Revue Européenne du Droit
Contract Law Heterodoxy
Issue #4
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Issue

Issue #4

Authors

Kevin E. Davis , Mariana Pargendler

Revue européenne du droit, Summer 2022, n°4

There is an ongoing debate about whether contract law has any role to play in addressing economic inequality 3 . On this view, contract law can at most be used to address imbalances of wealth or power between parties to specific transactions, but not to help parties who are disadvantaged relative to other members of the broader society 4

In recent years there has been a resurgence of interest in heterodox approaches that allow bodies of law besides tax law to play a role in combatting inequality 5 . Several scholars have argued that contract law ought to be recruited into the battle 6 ,  resurrecting high-profile earlier debates among U.S. scholars 7 . However, so far, conversations about these heterodox approaches have focused on legal developments in North America and Western Europe. This is unfortunate because economic inequality is a pressing problem in other parts of the world, including in developing countries, some of which may be sites of important legal innovations.

In fact, there is a great deal to be learned about contract law heterodoxy from the jurisprudence of developing countries. There are prominent examples of courts and legislatures in Brazil, Colombia and South Africa openly using their control over the legal effects of agreements between private actors to influence the distribution of wealth. Attention to those heterodox developments promises to enrich the debate about the role of contract law in addressing economic inequality around the world.

We begin this essay by setting out the theoretical foundations of contract law orthodoxy and then discussing the possible objections. Next, we discuss examples of contract law heterodoxy drawn from our research on contract law in Brazil, Colombia, and South Africa. We conclude by discussing what these examples from the developing world might tell us about the viability of contract law heterodoxy in other countries, including more economically developed countries such as the United States or most members of the European Union. 

  1. The Foundations of Contract Law Orthodoxy

The orthodox view is that contract law generally is not and should not be concerned with the distribution of wealth in society 8 . Part of the underlying rationale is that contract law generally only comes into play when a person enters into a transaction . Moreover, people often alter their transactional behavior to avoid the effects of unpalatable contract law doctrines – for example, by adjusting the price term of the contract or refusing to contract altogether – while the strictures of other fields such as tax, property, and competition law are more difficult to avoid. The lack of comprehensiveness and ease of avoidance of contract law necessarily limit its effectiveness as a means of redistributing wealth.

If contract law is defined narrowly to include only the law applied in disputes resolved by civil courts, then its redistributive potential is even more limited. Contract law in that sense is only guaranteed to affect agreements between parties whose disputes are likely to end up in court if not resolved amiably, and does not apply directly to the enormous set of transactions in which lack of information or resources will keep the parties from resorting to the judicial system for enforcement of their rights. 

Finally, there are special grounds for concern about having courts consciously seek to alter the distribution of wealth in society.  In the Rawlsian tradition, such efforts arguably are only legitimate when pursued by elected officials, which judges often are not 9 . There are also pragmatic concerns about whether judges have enough information and expertise to predict the distributional effects of their decisions in contract cases on society as a whole, especially taking into account the complex set of factors that limit contract law’s effectiveness.

The concerns about lack of comprehensiveness, potential for avoidance, limited judicial powers, legitimacy, information and expertise all support two propositions that are central to what we call contract law orthodoxy, one substantive and the other institutional. The substantive claim is that contract law ought to play little or no role in combatting economic inequality. The institutional claim is that, to the extent that contract law does feature in distributional initiatives, these should be explicitly delineated by legislatures as opposed to courts. 

None of the concerns that underpin contract law orthodoxy have any bearing on whether contract law ought to be used to compensate for imbalances of information or power between contracting parties or to influence the relative effects of transactions upon the parties’ welfare.  Consequently, contract law orthodoxy is consistent with doctrines designed either to limit the effects of asymmetric information or market power during the negotiation of transactions or to limit unfair exchange. To be sure, there are bitter debates about whether fairness in either the negotiation or performance of contracts is an appropriate objective for contract law. But those internecine debates should not obscure the substantial consensus around contract law orthodoxy.

