUSINESS MANAGEMENT

• SUCCESSFUL CONTRACTS

• CRITERIA OF SUCCESS ? ? ?

• MAXIMISATION OF PROFITS ?

• OPTIMAL SUCCESS ?

• RELATIONAL SUCCESS ?• ECONOMIC ISSUES VERSUS MORAL ISSUES• OVERALL SOCIETAL DEVELOPMENT-CRITERIA ?

• SUSTAINABLE DEVELOPMENT ISSUES

SUCCESSFUL CONTRACT MANAGEMENT• SUCCESS AT EVERY STAGE OF A

CONTRACT ? ? ?• NEGOTIATION• BARGAINING• FORMATION• PERFORMANCE• BREACH• REMEDY• DISPUTE• RESOLUTION• ADJUDICATION

SUCCESSFUL CONTRACTS

• BEING BETTER OFF

• BEST BARGAIN

• ECONOMIC GAINS

• MORAL ISSUES

• SOCIAL ISSUES

• POLITICAL ISSUES

• LEGAL ISSUES

RELEVANT ECONOMIC CONCEPTS• Transaction costs = fixed costs + variable

costs;

• Fixed costs = commissions + transfer fees + taxes;

• Variable costs = execution costs + opportunity costs;

• Execution costs = price impact + market timing costs;

• Opportunity costs =

desired results – actual returns – execution costs – fixed costs.

ECONOMICS AND

NORMATIVE JURISPRUDENCE

JUSTICE

DUTY

LIABILITY

LEGAL INTERVENTION

GENERAL STRUCTURELEGISLATIONENFORCEMENT AGENCIESDISPUTE RESOLUTIONCOST BENEFIT RATIOSSOCIAL COSTSOPTIMALITY

non-economic dimensions

• WELFARE ECONOMICS

• MORALITY AND LAW

• EQUITY AND LAW

RICHARD POSNER“ law can encourage economic

efficiency by assigning property rights to those parties who would have secured them through market exchange if transaction costs were lower[ – that is to say – ] law should bring about allocations that mimic the results of a properly functioning market..”

.. let us understand ..

two views of a traffic ticket

>transfer of money from drivers to government

>incentive to people

not to drive too fast

how about this ?• marginal deterrence :

raise the penalty for armed robbery to highest

• legal philosopher – is it just ?

• economist – safety of witnesses

and this ?

plea bargaining:

criminal prefers to accept ..

rather than face punishment lottery

reduces average punishment but ..

prosecutors is then allowed to concentrate on more serious offences

how about this ?freedom of contract :fixing one term of contract :

e.g. requiring the landlord to give six months`

notice to the tenant before filing eviction

proceedings against the tenant in court

and thereby invite the higher rate of rentals.

.. let the courts enforce the contract as written, rather than deciding what terms the parties ought to have agreed to ..

..another example .. property law ..What is special about property ?good against the world .. unlike contract ..WHY ? .. Why plant if I can not harvest ?COMMON THINGS .. NOBODY OWNS AND

ANY BODY MAY USE .. air .. water .. .. ocean .. fish .. English language .. .. ..

.. inventions .. intellectual property .. .. .. ..WHY EVERYTHING ISN`T PROPERTY ?

COSTS ..

.. new issues ..

.. Will private ownership of electromagnetic spectrum encourage its effective use ?

economics and law.. interplay ..

LAW AND ECONOMICSBACKGROUND :As early as in18th century, Adam Smith discussed the economic effect on mercantilist legislation. Economic analyses of `non-mercantilist law` is relatively new. [ 1961 ] STARTING POINT :Two independent publications came :[ 1 ] THE PROBLEM OF SOCIAL COST – BY RONALD COASE AND[ 2 ] SOME THOUGHTS ON RISK DISTRIBUTION AND THE LAW OF TORTS – BY GUIDO CALABRESI[ 1970 ] : HENRY MANNE [ FORMER STUDENT OF COASE ] FOUNDED CENTER FOR LAW AND ECONOMICS

The Wealth of Nations (1789 )• “Whoever offers to another a bargain of any

kind proposes to do this; Give me that which I want, and you will have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” – Adam Smith

COASE THEOREM -1960

Contracts will be drawn up

with terms that maximize

the net gain to the parties

… Ronald Coase

LAW AS AUTONOMOUS PRACTICE

“ .. Law is investigated as an autonomous discipline within its own unique aims and characteristics .. may be a distinct manner of reasoning or a different source of authority …………………………………..”

