Libertarian Law and Legal Systems Part Three – Consent and Contract
By Duncan Whitmore
We will begin our survey of the causative events of legal liability in a libertarian legal system with those that arise from consent because, even though people may view “the law” as being synonymous with wrongs such as crimes and torts, consensual legal relations are, in fact, the most frequent types of legal interaction that arise in an individual’s life.
The predominant form of legal relations arising from consent is, of course, the contract; a person may enter tens of these contracts every single day by, for example, just purchasing a coffee, a bus ticket, or lunch, whereas most people would scarcely commit a single crime in their entire lives (although we might note that today states are happy to spill oceans of ink in criminalising, through legislation, even the most innocuous of actions). While any good legal system must have strong proscriptions against horrific acts such as murder and rape, it is the contract that is the primary preoccupation of everyone’s daily lives.
The first question to consider, then, is what exactly is a contract? Although it should be clear that all contracts concern some sort of bilateral arrangement, different legal systems have varying and often elaborate definitions.
In English law and in common law systems generally, contracts are agreements or promises made with consideration, that is, some form of good or service that is exchanged (alternatively, deeds can be signed to bind agreements made without consideration). There is, therefore a high degree of freedom of contract with the emphasis of the law being more on the question of the enforceability of the performance specified by the contract. The more prescriptive civil law jurisdictions, on the other hand, are more concerned with the precise rights and obligations that arise as a result of the contract (although we might note the gradual erosion of freedom of contract in common law systems as a result of non-discrimination laws and laws that attempt to prescribe particular rights and obligations arising from a particular contractual relationship, for example, a contract for employment).
Further, the bases upon which the legitimacy of contracts rests are also varied and numerous. For example, is it because the promisor intended to be bound in some way, or because the promisee relied upon the promise in order to arrange his affairs in a manner in which he would not have done so but for the promise? Are contracts even promises at all, or are they agreements, and what is the difference?
We do not have the space to enter a discussion of the shortcomings of most of these definitions of contracts and their bases of legitimacy1. But for libertarians it should be clear that none of them have much to do with the key concept of property with which all legal relations in a libertarian world are concerned (although the requirement of consideration in English law bears some resemblance to it). What, then, is this essential element of property in contractual relations?
We all know, as “Austrian” economists, that humans act so as to direct scarce resources available to their most highly valued ends. Libertarian theory states that you may do this unilaterally so long as the goods to which you are subjecting your action are ownerless and are, therefore, unvalued by anyone else. We can each arrange ownerless resources to meet our needs in any fashion we like without running into conflicts with other people.
However, in a world of interpersonal scarcity, we find ourselves in the position of desiring and coveting the goods that are owned by other people. We would prefer a particular good to be moved to meeting our ends and away from those of the current owner. But libertarian ethics prevents us from unilaterally making goods owned by someone else the object of our action, for then we are invading his property and violating the non-aggression principle. Rather, we have to secure the consent of the owner to move that property from meeting his ends towards meeting ours.
The basic purpose of a contract, therefore, is to procure someone else to voluntarily deal with his property in a way other than he is doing so at the moment. It is a method by which we can legitimately secure property that is owned by someone else towards meeting our ends. Contracts are, in effect, extended actions, the extension of gaining consent being necessary in order to overcome the “hurdle” of the title over the property claimed by the existing owner.
Normally the securing of this consent requires a quid pro quo arrangement – “If you will sell me a bar of chocolate, I will pay you 50p”; or “If you pay me £20 I will mow your lawn”. However, this needn’t be so, nor does the initiator of the exchange have to be the one who wishes to get his hands on someone else’s property. As we shall see, gifts are a valid form of contract but in this case it is normally the donor and not the recipient who proposes that a gift should be made.
Why, however, do contracts have the force of law? If they are to be violently enforced then any breach of a contract would necessarily have to be a violation of the non-aggression principle, otherwise, in a libertarian world, only non-violent methods of enforcement could be resorted to.
The reason is that the contracting party is not just agreeing to do something with his property – rather, he is purporting to grant a title over the property to you. At its fullest extent this may be an exchange of the full title of ownership from him to you, completely extinguishing his title and furnishing you with 100% ownership. However it needn’t necessarily be so. Leasehold titles (or the “renting” of durable goods) and easement rights would be valid titles exchanged by contract. Because the owner of property has granted you a title over that property any subsequent interference in that title by him is a breach of your property rights and a violation of the non-aggression principle. Thus, in a libertarian world, it may be enforced by legal sanction.
