The benefits of proper contract enforcement for African businesses
May 31, 2016
Contract enforcement refers to the systems and processes involved in being able to get a contract enforced through legal action. Proper contract enforcement practices enhance the predictability of commercial relationships and reduce uncertainty by assuring businesses and individuals that their contractual rights will be upheld by local courts.
Enforcing contracts is one of the 10 indicators that the World Bank uses in its annual Doing Business Report, as a measurement of ease in doing business across the world.
When procedures for enforcing contractual transactions are bureaucratic, or when contractual disputes cannot be resolved in a timely and cost-effective way, economies become less efficient. Weak contract enforcement systems slow down the pace of trade, investment and economic growth in a country. It is therefore vital that governments in the African continent continue their efforts to improve and ensure proper contract enforcement.
Business owners want to be assured that their contracts will be enforced by an effective judicial system. Should they enter into commercial dispute, they need assurance that it will be resolved in a quick, fair and transparent way.
Effective contract enforcement helps businesses to reduce the time and costs spent on resolving commercial disputes. It also frees up capital that would otherwise have been tied up in litigation, allowing businesses to invest this capital back into their business.
ICF interventions on contract enforcement focus on ensuring that business owners can protect their rights through a court of law. This involves strengthening a country’s judicial system in order to make the courts more efficient (as in the case of Zambia) or introducing dedicated commercial courts to deal with commercial disputes (as in the case of Burkina Faso and Sierra Leone). Other interventions involve the establishment of alternative dispute resolution mechanisms like the Kigali International Arbitration Centre or the Lagos Court of Arbitration which give businesses the option of resolving their disputes through arbitration, mediation or adjudication.
According to the World Bank, effective commercial dispute resolution has many benefits for businesses. Courts are an essential stakeholder for entrepreneurs as the courts interpret the rules of the market and protect the business owner’s economic rights. Efficient and transparent courts promote effective business relationships, as the entrepreneur will trust that they can rely on the courts to enforce their contractual rights. Fast and cost-effective court procedures are essential for business owners, especially for small businesses, as they usually lack resources to stay in business while awaiting the outcome of a long court dispute.
The use of Information and Communication Technology can contribute significantly towards improved contract enforcement. Electronic case management systems allow courts to manage the allocation of cases more effectively to ensure the speedy resolution of disputes. It also enables court records to be stored digitally, eliminating the problem of misplaced case files. The use of real time court reporting systems help to improve transparency in the courtroom by enabling proceedings to be recorded and projected for all parties to see, allowing proper record keeping and future verification if needed.
According to the Organisation for Economic Co-operation and Development (OECD), the key issues when assessing the effectiveness of a country’s contract enforcement and dispute resolution systems include: how the contract enforcement system performs in terms of securing commitment between the transacting parties and enforcing contracts at a reasonable cost, accessibility to all investors, and the options for alternative dispute settlement mechanisms as well as their cost-effectiveness.
For any country looking to improve the ease of doing business for entrepreneurs, it is vital to have proper contract enforcement systems in place. These don’t only provide entrepreneurs with the confidence to take risks, but they also allow them to focus on their business, instead of wasting valuable time and money on addressing commercial disputes.
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