Instead .. law and economic theorists seek to investigate whether .. Legal practice is best described by its purported function as a social tool aiming at promotion of economic efficiency – something it has in common with other social practices ..

SUB-FIELDS POSITIVE : PREDICTING .. THE EFFECTS OF VARIOUS LEGAL RULES – ALSO EXPLAINS DEVELOPMENT OF LEGAL RULES;

[ COMMON LAW OF TORTS IN TERMS OF ECONOMIC EFFICIENCY ]==========================================================

NORMATIVE : GOES ONE STEP FURTHER MAKES POLICY RECOMMENDATIONS .. ON THE BASIS OF .. .. CONSEQUENCES OF POLICIES; KEY CONCEPT : ALLOCATIVE EFFICIENCY

COASE THEOREM -1960

Contracts will be drawn up

with terms that maximize

the net gain to the parties

… Ronald Coase

BASIC ECONOMIC ASSUMPTIONS

HUMAN BEINGS ARE RATIONAL MAXIMISERS OF THEIR SATISFACTIONS

THEY RESPOND TO INCENTIVESTHEY ADJUST THE MEANS TO ENDS IN

THE MOST EFFICIENT WAY POSSIBLETHE SATISFACTION COULD BE MONETARY

AS WELL AS NON-MONETARY

using economics to choose legal rules

Criticism :

economics and law .. ..

make unrealistic simplifying assumptions about human nature

=================================

Correction of externalities

Correction of market failures

ECONOMIC ASSUPTIONS ……

EVERY POTENTIAL SATISFACTION CAN BE INVESTIGATED ACCORDING TO ECONOMIC OR MEANS-END RATIONALITY AND THE TRADE-OFF OF COSTS AND BENEFITS

[since every potential satisfaction is implicated in .. .. .. .. .. .. .. .. .. .. .. .. ..

the calculus of economic satisfaction]

IMPROVEMENT OF EFFICIENCY

A MORE EFFICIENT ALLOCATION IS ONE THAT INCREASES THE VALUE OF RESOURCES

EFFICIENCY IN THE ALLOCATION OF RESOURCES IS DISTINGUISHED FROM EQUITY, WHICH IS CONCERNED WITH JUSTICE IN DISTRIBUTION OF WEALTH

..economic efficiency >>> law ..

BECAUSE SOME PEOPLE VALUE SPECIFIC GOODS HIGHER OR LOWER THAN OTHERS,.. .. .. .. .. .. .. ECONOMIC EFFICIENCY CAN OFTEN BE RAISED THROUGH .. .. .. VOLUNTARY TRANSFER OF GOODS.

EFFICIENCY PROMOTING TRANSFERCONTRACT

CONTRACTONE PARTY VALUES MONEY MORE

THAN THE ITEM OWNED .. AND THE OTHER VALUES THE ITEM MORE THAN THE ASKING PRICE ..THE EXCHANGE PRODUCES A NET GAIN IN ECONOMIC GOODS ..EACH PERSON ENDS UP BETTER OFF THAN BEFORE ..

