BizCLIR

Unlike a country such as Croatia, which had a strong legal tradition to build upon when emerging from socialism, Albania has no strong history of modern law. The kanun, an expression of traditional law that developed during the Middle Ages, still informs and influences many social arrangements, but there are few well accepted statutes from before 1991 to build upon for commercial activity.

The international community has helped address this legal abyss by assisting with substantial reforms in the past nine years. As a result, all of the commercial laws examined for this assessment are new, with the oldest (the Civil Code) adopted in 1992. As a further consequence, all of the laws are relatively modern and generally reflect modern European traditions and norms.

This is reflected in the comparative scores below taken from C-LIR assessments done in Macedonia, Poland, Romania, Ukraine, and Kazakhstan. Albania has the highest scores for legal framework (85%), better even than Poland (84%). For all other areas, however, Albania falls well below Poland, but compares favorably with Macedonia, Romania, and Kazakhstan, except in Implementing Institutions. Only Ukraine consistently performs below Albania.

In the other assessments done with this methodology, much attention has been paid to the need for revising laws and improving the legal framework. For Albania, this has not been the case. The complete newness of the laws and the legal traditions has led to an unusual situation in which most of the observations apply across the board to all areas of commercial law.

To address these broad areas, general comments are set forth below. In addition, analysis of the courts and most supporting institutions have been examined most thoroughly in part E - Contracts.

Legal Framework

Process. In extensive interviews with more than 50 people, the most frequently heard commentary on Albanian commercial legislation was that the laws are generally good enough, but need to be implemented. The team found this to be true in examining the framework laws. Revisions can certainly be made, and should be, but the focus of assistance at this point should be less on substantive issues and more on process.

Judges, lawyers, businesspeople and even members of Parliament uniformly agreed that there is no formal mechanism for engaging stakeholders -- particularly the private sector -- in the formulation, revision, or adoption of legislation. Several government officials responsible for legislative drafting noted that they generally provided drafts to some groups for comments, but they cited personal conviction rather than mandatory regulations as their reason for doing this. This conviction leads to some private sector feedback, but the approach is not predictable and does not capture a broad enough section of those who will be affected by the laws.

There appears to be a window of opportunity for creating an interactive, participatory process for drafting legislation. First, a number of respondents responsible for or involved in legislative drafting noted their practice of seeking comment from private sector interest groups, suggesting that there is at least a core group of officials who understand the need for such input. Second, several members of Parliament interviewed indicated a desire for more assistance from the donor community, suggesting that there might be an increased sense of receptivity from Parliament for technical assistance. Third, the private sector, as well as the judges, indicated that they want and need a formal mechanism for communicating their interests and their findings on the need for new or revised laws. (The judges pointed out that although they deal with gaps in the law, they have no way of making sure the identified gaps are eventually filled.)

Creating such a mechanism will not only support the development and refinement of Albanian law, it will have a number of other important benefits. Meaningful involvement will help to remove the often heard complaint that these laws are German or French but not Albanian. Feedback and comment would allow the drafts to be adjusted to the Albanian context and to build a sense of ownership where little currently exists. This should provide greater support for implementation as the private sector has notice of new laws and accepts the laws as its own. In addition, the participatory process builds respect for and commitment to democracy itself by reinforcing the concept of accountability of government officials to the electing constituency in a culture where government by decree has been the rule. Finally, it increases socio-political stability by providing the private sector with a rational, formal system for voicing their needs. Though commercial law provides a context for creating such a system, it will be used for all law-making.

Education and Awareness. Another universal theme for all areas of law was ignorance of both law and commerce. Basic business concepts are not well understood or known among law makers, judges, lawyers or even much of the business community. With less than ten years in the modern world, Albanians face a bewildering array of new concepts, including modern commercial law. They still have little education or experience in these areas, and in many cases are unable to absorb the plethora of new laws because they do not understand the underlying transactions that the laws regulate.

One of the best illustrations of the problem was presented by a lawyer who had assisted with the preparation of the 1994 bankruptcy law. When asked what he thought about the draft of the new bankruptcy law, he responded "What new law?" This level of (un)awareness was found throughout the legal community with respect to a wide variety of existing and proposed laws. It should be noted the system of relatively silent adoption of the existing commercial laws has worked against their implementation, and has left Albanians with a feeling that they have a set of foreign-imposed statutes, which they do not yet relate to effectively.

