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No.

347 June 3, 1999

Restoring the Boundary


Tort Law and the Right to Contract
by Michael I. Krauss

Executive Summary

Today courts regularly resolve disputes by forbidden to sell certain products—because a


applying tort principles when they should apply government agency has determined they are
the law of contracts. When parties have an too dangerous—may also be forbidden to sell
opportunity to negotiate the terms of their rela- his own labor—because the state has deter-
tionship, the resultant contracts ought to be mined that the wages he would accept are too
enforced. Tort law is an acceptable substitute low. Contracts once freely negotiated, and sub-
only if parties have no opportunity to bargain. ject to private suit in the event of fraud or fail-
Over the years the boundary between tort ure to perform, are increasingly replaced by
and contract has shifted sharply toward tort. regulation. Unhappily, once government has
For example, physicians serving rural areas are advanced a plausible rationale for prohibiting
often not allowed to contract with patients consensual behavior in one area, its tentacles
for a lower price in return for diminished care. inevitably extend to other areas as well.
And courts have allowed consumers who buy Today's torts "crisis" does not exist because
cars without air bags to recover from manu- corporations are oppressing individuals, or
facturers for injuries that only air bags would because we need federal legislation to replace
have prevented. Sometimes courts even state tort rules. The crisis exists because our
ignore compulsory arbitration provisions that rights have been given increasingly less respect
waive the usual judicial procedures for resolv- by government. The crisis exists because we
ing disputes. have not allowed tort to be tort, and contract
Even worse, rules have sprung up that pro- to be contract. We need to restore the bound-
hibit ordinary commercial contracts. A person ary between contract and tort.

Michael I. Krauss is professor of law at George Mason University School of Law.


Traditional rules the pills had the warning been more
of liability have Introduction “stringent.” She wins.2
all too often been “Tort reform” has been a staple in As those examples suggest, we are a long way
replaced by rules, Congress and state legislatures for some today from having a body of tort law that
time—and not without reason. Over the last reflects ordinary principles of individual
if they can be 40 years or so, the law of torts, which com- responsibility. Under the old common law, for
called such, that mon-law judges crafted over the centuries to the most part, those who harmed their neigh-
are little connect- hold people and organizations responsible bors without justification, as specified by law,
for the harms they cause, has been trans- were held responsible for making them whole
ed to common- formed into a kind of general social insur- again. The law presumed that people were free
sense notions of ance scheme. As a result, traditional rules of to choose how to act, but it also held them
individual liability have all too often been replaced by liable for the harmful consequences of their
rules, if they can be called such, that are little wrongful choices.
responsibility. connected to common-sense notions of indi- One of the principal ways traditional tort
vidual responsibility. law regulated or policed the freedom to act,
Today the “deep-pocket” principle domi- and the right to be free from harms wrongful-
nates tort law. Large corporations and some- ly caused by others, was through close connec-
times whole industries are held responsible for tion with the law of contract. People were free
compensating “victims,” even when the vic- to act on the understanding that if their acts
tims themselves would ordinarily be thought unjustifiably harmed others they would be
to be responsible for their losses and even held liable for making those others whole
when responsibility may already have been again. But they were also free to associate with
decided by a prior agreement between the par- others and to agree, through contracts, to allo-
ties. Given the uncertainty those legal changes cate in any way they wished the risks of harm
have brought about, individuals and organiza- that might arise from the association. Thus, by
tions find it increasingly difficult to assess limiting their freedom, through promises
risks or to plan their affairs in a rational way. made and obligations incurred, such people
Opportunities are forgone, financial disaster is actually expanded their freedom. They did not
always just around the corner, and the aggre- have to leave everything to chance and then try
gate costs for everyone grow ever larger. to sort things out only after something went
Consider just two examples of the modern wrong. They could anticipate what might rea-
dilemma: sonably go wrong and allocate the risks of that
in a way that seemed best to serve their respec-
1. A mother and father allow their four- tive interests.
year-old daughter to play with a dispos- Through explicit contracts, then, people
able butane cigarette lighter, which leads allocated risks among themselves and avoided
to a tragic fire killing the four-year-old having later to rely on courts to determine lia-
and her two siblings. The courts allow bility through tort law when one of those risks
the parents to claim that the lighter was materialized. At the same time, tort law often
defective in design because “it lacked fea- invoked implicit contracts in assigning liabili-
sible child resistant features.”1 ty after a loss had occurred. Courts said that
2. A woman who requests and obtains a certain victims, by their actions, implicitly
prescription for birth control pills, and assumed the risk of a loss. In that case, they
who receives a written warning about the must bear any such loss rather than have the
increased risk of liver tumors among court shift it to the person causing it.
those who take such pills, sues the man- Of late, however, the boundary between
ufacturer after developing a liver tumor. tort law and contract law has shifted sharply
She claims she never would have taken toward tort. In the product liability arena, for

2
example, courts often reject the notion that a kick was slight and was in fact called a
buyer has implicitly contracted to assume the “touch” by the court. Unbeknownst to
risk, fully disclosed, associated with purchase the boy, however, his victim was recover-
and use of a particular product. In medical ing from an infection in precisely the
malpractice cases, courts typically disallow spot where contact occurred. The blow
written contractual waivers, by which con- reactivated the wound, eventually result-
sumers might express their willingness to ing in permanent incapacitation.
receive a lower standard of care, and to relin- Despite knowing nothing about the vic-
quish certain legal remedies, in return for a tim’s fragility, the young defendant was
lower price. Sometimes courts will even held liable for the entire injury. The court
ignore compulsory arbitration provisions refused to force the victim to assume the
that, while leaving the standard of care risk of injury to his shin; it did not say,
unchanged, waive the usual procedures for for example, that he should have “self-
resolving contract disputes. In each of those insured” (perhaps by wearing a shin
instances, the court will substitute tort guard). Rather, the plaintiff’s bodily
redress, notwithstanding that the parties integrity was his by right and its viola-
assigned risks by contract prior to any injury tion by the defendant was a tort. In a
having occurred. noteworthy aside, however, the court
Of late, the
The first section of this study looks at the suggested that its decision would have boundary
boundary between tort law and contract law been different had the kick occurred, say, between tort law
as it has evolved over time. The second sec- while roughhousing on the playground
tion contrasts how the legal system does and during recess. In that case the victim, by and contract law
how it should protect us from harm by oth- an “implied contract,” would have has shifted
ers. The third section examines contractual assumed the risk of being kicked. Thus,
waivers and the modern tendency to ignore
sharply toward
the defendant’s action would not have
them or replace them by tort law. Finally, the been wrongful even though it caused tort.
fourth section explores the concept of harm to the victim.
“inalienability,” asking whether there are cer- 2. In Obstetrics and Gynecologists v. Pepper
tain narrowly defined categories of rights, the (1985),4 a Nevada clinic (O&G) required
contractual exchange of which should not be all patients to sign a standard agree-
enforceable. ment before receiving any treatment.
The agreement provided that any dis-
putes arising between the parties would
The Boundary between Tort be submitted to independent binding
Law and Contract Law arbitration, both parties expressly waiv-
ing their right to a jury trial. The arbi-
Three tort stories, taken from real cases, tration procedure was beneficial to
will help illustrate the connection between O&G because it was faster and cheaper
torts and contract. The first case was decided than a jury trial and it would likely
over 100 years ago. The other two are more result in awards more favorable to
recent. Each made local newspaper headlines. defendant O&G than jury awards
In each, the plaintiff won and the defendant would be in malpractice trials. The pro-
protested the decision. cedure was arguably beneficial to
patients as well. Evidence suggested
1. In Vosburg v. Putney (1891),3 a 12-year- that the fees charged by O&G were
old Wisconsin schoolboy kicked a class- more modest than those charged by
mate in the shin during class. He appar- comparable groups whose contracts did
ently had every wish to annoy the class- not contain an arbitration clause. That
mate but no desire to injure him—the is not surprising, of course. As part of

