Freedom of Contract:
A New Look at the History and Future of the Idea
ARTHUR CHRENKOFF
*
Freedom of Contract and the Liberal Law
The classic exposition of the doctrine of freedom of contract was delivered by Sir
George Jessel MR, over a hundred and twenty years ago:
[I]f there is one thing which more than another public policy requires it is
that men of full age and competent 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.*1
Jessel MR’s contemporary, the famous Lord Bramwell, expressed more
colourfully the sceptical and detached attitude, so characteristic of a champion of
freedom of contract: “For here is a contract made by a fishmonger and a carrier of
fish, who know their business and whether it is just and reasonable is to be settled
by me who am neither fishmonger nor carrier, nor with any knowledge of their
business”.2
Lord Bramwell went on to state another presupposition underlying the doctrine:
I am for my part prepared to hold, not that an agreement between two people
which has been voluntarily entered into by them cannot be unreasonable, but
the fact that it has been voluntarily entered into by them is the strongest
possible proof that it is a reasonable agreement, and that I should require the
strongest possible evidence, or something more even than a possibility, to
shew me that was an unreasonable agreement.3
*•
1
2
3
BA LLB(Hons)(UQ), currently researching a master’s thesis on freedom of contract.
Originally presented as a paper before the Queensland Association of Legal
Philosophy. The author would like to thank Dr Suri Ratnapala, ProfAlan Fogg, Linda
Haller, Peter Butler and David Morrison for their suggestions, help and
encouragement. All the mistakes remain the author’s.
Printing and Numerical Registering Company v Sampson (1875) LR 19 Eq 462, 465.
Manchester, Sheffield and Lincolnshire Railway Co v Brown (1883) 8 AC 713, 716.
Ibid at 718-9.
Freedom of Contract
37
A few key points can be extracted from the above formulations. Freedom of
contract, in its ideal form, requires the state to acknowledge the autonomy of the
individual in making choices which affect that individual, to recognize that a party
to a contract is a better arbiter of his or her interests than the legal system, and is
better qualified to assess the fairness and reasonableness of the ways chosen to give
effect to that interest. Thus, adherence to the doctrine requires that the party be left
alone to choose what kind of contract it wants, with whom and on what terms. As
Reinhard Zimmermann writes, “[t]he courts are merely concerned with the fairness
of the bargaining process”;4 that is, ensuring that factors such as duress, fraud,
misrepresentation and mistake do not affect the voluntariness of the consent. The
courts are also, of course, concerned with the enforcement of contracts; beyond
those two areas, however, there is little scope for judicial (or, indeed, legislative)
interference.
The idea of freedom of contract is a typical example of what might be termed
the liberal conception of law. Because liberalism puts a premium on equality of
opportunity rather than equality of outcome, the liberal law aims to guarantee
procedural fairness as opposed to the fairness of results. Because liberalism deems
the individual to be the best arbiter of his or her interests, needs, wants and
preferences, the liberal law will not try to double-guess the individual, and turn
itself into an end-oriented instrument of social engineering. Because liberalism
respects the individual choice, the liberal law will do its utmost to protect that
sphere of autonomy and not subject it to too much outside interference. The
doctrine of freedom of contract is undoubtedly a perfect reflection of this liberal
attitude to law.5
The Liberal and Capitalist Impulses
In the minds of commentators and scholars the idea of freedom of contract has
become forever associated with the nineteenth century and the golden age of
4
5
Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian
Tradition (Juta & Co, Cape Town, 1990) p 577 [emphasis in original].
See for example Roger Brownsword, “Liberalism and the Law of Contract” in
Liberalism and Recent Legal and Social Philosophy, Richard Belamy (ed) (Franz
Steiner Verlag Wiesbaden GMBH, Stuttgart, 1989) p 86; Michael Rosenfeld, “Contract
and Justice: The Relation Between Classical Contract Law and Social Contract Theory”
(1985) 70 Iowa Law Review 777; and Morris R Cohen, “The Basis of Contract” (1933)
46 Harvard Law Review 558.
38
(1996) 21 Australian Journal of Legal Philosophy
laissez-faire. However, a more careful reading of history clearly demonstrates that
the doctrine cannot be claimed to be either an original product of the last century
or of the Anglo-Saxon legal milieu, as it has periodically reappeared throughout
history in many different cultural settings. It has to be said that it was only with the
advent of classical liberalism and theoretical capitalism towards the end of the
eighteenth century, that the doctrine of freedom of contract has acquired its solid
philosophical foundations.
It is my contention that what invariably determines whether the doctrine of
freedom of contract will appear and be accepted as a valid legal doctrine in any
particular social setting, depends on the simultaneous influence and interaction
between what I call the liberal impulse and the capitalist impulse. While for many
commentators, and particularly for critics of these impulses, liberalism and
capitalism became so closely associated as to be virtually indistinguishable, it will
be essential to remember that for the purposes of this argument these two impulses
embody separate philosophical attitudes.
I shall borrow the interpretation of capitalist action from Max Weber. Such
action is “one which rests on the expectation of profit by the utilization of
opportunities for exchange”.6 The capitalist impulse is, therefore, an attitude or a
mindset which promotes self-interest as the basis of human action. The capitalist
impulse finds its expression in the material world through many avenues of human
endeavour: trade and commerce, banking and finance, commercial exploitation of
primary resources, manufacturing and industry, service provision. The impulse is
characterized by the emphasis on accumulation and investments7 and the
commodification of property and labour. To put it colloquially, the capitalist
impulse is present whenever a person wants to “make a buck for himself or
herself5. Thus it can be contrasted with other impulses that aim to organize the
society and the economy according to a variety of principles including sustenance,
status, cooperation and egalitarianism.
6
7
Max Weber, The Protestant Ethic and the Spirit ofCapitalism (Charles Scribner’s Sons,
New York, 1976) p 17.
