Freedom to Contract
by Dr. Edward Younkins
Professor of Accountancy
and Business Administration at Wheeling Jesuit University in West Virginia
and author of Capitalism and Commerce.
A contract is a binding
agreement between two or more parties that usually results in some type
of performance. Without doubt, trade and commerce could not thrive if freely
made agreements were not normally carried out. Contract can be viewed as
a method in which men bargaining with one another can make sure that their
promises will last longer than their changeable states of mind. The law
of contract provides a mechanism through which private individuals can,
to a certain degree, predict, control, and stabilize the future. Contracts
allow people to incur reciprocal responsibilities and commitments, to make
promises others can rely on, to remove some uncertainty from life, and
to establish reasonable expectations for future actions.
A function of the state,
operating mainly through the court system, is to enforce performance by
requiring the promisor to fulfill his bargain on penalty of fine or imprisonment
or by awarding judgment against him for money damages when, without legal
reason, he fails to perform. State compulsion has replaced private force,
which was common in earlier time periods. State enforcement in concerns
of bargain and promise can be viewed as one of the state’s most important
functions behind only peacekeeping and property defense. In essence, a
breach of contract is an indirect use of force.
Contract Law’s Pragmatic
Basis
With the advent of specialization
of labor, human beings created an exchange mechanism through which a man,
who can produce something more efficiently than another, can exchange it
for another item that he would create less efficiently than the other person.
A person gives in order to receive, and this giving and receiving arrangement
is frequently protected by a formal contract.
Frequently, one or both
sides to an agreement are carried out at a later date. In order for an
exchange to be arranged at one point in time, with performance to take
place later, the parties, rather than simply rely on one another’s honor
to secure performance, normally depend upon a legally enforceable obligation
to comply with the agreement.
The contract is integral
to a market economy. Think of the variety of commitments that must be honored
for any firm to operate. Each of these arrangements is usually defined
by contract. If most of these contracts were not carried out according
to their terms, commercial transactions would be impossible. Any commercial
organization consists of numerous separate activities bound into an effective
whole through a collection of contracts.
The idea that contracts
are legally enforceable does not ensure performance, but does increase
the probability of performance. When a party knows he may face legal action
if he does not comply, he is more likely to complete his side of the bargain.
In addition, if performance is not expected, the fact that a lawsuit may
be brought may be sufficient to obtain an acceptable out-of-court settlement.
Contract liability is promissory
liability. In a business society, where wealth largely consists of promises,
it is of paramount importance to protect the interests of the individual
promisees. Promises, in the form of contracts, have become a convention
whereby people are able to realize their aims by creating expectations
about one another’s conduct.
The Moral Foundation of Contracts
In addition to the above
pragmatic foundation for the law of contract, there is a moral basis for
requiring a man to keep his promise. Deceit is wrong and should not be
practiced. A man should do what he promises to do, particularly when his
given word encourages another person, relying on that promise, to take
action or make a promise to take action.
Morality, according to Immanuel
Kant, requires that a man not make an exception of himself, and that he
not follow rules or engages in practices that he could not recommend to
all persons. As Kant puts it in his categorical imperative, “I ought never
to act except in such a way that I can also will that my maxim become a
universal law.”
Consider the case in which
a businessman is deciding whether or not he should break a contract. If
he were to declare the principle of his action to be a universal law such
as, “Always break contracts,” or “Contract breaking is permissible,” the
act of breaking contracts would be self-defeating. The first assertion
logically would result in a world in which people always breached their
contracts and no one kept his word. Given the second maxim, people would
never know whether or not a contract would be kept, and thus the purpose
of both keeping a contract and breaking one would be defeated. Successful
(i.e., to one’s advantage) contract breaking is possible only when it is
not made a universal law. Profitable contract breaking can only occur in
a world in which contracts are normally honored. If contract breaking were
universalized then business practice would become inconceivable and inexecutable.
If a businessman were to advocate universal contract violation, his advocacy
would be in vain. Therefore, applying Kant’s categorical imperative, the
businessman ought to keep the contract except, of course, in a case in
which his promise was exacted by force or fraud. Fraud is implicit theft
in that it involves the failure to fulfill a freely agreed-upon transfer
of property.
The right of property includes
the right to make contracts regarding that property. The right to contract
is derivable from the right of private property. It follows that enforceable
contracts are those in which the failure of one party to live up to the
provisions of the contract implies the appropriation of property from the
other party. Enforceable contracts are those supported by the authorization
of legal coercion.