Contracts, therefore, are exchanges, or transfers of title to property. This definition of a contract may be known to readers who are familiar with the “title transfer” theory of contract. Nevertheless, the law will also need to consider situations where there isn’t a strict “title” to the property in the sense with which this word is understood in contemporary legal systems. It is typical, in economics, to make a distinction between goods on the one hand and services on the other – a good, for example, being an apple that can be eaten whereas a service being, say, a ride in a taxi cab. Legally I would have title to the apple but I would not have title to the taxi cab. Yet all goods are valued for the service that they offer – the apple for the satiating of my hunger and the taxi for its transportation of me from A to B. There is no value inherent in goods, rather the value always springs from the service it is able to achieve in meeting the fulfilment of an end.
The distinction arises because “goods” typically service those ends that we can only satisfy from complete ownership – i.e. a title over – and exclusive use of the whole of the servicing good. I cannot borrow, eat and then return the same apple at a later date – rather, I have to own it in its entirety. “Services”, on the other hand, are those goods that service ends that can be satisfied without complete ownership. Contemporary legal systems do not say that I own or lease a taxi in order to satisfy my end of getting from A to B; nevertheless, I do obtain possession of it for a period of time. Similarly, if I am an employer a legal system would not say that I “own” the labour of my employee. Colloquially, in each case, I might say that I have “hired” a taxi or “hired” my employee but legal systems confer no formal title to either of these things upon me. How libertarian legal systems might unscramble these problems we shall see below.
The transfer of the title to a good requires the owner to abandon his rights that good. With the hiring or leasing out of a durable good the good in its entirety is not, of course, abandoned by the original owner, merely the good’s productive services for the duration of the period of hire. As we shall see labour contracts can be enforced as exchanges of money in return for the performance of the service of labour. Whether a person has the ability to abandon the physical matter that comprises his own body and to transfer it as property (i.e. to enter a contract of slavery or indentured servitude) is a contentious area of libertarian theory that we cannot hope to resolve here. Nevertheless we must recognise the fact that libertarian courts will face it as a question.
The contract, therefore, is the execution of the transfer of title over a good from one person to another – it is the instrument that gives it legal recognition. Anything interpreted as being preliminary to an execution of transfer on the part of the transferring party – the promise to transfer, the desire to transfer, the wish to transfer, the hope to transfer, and so on – does not suffice as a contract.
It is typical to justify this on the grounds that recognising a promise or statement of desire as a contract would require a person to bind, and thus alienate, his will, something which cannot be done.2 Regardless of one’s views of the alienability doctrine, a simpler explanation is that as the promise or statement of desire has not itself executed transfer of the actual good under consideration, there must, in a libertarian legal system, be some other property that is transferred if there is to be a valid contract. This can only be the thought or desire expressed by the transferring party. But as we noted in part two, thoughts, feelings, desires and so on are not tangible property and are not capable of ownership. A fortiori they cannot, therefore, be transferred. These thoughts and feelings do, of course, reside in the physical matter of the brain, but aside from the inability to identify and isolate the specific cerebral matter in which these thoughts reside, few contracting parties are likely to be intent upon transferring a physical part of their most vital organ. In the absence of any conduct that indicates an actual transfer of tangible property that is the subject of the statement of desire or promise, there will be no contract in a libertarian legal system. Precisely what this conduct will be is for a libertarian courts to decide.
This does not mean to say, of course, that promises or expressions of desire do not have moral force even though they lack legal force. We are not stating that a person would not be behaving badly by reneging on his promise; we are merely stating that he may not be subject legal sanction – i.e. the use of force – as a response to this withdrawal. Moreover, there is also the possibility that transfers of title that masquerade as promises (or give the appearance of promises) will be given recognition as contracts by a libertarian court, particularly where the subject matter is clear and unambiguous and the difference turns only on a matter of words.
For example, consider the following two statements:
- “I transfer £100 to you effective as of Thursday”;
- “I promise I will transfer £100 to you on Thursday”
The first statement would ordinarily be binding upon the transferring party; the second one would not. However, libertarian courts may be loath to dismiss the second as being without legal consequence simply by the insertion of the word “promise”. What has to be remembered is that the entire conduct of the individual is considered, and merely because he used the word “promise” does not necessarily mean that he did not intend to action a transfer of title to the £100. For example, if the statement was an off-the-cuff remark then it may be held to be a promise; on the other hand, if it was the conclusion of drawn out negotiations then it may be held to be a binding contract.
