Freedom ofContract: A New Look at the History and Future ...

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

*• 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, Prof Alan Fogg, Linda Haller, Peter Butler and David Morrison for their suggestions, help and encouragement. All the mistakes remain the author’s.

1 Printing and Numerical Registering Company v Sampson (1875) LR 19 Eq 462, 465.2 Manchester, Sheffield and Lincolnshire Railway Co v Brown (1883) 8 AC 713, 716.3 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 Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition (Juta & Co, Cape Town, 1990) p 577 [emphasis in original].

5 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 Max Weber, The Protestant Ethic and the Spirit of Capitalism (Charles Scribner’s Sons, New York, 1976) p 17.

7 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.


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 antisocieties 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.


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 of society 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.


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 of Legal 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 of Athenian 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.


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, 3069, 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 of Ancient History (Macmillan, London, 1893) pp 193-205; specifically Fritz Schultz, Principles of Roman 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

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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 of Medieval 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.


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 of Politics 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 of Dictatorship and Democracy: Lord and Peasant in the Making of the 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.


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 lawmaking 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 of Money: 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 (McGraw- Hill 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,

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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 of English 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 of Social 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).


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).


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-Century- Crofts, 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).


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 Chen- Wishart, 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 of Legal 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.


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.


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 of Marxist 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

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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 antiliberal 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...)


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 xxvii- xli.

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 of Economics: 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.


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:

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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 of the Elites and the Betrayal ofDemocracy (W W Norton & Company Inc, New York, 1995) ch 2.

57 Workplace Relations Act 1996 (Cth).

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