  1. The limits of orthodoxy

Although the arguments in favor of contract law orthodoxy are compelling, they are not irrefutable 10 . If we assume that combatting economic inequality is a valid objective of public policy, then the next question becomes what are the best policy instruments for the task. The orthodox substantive claim that contract law should not be one of those instruments depends on the merits of policies that include contract law interventions relative to policies that do not involve contract law. The fact that there are important constraints on the effectiveness and legitimacy of contract law is not enough to rule out the option of resorting to contract law if other policy instruments may have their own limitations.

All of the alternative instruments for combatting inequality have important limitations. For instance, the theoretical benefits of comprehensive tax or land reforms might be unattainable in practice because reforms to those highly salient bodies of law must overcome various forms of legislative inertia and popular biases against redistributive policies. These types of laws are also susceptible to evasion and avoidance..

The institutional component of contract law orthodoxy rests on questionable assumptions about the lack of information, expertise and legitimacy (in relation to distributional matters) of courts. The amount of information and expertise that courts possess relative to legislatures seems likely to be contingent on institutional design. The relative ability of courts’ and legislatures’ to assess the overall distributive effects of interventions will depend on factors such as the qualifications and workloads of judges, court staff, and lawyers, as well procedures for gathering evidence, compared to the qualifications, workloads and information-gathering processes available to legislators.   

The extent to which is legitimate for courts to address distributional questions may also depend on the choices that a society has made about institutional design. In jurisdictions where courts have constitutional mandates to protect economic rights it is difficult to avoid the conclusion that it is legitimate for courts to take into account distributional considerations. Even in countries whose constitutions only explicitly provide for judicial protection of civil and political rights, courts arguably have the authority to ensure that the distribution of wealth secures the economic prerequisites to enjoyment of non-economic rights.

Finally, the argument that distributive objectives are best secured through legislative as opposed to judicial institutions ignores the possibility that legislative institutions will be more susceptible than courts to democratically illegitimate forms of political capture that thwart distributive interventions.

  1. Contract law heterodoxy in developing countries

The theoretical objections to contract law orthodoxy are well known among scholars in developed countries but the case for deviating from orthodoxy has been undercut by a perception that heterodoxy has little practical appeal. There is a widely held view that contract law around the world has converged on orthodoxy 11 . Our study challenges this view by revealing important examples of contract law heterodoxy in Brazil, Colombia, and South Africa, three large developing countries.

Perhaps the most explicit endorsement of contract law heterodoxy can be found in the Constitutional Court of South Africa’ decision in Paulsen and Another v. Slip Knot Investments 777 (Pt) Limited 12 .   The main issue in the case was whether the interest a creditor could recover on a debt in arrears after the institution of legal proceedings but before the date of judgment should be subject to a rule that limited the amount of prejudgment interest a creditor could recover to the principal of the debt. The majority of the Court decided that the limit should apply. They acknowledged that limiting interest risked encouraging debtors to employ delaying tactics to prolong litigation but observed that allowing interest to accrue without limit during the pendency of litigation would prejudice debtors and inhibit their constitutional right of access to the courts. In the main judgment, Justice Madlanga explicitly based the decision on distributional grounds:

‘We need to look at South Africa’s socio-economic realities.  A large percentage of the providers of credit are large, established and well-resourced corporates.  On the other hand, although there may be what the dissenting judgment refers to as “stout-boned” credit consumers, it would be ignoring our country’s economic reality to suggest that there is any comparison between these corporates and most credit consumers.  To many credit consumers, who fall on the wrong side of this country’s vast capital disparities, astronomical interest may mean the difference between economic survival and complete financial ruin.  While in some cases creditors may lose money to inflation during litigation, this is very unlikely to have the same catastrophic effect on the creditor compared to what the accumulation of run-away interest will have on the debtor. If I were to be forced to make a choice between the two, it would be an easy one for me.’ 13