It is important to realise that the property need not be in existence or under the legal ownership of the transferring party at the time of contract. If I contract with someone to clean my car next week for a sum of money, payable upon completion, I might not have the money now but will do so by the time I am obliged to make payment. Similarly, I might agree to sell someone a car in one month that I do not own now but will be required to arrange for ownership of it before the transfer date.
Parties to contracts need to judge, individually, the risk of default involved in entering such contracts. A standard commercial solution that has emerged in our contemporary legal systems is the thirty day credit period where a supplier will transfer a good on day one, invoice the debtor, and the latter will be required to make payment in cash – not existing in his possession at the time of the contract – within thirty days. Furthermore, it should be clear that there is no reason why libertarian courts would not recognise transfers taking effect at a future date, so long as the action of the transferring party was interpreted as a statement of transfer and not as mere promise or wish.
Finally, contracts can be oral or written; the difference may, of course, have evidential impacts but as long as the facts of a case are established the precise form of the contract makes little difference upon the questions of law.
Types of Contract
Let us therefore investigate the types of situation in which contracts may arise and where a libertarian legal system will be required to interpret and determine the legal outcomes.
There are five such possible situations:
- The unilateral declaration of transfer of a good (i.e. a “gift”);
- The exchange of a good for another good;
- The exchange of a good for the performance of a service;
- The exchange of a performance of a service for the performance of a service;
- The unilateral declaration of the performance of a service.
Each of these situations involves the intention to transfer at least a portion of the productive services of property to another individual. Let us investigate these in turn.
First of all, the gift contract is relatively straightforward – a simple declaration of transfer of property by an individual without any action necessary on the part of the recipient. It is clear in this instance precisely what the property is and who should own it as a result of the transfer – for property is being transferred in a single direction without condition. Even though the receiving party has done nothing he may now (or at a specified date of transfer) consider the title to the property his. If the transferring party retains possession of the property it is clear that he has now absconded with what is somebody else’s property (although some legal systems require the gift to have actually been delivered before the gift is legally recognised). Hence he can be compelled by legal remedy – i.e. violent enforcement – to rectify that situation. Possible remedies we shall explore below. The recipient may, of course, refuse the gift, in which case the property would either revert to the transferring party or could simply become abandoned.
Matters become a little more complicated when a good is exchanged in return for another good. There are several ways in which this could, theoretically, take effect.
The first is for each party to declare in the contract the transfer of each other’s property, for example, “A hereby transfers title to a sum of £100 to B, and B hereby transfers title to a television set to A”. Although this could be applied to some situations such a contract appears to be more like two unilateral declarations of transfer (i.e. two simultaneous gifts) than a contract of exchange, and this does not correctly interpret the intentions of the parties to the exchange. Few people would suggest that when you buy something in a shop you are “exchanging gifts” as opposed to engaging in mutual trade. People are not simply transferring their property in the hope of getting something back – rather, the transfer of title becomes conditional upon getting something back, and title only transfers when something is given back. In other words A will only transfer a sum of £100 to B if B will transfer the title to a television set to A.
Very few transactions are physically simultaneous – somebody usually has to transfer their property before they receive the other party’s property in return. Even in a shop when the period of transaction is very short, either the purchaser has to hand over the money before he gets the good or the shopkeeper has to hand over the good before he gets the money. A conditional exchange prevents title to your property passing until the other side fulfils his half of the bargain.
Precisely which titles pass and when depends upon the wording of the contract. The contract may specify that B’s transfer to A of the title to a television set will be made upon the transfer of £100 by A to B – in other words, delivery of the money must be made first. If B delivers the television set to A in advance then title to the set does not pass; if A defaults, then under this wording the television set is the property which B retains title over (i.e. he gains no title to the money that should have been paid for it). If, on the other hand, A pays in advance then title to the money transfers from A to B immediately and title to the television set transfers from B to A; the television set is now properly A’s and B is required to deliver it. However, if the wording of the contract was the other way round – that A’s transfer to B of the title to money will be made upon the transfer of the television set by B to A – then the situation is reversed and now it is the television set that must be delivered first. If B delivers the television set in advance of payment then it is the £100 that is now his and not the television set; if A pays in advance then he retains title to the £100 until the television set is transferred.
