The Evolution of the Common Law and Efficiency*

• Publication year: 2012

The Evolution of the Common Law and Efficiency^*

Nuno Garoupa^** & Carlos Gómez Ligüerre^***

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Table of Contents

I. Introduction...............................................................................309

A. Development of the Common Law............................................311
B. Local Determinants of the Common Law and Legal Origins... 313
C. The Role of Statute Law............................................................316
D. Choice of Common Law Jurisdictions......................................318

II. The Efficiency of the Common Law Hypothesis...................319

A. Multiple Efficient Equilibria....................................................322
B. Single Efficient Equilibrium.....................................................323
C. Putting Both Models Together.................................................325

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III. Discussion of Examples.............................................................326

A. Tort Law...................................................................................326
B. Defamation Law.......................................................................329
C. Professional Responsibility......................................................331
D. Cost Rules in Civil Litigation...................................................332
E. Civil Juries...............................................................................335

IV. Conclusions.................................................................................339

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I. INTRODUCTION

The efficiency of the common law generated discussion among legal economists quite early in the law and economics literature. The controversial thesis was introduced by Judge Richard Posner in his seminal book, Economic Analysis of Law.¹ His main argument was that there is an implicit economic logic to the common law.² In his view, the doctrines in common law provide a coherent and consistent system of incentives which induce efficient behavior, not merely in explicit markets, but in all social contexts (the so-called implicit markets).³ For example, common law reduces transaction costs to favor market transactions when appropriate.⁴ Quite naturally, Judge Posner recognizes that not all doctrines in common law are economically justifiable or even easy to understand from an economic perspective.⁵ Economics does not offer a complete and exhaustive theory of the common law, but his view is that it offers a balanced and significant explanation.⁶

Judge Posner's hypothesis can be traced back to the evolutionary theory of the common law suggested by Justice Holmes in the 1880s.⁷ Holmes's main argument was that the judicial responses to public policy, rather than some internal logic, drive development of the common law.⁸ According to him, the ability of the common law to adjust appropriately to external needs relied on the recruitment of the judiciary as representatives of the community.⁹ Notably, Holmes's theory vehemently opposed the codification movement in the United States in those days.¹⁰ Justice Holmes did not use an efficiency argument for the common law (and against codification).¹¹ Although developed in a different historical background, Judge Posner's understanding of the common law is not very different from the theory developed by Justice Holmes.

It is important to stress that the common law of Justice Holmes and Judge Posner reflects the Blackstonian definition. According to Sir William

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Blackstone, writing in 1796, the common law consists of general customs by which the judges and the courts are guided and directed.¹² Alternatively, the common law includes all legal doctrines that do not require a written form to be valid but rather rely on the usage by courts.¹³ Therefore, statutes have a secondary and subordinate role.¹⁴ They are essentially declaratory (to restate the common law) or remedial (to correct the flaws of the common law).¹⁵

However, in American legal history, the Blackstonian understanding of the common law has not been without controversies. For example, Justice Cardozo saw clear advantages in the codification process and recognized some advantages to the French legal method in shaping judgments.¹⁶ "The American codification debate in the nineteenth century clearly shows that there are multiple understandings of the role of the common law."¹⁷ By proposing the efficiency hypothesis of the common law, Judge Posner noticeably opts for one side of the discussion. Unfortunately, most legal economists have not realized that the Posnerian hypothesis has to be understood in the context of a richer debate.¹⁸ Looking at the debates in the past, the traditional arguments for the Blackstonian common law included flexibility, stability, and ability to develop better rules without the need for statutes.¹⁹ The conventional arguments against the Blackstonian common law mentioned uncertainty (because of conflicting precedents), difficulty of nonlawyers to understand the law (higher transaction costs in modern economic language), and incorrectly allowing judges to legislate.²⁰

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Still,

Judge Posner's hypothesis of the efficiency of the common law begs for a more detailed explanation from the start. In particular, the hypothesis lacks a more explicit [and consistent] mechanism for explaining why the common law should be efficient. . . . [A] remarkable literature emerged as a consequence. Legal economists proposed different [and ingenious] explanations that have been evolutionary models identifying the forces that have shaped the common law to generate efficient rules.²¹

"[I]f the common law is evolutionarily efficient, we are left with no explanation for the important doctrinal differences across common law jurisdictions . . . ."²² One of the many problems with the economic literature on this topic is the confusing use of "common law" to describe different legal features. our definition is the standard one: "a body of general rules prescribing social conduct," originally enforced by the ordinary royal courts in England (as opposed to equity, local, or ecclesiastical courts), and characterized by the development of its own principles in actual legal controversies (through the use of judicial precedents), by the procedure of trial by jury, and by the doctrine of the supremacy of law (all agencies of government are subject to court review and compelled to follow legal procedure such as due process).²³

A. Development of the Common Law

The development of the common law in the thirteen colonies followed different paths that were not only distinct from the original English common law, but also between the colonies themselves.²⁴ Unlike in the English tradition, colonial law tended to be codified with the exception of Maryland.²⁵ Some of these colonial law codes departed significantly from the English common law, in particular in New England (Massachusetts most importantly) and Pennsylvania.²⁶ In other cases, such as Virginia and the

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Carolinas, English law was influential in adjudication, for example, but subsidiary to colonial law.²⁷ In a show of the general respect for self rule, appeals from colonial courts to the English Privy Council were generally not allowed and drastically discouraged.²⁸ Thus, it was not English common law, but these local departures that shaped the general reasoning and principles of American common law.²⁹

All the same, it is unquestionable that the English common law influenced and formed the American common law.³⁰ No doubt there were political and economic factors helping the convergence with English law.³¹ But the very different realities faced by the colonies and the metropolis led to significant departures from the English common law in many fields of law, notably property (including inheritance, alienability, and trespass), contracts (including remedies and restitution), torts (from negligence rules to proximate causation), slavery laws, and family (marriage and divorce rules).³²

In fact, we could describe the early stages of American common law more accurately by recognizing the existence of thirteen different legal systems with different degrees of codification (quite significant in Massachusetts due to the Puritan distrust of lawyers).³³ English law was important more in the sense of providing a background and legal method than the elements of substantive law.³⁴ The situation changed in the eighteenth century, when colonial courts became more English in nature.³⁵ The British developed more interventionist methods of governing the colonies, which resulted in a strengthening of the executive power.³⁶ Although the British did not opt for a model of giving the courts in London jurisdiction over colonial courts, the role of the Privy Council was enhanced.³⁷ Colonial statute law was subject to review by the Privy

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Council.³⁸ A process of convergence in substance and style was imposed by the Privy Council.³⁹ Yet frequent delays and the permissive attitude of the Council (more political than truly judicial) undermined the possibility of full conformity of the colonial courts by the time of independence.⁴⁰

Similar trends are found in other common law jurisdictions, such as Australia, Canada, New Zealand, and Ireland.⁴¹ Their common law systems have been formed and shaped by the English common law. Yet local determinants and different historical events have effected important departures from the original law in significant areas.⁴²

B. Local Determinants of the Common Law and Legal Origins

This Article assesses the efficiency of the common law hypothesis to detect the possible explanations for those main differences. If local determinants shape the common law differently, the literature needs to address these particularities that have been largely ignored. The consequence is that there might be no single efficient outcome, thus undermining the "one-size-fits-all" theory of the legal origins literature.⁴³...