Independence of contract and purity of contract are the central ideologies

“Independence of contract and purity of contract are the central ideologies” Discuss

Introduction:

In this assignment the statement “Freedom of contract and sanctity of contract are the dominant ideologies. Parties should be as free as possible to make agreements on their own terms without the interference of the courts or Parliament and their agreements should be respected, upheld and enforced by the courts” will be discussed.

According to Salmond “a contract is an agreement creating and defining obligations between the parties”. “Freedom of contract is a judicial concept which holds that contracts are based on mutual agreement and free choice. Henry James Sumner Maine proposed that social structures evolve from roles derived from status to those based on contractual freedom. A status system establishes obligations and relationships by birth whereas 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 in a minimal state.” 1

“Sanctity of Contract is a general idea that once parties duly enter into a contract, they must honor their obligations under that contract. Whereas, efficient breach theory is that parties should feel free to breach a contract and pay damages, so long as this result is more economically efficient than performing under the contract.” 2

The freedom of contract involves two main elements:

(1) Every person is free to enter into a contract with any other person they choose.

(2) Every person is free to contract on any terms they want.

According to the view of Sir George Jessel in 1875 in Printing and Numerical Registering Co. v Sampson (1875) LR 19 Eq 462, it stated that:

if there is one thing more than another which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty in contracting, and that their contracts, when entered freely and voluntarily, shall be held sacred and shall be enforced by the Courts of Justice.

1 http://en.wikipedia.org/wiki/Freedom_of_contract

2 http://definitions.uslegal.com/s/sanctity-of-contract/

Essential Elements of a Contract:

“An agreement becomes enforceable by law when it fulfils certain conditions. These conditions, which may be called the Essential Elements of a Contract, are explained below.

1. Offer and Acceptance:

There must be a lawful offer by one party and a lawful acceptance of the offer by the other party or parties such as ‘X’ says to ‘Y’ will marry me? This is an offer and if ‘Y’ says yes then this is an acceptance.

2. Intention to create Legal Relationship:

There must be an intention (among the parties) that the agreement `shall result in or create legal relations. For example, an agreement to dine at a friend’ house is not an agreement intended to create legal relations and is not a contract. But an agreement to buy and sell goods or an agreement to marry, are agreements intended to create some legal relationship and are therefore contracts

3. Lawful Consideration:

An agreement is legally enforceable only when each of the parties [gives something and gets something in return-is called consideration]. An agreement to do something for nothing is usually not enforceable by law. The consideration may be an act (doing something or not) or a promise to do or not to do. Consideration may be past, present or future. But only valid considerations are “lawful consideration”

4. Capacity of Parties:

. The agreement is not enforceable by law, If any of the parties suffers from minority, lunacy, idiocy, drunkenness, and similar other factors.

5. Free Consent:

In order to be enforceable, an agreement must be based on the free consent of all the parties. There is absence of genuine consent if the agreement is induced bycoercion, undue influence, mistake, misrepresentation, and fraud.

6. Legality of the Object:

The object for which the agreement has been-entered into must not be illegal, or immoral or opposed to public policy.

7. Certainty:

The agreement must not be vague. It must be possible to ascertain the meaning of the agreement, for otherwise it cannot be enforced.

8. Possibility of Performance:

The agreement must be capable of being performed. A promise to do an impossible thing cannot be enforced.

9. Void Agreements:

An agreement so made must not have been expressly declared to be void. Under Indian Contract Act there are five categories of agreements which are expressly declared to be void. They are:

    • Agreement in restraint, to marriage.
    • Agreement in restraint of trade.
    • Agreement in restraint of proceedings.
    • Agreements having uncertain meaning.
    • Wagering agreement.

10. Writing, Registration and Legal Formalities:

An oral, contract is valid, except in those cases where writing and/or registration is required by some statute. The terms of an oral contract are sometimes difficult to prove. Writing is required in cases of lease, gift, sale and mortgage of immovable property, negotiable instruments; memorandum and articles of association of a company etc.”

Basis of contract:

Classical contract theory is closely related with freedom of contract, this theory attributes contractual obligations to the will of the parties. Classical contract theory emerged in the late nineteenth century to provide the foundation for the principles that govern the formation, performance, and enforcement of the bargain contract.4 The theory insists that the unrestricted exercise of freedom of contract5 between parties who possess equal bargaining power, equal skill, and perfect knowledge of relevant market conditions maximizes individual welfare and promotes the most efficient allocation of resources in the marketplace.

