Enforcing contracts: How judicial efficiency supports freedom of contract

Author: Doing Business
Publication: Doing Business 2015
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  • In regulating freedom of contract, authorities around the world have had to strike a balance between the desire to give contracting parties the ability to enter into mutually beneficial arrangements and the need to provide adequate safeguards against possible abuse.
  • Worldwide, the most common limitations to freedom of contract stem from local legislation, through which the government attempts to draw a boundary between the use and misuse of bargaining power. Other limitations stem from the courts, which play a vital role in shaping freedom of contract by deciding whether or not to enforce certain agreements.
  • In a sample of 34 economies, none allow the parties to a contract to exclude liability for gross negligence or for damages resulting in personal injury. Similarly, all of the economies consider contracts void or voidable if concluded in contravention of public policy or under duress, fraud or coercion. Only 4—the Democratic Republic of Congo, Pakistan, the Philippines and Sri Lanka—set no statutory limit on interest rates. Almost half (14) explicitly prohibit covenants restricting the alienation of real property.
  • Even where there is considerable freedom of contract, slow resolution of contract disputes can impose implicit limitations. Without reasonably expeditious dispute resolution, the meaning of freedom of contract can be greatly eroded.