BizCLIR

A number of observations and findings apply to more than one substantive area of law under the diagnostic methodology. For Armenia, in fact, the greatest problems were crosscutting institutional issues involving the courts and legislative processes. Courts serve as implementing or supporting institutions for all areas of commercial law, so that general problems affecting all areas are discussed in this chapter, while specific problems related to specific subject matters are addressed in the subsequent chapters. Likewise, legislative process is an overarching issue for all laws. A number of other observations regarding supporting institutions and market for demand are not specific to each law and are also covered below.

A. General Comments on the Social and Economic Setting

Despite their understandable pride in Armenia’s 1700-year history as the first Christian nation in the world, Armenians find little comfort today in that past. The last century did not go well for the country. Armenia was subject to a conflict with Turkey in 1915, in which, it is estimated, from 600,000 to one million Armenians died, while many more were dislocated from what is now western Turkey into the Middle East, Europe, Russia, and the United States. Before recovering from these tragic events, Armenia came under the domination of the Soviet Union, thwarting any possibility that the economy might recover along capitalist, free market lines.

The dissolution of the Soviet Union was a mixed blessing for Armenians. On one hand, they obtained political independence and established their own government on September 21, 1991. On the other, they lost their somewhat privileged position within the former Soviet Union, where they had enjoyed a disproportionate share of trade and economic subsidies. The catastrophic earthquake of 1988, from which some sections of the country are still recovering, compounded this loss of subsidies.

In addition, the dissolution of the old order allowed simmering hostilities from the past to boil over into conflict, resulting in the secession movement of the Nagorno-Karabakh region of Azerbaijan. Although the war between Azerbaijan and Armenia over this ethnically Armenian enclave has settled down into something of a stalemate, the borders to Azerbaijan and Turkey resulting from this war are still closed. Armenia, a small country to begin with, is now unnecessarily isolated.

In short, Armenia was ill prepared economically, politically, and socially to embrace the opportunities for development presented by the dissolution of the old Soviet regime. Recovery and development are proving to be much slower and more painful than anticipated when the Iron Curtain fell in 1989. Armenia has no significant modern history of democracy or market economics to build on. Although there is a large, well-educated, well-financed Diaspora, interested in helping to rebuild the country, there is a wide cultural gap between those Armenians who created a new life abroad in the developing world and those who survived 70 years of Soviet oppression. Many of the well-intentioned Diaspora Armenians who returned to invest in the homeland of their parents have disinvested and returned to their own homelands as the “Re-aspora.”

B. The Commercial Courts of Armenia

During recent revisions to the CLIR methodology, we have decided to conduct a separate, focused assessment of the courts responsible for commercial dispute resolution. Previously, they were studied as the implementing institutions for Contracts, but their impact is much wider than just contract resolution – the courts affect every area of commercial law in the legal framework

1. Introduction

The importance of the court system was emphasized during the diagnostic by the unanimous concern among respondents regarding the quality of the institution. Although, as described below, a new set of Commercial Courts has just been established and is still too young to assess, overall satisfaction with the court system is extremely low. Respondents complained of long delays, poor decision-making (when decisions were even issued), and suspicions of corruption. Several of those who had studied the courts felt that even the well-meaning judges and lawyers often found themselves tempted to use bribery to resolve disputes simply because so few people know or understand the law, and thus are not in a position to insist on accountable, transparent decisions. Others have noted that the courts can work, but usually only when the legal and factual issues are extremely simple, and one lawyer is persistent in pushing the case through an excessively slow system subject to unnecessary delays.

