Freedom of Contract

There are three basic institutions that provide the framework for all economic transactions in contemporary society, namely, market, governmental regulation, and contract. The economic analysis of their performance and function reveals that contracting is an especially effective legal institution in coordinating private economic transactions if the following requirements are satisfied in the process of contract formation and contract performance: freedom of contract, fairness and social utility, bargaining power parities, symmetric information and transparency of intentions, third-party exemption, possibility of adjustment, and legal forum for settlement and enforceability.

Freedom of contract is sometimes explained as deriving from the prepolitical notions of freedom and autonomy, which assign rights to the individuals to plan, consider, and pursue their welfare. Other contract theorists originate freedom of contract within democratic self-government and the division of responsibility between the citizens and the state for promoting just society, and individual and social welfare. One of the basic duties of the liberal state is to recognize its citizens' rights to freedom of contract and to protect their voluntary, rational, and lawful consent from coercion or interference in their private transactions. Therefore, governmental and judicial intervention in private contractual relationships by [Page 942]means of legislation and court rulings must be limited to equal protection of citizens' rights, their rightful expectations, and the legal enforcement of their obligations. Briefly, freedom of contract is constitutionally protected in a liberal society. Besides moral and political claims for freedom, autonomy, and responsibility, freedom of contract is also justified by the fact that it provides the most efficient welfare-enhancing institution for coordinating the transfer and exchange of property, rights, and entitlements among the members of society. Therefore, considerations as to whether private contractual arrangements enhance individual and social welfare do not fall outside the purview of legislation and jurisdiction. Jurisprudence and the law based on these philosophical, economic, and political theories have attributed central importance to freedom of contract—and ownership rights—since the last decades of the 19th century.

Nevertheless, the proponents of legal realism and critical legal studies, to mention a few influential legal schools, discuss critically the notion of freedom of contract and regard it as an ideological doctrine of jurisprudence, which is rooted in 19th-century laissezfaire capitalism. One of the most persuasive arguments against classical contract theory comes from the plain fact that standard form contracts created and used by business enterprises in transactions with their clients and customers are predominant in the economy today. In the case of standard form contracts, bargaining—whereby the contracting parties attempt to draft a contract, determine its contents, and agree on contract terms and conditions of performance—virtually never takes place. Price frequently comes under the nonnegotiable terms of contract as well. These types of contracts do not depend on aggregatio mentium or consensus ad idem, namely, the meeting of the minds of the parties. Standard form contracts are deliberately drafted on a take it or leave it basis. Freedom of contract rarely means freedom of contract from the point of view of the nondrafting party. We have to conclude standard form contracts on a daily basis without following the steps of contract formation prescribed in contract law textbooks. Bargaining inefficiencies, high transaction costs of contract formation, asymmetric information, and other market imperfections give business enterprises opportunity to create their own private ordering and to impose less favorable or even unfair terms and conditions on their nondrafting parties. While it is necessary to choose the law of the jurisdiction to avoid choice-of-law conflicts in private contractual arrangements, business enterprises can also capitalize on the global commercial environment, especially in the case of online transactions. Mutual acceptance of governing law, forum, arbitration, and judgments on the part of the contracting parties are also absent in standard form contracts. Business enterprises choose the exclusive jurisdiction and venue of the courts on whose territory they are incorporated, even if the place of performance is in another hemisphere. They also endeavor to opt out of the legal jurisdiction that prescribes high and strict standards for contractual liability and contains detailed regulations on the protection of consumer rights. As a result, a legal forum for settlement is practically inaccessible to the nondrafting parties—most often, clients and customers—when contract disputes arise. The geographical distance of courts located far away from the place of performance, high transaction costs, and the imperfect knowledge of contract terms and governing law provide disincentives for the other party to seek remedies for unconscionability, undue influence, harm, or contract breach. Nondrafting parties typically take the option of rational ignorance and do not educate themselves about terms and conditions of contract to become informed and rational decision makers. In doing so, they seek to avoid incurring the high transaction costs of obtaining information, negotiation, and contract formation. Therefore, the well-established concepts of classical contract theory—such as offer, acceptance, and consent between equally situated and rational economic actors—lose their original meaning in the context of standard form contracts. To sum up, commercial and consumer sales contracts—boilerplate contracts, preprinted contracts, one-sided contracts, mass-market uniform adhesion contracts, take it or leave it contracts, rolling contracts, shrink-wrap and click-wrap contracts, and so on—usually do not satisfy the above-mentioned requirements for contract formation.

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