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