Lost in translation Abstract: reforming a body of law requires care and attention if significant changes of previous rules may impact incentives. Legal rules changes should be preceded by discussions and serious evaluation of social institutions, common practices and, especially, what incentives will be provided in order to obtain adherence to innovations and avoid rejection or non compliance. Mainly, as pointed out by Ronald Coase, it is important that transaction costs are minimized or eliminated. Not differently are the concerns regarding to the transplant of legal rules. It is not a good solution to refresh norms and the experience shows that when a whole body of rules, a code is copied, it is even worse. If legal codes are to reduce uncertainty when persons make decisions, enabling the evaluation of costs and prizes, long and burdensome discussions are required before a new code is approved of and enacted to guarantee it reflects social institutions and demands correctly. Law and economics is an important tool to evaluate changes in legal rules, mainly in what concerns transaction costs and externalities. But, in Brazil, in 2002, the concern was far from legislators’ focus as analyses of the civil code evidences. Legislators did not provide incentives, ignored transaction costs and negative externalities; “The Law of Enterprise” is the part most disturbing since it regulates private economic organizations. The paper discusses some articles, creation of transaction costs and second order effects. Emphasis is given to entrepreneur and enterprise notions comparing Italian and Brazilian legal policies. 1 – Introduction: The tendency of civil law countries that maintain codes as reference points has merits. After all codes are part of legal tradition, and as systems of positive rules help organize subject matters. Most importantly, according to historians, the French codes, as instruments of policy, guaranteed equality among citizens by preventing judges to made rules and favor the nobility. Codes are also a means of State control over citizens. When a code reflects social institutions, changes in rules will follow changes in the basis, reason why legal systems are open – they influence and are influenced by institutions and majority social trends. The constant inter influence of law on society and society on law prevents that obsolete rules that create costs be maintained. Exceptions are legislators capture and/or legislator self interest. And codes, that is a systematized body of rules, do the get old, irrecoverable? Do codes have a validity period after which they expire? Apparently Brazilians considered civil and commercial codes expired and opted to produce a new code, the 2002 civil code. The 1850 Brazilian commercial code, a law influenced by persons who understood the needs or necessities of trade, was designed to reduce transaction costs. Since enacted many and important special rules that modified parts of the code were approved but the code, or what remained from the original piece, was their reference point. The new civil code incorporated parts of the remainders of the “old” commercial code but, due to imprecise terminology adopted, after only 5 years, is a source of transaction costs and incomprehension. As demonstrated below, use of words that have no legal-technical significance, reproduction of foreign rules and inadequate innovation compromise the function of law – correct incentives, reducing social costs and negative externalities. 2 –Brazilian legislation before 2002: the former two private codes, commercial and civil, reflected society and social institutions of the nineteenth and early twentieth century. Civil, particularly, based on 19th century European codes, centered on individuals and rural property, and no rules related to agribusiness or adequate for a services society. A revision was mandatory; special rules or as some said, by statutes updated family law, women and children’s rights. Commercial code had been modified in the same process and tax law contributed. But, the sixties move in the direction of unifying the law of obligations, in the seventies was converted in a project to draft a new civil code which would receive part of the commercial code and, it was said, modernize Brazilian legislation. The reason behind the first proposal was the fact that litigation of commercial and civil disputes, submitted to the same courts, did not justify two different laws of obligations. In the seventies, under the influence of the Italian civil code, military governments ruling the country, and a tendency to favor State control were consistent with the draft prepared by a commission of scholars under Miguel Reale’s supervision and coordination. The members, but for one professor of commercial law, taught civil law or civil procedure and the bias contaminated the draft and was not expunged from the code. When the two codes were in force, classifying an economic activity was a result of comparing the activity and the list contained in article 19 of “Regulamento” n. 737, of 1850. That law reflected the existence of a special commercial jurisdiction which ruled all commercial disputes. The list was used as reference to indicate, even after commercial courts