2.1 Introduction
Economic inequality is one of the most pressing problems facing modern societies, but it remains an open question whether it is one that contract law has any role to play in addressing. The orthodox answer to this question is no – contract law should pursue autonomy, efficiency, or justice in exchange, but not distributive objectives. This orthodoxy is rooted in the idea that pursuit of distributive objectives through contract law is both illegitimate and ineffective, particularly when initiated by judges as opposed to legislators. Accordingly, distribution should be pursued principally through the fiscal system – taxes and public spending – rather than through courts’ rulings in contractual disputes. Critiques of the prevailing orthodoxy struggle with an inconvenient fact: Existing literature suggests that legal systems around the world have converged on contract law doctrines that are insensitive to distributive considerations, part of a broader trend that leaves very few differences of economic significance among contract laws. The absence of concrete experiences with alternatives to contract law orthodoxy casts doubt on the appeal and viability of heterodoxy.
This chapter explores examples of contract law heterodoxy in the legal systems of the Global South. Although the potential uses of contract law to mitigate inequality have long been the subject of heated scholarly debate,Footnote 1 the comparative dimension of this controversy has been neglected, even though inequality in the Global South is an especially pressing concern.Footnote 2 Our analysis unveils how courts in select Global South jurisdictions have recently diverged from orthodoxy and begun to embrace heterodoxy: the use of contract law to reduce inequality. In particular, we document important instances in which courts in South Africa, Brazil, and Colombia have adopted distinctly heterodox approaches to contract law. The decisions cover an eclectic mix of topics, including general rules on the calculation of prejudgment interest as well as more specific doctrines governing the purchase and sale of real estate and the provision of health insurance, life insurance, and water.
We do not claim that legal heterodoxy prevails in all Global South jurisdictions or even that it is dominant in the Global South jurisdictions we focus on in our case studies; indeed, we believe that this is not the case. We also do not maintain that heterodox contract laws actually achieve their intended distributive objectives; they may well be ineffective or backfire. Nevertheless, the greater incidence of contract law heterodoxy in several large Global South jurisdictions is noteworthy and likely consequential from an economic standpoint.
The existence of contract law heterodoxy in Global South jurisdictions has both practical and scholarly implications. From an economic perspective, heterodox approaches to contract law have the potential to alter pricing schemes, contract design, the choice of contracting partners, and incentives for vertical integration. From a theoretical standpoint, the finding of greater contract law heterodoxy in Global South jurisdictions has important implications for scholarship on comparative contract law, law and development, and contract theory.
To begin, these findings contradict the frequent assumption that contract laws do not differ substantially around the world.Footnote 3 The consensus in the literature on comparative law has been that the traditional distinctions between contract law in civil and common law systems are either waning or have limited economic significance.Footnote 4 As for comparisons between Global North and Global South countries, the focus of the literature on the role of contract institutions in development has been on differences in contract enforcement. When institutional economists and international agencies, such as the World Bank, have attempted to assess the quality of contract institutions across the globe, they have focused exclusively on measures of enforcement (such as the time and costs of legal proceedings and the competence and integrity of courts), completely neglecting potential variations in contract law doctrines.Footnote 5 Scholars who have commented on substantive divergences between private law in Global South and Global North jurisdictions have posited that jurisdictions in Latin America and Africa embody “the rule of political law,” in which distribution is led by political actors who are susceptible to influence by wealthy as well as poor groups.Footnote 6 In contract law at least, the possibility of progressive judicially-led innovations in the Global South – a well-known phenomenon in constitutional lawFootnote 7 – has been overlooked.
Contract law heterodoxy in the Global South also destabilizes the theoretical foundations of contract law orthodoxy, namely, arguments that distribution through contract law as opposed to the fiscal system is always illegitimate or ineffective. Our findings suggest that the practical appeal of these arguments is contingent rather than universal. Even if contract law orthodoxy is optimal for Global North jurisdictions, contract law heterodoxy may, in economic parlance, constitute an attractive second-best approach in the Global South, given the limitations of other institutional alternatives in tackling inequality.
We argue that three key features of the countries we study favor the use of contract law to achieve distributive objectives and explain the emergence of heterodox approaches. First, widespread poverty and inequality make the distributions of income and wealth more salient. The fact that these inequalities are often traced to historical injustices such as slavery and colonial exploitation enhances the perceived legitimacy of distributive objectives. Second, the fiscal system has failed to meaningfully reduce persistent inequality. Third, consideration of inequality in contract disputes is often viewed as a constitutional imperative in view of legal commitments to equality. For all these reasons, arguments against consideration of distributive concerns in contract law have recently won less traction in Brazil, South Africa, and Colombia than in the Global North.
Finally, our examination of contract law heterodoxy in the Global South has a deeper methodological implication. Specifically, it illustrates the potential benefits of looking beyond the usual Global North suspects as sites for contract law scholarship and comparative analysis. Explorations of how and why contract law varies from one environment to another can shed a great deal of light on empirical assumptions and prevailing normative and explanatory theories. At the very least, this kind of inquiry can help address the question of whether Global South jurisdictions are best served by rules of contract law that diverge from those which are suitable for the Global North. We show that analysis of innovations in the Global South can also illuminate how contract law might respond to problems that affect a broader range of countries.
As inequality becomes an increasingly pressing problem around the world, deviations from contract law orthodoxy in the Global North become more plausible. In fact, the highly explicit instances of heterodoxy in the developing world draw attention to the significant – if less salient and often downplayed – elements of heterodoxy in the contract laws of the United States and European jurisdictions. In the real-world operation of different legal systems, the distinction between contract law orthodoxy and heterodoxy is a continuum rather than a dichotomy. Orthodoxy is not, contrary to frequent assumptions, the inevitable or universal “end of history” for contract law. Mounting inequality raises the prospect of public policy interventions through contract law in all jurisdictions – regardless of whether one believes they constitute clever remedies or misguided populist responses.
Before proceeding, two caveats are in order regarding the scope of the analysis that follows. First, our analysis leaves out agreements governed by labor and employment law. In contrast to prevailing assumptions of similarities in general contract laws, scholars have documented significant cross-country variations in the law of employment agreements.Footnote 8 Excluding employment agreements from the scope of this chapter likely understates the degree of contract law heterodoxy in the Global South to a significant extent.
Second, contract law heterodoxy is not a unitary phenomenon. Just as we define contract law orthodoxy broadly enough to encompass distinct (and conflicting) normative goals, contract law heterodoxy is used as an expansive category that covers different strategies to address diverse and potentially conflicting conceptions of inequality. Heterodox approaches may be more or less tailored to the circumstances of the particular contract parties, or instead operate based on untailored (categorical) assumptions about the majority of similar cases.Footnote 9 Contract law heterodoxy may focus on factors such as income, wealth, ability, capabilities, opportunity, poverty, exclusion, race, gender, or historical injustice – and these are only a few of the possible dimensions. While we focus on how contract law heterodoxy in South Africa, Brazil, and Colombia differs from contract law orthodoxy in the Global North, the case studies reveal “varieties of heterodoxy,” rather than a single monolithic approach.
