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Reforming Pacific Contract Law

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Reforming Pacific Contract Law August 2009 Reforming Pacific Contract Law The views expressed herein are those of the consultant and do not necessarily represent those of ADB’s members, Board of Directors, Management, or staff, and may be preliminary in nature. © 2009 Asian Development Bank All rights reserved. This report was prepared for the Asian Development Bank (ADB) by Professors Fred Ellinghaus and Ted Wright, Newcastle Law School and Centre for Institutional and Organisational Studies, University of Newcastle, Australia, under the supervision of Winfried Wicklein, Senior Private Sector Development Specialist, ADB, Pacific Liaison and Coordination Office, Sydney, Australia. This report was supported by the Pacific Private Sector Development Initiative (PSDI), an ADB regional technical assistance project supported by the Australian Agency for International Development. The views expressed in this report are those of the authors and do not necessarily reflect the views and policies of ADB, its Board of Governors, or the governments they represent. This report has not been formally edited. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. Use of the term “country” does not imply any judgment by the authors or ADB as to the legal or other status of any territorial entity. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax + 63 2 636 2444 www.adb.org Pacific Liaison and Coordination Office Level 18, 1 Margaret Street Sydney, NSW 2000, Australia Tel +61 2 82709444 Fax +61 2 82709445 www.adb.org/plco CONTENTS Page EXECUTIVE SUMMARY i I. INTRODUCTION 1 A. Private sector development and contract enforcement 3 II. SUMMARY OF VISITS 5 III. THE LEGAL ENVIRONMENT 5 A. Overview 5 B. English case law 6 C. Local case law 7 D. English legislation 8 E. Local legislation 9 F. Customary law 10 G. Inaccessibility of case law 11 IV. SHORTCOMINGS OF CONTRACT LAW IN THE PACIFIC 12 A. Overview 12 B. Little used by locals 12 C. Poorly understood 13 D. Mistrusted 14 E. Out of touch 15 F. Lack of resources 15 G. Inefficient outcomes 16 V. BENEFITS OF A PACIFIC CONTRACT CODE 19 A. Overview 19 B. Better understanding of law and greater use of contracts 22 C. Better legal support for business 23 D. Better investment environment 24 VI. RECOMMENDATIONS 25 APPENDIXES 1. List of People Consulted 27 The views expressed herein are those of the consultant and do not necessarily represent those of ADB’s members, Board of Directors, Management, or staff, and may be preliminary in nature. EXECUTIVE SUMMARY We were engaged as ADB consultants to a Private Sector Development Initiative project on contract law reform in the Pacific Islands. Phase 1 of the project required us to investigate and report on whether contract law reform would assist private sector development in Pacific countries. We completed site visits to the Solomon Islands, Vanuatu, Tonga and Papua New Guinea in the period July-November 2008. This report describes our findings. The general law of contract in these countries is not codified. In most jurisdictions there is some legislation dealing with specific contracts, mostly adopted from the UK, and often now outdated. But the general rules of formation, performance and enforcement of contracts are to be found only in the reported decisions of courts, going back for centuries, predominantly English but also from Australia, NZ and other common law jurisdictions. The volume of these reports is massive and constantly increasing. Case law is often minutely detailed, abstract and complex. The form in which the rules are stated varies from judgment to judgment, and no single formulation can ever be taken as authoritative or final. In our view, and that of most people whom we consulted on our visits, this system of law does not serve the needs of the Pacific Islands well. The inaccessibility of case law, the time and cost associated with applying it, the difficulty of keeping up to date, and the remoteness of English law from Pacific conditions, were universally cited as significant problems by business people and lawyers alike. These difficulties are compounded by the fact that access to skilled legal advice in these countries is limited. Contract law is little used, poorly understood, and often mistrusted by local businesspeople. As a result there is a large informal economy, and correspondingly little participation by locals in the formal economy. Few written contracts are made, often leading to inefficient risk management, problems of non-compliance and unnecessary disputation, and spectacularly inefficient outcomes. These factors have a self-evident limiting effect on economic development. We have concluded that a written contract law in the form of a