“The law of contract is perceived as a set of power-conferring rules which enable individuals to enter into agreements of their own choice on their own terms. Freedom of contract and sanctity of contract are the dominant ideologies. Parties should be as free as possible to make agreements on their own terms without the interference of the courts or Parliament and their agreements should be respected, upheld and enforced by the courts. But today the will theory has been largely discredited. It is not possible to attribute many of the doctrines of contract law to the will of the parties. Doctrines such as consideration, illegality, frustration and duress cannot be ascribed to the will of the parties, nor can statutes such as the Unfair Contract Terms Act 1977.

4 Numbers of scholars have discussed the origins of classical contract theory. See, e.g., LAWRENCE M. FRIEDMAN, CONTRACT LAW IN AMERICA: A SOCIAL AND ECONOMIC CASE STUDY (1965); see also GRANT GILMORE, THE DEATH OF CONTRACT 13 (1974) (crediting Christopher Langdell, who was appointed Dean of the Harvard Law School in 1870, with “the almost inadvertent discovery of the general theory of Contract”.); E. Alan Farnsworth, The Past of Promise: An Historical Introduction to Contract, 69 COLuM. L. REv. 576 (1969); Samuel Williston, Freedom of Contract, 6 CORN. L. Q. 365, 367 (1921)

5 The classic statement of freedom of contract is found in Printing & Numerical Registering Co. v. Sampson, 19 L. R.-EQ. 462, 465 (M.R. 1875):

It must not be forgotten that you are not to extend arbitrarily those rules which say that a given contract is void as being against public policy, because if 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 freely and voluntarily entered into shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider – that you are not to lightly interfere with this freedom of contract.

Classical contract theory’s emphasis on unrestricted freedom of contract had its roots in nineteenth century political philosophy, which declared “the end of man is freedom.” Roscoe Pound, the End of Law as Developed in Juristic Thought 11, 30 HARv. L. REv 201, 204 (1917); Morris R. Cohen, The Basis of Contract, and 46 HARV. L. REv. 553 (1933); Roscoe Pound, Liberty of Contract, 18 YALE L. J. 454 (1909);

The will theory of contract:

The will theory has, however, been revived and subjected to elegant refinement by Professor Fried (1981). Fried maintains that the law of contract is based upon the ‘promise-principle’, by which ‘persons may impose on themselves obligations where none existed before’. The source of the contractual obligation is the promise itself. But, at the same time, Fried concedes that doctrines such as mistake and frustration cannot be explained on the basis of his promise-principle. Other non-promissory principles must be invoked, such as the ‘consideration of fairness’ or ‘the encouragement of due care’.

But Fried’s theory remains closely linked to laissez-faire ideology. He maintains that contract law respects individual autonomy and that the will theory is ‘a fair implication of liberal individualism’. He rejects the proposition that the law of contract is an appropriate vehicle for engaging in the redistribution of wealth. But his theory is open to attack on two principal grounds.

Laissez-faire philosophy:

The first is that it is difficult to explain many modern contractual doctrines in terms of liberal individualism or laissez-faire philosophy. The growth of standard form contracts and the aggregation of capital within fewer hands have enabled powerful contracting parties to impose contractual terms upon consumers and other weaker parties. The response of the courts and Parliament has been to place greater limits upon the exercise of contractual power. Legislation has been introduced to regulate employment contracts and consumer credit contracts in an effort to provide a measure of protection for employees and consumers. Such legislation cannot be explained in terms of laissez-faire ideology, nor can the expansion of the doctrines of duress and undue influence, or the extensive regulation of exclusion clauses which has been introduced by Parliament. Conceptions of fairness seem to underpin many of the rules of contract law. Such departures from the principles of liberal individualism have led some commentators to argue that altruism should be recognized as the basis of contract law (Kennedy, 1976), while others have argued that the law of contract should have as an aim the redistribution of wealth (Kronman, 1980).

A second attack on the promise-principle has been launched on the ground that, in many cases, the courts do not uphold the promise-principle because they do not actually order the promisor to carry out his promise. The promisee must generally content him with an action for damages. Suppose I enter into a contract to sell you 10 apples for £2. I then refuse to perform my side of the bargain. I am in breach of contract. But you must mitigate your loss. So you buy 10 apples for £2 at a nearby market. If you sue me for damages, what is your loss? You have not suffered any and you cannot enforce my promise. So how can it be said that my promise is binding if you cannot enforce it? Your expectation of profit may be protected but, where that profit can be obtained elsewhere at no loss to you, then you have no effective contractual claim against me. Your expectations have been fulfilled, albeit from another source.

Law of obligation:

Atiyah has written (1986b) that ‘wherever benefits are obtained, wherever acts of reasonable reliance take place, obligations may arise, both morally and in law’. This argument is one of enormous significance. It is used by Atiyah (1979) in an effort to establish a law of obligations based upon the ‘three basic pillars of the law of obligations, the idea of recompense for benefit, of protection of reasonable reliance, and of the voluntary creation and extinction of rights and liabilities’. The adoption of such an approach would lead to the creation of a law of obligations and, in consequence, contract law would cease to have a distinct identity based upon the promise-principle or the will theory. This is why this school of thought has been called ‘the death of contract’ school. We shall return to these arguments at various points in this book.

