BizCLIR

The ability to create and enforce contracts under a clear, consistent legal framework is a critical component of economic growth. Where there is a widely held expectation that agreements freely entered into between businesses or individuals will be subject to enforcement by a court or other tribunal, a marketplace can be transformed. What was once mere hope for performance based on a personal relationship or vague insinuation becomes a legitimate expectation of delivery. When business partners are in fact required to do what they have said that they will do – pay money, deliver goods, provide services, and so forth – risk diminishes and the recipients of a promise can better plan for the future. With decreased risk, the cost of doing business goes down, thereby elevating the private sector’s prospects for profit.

This chapter examines the laws and business practices underlying the use of contracts in Tanzania, as well as the institutional effectiveness of resolving and enforcing contract-related disputes. In fact, the World Bank ranks Tanzania’s performance with respect to Enforcing Contracts extremely well – the country placed 35th out of 178 countries in 2007. This rosy picture does not seem accurate in practice, however. It likely reflects only the treatment of higher-value cases where more well-heeled actors may seek redress in Tanzania’s relatively new commercial court. In fact, most commercial actors in Tanzania are rarely in a position to engage the formal mechanisms of the commercial court, or, for that matter, any court, to resolve their contract disputes.

Reasons for avoiding the courts include the perception of high fees, slow processes, and frequent delay tactics used by lawyers. Even more significantly, a huge part of Tanzania’s business community still operates informally. Contracts are typically formed with a handshake, a smile, and someone’s word. It is rare for written contracts to be drafted and signed by the parties to a business transaction. As explained by one textile manufacturer, written contracts are not typically used for orders or deliveries. If someone wants to produce 500 Kongas – a traditional and colorful African cloth -- then he or she brings in a fabric design to the factory and the manufacture produces it. The customer does not pay in advance; rather, payment is generally rendered when the order is completed and received. In this business, if a customer fails to pay for the order then the manufacture will most likely cut his losses and simply refrain from doing business with that customer again.

Although this approach to doing business allows commerce to take place relatively unencumbered by the hassle and expenses of greater formality, it becomes much riskier when the customer and the manufacturer are strangers to one another. A strengthened legal system can diminish the risk of doing business with an unknown partner. That is, it can provide the manufacturer with more information about prospective customers and greater confidence that those customers will meet their obligations. With that greater level of confidence, business can grow.