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Freedom of Contract: A Bedrock of Freedom

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Freedom of contract used to be understood as a cornerstone of civilization and a crucial element in economic progress. The Constitution’s Framers included in Article 1, Section 10, a clause stating that Congress was forbidden to enact any law impairing the obligation of contracts. And in the Civil Rights Act of 1866, Congress included the freedom to enter into contracts among the rights that were to be protected against state action.

However, owing to the malign influence of Progressivism and its abhorrence of individual rights, today the freedom to enter into contracts — or to decline to — has been badly circumscribed. What freedom remains is being whittled away steadily by officials who want control over the lives of others.

A case arising out of an ordinance passed in Seattle is illustrative of the trend.

On January 1, a new law took effect there, mandating that landlords rent available apartments to the first prospective tenant who meets “all the screening criteria necessary for the approval of the application.” Under Seattle’s “first in time” rule, landlords cannot see if several people apply and then choose the one they prefer. If a landlord were to do that, he would now be guilty of an “unfair practice” and subject to both city fines and suit from any aggrieved renter.

That law continues and extends the politicization of the housing market, with government officials exercising their coercive power and turning landlords into vassals. It does so by depriving landlords of their freedom of contract. They are compelled to enter into a contract with someone with whom they might not want to enter into a contract.

The first thing a student learns about contract law is that to form a contract, voluntary consent is needed from both parties. Under the common law, prospective sellers had a perfect right to say “no” to any offer, just as prospective buyers had a perfect right not to make an offer. If common law still prevailed in Seattle, landlords would be free to decline to rent to someone for reasons sufficient only to themselves: because the person looks unreliable; because the person smokes, because the person is wearing a Make America Great Again cap, and so on.

And that right would be symmetrical with the right of all prospective renters to look at the properties available on the market and pass any of them by for reasons of their own: because the apartment is not in a good-enough area; because other tenants look unpleasant; because the owner wears a Make America Great Again cap, and so on.

Note that whether outside parties might regard either side’s reasons for not wanting to contract good or bad (invariably called “discrimination” these days) is irrelevant. In a free society, people are entitled to peacefully act or not act according to their own beliefs and values.

The common law also disallowed any use of coercion to make a person enter into a contract. If a purported contract had been procured by threats or violence, it was not a contract at all. Thus, if a renter who wanted to rent a vacant apartment used threats of violence to force a landlord to rent a unit, the law would treat the resulting “agreement” as having no legal force. But here, Seattle uses the threat of government force to make landlords obey its commands to rent to the first applicant. Morally, that is every bit as objectionable as an individual’s use of threats to get his way, but, being a government, Seattle’s city council presumes that it can get away with it.

Sad to say, there is little left of the common law of contracts in the United States. Governments have been dictating to people how they must contract for many decades, and recently they have even taken to punishing people for choosing not to make a contract.

Challenge

At least there is hope that Seattle will not get away with its further destruction of freedom of contract. Its law is being challenged in court by a family that wants to preserve what’s left of their contractual freedom.

MariLyn Yim and her husband own one duplex and one triplex in Seattle. They and their three children live in a unit of the triplex and rent the other two. They do not want to give up the right to choose which tenant will move in and live next to them. Compatibility and safety are of great concern to them. The Yims state in a March 9 press release by the Pacific Legal Foundation, “We are, literally, mom-and-pop property owners renting out our home to make Seattle affordable for our family…. We aren’t corporate landlords sitting on large capital reserves or with hundreds of rentals to spread our risk. One bad tenant could take us years to recover from financially.”

Pacific Legal is representing the Yim family and other plaintiffs in a suit challenging the legality of Seattle’s “first in time” mandate. Their argument is that the ordinance violates Washington’s state constitution, specifically its provision that private property may not be taken without payment of just compensation.

Pacific Legal’s attorney handling the case, Ethan Blevins, argues, “By telling landlords, including mom-and-pop property owners, that they have basically no say in who can live in their rental units, Seattle is stripping them of a fundamental right…. This amounts to a taking of private property rights and government can’t do that without reimbursing the property owner.”

I hope the plaintiffs and PLF triumph in the case, but notice that they are not bringing the case under the theory that Seattle has violated the rights of the plaintiffs to freely enter into contracts, but rather under a takings theory. That choice is regrettable because the city isn’t actually taking the property of landlords for some public use; what it is doing, rather, is dictating to them how they must contract with would-be renters. That is what ought to be the central issue in the case.