My own view is that Fried correctly identifies a strong current of individualism which runs through the law of contract. A promise does engender an expectation in the promise and, unless a good reason to the contrary appears, the courts will call upon a defaulting promisor to fulfill the expectation so created. But the critics of Fried are also correct in their argument that the commitment to individual autonomy is tempered in its application by considerations of fairness, consumerism and altruism. These conflicting ideologies run through the entire law of contract (for a fuller examination of these ideologies under the titles of ‘Market-Individualism’ and ‘Consumer-Welfarism’ see Adams and Brownsword, 1987). The law of contract is not based upon one ideology; both ideologies are present in the case law and the legislation.” 6

6 Mckendrick Ewan (2003) ‘Contract Law’, Fifth Edition, Chapter-1, Page-4, Para-4, Line-5

Law of commercial transaction:

Freedom of contract, they claimed, could only survive in an economy where trust and good will existed between parties who did business. Comprehensive reforms in the law were necessary, they insisted, to channel the exercise of liberty toward cooperation and decency, and, thus, to preserve the bargain contract as the vehicle to facilitate the most efficient distribution of resources in the economy.7 In the early 1940s, the American Law Institute and the National Conference of Commissioners on Uniform State Laws8 responded to the warnings and began the process of modernizing the law of commercial transactions.9 The product of their efforts, the Uniform Commercial Code (“Code”), was enacted into law by state legislatures during the 1950s and 1960s.

Observation of the will theory:

On the view of ‘the will theory’ that a contract was the result of a real agreement between two or more parties and that such a union of wills was inherently worthy of respect; for it extended the reach of an individual’s personality and thereby tended to increase his freedom and worth in the community. The view that the essence of contract is agreement, and the essence of agreement is a union of wills, was not a new nineteenth-century conception. For as

Sir William Holdsworth has pointed out; it was clearly recognized by the lawyers of the sixteenth century. Thus in Broivning v. Beston Counsel contended in his argument that contracts it is not material which of the parties speak the words, if the other agrees to them, for the agreement of the minds of the parties is the only thing the law respects in contracts, and such words as express the assent of the parties, and have substance in them, is sufficient. Sir William Anson writing in 1882 stated his position in the controversy as follows10: “While the consensus ad idem or agreement is the ideal basis of contract, the court will assume the existence as a necessary sequence of certain overt acts of the parties.

7E. Merrick Dodd, From Maximum Wages to Minimum Wages: Six Centuries of Regulation of Employment Contracts, 43 COLUM. L. REv. 643 (1942). The modem period has been one in whicha new impulse towards regulation has gathered strength as a result of our experience of the evils towhich unlimited freedom of contract gives rise in an industrial society characterized by extremeinequalities of wealth and bargaining power and by sudden oscillations between booms anddepressions.

8 A. Brooke Overby, Modeling UCC Drafting, 29 LoY. L.A. L. REv. 645, 650-56 (providing a history of the two organizations).

9 Allen R. Kamp, Downtown Code: A History of the Uniform Commercial Code: 1949-54, 49 BUFF. L. REV. 359 (2001); Allen R. Kamp, Uptown Act: A History of the Uniform Commercial Code: 1940 – 49, 51 SMU L. REv. 275 (1998)

10 Principles of the English, Law of Contract, 2nd ed., p. 13.

Their minds must be need out of reach of a court of law, but where they exhibit all the phenomena of agreement the existence of agreement will be taken for granted.” In the latest edition of Cheshire and Fifoot on the Law of Contract the matter is put in this way: “A contracting party . . . is bound because he has agreed to be bound. Agreement, however, is not a mental state but an act, and, as an act, is a matter of inference from conduct. The parties are to be judged not by what is in their minds, but by what they have said or written or done.” Classical contract theory rests upon three fundamental propositions.11 The exercise of freedom of contract between equal parties in markets of perfect competition is the key to individual welfare and the common good.12 Freedom of contract is defined as the power to decide whether to contract and to establish the terms of the bargain.13 “We have been proud of our ‘freedom of contract,’ confident that the maximum of social progress will result from encouragement of each man’s initiative and ambition by giving him the right to use his economic power to the full.”14

“It is a presupposition of the whole economic order that promises will be kept. Indeed, the whole matter goes deeper. The social order rests upon stability and predictability of conduct, of which keeping promises is a large item.”15 Thus, the bargain contract is the manifestation of liberty in the marketplace and the vehicle to facilitate the most efficient allocation of resources in the economic order.