2.2 Contract Law Orthodoxy
2.2.1 Defining Contract Law Orthodoxy
Although there are profound disagreements about the aims and purposes of contract law, the orthodox view is that generally contract law is not and should not be concerned with the distribution of wealth in society.Footnote 10 Liberals and libertarians argue that contract law should instead be motivated by the value of individual autonomy, that is, the value of allowing individuals to make the momentous decision to bind themselves legally or, more broadly, by making it possible for them to pursue their own conceptions of the good in collaboration with others.Footnote 11 Law and economics scholars argue that contract law should be designed to promote efficiency, primarily by facilitating mutually beneficial (Pareto-efficient) exchanges.Footnote 12 Finally, scholars writing in the Aristotelian tradition focus on how contract law can help to preserve the existing distribution of wealth – which is presumed to be just – by promoting equality in exchange, which entails, among other things, ensuring that the terms of contracts are substantively fair.Footnote 13
Although there is a fair amount of tension between these different intellectual traditions, they all view the pursuit of distributive objectives as beyond the domain of contract law, at least as that body of law is traditionally defined by teachers and scholars. Distributive considerations appear prominently in anti-discrimination law and bankruptcy law, which clearly bear upon the enforcement of contracts. But those bodies of law are traditionally understood to fall outside the bounds of contract law. Teachers and scholars also tend to define the domain of contract law in ways that exclude the statutory schemes that govern specific types of contracts, turning the field into a “law of leftovers.”Footnote 14 Those statutory schemes may well contain underappreciated amounts of heterodoxy. In any event, the dominant view, however accurate, is that distribution does not, and should not, influence the core contract law doctrines of general applicability concerning which promises are enforceable, how to determine when promises have not been performed and therefore need to be enforced, or the remedies available to the party seeking enforcement.Footnote 15
Admittedly, there are points of contact between the orthodox and heterodox approaches when different objectives overlap. For instance, systemic disadvantage may be correlated with the presence of factors that undermine the promotion of autonomy, efficiency, or equality in exchange – factors such as coercion, imperfect information, or substantive unfairness. 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. It can often be difficult, in practice, to ascertain whether a certain exception to freedom of contract for the benefit of a disadvantaged party is attributable to orthodox or distributive considerations. Orthodox rhetoric may mask distributive objectives, and vice versa.
Moreover, it is important to recognize that the same tenets of contract law orthodoxy may lead to distinct patterns of adjudication owing to differences in factual circumstances. For instance, greater prevalence of inequality and market concentration in developing jurisdictions could prompt more frequent findings of unconscionability for the benefit of the weaker party, even under orthodox contract doctrines. The differences in dominant fact patterns are an important, though often overlooked, element in understanding the landscape of contract adjudication in the Global South. We argue, however, that there is more to the story: Beyond variations in the incidence of similar doctrines across jurisdictions due to distinct fact patterns, there are noticeable differences in contract law rules and doctrines as well.Footnote 16
In practice, a legal system may embrace orthodoxy in relation to some types of transactions but not others, or place varying amounts of weight on distributive considerations. Therefore, the distinction between what we term orthodox and heterodox approaches to contract law constitutes a spectrum rather than a binary division. As is the case in comparative law more generally, our goal here is to examine differences in emphasis between the contract laws of certain Global North and Global South jurisdictions rather than to identify stark contrasts.
2.2.2 Orthodoxy and Heterodoxy in the United States
The common law of contracts in the United States is overwhelmingly orthodox.Footnote 17 While there are several doctrines consistent with contract law heterodoxy in that they may be used to protect weaker parties, an orthodox reading of those doctrines is that they are triggered when the potential beneficiary is less informed or is being coerced by the opposing party or when the transaction deviates significantly from prevailing notions of a fair bargain.Footnote 18 They do not key upon whether the person is disadvantaged relative to society as a whole nor do they explicitly refer to the role of contract law in promoting social justice more generally.
There are important exceptions to the prevailing orthodoxy in US contract law. As far as judicial decisions are concerned, the most famous example of heterodoxy is Judge Skelly Wright’s opinion in Williams v. Walker-Thomas Furniture.Footnote 19 That opinion endorsed the use of the doctrine of unconscionability to avoid enforcement of a sweepingly broad security agreement by a furniture store against a woman who was identified as being on public assistance and responsible for seven children.Footnote 20 Although her race was not mentioned in the opinion, it is safe to assume that the court was aware that the customer was Black, as were most of the store’s other customers. Judge Wright ruled that the unconscionability doctrine applies when the party seeking relief faces “an absence of meaningful choice ... together with terms which are unreasonably favorable to the other party.”Footnote 21 This language could be interpreted to reflect purely orthodox concerns about asymmetric information, coercion, and unfair exchange, which is now the mainstream understanding of the unconscionability doctrine in the United States.Footnote 22 However, in extrajudicial writings, Wright characterized the Williams decision as part of the “law of the poor,” a decidedly heterodox label.Footnote 23
The “law of the poor” has not featured prominently in judicial decisions for contract cases in the United States – with the important exception of the implied warranty of habitability in residential landlord–tenant law.Footnote 24 One of the leading decisions in that field is another opinion authored by Judge Skelly Wright, Javins v. First National Realty.Footnote 25 Judge Wright announced that the decision was motivated in part by a desire to give effect to the expectations of the typical tenant, and in part by concerns about inequality in bargaining power arising from the use of standardized contracts.Footnote 26 Attention to these factors is consistent with orthodox concerns about autonomy, efficiency, and justice in exchange. But Judge Wright said that another compelling reason to adopt the implied warranty was to address the inequality in bargaining power caused specifically by “racial and class discrimination.”Footnote 27 He made it clear that the decision was motivated by systemic concerns, saying “that poor housing [was] detrimental to the whole society, not merely to the unlucky ones who must suffer the daily indignity of living in a slum.”Footnote 28 And, in private correspondence, Judge Wright described the Javins decision as part of an effort “to ameliorate, if not eliminate, the injustice involved in the way many of the poor were required to live in the nation’s capital.”Footnote 29 Unlike Williams v. Walker-Thomas Furniture, the decision in Javins endorsed a form of heterodoxy that is now an established feature of US law. Most states have legislation that codifies implied warranties of repair and habitability in residential leases, typically motivated, at least in part, by concerns about poverty and inequality.Footnote 30
There are also notable historical examples of legislative interventions enacted in times of economic crisis that have fairly obvious distributive motivations. For instance, there is a long history of US states passing laws that impose moratoria on enforcement of creditors’ rights, especially during economic downturns and particularly for the benefit of farmers.Footnote 31 The US Supreme Court upheld the constitutionality of the moratoria by arguing that “the legislation was not for the mere advantage of particular individuals but for the protection of a basic interest of society.”Footnote 32 The Court endorsed the Supreme Court of Minnesota’s finding that “the economic emergency which threatened ‘the loss of homes and lands which furnish those in possession the necessary shelter and means of subsistence’ was a ‘potent cause’ for the enactment of the statute.”Footnote 33 There are, of course, also more recent examples of US legislation pertaining to contracts that have had significant distributive effects, even if that was not their ostensible purpose.Footnote 34
2.2.3 Orthodoxy and Heterodoxy in Continental Europe
We now turn to continental Europe, another setting in which contract law orthodoxy largely prevails. The well-known differences between consumer contract law in the European Union and in the United States can be interpreted as divergent responses to concerns about consumer behavioral biases or inequality of exchange. To that extent, both jurisdictions are merely pursuing different versions of contract law orthodoxy.Footnote 35
The closest instance of a heterodox approach to contract law is the famous 1993 decision by the German Constitutional Court (Bundesverfassungsgericht) in the Bürgschaft case, which became the poster child for the consideration of fundamental rights in the interpretation and enforcement of private contracts.Footnote 36 The case involved the provision of a hefty personal guarantee (surety) by a 21-year-old daughter for the bank’s extension of credit to her father. When she entered into the agreement, the daughter, who lacked either a professional education or a full-time job, earned 1,150 DM per month in a fish factory. By the time her father defaulted and the bank sued her for 160,000 DM, she was a single mother on social security. Her appeal argued that “courts should deny recognition to contracts that so strongly reduce the freedom of action of one of the contracting parties that she can no longer live with dignity.”Footnote 37
The German Constitutional Court found that the enforcement of an agreement characterized by a significant imbalance in bargaining power and resulting in such harsh consequences for the weaker party violated the constitutional rights to human dignity and free development of personality, as well as the principle of the social State (Sozialstaatsprinzip).Footnote 38 While the court’s reasoning in the Bürgschaft decision stands out for its appeal to the social State and for its concern about the weaker party, the same result of full discharge would occur in other jurisdictions through different doctrinal routes.Footnote 39
A prominent 1996 decision by the French Cour de cassation invoked fundamental rights to adjudicate a landlord–tenant dispute.Footnote 40 The agreement in question between the tenant and the city of Paris provided for the exclusive use by the tenant and her two children. However, the tenant also accommodated her children’s father as well as her sister, leading to a notice of termination by the city. The Court invalidated the termination as a violation of the right to private and family life recognized by Article 8 of the European Convention of Human Rights.Footnote 41 At any rate, while noteworthy and widely cited, these cases from the 1990s failed to spur a revolution in contract law toward greater attention to social justice and inequality.
