Efficiency and Commerce for All

February 11th, 2010 - by Quincy

You probably own something which is worth more to you than the money you could sell it for. Wedding rings and family heirlooms are obvious examples. Suppose that this thing which you value so much had been damaged in some way, and you took it to a repair shop. Suppose that this repair shop, as is common, was in the business of selling as well as repairing items like yours. Suppose lastly that, because of mistake or malice, the repair shop sold your item instead of returning it to you. Certainly, you would want to recover your item and would expect the law to support your claim. After all, you have a right to your property, and when the repair shop sold your property instead of returning it to you, your property right was violated. Protecting property rights is one of the essential functions of government; in the words of the Declaration of Independence, “to secure these rights, governments are instituted among men.” But in the circumstances described above, your high expectations would be disappointed. Under current law, although you could sue to recover the monetary value of the item, you could not recover the item itself.

State law governing the sale of goods is based on a body of model statutes called the Uniform Commercial Code (UCC). Instead of arising from the usual legislative process, the UCC was written by two private legal organizations and then enacted—with a few modifications—by the legislatures of most states. See UCC Introduction. The provision of the UCC that would prevent you from recovering your item in the circumstances described above reads as follows, “Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in the ordinary course of business. … regardless of any condition expressed between the parties …” UCC § 2-403(2)-(3).

So we see that in some circumstances state law explicitly refuses to protect you from clear violations of your property rights. This isn’t earth-shattering news. It probably won’t make you jump out of your chair and start a revolution. Nevertheless, it is worth noting because this and other laws which work similar mischief are evidence of a dangerous trend in society’s view of property rights. Put simply, concerns about commercial efficiency have come to trump principles of justice.

The efficiency justification for UCC § 2-403 runs something like this: commerce depends upon low-cost transactions between buyers and sellers. If buyers were obliged to return goods that they had purchased under circumstances like those described above (a repairman wrongfully selling goods that were only entrusted to him for repair), then buyers could never be certain that they actually owned the goods that they paid for. This uncertainty about ownership would have inefficient consequences. For example, some buyers would pay to investigate whether the seller had actual ownership of the goods; some buyers would buy anonymously to avoid the risk; and some transactions simply wouldn’t happen at all. These inefficiencies and other consequences of uncertainty would stifle commerce.

I don’t know whether these efficiency concerns stem from sound economics, but it doesn’t really matter. The important question is not whether a law is efficient; the important question is whether a law is just. Just laws are the foundation of individual liberty because just laws recognize and protect individual rights. UCC § 2-403 is an unjust law because after implicitly recognizing a property right, it declines to enforce it. Sadly, this is not an isolated problem.

This substitution of efficiency for justice manifests itself in many other areas of the law. In real property law, for example, the U.S. Supreme Court ruled that the Constitution did not bar government from seizing the homes of private citizens and giving them to a corporation if that corporation could show that it would make more efficient use of the land. Kelo v. City of New London, 545 U.S. 469 (2005). In nuisance law, courts now allow individuals to damage their neighbor’s property through the creation of a nuisance if that nuisance produces economically efficient results. Boomer v. Atlantic Cement Co., 26 NY2d 219 (1970). These are only two examples of many.

Justice is the heart of good law. If we substitute efficiency for justice, law becomes nothing more than a manipulable mechanism for invoking government force. Justice is a foundational part of American traditions. Among the few phrases of the Pledge of Allegiance that have remained constant—and have not been the target of law suits—is the phrase “liberty and justice for all.” Do we really want to substitute such noble ideals with an uninspiring surrender like “efficiency and commerce for all”?

3 Responses to “Efficiency and Commerce for All”

  1. Sean says:

    Iin this hypothetical, what if you can’t get the heirloom back? How much should damages be? And what if you can only get it back at a grossly inflated price, since the new owner knows they have the store over a barrel – how much should the store be force to pay for the heirloom? Now what if the heirloom was destroyed rather than sold – should the store owner be forced to recreate the item? Would that lead to opportunistic behavior from litigants (e.g. the ring had diamonds rather than zirconium – how can you double check)?

    I wonder if these problems wouldn’t become almost intractable without some kind of market value equivalent damages. Recognizing only pecuniary damages doesn’t seem unreasonable, given other damages are so hard to assess and can/may/will lead to unscrupulous behavior. It is always crummy when something like this happens, but forcing individuals to bear their own risk with sentimental value strikes me as appropriate – especially when they can use their own judgment to pick a repair shop or whatever.

    But you know my stance – promotion of efficiency can be a proper role for government, under certain conditions.

  2. Quincy says:

    Sean, my criticism of the UCC provision is that it codifies the destruction of a legitimate property right in the interest of efficiency: instead of permitting the rightful owner to reclaim his property from the buyer, the UCC dictates that the rightful owner’s only legal remedy is to sue the repair shop for money. Prior to the UCC’s legal gymnastics, the rightful owner had a property right to a specific piece of property—the heirloom, wedding ring, etc. The UCC, however, transforms that right to a specific piece of property into a contract right to payment by the repair shop. It is this transformation that I object to. A just law, a law which protected property rights, would allow the rightful owner to reclaim his property from the buyer and the buyer would then be able to reclaim from the repair shop the money he paid for the goods. Notice that the just law also has the benefit of revealing the precise amount that the repair shop should pay to the buyer in damages: the price that the buyer paid for the item plus reasonable legal fees.

    Now, you listed a number of (efficiency?) concerns that might arise if the law permitted the rightful owner to reclaim his item: calculating damages in the event that the item cannot be recovered, the buyer extorting the repair shop for the return of the item, whether the repair shop should have to recreate an item that was destroyed, and litigants making false claims about the item’s value. I don’t think that the extortion concern is valid, because under a just law the buyer would be obligated by law, and subject to criminal prosecution, if he refused to return the property to the rightful owner. Of course this does not resolve your other concerns.

    But the UCC provision doesn’t resolve these concerns either. Under the UCC, the repair shop is still liable to the rightful owner under various legal theories: civil fraud, conversion, etc. The court must still determine the appropriate amount of damages. There is still the potential for the rightful owner to make false claims about the value of the property. And there is still the potential that if the repair shop were obliged to correct its mistake by re-creating the property that waste or some of the individual liberty concerns inherent in requiring specific performance might result.

    In other words, protecting the rightful owner’s property right doesn’t cause the problems you are concerned about. The problems you have described are the result of the subjective vs objective value problem of economic analysis. In fact, the application of efficiency concerns in place of principles of justice aggravates the subjective vs objective value problem.

  3. Sean says:

    I misunderstood what the UCC did with assessing damages. I mistakenly thought you said the UCC limits recovery to objective values, not that it prevented suing for the object itself (where it can be returned).

    Thanks, I guess I should take Secured Transactions or whatever class covers the UCC.

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