FREEDOM OF CONTRACT: CONCEPT, POSTULATES AND RESTRICTIONS

SANKALP JAIN*

INTRODUCTION

The right of contract is considered to be the most basic legal right of an individual. It
assumes more importance in the present market based economy wherein individuals
frequently enter into contractual relationships with each other.1 The right to enter into
contract essentially encompasses freedom to enter into contract, for without it, the whole
concept will be nothing but a futility.2 It essentially means that the freedom of contract is
the basic right of an individual to enter into contract. The common understanding of the
term ‘freedom of contract’ connotes that the parties are free to enter into the contractual
relationship with any individual or entity and on any terms mutually agreed by the parties.
It implies that the freedom of contract ultimately rests on the consent of the parties.3

The classic contract theory insisted on unrestricted freedom of contract between parties
who possess equal bargaining power.4 However, the harsh reality of the marketplace
projects a totally different picture. Parties having equal bargaining power do not exist in
most places. The inequalities in the market place have given enough room for the dominant
to exploit the less dominant. The concept of freedom of contract has been interpreted to
empower the economically superior class to dominate and dictate terms to others.5 The
economic insecurities of working class have also given strength to them. In this paper the
focus will be on the rise and fall of freedom of contract through the ages.
*
sankalp_jain11@yahoo.com.
1
David P. Weber, ‘Prohibiting freedom of contract: A fundamental restriction’. Available at:
http://ssrn.com/abstract=2129441.
2
Ibid.
3
Lu, Shumei, "Gap-filling and Freedom of Contract" (2000). LLM .Theses and Essays. Paper 29. Available at
http://digitalcommons.law.uga.edu/stu_llm/29.
4
Edwards, Carolyn, "Freedom of Contract and Fundamental Fairness for Individual Parties: The Tug of War
Continues" Vol 77(3) UMKC Law Review, 647.
5
Supra note 1.
EARLIER CONCEPTION OF FREEDOM OF CONTRACT

Progress of human society can be broadly classified into two phases, firstly, varna based
system and secondly, market based system. The varna based system postulated that the
relationship is based on status, rather than on contract. Hence, the applicability of freedom
of contract is not to be considered in that phase. However, in second phase calls for a great
amount of introspection and deliberation.6 Perhaps, it is about this phase that Sir Henry
Maine famously quoted “movement of progressive societies has hitherto been from status
to contract”. He considered this movement both desirable and inevitable.7 In the market
based economy the production and consumption are controlled by individual. The
economic decision making is largely done by individual actors based on response of the
market, technological developments and other factors. One of the aspects of market
economy is that its very success depends on market inequalities.8 In any market based
economic structure any mechanism which governs rights and obligations between two
individuals is an indispensible one. Therefore, it follows that general rules of English law of
contract were developed in eighteenth and nineteenth century.9 These principles were
influenced by the natural law theories and laissez faire.

Classic theory of contract which is the genus of freedom of contract rests on three
fundamental propositions.10 Firstly, freedom of contract between parties of equal position
holds the key to individual welfare and the common good. Secondly, it protects the
reasonable expectations of the parties that the promises will be performed and lastly, the
state action is an impediment in the path of freedom of contract, for it results in curtailing
rights and liberties of the individuals.

6
Ibid.
7
J. Beatson, Anson’s Law of Contract, (Oxford University Press, 28th Ed, 2009, London)
8
Michael J. Trebilcock, The Limits of Freedom of Contract, 1 (London: Harvard University Press, 1993).
9
Patrick S. Atiyah, An Introduction to the Law of Contract, 2 (Oxford: Oxford University Press, 1961).
10
Supra note 8.
In the view of P.S. Athiya11 the prevalent concept in those days was that all men are born
with the inalienable right to enter into legally enforceable contracts. Individualism and
libertarianism were dominant philosophies prevalent at that time.12 The impact of these
philosophical concepts was taken as a tool to propagate the theory of freedom of contract.
Kantian concept of justice laid emphasis on the maximization of individual freedom of
action. It meant that law should abdicate itself from governing human relations and
concentrate on allocation of liberties to individuals in the society. The personhood theory of
Kant emphasized that contract should be the last product of perfect idea of personality and
this could have been possible only when there was ample freedom of contract and the
individuals who enter into the contract are truly free.13

Conception of laissez faire also prescribed a bare minimum of interference from the state. It
specifically postulated that laws should not govern the human relationships. Hence, it stood
for the idea of enterprise, freedom of contract and freedom to compete.14 The ardent
loyalists of laissez faire Mill and Smith advocated for freedom of contract. According to Mill,
in order to let individuals develop freely, production and trade should be allowed
unimpeded. On the other hand Smith advocated for economic efficiency and individual
autonomy in bargaining processes.15

