Freedom of contract is the freedom of private or public individuals and groups (of any legal entity) 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. Through freedom of contract, individuals possess a general freedom to choose with whom to contract, whether to contract or not, and on which terms to contract.
Contents
History
Henry James Sumner Maine proposed that social structures evolve from roles derived from social status to those based on contractual freedom. A status system establishes obligations and relationships by birth, but 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 under a "minimal state."
Lochner v. New York
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 to prop up monopoly interests.
In 1905, the Supreme Court used the due process clause in the Fourteenth Amendment to declare unconstitutional the New York state statute imposing a limit on hours of work. Rufus Wheeler 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, Jr. accused the majority of basing its decision on laissez-faire ideology. He believed that it was making law based on economics rather than interpreting the constitution. He believed that "Liberty of Contract" did not exist and that it was not was intended in the Constitution.
Afterward
In his "Liberty of Contract" (1909), Roscoe Pound critiqued freedom-of-contract laws by laying out case after case in which 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 (486-487).
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.
United Kingdom
In the late 19th century, the English judiciary espoused "freedom of contract" as a generally applicable feature of public policy, best expressed in Printing and Numerical Registering Co v Sampson by Sir George Jessel MR. In the later 20th century, the view of the common law had changed completely. In George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd, Lord Denning MR compared "freedom of contract" with oppression of the weak, as he outlined the development the law had undergone.