SUCH A CONTRACTUAL EXCHANGE .. IS OFTEN MORALLY OPTIMAL …………

COASE THEOREM -1960

Contracts will be drawn up

with terms that maximize

the net gain to the parties

… Ronald Coase

GAMES THEORYSTRATEGIC ACTION

- AN INTENDING PURCHASE SHOWING DELIBERATE DISINTEREST ……………

- LEGAL ACTIONS ARE OFTEN …………. DEEPLY IMPLICATED IN AND ANIMATED BY STRATEGIC MOTIVES

KALDOR-HICKS EFFICIENCY

OVERALL ECONOMIC GAINS .. OUTWEIGH THE LOSSES ………………

IN OTHER WORDS – THE GAINS IN ECONOMIC EFFICIENCY

ARE SO LARGE ENOUGH THAT …….. THE WINNERS COULD, ………………… IF THEY HAD TO, …………….. COMPENSATE THE LOSERS ………… IN THE NEW ALLOCATION OF GOODS .. AND STILL REMAIN BETTER OFF ..

ENSURING ECONOMIC EFFICIENCY

AVOID SITUATIONS THAT LEAD TO MARKET FAILIRE

[ for example- existence of monopolies ]EMPLOY SUBTLER LEGAL MEANS FOR

REMEDYING .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. LESS OBVIOUS MARKET-FAILURES

ENFORCE VALID CONTRACTSINTERNALIZE THE EXTERNALITIES ? ? ?

EXTERNALITIES

EXTERNALITY IS A COST NOT REFLECTED IN THE MARKET PRICE OF GOODS………......... [ for example, environmental costs are imposed by auto-manufacturers on the purchasers / parties in an involuntary manner ]

TO INTERNALIZE THE EXTERNALITIES ……

LEGAL MEANS SHOULD BE USED …………

TO IMPOSE A MARGINAL TAX …………...

UPON THE OFFENDING PARTY …………...

.. Coase theorem ..

efficiency hypothesis : under perfect competition private and

social costs will be equal ..

invariance hypothesis : the final allocation of resources ..

will be invariant .. ..

under alternative assignments of rights ..

EFFICIENCY CONCEPTS

PARETO EFFICIENCY :

A LEGAL RULE IS PARETO EFFICIENT, IF IT COULD NOT BE CHANGED ..

SO AS TO MAKE .. ..

ONE PERSON BETTER OFF .. .. .. WITHOUT MAKING .. .. .. ..

ANOTHER PERSON WORSE OFF ……...

>>> KALDOR-HICKS EFFICIENCY

EFFICIENCY CONCEPTSKALDOR-HICKS EFFICIENCY :

A LEGAL RULE IS KALDOR-HICKS EFFICIENT IF IT COULD BE MADE PARETO EFFICIENT BY ONE PARTY COMPENSATING OTHERS AS TO

OFFSET THEIR LOSS

=================================

2007 : WARRANT SAMUEL :

THE LEGAL-ECONOMIC NEXUS

=================================

KALDOR-HICKS EFFICIENCY

OVERALL ECONOMIC GAINS .. OUTWEIGH THE LOSSES ………………

IN OTHER WORDS – THE GAINS IN ECONOMIC EFFICIENCY

ARE SO LARGE ENOUGH THAT …….. THE WINNERS COULD, ………………… IF THEY HAD TO, …………….. COMPENSATE THE LOSERS ………… IN THE NEW ALLOCATION OF GOODS .. AND STILL REMAIN BETTER OFF ..

.. a criticism economics and law make unrealistic ..

and .. ..oversimplified assumptions.. ..

about human nature .. .. ..

CORRECTION OF EXTERNALITIES

CORRECTION .. OF .. ..

MARKET FAILURES .. .. ..

BEHAVIOURIAL ECONOMICS AND LAW

HUMAN LIMITS QUA MEANS-END RATIONALITY BOUNDED RATIONALITY ………………………

DISTORTED DUE TO …………………

LIMITS OF ONE`S COGNITIVE FACULTIES DISTORTION OF RATIONALITY BY …………

“ AVAILABILITY HEURISTIC ” IRRATIONAL COGNITIVE OVERVALUATION OF

OBJECTS [ BY COURTS – JUDGES ]

law creeps into economics

economists realize :

That effective property and contract rights are fundamental to economic growth and development ..

This realization has opened economics to an infusion of legal concepts ,.. .. .. .. .. .. .. .. .. .. .. such as ..