Much of this is, of course, theoretical as when it comes to dealing with a defaulting party your primary interest is in pursuing the course of action that gives you the greatest chance of some sort of recovery rather than relentlessly striving after the precise property that is yours, particularly if the debtor is insolvent. Nevertheless this theoretical clarity is important for understanding the foundations of the libertarian law of contract and how it is fundamentally based upon the concept of property. As we shall see below, most commercial contracts will state the situation that occurs in default by specifying precisely which title exchanges will occur in all possible actions of each party (if person A pays, outcome X will result; if person A does not pay, outcome Y will result, etc.).
Furthermore, we might say that the hire of durable goods – including the leasing of land – falls under this category of an exchange of goods. The durable good is not transferred in its entirety but the degree and length of possession transferred is significant enough to confer a leasehold title to the property upon the recipient, in exchange for the title to rent money.
Given this, should not the third type of situation – the transfer of a good in exchange for the performance of a service – fall into the second? As we outlined above, all services depend upon property to carry them out and the recipient of the service is, in effect, hiring the property for the duration of the period of time in which the service is performed – a ride in a taxi being a good example.
However, unlike the lease of land, we never say that a person gains title to a taxi and its driver, even though in theory we might say that he should so gain. The reason is likely to be precisely as we stated in part one – that legal rules and principles are determined not only by what should be applied in theory but by that which accords with custom, tradition and practical expedience. The rights which result from conflicts arising from scarcity are only those rights that people demand; no one demands rights over goods that are not scarce because there is no conflict over these goods. Where the goods are scarce, however, we must remember that the enforcement of titles and ownership rights, followed by any subsequent remedial action, is itself costly and burdensome. There will, therefore, always be a category of scarce goods where the economic benefit is low and the cost of recovery high so that the conferring of formal titles would be wasteful.
It is reasonable to suggest that services fall into this category. A ride in a taxi is of such short duration, the economic benefit minor, and with dozens of rides being carried out for different people every day, people are not willing to demand the security of a formal title in order to resolve any arising conflict. If, on the other hand, taxi rides were to become crucial to welfare or desperately scarce then formal titles may become worthwhile for this purpose. A more likely scenario is if someone wishes to hire a taxi for a number of days in order ferry important guests to and from various functions in which case a formal hire title may be necessary.
The same phenomenon will be in operation when the goods providing the services are not delegated exclusively to the possession of the beneficiary. A professional accountant, for example, may deal with dozens of clients from his single office and may switch back and forth between work for a number of them in a single day. Working out a system of leasehold titles to all of the accountant’s equipment in such a case would be not only arduous and costly but close to impossible.
In the absence, therefore, of a formal title to the goods providing the service, what security is available to the recipient of the service? If he is transferring a good in exchange for the service it is likely that courts recognise this contract as a conditional transfer of the good – for example, A will transfer £5 if B gives him a ride in the taxi. If A does not get his taxi ride then he keeps his money, i.e. title to the money does not pass to B until the journey is complete, regardless of when payment is actually made. This latter aspect is especially important for services that are delivered over a long period of time such as a development or consultancy. Down payments or deposits will be required so that the developer can fund his operations for the period of service but should he fail to deliver then the contracting party can sue for return of the funds as the latter remain his property.
Matters become a little more difficult in the fourth type of situation – that of a performance of a service in return for the performance of a service. For example, A will mow B’s lawn if B gives A a ride in B’s taxi cab. Other examples might be more extensive – A will provide B with consultancy services for a year if B will provide A with IT services.
Such contracts are, again, conditional exchanges from which the recipients benefit except that no formal title to property passes. In pure theory no contract should be recognised in this situation because of the lack of the property element. Nevertheless, we can analyse some of the considerations a libertarian legal system may have to face in determining the outcomes of these situations.
First, we can say that, as we explained above, the absence of intention to transfer formal titles demonstrates that the parties place a relatively low value on gaining the outcome. It might not matter, for instance, if A mows B’s lawn once but does not gain his taxi ride. In most cases these situations are likely to be cases where the parties are not dealing at arm’s length but are, rather, friends or relatives and where a resulting legal remedy is not intended.
