The freedom of groups like corporations and individuals to enter into contracts bereft of government restrictions is the fundamental basis of freedom of contract. Indeed, such freedom opposes price-fixing, competition law, and minimum wage as forms of government restrictions. This freedom is premised on the doctrine of laissez-faire. The topic of freedom of contract can be tricky since it carries a weighty ideological charge. It involves choosing between government control and individual liberty. Conversely, it can be a choice between free-market capitalism and communitarian consensus. Thus, contractual freedom involves the liberty to choose the terms of whether to contract, with whom and on which contract terms. This doctrine envisages the legal right for people to bind themselves legally. Thus, this is a basic judicial concept that holds that contracts are based upon free choice and mutual agreement.
This paper will seek to demonstrate that indeed, the conception of freedom of contract is rigid and thus highly unrealistic. Based on Kimel’s Neutrality, Autonomy, and Freedom of Contract, this essay will demonstrate justifications fronted in the intervention of the law of contract and its desirability in legal, economic, and social policies. In fact, the application of this law reflects valid and overlapping concerns at times for public wellbeing, individuals, social justice, and vulnerable individuals. This paper will delve into statute law and other relevant cases in order to demonstrate the erosion of this concept during the twentieth century. Lastly, this essay will provide the justifications that culminated in the overt erosion of the concept of contract freedom.
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It is clear that this concept presupposes that contracts should not be hindered by external controls like government interference. People are free to design relations through private agreements. A contract involves legally enforceable promises or an assortment of promises, and thus people should be accorded the freedom to chose when, how, and where to contract. The evolution of social structures is based on roles arising from a status based on some contractual freedom. Status systems establish relationships and obligations by birth. On the other hand, contractual freedom presumes that people are equal and free. As elucidated by Robert Nozick and other modern libertarians perceive this concept as a vivid expression of independent decisions by separate individuals in pursuant of their interests under a minimal state.
In the 20th Century, it has become evident that certain contract law’s parts raise contractual freedom issues. Such elements include the rules that oppose excessively liquidated damages or those that block promises enforcement unsupported by a form of consideration limit contracting parties’ freedom. The enforcement of some inconsiderate and callous contract terms has been deemed unconscionable by law courts. Contractual freedom is also limited in labor law, insurance law, products liability, and landlord-tenant law as well as other many doctrinal fields. Questions arise when contracts are signed out of duress or fraud. For instance, when one is forced to sign a contract at gunpoint, this limit contract terms, which create externalities or even affect third parties.
Joseph Lochner was a baker in New York, U.S. He was fined because of limiting state laws that limited the number of hours that employees were to work in 1905. Lochner, in turn, sued the state alleging that he had been denied his ‘due process’ right. He claimed that it was his right to contract with employees freely and thus the state unjustly interfered with this right. The U.S. Supreme Court utilized the clause on due process envisioned by the 14th Amendment in declaring unconstitutional the statute by the state of New York that limited the number of hours that employees could work. The majority ruled that under the provision, states should not deprive any person of liberty, property, or life without the law’s due process. Employees and employers possess the right to freely sell and purchase labor respectively. The 14th Amendment protects this liberty.
However, the dissenting judge, Justice Holmes, argued that the majority’s decision was based upon the ideology of laissez-faire and that their decision was premised on economics and not a proper interpretation of the constitution. According to Roscoe Pound, contract laws’ freedom was to blame for the violation of labor rights. Federal and State Supreme courts struck down labor rights. Sane individualism and common law would render such rulings wrong. However, this has changed especially in the 20th century. Courts are upholding reformist legislation as far as labor rights are concerned. The Supreme Court, for instance, reversed its own view in the West Coast Hotel Co. v. Parrish in 1937. The Court consequently upheld a law by Washington State that set a minimum wage.
Before the turn of the 19th century, the UK judiciary considered contractual freedom as an applicable public policy feature. This was expressed in the Printing and Numerical Registering Co. v. Sampson case. However, in the late 20th century, this common-law view completely changed. Lord Denning posited that contractual freedom was tantamount to oppression to the less privileged and the weak in the George Mitchell (Chester Hall) Ltd v. Lock Seeds Ltd case. While adults have the right to make legally binding and mutual agreements with other persons bereft of government interference, they cannot fulfill some obligations. In fact, there are circumstances that government interference may be deemed necessary. According to Stuart Mill, governments cannot limit their concerns with contracts to mere simple enforcement. Governments determine which contracts can be enforced and which cannot fir enforceability. This is done for the public good and is adherent to the utilitarian philosophy.
To Tawney, the few that consider social history facts dispassionately are likely to be disposed to deny exploitation of the weak people by those who are powerful, organized for economic gain purposes, buttressed through imposition of legal systems, and consequently screened by demure virtuous sentiments draperies, as well as resounding rhetoric, is a permanent feature amongst world communities. Contract law remains a fundamental institution underpinning market systems. A rigid examination of the law of contract underscored in contractual freedom is integral in any economic rhetoric. It is important and desirable for economic fundamentalism to comprehend the origins of the doctrine, its emergence, and decline as an element of the 20th-century view of laissez-faire doctrine and social theory. The emergence of orthodox contract law in the U.S. and in England occurred at the turn of the 19th Century. The doctrine of contractual freedom is the theoretical framework underpinning economic fundamentalism.
