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Part D-I Part D-I

The Economics of Tort Law The Economics of Tort Law

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ObjectivesObjectives

The legal theory of Tort LawThe legal theory of Tort Law

Precaution and HarmPrecaution and Harm

The essentials of the economics of The essentials of the economics of tortstorts

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The Legal Theory of Tort LawThe Legal Theory of Tort Law

The The threethree elements of the traditional theory of torts elements of the traditional theory of torts

1. The plaintiff must have suffered harm1. The plaintiff must have suffered harm

2. The defendant’s act or failure to act must have 2. The defendant’s act or failure to act must have caused the harmcaused the harm

3. The defendant’s act or failure to act must 3. The defendant’s act or failure to act must constitute a ‘breach of a duty’ owed to the plaintiff constitute a ‘breach of a duty’ owed to the plaintiff by the defendant.by the defendant.

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1.1. If no If no harmharm was was actuallyactually suffered then there was no tort. suffered then there was no tort.

Examples: - The school bus company hires a driver with three Examples: - The school bus company hires a driver with three previous drunk driving charges and this driver is charged previous drunk driving charges and this driver is charged with drunk driving while driving your child home from with drunk driving while driving your child home from school. No accident, no harm, no tort - you cannot sue. school. No accident, no harm, no tort - you cannot sue.

- You find out that the classroom that you are sitting in has - You find out that the classroom that you are sitting in has been mistakenly painted with the radioactive paint. You been mistakenly painted with the radioactive paint. You are told that the probability that you will develop cancer are told that the probability that you will develop cancer over the next 25 years has tripled as a result. You cannot over the next 25 years has tripled as a result. You cannot sue for exposure (having suffered increased risk). You sue for exposure (having suffered increased risk). You must first develop cancer and then try to sue for the harm.must first develop cancer and then try to sue for the harm.

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2.2. Traditional theory requires that the defendant must have Traditional theory requires that the defendant must have ‘‘causedcaused’ the plaintiff’s harm.’ the plaintiff’s harm.

I punch someone and break his nose. I I punch someone and break his nose. I causedcaused the broken the broken nose. nose.

I attempt to punch someone, he steps back and falls into an I attempt to punch someone, he steps back and falls into an open manhole breaking his nose. I did open manhole breaking his nose. I did not causenot cause the the broken nose.broken nose.

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Causation and torts versus morality.Causation and torts versus morality.

An act can be ‘wrong’ (reckless, endangering, immoral, An act can be ‘wrong’ (reckless, endangering, immoral, criminal, etc.) but not a tort.criminal, etc.) but not a tort.

Ex: Ex: On New Years Eve my friends and I go out-of-doors On New Years Eve my friends and I go out-of-doors and fire off our hand guns. My shot happens to hit and fire off our hand guns. My shot happens to hit

and and kill my neighbour. My friends and I all did something kill my neighbour. My friends and I all did something equally stupid but only I committed a tort.equally stupid but only I committed a tort.

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Determining causation can be very difficult. It is a difficult Determining causation can be very difficult. It is a difficult philosophical proposition.philosophical proposition.

Cause-In-Fact Cause-In-Fact and the and the But-For-TestBut-For-Test

But for A would event B have occurred?But for A would event B have occurred?

If the answer to the above question is ‘no’ then A was the cause-in-If the answer to the above question is ‘no’ then A was the cause-in-fact. fact.

If the answer to the above question is ‘yes’ then A was not the cause-If the answer to the above question is ‘yes’ then A was not the cause-in-factin-fact

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Ex: Ex: I buy a camping stove that is defective. It blows-up I buy a camping stove that is defective. It blows-up destroying my campsite.destroying my campsite.

Had the stove not been defective would my campsite have Had the stove not been defective would my campsite have blown-up? No, therefore the defective stove is the cause-blown-up? No, therefore the defective stove is the cause-in-fact. in-fact.

The but-for-test is not always useful - Multiple causesThe but-for-test is not always useful - Multiple causes

My car brakes are defective (they are only 75% effective). My car brakes are defective (they are only 75% effective). One day I am ‘speeding’ down the road a pedestrian walks One day I am ‘speeding’ down the road a pedestrian walks out in front of my car and I slam on the brakes and hit her. out in front of my car and I slam on the brakes and hit her. What does the but-for-test say? Both the defective brakes What does the but-for-test say? Both the defective brakes andand my speeding caused the accident. my speeding caused the accident.

