Liberty Free Press
June 15, 2000

Freedom to Contract 
by Dr. Edward Younkins  
Professor of Accountancy and Business Administration at Wheeling Jesuit University in West Virginia and author of Capitalism and Commerce. 

A contract is a binding agreement between two or more parties that usually results in some type of performance. Without doubt, trade and commerce could not thrive if freely made agreements were not normally carried out. Contract can be viewed as a method in which men bargaining with one another can make sure that their promises will last longer than their changeable states of mind. The law of contract provides a mechanism through which private individuals can, to a certain degree, predict, control, and stabilize the future. Contracts allow people to incur reciprocal responsibilities and commitments, to make promises others can rely on, to remove some uncertainty from life, and to establish reasonable expectations for future actions. 
A function of the state, operating mainly through the court system, is to enforce performance by requiring the promisor to fulfill his bargain on penalty of fine or imprisonment or by awarding judgment against him for money damages when, without legal reason, he fails to perform. State compulsion has replaced private force, which was common in earlier time periods. State enforcement in concerns of bargain and promise can be viewed as one of the state’s most important functions behind only peacekeeping and property defense. In essence, a breach of contract is an indirect use of force. 
Contract Law’s Pragmatic Basis 
With the advent of specialization of labor, human beings created an exchange mechanism through which a man, who can produce something more efficiently than another, can exchange it for another item that he would create less efficiently than the other person. A person gives in order to receive, and this giving and receiving arrangement is frequently protected by a formal contract. 
Frequently, one or both sides to an agreement are carried out at a later date. In order for an exchange to be arranged at one point in time, with performance to take place later, the parties, rather than simply rely on one another’s honor to secure performance, normally depend upon a legally enforceable obligation to comply with the agreement. 
The contract is integral to a market economy. Think of the variety of commitments that must be honored for any firm to operate. Each of these arrangements is usually defined by contract. If most of these contracts were not carried out according to their terms, commercial transactions would be impossible. Any commercial organization consists of numerous separate activities bound into an effective whole through a collection of contracts. 
The idea that contracts are legally enforceable does not ensure performance, but does increase the probability of performance. When a party knows he may face legal action if he does not comply, he is more likely to complete his side of the bargain. In addition, if performance is not expected, the fact that a lawsuit may be brought may be sufficient to obtain an acceptable out-of-court settlement. 
Contract liability is promissory liability. In a business society, where wealth largely consists of promises, it is of paramount importance to protect the interests of the individual promisees. Promises, in the form of contracts, have become a convention whereby people are able to realize their aims by creating expectations about one another’s conduct. 