3
their contracts for services, O&G and Minton v. Honda of America.5 Jeffrey
other clinics in effect packaged an “insur- Minton was driving his 1990 Honda
ance policy”—a commitment to pay dam- Accord in Miami County, Ohio, when a
ages in the event that a customer could vehicle traveling in the opposite direction
demonstrate that the clinic was negli- crossed the center line and collided with
gent. O&G’s “policy” had lower adminis- Minton’s automobile. Minton was killed.
trative costs and a lower expected payoff In the past, the negligent driver of the
than competitors’ policies, so O&G could oncoming car would have been the sole
afford to charge less. defendant in a tort suit. Not today. A
The standard procedure of the clinic wrongful death suit was filed against
required the receptionist to hand deep-pocketed Honda, on the grounds
prospective patients the arbitration that the Accord it sold to Minton was not
agreement, along with two information equipped with air bags. (Honda did not
sheets, and to inform them that any ques- ship Accords with air bags until 1992.
tions concerning the agreement would be The 1990 Accord was equipped with seat
answered then and there. Patients signed belts and shoulder harnesses, in strict
the agreement before receiving treat- conformity with existing law.) Minton
ment; the physician signed later. If a knew, of course, when he purchased his
patient refused to sign the arbitration 1990 Accord that he was not getting air
agreement, the clinic would refuse treat- bags. He did not pay for air bags. He did
ment. not elect to buy a competing brand vehi-
Plaintiff Pepper entered the clinic to cle equipped with air bags. Can the plain-
obtain a prescription for oral contracep- tiff legally claim that Minton was entitled
tives. After signing the agreement, she to get something he never thought he
was given the contraceptives, which were was buying? Yes, said the Ohio Supreme
accompanied by a detailed written warn- Court.
ing of possible side effects, including the
risk of stroke. Nine months after receiv- The connection between tort and contract
ing her prescription, Pepper suffered a law in those three cases will be developed more
stroke that left her partially paralyzed. fully below. Because that topic recurs through-
She sued the clinic, claiming that it out this study, however, a few preliminary
should have refused to prescribe the con- observations might be useful. At the outset,
traceptive because of her unusual med- imagine that everyone could effortlessly nego-
Imagine that ical history. Defendant O&G moved to tiate with everyone else. In such a world, an
stay the lawsuit pending arbitration. array of contracts could allocate all risks of
everyone could Thus, the question before the court was harms that might arise from human interac-
effortlessly nego- whether the arbitration contract was tion. Thus, assuming price was no object,
tiate with every- binding on the parties. If not, the tort suit motorists wishing to travel at high speeds
should proceed. The Nevada Court of could negotiate risks among themselves and
one else. In such a Appeals affirmed the lower court’s judg- could purchase from slower motorists and
world, an array of ment that the arbitration agreement was pedestrians promises to keep off the streets at
an “adhesion contract” (a contract draft- the appropriate times. The motorists and
contracts could ed entirely by one party, with no individ- pedestrians would make such promises in
allocate all risks ualized negotiation); that the plaintiff exchange for adequate compensation for their
of harms that was a “weaker party”; that the agreement inconvenience. If an “accident” occurred, the
was “unduly oppressive”; and that, as a allocation of its costs would be determined by
might arise. result, it should not be enforced. The those contracts, which would have considered
motion to stay the tort trial was denied. all foreseeable risks.
3. The following chain of events gave rise to Any suit in this fictitious world would be

4
a contract suit, provoked either by the failure to] make me a house good and strong and of a Product liability
of a party to keep his word or by the ambigu- certain form, and he makes a house which is suits usually
ity of a written agreement. In a society of free weak and bad and of another form, I shall have
and responsible individuals, the court’s role an action of trespass on my case.”6 accord little
would consist simply of interpreting con- Note that “trespass” was the basic tort respect to
tracts—of determining which risks had been action; thus the court borrowed tort termi-
assumed by which parties—and of holding nology—a classic recognition that both tort
contractual
the parties to their agreements. After an acci- and contract assigned risks. As technology provisions.
dent, of course, those parties who had advances, free people are more easily able to
assumed the risk of a loss might wish they get together and, aided by law, exchange
had never done so. They might consider what rights. Over time, therefore, one would expect
they were “paid” for assuming the risk inade- that contract (voluntary, pre-injury assump-
quate. Were the courts to “rewrite” or fail to tion of risks) would expand and tort (invol-
enforce such contracts, however, there would untary, post-injury assignment of risks to
be no point to contracts in the first place and actors who behave wrongfully) would shrink.
the practice of allocating risks before a loss But if advances in technology and legal
occurs would disappear. understanding ought to encourage contrac-
In the real world, of course, we cannot tual arrangements, while discouraging
contract effortlessly. Transaction costs are reliance on tort law, it is hard to explain two
often high, which means there are accidents of the three tort stories recounted above.
that involve parties who have not allocated Vosburg v. Putney looks correctly decided: the
the risks of their behavior in advance. Some victim had never consented, even implicitly,
collisions of interests are literal—on the pub- to the risk of being kicked; he was unilateral-
lic roads, for example. Others are more sub- ly “invaded” by the wrongful action of the
tle—those concerning the use of public defendant. But what of Obstetrics and
resources such as water or air, for instance. Gynecologists v. Pepper, where the arbitration
One person might have an interest in pollut- contract was set aside by the court and the
ing those resources while others have an parties had to rely on tort law instead? And
interest in keeping them clean—yet no con- what of Minton v. Honda, where the negligence
tract is drawn to determine which interest of an oncoming driver killed Minton, yet
will prevail. Still, in real life many contracts Honda was deemed liable because Minton’s
can and do arise. car did not have air bags, which were neither
The common law of contract was sensitive required by law nor demanded by the buyer?
early on to the respective roles of tort and con- Instead of contract expanding and tort
tract in allocating risks—and to the moral and shrinking as changes in technology and
economic preferability of contract when avail- legal understanding facilitate consensual
able. With the growing merchant trade of allocation of risks, in many ways the oppo-
15th-century England, courts began to hear site has occurred: postwar America has wit-
complaints against persons professing a par- nessed a successful invasion of much of
ticular skill—say, carpentry—who preformed contract law by tort law.7 Virtually all med-
their jobs poorly. Thus, there gradually devel- ical malpractice suits pit contracting par-
oped a new legal action or claim called “tres- ties against each other, for example, yet alle-
pass for deceit.” In construction disputes, for gations of inadequate care are usually
example, courts typically assigned the risk of a decided under the law of torts, not the law
cave-in, say, to the builder, reasoning that the of contracts. And product liability suits
homeowner’s rights had been “invaded,” usually accord little respect to contractual
much as if a stranger had invaded the owner’s provisions, even though they involve a con-
estate and smashed the building. To quote a tractual chain, including wholesalers and
foundational judgment: “If a carpenter [agrees retailers, that affords many opportunities

