Download January 16, 2007

ECONOMIC ANALYSIS OF TORT LAW
January 16, 2007
ECONOMIC ANALYSIS OF TORT LAW
Private Goods
Property Rights
Public Goods
Private Bads
Harms or Wrongs
Public Bads
ECONOMIC ANALYSIS OF TORT LAW
Private Bads
Torts
Intentional
Pollution
Assault
Fraud
Unintentional
Negligence
THEOREM OF
COASE
Same efficiency under rival allocation of rights
EXCEPTIONS:
High Transaction Costs
Asymmetric Information
Empty Core
ECONOMIC ANALYSIS OF TORT LAW
Private Bads
Asymmetric Information
Forces of Nature
Imperfect Allocation of
Information
ECONOMIC ANALYSIS OF TORT LAW
• In contracts, the agents may agree to
adopt a sharing rule
• In torts, the “social planner” or “lawmaking agency” acts to “impose” an
optimal sharing rule on the agents
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
PRINCIPAL - AGENCY
TORT
BILATERAL - AGENCY
• A principal in a
• A court in a private
private bilateral
bilateral agency
contract relationship
relationship writes a
writes a contract that
rule that may serve to
may serve to “sort”
“sort” or “separate”
or “separate” agents
contracts into more
into more efficient
efficient outcomes
contracts
ECONOMIC ANALYSIS OF TORT LAW
• Cooter, in his article, poses the
following question:
• Can the goal of compensating the victim be
reconciled with the minimization of social
costs?
• What tort system fully internalizes the social
costs of precaution to the private costs of each
individual?
ECONOMIC ANALYSIS OF TORT LAW
INTENTIONAL TORTS
Pollution
Assault
Fraud
ECONOMIC ANALYSIS OF TORT LAW
• Intentional torts involve "express"
intention. A party willfully inflicts harm on
another.
• Assaults and batteries are examples.
• As well, one may recall the torts of
trespass, interference with property rights
and nuisance. (See KVP case)
ECONOMIC ANALYSIS OF TORT LAW
• Intentional torts generally carry the standard of
"strict liability“ in the awarding of compensation
to victims. In terms of establishing legally liability,
such torts require proof of
• who the parties are
• causation (physical cause and effect) and
• damages.
• The rule of strict liability with perfectly
compensatory damages gives the victim no
incentive to take precaution. [Cooter (p. 323)]
ECONOMIC ANALYSIS OF TORT LAW
• In the typical tort, the plaintiff suffers a loss
that depends on the amounts of care
taken by both the plaintiff and the
defendant
• Legal rules of the form L(e ,e ) emerge
• L(e ,e ) = 0 No fault
• L(e ,e ) = 1 Strict liability
• e = action of “injuror” defendant
• e = action of “victim” plaintiff
1
1
2
1
2
1
2
2
ECONOMIC ANALYSIS OF TORT LAW
• First Example – Collateral Proceedings
• Criminal
Tort
Public
Bads
Private
Bads
ECONOMIC ANALYSIS OF TORT LAW
BILATERAL AGENCY
“SUPER”
Principal
= Judge
Its “problem” is to maximize
social surplus
TORTS
AGENT 1
AGENT 2
ECONOMIC ANALYSIS OF TORT LAW
• First Example
• Criminal
Ontario Court
of Justice
(Criminal
court)
Tort
Ontario
Superior
Court
(Civil
court)
Ontario Court of Appeal
ECONOMIC ANALYSIS OF TORT LAW
• First Example – Collateral Proceedings
• Criminal
Tort
• Assault
• Murder
Assault
Wrongful
Death
ECONOMIC ANALYSIS OF TORT LAW
• O. J. Simpson was tried
for the murder of ex-wife
Nicole brown Simpson
and her friend Ronald
Goldman in 1994. He was
acquitted in a Los
Angeles criminal court in
1995 after a lengthy trial.
• In 1997, Simpson was
found liable for their
deaths in civil court, but
to date has never paid
the judgment
ECONOMIC ANALYSIS OF TORT LAW
• Second Example – Collateral Defences
Criminal Court
Civil Court
• Contributory Negligence
» Still an absolute defence
in some cases
Not an
absolute
defence
ECONOMIC ANALYSIS OF TORT LAW
• Third Example
• The tort of appropriation of personality is
not only alive and well in Canada but
appears to survive the death of a celebrity.