disappeared, activities regulated by the commercial code, decrees, or statutes that modified or complemented the code. The list served as parameter to discriminate as commercial all partnerships when object clause referred to at least one of the activities. Activities described in that article 19 were: manufacture or transformation of goods; resale of merchandises and animals; transport, insurance, financial services, and public entertainment, plus auxiliary activities. Doctrine defined such activities as having commercial nature. The importance of the discrimination of activities is demonstrated by the fact that not even revocation of said 1850 Regulamento, not reproduced in any other law or regulation, the list remained as reference followed and adopted by scholars and courts. Anyone studying commercial law would use the list to frame the work. 3 – New code: in January 2002 Congress approved the new civil code based on a proposal elaborated in the mid seventies. The legal reform, said to modernize Brazilian private legislation, unified the law of obligations in one body, part of the code. If, when the project was drafted, the part regulating economic activities was named “Da Atividade Negocial” (of the negotiation activity), and the rules designed to include both, commercial and ordinary professional economic activities. As Ascarelli and Liebman taught for a period in the Law School of the University of São Paulo, the influence of Italian doctrine and legislation is clear in this part of the new code. And here resides, also, the problems associated to translation. The book – Da Atividade Negocial, afterwards renamed Do Direito de Empresa – The Law of Enterprise, starts with a definition of entrepreneur. Its article 9661 merely reproduces article 2.082 2 of the Italian civil code. Entrepreneur, a professional, or someone who exercises economic activities at makes it his way of earning life, a broad notion is also someone who organizes his or hers activity. Organizations are structures that reduce transaction costs; any professional that intends to have a presence in the marketplace, to be competitive, will create an organization. But the idea of organization brings to mind the concept of assembling production factors, which, in turn, is associated to commercial activities. In this hypothesis intellectual professions are enterprises, thus commercial undertakings. Odd and wrong conclusion as, in Italy is demonstrated in article 21953 of the civil code. But, when translating part of book V of that code, probably under the influence of doctrine 1 - Considera-se empresário quem exerce profissionalmente atividade econômica organizada para a produção ou a circulação de bens ou de serviços. 2 - Imprenditore- È imprenditore [1330,1368,1655,1722 n,4,1824,2710] chi esercita professionalmente[2070] un’attività economica organizzata al fine della produzione o dello scambio di beni o di servizi [2135,2195] 3- Imprenditori soggetti a registrazione – Sono soggetti all’obbligo dell’iscrizione nel registro delle imprese [2188ss], gli imprenditori che esercitano: a) un’attività industriale diretta alla produzione di beni o di servizi; 2) un’attività intermediaria nella circolazione dei beni; 3) un’attività di trasporto per terra [1678], per acqua o per aria; 4) un’attività bancaria [1834 ss.](1) o assicurativa [1882]; 5) altre attività ausiliarie delle precedenti [1754]. Le developed when the commercial code was in force, and based on the doctrine that recurred to article 19 of Regulamento n. 737 to classify commercial activities as a central reference point, (always invoked as the basis to define commercial activities), there is no specific rule, in the 2002 code, that may comply with the same purpose. If determining the nature of commercial transactions is still necessary, the notion of entrepreneur is too large (or specifically ambiguous). Brazilian legislators, improperly in my understanding, added a paragraph to article 966. Sole paragraph to article 9664 determines that intellectual professionals are not entrepreneurs. The definition of entrepreneur is residual considering all professionals acting in the marketplace. The reason to exclude intellectual professional narrows the concept of entrepreneur. Reasons might be the fact that intellectual professions are characterized by the incorporation in goods or services produced, of features and/or ideas directly related to the “producer”, and, therefore, are not easily replicated or reproduced, in sum they are not fungible. Abilities, creativity, knowledge, inventiveness linked to the professional and considered a projection of his or hers personhood are detected. Fungible goods and/or services destined to be marketed, characteristic of merchandizes, are produced by entrepreneurs, and are the majority of traded goods or services. As trade marks, origin denomination or other means, may individualize some products, are not sufficient to make them a product of intellect. Those are trade tools to identify producers and influence consumers choice, that is, reflect on competition. Excluding intellectual activities from the notion of entrepreneurship, would be perfect had the phrase ended at the word collaborators (colaboradores). Bu the last sentence innovates as it includes, among entrepreneurs, intellectual activities if an “elemento de empresa” results from the activity. Decipher me or I shall eat you, demanded the Sphinx. What makes an disposizioni della legge che fanno riferimento alle attività e alle imprese commerciali si applicano, se non risulta diversamente, a tutte le attività indicate in questo articolo e alle imprese che le esercitano. 