NATIONAL 5 (Spotlight Weekly)]

Whither Judiciary?

The apex court's procedures on the sale purchase of Credit-Agricole Indosuez's shares raises a key question: how secure is Nepal for foreign investment?

By KESHAB POUDEL

More than half a dozen foreign investors have packed their bags over the last three years because of the lengthy judicial process in Nepal. Multinationals like Kodak Film and Dornier have left the country carrying bitter experiences of the Nepalese legal system.

Credit Agricole-Indo-Suez bank is in the midst of similar legal trouble. As its cases are involved in the lengthy judicial procedures of the Supreme and Appellate Courts, nobody knows how long a settlement would take.

Indosuez bank : In legal tangle

Nepal Indo-Suez Banks Ltd is a joint venture with 50 percent share holdings by Credit Agricole-Indo-Suez of France and the remainder belonging Nepalese shareholders, including Rastriya Banijya Bank, Rastriya Bima Sansthan and the general public.

After disputes with the Chaudhary Group in court, Credit Agricole-Indo-Suez is said to be in a dilemma over whether to continue its future ties with Nepal. On behalf of the Chaudhary Group, Binod Chaudhary filed a case against Credit Agricole in Lalitpur Appellate Court seeking a restraining order against the sale of 50 percent shares belonging to Credit Agricole to any party other than himself or the person nominated by him. He also demanded the issuance of an interim order.

Chaudhary claims that his Memorandum of Understanding (MoU) with Credit Agricole allows indefinite time to purchase its shares in the bank. Lalitpur Appellate Court, however, declined to grant the request and Chaudhary filed another case at the Supreme Court in the modality of an appeal seeking an interim order.

At the initial stage, a single bench presided over by Supreme Court Justice Min Bahadur Rayamajhi ordered routine explanation from the appellate court seeking the contention of the petitioner. The case is now under consideration of the Supreme and Appellate Courts. Indo-Suez wanted to disinvest its 50 percent share and get permission from the Nepal Rastra Bank. At the last minute, industrialist Chaudhary filed a case on the ground that the MoU is based on indefinite period of time and he is entitled to get the share.

The MoU, according to the Contract Act, was based on principle and was subject to another contract. The agreement was only to negotiate for another contract. Legal practitioners assert that Chaudhary cannot laim the MoU forever guarantees his right since the document, signed in 1999, had already expired the same year. Under the MoU, there were certain conditionalities on preparing the sale purchase agreement.

Supreme Court : four rule of law

According to the minutes of the meeting held at Kathmandu on Friday April 23, 1999 in connection with the proposal of the sale purchase of 50 percent of the shares of Nepal Indosuez Bank Limited, the validity of the MoU between the parties was extended from March 15 to 15 July 1999. The paper was signed by Michel Courjaret on behalf of Agricole-Indosuez and Binod K. Chaudhary on behalf of Chaudhary Group.

Chaudhary on May 16, 1999 wrote a letter to Courjarat, chief executive officer of Indosuez Bank Ltd. saying that there was an obvious conflict, which could only be resolved by reaching an understanding that the MOU has to be extended for a somewhat longer period to cover the date when the authorities would approve the application for sale of shares. In the letter, Chaudhary also wrote: "Please take up this matter with your Singapore office and let me have your response."

According to the MoU, another contract was needed for the terms and condition of the sale purchase of the shares, but the court turned a blind eye to the basic agreement. "The MoU gives Chaudhary Group indefinite right to buy the share," said advocate Sushil Panta, who is also the legal advisor of the Nepal Rastra Bank, pleading on behalf of Chaudhary in Lalitpur Appellate Court.

In the Supreme Court, Chaudhary's lawyers put forth the views expressed by Panta in the appellate court and sought the interim order. The defendant's lawyers hold the view that that the MoU is not a final document.

"The MoU is not a final document, as it is just an agreement in principle, subject to contract and negotiations for further agreement," said advocate Sudhir Shrestha, pleading the case in the Supreme Court on behalf of Credit-Agricole-Indosuez.

The judiciary has an important role to play in the economic development of the country, particularly in terms of the volume of foreign investment that comes in. Because of weaknesses in the judiciary, many companies have left the country. Many companies want to settle legal complications offshore.

It seems that Nepalese judiciary does not have anything much for foreign investment, as it does not set a timeframe to end such disputes. The time has come to review the judicial system in order to make it at par with international standards and practices.

Apart from political stability and proper policies, foreign investment depends on the strength and independence of the judiciary. Nepal needs to demonstrate that its judiciary is independent and capable enough of guaranteeing the basic legal requirements foreign investors.

The Nepalese judiciary has a five-decade-long history and has been people friendly. The courts have upheld the rights of the people, which has helped to instil faith in the masses. The courts needs to set similar standards for foreign investors, especially at a time when many multinational companies are knocking its doors.

If experience is a guide, there is little room for optimism for foreign investors. Many multinationals have put the country as a high-risk area for investment. The bureaucracy, politicians and the private sector are driving foreign investors out.

"The practice existing in country shows that even a Nepali has to flee the country, forget about foreign investors," said a Nepalese businessman struggling with a case in the court, on condition of anonymity. "There is no room for impartial and fair business."

To prosper, economies need institutional arrangements to resolve disputes among firms, citizens and government; to clarify ambiguities in laws and regulations; and to enforce compliance, points out the World Development Report 1997. The third component of judicial effectiveness is organizational efficiency, which is needed to avoid long delays in clearing the case. The average case takes 1,500 days to clear in Brazil and Ecuador, but only in 100 in France."

The judicial system can strengthen the investment climate of the country as long as its decisions are perceived to be fair. If the local legal system is found to be ineffective, the parties concerned will opt for offshore countries in case of legal problems. This is what happening in the Philippines, Brazil, Ecuador and other countries.

Even in the Indosuez case, the MoU is subject to Singapore law, which is one of the important pleas of the bank. "Without resolving this preliminary legal objections, the court has entered into the deal. This is a very sad part of the decision," said a lawyer.

There must be a firm system to show foreign investors that they will receive equal treatment during the period of investment and when pulling out. If there is a hostile situation in withdrawing investment, it will send a negative message to all would-be investors.

"In signing the MoU on sale purchase of shares of Nepal Indosuez, both business houses deliberately used the agreement in principle, subject to contract and negotiations for further agreement under the concept of contract law," said advocate Shrestha.

In legal terms, an MoU does not have legal binding and party can withdraw from it at any time. In this case, the MoU clearly says that it is subject to Singapore law. The local court cannot take judicial notice of Singaporean law.

Chaudhary's lawyer disagrees. "The MoU gives an indefinite right to sale and purchase of the share of Indosuez to the Chaudhary Group," said advocate Sambhu Thapa, who was a lawyer of Nepal Rastra Bank governor Tilak Rawal during the hearings on his dismissal.

Nepal contains several risk factors for foreign investors. The country is vulnerable in terms of geography, market and labor law, power, and undisciplined manpower. When the local courts deal with cross-border business issues, they have to follow the norms and principles set and accepted in developed legal systems and the decision should be made under the established principles of such law. If the local court takes a decision on its own, foreign investors may list the judiciary as another risk factor while assessing the viability of any project in Nepal. If that happens, it would spell economic disaster for the country.