Liability costs, property rules, liability rules, default rules, strict liability, priority in bankruptcy, non-monetary sanctions etc.

economic concepts creep into lawincentive effectsopportunity costsrisk aversiontransaction costsfree ridingmarket failurecost benefit analysisopen-access sourcerent seeking etc. etc.

contracting-motives• Three broad motives are generally associated

with contracting, apart from this basic commitment-enhancing function, namely, risk transfer, incentive alignment, and transaction cost economizing.

• While the essence of contracting is .. .. .. .. .. .. commitment, .. the design and interpretation of contractual agreements will depend on which of these three motives dominates.

• (In pure insurance or risk-transfer transactions, the objective is to shift risk to the less risk-averse transactor or ‘low-cost risk bearer)

Contract Law • The law governing exchange is crucial for

a market economy. Most of the doctrines of contract law seem consistent with economic efficiency.

• Law and economics study of contract law has shown that, in general, it is efficient for parties to be allowed to write their own contracts, and under normal circumstances, for courts to enforce .. .. the agreed-on terms, .. .. Including .. .. .. the agreed-on price.

Why Contract? • The essence of any contract is mutual

exchange of promises; and every promise contemplates a sense of commitment. It is elementary that the transacting parties will be justifiably reluctant to make investments, forego opportunities, or take other actions necessary to realize the full value of exchange unless there is some form of assurance that the other promisor will, when the time comes, uphold his end of a bargain.

sanctions-legal and non-legal• Often, reputation considerations – the prospect

that trading partners will withhold future cooperation – may provide the required assurance, especially in long-term relational business transactions.

• But where the impact of such non-legal sanctions is insufficient to effectively curb opportunism, legal contracting offers an additional recourse, since .. .. .. by contracting, the transactors expose themselves to legal sanctions for failing to honour their respective promised commitments.

ENFORCING EFFICIENT CONTRACTS

The courts will generally not enforce contracts if performance would be inefficient, but, rather, will allow payment of damages.

If, for example, I agree to build something for you in return for Rs.500,000, but meanwhile costs increase so that the thing would cost me Rs.650,000 to build; it is now inefficient for me to build it.

Courts, recognizing this, allow compensation

with a monetary payment instead.

This is efficient.

CONTRACT : BARGAIN THEORY

ISOLATION AND ABSTRACTION

OF

MINIMAL ELEMENTS OF A TYPICAL CONTRACT

.. late 19th and early 20th centuries ..anglo-american courts

.. enforcement of promises ..

what promises should be enforceable at law

? ? ? ? ?

.. bargain principle ..

.. A promise is legally enforceable if it is given as a part of a bargain ..

.. Otherwise a promise is unenforceable ..

CLASSIFICATION OF PROMISESBARGAINS

NON-BARGAINS

RECIPROCAL INDUCEMENTSREGARDLESS OF FORM

BARGAIN AND ECONOMIC EQUILIBRIUM

When two persons enter a contract, both seek favorable terms.

Assuming that both of them have the same information about the contract-goods, and also know each other’s valuations, then they would enter into a contract if an exchange would make both parties better off.

For them, the terms of the contract will create the greatest pie, and both of them will divide that pie according to their relative bargaining power.

OPTIMAL BARGAIN• For example, if Seller values a gadget at 1000

Rupees, and Buyer it at 20000 Rupees, they will make a deal. The surplus is 1000 Rupees, and they will split it by choosing a price between 1000 Rupees and 20000 Rupees.

• If Buyer will also pay 200 Rupees for a warranty, and the warranty will cost Seller 100 Rupees, then the contract will include a warranty, and a price adjustment between 100 Rupees 200 Rupees for the warranty..

.. bargain principle .... A promise is legally enforceable if it is

given as a part of a bargain ..

.. Otherwise a promise is unenforceable ..

CLASSIFICATION OF PROMISESBARGAINS

NON-BARGAINS

RECIPROCAL INDUCEMENTSREGARDLESS OF FORM

.. Elements of Contract ..

