Freedom of contract declares that individuals may legally enter into contracts. It is a legal notion that upholds contracts willfully established by two parties. Freedom of contract embraces two similar but unique ideas:

  • Contracts are created when two parties agree upon something.
  • Contracts are created willingly and without any intervention from the government or court system.

What Is a Contract?

A contract is a legal document that outlines details of an agreement between two or more parties for the exchange of services and/or goods. It clearly states the agreed-upon conditions and cannot be altered for any reason other than what is listed in the document. Trade and commerce cannot prosper without the willful execution of such agreements.

Contract law allows private citizens to foresee, regulate and maintain the future to the best of their ability and knowledge. Contracts obligate both parties to perform the services or provide the goods according to the specified criteria so long as the contract is valid.

The state court system is designed to make sure all parties involved fulfill the duty or role outlined in the contract. If one party violates the conditions in the contract, the courts have the right to fine or imprison this party or to award the other party monetary damages.

In these cases, rather than the parties settling the matter privately, the state court system is helping to resolve conflicts between parties. When one party violates a contract, this is known as a breach of contract. The injured party can sue the breaching party, and the court can help settle the dispute peaceably.

Freedom of Contract Law

Freedom of contract gives people the right to make private commitments to one another when they do not agree with society's standards. The government, or any other outside source, cannot hinder a contract. 

The belief that the parties are to rightfully fulfill their obligations combined with the decision to settle all disputes out of court is the basis of global business transactions.

Freedom is described as the mutual decision to enter into a contract and how it should be written. Parties are free to draft their own contracts that are specific to their business transaction, as long as they do not involve illegal activities or include unfair terms.

However, state law may limit parties' freedom to create their own contract based on how it is written. Contracts including wording that limit or dismiss the fair treatment of either party are not of good morals. These kinds of contracts are automatically dismissed. 

Restrictions on Freedom of Contract

State and federal law governs freedom of contract and may place restrictions on the following:

  • The level of damages that can be awarded to the injured party
  • The length of agreements
  • The ability to exclude or limit liability

Restrictions on Damages

There are some countries, including England, that mandate any damages recovered from a breach of contract or other commitments should be limited to the actual level of damage or loss suffered.

A contractual clause, such as a liquidated damages clause in a development contract, that tries to set a limit on the level of damage in certain instances is invalid if the level of damage is more than the original estimate. In such cases, the court must determine an actual level of damage.

Restrictions on Contract Length

If the rules, regulations, and procedures are consistent with the infrastructure project, current laws stating the length of the contract or the time that public assets can be let to a private business need to be considered. A governing country may also want to place limits on the ability to make barriers for projects. Other items to consider in this regard include the following:

  • Are there restrictions on the parties' choice to decide on termination rights and procedures?
  • Can the length of the agreement be extended in certain situations?
  • Are the parties allowed to choose to agree on a payment arrangement in the case of a termination?

Restrictions on Limiting or Excluding Liability

Several authorities have direct clauses in their laws that state to what extent a party may limit its responsibility in the event of death, injury, or property damage. These clauses are designed to protect the public.

Make sure you understand these restrictions before writing a project agreement. An agreement can become invalid when it tries to exceed the allowed limits.

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