The Moral Foundation of Contracts 
In addition to the above pragmatic foundation for the law of contract, there is a moral basis for requiring a man to keep his promise. Deceit is wrong and should not be practiced. A man should do what he promises to do, particularly when his given word encourages another person, relying on that promise, to take action or make a promise to take action. 
Morality, according to Immanuel Kant, requires that a man not make an exception of himself, and that he not follow rules or engages in practices that he could not recommend to all persons. As Kant puts it in his categorical imperative, “I ought never to act except in such a way that I can also will that my maxim become a universal law.” 
Consider the case in which a businessman is deciding whether or not he should break a contract. If he were to declare the principle of his action to be a universal law such as, “Always break contracts,” or “Contract breaking is permissible,” the act of breaking contracts would be self-defeating. The first assertion logically would result in a world in which people always breached their contracts and no one kept his word. Given the second maxim, people would never know whether or not a contract would be kept, and thus the purpose of both keeping a contract and breaking one would be defeated. Successful (i.e., to one’s advantage) contract breaking is possible only when it is not made a universal law. Profitable contract breaking can only occur in a world in which contracts are normally honored. If contract breaking were universalized then business practice would become inconceivable and inexecutable. If a businessman were to advocate universal contract violation, his advocacy would be in vain. Therefore, applying Kant’s categorical imperative, the businessman ought to keep the contract except, of course, in a case in which his promise was exacted by force or fraud. Fraud is implicit theft in that it involves the failure to fulfill a freely agreed-upon transfer of property. 
The right of property includes the right to make contracts regarding that property. The right to contract is derivable from the right of private property. It follows that enforceable contracts are those in which the failure of one party to live up to the provisions of the contract implies the appropriation of property from the other party. Enforceable contracts are those supported by the authorization of legal coercion. 
Contract’s Legal Relatives 
The underpinnings of contract law can be found in the law of torts (i.e., the law of private wrongs), and to a somewhat lesser degree, property law. The law of torts, which is based on the ideas of personal accountability, causation, and   negligence, had previously granted remedies for deceit and trespass. Elements similar to deceit and trespass are present in a contract case in which a person attempts to perform some act for another and does it fraudulently or incompetently. Also, the concept of assumpsit, the complete failure to perform what a person had promised to do, was based on an analogy to tort law. In addition, in the still older law of property, we discover the phenomenon of an obligation, created by recorded and sealed deed, recognized in both religious and lay courts. We find here a situation in which a promisor conveys, by deed, a thing of value to the promisee. 
The corporation logically grew out of the idea of contract. A voluntary association of human beings bound together in order to attain a purpose is the basis for the existence of a corporation. Corporateness is an inherent right common to all men and grounded in the principles of freedom of association and freedom to contract. Corporate stockholders, managers, and workers have a common interest in a corporation’s survival and prosperity. The corporation can thus be viewed as a nexus for a set of contracting relationships among these and other individuals. 
A corporation involves a set of bilateral and multilateral agreements with parties such as workers, unions, managers, stockholders, customers, bankers, suppliers, retailers, creditors, etc. These individuals enter into contracts with the firm in which they agree to trade value for value. 
From Status to Contract 
Contract law is a key component of a free society. Contracts involve a trade-off of flexibility for security and the voluntary assumption of mutual obligation and commitment. Through contract, a participant in civil society is differentiated from the atomistic individual. 
Autonomous human beings have the rational ability and natural right to make their own life choices. A necessary condition of acting autonomously is the possibility of freely making mutually binding agreements. Autonomy thus requires freedom of contract. Better connections between persons can be made by contract, which works to mutual benefit, instead of through coercion, which does not. 
Although a contract may appear to be the subordination of one man’s will to another, the former gains more than he gives up, as does the latter. In a free society, the only transactions people engage in are positive-sum ones in which both parties believe they will benefit. 
Historically, the rise of contract within Western civilization reflected the disintegration of a status-determined society. Contract became a tool of change and self-determination, an instrument of peace, and the only legitimate means of social integration in a free society. Progress depends on protected property rights and the confidence that contractual obligations will be honored. 
Sir Henry Sumner Maine, the nineteenth-century legal historian, wrote that progressive societies exhibit a development from status-bound roles to those founded more and more on contractual freedom. Whereas a status system establishes obligations, conditions, and interrelations by birth, contract regards individuals as free and equal moral agents developing their own bonds with others. In a free society, there is high degree of social mobility and freedom to associate in response to current and expected future needs. Social arrangements are a result of the independent decisions of separate individuals pursuing their own interests, rather than by a central powerful authority such as the state or the Church.   
In Western society, with the steady dissolution of castes, social classes, guilds, ethnic cultures, and so on, human resources have become more available to organizers in business and other associations. Organizers compete for the best managerial and non managerial employees, and with the freedom of association present in the era of contracts, it is possible to create successful organizations despite some interference by the state.  

Freedom to Contract Promotes Progress 
In her 1998 book, The Future and Its Enemies, Virginia Postrel explains that, by treating individuals as free and equal generic units, contract permits people to create arrangements far beyond the plans of any grand designers. Only by treating individuals in this manner can over-arching rules allow people to use their own knowledge, express their individuality, and take advantage of their own ideas by joining them and their property in various unanticipated ways. When people cannot make binding, enforceable commitments, dynamic progress is severely hampered. The idea of contract fosters progress by encouraging specialization and allowing an extended order to develop. Postrel also points out the especial importance of well-functioning legal systems when strangers interact in commercial and other situations. In addition, she notes that the goal of contract law is not to inspire legal suits but to settle or avoid them. Well-known rules that eliminate ambiguity make it more likely that promises will be kept. 
In order to be invaluable to businessmen and other members of a free society, the contract must be a tool of virtually unlimited adaptability. To achieve this, the legal system must minimize the formality necessary for contractual transactions. It can do this by permitting freedom as to the form and content of contractual arrangements. Contracts have been rewritten through prior restraints (e.g., rent control, minimum wage laws, and interest rate ceilings) and subsequent nullification of contract terms. Legislators and judges should refrain from substituting their own judgments in cases where they believe there is unequal bargaining power or where they think that certain contracts are not in the “public interest.” Contract sanctity is paramount. Such a free contract system encourages dynamic processes and technological achievements by permitting entrepreneurs to quickly and flexibly experiment with new ways of satisfying wants. 

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