5
for the voluntary assumption and exchange That term is intuitively attractive because
of risks. property rule protection appears to be what
Why does tort law intervene procedurally we need when we have a property right. With
and substantively when contract law, with its property rule protection, Jill is immune to
assumption-of-risk principles, would often any claim by Jack that he, not she, is entitled
better and more fairly serve to adjudicate dis- to the watch because, say, he values it more.
putes? I next examine that question, criticize In a free society, such a claim gets no legal
the rationales for the current boundary recognition. If Jack really does value the
between tort and contract law, and argue for watch more than Jill does, he can demon-
adjusting that boundary to enhance liberty strate that by offering to buy it from her. By
and personal responsibility. definition, a voluntary sale of that kind
would compensate Jill for whatever value she
attached to the watch. We do not want courts
How Are We Protected from or other governmental agencies forcibly
Harm by Others? How redistributing property simply because they
Should We Be Protected? believe some other person or people may
value the property more than do its current
We do not want Our right not to be subjected to certain owners.
courts or other conduct by others is protected by law in vari- To have a property right, then, is to have a
governmental ous ways, often depending on the character right that is immune from violation based on
of the harm (whether it is intentional or acci- some state-imposed interpersonal compari-
agencies forcibly dental). That, in turn, often leads to different son of the property’s worth. In a pithy state-
redistributing remedies when losses arise. Consider the fol- ment, legal philosopher Ronald Dworkin
lowing example. If Jill owns a watch, her right captured the significance of property rules
property simply to the watch does not depend on her valuing when he observed that “rights trump utili-
because they it at any particular level. She may value it lit- ty.”9 Thus, in the Vosburg case above, the
believe some tle. Or she may value it well beyond its mar- plaintiff’s right to his shin barred the defen-
ket value—say, because it was given to her by dant’s claim that the plaintiff could most
other person or her deceased father. Having such a right inexpensively have avoided the injury—by
people may value means that if Jack takes Jill’s watch, Jill can wearing a shin guard, for instance. Similarly,
obtain a court order for its restitution and if a victim’s bodily integrity is protected by a
the property more any damages that may have arisen from the property rule, it will be to no avail for a mug-
than do its cur- theft. Only if restitution is impossible, per- ger to claim that he enjoys mugging, or that
rent owners. haps because Jack has destroyed the watch, he needs the money more than the victim
must Jill be content with monetary damages does, or that his victim “asked for it” by walk-
in lieu of the watch itself. The amount of ing in the park at night.
those damages may well exceed the market Property rules typically protect rights
value of a watch of similar brand and condi- against intentional, unconsented-to inva-
tion. Damages may include the sentimental sion. They are ideal for protecting rights
value Jill attached to the watch and a punitive when parties have a chance to bargain,
element reflecting societal condemnation of should they wish to, about an exchange.
Jack’s intentional violation of Jill’s right. When contracting is difficult or impossible,
In a seminal law review article, Professor however, we often protect property through a
(now Judge) Guido Calabresi and A. Douglas “liability rule.” To see how that works, con-
Melamed, principal deputy assistant attorney sider first that we create a risk of injuring oth-
general of the Antitrust Division of the U.S. ers every time we go out in public. If Jack
Department of Justice, characterized the pro- pushes his shopping cart down the aisle at
tection afforded Jill in the above example as the supermarket, for example, he exposes Jill
protection afforded by a “property rule.”8 and everyone else at the market to the possi-

6
bility of an accident. None of the people thus final section of this paper. But first, here are
exposed has agreed, prior to any accident, on two illustrations to help flesh out the dis-
just who must ultimately bear the loss, much tinction between the property rule and the
less to what extent. liability rule.
It is here that courts step in with liability
rules. Unless the risk to others is unreason- Illustration One: A Property Dispute
ably high, the courts do not stop us from over Intentional Pollution
engaging in the ordinary activities of life. Environmental pollution illustrates the
Rather, once an accident occurs as a result of different ways of determining both the
such activities, courts hold us liable for the owner of an entitlement and the means of
losses we negligently cause others, absent some protecting that entitlement. Suppose plain-
excuse such as the negligent behavior of the tiff (P) claims that defendant (D) is polluting
injured party. Thus, unlike the situation P’s property. D admits to some small
under a property rule, the loss suffered by a amount of pollution but insists that it is not
victim might be his to bear—if it arises wrongful or unreasonable, given all the cir-
through no fault of anyone else, or through cumstances. If P and D litigate their dispute,
the partial fault of the victim. And when the the court will have to decide two questions.
court does shift a loss to the person who First, it must decide which party is legally
caused it, the loss is typically valued at a mar- entitled to prevail: may D pollute moderate-
ket rate. Thus, if Jack negligently damaged ly, or may P successfully object to the pollu-
Jill’s watch in a supermarket collision, he tion? Second, the court must determine how
would be liable for compensating her for her to protect the entitlement it has found.
loss as objectively measured by the market Suppose the court finds in favor of P.
value of the watch, not as subjectively mea- Thus P has the entitlement.
sured by Jill.
Property rules fully protect our rights and 1. If P’s entitlement were protected by a
are feasible whenever parties can bargain. property rule, the court would enjoin
Liability rules give less complete protection but the pollution and require D to com-
are well suited for accidental losses. But prop- pensate P fully for any past losses
erty and liability rules do not exhaust the ways claimed and proven. D would be able
in which we protect our rights. As Calabresi to continue emitting pollutants if and
and Melamed point out, and as others have only if D and P could come to some
elaborated,10 we also use “inalienability rules.” agreement whereby P would waive the
Although not without controversy, an inalien- benefit of the court order. The pay- Both property
ability rule precludes even voluntary alienation ment for that waiver would by defini-
(sale or donation) by the right holder himself. tion compensate P for all damages he rules and inalien-
Many corporal entitlements—the right to one’s suffers. ability rules pro-
heart, for example, but not the right to one’s 2. If P’s entitlement were protected by a tect rights from
hair—are protected by full inalienability rules. liability rule, however, D would not be
Although I “own” my liver, I may not legally sell so enjoined but would be told that he being forcibly
it, notwithstanding that the right to sell is ordi- could continue to pollute, provided he transferred in the
narily inherent in the right to own.11 Both paid court-ordered damages to P. In
property rules and inalienability rules protect essence the court would be imposing
name of social
rights from being forcibly transferred in the the terms of one of many possible post- utility. But only a
name of social utility. But only a property rule injunction contracts that might have property rule
allows transfer by contract; if an entitlement is been negotiated by the parties in sce-
protected by an inalienability rule, not even vol- nario 1. The court effectively condemns allows transfer by
untary consent authorizes transfer of the right. P’s land to suffer a servitude of pollu- contract.
I shall take up inalienability rules in the tion, then fixes the value of that servi-

7
Even in one-time tude. There is no guarantee that the nario 3—allowing P to buy less pollu-
harm cases, the court’s estimation fully reflects P’s tion than the law permitted while
assessment of his damages. Rather, the requiring D to sell his right to pollute.
distinction award typically reflects the diminished
between property market value of P’s land. (Nor, of Table 1 illustrates the alternatives available
course, is there any guarantee that D to the court.
rules and liability would be willing to pay to continue his
rules is useful for pollution. The activity may not be Illustration Two: Episodic,
understanding worth the price the court fixes.) Unintentional Harm
Unlike the pollution example, most tort
different ways in On the other hand, the court might deter- suits do not involve an ongoing pattern of
which rights mine that D was not wrongfully polluting, in damage. Even in one-time harm cases, how-
might be which case D has the entitlement. ever, the distinction between property rules
and liability rules is useful for understand-
protected. 3. If D’s entitlement were protected by a ing different ways in which rights might be
property rule, P’s suit would be dis- protected.
missed outright. P could still stop the Thus, in a celebrated U.S. Supreme Court
pollution, of course, but to do so he decision,13 defendant railroad conceded that
would have to pay D not to pollute— it had negligently allowed sparks to land on a
not to do what he had the right to do. P farmer’s land adjacent to its tracks, damaging
would have to meet D’s price in a post- the farmer’s crops. The railroad claimed,
judgment contract. however, that the farmer had stacked his
4. The court could also protect D’s claim crops too close to the tracks, and that the
with a liability rule if the laws of the damage from the resulting fire was therefore
jurisdiction permit holding a plaintiff much greater than it would otherwise have
liable for damages.12 It could recognize been. That, the railroad claimed, was “con-
D’s right to pollute, then proceed to tributory negligence,” by the farmer, which
take the right away from D (i.e., pro- under tort rules then in effect would bar any
hibit future pollution) in return for recovery.
damages payable to D by P. That would In deciding the case, the Supreme Court’s
be equivalent to setting the terms of majority noted that the railroad had not pur-
one of many possible post-judgment chased any servitude from the farmer that
transactions between P and D in sce- limited what he might do. In fact, the Court

