This paper examines the principle of freedom of contract as a foundational element of modern legal and economic systems, tracing its development through landmark U.S. Supreme Court cases such as Lochner v. New York and West Coast Hotel v. Parrish. It analyzes how government restrictions — particularly in employment and competition law — limit contractual freedom to protect vulnerable parties and prevent market abuses. The paper then applies these concepts to Vietnam, exploring how the country balances Socialist labor protections and state-owned enterprise dominance against the demands of foreign investment and free-market reform. It concludes that Vietnam must carefully calibrate its legal institutions to sustain economic growth without undermining the competitive advantages that attract international business.
The principle of freedom of contract is one of the most important legal concepts underlying the modern American legal system. In brief, freedom of contract is the freedom of willing parties to reach whatever bargain they choose when forming a contract, and their right to expect that courts will enforce that contract. Freedom of contract has become almost as fundamental to our society as the Constitution of the United States. Freedom of contract, or "liberty of contract," refers to the freedom of individuals and corporations to form contracts without government restrictions.[1]
The freedom to contract is a fundamental element of neoliberal, laissez-faire economics. Courts believe that protecting the integrity of contracts will encourage economic activity by providing legal certainty to the contracting parties. Legal certainty allows those parties to depend on the contract — trusting that certain actions will be performed — when making other plans.[2] Freedom of contract is often frustrated by government restrictions on commercial relationships, such as minimum wage laws or antitrust regulation.
Most restrictions on freedom of contract exist because of some incongruity between the bargaining power of the parties involved. An imbalance in bargaining power can affect the terms of a contract in a number of ways. Such incongruities arise either because one party is more powerful than another, or because of the nature of the objects being exchanged.
The most common restrictions on contract law arise within the relationship between an employer and an employee. The employer usually holds leverage in an employment agreement because it is selecting a provider of labor from what may be a large pool of potential workers. When the pool of available employees is large, the employer has considerable leverage in dictating the terms of the employment contract, since many other workers might accept terms favorable to the employer.
Another source of difficulty in employment contracts is the challenge of defining the parameters of the labor product to be provided. In an employment contract, one party exchanges a good for a service. Because one unit of the exchange — labor — is represented by action rather than tangible property, it is inherently incongruent with the other unit of exchange, which is a good or piece of property. Because these units are so dissimilar, it is often difficult for the person offering services to know what manner and degree of service the receiving party expects. Furthermore, it can be hard to determine what a "fair" price for the service is when the pool of potential workers is large.
Lochner v. New York is a landmark case in the area of employment contracts that pitted freedom of contract against labor protections.[3] In that decision, the United States Supreme Court held that a "liberty of contract" was guaranteed by the U.S. Constitution through the Due Process Clause of the Fourteenth Amendment. The Court struck down a law that limited the number of hours a baker could work each day and each week, finding that the labor protection statute was attempting to regulate the actual terms of the employment contract.[4] The Court characterized this attempt to regulate those terms as an "unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract."[5]
Although Lochner v. New York was influential in establishing freedom of contract as a constitutionally guaranteed right, West Coast Hotel Co. v. Parrish established that labor protections could override freedom of contract in certain situations.[6] That case involved a minimum wage law enacted by the State of Washington, which prohibited employers from paying employees a salary below a specified floor — even if the employee agreed to be paid below that amount.[7] This was a direct restriction on freedom of contract, yet the Supreme Court upheld it as constitutional, reasoning that the Constitution permitted restrictions on the liberty of contract where those restrictions are intended to protect the "community, health and safety" of vulnerable groups in society.[8]
As economies develop, some individuals will inevitably accumulate more property and power than others. This imbalance results in some parties holding greater bargaining power in contracts than others. The more powerful party typically possesses something the weaker party wants, giving the stronger party leverage to demand more favorable terms. This leverage, in itself, is neither unfair nor unexpected — supply and demand are natural economic forces. The problems arise, rather, from the way in which the stronger party chooses to capitalize on its economic advantage.
The Sherman Antitrust Act[9] requires the U.S. federal government to regulate businesses suspected of monopolistic and anti-competitive conduct. It remains the fundamental source of competition law in the United States. Following the Sherman Act, Standard Oil v. United States became the first case in which the government actively broke up the property of a private business because of the way the company had applied its bargaining advantage.[10] The Supreme Court found Standard Oil guilty of monopolizing the petroleum industry through a series of abusive and anti-competitive business practices,[11] and ordered the company to be partitioned into several independent, competing firms.[12]
The Federal Trade Commission is the government agency responsible for enforcing and promulgating federal competition law.[13] The agency is tasked with protecting consumers and preventing anti-competitive business practices such as monopolies or other situations where powerful businesses abuse their bargaining power when dealing with consumers or smaller competitors.[14]
"MOLISA regulations and Vietnam's labor law framework"
"SOEs, market dominance, and trade protectionism concerns"
Vietnam is undergoing a challenging transformation from a Socialist economic backwater to a dynamic free-market economy. It has had to dismantle its old legal framework and replace it, piece by piece, with Western-inspired legal institutions in order to attract the foreign investment that is so essential to its growth. However, it must be careful not to apply these legal institutions too hastily, or it risks stifling the very growth that these institutions are meant to support.
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