And:

‘It cannot be plausibly gainsaid that for our democracy to be meaningful, it is only fitting that those previously denigrated by racism and apartheid, confined to the fringes of society and stripped of dignity and self-worth must also enter the terrain of meaningful, substantial economic activity. Surely, our hard-fought democracy could not have been only about the change of the political face of our country and such upliftment of the lot of the downtrodden as the public purse and government policies permit.  Entrepreneurship and the economic advancement of those with no history of being financially resourced must be given room to take root and thrive.  This can hardly happen without finance.  The sort of interest to which Oneanate exposes our legal system is deleterious to this necessary economic advancement.’ 14

Contract law heterodoxy also features prominently in certain areas of contract law in Colombia. Colombia’s Constitution, enacted in 1991, provides that regulation of the provision of public services should take into account the criteria of cost, solidarity, and, most notably for present purposes, income redistribution 15 . Contract cases typically reach the Constitutional Court through tutela claims, a type of action guaranteed by the constitution to protect fundamental rights against public authorities, as well as private parties in exceptional circumstances defined by statute 16 . While contract law disputes are generally subject to ordinary jurisdiction and remedies, tutela may be invoked by “subjects of special constitutional protection,” such as the elderly, the ill, minors, the disabled, female heads of households, and persons earning less than the minimum wage 17 . Contract disputes potentially impinging on fundamental rights such as life, health or the vital minimum are thus subject to tutela claims and constitutional review 18 . In cases involving health insurance contracts the Court frequently applies constitutional principles to require expansions of coverage, whether by requiring renewal, barring termination or limiting exclusions. For instance, in one case the Court reversed a denial of health coverage for failure to disclose a preexisting condition and grounded its decision in part on “the protection of the fundamental right to the ‘vital minimum’ of persons in situation of vulnerability and manifest weakness.” 19

Colombia’s Constitutional Court has also appealed to the fundamental rights to human dignity, life, health, and equality to limit a water company’s ability to stop the provision of water due to nonpayment by “subjects of special protection.” 20 The plaintiff in the case was a 54-year old woman who was the head of her household, physically incapacitated to work, and responsible for two minor sons. While the Court upheld the statutory provision permitting the suspension of supply as a means to promote the efficient, continuous, and uninterrupted provision of public services to all, it also determined that denial of water to subjects of special protection was disproportionate and, therefore, unconstitutional.  The Court held that, in response to nonpayment, the company should investigate the credit situation of the user and negotiate payment agreements consistent with their ability to pay. If the payment obligations were still not performed, the company could limit the water supply to 50 liters per person 21 .

We also see heterodox tendencies in decisions from both South Africa and Brazil concerning the rights of people who default on agreements to pay for purchases of real estate in installments, a common practice in countries where financial markets are not well developed and so credit from financial institutions tends to be expensive. The South African Constitutional Court held that allowing the purchaser to cure the default and demand completion of the purchase was required by the constitutional values of “reciprocal recognition of the dignity, freedom and equal worth of others.” 22 In Brazil, the Superior Court of Justice held that if consumers who agreed to purchase new homes in installments unilaterally terminated the agreements the construction company could retain no more than 10 or 15 percent of the amounts paid and could not recover either compensatory damages or contractual penalties. One interpretation of these decisions is that concerns about inequality and social justice led courts to effectively shift labor and real estate market risks from lower and middle-class consumers to construction companies. 

