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Inevitability Of Punishment

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Dr. Andrei Maximov Maximov&Partners LLC am@maximov.com www.maximov.ge

Doing business by unwritten rules, experiencing it as a service to family or friends with lacking business planning is a very common phenomenon in Georgia which too often results in conflict, including the case of a foreign investor and entrepreneur and his local partner.

Inevitability of punishment is, in my opinion, the most important issue, the key link which would help getting Georgian economy out of the existing condition and up to a better future. The heart of the problem when dealing with a business conflict is ultimately as follows: who wins in the end? The scrupulous and honest party or its opposite, brazen and unscrupulous?

Make no mistake: the judicial and legal system in today’s Georgia works, even though unintentionally, in the interests of business people with no ethics. For example, I am an investor or a businessman who got cheated. Let’s say, the other party simply defaulted on contractual payments for delivered goods or provided services. It is lucky if all conditions were registered within the legal environment—otherwise, there would be no use even mentioning the issue. However, even if all documents are in place, this is not sufficient. When going to court, the injured party sets itself up for many years of waiting for a court decision on quite an obvious issue. It is difficult to blame the judges for that: each of them has on average 500-600 cases on his desk, so it is not physically possible to review them within a period of time that would have been reasonable for businesses.

Also, what is an ineffective judicial system when compared to its resulting lack of punishment and/or a punishment that is indefinitely postponed? In such a case those will win in business who cheat, default on their obligations and do not pay for provided services or delivered goods. Under such conditions the unscrupulous businessman will always have competitive advantage over the honest one! This state of things will raise the number of those who would like to cheat and to drive into a corner all those who honestly pay on time and fulfill all their contractual obligations. It becomes more profitable, as per business process, to take advantage of one’s partner rather than doing business honestly (let us leave business ethics alone). It is great when you can use someone else’s money with 0% interest for three years in a row, and only then you would have to return them to their source as per the court decision—that is, if you will find the donor at all… Why, indeed, bother getting secured loan from a bank, with its 20% interest?

A year ago, there appeared, finally, some light at the end of the tunnel: changes in Georgian legislation allowed the resolution of business conflicts via private arbitration and in a rather prompt manner–after all, two or, as a maximum, three months, though still quite a long delay, but so much faster than three years of wait… However, since the arbitration decision must be approved by courts, in reality everything got back to square one.

I will provide an example from own business practice. We have been working for two and a half years with a respectable Railway Car Building Company (a subsidiary of Georgia’s Railway Car Building Holding): we were providing truck haulage services for delivering mounted wheels and spare parts from Russia, always on a deferred-payment basis. We got always paid while we were still in the processing of delivering the cargo. However, every time when the last truck would get to the depot, payments would stop. Our companies work in the legal environment only, our business used the services of the best legal experts in Georgia, and our contracts had clauses for very impressive penalties for violating terms of payment (up to 0.5% per day off the outstanding amounts). As company debt grew outrageously high, our lawyers got to work. When considering our claim, however, the judge declined the application of an interlocutory injunction on the grounds that that could lead to the bankruptcy of the defendant (he was obviously not too concerned, in this case, with a possible bankruptcy of the claimant). The threat of a potential settlement to avoid huge penalties may have been a factor in making our debtors “afraid”, so that they eventually paid up their dues following three pre-trial settlements and even hefty penalty fees for breach of contract. Only one smaller payment was still outstanding, a few thousands of dollars, so we decided, as an experiment, to deal with it via arbitration. What a wrong move! The arbitrator arrived at a fairly quick decision indeed, only after two months of consideration—and it was in our favor, too. For some reason, however, he drastically reduced late payment penalties: he may have regarded our company as a malicious money-lender. Despite the fact that our intention was never to lend money to anyone and that, as a result, we paid own money for somebody else’s haulage. Most importantly, however, is this: this arbitration decision is still, after four months’ waiting time, not approved by the judge due to certain reasons that are not entirely comprehendible (judge on vacation, change of judges, etc). It is still “hanging” even though no full-fledged case hearing is necessary: we are talking only about the approval of the verdict that had already been passed.

This is not about our relationship with the Railway Car Building Company. This is about theory. Just imagine which inferences from this situation will deduce a company that has constantly (and Railway Car Building Company is typical in this respect) practiced payment default or delays in its relations with its suppliers. I have no personal grievances to company top managers (though no sympathy, either). They do everything quite correctly when looking at the situation from the narrow, utilitarian standpoint: they carry out their operations executing their production plan at someone else’s expense. Why not, if the existing legal system allows that and, more so, even supports such behavior? They did it once, then ten times, then one hundred times more. When banks do not agree to finance an unreliable client, even using high interest rates, then why not get resources from the supplier of goods or services—all the more so, as no interest has to be paid for as long as three years?! On top of that, such business practices, even though everyone is aware of them, are not an obstacle for starting successful PR campaigns, getting national business awards and getting to the top of the national rating for successful business enterprises.

I would like to stress the point that without the inevitability of punishment in Georgian business environment there will be no great influx of foreign investors into the country, especially small- and medium-scale investors, despite the most successful institutional reforms. It is not true that foreign investors are only interested in top profits. Their first priority is not to lose their money, and only next comes their keen desire to recover funds with a profit. Investors will, without thinking twice, accept smaller profit and longer pay-off profit if they get guarantees against losses and more predictability in their business process. More importantly, investors would be enthusiastic for getting in and enriching Georgian economy with their ideas, knowledge and money.