Table 1
Methods of Protecting Entitlement
__________________________________________________________________________________

Entitlement Holder Property Rule Liability Rule


__________________________________________________________________________________

Plaintiff 1. Injunction against 2. Pollution allowed,


future pollution damages awarded to P

Defendant 3. Pollution allowed, 4. Injunction against future


P’s suit dismissed pollution, damages awarded
to D
__________________________________________________________________________________

8
concluded, the farmer could not be negligent property owner’s valuations and substi-
in placing his own crops on his own land. By tute those of a third party, they should
implication, the Court was protecting the be used sparingly.
farmer’s right to store crops with a property
rule, for absent any agreement with the rail- With that background, let us turn next to
road to the contrary, the farmer had a perfect explore areas of the law where property rules
right to use his property as he wished. In dis- ought to replace liability rules and contract
sent, Justice Oliver Wendell Holmes, Jr., law ought to replace tort.
agreed that, in the absence of such a contract,
the railroad could not enjoin the farmer from
stacking his crops near its track. But Holmes Waivers and Tort
insisted that if the farmer’s decision did not Law
maximize joint (farmer + railroad) economic
output, then the farmer was “contributorily Many disputes are adjudicated today
negligent” and therefore could not recover under tort principles when they could and
the value of his destroyed crops. In essence, should be adjudicated under contract prin-
Holmes would have protected the farmer’s ciples. In such cases, parties can and often
right to stack his crop with a liability rule: the do consent—explicitly or implicitly—to bear
Rights protected
farmer was entitled to damages unless anoth- in various ways the various risks that may by liability rules
er use of his land was socially optimal. be involved in their relationship. If courts may be taken
The importance of and distinctions bet- took that into account—invoking contract
ween tort and contract on the one hand and principles, by implication—their decisions away against an
between property and liability rules on the would be very different than if they ignored owner’s will. A
other should now be clear. those issues and relied instead on tort prin-
ciples alone.
court will decide
1. Rights protected by property rules There are two distinct ways in which con- whether, to what
may not be taken away against an tract principles might apply: extent, and to
owner’s will. They are alienated only
through contract and, therefore, take • Substantively, the parties could agree, whom damages
into account subjective evaluations of before any loss, to a standard of care are payable.
the owner. or quality that is different than the
2. Rights protected by liability rules may one a court might impose after a loss
be taken away against an owner’s will, has occurred.
in which case a third party (a court, • Procedurally, parties could agree to
applying tort law) will decide whether, have any disputes adjudicated in a
to what extent, and to whom damages forum of their choice rather than in a
are payable. In making such a deci- court as provided by tort law.
sion, a court will not consider subjec-
tive evaluations. Substantive Waivers
3. When parties have an opportunity to When parties contract for goods and ser-
negotiate, pre-injury, the terms and vices, there is no single level of care or quality
conditions of their relationship, proper- they must agree upon—even if a court apply-
ty rules are to be preferred; they effectu- ing tort law would have to select an “appro-
ate the voluntary choices of the parties priate” level in adjudicating a subsequent dis-
and fully respect property rights. pute. Parties could avoid having courts
4. When parties do not have an opportu- impose a standard by making a selection
nity to bargain prior to the occurrence themselves, prior to any loss. Thus, a patient
of an injury, liability rules may be might demand more tests of his doctor than
required. But because they ignore the would be required of a “reasonable physi-

9
cian” under current tort law. Courts would level of care less than that dispensed
generally enforce such a contract, holding the to wealthy patients in prosperous
doctor to the higher level of care he cities and suburbs.17
promised. Of course, suppliers will not • Courts have allowed purchasers who
expose themselves to additional liability for knew their cars were not equipped with
nothing; consumers must pay for the addi- air bags18 or rear seat belts19 to recover
tional care they purchase. from auto manufacturers on the
But is the converse true? What if a physi- ground that their automobiles did not
cian offers fewer tests than might later be protect them in collisions as well as cars
thought “reasonable” by a court in a tort suit equipped with those devices would
and the patient accepts the offer, presumably have.
for a lower fee? Or suppose the patient • Transit companies have been held liable
requests a lower level of service and the doc- for criminal acts committed by felons
tor agrees? Is the patient allowed to assume on buses traveling through dangerous
the risk of injury? Will his subsequent claim neighborhoods, even though that dan-
that the level of care provided was too low be ger was well known to all passengers,
dismissed on the ground that he consented who could have paid for a private taxi
to that lower level of care? had they wished to avoid contact with
Here the answer is decidedly mixed. the public.20
Sometimes contracting parties are indeed
held to their contracts. Thus, courts have Courts constantly hold that consumers
held that a plaintiff who visits a doctor of chi- lack the capacity to assume certain risks
ropractic cannot sue the doctor simply because they lack “bargaining power.”
because he did not have the skills or use the Contracts with rural doctors, or sellers of
techniques of a medical doctor.14 Similarly, inexpensive cars, or transit companies are
those who purchase frame buildings cannot deemed to be “adhesion contracts” that
successfully sue builders because their lodg- should not bind the consumer, much as chil-
ing proved less fire resistant than a brick dren are not bound by their contractual
house.15 And people who fell on a moving agreements. In an oft-cited passage from a
ramp in a “fun house” have been unsuccess- seminal products liability case, the California
ful in suits against the owners and operators Supreme Court justified its preference for
of the amusement.16 In each such case the tort over contract in the following terms:
plaintiff asked the court to ignore the con-
Very often, courts tract principles the defendant raised as a Under modern conditions the ordi-
defense, but the court refused to do so. Such nary layman, on responding to the
refuse to sanction holdings suggest that the court is applying a importuning of colorful advertising,
arrangements in property rule, and that consumers can trade has neither the opportunity nor the
which consumers their rights for other benefits—cost savings, capacity to inspect or to determine
thrills, and so forth. the fitness of an automobile for use.
explicitly or Very often, however, courts refuse to sanc- . . . In such a marketing milieu his
implicitly assume tion arrangements in which consumers explic- remedies and those of persons who
itly or implicitly assume certain risks. Examples properly claim through him should
certain risks. in which courts insist that consumers get “the not depend upon the intricacies of
best,” even when they have paid for less, are the law of sales. . . . It should rest, as
legion. Here is a short sampling: was once said, upon “the demands of
social justice.”21
• In most states, less well paid physi-
cians serving rural areas are not When courts refuse to enforce contracts
allowed to contract with patients for a through which the parties have voluntarily

