The Locke Luminary Vol. I, No. 2 (Winter 1998) Part 3
Edited by Amanda J. Owens, Director of Legal Studies, and Dr. Charles K. Rowley, General Director
Property, Contract and Tort: Some Simple Rules for Cyberspace
by Dr. Charles K. Rowley, Joint Editor of The Locke Luminary
Definitions of Concepts
Whether or not a centralized legal authority exists, whether or not, indeed, civil society itself exists, the concepts of property, contract and tort, how they are interpreted, how they are respected and how they are enforced, exert powerful influences on the nature of personal and commercial relationships forged between individuals. Defining and specifying property is primarily the function of the law of property and, to a lesser extent, of the law of torts (nuisance). Providing for the transferability of property is primarily the function of the law of contracts. The protection of property is primarily the function both of the law of torts (nuisance, trespass, and accident) and of criminal law.
Let me commence this presentation, therefore, with some very basic definitions of these concepts:
Property
Property consists of a bundle of liberties that determines what an individual may or may not do with the resources in his possession. There is no discontinuity in this discussion of liberties in moving from physical resources to intellectual resources, for example, from land to inventions. The same basic principles apply. Liberties may be determined by custom, by natural law or by some centralized authority. The liberties, however determined, describe the extent to which an individual may possess, use, transform, transfer or exclude others from some resource. These liberties are not immutable. They may change over time. At any one point in time, however, they constitute a detailed answer to four fundamental questions:
How is ownership established?
What can be privately owned?
What may owners do with their property?
What are the remedies for the violation of property liberties?
To the degree that property liberties exist, owners enjoy a zone of privacy in which they may exercise their will without being answerable to others. The extent of this zone is an important determinant of the negative freedom enjoyed by the individual (Hayek 1960). An association of individuals in which there is no such zone of privacy is essentially unfree.
Contract
Once property liberties have been defined and specified, the focus then settles on mechanisms for facilitating the transferability of such liberties as between individuals. This is principally the function of the law of contracts. Rules governing contract may be determined by custom, by natural law or by some centralized authority. Such rules address two fundamental questions:
What promises can be enforced?
What are the remedies for breaking enforceable promises?
The nature of the responses provided to these two questions determines the extent to which individuals operate within the framework of a private or a public ordering. The closer a system of rules approximates to the conditions of a private ordering, the more nearly it satisfies the conditions of negative freedom. An association of individuals in which the rules governing contract do not approximate to a private ordering is essentially unfree.
Tort
Individuals may invade the property of others in many ways. Some such invasions are intentional and some are accidental. Some are serious and some are trivial. Some such invasions may constitute crimes and some may not. Suppose that the victim of such an invasion seeks redress. Since he and the transgressor are private persons, redress must be obtained through private law.
Where the damage affects resources that are not defined as property - for example if they affect the victim's body or his reputation - or where the damage takes the form of an accident, where traditional property law remedies do not apply, the victim cannot seek redress through the law of property. Where the damage does not arise as a consequence of a broken promise, the victim cannot seek redress through the law of contract. In such circumstances, there exists a need for a third major body of private law other than property or contracts.
The law of torts, whether it is determined by custom, by natural law or by some centralized authority, provides such a third body of law concerned with redressing wrongs that do not arise from breach of contract and that cannot be remedied by an injunction against future interference. The precise boundary between the private law of tort and the criminal and regulatory laws differs according to different legal doctrines.
The law of tort addresses two fundamental questions:
What elements must be present for a tort to have occurred?
What are the remedies available to the victim of a tort?
As a general rule, the wider the range of the law of tort and the narrower the range of the criminal and regulatory laws, the greater is the negative freedom enjoyed by an individual in society. Within the law of tort itself, the more restrictive the elements deemed necessary for recovery by a victim, and the more compensatory and less penal the remedies provided by the law, the greater the zone of privacy, and thus the degree of negative freedom made available to the individual.