Although we do not see significant deviation from contract law orthodoxy in either continental Europe or the United States, there is greater support for heterodoxy in the European discourse about contract law. On balance, continental European scholars appear to be more likely than their US or UK counterparts to defend the role of contract law in the pursuit of social justice. It is common in continental Europe to regard contract law as striking a balance between the fundamental values of autonomy and solidarity,Footnote 42 a framing that differs from US scholars’ primary focus on efficiency, autonomy, and fairness in exchange.Footnote 43
2.2.4 The Impact of the COVID-19 Pandemic
The COVID-19 pandemic threatened to exacerbate inequality in most countries. The pandemic prompted not only moratoria on evictions of residential tenants in the United States, as discussed in Chapter 6 by Bianca Tavolari and Saylon Pereira, but also new manifestations of contract law heterodoxy in Europe. The German statute “to mitigate the consequences of the Coronavirus crisis” allowed consumers to refuse payment of essential continuing obligations if they would not be able to pay for the service without risking either their own subsistence or that of their dependents.Footnote 44 A temporary right to refuse performance was also extended to microbusinesses, provided that its exercise does not “endanger the creditor’s [] subsistence[,] ... the reasonable subsistence of [the creditor’s] dependents or the economic basis of [the] business” (in which case the debtor may seek to terminate the contract).Footnote 45 In linking contract rights to the particular economic situation of the parties – and not to the fairness of the exchange – this special German legislation reflects a new manifestation of contract law heterodoxy in a Global North jurisdiction, even if it was only a temporary response to a time of significant economic crisis and dislocation. We now turn to the description of contract law heterodoxy in the Global South, contexts where economic crisis, dislocation, and inequality are particularly commonplace.
2.3 Contract Law Heterodoxy in the Global South
In this section we describe instances in which contract law in three Global South jurisdictions – South Africa, Brazil, and Colombia – diverges from orthodoxy. Each example involves a doctrine formulated by one of the apex courts of the country which covers an economically important class of transactions. None of our examples involve the law of employment agreements because, as noted in the introduction, that is one of the few areas of contract law where scholars have already documented economically significant divergence.Footnote 46 Still, our collection of illustrations is eclectic. The contracts in dispute range from agreements for purchase and sale of residential real estate to insurance contracts to agreements for the provision of water. The different examples reveal that contract law heterodoxy, that is the endorsement of contract doctrines which embrace distributional goals, has made important inroads into the legal systems of these three countries. They are not, however, intended to suggest that contract law heterodoxy is dominant in any of these legal systems. In fact, even in the areas of law that we canvass, we document tension and conflict between proponents of orthodox and heterodox approaches.
2.3.1 South Africa
South Africa is perhaps the leading example of a jurisdiction which has recently taken a heterodox approach to the relationship between contract law and inequality.Footnote 47 Much of the change has been driven by the incorporation of constitutional principles into contract law. This kind of horizontal application of constitutional principles is expressly required by the South African Constitution which states: “[W]hen developing the common law or customary law, every court, tribunal or forum must promote the spirit, purport and objects of the Bill of Rights.”Footnote 48
In a prominent series of decisions, the Constitutional Court of South Africa has taken the position that both principles of contract law and decisions about whether to enforce specific contractual terms must conform to constitutional values,Footnote 49 which might entail departing from “colonial legal tradition represented by English law, Roman law and Roman Dutch law.”Footnote 50 Among those constitutional values is “ubuntu,” an African concept which “emphasises the communal nature of society and ‘carries in it the ideas of humaneness, social justice and fairness’ and envelopes ‘the key values of group solidarity, compassion, respect, human dignity, conformity to basic norms and collective unity.’”Footnote 51
2.3.1.1 Prejudgment Interest
In Paulsen v. Slip Knot Investments 777 Ltd., the Constitutional Court explicitly stated that limits on the principle of freedom of contract must be fashioned in light of socio-economic realities that include substantial amounts of economic inequality and poverty.Footnote 52 The appeal concerned the scope of the ancient in duplum doctrine, a rule which limits the interest that a creditor can recover on debts in arrears to an amount equal to the principal of the debt. At issue in Paulsen was whether the rule applied to interest that accrued after the institution of legal proceedings but before the date of judgment (there was no dispute that interest could accrue after judgment).Footnote 53 In a 1997 decision called Oneanate, South Africa’s Supreme Court of Appeal decided that the in duplum rule should be suspended during the pendency of litigation.Footnote 54
The debtors in Paulsen were sureties for a property developer which had defaulted on a debt of R12 million.Footnote 55 The loan agreement specified that interest was to accrue at the rate of 3 percent per month. Under the traditional in duplum rule, the creditor could not have a judgment for more than R24 million. Under the narrower version of the rule favored in Oneanate, the creditor was entitled to a judgment for R72 million.Footnote 56
In a split decision, the Constitutional Court in Paulsen decided to reinstate the traditional in duplum rule. In the main opinion, Justice Madlanga wrote that the court in Oneanate misread the relevant authorities and ignored relevant public policy considerations. The overlooked considerations were the risks that modification of the rule would prejudice debtors and inhibit their constitutional right of access to the courts. Justice Madlanga reasoned that “debtors, despite a genuinely held belief that they have a valid defence, may sooner opt to settle a claim than face the potentially financially ruinous interest that would again commence to pile up once court process was served.”Footnote 57
Justice Madlanga acknowledged that there were competing policy considerations. In particular, the traditional rule would encourage debtors to prolong litigation by raising frivolous defenses or employing other delaying tactics. This might in turn raise a constitutional concern if it caused creditors to abandon claims against defaulting debtors because the value was eroded by inflation.Footnote 58 Pulling in the other direction, though, was the fact that creditors could protect themselves by charging relatively high rates of interest, avoiding lending to debtors who were bad risks, and litigating swiftly.Footnote 59 He also noted that debtors’ delaying tactics could be addressed by means of summary judgment and punitive costs awards.Footnote 60 More importantly, he believed that bearing the costs of prolonged litigation would prejudice debtors more than creditors because, although the Paulsens appeared to be “stout-boned commercial parties,” debtors generally were more likely to be financially vulnerable.Footnote 61
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.Footnote 62
Justice Madlanga went on to make it clear that he was particularly concerned about debtors who had been affected by apartheid and either remained financially vulnerable or were just emerging from the ranks of the financially vulnerable.