4 - 966 .... Parágrafo único – Não se considera empresário quem exerce profissão intelectual, de natureza científica, literária ou artística, ainda com o concurso de auxiliares ou colaboradores, salvo se o exercício da profissão constituir elemento de empresa. intellectual professional an entrepreneur – the phrase “if the exercise of the profession constitutes said element of enterprise, (elemento de empresa) is not clear to some administrative bodies in Brazil. What is the element of enterprise with the ability to make intellectual professional entrepreneurs? If producers had been classified as commercial, civil entrepreneurs, including intellectual and rural professionals, as regulated in the Italian code, the doubt would not exist. Bad or faulty translation, however, leads to obscure interpretations. Elemento de empresa is, according to some scholars, defined as the organization; and as any enterprise is an organization, and organization is not defined, we come to a circular form of explanation that clarifies nothing. The basis for this reasoning lies on an example supplied by Sylvio Marcondes Machado, in an effort to explain why medical doctors are not entrepreneurs and hospitals are enterprises. No remarks are to be made to the example which is correct. Incorrect are the interpretations that followed. Marcondes Machado did not dig deep into the notions behind his example as it appears obvious that the activities differ in nature. Basing conclusions on an example as authority’s dictum generates uncertainty and transaction costs. A brief examination of the aggregate of services rendered by a hospital evidences that besides medical care – intellectual activity - other goods and services are provided. Pharmaceuticals, meals, laundry, come to mind and those represent commercial activities. The first, pharmaceuticals reflects intermediation; meals are a combination of intermediation and preparation. A single commercial activity provided by hospitals would suffice to define it as an enterprise. And it is, in this case, irrelevant if health care provided by medical doctors is more important. Without all acts (or activities) it would not be possible to treat patients in need of surgeries, for example. Not the organization but the aggregation of activities deprived of intellectual nature that justify Marcondes Machado’s example. Not organization, even it is necessary and clearly present in hospital services that determines its classification as enterprise; doctors that work there, nurses, medical students, and a whole body of professional rendering services are intellectual professionals. A better explanation of what drafter had in mind when the copied article 2082 but not article 2195 of the Italian legislation, may be provided by article 9675 of the Brazilian code. The command to entrepreneurs that registration before the commercial public registry must occur before starting activity is emblematic. Note that, again, a deviation of the Italian code is present. The former allows a 30 day period of activity before registration, while the Brazilian code requires registration previous to the start of activities. Possibly due to the evaluation of legal capacity to operate in any market as a supplier; another reason might be the prevention or making it more difficult for irregular entrepreneurs’ to have access to credit. Or, the wrong concept that no irregular or de facto entrepreneur should be allowed! Conclusion, as logical interpretation of both, articles 966, its sole paragraph, and 967, is that entrepreneur and merchant are synonyms. Since no list discriminating commercial activities, best indication for scholars would be to root the set of activities that will be regulated by special laws to article 19 of the revoked 1850 Regulamento. Question is if a law enacted in 2002 may be interpreted using as an instrument the revoked 1850 regulation. If returning to the traditional and consolidated method of interpretation based on the list of activities that have commercial nature, frequent errors will occur. Two come to mind. First is the idea that certified public accountants (CPAs) if rendering services under a partnership model are merchants. The other refers to lawyers acting as consultants, are not classified as intellectual professionals but, instead, as intermediaries, thus, merchants. 