Article by Harjot Singh on "Information Asymmetry in the Indian Legal System: An Empirical Analysis" - The Libertarian Weekly

January 01, 2017 | Harjot Singh (Student - JSLH)

The Advocates Act 1961 regulates legal services in India. The act empowers, and constitutes, the Bar Council of India, which frames rules for advocates practicing litigation. The 21st Law Commission was constituted by the Law Ministry in 2015 and former Chief Justice of Odisha was appointed the chairman. He is also serving on the Cauvery Water Dispute Tribunal.

The body’s primary function is to recommend amendments in the interest of progressive law reform. One of the key functions of the 21st Law Commission was to present recommendations on the Advocates Act 1961. The Act has not seen much change since its inception in 1961 and creates a monopoly operated by the Bar Council of India in the regulatory process. The 21st Law Commission notified various stakeholders, including civil societies, to present recommendations and papers for consideration on reforming the Act.
Centre for Civil Society, a research-based civil society think-tank in New Delhi presented a series of recommendations to the Law Commission in December 2016, based on empirical evidence collected from secondary research. The recommendations are to be published soon, along with the Law Commission’s own report on the Advocates Act 1961.
In an analysis, it was found that there is severe information asymmetry arising out of the Act’s provisions. The primary reason for this information asymmetry was due to the restrictions placed on advocates by the Bar Council of India. The restrictions are affecting the powers of litigants. In the following sections, I have discussed the key components contributing to the restrictions, and the subsequent information asymmetry.
  1. Introduction to Information Asymmetry
Information Asymmetry can be defined as the difference in levels of information between two parties engaged in a contract. In legal services, this relationship exists between the client and the lawyer. If the client does not have complete information about the lawyer, or his procedure, he is at an information disadvantage. Such a relationship is the definition of information asymmetry in a system. Alternatively, if a litigant does not share case information, or in honesty, with his lawyer, the lawyer would be at an information disadvantage. However, this is rarely the situation as case-related documents are required at the beginning of litigation.
Further, legal service is a credence good, and the utility of a credence good cannot be determined by the user even after receiving the service. Litigants are not experts in legal procedure or statutes, and therefore they cannot assess the service they are being provided. There are, of course, exceptions to this rule, and clients who use legal services regularly would be better informed, and would thus be able to assess the utility of the services.
Analysing the Advocates Act 1961, and the literature, the following factors create information asymmetry in legal services, which puts the litigant at a disadvantage.
The first, lack of information regarding the quality of service. Second, lack of information regarding the course of action taken by a lawyer in litigation. Third, lack of fee comparison mechanisms to help satisfy utility and compare different services that would suit financial constraints.
Current regulations, in the Bar Council of India rules, prohibit advocates from advertising their services, fees and experience. Thought the BCI has made certain amendments allowing firms, and individuals, to advertise using a website, posting personal information. However, rules regarding such are ambiguous, and most firms and individuals operating websites are in blatant violation of the regulation.
The aforementioned factors that contribute to information asymmetry arise due to lack of competition and go against principles of free markets, therefore affecting the quality of services and contributing to higher fees. Alternatively, such a system also contributes to unemployment and below average fee, or market failure of the service.
  1. Literature Review and Analysis
There is significant literature arguing against the system adopted in the Advocates Act 1961. Mehta (2006) argues, that advertisement does not lead to commercialisation of the legal profession and rather removes information barriers, increasing transparency. Regulation on advertisements are against competitive principles, and lead to the creation of monopolies and oligopolies, with individuals or small group of players benefiting, such as members of the Bar Councils, or lawyers with seniority and links. Such regulations have a negative effect on the aggregate quality of the service and lead to information asymmetry.
In addition, Rupa Chandra et. al (2015) says that lack of competition due to regulations on advertisements lead to higher fees and lower standards.
Further, George Akerlof (1970) argues that when clients are unable to discern a value for services they avail, information asymmetry of the highest order is created. Such information asymmetry leads to weakening of the market product and contributes to unemployment and the eventual market failure of the service product.
The European Commission presented a report on the economic impact of liberalising professional services. The report found that in countries with fewer regulations on legal services, one euro of investment generated an approximate of 1.8 euro worth of value to the gross product.
The Supreme Court protects freedom of speech, and freedom of commercial speech, yet in the matter of legal services, it has restricted itself by suggesting that commercial liberalisation of the legal profession will lead to unethical practices. Evidence from other countries supports the argument against the concerns of the Supreme Court, as legal services have been liberalised to a great extent in several European Union states, Hong Kong, Israel, Singapore, United Kingdom and the United States. All of these states have legalised advertisements in the legal profession with requisite regulations to safeguard litigants from malpractices.
III. Conclusion
Empirical evidence clearly argues for a case of liberalisation of legal services, which would include legalising multidisciplinary partnerships (not discussed in this paper). However, the Supreme Court has expressed concerns, which evidence points is unlikely to be the case. The Bar Council of India argues that liberalising legal services would lead to unethical practices. However, recent revelations under the Right to Information Act tell a different story; one of severe malpractice in the system.
Under the literature, I would conclude that the legal service industry in India should be liberalised to create more employment, transparency and reduce the severe information asymmetry caused by the general nature of credence goods.
This paper would not be possible without the support and guidance of Mr. Prashant Narang, advocate for iJustice, Centre for Civil Society.