Paul Rubin’s theory of common law efficiency

By Tarunya Shankar

Editor’s note:

In the common law system, there are three players – the victim, the injurer and the authority of law. As per Rubin, the theory of accident liability applies, and he calculates the total cost of each party involved, with the party having the heavier cost being held liable. Rubin further analyses the possibility of these parties working around the justice, and away from the decisions of judges. This paper also touches upon the importance of precedents, and incorporating the effects of efficient rules that must be be maintained and inefficient rules that must be litigated until overturned. Finally, it examines the cost to implementing such efficiencies.

Introduction

The first thing one recognizes when studying Rubin’s work on common law efficiency is his simple acknowledgement regarding the existence of such efficiency, observed by his naming his work “Why Is The Common Law Efficient?”. Rubin’s theory is essentially a continuation of Posner’s theory that the common law exists and strives towards economic efficiency (Posner, 1972), as he purposes that Posner has failed to enlist the reasons for this efficiency oriented theory effectively or in a persuasive manner. As suggested by the title, Rubin in his work attempts to theorise an adequate explanation for the concluding that the system of common law functions in such a manner as to ensure economic efficiency and further, he breaks down the various players in the common law system and their functions in achieving said efficiency (Rubin, 1977).

Rubin’s analysis

There are essentially only three players in the common law system, that is, the victim or complainant, then the injurer or the defendant and finally the authority of law who is the presiding judge (Posner, 1972). Naturally, the representatives of the party are in play as well, but they are not considered as separate individual parties as they simply carry out the actions desired by the concerned parties, the involved players. Rubin follows this line of thinking for the most part and he adequately explains his thoughts or theory with the use of an example of accident liability (Rubin, 1977). The efficient outcome can be best deciphered by the usage of a formula to calculate the total cost to each party involved in the accident (Rubin, 1977). To arrive at this formula, Rubin supposes an accident in which the injurers are part of group A and the victims are part of group B, and the optimal solution can be calculated depending on whether the liability is placed on A or B, that is, the injurer or the victim. The first thing to be done is calculate the total cost of each of the parties in the accident, which includes the cost of avoiding or preventing the accident to begin with and the number of accidents likely to occur taken with the cost of the accident after its occurrence (Rubin, 1977).

Rubin then postulates a situation in which the total cost for B is lesser than the total cost for A, implying that efficiency is achieved when B is held liable and bears the burden of cost, that is the victim. But the question as to whether or not efficiency will be achieved is dependent on the assignment of liability and with regard to this aspect the courts are held to follow precedent, that is previous decisions regarding similar cases of assignment liability. Assume R to be the probability that B is not held liable in accordance with precedence, i.e, the probability that B will win the suit. If the probability that B will win the suit is greater than 50%, it implies that the precedence in place is in favour of B, the victim, and in case the probability that B will win the suit is less than 50%, the implication is that the precedence is in favour of A. Thus, by this logic, if the efficient solution is one in which B is held liable, then the efficient solution exists when the probability that B will win the suit is less than 50% and the precedent is in favour of A. It is at this point in his theorizing that Rubin disagrees with Posner, saying that even though judges do for the large part make decisions relying solely or partly on precedent, it is the need for the other players in the common law system to change the presiding precedent to one they find to be efficient that more often than not leads to constant and persistent litigation and how other circumstances can lead to efficiency. Rubin further analyses the possibility of these parties working around the justice, and away from the decisions of judges, by one party, say party B, paying a specified amount, less than that would be determined by the courts in cases where precedent held that party B would be held liable, thus removing the need for the common law system to achieve the efficient solution. Rubin’s analysis involves the feasibility of such situations in various cases, depending on the liability assignment, the total costs of the accidents, using an accident as an example, and the transaction costs involved for both taking the case to court as well as avoiding the common law system (Rubin, 1977).

Importance of precedents

The importance of precedents when determining the efficiency of common law is dependent on the interest either or both of the involved parties, i.e, the victims and injurers, have in setting a precedent for future cases of a similar nature. As such, three cases arise, whereby, neither part is interested in setting a precedent, both parties are interested in setting a precedent and finally only one party has an interest in setting a precedent (Rubin, 1977).

Posner postulates a situation in which both parties have an interest in setting a precedent of law, and thus both parties will continue the process of litigation until such a point as they both believe an efficient solution has been reached by the courts (Posner, 1972). Rubin, in agreement with Posner, states, “If rules are inefficient, there will be an incentive for the party held liable to force litigation; if rules are efficient, there will be no such incentive. Thus, efficient rules will be maintained and inefficient rules litigated until overturned.” Thus, the common law system, the system of litigation, functions with a dependency on the parties interest in the precedence and the need for the efficient rule to be set and enforced for future reference as well as for the benefit of the individual parties and their respect interest in the result of the case, a result handed out by a judge (Rubin, 1977). The urge for further litigation usually arises when the cost required to be paid by the party held liable under the inefficient rule increases or becomes exponentially large (Rubin, 1977). As Rubin states, “… If rules are inefficient, parties will use the courts until the rules are changed; conversely if rules are efficient, the courts will not be used and the efficient rule will remain in force.”(Rubin, 1977). Rubin’s logic differs from Posner’s in that judges do not “drive” the process of attaining efficiency, they simply speed up the process. Essentially, efficiency will be arrived at, with or without the decisions of judges, though judges do play a large role in achieving efficiency.