2. Legal Framework

In principle, the Law on the Judicial System; the Law on the Status of Judges 1998; the Law Amending the Law on the Judiciary 2001 which creates the Economic Court; the 1998 Code of Civil Procedure and the Law on Compulsory Enforcement of Judicial Acts together comprise the key laws for judicial enforcement of legal rights in Armenia. In practice, the legislative framework is not well suited to commercial cases.
In Armenia, the 17 entry-level courts are called the Courts of First Instance with approximately 110 judges. Their jurisdiction is general, and until October 2001, included all commercial and bankruptcy cases. Now those cases will be handled by the Economic Court, with 15 newly appointed judges. Appeals from the Courts of First Instance travel up to three second instance Appellate Courts (20 judges) and then on to the single Court of Cassation (13 judges) for final review. Under the Law on the Judiciary, economic and commercial cases go before one trial judge in the Economic Court whose decision is to be rendered within one month of receiving the “statement of claim.” The decision may be appealed directly to the Court of Cassation. If reversed and remanded, the case returns to the Economic Court to be heard by a three judge panel. Currently, ten judges of the Economic Court are located in Yerevan and five are in provincial centers. In addition, there is a separate Constitutional Court that hears challenges to the Constitution.

Courts of First Instance are currently staffed by approximately 165 judges. Of these, only 29 (17.6%) are women, which is quite low compared to many other transition countries. The average age is well under 45 years.  The Constitutional Court has lately issued opinions demonstrating a high degree of independence. The Constitutional Court and the Court of Cassation are generally highly regarded by the people. However, a number of complaints were raised with respect to the very limited standing available for individuals to raise constitutional issues and have them heard by the court. Several prominent lawyers and judges are working together to define the issues more carefully and propose appropriate legislative amendments. Success may be limited or delayed by the extremely closed legislative process, but at least the problem is being addressed.

The lower courts are not at all respected. The fee structure, based on percentages of the amount claimed, is inappropriate and is properly viewed as confiscatory. The Code of Civil Procedure is unnecessarily complicated and needs to be simplified, but the greater problem is a lack of judicial management in pushing cases through instead of permitting unjustifiable delays. At present, there is no Judicial Code of Ethics, which only adds to the public’s distrust and belief that the court system is subject to widespread corruption.
 
The Committee of Court Chairmen housed in the Court of Cassation acts as the main policy making body, administrative agent, and training supervisor (through the Judicial Training Center) for the entire judiciary. A prior Association of Judges became dormant after formation of the Judicial Training Center. Lately, it has been revived because the Judicial Training Center has not adequately responded to the urgent need for judicial training.

The courts are technically independent under the Armenian Constitution, with judges appointed for life. Many legal professionals were of the opinion that this is not altogether meaningful, and that there has been significant political tampering with judicial decisions over the years. The conditions for tampering are certainly in place: few court opinions are published, and thus open to scrutiny; pay is very poor; and no system of accountability is effectively in place.

Legal proceedings are predicated on oral hearings, rather than on written briefs and now requires reform. Developed with German assistance, the Code of Civil Procedure assumes an activist judiciary that understands modern procedure and that can discipline the parties. This is not happening at present in Armenia in part due to lack of judicial training. Published and accessible judicial decisions, consistency in judicial decision-making, enforcement of judgments and the capacity of ancillary service providers (e.g. bailiffs) remain areas that require strengthening. A minor but telling example of the institutional weakness is that there is no verbatim transcription in court of civil proceedings. The result is that a court record may not be reviewed by the parties and the lawyers until 12 months later. One foreign lawyer now makes his or her own audiotapes of civil proceedings as both a contemporaneous record and as a way of monitoring the judge.

Opinions, while usually written, are not published, and are available only to the parties. Several practitioners complained vigorously regarding the quality of the opinions, describing them as almost Caesarean in brevity and content: like Caesar’s famous boast “I came, I saw, I conquered”, many Armenian judges are accused of reducing their opinions to “I heard, I considered, I awarded.” In general, opinions do not include an adequate description of the legal and factual basis for the judge’s award, thus limiting the parties’ understanding of the law applied to their case and eliminating any clear record for appeal. Many young judges are eager to see their opinions published.11 An effort is underway to assemble and publish existing opinions by collecting them from attorneys on a voluntary basis, and private practitioners have also developed a proposal for internet-based publication of new opinions. Other than these private-sector initiatives, there does not appear to be any plan for upgrading the level or availability of judicial opinions at present.

