In defence of private property

“It is not the commoners that are tragic, but the commoners who continue to uphold such as inefficient means of allocating precious resources” Discuss

The debate on how resources should be allocated is not just one that lingers among economists, but lawyers too. This is because lawyers are constantly faced with problems of how property rights should be allocated and so questioning the validity of the private property regime our capitalist economy is founded on is absolutely crucial. Land in particular is especially important as it indestructible, immovable and necessity for human survival. In this essay, I will be looking at the debate between communal and private property and concluding that ultimately both ownership systems are infested with problems but private property provides an arguably smaller problem and thus it is tragic that commoners in communal systems refuse to move from an inefficient means of allocating precious resources.

Communal property ownership can be defined as an ownership shared by more than one legal entity, they do not have the right to exclude as would exist in a private regime, they have the right not to be excluded. Infamously, the economist Hardin proposed the “Tragedy of the Commons” within which he aimed to demonstrate why communal ownership is inefficient and should be transformed into a private regime. He argued that open unowned properties will be overused and exploited as no person bares the direct cost of their use/actions on the land but they will directly benefit. He gives two examples: one of a pasture land that is open to all and ends up overgrazed and useless as farmers keep bringing more cattle on the land. And the second is pollution, he says people will not be careful about how much pollution and external cost they are adding to the land as they bare no cost of polluting. He suggests that there are two ways we can solve this and that is by moving to either a private property regime or a state owned property regime. However, again with state property, the problem is that the decision makers do not directly benefit or become disadvantaged on the basis of their decisions and so their decision will not be the most efficient ones. That leaves a straightforward argument for why we should move to such a regime. 

However, the theory itself is infected with substantial problems. For example, the example given only works on the basis that the cattle is privately owned, and it is private property that drives profit maximisation and makes each farmer to ignore the communal cost and focus on individual benefits. Furthermore, had the cattle also be communally owned then perhaps the land would not become overgrazed as farmers would not be able to keep adding to the herd.   I would question this criticism, however. This is because, profit maximisation incentive also exists in communal ownership. If all the cattle was part of the land then the farmers would still seek ways in which they can maximise their benefit from the land, the only difference is that costs would be higher because there are larger negotiation costs when you have more than one person. If the farmers were able to and could see the profit coming in from herding sheep on the land, they would find ways to bring in more cows. Ultimately, it is human nature to strive for something better. It also important to note, that as lawyers we can forget that economics is built on mathematical models which includes a number of assumptions, one common one being that individuals are rational i.e. they strive to maximise utility whether it is through consumption or profit maximisation. On these grounds I would uphold the statement that it is tragic that the commoners still wish to hold onto the communal method of ownership. 

Nevertheless, critics are quick to point out that overgrazing and long-term detrimental effects are not limited to communal or state ownerships, they do happen in private property systems too. This is also true, most of the Western world exists on the foundations of private property and yet most of the pollution also comes from the Western world. However, it seems that the more subtle point about allocation of resources is being missed. Such impacts happen on a much smaller scale were private property is in practise and this is because costs are much lower e.g. third party negotiation and transaction. This means that any addition cost such as pollution or exploitation makes a much bigger impact than situations where already costs are quite high. Furthermore, as a private owner you are incentives to find ways to improve the quality of your land and cost minimise as you are aware that if you do not care for your land, no one else is, you are the sole responsible owner. In communal systems not only do the costs impact you less, giving less incentives to improve the land, you will always be relying on the next person to create a cost-minimising way and say you do there will be large negotiation costs before it will be accepted and implemented as you can’t exclude others of their rights to use the land which may not be compatible with you own mechanism. 

Furthermore, Barzel provides a great real case study of how successful and efficient the private property system can be at allocating resources. In 1958, the North Sea was divided and separately owned by private companies and it resulted in a large amount of development and availability of oil that we did not have previously,  It is for this reason that today when the world is seeing environmental troubles, we are turning to Private property solution such as tradeable carbon rights to find an answer. 

