contract enforcement

For markets to function properly, contracts must be honoured. Development in industrial democracies has been attributed to a long tradition of upholding and enforcing bargains among economic agents. Enforcement is central to commercial exchange, and therefore to economic and industrial development. Good enforcement procedures enhance the predictability of exchange and reduce uncertainty by restraining destructive opportunistic behaviour among contracting parties, leading to reduced transaction costs.

Market-friendly laws and an independent and competent judiciary to implement them have long been credited for fostering economic and industrial development. Therefore, adequate judicial contract enforcement procedures are crucial because they ensure equality between actors by preventing powerful actors from taking advantage of their weaker counterparts in contractual agreements.

Informal means of contract enforcement often complements and sometimes supplements judicial contract enforcement procedures in transition and market economies alike. Relational and reputation contracting, for instance, are common informal enforcement mechanisms, where the underlying principle is that the long-term benefits of future business relationships outweigh the one-off gains brought about by breach of contract.

Contract enforcement mechanisms, either formal or informal, are critical to commercial exchange, and hence to economic and industrial development. Therefore, designing and implementing a policy that enhances the enforceability of contracts is a prerequisite of any transition programme. However, designing an effective policy poses several challenges. Because contract enforcement mechanisms do not operate independently, but are part of a larger framework of norms and values of a society, the mechanisms must be flexible enough to adapt to changes in the environment where they operate. Policy makes should also make sure that the contract enforceability enhancing policy does not have unintended consequences, for instance; an introduction of judicial enforcement causing impersonal exchanges to become more important than personal exchanges, thereby reducing the benefits of intercommunity trade. Finally, policy makers should take into account informal enforcement mechanisms when addressing judicial reform. Contract enforcement can be reinforced when both types of enforcement mechanism operate in synergy.

Designing and implementing an effective policy to enhance contract enforceability is a long and arduous task and touches the core of society and its values. Yet, transition economies have no option but to preserve and discharge it successfully, for without it, even the most modest transition programme is unlikely to achieve its objectives.

Further reading

In 2005 the EBRD and BIICL co-authored the following book - " Enforcing Contracts in Transition Economies". Visit the BIICL website for further information.

In 2003 the EBRD, in partnership with the British Institute of International Comparative Law, co hosted an international conference  (0.3Mb) on 'Contractual Rights and Obligations in Central and South-eastern Europe and the Commonwealth of Independent States - An exploration of practical issues of contract enforcement'

Contract Enforcement – Law in Transition, Autumn 2001