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Contract Enforcement: An Overview of the Issues

Contract Enforcement: An Overview of the Issues. Richard Messick The Nuts & Bolts of Judicial Reform April 18, 2006. 2/3rds of firms in Investment Climate surveys have never sued to collect an overdue bill Percentage of Firms Using Courts in Last Dispute --.

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Contract Enforcement: An Overview of the Issues

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

  2. 2/3rds of firms in Investment Climate surveys have never sued to collect an overdue bill Percentage of Firms Using Courts in Last Dispute -- Myth I: Courts Are Everything Everything

  3. 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): 695-714 (2003)

  4. 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 Complex Contracts

  5. Contract Enforcement Mechanisms Complex Contracts Simple Contracts Involve third party? no yes Repeat business important? • Bilateral • Hostages • Tying Agreements • Franchising & Distribution • Multilateral • Reputation & Sanctions • ADR • Courts • Regulatory Agencies no cash & carry yes Unilateral Commitments

  6. 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) Policy Interventions: Unilateral

  7. 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

  8. 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

  9. 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 Policy Issues:Reputation

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

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

  12. ADR: Some Early Results

  13. ADR: Why Results Meager

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

  15. 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 ADR: Policy Interventions

  16. 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: Donor Projects

  17. Judicial Reform: Early Success

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

  19. 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: Lessons

  20. 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 Judicial Reform: New Directions

  21. Debt Contract Reforms Days to Enforce Contract

  22. Allow specialized collection agencies Verify creditors’ story (Mexico) Permit cognovit notes or equivalent Assure fast-track procedures/small claims court function Revise enforcement methods Judicial Reform: Debt Collection

  23. 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 Regulatory Agencies

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