LISBON (Reuters) - Along Portugal’s Atlantic coastline even surf gear businesses are struggling. They aren’t victims only of the debt crisis that forced Lisbon into a bailout last year but of a legal system that is among the most inefficient in the developed world.
Luis Falcao LDA, a surf wear importer and retailer with 10 outlets, is a prime example. The company is involved in over one hundred legal cases to recover unpaid bills worth over 1 million euros that have been stuck in the courts for four to six years, says Miguel Tilli, a lawyer for the business that is owned by his father.
“That’s the country we live in,” Tilli sighs. “We’re running a tight ship, surviving, but too many firms are simply folding.”
As part of Portugal’s 78 billion euro international bailout, its EU and IMF lenders have demanded judicial reform to unblock court cases involving billions of euros in repossessions, back taxes and fines. Delays in settling cases are compounding the structural weaknesses of Portugal’s economy - uncompetitive labor costs, large debts and a lack of financing.
To an established business like Luis Falcao, the bills stranded in courts mean lost expansion opportunities.
To hundreds of other small firms, especially in the hard-hit construction sector, being unable to collect on a 5,000 euro bounced cheque for a few months can mean going under.
“Inefficient courts have a direct economic impact on employment, on credit... and weaken the ability of a country to attract foreign direct investment,” said IMF legal adviser Sebastiaan Pompe.
Following a decade of stagnation, Portugal’s economy is now experiencing its worst recession since the 1970s. Unemployment is at a record high of over 15 percent. Foreign direct investment in Portugal fell to 82 billion euros in June this year from 87 billion euros a year earlier, according to the latest available central bank data.
Portugal’s justice system is the second slowest in Western Europe after Italy’s even though it has one of the highest rates of judges and prosecutors, over 30 per 100,000 people.
The European Commission for the Efficiency of Justice estimated in 2010 judges here would need 430 days to close all pending cases, more than twice Sweden’s 197 days. Pending cases rose by about 4 percent last year to 1.23 million.
Foreign investors are suffering too.
Chris Barton, head of the British-Portuguese Chamber of Commerce in Lisbon, highlights the case of one British entrepreneur who has been locked in a multi-million euro compensation battle with a southern municipality for 20 years over an operating license for his industrial storage facility.
“He’s won all cases so far, but got nothing. We suggested our own legal team’s help. They were very sympathetic, but concluded that you’ll basically never win a battle against the state unless the system changes... In general, people do feel very frustrated with the slowness of justice here,” Barton said.
The reform should bring some relief.
Most delayed cases, like those the surf wear company complains about, have already been judged in the first instance. But currently they require a second process to enable collection. The need for a second process will be eliminated under the planned reforms.
“That alone will reduce the number of stalled cases by 40 percent,” said Justice Minister Paula von Hafe Teixeira da Cruz.
Her reform drive over the past year has won praise from Portugal’s EU and IMF lenders. She says she is determined to clear the backlog of cases by June 2013, as demanded under the terms of the bailout.
“Everything is either already working, like the new intellectual property court, or ready as a draft law. It’s a massive job for one year. We’ve met all the lenders’ deadlines so far and we expect to continue doing so,” she said.
That means that a new civil code and district court system must be approved by parliament by year-end and implemented in months. The minister said her team had already cleared 100,000 cases, reducing the backlog of delayed cases to “very roughly” 500,000.
The Judges’ Association fears the changes are being rushed through without sufficient thought and on the cheap.
“It has to be done with time and money for the implementation, including a decent computer system, adequate court buildings. There have been reforms in the past that looked great on paper but they gave absolutely no results because they didn’t have the necessary resources. No money, no honey,” said association chief Jose Mouraz Lopes.
The number of district courts will be slashed to 23 from 320, pooling their work in larger centers and closing courts in rural areas where the population has shrunk since the system was established in 1837. Courts will specialize to deal with labor or trade issues.
“The minister was courageous about the district courts, you have to give her that, but the main thing is that they don’t have the money to do it properly,” said Prof. Nuno Garoupa, law and economics researcher at the University of Illinois.
“The whole system needs a game-over and start-again moment, when old processes are cleaned up, but that would require double the number of judges we have today,” he added.
He called for a model more like the Netherlands, where courts are financed according to their efficiency, or Finland and Norway that set deadlines of six to 12 months to complete most cases. Portugal’s convoluted system has more in common with France and Italy, he said.
Conceicao Gomes, researcher and author of a book “Delays in Justice”, said the reform push must continue: “It’s not enough to put it in a law, it takes time to implement. But nothing will change tomorrow unless we start today.”
($1 = 0.7606 euros)
Reporting By Andrei Khalip; editing by Janet McBride