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Chapter VIII
Contract Laws
8.1 Definition Of A Contract
Thou shalt not take thy brother’s garment; thou shalt pay for that which thou shalt receive of thy brother. (D&C 42:54)
Now if a man owed another, and he would not pay that which he did owe, he was complained of to the judge; and the judge executed authority, and sent forth officers that the man should be brought before him; and he judged the man according to the law and the evidences which were brought against him, and thus the man was compelled to pay that which he owed, or be stripped, or be cast out from among the people as a thief and a robber. (Alma 11:2)
A contract is a promise or a set of promises which courts will enforce. It is an agreement which government will either compel the parties to perform or pay damages if they fail to do so.
When a party claims that the agreement he has made is enforceable, he has the burden of proving first of all that it is of the kind which society considers legally binding. In many instances we do not intend that our agreements have legal consequences; therefore, the courts refuse to give them this effect. Social engagements are of this nature. The plaintiff must also show that he gave, or promised to give, some legal right in exchange for the promise he is trying to enforce. Unless he gave what is termed “consideration,” or “legal detriment,” to the other party, he cannot recover. Courts will not enforce the mere promise to make a gift.
But even though plaintiff proves the existence of the agreement, that it is of the type which is enforceable and that he gave consideration, he still may not be able to enforce the promise made to him. The defendant may raise any one of the following defenses: (1) That the agreement was the result of a mistake, misrepresentation or duress; (2) That he, the defendant, is excused from liability by the law because he was a minor or a mental incompetent at the time the agreement was formed; (3) That the contract is of the type which the law demands be written and this one is not; (4) That the purpose of [p. 96] the agreement is to commit a crime and is therefore illegal and unenforceable.
8.2 Purpose Of Enforcing Contracts
Man’s unalienable rights to the elements of freedom may be divided into two categories: (1) Natural, and (2) Acquired. Natural rights are those with which we are born. They entitle us to protection by imposing upon all others the duty to refrain from injuring our life, liberty, property and knowledge. These rights are protected by the criminal and tort laws. Acquired rights are those we obtain by making agreements with others. They are protected primarily by the law of contracts.
We enter into contracts for the purpose of acquiring from another the right to compel him to give us something which will enable us to accomplish our purposes or exercise our freedom. To acquire such a right, we must in turn give him the right to compel us to do something which will aid him in the exercise of his freedom.
Contracts are enforced to give these reciprocal rights substance. Were this not done the rights would not exist. The promises made by the parties would depend entirely upon the whim of the promisor. It is their enforcement which turns them into acquired rights.
8.3 The Importance Of Rights Acquired Under Contract
Contracts are so common in our lives that it is easy to fail to see their importance. Virtually the entire time we spend in our occupations is devoted to fulfilling contractual obligations owed to others. The balance of our time is largely spent enjoying the benefits of contractual rights acquired from others. If we are employed, our productive time is used discharging the duties assumed under the employment contract. If we are self-employed we are engaged in producing goods and services we have contracted, or will contract, to sell. Upon receiving our wages or the selling price of what we produce, we use the money to make contracts for the purchase of goods and [p. 97] services produced by others. There are very few activities which are not directed toward the discharging of contractual obligations or the enjoyment of contractual rights.
This situation is a consequence of the very extensive division of labor in our well-developed economy wherein we consume very little of what we produce and produce very little of what we consume. Each man specializes. He learns a particular vocation, develops his skill, acquired the facilities necessary for mass production and then produces in quantity for sale.
But let it be observed that this division of labor with the enormous advantages and benefits derived therefrom, depend entirely upon freedom of contract. Take that away and each man is under the necessity of building his own home with materials prepared by himself, weaving his own cloth and making his own clothing, raising and preparing his own food and building his own automobile.
The importance of contractual freedom is better seen if we consider what other freedoms would remain if this one were denied. The right of private property lies at the foundation of all other freedoms and under circumstances which prevail today, freedom of contract is the very heart and soul of the right of private property. To the extent it is restricted the freedom to acquire from others those goods and services we need to accomplish our purposes is restricted. The necessity of this freedom was stated by George Jessel in these words:
If there is one thing more than any other which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that contracts when entered into freely and voluntarily, shall be held good and shall be enforced by the courts of justice. (Printing and Numerical Registering Co. v. Sampson, 19 L.R. Eq. 462, 465)
The importance attached to the contract obligation by the Founding Fathers is indicated by the following Constitutional limitation which they placed on the power of state governments to deny the rights represented by such obligations:
No state shall ... pass any ... law impairing the obligation of contracts. (Art. I, Sec. 10) [p. 98]
8.4 The Limit On Freedom Of Contract
The limit on the freedom to make contracts and act jointly towards a common purpose is the same as the limit on the freedom to act alone: It shall not be used to commit crimes. Projects undertaken by two or more people with an evil intent are obviously more dangerous and harmful to society than those undertaken by the individual and must be forbidden and punished. The test as to what constitutes an evil intent is the same for those who act in concert as for the man who acts alone: Was it their design to injure the elements of freedom by doing to others that which they knew would be wrong and harmful if done to them?