Before Resorting to a Centralized Authority
The State of Nature
Cyberspace, in its present form, is a state of nature in the sense defined by John Locke in 1690. For Locke, the state of nature is 'a state of perfect freedom to order their actions, and dispose of their possessions, and persons, as they think fit, within the bounds of the law of nature, without asking leave, or depending on the will of any other man' (Locke, II, para. 4). The state of nature is also a state characterized by the absence of a common judge: 'Want of a common judge with authority, puts all men in a state of nature' (Locke II, para. 19) and 'Men living together according to reason, without a common superior on earth, with authority to judge between them is properly the state of nature' (ibid.).
Locke defined this state of nature, much as I view cyberspace at the present time, as based upon relationships between individuals characterized by a strong moral content. 'The state of nature has a law of nature to govern it, which obliges every one: And reason, which is that law, teaches mankind, who will but consult it, that being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions' (Locke II, para. 6).
The law of nature implies that the state of nature is not a state of license, but rather is characterized by duties and obligations to which all individuals are subject: 'But though this be a state of liberty, yet it is not a state of licence' (Locke II, para. 6). Man has the right, in the state of nature, to punish those who transgress his natural rights: 'the execution of the law of nature is in that state, put into every man's hands, whereby every one has the right to punish the transgressors of that law to such a degree, as may hinder its violation' (Locke II, para. 7).
The state of nature, as defined by Locke, is by no means the bleak jungle characterized by Thomas Hobbes in his book, Leviathan (1651). For Locke 'It is a state of limited safety and considerable uncertainty, a state of significant but not desperate "inconveniences", a state to which only certain limited forms of political society will be preferable' (Simmons 1993, 26).
At one extreme, Locke describes the state of nature as ' a state of peace, good will, mutual assistance and preservation' (Locke II, para. 19. At the other extreme, he describes it as 'a state of enmity, malice, violence and mutual destruction' (ibid.). Since individuals almost always fall between these two extremes, the social characterization of the state of nature is a mixed account, or as Locke puts it, 'one of mediocrity' (ibid.). It is a state to which only certain limited forms of political society will be preferable.
In contemplating any decision whether or not to resort to some form of centralized authority, therefore, it is important to understand the nature of the goals that we are attempting to achieve.
The limits of conseqentialism
Despite much high-flown rhetoric, most individuals pursue the 'grand criterion' of political hedonism by which they approve of systems that mainly favor themselves and disapprove of systems that mainly favor others (Jasay 1996, 5-1). Such a principle has no hope of generating a semblance of basic agreement among individuals whose tastes and attributes differ. 'It is difficult to see why a loser in a competitive struggle should support the market system when it encourages the development of character traits whose existence in others works to his disadvantage and which he himself does not possess' (Buchanan 1985,51).
Modern utilitarians - those who rely upon the Kaldor-Hicks potential compensation test to compare the consequences of alternative systems of alternative policies - attempt to circumvent the problems posed by differences in tastes and values by using the seemingly common measuring rod of money. This attempt fails patently to balance incommensurables in any value neutral way. Economists know full well that utilities are neither measurable on a cardinal scale, nor are they comparable among individuals. The potential compensation test is a hoax perpetrated on an unsuspecting public to claim policy significance where it does not exist (Rowley and Peacock 1975). Since compensation is not paid, the market test - the only test relevant where there are both gainers and losers from political acts - simply does not exist.
A non-consequentialist alternative
Politics differs from voluntary exchange in a fundamental way, despite all protestations to the contrary by those who put their faith in social contract. It involves the use of an irresistible power, namely the monopoly of the legitimate use of force to impose the will of some on all, including on those who would reject it if they could (Jasay 1996, 5-9).
