Freedom of Contract

• Author: James Willard Hurst
• Pages: 1111-1117

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Freedom of contract in the United States means that the law accepts and protects broad scope for private individuals and business firms to decide the uses of economic resources in seeking profits. Through the country's history, sharp controversies have centered on exercise of freedom of contract as it has affected concerns for the worth of individuals, the vitality of private markets, the natural and social environment, and the structure of practical as well as formal legal power in the society. Few other concepts touch as many dimensions of the history of American public policy and constitutional law.

The law's attention to freedom of contract has centered on fostering and sustaining the private market as a major institution of social control (ranking in importance with the law itself). Even the assessment of the interactions of freedom of contract and other values, not defined in market, has typically resulted from community reactions to the effects of market operations. Thus, to examine the place of freedom of contract in constitutional law entails examining the roles and working character of the market.

Law and public policy have historically responded to four salient characteristics of private contract activity in market, carrying both constructive and damaging aspects. These responses have provided the institutional setting within which the substantive legalconstitutional meaning of freedom of contract has emerged.

(1) Under the protection of the law of contract, private contract activity seeking profit in market energizes private will in producing and distributing goods and services. This activity promises efficiency in allocating limited resources, partly because the actors are motivated to obtain the most output for the least input, and partly because market bargaining allows flexibility in coordinating a great volume and diversity of private decisions. In the country's constitutional tradition, social and political values also favor freedom of contract. Proponents argue that individuals gain self-respect from the initiatives of will they exercise in markets, as well as courage to participate in and criticize government because their means of livelihood are not dependent on official favor. The law reflects this appraisal of positive values by presuming the legality of private contracts until a challenger demonstrates their unlawfulness, and by casting some constitutional protections around private contract activity and the property interests it produces. (See CONTRACT CLAUSE; SUBSTANTIVE DUE PROCESS; TAKING OF PROPERTY; ECONOMIC REGULATION AND THE CONSTITUTION.) But the driving dynamic of private contract activity is the focused self-interest of the bargainers. We value this dynamic because it counters the inertia prevalent in social relationships, but it largely ignores the impact of bargains on people other than the bargainers. A factory producing to meet its contractual obligations may deposit in a handy stream industrial wastes harmful to the public's interest in pure drinking water or recreational opportunities. The law responds to this narrow focus of the market with ENVIRONMENTAL REGULATIONS, the constitutionality of which may or may not be challenged.

(2) Large-scale markets cannot operate by barter but require use of money (including money-measured credit). Law responds to this need by regulating the money supply. But the money calculus required by extended contract activity carries dangers of a bias in identifying and weighing matters of public interest. Public opinion, public policy-makers (including judges), and market-oriented pressure groups seeking to influence legislators and other public officers tend to identify interests deserving law's promotion or protection only with interests readily calculable in dollar terms. Thus, nineteenth-century COMMON LAW readily gave JUDGMENT for money damages if a factory failed to deliver promised goods to a buyer but was grudging in recognizing a community right to redress for more diffuse detriments?hard to measure in dollars?caused by the factory's deposit of industrial waste in a nearby stream. Today's public policy, with the blessings of today's constitutional law, increasingly seeks to offset the bias injected by a monetized calculus of interests by legislating to protect diffuse values and establishing administrative agencies to implement them.

(3) Whether tailored to particular transactions or standardized as in such commercial instruments as promissory notes or warehouse receipts, private contracts can be multiplied to any number of dealings and varied to shifting conditions of supply and demand. Contracts and the market thus permit flexible adaptation to changes in the conditions of the economy and the parties. Public policy recognizes the value of this adaptability in the law's readiness to enforce such terms of dealing as the parties choose and in legalconstitutional doctrine protecting the play of market competition. However, when change proceeds in this manner, its increments are so small that even the parties, let alone the environing society, may not be aware that the accumulation of relatively limited incremental

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shifts is producing basic alterations in the social context which no one has predicted, assessed, or chosen to bring about.

(4) Private contracting parties and the markets in which they operate typically work within the distribution of wealth and income in society as they find it. Contract and property law reinforce this distribution; only in rare hard cases will courts set aside a bargain as unconscionable, and normally they will not examine the adequacy of the consideration a party accepted in return for what he promised to perform. But underlying the social utility of freedom of contract and the resource-allocations role of markets lies an assumption: that private bargainers enjoy a considerable range of practical and legal options in dealing with each other. Great inequalities of wealth may grossly distort some bargaining relations, so that freedom of contract becomes illusory and markets sharply accentuate inequalities of bargaining power. While constitutional law only rarely addresses such inequalities (see INDIGENTS; WEALTH DISTRIBUTION), it consistently validates legislation to this end. (See SUBSTANTIVE Due Process; ECONOMIC REGULATION; COMMERCE CLAUSE.) Sometimes lawmakers seek to encourage private organization of countervailing power, as in the law regarding COLLECTIVE BARGAINING between management and LABOR. Sometimes they interpose between focused centers of private market power and diffused bodies of customers a public bargaining agency, as in the law of public utilities. Such legal interventions and their constitutional underpinnings depart from an abstract model of freedom of contract in order to promote more real freedom of bargaining.

The span from the 1880s through the 1920s witnessed increased resort to state and national law to correct imperfections of private contract activity in market. In this period opponents of government intervention made "freedom of contract" a code phrase for imposing constitutional and other limits on legal regulation. This emphasis has been so prominent in past policy debate that there is danger of equating the idea of freedom of contract with limitations on the use of law. In fact, law operates at least as much to promote market activity as to regulate it. A realistic assessment of the relation of constitutional law to freedom of contract must recognize the range of such promotional roles of legal processes.

By the late eighteenth century, in this country of abundant land, the law of land titles made land fully transferable and thus readily marketable?thus promoting private contract activity. By the mid-nineteenth century, common law had established a strong presumption in favor of the legality of private agreements for market dealing. By the second half of the nineteenth century, state legislatures were actively removing the common law disability of married women to make binding contracts. The married women's property acts may have responded more to the wish of the husband's creditors to acquire effective pledge of the wife's assets to secure her husband's debts than to any concern for sex equality. Still, these statutes enlarged the potential scope for contract activity in market.

Legal development, often supported by constitutional law, has consistently fostered entrepreneurial energy. Contract law legitimized and standardized a growing range of trade documents and instruments for capital investment. In three respects law especially promoted increased reach and pervasive effect of private contract activity. Though often inefficiently, law...