Law of Contract - Freedom of Contract

Law of Contract

 

 

 

Introduction

A contract refers to an agreement that gives rise to obligations that are recognised and enforceable by law[1]. One of the elements that distinguish contracts from other legal obligations is the fact that contracts are founded on mutual agreement between the contracting parties. The right to contract is an essential right in the society and is highly regarded in the market-based economy. The right to contract is deeply entrenched in the modern society such that cases of infringement on the right are usually considered traditional, for example, limitations on women’s rights that occurred prior to the 19^th and 20^th century[2].

Contracting has become an important component of the society and is widely applied in different areas such as marriage and business transactions. Considering the importance of contracting, it is difficult to envisage how to live without the right to contract. The right to contract is related to concept of ‘freedom of contract’, a general doctrine which emphasizes that individuals should be allowed to freely join with other parties in any type of exchange or association on the basis of any terms that they have mutually agreed to[3]. On the basis of the doctrine of freedom of contract, an individual should not be restricted to enter in to such type of relationship if they intend to do it out of mutual consent.  This paper evaluates the statement that ‘the idea that two capable parties should be free to contract on their own terms is now outdates due to Parliamentary and Judicial intervention’.

Analysis

To successfully establish a contract, the parties involved must reach an agreement supported by a specific consideration. Moreover, the parties must have the intention to enter into legal relations[4]. The principle of freedom of contract was a critical ideal that governed the law of contract during the 19^th century. The principle restricted state interference on different issues in the economy such as establishment of contractual relationships. Subsequently, the principle resulted in provision of freedom of choice amongst individuals. Under the principle of freedom of contract, individuals enjoyed substantial autonomy in determining the terms of the contract[5].  The freedom of contract emphasises on ‘the right to choose one’s contracting parties and to bargain with them on any terms one sees fit’[6]. Apart from the right to enter into contractual agreement with a party of choice, the principle of freedom of contract is also founded on other liberties.  The first liberty relates to the fact that the parties to the contract have freedom in formulating the terms of the contract and to determine whether to comply with the terms implied by under the Common Law or other applicable statute.  Additionally, the principle of freedom to contract provides the parties to the contract the right to waive legal liability or to compromise a legal dispute[7]. The doctrine of freedom of contract is recognised in both the English law and other legal traditions.  Nevertheless, the principle has been an area of contention for centuries across different jurisdictions. In spite of the significance of individual’s rights in the contracting process, one’s freedom of contract should be restricted. The principle of freedom of contract implies that the parties involved in the contract are under no duty to enter into an agreement. Subsequently, they are not obliged to deliver the content of the contract.  This aspect would amount to breach of contract.

Limitations to the principle of freedom of contract

Contrary to the widely held notion of liberty associated with the principle of freedom of contract, freedom of contract is no longer unlimited[8].  Developments and amendments on contract law through judicial and parliamentary interventions have led to formulation of clear rules on how parties to a contract should use their freedom.  Consequently, the interventions have led to establishment of formal aspects that should guide a contract agreement and the content of the contract[9].  Amongst the overarching areas in which the principle of freedom of contracting is limited relate to aspects associated with public policy, protection of consumers against using law punitively, and in relation to the personal capacity of the contracting parties.  The rationale of limiting the freedom of contract is underlined by the need to ensure that weaker parties in the contract are adequately protected.  One of the perspectives that explain the need for state intervention on contracts is to promote morality in contractual relationships[10].  Thus, the argument on that individual should be provided ‘freedom of contract’ is outdated under the law of contract.  

Imposition of limitation on freedom of contract under the private law encompasses different rules such as the rules that guide contract formation, performance, and termination. Not all individuals have the legal capacity to enter into a contract. Examples of such parties include minors and mentally incapacitated individuals. Thus, the freedom of contracting has some boundaries.  The Indian Contract Act (s.II) stipulates that individuals under 17 years of age cannot enter into a legally binding and enforceable contract of employment. Similarly, the English law stipulates that contracts involving minor are absolutely void and hence are unenforceable[11].

