O thy expenses, dear law!
Not that long ago, a friend of mine wanted to have his business registered. He asked around a few places, did his market research, did whatever else he needed to do and then went on to hire a middleman do get the official papers done. As a layman in a country where local level systems are set up to help one with legal compliance one would wonder why he did what he did. Might I add, he’s not the only one who finds problems with navigating the legal labyrinth on his own—the country is filled with countless others who have no faith in the legal structure as such. The mistrust is, to say the very least, built in the very process of socialization. From friends who have had property cases that have now started to span over generations to the new and aspiring entrepreneurs who think that paying the middlemen rather than making endless fruitless visits to the government offices for registration of a new business is a viable option to businessmen who do not hesitate to use third party coercion—these are but few in the laundry list of things that are not so ideal in terms of legal compliance in Nepal.
As such, courts are the formalized state structures that deal with the legal issues in the country and being state-run structures they are subsidized by the government and at least on papers provide services at minimal costs to the larger populace. But as a better known fact, courts in Nepal are plagued by their own set of worries—their dockets are overflowing and they face resource (human, technical, financial) crunch. As per Supreme Court’s Annual Report there are 52,098 backlogs in all courts across the country and the number is only growing. As a layman, for me as well as for countless others the choice of the contracting and enforcement mechanism would naturally depend on the cost of using it. The focus is not only on the costs (say, a court fee) that is incurred to get a contract enforced, but on transaction costs (for example, time spent in court, bribes, social detriment in escalating disputes) of getting a service. People make their choice based on these costs and when the costs are high they either look for alternatives or do not undertake such transactions in the first place.
The fact the people struggle with legal compliance in Nepal can be evinced in the journey of my aforementioned friend. After having had the legal assistance from the middleman and a couple of lawyers and having bribed a handful of officials here and there he finally set up a business. It so happened that the business ran breakeven for a few years and it came to a point where he wanted to close it down for good. The forthcoming reality hit him hard—it was difficult to close the business afterall! He needed to appoint liquidators and auditors, get all clearance from his employees and comply with an endless list of procedures—the cost of which became extremely high. There again are middlemen and the added costs. He found himself in a lose-lose situation.
This is what happens to a majority of those who wish to close their business. It takes around 5 years of paying annual taxes and visiting the concerned authorities time and again just in case one wills to close the business down. This is why many companies choose to pay the minimum amount and decide to run for losses, or cut through the red tape. Contrary to what happens in countries like Australia where it takes two months to exit a business.
Smaller private enterprises which usually face greater transactional uncertainty and risks of cheating and have shorter business time-horizons than large enterprises tend to resolve contract disputes largely outside the courtroom, partly due to a lack of confidence in the courts’ ability to enforce judgments in a timely manner. For a transition economy like ours that has been struggling with its micro-economic instabilities, the inability to enforce judgments timely often entails substantial adverse commercial implications. This lack of confidence in the state systems most critically, even a short delay in recovering debt or payment through formal enforcement by “slow” courts can cause significant financial losses in real terms.
Across the globe, the failures of the nation’s public courts—for example, overcrowded dockets, costly delays, and legal uncertainty—have spurred the development of private-sector alternatives. Privatizing dispute-resolution services, and contracting out to the private sector, can offer better service at lower cost. Precautions however, should be taken so as to minimize undue influence by interest groups. Easier said than done!
Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.