6.2 Essential assumptions in a contract 6.3 Critical review of assumptions 6.4 Conditions in the changing society 6.5 Contract in changing society 6.6 Concluding remarks
6.1 INTRODUCTION
According to Sir Henry Maine the progressive society has developed from status to contract. Friedman took this argument further by stating that “as against a legal status determined by ties and conditions outside personal decisions, contract allows the individual to change his country or employment” (Law in the changing Society, 1996). A feudal Society of serfs and slaves was a static society where things used to be determined by status of the individual. In order to evolve a progressive society an ideological conflict was inevitable, which we find evident in the American civil war when South tried to defend a farm society of serfs and slaves and the North aspired for a free economic society to develop commerce and industries.
According to a section of sociologists the domination of caste and class in Indian society, is a point in evidence of Indian society being backward, static, immobile and feudal. A mobile society always aspires for change and progress. It demands freedom of every individual being to determine his/her course of action.
6.2 ESSENTIAL ASSUMPTIONS IN A CONTRACT A contract-society is one which is based on certain essential assumptions. Some of these basic assumptions are:
1. Equality of status — Unless there is a freedom of contract an individual does not have the liberty of determining his economic destiny through the contractual process. Thus, equality and freedom of contract are interchangeable assumptions of a contract society. Friedman opined that lack of freedom, to make or unmake a contract, or to bargain on his terms, also implies lack of equality (1970 - 93). In a contract society the fundamental issue, therefore, is that each party to the contract must be equal to the other party in so far as his or her bargaining ability and stipulating terms are concerned. It is, therefore, necessary that there shall be no social or political restraints which may stand in the way of individual contractors to assume a position of equality. According to John Stuart Mill every human being has the right to determine what he should do and what he should not do. Bentham in his Utilitarian thesis explained the contractual ability of a person through his/her relative understanding of marginal utility of the fruits of his action. The Constitution of India has guaranteed this right to equality in so far as dealings of the state with the citizens is concerned.
Ofcourse this concept of equality has undergone several
6. CONTRACT IN THE CHANGING SOCIETY
interpretations in an open market and a socialist economic transactions. But the basic issue of equality of the parties and their right to determine terms and conditions in the contract on different considerations, specially the economic consideration of transaction costs, is presumed in democratic functioning of the state.
2. Freedom of choice — Economists are of the view that essential conditions of success in a contract society depends upon its market conditions. A market which cannot be determined either by an individual buyer/seller achieves perfection of a contract society. Such a market condition therefore essentially requires:
(a) alternate actions; and (b) freedom of choice. A buyer may be compelled to buy a thing at a dictated price because of the absence of either of the conditions or both. Such a structure leads towards the status, more than the ability. This is an anti-thesis to a contract society.
3. Free exchange — Contract envisages exchange through volition. The concept of exchange has of course undergone a systematic change from the days of barter-economy to the present days of money economy. Presently exchange is circuitous i.e., commodities/services are exchanged for money, and money in turn is exchanged for commodities/services. Any regulative mechanics preventing exchange either in the stage for money or for goods tends to create an obstacle to the development of a contract society.
6.3 CRITICAL REVIEW OF ASSUMPTIONS
1. Equality — A contract society is growingly made equivalent to capitalism, whereas, a regulated society is termed as socialistic. This political overtone on economic relations may not always signify the truth. In a capitalist society of high industrial growth, the equality of bargaining between an employer and employee becomes a myth, specially in the context of populace developing countries. (In any country number of employers are less than the number of employees seeking jobs.) However, employees uniting themselves may strengthen their bargaining capacity; and so may the employers unite themselves to create a monopoly. In several countries anti-monopoly or anti-trust laws prohibit any attempt of creating monopoly and cornering of the market. The same logic is now growingly used against the state action of allowing trade unionism. If the state does not allow trade unionism and also does not stipulate the minimum wages, the inequality of status in fact between the employer-employee especially in the developing world will reduce the wages to be paid to the employees to sub human levels. It would further encourage the unethical competition of wage reduction between existing employees and unemployed people (the unemployed persons in their eagerness to become employed, would be willing to accept very low wages, and, the employers would be in a position to exploit this situation to their own advantage, paying scant regard to the rights of the employees). It is true that in a democratic country with a free economy the state has to confine its role in regulating activities
by — (1) recognising all players; (2) ensuring the rule of the game; (3) seeing that all possible unevenness in playing conditions are avoided; and (4) strictly policing so that none can disturb the situation.
It is, therefore, argued that creating unevenness in the field of contract by prescription of minimum wages or payment of bonus etc amounts to disturbing the economic operations and conditions of inequality. These in fact, as argued by some, prevent employers from increasing the productivity and creating job opportunities.
Therefore two different types of arguments are clear. Firstly, that equality itself becomes a myth in economic operations like employer-employee relationship. The mere capital movement itself creates inequality in the playing conditions which the state cannot overlook. Secondly, state cannot allow the economically weaker section of its population exploited by stronger section of its population in any manner, whatever be the form of exploitation i.e., social, economic or political. Based on these two arguments, a third opinion emerges. That is, the state has to ensure minimum public welfare and a sound public policy.
