Ensuring Efficient Contract Enforcement for Inducing Investment

– This article was originally published by Ankshita Chaudhary in the Himalayan Times on the December 02, 2018

The ability to enforce a contract, both formal and informal, is a fundamental precondition for markets to function properly. Good contract enforcement practices enhance the predictability for all parties involved by assuring them that their contractual rights will be upheld. This fosters more formal transactions.

Commercial law and judicial reforms, although often overlooked, are essential in encouraging investment, both domestic and foreign. An efficient, effective and impartial judicial system along with a clear and predictable legislative framework will endorse an attractive venue for investment. In the recent years, the World Bank’s Doing Business report has emerged as a significant gauge to identify countries with high yield on investments. As per the most recent (2019) report, Nepal ranks 154thout of 190 countries in ease of enforcing contracts. This data does not paint a sunny picture as it communicates that Nepal has a long way to go before it can meet the optimum conditions for investment.

Inefficiency in Dispute Resolution

The commercial bench in the High Court is plagued with a massive backlog of 20,093 cases (which includes a substantial number of commercial cases) as per the Annual Report of the Supreme Court 2073/74. Such backlog in the judiciary system results in the delay of proceedings, not to forget that it also results in lack of accessibility of justice to the average citizen. As the dockets get crowded, it takes more time to resolve a dispute through the judicial system and results in the parties having to bear additional costs. According to World Bank’s Doing Business, enforcing a contract in Nepal takes an average of 910 days, which equivalents to approximately 2.5 years, and costs 26.8% of the value of the claim. This not only increases the direct costs (court fees and attorney fees) but also surges the transaction costs (time spent in court, cost of preparation, bribes).

Issues with the Alternative Dispute Resolution Mechanisms

Arbitration in Nepal can be challenged by the higher courts on points of law. Article 30 of the Arbitration Act, 1999, provides for circumstances under which the decision taken by the arbitrator is deemed to be invalidated. In case the petitioner is able to prove that the arbitration decision contains certain matters outlined in the Act, the award can be invalidated and thus the party can file a petition in the High Court. This has thus, led to parties filing petitions numerous times and not complying with the arbitral award thereby lengthening process. Often times when the court becomes involved in the Arbitration, serious delays are likely to occur. The parties may resort to the court for assistance during and after the arbitration process. Even though the scope of the court’s involvement is narrow and clearly defined by the Arbitration Act, it is widely seen that the courts interpret the Act liberally and exceed their jurisdictions. The level of court involvement in arbitration cases causes significant delays and undermines the necessary role of arbitration to be an attractive alternative to the court for business disputes.

Lack of court automation extension into the lower tiers

The Supreme Court (SC) web portal allows public users to enquire about their cases and motions as well as offers the ability to effectively track the status of their cases in the court. At a minimum, this provides the users with ready access to their case process details or a related appeal, without the need to retrieve data physically. The SC also has an official mobile app which is a part of the digital drive and e-governance. Though we cannot discredit the technological developments that have taken place in the recent years, we also need to provide substantial training to the concerned people to allow the execution of such technological solutions. Moreover, the above developments are only limited to the SC. The other two tiers, tribunals and the Special Courts must also be included in this particular scheme.

Problems and Bottlenecks in the Court

The judicial system in Nepal is deemed to be slow, unpredictable and vulnerable to excessive politicization and corruption. The commercial bench in the District Court is the court for first instance in case of a commercial dispute. However, the bench is plagued with issues. The judges on the panel are subject to regular rotation and hence struggle to build sectoral expertise. As per consultations with the experts, it was also found that there exists a need to acquaint both the judges and the lawyers with a stronger skill set in order to successfully settle the disputes and result in stronger judgements. Likewise, the scope as well as the jurisdiction of the commercial bench needs to be broadened to ensure that all commercial cases either directly go to the commercial bench or go to other courts or tribunals that are supervised by the commercial bench.