Pacta Sunt Servanda Versus Social Role of Contracts

Abstract: Forward sale of soybeans was one of the driving forces behind development of soybean agribusiness in Brazil. A specific issue motivated this study: breach of contract by soybean growers during a period of marked increase in soy prices and subsequent judicial rulings. Descriptive and econometric analysis (PROBIT) has been carried out in 161 judicial appeal decisions in the Goiás Court of Justice (Brazil) and a quantitative survey was done with 70 farmers. The core hypothesis of this study is that the instability created by judicial decisions raises transaction costs and hampers economic development. Contradictory court decisions were found between the first and appeal decisions, as well as in the case of same judicial level. The effects of court decisions are realized such as in the case of more requirements of guarantees and the reduction in the number of contracts. Those soybean farmers who did not breach their contracts also have been negatively affected by the strategic reactions of trading and processing companies. Use of the concept “social function of the contract” led to a high degree of instability in contracts. Therefore, the transaction costs have been increased for all the agents and the importance of economic sanctions has increased as well.