As opposed to accumulation merely for the sake of status that is characteristic of
primitive societies and economies: Joseph M Perillo, “Exchange, Contract and Law in
the Stone Age” (1969) 31 Arizona Law Review 27-31, and Raymond Firth, Elements of
Social Organization (Watts & Co, London, 1951) p 135.
Freedom of Contract
39
It is not the capitalist impulse working alone that brings about the general
acceptance of the doctrine of freedom of contract but the capitalist impulse and the
liberal impulse operating together and interacting with each other. The liberal
impulse is a way of perceiving the human being and his or her relations with the
state and the society. It focuses on a person as an individual and not merely a
member of the family, the kin group, the tribe, or the collective of any sort. It
recognizes that at least some people in the community are independent moral and
social agents and should enjoy certain autonomy of action.
History shows quite clearly that freedom of contract will only come to be
accepted as a valid legal doctrine in a society where a significant, though not
necessarily a sizable, proportion of the population is deemed to have certain rights
and freedoms vis-a-vis its rulers, where they are treated as free citizens and not
merely subjects of the state, and where even the leader is perceived only as primus
inter pares - first among equals - as the Romans had it. Conversely, freedom of
contract cannot exist to any significant degree in small, tightly-knit communities
based on relationships of kinship and status; it cannot exist in the theocratic anti­
societies like those of ancient Egypt where the very life of every subject depends
on a whim of the living god; it cannot exist under the feudal system where the
right-possessing equals are counted in hundreds if not dozens and the rest of the
population toils in servitude.
It has to be noted that while arguably both impulses can be found in virtually
every society that ever existed, for the freedom of contract to become a legal norm,
those two impulses have to become more or less dominant philosophical outlooks
in a particular social context, to the extent that an intellectual - and, by extension,
law-making - milieu is created that is favourable towards the doctrine. Why the
interaction of the capitalist and the liberal impulses leads to the emergence and
acceptance of freedom of contract is obvious. As John Chamberlain said,
“Capitalism is promises”.8 Where the profit motive operates, one will invariably
find contract; the capitalist impulse cannot find legal expression in any other way
except through a legally binding agreement. Once the contract is regularly used in
a society as a means of ordering and organizing human interaction, the liberal
impulse guarantees, in turn, that it will be used to its fullest potential as a vehicle
for expressing individual preferences. The liberal impulse provides the framework
for the enforcement of contracts according to the wishes of the parties.
8.
John Chamberlain, The Roots of Capitalism (Liberty Press, Indianapolis, 1976) p 87.
40
(1996) 21 Australian Journal of Legal Philosophy
Freedom of Contract Before the Golden Age
Despite the once virtually universal acceptance of Sir Henry Sumner Maine’s
famous dictum that the human advance to civilization is characterized by the
progression from status to contract,9 it now seems clear that contract has been a
part of human experience from time immemorial,10 whether as a part of the
economic sphere of life or an element of the social and religious interaction.11 It is
true to say, though, that contract never played a very significant role in primitive
societies and, consequently, the freedom of contract never really had the chance to
develop. This is due to the absence of both the liberal and the capitalist impulses.
There was no place for the liberal impulse in societies based on kinship or family,
where the individual was completely subsumed by the group and only seen in terms
of his or her relationships with various other members of the same group.12 The
capitalist impulse never really had a chance to emerge in societies where
production and distribution were largely organized according to customary rules
of status, and where the limited population base, and therefore limited division of
labour, as well as technological backwardness, made both large-scale production
9
Sir Henry Sumner Maine, Ancient Law: its connection with the early history ofsociety
and its relation to modern ideas (John Murray, Albermarle Street, London, 1906) p 173.
10 Hoebel writes that the famous formulation should not be taken as an “all-or-none”
proposition “which it is improbable that Maine intended or anthropological data justifies
... The contrast of Status as against Contract legal forms is not one of mutual
exclusiveness but of degree”: E Adamson Hoebel, “Status and Contract in Primitive
Law” in Cross-Cultural Understanding: Epistemology in Anthropology, F S C Northrop
and Helen H Livingston (eds) (Harper & Row, New York 1964) pp 287, 292. However,
as Rouland writes, “it is also the case that in general each society is characterized by the
dominance of one model over the other”: Norbert Rouland, Legal Anthropology
(Athlone Press, London, 1994) p 229.
11 That ultimate basis of contract - the recognition of a promise as morally, if not legally,
binding - was present in great majority of primitive societies: Perillo op cit, pp 48-9 See
generally B W Leist, “The Fides Commandment” in Primitive and Ancient Legal
Institutions, Albert Kocourek and John H Wigmore (eds) (Little, Brown and Company,
Boston, 1915).
12 See generally Burton Pasternak, Introduction to Kinship and Social Organization
(Prentice-Hall Inc, Englewood Cliffs, 1976) pp lOff.
Freedom of Contract
41
and trade relatively rare occurrences.13 Contract, as a way of dealing with strangers,
was largely absent where the interaction with strangers was as limited as it was
among primitive isolated communities. The only exception seems to be ancient
Palestine, where, as even a cursory reading of the Old Testament will indicate, not
only contract but also freedom of contract flourished.14 Many bargains documented
in Genesis, Exodus and Judges would today be struck down by the courts on the
basis of unfairness, unreasonableness and harshness.15 The explanation for this
Israelite exceptionalism seems to be the unique role that contract, or covenant,
played in Hebrew religion, as well as the importance attached to the oath.16
Freedom of contract does make an appearance in ancient Greece and Rome. The
Greek attitude is well captured in one agreement, preserved in the writings of
Demosthenes, which includes as one of its terms that “nothing else [shall] have
greater validity than [this] contract’5.17 So entrenched was the doctrine in Athenian
law, that some parties went to the courts with serious expectations that they would
uphold and enforce contracts constituting conspiracies to commit crime.18 In Rome
the spirit of freedom of contract was reflected in legal maxims such as “the parties
to a contract are free to get the better of one another”19 or “when a man makes a
contract, as he orally declares, so shall be law”.20 The Roman courts had proven to
13 E Adamson Hoebel, Man in the Primitive World: An Introduction to Anthropology (2 nd
ed, McGraw-Hill Book Company Inc, New York, 1958) pp 448ff.
