Debt Litigation and the Performance of Law Courts in Eighteenth-Century Portugal

Abstract

Theoretically, the extent to which the eighteenth-century Portuguese legal system was able to enforce loan contracts should be evident from the duration of the court proceedings and the execution of the collateral that secured the loans. Yet, data from a newly assembled data set that includes the contracts established by the Lisbon Misericórdia—the major lay brotherhood in Portugal and a leading creditor in the city—as well as 990 lawsuits from its private court of law (exclusive jurisdiction) have a different story to tell about the complex mechanisms behind the lending activities of the institution. Notwithstanding the reasonably rapid resolution of its cases and its routinely successful execution of collateral, the Misericórdia’s law court was powerless to solve the problem of default or to safeguard lenders’ property rights. The membership of creditors and debtors in the Misericórdia tended to undermine cooperation rather than enhance it, challenging the assumption that cohesive groups hold high levels of social capital.

Institutional investors in the Portuguese credit market (1550–1800): The case of the Misericórdias

“…Debt restructuring was one of the ways to avoid default, but creditors also had other formal mechanisms at their disposal. Portuguese law protected creditors' property rights, and law courts often enforced contracts expeditiously (Rodrigues 2019c), although idiosyncratic characteristics of the parties could affect the enforcement mechanisms (Reis 2011).…”

“…Debtors often had difficulty in paying the annual interest, and the Misericórdia failed to set up an effective charging system, enabling the accumulation of an extraordinary volume of due interest and capital, with severe repercussions for the organisation's financial health. Even resorting to law courts or private order institutions did not solve loan non-compliance issues (Rodrigues 2019a(Rodrigues , 2019c. In this context, the crown started to meddle in the confraternity's credit activity (Lopes 2008).…”

“…In contrast, loans advanced to individuals were considered less secure because debtors often missed the payments of annual interest, and it was very expensive to execute each one of them (Rodrigues 2019c). The enforcement of these contracts was complex, lengthy and, therefore, costly.…”

“…22 Missed annual interest payments, default on credit and debtors' bankruptcies were common scenarios in the Misericórdias' lending activities (Lopes 2008). For some Misericórdias, such as that of Lisbon, the non-compliance of private credit contracts took significant proportions, hovering around 70 per cent of all loans (Rodrigues 2019a(Rodrigues , 2019c. The high proportion of default on debts in the case of Lisbon had to do with the inbreeding nature of the loans, which were addressed mainly to the members of the high nobility, who were, at the same time, members of the confraternity and had a seat on its governing bodies.…”

Early Modern Financial Development in the Iberian Peninsula

“…Moreover, a recent study has shown that judicial rulings determining the seizure of assets given as collateral were not effectively enforced, either because of the courts' lack of coercive means or because judges were reluctant to contend with a social group that enhanced the institution's prestige. The state intervened and interdicted the Misericórdia from lending to private borrowers in 1775, which reinforced the institution's option of applying its liquidity in public credit (Rodrigues 2019b).…”