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Source link: http://archive.mises.org/9084/corporations-and-limited-liability-for-torts/

Corporations and Limited Liability for Torts

December 10, 2008 by

There’s been a good deal of discussion lately of the legitimacy of corporations: see my posts Left-Libertarians on Corporations “Expropriating the Efforts of Stakeholders” and In Defense of the Corporation. Various types–anti-industrialists, socialists, left-libertarians–make a variety of criticisms of the corporation. Some oppose it because they oppose “capitalism”; or because it is invariably in bed with the state; or because it exploits workers; or because they dislike “bigness”. Most of these are wrongheaded or off point.

Another very common criticism is that corporations receive special privileges from the state–”limited liability”. This concerns two basic issues: the limited liability of shareholders for contractual liability of the corporation; and for torts committed by employees of the corporation. The former is easily dealt with–see Hessen (more on this below).The most controversial issue is the tort issue. This is bizarre for a number of reasons. In the typical case, the victim injured by the tort of an employee of the corporation can of course sue the employee who committed the tort; but he usually just sues the company because it has deep pockets. He is not usually affected by the inability to sue the shareholders, since he would not anyway. The corporate assets, or its insurance, would cover it. But it bugs anti-corporate types that shareholders can’t be sued for torts of employees of a company they own shares in.

Lately I’ve begun to emphasize that the anti-corporatists, in characterizing limited liability as a privilege, have to assume that on the free market shareholders should have liability. But this is a dubious assumption. First, it rests on the idea of respondeat superior (master is liable for torts of his servant), which itself dubious. Second, it rests on an undeveloped notion of strict liability which assumes that you are liable for torts committed “with [or by?] your property.” But property does not commit crimes or torts–people do. Property serves as means. If you borrow my car and run over someone, it is not obvious to me that I am responsible for your negligent action–just because I owned the car. Second, as I discussed in The Over-reliance on State Classifications: “Employee” and “Shareholder”, this rests too much on state definitions of ownership. Marriage, shareholder, owner, adult, citizen, money, bank, employer, employee, hobby, …. — so many things are keyed off their classifications. It irks me when libertarians build up their arguments and concepts based on these, as if they are objective and valid distinctions.

Looking at reality: ownership is the right to control a resource–in a company it’s distributed, since shareholders can’t just walk in and use the assets of the company (drives its cars; use its HQ to throw a party). As a practical matter, people with control over property are distributed in complex ways.

Second, it’s often assumed that shareholders are “investors”–people who gave money to the company. This seems to implicitly assume that you are responsible for aiding and abetting the company. Several problems here. (a) shareholders are not necessarily investors (if you buy Exxon stock from another shareholder, you give him money, but not Exxon); (b) other people give Exxon much more money, like customers; (c) the control exerted by shareholders is minimal–they can vote for board members, who in turn appoint officers, who hire managers and employees. Others–creditors, vendors, contractors, employees, unions, “stakeholders”–often exert more influence over what the company does than any given shareholder or even the whole class of shareholders.

I believe the only way to sort this out is to apply a carefully developed and libertarian-compatible theory of causation. Whenever you want to attribute responsibility to A for actions of B, you have to have a good reason. This area is underdeveloped but my approach is laid out in Causation and Aggression. I am not even sure if respondeat superior is justified; much less stretching it to cover shareholders–stretching it so far would make so many other parties potentially responsible for the actions of one tortfeasor. Libertarians want to just point to the rules developed in the common law and take this for granted, as if it’s unquestionably legitimate. It’s not. We are libertarians, not positivists.

I just recalled, in correspondence with Brad Spangler, that there is a great pithy excerpt from Hessen, pp. 18-21 of his classic book In Defense of the Corporation. He grants (a bit too generously, perhaps) the application of respondeat superior to the company itself, but argues very concisely–and without a carefully developed theory of causation but with sound insight and good intuition–why shareholders should not be liable for torts of employees. I highly recommend you read pp. 18-21. (N.b. left-libertarians: at pp. 20-21, Hessen explains that if anything, the state takeover of corporate law benefits not large companies, but small, one-man and “close” corporations since they would normally be liable for their actions, unlike shareholders of a large company.)

Bottom line: libertarians who claim that limited liability for torts is a state privilege have the burden of proving that shareholders should be liable for torts committed by employees of a company the shareholder owns a share in–and to show why creditors, suppliers, employees, and other “aiders and abetters” are not liable. And don’t just point to the common law rules and respondeat superior–we are libertarians. Show why this rule is libertarian.

I went over this in a 2004 LRC post, Legitimizing the Corporation, which I excerpt below:

***

… most people don’t even realize that if a FedEx truck runs you over negligently you can sue the driver. They think he is immune from suit or something. But it is the other way around; if a FedEx truck negligently hits you, it is of course the driver that is responsible. His employer is responsible for its employee’s own negligence and liability only because of the doctrine of respondeat superior; but if the employee is found to be non-negligent, the employer-corporation is off the hook too. This is in fact why corporations usually defend their employee and themselves when sued for the employee’s actions.