We make no claim that heterodoxy is the dominant feature of contract law in any of Brazil, Colombia or South Africa. Not only are there many areas of contract law in these countries in which orthodoxy still prevails, but some of the initial heterodox moves were quickly followed by clear steps toward orthodoxy. In 2020, the South African Constitutional Court forcefully rejected the broader proposition that enforcement of a contractual term violates the constitutional right to equality merely because it will prejudice a member of a historically disadvantaged group 23 .  In 2018, Brazilian construction companies successfully lobbied for legislation that permits construction companies to retain up to 50 percent of the amounts paid by defaulting installment purchasers 24 . In 2019, the Brazilian Congress enacted a “Law on Economic Freedom,” which demands that the interpretation and enforcement of contracts favor economic freedom, respect the parties’ allocation of contractual risks, and resort to judicial revisions only in an exceptional and limited manner, though the new rules are largely inapplicable to consumer contracts or other contracts with imbalances in bargaining power 25 . At any rate, these developments reflect ongoing contestation in South Africa and Brazil over the extent to which orthodoxy should prevail in contract law.  

  1. The global significance of contract law heterodoxy 

It is no coincidence that the best examples of contract law heterodoxy we could find come from Brazil, Colombia and South Africa. These are three countries in which the limitations of contract law orthodoxy are especially obvious. First, all three countries are plagued by economic inequality that has proved stubbornly resistant to progressive fiscal policy. Based on the Gini index, South Africa is the most unequal country on earth while, along with Belize, Brazil and Colombia are the most unequal countries outside of Africa 26 . In the face of apparent failure of the tax-and-transfer system in fighting inequality, it is easy to see how judges and lawmakers might be tempted to experiment with alternatives. Second, all three countries’ constitutional courts are well known for their embrace of “transformative constitutionalism,” which starts from the premise that constitutional law should transform rather than simply reflect the society it governs 27 . Transformative constitutionalism fundamentally rejects the proposition that it is illegitimate for courts to consciously attempt to alter the distribution of wealth in society.

Although conditions in Brazil, Colombia and South Africa might be especially conducive to the emergence of contract law heterodoxy, lawmakers in other countries who are concerned about economic inequality would benefit from paying attention to developments in those countries. Studies of the impact of concrete heterodox initiatives may shed light on the relative effectiveness of redistributive policies that do and do not implicate contract law. At the very least, studying foreign initiatives can help to identify alternatives that might be worth investigating further. 

We also hope that attention to contract law heterodoxy in developing countries will spark interest in existing instances of embedded heterodoxy in developed countries. Consider, for example, the United States, where orthodox discourse in contract law is deeply entrenched. Laws that bar discrimination in contracting qualify as part of contract law, broadly defined, and are obviously designed to improve the welfare of disadvantaged groups. In the United States, those laws can be traced back to the Civil Rights Act of 1866, which was enacted in the aftermath of the civil war to improve the status of former slaves 28 . There are also important examples of U.S. laws that have had substantial distributive effects, even if that was not their stated purpose. In the 1930s, moratoria on enforcement of creditors’ rights were used to protect struggling farmers. More recently, the regulations of credit card issuers found in the Credit Card Accountability Responsibility, and Disclosure Act of 2009 (the “CARD Act”) appear to have had dramatic effects on the welfare of consumers, and particularly the worst off 29 . The same appears to be true of moratoria on evictions and foreclosures adopted in response to the COVID-19 pandemic. 

The challenge that these examples pose to contract law orthodoxy should not be underestimated. Sometimes these types of legal interventions are dismissed by narrowing the definition of contract law to exclude antidiscrimination law, crisis-driven interventions, or legislation focused on specific markets. These discursive moves make it easy to dismiss examples of contract law heterodoxy as isolated products of power politics rather than examples of principled efforts to combat inequality through contract law that may be worth expanding and systematizing. “)

In the fight against inequality, the role of contract law should be part of the conversation. Academics and lawmakers around the world may find it instructive to study and learn from initiatives in developing countries. This is unlikely to be the only area in which incorporating contributions from developing countries will enrich conversations about the role that law ought to play in the governance of the economy.

