The Sanctity of Contract: Reaching the Goal by Observing the Rules

Standard

By Tom Allen[1]

To “win the game” you must first know the rules and then play by them.

Rwanda is greatly admired for many reasons, including its spectacular trajectory from the abyss of the 1994 Genocide to becoming the fastest developing nation on earth. This did not “just happen.”

The greatest achievements in Rwanda have resulted from good governance and disciplined leaders who know the rules and play by them.

Rwanda’s struggle for liberation continues, but now it is a struggle for poverty alleviation, economic development, and taking its proper place in the global community.

Rwanda struggles to increase its participation in the global economy. Like it or not, the lingua franca of the global economic community is English.

The progressive, determined leadership of Rwanda decided, “We will speak English, for it will accelerate our progress to our goal.”

This is learning and playing by the rules of the game that Rwanda wants to win.

But the most fundamental language of the global economic community is not actually English, but rather the “language of Contracts,” which is (fortunately for all who want to learn it) much more rule oriented, predictable, and consistent than English: negotiation, offer, acceptance, consideration, a mutual exchange of promises, action in reliance, mutual obligations, performance, enforceability, payment of damages for breach of promise, benefit of bargain, etc.

This is the language of thriving economies. Master this simple language and apply its rules, and the economy of Rwanda will more quickly develop and thrive.

Contrary to the belief of most Westerners, the sanctity and enforceability of contract is not a universal law or worldwide perspective.

It is not a fundamental issue of “right” and “wrong.”  Rather than strictly adhere to “the sanctity of contract,” some cultures are more committed to their sense of equity, fairness, appreciation for changing circumstances, and what might be called understanding and grace for all, in all situations.

For them, the agreed terms of the contracts are thus always subject to reconsideration. A “good excuse” may be equal to “good performance.”

Perhaps they are “right,” but such a view greatly impedes commerce and economic growth, and repels foreign investors.

Many Rwandans tend toward this view that a contractual promise and obligation is always subject to reconsideration in terms of current ability, change of circumstances, and fairness, any of which may justify nonperformance.

But this view is considered intolerable by the global investment community, which requires that all parties play according to the rules of contract… the only way that the game of commerce can efficiently proceed.

Entrepreneurs understand that they will profit from some deals, and they will suffer losses in others, but the most important principle is that all parties perform their contractual promises so that they can move on to the next deal in a robust economy where, in the long term, almost everybody profits.

Accepting a loss with integrity is not humiliating or shameful; reneging on a contractual promise is.

The most valuable asset of an entrepreneur is her reputation for performing as agreed. This can be extrapolated to assert that the most valuable capital asset of a national economy is a reputation for honoring the sanctity of contract, an environment into which investors will readily and confidently invest.

The tireless efforts of the many who labor to attract foreign direct investment (FDI) to Rwanda have produced modest results even with the impressive support of the World Bank’s Doing Business Report.

Why? It is because Rwanda has yet to establish its reputation for the sanctity and efficient enforceability of contract.

Thus, investors go elsewhere where they feel more confident they will receive what is promised in exchange for what the investor promises, that is, what lawyers call “the benefit of the bargain” (which might actually result in a loss, but “the deal is the deal.”)

Perhaps illustrations will be helpful:

This writer was given $10,000 and the mandate to purchase Kinyarwanda Bibles and distribute them among micro-finance trust groups.

Due diligence of possible sources ultimately led to a prominent vendor of Bibles in Kigali. The vendor promised to deliver 2,000 Bibles in exchange for $10,000, which this writer promised to pay.

All essential details of this very simple transaction were set forth in a written contract, which both parties dated, signed, and stamped with their respective stamps.

When the Bibles arrived in Rwanda a few weeks later, the vendor refused to deliver, as promised, explaining that his cost of transport had increased, and he was therefore not required to perform (unless the purchaser agreed to pay more money or accept fewer Bibles).

What if his cost of transportation had gone down? What if the buyer’s circumstances had changed, and the buyer now only wanted to pay for 1,000 Bibles, or he wanted to buy Bibles from another source for a cheaper price?

Thus, the rhythm of simple but robust commerce came to a halt and the parties became embroiled in a wasteful and unnecessary dispute.

In yet another recent experience, the lack of respect for contract by one person has obstructed a matter of national interest: A social entrepreneur came to Rwanda to set up a desperately needed food processing plant to produce a special product that would save the lives of tens of thousands of malnourished babies in Rwanda, Burundi, and DRC.

The entrepreneur worked in collaboration with UNICEF, CAMERWA, RBS, and various multi-national corporations that are very good prospects for setting up their own operations in Rwanda.

Because of the enormous capital improvements required, it was critical that the site of the food processing plant be owned by the entrepreneur’s company, not leased. After much searching, the entrepreneur discovered a suitable site for the new manufacturing facility.

Pending further development of the business plan and financing, he entered into a Lease Agreement with an option to purchase the real property for $450,000. During the following months, the business plan was perfected and financing was secured.

