In the wake of a damning report on the state of Cambodia’s courts, businesses say the quality of the judicial system is affecting decisions on whether to invest in the Kingdom

The Kingdom’s judiciary took a lashing last month when the International Bar Association published a report that found Cambodia’s courts to be plagued by corruption, bribery and political influence.

The report, titled Justice versus Corruption: Challenges to the Independence of the Judiciary in Cambodia, painted a grim picture of the Kingdom’s judicial functioning and cited a lack of confidence in its operations from both locals and foreigners.

Endemic corruption across every sector, including the judiciary, is one of the reasons for Cambodia’s abysmally low “Ease of Doing Business” ranking put out by the World Bank. The annual rankings placed Cambodia 184 out of 189 countries for ease of doing business, with enforcement of legal contracts ranked 178th – reflecting the state of the Kingdom’s court system.

The impact on investment is likely significant. Having a “strong and effective” judicial system was one of the key factors incoming investors would base their investment decisions on, said Matthew Rendall, senior partner at Sok Siphana and Associates.

“It is not in and of itself necessarily a factor which may cause them to choose not to invest, but it certainly forms part of their considerations when deciding whether or not to invest,” Rendall said.

On the issue of enforcing contracts, with the system as it currently stands, foreign investors find it hard to rely on the judiciary because of the lack of “the courts providing reasons for their decision making”, according to Rendall.

“The current state of the development within the Cambodian court system makes it difficult for foreign investors to rely on the courts to enforce contracts,” he said.

The changing of contract terms and the lack of a strong legal recourse in the country could hurt Cambodia’s prospects with potential investors going forward, particularly when dealing with a local partner, said Thomas Hugger, chief executive and fund manager at investment firm Asia Frontier Capital.

“Legal recourse might be, for example, more important for a joint-venture company compared with a company which invests on its own,” Hugger said.

However, despite economic progress made by the country, investors want to see a strong legal framework that can help protect their investments, he added.

“There is no doubt that a stable legal and regulatory framework could certainly help to attract more investments in Cambodia,” he said.

According to David Van, representative for business advisory firm Bower Group Asia, a weak judiciary will largely impact the influx of large multinational companies (MNCs), which bring with them large investments and jobs.

“Today, Cambodia counts less than 20 reputable MNCs compared to, say, over 10,000 based in Singapore, indicative of the disparities between the two judiciary frameworks,” Van said.

Given the lack of specialised commercial courts in Cambodia, the government five years ago issued a sub-decree to establish the National Commercial Arbitration Centre (NCAC), which was established in 2013 and opened for cases in 2014. But, as the centre has seen only one case in the past year, its effectiveness has yet to be ascertained.

“The NCAC has been established for the last few years but remains untested,” said Van.

The fact that the centre has seen only one case points to the larger issue of awareness that arbitration can be used as an effective tool to settling commercial disputes, said Ros Monin, president of the NCAC.

“But the problem is the centre is new and they can only come to the arbitration centre with the agreement of both parties,” he said.

According to Monin, despite the slow start, an increasing number of companies are putting arbitration clauses in their contracts, given that arbitration proceedings can only move forward if both parties put in the clause, which can be binding or non-binding according to the clause.

The one case – details of which have been kept confidential – had only one party agreeing to go in for arbitration, with the other party refusing to because the contract did not contain a valid arbitration clause.

But, even in cases where an arbitration ruling has been issued, enforcement of the ruling has to be carried out by the courts, which means dealing with the Kingdom’s notoriously corrupt and ineffective judicial system.

“Regarding the [implementation of the ruling] by the court system, it is another issue,” Monin said.