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Wednesday, June 29, 2022

Courts must assess which central bank policies are suitable for judicial review while insisting on RBI’s accountability

Adopting the polycentricity test within constitutional jurisprudence would help sustain the legitimacy of judicial review while retaining the accountability of technocratic institutions such as the central bank.

Written by Pratik Datta |
Updated: November 11, 2020 8:40:45 am
Monetary policy and pecuniary penalties are at two extreme ends of the polycentricity spectrum.

Judicial review of central bank actions appears to have become commonplace in India. The Supreme Court is currently considering if the RBI should extend the COVID-19 induced loan moratorium and waive the accrued interest on interest. Earlier this year, the court struck down an RBI circular imposing a ban on virtual currencies. Last year, it quashed another RBI circular that mandated banks and financial institutions to initiate insolvency proceedings against defaulting companies with significant loan exposures.

Increasing judicial scrutiny of central banks is not entirely unique to India. In May this year, the German constitutional court ruled against the European Central Bank’s public sector purchase programme on grounds that it failed to apply a proportionality analysis. While only time will tell if these instances portend a wider trend, there is an urgent need to recognise the logical limits of judicial review of central bank actions.

Legal scholars have long recognised that certain disputes are inherently unsuitable for adjudicative disposition. The most influential arguments on this subject were advanced by the American legal philosopher Lon Luvois Fuller in a paper titled “The Forms and Limits of Adjudication”.

Fuller’s central thesis was that adversarial adjudication is not suitable for resolving “polycentric” problems. He compared polycentricity with a spider’s web — a pull on one strand distributes the tension throughout the web in a complicated pattern. Applied to adjudication, polycentric problems normally involve many affected parties and a somewhat fluid state of affairs. The range of those affected by the dispute cannot easily be foreseen and their participation in the decision-making process by reasoned arguments and proofs cannot possibly be organised. As a result, the adjudicator is inadequately informed and cannot determine the complex repercussions of a proposed solution.

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Fuller argued that attempts to resolve polycentric problems through adjudication would lead to inferior outcomes. Either the solution would fail, or the adjudicator would be forced to ignore judicial proprieties to try out various solutions. Worse, the adjudicator may reformulate the problem itself to make it amenable to adjudicative disposition. Evidently, polycentricity is the underlying reason why adjudicators usually refrain from reviewing policy decisions.

Fuller did, however, recognise that all disputes submitted to adjudication have some elements of polycentricity. For instance, a judicial decision may act as an awkward precedent in some future situation not foreseen by the judge. He, therefore, concluded that ultimately it is a question of knowing when the polycentric elements have become so significant and predominant that the proper limits of adjudication have been reached.

Disputes involving certain central bank functions are highly polycentric and are unsuitable for resolution through judicial review. For example, consider monetary policy function. This involves varying short-term interest rate to control supply and demand of money in the economy, which, in turn, influences economic activity and inflation. If judicial review supplants the central bank’s decision on this rate with the decision of the adjudicator, the repercussions would affect every single borrower and saver. Yet, the adjudicator can neither offer a meaningful hearing to all those affected parties, nor can he effectively process all the necessary information to determine an optimal solution. Evidently, disputes about monetary policy rate are highly polycentric and are better resolved outside the court.

This, however, does not imply that all disputes involving central bank functions are incapable of resolution through judicial review. For example, a dispute regarding imposition of a pecuniary penalty by a central bank on its regulated bank for failure to comply with the law could be resolved through judicial review. If the adjudicator finds the central bank to be correct, it need not interfere. If the adjudicator finds the central bank to be incorrect, it could modify or overturn the central bank’s decision. Clearly, judicial review could be effectively used to resolve bipolar disputes involving the central bank if they exhibit low polycentricity.

Monetary policy and pecuniary penalties are at two extreme ends of the polycentricity spectrum. There are, however, various central bank functions of intermediate polycentricity. Consider prudential regulations such as bank capital regulation. These regulations could be at the heart of a bipolar dispute involving the central bank. If judicial review supplants provisions of such regulations with the decision of the adjudicator, it may appear to directly impact only the banks and nobody else. But in reality, it could impact bank lending, which, in turn, would have complex repercussions on the entire credit market and risk-taking abilities across the economy. An adjudicator is not equipped to determine who all would be affected due to such repercussions. Effective hearing of all affected parties, directly or indirectly, would, therefore, be impossible. Consequently, some bipolar disputes involving the central bank may be too polycentric for meaningful resolution through judicial review.

It may be useful to note here that all the above examples involve substantive judicial review — the central bank’s decision is supplanted by the adjudicator’s decision. This need not always be the case. Judicial review could be purely procedural — the adjudicator could merely review whether the central bank’s action is within its legal mandate or not. The adjudicator could at most nullify a procedurally invalid central bank action, but may never supplant the decision of the central bank with his own. Therefore, procedural judicial review of central bank actions need not be concerned with Fuller’s polycentricity.

Overall, the polycentricity test offers a conceptual framework for determining if a commercial dispute brought before the court involves a question of public policy that should ideally be kept beyond the remit of substantive judicial review. Adopting this test within constitutional jurisprudence would help sustain the legitimacy of judicial review while retaining the accountability of technocratic institutions such as the central bank.

This article first appeared in the print edition on November 11, 2020 under the title ‘Needed: A fine balance’. The writer is senior research fellow, Shardul Amarchand Mangaldas & Co. Views are personal

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