10
assumed risks, they are denying property rule refuse to credit a consumer’s willingness to Courts that
protection for entitlements. It might appear assume risk are often forcing a wealthy per- refuse to credit a
at first that they are imposing inalienability son’s set of preferences on the poor. In doing
rules, preventing the parties from assuming so they impoverish the most needy con- consumer’s will-
risks at all. But that is not really the case, at sumers, who already spend a larger percent- ingness to assume
least not at first. Parties may voluntarily age of their income on consumer goods than
assume risks—may sell and buy less safe cars do the rich.
risk are often
for lower prices, for example—and enjoy the If unable to purchase anything but the forcing a wealthy
benefits of their bargains as long as no loss highest quality, many poorer consumers will person’s set of
occurs. But once a loss does occur, and a choose not to purchase at all. They will con-
court refuses, in effect, to enforce such a con- tinue to drive the old, dangerous clunker if preferences on
tract—holding a seller liable, for example, for the only new car that manufacturers can sell the poor.
a standard of safety for which the buyer never them is “too safe” for them to afford. They
paid—that amounts to deciding complaints may even forgo medical treatment if tort law
about such losses by a liability rule, not by a imposes Park Avenue pricing on the rural
property role. The court, not the parties, practitioner. When the automobile company,
decides the dispute not on the basis of the chain saw manufacturer, and ladder maker
contract that was actually reached by the par- are forced to add safety devices under threat
ties but on the basis of a contract that they of tort liability, they have to charge for those
“should” have reached. The court rejects the devices, of course. While some consumers
tradeoffs that the parties negotiated and the may want as much safety as they can get, all
values that the parties agreed on; in their the time, others are unwilling to pay for the
place it imposes its values on the parties— safest house, the safest car, the safest whatev-
paternalistically—to reach a “fair” decision. er. We all have limited resources, and safety is
Once a pattern of such court decisions only one good among many that we value.
emerges, manufacturers, sellers, doctors, Imagine, for example, that an expensive
and others start to change their practices— safety device has been developed to protect
at least insofar as they can discern the direc- against an extremely unlikely occurrence dur-
tion of the decisions. And those changes, ing use of a chain saw. The device might be of
necessitated by the court decisions, invari- interest only to those whose lost income,
ably result in fewer and more costly choices were they the victim of that rare accident,
for consumers. The confusion inherent in would be so high that they were willing to pay
the courts’ paternalism, and the problems for the device now to “self-insure.” Other
that follow, is legion. consumers might be willing to forgo the
By refusing to allow consumers to trade device, in effect trading a less expensive chain
some safety for a lower price, for example, saw for an insignificantly higher accident
courts believe they are protecting poorer con- rate. If the chain saw manufacturer were to be
sumers. In fact, poorer consumers quite held liable for such accidents—on the ground
rationally place a lower monetary value on that the saw is “defective” without the safety
safety devices than do richer consumers. option—it might refuse to sell the less expen-
Because poor consumers earn less income, sive version of the saw. All purchasers would
they are unwilling to pay as much for protec- therefore have to pay the higher amount for a
tion from loss of that income. Poor con- saw equipped with the safety device. The
sumers have more pressing needs for their excess self-insurance “premium” paid by
current income—another reason they are less poorer consumers (i.e., the amount by which
likely to spend it to protect future income. In the cost of the safety device exceeds the pres-
other words, it is rational for poorer con- ent value of their expected future lost
sumers to bear risks that wealthier con- income) is effectively a subsidy for high-risk
sumers will pay to mitigate. Courts that consumers. Should residents of south-cen-

11
tral Los Angeles pay fire insurance premiums “hold-up” settlements that are incongruent
based on the artwork in Beverly Hills homes? with state substantive law).24
By refusing contractual assumption of risk, Given the monopoly it claims on the use
courts bring about precisely that kind of of legitimate force, the state judicial system
regressive transfer payment.22 will determine the enforceability of procedur-
When dangers are not hidden and a con- al agreements. Most monopolists don’t like
tract is otherwise legal (e.g., when there is competition. That fact has led many
no statute that requires every chain saw to observers to predict that courts would not
have all conceivable safety features or every look kindly on rival adjudicators. In federal
car to be a Volvo), contract law with proper- court, for example, the choice of a “forum”
ty rule protection, by allowing parties to other than the one that would ordinarily
assume substantive risks, expands the have jurisdiction must be deemed “reason-
realm within which we exercise our free- able.”25 And state courts will often strike
dom. By contrast, when courts impose tort down the choice of another state’s courts or
law with liability rule protection they are substantive law if the choice shocks the
“regulating” in a way that makes the poor forum state’s “public policy.”26 Holdings
worse off. Those “regulations” often restricting the availability of arbitration on
Holdings restrict- increase total risk, and they impose a the ground of “unequal bargaining power,”
ing the availabili- regressive “tax” that subsidizes more pros- as in Obstetrics and Gynecologists v. Pepper, are
ty of arbitration perous and more risk-averse classes of the not uncommon. Yet consistent refusal to
population—probably including legislators enforce ADR clauses would prevent contracts
on the ground of and consumer “advocates”—at the expense containing such clauses from offering sav-
“unequal bargain- of the poor. ings to consumers.
Despite government-imposed obstacles,
ing power” are Procedural Waivers ADR is thriving. Private alternatives to the
not uncommon. Unlike substantive waivers, which address federal and state courts, available for over 70
such things as the standard of care enforced years, are growing rapidly. The American
by law or the level of risk the law tolerates, Arbitration Association (AAA) now handles
procedural waivers amount to efforts to more than 60,000 disputes a year. For the last
bypass the state’s adjudicative monopoly. 20 years, AAA has faced private competition,
They might involve the choice of a different from Judicial Arbitration and Mediation
jurisdiction’s substantive law, or a different Services (JAMS, created in 1979), EnDispute
jurisdiction’s courts, or private adjudication (1982), and Judicate (1983), among others.
(i.e., arbitration or other alternative dispute Unlike AAA, those competitors actually hire
resolution, or ADR, services), or the aban- former judges, who come with a ready-made
donment by a party (typically the consumer) “brand name” for honesty and legal expertise.
of his constitutional right to a jury trial in a Whereas AAA concentrates on ordinary com-
court of common law.23 mercial transactions, JAMS and the other
There is a sense, of course, in which the firms take medical and product liability cases
distribution between substantive and pro- as well. Typical delays between filing and set-
cedural waivers collapses, for every substan- tlement run from six weeks in standard com-
tive effort to select a standard of care differ- mercial JAMS cases to more than two years in
ent than that imposed by courts is perforce some complex medical cases27; but even two
an effort to bypass them. But the converse years is far less than court adjudication usu-
is not true: efforts to bypass courts may ally requires. Moreover, the financial cost of
have nonsubstantive goals (e.g., even with- ADR is much less than that of the public tort
out modifying the “default” standard of system, where litigation expenses eat up over
care, arbitration might be cheaper and half of all compensation awards.28
faster than a jury trial and might prevent Is there any reason not to enforce a choice