The second case is one in which only one party has an interest in setting a precedent for future cases, in which case the scales are tipped in favour of that party (Rubin, 1977). If there are 2 parties, A and B, but only B has a vested interest in future cases of a similar nature, then B will continue to litigate until the court grants a verdict that is consistent with B’s interest, which unfortunately will be inconsistent with the economically efficient outcome, as has been the case in nuisance law (Rubin, 1977).

Finally, there are the cases in which neither party is interested in the precedent to be set for future cases and have only a vested interest in their own position and their individual liability (Rubin 1977). In this particular, as with the previous one, Posner’s theory of efficiency being dependent on judges is irrelevant as neither party has any vested interest in taking the issue of liability assignment to the court, and thus the decision of a judge is not a factor in efficiency. In fact, in such a situation, a judge is required to make a decision if there is a conflict regarding the possible outcome of the case, an uncertainty that cannot and has not been made certain by precedence.

Posner’s theory of common law efficiency, in the researcher’s opinion can be summed up in one sentence by Priest, which says, “Since litigation is more likely than settlement where, ceteris paribus, the stakes of a case are greater, disputes arising under inefficient rules will be more likely relitigated  than disputes arising under efficient rules.” (Priest, 1977). Rubin’s theory of common law efficiency does not dispute this but simply adds that the inefficient rule may not be litigated or relitigated in situations in which neither party has an interest in the efficiency of the rule.

Costs of common law efficiency

“The common law method is to allocate responsibilities between people engaged in interacting activities in such a way as to maximize the joint value, or, what amounts to the same thing, minimize the joint cost of the activities.” (Posner, 1972)

Efficiency in the common law system always inevitably boils down to cost. The questions raised and answered by legal economists revolve around the total costs incurred by the two parties in case of a conflict, the alternative costs of settling the conflict and a comparison of such a cost to the cost likely to be incurred based on the rule in place, efficient or inefficient, if the parties were to go to court to assign liability as well as compensation. It stands to reason, thus, that the higher the transaction costs of going to court for both parties, the less likely the parties are to go to court to settle the dispute. Thus, if the rule is inefficient in such a case, the rule in unlikely to be litigated and hence remains inefficient.

Social costs must be designated to both the parties to truly ensure efficiency. For example in a case where there is a single polluter and many victims, the victims should pay any avoidance costs that they can afford and the polluter should pay the victims for any harm afflicted on the victims as a result of the pollution, though the amount of compensation should be at par with the harm done and not any more (Dewees and Halewood, 1992). In fact, in such case, analyses have been done that show that depending on the types of cases, for example nuisance cases, the property rights are assigned different levels of importance and thus any party violating these rights, would be held liable only to the extent the court deems the property rights important or valuable (Dewees and Halewood, 1992). But the result of settling disputes in court is that there exists a possibility of nuisance cases being decided on the basis of simple damages or basic injunctive relief instead of the actual total sum cost of the conflict that occurred (Dewees and Halewood, 1992). Rubin, similarly, deals with the complications that arise when dealing with the efficient and inefficient rules of common law, such as corruption, bribery, or the total costs of settling outside the court, which Rubin defines as net court costs, the value of court costs minus the cost of settling outside the court. Gould states that such court costs, if extremely high could result in decreasing inefficient litigation (Gould, 1973), but at the same time could result in similarly decreasing efficient litigation (Rubin, 1977). “It is argued that the traditional efficiency of the common law arose in the context of a particular historical institutional setting and that changes in that institutional framework have made the common law more susceptible to rent-seeking pressures and thereby undermined its pro-efficiency orientation.” (Zywicki). This statement is made with regard to the theory of supply and demand for efficiency in the system of litigation.

Supply and demand of efficient rules

The efficiency of common law can best be determined by the production of efficient rules by the court. This efficiency of these rules functions in a manner similar to that of the goods and services market, as it is dependent upon the supply of these efficient rules as well as the demand for them by the parties involved (Zywicki). A similar theory is that the legal system is to be thought of as a type of market, that caters to all different types of interest groups, and throws around the concept of bidding, or demanding through litigation, newer or more efficient rules to replace the inefficient ones currently in play.

In fact, it can be said that the supply and demand of common law rules are dependent on this same interest of the litigants as Rubin theorised. It is the need for an efficient rule to be set into place that leads to the generation of a demand for the framing and enforcement of these efficient rules, and which also, in many ways, explain the movement of the common law system away from the production of efficient rules, in cases where private parties have more interest in personal or financial gain than in the setting of a precedent or requirement of an efficient rule (Zywicki). In accordance with this theory, the rise and fall of demand of efficient rules lies in the hands of litigants and their interest in either efficiency or personal gain, and the rise and fall of supply of efficient rules is dependent on the judges and the common law system, and whether the precedents set are deemed to be efficient or not by the judges. In that manner, both Posner and Rubin analysed the efficiency of common law accurately, but simply from opposing sides.