8.5 Natural Limits On The Power To Deny Freedom Of Contract
Just as it is wrong for the citizens to abuse their freedom of contract by committing crimes, even so it is wrong for government to abuse its power to deny freedom of contract by committing crimes. The limit of the power of government to punish group behavior is identical with its power to punish individual behavior: It shall not punish any acts except those committed with an evil intent. When it does so, rather than punishing a crime it commits one.
When people act in concert either for good or evil, their capability to accomplish their purposes is increased immeasurably over the sum total of their capabilities when acting alone. Therefore just as it is imperative for government to forbid its citizens to enter contracts to do evil, it is equally needful that it leave them free to enter contracts to accomplish good. To prevent men from entering into agreements to promote their mutual interests is to deny them that freedom which is the most effective of all — the freedom to cooperate. They can achieve their respective goals with infinitely greater ease and promptness if left free to make exchanges and coordinate their efforts. Unfortunately, governments are continually adopting laws which deny their citizens this freedom. Let us consider some of them. [p. 99]
8.6 Denial Of Freedom Of Contract By Punshing Only One Of The Contracting Parties
Except for those which forbid evil conduct, virtually all laws which deny freedom of contract permit only one of the two contracting parties to be punished for violating them. The party singled out for condemnation is always the one against whom there exists a prejudice in our society today. He is the capitalist, the employer, the manufacturer, the seller, the lender. He also just happens to belong to the economic interest with the least number of votes. Whenever he makes an agreement, his motives are presumed to be evil. He wants to pay the lowest wage for the most work; charge the highest price for the cheapest product; obtain the largest return on the smallest investment. The motives of the other party to the contract are always above reproach. All he wants is the highest wage for the least effort; the best product for the cheapest price; the biggest loan at the lowest interest rate. These feelings are common to all of us and so they cannot possibly be evil and punishable. To see clearly the injustice of laws which destroy freedom of contract, and to correctly appraise the enormous harm they cause, it is necessary to remove this prejudice which obscures our vision.
Let us do so by assuming that such laws provide for punishing the employee rather than the employer; the buyer rather than the seller, etc. Or we might assume that the law provides for punishing both parties. It is perfectly safe to do this because it doesn’t alter the effect of the laws to any appreciable degree. They will be obeyed and no one will be punished in the overwhelming majority of cases no matter which party is made the criminal.
Let us assume then a minimum wage law which makes only the employee the offender in case of violation; that he violates the law by entering into a contract with his employer providing for less wages than the law permits; that he is being prosecuted before a jury. Can anyone imagine he will be convicted? His defense is that he could not obtain employment for a higher wage or he would have done so. He accepted this job in lieu of public welfare or permitting his family to go hungry and why should he be punished for that? He has saved the public the cost of feeding him, has accommodated the [p. 100] employer who needed his services and has produced goods which the public wants. How can the law make such conduct a crime, he wants to know?
In answer to the argument that low wages hurt the cause of the working man, he points out that higher wages are always passed on to the consumer in the form of higher prices and since the great majority of the consumers are laborers, the benefits from higher wages are illusory. The real effect of the law is to injure labor because the price of the product must be raised by more than the raise in wages to cover the additional taxes levied to support the regulatory agency.
He admits that he broke the law but he claims the law to be unjust. It denies him his right to make a living. It punishes him for innocent behavior. It increases taxes and prevents the production of goods and services which the public needs and wants.
For a second illustration, let us assume there is a licensing law which provides for punishing both of the contracting parties in case of violation, that an unlicensed seller has sold some goods to a buyer and both are now being prosecuted. The government admits that there is no evidence that the transaction harmed anyone. There was no deception involved; the seller owned the merchandise, represented it fairly and the price was below that being charged by sellers with licenses. Nevertheless, says the prosecutor, these men entered into a contract in violation of a law, this makes them criminals and they should be punished.