Offer

Acceptance

Consideration

..consideration ..

.. makes the promise enforceable..

regardless of equivalence

ROMAN LAW

.. NO CONSIDERATION ..

.. NO CONTRACT ..

.. the key question .... whether bargain occurred ..

.. that`s all ..

.. regardless of whether it is fair ..

……………………………..courts should enforce bargain ..

.. not supervise them ..

.. fair value ..

INQUIRYINFORMATIONBURDEN ON COURTSINHIBITS COMMERCE

one sided contract – bargain..UNCONSCIINABILITY ..

BOWL OF SOUPE

AND

FORTUNE INHERITANCE

WILL THEORYINTENTION OF THE PARTIES

TO BE BOUND

CO-OPERATION AND COMMITMENTS

INSTANT / SIMULTANEOUS EXCHANGEDEFERRED EXCHANGE

passage of time between ..the exchange of promises and their performance creates uncertainties and risks ..( which )present obstacles to exchange and co-operation .. ..-enforceability of promises encourages .. exchange and co-operation .. .. .. .. .. .. .. .. .. .. ..

PERFORMANCE

perfect expectation damagesoptimal performance

RELIANCE

OPTIMAL RELIANCE

LEGAL INCENTIVE FOR RELIANCE

REMEDIES

WHAT SHOULD BE THE REMEDIES FOR BREACH OF ENFORCEABLE CONTRACTS ..

PROMISEE IS ENTITLED TO ..

“ BENEFITS OF THE BARGAIN ”

.. DAMAGE MEASURE ..

EXPECTATION DAMAGES .. .. ..

HOW WELL OFF ..

WOULD THE PROMISEE HAD BEEN

.. ..

IF THE PROMISE HAD BEEN KEPT ..

END OF PART-1

PERFECT CONTRACTSAND

MARKET FAILURE

INDIVIDUAL RATIONALISM

TRANSACTION COSTS

RATIONAL CONTRACTS

LEGAL INCOMPETENCE

RATIONAL DECISION MAKER CAN RANK OUTCOMES AS –

LEAST PREFERRED ..

TO

MOST PREFERRED .. ..

COMPETENCE

.. THUMB RULE ..

.. COMPETENT PROMISOR ..

MUST SERVE THE INTERESTS OF

AN INCOMPETENT PROMISEE

? ? ? ? ?

.. TRANSACTIONAL INCAPACITY ..

SELLER > HIGH PRESSURE TACTICS

CONFUSING THE CUSTOMER .. .. INTO .. SIGNING…………................. AN UNFAVOURABLE CONTRACT

.. INCAPACITY TO MAKE

.. THIS TRANSACTION ..

UNDER THESE CIRCUMSTANCES

ADHESIAN CONTRACTSSTANDARD TERMS CONTRACTSPRINTED FORMAT CONTRACTS‘TAKE IT OR LEAVE IT’ BASIS CONTRACTSDISPARITY IN BARGAINING POWERSUNCONSCIENABLE CONTRAC TERMSUNFAIR CONTRACT TERMSGOVERNMENT CONTRACTS‘FREEDOM’ OF CONTRACTINGISSUE OF ‘FREE’ CONSENT

ECONOMIC THEORY OF CONTRACT LAW

REMEDIES

AND

INCENTIVES

BEING BETTER OFF

ADEQUATECONSIDERATION

ISSUES IN IPR / COMPETITION LAWS :INCENTIVE QUESTIONAMOUNT OF INNOVATIONSTANDARD APPLIED TO DETERMINE

WHICH INVENTION QUALIFIES FOR THE MONOPOLY

EFFICIENT ALLOCATION OF ..

SCARCE RESOURCES.. .. FOR .. .. .. THOSE PRODUCTS AND SERVICES .. .. WHICH CONSUMERS VALUE

CONSUMER ORIENTED RWARD SYSTEM

MARKET MOTIVATION THEORY

..a trade off..

..between..

..a short-term monopoly ..

..and..

..the possible advantage of .. .. ..having new or better products .. ..which are

not otherwise available..