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DistantDistant and and proximateproximate cause cause

I realize that my brakes are defective so I pull over and park I realize that my brakes are defective so I pull over and park on the side of the road but my car is partially on the on the side of the road but my car is partially on the pavement. Another car hits my car. But-for-the defective pavement. Another car hits my car. But-for-the defective brakes the accident would not have occurred is the brake brakes the accident would not have occurred is the brake manufacture at fault?manufacture at fault?

Generally the ‘proximate’ cause establishes liability under the Generally the ‘proximate’ cause establishes liability under the traditional theory (I parked my car incorrectly.) traditional theory (I parked my car incorrectly.)

- I had the ‘l- I had the ‘last clear chance’ ast clear chance’ to avoid the accidentto avoid the accident

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The concept of The concept of cause in tortcause in tort and and functions in economic modelsfunctions in economic models

Consider economic models of utility or profit max.Consider economic models of utility or profit max.

Each individual has some utility functionEach individual has some utility function in which there are in which there are variables the values of which make them happier, less variables the values of which make them happier, less happy, more profit, less profit, etc.happy, more profit, less profit, etc.

Level of well-being, for me is = U [good health, wealth, Level of well-being, for me is = U [good health, wealth, consumption (food, clothing, cars, movies, consumption (food, clothing, cars, movies, cigarettes cigarettes ...), ...), peace of mind, peace of mind, safe neighbourhoodsafe neighbourhood, ...]., ...].

Level of well-being, for you is = V [good health, wealth, Level of well-being, for you is = V [good health, wealth, consumption (food, clothing, consumption (food, clothing, ‘fast’ cars‘fast’ cars, movies ...), peace of , movies ...), peace of mind, mind, clean airclean air, , driving fastdriving fast, ...]. , ...].

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You control a variable that affects my level of utility, You control a variable that affects my level of utility, driving fastdriving fast. . Our utility functions are said to be ‘interdependent’ Our utility functions are said to be ‘interdependent’

I control a variable that affects your utility, I control a variable that affects your utility, smokingsmoking. So again, . So again, our utility functions are ‘interdependent’.our utility functions are ‘interdependent’.

The firm has some profit function in which there are variables - The firm has some profit function in which there are variables - again think of this in very broad termsagain think of this in very broad terms

Level of profit, for the firm is = Q (labour, steel, asbestos, ...).Level of profit, for the firm is = Q (labour, steel, asbestos, ...).

The firm controls a variable that affects my level of utility, The firm controls a variable that affects my level of utility, asbestosasbestos. .

Our utility and output, or profit functions are said to be Our utility and output, or profit functions are said to be ‘interdependent’‘interdependent’

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When one agent controls a variable that affects another When one agent controls a variable that affects another agent’s utility or profit this interdependence gives rise to an agent’s utility or profit this interdependence gives rise to an externalityexternality..

Cause in tortCause in tort is usually created by such interdependencies is usually created by such interdependencies

- externalities.- externalities.

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3.3. Breach of Duty - Describing ‘fault’Breach of Duty - Describing ‘fault’

Fault arises if the defendant’s actions, or failure to act, does Fault arises if the defendant’s actions, or failure to act, does not meet some ‘legal standard of care’not meet some ‘legal standard of care’

A ‘duty of care’ is a legal standard which establishes the A ‘duty of care’ is a legal standard which establishes the minimum acceptable level of precaution in the given minimum acceptable level of precaution in the given situation. situation.

The defendant must be shown to have The defendant must be shown to have breached a dutybreached a duty that that was owed to the plaintiff. was owed to the plaintiff.

If the defendant has breached a duty of care, then he or she is If the defendant has breached a duty of care, then he or she is said to be said to be at faultat fault or or negligentnegligent. .

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Fault might result from an Fault might result from an intentional tortintentional tort or or negligencenegligence (failure to take precautions)(failure to take precautions)

In this course we will deal with In this course we will deal with unintentional tortsunintentional torts - accidents- accidents

Intentional tortsIntentional torts are generally crimes and are dealt with in are generally crimes and are dealt with incriminal lawcriminal law

Our study of torts is a study of Our study of torts is a study of accidentsaccidents

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The notion of The notion of negligencenegligence allows for a defence that the allows for a defence that the defendant followed all the applicable defendant followed all the applicable standards of carestandards of care. .