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.Footnote 63
Accordingly, Justice Madlanga and the majority of the Constitutional Court decided to limit the creditor’s judgment to R24 million.Footnote 64
2.3.1.2 Installment Purchases of Land
South African jurisprudence also prescribes that constitutional principles inform the interpretation of statutory provisions regulating specific contractual provisions. A prominent example of this sort of application of constitutional principles is Botha v Rich N.O., which concerned the statutory rights of purchasers of land who agree to pay in installments.Footnote 65 The Alienation of Land Act 1981 authorized a purchaser who paid more than 50 percent of the purchase price to demand that title be registered in their name, subject to the purchaser providing a mortgage in favor of the vendor to secure the purchaser’s remaining obligations.Footnote 66 The central issue in Botha was what happens when a vendor fails to comply with a demand for a transfer. Was a purchaser who defaulted on her payments after paying more than 50 percent of the purchase price only entitled to cancel the contract and recover the amount she paid, or could she, in the alternative, demand specific performance of the obligation to register a transfer? The statute mentioned the possibility of cancellation and restitution but said nothing about specific performance.Footnote 67
In Botha, the Court held that the purchaser was entitled to specific performance of the right to a transfer, conditional upon payment of arrears and amounts owed to the local municipality.Footnote 68 The Court could probably have reached this result based solely on ordinary principles of statutory interpretation. However, the Court went out of its way to say that the case raised a constitutional issue and that its decision was motivated by the constitutional duty to “promote the spirit, purport and objects of the Bill of Rights.”Footnote 69 It pointed out that the statute was enacted to protect installment purchasers and was prompted by the collapse of several township development companies in the 1970s.Footnote 70 It could have, but did not, note that there was good reason to believe that, in the South African context, people who purchased real estate by installment were likely to be relatively poor.Footnote 71
2.3.1.3 Equality Rights and the Enforcement of Contractual Terms
Concerns about inequality have also influenced the South African Constitutional Court’s approach to the enforcement of contractual terms, but less profoundly than in cases concerned with the development of principles of contract law. Technically speaking, the Court does not evaluate contractual terms directly against constitutional norms. Instead, contractual terms are evaluated in light of public policy, which is in turn shaped by constitutional values along with more traditional requirements of reasonableness and fairness. Significantly, the Constitutional Court has decreed that the relative bargaining power of the parties to the contract in question ought to be considered in determining whether contractual terms contravene public policy, stating, “[t]his is an important principle in a society as unequal as ours.”Footnote 72 This contrasts with the approach taken in cases like Paulsen, in which the court ignored the fact that the parties seeking relief were “stout-boned” commercial actors.Footnote 73 It is not entirely clear, though, what counts as evidence of inequality of bargaining power. For instance, the seminal decision in Napier v. Barkhuisen was about whether a limitation of time for bringing claims under an automobile insurance policy was consistent with public policy. The majority in the Constitutional Court decided that there was insufficient evidence that enforcement of the clause was unreasonable.Footnote 74 However, the court noted below that the insured drove an expensive automobile (a BMW).Footnote 75
The South African Constitutional Court continues to grapple with the challenges of using contract law to promote equality. Although most of the Court’s members appear to be convinced of the legitimacy of the exercise, there remain serious questions about how far they are willing to depart from orthodoxy, as well as ongoing concerns about how to accurately identify disadvantaged parties and how to ensure that the potential benefits of decisions are not erased by changes in contracting practices.
All of these issues were raised, but not necessarily resolved, in Beadica 231 CC v. Trustees for the time being of the Oregon Trust.Footnote 76 In that case the trial judge allowed a set of franchisees to exercise options to renew their leases even though they failed to comply with a requirement that they give notice of intention to exercise the option more than six months prior to the initial termination date. The franchisees were black-owned enterprises and acquired their businesses as part “of a black economic empowerment [transaction]” funded by the National Empowerment Fund,Footnote 77 a public agency legislatively charged with “facilitat[ing] the redressing of economic inequality which resulted from the past unfair discrimination against historically disadvantaged persons.”Footnote 78
The trial judge noted that the statutory initiative would be dealt a blow if the lease were cancelled.Footnote 79 He found that cancellation would be a disproportionate sanction.Footnote 80 He also referred to the competing policy considerations of, on the one hand, legal certainty and, on the other hand, the importance of infusing contract law with good faith and fairness and constitutional values such as ubuntu.
The trial decision in Beadica was overturned on appeal,Footnote 81 and that result was upheld by a divided Constitutional Court. The seven judges in the majority found that the renewal terms were written “in simple, uncomplicated language, which an ordinary person could reasonably be expected to understand” and so the franchisees failed to satisfy their onus of showing that enforcement would be unreasonable.Footnote 82 The majority were also unsympathetic to the franchisees’ claim that strict enforcement of the renewal provision would violate public policy because it would be inconsistent with the constitutional right to equality.
In her majority opinion, Theron J. strongly rejected the proposition that enforcement of a contractual term would violate the constitutional right to equality merely because it would prejudice a member of a historically disadvantaged group. In fact, she suggested that refusing to enforce the contract would hurt rather than help the cause of equality, worrying that contracting parties would respond to such a legal rule by adjusting other terms of their contracts with members of disadvantaged groups, or refusing to contract with them altogether.Footnote 83 Her concern echoes a recurring theme in legal academics’ defenses of contract law orthodoxy.Footnote 84
The two dissenting judgments both argued that there was sufficient evidence to conclude that the franchisees were relatively unsophisticated and in a position of unequal bargaining power compared to the franchisors.Footnote 85 The dissenting judges would have found that enforcement in these circumstances was contrary to good faith, public policy, and ubuntu.Footnote 86 The majority’s opinion, however, draws very important boundaries around heterodoxy in South African contract law.
2.3.2 Brazil
Brazil’s contract law is heterodox, both in form and substance. Courts habitually note the “change in paradigm” in private law from a merely “liberal, individualistic, and patrimonial” view of private relations to one which emphasizes “good faith, the social function of contract and property and the valuing of the existential minimum.”Footnote 87 The effect is that “the right to liberty and party autonomy needs to be weighed against the duty of social solidarity, in the sense that citizens must mutually help each other to preserve humanity and build a free, just, and solidary society that belongs to everyone indistinctly.”Footnote 88 In this view, “solidarity is a guideline, an interpretative value, a guide to distributive justice,” while “good faith is the translation of the respect to human dignity” and “represents the functionalization of private relations based on solidarity.”Footnote 89 The scholarly push for the “constitutionalization of civil law” through horizontal effects of fundamental rights has been highly influential, even if the phenomenon is resented by doctrinal and law-and-economics scholars.Footnote 90
Judicial and scholarly rhetoric on the role of human dignity, the social function of contract, and social solidarity in contract law disputes is pervasive. A search of abstracts (ementas) of contract opinions by Brazil’s Superior Court of Justice (Superior Tribunal de Justiça (“STJ”))Footnote 91 alone returned over 1,700 results for “human dignity,” over 13,000 results for “social function,” and over 780 results for “social justice.”Footnote 92 However, not all heterodox rhetoric translates into heterodox results, and not all heterodox results are based on heterodox rhetoric. While noting that heterodox rhetoric is widespread, this section will focus primarily on the distinct contours of the Brazilian contract law regime (heterodox results) that appear to set it apart from the international norm in the Global North.