14 Geoffrey P Miller, “Contracts of Genesis” (1993) 22 Journal ofLegal Studies 15-45.
15 See for example Jacob’s contract with Essau (Genesis 25:27-34) or Jephthah’s covenant
with the Lord (Judges 11:29-40).
16 Norman Cantor, The Sacred Chain: A History of the Jews (Harper Collins, London,
1995) p 19.
17 Demosthenes, Against Lacritus, 13.
18 SC Todd, The Shape ofAthenian Law (Clarendon Press, Oxford, 1993) p 264; see also
Edward E Chan, Athenian Economy and Society: A Banking Perspective (Princeton
University Press, Princeton, 1992) p 42.
19 Quoted in J Gilchrist, The Church and Economic Activity in the Middle Ages
(Macmillan, London, 1969) p 59.
20 Quoted in A S Diamond, Primitive Law (Watts & Co, London, 1950) p 428.
42
(1996) 21 Australian Journal of Legal Philosophy
be singularly unwilling to intervene in cases of gross inadequacy of consideration,
inequality of bargaining positions, harsh penalty clauses and other hard bargains.21
In both those societies the liberal impulse was relatively strong. Citizens of the
Greek polis as well as Roman citizens were deemed to be free and autonomous
individuals whose freedom of action was a right that the state had to respect. In
both societies this attitude was also extended, almost by default, to non-citizens
who engaged in trade.22 And trade it was, indeed, the great growth of which in the
second half of the first millennium BC, provided the major channel through which
the capitalist impulse could flow in Greece and Rome.
It is also instructive to look to ancient Rome to see how freedom of contract
declines when both the liberal impulse and the capitalist impulse are slowly stifled
by rival visions of society. The liberal impulse was the first to suffer when it was
subsumed by the principles of autocratic imperial rule following the fall of the
Republic; individuals quickly found themselves at the absolute mercy of the
emperor as the last vestiges of constitutional government were abandoned. The
capitalist impulse was similarly subdued through ever-increasing government
intervention and regulation.23 After the fall of the Western Roman empire, the
concept of freedom of contract disappeared completely from the legal world, as
both impulses were near-completely extinguished. Both in its social and economic
organization, society during the Dark Ages reverted back to the status model of
isolation, self-sufficiency, custom and rigid hierarchy24
21 For the best treatment of the area see Zimmermann op cit, particularly ppl07, 258, 306­
9, 458.
22 See Frank J Frost, Greek Society (D C Heath and Company, Lexington, 1971) pp 86ff;
H D F Kitto, The Greeks (Penguin Books, London, 1957) pp 65, 78, 124ff; Herbert J
Muller, “Freedom and Justice in History” in Freedom: Its History, Nature and
Varieties, Robert E Dewey and James A Gould (eds) (Macmillan, New York, 1971) p
25; W Warde Fowler, The City-State of the Greeks and Romans: A Survey Introductory
to the Study ofAncient History (Macmillan, London, 1893) pp 193-205; specifically
Fritz Schultz, Principles ofRoman Law (Clarendon Press, Oxford, 1936) pp 146ff; and
Zimmermann op cit, pp 166, 256.
23 See an interesting discussion in Bruce Bartlett, “How Excessive Government Killed
Ancient Rome” (1996) 14 Cato Journal 287-303.
24 On the general process see Robert S Lopez, The Commercial Revolution in the Middle
Ages: 950-1350 (Prentice-Hall Inc, Englewood Cliffs, 1971) pp 48-9, and Howard L
(continued...)
Freedom of Contract
43
The impulses resurfaced again in the Middle Ages, in the free trading cities of
Western Europe. The concept of a free citizen makes an appearance again, and
trade revives on a large scale.24
25 Christianity as the official, state religion is both a
promoter and a hindrance to the liberal and the capitalist impulses. Its individualist
emphasis certainly helps to soften the organic medieval view of a person; on the
other hand, Christianity perceives self-interest as a dangerous sentiment that has
to be controlled for the sake of maintaining a good, God-oriented society.26 This
is why freedom of contract appears only to a limited extent, as a part of lex
mercatoria or the Law Merchant - that is, the customary law that applies only to
people professionally engaged in trade.27 The doctrine of freedom of contract has
to wait until the end of the eighteenth century to come to prominence again.
Meanwhile, from the sixteenth century onwards, the liberal and the capitalist
impulses are being stifled again by the rise of the autocratic form of government
and the adoption of mercantilism as the official state economic policy.
The Forces Behind the Impulses
It might be instructive at this point to speculate as to what factors contribute to the
emergence or the absence of the liberal and the capitalist impulses in any given
society. Such inquiry may provide some possible pointers as to the future of
freedom of contract in our own society.
It is interesting to speculate on the role geography and climate play in the initial
emergence and in the maintenance and subsequent vitality of the liberal impulse.
24 (...continued)
Adelson, Medieval Commerce (Van Nostrand Company Inc, Princeton, 1962) pp 26,
52.
25 Some of the best treatment of the subject is still to be found in Henri Pirenne, Economic
and Social History ofMedieval Europe (Routledge & Kegan Paul Ltd, London, 1936)
pp 51-2, and Henri Pirenne, Medieval Cities: Their Origins and Revival of Trade
(Doubleday Anchor Books, Garden City, 1925) pp 80ff.
26 On the point see generally Gilchrist op cit, pp 50ff; Karl Ferdinand Wemer, “Political
and Social Structures of the West, 300-1300” in Europe and the Rise of Capitalism,
Jean Baechler et al (eds) (Basil Blackwell, London, 1988); and Brian Tierney,
“Freedom and the Medieval Church” in The Origins of Modern Freedom in the West,
R W Davis (ed) (Stanford University Press, Stanford, 1995).
