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Contract Enforcement: An Overview of the Issues Richard Messick The Nuts & Bolts of Judicial Reform April 18, 2006.

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Presentation on theme: "Contract Enforcement: An Overview of the Issues Richard Messick The Nuts & Bolts of Judicial Reform April 18, 2006."— Presentation transcript:


2 Contract Enforcement: An Overview of the Issues Richard Messick The Nuts & Bolts of Judicial Reform April 18, 2006

3 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 --

4 Myth II: Courts Are Irrelevant How Romanian firms enforce contracts Source: Peter Murrell, Firms Facing New Institutions: Transactional Governance in Romania, Journal of Comparative Economics 31(4): (2003)

5 Contract Prerequisite: Property Rights Two essentials. Rights must be: Secure – protected from theft, fraud and other crimes and from uncompensated seizure by government; and Verifiable – ownership readily determinable through registries and legal rules

6 Contract Basics Exchange of goods or services –written document unnecessary –enforceability by court irrelevant Terms –price –quantity –quality –timing of performance

7 Contracts: Cash & Carry Characteristics –price and quantity determinate –quality observable –simultaneous performance Examples: –flea markets –kiosks/street vendors

8 Complex Contracts Staggered performance: trade credit, payment by check, deposit or guarantee, goods made to order Quality: 2 nd or 3 rd party inspection, best efforts, timely manner Price: formula (e.g. cost plus) Quantity: exclusive dealing, requirements

9 Simple Contracts 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? noyes

10 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)

11 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

12 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

13 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 –Underwriters Lab/Argentine CPA

14 ADR: Characteristics Voluntary decision to use neutral third party to resolve dispute Types: arbitration, mediation, conciliation Advantages –accuracy, speed, less contentious, less costly (?)

15 ADR: Types Free Standing: –Local Chamber of Commerce, NGO, Trade Association, World Bank Court-Connected: –B-H, Albania, Ecuador, Bolivia

16 ADR: Some Early Results Country Time (months) Total Cases Resolved/ % of total Not resolved Pending WB/Gaza12133/23%46 Albania1680/0%71 Ecuador /24%674- B-H231946/14%2730

17 ADR: Some Early Results

18 ADR: Why Results Meager

19 ADR: Government-Investor Disputes Means: Bilateral Investment Treaties, Regional Trade Agreements (NAFTA, CAFTA), ICSID, ICC Are International Arbitrators Biased Against LDCs?

20 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

21 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

22 Judicial Reform: Early Success

23 Judicial Reform: Bank Record Stand alone : –5 for 8 or.625 Africa components: –13 for 21 or.619

24 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

25 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

26 Debt Contract Reforms Days to Enforce Contract

27 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

28 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

29 Analytical and Advisory –Review advertising, trademark, and competition laws and those governing credit bureau establishment and operation –Ensure party to ICSID and regional and bilateral treaties with dispute provisions Operations –Support credit bureaus, trade groups, BBBs,and other certification agencies Translating into Operations

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