Brazilian scholars have long argued “that the substance of courts’ approach to contract enforcement” – rather than the duration and cost of procedures, as assumed by the international literature and the World Bank – is potentially distinct and problematic.Footnote 93 According to a survey of Brazilian judges by political scientists in the early 2000s, only 48 percent of respondents argued that contracts must be respected independently of social repercussions, whereas 61 percent of them declared that the achievement of social justice justifies breaches of contract.Footnote 94 A famous 2005 article by some of Brazil’s most prominent economists blamed the country’s “extraordinarily high interest rates” for private credit on legal uncertainty due to courts’ “anti-creditor bias,” which they attributed, among other things, to “deep social differences and the high levels of income concentration in the country.”Footnote 95 Since then, local literature has emerged to challenge both the existence and root causes of the alleged legal uncertainty and anti-creditor bias.Footnote 96 Nevertheless, the use of constitutional principles and social considerations in adjudicating contract disputes in Brazil is largely accepted as a descriptive matter, though contested from a normative standpoint.
2.3.2.1 Consumer Housing Purchases and Heterodox Contract Remedies
One notable instance of doctrinal heterodoxy appears in the judicial treatment of contracts for the acquisition of new housing from construction companies. A fairly common market practice is for consumers to acquire new housing through monthly installments before and during construction, effectively prepaying for their unit and helping to finance the housing project. As in South Africa, this longstanding practice likely responds, at least in part, to failures in the country’s credit markets, leading to inordinately high interest rates in consumer and financial credit.Footnote 97
In this context, a common fact pattern is the contractual breach by a consumer who is unable or unwilling to make the agreed upon installment payments. From an orthodox perspective, the legal treatment of this fact pattern should be reasonably straightforward. The construction company should be able to seek enforcement of the contract by demanding payment or to terminate the contract and seek either expectation damages or stipulated damages. In the case of a falling market, expectation damages could be substantial. Stipulated damages clauses in the sales contract could be subject to judicial scrutiny if excessive.
The resolution of this type of dispute in Brazil has differed sharply from the description given here. Courts have come to recognize consumers’ rights to terminate the contract at-will and obtain restitution of circa 85 percent of the installment amounts paid.Footnote 98 This solution diverges from standard contract law insofar as the construction company has no right to demand performance, and the damages are fixed between 10 and 25 percent of the amounts paid in. In practice, this means that the sole remedy for breach is a court-imposed liquidated damages clause, which may easily be either over- or under-compensatory. In other words, the basic notion of contract as an agreement backed by expectation damages is no longer available in this highly significant segment of the Brazilian economy.Footnote 99
No statutory rules prescribe this outcome. The Consumer Protection Code of 1990 (Código de Defesa do Consumidor) states that:
In contracts for the purchase and sale of movable and immovable goods against payment in installments, as well as in fiduciary alienations in guarantee, clauses that establish the total loss of installments paid for the benefit of the creditor claiming the termination of the contract for breach and the repossession of the sold product are deemed to be null and void.Footnote 100
This provision can be understood as a form of statutory constraint on penalty clauses and, as such, is largely consistent with contract law orthodoxy. Brazil’s President vetoed another more heterodox provision of the Consumer Protection Code requiring the restitution of all amounts paid minus the economic benefit received.Footnote 101
The heterodox exit option granted to consumers followed from a series of incremental doctrinal steps based on somewhat traditional contract law principles.Footnote 102 In the first cases to reach the Superior Court of Justice, the Court held that “the defaulting debtor in principle has no right to request the termination of the contract,” a conclusion to be altered only if “there is a supervening fact which is sufficiently strong to justify the breach.”Footnote 103 The Court then found that currency devaluation and the application of various criteria for inflation adjustment under different national economic plans were supervening facts authorizing the termination of the contract because it was impossible, as a practical matter, for the consumer to perform.Footnote 104 The Court also found in such cases that contractual penalty clauses providing for the forfeiture of 90 percent of the amounts paid were abusive under the Consumer Protection Code – again not an outlandish conclusion in view of traditional suspicion of penalty clauses.Footnote 105
In 2002 the Court settled a split between its chambers and confirmed that a consumer purchaser of real estate could unilaterally terminate the agreement due to the “insupportability” of installments. It also permitted the construction company to retain 25 percent of the amount paid “considering not only the costs of the company with the project but also the fact that, in this case, it was the plaintiff who took the initiative to breach the agreement.”Footnote 106 The dissenting justices argued that the majority’s interpretation was unreasonable in effectively implementing a vetoed statutory provision.Footnote 107
Subsequent decisions did away with the requirement of changed circumstances or the impossibility or insupportability of payments by the purchaser, effectively permitting home buyers to terminate purchase agreements at will. Courts also increasingly settled on the retention of a fixed percentage by the construction company, typically 10 or 15 percent of the amounts paid, without examining the particular benefits accruing to the consumer or damages incurred by the company. This form of remedial heterodoxy – in the form of judicially-imposed liquidated damages that dispense with proof of benefit or harm – likely responds to the massive caseload facing Brazilian courts. From a functional perspective, courts effectively implied a termination option subject to a small liquidated damages clause in all consumer contracts for the purchase of new housing.
Concerns about inequality and social justice likely played a role in the development of this line of opinions, which effectively shifted labor and real estate market risks from consumers to construction companies.Footnote 108 During the period of soaring house prices in the early 2000s, the implied exit option benefited consumers and construction companies alike, as the latter obtained financing from the first purchasers and then resold the units for a higher price if the initial purchasers were unable to pay. The termination agreements written in the shadow of the exit option case law were called “distratos” – a term which, according to the Civil Code, designates a mutual agreement to terminate a contract, even though not all terminations were entirely voluntary given the prevailing jurisprudence.Footnote 109 Nevertheless, when the housing market bubble exploded around 2014, demand for distratos – evidently encouraged by the heterodox jurisprudence – became a major problem for construction companies, some of which filed for bankruptcy during this period.
After significant lobbying from construction companies, a 2018 statute increased the maximum amount that could be retained in case of distratos to 50 percent of the amounts paid.Footnote 110 Strengthening the force of the contractual obligation was a step toward orthodoxy, although the reform is still heterodox in sanctioning now statutory liquidated damages in lieu of a default of expectation damages.