An interesting type of property which also exists within the realms of communal property is anti-commons. Thus far we have discussed property, whereby everyone has the right not to be excluded and so they can use the land. However, in anti-commons, here everybody has a right to exclude but no personal right themselves to use the land. It was first identified by Michealman but later reformulated by Heller who uses the example of a communal garden to explain this. He says that imagine there is a communal garden given to handful of households to share, similar to the pasture land shared by farmers in tradegy of the commons. They might exclude others from the garden by inserting locks on the entrance but the problem is then they themselves cannot use the land as unlocking would infringe someone else’s rights. This means that land doesn’t get used and thus is inefficient. At first this seems theoretical, but Heller uses it to explain the situation in post-soviet Moscow. After the state ownership of shops ceased, shops in Moscow still remained virtually empty of consumer goods. Kiosks tended to operate illegally outside on the street. This was because property rights in shops were distributed among a number of different bodies in an attempt to placate or compensate socialist-era stakeholders, shops thus had become anticommons property: no single individual was given full ownership rights. 

Anticommons is another crucial demonstration of how difficult, impractical and inefficient communal systems can be and thus it is tragic that commoners continue to uphold such an archaic and inefficient system. It is only in the last few centuries we have seen radical growth and technology, private ownership of not just land but intellectual property, water and goods and services has a lot to do with this. In conclusion, I would argue that private property is way forward.

Private, Communal & State Ownership

Private, Communal & State Ownership

Clarke & Kohler pp. 35-42, 59-62, 75-78

Demsetz, “Towards a theory of property rights” C&K pp. 65-68

35-42

• Communal property: property rights in things can be held by communities. 
• Public or state property: the state may hold all the property rights in a thing, and allocate the use of things to particular citizens by administrative rather than property rules. 
• Do note that there is no consensus over what constitutes state and public property - there is not even the distinction between private and state. 
• Ownerless things or ‘no property’ are objects in which no one has property rights so you might have a priviledge of benefiting from it but not a right. Examples include: free newspapers, radio signals, downloadable material from the internet. In Hunter v Canary Wharf, the House of Lord decided that terrestrial television signals were an example of this. 
• Communal property: This is where not only do persons have a priviledge to use the resource but a right not be excluded from using it. They can be open e.g. everyone in the world is a member or closed/limited where membership of the ‘community’ is limited. 
• Open access communal property is not necessarily state owned e.g. a public right of way which is open access communal property may be owned by a private induvidual. Another way in which open access communal property differs from state is that if the user has the right not be excluded from the state then we can say this is open access communal property as state property can use facilities and merely license users by permission to use it.
• The difference between allocation and provision of resources is this - allocation of resources sees what type of ownership is present should the facility be limited to a certain class or is free for all to use or is the public entitled to use it. Provision on the other hand whether anyone should be responsible for ensuring that the resources are available in the first place. 
• Limited access communal property can be distinguished from private co-ownership. Private co-owners are usually identified by their transmissable property interest. Members of a community, on the other hand, are identified in reference to a particular defining characteristic and no induvidual member has a transmissable interest. However, this is not a clear-cut analysis that is always correct as with all other aspects with law there are exceptions and distinct situations where this does not hold.
• If a communal property is that which no one has a right to be excluded and priviledge to use but cannot exclude others then the opposite is Anticommons property. 
• Anticommons property was first suggested by Frank Michealman a property which everyone has a right to exclude but no right or priviledge to use themselves.  This concept became useful when it was reformulated by Micheal Heller, who described it as a situation where ownership rights are distributed to multiple owners in such a way that each owner can exclude others and hence cannot actually use the resource for himself. He gives the example of a communal garden which all households are given to share, they all put locks to exclude others but one person themself cannot use it as that would require asking the other households to remove their locks and thus infringing their rights. 
• Thats why in England only up to 4 people to co-own land as to avoid some of the problem of the anti common. Thats why even with communal problem its 4 people. Anti common is an externality of communal ownership. 
• The concept of the anticommons property is significant because it allowed Heller to demonstrate why post-soviet Moscow was inefficient. After the state ownership of shops ceased, shops in Moscow still remained virtually empty of consumer goods. Kiosks tended to operate illegally outside on the street. This was because property rights in shops were distributed amoung a number of different bodies in an attempt to placate or compensate socialist-era stakehlders, shops thus had become anticommons property: no single induvidual was given full ownership rights. 
• No property - the point is to not be regulated. You can’t say you have a right to it. Its just there - you can use it - you can’t own it as you can’t loose it.