In English contract law there is a separate doctrine of “intention to create legal relations” that has led to some problems in cases where the exchange of goods has not been recognised as a contract for the reason that familiarity between the parties has been presumed to preclude any legal remedy. This is not relevant under libertarian law because here the intention to exchange titles to property is an intention to create legal relations (i.e. the intention to transfer title and an intention to be legally bound are one and the same thing). The mere exchange of a service for a service manifestly demonstrates an intention not to create such relations. The conferring of a property title demonstrates in the parties the desire for the security of the legitimacy to use force in order to gain the fulfilment of their ends. Where this is absent and there are no formal property dealings then it is reasonable for a court to conclude that such security was not valued by the parties.
Libertarian courts will still need to have mechanisms in order to distinguish familial, or so-called “gentleman’s agreements” and casual agreements – i.e. “I will give you a fiver if you can kick this ball through the net” – from valid contracts, and to some extent the kind of examination required may well be identical to that undertaken in order to construe an “intention to create legal relations”. The focus, however, is on whether the conduct of the parties demonstrates their intention to transfer title to property, an approach which provides far more clarity than the vaguer and less defined concept of “legal relations”. People always have the option of concluding their arrangements with formal, enforceable titles if they deem the outcome of the contract to be sufficiently valuable to them; where they fail to choose this option they should not expect the remedy of violent enforcement to come to their aid.
Where the provision of services is extended (or gives the appearance of having a high monetary value) libertarian courts may be willing to recognise an exchange of title if the performance of the service appears to give de facto exclusivity or possession to the recipient over the property that executes that service. Again, we must stress that it is the entire conduct of the parties to the agreement that matters and not simply the words that are on the face of the contract (so, in other words, a knowledgeable party could not try to take advantage of an ignorant party by calling what is, in fact, a transfer of title the performance of a service). Nevertheless, the granting of contractual liability in such cases is likely to be very limited in scope.
It follows from this that the fifth type of situation – the unilateral declaration of a performance of a service – also cannot be an enforceable contract. With regards to both the fourth and fifth situations we can see that any application of contract law to this situation would result in the most innocuous of agreements and declarations falling within the ambit of enforceable contracts. “I will help you with the shopping this afternoon”; “I will meet you in town at 7pm”; “I will clean the bathroom on Sunday”. Absent any demonstrable intention to create titles over property that perform these services the law has no business in these situations.
Breach of Contract and Contractual Remedies
While the focus on this series of essays is on the grounds on which legal liability is recognised and not on legal remedies, it is nevertheless appropriate to consider precisely what the law may compel a contracting party to do in the event that he defaults.
The first and, from the point of view of the receiving party, most ideal outcome is specific performance – full and final delivery of the property that is transferred by the contract. The property belongs to the receiving party and he has the right to compel its transfer. But once again, legal principles will be formed with regards to practical expediency as well as pure theory. Legal proceedings and legal recovery are, as we mentioned above, costly in their own right, and very often the path pursued will be that which gives the greatest chance of recovery for the recipient with the lowest cost. Indeed, specific performance may not be available at all where the property has ceased to exist, or has been damaged or altered – a situation which is most likely in the case of perishable goods. In cases where the property has been transferred to a third party, or its location has moved considerably, the cost of recovery may render specific performance difficult and expensive3.
In most cases where the property in its original form is no longer in the debtor’s possession, the easier outcome will be to sue for compensation or what has been come to be known in contemporary legal systems as damages. Especially if there are proceeds from the sale of the property to a third party this might provide the greatest chance of recovery. Alternatively, the court may order seizure of other goods in the debtor’s possession to be sold for their monetary value in order to pay the necessary compensation.
Traditionally in English law there have been several rationales for why damages should be paid, and at least one of them will be prominent in a single case. First, to pay the so-called “reliance interest” of the recipient – i.e. so that the contract is effectively rescinded or “unscrambled” as a result of the breach, and the injured party gets back what it put into the bargain; second, to pay the “expectation interest” – that which the injured party expected to gain from the deal; and finally, restitutionary damages attempt to disgorge from the breaching party any gain or profit he made as a result of the breach.
Libertarian law largely transcends these categories. A party is entitled to recover the property that it is legally his as a result of the contract, nothing more and nothing less; failing this, he may receive its monetary equivalent in damages. On occasions when he is the party receiving title to property from the other he will get what he hoped to gain; where he is the party transferring property he will get back what he originally had. In cases where both parties are exchanging property then the outcome may depend on which title transferred first. For example, let’s say that A agrees to buy a television set from B in exchange for £100 and pays the money across to B. If the contract specifies that title to the television set transfers upon payment of £100 then the property owed to A in the event of breach by B is television set, i.e. A’s expectation interest. If, on the other hand, the contract specifies that title to £100 only passes upon delivery of the television set, then A retains title in the £100, i.e. A’s reliance interest.