• The tort was first recognized by the
Ontario Court of Appeal in Krouse v.
Chrysler Canada Ltd. in 1972
ECONOMIC ANALYSIS OF TORT LAW
• Where a celebrity is the subject matter of a work,
the public's interest in knowing about the
celebrity will defeat a claim for appropriation of
personality.
• Where the celebrity has consented to the use of
his or her likeness, a claim for appropriation of
personality will not succeed.
• The right to exploit a celebrity's personality
commercially may be transferred to a third party,
and the celebrity and his or her estate will have
no right to restrain such exploitation by the
transferee.
ECONOMIC ANALYSIS OF TORT LAW
• Related torts
•
•
•
•
Passing Off
Defamation
Malicious falsehood
Copyright infringement
• Provide sanctions against the
unauthorised use of an individual's
persona in commercial enterprises in
particular and special circumstances.
ECONOMIC ANALYSIS OF TORT LAW
UNINTENTIONAL TORTS
Negligence
ECONOMIC ANALYSIS OF TORT LAW
BILATERAL AGENCY
• A second category of tort involves the
infliction of unintentional harm. The most
frequent situation involves negligence.
ECONOMIC ANALYSIS OF TORT LAW
BILATERAL AGENCY
• In addition to the three (3) components requiring
proof in the intentional torts - identification,
causation and damage - two further components
are required. A plaintiff ("injured party") must
also show that
• a "standard of care" is owed and
• that this "standard" was breached. This second requirement
answers the question“ to whom is the duty of care owed"?
ECONOMIC ANALYSIS OF TORT LAW
BILATERAL AGENCY
• So the infliction of harm on the plaintiff,
though required, is not sufficient to
establish liability. This "weaker" standard
of liability is called "ordinary negligence".
• This form of tort liability grew in
importance throughout the nineteenth
century due to expanding industrialization.
ECONOMIC ANALYSIS OF TORT LAW
• This is sometimes referred to as the
“precautionary” principle
Torts - History
• Modern Developments
• Protecting employers from workers
» Doctrine of Respondeat Superior
» Doctrine of Volenti Non Fit Iniuria
» Horwitz thesis – Emergence of negligence rules
• Protecting workers from employers
»
»
»
»
»
1830’s – Factory Acts
1860’s – Fatal Accidents Act
1880’s – Employer Liability Act
1910’s – Workers Compensation
1920’s – Comparative Negligence
ECONOMIC ANALYSIS OF TORT LAW
• STRICT LIABILITY
In 1974, Professor Morton Horwitz at
Harvard advanced the thesis that
industrialization in the West had motivated
a trend in law to prove intent or negligence
against parties who in pre-industrial
• societies would have been found strictly
liable for harms committed.
•
ECONOMIC ANALYSIS OF TORT LAW
• In the early "common law" cases for
negligence, the parties had to have some
pre-existing relationship between the
injured and the injuror.
• This would include a contract (retailer customer) or status (parent - child). A "duty
of care" was owed parties within
relationships.
ECONOMIC ANALYSIS OF TORT LAW
•
The Butterfield v. Forrester decision
was the origin of this common law defence
that, if proved, amounted to a bar of any
recovery by a plaintiff irregardless of the
conduct of the defendant if the plaintiff was
a part cause of the tort.
• Butterfield v. Forrester (1809) 11 East
60, 103 E.R. 960
• Cooter, pp. 63 - 64, 2003.
ECONOMIC ANALYSIS OF TORT LAW
• The plaintiff, Butterfield, was thrown from
his horse when it hit a pole that Forrester
had temporarily laid cross the highway.
The "contributory negligence" of Butterfield
was riding his horse too fast, preventing
him from seeing Forrester's obstruction
soon enough to avoid it. Notwithstanding
that Forrester was negligent, so was
Butterfield. This constituted a complete
defence for Forrester.
ECONOMIC ANALYSIS OF TORT LAW
• According to Cooter, neither the “no
liability” rule nor the “strict liability” rule,
can be optimal in joint accident cases.