27 Leon E Trakman, The Law Merchant: The Evolution of Commercial Law (Fred B
Rothman & Co, Littleton, 1983) pp 7ff.
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(1996) 21 Australian Journal of Legal Philosophy
One can look to Karl Wittfogel’s works on the differences between hydraulic
civilizations where autocracy appears as a by-product of the efforts to organize
large-scale irrigation projects in arid areas, and hydroagriculture civilizations
where the rainfall is sufficient to provide the adequate supply of water for
agricultural purposes, and where the political structures that emerge are, therefore,
much more decentralized and less oppressive.28
One can also borrow certain ideas from democratic theory. Societies with open f
borders are susceptible to foreign invasions and in response to the threat tend to
create strong centralized governments with large standing armies. Societies which
are relatively safe due to physical isolation or inhospitable terrain, on the other
hand, are likely to develop weaker governments, no standing armies, and a more
individualistic outlook.29
We have to observe that societies where the liberal impulse developed and later
contributed to the emergence of freedom of contract - that is, ancient Greece and
Rome, England, and later the United States - are societies which relied on rainfall
rather than irrigation for their agricultural needs. Furthermore, they are all societies
which were relatively safe from foreign invasions and occupations either because
of the water barrier (in case of British Isles and North America) or the
mountainous, rugged terrain (in Greece and Rome).30 The state that does not
become strong as a result of large-scale people and resource mobilization - for the
purpose of providing livelihood or defense from external threats - never becomes
strong enough to stifle the liberal impulse among its citizens.
The capitalist impulse is similarly dependent on the presence and influence of
outside factors. Unless these appear, the impulse will lie dormant without finding
28 Karl A Wittfogel, Oriental Despotism: A Comparative Study of Social Power (Yale
University Press, New Haven, 1957).
29 See for example Ulf Sundhaussen, “Democracy and the Middle Classes: Reflections on
Political Development” (1991) 37 Australian Journal ofPolitics and History 102-3, and
Leslie Lipson, The Democratic Civilization (Oxford University Press, New York, 1964)
pp 162-73.
30 Such observations have been made particularly often in respect of the British Isles:
Barrington Moore Jr, Social Origins ofDictatorship and Democracy: Lord and Peasant
in the Making ofthe Modern World (Allen Lane, Penguin Press, London, 1967) p 444,
and Kenneth H F Dyson The State Tradition in Western Europe: A Study of an Idea and
Institution (Martin Robertson, Oxford, 1980) p 37; see also Sundhaussen op cit, p 102
and Lipson op cit, p 172.
Freedom of Contract
45
avenues of expression. It needs certain stimuli to become a dominant philosophical
force in society. The capitalist impulse, in essence, depends on technological
developments and the nature of economic organization that allow it to develop and
grow in ever-new directions, thus making it intellectually attractive to the law­
making elites. It is through inventions such as the sailing ship, compass, spinning
wheel, steam engine, computer and countless others through the ages that the
capitalist impulse could express itself through trade and manufacture.31 One has to
remember some purely commercial developments that at various points in time
revolutionized the world of economics and pushed it in new directions - including,
for example, coinage, negotiable instruments, double-entry bookkeeping, futures
markets and multinational corporations among others.32 There were also physical
factors at play: it is because of the growth of population that the division of labour
could occur; markets came into existence that created sufficient demand to make
various commercial operations feasible and profitable.33 It was, in turn, the rise of
mass-production, cartelization and centralization, that, together with many other
factors, worked against the capitalist impulse from the end of the nineteenth
century to create an intellectual climate hostile to it and, by extension, to freedom
of contract.34
31 The best example of that, of course, are the processes of the Industrial Revolution: see
particularly Bernard Braudel, Civilization and Capitalism, 15th- 18th Century, vol III,
The Perspective of the World (Collins/Fontana Press, London, 1984) pp 538ff.
32 See for example, on money: Norman Angell, The Story of Money (Cassell & Company
Ltd, London, 1930) and Glyn Davies, A History ofMoney: From Ancient Times to the
Present Day (University of Wales Press, Cardiff, 1994) pp 14ff. On the futures market:
Morton J Horowitz, “The Historical Foundations of Modem Contract Doctrine” (1974)
87 Harvard Law Review 918.
33 In the context of primitive societies see Pasternak op cit, p 16, Leslie A White, The
Evolution of Culture: The Development of Civilization to the Fall of Rome (McGrawHill Book Company Inc, New York, 1959) p 294, and Philip E L Smith, Food
Production and its Consequences (Cummings Publishing Company, Menlo Park, 1976)
p 47. In the context of the Industrial Revolution, see W W Rostow, How It All Began:
Origins of the Modern Economy (Methuen & Co Ltd, London, 1975) p 14.
34 On how the economic and technological changes influenced the mentality of reformers
see Robert H Wiebe, The Search for Order 1877-1920 (Hill and Wang, New York,
1967) pp 168ff; and David Thomson, England in the Nineteenth Century 1815-1914
(Penguin Books, Harmondsworth, 1950) pp 145-6. On the general influence of material
conditions towards the end of the last century see Wiebe op cit, p 133; Thomson op cit,
(continued...)
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(1996) 21 Australian Journal of Legal Philosophy
It is interesting to note that every major shift in social and economic
organization is created and then, in turn, works to strengthen the influence of a
specific group in society which is, predictably, the main beneficiary of the changes.
