Select Page

Stanford University School of Law
Donohue, John J.

· Purpose of Tort Liability:
o Optimal Deterrence
§ Deter excessive risk
o Compensation
o Retribution/Punishment/Civil Redress
o Loss distribution
· Traditional Theory of Tort Liability
o Cause of action:
§ Tort requires (1) duty, (2) breach of duty, (3) causation, and (4) damages
ú plaintiff must have suffered a harm
ú defendant’s act or failure to act must cause the harm
ú defendant’s act or failure to act must be a breach of duty owed to the plaintiff by defendant
· Liability Rules
o No liability: victim internalizes the cost of the accident
§ no incentive to injurer to take precaution
§ victim must expend on precautions as well as costs of accident
o Full or strict liability: injurer internalizes the cost of the accident
§ No incentive for victim to take precaution
§ Injurer must expend resources on precautions as well as costs of accidents
§ Typically in situations of:
ú ultra hazardous behavior
ú Dangerous pets
ú Products liability
ú Certain statutes
o Negligence: both parties internalize the cost of the accident as long as the negligent standard is set at efficient point
§ Both parties have an incentive to take precaution – puts the liability somewhat on both parties (injurer standard defined by law and obeyed by rational actor, victim becomes liable);
§ Different forms of negligence:
ú Simple negligence: if the injurer obeys the liability standard, then injurer is not liable regardless of victim’s actions; otherwise injurer is liable
ú Negligence with contributory negligence: if injurer is negligent, he/she is only liable if the victim is faultless; if both injurer and victim were negligent, then the injurer is not liable
ú Comparative Negligence: if both parties negligent, pay in proportion to their respective levels of negligence
ú Strict liability with contributory negligence: if victim is faultless then the injurer is always liable, if the victim is at fault then injurer is not liable

Pareto Efficiency – At least one party position is improved and no parties position is worsened
Kaldor-Hicks – At least one party’s position is improved such that they can reimburse the other party for their losses
Coase Theorem = If (a) transaction costs are negligible or transactions are costless, and (b) there is no extortion, an efficient outcome will be reached regardless of how legal entitlements are set
Least cost avoider = the person should bear the costs of the accident is the person who most easily avoid or minimize those costs in general (i.e. product manufacturer in products liability)
Residual Bearer of Harm – the person who eventually bears the cost of the harm, also the person who engages in appropriate levels of activity
Hand rule – Liability lies on the greater side of this equation: (cost of accident)*(probability) vs. (cost of precaution) … if the cost of precaution is less than the cost and probability product, then you must take that precaution or be held liable for negligence if somebody receives the foreseen harm.

The economic essence of tort law is its use of liability to internalize externalities created by high transaction costs.
· The tort liability system plays a significant role in reducing the frequency with which we accidentally lose our property, health, and lives.
· By allocating the cost of accidents, the tort liability system provides incentives for precaution, much as markets allocate costs and provide incentives for production. (CONTINUED ON CU PAGE 411)
· In contracts you have capacity for negotiation because everything is done ex ante, however in tort everything is done ex post, so negotiation becomes very difficult.
· The first question with public policy: Are there major

hat the small decrease in wealth and therefore small decrease in utility is balanced across everyone. The one person whose house actually catches fire doesn’t risk falling all the way down the wealth/utility graph. Insurance keeps relatively rich people still rich, while protecting one. Insurance is the inverse.

Calibreisi – We want liability to fall on the “least cost avoider.”

Private cost v. Social Cost
· General Comment (testable?):
o Money itself it just a claim on assets, but the dollar bill is not social wealth. If you dropped it down the well, pulling it up doesn’t add to the total social wealth – unlike an iPod.
o What if instead of defining negligence, we said “if you don’t drive at an efficient level, you will be shot.” How would that change our behavior? It would work greatly in perfectly function system…not such much if there is enforcement error.
o Friedman theory of 100 mile radius of responsibility …. everybody within radius pays out to everyone outside

Activity level analysis
· neither strict liability nor negligence standards provide the perfect efficient level of activity: TABLE 8.2 page 340. “Non-negligently caused harm” is not internalized, and this is not addressed by SL or the negligence standard. It is a dream to think the negligence standard finds a perfectly efficient standard of care, it does not take into account activity level and subsequent harm.

Punitive Damages (malicious, oppressive, gross, willful and wanton, or fraudulent):