59-62: Justifications for property rights

• Lawrence Becker draws a distinction between two types of justifications: general and specific. General concerns why to have property rights in the first place and specific what sorts things people should own under what condition  (macro v micro).
• Economist regard the institute of property as a means of solving these problems caused by scarcity of resources. 
• Garrett Hardin put forward the justification of private property in “The Tradegy of Commons”. Where he essentially argued that open unowned properties will be overused and exploited as no person bares the direct cost of their actions on the land so if you have some form of ownership then there is someone who is responsible and bares the cost and thus ensures that this does not happen. He gives 2 examples: one of a pasture that is open to all and ends up overgrazed and useless and the second is pollution, he says people will not be careful about how much pollution and external cost they are adding to the land as they bare no cost of it.
• There are several criticisms of Hardin’s justification. The first is that he fails to identify why private ownership is better than limited access communal ownership. This is probably because he does not make a distinction between no-property, open-access and limited access communal property. 
• Demsetz looks at this proposal more closely saying that private property is not always the answer and that limited access communal property can be too. He says however the society this produces will be distinct from if there was private property and that regulation will tend to be through social convention as opposed to legal regulation. Furthermore, the nature of the resource and the prevailing environmental conditions will determine which type of ownership is more suited. 
• Demsetz however failed to take sufficient account of state ownership which Hardin himself acknowledged that might provide some solution.

75-78: Yoram Barzel, Economic Analysis of Property Rights ‘The Conversion of the North Sea into Owned Property’

• Barzel provides the example of when in 1958 the North Sea was divided and became private companies and as a result large development was seen in this area. 
• Coase therom: the absense of transactions costs inhibiting the proper working of the market, the efficient allocation of resources will occur wherever the entitlement is first put. 

Demsetz, “Towards a theory of property rights” C&K pp. 65-68

• The "main allocative function of property rights is the internalization of beneficial and harmful effects"
• If you have a small community, this can work... but only if the cost of changing the grabber's behavior (i.e., transaction cost) is less than the harm the community is suffering. We must assume that this is a community of rational, economically-efficient people who will pay only if "cost < harm."
• That is because the transaction costs of changing grabbers' behavior in large communities are higher than the externalities... thereby preempting internalization. 
• In contrast, a "private property rights" system significantly reduces the externalities a society experiences. Let me illustrate using land as a type of property. Having exclusive ownership of a parcel of land incents one (by design) to manage it in such a way that society's interests are better addressed. For example, the owner now has access only to the portion of natural resources that are on his land. Therefore, by depleting his resources, the owner hurts only himself; the other parcel owners' resources are not affected. Therefore, the externalities of a given conduct are significantly reduced.
• In a private-rights system, the transaction cost of reducing the externality is lower than under a communal-rights setup, because the private system recognizes a bundle of rights belonging to the neighbors. For example, if soot from the factory's pollution is deposited on a neighbor's land, the neighbor could sue the company for trespass. A private-rights system also implies a more efficient means of internalizing. For example, if the neighbors got together and pooled funds to persuade the company not to pollute, a private-rights system helps define which neighbors are required to be present in the negotiation 
• At that point, society can introduce government intervention by either limiting someone's rights to use the land, or by requiring that certain types of property (e.g., factories) be government-owned and managed with society's broader needs in mind. Government intervention can further reduce externalities, though it may create others, such as limited freedom, limited enterprise, less-vibrant economy, etc. Demsetz did not elaborate on government regulation in the excerpt.
• Demsetz's principles that civilized societies must be economically efficient and that an economically-efficient society has the duty to minimize externalities, aim to justify the transition from a communal-property legal system to one of private property rights and government regulation.