4 – Partnerships after 2002: 5 – É obrigatória a inscrição do empresário no Registro Público de Empresas Mercantis da respectiva sede, antes do início da atividade. As the law of obligations was unified contracts, partnerships included, are regulated in the same part of the code. Partnerships are defined in article 981 6 ; article 982 7 defines entrepreneurial partnership if the object clause expresses an activity typical of entrepreneur. Exceptions are corporations, always commercial, and cooperatives, always non commercial, determines sole paragraph.8 Again, the fact that corporations are commercial due to form, or in the legislative language, enterprises, corroborates the conclusion above. Entrepreneur and merchant are synonyms. And article 9839 supports the thesis as it requires enterprises to adopt one of the models, structures created and developed by merchants since the twelfth Century. The command in article 983 is clear. “Commercial” undertakings are enterprises and must, when organized as partnerships, adopt a commercial form model, one of the traditional structures developed for commercial uses. Non commercial undertakings may adopt any of the forms, but it this does not imply they should be classified as enterprises. Creation of a CPAs partnership under the structure of a limited liability partnership is not followed by considering the undertaking as an enterprise. Neither organization nor legal models are, per se, sufficient to define enterprise or commercial undertaking. Conclusion: a simple translation, if improperly made, gives space for incorrect interpretations, thus creating externalities and second order effects. 4.1 – limited liability partnership: The German GmbH was introduced in Brazil in 1919, under the commercial code as a special law. Decree n. 3.078, with 19 articles, regulated the then new structure and made the most used model. Limited liability and no minimum equity 6 - Celebram contrato de sociedade as pessoas que reciprocamente se obrigam a contribuir com bens ou serviços, para o exercício de atividade econômica e a partilha, entre si, dos resultados. Parágrafo único. A atividade pode restringir-se à realização de um ou mais negócios determinados. 7 - Salvo as exceções expressas, considera-se empresária a sociedade que tem por objeto o exercício de atividade própria de empresário sujeito a registro (art. 967) e, simples, as demais. 8 - Parágrafo único. Independentemente de seu objeto, considera-se empresária a sociedade por ações; e, simples, a cooperativa. 9- A sociedade empresária deve constituir-se segundo um dos tipos regulados nos arts. 1.039 a 1.092; a sociedade simples pode constituir-se de conformidade com um desses tipos, e, não o fazendo, subordina-se às normas que lhe são próprias. or capital, remittance to company law articles if and when necessary, may its success. A flexible model was a most welcomed characteristic. Any and all decisions referring to the partnerships’ ordinary or extraordinary administration, required approval of partners representing 50%+1 quotas or simple majority, unless otherwise provided for in the contract. The use of this model to create partnerships by and between couples soon raised a doubt. If married under the complete separation of assets, would the partnership violate the regime? And in case of marriage under complete communication of assets regime, would it be against creditors interests? The questions relied on the possibility of variation of the declared or legal asset regime by spouses. No consideration was given to the fact that shielding business assets was in the interest of business creditors. After burdensome doctrinal discussions, finally courts decided that no violation of legal rules existed if couples, irrespective of asset regime, created limited liability partnerships. Put it differently, married couples could, without breaking the law, organize such a partnership, separating assets and risks. Fact that Brazilian scholars, at least, until the 1960, considered this illegal as the understanding was that a couple’s wealth should not be split under the same ownership (legal and natural persons were not distinguished although formally different), but social needs superseded legal formalism. It became common for married couples under any asset regime, to separate private or household assets from those used in economic activities. Now, post 2002, formalism is in full force again, as if reality and experience do not matter. Article 97710 reflects the same and overcome discussions as far as risk segregation. Couples married under total communication or legal compulsory non communication of assets is prohibited from organizing partnerships; the prohibition includes such arrangements even if a third party is a partner. - Faculta-se aos cônjuges contratar sociedade, entre si ou com terceiros, desde que não tenham casado no regime da comunhão universal de bens, ou no caso de separação obrigatória. 10 If legal persons permit shielding assets and segregate risks, when associated to the exercise of economic activities it serves, also to protect some creditors, those whose credits are linked to the activity, from claims presented by persons whose credits are of a different nature or origin. Article 977 takes another path as form prevails over function, disregarding risk shielding. Even though there one man corporations are admitted, albeit organized by legal persons, it is impossible to create a one person limited partnership for no legal provision was made in a XXI century code. Probably the reasons would repeat the same severe critics of the limitada created by and between married couples. Considering that Italy, France, Spain and Portugal, civil law countries, accept one man GmbH, and some even modified