Contract’s Legal Relatives
The underpinnings of contract
law can be found in the law of torts (i.e., the law of private wrongs),
and to a somewhat lesser degree, property law. The law of torts, which
is based on the ideas of personal accountability, causation, and
negligence, had previously granted remedies for deceit and trespass. Elements
similar to deceit and trespass are present in a contract case in which
a person attempts to perform some act for another and does it fraudulently
or incompetently. Also, the concept of assumpsit, the complete failure
to perform what a person had promised to do, was based on an analogy to
tort law. In addition, in the still older law of property, we discover
the phenomenon of an obligation, created by recorded and sealed deed, recognized
in both religious and lay courts. We find here a situation in which a promisor
conveys, by deed, a thing of value to the promisee.
The corporation logically
grew out of the idea of contract. A voluntary association of human beings
bound together in order to attain a purpose is the basis for the existence
of a corporation. Corporateness is an inherent right common to all men
and grounded in the principles of freedom of association and freedom to
contract. Corporate stockholders, managers, and workers have a common interest
in a corporation’s survival and prosperity. The corporation can thus be
viewed as a nexus for a set of contracting relationships among these and
other individuals.
A corporation involves a
set of bilateral and multilateral agreements with parties such as workers,
unions, managers, stockholders, customers, bankers, suppliers, retailers,
creditors, etc. These individuals enter into contracts with the firm in
which they agree to trade value for value.
From Status to Contract
Contract law is a key component
of a free society. Contracts involve a trade-off of flexibility for security
and the voluntary assumption of mutual obligation and commitment. Through
contract, a participant in civil society is differentiated from the atomistic
individual.
Autonomous human beings
have the rational ability and natural right to make their own life choices.
A necessary condition of acting autonomously is the possibility of freely
making mutually binding agreements. Autonomy thus requires freedom of contract.
Better connections between persons can be made by contract, which works
to mutual benefit, instead of through coercion, which does not.
Although a contract may
appear to be the subordination of one man’s will to another, the former
gains more than he gives up, as does the latter. In a free society, the
only transactions people engage in are positive-sum ones in which both
parties believe they will benefit.
Historically, the rise of
contract within Western civilization reflected the disintegration of a
status-determined society. Contract became a tool of change and self-determination,
an instrument of peace, and the only legitimate means of social integration
in a free society. Progress depends on protected property rights and the
confidence that contractual obligations will be honored.
Sir Henry Sumner Maine,
the nineteenth-century legal historian, wrote that progressive societies
exhibit a development from status-bound roles to those founded more and
more on contractual freedom. Whereas a status system establishes obligations,
conditions, and interrelations by birth, contract regards individuals as
free and equal moral agents developing their own bonds with others. In
a free society, there is high degree of social mobility and freedom to
associate in response to current and expected future needs. Social arrangements
are a result of the independent decisions of separate individuals pursuing
their own interests, rather than by a central powerful authority such as
the state or the Church.
In Western society, with
the steady dissolution of castes, social classes, guilds, ethnic cultures,
and so on, human resources have become more available to organizers in
business and other associations. Organizers compete for the best managerial
and non managerial employees, and with the freedom of association present
in the era of contracts, it is possible to create successful organizations
despite some interference by the state.
Freedom to Contract Promotes
Progress
In her 1998 book, The
Future and Its Enemies, Virginia Postrel explains that, by treating
individuals as free and equal generic units, contract permits people to
create arrangements far beyond the plans of any grand designers. Only by
treating individuals in this manner can over-arching rules allow people
to use their own knowledge, express their individuality, and take advantage
of their own ideas by joining them and their property in various unanticipated
ways. When people cannot make binding, enforceable commitments, dynamic
progress is severely hampered. The idea of contract fosters progress by
encouraging specialization and allowing an extended order to develop. Postrel
also points out the especial importance of well-functioning legal systems
when strangers interact in commercial and other situations. In addition,
she notes that the goal of contract law is not to inspire legal suits but
to settle or avoid them. Well-known rules that eliminate ambiguity make
it more likely that promises will be kept.
In order to be invaluable
to businessmen and other members of a free society, the contract must be
a tool of virtually unlimited adaptability. To achieve this, the legal
system must minimize the formality necessary for contractual transactions.
It can do this by permitting freedom as to the form and content of contractual
arrangements. Contracts have been rewritten through prior restraints (e.g.,
rent control, minimum wage laws, and interest rate ceilings) and subsequent
nullification of contract terms. Legislators and judges should refrain
from substituting their own judgments in cases where they believe there
is unequal bargaining power or where they think that certain contracts
are not in the “public interest.” Contract sanctity is paramount. Such
a free contract system encourages dynamic processes and technological achievements
by permitting entrepreneurs to quickly and flexibly experiment with new
ways of satisfying wants.
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