For politics, given the failure of the consequentialist ethic to provide effective guidance for policy, the Hippocratic precept applies with particular stringency: first, avoid doing harm. The state that ignores this precept and acts on consequentialist logic will quickly fritter away the legitimacy of its monopoly of force - if indeed it ever had it. This precept offers a basic presumption against coercion by the state. The first, avoid doing harm precept thus strongly commends the state to when in doubt, abstain. Admittedly, this is a difficult presumption for the state to honor in an environment already permeated by consequentialist philosophy. Fortunately cyberspace is not yet such an environment.
What then does when in doubt, abstain offer by way of guidance to the state that contemplates coercion. The first principle is that applying coercion is legitimate only when it is positively invited by the prospective coercee. Rational individuals may invite such coercion when confronted by transaction costs - default temptations, free-rider temptations and hold-out temptations - that otherwise would obstruct the solution of bargaining problems.
It is not enough, however, for the state to rely upon hypothetical invitations since these have no higher standing than hypothetical contracts. It must respond only to actual invitations if it is to adhere to the when in doubt abstain precept. By so restraining its impulse towards intervention, the state will allow opportunities for private solutions to emerge, before it responds to carefully formulated requests by individuals to be coerced.
Given this presumption against coercion, the basic rule is that a person is presumed free to do what is feasible for him to do. This presumption is subject to two constraints. The first constraint relates an individual's proposed actions to his own obligations. The second constraint relates an individual's proposed actions to harm that such actions would impose on others. If neither of these constraints binds, the individual confronts no burden of proof concerning the admissibility of feasible actions. The burden of proof rests with those who would challenge such actions.
The implications for a private system of law.
If the twin presumptions of first avoid doing harm and when in doubt abstain are honored, the role of politics, if there is one at all, is confined to upholding the customary laws of property, contract and tort. It is by no means certain that this role is indispensable. There is no compelling evidence that suggests that property, contract and tort cannot be adequately and efficiently protected by extra-political means.
Bruce Benson (1990) in his seminal book, entitled: The Enterprise of Law, clearly traces the ability of customary law to offer a viable alternative to the authoritarian law imposed by the state. Customary law is recognized primarily on the basis of reciprocity. Each individual recognizes the benefits of behaving in accordance with other individuals' expectations, given that others also behave as he expects (Benson 1990, 12).
Such reciprocity is the basic source both of the recognition of duty to obey law and of law enforcement in a customary system of law. In such circumstances, private property liberties and the rights of individuals constitute the most important primary rules of conduct. The incentives to obey the law must be largely positive embedded in the notion of mutual reciprocity.
Offenses under customary law are treated as private wrongs or torts, rather than as crimes. This requires the emergence of clear codes of conduct enforced through reciprocally acceptable, well-established adjudication procedures accompanied by effective legal sanctions (Benson 1990, 13). The net benefits of resorting to adjudication are those associated with avoiding violent conficts.
Dispute resolution can be a major source of legal change. Adjudicators will often make more precise those rules about which differences of opinion exist. They may even supply new rules because no generally recognized rule covers a new situation. (Benson 1990, 14). If this new rule is generally accepted it becomes part of customary law. It does so by voluntary consent, not by coercive imposition. Mutually detrimental rules will be ignored and mutually beneficial rules will be adopted.
Because rules of customary law are in the nature of torts, the aggrieved party must pursue prosecution. Individuals have strong reciprocal incentives to form mutual support groups for legal matters. The group members obligate themselves to aid any other member in a valid dispute, given that the member has fulfilled his obligations in the past. Thus, ability to obtain support in a dispute depends on reciprocal loyalty (Benson 1990, 14).
The impetus for accepting adjudication in a customary legal system is the omnipresent threat of force. Use of force is unlikely to be the norm. Agreements over adjudication typically are a lower cost solution. If an accused offender is found guilty by the adjudicator, punishment in a customary system of law will be economic in nature, taking the form of restitution, in the form of a fine payable to the plaintiff.
