Monday, July 6, 2015

What will become of Law 75 after the Krueger report? Where does the Puerto Rico Supreme Court fit in?

Those who have read the Ann Krueger report on Puerto Rico or its summary, and those of us who are attentive and affected residents of Puerto Rico or have economic interests in our shores, have reason for concern (should I say, alarm) about what is to come from Puerto Rico's endemic and historic structural problems identified in the report.

Most of the recommendations coming from the Krueger report are not new. All require hard to find political party consensus and political will. Most require U.S. Congressional or political oversight and legislation. Some of the recommendations include enacting federal bankruptcy protection for public corporations, the repeal or modification of the Jones Act, increasing local income tax and property tax collections, reducing the federal minimum wage for Puerto Rico, obtaining parity for federal welfare programs, reinstating Section 936 or similar federal tax credits, passing reforms of local labor laws and construction permits, among others.

More relevant to the subject matter of my blog, however, are business law reforms needed to make Puerto Rico's economic environment more competitive and business friendly. While the Krueger report is not too specific about the commercial legislation that can or should be revisited, it is not hard to predict that laws protecting Puerto Rico dealers and sales agents, among others, will come under the microscope as they have in the past. But before one jumps to conclusions about whether Laws 75 and 21 produce inefficiencies (or not) or contribute (or not) to public welfare, I'd like to add a factor that is far more conducive to commercial instability than is political inaction to change existing legislation.

According to the Krueger report, Puerto Rico ranks squarely in the middle of all foreign states in the world when it comes to respecting contracts. That is, 50% of all the countries have more respect for the validity and enforcement of private contracts than we do. What would those investing millions of dollars in Puerto Rico's real estate ventures and infrastructure think of this? An alarming statistic to be sure and nothing to be proud of. But why? Courts, administrative agencies, and contracting parties who sue are all responsible for this. I've reported before an increasing tendency of our local courts not to respect civil and commercial contracts as written. Under the guise of the Civil Code's disposition to ascertain the true intent of the parties, courts have used this as a license to ignore clear and unambiguous contractual terms and to reform contracts for the benefit of one of the contracting parties, usually the one who is perceived to be weaker or economically disadvantaged. But often the government itself is the beneficiary of contractual reform. This activisim or protectionism creates a spiral or doom of uncertainty and unpredictability in legal outcomes. As troublesome is the whole body of law that virtually makes private contracts worthless when contracting with the government. Estoppel and unjust enrichment doctrines do not apply, and I could go on.

The short of all this is that commercial legal reform and economic progress cannot be successful without judicial restraint and a predictable and uniform rule of law.

The Supreme Court of Puerto Rico, as the ultimate spokesman of what Puerto Rico law is, has the power if not a constitutional obligation to put an end to judicial activism in our local courts below and bring stabilty to our rule of law that is so badly needed. Maybe then we can begin to move up the "rankings" and improve our business climate to stimulate investment, create more jobs, and stop human capital from leaving Puerto Rico. Half the countries in the world are better than us at respecting contracts. What a shame.