Midterm Is Not Yet Graded. Hopefully by the End of the Week

Econ 522 – Lecture 15 (Nov 4 2008)

Midterm is not yet graded. Hopefully by the end of the week.

One point I want to quickly revisit.

There are two separate questions we addressed when looking at the question of breach:

· when do we expect a promisor to breach?

· when would it be efficient for a promisor to breach?

These are different questions, and may have different answers.

We expect a promisor to breach when it’s cheaper to breach than to perform, that is, when his liability for breach (presumably, the damages he’ll owe) is greater than the cost of performance. This has nothing to do with efficiency – it’s just one guy, doing what is best for him, given the options he faces.

Now, the question of efficiency involves summing up everyone’s payoffs – in this case, the promisor and the promisee. It’s efficient for the promisor to breach when the total payoffs are higher when he breaches than when he performs. Since it’s usually the promisor who’s incurring costs and the promisee who’s getting benefits, this will typically be when the cost of performing is higher than the benefit of performance.

So the challenge, when designing a remedy, is to make the two solutions match – that is, to make the promisor, when he’s just thinking about himself, breach exactly in the times when it’s efficient for him to breach. But it’s important to keep the two concepts distinct – the promisor will do what is in his best interest, and the challenge is to make that match up with what’s efficient. We’ll face the same challenge with tort law as well.

Today, we begin tort law.

The word tort is from French, and means injury. With contract law, we studied situations where someone injured you by breaking a promise they had made. With tort law, we will look at situations where someone harmed you without having made any promises.

A line I like from the Friedman book:

“If someone shoots you, you call a cop. If he runs his car into yours, you call a lawyer.”

The line between the two isn’t always that clear. Some torts are crimes as well – if someone assaults you, they may go to jail, and you may also sue them for damages. (Plus, there’s the OJ Simpson case.) We’ll get to criminal law in a few weeks; for now we’ll focus on the tort side.

Before we get to the material, though, I’d like to do a quick experiment.

As with nuisance law and contract law, our focus in torts will not be on fairness or equity, but on efficiency, that is, on structuring the law to provide correct incentives for people to behave efficiently.

· For deliberate harms, this will usually be fairly simple.

· For accidental harms, though – traffic accidents and things like that – setting the correct incentive for avoiding harm is tricky.

· Unlike in nuisance law, injunctive relief is often not an option

· Much as we’d like to imagine that nobody could run into your car without negotiating for permission, it doesn’t work that way

· Similarly, unlike with contract law, there is no promise or agreement made ahead of time; something happens, and then we deal with it.

· Cooter and Ulen explain tort law as covering all the situations where transaction costs were too high to allow for bargaining

o It’s impossible to negotiate with every driver for the right to hit you

o it’s not always possible to bargain with an angry drunk about whether or not he breaks your nose.

· Thus, Cooter and Ulen define the essence of tort law, at least economically, as the attempt to make injurers internalize the externalities they cause, in situations where transaction costs are too high to do this through property or contract rights.

With contract law, we started out by discussing a “classic” legal theory of contracts (the bargain theory), and then moved on to an economic analysis. With torts, we’ll do the same.

The traditional theory of tort liability was developed about 100 years ago. It specified three key elements of a tort, which must be present for he plaintiff to recover damages:

· harm

· causation

· breach of duty

harm

· First, and simplest, the plaintiff needs to have been harmed.

· Without harm, there is no tort.

· The book gives an example of a gas company that sold gas with a defective additive, which has no effect on cars with normal carburetors but is dangerous in cars with turbocharged carbs.

· The owner of a car with a normal carburetor might be outraged by the situation, but since the gas did no damage to his car, he cannot sue.

· Similarly, traditional tort theory does not compensate for exposure to risk.

· Suppose a manufacturer accidentally exposed a bunch of workers to a chemical that doctors agree will cause 15% of them to develop liver cancer later in life.

· Under traditional tort doctrine, the victims must wait and see who gets cancer before suing.

· Similarly, if I do something negligent that causes you a 50% chance of dying, but you get lucky and escape the situation, I’m generally not liable for any damages.

· (So far, U.S. courts have been reluctant to allow tort actions on the basis of exposure to harm, although some believe they should. Thus, safety regulation, administered by a government agency, is typically used instead of tort law to deal with exposure to low-probability harms.)

In theory, harm has a simple economic interpretation: a downward shift in the victim’s utility. Like in the hairy hand case, we can imagine a victim has some utility function over health and money, with some sort of indifference curves:

A car accident might lower both my wealth (because my car is worth less) and my health (because I got whiplash), moving me to a lower indifference curve.

· Perfect compensation should restore me to my original level of utility.

· Money damages are typically how this is done.

· Obviously, some amount of money can get me back to my original level of wealth (by repairing whatever was broken on my car).

· If there is medical care available that would restore me to my original level of health, then the cost of this treatment would get me back to my original level of health as well, so I’d be back where I started.

· Of course, there are some harms that can’t be undone – the amputated leg in the experiment, or other permanent injury

· but there may be some amount of money that would compensate for it, by getting me back to the same indifference curve I started out on.

· Just like in the hairy hand case, we can work out perfect damages in this way.

So that’s the theory – the notion of “perfect compensation.”

· In reality, courts have traditionally been very willing to compensate victims for tangible losses – medical costs, lost income, damaged property

· but less willing to compensate for intangible losses or losses that are difficult to measure, such as emotional harm, pain and suffering, or loss of companionship

· Over the years, however, American courts in particular have expanded the list of compensable harms to include many of these intangibles.