There is a crying need for education and awareness for all of groups before or in concert with the passage of any new laws. Simple "street laws" are being prepared by GTZ for broad publication and dissemination, but a focused campaign for priority areas such as credit and collateral will be needed before the country can effectively use or otherwise implement these laws. Without such assistance, new laws may even be counterproductive, like dragging a new swimmer into deeper and rougher water instead of teaching basic strokes.

Consolidation and approximation. Several legal professionals noted the need for a formal Commercial Code and for careful approximation of laws to European standards (for eventual membership in the European Union) and compliance with WTO requirements. If pursued in the manner of past legal reforms, these are not likely to be absorbable by the legal community, which cannot yet absorb the current changes. Even so, they express important issues.

The idea of a Commercial Code is more a preference than a need. Many civil law traditions do indeed set out their commercial laws in a separate Commercial Code, although many of the underlying concepts supporting commercial transactions are set forth in the Civil Code. On the other hand, many civil law countries have the approach currently employed in Albania of incorporating commercial laws within the Civil Code through specialized sections. It is hard to imagine a reason for replacing this perfectly acceptable system with another at this time. Perhaps it should be revisited in the long term, but should resisted in the near term.

Approximation and compliance are valid concerns. The issues are much more related to implementation than legislation, however. Most of the laws have been adopted in the shadow of WTO and the European Union, and if applied would generally harmonize. Recognizing this, support for harmonization and compliance at the legislative level should focus on a slower, deliberate process of identifying and addressing the areas of refinement on a biannual or other mid-term basis.

New laws. Despite the very conservative tone of this introductory section, it is recognized that some new laws will be needed from time to time as the existing laws are better applied. For example, one legal professional who works with foreign investors noted the need for a franchise law. In fact, the Civil Code covers franchise, but the respondent was correct that the nine articles do not provide sufficient coverage and need to be expanded through implementing or supplemental regulation.

But which new laws are needed? A supply side approach would compare Albania to a European country and start pumping in the new laws and regulations based on eventual investment and commercial needs. As already stated numerous times, the legal and business community cannot absorb such a project, which would have to be staffed and run by a team of foreign experts with little Albanian participatory capacity. A more effective approach would be to have the foreign and domestic business community, with input from the legal community, identify areas in which their existing or planned commercial activities are being constrained, and then identify which constraints are based on gaps in law rather than implementation or physical infrastructure. A national program of business roundtables or workshops could be used to identify and prioritize needs, and build the nascent business associations at the same time. Laws identified should then be fed into a formal mechanism of participatory legislative process.

Implementing Institutions

The courts are the principal implementing institution for contract and bankruptcy, a secondary implementing institution for collateral (in defining rights under collateral law), and a supporting institution for company, foreign investment, competition and trade. Clearly, they are fundamental to commercial legal and institutional reform. In Albania, they are fundamentally weak.

The courts were repeatedly cited for their lack of effectiveness in the tasks they are handling. This is understandable in light of Albanian history, but certainly not acceptable for Albania's future. The need for increased legal knowledge, increased transparency and reduced corruption were all noted. These are addressed in somewhat more detail in the section on Contract Law, below, but are mentioned here for emphasis.

The courts are undergoing positive change. USAID has helped to establish a Magistrates' School which is addressing the need for theoretical and practical training. The World Bank is about to commence a large scale project of administrative reform, including assistance in case management and court administration to help streamline and improve the process of justice. The European Commission, the Soros Foundation and others are also providing targeted assistance. Local leadership and commitment to reform are strong, so that the outlook for the judiciary is very good.

It is not clear, however, to what extent these projects will address the need for transparency through written, published judicial decisions. According to Albanian law, all judges must issue their final decisions in written form, but the practice of oral decisions, or written decisions without a legal basis is reported to be widespread. The newly established Courts Inspectorate may need assistance in learning to evaluate written decisions, and training will certainly be needed for judges who have never been trained in decision writing. Without strict enforcement of this law, it will be virtually impossible to turn the tide of reported corruption and establish confidence in the judiciary.

Assistance will be also be needed on a targeted basis as actual needs arise. For example, much of the education in bankruptcy will not be meaningful until some bankruptcy cases begin to filter through the courts. At that time, the business and legal communities could profit greatly from direct assistance, using a bankruptcy case as a teaching opportunity, with expert assistance and public analysis, not unlike some highly publicized trials in the U.S. during the last decade.

Supporting Institutions

For all areas of law, the supporting institutions are generally weak, whether public or private. The specialized services, professional associations, special interest business associations, and other private sector associations found in a healthy civil society are generally weak or missing. One result is that any demand for change is difficult to coordinate or focus, and the actual changes are more difficult to supply.

