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Business Contract Law in Brazil: The Challenges of

Judicial EnforcementVinicius Klein

Columbia Law School Visiting ScholarPhD Candidate in Private Law at UERJ

Corporate Law Professor at Positivo University

Introduction

“There is a widespread agreement that any viable theory of contract will have to take the fairness of a contract into account, yet there is no agreement as to how to do so.” (James Gordley - The Philosophical Origins of Modern Contract Doctrine )

The Question

Suppose the following case: Company A and Company B agree on a

business contract stating the following: The distribution network will be shared

and Company A and Company B will use the same technology in the distribution process.

The Question

Then suppose that a consumer protection organization fears an augmentation in prices and sues both companies on the ground that this contract harms consumers.

Question: Are courts and specially their current style of legal reasoning suitable to adjudicate such a dispute?

The Question

My thesis: Brazilian courts are rather not suitable to adjudicate such questions.

First, let’s have a look at the main deficiencies of courts when facing such questions and, second, look at some ideas about how to overcome them.

Framework

A court in Brazil would answer such case by using principles of Brazilian Contract Law. The question will be approached by a two prong test: On the one hand the constitutional principles of freedom of contract, consumer protection and social function, on the other hand, statutory provisions like good faith.

If the court reaches the conclusion that the effects are negative for consumers it has to answer the question whether the companies are capable to achieve the same objective in a way that harms consumers less?

Framework

Before answering the question let’s look at some features of Brazilian courts:

Brazilian judges are not used to policy arguments in the reasoning of their decisions. It is not common in the Brazilian legal culture. However, the cases described demand arguing with constitutional principles and policy arguments. It further requires judges to look at the consequences of the outcome of the case and the impact on future cases.

As a consequence, such reasoning will often be omitted in the final version of the legal reasoning of a court decision.

Framework

There is a lack of expertise of the judges when analyzing cases with economic sophisticated tools.

Therefore courts use ad hoc experts to brief them with non-legal arguments. However, such opinions are not part of the published decision. This leads to a lack of transparency in the actually very policy driven reasoning of the decision.

Framework

The use of arbitration and private enforcement mechanisms will probably not help since national consumer affairs are not well suited for arbitration and other private resolution mechanisms.

In Brazil a change in the consumer protection statutes is unlikely in the near future. Conversely, the use of collective actions is increasing. Thus, there is a need for clarification of this question.

Building a possible solution

This question is not entirely new, antitrust cases deal with the same problem.

In Brazil antitrust cases are decided in a administrative procedure and usually do not go to courts. But a contract challenged on the ground of consumer protection will go to court.

Building a possible solution

Antitrust authorities use an approach that looks on consequences of the decision. Additionally, it follows an previously published and public economic guideline about how economic theory will be used to adjudicate the case.

Antirust challenges to business contracts are usually about the overall effects for society and not just about the parties in the contract.

Building a possible solution

Question: Can the principles developed in antitrust law be transferred to our example and may they help us to develop a more adequate reasoning in consumer disputes against business contracts?

Building a possible solution

My thesis is that the answer is positive. This comparison is at least a very good starting point.

But in this exercise we must be aware that the different institutional features will not allow a quick and easy transplant.

The proposed Solution

One possible solution is the use of approaches and mechanisms developed in antitrust cases to improve the judicial enforcement of protective statutes in business contract cases like our example. Specially two points can be emphasized: 1) The use of guidelines for an economic analysis

of business contract cases; 2) The explicit use of arguments looking on the

consequences of a decision and explicitly include such arguments in the legal reasoning;

The proposed Solution

Some problems this solution faces: The aim of the legislation and the

economic theory used in antitrust law are subject to a wide consensus. On the contrary, in contract law both questions are highly controversial.

Judges don’t have the basic economic background to apply the guidelines.

The proposed Solution

The use of guidelines can overemphasize the role of the economic arguments. Balancing them with other arguments is very challenging for judges.

The use of policy arguments and the focus on the consequences of the outcome could increase judicial discretion to an unacceptable level.

Conclusion

This question shows a broad problem: Issuing a more consumer protective regulation

is not a guarantee of mission accomplished in delivering effective consumer protection.

At least two problems must be faced: 1) The necessity of new argumentation tools 2) The institutional competence of the courts