It is that group which always stands at the intellectual forefront of the fight for or
against freedom of contract. In medieval Europe it was the new trading middle
class which championed contractual freedom.34
35 Towards the end of the eighteenth
century and throughout the nineteenth century it was the trading and also the new
manufacturing middle classes which fought for the general acceptance of the
doctrine.36 The structural changes about a hundred years ago created their own
constituent group, which I call the “Managerial middle class”. Its members were
largely involved in administration, planning, professional support and service
provision for the growing public and private sectors. They championed the
restrictions on freedom of contract.37 So too the so-called “New Class” from the
1950s onwards, which was the main force behind, and the main beneficiary of, the
growth of government and bureaucracies post-World War II.38
34 (...continued)
p 193. See generally Samuel P Hays, The Response to Industrialism: 1885-1914
(University of Chicago Press, Chicago, 1957) pp 48ff; Alfred D Chandler Jr, The
Visible Hand: The Managerial Revolution in American Business (Harvard University
Press, Cambridge, 1977) and some interesting observations in Irving Kristol, “On
Corporate Capitalism in America” in Reflections of a Neoconservative: Looking Back,
Looking Ahead (Basic Books Inc, New York, 1983) pp 203-4.
35 Pirenne, Economic... op cit, p 51; Trakman op cit, ch 1.
36 Joyce Appleby, “The Social Origins of American Revolutionary Ideology” (1978) 64
The Journal of American History 948-54; Robert L Heilbroner, The Making of
Economic Society (Prentice-Hall Inc, Englewood Cliffs, 1962) p 76; E Lipson, The
Growth ofEnglish Society: A Short Economic History (Adam & Charles Black, London,
1954) p 191; and Y S Brenner, A Short History of Economic Progress: A Course in
Economic History (Frank Cas & Co Ltd, London, 1969) pp 151-2.
37 Michael Freeden, The New Liberalism: An Ideology ofSocial Reform (Clarendon Press,
Oxford, 1978) p 3; Wiebe op cit, p 153; and Richard Hofstadter, The Age of Reform:
From Bryan to F D R (Alfred A Knopf, New York, 1963) pp 144-8.
38 See generally B Bruce-Briggs, “An Introduction to the Idea of the New Class” in The
New Class? B Bruce-Briggs (ed) (McGraw-Hill Book Company, New York, 1979).
Freedom of Contract
47
Comes the Challenge: the Progressivist and the Populist Impulses
Little needs to be said about the nineteenth century. This is the period which every
contract law textbook and every study of legal history recognizes as the golden age
of the doctrine of freedom of contract.39 It is from this period that the most famous
court decisions come, and in which the most famous advocates of the doctrine lived
and wrote. The prominence the freedom of contract enjoyed in this era can be
credited to the exceptionally strong influence of both the liberal and the capitalist
impulses in the intellectual and economic life of the era. This was the age when
classical liberalism came to be not only fully developed but also widely recognized
as the most influential ideology of the day. With Smith, Ricardo, Malthus, Mill and
Spencer, capitalism has also acquired, for the first time, a sound theoretical basis
which greatly contributed to the considerable influence and acceptance that
capitalist ideas had, due to the impact of the Industrial Revolution and the
previously unparalleled commercial and industrial expansion that followed.
Towards the end of the nineteenth century the tide started shifting against both
laissez-faire capitalism and classical liberalism, and, as a consequence, against the
doctrine of freedom of contract.40 If the nineteenth century can be generalized as
the century of laissez-faire, the twentieth century may be called the age of
collectivism, where the basic tenets of capitalism and liberalism in the Western
world were challenged not only by the totalitarian ideologies of Marxism and
fascism from without, but also by the milder forms of both from within.
One of the competing impulses to emerge from that milieu is what I termed the
progressivist impulse. In the extreme form, the progressivist impulse was carried
by various Marxist-influenced sectors of political opinion. However as the centre
of political gravity moved markedly to the left towards the end of the last century,
the carriers and propagandists of the progressivist impulse were very often found
among the more mainstream sections of public opinion, even those claiming the
intellectual heritage of liberalism such as the New Liberals in England and the
Progressives in the United States.
39 To mention only the classic treatment of the matter: P S Atiyah, The Rise and Fall of
Freedom of Contract (Clarendon Press, Oxford, 1979).
40 For an interesting analysis of the phenomenon see Milton Friedman and Rose D
Friedman, “The Tides in the Affairs of Men” in Thinking About America: The United
States in the 1990s, Annelise Anderson and Dennis L Bark (eds) (Hoover Institution
Press, Stanford, 1988).
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(1996) 21 Australian Journal of Legal Philosophy
The progressivist impulse essentially attacked both the liberal impulse and the
capitalist impulse. Instead of seeing society as composed of individuals, society
instead was viewed as composing various groups - mostly economic classes. The
social disparities and inequalities were made to justify the view that in reality the
doctrine of freedom of contract is nothing but a cynical legal device that those in
the positions of power use to perpetuate the status quo and keep the lower classes
powerless and destitute. Hence the inequality of bargaining power was to be the
main concern of the advocates of the progressivist impulse, and curing the effects
of that inequality the main thrust of the attack on the classical view of freedom of
contract.
The best example of such views can be found in the writings of L H Hobhouse.
For him, contracts between parties which were not equal could not be free:
The bargain is a forced bargain. The weaker man consents as one slipping
over precipice might consent to give all his fortune to one who will throw
him a rope on no other terms. True consent is free consent, and full freedom
of consent implies equality on the part of both parties to bargain. Just as
government first secured the elements of freedom for all when it prevented
the physically stronger man from slaying, beating, despoiling his neighbours,
so it secures a larger measure of freedom for all by every restriction which
it imposes with a view to preventing one from making use of any of his
advantages to the disadvantage of others.41
For Hobhouse there was no doubt that a worker and an employer could never
be in an equal bargaining position: the employer always had more people willing
to work for him than he had a need for; the worker, on the other hand, had he
decided not to work under the conditions offered to him, would be faced with a
prospect of his children going hungry.42
The thrust of the reform was, therefore, the redistribution of bargaining power
between the parties. This has been reflected in the support for the principle of
collective bargaining which effectively removed the making of employment
41 L H Hobhouse, Liberalism (Oxford University Press, New York, 1964) [1911] p 50.
42 Ibid at 47. For other interesting contemporary examples see: T H Green, The Political
Theory ofTH Green: Selected Writings, John R Rodman (ed) (Appleton-CenturyCrofts, New York 1964) pp 53ff (England); and Richard T Ely, Property and Contract:
In Their Relation to Distribution of Wealth, vol II (Macmillan and Co, London, 1914)
pp 579ff, particularly pp 651-4, 604-9 (United States).