CASE STUDYINDIAN MATTERS

Telco India V/S RRTA :

1977 Supreme Court

Bennet & Colman matter :

1988 Supreme Court

Mahindra & Mahindra matter :

1979 Supreme Court

DISCUSSION

ECONOMIC INTERPLAY

BETWEEN

IPR-LAW

AND

COMPETITION-LAW

Purpose of Competition Law

promote and maintain competition by ensuring that markets function fairly and efficiently.

prohibit business practices that would prevent free and fair competition from taking place

educate and inform business persons of their rights and responsibilities under the Act

Competitive markets are essential to economic

growth and improvement in consumer welfare

Objective No. 3 of Fair Competition Act

• to ensure that all enterprises, irrespective of size, have the

opportunity to participate equitably in the market place

freedom to operate without interference

equal access to raw materials, finance, customers, equipment, and support schemes

equal access to regulatory redress.

Responsibility of Small Business

Anti-competitive conduct acts to frustrate the potential benefits that should be generated in a free and competitive market

Only where such activity is eliminated, can the small business sector really maximize the potential opportunities that are available in the market place.

Onus is on small businesses to be aware, to be vigilant and to act when you observe these signals.

Anti-competitive Conduct

Anti-Competitive Agreements • Any arrangement or understanding whether oral or in

writing likely to prevent, restrict or distort competition Abuse of Dominance

• An enterprise holding a dominant position that engages in conduct which impedes the maintenance or development of effective competition in a market.

Anti-competitive Mergers• when two or more businesses cease to be distinct

entities and are likely to control 40% or more of any market, the merger will not be permitted if it is likely to affect competition adversely or be detrimental to consumers or the economy;

How small businesses have become victims

forced to purchase their raw material and other inputs at excessive prices

excluded from certain discounts because they were not affiliated to the supplier, or part of a ‘grand-father’ agreement.

forced to share detailed confidential cost information

forced to do business only with particular supplier or not get supplies.

large businesses direct new business to the larger more established businesses

Why Small Businesses must be Aware

Often are victims of unfair business practices forced to absorb higher than economic operational

cost Can be perpetrators of unfair activity.

remove the very competition that leads to increased innovation and productivity

Unlikely to maximise potential in market-place.

Need to be familiar with the concepts of competition law and the benefits of maintaining fair and

competitive markets.

How small businesses are perpetrators

small businesses have acted in breach of the law, not always knowingly but Ignorance of the law is no excuse.

group of small businesses in the distribution sector agreed to pass on the increase in price, plus a little extra to earn greater profit.

agreed with supplier how they would set prices so as not to compete

professional associations agreed and developed mandatory lists of the prices

Tips for recognising Unfair Conduct

Collusion The prices of similar products of different suppliers are always

identical, especially when they were different previously. statements indicating an understanding on prices

Bid rigging Same company always wins bids Rules and conditions that exclude many potential bidders Successful bidders repeatedly subcontract unsuccessful

bidders Abuse of Dominance

The price of a good bears little relation to its cost of production Requirements stipulating with which businesses you must deal Competitors being charged different prices for same good

THE THOUGHT PROCESS .. ASSERTING ECONOMIC PERSPECTIVESACKNOWLEDGING , THAT ANALYSIS AND

EVALUATION OF IP-LAW BE WITHIN ..

AN ECONOMIC FRAMEWORK, THEREBY .. SEEKING TO ALIGN THE LAW WITH .. .. .. ..

THE DICTATES OF ECONOMICS .. ..

ECONOMIC EFFICIENCY OF ..