Fundamental Breach

• A further rule that the common law sought to introduce to restrict the impact of exclusion clauses was the doctrine of fundamental breach.
• The rule stated that some breaches of contract are so serious that no exclusion clause can cover them.
• Example Harbutt’s Plasticine 1970,  the defendants designed and installed a pipe work into the plaintiff’s factory which were totally unsuitable and caused a fire which destroyed the factory. The defendent’s hoped to rely on a limited liability clause, which limited their liability to contract price. 
• The court of appeal dismissed the appeal from defendants
• Lord Denning - in considering the consequences of of a fundamental breach, it is necessary to draw a distinction between a fundamental breach which leaves the contract open to be performed and a fundamental breach which itself brings the contract to an end.
• The first type, it means that you can sue for damages for past or present breaches because you have affirmed the contract, you cannot end it. only if you claim then in the second group does the contract end.
• The second type,...one party has been guilty of a fundamental breach of contract, that is, a breach goes to the very root of contract , the other side accepts it , so contract comes to an end  then the guilty party cannot rely on their exclusion or limited liability clause as the contract has come to an end,
• This was later rejected in Photo Production Ltd v Securicor Transport Ltd 
• Plaintiff had contracted with defendant to send a security guard to check their factories at night. Unfortunately, one that they hired went to the factory and started a fire. It was clear from facts they had not been negligent in recruiting him. They had a liability clause. The issue was whether the clause was nullified by a fundamental breach . The CA held it was and that the exclusion clause applied despite that a fundamental breach had occurred.
• doctrine no longer necessary as we have UCTA and Harbutt was overruled 

Exclusion Clauses - Incorporation and Interpretation

Incorporation

In the past the courts have kept a more commercial attitudes. permitting exclusion clauses. However, societal changes have really pushed a new approach courts have. The case below is an example;


 Thompson v LMS Railway 1930

The claimant was injured whilst stepping off a train. The railway company displayed prominent notices on the platforms excluding liability personal injury and damage to property due to negligence. The tickets also stated they were subject to terms and conditions displayed on the platform. The claimant was illiterate and could not read the signs. She argued that the exclusion clause was not incorporated into the contract as the railway company had not brought the clause to her attention at the time the contract was made.

Held:

The clause was incorporated. There is only a requirement to take reasonable steps to bring the clause to the attention of a reasonable person. There was no duty to ensure that every traveller was aware of the clause. The claimant was therefore unsuccessful in her claim for damages.

Furthermore, although as we will see courts are more reluctant to permit standard form exclusion clauses, it still holds true that being illiterate, ignorance to the law, is not an excuse for the law. If you don't read the clause or are illiterate that is not sufficient ground to argue it is unincorporated. 


Olley v Marlborough Court 1949

The claimant booked into a hotel. In the hotel room on the back of the door a notice sought to exclude liability of the hotel proprietors for any lost, stolen or damaged property. The claimant had her fur coat stolen because the receptionist was negligent leaving the door keys out. 

Held:

The notice was ineffective. The contract had already been made by the time the claimant had seen the notice. It did not therefore form part of the contract.

Thorton v Shoe Lane Parking 1971

The claimant was injured in a car park partly due to the defendant's negligence. The claimant was given a ticket on entering the car park after putting money into a machine. The ticket stated the contract of parking was subject to terms and conditions which were displayed on the inside of the car park. One of the terms excluded liability for personal injuries arising through negligence. 

Held:

The machine itself constituted the offer. The acceptance was by putting the money into the machine. The ticket was dispensed after the acceptance took place and therefore the clause was not incorporated into the contract, lack of reasonable notice.

Chapelton v Barry UDC [1940] 

A man rented two deck chairs and was given a ticket. He couldn’t negotiate the terms, he fell through the deck chair. However, there was an exemption clause exemption the deck chairs.


Held;

courts said that it wasn’t reasonable to expect this kind of contractual agreement. Furthermore, neither party intended the ticket to be contractually binding, it was a mere receipt. 

Interpretation 

In common law the Contra Proferentem rule is used.

• This is where you interpret contract against the person who wrote it. You recognise the person who has been injured did not negotiate that clause.  Courts use every method to interpret the clause so it doesn't affect the person who is injured.

Wallis Sons Wells v Pratt Haynes 1911

A seed sale contract clause said the sellers gave ‘no warranty express or implied’ as to the seeds’ description. The seeds did not match the description.

 Held, that the clause only applied to a warranty, and the description was actually a condition of the contract.