Notes

  1. This article summarizes arguments presented at greater length in Kevin E. Davis and Mariana Pargendler, Contract Law and Inequality, 107 Iowa L. Rev. (forthcoming). 1 . The orthodox view is that tax law ought to play the central role in combatting inequality while other areas of law should focus on narrower concerns such as economic efficiency or equality in exchange 2 See e.g., Louis Kaplow & Steven Shavell, Why the Legal System is Less Efficient than the Income Tax in Redistributing Income, 23 J. Legal Stud. 667 (1994). 
  2. In French law, for example, doctrines such as imprévision and lésion appear to reflect concerns about inequality of bargaining power and unfair exchange as between the parties to the contract rather than the overall distribution of wealth in society. Admittedly, systemic disadvantage may be correlated with factors, such as substantive unfairness or asymmetric information, that undermine autonomy, efficiency, or equality in exchange. Within the orthodox position, examples of judicial solicitude for disadvantaged groups may be explained by concern about whether enforcement will promote autonomy or efficiency or equality in exchange, rather than about systemic disadvantage in its own right. Nevertheless, it can often be difficult, in practice, to determine whether a certain form of judicial intervention for the benefit of the weaker party is attributable to orthodox or distributive considerations. Orthodox rhetoric may mask distributive objectives, and vice-versa.
  3. Aditi Bagchi, Distributive Injustice and Private Law, 60 Hastings L.J. 105, (2008); Daphna Lewinsohn-Zamir, In Defense of Redistribution Through Private Law, 91 Minn. L. Rev. 326, 396–97 (2006); Hanoch Dagan & Avihay Dorfman, Poverty and Private Law: Beyond Distributive Justice (Working Paper, 2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3637034 [https://perma.cc/E854-RR2S]; Lee Anne Fennell & Richard H. McAdams, The Distributive Deficit in Law and Economics, 100 Minn. L. Rev.  1051 (2016); Richard L. Revesz, Regulation and Distribution, 93 N.Y.U. L. Rev. 1489, 1489 (2018); Colin Mayer, The Future of the Corporation and the Economics of Purpose, 58 J. Mgmt. Stud. 887 (2021); Zachary Liscow, Redistribution for Realists, 107 Iowa L. Rev. 495, 556–57 (2022).
  4. Bagchi, supra at 125–30, 135–41; Rory Van Loo, Broadening Consumer Law: Competition, Protection, and Distribution, 95 Notre Dame L. Rev. 211 (2019); Zhong Xing Tan, Where the Action Is: Macro and Micro Justice in Contract Law, 83 Mod. L. Rev. 725, 728 (2020). 
  5. Anthony T. Kronman, Contract Law and Distributive Justice, 89 Yale L.J. 472, 510–11 (1980); Bruce Ackerman, Regulating Slum Housing Markets on Behalf of the Poor: Of Housing Codes, Housing Subsidies and Income Redistribution Policy, 80 Yale L.J. 1093, 1197 (1971); Richard T. Ely, Property and Contract in their Relation to the Distribution of Wealth (1914).
  6. John Rawls, Political Liberalism: Expanded Edition 267–68 (Columbia Univ. Press 2005) (assuming that it would not be “feasible and practicable” to preserve background justice through rules imposed on individuals); Trebilcock, supra note 20, at 97–101, 248–261 (arguing that contract law should not be used to address systemic inequalities in competitive markets); Hugh Collins, Distributive Justice Through Contracts, 49 Curr. Leg. Prob. 49, 49 (1992) (“The general view seems to be that the law of contract does not embody as one of its aims the achievement of a particular pattern of distributive justice”); Robert E. Scott, A joint maximization theory of contract and regulation, in Research Handbook on Private Law Theory, 22 (Hanoch Dagan and Benjamin C. Zipursky eds., 2020) (“The contemporary American common law of contracts has largely shed the varied purposes animating its English ancestor, including the pluralist values derived from equity’s ex post perspective, in favor of the singular purpose of vindicating ex ante contractual intent”). Cf. Duncan Kennedy, Distributive and Paternalist Motives in Contract and Tort Law, with Special Reference to Compulsory Terms and Unequal Bargaining Power, 41 Maryland L. Rev. 563, 586-588 (1982) (arguing that distributive motives are considered less acceptable than efficiency motives but more acceptable than paternalism).