Evolution of freedom of contract and the need for consumer protection

One of the areas in which the concept of contracting is widely applied relate to consumer rights.  The rules stipulated under the law of contract are aimed at promoting fair trade practices hence minimising the possible problems that might arise from non compliance with the requirements of the contractual obligation.  Thus, consumers benefit from the contract rules by safeguarding them from negative behaviour of some parties to the contract[12]. For example, the rules stipulate under the law of contract ensure that suppliers adhere to provision of product quality.    Therefore, the principle of freedom of contract is not a guarantee that the results of the contract will be acceptable to all the parties involved. This recognition has created the need for intervention in different areas of law amongst them labour, tenant and land lord laws[13].

 Limitation on freedom of contract is underlined by recognition of the need to curb strong parties in the contracting process from taking advantage of the weaker parties.  Thus, restricting the freedom of one party in order to support the freedom of another party is a justifiable.  One of the approaches through which the concept of freedom of contract is outdated by relates to the terms of the contract.  ‘ A contract has not only the juridical effects agreed to by the parties, but also those which, according to the nature of the contract result from law, usage, or the requirements of reasonableness and fairness’[14].  The terms of a contract are either expressed or implied.

The need to protect consumers in the law of contract has been spurred by the need to enhance equality in the contract formation, execution and termination processes.  Application of the principle of freedom of contract might lead to inequality if one of the contracting parties possesses substantial bargaining power. Such a party might influence the terms of the contract by dictating the applicable terms.  To eliminate such occurrences the legislature has a duty to restore parity hence ensuring adequate protection of constitutional right. Despite the fact that the parliament might fail to institute mandatory law in some areas of life, it is the responsibility of the judiciary to ensure that the fundamental rights complied with hence promoting contractual parity[15].  

Without prior knowledge of the other parties mental incapacity, negotiations between two parties gives rise to a contract under the principle of freedom of contract. Judicial and legislative interventions guarantee the parties to a contract of are at a position that provides them the capacity to effectively bargain the content of the contract.  The principle of fairness is  illustrated in the case of Hart v O’Connor [1985] 1 AC 1001, which argued that in pursuant for fairness , the law will make void any contractual agreement that is made on the basis of duress or a situation whereby some parties to the contract have unequal bargaining power.  In this case, one of the parties to the contract was mentally disabled. In spite of the fact that one of the parties did not have information on the mental incapacity of one of the parties, the   court ruled that the contract was not enforceable.  This aspect is further affirmed by the Supreme Court in Dunhill v. Burgin (No.’s 1 and 2) (2014)[16]. In the ruling, the court argues that any agreement reached without the knowledge of the other party suffering from mental incapacity is invalid[17].

Moreover, judicial intervention may also be essential in ensuring that all the parties substantively contribute and comply with the terms and   content of the contract. Traditionally, protecting the consumer was not considered a major issue since because it entailed legislative intervention with promotion of equality being the main issue. However, the need to protect the consumer in contract law has been increased by the fact that consumers are not limited to a specific area of contract law. On the contrary, consumers involve themselves in different transactions such as buying, renting, entering into insurance contracts, and acting as surety for third parties amongst others. In essence, everyone is a consumer.

Consumers are naïve, thus, they tend to act fast and fail to give extensive thought to issues when entering into contracts. Therefore, they need to be protected against the possible implications arising from the contractual relationship established.   Netherlands is one of the countries that have appreciated the importance of protecting consumers by limiting the freedom of contract[18].  For example, the decision by the Dutch Supreme Court to uphold a ruling made by The Hague Court of Appeal that exemption of the electricity provider on his responsibility towards the consumer was not only unreasonable but also unlawful underlines the significance of ensuring that the customer is adequately protected[19]. On the basis of the principle of freedom of contracting, the electricity provider would be absolved of any liability in the event of damage caused to the consumer as a result of disruptions in electricity supply. However, the judicial intervention on the doctrine of ‘freedom of contract’ has ensured that electricity suppliers can be held liable for damages arising from disruptions in electricity supply. 