12
for binding arbitration? One possible ration- factored into the prices of goods and services
ale, often voiced by legislators29 and law pro- in a competitive market.
fessors, is that large corporations use their Suppose, for example, that each side has a
superior bargaining power to impose 50 percent chance of winning a big case
unwanted arbitration clauses on unwilling before either side incurs any legal expenses.
consumers. Professor Jean Sternlight of the But each side believes that lawyers, experts,
Florida State University College of Law, a detailed discovery requests, sociological jury
proponent of this view, recently summarized analyses, and so forth will increase the chance
it as follows: “The profit-maximizing compa- of winning. So each party might decide to
ny will attempt to draft a dispute resolution spend, say, $100,000 on such legal costs—
contract so as to maximize its profits and only to realize that, because both parties tried
minimize its losses. The company will seek an to gain an advantage, the probability of win-
agreement that will minimize the likelihood ning has remained 50 percent. Nevertheless,
of having any claims made against it at all.”30 each side will spend the $100,000, fearing the
The second sentence in Sternlight’s argu- consequences if it does not and its opponent
ment may not follow from the first, for it is does.33 As is the case for some military
not necessarily in a company’s best interest to buildups, the wasteful cost of escalation
minimize claims against it. Naturally, con- could outweigh what is ultimately at stake,
sumers care about remedies when corpora- unless some enforceable “nonproliferation
tions breach their contracts, so they require agreement” can be reached. Binding arbitra-
substantial compensation to renounce the tion, which typically limits lawyers’ fees and
right to such remedies. Companies that fre- procedures, is one type of nonproliferation
quently breach their contracts and preclude agreement.
recovery through abusive arbitration clauses Critics of ADR not only complain about
have to reduce the prices of their products to consumer oppression, they also raise narrow-
compensate, much as the “street corner sales- er technical objections that warrant a
man,” who is difficult to reach in court, must response. Some critics protest that ADR pro-
underprice the storefront merchant in order duces biased results because arbitrators’ pay
to succeed. On the other hand, companies comes from those who are affected by their
that desire to promote a reputation for trust- rulings, while remuneration of common law
worthiness have little incentive to insert judges does not depend on their pleasing
oppressive arbitration clauses in their con- anyone. “Repeat players” (e.g., corporations
tracts. To the contrary, their profits will be brought frequently to arbitration) might
maximized by the higher prices they will be therefore exercise undue influence on the Companies that
able to command from consumers who value selection of arbitrators, to the detriment of
the fact that they “stand behind” their goods “one-time” players (e.g., individual con-
desire to promote
or services.31 That reasoning is sound unless sumers).34 That problem is, however, hardly a reputation for
consumers are indifferent to those remedies unique to, or acutely present in, arbitration. trustworthiness
available to them in case of breach. But if they Ninety-eight percent of tort suits are filed in
are indifferent to those remedies, why would state court, and many state court judges are have little incen-
they not be similarly indifferent to reputa- elected. In the electoral process, plaintiffs’ tive to insert
tion, service, and quality? lawyers are conspicuous “repeat players” who
Arbitration is not merely a tug of war may exert great influence.
oppressive arbi-
between vendors and consumers, each hop- Consumers’ associations are also essen- tration clauses in
ing to avoid a risk. Rather, both parties can tially “repeat players” in arbitration hearings, their contracts.
gain from arbitration. Litigation expenses in on the “little guys’” side. They can influence
tort often exceed the amount received by vic- the process by criticizing unfair ADR services.
tims for compensation.32 Savings from a Likely because of this, ADR firms have them-
more streamlined process would naturally be selves attempted to address the problem of

13
Arbitration firms undue influence. JAMS, for example, careful- instrumental in the development of law in
that develop effi- ly isolates its judges from the collection of market societies.38
revenue: the judge does his job, and another Because of a rather technical federal
cient rules will division collects the payment. Overall, ADR statute enacted in 1925,39 procedural waivers
attract long-term firms have a strong incentive to maintain a of tort via arbitration clauses are much easier
reputation for integrity; a consistently biased to enforce than are substantive waivers. The
clients because of firm would undermine corporate goodwill centerpiece of the 1925 Federal Arbitration
their reputation and ultimately defeat the commercial raison Act40 is section 2, which reads as follows:
for effective dis- d’être of dispute resolution.
Judge Richard Posner and Professor A written provision in . . . a contract
pute resolution. William Landes argue that a state subsidy for evidencing a transaction involving
and monopoly over adjudication make sense commerce to settle by arbitration a
because common law courts produce new controversy thereafter arising out of
law, which is publicly recognized and fol- such contract or transaction, or the
lowed.35 Rules of law are intellectual prod- refusal to perform the whole or any
ucts; once an effective rule is developed, oth- part thereof, or an agreement in writ-
ers can benefit from it “for free.” Usually we ing to submit to arbitration an exist-
give copyright or patent protection to intel- ing controversy arising out of such a
lectual property holders to encourage them contract, transaction, or refusal, shall
to produce those intellectual products in suf- be valid, irrevocable, and enforceable,
ficient numbers. But of course no one has a save upon such grounds as exist at
patent on rules of law. So private industry law or in equity for the revocation of
(i.e., arbitration firms), according to Posner any contract.
and Landes, does not have a strong incentive
to produce good law. The Supreme Court has held that the act
The argument advanced by Posner and
Landes is that the production of rules of • preempts any state law prohibiting arbi-
law should be an exclusive prerogative of tration, with respect to contracts con-
the state in order to ensure that enough taining an arbitration agreement and
rules are produced. But as I have pointed involving interstate commerce;41
out in another context,36 Posner and • applies not only to transactions between
Landes overlook how private producers can two merchants but also to transactions
benefit from developing legal rules. between a merchant and a noncommer-
Arbitration firms that develop efficient cial consumer;42 and
rules will attract long-term clients because • preempts a state law requiring that the
of their reputation for effective dispute res- existence of an arbitration clause be
olution—a reputation that is hard for com- mentioned “in underlined capital let-
petitors to emulate, given the difficulty of ters on the first page of the contract,”
replicating the human capital upon which because that state law was applicable
the reputation depends.37 And although only to arbitration agreements and not
private arbitration firms might “free ride” to contracts generally.43
on some publicly created rules of law, it is
likely that those firms were created at least Several aspects of the case law are trouble-
in part to escape from such rules. More fun- some, despite the happy fact that the cases
damentally, the claim that only state agen- overall appear to facilitate arbitration.
cies should be allowed to develop binding
rules for private behavior is ultimately an • The state statute requiring “underlined
affront to freedom. It ignores the historical capital letters on the first page of the
importance of industry custom, which was contract” mandated nothing more than

14
a formal notice, at the beginning of a incoherently and unevenly under current
long contract, that the constitutional case law. Substantive waiver, the most direct
right to sue in common law court was way to implement “property rule” protection
being waived. It is hard to see how a for entitlements, is sometimes allowed but
notice requirement would be harmful; often denied. The denials, when they happen,
it ensures that the arbitration clause is are ill-advised attempts to protect “needy”
entered into knowingly.44 As the plaintiffs—attempts that in fact hurt them.
Montana Supreme Court noted, “To Procedural waivers, especially via ADR provi-
hold otherwise would be to infer that sions, are currently more likely to be enforced
arbitration is so onerous as a means of than are substantive waivers. Surprisingly,
dispute resolution that it can only be procedural waivers have been endorsed by the
foisted upon the uninformed.”45 Supreme Court even when the waiving party
• Federal ascendancy over state law based may not have been fully informed.
on a limitless notion of “interstate com-
merce” is incompatible with our
Constitution. The Supreme Court itself Inalienability and Tort Law
appears increasingly to be challenging
that use of the Commerce Clause. Enforcement of substantive and proce-
Should all volun-
Justice Thomas dissented in the dural waivers would mean a shift in the pres- tary agreements
Montana case, stating that he did not ent boundary between contract and tort, be enforced?
believe the Federal Arbitration Act away from tort adjudication and toward
applied to proceedings brought in state greater reliance on the law of contracts. The Clearly not.
court. His concurrence in the landmark case for narrowing the domain of tort law,
Lopez case,46 and to a lesser extent the and for expanding the domain of contract, is
majority opinion in that case, indicates in reality a case for expanding property rules
that a tenuous relation to interstate and constricting liability rules.
commerce may no longer be enough to But should all voluntary agreements be
supplant state jurisdiction. enforced? Clearly not. Imagine a “thief for
• State statutes restricting or condition- hire” contract under which Y pays X money
ing arbitration are still being enforced,47 in consideration for which X promises to
especially when they affect professional steal Z’s property and deliver it to Y. Such an
services. Thus, for example, states gen- agreement is and should be deemed contrary
erally disregard arbitration agreements to public order and thus unenforceable,
in retainer contracts between clients because it involves violations of the rights of
and their attorneys.48 And state rules noncontracting parties (in this case, Z’s right
that permit the revocation of contracts to his property).
generally (as contrasted with rules Sometimes, however, X and Y’s contract
exclusively applicable to arbitration purports to transfer a right that one of them
agreements) remain enforceable under does own but may not alienate. Almost no
the express provisions of section 2 of one would call for the enforcement of a con-
the Federal Arbitration Act. Thus, the tract under the terms of which X sold himself
“unconscionability” technique invoked into slavery, for example; and few would
by the court to invalidate the arbitra- authorize a contract by which X, while in
tion clause in Obstetrics and Gynecologists good health, sells his heart to Y for immedi-
v. Pepper survives the act, because the ate “delivery.”49 Some (but not all) constitu-
theory of unconscionability is not limit- tional rights are deemed inalienable50 as are
ed to arbitration agreements. the natural rights to life, liberty, and the pur-
suit of happiness, the attempted deprivation
In summary, waivers of tort are treated of which justified our Founders’ revolt