The defense used by the buyer and seller is that the law is unconstitutional in that it violates their unalienable rights to deal with private property. Their position is that the Constitution places a limit on the power of government to pass laws and that limit has been exceeded in this case; that it is the function of government to protect the right of private property and to uphold and enforce contracts but this law is in direct opposition to both of these purposes. They further contend that it provides for punishing people who have intended no evil and caused no harm and it is therefore contrary to the elementary principles of justice upon which our Constitutional system is founded. Their final argument is that if anyone should be punished in this case, it should be the licensees and the legislators who are responsible for the law and who are committing extortion by forcibly restraining competition and causing a rise in prices.
The two laws discussed in the above cases are fairly typical of [p. 101] an enormous number of administrative laws now in force on both the national and the state level — except for the fact that legislators would never provide for punishing the laborer and the consumer. But the important point to be gathered from these cases is that the effect of the laws is virtually the same as if they did. Laborers and consumers are denied their freedom of contract no matter which party the law condemns. It is impossible for government to deny freedom to one party to a contract without denying freedom to the other to the same extent. If one cannot make an agreement contrary to the law neither can the other.
The effect on the public is the same in either case. When freedom of contract is interfered with the inevitable result is to reduce the amount of goods and services available for consumption and raise both taxes and prices.
And finally, even though prejudice may prevent us from recognizing the fact as clearly as we should, when criminal laws are passed which deny freedom to enter into legitimate contracts, the unavoidable consequence is to punish the innocent who have intended no evil nor committed harm.
8.7 Licensing Laws
The most common method used by government to suppress freedom of contract is by adopting licensing laws which deny people the right to enter the occupation of their choice and to patronize the business of their choice. There are two types of licensing laws: (1) Those adopted for revenue-raising purposes where the only requirement to obtain the license is to pay a fee; (2) Those of the regulatory type which make it a criminal offense to engage in the licensed activity without the consent of the state. We are here concerned only with the latter type.
Regulatory licensing laws may be divided into three main categories:
(1) Those making the prohibition against competition complete by denying a license to all except one or two businesses. Illustrative of this type are those which grant an exclusive franchise to a utility, transportation or communication business to operate in a certain area.
(2) Those which prevent an applicant from obtaining a license unless he owns certain facilities for carrying on the business. Of this type are [p. 102] laws which make it a crime to produce farm or dairy products without a “base” or a “quota”; those which require a minimum of capital such as is demanded for entry into banking or insurance; zoning laws which dictate the type of activity which may be conducted on land in a certain area.
(3) Those which restrict entry into the trades and professions by requiring that the practitioner have a specified minimum amount of education or experience, or have passed an examination. The professions of law, medicine and engineering, and the plumbing, electrical and construction trades are protected from competition by such laws.
In each of these cases the law either flatly prohibits entry into the licensed field or imposes conditions which the overwhelming majority cannot meet without spending years of time and thousands of dollars. Thus the practical effect of licensing laws is to create a government enforced monopoly which controls the number of licensees merely by raising or lowering the entry requirements. Let us examine the purpose and effect of such laws.
8.8 Do Licensing Laws Restrain Crime?
Some claim that licensing laws serve to restrain crime. But how can they have this effect when existing criminal laws cover every type of criminal activity conceivable? The particular crime which people seem to fear most is that of false advertising. They assume that except for such laws, a great many criminals would enter the monopolized occupations and deceive the public with false claims.