THE LEGAL DOCTRINES AND PRINCIPLES

SWAN COMMITTEE U.K. 1949

4 STAGES IN THE PATENTSYSTEM :ENCOURAGEMENT OF RESEARCH AND

INNOVATIONINDUCEMENT FOR DISCLOSURE OFFER A REWARD FOR EXPENSES FOR

DEVELOPING THE INVENTIONTO THE STAGE OF BEING COMMERCIALLY PRACTICABLE

INDUCEMENT FOR INVESTMENT OF CAPITAL IN NEW LINE OF PRODUCTION

thought process .. scepticism .. about social values of IP rights

labour creates an entitlement to fruitscumulative process of innovationextent of validity of claims to

exclusivitycost benefit trade off

ISSUES IN IPR / COMPETITION LAWS :

INCENTIVE QUESTIONAMOUNT OF INNOVATIONSTANDARD APPLIED TO DETERMINE

WHICH INVENTION QUALIFIES FOR THE MONOPOLY

EFFICIENT ALLOCATION OF ..

SCARCE RESOURCES.. .. FOR .. .. .. THOSE PRODUCTS AND SERVICES .. .. WHICH CONSUMERS VALUE

a thought process..does the award of a patent amount to

misdirection of resources ?actually patent system under-rewards ..

the initial researcher .. when the patent-award goes to claimant

who only puts on “ the finishing touch ” .. The one who drove the last and easiest mile in the long race to marketability

a trade off between a short-term monopoly and the possible advantage of having new or better products not otherwise available

CONSUMER ORIENTED RWARD SYSTEM

MARKET MOTIVATION THEORY

a trade off between..

a short-term monopoly ..

and the possible advantage of .. ..

having new or better products .. ..

not otherwise available

LEBMLEGAL ECONOMICS IN BUSINESS MANAGEMENT

MONOPOLIES ANTITRUST

COMPETITION LAW

ANTICOMPETITIVE AGREEMENTS

efficiency benefits andanticompetitive agreements

ANTICOMPETITIVE AGREEMENTS ……… ARE ILLEGAL UNLESS THEY HAVE EFFICIENCY BENEFITS WHICH ARE PASSED ON TO CONSUMERS; AND WHICH ( BENEFITS ) COULD NOT HAVE BEEN ACHIEVED … … … … … … … … IN A LESS RESTRICTIVE WAY… … … ...

105

Competition law

• Concerned with promoting business activity

• Requires the application of economic theory

• Prohibits business conduct which harms competitive markets

106

Objectives of competition law• Protects the competitive process

• Economic efficiency

• Prevents the harmful effects of monopoly

• Secures consumer benefits such as lower prices, wider choice and more innovation

107

market power and competition law

• Important concept in competition law

• Often defined as the ability to restrict output and raise price

• Is more likely to exist where there are small number of suppliers or one dominant supplier

108

Market Power and IPR• Simple existence of an IPR does not mean

that the holder automatically acquires a monopoly for the purpose of competition law.

• The European Court of Justice said in Magill TV Guide/ITP (1989) 91/89R that:

“So far as dominant position is concerned, it is to be remembered at the outset that mere ownership of an intellectual property right cannot confer such a position.”

109

Hong Kong competition law

• Applies only to telecommunications and broadcasting sectors

• Introduced in telecommunications in June 2000

• Mergers and acquisitions added but not yet in force

110

Competition Law in the Telecommunications Market

Section 7K(1) – Anti-Competitive Practice

“A licensee shall not engage in conduct which, in the opinion of the Authority, has the purpose or effect of preventing or substantially restricting competition in the telecommunications market.”

111

Competition Law in the Telecommunications Market

Section 7K(2) – Factors to Determine Anti-Competitive Practice

• agreements to fix the price in a telecommunications market;

• an action preventing or restricting the supply of goods or services to competitors;

• agreements between licensees to share any telecommunications market between them on agreed geographic or customer lines;

• the conditions of relevant licences.

112

Competition Law in the Telecommunications Market

Section 7L(1) – Abuse of Dominant Position

“A licensee in a dominant position in a telecommunications market shall not abuse its position”

PUBLIC CHOICE THEORY

HOW THE NATURE OF THE LEGISLATIVE PROCESSSES AND COLLECTIVE DECISION-PROCESSES INFLUENCE THE NATURE OF LAW ……………………

INTENT OF THE LEGISLATURE :AGENDA SETTOR`S INFLUENCEGENUINE COLLECTIVE LEGISLATIONDISCUSS – IT LAW OF INDIA

PATENTS LAW OF INDIA

MISC. TOPICS

FOR

INTERACTIVE SESSION

DEALING WITH CARTELS• Cartels with multi-continental effects are the most harmful type.

