Judicial reform and commercial justice: the experience of Tanzania's commercial court

DRAFT 8/12/04 BACKGROUND PAPER PREPARED FOR THE WORLD DEVELOPMENT REPORT 2005 JUDICIAL REFORM AND COMMERCIAL JUSTICE: THE EXPERIENCE OF TANZANIA'S COMMERCIAL COURT David Louis Finnegan Abstract Policymakers in developing and transition economies have increasingly recognized the important role played by judiciaries in creating an institutional environment conducive to robust private sector activity. It was this recognition that prompted the government of Tanzania, with the support of local business groups, international investors, and the donor community, to create a specialized court dedicated to considering and resolving commercial and financial cases. The Commercial Division of the High Court of Tanzania (the "Commercial Court") was established in 1999 with the express purpose of improving the efficiency and fairness of commercial dispute resolution in the country. This Note examines the background behind the creation of the Commercial Court, summarizes the Court's structure and operation, and offers a brief assessment of its performance and impact. Although it is too early in the life of the Court to draw definitive conclusions about its overall long-term impact, to date the Court has demonstrated an ability to resolve commercial cases in a relatively efficient manner. David Louis Finnegan is an Assistant Professor of Law at the Thomas M. Cooley Law School in Lansing, Michigan. He may be reached by e-mail at finnegad@cooley.edu. The views expressed are those of the author and do not necessarily reflect official views of the World Bank.  DRAFT 8/12/04 Commercial Dispute Resolution in Tanzania Tanzania established the Commercial Court to address perceived deficiencies in the judicial resolution of business disputes in the country. The government believed that a speedy and reliable vehicle for commercial dispute resolution would facilitate private sector development and improve investor confidence. A number of factors combined to create a perception among the domestic and international business communities of significant delays in the administration of justice and unfairness within the Tanzanian judicial system, even at the High Court level where high-value disputes are litigated. As one Tanzanian jurist observed, "[a]larming delays and backlog of cases in existence in the general registries of the High Court were and are not a secret."1 Tanzanian courts, including the High Court, have suffered from and continue to suffer from poor case management practices, corruption, low levels of remuneration within the judiciary, lack of adequate physical infrastructure, and inadequately funded operating budgets. In addition, members of the judiciary have in the past exhibited fairly casual attitudes toward the granting of adjournments and temporary injunctions, which only serve to increase delays and compound the backlog problem. Finally, there has been a general perception that members of the judiciary lack a sound understanding of applicable commercial laws and legal principles, a problem that specialization is designed to address. Taken together, these factors contributed to considerable case backlog and significant delays in the administration of justice. There is a widespread perception among Tanzanian lawyers and business people that even routine commercial debt recovery cases take four to five years on average to be resolved in the general division of the High Court, and that cases involving more complicated issues of commercial or contract law can take much longer. A review of High Court registrar files prior to the creation of the Commercial Court is instructive: a sample of commercial cases filed in 1997 reveals that 56% of them were still pending and had yet to be resolved as of December 2000, more than three years later. The 44% of cases that had been resolved took an average of more than 15 months to be resolved. Creating a New Court 2  DRAFT 8/12/04 The Commercial Court was designed to address these deficiencies in the limited context of business dispute resolution in Tanzania. Several domestic and international factors combined to make the establishment of the Court politically and financially viable. The idea for a specialized commercial court began to germinate in the early 1990s as the Tanzanian government contemplated legislative and regulatory reforms designed to enhance on-going economic liberalization efforts. During this period, the government convened a task force to identify areas of legal reform required to bring the legal system in closer conformity to the requirements of a functioning market economy. One of the recommendations adopted by the task force was the creation of a specialized court to hear commercial and financial cases. This recommendation was accepted at the highest levels of government and formally approved in 1997. The recommendation received the enthusiastic support of the late Francis Nyalali, then Chief Justice of Tanzania. Chief Justice Nyalali took a personal interest in the Commercial Court project and was instrumental in bringing it to fruition. He made fact-finding tours of several countries that had established specialized commercial courts, consulted with judges and lawyers around the world, and participated in the subsequent formulation of a concrete proposal for the creation of the Court. At the same time, the business community, both locally through various chambers of commerce and internationally via investor pressure, worked with the donor and international financial communities to push for the Commercial Court project. Local business and financial communities lobbied the government for the creation of a specialized commercial court. The business community also used the newly liberalized media as an outlet to voice concerns about the state of the