Contract enforcement and dispute resolution

 

Rationale | Key considerations | Assessment | Resources | Next

 

1.4 Is the system of contract enforcement effective and widely accessible to all investors? What alternative systems of dispute settlement has the government established to ensure the widest possible scope of protection at a reasonable cost?


Rationale

The ability to make and enforce contracts and resolve disputes is fundamental if markets are to function properly. Good enforcement procedures enhance predictability in commercial relationships and reduce uncertainty by assuring investors that their contractual rights will be upheld promptly by local courts. When procedures for enforcing commercial transactions are bureaucratic and cumbersome or when contractual disputes cannot be resolved in a timely and cost effective manner, economies rely on less efficient commercial practices. Traders depend more heavily on personal and family contacts; banks reduce the amount of lending because they cannot be assured of the ability to collect on debts or obtain control of property pledged as collateral to secure loans; and transactions tend to be conducted on a cash-only basis. This limits the funding available for business expansion and slows down trade, investment, economic growth and development. Question 1.5 is related to this question. It deals with cross-border investments and concerns contract enforcement through international channels in the event of expropriation of assets.

 

Key considerations

Contract law includes the rules set and administered by the state that determine when an agreement is enforceable, the grounds on which a breach of the agreement will be found and the consequences. Contract enforcement is one of the pillars of the rule of law.

  • Effective contract enforcement
    When two parties strike a bargain, there must be some mechanism to ensure that each party will stick to the terms. The main contract enforcement mechanisms are self-enforcement (e.g. posting bonds, ending a commercial relationship), reputation (e.g. risking a future commercial relationship), organisational (e.g. third party audits), technology (e.g. to monitor sales) and of course contract law. The PFI user needs to examine these mechanisms. From an economy-wide perspective, the issue is not whether a contract can be enforced but rather the cost of the various enforcement mechanisms and their efficacy in improving confidence between contracting parties. To be effective, the costs of enforcement must not outweigh the gains achieved from increased contractual commitment.
     
  • Institutional requirements to support contract enforcement
    Having a contract law on the books is not sufficient. What matters equally are the role and practices of the legal institutions that support the effective implementation of contract law. The legal institutions relate to the organisation of courts, an independent and competent judiciary, the legal profession, the enforcement services and the process of law making itself. Their design is a crucial factor influencing equality of treatment between actors (e.g. small- and large-sized enterprises) and also bears on the cost of enforcement and thus the reliance and confidence that investors have in the system of contract enforcement.
     
  • Alternative dispute settlement processes
    Exclusive reliance on formal systems of contract enforcement (i.e. litigation through the judiciary system) can be costly and slow. Alternative dispute resolution systems seek to resolve differences between parties in a timely and fair manner. The main examples are arbitration, mediation and conciliation hearings, often by industry bodies, specialised agencies or third party evaluators, conducted at the national or international level. Alternative dispute settlement processes often complement and sometimes supplement judicial contract enforcement procedures and can strengthen contractual commitment at lower cost. How well these alternative dispute resolution mechanisms function? What are the relative costs and efficacy of the alternatives available and the methods of involvement by the official sector to enforce settlement agreements?

 

Policy practices to scrutinise

Key issues in assessing the effectiveness of a country’s contract enforcement and dispute resolution system are how the contract enforcement system (i.e. contract law and supporting legal institutions) performs in terms of securing committal between transacting parties and enforcing contracts at a reasonable cost; as well as the accessibility to all investors and the options for, and cost effectiveness of, alternative dispute settlement mechanisms.

 

The following policy practices and criteria ought to be considered:

  • The role of the rule of the law in the development and protection of contractual rights. Areas that need to be considered include whether:
    • The jurisdiction for hearing contractual disputes is clearly defined in law (e.g. for contracts involving foreign entities, government and state-owned enterprises) and in which courts (e.g. local, specialised, small-claim courts); each agency involved in contract enforcement has well-defined responsibilities and powers to order particular remedies to parties and if there are limitations on these powers (e.g. prohibition on seizing state property to satisfy court judgements) they are transparent; national laws define the validity and enforcement of foreign judgments; and clear rules exist on who can invoke the work of the court (e.g. government agencies, like the competition authority or third party beneficiaries of the contract).
       