  7. Kevin A. Kordana & David H. Tabachnick, Rawls and Contract Law, 73 Geo. Wash. L. Rev. 598, 623–624 (2005).
  8. Kronman, supra at 508-510. This section also draws on refutations of the general argument that distributive objectives should be pursued exclusively through fiscal policy set out in Fennell & McAdams and Liscow, supra. 
  9. See, e.g., Felipe Jiménez, Against Parochialism in Contract Theory: A Response to Brian Bix, 32 Ratio Juris 233, 236 (2019) (“[t]here is . . . an important level of convergence in the legal texts of different Western systems of contract law” so that “diverse systems of contract law (at least in Western legal cultures, if not beyond) are structurally and functionally consistent”).
  10. [2015] ZACC 5.
  11. Paulsen ¶ 66.
  12. Paulsen ¶ 75.
  13. Colombia Constitution, art. 367.
  14. Id., art. 86.
  15. Gabriela Zarante Bahamón, Constitutionalización y Protección de Derechos Fundamentales en el Contrato de Seguros, 45 Rev. Ibero-Latinoam Seguros 233, 236 (2016). 
  16. Id. at 239. 
  17. Constitutional Court of Colombia, Sentencia T-027-19, Jan. 30, 2019. For local commentary, see María Paula Gómez Sáenz & Gonzalo Jiménez Triviño, Novedad Jurisprudencial: La Corte Constitucional Modificó el Precedente Jurisprudencial en Relación com Las Cargas de la Aseguradora Frente a La Declaração de Riego en El Contrato de Seguros, 19 Univ. Stud. Bogotá (Colombia) 211, 220 (2019) (describing the decision as highlighting the constitutional duty of insurance companies vis-à-vis persons of clear vulnerability and weakness). 
  18. Constitutional Court of Colombia, Sentencia T-740/11, Oct. 3, 2011.
  19.  Id.
  20. Botha and Another v Rich NO and Others [2014] ZACC 11.
  21. [2020] ZACC 13 [Beadica], ¶ 101.
  22. Lei nº 13.786, de 27 de dezembro de 2018.
  23. Lei 13.874, de 20 de setembro de 2019, Art. 1º, par. 2º, and Art. 7º (adding new Arts. 421 and 421-A to the Civil Code). 
  24. World Bank, https://data.worldbank.org/indicator/SI.POV.GINI?most_recent_value_desc=true 
  25. In Klare’s words:

    By transformative constitutionalism I mean a long-term project of constitutional enactment, interpretation, and enforcement committed (not in isolation, of course, but in a historical context of conducive political developments) to transforming a country’s political and social institutions and power relationships in a democratic, participatory, and egalitarian direction. Transformative constitutionalism connotes an enterprise of inducing large-scale social change through nonviolent political processes grounded in law. I have in mind a transformation vast enough to be inadequately captured by the phrase ‘reform,’ but something short of or different from ‘revolution’ in any traditional sense of the word. In the background is an idea of a highly egalitarian, caring, multicultural community, governed through participatory, democratic processes in both the polity and large portions of what we now call the ‘private sphere.’Karl E. Klare, Legal Culture and Transformative Constitutionalism, 14 S. Afr. J. on Hum. Rts. 146, 150 (1998).

  26. Act of April 9, 1866, ch. 31, 14 Stat. 27 (reenacted by Enforcement Act of 1870, ch. 114, § 18, 16 Stat. 140, 144 (1870) (codified as amended at 42 U.S.C. §§ 19811982 (1987)).
  27. Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney & Johannes Stroebel, Regulating Consumer Financial Products: Evidence from Credit Cards,130 Q.J. Econ. 111, 114 (2015).
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