Despite the evident increases in cartel detection rates and the size of monetary fines and penalties in the past decade, a good case can be made that current global anti-cartel regimes are under-deterring.

• While the recent worldwide trend towards the intensification of cartel penalties has been desirable, global cartels are more difficult to detect, have less fear from entry of rivals, achieve higher levels of sales and profitability, and systematically receive weaker corporate sanctions than comparable domestic cartels. Global antitrust sanctions should be higher for global cartels than for other types.

• If procedures for calculating criminal fines correspond more closely to the actual levels of cartel overcharges, monetary sanctions against price fixing will more closely provide optimal deterrence.

ECONOMICS OF CASINOS

CAUTION

SO CALLED RESEARCH IN SUCH CASES IS OFEN CONDUCTED BY ORGANIZATIONS WITH A VESTED INTEREST IN THE OUTCOME OF THE RESEARCH, OR WITH INDUSTRY TIES, OR BY STATE AGENCIES;

STATISTICAL DATA NEDD NOT BE TREATED AS CONCLUSIVE;

GENERAL CONCLUSIONS MAY BE DRAWN

COMMODIFYING LIABILITY

EFFECT OF LIABILITY ON INCENTIVES FOR RISK BEAING OR REDUCING RISKS

CONTROLLING HARMFUL ACTIVITIESCORRECTIVE TAXATION / REGULATIONINSURANCECONTINGENT CLAIMSSTOCK OPTION –COMMODITY FUTURES

LAW PROHIBITS MARKETS FOR LIABILITY RIGHTS

ECONOMIC CONSEQUENCES OF A WEAK JUDICIARY

NEGATIVE EFFECT ON ECONOMIC AND SOCIAL DEVELOPMENT

LOWER PER CAPITA INCOMEHIGHER POVERTY RATESLOWER PRIVATE ECONOMIC ACTIVITYPOORER PUBLIC INFRASTRUCTUREHIGHER CRIME RATES ( LOW CONVICTION RATES )MORE INDUSTRIAL RIOTS

GENERAL CONCLUSIONCOSTS : BENEFITS RATIO

COSTS ARE 1.9 TIMES GREATER

THAN THE BENEFITS

TOBACCO TRADE LIQUOR TRADE SEX TRADE HOSPITALITY TRADE TOURISM TRADE

IMPORTANT - COSTS ARE MORE SUBTLE AND LESS TANGIBLE THAN THE BENEFITS

COSTS AND BENEFITS OF

CASINO GAMBLING

ESTIMATES OF BOTH THE POSITIVE AND NEGATIVE EXTERNALITIES GENERATED BY CASINOS

BENEFITS INCREASE IN REVENUES JOB CREATION TAX COLLECTION GAIN IN UTILITY –

MODERATE ENTERTAINMENT INVESTMENT STIMULATION TOURISM DEVELOPMENT ECONOMIC DEVELOPMENT URBAN OR WATERFRONT REVITALIZATION IMPROVEMENT OF THE ECONOMIC STATUS OF

THE DESERVING UNDERPRIVILEGED “GROUPS”

COSTS

MORAL DISAPPROVALS FEARS OF ADVERSE SOCIAL IMPACTS CRIMES BUSINESS EMPLOYMENT COSTS BANKRUPTCY ( 20 % ) SUICIDES ILLNESS SOCIAL SERVICE COSTS REGULATORY COSTS ABUSED ( BORROWED ) MONIES

CORPORATE GOVERNANCE

ECONOMIC INTERESTS OF –SHAREHOLDERSCREDITORSBANKSEMPLOYEESMANAGERSDIRECTORSSTATEOTHER STAKE-HOLDERS ? ? ?

END THANK YOU ALL

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