These philosophies had a great impact on the law of contract. The simple reason behind it
was that almost all economic activities necessarily had contractual relationships and state
had no role to play in them. The function of law was confined to look into the dispute which
was agitated in the court based on contractual terms.16 The roots of freedom of contract
were so deeply into the soils of both the philosophies mentioned above that even courts
considered them as sacred. In the words of Sir George Jessel, “If there is one thing more

11
Supra note 9 at 3.
12
Julius Stone, Human Law and Human Justice, 86 (Stanford, Stanford University Press, 1968).
13
Ibid.
14
T.S. Venkatesa Iyer, The Law of Contracts and Tenders, 8 (6th edn., Hyderabad: Gogia and Company, 1994).
15
Samuel Williston, “Freedom of Contract”, 6 Cornell Law Quarterly 365 at 366.
16
Supra note 9 at 2.
than another which public policy requires, it is that men of full age and understanding shall
have the utmost liberty of contracting and that their contracts, when entered into freely and
voluntarily, shall be held sacred and shall be enforced by Courts of Justice.”17 (emphasis
supplied). Truly the freedom of contract was a step towards greater individual freedom.18

POSTULATES OF FREEDOM OF CONTRACT

Two most important postulates of freedom of contract are, firstly, freedom to choose
contracting partners and secondly, freedom to choose terms of contract. The common
thread running through them is the intention of the parties. The courts used to decide cases
on the basis of intention of the parties. Intention as manifest from their language and
conduct was given preference over bulk of legal rules. Certain requirements of law, viz.
public purpose and illegal purpose etc. were mandatory, large part of contractual
relationship was governed by contracts. Hence, the notion of meeting of minds free from
any legal order held its sway.

Regarding the first aspect of freedom of contract, individual was free to choose the
contracting partners. Since capitalism envisaged free competition, this postulate was a
keynote in describing freedom of contract. Nevertheless, this idea received a setback with
the conception of welfare legislation and introduction of monopolies in certain sectors. The
second postulate of freedom of contract is also an important one inasmuch as the terms of
the contracts are core of contractual relationships. Freedom to decide terms of contracts
were nevertheless subject to overriding public interest and public policy. However, the
larger part of contracts was subject to free will of the parties.

In USA the freedom of contract was treated with equal deference. Commercial enterprises
also enjoyed the freedom of contract.19 Freedom of contract is an entrenched

17
Printing and Numerical Registering Company v. Sampson, (1875), L.R. 19 Eq. 462 at 465.
18
Mark Pettit, Jr., “Freedom, Freedom of Contract and the ‘Rise and Fall’”, 79 Boston University Law Review
263 at 266.
19
Dennis Lloyd, The Idea of Law, 144 (London: Penguin Books, 1991).
Constitutional provision in USA.20 Judiciary in USA accorded utmost respect to freedom of
contract and was willing to strike down social welfare legislations for upholding freedom of
contract. In a landmark decision of Lochner v. New York21 the state made a law prescribing
maximum working hours for labourers in bakeries and confectionaries. The court struck
down the legislation as it encroached upon freedom of contract in an arbitrary and
unreasonable manner. The majority believed that it was not a fit case for application of the
doctrine of ‘police power’, which recognised in the state an inherent right to impose
restrictions on contractual freedom on the grounds of public health, safety, morals and
abatement of public nuisances. Justice Field in famous Slaughter House Case22 held that
concept of “liberty” enshrined in the Fourteenth Amendment meant not “merely physical
freedom” but “[the freedom of an individual] to act in such manner not inconsistent with
the equal rights of others as his judgment may dictate for the promotion of happiness.” In
this case the Supreme Court had refused to accept that the freedom of contract (fourteenth
amendment) invalidated Louisiana state law that ordered that all cattle in a given area be
slaughtered at a common premises belonging to a state-organised corporation, in the
interests of public health.

In Adkins v. Children’s Hospital23 one of the later judgments in this vein, the United States
Supreme Court struck down as unconstitutional a minimum-wage legislation that sought to
provide relief to working women in the District of Columbia. Sutherland J., in delivering the
majority opinion of the court, declared that while liberty of contract was ‘not absolute’,
“…freedom of contract is nevertheless the general rule, and restraint is the exception. …
[This means] parties have an equal right to obtain from each other the best terms they can
as the result of private bargaining.”

