Econ 522 – Lecture 16 (Nov 1 2007)
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 division 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 civil
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
deliberate harms, this will usually be fairly easy. 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. It’s impossible to negotiate with every driver for the right to hit
you; 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, 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, that 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 lowprobability harms.)
In theory, harm has a simple economic explanation: 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:
$
Health
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 equal to the actual harm done sets the right 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. 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. 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, there’s no precise legal
definition for how close the action must be to the harm.
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.
When harm and causation are sufficient for a tort to exist, the rule is referred to as “strict
liability”. Under the common law, strict liability tends to be the rule for unusually
dangerous activities. The book gives the example of a construction company blasting
with dynamite – the company is liable for any harm caused by the blasting.
In most cases, however, there is a third element that must be demonstrated in addition to
harm and causation. It must be shown that the defendant breached a duty he owed to
the defendant, and that this breach led to the harm. If I punch someone in a bar, I breach
a duty not to punch them. When an injurer breaches a legal duty, he is “at fault,” or
“negligent.”
A liability rule requiring all three elements – harm, causation, and fault – is referred to as
a “negligence” rule. Under a negligence rule, a defendant can argue that an accident
occurred despite his best efforts to prevent it. That is, under a negligence rule, even if I
caused you harm, I’m not liable if I satisfied the applicable standard of care and the
accident happened anyway. (For accidents, the “duty” owed to the victim is the duty of
care – when that duty is breached, that is, when I am careless or negligent, I am liable;
when I meet that duty, even if you get hurt, I’m not liable.)
Of course, this leaves the question of who determines the applicable standard of care –
that is, how careful you have to be to not be considered negligent. In some cases, there
may be a clear yes/no test – the swimming pool had a lifeguard on duty or it didn’t. In
many cases, there isn’t. Is driving a car 50 MPH on a particular road negligent? What
about 51? 52?
Cooter and Ulen illustrate this with a very complicated diagram, where x is a continuous
variable representing the amount of precaution you take, and x~ is the legal standard of
care. This divides precaution into two ranges: a “permitted zone” x >= x~, and a
“forbidden zone” x < x~ where you would be liable.
How is this standard of care determined? In some cases, the government imposes safety
regulations that set the standard – speed limits for highway driving, the requirement that
bicycles have brakes, workplace regulations, and so on. Some are left vague – the
definition of “reckless driving” may depend on the road, the time of day, the weather.
In these situations, the common law tends to focus on the duty of reasonable care. Like
foreseeable reliance, this is the level of care that a reasonable person would have taken
under the circumstances. If you took less care than a reasonable person would have, you
are liable; if you took more care, you are not. (The civil law tends to rely less on
standards of “reasonableness”, and tries to be more specific in what duties are owed and
what level of care is required.)
Under a rule of strict liability, proof of negligence is unnecessary; proving harm and
causation is enough to establish liability. Under a rule of negligence, you must prove
harm, causation, and negligence.
Interestingly, the movement between these two rules has not always gone in the same
direction. Strict liability was the usual rule in much of Europe before the 1800s. By the
beginning of the 1900s, negligence became the usual rule; but in the second half of the
1900s, strict liability experienced a rebirth, especially for manufacturer liability in
American consumer products. Manufacturers in the U.S. are now held liable for harms
caused by defective products, whether or not they were at fault – we’ll see examples of
this shortly. (The Friedman book spends a surprising amount of time on the problem of
who should be responsible when a bottle of Coke explodes, which I guess used to be a
pretty big problem before they switched away from glass bottles.)
Next week, we’ll get into a formal economic model of tort law, and the different
incentives that strict liability and negligence rules create for avoidance of harm. I’d
rather not start that today, so instead, I’ll wrap up with two more examples from
Friedman showing why causation is a tricky question.
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.