    • The existence of distinct laws that underpin and support self-enforcement mechanisms. For instance, laws enabling and governing transactions secured by collateral, deposits, bonds and so on. These increase the effectiveness of a contractual promise by reducing the cost of enforcement and the risk of unsatisfactory court adjudication and orders. Is the institutional environment able to recognise and enforce these practices? Is it, for example, legally possible to establish escrow accounts or liens?
  • The implementation of contract enforcement laws. While mechanisms might be available in principle to enforce contractual agreements, experience often shows that the process can be limiting, because it is expensive, slow or partial. What policy practices and constraints compromise the effective implementation and enforcement of contract laws? The factors to consider are:
    • The performance of the supporting legal institutions. This will involve assessing judicial expertise (e.g. technical capacity of judges to hear complex business disputes), the impartiality and independence of the courts and the integrity of the judiciary (e.g. adhering to codes of judicial ethics, evidence or strong perceptions of corruption); the court system (e.g. case load of judges, backlog of cases, level of funding, staff training); case management practices of the court system (e.g. time limits and sanctions on delaying tactics, use of information technology for filing and tracking cases, for implementing procedural and jurisdictional rules, and for recording and disseminating reasoned case histories); the ability of the courts to contribute to jurisprudence in the area of contract enforcement (e.g. mandatory publication of decisions); and the track record of the legal system enforcing contractual agreements and settlements (e.g. do all types of parties duly obey court orders?).
       
    • The costs involved by a plaintiff to enforce a contract. This will depend on court fees including taxes, expert fees, enforcement fees, costs of discovery and geographic accessibility to courts. Enforcement costs will also depend on the average length of time required to enforce a contract through the court system. This in turn is determined by the number and complexity of pre-trial and trial procedures mandated by law (e.g. evidentiary standards, cooling-off periods) or court regulation (e.g. time limits for court actions and on the parties to present evidence) and procedural rules between the parties needed to file a case, during the trial and judgment period and to enforce the judgment. Also relevant for determining enforcement costs is whether procedural rules depend on the nature of the dispute and the court that is hearing the dispute (e.g. small-claim courts often have simplified procedures).
  • When examining the practices of a country’s contract enforcement and dispute settlement system, the point is not to choose between one judicial system and another but rather to evaluate the cost and effectiveness of different contractual enforcement mechanisms in the reviewed country’s specific institutional context. In doing this, it is important to obtain the views of all the players. Since businesses are often the parties involved in disputes they can help pinpoint the possible practices which deter accessibility, raise the cost and slow down the resolution of commercial disputes. Similarly seeking the views of judges, lawyers etc. can help to identify reform needs (e.g. conflicts of law) and possible solutions that improve the efficiency of the courts in the enforcement of contractual rights and obligations.
     
  • Alternative dispute settlement systems. What measures have been taken to encourage the use of other dispute resolution channels (e.g. ICC, UNCITRAL, ICSID arbitration) and to examine the cost effectiveness of alternative options for hearing and settling disputes? The factors to consider are: whether all investors have the right to choose an alternative dispute settlement method (e.g. international commercial arbitration); and if not, the rules that determine access; the processes used by local courts to enforce arbitration awards and how well they function (e.g. no significant additional cost to the plaintiff and prompt settlement); and the rules that determine final authority (e.g. consider no new evidence, time to appeal period) and whether they succeed in limiting the practice of “forum shopping”: i.e. tactics used by a party to unduly delay the process of settlement by trying to have their case re-heard before the formal court system.

 

Further resources

  • The International Development Law Organisation (IDLO) provides developing countries with resources, tools and professional skills for establishing or strengthening the rule of law. They offer programmes specifically designed to improve legal frameworks and build capacity in commercial law, including contract enforcement.
     
  • One dimension of the World Bank Cost of Doing Business project covers contract enforcement. The indicators measure the efficiency of the judicial system in resolving a commercial dispute. The data are based on a payment dispute before local courts and relate to: i) the number of procedures involved; ii) the average time, measured in days it takes to enforce a contract from the moment a plaintiff files the lawsuit until payment and; iii) the cost entailed, relative to the value of the debt (assumed to be 200 per cent of the country’s per capita income). The information is updated yearly and is available for most countries, facilitating cross-country comparisons.
     
  • The Judicial Reform Index is a tool developed by the American Bar Association to assess how judicial institutions implement the rule of law. The JRI is based on comparative legal traditions as well as international standards, such as the U.N. Basic Principles on the Independence of the Judiciary. It has been used to assess judiciaries in more than 15 countries in Europe and Eurasia through a prism of 30 indicators related to: quality, education and diversity of judges; judicial powers; financial resources; structural safeguards; transparency; and judicial efficiency. The tool could usefully be applied in other countries.
     
  • The United Nations Commission on International Trade Law (UNCITRAL) has a general mandate to further the progressive harmonisation and unification of the law of international trade. One area of the Commission’s work is International Commercial Arbitration and Conciliation. Their website offers UNCITRAL Model Laws on International Commercial Conciliation and International Commercial Arbitration, guidelines and procedural rules on their use, as well as a set of useful on-line resources.
     
  • International Centre for Settlement of Investment Disputes (ICSID) (see Question 1.8).
     
  • The World Bank has produced an Alternative Dispute Resolution Manual, which provides practical advice and an overview of good practices when introducing commercial mediation to any legal system. Using case studies, diagnostic and assessment tools and stakeholder-specific marketing approaches, the manual provides strategies to overcome the challenges of building alternative dispute resolution programmes.

previous | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | next

 

Back

 

Related Documents