The entrepreneur proceeded to exercise his contractual right to purchase the land for $450,000, as agreed. The owner refused and demanded $600,000. An independent appraisal determined that the property is actually worth as little as $280,000 and no more than $460,000.

The project is not viable unless the real property can be purchased, as contractually agreed. The project is presently stalled, and mired in litigation, and babies die.

The Rwanda Development Board was asked to intervene, but they could not help. The attorney for the entrepreneur assures him that the Rwandan owner has no legal defense against the entrepreneur’s contractual right to purchase the property, but he continued with “and that means that there is a 60% chance that you may actually win in Court.”

Unfortunately for Rwanda and its economy, this entrepreneur has options. He and the multinational corporations that collaborate with him can simply build the same manufacturing facility elsewhere in Africa.

Another example illustrates that the sanctity of contract is a subject upon which the Government of Rwanda (GoR) might also reflect and improve: As so often happens, a high-capacity visitor fell in love with Rwanda and wanted to participate in achieving the great vision.

This entrepreneur owns and leads a large firm which provides valuable personal services. The firm spent approximately $30,000 to respond to a large GoR tender. They learned and “played by the rules” of GoR’s procurement process and they “won” the tender.

They believed that “the deal” was consummated. But for reasons that were never explained, the project stalled and they were never directed to commence the project, and the $30,000 investment to win the tender was wasted.

But their love for Rwanda persisted, and the firm responded to another tender for another project, and again won, and this foreign firm actually provided approximately $50,000 in valuable services, exactly as agreed in the written contract.

There was never any dispute concerning the timeliness or quality of the firm’s performance. The provider presented the anticipated invoice for payment, exactly as provided in the contract.

Although there was no dispute concerning the performance of the provider, the Rwandan recipient of the services decided that “This just seems like a lot of money.” Payment is now one year overdue.

This foreign investor is not likely to sue, but will no longer participate in the development of Rwanda, and will strongly caution other foreign investors. Rwanda has lost a valuable friend and supporter. The cost to Rwanda greatly exceeds the cost of simply paying the contract price, as promised.

How can Rwanda establish a reputation for honoring the sanctity of contract and thereby create an environment into which investors will readily and confidently invest?

Experience tells us that it can be best achieved by the inspired leadership of President Paul Kagame, who has personally launched and led numerous campaigns to reshape Rwanda to the amazement of the watching world. In a recent successful campaign, His Excellency passionately called upon his nation to learn and greatly improve “Customer Care,” which became an issue of national pride. Sanctity of contract and “promise keeping” should become an even greater issue of national pride, and it is certainly critical to achieve the goals of Vision 2020.

The person who nonchalantly breaches a contractual promise should be castigated in both the community and the courts as an impediment to Rwanda’s vision for economic development and also as a discouragement to foreign investors.

Not only should the leadership of Rwanda take this important message to the people, they should also assure that it is lived out within their own offices and agencies, even when it means suffering some buyer’s or seller’s remorse.

Suffering the results of a “bad deal” is a much lesser consequence than suffering the loss of reputation for integrity and credibility.

Government, quasi-government agencies, and universities should participate in drafting and promoting very simple, easily understood and used form contracts: Leases for homes, gardens, and shops; employment contracts; agricultural contracts for sale/purchase of future crops; and other such common contracts which Rwandans can confidently use, perform, and thereby boost economic activity.

Contracting parties must bear the ultimate responsibility for diligently developing and documenting the terms of their agreement in a clear, precise, logical, complete “Contract” that avoids ambiguities and eliminates the possibility of misunderstanding.

Thereafter, the contracting parties must perform their respective contractual obligations and be prepared to enforce their contractual rights, even if that requires using the judicial process.

Rwanda should continue current efforts to provide unrestricted, efficient, economical access to the courts or, even better, to quick and efficient mediation for resolution of contractual disputes by the enforcement of the reasonable expectations of the parties based upon the plain words of their agreement.

“Quick and efficient” cannot be a substitute for “sanctity of contract” without seriously undermining economic development and the vision for Rwanda.

Mediators and judges must be trained and committed to protecting and promoting fundamental legal principles and enforcing legal contracts, without concern for personalities, sympathies, prejudices, and who wins.

Everybody ultimately wins under “the rule of law” and everybody ultimately loses under the uncertain rule of personalities.

The real lingua franca

The sanctity and efficient enforceability of contract is the real lingua franca and rule of the game that Rwanda wants to win.

It should be passionately promoted by the Office of the President, the Ministry of Justice, throughout the other Ministries and Government of Rwanda, all the way down to the primary schools and in the churches. It should become a key component of Rwanda’s greatest asset, its cultural capital.

Source: http://www.daedalusexperiment.com/issue-2/reaching-goal-observing-rules.php


[1] The author notes: Rwanda’s reputation for low corruption and belief in rule of law is well deserved. Still, the author, a trained lawyer working in the faith-based community and very dedicated to Rwanda, has a couple of sobering anecdotes and suggests a way to do even better.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s