The concept of contract as a vehicle of exploitation cannot be allowed in a democratic set-up.
On the other hand protagonists of colonialism argue, firstly that the state intervention in the freedom of contract violates the basic moral and political issues of democratic governance.
Secondly, it effects the efficiency of the economic system by increasing the transaction cost (one of the noble bureaucrat of recent times has attributed credit to system of slavery in rising American economy.) Thirdly, state intervention in the area of freedom of contract prevents growth and restricts employment opportunities. Fourthly, social welfare must not be confused with hard-core economic rules, which regulate the price for factors of production on demand and supply. More supply of labour would reduce the cost of labour, encourage more investment creates more job opportunities and ultimately increase the wage structure, thus, striking a balance of investment, productivity and employment.
In fact the dynamics of society revolves around this question of balancing the interests of various sections of society.
Accordingly over the years we see the change in the nature and formation of contract itself — from individual contract i.e., parties to the contract determining terms & conditions, we entered into a concept of the state regulating terms & conditions, i.e., a third party directing the conditions of contract. This brings into various forms of contract as well as principles, for example, the standard form of contract is one in which all terms and conditions are stipulated by one party either on its own (since it is in fact the powerful party) or because of the state intervention (since the state is concerned in protecting the public interest).
The other party to the contract has to submit to it. A basic principle has arisen out of this form of contract which ideally suits mass production in an industrial setup. The principle is that the seller cannot stipulate different prices for similar products to different customers. In some countries this principle is covered under unfair trade practices and in some other countries it is taken as against business ethics.
2. Choice — Freedom of choice is dependent upon many macro-level policy concerns of the state, for example, the people want more choice in motor cars, more import of machineries and technology is needed, as well as need for more roads. So where the capital of the country is limited and there are multiple needs it may be necessary for the state to regulate the capital deployment to some avenues more than the other. Necessarily, therefore, in short supply choices are restricted. In a socialist society, private satisfaction does not take a leading role specially because supply of the essential commodities is limited and free choice would lead to disaster. Free choice is possible when there are several alternatives, each having sufficient supplies and all people have contracting abilities (according to Marshall need is not demand. A person having the purchasing power and ability to go to the market and to place the order according to his/her ability for the product, is the demand). State as the friend of the people determines what is the essential need of the people, how to meet the essential need and what amount of capital is to be deployed in producing that.
In the changing society which tends to globalize economists of the free market variety, argue that state is not required to be engaged in the production and distribution level operations.
Free entrepreneurs from any part of the globe shall look after the people’s interest and design their standard of living.
According to them, choice is not merely to be free in the national context, it has to be free in the international context. The question, therefore, shall influence the building up of international transactions and regulations at the cost of the national system. The concept of freedom is itself questionable.
Even where choice is unlimited like the choice of hire and fire, raises many questions of wider interest. Some people argue that having such a policy of hire and fire only because there is an abundant labour supply can become dangerous to a country.
It may create huge unemployment which the national economy cannot absorb. It will encourage destabilization and ultimately lead to de-industrialization. Open market protagonists on the other hand argue that conditions of efficiency can only be maintained by providing freedom of choice. State interference in this area will lead to an immobile society. The question of choice has not remained an individual issue any longer. Choice involves a risk. Suppose A chooses to purchase a couple of bullocks for his cultivation it bears a risk to the life of the bullocks. It means that people having similar choice run a similar risk. In modern times this risk sharing amongst all those who have similar choice has become an essential part of the transaction. It is even absorbed in the cost of an article.
3. Free exchange — This is seldom allowed totally in any country. Lack of foreign exchange, adverse balance of payment, regulated imports, all these are evidences of restrictions imposed on exchanges. In a chronically short supply of market price regulation by the state is often practised. Restrictions on free exchanges are often recognised by the common law courts in various parts of the world. Restrictive covenants are generally held valid in sale of business good-will.
6.4 CONDITIONS IN THE CHANGING SOCIETY Friedman has mentioned four factors that are mainly responsible for transformation in the function and substance of the contract (Changing Society, p.97). They are:
(1) Localization of Industry, trade and commerce with corresponding urbanization and standardization of life.
This results in a standard form of contract or a contract of adhesion;
(2) Increasing collectivisation. This results in collective bargaining, consumer movement and various forms of interference by the state;
(3) Tremendous expansion of welfare and social service functions of the state. This results in multitude of statutory terms of contract, wide expansion of government departments for regulation and control; and
(4) Economic security aspects of contract de-emphasized in the wide range of state interference. This results in frustration of contract and extension of legal excuses for non performance.
The society is growing very fast. The above four factors responsible for transformation of the substance of contract in one direction especially in the post war free world. In the nineties we are experiencing some other factors in the socio-economic and political movement requiring transformation of function and substance of contract in the opposing direction.
They are :
(i) Globalization of market. This requires unrestricted free movement of capital which will necessarily require the dismantling of the national regulatory system and exposing the national interest to be subjective to the global regulation. It may, therefore, herald a new era of international regulations and practices influencing the national system. This will weaken the public control on terms and conditions of contract, dismantle public authorities for regulation of contracts, and reduce national authority to its police role ;
(ii) Prolific growth of Multi-National Corporations [MNCs]
and adaptation of different techniques of MNC functioning.
