Freedom of contract

What it means

Freedom of contract is one of the basic principles of private law. It means the parties freely decide whether to conclude a contract at all, with whom, what its content will be and in what form it is made. The state intervenes in these decisions only where protection of the weaker party or the public interest requires it.

Both the Commercial Code and the Civil Code allow parties to conclude a contract that the law does not specifically regulate, a so-called innominate contract. The condition is that the essential terms are sufficiently definite. The parties may also agree to depart from many statutory provisions.

Freedom of contract is not unlimited, however. It is restricted by mandatory provisions of law that cannot be changed, good morals, the principles of fair dealing and special rules protecting consumers, employees or competition. A clause that breaches them may be invalid.

How it works in practice

In business, freedom of contract allows a contract to be tailored to the specific deal: agreeing payment terms, a contractual penalty, a cap on liability, the governing law or the method of dispute resolution. Many contracts, such as a cooperation agreement or a service agreement, rest on it.

There is more room between businesses than towards consumers. In a consumer contract, unfair terms that create a significant imbalance to the consumer's detriment are invalid, and the consumer cannot waive rights the law gives them. Limits apply between businesses too, for example on invoice payment periods.

Freedom of contract also covers form. Many contracts can be made orally or by email, but the law requires written form for some, such as a transfer of property, and an officially certified signature or a notarial deed for others. For evidential reasons, written form is recommended even where it is not compulsory.

What to watch out for

The fact that the parties agreed on something does not make it valid. An agreement that circumvents the law, for example by disguising another legal act, or that conflicts with good morals may be invalid in whole or in part. With unusual clauses, it is sensible to check that they do not cross limits the law does not allow to be changed.

Be careful with terms and conditions that the contract merely refers to. If the other party did not know them or they were not attached, they may not form part of the contract, and surprising clauses in them may be ineffective. Freedom of contract assumes both parties know what they are agreeing to.