judiciary. International investors who had acquired shares of newly privatized Tanzanian banks and business firms added a significant measure of support for the Commercial Court project. When these investors realized the sizeable amount of debt held by newly privatized enterprises, they pushed for a swifter judicial mechanism for recovering debts. Finally, the creation of the Commercial Court was consistent with the increasing emphasis among donors and the international financial institutions on creating an enabling institutional environment for expansion of private market activity in developing and transition economies. Beginning in 1998, DANIDA, the Danish overseas development agency, took a specific interest in the Commercial Court project. DANIDA provided financial support for the 3  DRAFT 8/12/04 establishment of the Court, including training of Court staff, refurbishment of a permanent Commercial Court building, and provision of office equipment and supplies. In early 1999, the Tanzania government adopted a final proposal and the Court began operation in September 1999. Institutional Features Although formally established as a specialized division of the High Court of Tanzania, the Commercial Court operates in practice as a distinct, stand-alone court. The Court operates out of its own recently refurbished courthouse and does not share facilities with other divisions of the High Court, it maintains a separate registry and case management system, and its management staff and operating personnel are not shared with other divisions of the High Court. Three judges presently serve on the Commercial Court on a full-time and exclusive basis, each responsible for a share of the Court's caseload. For the time being, the Commercial Court maintains a single registry located in Dar es Salaam, although there are plans to expand the Court to several additional regions within the next year. In order for a case to qualify for consideration by the Commercial Court, it must be deemed to have "commercial significance." The applicable court rules broadly define the scope of this subject matter jurisdiction to include, inter alia, cases involving the formation and governance of business firms, the contractual relationships of firms, the restructuring or payment of commercial debts, and liabilities arising out of a firm's business activities. As a division of the High Court, the Commercial Court is intended to have jurisdiction over disputes that involve relatively large sums of money. In its first three years of operation, the Court had pecuniary jurisdiction over cases involving amounts in controversy of at least Tsh. 10 million (about US$9,425). This statutory minimum was raised substantially by legislative amendment in 2002 so that now disputes must involve at least Tsh. 100 million (about US$94,250) before they are eligible for consideration by the Court. The change in the High Court's pecuniary jurisdiction has noticeably reduced the number of cases that are being brought before the Commercial Court, and an effort is under way to revise the current statutory minimum. Cases involving commercial claims valued at less than Tsh. 100,000,000 must be filed in lower courts, principally the Resident Magistrate or District Magistrate courts. The Commercial Court's subject matter jurisdiction is not exclusive; instead, the Court shares jurisdiction over commercial matters concurrently with the general division of the High 4  DRAFT 8/12/04 Court. A plaintiff thus may choose to file its commercial case in either court (but not both). Under certain conditions, cases filed with the general division of the High Court may be subsequently transferred to the Commercial Court. There are several important operational and procedural differences between the Commercial Court and the High Court's general division: First, the Commercial Court has a much higher filing fee structure and, unlike the general division, there is no ceiling on fee amounts. Fees are significantly lower for cases filed in the general division of the High Court and are capped. The high filing fees make Commercial Court lawsuits prohibitively expensive for many business firms. Second, pursuant to a fee retention policy, the Commercial Court may retain fees paid by litigants. The Court is required to remit fees to the treasury only after it has collected an amount equal to its annual operating budget. The Court uses the retained fees to pay for budgeted expenses. The general division of the High Court, on the other hand, is not entitled to retain fees and instead must remit all fees collected to the treasury. It is dependent upon payments authorized and made by the Ministry of Justice and Constitutional Affairs to meet expenses. Such payments are frequently delayed and the High Court often runs short of essential supplies, including the stationery used to create trial records. The Commercial Court received its first case on September 16, 1999. The number of cases filed with the Court increased steadily in its first several years of operation. In 1999-2000, 116 cases were filed and the Court decided or otherwise resolved 66 cases; in 2001, 301 cases were filed and 227 were resolved; in 2002, 351 cases were filed and 234 were resolved; and in the first 11 months of 2003, 158 cases were filed and 242 were resolved. The decline in the number of cases filed with the Court in 2003, as mentioned above, is largely attributable to the substantial increase in the Court's pecuniary jurisdiction in 2002. A sizeable majority of cases filed with the Court involve debt recovery claims or other types of contract disputes. The balance of the Court's docket is comprised of cases involving a wide range of legal issues, including tort, trademark, property, insurance, tax, and company law claims. Banks and financial institutions are the heaviest users of the Court's services