Excerpted From: Kevin E. Davis and Mariana Pargendler, Contract Law and Inequality, 107 Iowa Law Review 1485 (May 2022) (249 Footnotes) (Full Document)


DavisPargendlerEconomic 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.

We contribute to this debate by providing examples of contract law heterodoxy in the legal systems of developing countries. Although the potential uses of contract law to mitigate inequality have long been the subject of heated scholarly debate, the comparative dimension of this controversy has been neglected, even though inequality in developing countries is an especially pressing concern. Our analysis unveils how courts in select developing countries 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 developing countries or even that it is dominant in the developing countries 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 developing countries is noteworthy and likely consequential from an economic standpoint.

The existence of contract law heterodoxy in developing countries 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 developing countries 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. The consensus in the literature on comparative law has been that the traditional distinctions between contract law in civil and common law systems either are waning or have limited economic significance. As for comparisons between developed and developing 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, attempt to assess the quality of contract institutions across the globe, they focus 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. Scholars who have commented on substantive divergences between private law in developed and developing countries 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. In contract law at least, the possibility of progressive, judicially led innovations in developing countries--a well-known phenomenon in constitutional law been overlooked.

Contract law heterodoxy in developing countries 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 developed countries, contract law heterodoxy may, in economic parlance, constitute a second-best approach in developing countries, 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 developed jurisdictions.

Finally, our examination of contract law heterodoxy in developing countries has a deeper methodological implication. Specifically, it illustrates the potential benefits of looking beyond the usual developed country 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 developing countries are best served by rules of contract law that diverge from those which are suitable for developed countries. We show that analysis of innovations in developing countries 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 developed countries 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. It is widely accepted that labor and employment law influence both efficiency and the distribution of wealth in society and are used as instruments for addressing poverty and inequality in some developing countries. Labor and employment law feature prominently in proposals to focus on “predistribution”--that is, mechanisms that shape the distribution of income and wealth prior to taxes and transfers. Excluding employment agreements from the scope of this Article likely understates the degree of contract law heterodoxy in developing countries 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. 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 developed world, the case studies reveal “varieties of heterodoxy,” rather than a single monolithic approach.

The remainder of this Article is organized as follows. Part I focuses on contract law orthodoxy. It begins with the definition of orthodoxy as the rejection of distributive objectives in contract law. It then describes the scholarly consensus that U.S. common law of contracts is overwhelmingly orthodox, identifies the rare examples of heterodoxy in U.S. contract law, and discusses the comparatively limited evidence of heterodoxy in the contract law of leading jurisdictions in continental Europe. Part II presents more robust examples of contract law heterodoxy, drawing upon cases from South Africa, Brazil, and Colombia. Part III offers a theoretical account to explain the observed divergence. The first Section begins by reviewing the arguments typically used to justify contract law orthodoxy. It then posits that the strength of arguments in favor of orthodoxy varies depending on underlying economic conditions, levels of state capacity, and conceptions of the judicial role. Even if there are good reasons for caution about the promise of contract law heterodoxy in reducing inequality, we conjecture that rising global wealth disparities and other forms of convergence between developed and developing societies will stimulate a corresponding greater interest in heterodox approaches to contract law in developed countries.

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Documenting examples of contract law heterodoxy in developing countries illuminates both the factors shaping legal developments in developing countries and the normative stakes of contract law more generally. Contrary to conventional understandings, private law in developing countries is not merely a flawed copy of foreign counterparts or a remnant of indigenous (and backward) customs. Nor do the differences between developed and developing countries concern exclusively the efficiency of judicial enforcement. Instead, the economic, social, and institutional challenges faced by developing countries 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 developing countries 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 developed countries. 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 developing countries.

Beller Family Professor of Business Law, New York University School of Law.

Professor of Law, Fundação Getulio Vargas Law School in São Paulo (FGV Direito SP); Global Professor of Law, New York University School of Law.