Transnational and multinational companies are gradually gaining ground and the days are not far off when these Trans-National Corporations [TNCs] and MNCs will take over a significant control of the economic affairs of the global economy. This will change various forms of contracts between holding - subsidiary relations and other organisational and managerial techniques. The growth of their occupation in relation to agriculture shall necessarily commercialise the whole area of land-tenancy system, production structure, seed, patenting and the like. Growing strength of these TNCs and MNCs shall weaken the role of state in contractual situations.
It will, therefore, mean de-emphasizing public interest and reduce the realm of contract as essential instrument of determining private interest ; and
(iii) Wide scale de-regulation of public control. In the last fifty years the argument of public policy and consequently the public control were built up both statutorily as well as through
judicial pronouncements. In India the activist judiciary started expanding the right to life and including in it almost everything under the sun like health, education, shelter, etc., (Olga Tellis, Mohini Jain, Asiad Workers’ case, M.C. Mehta (environment case). This has necessarily developed a system of government with a distinct policy of governance. This policy of governance can be said to be social policy of the government. As a result there have been several implications of this type of governance specially effecting the realm of contract in the following manner:
(a) Government used to regulate the terms and conditions of the contract to protect the disadvantaged groups and the interest of the public. For eg., a wage structure was imposed through Minimum Wages Act. The collective bargaining of the workers was strengthened by encouraging trade union movement, the prices were determined by a strong price policy etc.;
(b) If countries like India being predominantly agricultural formed a very strict regulatory land holding and tenancy system, any type of land alienation through contract affecting this fundamental policy was made unconstitutional and illegal.
Commercialization of land holdings was prevented at all costs;
(c) Workers and employees were considered as protective area of the state and therefore, several regulatory and welfare statutes were passed directly the employer to ensure their statutory obligations;
(d) There was a growing tendency of private agreemments being scrutinised through public law arguments. Questions like reservations were taken into the functioning of all government companies and corporations discharging only commercial functions. The concept of instrumentality of State was growingly used by the judiciary and as a result the responsibility of the state became all pervasive; and
(e) The state took the responsibility on itself to regulate control and involve itself in the capital movement and had built up a strict regulative framework through license, permissions and certification.
Consequently many public authorities were constituted to oversee the legal regime as well as its economic operations. A mixed economic model started being managed on the principle of public enterprise leadership.
Presently under the globalization scheme the whole structure of this public control mechanism is debased involving deregulation, delicensing, de public sector monopolisation, depublic control and obviously dismantling the public interest logic.
6.5 CONTRACT IN CHANGING SOCIETY
In the above paragraphs we have attempted to explain that the function and substance of contract changes with the changing society. No human society is static in nature - even ‘status society’ like a nomadic society was never static in character.
Similarly a ‘contract society’ could also develop certain static characters. This is a sociological and anthropological question and not within our realm of discussion.
Function and substance of contract in early industrial civilizations were based upon the assumptions already discussed i.e., equality of status, freedom of choice and free exchange.
But soon it was realized that all were not equal, all do not have absolute freedom of choice and liberty of exchange is also controllable. With this understanding both trade union movements and cartelisation of organisations started to wriggle out power. After all money begets power, therefore, those who were employers were more powerful. In order to counteract them, trade union movements started collective bargaining.
Initially discounted, rejected and confronted by the state, ultimately the state had to yield to the movement for the sake of promoting welfareism. Gradually welfare state started dictating terms to both the parties in the democratic setup of governance.
Prescription of minimum wages by the state which was declared as ultra-vires, was ultimately accepted as a norm of good governance. The welfare state, therefore, enforced conditions in a contractual relationship between parties in the name of social welfare, public policy and equity. Free market contracts were taken over by public distribution system contracts i.e., freedom to choose customers/sellers, commodities and price was substituted by fair price shop, rationing definite quantity at definite price. Freedom of contract is substituted by direction and order. An offer is replaced by a petition and an acceptance by license. The performance of contract became equal to execution of an order. Though the society in that welfare state did not become a society full of status in the form of capitalists and labourers, the state nevertheless brought itself within the interactive centre for capital and labour. State became essentially a friend of the people against all types of exploitation.
Prescription of minimum wages by the state which was declared as ultra-vires, was ultimately accepted as a norm of good governance. The welfare state, therefore, enforced conditions in a contractual relationship between parties in the name of social welfare, public policy and equity. Free market contracts were taken over by public distribution system contracts i.e., freedom to choose customers/sellers, commodities and price was substituted by fair price shop, rationing definite quantity at definite price. Freedom of contract is substituted by direction and order. An offer is replaced by a petition and an acceptance by license. The performance of contract became equal to execution of an order. Though the society in that welfare state did not become a society full of status in the form of capitalists and labourers, the state nevertheless brought itself within the interactive centre for capital and labour. State became essentially a friend of the people against all types of exploitation.