• This was exactly the conclusion common
law judges reached in such cases
ECONOMIC ANALYSIS OF TORT LAW
• A major change did indeed occur, but not
until 1934. In 1934 with the landmark
House of Lords ruling in Donohue v
Stevenson, [1932] A.C. 532 (H.L.)
ECONOMIC ANALYSIS OF TORT LAW
• A customer was permitted to sue "up the
chain of production" (wholesaler,
manufacturer) for a "ginger ale” purchase
contaminated with the remains of a dead
mouse.
• So the "duty of care" was extended to
such parties as could have been
"reasonably foreseen" by the injurors.
ECONOMIC ANALYSIS OF TORT LAW
• The common law rule that combines
negligence with the defence of
contributory negligence is defined as
follows:
• L(a ,a ) = { 1 if a < a * and a > a *
{0 if a > a * and a < a *
1
2
1
1
1
1
2
2
2
2
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
TORT
PRINCIPAL - AGENCY
BILATERAL - AGENCY
• a = level of precaution
invested by the agentpromisor (Agent 1)
against breach of
contract against (Agent
2)
1
• a = level of precaution
invested by the agentpromisor (Agent 1)
against wrongs causing
damages
1
• a = level of precaution
invested by the agentpromisor (Agent 2)
against wrongs causing
damages
2
• a = level of reliance
invested by the agentpromisee (Agent 2) in
Agent 1
2
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
TORT
PRINCIPAL - AGENCY
BILATERAL - AGENCY
• p(a ) = Probability of
No Breach
• p(a , a ) = Probability
of No Breach
• Probability of
Performance
• A Completed Contract
• Probability of
Performance
• A Completed Contract
1
• p’(a ) > 0
1
• More effort results in
more precaution
against breach
• p’’(a ) < 0
1
• Diminishing “returns”
to precaution as more
effort invested
1
2
• p’(a ), p’(a ) > 0
1
2
• More effort results in
more precaution
against breach
• p’’(a ), p’’(a )< 0
1
2
• Diminishing “returns”
to precaution as more
effort invested
ECONOMIC ANALYSIS OF TORT LAW
• p(a U a ) = Probability of No Breach
• p(a U a ) = p(a ) + p(a ) - p(a ∩ a )
1
2
1
2
1
2
1
2
• p(a U a ) = p(a ) + p(a ) - p(a )p(a )
1
2
1
2
1
2
ECONOMIC ANALYSIS OF TORT LAW
• 1 - p(a U a ) = Probability of Breach
• p(a U a ) = 1 - p(a ) - p(a ) + p(a )p(a )
1
1
•
2
2
1
2
1
2
ECONOMIC ANALYSIS OF TORT LAW
• This is an example of double moral
hazard
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
TORT
PRINCIPAL - AGENCY
BILATERAL - AGENCY
• P cannot observe a
• A knows that P
cannot observe a
• A will apply less
that optimal a
unless it can be
assured that doing
so will not minimize
TOTAL expected
damages
2
1
1
2
1
1
1
A cannot observe a
A cannot observe a
2
1
1
2
• Both parties know
this
• Both parties will
apply less than
optimal efforts a
1,2
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
TORT
PRINCIPAL - AGENCY
BILATERAL - AGENCY
• The critical difference
is the assumption in
all contract cases that
the parties are
"known" through each
of the stages of the
contract.
• In tort cases the
parties are "known"
only after the harm is
committed.
