contract enforcement: an overview of the issues richard messick the nuts & bolts of judicial...
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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 --
39
30
25
20
6
0
5
10
15
20
25
30
35
40
45
Poland Slovakia Romania Ukraine Russia
Myth II: Courts Are Irrelevant
How Romanian firms enforce contracts
0
2
4
6
8
10
Futurebusiness
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
SimpleContracts
Repeat business important?
cash & carry
no
Bilateral
•Hostages
•Tying Agreements
•Franchising & Distribution
Unilateral Commitments
Multilateral
•Reputation & Sanctions
•ADR
•Courts
•Regulatory Agencies
Contract Enforcement Mechanisms
Complex Contracts
yes
Involve third party?
no yes
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)
• 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: Types
• 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
Bilateral Enforcement Mechanisms: Policy Interventions
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
888
319
13 8
214
463 0
0
100
200
300
400
500
600
700
800
900
1000
Ecuador B-H WB/Gaza Albania
Nu
mb
er o
f C
ases
Blue: Cases Referred to ADRRed: Cases Resolved
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
0100200300400500600700800
Barquesimeto CiudadBolivar
Median days to resolve case
Impact of Reform on Debt Collection Cases
Before
After
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
0
50
100
150
200
250
300
350
400
450
500
OECD EAP S A ECA SSA MENA LAC
Days to Enforce Contract
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