 One of the ways through which consumers are protected relates to formulation of Civil Code that contains extensive laws and regulations on contractual relationships. Despite the fact that some of the provisions stipulated under the Civil Code are only applicable if the parties involved do not deviate, there are some provisions relating to certain forms of contracts that are mandatory. The parliamentary and judicial decision to formulate mandatory laws has been informed by the fact that some parties may voluntarily deviate from the contents of the contract, which might negatively impact the other parties to the contract. Different jurisdictions have adopted different approaches in the quest to protect consumers. For example, the Netherlands, Italy, and Germany have entrenched the concept of consumer protection in the Civil Code[20].  Incorporation of consumer protection in the Dutch Civil Code has contributed to promotion of proper social conduct in the contract formation, execution and termination processes. Through this approach, Netherlands has succeeded in entrenching the element of consumer protection in its contract law as illustrated by a number of Dutch legislations. The general conditions applicable to a particular contract in Netherlands are currently regulated by law. Thus, the input by the Dutch courts and legislators has significantly influenced formation, execution and termination of contracts in the Netherland. For example, the contracting parties have to comply with the requirements specified under Article 6: 231-247 of the Dutch Civil Code[21]. 

Moreover, the contents stipulated under the consumers’ sales contract are expressly regulated by law, as stipulated by Article 7:6. Article 7:6 of the sales contract in the Netherlands stipulates that rules regulating the consumer sales contract are mandatory. In addition to the above aspects, Article 6:2(1) of the Dutch Civil Code stipulates that creditors and debtors are legally obliged to pursue the elements of fairness and reasonableness in dealing with each other[22].

Protection from freedom of contract in employment

Limitation on the freedom of contract is further underlined by the need to eliminate the use of coercion against the weaker party. One of the parties involved in the contract may use his power to influence the outcome of the contract, which might in effect have negative implications on the weaker party.  This aspect is illustrated by the case of Coppage v. Kansas, 236 U.S 1 (1915). The court ruled that an employer who uses coercion in hiring employees by imposing conditions that the employees should not become members of labour movement or organisation during their period of employment is subject to imprisonment or fine determined by the court.  Restricting employees from joining labour organisations comprises infringement on the employees’ constitutional rights.  Additionally, instituting such conditions means that the employer is essentially prescribing the terms within which the employee must operate. Therefore, the employer is capable of exploiting the employee.

 Conclusion

            During the 19^th century, the principle of freedom of contract, which stipulates that parties are free to contract in their own terms constituted a major element that guided the law of contract. However, Parliamentary and Judicial interventions undertaken over the past decades have contributed to remarkable improvement in the law of contract hence making the principle outdated. The Judicial and Parliamentary interventions made are justifiable in the modern society. The interventions have significantly sealed the contractual gaps that might   contribute to exploitation of the weaker parties to the contract. Amongst the areas in which the interventions have led to provision of adequate protection relate to employment and consumers. Subsequently, interventions have greatly contributed to provision of sufficient protection against the weaker parties. Moreover, the interventions have led to establishment of limits on which the concept of freedom of contract is applicable. Under the principle, all individuals irrespective of their age or mental capacity or age would enter into contracts. Nevertheless, the reforms that have been undertaken on the law of contract have led to elimination of mentally disabled and minors from the category of parties that can enter into enforceable contract.

In summary, reforms on the principle of freedom of contract have greatly streamlined the effectiveness with which the law of contract is applied and administered. One of the ways through which this goal has been achieved related to promotion of equity in the contract formation, execution and termination process. The judicial and parliamentary interventions have significantly contributed to development of balance with reference to bargaining power in the contracting process. Moreover, the reforms have contributed to improvement in contract fulfilment by ensuring that all the parties adhere to the content and requirements of the contract.  This has been achieved by ensuring that none of the parties to an enforceable contract breaches the contract hence translating into establishment of effective contractual relationships. 

 

 

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