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March 29, 2017

Sir, laws matter


March 29, 2017

I met the chief minister of Punjab yesterday. The meeting was in my capacity as a director of the newly reformed Punjab Board of Investment & Trade. Here is what I had planned to say.

Sir, let me ask you a question: what do you think is the single most consequential law passed by the Punjab Assembly while under your guidance?

In my view, the answer to that question is the Punjab Rented Premises Act, 2009. Let me explain why.

Under the legal system introduced by the British (and specifically the Transfer of Property Act, 1882), the law of rent was simple. All leases of a year or more needed to be registered. Once your lease ran out, the landlord had the right to kick you out – no reason required.

In 1959, the then government of West Pakistan adopted the West Pakistan Urban Rent Restriction Ordinance, 1959. Under this law, once your lease ran out, the landlord could not kick you out. Instead, you could only be evicted if the landlord could establish either default or “bona fide personal need.” And by ‘establish’, I mean establish in court after a full-fledged trial.

The consequences of the 1959 law were horrendous. Given the speed with which our overburdened courts operate, every lease agreement (whether for a month or a decade) became a lease forever. Even routine rent cases were litigated all the way up to the Supreme Court, taking decades along the way. Landlords thus faced two unpalatable choices: either leave their properties untenanted or take the risk of renting to someone who could then not be dislodged for a decade. Some decided to hedge their bets and hung out signs saying: “For rent to banks and multinationals only”. All to no avail.

The end result was not only more frivolous litigation but a severe shortage of rentable property. In simple economic terms, the 1959 ordinance made renting property a high risk proposition. In order to offset that risk, landlords asked for higher rents – which less people were able to pay.

In 2009, the Punjab Assembly passed the Punjab Rented Premises Act. That law repealed the 1959 ordinance and instead reintroduced a system which allows landlords to turf out their tenants when a lease expires. As a consequence of this law, an entire category of litigation has been wiped out. There used to be a class of lawyers who did nothing but rent cases. They still exist but their numbers are far fewer because the advantages of litigation have been taken away. And at least anecdotally, the further result is that more rented property has come on the market because landlords have become more willing to take the risk of renting property out.

Sir, the simple point here is that laws matter. Yes, it is important to build projects. Yes, it is important to improve infrastructure. Yes, it is important to have tangible results. But the intangible doesn’t become any less important just because it is intangible. All of your policies and projects and all of the private sector’s endeavours are dependent on a legal base that hasn’t been modernised in more than a century. And that age is beginning to show. You want your government to be the Ferrari of governments. But you can’t drive a Ferrari on dirt roads. At least, not very fast.

The further point to note is that after the 18th     Amendment, the role of the provinces has become massively more important. Before 2010, you could (in theory) rely on parliament to do the needful or, at least, comfort yourself with the thought that if things were really that bad, then parliament would step in. Well, those days are over. Parliament’s law-making is now confined to the limited items on the Federal Legislative List.

And we’re not talking here about controversial stuff. We’re talking about simple, basic stuff, the kind you figure out after sleeping through a freshman lecture on economics. Here are three examples.

First up is a benami law. Yes, I know the National Assembly has just passed a benami bill. No, I don’t know why the National Assembly is messing around with benami. Land was a provincial subject even before the 18th          Amendment. If by some miracle the new benami law gets passed by the Senate, it will last about 30 seconds in court.

“Learned DAG, are you familiar with the Federal Legislative List?”

“Err, yes your Lordship.”

“Thank you. Writ allowed with exemplary costs.”

Second up is a limited partnership act. Yes, I know the SECP is keen on passing a limited liability partnership law. No, I don’t know why they’re messing around with partnership. Like land, partnership has been a provincial subject since the dawn of time.

The fundamental issue here is the mechanism through which people organise business activity. Currently, there are two options: a company limited by shares or a general partnership. A company works great at a larger level. It allows people to invest and it provides for limited liability. But for small enterprises, the regulatory demands and hassles of the SECP are simply too much to handle. Small businesses don’t want to file forms every year and they don’t want to deal with the hassle of board meetings and board resolutions. In any event, most banks won’t lend to a company without getting a personal guarantee from every director, so the whole point of a company stands defeated in many cases.

A partnership, on the other hand, is wondrously simple and easy. You only have to register it once. And it is more tax-efficient than a company. But then again, a partnership makes you liable for everything your partners do, as the saying goes, down to the last cufflink.

The simple answer to this problem is to introduce the concept of a ‘limited partnership’. In a limited partnership, there are two types of partners: general partners who remain fully liable and limited partners, who are liable only to the extent of their investment. A limited partnership therefore offers the best of both worlds: simplicity and limited liability for investors. Interestingly, this ‘innovation’ was introduced in England in 1907!

The third subject that needs immediate attention is domestic arbitration. Our current law dates back to 1940. And that is a significant issue because unlike many of our other laws, it has not dated well. In 1940, even English judges regarded commercial arbitration with barely disguised loathing. Today, the business world regards arbitration as a commercial necessity. Pakistan, however, remains mired in a situation which (to quote an Indian judge) has “made lawyers laugh and legal philosophers weep.”

Mr Chief Minister, your legacy has to consist of more than bricks and mortar. If you want businesses to flourish in Punjab, you have to use your majority in the Punjab Assembly to pass laws which make a significant economic impact. You have to lead the way.

As it happened, I didn’t get to make the whole speech. But I did manage to get my point across. And the good news is that I have been tasked with presenting drafts of the three laws so that they can be formally considered. Let’s see what happens now.


The writer is an advocate of the Supreme Court of Pakistan.

Twitter: @laalshah