Fortunately, a number of programs have begun to address some of the needs. World Bank is reported to have a program for the bailiffs and judicial enforcement agents, which will be critical in making commercial judgments meaningful. In education, there is also progress, including the Magistrates' School mentioned above and the Masters of Business Administration program being offered at the Faculty of Economics with funding from USAID through the University of Nebraska. Both of these have been very well received.

In addition, the World Bank will soon be instituting a program of assistance in legal publishing for the Official Gazette and others, with an emphasis on electronic publishing and internet dissemination. This will help fill the gap in available legal materials. Internet access will certainly increase the availability of much needed materials, but increases in comprehension of those materials will need additional effort.

Associations. The weakness of associations presents a critical problem and a critical opportunity. A number of national, local and bi-lateral business associations are forming and growing. Few have a clear understanding of how an association should be structured or operate, how it is funded, and what kinds of services can and should be provided to its members. A program of general association building would probably be a valuable investment over the next few years. The Albanian-American Chamber of Commerce, founded during the second week of this assessment, would be a natural leader and counterpart for providing general training in association building and association management. The newly revived Chamber of Trade and Industry also appears to have strong leadership potential as a sponsor or counterpart in association building activities. For lawyers, both the Chamber of Advocacy and the Association of Women Lawyers need assistance in organizing and improving the legal profession.

While such technical assistance to business associations may not immediately appear relevant to commercial law, it should be noted that business and professional associations are both counterparts and conduits in the development and dissemination of commercial laws. They provide a structure for representing special interests, and for collecting and communicating information on the impact of law on those interests. They also provide a transparent forum for government and private sector communication, strengthening the rule of law while weakening the capacity for hidden or corrupt influences. Moreover, there is demand for these services -- several thousand companies and individuals have joined new and existing associations in the past year.

Education. Strong associations serve a critical role in educating their members and the general public about legal issues, a role that extends beyond the need for educational institutions and their courses. Accordingly, public awareness and educational programs should include appropriate associations whenever possible, both as sponsors and counterparts. Such partnerships strengthen the associations while disseminating necessary information.

General "popular" or "street" education and awareness is needed in a number of areas. In addition to law generally, and even specific laws such as collateral, there is need for increasing awareness in virtually all areas of business, commerce, law and economics. Some of the topics which might be useful in the near term include:

• General business concepts
• How companies operate
• Profits, losses and revenues
• Marketing and public relations
• The nature of contracts and how they work
• How credit works, including the need for foreclosure and repossession
• The economic impact of law
• How enforcement of judgments strengthens the economy
• The role of government in facilitating growth through commercial law
• Specific laws
• Customs law and valuation
• Collateral law -- how and why it works
• Bankruptcy -- every aspect

While there are many experienced professionals and educated individuals who understand these areas, there is no group (other than banks and foreign accounting firms) with sufficient understanding to support Albanian economic development. Courses should be provided for lawmakers, government officials, judges, lawyers, notaries, and business people, recognizing that most have no practical business experience, and few have more than nine years of experience.

Continuing Legal Education. There is currently no program of Continuing Legal Education (CLE) for lawyers, notaries or judges. A retraining program is planned for existing judges who did not attend the Magistrates' School, but not for ongoing provision of relevant legal education. More troubling, however, is that no institution has yet been identified that appears ready to take responsibility for a CLE program.

For judges, it is likely that the Magistrates' School will eventually provide the necessary follow-on seminars and workshops as course materials are revised in light of changing laws and circumstances. The Association of Judges would be a natural vehicle for CLE programs. The team was unable to meet with the Association, but did find judges who are not members and do not value membership, relying on NGOs and projects for their needs. Clearly, the Association will need support if it is to become meaningful for its constituency.

The Chamber of Advocacy (formerly the Bar Association) is another natural candidate to develop and offer CLE courses for lawyers and notaries, many of which could also serve judges. Unfortunately, the Chamber has a well established history of inactivity, so that it does not currently enjoy the respect of the legal community necessary to function as a professional organization. Current leadership has expressed interest in change. This may be the hour in which assistance will bring lasting results, although this remains to be proven. On the other hand, the team heard high praise for the Association of Women Lawyers, which could serve as an additional or separate vehicle for development of CLE.