Therefore, despite the accident having occurred, and despite Therefore, despite the accident having occurred, and despite someone having been injured, no tort was committed. someone having been injured, no tort was committed.

Example: You fell into a hole on my construction site. But I Example: You fell into a hole on my construction site. But I had posted a warning and erected barriers which you had posted a warning and erected barriers which you ignored. I fulfilled my ignored. I fulfilled my duty to careduty to care – no liability, no tort. – no liability, no tort.

Negligence and liabilityNegligence and liability

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There are different notions of liability in tort lawThere are different notions of liability in tort law

If the rule is If the rule is strict liabilitystrict liability then establishing harm and then establishing harm and proximate cause is sufficient to establish liability for a tort.proximate cause is sufficient to establish liability for a tort.

When does When does strict liabilitystrict liability apply? apply?

Generally when the activity is inherently risky, creating Generally when the activity is inherently risky, creating unusual danger (using dynamite). Even if the defendant unusual danger (using dynamite). Even if the defendant takes all the normal precautions, if an accident occurs and takes all the normal precautions, if an accident occurs and someone is harmed, then they are at fault. The risk of loss someone is harmed, then they are at fault. The risk of loss is entirely shifted to the party who decides to engage is is entirely shifted to the party who decides to engage is such very risky activities. such very risky activities. This appears to apply to the This appears to apply to the manufacturer of almost anything in the USA.manufacturer of almost anything in the USA.

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How is the How is the legal standard of carelegal standard of care established? established?

By law (speed limits, fire regulations, health and safety By law (speed limits, fire regulations, health and safety regulations) more or less precise statements of the legal regulations) more or less precise statements of the legal standard.standard.

By unwritten social norms, community standardsBy unwritten social norms, community standards

By professional standards of practiceBy professional standards of practice

By Judges – in common law – ‘reasonable care’, ‘reasonable By Judges – in common law – ‘reasonable care’, ‘reasonable person’.person’.

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Legal Standard of Care for Continuous PrecautionLegal Standard of Care for Continuous Precaution

Pr. of an accidentPr. of an accident Pr. of an accidentPr. of an accident

x = amount of precautionx = amount of precaution

100%100% 0%0%

Forbidden zoneForbidden zone Permitted zonePermitted zone

x’

x > x’x > x’x< x’x< x’

x’ = standard of carex’ = standard of care

x -----------x -----------

<---------- <---------- Pr. of accidentPr. of accident

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Examples of PrecautionExamples of Precaution

Height of fence around a swimming poolHeight of fence around a swimming poolMaintenance schedule on aircraftMaintenance schedule on aircraftDriving speedDriving speedBrake inspection Brake inspection Fire alarms and sprinklers Fire alarms and sprinklers Doctor taking a rest between operationsDoctor taking a rest between operationsDoctor ordering diagnostic testsDoctor ordering diagnostic testsSecond opinionsSecond opinionsetc.etc.

Each of the above affects the probability of an accidentEach of the above affects the probability of an accident

Discrete vs Continuous precautionDiscrete vs Continuous precaution

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How to measure How to measure HarmHarm

Recall that a Tort implies that someone was harmedRecall that a Tort implies that someone was harmed

The injured person has the right to seek compensation –The injured person has the right to seek compensation –damagesdamages - to - to be made whole be made whole

The harm might include:The harm might include:

- damaged property- damaged property- lost earnings- lost earnings- physical harm- physical harm- medical and rehabilitation costs- medical and rehabilitation costs- lost opportunity to marry- lost opportunity to marry- loss of guidance and companionship- loss of guidance and companionship- psychological trauma- psychological trauma- etc.- etc.

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How can a court deal with damages in the context of How can a court deal with damages in the context of emotional grief or physical harm? emotional grief or physical harm?

The utility model, a definition of harm and The utility model, a definition of harm and Perfect Perfect CompensationCompensation

What about the economic notion of utility - individual well-What about the economic notion of utility - individual well-being?being?