Pacific Contract Code of 50-75 Articles, stating existing rules of common law and equity in the form of broad principles, would have many benefits for these jurisdictions. Such a Code would make contract law more accessible and efficient, and serve as an educational tool, encouraging local people to use contracts and to participate in the formal economy. It would improve legal support for local business, and help to produce a better investment environment. It could provide a uniform law throughout the region that is fully compatible with the law of the region’s trading partners. The proposal to draft such a Pacific Contract Code was strongly supported by nearly everyone we spoke to, including the Chief Justices of all four jurisdictions. We recommend that the project proceed as soon as possible to Phase 2, entailing the preparation of a draft Pacific Contract Code and Discussion Paper by the consultants, and of a final version of the Code, revised after submission to expert scrutiny and in-country consultations with major stakeholders, in a form ready for legislative adoption in each jurisdiction. A detailed indicative Phase 2 plan, with time lines, is included in Part 6 (Recommendations) of this Report. We recognise that the implementation phase of this project will be crucial. It will involve not only the process of bringing about the enactment of the Pacific Contract Code in Pacific countries (Phase 3), but also strategies to ensure that it is brought home to lawyers, business and grass roots in the community, in other words strategies to bring about cultural change (Phase 4). We elaborate these points in para 114 of Part 6, Recommendations. However, we do not address ii the details of Phase 3 and Phase 4 in this report. The project cannot go forward without first producing and disseminating a draft Pacific Contract Code. Our recommendations are limited to implementation of this next phase (Phase 2) of the project. 1 I. INTRODUCTION 1. We were engaged as consultants to a Private Sector Development Initiative project on contract law reform in the Pacific Islands. Phase 1 of this project required us to report on the contract environment of four Pacific Island jurisdictions, with a view to recommending legal reforms that would promote private sector development. The project is part of a broad initiative directed towards reforming the laws governing business in the Pacific Islands in ways that will foster private sector development. 2. The four jurisdictions we visited were Papua New Guinea, Solomon Islands, Tonga and Vanuatu. It is the Asian Development Bank’s intention that Samoa and Fiji would be consulted in Phase 2 of this project. We believe that this report will also be of relevance to the other nations in the Pacific Island region. 3. PNG’s economy is significantly larger than the others but overall they are ‘small economies, not very diverse’.1 Many of the people we spoke to remarked on this fact explicitly. 4. An important feature of all four jurisdictions is their relatively very large informal economy. In PNG we were told that between 80 - 85% of the total economy was informal.2 ‘The actual business sector is much larger than the official business sector.’3 We were also told that general failure of local people to use contracts, and the reliance of local business people on personal, familial and tribal relationships was a significant impediment to their participation in the formal economy.4 Increasing participation in the formal economy, in particular by small and medium local enterprise, is a major development strategy in the region. As one banker said, ‘private sector SMEs (small and medium enterprises) are the future of the economy’. 5 5. We have concluded that it would assist private sector development in these economies if legislation were passed adopting a contract code in the form of 50-75 short articles in simple language, stating the rules of general contract law in a form compatible both with the common law rules now applicable in Pacific jurisdictions, and with the codified rules of other legal systems, including those of the region’s major trading partners.6 We refer to this code hereafter as the Pacific Contract Code (PCC). We recommend the production and dissemination of a draft Pacific Contract Code as the task next to be undertaken in Phase 2 of this project. Some 1 [4](Finance VAN). Throughout this report we will refer to observations made to us by the people we consulted. We are preserving their anonymity by using a code number and generic description. 2 [43](Law PNG), [1](Business PNG), [61](Finance PNG). 80% don’t have bank accounts: [51](Law PNG). 3 [35](Gov’t PNG). 4 ‘Lack of understanding of contract is an impediment when an enterprise shows up and wants to do something’: [47](Finance PNG).
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