the civil code, adding to the list of possibilities the one man partnership, clearly taking into account that the dynamics of economic activities in a globalized era, requires mechanisms that segregate and shield risks. Limited liability partnership and corporations are organizational structures that serve various purposes. Two are vital – limited liability of members and the other a governance operational model; risk division is a consequence of recognition as legal persons, different form the members, one, two or several. Lost in translation or affirmative of the predominance of the Roman roots as some claim? Roman roots and formalism prevailed; risk protection, a not meaningful goal deserved no attention. Risk bearing and risk shielding are sources of transaction costs and/or externalities. Brazilian legislators did not take those effects into account; no comprehension of social demands and the importance of designing legal rules as close to as possible to social aims. A code that adopts sociality as a fundamental principle, barriers to risk bearing should be understood as pat of social interest. Separation of assets and investment in risky projects are almost inseparable. Article 977 created a problem; what to do with existing limited liability partnerships between spouses married under one of the prohibited asset regimes. Should they be wounded up or one of the spouses should withdraw? The one year period during which partnerships should adapt contracts to the new regulation required a clear definition. A Solomon solution emerged given by the public registry authority. The foundation presented was that such partnerships were a final and perfect legal act, and thus would not be reached by the new law! Article 977 and the registrar authority’s decision exemplify second order effects caused by unnecessary changes and may be included in what is know as Brazilian costs of doing business. Worse is the fact that the new code allows for changes in asset regime in which case a couple could circumvent the prohibition rule. It appears that the code is not a system and this, also, may increase transaction costs. Last remark, a non entrepreneurial partnership, transposition of the Italian società semplice, the model to partnerships exercising activities not qualified as enterprise, supplements all enterprise models, including the limitada. Remittance to corporate law must be a contractual clause. 5- Commercial contracts and interpretation of dubious clauses: probably the worst decision in what concerns unification of the law of obligations resides in the non reproduction of articles 13011 and 13112 of the commercial code applicable to interpretation of dubious clauses, incomplete or lack of regulation. 11 - “As palavras dos contratos e convenções mercantis devem inteiramente entender-se segundo o costume e uso recebido no comércio, e pelo mesmo modo e sentido por que os negociantes se costumam explicar, posto que entendidas de outra sorte possam significar coisa diversa. 12 - Sendo necessário interpretar as cláusulas do contrato, a interpretação, além das regras sobreditas, será regulada sobre as seguintes bases: 1. a inteligência simples e adequada, que for mais conforme à boa-fé, e ao verdadeiro espírito e natureza do contrato, deverá sempre prevalecer à rigorosa e restrita significação das palavras; 2. as cláusulas duvidosas serão entendidas pelas que o não forem e que as partes tiverem admitido; e as antecedentes e subseqüentes, que estiverem em harmonia, explicitarão as ambíguas; 3.o fato dos contratantes posterior ao contrato, que tiver relação com o objeto principal, será a melhor explicação da vontade que as partes tiveram no ato da celebração do mesmo contrato; 4. o uso e prática geralmente observada no comércio nos casos da mesma natureza, e especialmente o costume do lugar onde contrato deva ser execução, prevalecerá a qualquer inteligência em contrário que se pretenda dar às palavras; 5. nos caos duvidosos, que não possam resolver-se segundo as bases estabelecidas, decidir-se-á em favor do devedor. Even if common rules could be invoked to interpret commercial contracts, this would be done if no commercial usages and customs existed. The idea reduced transaction costs as in writing contracts as usages and customs, known to merchants would apply irrespective of express mention. Based on the operability principle it could be imagined that articles 130 and 131 will not represent a barrier. Wrong guessing as contracts social function, in article 42113, generates externalities. Writing contracts, especially commercial ones require, now, more care, increasing transaction costs. And yet, since the former Introduction Law (Lei de Introdução) was not revoked, maybe an appeal to usages and costumes, would suffice and permit the creation of new partnerships by and between married couples regardless of the asset regime. 