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WealthWealth

HealthHealth

U0

U1

HH11HH22

WW11

WW22

Loss of health HLoss of health H1 1 - H- H22

Compensation (damages) WCompensation (damages) W22 – W – W11

AABB

CC

0

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Under this ‘utility model’ there will always be some amount of Under this ‘utility model’ there will always be some amount of monetary damages that could monetary damages that could make the plaintiff wholemake the plaintiff whole - - perfect compensation perfect compensation

Referred to by economists as Referred to by economists as Hedonic DamagesHedonic Damages..

- Bias towards full compensation for - Bias towards full compensation for tangibletangible losses (out-of- losses (out-of-pocket expenses, lost income, etc.). These types of losses pocket expenses, lost income, etc.). These types of losses are easier to quantify.are easier to quantify.

- Bias against attempting to fully compensate for - Bias against attempting to fully compensate for intangibleintangible losses (emotional harm, distress, loss of care and guidance, losses (emotional harm, distress, loss of care and guidance, pain, suffering, etc.) Difficult to quantify: ‘subjective’ harm pain, suffering, etc.) Difficult to quantify: ‘subjective’ harm versus ‘objective’ unit of money? Very difficult for courts to versus ‘objective’ unit of money? Very difficult for courts to regulate this. regulate this.

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We want We want perfect compensationperfect compensation because we want people to take because we want people to take an an efficient level of precautionefficient level of precaution

We want potential injurers to consider the full cost of any harm We want potential injurers to consider the full cost of any harm they might causethey might cause

We will see that inflicting harm without consequence leads to too We will see that inflicting harm without consequence leads to too much harm inflicted - too much risk leading to too many much harm inflicted - too much risk leading to too many accidentsaccidents

Example: Currently in Canadian courts, if a child is injured, then Example: Currently in Canadian courts, if a child is injured, then

the injuring party is liable for the full cost of medical care, the injuring party is liable for the full cost of medical care, rehab, out-of-pocket expenses, future loss of income, but a rehab, out-of-pocket expenses, future loss of income, but a maximum amount of pain and suffering ($320,000). maximum amount of pain and suffering ($320,000).

If the child is killed in the accident, then the surviving family might If the child is killed in the accident, then the surviving family might receive $10,000 to $50,000, depending on the family receive $10,000 to $50,000, depending on the family circumstances.circumstances. Pain and suffering compensation is likely Pain and suffering compensation is likely too low in Canada – maybe too high in the United States????too low in Canada – maybe too high in the United States????

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The Essential Economics of Tort LawThe Essential Economics of Tort Law

Tort law concerns relationships among individuals for which Tort law concerns relationships among individuals for which transaction costs are relatively high. transaction costs are relatively high.

We impose risk on each other every dayWe impose risk on each other every day

Have you ever thought to yourself?Have you ever thought to yourself?

- I wish my neighbour would keep his pit bull tied up. - I wish my neighbour would keep his pit bull tied up. - I wish that person wouldn’t drive so fast.- I wish that person wouldn’t drive so fast.- I wish the neighbour would shovel his sidewalk.- I wish the neighbour would shovel his sidewalk.- I hope this doctor knows what she is doing.- I hope this doctor knows what she is doing.- I hope this airline has performed proper maintenance.- I hope this airline has performed proper maintenance.

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Just about everything we do imposes some risk on someone. Just about everything we do imposes some risk on someone.

These risks are These risks are externalitiesexternalities since they result from our actions but since they result from our actions but we do not account for them when we decide to do the things we we do not account for them when we decide to do the things we do (we do not pay for the risks we impose on others).do (we do not pay for the risks we impose on others).

Why don’t we negotiate for payment in these cases. Why don’t we negotiate for payment in these cases.

Risk bearer’s property rightsRisk bearer’s property rights – make the risk creators pay the risk – make the risk creators pay the risk bearers for the risk they impose,bearers for the risk they impose,

OrOr Risk creator’s property rightsRisk creator’s property rights - negotiate with the risk creator on a - negotiate with the risk creator on a

price the risk bearer will pay for a reduction in risk. price the risk bearer will pay for a reduction in risk.

Transaction costsTransaction costs would be far too high and these are generally would be far too high and these are generally low low probabilityprobability events (the potential gain from any one trade would events (the potential gain from any one trade would be small). be small).