Restitutionary cases may be more complex as, properly considered, they are really a part of the wider category of punitive damages. Any punitive or exemplary damages are unlikely to be awarded in the absence of an intention to breach a contract that renders the default as an act of fraud, a consideration we shall explore below.
Under the rule that a person is entitled to recover from a breach of contract only the property that is legally his as a result of that agreement, it should be clear that in most cases “consequential loss” or recovery of further expenditure incurred as a result of reliance upon the contract is not automatically available to the plaintiff.
For example, a person hires an architect to design a building in return for a sum of £100K, and a further £500K is spent on building materials and hiring other services. Before the project can be completed the architect breaches his contract and the project is forced to a halt. The plaintiff can only recover from the architect the £100K paid across to him in return for his architectural services; he cannot recover the £500K spent on reliance of the architect’s performance. The additional £500K forms no part of the property specified in the contract with the architect.
In these cases, the likely initiative taken by informed parties is to arrange the transfer of titles to property to account for all possible actions of each party. The contract with the architect might therefore state “A transfers to B £100K if B performs architectural services for A for project X; if B fails to perform architectural services for A for project X then B will transfer to A 50% of the costs incurred by A for project X”. It is always possible, therefore, for parties to structure the property arrangements to account for any envisaged scenario. A court will then interpret the contract against the facts in order to determine and enforce a property arrangement in the result of default or dispute. Alternatively, the risk of default can be mitigated through insurance, such as with surety or performance bonds, so that the insurer guarantees a payout in the event that one of the parties breaches.
This should not be taken to mean that consequential is irrecoverable – merely that establishing title to a given piece of property under the contract is not sufficient to complete a claim in that regard. Instead, the plaintiff bears the additional burden of proving that the breach of contract was the relevant cause of the consequential loss. This is too complex to go into detail here, but suffice it to say that breach of contract is, after all, an aggressive act, and aggressors should be required to make good the injuries caused to the plaintiff by virtue of that act. For instance, if you assault a man and he is unable to work then you must compensate him for his lost earnings during his recovery. There is no reason for this not to apply to breaches of contract also. However, to avoid the possibility of open ended liability, commercial parties are likely to undertake the kinds of contractual structuring and liability exclusions that we outlined in the previous paragraph. Thus the question of consequential loss is likely to be academic in most cases.
In some instances an aggressive act may also happen to be a breach of contract, but the breach is merely incidental. In such instances, the existence of a contract will not preclude recovery for the larger loss. For example, suppose that A agrees with B that B will pilot A in a private plane in return for a fee of £1,000. A pays B the £1,000 and the plane takes off. However, during the journey, B decides to break his contract and bails out of the plane with a parachute, leaving no one to pilot the plane. As a result, the plane crashes and A is either seriously injured or is killed. Under the principles of contract that we just outlined, A should only be able to recover from B the £1,000 pilot fee, and could not sue for consequential injuries he sustained from the plane crash. However, this does not rule out the likelihood of a court finding that, regardless of the contract, B’s bailing out was an aggressive act in its own right which caused the injuries to A. Indeed, that is what the court would find if there had been no contract and B was piloting A for free. The contract merely stipulates that the journey is being made for a mutually agreed price – it is not the sole determinant of all liability that arises between the two parties. Having said that, where a contract anticipates a particular kind of breach and specifies the remedy to be provided then we can expect courts to default to that agreement rather than looking for other grounds of liability.
It should be clear that such contractual structuring of property also permits penalty clauses – usually precluded in English contract law – to be established in contracts. The contract with the architect could quite easily have said that B will transfer to A 200% of the costs of project X incurred by A in the event that A fails to perform his services. The insertion and acceptance of such clauses in contracts merely indicates the value that is placed on performance by each party and their eagerness to get their hands on each other’s property. Such arrangements are entirely consistent with libertarian property principles.
In sum, based upon both the considerations of theory and of practical expediency, we might state therefore that, under libertarian contract law, a contracting party has a primary obligation to pay the property that is the subject of the contract, and a secondary obligation to pay compensatory damages as an equivalent. This is subject to the further consideration of how, precisely, libertarian courts will classify the status of a defaulting debtor – is he, for example, a thief of what is now the property of the other contracting party and, thus, a criminal who should be subjected to some sort of punishment? Or does he bear something resembling civil liability in our contemporary legal systems and need only furnish compensation?