JOHN LEE & SON (GRANTHAM) LTD v. RAILWAY EXECUTIVE 1949

Goods stored in a railway warehouse let to a tenant were damaged by fire and the tenant brought an action against the railway executive alleging that the accident was due to their negligence because a spark ejected from their railway engine had caused the fire. The defendants set up a clause in the tenancy agreement which exempted them for loss of or damage to property however caused (whether by act or neglect of the company or their servants or agents or not) which "but for the tenancy hereby created would not have arisen".

The company was liable. The words "but the tenancy hereby created" were confined to liabilities which arose reason of the relationship of landlord and tenant.

Limitations of Frustration

Express contractual provision 

In a case where a supervening event has rendered performance radically different to the original agreement, but there is an express contractual provision dealing with such an intervening event, the ocntract will not necessarily be frustrated. 

Clauses such as these should not be confused with force majeure clauses, which merely temporarily makes the contract difficult to fufile

Foreseeable supervening event

Where a supervening event occurs, which would otherwise lead to frustration of the contract, if the event was a reasonably forseeable possibility, the contract may not be frustrated The Davis Contracters case can also apply here, the shortage of labour and raw materials was not unforeseeable. 

The supervening event was caused by one of the parties  - Self Induced Frustration

As stated above, frustration only occurs when a supervening event occurs without default of either party. This prevents a party from self-inducing frustration to escape contractual liability. There is also a strong view that negligence alone by a party could constitute default. The onus of proving that the supervening event was caused by one of the parties lies with the party who makes the allegation. 

An example is J Lauritzen AS v Wijsmuller BV, “The Super Servant Two” 1990,  here the defendant contracted to transport Plantiff’s oil rig from Japan to Holland using either the “the Super Servant One” or the “Super Servant Two” transpotation unit. The defendant intended to use no 2 but it sank. Meanwhile, the defendant allocated no.1 to other contracts. It was self-induced as it was the defendants choice to allocate the ships to other parties. 

The burden of proving that the frustration is self-induced is on the party claiming it. 

Distinguishing Frustration from Force Majeure

In common law jurisdictions, force majeure means an event that does not make the obligations impossible but rather temporarily difficult.By using notice with force majeure obligations can be suspended as opposed to disposed of. 

Law Reform (Frustrated Contracts) Act 1943

Statutory intvention

• Law Reform (Frustrated Contracts) Act 1943

• Created to deal with hardships of Paradine, but itself created some hardships

Act deals with 3 very specific areas:

1. Recovery of money paid in advance of the contract 
1. section 1(2)  confirms that money paid can be recoverable - Fibrosa
2. Money due ceases to be payable - Taylor v Caldwell - Appleby v Myer 1967, where any benefit was destroyed by fire, would not give rise to recovery under this subsection. 

1. Under 1(2) the court also has discretion to reward a party who has carried out work under contract 
2. recovery for partial performance

1. under s1(3) the court can allow recovery for paritial performance where other party has conferred a valuable benefit on the other party 

1. this is the discretion of the court to decide what is reasonable 

Frustration of Purpose

Frustration of purpose refers to an event or action outside of the control of the parties of the contract that renders the objective reasoning of a contract obsolete.

This doctrine comes from the case of Krell v Henry [1903], where the defendant agreed to rent a flat from the plaintiff for the purposes of watching the coronation procession of Edward VII. Henry payed a deposit of 25pounds but refused to pay the remaining balance of 50pounds when the procession was cancelled due to the King falling ill. Krell sued for the remaining money, but it was found that as Henry had rented the flat for the sole purpose of watching the procession, and that the cancellation of the procession would not have been anticipated by the parties at the outset of the agreement, the contract had been frustrated and therefore the further obligations of the parties did not have to be performed.

This should be compared to Herne Bay Steamboat Co v Hutton 1903 where the event only impacted purpose marginally and thus was not deemed to be frustrated. The defendant hired out the claimant's steamship. The purpose of the contract was to take paying passengers to view the Naval Review which was part of King Edward VII's coronation celebrations. The defendants were also offering a day’s cruise for the passengers. The Naval Review was cancelled as the King was ill. The defendant did not use the steamship and the claimant brought an action for the agreed contract price. The defendant argued the contract had become frustrated due to the cancellation of the Naval Review. It was held, The contract was not frustrated. The contract had not been deprived of its sole commercial purpose as it was still possible to perform the days cruise. The Naval Review was not the only commercial purpose of the contract.