Common law development and its correlated growth of the law of contract in the U.S. and in England coincided with the rise of capitalism as well as its adherence to the social contract theory. In the medieval era, relationships were basically customary but the law was instrumental in backing this practice. Indeed, morality, custom, and law were not clearly distinguishable. Particularly, while there were elements of free choice and bargaining in economics, ethical ideas constrained such freedom. This ensured that any economic relationship was just and fair. Law and custom ensured that people in authority enforce just wages and just prices. It was considered usurious for a party to gain more advantage than the other party and therefore people were guided by a desire to subsist. The need to impose price controls and regulate wages was eroded at the turn of the 15th century where after which lending was done at interest. The sale of qualitatively and quantitatively incorrect products was void and sinful. Sellers were expected to reveal flaws in their products. The caveat emptor doctrine had no place.
In the 18th and 19th centuries, judges felt the need to disregard precedent. It was deemed necessary to make laws that were consistent with the existing contractual ideology. In the 19th Century, a newfangled utilitarianism has eroded concern for contract fairness. Value changes were intended to reshape the existing legal system to benefit the business. The 20th century was seen as the heyday of laissez-faire and contract sanctity. Global support for the free market system and the need to incorporate government regulation have expanded greatly. Judges emphasized the need to fulfill contractual obligations with moral fervor. The entrenchment of contractual ideology in world economic systems promotes laissez-faire and economic development.
Freedom of contract remains an ideologically electric notion that attracts a strongly held political viewpoint. However, there is a need for legislative limit contractual freedom. Behind contract law, lies an assortment of political, social, and economic values, which define the responsibilities of markets in contemporary developed countries. However, markets are neither the singular social organization mode nor the societies’ sole distribution and production channel. Contract law helps in the facilitation of a well-informed and voluntary exchange of exclusive and well-defined property rights. Arguably, utilitarianism is the prime milieu philosophy in modern economics. Libertarians contend that the law of contract guarantees individual autonomy.
The major rationale behind limiting contractual freedom revolves around the fear related to the commodification of particular relations and goods, presence of effects of third-party, imperfect information, coercion, control and supervision of open preferences for contracting parties for dissimilar paternalistic reasons. Even in communities committed to economic and political liberalism, a room is provided to debate the market’s scope. Market paradigm critiques may be superficially and partly based on many historical arguments among others. Contracts permitting the sale of public offices, votes, body organs, blood, as well as contracts of commercial surrogacy, pornography or prostitution undermine values of human flourishing or human self-fulfillment. Private property-private exchange systems depend upon their stability and the system being non-universal. If bureaucratic, legal, and political offices were auctioned-off, their holders accepting bribes and sale of votes, the private orb could be destabilized massively. As enunciated by Stuart Mills in On Liberty, governments should not permit voluntary self-enslavement through contracts.
In 1935, Wisconsin parliament passed a statute that required every public accountant to be licensed. State Board of Accountancy was established under a statutory scheme. In Wangerin v. Wisconsin State Board of Accountancy case, plaintiffs that purported to work as public accountants sued to be enjoined the enforcement of the statute’s penal provisions. The plaintiffs argued that practicing accounting could not affect the public welfare. They argued that this statute could interfere with their freedom of contract. The statute does not involve employee-bookkeepers but is comprehensive. Defendants in the case demurred to this complaint. Consequently, the demurrer was accordingly sustained. On appeal, it was held that the practice of accounting affected public welfare and thus the statute was said to be in line with the state’s power.
There is a need to limit contractual freedom to avert markets for commercial surrogacy, new-borns, employment regulation, regulation of residential tenancy, and prostitution. Double bind effects involve the problem where prohibiting exchange may make the plight of those involved actually worse off. For instance, banning prostitution can purge income-earning options for poorer women. Again, the domino effect entails the impact of counterbalancing market manifestations and rhetoric may pervert and change discourse terms. Secondly, there is a need to address externalities. Externalities could be thought of as the imposition of positive benefits or negative costs from exchange transactions on third parties who are non-consenting. Positive externalities culminate in incentive problems leading to a suboptimal quantity of goods in question. On the other hand, negative externalities like pollution are serious but important. There are contracts that yield negative externalities that are harmful. For instance, there are contracts that lead to perilous leisure activities.
Additionally, there are some contracts based on coercion. Where there is no information asymmetry and cognitive difference and a contract is signed, the question of whether the parties involved rendered their consent involuntarily arises. Technically, every contract is ‘coerced’ due to the pervasiveness of resource scarcity and opportunities. However, unless contract signing is done through the application of actual hypnotic trance, torture, or physical force, every economic exchange is voluntary. Right theorists provide a definition of coercion by distinguishing offers and threats. Threats decrease the available possibilities for proposal recipients while offers provide an expansion. However, difficulties arise in determining an offeree’s baseline. The offer’s measure could be phenomenological, moral, or statistical. Contracts that take advantage of other people through coercion are unenforceable. This limits the freedom of contract. Any contract should render the parties involved better off. When people are forced into contracts, this negatives the doctrine of distributive justice. Towards this end, there is a need for regulatory and antitrust law.
In conclusion, contracts in the event of information asymmetry can be vitiated. Exercising autonomous choices requires enough information. In the 20th century, the doctrine of contractual freedom is limited in the event of imperfect information. Cases of information failure include innocent misrepresentation, negligent misrepresentation, material non-disclosure, and fraud. Imperfections in symmetric information correspond with contract doctrines that relate to mutual mistake, contract modification, and frustration. Before a party signs a contract, there is a need for him/her to have full information as to the terms of the contract as well as the consequences that accompany the failure to execute the contract. Judges in the 21st century have the freedom to determine when contracts signed bereft of perfect information can be vitiated.