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
TORT
PRINCIPAL - AGENCY
BILATERAL - AGENCY
• In a "hypothetical" sense,
as Demzetz states in his
article, the "transaction
costs“ of determining in
advance who the parties
to the tort and how the
tort could be prevented
will be is so
"astronomically high" that
such a determination will
not occur. Demsetz, Harold,
"When Does the Rule of Liability
Matter?", (1972) 1 J. of Leg. Stud. 13
at p. 26
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
TORT
PRINCIPAL - AGENCY
BILATERAL - AGENCY
•Out of low transaction costs, the
possibility of voluntary agreements
are greater, so rules of negotiation
develop. Demsetz, at p. 26
• Out of high transaction
costs, the possibility of
voluntary agreements are
negligible, so as in the
case of automobile
accidents, rules of the
road evolve and are
imposed. Demsetz, at p. 26
ECONOMIC ANALYSIS OF TORT LAW
• Also, according to Cooter, a simple
negligence rule requires the victim be
compensated by the injuror – provided if
and only if the injuror is at fault
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
TORT
PRINCIPAL - AGENCY
BILATERAL - AGENCY
• “Liability rule” or “liability
marginal cost curve” for
Agent 1 is added in orange
to the joint social surplus of
the parties
• Max [p(a )R (a ) + [1 p(a )]R (a )] - a - a [1-p(a )]D
2
2
NP
2
P
1
e
1
1
2
[1 - p(a1, a2)] = Probability of Breach
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
TORT
PRINCIPAL - AGENCY
BILATERAL - AGENCY
Strict Liabilty Rule –MC1
Contracted Liability Rule
– MC1
Expected Liability – MC1
ECONOMIC ANALYSIS OF TORT LAW
• The parties will choose that level of
effort which minimizes their respective
costs:
• Min (Social Costs)
• = Min[a + a - (1 - p(a ,a ))D]
1
2
1
2
ECONOMIC ANALYSIS OF TORT LAW
CONTRACT
TORT
PRINCIPAL - AGENCY
BILATERAL - AGENCY
pNP
pP Marginal Cost Curve of
Agent 1
Expected Marginal
Cost Curve of Agent 1
under Expectation
Damages
a10 a1* a11
ECONOMIC ANALYSIS OF TORT LAW
a2
Axes
pP
a*2
a1
ECONOMIC ANALYSIS OF TORT LAW
• Professor Osborne argues that the Nash
equilibrium induced by this rule
• Is unique
• Reflect the socially desirable efforts for which each
party should strive
• The injuror-defendant’s effort is a best response to
the victim-plaintiff’s effort
• The victim-plaintiff’s effort is a best response to the
injuror-defendant’s effort (Osborne, 93-94)
ECONOMIC ANALYSIS OF TORT LAW
a1
Axes
a2 + [1 –p(a1,a2)]D
a*1
a1 + [1 –p(a1,a2)]D
a2
ECONOMIC ANALYSIS OF TORT LAW
• The "strict liability" branches of law
became increasingly confined to
intellectual property infringement actions
and anomalous cases that found their
rationales in pre-industrial societies.
• Could we be witnessing a reversal?
ECONOMIC ANALYSIS OF TORT LAW
• Negligence – Defence of Contributory
$ Negligence
a1*
ECONOMIC ANALYSIS OF TORT LAW
• During the 1920's and 1930's most provinces
and states passed statutes that altered the
contributory negligence defence to that of
comparative negligence.
• The rule a1 = E is still the effort that minimally
meets the injuror's standard of care.
• Unless the victim applies a2 = E < SC, then the
injuror will be 100% liable if a1 < SC.
ECONOMIC ANALYSIS OF TORT LAW
• Negligence – Comparative Negligence
$
a1*
ECONOMIC ANALYSIS OF TORT LAW
• Modern Developments
• The Horwitz thesis “in reverse” – moving back to
strict liability
»
»
»
»
»
»
»
1930’s - O’Donoghue v. Stevenson
1960’s – Hedley Byrne v. Barclay’s Bank
1970’s - Economic loss – Seaway Hotel case
1970’s – Economic experts – CUPE v. AIB
1980’s – Central Trust v. Rafuse
1980’s – International Corona v. Lac Minerals
1990’s – “Historical” tort cases
ECONOMIC ANALYSIS OF TORT LAW
• The tort of negligent misrepresentation
was first recognized by the House of Lords
in Hedley Byrne & Co. v. Heller & Partners
Ltd., [1964] A.C. 465 (H.L.). This case is
now an established precedent in Canadian
tort law.
• Malpass v. Morrison (November 9, 2004) Superior Court
- Grossi J. (Sault Ste. Marie)
ECONOMIC ANALYSIS OF TORT LAW
• The re-imposition of "strict liability“ in
contractual and tort situations is being
accomplished with the superimposing of
fiduciary duties, "implicit agency", which
impose strict liability, in an increasing
number of cases.
ECONOMIC ANALYSIS OF TORT LAW
• STRICT LIABILITY – Asymmetric
$
Information
a1*