Rent-seeking comes into play when the supply of these rules is dependent on the demand for efficient rules created not by the general body but rather that of certain special interest groups. The rules, due to the complications Rubin had foreseen, become inefficient as the courts and administration that implement these rules choose to cater specifically towards those special interest groups (Zywicki).  In fact, parties may choose to divert their wealth from court costs or settlement costs to invest in “rent-seeking” new legislations in their favour. Thus, we see efficiency in a biased form, a shift in the legislation and litigation from being favourable to efficiency, to being favourable to the investors.

In general, parties will be willing to invest resources up to the amount to be transferred in seeking favorable legislation. Consider, for instance, an import quota that if enacted would enrich the American steel industry by a total present value of $100 million over the expected life of the legislation (say 10 years), as compared with expected profits without the quota. In such a case, the steel industry would be willing to invest up to $100 million in the form of campaign contributions, media advertising, in-kind campaign help and the like.12 Of course, some of the benefit—and thus some of the cost—will also flow to the employees of firms in the steel industry. So the “industry” that benefits includes all relevant actors, such as shareholders, employees, management, etc. In contrast, the costs of the quota will be diffuse and borne by the many consumers of steel and steel products, who will now be forced to pay slightly higher prices for raw steel and goods manufactured with steel. The exact division of the $100 million surplus among these groups is unimportant for current purposes; what matters is the recognition that legal changes can enrich some groups at the expense of others and that rational parties will invest resources so as to bring about legal changes in order to capture these gains, if the benefited parties are sufficiently able to organize to mount an effective lobbying effort.” (Zywicki).

Essentially, Rubin stated that if the common law system were to be analysed as if it were the market, then the private litigants would be the consumers that consist of the demand side of the market while the judges would be the suppliers. Thus it goes to reason that the judges make the legal rulings that resolve the conflict at hand, but whether or not to depend on these rulings for future guidance is dependent on the demand created by the private litigants, or the “consumers” (Rubin, 1977). And the rents received on these efficient rules are long term, and thus a trend can be seen whereby the parties that repeatedly take conflicts to the court are those who have an incentive to determine the precedent to be set and the outcome of future cases.

Incorporating the effect of precedence

Another theory introduced to efficiently incorporate these precedents without the prejudice that was speculated in the past paragraphs, was one which calculated the amount that is required to be spent by both litigant parties in order to ensure that both parties ended up with an equal probability of winning the case. If the ratio of these costs is equivalent to one, then it is presumed that the courts are unbiased (Goodman). Essentially, it is the party with greater and more exorbitant economic stakes, or risk, that will be successful while litigating. If the inefficient rule is not in their favour, litigation will continue until the efficient rule is supplied by the judge. However, if the inefficient rule is in the favour of the aforementioned party, then the rule will be litigated until made efficient only if the opposing party has the necessary resources to do so and is of the opinion that their risk is greater. Conclusively, one can determine that individual litigants are usually more inclined to fight in court for personal or financial gain than for the socially intrinsic or aesthetic value of a rule (Goodman). “Of course, the individual litigants are motivated by private gains, not social ones. Nonetheless, if the ratio of private benefits which derive from a favorable decision accurately reflects the ratio of social benefits-as would be the case if the parties are representative of the market as a whole-or if the ratio of private benefits does not unduly distort the ratio of social benefits, we expect, over a series of cases, an efficient precedent to be established.” (Goodman).

Conclusion

The economic efficiency of common law has gradually developed over a large period of time, though the focus of this development was largely derived from the theories of Posner and Rubin regarding common law efficiency. From these analyses, one can infer that economic efficiency can be brought about by the individual litigants, and much like the manner in which the demand in the market is run by the preference of the consumers, the economic efficiency of common law is dependent upon the preference of the litigants, that is, whether they believe their economic gain or loss is greater or more likely to occur if they were to either go to court or settle instead. Essentially, if a litigant finds financial gain more attractive than the creation, or rather production, and enforcement of a new efficient legislation, then such a litigant will choose the cost of settling over the cost of litigation. This is because the cost of litigating will be exorbitantly high if the rule in place is inefficient, and the party the efficient rule favours, chooses to litigate until the efficient rule is passed. Rubin’s analysis of common law was wider than Posner’s, in that it included the value of the rule in place to the litigating parties and not merely the weightage given to the rule by the presiding judge. Since then, the analysis of common law efficiency has been further widened, to include the cost of equalizing the probability of the either party winning, to reduce the bias that has currently taken over the justice system. However, true economic efficiency can only effectively be achieved if both litigants and judges are made aware of what constitutes an economically efficient law in terms of monetary costs as well as social costs. The common law system is simply a machine, that, in order to function, depends on all cogs and screws to competently grind.

Edited by Neerja Gurnani

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