15
against an oppressive English state. Still That saves the cost and possible inefficien-
other rights are subject to a mixed property- cies of private litigation and transactions,
inalienability rule: a functioning kidney, for so it is claimed.
example, may be given away (sometimes only Perhaps so. But in the process it
to certain people) but may not be sold. infringes on the right of X to do with his
Similarly, custody rights over our natural property as he pleases, so long as he does not
children may not be sold but may be given interfere with his neighbors’ quiet enjoyment
away through adoption. of their property. Moreover, the enactment of
Those pure or modified inalienability a zoning regulation assumes that legislators
rules are widely endorsed. Others are the sub- are somehow able to determine accurately,
ject of considerable controversy. Use of and cheaply, the costs and benefits of the
another’s sexual organs may be allowed, for proposed construction to third parties. To
love or pleasure, but not in an explicit con- the contrary, “Austrian” economists52 have
tract for money. In many jurisdictions shown that centralized state agents cannot
wombs are subject to similar restrictions, discover information as efficiently as can
both in surrogacy contracts and in adoption transactors. The interaction of multiple eco-
cases. Such matters, grounded on moral val- nomic variables is too complex and therefore
ues, are but the tip of the iceberg. Far more too indeterminate for theoretical or empiri-
prevalent are inalienability rules that have cal models. The market itself continually
sprung up in the form of legislation to digests relevant information and reflects that
restrict ordinary commercial transactions. information in purchase and sale decisions,
An economic rather than a moral ration- ultimately revealed in transaction prices. By
ale is most commonly advanced for the use of means of those prices, transactors are able to
inalienability rules in the commercial arena. discover the impounded information neces-
Those rules, so the argument goes, are just sary for economic decisionmaking. But if
another method of correcting for “market regulations foreclose market transactions,
failure.” The claim is that when X contracts the requisite information is suppressed.
with Y to, say, build a store on previously Another objection to the economic ration-
vacant land, X may impose costs on others. ale for inalienability is that it transforms
It’s not that the construction might violate private law into public law. Every commercial
traditional common law principles of nui- contract has an impact on outside parties—
sance,51 in which case legal remedies would competitors, suppliers, other customers, and
be available. Rather, it’s that the owners of on and on. The state’s replacement of private
An economic surrounding property may not, for whatever by public allocation of resources on that
reason, approve of the new project and may ground is simply illegitimate. In the typical
rather than a believe, rightly or wrongly, that it will dimin- lawsuit, the plaintiff claims that the defen-
moral rationale is ish the value of their property. dant behaved (i.e., used his property) wrong-
most commonly Those perceived costs are sometimes so fully in the particular context of one individ-
great, according to Calabresi and Melamed, ual accident. By contrast, efficiency-based
advanced for the that outsiders might theoretically be willing to inalienability rules would prohibit entire
use of inalienabil- pay X to leave the land in a pristine state. Yet categories of behavior just because they are
the large number of affected outsiders makes deemed by regulators to cause substantial
ity rules in the it difficult to organize them and tempts each third-party costs. Those blanket prohibitions
commercial outsider not to offer payment to X in the hope are analogous to general criminal statutes
arena. of “free riding” on the concerns of others. To implemented by the government as agent for
“resolve” that problem, the government sim- allegedly affected third parties.
ply makes the proposed construction contract Once the state has advanced a plausible
illegal through, say, a zoning regulation—an economic explanation for prohibiting con-
example of limited economic inalienability. sensual behavior in one area, its appetite

16
inevitably extends into other areas as well. A not installed. The courts in those two cases The torts crisis
person who today is prohibited from selling were wrong not to enforce the contracts to exists because the
certain toys—because a government agency which the plaintiffs had agreed. By abrogat-
has determined that they are “too danger- ing the contracts, the courts declined to pro- exercise of our
ous”—or certain cars—because they consume tect the rights of the parties with a property property rights
“too much” gas or have no seat belts—may rule. Instead, the courts felt that they knew
tomorrow be forbidden to sell his own
has been given
best how resources should have been allocat-
labor—because he is being offered “too little” ed. So they substituted a liability rule, which increasingly less
money or is not a member of a union, or offers incomplete protection of rights. respect by
because the state has determined that he is Those cases help explain today’s torts “cri-
too old or of the wrong race. Contracts once sis.” It does not exist because corporations
government.
freely negotiated, and subject to private suit are oppressing individuals. Nor does it exist
in case of fraud or failure to perform, are because we need federal mandates to replace
increasingly replaced by regulation. Private state tort rules. The crisis exists because the
ordering is increasingly replaced by the regu- exercise of our property rights has been given
latory state. The economic rationale for over- increasingly less respect by government. The
riding property rule protection and substi- crisis exists because we have not allowed tort
tuting inalienability rules is dangerous. to be tort, and contract to be contract. We
Inalienability rules are more properly need to reestablish the boundary between
grounded in morality than in economics. contract and tort, limiting liability rules to
Societal revulsion at immoral acts is not their appropriate realm. And we need to rati-
susceptible to quick and easy cost/benefit fy a narrow, moral theory of inalienability
analyses, for the reason that moral truths rules, which will allow us to identify the very
cannot be treated as commodities.53 Indeed, few offensive transactions to which those
a moral code informs our law; if it did not, rules should apply. Legal scholars, judges,
we would not be a moral society. But that and legislators must comprehend and act on
said, moral considerations justify far fewer those basic truths about private ordering in a
instances of inalienability than does the free society.
pervasive economic rationale that so typi-
fies the regulatory state.
Notes
1. Perkins v. Wilkinson Sword, Inc., 700 N.E.2d 1247
Conclusion (Ohio 1998).

This study began with three stories: A cen- 2. Gurski v. Ayerst, 953 F. Supp. 412 (D. Mass.
1997).
tury ago a young boy was intentionally, albeit
innocently, kicked, with dire consequences. 3. 50 N.W. 403 (Wis. 1891).
Some economists claimed that he should not
recover damages, because he could easily and 4. 693 P.2d 1259 (Nev. 1985).
inexpensively have worn a shin guard. But the 5. 684 N.E. 2d 648 (Ohio 1997).
court was correct not to compromise the vic-
tim’s right to his bodily integrity by subject- 6. Y.B. 14 Hy VI p. 18, pl. 58 (1436), quoted in
ing him to that kind of calculation. William S. Holdsworth, History of English Law
(London: Methuen, 1909), vol. 3, p. 330.
More recently a woman was excused from
an agreement to arbitrate a dispute with her 7. Grant Gilmore, The Death of Contract, 2d ed., ed.
doctor. And an automobile fatality was and foreword by Ronald K. L. Collins (Columbus:
blamed on a car maker who had not installed Ohio State University Press, 1995), p. 15.
air bags, which were not required by law, even 8. Guido Calabresi and A. Douglas Melamed,
though the purchaser knew that they were “Property Rules, Liability Rules and Inalienability:

17
One View of the Cathedral,” Harvard Law Review 20. Lopez v. Southern California Rapid Transit, 710
85 (1972): 1989. P.2d 907 (Cal. 1985).

