Generalizing Freedom of Contract

Abstract

The freedom of contract principle today permits parties to choose a contract’s substantive terms; otherwise, contract law overrides the principle in favor of regulating party choices regarding a contract’s remedy, interpretive, and modification terms -- the “procedural terms”. For example, parties can choose the form that a modification term takes but a mandatory contract law rule prevents parties from barring modifications altogether. A fundamental premise of a liberal state holds that agents should be free to pursue their projects unless a justification for constraint exists. It is this fundamental premise that supports party freedom to choose a contracts’ substantive terms. We argue here that the premise, properly applied, also supports party freedom to choose a contract’s procedural terms. fA mandatory contract law rule, in theory, functions in service of a policy, such as prohibiting excessively one-sided deals. Our initial argument against mandatory rules is that implementing a policy with a mandatory rule is unwise because these rules in actual effect function arbitrarily: they bind only unsophisticated or occasional players while sophisticated parties use adroit contracting strategies to avoid the rules’ impact. Our second argument supposes that mandatory rules are generally binding but shows that, even so, moral and economic theory both fail to support the procedural constraints. There is a divide in the contracts literature, and increasingly among courts, between moral and economic views of contract law. Most moral views support constraining the parties’ choice of the procedural terms while the economic view, in contrast, supports reducing the constraints to defaults or repealing them. We dissolve this so far intractable divide by showing that deontic moral theories also support extending the freedom of contract principle to include party choice regarding the procedural terms. Our third claim brings the economic case up to date by showing that economic contract theory supports the same extended view of contractual freedom as the classic economic view. Finally, we move beyond the current state supplied contract law to sketch a limiting case for freedom of contract: a commercial world in which parties could create their own contracting regimes in lieu of the current state regime. Our argument that parties should be free to choose procedural terms has wide ranging implications. The law’s mandatory rules bind everywhere, reducing party freedom to contract regarding property, corporations, finance, and elsewhere. Reducing these rules to defaults thus would increase the fairness and efficiency of business law generally.