Freedom of Contract
49
contracts from individual employers and individual employees.43 Similarly, it was
the rationale behind the attempts to deal with the negative effects of such
inequalities, as in various efforts to have certain contractual terms declared
unenforceable because of the perception that they were unduly harsh or unfair to
the weaker party and would not have been included in the contract if the stronger
party had not in effect used its power to force the weaker party into accepting
them.44 The contract was also to be used as a more direct instrument of
redistribution in situations where it was felt that free negotiation between
individuals would never lead to socially desirable results, such as greater equality
or more equitable distribution of wealth and employment opportunities. Hence the
incorporation within commercial and consumer contracts of various implied or
statutory terms designed to give the weaker party what it was thought to be a “fair
deal”.45 Hence the minimum wage laws and the compulsory arbitration process in
Australia, which reflected the view that the workers will only get decent pay and
working conditions if those reforms are forced on the employers by the courts and
43 The principle was introduced in Great Britain through the Trade Disputes Act 1906, in
the United States in the National Labor Relations Act 1935; it made its first appearance
in Australia in the Industrial Arbitration Act (NSW) 1901. See generally E Merick
Dodd, “From Maximum Wages to Minimum Wages: Six Centuries of Employment
Contracts” (1943) 43 Colombia Law Review; Paul Davies and Mark Freeland, Labour
Legislation and Public Policy: A Contemporary History (Clarendon Press, Oxford,
1993) passim; and W B Creighton et al, Labour Law: Materials and Commentary (Law
Book, Sydney, 1983) pp 6-8.
44 For the general discussion of the “inequality of bargaining power” controversy, chiefly
created by Lord Denning in Lloyds Bank Ltd v Bundy [1975] QB 326, and the doctrine
of unconscionability, see Peter M Hall, Unconscionable Contracts and Economic
Duress (CCH Australia Limited, Sydney, 1985); John R Peden, The Law of Unjust
Contracts: Including the Contract Review Act 1980 (NSW) With Detailed Annotation,
Procedure and Pleadings (Butterworths, Sydney, 1982); Hugh Beale, “Inequality of
Bargaining Power” (1986) 6 Oxford Journal of Legal Studies 123-36; Mindy ChenWishart, Unconscionable Bargains (Butterworths, Wellington, 1989); and Spencer
Nathan Thai, “The Inequality of Bargaining Power Doctrine: the Problem of Defining
Contractual Unfairness” (1988) 8 Oxford Journal ofLegal Studies 17-33.
45 The legislatures proved to be much more interventionist in the area than the courts - one
only has to look to the Trade Practices Act 1974 (Cth), the Supply of Goods (Implied
Terms) Act 1973 (Great Britain), or the Contract Review Act 1980 (NSW), particularly
s 7.
50
(1996) 21 Australian Journal of Legal Philosophy
legislatures.46 Hence the affirmative action initiatives, which in effect and despite
the claims to the contrary by their proponents, created a system of quotas where
employers are forced to contract with members of certain groups in society that
were deemed to be disadvantaged and previously discriminated against.47
46 Minimum wage in certain industries was introduced in Great Britain by the Trade
Boards Act 1909. In the United States several state initiatives were struck down by the
Supreme Court (in a series of decisions starting with Adkins v Children’s Hospital 261
US 525 (1923)) but the system was eventually introduced through the National
Industrial Recovery Act 1933 and the Fair Labor Standard Act 1938. In Australia wages
and conditions became matters that can be fixed by a government body since the
passage of the Conciliation and Arbitration Act (Cth) 1904.
47 The Australian legislation includes the Racial Discrimination Act (Cth) 1975, Sex
Discrimination Act (Cth) 1984, the Affirmative Action (Equal Employment
Opportunities for Women) Act (Cth) 1986 and the Disability Discrimination Act (Cth)
1992. In the United States, aside from the Civil Rights Act 1964 (particularly its Title
VII), a considerable use is made of Executive Orders (some of the more important ones
in the area are EO 10925, EO 11246, EO 11375). For some of the official rationale
behind the affirmative action initiatives, see National Committee on Discrimination in
Employment and Occupation, Equal Employment Opportunity: Some Guidelines for
Developing Personnel Practices (Australian Government Publishing Service, Canberra,
1984) pp 12-5, Affirmative Action Resource Unit, Office for the Status of Women,
Equality for Women at Work: A Survey of 10 OECD Countries (Australian Government
Publishing Service, Canberra, 1985) p 22; Harish C Jain, Disadvantaged Groups on the
Labour Market and Measures to Assist Them (Organization for Economic Co-operation
and Development, Paris, 1979) p 5; Chris Ronalds, Affirmative Action and Sex
Discrimination: A Handbook on Legal Rights For Women (2 nd ed, Pluto Press, Sydney,
1991) p 12; and Department of Employment and Industrial Relations, Equal
Employment Opportunity Strategic Plan (Australian Government Publishing Service,
Canberra, 1986) p 1. For some of the debate as to whether “goals” should be equated
with “quotas” see Robert K Fullinwider, The Reverse Discrimination Controversy: A
Moral and Legal Analysis (Rowman and Littlefield, Totowa N J, 1980) pp 162-5;
Nathan Glazer, Affirmative Discrimination: Ethnic Inequalities and Public Policy
(Basic Books Inc, New York, 1975) p 48; Thomas Sowell, Civil Rights: Rhetoric or
Reality? (William Morrow & Company Inc, New York, 1984) p 41; and Alan H
Goldman, “Affirmative Action” in Equality and Preferential Treatment: A Philosophy
and Public Affairs' Reader, Marshall Cohen et al (eds) (Princeton University Press,
Princeton NJ, 1977) pp 196-7.