9. Ronald Dworkin, Taking Rights Seriously 21. Henningsen v. Bloomfield Motors, 161.A2d 69,
(Cambridge, Mass.: Harvard University Press, 83–84 (N.J. 1960).
1977), p. ix.
22. George Priest, “The Current Insurance Crisis
10. Margaret Jane Radin, “Market Inalienability,” and Modern Tort Law,” Yale Law Journal 96
Harvard Law Review 100 (1987): 1849; and Susan (1987): 1821.
Rose-Ackerman, “Inalienability and the Theory of
Property Rights,” Columbia Law Review 85 (1985): 23. Quite frequently the election of arbitration is
931–69. analytically an attempt to obtain an enforceable
ex ante waiver of the right to a jury trial, which is
11. Sometimes the inalienability rule is partial provided in the federal and in all 50 state consti-
only: donation of the entitlement is allowed while tutions. A contractual clause that merely waives
sale is prohibited. That rule applies to blood and the right to a jury trial, without simultaneously
kidney transfers in many jurisdictions. choosing a different form of adjudication, will
invariably be deemed unenforceable.
12. See Spur Indus. v. Del E. Webb Dev. Co., 494 P.2d
700 (Ariz. 1972). Spur operated a cattle feedlot 24. The high cost of litigation, coupled with the
miles from any community. Webb’s residential “American rule” fee structure (wherein the loser in
development grew substantially and eventually a tort suit is not obliged to pay the winner’s attor-
abutted Spur. Odor and flies from the feedlot neys’ fees), arguably encourages frivolous suits
interfered with the residents’ use and enjoyment that nonetheless have high “settlement” or “nui-
of their properties. The court found the feedlot to sance” value. Efforts to bypass state courts may
be a nuisance and ruled that Spur must move or merely be ways to discourage such nuisance suits.
close down but required Webb to indemnify Spur
by paying the costs of moving or closing the feed- 25. But see Carnival Cruises Lines v. Shute, 499 U.S.
lot. 585, 591–95 (1991), where “reasonableness” was
interpreted quite liberally.
13. LeRoy Fibre v. Chicago Milwaukee & St. Paul Ry,
34 S. Ct. 415 (1914). 26. See Restatement (Second) of Conflict of Laws, §187
(2) (1971). In the Casarotto case, to be discussed
14. Brown v. Shyne, 151 N.E. 197 (N.Y. 1926). below, a contract concluded in Montana chose
Connecticut courts and substantive law for all
15. See, for example, Jardine Estates Inc. v. Koppel, disputes, however minor. The Montana Supreme
133 A.2d 1 (N.J. 1957). Court concluded that the clause violated
Montana public policy. See Casarotto v. Lombardi,
16. Meistrich v. Casino Arena Attractions, 155 A.2d 90 886 P.2d 931, 935 (1994).
(N.J. 1957).
27. See Engalla v. Permanente Medical Group, 43 Cal.
17. See, for example, Canterbury v. Spence, 464 Rptr. 2d 621, 629 (Cal. App. 1995).
F.2d 772 (D.C. Cir. 1972); Kalsbeck v. Westview
Clinic PA, 375 N.W.2d 861 (Minn. App. 1985); and 28. Priest.
Roberts v. Tardif, 417 A.2d 444 (Maine 1980)
(obstetrical treatment of mother did not measure 29. Rep. Patricia Schroeder (D-Colo.) was an out-
up to nationally recognized standards of care). spoken proponent of the inalienable right to a
common law jury trial. HR 3748, an unsuccessful
18. See, for example, Tebbets v. Ford Motor Company, bill she introduced in her last session before retir-
140 N.H. 203 (1995); Johnson v. General Motors, ing, would have prohibited all pre-dispute arbitra-
438 S.E.2d 28 (W. Va. 1993); and Minton v. Honda tion agreements.
of American Mfg., Inc., 684 N.E.2d 648, 655 (Ohio
1997). 30. Jean Sternlight, “Panacea or Corporate Tool:
Debunking the Supreme Court’s Preference for
19. See, for example, Volkswagenwerk Aktieng- Binding Arbitration,” Washington University Law
eschellschaft v. Merritt, 531 S.W.2d 938 (Ark. 1976); Quarterly 74 (1996): 680.
and Murphy v. Nissan, 650 F. Supp. 922 (E.D.N.Y.
1987). See also Kurt B. Chadwell, “Automobile 31. See Larry Ribstein, “Choosing Law by
Passive Restraint Claims Post Cippollone: An End Contract,” Journal of Corporate Law 18 (1993):
of the Federal Preemption Defense,” Baylor Law 245–300.
Review 46 (1994): 141–81.
32. Priest.

18
33. In game theory, those winner-take-all scenar- enforce stringent “hidden” clauses, written in very
ios are extreme forms of what is known as the small print, on long contracts that the merchant
“prisoners’ dilemma.” does not expect the consumer to read. One should
not be held to obligations to which one has not
34. See generally Marc Galanter, “Speculations consented. The context of the agreement may
on the Limits of Legal Change,” Law & Society make it clear that no real opportunity to take
Review 9 (1974): 95–151. notice of (and therefore consent to) the stringent,
hidden clauses was ever given.
35. William A. Landes and Richard A. Posner,
“Adjudication as a Private Good,” Journal of Legal 45. Doctors’ Associates v. Casarotto, 901 P.2d 596,
Studies 8 (1979): 235–84. 597–98.

36. Michael I. Krauss, “Regulation vs. Markets in 46. United States v. Lopez 115 S. Ct. 1624 (1995).
Development of Standards,” Southern California
Interdisciplinary Law Journal 3 (1994): 781–808. 47. See, for example, Columbus Anesthesia Group v.
Kutzner, 459 S.E.2d 422 (Ga. Ct. App. 1995).
37. Bryan Caplan, “The Present and Potential of
Alternative Dispute Resolution,” Regulation 2 48. See Jane Massey Draper, “Validity and
(1994): 21. Construction of Agreement between Attorney
and Client to Arbitrate Disputes Arising between
38. Michael I. Krauss, “Tort Law and Private Them,” American Law Reporter 5th 26 (1995): 107;
Ordering,” St. Louis University Law Journal 35 and Supreme Court of Ohio Disciplinary
(1991): 623–55. Opinion 96–9, December 6, 1996 (Westlaw file
“OH Adv. Op. 96–9”).
39. U.S. Arbitration Act, 43 Stat. 883 (1925). Current
version codified at 9 U.S.C. §§1–208 (1994). 49. There is virtual unanimity that those con-
tracts are not enforceable by specific performance.
40. The act came to be known as the Federal That is not to say they should be null and void.
Arbitration Act following Congress’s deletion in Perhaps the “purchaser” of X’s heart should be
1947 of a section naming the statute the U.S. able to sue X for monetary damages if, for exam-
Arbitration Act. ple, following X’s “breach” the purchaser had to
wait in the hospital for a donor heart, losing
41. Southland v. Keating, 104 S. Ct. 852 (1984) income while waiting.
(7–Eleven franchisees sued franchiser Southland
in state court, alleging Southland had violated 50. For example, the right to vote and the right to
disclosure requirements of California Franchise bear arms are inalienable constitutional rights.
Investment Law. Southland sought to compel ar- But the right to a jury trial may be waived.
bitration, as provided in franchise agreement. The
California Supreme Court held that California 51. See Lucas v. South Carolina Coastal Council, 505
law required claims to be brought in court, and U.S. 1003, 1029–30 (1992).
therefore refused to order arbitration. Held,
Federal Arbitration Act preempts California law). 52. See, for example, Ludwig von Mises,
Socialism: An Economic and Sociological Analysis, 2d
42. Allied–Bruce Terminix v. Dobson, 115 S. Ct. 834 ed.,trans.J.Kahane(Indianapolis:Liberty Classics,
(1995). 1932).

43. Doctors’ Associates v. Casarotto, 116 S. Ct. 1652 53. For a good discussion of this question, see
(1996). Richard Arneson, “Commodification and Com-
mercial Surrogacy,” Philosophy & Public Affairs 21
44. There are sound, liberty-based reasons not to (1992): 132–64.

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