20
Article I, § 10 of the United States Constitution, also refer to Kirsten L. McCaw, “Freedom Of Contract Versus
The Antidiscrimination Principle: A Critical Look At The Tension Between Contractual Freedom And
Antidiscrimination” 7 Seton Hall Constitutional Law Journal 195 at 198.
21
(1905) 198 US 45.
22
(1872) 16 Wall. (U.S.) 36, at 90-9, see also, Butcher’s Union Co. v. Crescent City Co. (1883) 111 U.S. 746.
23
(1922) 261 US 525.
In Coppage v. Kansas24 the Supreme Court strengthened its anti-labour stance by striking
down a law aimed at protecting employees from having to sign ‘yellow-dog’ contracts with
their employers as guarantees that they would not join any union. Third parties who
attempted to organise employees into unions despite such agreements were declared liable
in tort for interfering in contractual relations. Hence the core issue remains that as to what
extent the law should provide freedom of contract to the parties.25

FREEDOM OF CONTRACT IN THE PRESENT DAY CONTEXT

There has been a considerable shift in the sanctity of freedom of contract in the present
context, It can be tersely said that there has been a ‘fall of freedom of contract’ in sharp
contrast to the earlier rise in the freedom of contract. Amidst complicated social and
industrial conditions in the society, the idea of freedom of contract has ceased to have
much idealistic attraction.26 The concept of freedom of contract has suffered serious
inroads with the development of welfare conception of state and presence of sophisticated
mechanism of society. Each and every aspect of freedom of contract was put to severe
litmus test in closing of nineteenth century. There are various counts on which this analysis
can be done.27 The major ones are firstly, statutory restrictions; secondly, standard form
contracts; thirdly, monopolistic dominance in the market.

I. Statutory Restrictions

The development of welfare state has brought within its fold the idea of social welfare
legislations to protect the interest of public and of consumers. The major development in
this field can be witnessed in labour relations. The relations between employer and
employee have been largely regulated by labour legislations. It follows that any agreement
between employee and employer which runs into the teeth of the statutory provisions will

24
(1915) 236 US 20.
25
Supra note 7.
26
Ibid.
27
Ibid.
be not enforceable. Legislations such as Industrial Dispute Act, Minimum Wages Act,
Maternity Relief Act, etc are epic in this field. They lay down rules and regulations to govern
the relations between the employer and employee. To take care of dominant position and
anti competitive agreements, Competition Act, 2002 is in place. The instances of anti
competitive agreements and abuse of dominance may be many. Hence, there is an absolute
restriction into entering into any contract which results in anti competitive agreements or
abuse of dominant position.28 Even the Contract Act, 1872 provides in section 25 that any
agreement which is against the law of the land shall not be enforceable. Section 30 of the
Act lays down that agreement by wager are void. Section 27 lays down that agreement in
restraint of trade are void and section 26 lays down that the agreements in restraint of
marriage are void. Likewise there are numerous instances in the law of Contract as applied
in India that reasonable restrictions have been placed. Individual’s autonomy in regulating
the contractual relations is limited by these provisions of law. Therefore, there remains an
implied restriction on the freedom of contract. There are also wide ranging statutory
restrictions on discrimination on grounds of sex, race and disability and in the selection of
employees and the terms upon which they will be employed.

II. Standard Form Contracts

Standard form contracts contain a set of pre-determined terms and conditions in which the
individual is not allowed to negotiate. They are in form of ‘take it or leave it’ contracts. The
growing usage of standard-form contracts (especially in the areas of insurance and sale of
mass-manufactured goods) has also compromised the absolute reign of freedom of
contract. A standard-form contract or a contract d’adhesion incorporates several non-
negotiable terms, tailored to suit the interests of the stronger contracting partner. It is an
especially dangerous weapon in the hands of monopoly service providers who, by
exercising the prerogatives of their superior bargaining status, effectively rubbish the
notion that the terms of their contracts are arrived at by a ‘meeting of the minds’ or mutual

28
Refer Section 3 and 4 of the Competition Act, 2002.
agreement between both parties. Highlighting the dangerous side of the rising trend in
favour of standard-form contracts, Lord Diplock once observed in Schroeder v. Macaulay29

“It is the result of the concentration of particular kinds of business in

relatively few hands. The ticket cases in the nineteenth century provide what
are probably the first examples. The terms of this kind of standard form of
contract have not been the subject of negotiation between the parties to it or
approved by any organisation representing the interests of the weaker party.
They have been dictated by that party whose bargaining power either
exercised alone or in conjunction with others providing similar goods or
services enable him to say: if you want these goods or services at all, these are
the only terms on which they are obtainable. Take it or leave it.”

