Freedom of contract

Freedom of contract is the freedom of individuals and corporations to form contracts without government restrictions. This is opposed to government restrictions such as minimum wage, competition law, or price fixing. The freedom to contract is the underpinning of laissez-faire economics and is a cornerstone of free market libertarianism.

History

Henry James Sumner Maine proposed that social structures evolve from roles derived from status to those based on contractual freedom. A status system establishes obligations and relationships by birth whereas a contract presumes that the individuals are free and equal. Modern libertarianism such as that advanced by Robert Nozick sees freedom of contract as the expression of the independent decisions of separate individuals pursuing their own interests in a "minimal state."

Freedom of contract in America

Lochner v. New York

Main article: Lochner v. New York

Joseph Lochner at work in 1905

In 1902 a New York baker named Joseph Lochner was fined for violating a state law limiting the number of hours his employees could work. He sued the state on the grounds that he was denied his right to "due process". Lochner claimed that he had the right to freely contract with his employees and that the state had unfairly interfered with that right.

In 1905 the Supreme Court used the "due process" clause in the 14th Amendment to declare unconstitutional the New York state statute imposing a limit on hours of work. In Lochner v. New York, Justice Peckham wrote for the majority: "Under that provision no state shall deprive any person of life, liberty, or property without due process of law. The right to purchase or to sell labor is part of the liberty protected by this amendment..."

Writing in dissent, Oliver Wendell Holmes accused the majority of basing its decision on laissez-faire ideology. He believed that they were making law based on economics rather than interpreting the constitution. Neither did he believe that "Liberty of Contract" existed or was intended in the constitution.

In his "Liberty of Contract" (1909), Roscoe Pound critiqued freedom of contract laws by laying out case after case where labor rights were struck down by State and Federal Supreme Courts. Pound argued the courts' rulings were "simply wrong" from the standpoint of common law and "even from that of a sane individualism" (482). Pound further compared the situation of labor legislation in his time to common opinion of usury and that the two were "of the same type" (484). Pound lamented that the legacy of such "academic" and "artificial" judicial rulings for liberty of contract engendered a "lost respect for the courts", but predicted a "bright" future for labor legislation (486-87).^[1]

The Supreme Court applied the liberty of contract doctrine sporadically over the next three decades, but generally upheld reformist legislation as being within the states' police power. In 1937 the Court reversed its view in the case West Coast Hotel Co. v. Parrish. In that case the court upheld a Washington state law setting a minimum wage.

Exclusion clauses

In George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd, Lord Denning MR compared "freedom of contract" with oppression of the weak.

“

The heyday of freedom of contract None of you nowadays will remember the trouble we had - when I was called to the Bar - with exemption clauses. They were printed in small print on the back of tickets and order forms and invoices. They were contained in catalogues or timetables. They were held to be binding on any person who took them without objection. No one ever did object. He never read them or knew what was in them. No matter how unreasonable they were, he was bound. All this was done in the name of "freedom of contract." But the freedom was all on the side of the big concern which had the use of the printing press. No freedom for the little man who took the ticket or order form or invoice. The big concern said, "Take it or leave it." The little man had no option but to take it. The big concern could and did exempt itself from liability in its own interest without regard to the little man. It got away with it time after time. When the courts said to the big concern, "You must put it in clear words," the big concern had no hesitation in doing so. It knew well that the little man would never read the exemption clauses or understand them. It was a bleak winter for our law of contract. It is illustrated by two cases, Thompson v. London, Midland and Scottish Railway Co. [1930] 1 K.B. 41 (in which there was exemption from liability, not on the ticket, but only in small print at the back of the timetable, and the company were held not liable) and L'Estrange v. F. Graucob Ltd. [1934] 2 K.B. 394 (in which there was complete exemption in small print at the bottom of the order form, and the company were held not liable). The secret weapon Faced with this abuse of power - by the strong against the weak - by the use of the small print of the conditions - the judges did what they could to put a curb upon it. They still had before them the idol, "freedom of contract." They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to stab the idol in the back. This weapon was called "the true construction of the contract." They used it with great skill and ingenuity. They used it so as to depart from the natural meaning of the words of the exemption clause and to put upon them a strained and unnatural construction. In case after case, they said that the words were not strong enough to give the big concern exemption from liability; or that in the circumstances the big concern was not entitled to rely on the exemption clause. If a ship deviated from the contractual voyage, the owner could not rely on the exemption clause. If a warehouseman stored the goods in the wrong warehouse, he could not pray in aid the limitation clause. If the seller supplied goods different in kind from those contracted for, he could not rely on any exemption from liability. If a shipowner delivered goods to a person without production of the bill of lading, he could not escape responsibility by reference to an exemption clause. In short, whenever the wide words - in their natural meaning - would give rise to an unreasonable result, the judges either rejected them as repugnant to the main purpose of the contract, or else cut them down to size in order to produce a reasonable result. This is illustrated by these cases in the House of Lords: Glynn v. Margetson & Co. [1893] A.C. 351 ; London and North Western Railway Co. v. Neilson [1922] 2 A.C. 263 ; Cunard Steamship Co. Ltd. v. Buerger [1927] A.C. 1 ; and by Canada Steamship Lines Ltd. v. The King [1952] A.C. 192 and Sze Hai Tong Bank Ltd. v. Rambler Cycle Co. Ltd. [1959] A.C. 576 in the Privy Council; and innumerable cases in the Court of Appeal, culminating in Levison v. Patent Steam Carpet Cleaning Co. Ltd. [1978] Q.B. 69 . But when the clause was itself reasonable and gave rise to a reasonable result, the judges upheld it; at any rate, when the clause did not exclude liability entirely but only limited it to a reasonable amount. So where goods were deposited in a cloakroom or sent to a laundry for cleaning, it was quite reasonable for the company to limit their liability to a reasonable amount, having regard to the small charge made for the service. These are illustrated by Gibaud v. Great Eastern Railway Co. [1921] 2 K.B. 426 ; Alderslade v Hendon Laundry Ltd. [1945] K.B. 189 and Gillespie Bros. & Co. Ltd. v Roy Bowles Transport Ltd. [1973] Q.B. 400.

”

Literature

• Trebilcock, Michael J.:"The Limits of Freedom of Contract" (Harvard University Press) ISBN 13 978-0-674-53429-2

• Atiyah, P.S:"The Rise and Fall of Freedom of Contract" (Oxford University Press, USA; New ed; Dec 12, 1985) ISBN 13 978-0198255277

• Bernstein, David E.: Freedom of Contract, George Mason Law & Economics Research Paper No. 08-51 (2008)

References

1. ^ Roscoe Pound, "Liberty of Contract," 18 Yale Law Journal 454 (1909).

External links

• Freedom to Contract by Dr. Edward Younkins