The city’s aggression here lies in its abrogation of the most fundamental right of any contracting party, namely the right to say “no.” But like so many other cases of government coercion to deprive individuals of freedom of contract these days, the defense against it is not based on the right of each person to make or decline to make contracts according to his individual values, but under some other legal theory.

The wrong rights

What has happened to the law of contract in America?

The Constitution does have a provision (in Article I, Section 10) declaring that states may not pass laws that “impair the obligation of contracts.” The Contract Clause, however, has been rendered almost a dead letter by generations of legal decisions saying that government may indeed impair contracts (i.e., rewrite them so as to benefit one party) if the law doing so can be said to somehow protect the health, safety, or morals of the people under state “police power.”

Those “police power” exceptions, however, have become so numerous that they almost entirely swallow the rule. (For an excellent exposition of that, I recommend a 2016 book, The Contract Clause: A Constitutional History, by James W. Ely Jr.) That trend began in the 19th century and reached flood stage in the 20th, especially during the New Deal era.

One of the key decisions of the Supreme Court was Home Building and Loan v. Blaisdell (1934), where it upheld a Minnesota law that tore up mortgage contracts by protecting people who hadn’t paid from being evicted under the terms of the agreement. Minnesota’s statute obviously impaired the contract by changing a key term, but Chief Justice Charles Evans Hughes and a majority of the Court held the law valid. He acknowledged that emergencies do not create new governmental power under the Constitution, then proceeded to create a vague, multi-part test for when they do.

In dissent, Justice George Sutherland wrote that the majority opinion carried the ominous potential for “future gradual but ever-advancing encroachments upon the sanctity of private and public contracts.” Never was a jurist more right.

U.S. courts have sometimes decided to protect contractual freedom. The most famous case is Lochner v. New York (1905), where a majority struck down a statute putting a limit on the number of hours a baker could contract to work in a week. That case, however, was not argued under the Contract Clause, but instead under the Fourteenth Amendment’s provision that no state may deny a citizen life, liberty or property without due process of law. Justice Rufus Peckham’s opinion held that contractual freedom to decide how many hours you want to work is part of the liberty protected under that amendment.

Unfortunately, using the Fourteenth Amendment to shield people against laws that deprive them of the freedom to enter into contracts as they see fit — or decline to do so — has been out of jurisprudential style since the 1930s. Today, Lochner is widely reviled by constitutional scholars because the Court alleged to have substituted its values for those of the people’s elected representatives in the legislature. But all the justices did was to keep those politicians from imposing their values on workers who wanted more hours of work than the legal maximum.

The essence of freedom of contract is that each person is entitled to act according to his own values. Unfortunately, freedom of contract has so fallen out of constitutional favor that it would be simply astounding if any court today used a Fourteenth Amendment due process rationale to strike down a law that deprives Americans (such as the Yims) of their contractual freedom.

Thus we are left with arguments that attacks on it are unconstitutional because they violate the Fifth Amendment (as in this case), or the First Amendment’s free speech or free exercise of religion clauses.  Consider another recent case in Washington, Ingersoll v. Arlene’s Flowers. The state imposed a large fine on a florist because the owner, Baronelle Stutzman, declined to contract to provide the floral arrangements for a gay wedding. The case against the legality of the state’s punishment was argued on First Amendment religious freedom grounds — unsuccessfully.

I have no reason to doubt the sincerity of Stutzman’s religious convictions against gay marriage, but the fundamental defect in what the state has done to her deprives her of freedom of contract — the freedom to say “no” to offers she does not care to accept.

Lawyers think they must hunt for First Amendment reasons to combat the spread of anti-discrimination laws because the “mere” right to choose with whom you’ll contract is no longer given any weight. What those arguments miss is the fact that contractual freedom is every bit as essential to a civilized nation as are property rights, freedom of speech, and freedom of religion.

It will be a fine day for America if we ever get back to just protecting freedom of contract straight up, for everyone.

This article was originally published in the September 2017 edition of Future of Freedom.

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    George C. Leef is the research director of the George C. Leef is the research director of the Martin Center for Academic Renewal in Raleigh, North Carolina. in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.