Inefficient contract enforcement mechanism in Pakistan
It is essential for attracting investment, the area needs urgent reformation
It is essential for attracting investment, the area needs urgent reformation. PHOTO: AFP
ISLAMABAD:
In the World Bank’s ‘Ease of Doing Business Index 2016’, Pakistan’s ranking has plummeted further to 138 out of 189 countries, indicating that the regulatory environment is not conducive for businesses.
Statistics of the State Bank of Pakistan (SBP) also revealed that investment was shifting out of the country. This is mainly due to an inefficient contract enforcement mechanism; an essential element in attracting foreign and local investment.
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Countries hosting large investments from private businesses are usually ranked below 70, whereas Pakistan is ranked 151 in enforcing contracts.“Speedy trials are essential for small enterprises, which may lack resources to stay in business while awaiting the outcome of a long court dispute,” stated the World Bank on contract enforcement.
In Pakistan, the duration of the contract is highly unpredictable and so inefficient that at best, it can take around 3 years and at worst, it could be as long as forever.
For example, a suit for the specific performance of a sale agreement was instituted on 26th February, 2000, before the Civil Court of Sargodha on which the final decision came after 10 years. Similarly, a petition for leave to appeal was filed in Supreme Court of Pakistan against the judgement of the Lahore High Court in 2003. The Supreme Court of Pakistan gave its judgement on this appeal after 10 years on May 7, 2013.
Pendency of cases in local courts is another obstacle in speedier execution of commercial contracts.
The Annual Report of Lahore High Court indicates that out of 317,459 cases in 2014, 164,683 (52% of the total cases) were added in to the existing backlog out of which 44,908 were civil and 9,106 were commercial cases.
Although the legal system provides higher priority to the settlement of commercial disputes, one cannot find an exclusive court or a division for it, which is also one of the major reasons behind pendency of disputes in local courts.
Moreover, dispute resolution costs are usually high and unpredictable. According to the World Bank data, if the value of a claim is $5,000, then the recovery of such a claim will typically cost $900 to the plaintiff, out of which costs are $550, court fees will be another $295 and enforcement fees will take around $60.
However, while quoting several examples, most lawyers at the Islamabad High Court (IHC) believe that the World Bank estimates are highly overstated. According to a senior advocate at IHC, for a dispute based on a claim of Rs49.5 million, filed in IHC, a private construction company has paid around Rs2 million in legal costs, which amounts to 4% of the value of claim.
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Effective resolution of commercial disputes, supported by an efficient judicial system, has many benefits. Courts are important for the interpretation of the rules of the market and in the protection of social and economic rights of the entrepreneurs. An efficient legal system encourages and protects new commercial relationships because businesses know that courts will support them if the other party fails to pay.
In Pakistan, inefficient contract enforcement mechanism is also an after-effect of complex judicial processes. From filling of a law suit till the final judgment, the judicial process suffers from delaying tactics used by the parties involved.
As there is no limit on the adjournments, parties can prolong the process of court hearings by taking unnecessary adjournments. Furthermore, miscellaneous applications can also play a major role in the prolonging the dispute resolution e.g. instead of filing a written statement, application for dismal of lawsuit is usually filed by defendant to buy some time. Legal framework on civil disputes contains well defined time standards regarding service of process, first hearing, filing of the statement of defence, completion of the evidence period, and submission of final judgement.
These time standards are usually not followed in 50% of the civil cases.
Furthermore, most of the local courts are not automated. In order to access laws and regulations, to generate a hearing schedule, to send notifications to the lawyers, to track the status of a particular case and for many other case management purposes, there is no electronic device available (within the court) for the judges to use. Similarly, electronic case management devices are also not available for the lawyers. Moreover, plaintiff cannot file a law suit electronically. He cannot even pay court fees through an electronic system.
Performance monitoring systems are also absent in most of the competent courts. Performance reports are not generated which otherwise can be helpful in analysing the time period of pending cases and the progress of individual cases.
Unfortunately the up-gradation of contract enforcement mechanism has not been the priority of any government in this country. It is highly recommended that the government of Pakistan should introduce all the necessary reforms in this sector, otherwise the ranking of the country on Ease of Doing Business Index would decline further which would make the country very unappealing for investments.