Freedom of Contract
51
Another interesting aspect of the progressivist impulse was its paternalistic
attitude towards the general population.48 It can be traced back to Marx’s idea of
false consciousness - the belief that since the human consciousness is determined
by the mode and means of production, and the mode and means of production serve
the interests of the ruling class, the subjective beliefs of the masses in regards to
their interests will not constitute an accurate reflection of their objective interests.49
Paternalism has become to mean a well-entrenched view that people do not possess
sufficient information - or even the very cognitive ability - to determine what is
truly in their interest, and that it is the authorities who know these interests, and are
under an obligation to see that these true interests are realized, whether or not the
individuals actually want it to happen.50
48 A good general discussions of the concept of paternalism can be found in Gerard
Dworkin, “Paternalism” (1972) 56 The Monist 64-84; Gerard Dworkin, “Paternalism:
Some Second Thoughts” in Paternalism, Rolf Sartorius (ed) (University of Minnesota
Press, Minneapolis, 1983); and John Kleinig, Paternalism (Rowman & Allanheld,
TotowaNJ, 1984).
49 Karl Marx, Preface to “A Contribution to the Critique of Political Economy” in Karl
Marx and Frederick Engels, Selected Works (Lawrence and Wishart, London, 1968) p
57; Karl Marx and Frederick Engels, The German Ideology (Progress Publishers,
Moscow, 1964) [1846] p 60. For a commentary see A Dictionary ofMarxist Thought,
Tom Bottomore (ed) (Harvard University Press, Cambridge Mass, 1983) p 80.
50 Some recent examples of paternalistic thinking in legal and public policy literature
include “Decision makers in our society impose compulsory terms because they think
buyers suffer from a number of quite specific kinds of false consciousness” per Duncan
Kennedy, “Distributive and Paternalistic Motives in Contract and Tort Law, with
Special Reference to Compulsory Terms and Unequal Bargaining Power” (1982) 41
Maryland Law Review 626 [emphasis added]; Goldring wondering whether “consumers
really want what they say, or does this want result from more or less subtle persuasion,
so that ‘wants’ become quite remote from what people would really choose, left to their
own?” per John Goldring, Consumers or Victims? (George Allen & Unwin, Sydney,
1982) p 15; “[T]here are instances when the perceived needs of the public differ from
its objective needs ... In low-level issue, the public has only the vaguest notion of what
its welfare requires” per Mark V Nadel, “Representation and the Consumer Interest” in
Consumerism: Search for the Consumer Interest, David A Aaker and George S Day
(eds) (3rd ed, The Free Press, New York, 1978) pp 63-4; “Appearances deceive. A good
affirmative action program is one that promotes organizational effectiveness by
expanding standards so that they can apply sensibly to individuals who are in some
sense non-standard ... Concerning fairness, a good affirmative action program makes
(continued...)
52
(1996) 21 Australian Journal of Legal Philosophy
This paternalistic outlook, of course, strikes at the very rationale for the
existence of the doctrine of freedom of contract - namely that an individual’s
preferences as expressed through contract should be respected, because only the
individual knows what is in his or her own best interest and no other person or
entity has more or better information to double-guess that individual and override
his or her preferences.50
51 Throughout this century the paternalistic attitude found its
reflection in numerous restrictions put on the freedom of contract, such as
compulsory terms which cannot be altered or removed by contract. This was to
guarantee that false consciousness will not make the party lose the benefits he or
she is thought to deserve.
The progressivist impulse worked, therefore, to directly challenge both impulses
that brought about the doctrine of freedom of contract. It challenged the notion of
the individual responsible for his or her own destiny, and it sought to circumscribe
the forces of capitalism by subordinating self-interest to what it deemed were
worthier emotions, sentiments and causes.
The populist impulse that emerged and came to the fore roughly around the
same time as the progressivist impulse, was largely restricted to the United States.
But it, too, did not fail to influence other jurisdictions around the world, most
notably Australia. While the progressivist impulse was to a large extent both anti­
liberal and anti-capitalist, the quarrel of the populist challenge with the nineteenth
century status quo came down to one quality: “bigness”. Politically, the populist
impulse claimed to champion the interests of the small person - small producer,
small retailer, small capitalist - protecting him or her from the conspiratorial
machinations of Big Business and Big Finance (so-called Wall Street). It was not
the capitalist impulse per se that was deemed evil but the capitalist impulse
working through the large corporations that were seen as predatory entities striving
towards market monopoly through the use of various shadowy trade practices.52
50 (...continued)
an organization more thoughtful about what exactly it wishes to recognize and reward”
per Faye J Crosby and Fletcher A Blachard, “Introduction: Affirmative Action and the
Question of Standards” in Affirmative Action in Perspective, Fletcher A Blachard and
Faye J Crosby (eds) (Springer-Verlag, New York, 1989) p 5.
51 See Kleinig op cit, ch 2.
52 While the populist impulse cannot be completely equated with the populism as an
American political phenomenon, many basic ideas and responses did originate in that
(continued...)
Freedom of Contract
53
Both the progressivist and the populist impulses were concerned with the
relative size of the contracting parties and the wider implications of such disparity.
But the populist impulse sought to restrict contractual freedom not so much
because of the negative consequences any given contract would have on the weaker
party to that contract, but because of the negative consequences the contract would
have on subsequent contracts with third parties. Thus the populist impulse aimed
at restricting various merger, price-fixing, collusion, franchise and other similar
contracts because of the belief that such contracts would have unfair consequences
for the general population; for example, the smaller players were driven out of the
market consumers would pay higher prices, etc.52
53 All the legislation in the Western
world, from the Sherman Act to our own Trade Practices Act, is the result of the
populist impulse being implemented.54
In summary, it can be said that while the progressivist impulse sought to deal
with the effects of the size disparity between the contracting parties by distributing
risks and benefits of the contract to produce what it perceived as a more equitable
52 (...continued)
specific political milieu, see Norman Pollock, The Populist Response to Industrial
America: Midwestern Populist Thought (Harvard University Press, Cambridge, 1962)
ch 1; Kristol op cit, pp 204-7; Margaret Canovan, Populism (Harcourt Brace
Jovanovich, New York, 1981) pp 17ff; Hofstadter op cit, pp 61-4; George McKenna,
American Populism (G P Putnam’s Sons, New York, 1974) passim; and Norman
Pollack, The Populist Mind (Bobbs-Merrill Company Inc, New York, 1967) pp xxviixli.