Once in litigation it is not clear that settlement is encouraged or that the courts are able to offer ancillary services such as mediation, conciliation or arbitration. Alternate Dispute Resolution did not figure as a reality in our interviews, perhaps because the system to which it would be an alternate is still in need of such development. Compounding the problems with the judicial system is the fact that there is little ground for compromise or settlement. Foreign investors take their lumps and leave, muttering under their breath, “never again.”
Arbitration could be an alternative to the court system: an arbitration system and procedures are provided for under Armenian law. The fee structure, however, is prohibitive. Amendments have been at least partially developed by private sector attorneys, but there is no official project or plan to change the existing, ineffective system. There is some tradition of mediation and conciliation attempted by father figures and go-betweens but this is informal and not judicially enforceable. In summary, there is almost no arbitration or alternative dispute resolution going on in Armenia today.

With respect to enforcement of foreign judgments and arbitral awards, it was difficult to gauge how they are supposed to function due to lack of English translation of the Code of Civil Procedure at the time of this assessment. Assuming that they are enforceable in principle, as a practical matter judges who are struggling with domestic decisions are likely to have difficulty recognizing and enforcing a foreign judgment. Although commercial arbitration does not appear to be used at present in Armenia, enforcement of foreign arbitral awards is theoretically possible because Armenia ratified the New York Convention on the Enforcement of Foreign Arbitral Awards in 1997. In reality, however, it is not possible to obtain judicial execution of commercial arbitration awards. Respondents consistently expressed doubts about the ability of bailiffs to enforce judgments in Armenia, both because delay allows debtors to dispose of or hide their assets and because bailiffs’ inadequate salaries and inadequate procedural powers e.g. the power to scrutinize or suspend bank accounts mean that they have little incentive to proceed vigorously.

3. Implementing Institutions

Armenia’s courts are heavily limited by their infrastructure. The new Economic Court occupies a Spartan facility outside central Yerevan. The building has unlighted stairwells and no amenities. There will be seven regional facilities, but in the meantime, most regions are sharing space with Courts of First Instance. The judges of the Economic Court have little or no experience in handling bankruptcies. There is an urgent need for training and for adjusting the overall attitude of the judges to the concept of bankruptcy and how it fits in Armenia’s shift to a true market economy.

The judiciary is popularly perceived as a clannish institution where political and family connections can be important than merit for admission and advancement. This approach extends throughout the government and all the way down to the government controlled admissions procedure at Yerevan State Law School. In essence, the system works on goodwill rather than on inherent design. One practitioner said that in order to accomplish anything in a clerk’s office, first he has to look for friends.

Domestic lawyers generally contend that the courts are not independent in Armenia. They are cautiously critical of the quality of the judges’ decision-making regarding contract: some are good, others make bad decisions, but they agreed that courts have little experience of complex litigation or litigation in which foreign law is applied. Judges’ vulnerability to influence was accepted as a given element in litigation. Some lawyers felt that bribery was important, stating: “There is no bias in Armenian courts – whoever pays the most wins.”

In addition, several respondents insisted that politically well connected investors can manipulate the court system by calling in political influence at the highest levels. This kind of “escalation” of litigation to the decision-maker’s superior and ultimately to the Minister of Justice and/or the President is not unusual. Lawyers defended the practice as being their only recourse against a judge who appears biased, has been bribed or who simply has got the law or procedure completely wrong. However, the same lawyers agreed that this corrodes the justice system, earns them the enmity of certain judges and ultimately does not fix the root causes of their dissatisfaction with the courts.
Most of the younger judges will agree that the bedrock change needed for successful reform is a judiciary able to produce reasoned and published opinions. Severe lack of funds for computers and other essential hardware is a problem, but so is fear of exposure among the incompetent judges. Also, losing control of information monopolies means less opportunity for corruption.