Part of this difficulty stems from the classification of wrongs – that is, for a libertarian, breaches of the non-aggression principle – into crimes or torts. Rothbard, for example, practically abolishes the distinction, upgrading what in contemporary legal systems are described as “torts” (invasions of person and property) to “crimes”, and dismissing altogether the current legal categorisation of crimes as wrongs against the state4. However he then has to admit that all defaulting contractual parties, regardless of the circumstances, are “thieves” who have “stolen” the property of the other party. Faced with the conclusion that a defaulting debtor, who has been unable to pay because of mere hardship or unfortunate circumstances, should be thrown into debtors’ prison he merely states that this would be “beyond proportional punishment”5.
Such an approach creates the confusing possibility that different legal responses can flow from the same grounds of legal liability. It is conceptually clearer, however, to recognise varying grounds of liability each of which results in a specifically appropriate remedy. As we shall argue in part four of this series there is a case to be made for retaining the general distinction between criminal and tortious liability based upon the intention (as objectively viewed by the court) of the defaulting party. If his conduct indicates that he deliberately intended to abscond with the property that he owes (i.e. is a fraudster) then he should be regarded as a criminal and subject to higher sanction. If, on the other hand, he has done his level best to make ends meet and defaults simply because of poor business choices then it is more likely that he would be subject to the equivalent of civil liability. Libertarian legal systems are likely to recognise that it would be a travesty of justice to equate the two situations, and may go further and acknowledge gradations of liability between the two extremes. Unreliable and bad with financial affairs a person may be but this does mean that he should be branded as a dishonest thief who cares for nothing more than himself.
It is at this point where we can return to the consideration of punitive and restitutionary damages. Where a person has not intended to be in the position of being unable to pay the property to the debtor then these damages would clearly be unavailable. Similarly where the property under dispute was a small part of a much larger operation with legitimate property that earned a profit, it would be unjust to disgorge the entirety of the profit from the debtor. More difficult, however, is where the intention of the defaulting party has been to defraud the property owner or where the property has uniquely and with little aid earned a profit for the debtor. In these cases libertarian courts might recognise a punitive or restitutionary element in accordance with an accepted theory of punishment that is compatible with libertarian principles. Consideration of this is beyond the scope of this essay, but we must acknowledge its possibility.
We can conclude this survey of the law of consent with some minor considerations.
First of all, there should be no problem with third parties enforcing their rights to property that they acquire as a result of a contract between two other people. For example, A may agree with B that A will pay C £100 if B transfers a television set to A. If B so transfers the television set then title to the £100 is now properly C’s and C can sue for its delivery.
Second is the “problem” of so-called unfair contract terms. These are usually exclusion clauses that relieve the debtor of any excessive burden of liability in the event of a default. In principle there is nothing unjust, from a libertarian point of view, of such clauses if they are agreed to in the contract. All that they would do is specify with objective certainty where the property rights would lie should events X, Y or Z occur. From an economic view, such certainty is designed to avoid the costs of litigating or arbitrating a dispute should the debtor fail to perform. Thus we might say that such clauses grease the wheels of commerce so that every party knows where they stand in the event of a default, and the result of every outcome can be ascertained. Particularly if the debtor is a large and complex concern such as a corporation, open-ended or uncertain liability in just a single case may bring operations to a complete halt if that case is representative of the corporation’s entire customer base.
There is, of course, the possibility that large and knowledgeable parties will either include or exclude all manner of liability in the “small print” of a large contract in order to burden the other party. The only tool available to a libertarian court in order to strike these terms from the contract is to find that they were not incorporated as terms in the first place – i.e. they did not form part of the contract at all. Other than that such terms, in a libertarian world, will be subject to legal sanction.
This does not mean to say, however, that there is absolutely no regulation at all of burdensome contractual liability. We are simply saying that the law – the enforcement of rights through violent measures – has no part of it. We must remember that law, legislation and force are the ways of the statist, and that this way is precisely what we wish to avoid in a libertarian world. Only those acts that breach the non-aggression principle may be subject to the force of law. Where acts do not do this – such as the inclusion of “unfair” terms in a freely accepted contract – then there are plenty of ways of regulating this through voluntary trade.
