The social function of contracts in market economic systems
| Autor | Luciano Benetti Timm |
| Páginas | 139-153 |
Luciano Benetti Timm. Ph. Doctor in Business Law granted by UFRGS, with the credits and qualification of the research project accomplished at USP (Agreement USP/UFRGS). Master of Law by the University of Warwick. Associate Professor at PUCRS. This research was performed in the year 2005 at Ulbra PPGD.
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The new Civil Code (NCC), which was published in 2002 and became effective in 2003, brought about significant changes compared with the old one. Not from a quantitative standpoint (number of sections), but from a qualitative one (content of the rules). Maybe the most controversial rulePage 140 is section 421, that provides as follows: “Section 421. The freedom to contract shall be exercised by reason and within the limitations of the social function of the contract”. This is an unprecedented provision in the country's legislation, which has long included constitutional rules about the social function of the property (which will not be analyzed in this paper).
This paper intends to describe the current status in the Brazilian academic writings and case law regarding the social function of contracts (the first part addresses this topic) – which usually identifies the social function of the contract under the view of the distributive justice inherent to the Social State, with the purpose of balancing the economic and factual power between the parties. Second, the paper suggests a critical reading about the consensus that is coming up among Brazilian jurists and judges concerning the social function of contracts, starting with a view defended by the school of economic analysis of Law, substantiated by the work of Cooter and Ulen,1 as well as by the contributions of the New Institutional Economics of North2 Williamson3 and Coase4 (which does not necessarily exclude other scopes of approaches such as, for instance, Luhmann’s theory of systems). In Brazil, the references are the works organized by Sztajn and Zylbersztajn5 and by Pinheiro and Saddi6.
It will be demonstrated at the end of this paper that the consensus among Brazilian academic writers is mistaken when it defends the social function based on an idea of distributive justice and when it seeks to make “social justice” by interfering with contractual relations. In other words, the national consensus fails when it supports that the contract would not be a space for the contracting parties, but for society as a whole, where the community interests and social welfare would prevail11 since this reasoning ultimately creates a judicial precedent for constant magistrates reviews of contracts, with state interference on the agreement between the parties favoring the weaker party in the bargain.
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From an economic perspective, even if the prevailing social interest is waived, the arguments supporting the distributive or Public Law criteria to contracts (private space) does not make sense, as it ends up confusing the community interest with the protection of the weakest party (often reflecting an individual interest instead of a community one). Social interest does not always mean interference in order to favor one of the contracting parties. On the contrary, recent examples show that state interference with parties’ bargained agreements can favor the weakest party in the dispute and harm community interests, as it disarranges the marketplace, which is based upon the expectations of the economic agents.
In this regard, the review of business contracts can lead to juridical instability, and to insecurity in the economic scenario, which would result in more transactions costs for the parties to negotiate and to enforce their deals. Furthermore, those contract review cases show that the risk or even the loss arising from the interference is shared by society as a whole, which ends up having to bear the costs of the least efficient economic unit, by having to share the losses the latter has suffered paying for the legally protected insolvent (as it paradigmatically occurs with banking interests, and as it has occurred in a soy financing agreement in the state of Goiás7).
But that is not all. The current financial difficulties faced by welfare-protecting governments, fostering policies aiming to distribute wealth and not necessarily in generating it, globalization, a networked society and the organization of economic blocs challenge the Social State model itself (as it was originally conceived), and, consequently, the distribution model based on the ideal of “social justice” and of “humanization” of capitalism by means of the contract. In fact, it is the development of the capitalist system that makes the means of social progress viable, so one must think of a legal system that better contributes to this purpose and not one that conflicts with it.
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The method used in this research is fundamentally theoretical and uses bibliographical review and judicial precedents to illustrate the arguments.
We are moving towards a consensus in the national academic writings concerning the meaning of the social function of the contract provided for in the New Brazilian Civil Code (NCC). This (almost)8 unanimous opinion derives from the survey of articles published in major national periodicals between the years 2003 and 2005.9 A significant part of the researched authorsPage 143 understands the social function as the expression of “social justice” as directives within the contract scope inherent to the Welfare State. It is a phenomenon referred to as “publicizing”, “socialization” or even as “constitutionalization” of Private Law, which resulted in institutes traditionally belonging to Civil Law – such as the contract and property – being guided by distributive criteria inherent to Public Law, and to some extent, transferring to private parties some of government’s tasks.
The principle of the social function is perceived, within this “near” consensus, as a limitation to the principle of contractual freedom – now seen as of a typically bourgeois nature and consolidated by the civil codes of the 19th Century such as the Code Civil and the Burgerlichesgesetzbuch (BGB) – which is considered individualistic. The social function of the contract would ensure the prevalence of the community interests over individual interests. Essentially, this means (although not all the above-mentioned authors agree on that) the protection of the weakest party in the bargain, which would often not manifest his/her own free will, but succumb to the greater bargaining power of the economically stronger party or even to (re) distribute the economic benefits of the contract in spite of the bargain of the parties. Therefore, this is a contract concept model that assumes contractual freedom to be fictitious, and it is more appropriate to speak about submission when the economic power unbalances the bargaining power between the parties. This would also mean identifying the legitimate interests of third parties (therefore extraneous to the contract) to be protected. Hence, as the arguments go, there would be a need for the State (the Congress and the courts) to interfere with the contract so as to adjust the parties’ bargaining position.
In this regard, the words of Judith Martins Costa are paradigmatic: “The principle of the social function, now expressly supported by the Civil Code constitutes, in general terms, the social expression within Private Law, projecting, in its regulatory corpora, and in various legal subjects,Page 144 the guideline of social solidarity (Federal Constitution, section 3º, III, in fine). (...) the principle of the social function, (...) indicates a path to follow, as opposed to predatory individualism”10.
What about judicial precedents? In Brazil, as in countries of Roman-German-Canonic tradition in general, they are strongly influenced by academic writings, which play a fundamental role in the juridical praxis. Therefore, court decisions will often be highly influenced by the opinions of academics.
In this respect, on the basis of the social function of the contracts, some judges have been reviewing contracts under the political reasoning of protecting the weak against the strong, society as whole (for example, the borrower) instead of the individual (for example, the financial institution). By the same token, a portion of the judiciary has been prohibiting the interruption of water and electricity supply, as well as of everything related to “human dignity”, even if the interruption is allowed in the relevant water or electricity regulations and in the agreements entered into by and between the parties. One example can be found in the digests of the Civil Appeal no. 70010372027, 9th Civil Panel of Judges of the Supreme Court of the State of Rio Grande do Sul, August 10, 2005:
“NATIONAL HOUSING SYSTEM. CONTRACTUAL REVIEW ACTION. INCOME COMMITMENT PLAN. PRICE TABLE. CAPITALIZATION. SOCIAL FUNCTION OF THE CONTRACT. INSURANCE.
Possibility of reviewing and adapting the contract, thus balancing the business relations between the parties within those parameters conferred by the Rule of Law and the inherent function of the Judiciary.
(...) 6. The iniquitous application of the PRICE TABLE is withdrawn, and the calculation method for simple interest is adopted, with the purpose of avoiding the anatocism and the geometric and exponential progression of the interests.
7. When the contract stipulates debit balance indexation according to the savings account index...
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