There seems to be no historical evidence to support this assumption and logic refutes it. Why should it be assumed that unlicensed people are more criminally inclined than those who are licensed? Anyone who desires to make a living at a particular trade or profession cannot afford to jeopardize his reputation by engaging in criminal activity. Nor can he risk dealing falsely with his customers, thereby inviting expensive lawsuits. But even though it were true that those without licenses are more prone to deceive, existing criminal laws such as the following typical statute provide all of the protection against this threat which the law can give:
76-4-1. Sales to be made or service furnished — False representations. — Every person, whether acting on his own behalf or on behalf of another, who, with intent to sell or in any way dispose [p. 103] of real or personal property, choses in action, merchandise, service or anything of any nature whatsoever offered by such person, directly or indirectly, to the public for sale, use or distribution, or with intent to increase the consumption thereof, or to induce any member of the public to enter into any obligation relating thereto, or to acquire title thereto, or any interest therein, publishes, disseminates, circulates, or causes to be published, disseminated or circulated, or who in any manner places, or causes to be placed, before the public in this state, by any newspaper, magazine, book, pamphlet, circular, letter, handbill, placard, poster or other publication, or by any billboard, sign, card, label or window sign, showcase or window display, or by any other advertising device, or by public outcry or proclamation, or by telephone or radio, or in any other manner whatever, an advertisement regarding such property or service so offered to the public, which advertisement shall contain any statement, representation or assertion concerning such property or service, or concerning any circumstance or matter of fact connected in any way, directly or indirectly, with a proposed sale, performance or disposition thereof, which is deceptive or misleading, and which is known, or by the exercise of reasonable care could be known to be false, deceptive or misleading, to the person publishing, disseminating, circulating or placing before the public such advertisement, is guilty of a misdemeanor. (Utah Code Annotated, 76-4-1)
8.9 Do Licensing Laws Protect The Public Against Incompetence?
Another argument used to justify licensing laws is that they serve to protect the public against incompetence and inexperience. The feeling seems to be that only those who are the most qualified have a right to serve the people. Let us examine this argument.
We will commence with the trite observation that no one is free from error. No matter how old or young, how educated or ignorant, how experienced or untried, everyone is subject to making mistakes. Each person who lives a full and ordinary life, commences in a state of utter helplessness at birth, increases in ability until he reaches his prime, which is always short of perfection, and then returns again to utter incompetence at death. While some may largely retain their mental faculties until the end, physical deterioration is as certain as death itself.
Since all men are imperfect and prone to make mistakes, [p. 104] virtually every act of any consequence which we perform might possibly injure someone. No matter how careful, how well-trained or how well-intentioned we may be, the possibility of human error is always present to threaten the life, liberty, property or knowledge of others.
No physician, nurse or other practitioner of the healing arts ever becomes so skillful and wise that he is free from the danger of taking the life he is trying to save. No mechanic, builder, machine operator or craftsman ever becomes so proficient that he can claim that his efforts will always be constructive but never destructive; or that the product of his work will be free from dangerous defects. No producer of food or clothing ever reaches that state of perfection that the consumer is always benefitted but never harmed. No teacher ever becomes so knowledgeable and wise that he can be certain that he will always teach truth and never falsehood.
Being the humans that we are, we are forever subject to failure of mind and body; to malfunction of brain and muscle; to heart attack, lapse of memory and mistake of judgment. Especially is this true in view of man’s inability to fully understand and control the elements around him. Who can erect a structure which will withstand every earthquake or storm? Who can construct a piece of machinery so perfectly that it might not fail because of mental fatigue or some other unknown and unpredictable defect? Who understands the diversity of human minds and bodies well enough that he can foresee the effect of a given medicine or piece of information upon any particular person?
Furthermore, everyone is in a constant state of change. We are continually learning and forgetting; acquiring a skill only to lose it again; gaining vigor and health during one period and losing them in another.
Now is it possible for any licensing agency (who are erring humans themselves) to classify this infinite and everchanging diversity of human imperfection into two groups — the qualified and the unqualified — and be just to everyone? Any line which is drawn must be purely arbitrary with nothing more to support it than the prejudice or selfish interest of the one who drew it because all he has to choose between is varying degrees of constantly changing ignorance, incompetence and inexperience. And even though it were possible to distinguish between the “fit” and the “unfit,” due to the constant changes taking place in people, this classification would not be [p. 105] valid for more than a brief period. There would be those close to the line who would be constantly crossing over it going both ways.
Even admitting all of this to be true, argues the licensing advocate, still we must allow only those who are the “best” qualified to serve the public.
But who are the “best” qualified? If there is a sound reason why only the most superior should be entitled to make a living at law, medicine, engineering, banking or plumbing, then why don’t we permit only the top ten percent of those now engaged in these various activities to have licenses? If the public is entitled to have only the “best” why allow this other ninety percent who are inferior to sell to the public their “inferior” goods and services?
The obvious answer to this proposal is that it would have the effect of eliminating approximately ninety percent of the goods and services now being produced. That which they are providing is needed even though it is somewhat inferior, and it would be most ill-advised to prevent them from working just because they are less skillful and more apt to make mistakes than the superior ten percent.