- it makes no sense to assign property rights to risk – no - it makes no sense to assign property rights to risk – no subsequent trading can take place. subsequent trading can take place.

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Problem: we cannot negotiate a price for the risks because of Problem: we cannot negotiate a price for the risks because of the combination of low probability events and high the combination of low probability events and high transaction costs.transaction costs.

Examples:Examples:- motorists cannot negotiate in advance who will pay for a - motorists cannot negotiate in advance who will pay for a

traffic accident (too many motorists and too many traffic accident (too many motorists and too many possibilities). possibilities).

- manufactures will not want to negotiate over the costs of all - manufactures will not want to negotiate over the costs of all the things that might go wrong with their products. the things that might go wrong with their products.

- you would not want to negotiate the allocation of risk of a - you would not want to negotiate the allocation of risk of a slip and fall with every visitor to your home or business.slip and fall with every visitor to your home or business.

Nonetheless, in all of the above examples we would want the Nonetheless, in all of the above examples we would want the motorist, manufacturer and you to take appropriate motorist, manufacturer and you to take appropriate precaution (to consider the risk you impose on others). precaution (to consider the risk you impose on others).

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TTort law attempts to assign responsibility (termed ort law attempts to assign responsibility (termed liabilityliability) for ) for these risks to those who create them and thereby induce these risks to those who create them and thereby induce individuals to individuals to internalizeinternalize the the externalitiesexternalities (the risks they (the risks they impose on others)impose on others)

The economic purpose of tort liability is to make individuals The economic purpose of tort liability is to make individuals internalizeinternalize the risk (potential harm caused by torts) and the risk (potential harm caused by torts) and thereby induce individuals to invest in safety (to take thereby induce individuals to invest in safety (to take precaution)precaution)

Much of the economic analysis of tort law deals with the design Much of the economic analysis of tort law deals with the design of of efficient liability rulesefficient liability rules and determination of and determination of damagesdamages - who will pay and how much if an accident happens- who will pay and how much if an accident happens

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Do we want a world of zero risks?Do we want a world of zero risks?

No, we want an No, we want an efficientefficient amount of risk. amount of risk.

- efficient in that the liability and damages should result in - efficient in that the liability and damages should result in a minimization of the sum of the cost of avoiding the a minimization of the sum of the cost of avoiding the ‘bad outcome’ and the cost that results if the ‘bad ‘bad outcome’ and the cost that results if the ‘bad outcome’ occurs. outcome’ occurs.

The task of tort law is a difficult oneThe task of tort law is a difficult one

A balancing actA balancing act

Efficient liability rules and damagesEfficient liability rules and damages must balance the must balance the possible cost of harm (if an accident happens) against possible cost of harm (if an accident happens) against the cost of avoiding the accident (precaution)the cost of avoiding the accident (precaution)

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Note that there are other ways to Note that there are other ways to internalizeinternalize the the externalitiesexternalities created by high transaction costs in these ‘tort’ situations. created by high transaction costs in these ‘tort’ situations.

- - criminal lawcriminal law (drunk driving laws), (drunk driving laws),

- - regulationsregulations (auto safety - manufacturer and driver), (auto safety - manufacturer and driver),

- - tax/expendituretax/expenditure incentives (free child car seats). incentives (free child car seats).

Such policies are used along with tort law to control the risk we Such policies are used along with tort law to control the risk we impose and face each dayimpose and face each day

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To SummarizeTo Summarize

We impose We impose riskrisk on each other in our daily lives on each other in our daily lives

Society has developed norms of behaviour aimed at limiting Society has developed norms of behaviour aimed at limiting these risksthese risks

Individuals sometimes cause harm to others by violating these Individuals sometimes cause harm to others by violating these standards of carestandards of care..

The courts determine whether or not a violation of these The courts determine whether or not a violation of these standards caused the standards caused the harmharm and assign and assign liabilityliability to the to the individual who is at fault (individual who is at fault (negligentnegligent) or who simply caused ) or who simply caused the harm (strict liability). the harm (strict liability).

If tort law is If tort law is efficientefficient it should cause each of us to it should cause each of us to internalizeinternalize the risk we impose on others.the risk we impose on others.