In economics, freedom of contract has been studied in the field of contract theory. According to Coase`s theorem, freedom of contract is advantageous if there are no transaction costs. If two reasonable parties voluntarily enter into a contract, they must be better off (at least weakly) than without the contract. The parties agree to a contract that maximizes the total surplus they can generate. Therefore, restrictions on the class of binding contracts can only reduce the overall surplus. However, banning certain contracts can be beneficial if transaction costs are incurred. For example, Spier and Whinston (1995) have shown that non-performance of a contract between two parties may be desirable if the contract has negative externalities on a third party (which does not participate in the contract because of transaction costs). [3] It has also been argued that the presence of asymmetric information may make restrictions on contractual freedom desirable, as such restrictions may prevent ineffective bias due to signalling and filtering. [4],[5] Similarly, restrictions on freedom of contract can increase welfare when transaction costs are incurred due to moral hazard issues. [6] In addition, it may be desirable not to enforce certain contracts when agents are subject to cognitive biases. [7] Finally, an important question is whether contracting parties should be free to restrict their own freedom to amend their treaty in the future.

Schmitz (2005) and Davis (2006) argue that it may be advantageous not to apply non-renegotiation clauses in contracts. [8],[9] Henry James Sumner Maine proposed that social structures evolve from status-derived roles to roles based on contractual freedom. A status system establishes obligations and relationships through birth, but a contract presupposes that individuals are free and equal. Modern libertarianism, as advocated by Robert Nozick, sees freedom of contract as the expression of the independent decisions of distinct individuals pursuing their own interests in a “minimal state.” The Supreme Court applied the doctrine of freedom of contract sporadically over the next three decades, but generally confirmed that reformist legislation fell within the police power of the states. In 1937, the Court changed its mind in West Coast Hotel Co. v. Parrish. In that case, the court upheld a Washington state law that set a minimum wage. Faced with this abuse of power – of the strong against the weak – using the fine print of conditions – the judges did what they could to stop it. They still had the idol before them, “freedom of contract.” They always knelt down and worshiped him, but they hid a secret weapon under their coats.

They used it to stab the idol in the back. This weapon has been called “the true construction of the treaty.” They used it with great skill and ingenuity. They used it to depart from the natural meaning of the words of the exception clause and to impose on them a tense and unnatural interpretation. On a case-by-case basis, they said that words were not strong enough to absolve the big society of responsibility; or that the major group could not avail itself of the exemption clause in the circumstances. If a ship deviates from the contractual voyage, the owner cannot invoke the exemption clause. If a storekeeper stored the goods in the wrong warehouse, he could not pray for the limitation clause. If the seller supplies goods of a different nature from those contractually agreed, he cannot rely on an exclusion of liability. Where a shipowner has delivered goods to a person without producing the bill of lading, he cannot avoid liability by invoking an exception clause. In short, whenever general terms – in their natural sense – led to an inappropriate result, judges dismissed them as contrary to the main objective of the treaty or reduced them in order to achieve a reasonable result.

This is illustrated by the following cases in the House of Lords: Glynn v. Margetson & Co. [1893] A.C. 351; London and North Western Railway Co. v. Neilson [1922] 2 n. Chr. 263; Cunard Steamship Co. Ltd. c. Buerger [1927] A.C. 1; et Canada Steamship Lines Ltd c.

The King [1952] A.C. 192 et Sze Hai Tong Bank Ltd.