53 Eleanor M Fox and Lawrence A Sullivan, “The good and bad trust dichotomy: a short
history of a legal idea” in The Antitrust Impulse: An Economic, Historical, and Legal
Analysis vol I, Theodore Kovaleff (ed) (M E Sharpe, Armonk, 1994) pp 84-5.
54 See Donald Dewey, The Antitrust Experiment in America (Columbia University Press,
New York, 1990) pp 6ff; Marc Allen Eisner, Antitrust and the Triumph ofEconomics:
Institutions, Expertise, and Policy Change (The University of North Carolina Press,
1991) pp 22-3, 49-50; Warren Pengilley, Price Fixing Agreements: A Study of the
Economic, Legal and Administrative Objectives of Control of Horizontal Pricing
Agreements with an Evaluation of the Politics and Control of Such Agreements in
Australia (A thesis submitted to Department of Commerce for the degree of Ph D,
University of Newcastle 1972) vol II, pp 545ff; Theodore Kovaleff, “Historical
Perspective: An Introduction” in The Antitrust Impulse: An Economic, Historical and
Legal Analysis vol I, Theodore Kovaleff (ed) (M E Sharpe, Armonk, 1994); D J Stalley,
“Federal Control of Monopoly in Australia” (1956-9) 3 University of Queensland Law
Journal 258-89.
54
(1996) 21 Australian Journal of Legal Philosophy
outcome, the populist impulse was mainly concerned with actually preventing the
parties to a contract from getting into the state where their bargaining position
would be so strong as to have those negative consequences that the progressivist
impulse was trying to deal with.
The Future of Freedom of Contract
Together, the progressivist and the populist impulses made the twentieth century
a period of unprecedented legislative and judicial regulation and control of
contract. The liberal impulse was superseded by various philosophies of
collectivism and paternalism; the capitalist impulse was challenged by programs
of egalitarianism, welfarism and planning. As a result, innumerable restrictions
were placed on the parties’ ability to contract in regard to whatever subject matter
they wanted, with whomever they wanted, and on whatever terms they wanted. No
wonder that, for Professor Atiyah, the century from 1870 on was the period of the
fall of the freedom of contract. No wonder so many modern commentators have
deemed the doctrine to be of no more than a historical interest, a relic of a by-gone
era, no longer relevant in the present, different circumstances.
But is the future of the freedom of contract going to be as bleak as its fate was
over the past decades? There are strong indications that the answer is “no”. For
one, the liberal impulse is coming to the fore again, partly because of the failure of
that greatest of the anti-individualist experiments of all, communism, and partly in
reaction to the excesses of the Western systems such as welfarism, the middle way,
or group entitlements. The capitalist impulse too is getting stronger. This has
several causes: first, with the failure of radical alternatives, capitalism now seems
to be the winner in the battle of ideas; second, changes in the nature of the
economic system such as the rise of stateless or multinational corporations, the
globalization of trade, the information revolution and the rise of the Internet, all
mean that the state is increasingly losing control over economic matters.55 These
55 The bibliography on these changes is already huge, starting from now-classic works:
Alvin Toffler, Future Shock (Pan Books Ltd, London, 1971); Alvin Toffler, The Third
Wave (Pan Books, 1981) and John Naisbitt, Megatrends: Ten New Directions
Transforming Our Lives (Warner Books Inc, New York, 1984); to some of the more
interesting of the newer positions: Richard J Barnet and John Cavanagh, Global
Dreams: Imperial Corporations and the New World Order (Touchstone Books, New
York, 1995); James Dale Davidson and William Rees-Mogg, The Great Reckoning:
(continued...)
Freedom of Contract
55
changes have their own creator, champion and beneficiary in what I call the
Transnational Middle Class. Its outlook is internationalist; its domain is the
information industry; freedom, including freedom of contract, is its catch-cry.55
56
All these developments bode well for the future of freedom of contract. In a
world that is more focused on the individual, and where, almost by default,
economic freedom is becoming a norm, contractual liberty will be one of the
cherished values. Already, from the 1980s on there are signs of the slow return to
the ideal of contractual autonomy, chiefly as a result of the processes of
deregulation and labour market reform - most recently, for example, in industrial
law reforms in Australia which reintroduce the model of an individual employment
contract.57 Companies, too, faced with all the transaction costs imposed on them
by the current law, increasingly turn to private arbitration that sidesteps state
regulation.
It is, of course, all a matter of degree. Just like the nineteenth century was not
the age of an absolute freedom of contract and total laissez-faire, and the twentieth
century continued to have very strong undercurrents of the liberal and the capitalist
impulses, so the twenty-first century will not see a disappearance of various
reformist, progressive and radical impulses. It is not even a matter of public
opinion because public opinion was, is, and will continue to be largely divided.
What counts is the prevailing intellectual climate and the tenor of the intellectual
debate; this, after all, is what to a large extent determines what laws are made. And
after a century, this climate again favours the freedom of contract.
55 (...continued)
How the World Will Change Before the Year 2000 (Pan Books Limited, 1994); John
Redwood, Global Marketplace: Capitalism and its Future (Harper Collins Publishers,
London, 1993).
56 For a far from positive analysis of this phenomenon, see Christopher Lasch, The Revolt
ofthe Elites and the Betrayal ofDemocracy (W W Norton & Company Inc, New York,
1995) ch 2.
57 Workplace Relations Act 1996 (Cth).