“Contract thus became the indispensable instrument of the enterpriser, enabling him to go about his affairs in a rational way.”16 Finally, state action “is an evil, for it can only have for its object the regulation of the exercise of rights, and to regulate the exercise of a right is inevitably to limit it.”17 Accordingly, it is the duty of government to exercise restraint and to protect the right of the individual to contract freely.

11 For an outline of the propositions that support classical contract the theory, Melvin Aron Eisenberg, The Limits of Cognition and the Limits of Contract, 47 STAN. L. REV. 211, 211-12 (1995).

12 Ryan v. Weiner, 610 A.2d 1377, 1380 (Del. 1992) (“The right of competent persons to make contract and thus privately to acquire rights and obligations is a basic part of our general liberty. This ability to enter and enforce contracts is universally of thought not only to reflect and promote liberty, but as well to promote the production of wealth.”).

13 Roscoe Pound, Liberty of Contract, supra note 2, at 455 (observing that the first exhaustive treatment of freedom of contract as a fundamental natural right did not occur until the early 1890s).

14 John Dalzell, Duress by Economic Pressure I, 20 N.C. L. REv. 237, 237 (1942).

15 RoscoE POUND, III JURISPRUDENCE 162-63 (1959).

16 Kessler, supra note 6, at 629.

17 Pound, The End of Law, supra note 2, 205 n.16 (1917) (quoting CHARLES BEUDANT, LE DROIT INDIVIDUEL ET L’ETAT 148 (1891).

By the mid-1800s, courts18 had established the fundamental principles that govern the formation, performance, and enforcement of the bargain contract.19 They created a complex system of universal rules that mirrored the propositions of classical contract theory.20 This system assumed that equal parties exist in the marketplace and that each party is competent to choose the terms upon which he is willing to be bound.

18 “It was commonly accepted that proper division of labor between court and legislature gave contracts to the court. Legal theory assigned to the court the exclusive power of declaring “law” in the sense of basic, universal, underlying principles.” FRIEDMAN, supra note 1, at 25. For an extensive analysis of the institutional differences between courts and legislatures, see David L. Shapiro, Courts, Legislatures and Paternalism, 74 VA. L. REv. 519, 551-558 (1988).

19 See FRIEDMAN, supra note 1, at 194-95 (discussing the reasons why courts “were apparently free to invent such legal rules as they deemed most just and suitable to fit the cases and classes of cases before them.”).

20 Professor Friedman has offered the following description of the system of common law rules that courts established to preserve unfettered liberty in the marketplace:

The “pure” law of contract is an area of what we call abstract relationships. “Pure” contract doctrine is blind to details of subject matter and person. It does not ask who buys and who sells, and what is bought and sold …. Contract law is an abstraction – what is left in the law relating to agreements when all particularities of person and subject-matter are removed.

Id. at 20-21. This abstraction is not what people think of when they criticize the law as being too abstract, implying that the law is hyper-technical or unrealistic. The abstraction of classical contract law is not unrealistic; it is a deliberate renunciation of the particular, a deliberate relinquishment of the temptation to restrict untrammeled individual autonomy or the completely free market in the name of social

conclusion:

“Every man is the master of the contract he may choose to make: and it is of the highest importance that every contract should be construed according to the in-tension of the contracting parties.”21 A man may make such lawful promise as he sees fit, and is only bound by the promise he has made. This necessarily follows because a contract is, in its nature, based upon the consent of the parties, and hence one can only be bound in contract by the promise to which he has assented.Finally, we can say that, parties should have right to make agreement on their own term without the intrusion of the parliament and their agreement should be respected by the court. Also “it is the responsibility of government to exercise restraint and to protect the right of the individual to contract freely.” 22 The law of contract is perceived as a set of power-conferring rules which enable individuals to enter into agreements of their own choice on their own terms. Although it has some disadvantaged that is illegality and unfair agreement. It is not possible to attribute many of the doctrines of contract law to the will of the parties. Doctrines such as consideration, illegality, frustration and duress cannot be ascribed to the will of the parties, nor can statutes such as the Unfair Contract Terms Act 1977. Finally we can say that only legal and fair agreement should be respected by the court or parliament and party should make contract on the based of legal and fair agreement & Courts should disregard the expressed intention of the parties only in extreme cases and with great caution, but that it is sometimes beneficial to do so seems certain.

21 Clarke v. Watson (i865) i8 C. B. R., U. S. 278.

22 Pound, the End of Law, supra note 2, 205 n.16 (1917) (quoting CHARLES BEUDANT, LE DROIT INDIVIDUEL ET L’ETAT 148 (1891).

Bibliography:

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