Introduction
One of the most famous distinctions in contemporary legal theory was
made popular by Guido Calabresi & A. Douglas Melamed s famous
article, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral.
The core idea is simple. Legal rules that create private causes of
actions (or claims for relief) can be sorted into two kinds. Kind one
consists of rules that entitle the claimant to an injunction. Kind two
consists of rules that entitle the claimant to damages. The first kind
of rule is associated with property rights–hence, we can call the
first kind "property rules." The second kind of rule is associated
with tort liability or contractual liability–hence, we can call the
second kind "liability rules. The distinction between property rules
and liability rules is important, because injunctions and damages have
different effects on future behavior and on negotiated settlements to
claims.
This post in the Legal Theory Lexicon Series is aimed at law
students–especially first-year law students–with an interest in legal
theory. As always, this is a very short introduction to a complex
topic. I’ve provided references for further reading and a deeper
understanding.
Calabresi & Melamed’s Famous Formulation
"Another View of the Cathedral" is one of those articles that every
law student should read. But to get us started, let’s quote the famous
passages from near the start of the article where the distinction
between property rules and liability rules is introduced:
An entitlement is protected by a property rule
to the extent that someone who wishes to remove the entitlement from
its holder must buy it from him in a voluntary transaction in which the
value of the entitlement is agreed upon by the seller. It is the form
of entitlement which gives rise to the least amount of state
intervention: once the original entitlement is decided upon, the state
does not try to decide its value. It lets each of the parties say how
much the entitlement is worth to him, and gives the seller a veto if
the buyer does not offer enough. Property rules involve a collective
decision as to who is to be given an initial entitlement but not as to
the value of the entitlement.Whenever someone may destroy the initial entitlement if he is
willing to pay an objectively determined value for it, an entitlement
is protected by a liability rule. This value may be what it is thought
the original holder of the entitlement would have sold it for. But the
holder’s complaint that he would have demanded more will not avail him
once the objectively determined value is set. Obviously, liability
rules involve an additional stage of state intervention: not only are
entitlements protected, but their transfer or destruction is allowed on
the basis of a value determined by some organ of the state rather than
by the parties themselves. An entitlement is inalienable to the extent
that its transfer is not permitted between a willing buyer and a
willing seller. The state intervenes not only to determine who is
initially entitled and to determine the compensation that must be paid
if the entitlement is taken or destroyed, but also to forbid its sale
under some or all circumstances. Inalienability rules are thus quite
different from property and liability rules. Unlike those rules, rules
of inalienability not only "protect" the entitlement; they may also be
viewed as limiting or regulating the grant of the entitlement itself.
There is a lot packed into this short package. First, we get the basic distinction between enforcement by injunction and enforcement by liability for damages. Second,
we get the distinction between rights that are alienable and those
which cannot be bought and sold and hence are "inalienable." Third,
we get an argument that alienable rights that can be enforced by
injunctions require less state intervention than do inalienable rights
that are only enforceable by damage awards. These three ideas were the
conceptual core of Calabresi and Melamed’s distinction between property
rules and liability rules.
Mixed Rules
Even if you have never encountered the distinction between
property rules and liability rules before, you probably have already
thought to yourself that the world is not quite as black and white as
the distinction implies. The same underlying "primary right"–such as
the right to security of property–may be enforced by both injunction
and damages and involve both alienable and inalienable aspects. That
is, there are "mixed rules" as Calabresi and Melamed themselves noted:
It should be clear that most entitlements to
most goods are mixed. Taney’s house may be protected by a property rule
in situations where Marshall wishes to purchase it, by a liability rule
where the government decides to take it by eminent domain, and by a
rule of inalienability in situations where Taney is drunk or
incompetent.
Choosing Between Property Rules and Liability Rules
Why should the law choose property rules for some situations and
liability rules for others? That’s a very large and complex question.
Here are some of considerations that bear on an answer–recognizing
that these are only starting points:
The Possibility of Bargaining–It might
be argued that property rules are better suited to situations where the
parties can bargain over the transfer of rights. So the possessory
interest in real estate or chattels might be protected by property
rights, because the transfer of possession is something over which the
parties can bargain. An injunction against involuntary transfer forces
the parties to agree on terms for a voluntary transfer. On the other
hand, it might be argued that liability rules are better suited to
situations in which bargaining is impossible (or to be more precise,
very costly). For example, it would be difficult to bargain over an
automobile accident–the parties may be strangers, the accident is
unanticipated, and so forth. In that situation, a damage award rather
than an injunction seems like the only feasible mechanism for
protecting the right.Existence or Measurement of Damages–Sometimes it is very
difficult to measure damages. For example, in copyright law, it may be
difficult to prove that my copying of portions of you book had the
consequence of hurting your sales. (It’s possible my copying even
helped your sales.) When damages either don’t exist or can’t be
measured, then liability rules may be ineffective. But if the
copyright holder–to continue the example–has the right to an
injunction, this will force the infringer to pay for the right to
continue the infringing activity.Administrative Costs–Liability rules require the system to
measure damages and that may be costly. Evidence on the extent of
damages must be gathered, processed, and evaluated by a finder of
fact. Property rules do not involve these costs. This facto generally
favors property rules over liability rules.
Of
course, this is a partial and incomplete list. But these examples
illustrate the kinds of considerations that might favor a property rule
or a liability rule as the solution to a particular legal problem.
Conclusion
The distinction between property rules and liability rules
is fundamental to private law. As you study contracts, torts, and
property, it is very useful to ask yourself whether a particular legal
doctrine or cause of action involves a liability rule, a property rule,
or a mixed rule. Once you have the answer to that question, the next
inquiry is "why?" What justifications can be offered for the law’s
choice of a property rule over a liability rule, or vice versa. If you
ask these questions systematically in your study of private law, you
will be well on your way to a deeper and more sophisticated
understanding of these building block subjects.
References
Ian Ayres & J.M.
Balkin, Legal Entitements as Auctions: Property Rules, Liability Rules,
and Beyond, 106 Yale L.J. 703 (1996).Guido Calabresi & A. Douglas Melamed, Property Rules, Liability
Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev.
1089 (1972).Louis Kaplow & Steven Shavell, Property Rules versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713 (1996).
(This entry was last revised on November 30, 2008.)