Most, but certainly not all, of the newly appointed judges of the Economic Court are in favor of reform, but struggles over jurisdictional issues will surely arise as competing courts seek to refine the definition of “commercial cases” in their favor. On the other hand, litigants will try to avoid calling their cases commercial cases to avoid triggering very large fees. The court fees in these cases are based on the amount in controversy (2%–Courts of First Instance; 3%–Court of Appeals; 5%–Courts of Cassation). These percentage fees do have maximum limits ($2,000 at the first instance), but they can be substantial in simple cases of contract execution or default on a promissory note, for example.
Oddly enough, the modest pay for Court of First Instance judges ($200/month) was not viewed by anyone as a hindrance toward attracting lawyers to the bench. There is no shortage of talent taking the qualifying exam each year and judges are not leaving the bench for the private sector.

The Armenian judiciary lacks a transparent set of court procedures placing the judge firmly in control of litigation and administrative matters. This lack of clear authority stems from cultural distrust, entrenched monopolies (i.e. Bankruptcy Administrators, bailiffs), and a Ministry of Justice that sees a need for judicial reform on the one hand, but fears a dissipation of its power to a truly independent judiciary on the other.
The court will soon be a recipient of part of an $11.4 million loan from the World Bank to improve facilities, for training, and for public outreach and education on court processes. Given that this money will be spread throughout the court system, and given that most regional courts do not even have rudimentary equipment such as copy machines, it is uncertain how far the loan will go to enhance judicial stature or efficiency in appearance or in fact.

4. Supporting Institutions

Various institutions traditionally support the advancement and improvement of judicial capacity in many countries. These include associations of judges, Bar Associations, law schools, and separate judicial training institutes. For Armenia, these organizations are not yet providing the kind of input and support that is needed for a healthy judiciary, but there is evidence that some of them are heading in the right direction.

a. Judicial Training Center
It is surprising that the Judicial Training Center, as a creature of the courts and Ministry of Justice is actually a reactionary force. Numerous offers from donor agencies to fund judicial training have been turned down. Most recently, offers to train bailiffs in valuation and marketing techniques and a grant to improve public perception of the courts were refused. The Committee of Court Chairmen controls this agency on a day-to-day basis, and while some of its members are quite reform minded it is clear that the majority of its members are not. The revived Association of Judges is eager to make end runs around this vestige of Soviet attitude in order to accomplish its urgent training needs.

b. Bar Associations.
Private Bar – Most commercial lawyers are also affiliated with business and management consulting firms that provide a wide range of services. The Ministry of Justice, in an effort to keep civil courts open to all, actually discourages efforts to require competent, certified legal counsel in all civil court proceedings. The Bar Associations’ status is ambiguous because they are not truly state-sponsored and are not non-governmental organizations (NGO). Nevertheless, the Bar Associations (with their 500-600 members) are moving ahead with certification and specialization programs designed to let businesses and the public know who is qualified to practice in various areas. They are also the primary vehicle for licensing and disciplining of attorneys. Unfortunately, incompetent attorneys can still work as consultants and appear in civil court while not being accountable to anyone.
During their three years of operation, the Bar Associations have also begun public outreach programs to educate the public on numerous areas of fundamental rights (such as how to get divorced, what to do if arrested, etc.). The Bar Associations will also be working with the judges of the Economic Court to bring a series of nationwide seminars (town meeting style) and television shows to explain the jurisdiction and procedures of the new court and to familiarize the public with the concept of bankruptcy as a privatization tool.

c. Law Schools
While the law schools are slow to modernize their commercial law curricula, they are moving quickly to develop advocacy skills. These skills were not much in demand during Soviet days, but market driven commercial litigation demands advocates. Both Yerevan State Law School and the American University Law School point proudly to distinguished performances in recent worldwide moot court competitions. The moot court facility at Yerevan State was touted as the finest courtroom in all of Armenia, but we noted the prosecutor’s table was much larger than the defense table and the defense table was ringed with jail bar-like spindles for “symbolic” reasons.