Brazilian law also provides other instances of heterodox approaches to contract remedies in the name of equality, such as imposing a requirement of symmetry in the application of penalty clauses. This means that, if a consumer contract only stipulates a penalty for a breach by the consumer (but not by the trader), the same penalty should apply for the benefit of the consumer in case of a breach by the trader. These decisions are generally based on notions of good faith, contractual equilibrium, and the social function of contract, as well as on the overarching purpose of consumer protection.Footnote 111 In one such opinion, the Court quotes a scholar noting that the “principle of equilibrium” emerging from the Consumer Protection Code results from “the protection of the consumer in view of their vulnerability” as well as the “protection of economic equilibrium,” as a corollary of the principle of equality in the Brazilian Constitution.Footnote 112
The so-called inversion of penalty clauses for the benefit of purchasers of housing under construction was the subject of a judgment by the STJ in a collective proceeding which became binding on lower courts.Footnote 113 The issue was whether the penalty clause imposed by the contract in the event of a late payment by the consumer may be applied for the benefit of the consumer if the construction company delays the conveyance of the housing unit. The judgment in question was preceded by a public hearing (audiencia pública) that included testimony by several civil law scholars, economists, as well as associations of consumers and construction companies.Footnote 114
The public hearing dealt not only with technicalities regarding the doctrinal evolution of penalty clauses in Brazil, but also with the broader economic and social stakes of the issue in question. The attorney for the purchaser in the case defended the “heterointegration of the contract, by the judge” as a mechanism to achieve “social justice.”Footnote 115 One public defender emphasized how it had become commonplace to sell real estate to the poor who could not afford the installments, leading to loss of amounts paid by the consumer when terminating the contract and profits by the construction company in subsequent sales. He argued that lack of proper compensation for consumers in the case of delays would increase construction companies’ incentives to make successive sales to persons unable to pay, leading to even greater harm to the poorest.Footnote 116 Gustavo Franco, a prominent economist and former president of the Brazilian Central Bank, appeared on behalf of an association of construction companies to argue against the inversion of penalty clauses, citing a “peril of populism” by which concerns about the disadvantaged and the weak would end up distorting the system and ultimately hurting the supposed beneficiaries of such a policy.Footnote 117 The STJ ultimately sided with consumers to issue a binding statement permitting the inversion of penalty clauses in all subsequent cases involving housing purchases.Footnote 118
2.3.2.2 Health Insurance
There is also some evidence of heterodoxy in the field of insurance contracts. Brazilian courts have adopted pro-consumer approaches in prohibiting denial of coverage due to false statements or omissions of preexisting conditions by the insured, finding that insurance companies should bear the burden of requesting medical examinations. Numerous decisions also grant treatments deemed necessary for the realization of the insured’s constitutional right to health despite clear contractual exclusions.Footnote 119 Commentators suspect that the near-disappearance of the market for individual (as opposed to collective) insurance contracts in Brazil is at least partly due to the excessively consumer-friendly case law of Brazilian courts.Footnote 120
2.3.2.3 Legislative Backlash against Contract Law Heterodoxy
Brazil recently witnessed two legislative attempts to mitigate courts’ heterodox approaches to contract law through new statutory rules on legal interpretation and application. A 2018 amendment to the Introductory Law to the Brazilian Legal System, which provides general standards of interpretation and choice of law, introduced a new rule which provides that “in the administrative, controlling and judicial spheres, one may not decide based on abstract legal values without considering the practical consequences of the decision.”Footnote 121 The new provision is generally understood as an attempt to mitigate rising legal uncertainty due to an excessive use of broad principles (such as legality or human dignity) in legal decision-making in the country.
In 2019, the new “Law on Economic Freedom,” initially enacted by President Bolsonaro as a provisional measure, sought to restrain state interference in economic activity, including private contracts.Footnote 122 Among other things, the statute amends the Civil Code to provide that contracts are to be interpreted in favor of economic freedom, that the allocation of contractual risks by the parties shall be respected, and that judicial rewriting of contract terms should only occur in an exceptional and limited manner. In specifically articulating implicit tenets of contract law’s orthodoxy, it is difficult to make sense of these new rules except as a reaction to the prevailing heterodox approach of Brazilian courts. Nevertheless, the Law on Economic Freedom does not alter the protections of the Consumer Protection Code and, at any rate, its practical effects remain to be seen.
2.3.3 Colombia
Colombia’s Constitutional Court expressly appeals to fundamental rights – such as the right to a vital minimum, health, housing, human dignity, and equality – in resolving disputes involving parties deemed to be weak and vulnerable with respect to contracts for the provision of public services. Colombia’s Constitution, enacted in 1991, imposes on the state a duty to ensure the efficient provision of public services to all residents, which may be carried out by the state directly or by private parties subject to state regulation, control, and monitoring.Footnote 123 The Constitution goes on to provide that regulation of the provision of public services by statute should take into account the criteria of cost, solidarity, and, most notably for the present purposes, income redistribution.Footnote 124 However, the Constitutional Court of Colombia has intervened in contract disputes to promote the distributive concerns enshrined in the constitution even in the absence of statutory authorization. Some of its decisions can be justified as orthodox responses to concerns about imperfect information or substantive unfairness, but others appear to produce heterodox outcomes.
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.Footnote 125 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.Footnote 126 Contract disputes potentially impinging on fundamental rights such as life, health, or the vital minimum are thus subject to tutela claims and constitutional review.Footnote 127 The Court’s contract law jurisprudence has focused primarily on insurance and public utility contracts.
2.3.3.1 Health and Life Insurance
Colombia’s Constitutional Court has decided several cases involving health and life insurance contracts in favor of disadvantaged plaintiffs based on constitutional principles protecting health and the vital minimum. In a 2005 tutela decision, the Court found that a private health insurer’s refusal to renew a contract, while generally permissible, violated the constitutional right to health given the circumstances of the case. The plaintiff was an elderly person with multiple ailments that urgently required medical treatment, and the health insurance contract in question was in force for over four years. The Court rejected the argument that the social right to health applied exclusively against the state’s social security framework, finding that “the contract’s object has an inseparable relation to the effects of the constitutional right to health, so that the interpretation of the scope of contract clauses is contingent, in any case, on the need to guarantee the correct exercise of this right.”Footnote 128 In a subsequent 2011 decision, the Court held that a health insurance company could not terminate a contract for the continued nonpayment of the monthly premium when the insured was HIV-positive, citing the fundamental rights to dignified life, health, personal integrity, social security, and equality.Footnote 129 It found that, even though the patient was receiving treatment through Colombia’s standard health coverage, the relevant question was “the abuse of the company as the dominant party of the contract.”Footnote 130
2.3.3.2 Access to Water
The 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.”Footnote 131 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.Footnote 132
2.4 Explaining Divergence
The decisions and doctrines set out in Section 2.3 are difficult to reconcile with contract law orthodoxy. We first explain why defenders of orthodoxy would argue that these alternative approaches are either illegitimate or ineffective. We then identify ways in which economic, political, and legal features of Brazil and South Africa, and to a lesser extent Colombia, deviate from the assumptions that underpin contract law orthodoxy.
2.4.1 The Case for Orthodoxy
The orthodox view that contract law should not be designed to achieve distributive goals rests on two main sets of arguments. The first set focuses on legitimacy. One of those arguments rests on the libertarian proposition that forcible redistribution by the state generally cannot be justified, except, importantly, where it is required to rectify unjust transfers of resources.Footnote 133 Since contract law involves enforcement by the state, this view rules out redistribution through contract law in most cases.Footnote 134 Our impression is that relatively few modern legal scholars endorse this line of argument. A more widely accepted, though controversial, view is that judges lack the legitimacy to decide upon distributive objectives. According to at least some political theories, decisions about the distribution of resources in society are illegitimate unless made by democratically elected officials, which judges often are not.Footnote 135 This view is, to be sure, fiercely resisted by critical legal scholars.Footnote 136
The second and arguably most central pillar of contract law orthodoxy is a set of pragmatic arguments about effectiveness. The common feature of these arguments is a claim that fiscal policy, meaning the rules and practices concerning taxation and public spending, is superior to contract law as a means of achieving distributive justice.Footnote 137 At least five distinct arguments support this conclusion.Footnote 138
1. Accuracy and predictability. Fiscal policies can be conditioned on information – such as parties’ income, location, profession, and number of dependents – that may not be available to either a tribunal adjudicating a contractual dispute or to parties when they enter into their contract.Footnote 139 This means that rules of contract law conditioned on distributive information would not only be inaccurate, but would also lead to inefficient uncertainty among contracting parties.Footnote 140
2. Comprehensiveness. Redistribution through fiscal policy is likely to be more comprehensive.Footnote 141 Tax and spending programs can be applied to everyone in society, as opposed to just the parties subject to a given body of contract law. By contrast, when distribution is deliberately altered through regulation of contracts only people who participate in the relevant transactions will be affected.
