No promises

Running a business in Pakistan means dealing with uncertainty

One of the most recognised characteristics of the law is its responsibility to protect contractual promises. Intertwined with this aspect of the rule of law is a country’s economic growth. Build a legal system that provides sanctity to contractual relations, and you will see an upward surge in economic prosperity. Adam Smith had similar ideas in the “Wealth of nations”. In an oft-quoted paragraph, he writes that commerce seldom flourishes in states where “the faith of contracts is not supported by law”.

The foundation upon which a market is built is the contract. The amount of respect a legal system gives to it will determine the value of the promises made in that contract. If a country lacks mechanisms to ensure compliance with contractual promises, it will remain a quagmire for investment and business, leading to difficulties in economic growth. The World Bank seems to agree to this point, stating that a country’s legal system, in order to be effective, must be able to uphold contractual rights.

Given Pakistan’s desperate need to revitalise its economy, shouldn’t we be doing a little introspection on how conducive our legal system is towards enforcing promises made in contracts?

It’s a layer of a complex problem that has not been a priority for any of Pakistan’s governments in recent memory. And you can tell. The World Bank’s Worldwide Governance Indicators give Pakistan a governance score of -0.72 (within a range of -2.5 to +2.5) for upholding the rule of law. In its calculation of this score, the World Bank measures, amongst other things, the ease of enforcing contractual commitments. The face that Pakistan’s rating is abysmal should come as no surprise for anyone familiar with its legal system.

Take the simplest example: if my business provides you with goods or services then I expect to be paid what I am owed. As long as that bargain happens, the law can remain a distant speck on the horizon for both of us. But if things go awry, and I am refused payment, well, then unfortunately the law must step in.

The criminal law will not help me get my money back. For that I must go to court. In Pakistan’s civil courts, this usually means a minimum of ten years before I can even begin to consider getting my money back if I am dealing with a contested case. Any legal system that asks people to wait ten years before getting a lower court decision on a simple contractual arrangement deserves to be featured in a Franz Kafka plotline. And a “contested case” does not necessarily have to mean ‘complex’. I have seen routine billing disputes linger on with no end in sight. Even an eventual victory before the lower courts is not really a victory if the other side decides to appeal.

In healthy legal systems, as opposed to our local malnourished variety, only bona fide disputes are allowed to come before courts. The frivolous suits are thrown out before they can waste the court’s time and resources. This is also achieved by the court imposing “costs of litigation” on the losing party. These ‘cost orders’ make sure that people only come to court if they have genuine claims of substance in law. Meanwhile in Pakistan, any moron whose cousin happens to be a lawyer can show up with a ludicrous defence for not following through on their contractual promise and get away with wasting years of our courts’ time. While our procedural code talks about courts imposing “costs of litigation”, this is rarely, if ever, enforced.

These aren’t just problems for big businesses – if that is the immediate picture that comes to your mind. It concerns the small trader just as much. Going to court is expensive enough without having to withstand the stress, pressure and anxiety of a legal battle hanging over your head for at least a decade of your life.

We could resolve many of these issues by moving towards forms of alternative dispute resolution. Arbitration is a mechanism that has seen significant success in other parts of the world. Serious consideration should be given to developing this as a means of resolving contractual disputes in an expedient way.

Our current arbitration legislation is a relic of 1940 British colonial India that senior lawyer (and my mentor) Feisal Naqvi once described as a law that “makes lawyers laugh and legal philosophers weep”. In short, our current arbitration statute is an outdated relic that actually increases litigation rather than doing the opposite. It therefore needs to be tossed into the dustbin of history as soon as possible to be replaced by a law that actually works.

Running a business in Pakistan means dealing with more uncertainty than while navigating through the Bermuda Triangle. Businesses must steer through a maze of populist court decisions (private schools recently); judicial interference in contracts (Reko Diq and its $6 billion penalty); excessive regulation; uncertain taxation mechanisms (the subject of the SRO requires a separate column altogether); and, haphazard policymaking. Through it all, they must also endure a legal system in which the simplest promises cannot be enforced until years later.

And yet, not a single word of debate on this subject when talking about economic reforms. No one talks about reforming the civil justice system, no one is seriously talking about reforming the Arbitration Act of 1940, and no one in government is even considering the fact that our court system inspires zero faith in contractual promises. If the government is not ready to address these tough issues, then it is not ready to rethink our economy.

With the state of our legal system, to set up and run a business in Pakistan requires either substantial influence or superhuman optimism. Instead of constantly asking: why aren’t big corporations like PayPal coming to Pakistan? We should be asking: why would anyone want to run a business here?

Until we go about fixing our legal system, we cannot be optimistic about the economy. Don’t take it from me; Adam Smith said the same thing.

Published in The Express Tribune, July 30^th, 2019.

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