The writer is a Research Analyst at Policy Research Institute of Market Economy (PRIME)
Published in The Express Tribune, June 13th, 2016.
In the World Bank’s ‘Ease of Doing Business Index 2016’, Pakistan’s ranking has plummeted further to 138 out of 189 countries, indicating that the regulatory environment is not conducive for businesses.
Statistics of the State Bank of Pakistan (SBP) also revealed that investment was shifting out of the country. This is mainly due to an inefficient contract enforcement mechanism; an essential element in attracting foreign and local investment.
Contract for second LNG terminal to be awarded today
Countries hosting large investments from private businesses are usually ranked below 70, whereas Pakistan is ranked 151 in enforcing contracts.“Speedy trials are essential for small enterprises, which may lack resources to stay in business while awaiting the outcome of a long court dispute,” stated the World Bank on contract enforcement.
In Pakistan, the duration of the contract is highly unpredictable and so inefficient that at best, it can take around 3 years and at worst, it could be as long as forever.
For example, a suit for the specific performance of a sale agreement was instituted on 26th February, 2000, before the Civil Court of Sargodha on which the final decision came after 10 years. Similarly, a petition for leave to appeal was filed in Supreme Court of Pakistan against the judgement of the Lahore High Court in 2003. The Supreme Court of Pakistan gave its judgement on this appeal after 10 years on May 7, 2013.
Pendency of cases in local courts is another obstacle in speedier execution of commercial contracts.
The Annual Report of Lahore High Court indicates that out of 317,459 cases in 2014, 164,683 (52% of the total cases) were added in to the existing backlog out of which 44,908 were civil and 9,106 were commercial cases.
Although the legal system provides higher priority to the settlement of commercial disputes, one cannot find an exclusive court or a division for it, which is also one of the major reasons behind pendency of disputes in local courts.
Moreover, dispute resolution costs are usually high and unpredictable. According to the World Bank data, if the value of a claim is $5,000, then the recovery of such a claim will typically cost $900 to the plaintiff, out of which costs are $550, court fees will be another $295 and enforcement fees will take around $60.
However, while quoting several examples, most lawyers at the Islamabad High Court (IHC) believe that the World Bank estimates are highly overstated. According to a senior advocate at IHC, for a dispute based on a claim of Rs49.5 million, filed in IHC, a private construction company has paid around Rs2 million in legal costs, which amounts to 4% of the value of claim.
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Effective resolution of commercial disputes, supported by an efficient judicial system, has many benefits. Courts are important for the interpretation of the rules of the market and in the protection of social and economic rights of the entrepreneurs. An efficient legal system encourages and protects new commercial relationships because businesses know that courts will support them if the other party fails to pay.
In Pakistan, inefficient contract enforcement mechanism is also an after-effect of complex judicial processes. From filling of a law suit till the final judgment, the judicial process suffers from delaying tactics used by the parties involved.
As there is no limit on the adjournments, parties can prolong the process of court hearings by taking unnecessary adjournments. Furthermore, miscellaneous applications can also play a major role in the prolonging the dispute resolution e.g. instead of filing a written statement, application for dismal of lawsuit is usually filed by defendant to buy some time. Legal framework on civil disputes contains well defined time standards regarding service of process, first hearing, filing of the statement of defence, completion of the evidence period, and submission of final judgement.
These time standards are usually not followed in 50% of the civil cases.
Furthermore, most of the local courts are not automated. In order to access laws and regulations, to generate a hearing schedule, to send notifications to the lawyers, to track the status of a particular case and for many other case management purposes, there is no electronic device available (within the court) for the judges to use. Similarly, electronic case management devices are also not available for the lawyers. Moreover, plaintiff cannot file a law suit electronically. He cannot even pay court fees through an electronic system.
Performance monitoring systems are also absent in most of the competent courts. Performance reports are not generated which otherwise can be helpful in analysing the time period of pending cases and the progress of individual cases.
Unfortunately the up-gradation of contract enforcement mechanism has not been the priority of any government in this country. It is highly recommended that the government of Pakistan should introduce all the necessary reforms in this sector, otherwise the ranking of the country on Ease of Doing Business Index would decline further which would make the country very unappealing for investments.
The writer is a Research Analyst at Policy Research Institute of Market Economy (PRIME)
Published in The Express Tribune, June 13th, 2016.