3. Efficiency. Rules of contract law aimed at distributive objectives can induce inefficient behavior – meaning behavior whose costs exceed its benefits – that fiscal policy does not.Footnote 142 An example might be a warranty of habitability which requires sellers of buildings to make improvements whose costs exceed their value to certain buyers. In principle, policymakers could confer the same benefit on the relevant buyers more efficiently by granting them a tax credit financed by an increase in income taxes.
4. Avoidance. Perhaps the most powerful argument against using contract law to achieve distributive objectives is that contracting parties may be able to avoid the effects of distribution-motivated rules. The law can mandate that one party to a contract confer a benefit on their counterparty, but the target of the regulation is likely to adjust the price or other terms of the contract, or refuse to contract altogether, in order to offset the costs of the mandate. The overall distributive effects of the intervention will depend on the effects of those adjustments.
5. Interdependence. Sometimes the welfare of the people burdened by an intervention motivated by distribution will be intertwined with the welfare of the intended beneficiaries. In the extreme case, distributive concerns are irrelevant to the resolution of contractual disputes because there is complete identity between the interests of the parties to the contract, as in the case where the parties are firms owned by diversified shareholders with equal interests in both firms.Footnote 143 One common critique is that it may be difficult to determine the overall effects of a measure that initially distributes wealth from firms to individuals. While also questionable in the United States, this concern tends to be less powerful in the Global South, where stock ownership tends to be much more concentrated, and lower among the general population, than in the United States.
2.4.2 Explaining Heterodoxy
Distributive demands, and the relative legitimacy and effectiveness of judges and fiscal institutions, all vary from time to time and place to place. Accordingly, as Anthony Kronman pointed out in a classic article, the case for contract law orthodoxy is highly contingent on the social and institutional context.Footnote 144 For instance, US scholars have occasionally recognized that contract law may be an appealing second best mechanism for achieving distributive goals if the fiscal system cannot be counted on for that purpose.Footnote 145
Contract law heterodoxy emerged in the Global South under social, economic, and institutional conditions that deviate substantially from the conditions assumed by the conventional justifications for the orthodox approach. First, substantial and unjustifiable inequality bolsters the legitimacy of state-led efforts to improve the welfare of disadvantaged groups. Profound inequality and segregation also make it easier to aim redistributive measures accurately at relatively privileged actors without affecting members of disadvantaged groups. Second, states that experience high levels of inequality may be unable to achieve adequate distribution solely through fiscal institutions. Third, leading judges in these countries have responded to these circumstances by embracing the idea of transformative constitutionalism, which expressly legitimizes pursuit of distributive objectives by the judiciary in the course of resolving private disputes.
The legal systems in which we observe contract law heterodoxy are also heterodox in other areas. In fact, Brazil, Colombia, and South Africa are well known among comparative lawyers for their embrace of a heterodox approach to constitutional law known as “transformative constitutionalism.”Footnote 146 This term was coined to describe South Africa’s distinctive approach to constitutional law and has subsequently been applied to Brazilian and Colombian constitutional law as well.Footnote 147
As its name suggests, transformative constitutionalism starts from the premise that constitutional law should transform rather than simply reflect the society it governs.Footnote 148 Proponents argue that the project of social transformation would be doomed to failure if inequality and injustice in the private sphere were shielded from scrutiny. Accordingly, a key precept of transformative constitutionalism is that the constitution is to be used to reshape the laws that govern relations between private actors, including contract law.Footnote 149
While there is debate about whether transformative constitutionalism only appears in the Global South, it definitely relates to societies that have undergone profound political changes.Footnote 150 In the paradigmatic cases, those changes included the adoption of new constitutional texts following nation-wide consultations and deliberations. Brazil underwent this process in 1988, in the course of transitioning to democracy after a long period of military rule. Colombia’s 1991 Constitution was adopted in an effort to open up a two-party political system that was captured by a handful of powerful actors, leading to widespread popular frustration and political violence. In South Africa, the 1996 constitution was adopted to mark the end of the apartheid regime and the advent of multiracial democracy.
In each of these cases the reformed constitution was clearly designed to achieve economic as well as political change. The Brazilian constitution is the most explicit. It states that “[t]he fundamental objectives of the [state] are,” among other things, “to eradicate poverty and substandard living conditions and to reduce social and regional inequalities.”Footnote 151 Both the Brazilian and South African constitutions also make special provision for expropriation of rural land for the purpose of land reform.Footnote 152 In South Africa, the “commitment to land reform” is listed along with a broader commitment “to reforms to bring about equitable access to all South Africa’s natural resources.”Footnote 153 South Africa’s constitution also guarantees, in qualified terms, equitable access to land.Footnote 154 Finally, all three constitutional texts guarantee access to key goods such as education, healthcare, housing, and social security.Footnote 155
For the present purposes, the critical feature of transformative constitutionalism is that it allows courts charged with resolving contractual disputes to invoke constitutional norms as a basis for altering the distribution of resources in society, especially when the aim is to reverse inequality that can be linked to historic injustice. This directly contradicts the idea that it is illegitimate for judges to use contract law as a tool for promoting distributive objectives, a key intellectual foundation of contract law orthodoxy.
2.4.3 The Significance of Heterodoxy
To this point, our analysis has presumed that contract law heterodoxy matters from a practical standpoint. In this section, we examine three possible challenges to that conclusion. First, the divergence we observe may be formal rather than functional. Second, heterodox features of contract law may affect a relatively small proportion of the population. Third, firms might take steps to avoid the impact of distributive interventions.
2.4.3.1 Functional Convergence
A classic lesson of comparative law is that not all differences in legal doctrines and styles of legal reasoning translate into distinct outcomes of similar controversies. Instead, many comparative scholars believe that the opposite is true, with different doctrinal labels often bringing about similar or identical results. Prominent comparativists Konrad Zweigert and Hein Kötz famously argued for a presumption of functional similarity in the response of different legal systems to practical problems, despite apparent doctrinal differences.Footnote 156 That presumption may well apply to the problems addressed by contract law heterodoxy, even though Zweigert and Kötz limited their analysis to “advanced” legal systems, perhaps in an effort to exclude the Global South.
Our case studies deal primarily with legal arguments about the role of inequality and social rights in the adjudication of contract disputes. As noted throughout the country narratives, we believe that an orthodox approach could lead to the same result in at least some of the cases examined. Although prevalent, functional similarity does not appear to be universal, to the effect that contract law heterodoxy is, in many cases, consequential from an economic standpoint. Moreover, the greater tendency to invoke distributive or social justice considerations in contract law reasoning is interesting in its own right.
