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Freedom of Contract: or the lack of it

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Made it as a part of Introduction to Law course, no rights reserved since a lot of it is not referenced (yeah, I see the irony...)

Made it as a part of Introduction to Law course, no rights reserved since a lot of it is not referenced (yeah, I see the irony...)

Published in: News & Politics

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  • Since all contracts may have externalities, no contract should be protected by the U.S. constitution without providing for the claims of affected parties.
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  • 1. OR THE LACK OF IT Freedom of Contract
  • 2. Philosophical basis
    • Demonstrates membership of a free civil society in which citizens have autonomy.
    • Henry James Summer Maine:
      • proposed that social structures evolve from status to those based on contractual freedom.
      • Contract presumes that the individuals are free and equal.
    • Modern libertarianism:
      • Freedom of contract is an expression of the independent decisions of separate individuals pursuing their own interests in a “minimal state”.
  • 3. Favorability Doctrine
    • The party with less bargaining power given a leg up.
  • 4. Reasons for limiting freedom of contract
    • Michael J. Trebilcock, The limits of freedom of contract
    • Reasons given:
      • Commodification
      • Externalities
      • Coercion
      • Imperfect information
  • 5. Commodification
    • Slavery
    • Vote trading
    • Prostitution
    • Sale of bodily organs
    • Commercial surrogacy contracts
  • 6. Commodification
    • Even where society is committed to economic and social liberalism, there is room for debate on the scope of the market.
    • If political, legal and bureaucratic offices were auctioned off, their holders freely bribed or votes freely bought and sold, the private sphere would be massively destabilized.
    • Even John Stuart Mill, in On Liberty, argued against permitting voluntary self-enslavement
  • 7. Externalities
    • Externalities mean imposition of costs (negative); or benefits (positive) from a particular exchange transaction on non-consenting parties.
    • Almost all activities generate an externality: depends on how broadly you look.
      • "inadequate dietary or exercise regimens, excessively stressful work habits, risky leisure activities.” – cost to social welfare and public health systems
  • 8. Coercion
    • "Does this transaction render both parties to it better off, in terms of their subjective assessment of their own welfare, relative to how they would have perceived their welfare had they not encountered each other?”
    • Law + Economics approach
    • India: committing or threatening to commit any act forbidden by the penal code, or the unlawful detaining of or threatening to detain any property to the prejudice of any person with the intention of causing any person to enter into an agreement.
    • Indian Contract Act, 1872
  • 9. Coercion: Examples
    • The highwayman case: a highwayman or mugger holds up a passerby confronting him with the proposition: ‘Your money or your life’ and the passerby commits himself to hand over the money.
    • The lecherous millionaire case: A agrees to pay for a costly medical treatment of B’s child [or offers her an academic position or a promotion in the firm] in return for B’s sexual favors.
  • 10. Imperfect Information
    • Asymmetric information imperfections:
      • If one party to a contract is substantially less well informed about some aspect of the contract subject matter than the other.
      • In common law terms:
        • Fraud , Negligent Misrepresentation, Innocent Misrepresentation, Material non-disclosure.
      • Or even: standard form contracts, cognitive deficiencies.
  • 11. Imperfect Information
    • Symmetric information imperfections:
      • Doctrines of Frustration, Contract modification, Mutual mistake
      • These define the scope of permissible private or judicial adjustments to contractual relationships in the light of new information.
  • 12.
    • USA
    Jurisdictional Overview
  • 13. Contract clause of the Constitution
    • Article 1 Section 10 Clause 1 of the US Constitution:
    • "No State shall ... pass any ... Law impairing the Obligation of Contracts.“
    • Landmark judgment: Fletcher v. Peck (1810) – Supreme Court ruled that contract no matter how obtained cannot be invaded by state legislation.
  • 14. Due Process / Fourteenth Amendment
    • Landmark cases:
      • Lochner v. New York (1905): "right to free contract" was implicit in the due process clause of the Fourteenth Amendment. [case involved a New York law that limited the number of hours a baker could work each week]
      • Led to ‘the Lochner era’ lasting for almost 30 years
      • West Coast Hotel Co. v. Parrish (1937): Supreme Court took a much broader view of the government's power to regulate economic activities [upheld constitutionality of minimum wage legislation enacted by the state of Washington]
  • 15.
    • INDIA
    Jurisdictional Overview
  • 16. Indian Contract Act, 1872 - Some points
    • Illegal contracts void ab initio.
    • Protection to minors, persons of unsound mind.
    • Free consent required: consent is said to be free when not caused by coercion, undue influence, fraud, misrepresentation or mistake.
    • Certain kinds of agreements are void: in restraint of marriage, in restraint of trade, in restraint of legal proceedings.
  • 17.
    • GERMANY
    Jurisdictional Overview
  • 18. Labor law
    • Constraints are imposed by statute, collective agreement, works agreement and case law as concerns freedom of contractual content.
    • A provision in an individual contract of employment diverging from the regulation laid down in a collective agreement or works agreement is valid only if the employee thereby acquires more or improved rights.
  • 19. Labor Law
    • A provision in the individual contract may not diverge from collectively agreed provisions to the employee's disadvantage even if the employee has consented to this.
    • Subject only to a special procedure for control of contractual content by the Labour Courts.
  • 20. To Conclude
  • 21.
    • State’s role always been debatable, and although it is now accepted that it has to step in to ensure fair play:
    • Worth relooking into inefficient barriers to
    • freedom of contract.