The bargaining position and negotiability of an individual gets a beating. The party does not
get the freedom to negotiate. It can also be argued that there is no substantial meeting of
minds of the parties in most of the cases. At times it is not possible to let go the terms so
easily because the consumer is left with no choice in the market or in many cases most of
the dealers in that particular goods set their terms in such a manner that the consumer is
compelled to submit to those terms.

III. Monopolistic Dominance in the Market

There are numerous instances in the market wherein the providers of essential
commodities like, water, electricity, transport etc. enjoy monopoly or monopoly-like-
situation.30 In such instances there is hardly any choice in front of consumer to choose the
contracting partner. As discussed earlier, monopolistic and restrictive trade practices are
controlled by suitable legislations. Currently the Competition Act, 2002 is in place which
provides rider in entering into anti competitive agreements.31 Another aspect of setback of

29
[1974] 3 ALL ER 616 at 624.
30
Supra note 7.
31
Section 3 of Competition Act, 2002.
freedom of contract is oligopolistic market structure. It happens when there are more
buyers and fewer sellers. In such kind of environment the sellers resort to tacit collusion or
conscious parallelism. They increase the price simultaneously forming tacit cartel. As a
result of it the consumer is left with no option but to enter into contract with either of the
seller. Such kind of compulsory transactions compromise a lot on the freedom of contract.

OTHER FACTORS

In the words of Anson, “the negative aspect of freedom of contract, that there should be no
liability without consent embodied in a valid contract, sits uneasily with the practice of
implication of terms into contract, and the use of the standard of ‘reasonableness’ as a way
of dealing with gaps in the contractual language.”32 Freedom of contract is difficult to
reconcile with the adoption of the ‘objective theory’ which provides, in essence, that a
person (A), whose conduct is such that the other party reasonably believes that A has
assented to the terms of a contract, will be bound no matter what A’s real intention is.33

In England the legislative interference in drafting contracts was justified on the basis of
Bentham’s doctrine. Utilitarian doctrine stated that the law must strive to achieve “greatest
good of greatest number”. It was realized that freedom of contract supported only limited
interest group and facilitated unparallel discrepancy between differently situated economic
factors, therefore, a need for reforms was felt.34 Critics of the doctrine argued that the
freedom of contract can only be given when there is equality in bargaining power between
the parties. In absence of equality of bargaining power between the parties, the freedom of
contract will perpetuate economic inequality.35

The prevalent view in the nineteenth century was that the freedom of contract meant that
one could choose whom he or she wanted to contract with, and both the parties could

32
Supra note 7. Also see Tillmanns & Co. v. S.S. Kuntsford Ltd. [1908] A.C. 406.
33
Ibid.
34
Friedmann, Legal Theory, 400 (5th edn., Delhi: Universal Law Publishing Co. Pvt. Ltd., 1999).
35
Supra note 19 at 145.
arrive at the terms they wanted by mutual agreement. The law assumed that each man
could defend for himself, and if he entered into a harsh or burdensome contract he had
only himself to blame because there was freedom of contract and he could have gone
elsewhere.36

That notion, then, was hit by the realization that in most of the cases contracting parties are
not on an equal footing. Often times, one party finds itself with little choice in regard to the
selection of its contracting partner and the terms of the arrangement between them. To
suggest that all voluntary contracts were necessarily indicative of the intentions of both
parties, and that the right of each person to walk away from any exploitative arrangement
precluded him from seeking the intervention of the state in contractual affairs, was seen as
manifestly fallacious. There was no denying that both statutory prohibitions on certain
types of contract and the courts’ refusal to enforce certain agreements stemmed from the
acknowledgement that the state must protect certain classes from the harmful effects of
their own agreements. A better understanding of such contracts was evolved. They were no
longer seen as representative of voluntary arrangements reflecting the intentions of both
parties; rather, they were viewed as the products of a sort of economic duress, to which the
weaker party had assented because of necessity. It was significantly believed that
contractual terms, rather than being simple expressions of free will, were determined by
each party’s relative ability to hold out for more acceptable terms. That holdout power
depended in significant part on the parties’ relative wealth.

According to the liberals, the state is unable to provide distribution of resources in the
society or else, redistribution of resources in the society. According to them the freedom of
contract should not come in between the welfare functions of the state. Contract can serve
only three legitimate functions. Firstly, specify which agreements are legally bindings and
which are not, secondly, define rights and duties created by the ambiguous agreements and
lastly, to indicate the consequences of breach. However, another wing of libertarian

36
Supra note 9 at 9-10.
thought contends that any intrusion on the individuals freedom of contract is unacceptable
as it tantamount to the intrusion in the personal freedom and autonomy.37 According to
Robert Nozick38 any patterned conception of justice is bound to interfere in the lives of
individuals, meaning thereby, that the social justice function of the welfare state is bound
to fly in the face of freedom of contract. Freedom of contract cannot be let go as an unruly
horse which may result in the dominance of the superior giving rise to capitalism.