· One area where there is a huge disparity between tangible harm and actual harm is in the death of a child

· If a drunk driver kills a child, there is no loss of income to the child’s family; if anything, they avoid the expense of raising the child.

· This used to be a difficult problem for courts, as they could not find a tangible, measurable harm on which to base compensation.

· Allowing compensation for emotional distress and loss of companionship solves this problem.

In addition, once we start thinking about the incentives caused by tort liability, setting liability closer to the actual harm done sets better incentive for harm avoidance.

· On the other hand, intangible harms are extremely difficult to calculate.

· Reasonable people might disagree dramatically about the emotional harm of losing a leg, much less a child.

· In addition, some people are horrified at the very idea of putting a dollar value on someone’s life; and clearly, there is no amount of money that would make most parents indifferent to losing a child.

· So while compensation for intangible harms is an appealing idea, it leads to a great deal of disparity in awards, across different courts, or even within the same court, for similar injuries.

That’s the first element of a tort under the traditional view – harm. The second element that must be present is causation – that is, the defendant must have caused the plaintiff’s harm.

· Here, things can get pretty tricky. Suppose the factory where I work exposes me to some chemical that increases my risk of some disease from 1% to 1.2%. I come down with the disease. Did the chemical cause it?

· The law distinguishes two types of causes. The first is “cause-in-fact.” The test for cause-in-fact is generally the “but-for test”. That is, “but for the defendant’s actions, would the harm have occurred?”

· There’s an example in the Friedman book that shows how tricky even this simple rule can be.

o Three friends go out hunting, one of them scares up a pheasant, the other two turn and shoot and both, mistakenly, at the same exact time, shoot the first one, one through the head, one through the heart.

o Each one is very apologetic to the man’s widow, but say, “If I hadn’t shot him, he’d still be dead.” Did either of them cause his death? But for either one’s actions, he’d still have died.

· Another problem with the “but-for” test is that it doesn’t distinguish between recent actions and more distant actions.

· I punch a guy in the face in a bar. But for my punching him, his nose wouldn’t have been broken.

· Also, but for his parents having conceived him, he wouldn’t have been alive to be punched in the face, and the harm wouldn’t have occurred. Are his parents liable?

· But for him getting a job in my town and moving there three years ago, he wouldn’t have been in the bar to be punched in the face – is his employer liable?

So for a tort to exist, the defendant’s act must not only be the cause-in-fact of the harm, it must also be the proximate cause.

· Proximate just means close – there’s no rigid definition for how close the cause must be.

· One famous case, Palsgraf v Long Island Railway (1928), addressed this problem. The facts of the case were:

Plaintiff [Mrs. Palsgraf] was standing on a platform of defendant’s railroad after buying a ticket to go to Rockaway Beach. A train stopped at the station, bound for another place. Two men ran forward to catch it. One of the men reached the platform of the car without mishap, thought he train was already moving. The other man, carrying a package, jumped aboard the car, but seemed unsteady as if about to fall. A guard on the car, who had held the door open, reached forward to help him in, and another guard on the platform pushed him from behind. In this act, the package was dislodged, and fell upon the rails. It was a package of small size, about fifteen inches long, and was covered by a newspaper. In fact it contained fireworks, but there was nothing in its appearance to give notice of its contents. The fireworks when they fell exploded. The shock of the explosion threw down some scales at the other end of the platform many feet away. The scales struck the plaintiff, causing injuries for which she sues.

· The court ruled that even though the Long Island Railroad guard’s actions in pushing the passenger may have caused her injuries – he pushed a passenger who dropped a package of fireworks which went off and caused the scales to fall on her – his actions were too remote to be considered the proximate cause.

· As I said, though, there’s no precise legal definition for how close the action must be to the harm.

Another example from the Friedman book:

I run into a friend on the street, and we stop to talk for a minute. We say goodbye, go our separate ways, and twenty seconds later, he’s crushed by a falling safe. Clearly, but for talking to me, he would still be alive – he would have passed that spot well before the safe fell. Did I cause his death? Am I liable?

Friedman claims this hypothetical is based on a real case:

“A tree fell on a moving trolly, injuring passengers. One of them sued. He succeeded in demonstrating that in order for the trolly to be where it was when the tree fell on it the driver had to have driven faster than the speed limit at some point during the trip. Breaking the law is per se negligence, so the driver was legally negligent whether or not his driving was actually unsafe. If he had not driven over the speed limit, the trolly would not have been under the tree when it fell, so, the plaintiff argued, the driver’s negligence caused the injury.”

Thankfully, the court was not stupid, and the plaintiff lost. The court held that the driver’s negligence “had not caused the accident in the legally relevant sense.” I’m not really sure what that means, but it seems pretty clear that innocent actions which led to an accident by chance, but did not increase its likelihood, should not be punished. In this case, the driver’s speeding was just as likely to prevent the accident (by passing that point before the tree fell) as to cause it. If we think about tort law as an attempt to set the right incentives, there is no reason to discourage the driver’s actions.

This could be done in one of two ways. One, we could make him liable for the accident, but make him reverse-liable (have him receive a large reward) if his speeding caused him to miss a falling tree. Of course, it might be very hard to prove when he’s avoided an accident; really much simpler just to not make him liable in either case.

That’s two elements of a tort under the traditional theory. The third element is breach of duty, and is sometimes necessary and sometimes not.