A judgement under customary law typically is enforceable through the threat of ostracism by the community, outlawing those who do not comply from all future benefits available from the community. In extreme cases, outlaws may be hunted down mercilessly and disposed of at the disposition of the community. This process of retribution may be difficult in the case of cyberspace because miscreants may be able to shield themselves by relocating to permissive communities. Such communities, however, by definition, are high cost enforcers of customary law.
The implications for an authoritarian system of law
Suppose that the transaction costs associated with customary law prove to be too high with respect to cyberspace. Suppose, further, that a particular nation state determines that it would benefit by attracting cyberspace commerce to its own domain. How should it determine a legal system that would prove attractive to potential customers, given that cyberspace will always be characterized by competing legal systems. If the perspective developed in this presentation is persuasive, the following legal rules should be applied:
a) The law of property
Let exclusion stand is the principle that should underpin the law of property in cyberspace. Countless arguments can be mounted by those who lack property, or who are weak of will, or are short of talent or who are short of luck, to justify the state in breaking down exclusion and in redistributing resources in their favor. All such arguments are utilitarian in nature. They all breach the when in doubt, abstain precept.
There is another moral argument in defense of the exclusion principle or of the categorical nature of property, whose ownership entails no obligation to share it with others or to include non-owners in the benefits that it produces. In the absence of such an exclusion principle, legitimate ownership is forever impossible, since no one can become the rightful owner of something that was not previously clearly owned.
The legitimacy of what is variously called 'first taking', 'first appropriation' original occupation', or 'first possession' is crucially important to this theory of private property and should become a first principle of the law of property in cyberspace. This principle rests on the logic developed in section 2 of this presentation. If taking first possession is feasible and is admissible i.e. if it is not a tort (trespass) and violates no right (true by definition) then it is to be allowed. Taking exclusive possession is a liberty, and only a contrary right can obstruct or oppose it.
In such an environment, two alternative acts constitute appropriation and vest ownership in the performer. The first such act can be labeled 'finding and keeping'; the second such act can be labeled 'enclosure'. To the extent that the taking of first possession by finding and by enclosure is a feasible act, it is also admissible, hence a liberty, since the thing possessed, by definition, is previously unowned. Even though an act of first possession obviously precludes the liberty of another person to assume that same first possession, a liberty is not countered by a rival liberty, only by a prior right (Jasay 1996, 5-43).
Where first possession rights are infringed, the appropriate remedy is injunction where transaction costs are deemed to be sufficiently low for the parties to negotiate around the ruling. If the transaction costs are deemed to be too high for private negotiations to occur, then the appropriate remedy is damages, carefully assessed by the adjudicator to provide compensation for damages incurred.
The law of contract
Property properly defined is not a right, or a bundle of rights, but a liberty to act upon owned objects. The liberty to act includes use and disposition. The most important liberty of disposition is freedom of contract, whereby an owner transforms some of his liberties to use into obligations for himself and rights to others. While the owner has a liberty to use, the non-owner requires a right to use, a right that he can obtain only through contract. Contract, in this perspective, is not a privilege conferred by the state. Non-interference by the state with the liberty to contract follows directly from the first avoid doing harm precept. Only if both parties request coercion, for example, to enforce the contract, is this presumption legitimately displaced.
The law of contract that must prevail in such circumstances is the classical bargain law of contract in which the necessary and sufficient conditions are offer, acceptance and consideration. Such contracts are to be honored with respect to the precise wording of the bargain, and are void only in circumstances of fraud, coercion, mutual mistake and incapacity by reason of infancy or insanity. Any other limitation imposed by the state in the absence of agreement by those who would be coerced transgresses the first avoid doing harm precept. In particular, the state should refrain from voiding any contract on grounds that it is unconscionable or against the public interest, unless tortious harm is imposed upon identifiable third parties.
The bargain theory also has an answer to the question: what should the remedy be for the breach of an enforceable promise? The promisee is entitled to the benefit that the bargain provided i.e., the expectation damages. This is the solution that the market-orientated legal system will provide.