Freedom of contract can be viewed from two different angles: from negative angle as
absence of human or state coercion and from positive angle as freedom to pursue one’s
own goal of self realization. Thus, the interference of state or courts of law in any freedom
of contract can be seen as an impediment on the negative angle i.e. absence of human or
state coercion alternatively it can be seen as a welcome step to effectuate the positive
angle i.e. protection of weaker parties and letting them realize their own goal.

COLLECTIVE AGREEMENT AS RESPONSE TO LOSS OF FREEDOM OF CONTRACT

Despite the fact that there has been a significant loss in the freedom of contract in the
present world, the rise of trade unions and collective agreements has come to the rescue of
the parties. Although we cannot say those collective agreements have totally given an
answer to loss of freedom of contract but definitely they provide a good platform for an
individual weaker party to come at the equal bargaining position of the dominant party.
Nevertheless there is large number of aspects which the state as well as dominant
individuals still regulate.

CONCLUSION

Suffice it would be to end on the note that the freedom of contract has largely been diluted
in the wake of social justice. The reasons seem to be simple enough. The absolute freedom
would give ample room for the dominant to abuse its position and take advantage of the

37
Supra note 18.
38
Robert Nozick, Anarchy, State and Utopia (1974) at 163.
weaker parties. Indeed in a county like India, there is a dire need of welfare activities and
hence it becomes imperative that state should assume larger responsibility and impose
reasonable restrictions of the contracting wisdom of the parties. However, the flip side of
the picture has some ill effects also. Excessive restraint on freedom of contract
compromises with the rights and interests of the parties. At times, they are left with no
option but to enter into a contract which might not be beneficial for them. It would be trite
to say that the basic sense of freedom of contract should be retained at all levels of
relationships, which a touch of reasonable restriction so that the two extreme effects of it
can be avoided.
 BIBLIOGRAPHY

BOOKS

1. Dennis Lloyd, The Idea of Law, 145 (London: Penguin Books, 1991)

2. Friedmann, Legal Theory, (5th edn., Delhi: Universal Law Publishing Co. Pvt. Ltd.,
1999)

3. J. Beatson, Anson’s Law of Contract, (Oxford University Press, 28th Edn. 2009,
London)

4. Julius Stone, Human Law and Human Justice (Stanford, Stanford University Press,
1968)

5. Michael J. Trebilcock, The Limits of Freedom of Contract, (London: Harvard

University Press, 1993)

6. Patrick S. Atiyah, An Introduction to the Law of Contract, (Oxford: Oxford University

Press, 1961)

7. T.S. Venkatesa Iyer, The Law of Contracts and Tenders, (6th edn. Hyderabad: Gogia
and Company, 1994)

ARTICLES

1. David P. Weber, ‘Prohibiting freedom of contract: A fundamental restriction’.

Available at: http://ssrn.com/abstract=2129441

2. Edwards, Carolyn, "Freedom of Contract and Fundamental Fairness for Individual

Parties: The Tug of War Continues" Vol 77(3) UMKC Law Review, 647
 3. Kirsten L. McCaw, “Freedom Of Contract Versus The Antidiscrimination Principle: A
Critical Look At The Tension Between Contractual Freedom And Antidiscrimination”,
7 Seton Hall Constitutional Law Journal 195

4. Lu, Shumei, "Gap-filling and Freedom of Contract" (2000). LLM .Theses and Essays.
Paper 29. Available at: http://digitalcommons.law.uga.edu/stu_llm/29

5. Mark Pettit, Jr., “Freedom, Freedom of Contract and the ‘Rise and Fall’”, 79 Boston
University Law Review 263

6. Samuel Williston, “Freedom of Contract” 6 Cornell Law Quarterly 365

CASE LAWS

1. Adkins v. Children’s Hospital, (1922) 261 US 525

2. Coppage v. Kansas, (1915) 236 US 20

3. Lochner v. New York, (1905) 198 US 45

4. Printing and Numerical Registering Company v. Sampson (1875) L.R. 19 Eq. 462

5. Schroeder v. Macaulay, [1974] 3 ALL ER 616

6. Tillmanns & Co. v. S.S. Kuntsford Ltd. [1908] A.C. 406