6 – Conclusions: approval of the civil code with little discussions and a short 12 month period of vacatio legis evidences that approval of legal norms and speed in congressional process do not produce good results. Unclear expression “elemento de empresa” is a puzzle and any meaningful logical answer requires the interpreter to pay attention and combine two articles presented in a not orderly manner. The uncertainty created generates transaction costs and might make it burdensome to distinguish commercial and non commercial activities whose social objects are in the frontier. Little attention is given by scholars and courts to foster a definition of commercial enterprises using a methodology similar to the one after Resolution 737/1850 was revoked and its article 19 served as a pillar. The meaning of “element of enterprise”, as organization is a circular argument; a merchant practices acts of commerce or acts of commerce are those practiced by merchants? Is it possible to exercise, professionally, any economic activity without organization? Are all organizations enterprises? 13 - A liberdade de contratar será exercida em razão e nos limites da função social do contrato. The decision to preserve existing limited liability partnerships in clear violation of the law creates wrong expectations; maybe in other cases a similar decision will be adopted so why comply now. Interpretation of commercial contracts under the menace of the social function in the absence of articles 130 and 131 indicates that this code will not be commercialized as was the case in Italy. Bad translations as imports of foreign institutions are a source of transaction costs, second order effects and prejudicial to foster economic development. References 1 - Considera-se empresário quem exerce profissionalmente atividade econômica organizada para a produção ou a circulação de bens ou de serviços. 2 - Imprenditore- È imprenditore [1330,1368,1655,1722 n,4,1824,2710] chi esercita professionalmente[2070] un’attività economica organizzata al fine della produzione o dello scambio di beni o di servizi [2135,2195] 3 - Imprenditori soggetti a registrazione – Sono soggetti all’obbligo dell’iscrizione nel registro delle imprese [2188ss], gli imprenditori che esercitano: a) un’attività industriale diretta alla produzione di beni o di servizi; 2) un’attività intermediaria nella circolazione dei beni; 3) un’attività di trasporto per terra [1678], per acqua o per aria; 4) un’attività bancaria [1834 ss.](1) o assicurativa [1882]; 5) altre attività ausiliarie delle precedenti [1754]. Le disposizioni della legge che fanno riferimento alle attività e alle imprese commerciali si applicano, se non risulta diversamente, a tutte le attività indicate in questo articolo e alle imprese che le esercitano. 4 - 966 .... Parágrafo único – Não se considera empresário quem exerce profissão intelectual, de natureza científica, literária ou artística, ainda com o concurso de auxiliares ou colaboradores, salvo se o exercício da profissão constituir elemento de empresa. 5 – É obrigatória a inscrição do empresário no Registro Público de Empresas Mercantis da respectiva sede, antes do início da atividade. 6 - Celebram contrato de sociedade as pessoas que reciprocamente se obrigam a contribuir com bens ou serviços, para o exercício de atividade econômica e a partilha, entre si, dos resultados. Parágrafo único. A atividade pode restringir-se à realização de um ou mais negócios determinados. 7 - Salvo as exceções expressas, considera-se empresária a sociedade que tem por objeto o exercício de atividade própria de empresário sujeito a registro (art. 967) e, simples, as demais. 8 - Parágrafo único. Independentemente de seu objeto, considera-se empresária a sociedade pro ações; e, simples, a cooperativa. 9 - A sociedade empresária deve constituir-se segundo um dos tipos regulados nos arts. 1.039 a 1.092; a sociedade simples pode constituir-se de conformidade com um desses tipos, e, não o fazendo, subordina-se às normas que lhe são próprias. - Faculta-se aos cônjuges contratar sociedade, entre si ou com terceiros, desde que não tenham casado no regime da comunhão universal de bens, ou no caso de separação obrigatória. 11 - “As palavras dos contratos e convenções mercantis devem inteiramente entender-se segundo o costume e uso recebido no comércio, e pelo mesmo modo e sentido por que os negociantes se costumam explicar, posto que entendidas de outra sorte possam significar coisa diversa. 12 - Sendo necessário interpretar as cláusulas do contrato, a interpretação, além das regras sobreditas, será regulada sobre as seguintes bases: 1. a inteligência simples e adequada, que for mais conforme à boa-fé, e ao verdadeiro espírito e natureza do contrato, deverá sempre prevalecer à rigorosa e restrita significação das palavras; 2. as cláusulas duvidosas serão entendidas pelas que o não forem e que as partes tiverem admitido; e as antecedentes e subseqüentes, que estiverem em harmonia, explicitarão as ambíguas; 3.o fato dos contratantes posterior ao contrato, que tiver relação com o objeto principal, será a melhor explicação da vontade que as partes tiveram no ato da celebração do mesmo contrato; 4. o uso e prática geralmente observada no comércio nos casos da mesma natureza, e especialmente o costume do lugar onde contrato deva ser execução, prevalecerá a qualquer inteligência em contrário que se pretenda dar às palavras; 5. nos caos duvidosos, que não possam resolver-se segundo as bases estabelecidas, decidir-se-á em favor do devedor. 13 - A liberdade de contratar será exercida em razão e nos limites da função social do contrato. 10