Download Judicial Reform

Contract Enforcement:
An Overview of the Issues
Richard Messick
The Nuts & Bolts of Judicial Reform
April 18, 2006
Myth I: Courts Are Everything
Everything
• 2/3rds of firms in Investment Climate surveys
have never sued to collect an overdue bill
• Percentage of Firms Using Courts in Last
Dispute -45
40
39
35
30
30
25
25
20
20
15
10
6
5
0
Poland
Slovakia
Romania
Ukraine
Russia
Myth II: Courts Are Irrelevant
How Romanian firms enforce contracts
10
8
6
4
2
0
Future
business
Courts
ADR
Source: Peter Murrell, “Firms Facing New Institutions: Transactional Governance in Romania,” Journal of
Comparative Economics 31(4): 695-714 (2003)
Complex Contracts
Staggered performance: trade credit, payment
by check, deposit or guarantee, goods made
to order
Quality: 2nd or 3rd party inspection,“best
efforts,” “timely manner”
Price: formula (e.g. cost plus)
Quantity: exclusive dealing, requirements
Contract Enforcement Mechanisms
Simple
Contracts
Complex Contracts
Involve third party?
no
yes
Repeat business
important?
Bilateral
no
cash &
carry
yes
Unilateral
Commitments
•Hostages
•Tying
Agreements
•Franchising &
Distribution
Multilateral
•Reputation &
Sanctions
•ADR
•Courts
•Regulatory
Agencies
Policy Interventions: Unilateral
• Advertising
– access to state-owned media, reasonable rules
governing deception
• Irreversible investments
– ownership/long-term leases of land and buildings
• Trademarks/Brands
– strengthen registries, deter infringement (private
as well as public enforcement)
– create links with international firms (Uganda)
Bilateral Enforcement Mechanisms: Types
• Hostages
– Advance Payment/Postdated check
– Security interest/Leasing
– Mutual exchanges
• Tying agreements
– Credit to sales
• Exclusive dealing arrangements
– Franchising/Other supplier distributor
relations
Bilateral Enforcement Mechanisms:
Policy Interventions
• Scrub competition law to remove hurdles
to self-enforcing contracts
• Establish registries for moveable
property
• Ensure land registries provide “official
looking” title documents
• Self-help? Post-dated checks, Repo men
& Debt collection agencies
Policy Issues: Reputation
• Trade Associations
– distinguish anticompetitive boycott
from sanctions for contract breach
• Credit Bureaus
– balance privacy with right to circulate
information
– free entry of international firms
• Certification/BBBs
– Underwriter’s Lab/Argentine CPA
ADR: Characteristics
• Voluntary decision to use neutral
third party to resolve dispute
• Types: arbitration, mediation,
conciliation
• Advantages
–accuracy, speed, less
contentious, less costly (?)
ADR: Types
• Free Standing:
–Local Chamber of Commerce,
NGO, Trade Association, World
Bank
• Court-Connected:
–B-H, Albania, Ecuador, Bolivia
ADR: Some Early Results
1000
900
888
Number of Cases
800
Blue: Cases Referred to ADR
Red: Cases Resolved
700
600
500
400
300
319
214
200
100
46
13
3
8
0
0
Ecuador
B-H
WB/Gaza
Albania
ADR: Why Results Meager
ADR: Government-Investor
Disputes
Means: Bilateral Investment Treaties,
Regional Trade Agreements (NAFTA,
CAFTA), ICSID, ICC
Are International Arbitrators Biased
Against LDCs?
ADR: Policy Interventions
• Law should permit parties to
choose:
– arbiter
– governing law
– form of decision
• Narrow permitted court challenges
– within 90 days of award
– only for incapacity, notice, bias, public
policy
Judicial Reform: Donor Projects
• Bank experience:
– Only in past 12 years, mix of
approaches, no standard project
design
– Early results mixed: few successes
(Venezuela, Tanzania, Slovakia),
many question marks
• Other donors’ experience
similar
Judicial Reform: Early Success
Impact of Reform on Debt Collection Cases
800
700
600
500
400
300
200
100
0
Barquesimeto
Before
After
Ciudad
Bolivar
Median days to resolve case
Judicial Reform: Bank Record
•Stand alone:
– 5 for 8 or .625
•Africa components:
– 13 for 21 or .619
Judicial Reform: Lessons
• Can be highly political
– Commercial courts
– Opposition from lawyers, judges,
clerks, litigants (debtors, tenants)
• Evidence based dialogue essential
– Develop reform
– Tame opponents
• Altering incentives key
Judicial Reform: New Directions
• Greater emphasis on quantitative
analysis -- focus on performance
measurement
• Expanding scope to
complementary institutions
–Enforcement of court judgments
–Effect of regulation on price and
quality of lawyer and notarial
services
Debt Contract Reforms
Days to Enforce Contract
500
450
400
350
300
250
200
150
100
50
0
OECD
EAP
SA
ECA
SSA
MENA
LAC
Judicial Reform: Debt Collection
• Allow specialized collection
agencies
• Verify creditors’ story (Mexico)
• Permit cognovit notes or equivalent
• Assure fast-track procedures/small
claims court function
• Revise enforcement methods
Regulatory Agencies
• Contracts between government and private
firm
• Arose from need to renegotiate concessions
for water, street car lines, and other utilities in
19th century
• Unlike other third-party mechanisms,
regulator affiliated with one of the parties
• Hence need for devices to assure impartiality