d. Bailiffs and Notaries
Enforcement of domestic judgments is provided for by law but is difficult to effect in practice.
Bailiffs were uniformly identified as lacking the necessary authority, legal power, salary and prestige that would enable them to enforce judicial decisions. Businesspeople and domestic and international lawyers without exception regarded bailiffs as ineffectual in enforcing judicial decisions, but were sympathetic to their situation. As one domestic lawyer said ‘In a gray economy where people do not declare their income, it is nearly impossible to locate their assets’. Among domestic lawyers, the only alternative recommended to clients is self-enforcement i.e. negotiation, or pre-investigation of the other party’s assets to determine whether litigation will have any chance of success.
It is hard to conceive of these functionaries as court “supporting institutions” because of their preoccupation with supporting themselves. Nevertheless, as the move to make their operations transparent gains momentum, a certain competence borne of training and experience will necessarily be required. Training efforts for these groups must be very focused on practical issues and not deep theory. For example, notaries should be familiar with bankruptcy procedures when they are finally developed (especially claims procedures). Bailiffs should focus on topics such as valuation of assets and marketing techniques.

e. Bankruptcy Administrators
As noted before, this group is quickly moving toward increased accountability and competence. The Ministry of Justice is backing this progress and has recently licensed 40 Administrators. At the same time, however, the Ministry of Justice is promoting administrator control over the bankruptcy process to the diminution of the court’s independence and power. The bankruptcy court can function under these circumstances for now because almost all the cases are liquidation or no asset cases but it cannot provide a wide range of solutions to all the constituencies in a real market-based insolvency situation. Only judicial control over the system can balance these interests.

5. The Market for Reform (Social Dynamics)

Whether driven by a true sentiment for reform or by rapidly deteriorating confidence in Armenia among overseas investors, the creation of the Economic Court was a big step in the right direction. Unfortunately, the chaos present in the Courts of First Instance (especially in the area of bankruptcy) is now being transferred into this new court, while the court is staffed by judges with sufficient intellectual prowess but limited experience in commercial law and almost no experience with bankruptcy law. As their dockets pile up, the Ministry of Justice seems to be intent on enhancing the role of Bankruptcy Administrators at the new judges’ expense. The demand is strong from the business sector and the two “outside” Bar Associations of civil attorneys for independent judges, published decisions, and transparent court procedures to replace the Byzantine mystery that exists now.

6. Conclusions and Recommendations

The key to judicial independence and respect is reasoned and published opinions. Every effort should be made to support e-governance proposals and to use the Bar and law schools as an army for information gathering. There is no doubt that the Association of Judges would supervise the publishing of opinions if funding were available. Judges also need bench books on procedure and training in fundamental economic theory to understand that law can enhance investment and economic growth with predictable, enforceable processes open to all stakeholders. Training in the United States of America and countries like Estonia with its remarkable e-governance success story should be considered.

It was surprising how many organizations were involved in grass roots education on fundamental rights. Young professionals and the business community should back these efforts to help the public bolster the calls for reform.  Armenia has done more than most CIS countries to rid itself of the old Soviet bureaucracy. There is also a perception that the worst corruption of the post-Soviet days may be over. In short, most of the old Communist bosses have made their money. There are no longer insurmountable pockets of resistance to reform. This picture of an opportune moment for reform needs to be presented to the world.

Information mechanisms should be created to give the outside world, the Council of Europe, and other international bodies reports if indeed real progress is achieved in the coming months. Armenia must recover from so many obstacles, and must be seen to be recovering in order to coax back wary overseas investors and to build the morale and confidence to stimulate real internal growth.  Finally, allowing the new Economic Court judges to see successful foreign commercial courts first hand will go a long way to broadening their outlook on the question of judicial independence called for in the Armenian Constitution. This reorientation of mentality is fundamental for any meaningful and lasting modernization.