The Law Faculty would generally provide some support for CLE. In Albania, the Faculty simply has not shown interest. Several respondents noted that high politicization of Faculty leadership and appointments has led to a serious decrease in motivation and relevance of the professors in the past five years, while others noted that low salaries (based on hours taught, not on preparation time or research) and poor conditions leave little incentive for professors to develop new materials or take on additional responsibility. Faculty members have expressed an interest in change, and foreign specialists have noted that there are a number of potential reformers at the school. Opportunities should be provided for the Faculty to use technical assistance and improve its role and performance, if desired.

Accounting. Within the CLIR methodology, accountants and auditors have been identified as important supporting institutions, especially for companies, bankruptcy, and any legal action or transaction requiring valuation of a company. Albania does not currently have an accounting profession known to be capable of providing these services. This is not a function of insufficient use of International Accounting Standards (IAS), but a failure to use and apply the existing law on accounting and auditing.

Several specialists noted that IAS is needed only for certain kinds of entities and transactions, and these standards are being used there. Better standards would fill the vast majority of needs for Albanian accountants and accounting. This will be driven by banks which wish to make loans, businesses which wish to receive loans, and both businesses and tax authorities as they negotiate the proper level of taxes. Hence, improved accounting should be tied to programs in these areas, rather than placed in a vacuum of the theoretical (albeit accurate) need for proper accounting standards, with emphasis on enforcement, including civil or criminal liability for accountants and auditors who do not comply.

Market for Reform of Commercial Law

The demand side of the market equation is, as with any product or service, crucial for legal reform in Albania. Currently, demand is soft. Those interviewed almost unanimously voiced the opinion that the existing laws are good enough for now, and can be revised in a few years as needs arise. The demand, then, for framework laws does not seem sufficient to support any major initiatives at this time.

This does not mean, however, that there is no demand. The needs most frequently expressed were at the implementation level, where there appears to be substantial demand for change. The constant chorus of complaints regarding court performance made it quite clear that there is popular and professional pressure that can be harnessed to support the changes underway. The new Magistrates' School attracts top students, with more applications than it can fill. The outlook for court reform is quite good. The supply of the reforms is coming primarily from the donor community, but with governmental and institutional support. By working closely with Albanians and Albanian institutions, such as the Magistrates' School, it should be possible to avoid the sense of "foreign" solutions that has tainted much of the legislative reform.

There is also demand for a better legislative mechanism, although it is less focused. Several government drafters expressed their own desire to include the private sector in review of laws. Private sector associations expressed frustration or confusion at how they could voice their interests to government in an effective manner. It will probably be necessary to help both the public and private sectors to better understand the purpose and impact of participatory lawmaking, and to help focus private sector demand into proposals or support for a transparent participatory mechanism. If the goodwill encountered among drafters is representative of the mood of the legislators, then the government is in a position to supply this change, with outside technical assistance. Unfortunately, the last national experience with democracy was more than 70 years ago.

At the level of supporting institutions, there is also growing demand for the organizations that undergird commercial law development and civil society. In the past year, a number of private sector business associations have been started or revitalized, and those which are not operating effectively are subject to rather open criticism from their members. Lawyers are frustrated with an ineffective bar association, and several complained that they did not even receive notice for the few meetings held by the bar this past year. There seems to be strong desire for something better, but it has not become effectively focused.

Supply for this part of the market should ultimately come from the private sector, although the government could theoretically support the development of associations, if it had the resources. Most of the new associations need help: they do not have a history of associations to draw upon, and are often uncertain about the form, role, services, and organizational structure that they should have. This is another area where outside technical assistance could be very effective in the short term.

It is worth noting that Albania has a population of 3.4 million relatively poor people (by European standards). There are approximately 900 lawyers and 350 judges. The overall commercial market is quite small, and there is no large group of investors waiting to come in. In fact, much disinvestment is currently taking place among foreign investors, some of whom are moving their money to Albania's neighbors. It is not clear to what extent policy makers understand that they must compete with their neighbors for investment, and that they must eventually integrate regionally in order to offer investors more substantial markets. There does seem to be a strong interest in European integration, and this will provide an important context for reforms.

Some of the demand for change, however, is offset by satisfaction among many with the intimate, small town society that has existed for decades. Small loans are made between friends and colleagues, and few people have found a need yet for bank loans or collateralized credit. This is likely to change -- and may change quite rapidly with the advent of secured credit for farm equipment and machinery -- but the critical mass of those consciously demanding the benefits of globalization and modernization is quite small. Again, public awareness and public debate will be essential in bringing about lasting reforms.