A more comprehensive approach to functional equivalence would consider not only whether courts across different jurisdictions would decide a given case in the same way by invoking different contract law doctrines, but also whether they might arrive at similar outcomes by invoking other bodies of law. This kind of functional substitution may well serve to limit the practical significance of contract law heterodoxy. For instance, in the United States (and, to a lesser extent, other common law jurisdictions), bankruptcy offers vulnerable parties a fresh start from harsh bargains, while civil law jurisdictions are more likely to offer responses through contract law.Footnote 157 US bankruptcy law is considered to offer a safety net which at least partially compensates for a weak welfare state,Footnote 158 and several progressive scholars advocate using bankruptcy law to achieve social objectives beyond economic efficiency.Footnote 159 More generally, US law often tackles some of the same distributive concerns through specific legislative (rather than judicial) interventions, including in the realm of consumer finance, healthcare, and the provision of public services.Footnote 160
2.4.3.2 Lack of Comprehensiveness
The project of relying on contract law to achieve distributive objectives presupposes a minimum degree of access to formal markets and courts. This means that the impact of contract law heterodoxy is generally limited to parties who were able to enter into contracts with nontrivial stakes and who have access to courts (as well as, arguably, future contracting parties whose contract terms are shaped by the courts’ jurisprudence). The poorest of the poor, however, are likely to lack access both to significant contracts and to courts, especially when the effects of their poverty are compounded by a lack of information or other forms of vulnerability. Consequently, the primary beneficiaries of contract law heterodoxy presumably will be members of the middle class and lower middle class, not the poorest. This limitation of the potential effect of contract law heterodoxy is a concrete manifestation of the problem of comprehensiveness discussed in Section 2.3.
Lack of comprehensiveness is not a definitive indictment of contract law heterodoxy given growing global concern about the shrinking size and increasing precarity of the middle class. Moreover, the problem appears to be no more acute than the one observed in the context of transformative constitutionalism and the right to health. Various scholars argue that “the judicialization of the right to health” may be regressive in favoring relatively wealthy citizens with access to courts, unlike public health policies that would benefit the poorest segments of the population.Footnote 161
The fact that the impact of contract law heterodoxy depends on access to courts and formal contracting means that its prospects in any given jurisdiction will depend on a range of institutional arrangements. In the United States, for example, beyond the costs of legal proceedings (including legal representation), the widespread use and enforceability of arbitration clauses in consumer contracts limits the emergence and potential application of heterodox contract law.Footnote 162 By contrast, Global South jurisdictions such as Brazil generally resist the use of arbitration in consumer contracts, which remain subject to judicial review – a mode of dispute resolution more conducive to heterodoxy.Footnote 163
2.4.3.3 Avoidance
A central critique of contract law heterodoxy is that it can backfire. As the argument goes, attempts to favor certain groups in contract disputes may lead to price increases or other unfavorable contract terms that hurt precisely such parties in the future (the risk of “hurting the people you are trying to help”). Courts in the Global South are increasingly cognizant of the distinct ex ante incentives caused by contract law decisions, which can lead judges to pause before seeking to help the disadvantaged party in any given case due to the risk of harming similarly situated parties in the future.Footnote 164 This may be why most of the examples of heterodoxy we document involve changes in contract law doctrines of relatively broad application – such as rules on prejudgment interest or recovery of partial payments for real estate – that disproportionately benefit members of disadvantaged groups, as opposed to rules targeted solely at members of those groups. These kinds of rulings cannot be avoided simply by discriminating against members of the disadvantaged groups because they apply to transactions with a more broadly defined group of people. Even if the effects of these sorts of heterodox rulings are neutralized by changes in contracting behavior, the intended beneficiaries will not be the only ones to suffer. Therefore, the breadth of these rulings dilutes both their positive effects on intended beneficiaries and the negative effects of any efforts at avoidance.
Another concern is that contract law heterodoxy may impact industrial organization and market structure. By imposing an “equity tax” on the contract law system, heterodox contract laws may encourage firms to eschew contracts entirely, such as by embracing vertical integration. One study by Brazilian economists found that global fast-food chain McDonald’s changed its strategy in Brazil from relying primarily on franchisees (as it does in most jurisdictions) to adopting a significant majority of company-owned stores.Footnote 165 The shift occurred after courts rewrote the economic terms of franchise agreements based on constraints of Brazil’s landlord–tenant laws when franchisees sued following the devaluation of the country’s currency in 1999.Footnote 166
Yet increased vertical integration may not be a particularly attractive outcome for Global South jurisdictions whose economies are already dominated by large business groups. Scholars argue that weak contract institutions are one reason for the prevalence of family-owned business groups in the Global South, as vertical integration and the family’s reputation substitute for formal contract enforcement.Footnote 167
Paradoxically, at least some manifestations of contract law heterodoxy may favor relatively large business groups. Not only are they able to avoid market contracting to a greater extent through vertical integration, they may also be relatively attractive contracting partners because they are less likely to qualify for special legal treatment in the event of a dispute. In short, small businesses may benefit from heterodox contract adjudication, ex post, yet suffer from its expected effects ex ante through price adjustments and lost contracting opportunities. Conversely, firms belonging to large business groups could avoid both effects. What is perhaps even more troubling, by weakening private contracting as a commitment device, heterodox approaches to contract law could raise barriers to entry and again favor business groups with established reputations.
2.4.4 Prospects for Convergence
The conditions correlated with the emergence of heterodoxy in Brazil, South Africa, and Colombia are beginning to emerge in the United States and other Global North countries. There has been a tremendous rise in economic inequality in the United States and, to a lesser extent, other Global North countries, at the end of the twentieth century.Footnote 168 In many countries, including the United States, inequality is explained in part by a history of racial injustice. This has prompted increased calls for attention to distributive considerations by scholars and political leaders, and lamentations about the state’s inability to achieve the desired levels of distribution through tax and transfer schemes.Footnote 169 The manifestations of contract law heterodoxy that have emerged in Germany and other countries during the COVID-19 pandemic may mark the beginning of a trend.Footnote 170
If inequality continues to rise, the pressure to abandon contract law orthodoxy in the United States and similarly situated Global North countries will become stronger. If and when that happens, scholars and lawmakers in the Global North will benefit from studying the heterodox approaches that have emerged in countries such as South Africa, Brazil, and Colombia. Whether contract law heterodoxy is viewed as a promising policy alternative or as an ill-devised strategy, its real-world significance shows how inequality might affect the operation of foundational private law institutions.
2.5 Conclusion
Documenting examples of contract law heterodoxy in the Global South illuminates both the factors shaping legal developments in the Global South and the normative stakes of contract law more generally. Contrary to conventional understandings, private law in the Global South is not merely a flawed copy of foreign counterparts or a remnant of indigenous (and backward) customs. Nor do the differences between Global North and Global South countries exclusively concern the efficiency of judicial enforcement. Instead, the economic, social, and institutional challenges faced by Global South jurisdictions have promoted adaptations to contract law adjudication, including notably greater concern for distributive outcomes. While it is unclear whether this stance is beneficial, it is likely consequential from an economic standpoint.
The emergence of heterodox legal approaches in the Global South also draws attention to the potential link between inequality and the delegitimization of orthodox contract law doctrine. Economic dislocation during the Great Depression and the COVID-19 crisis also prompted more heterodox approaches to contract law in the Global North. For those opposing contract law heterodoxy, this may offer a warning on the importance of mitigating inequality through other means. For those favoring contract law heterodoxy, it may show the feasibility of a broader array of tools to fight social injustice. At any rate, the phenomenon reveals that contract law around the world is not as orthodox and uniform as scholars typically assume and that there are valuable lessons to be learned from turning the lens of legal scholarship toward the Global South.
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