But where does this argument lead to? If we follow this logic through the next step we must conclude that existing licensing laws are now denying the public an untold amount of goods and services which otherwise would be available. If they were changed so that twice as many people could enter into a given trade or occupation we might find approximately twice as much being produced in that area. The demand for goods and services is literally unlimited. There are millions of people who now need dental, medical, legal, engineering and other professional assistance who cannot afford to pay the fees charged by those who have been compelled to spend a substantial portion of their lives and tens of thousands of dollars of their money obtaining a license. The same can be said of trades, occupations and businesses of all kinds. If the bars were removed, people would flood into these areas, become proficient and begin exchanging goods and services with each other to the economic benefit of everyone — except possibly the present licensees and the bureaucrats.
When we deny men their freedom to be productive because they might possibly cause harm, we act foolishly and unjustly. If a person intends to do good, he does infinitely more good than harm. One who enters a business or a profession is well aware that he must serve the public or go bankrupt. No sensible person will undertake a job which he knows he cannot do even if he could find a customer [p. 106] who would permit him to try. He knows that he must produce what is needed and wanted or subject himself to lawsuits for breach of contract, tortious conduct and even criminal negligence.
Licensing laws are passed for one reason: to deny the public their freedom of contract; to prevent them from patronizing those who would enter the field and serve them if it were open. Rather than saying that such laws keep out the unqualified, it is more accurate to say that they keep the unqualified in. Were it not for such laws, existing licensees would lose many of their customers to newcomers who would provide the public with goods and services of a quality and at a price they would prefer over what is now available.
In a free economy the only ones in business are those who have customers who come to them voluntarily and in preference to anyone else. They are producing goods and services which the public want and are willing to pay for. What other test is there for being qualified? This is the only one which is relevant and many there have been who have failed it. The consuming public is discriminating and demanding. They are also merciless. They can be counted upon to keep the “unqualified” from serving them. No licensing board or government agency is needed for this purpose.
If those who consider themselves better “qualified” want to prove their excellence, they may do so in the open market. But why should they be allowed to establish a government-enforced monopoly which compels customers to patronize them or go without? If they are fearful that buyers might not be able to distinguish between them and those less skilled, they should be free to form themselves into exclusive associations and advertise their superior talents. But at the same time why should the public be denied their freedom to reject their claims or purchase products and services of an inferior quality and at a cheaper price if they desire? In other words, why should we continue to allow licensing laws to deny people their freedom of contract?
8.10 Regulatory Laws And Freedom Of Contract
While licensing laws are the chief offenders in restricting economic freedom, every regulatory measure has this effect. [p. 107] Businessmen are striving continually to perform a service or produce a product which satisfies their patrons. Their continuance in business demands this as do their profits. They must offer something which their customers want and at a price they can afford to pay. Every regulatory law interferes with their performance of this function and forces them to do things they consider inadvisable. The inevitable result is either to alter their products, raise their costs, or both. It is rare indeed when a regulatory measure has any different effect because the operators know far better than any legislator or bureaucrat how best to operate their businesses.
But if the producer’s product is altered, the customer is no longer able to purchase that which he prefers. With every increase in price some buyers who would otherwise have made a purchase, are no longer able to do so and those who do buy cannot afford as much. In this manner every regulatory law denies freedom of contract.
8.11 Welfare-State Laws And Freedom Of Contract
The term “welfare-state laws” as used herein means those measures by which governments practice compulsory charity and otherwise dictate the purposes for which people may spend their money. Under such laws the state takes property from its rightful owners and makes a gift thereof to those to whom it does not belong. Thus rather than allowing the owners to determine how much of their property shall be used for charity and to whom it shall be given, their servants in government perform this function for them. Also under these laws, governments impose such levies as social security taxes, medicare and unemployment insurance contributions rather than allowing the people to choose their own retirement, unemployment and health-care plans.
Every welfare-state law takes property from its owner and transfers either ownership or control to government. But when government has ownership control, the people do not and their freedom to contract with or about such funds is taken from them. [p. 108]
For it is expedient that I, the Lord, should make every man accountable, as a steward over earthly blessings, which I have made and prepared for my creatures.
I, the Lord, stretched out the heavens, and built the earth, my very handiwork; and all things therein are mine.
And it is my purpose to provide for my saints, for all things are mine.
But it must needs be done in mine own way; and behold this is the way that I, the Lord, have decreed to provide for my saints, that the poor shall be exalted, in that the rich are made low.
For the earth is full, and there is enough and to spare; yea, I prepared all things, and have given unto the children of men to be agents unto themselves.
(D&C 104:13–17)
[p. 109]
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