The first is the competition of the marketplace itself. Traders whose standard terms are too harsh will lose out to those who offer laxer terms. Second, there is every possibility that contractual scrutiny will be undertaken by private consumer watchdogs and ratings agencies who will refuse to accredit or will otherwise highlight companies who fail to moderate their standard terms of contract. Regulation, in a libertarian world, does not take the form of force and violence but, rather, through better informing you of the options that you can choose. A libertarian legal system will not relieve you of your personal responsibility by voiding a contract that you entered freely but now deem to be “unfair”.
In this vein we can also consider misrepresentation. It should be clear that any representation that induces a party to enter a contract must itself be a term of the contract to the extent that it specifies the nature of the property being transferred. For example, X is induced to buy a washing machine from Y as a result of the inducement that it would “last ten years”. If it only lasts five years, then what can X do? In order to sue for a return of his money, the contract would have to specify that the property transferred was “a washing machine that would last ten years”. If the machine lasts only five years then Y has defaulted as he did not deliver the property that was the subject of the contract. On the other hand, if the contract only purported to transfer “a washing machine” then X has no remedy as a washing machine is precisely what he got. The fact that he relied upon Y’s statement that the machine would last ten years is irrelevant. Of course, guarantees, warranties and other collateral arrangements would serve to protect X in this situation and are perfectly compatible with a libertarian legal order.
Space precludes us from considering many other interesting areas – such as implied terms (i.e. good faith), mistake, frustration of contract, and so on. However what we have expounded should be the general foundations of contract in a libertarian society.
Consent as a Defence to Use of Property
Finally, consent may serve to operate as a defence when it is alleged that someone has violated the non-aggression principle.
Consent to use property does not grant a right over the property in question in the way that a contract does. Rather, it simply proves an absence of conflict regarding the property’s use. As we mentioned in part one, the whole purpose of rights over property is to avoid conflicts regarding scarcity by granting the rightsholder the exclusive ability to divert the property to his mostly highly valued ends at the expense of everyone else’s ends. Where, however, the property owner consents to someone else using his property, then it demonstrates that the property is not being devoted to an end that he (the owner) does not desire. Indeed, the concept of demonstrated preference would, in fact, prove that the granting of such consent means that someone else “borrowing” the property is the most highly valued end of the property owner. As there is no conflict, there can be no violation of rights and, therefore, no legal response. Once consent is withdrawn, however, then any continued use of the property by the borrower becomes a violation of the non-aggression principle.
For example, if your neighbour allows you to borrow his lawnmower, then he is not granting you any right over the lawnmower. It simply means that, should he later allege that you stole the lawnmower, his consent would invalidate any legal action against you as that consent demonstrated that he saw no conflict in your borrowing of the lawnmower. If, however, you continue to use the lawnmower after consent has been withdrawn (or when the period of consent reaches an agreed expiry date, such as “until next week”) then your retention of the lawnmower would be subject to legal response. Legal responses would also follow if your particular use of the property exceeded that which the owner consented to (such as selling it, or taking it apart).
The same applies to personal and intimate bodily contact. If a woman consents to having sexual intercourse with a man then she is not granting the man a right over the physical matter that comprises her body. Rather, it simply means that both parties are in agreement as to how her body should be used on that particular occasion. Where, however, such consent is absent then it demonstrates that there is no agreement. Thus, it is consent that determines the difference between consensual sex and rape. Similar considerations apply to contact sport. For instance, in a game of rugby, the players consent to a certain amount of physical contact on the pitch which does not apply once the game is over.
Part Four is now available.
1For a detailed description and analysis of bases of contractual enforceability, see Randy E Barnett, A Consent Theory of Contract, 86 CLMLR 269.
2This would be the line taken by Rothbard. See Murray N Rothbard, The Ethics of Liberty, New York University Press (1998), 134-6.
3If the property has been transferred to a third party then a court may, of course, compel the third party to return the property to its rightful owner. Space precludes us from examining the justice of this outcome in detail here. Suffice it to say here that an individual cannot transfer to another person title to property that the former does not possess in the first place. Hence the third party receives no valid title.
4See Rothbard, p. 51, note 1; Id., Law, Property Rights, and Air Pollution, Cato Journal 2, no. 1 (Spring 1982), 55-99, reprinted in Id., Economic Controversies, Ludwig von Mises Institute (2011), at 409.
5Rothbard, Ethics, 144.