The law of tort
The liberty to act, whether with respect to property or to contract is constrained by the rights of others not to have harm imposed upon them by such acts. In a legal system governed by the first avoid doing harm precept, the law of tort will be narrowly defined, since a broad definition will jeopardize the liberty to exclude and to contract. Once again, the classical law of tort will apply.
Three elements must be present for recovery by the plaintiff under the traditional law of torts:
the plaintiff must have suffered harm;
the defendant's act or failure to act must cause the harm;
the defendant's act or failure to act must constitute the breach of a duty owed to the plaintiff by the defendant.
These elements define a tightly constrained negligence-based system of tort law. To these elements, I suggest that a contributory negligence rule should also be applied, barring a plaintiff from recovery where his behavior deviates from a due care standard. In the case of tortious acts, compensatory damages is the appropriate remedy, save where the tort is of a continuous nature making it feasible to apply the injunction remedy. There is an efficiency-based argument for a strict liability rule; and strict liability rules offer a more comprehensive defense of property rights than negligence rules. However, strict liability rules, are too easily accessed as vehicles to invade contractual liberties. As such, they clearly violate the precept of first avoid doing harm.
Conclusions
Any state that desires to play a major role in cyberspace should be governed in its legal interventions by the framework established in this paper. Where private acts are both feasible and admissible, state coercion is illegitimate; indeed, are tortious. They deform the value of liberties and rights. Only by the explicit invitation of those who would be coerced by state intervention can this presumption be overruled. Where private acts are feasible but inadmissible, as for example is the case with respect to contract breaches and tortious harms, the presumption against state intervention may be displaced. Even in such circumstances, the prudent state will delay in order to determine whether private resolutions of the problem can be devised. When it does intervene, prudentially, it will mirror the rules that emerge and evolve through custom in the absence of coercive authority
Dr. Charles K. Rowley is the General Director of The Locke Institute and Professor of Economics at George Mason University, United States. © The Locke Institute 1998
This paper was prepared for presentation at the Center for the Study of Emerging Institutions conference on Lex Cybernatoria: Voluntary Rule of Law in a Transnational Medium, Reykjavik, Iceland, October 15-18, 1998.
Selected Bibliography
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Buchanan, A. (1985). Ethics, Efficiency and the Market. Oxford: Clarendon Press.
Cooter, R. and Ulen, T. (1997). Law and Economics. New York: Addison-Wesley.
Epstein, R.A. (1995). Simple Rules for a Complex World. Cambridge, MA: Harvard University Press.
Hayek, F.A. (1960). The Constitution of Liberty. Chicago: University of Chicago Press.
Hobbes, T. (1651). Leviathan. Ed. M. Oakeshott. Oxford: Basil Blackwell, 1946.
Jasay, A. de. (1996). Before Resorting to Politics. The Shaftesbury Papers,5. Cheltenham, UK: Edward Elgar Publishing.
Locke, J. (1690). Two Treatises of Government. Ed. P. Laslett. Cambridge: Cambridge University Press, 1967.
Rowley, C.K. (1998). 'State of nature and civil society' The New Palgrave Dictionary of Economics and the Law, Volume 3 (Edited by Peter Newman) London and New York: Macmillan, 588-592.
Rowley, C.K. (1998). 'Law and economics from the perspective of economics' The New Palgrave Dictionary of Economics and the Law, Volume 2 (Edited by Peter Newman). London and New York: Macmillan, 514-524.
Rowley, C.K. (1998). 'Wealth Maximization in Normative Law And Economics: A Social Choice Analysis' George Mason Law Review. Volume 6, No. 4, Summer , 971-996.
Rowley, C.K. and Peacock, A.T. (1975). Welfare Economics: A Liberal Restatement: Oxford: Martin Robertson.
Simmons, A.J. (1993). On the Edge of Anarchy. Princeton: Princeton University Press.
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