But opposition does not always stem from ignorance of the law or leftism: for example, one critique comes from two libertarian-Austrian attorneys: “De-legitimizing the Corporation: An Austrian analysis of the firm”, Jeffrey F. Barr & Lee Iglody, Austrian Scholars Conference 7, March 30-31, 2001, Auburn, Alabama.

Robert Hessen’s (a Randian) In Defense of the Corporation is a good defense of corporations. He shows that they don’t require privilege from the state to exist; they can be constructed from private contracts. One of Hessen’s articles nicely summarizes some of his views. Some excerpts are pasted below. My view is that corporations are essentially compatible with libertarianism. As for voluntary debts being limited to the corporation’s assets; this is no problem since the creditor knows these limitations when he loans money. What about limited liability for torts or crimes? As mentioned, the person direclty responsible for a tort or crime is always liable; sometimes the employer (which is often a corporation) is also liable for the employee’s actions, via respondeat superior. Who else should be responsible? In my view, those who cause the damage are responsible. Shareholders don’t cause it any more than a bank who loans money to a company causes its employees to commit torts. The shareholders give money; and elect directors. The directors appoint officers/executives. The officers hire employees and direct what goes on. Now to the extent a given manager orders or otherwise causes a given action that damages someone, a case can be made that the manager is causally responsible, jointly liable with the employee who directly caused the damage. It’s harder to argue the directors are so directly responsible, but depending on the facts, it could be argued in some cases. But it’s very fact specific. Perhaps the rules on causation should be relaxed or modified, but this has nothing to do with there being a corporation or not–for the laws of causation should apply to any manager or person of sufficient influence in the organization hierarchy, regardless of legal form of the organization (that is, whether it’s a corporation, partnership, sole proprietorship, or what have you).

Excerpts from the Hessen article

The actual procedure for creating a corporation consists of filing a registration document with a state official (like recording the use of a fictitious business name), and the state’s role is purely formal and automatic. Moreover, to call incorporation a “privilege” implies that individuals have no right to create a corporation. But why is governmental permission needed? Who would be wronged if businesses adopted corporate features by contract? Whose rights would be violated if a firm declared itself to be a unit for the purposes of suing and being sued, holding and conveying title to property, or that it would continue in existence despite the death or withdrawal of its officers or investors, that its shares are freely transferable, or if it asserted limited liability for its debt obligations? (Liability for torts is a separate issue; see Hessen, pp. 18-21.) If potential creditors find any of these features objectionable, they can negotiate to exclude or modify them.

Economists invariably declare limited liability to be the crucial corporate feature. According to this view the corporation, as an entity, contracts debts in “its” own name, not “theirs” (the shareholders), so they are not responsible for its debts. But there is no need for such mental gymnastics because limited liability actually involves an implied contract between shareholders and outside creditors. By incorporating (that is, complying with the registration procedure prescribed by state law) and then by using the symbols “Inc.” or “Corp.,” shareholders are warning potential creditors that they do not accept unlimited personal liability, that creditors must look only to the corporation’s assets (if any) for satisfaction of their claims. This process, known as “constructive notice,” offers an easy means of economizing on transactions costs. It is an alternative to negotiating explicit limited-liability contracts with each creditor.

Creditors, however, are not obligated to accept limited liability. As Professor Bayless Manning observes; “As a part of the bargain negotiated when the corporation incurs the indebtedness, the creditor may, of course, succeed in extracting from a shareholder (or someone else who wants to see the loan go through) an outside pledge agreement, guaranty, endorsement, or the like that will have the effect of subjecting non-corporate assets to the creditor’s claim against the corporation.” This familiar pattern explains why limited liability is likely to be a mirage or delusion for a new, untested business, and thus also explains why some enterprises are not incorporated despite the ease of creating a corporation.

Another textbook myth is that limited liability explains why corporations were able to attract vast amounts of capital from nineteenth-century investors to carry out America’s industrialization. In fact, the industrial revolution was carried out chiefly by partnerships and unincorporated joint stock companies, rarely by corporations. The chief sources of capital for the early New England textile corporations were the founders’ personal savings, money borrowed from banks, the proceeds from state-approved lotteries, and the sale of bonds and debentures.

Even in the late nineteenth century, none of the giant industrial corporations drew equity capital from the general investment public. They were privately held and drew primarily on retained earnings for expansion. (The largest enterprise, Carnegie Brothers, was organized as a Limited Partnership Association in the Commonwealth of Pennsylvania, a status that did not inhibit its ability to own properties and sell steel in other states.)

External financing, through the sale of common stock, was nearly impossible in the nineteenth century because of asymmetrical information–that is, the inability of outside investors to gauge which firms were likely to earn a profit, and thus to calculate what would be a reasonable price to pay for shares. Instead, founders of corporations often gave away shares as a bonus to those who bought bonds, which were less risky because they carried underlying collateral, a fixed date of redemption, and a fixed rate of return. Occasionally, wealthy local residents bought shares, not primarily as investments for profit, but rather as a public-spirited gesture to foster economic growth in a town or region. The idea that limited liability would have been sufficient to entice outside investors to buy common stock is counterintuitive. The assurance that you could lose only your total investment is hardly a persuasive sales pitch.

No logical or moral necessity links partnerships with unlimited liability or corporations with limited liability. Legal rules do not suddenly spring into existence full grown; instead, they arise in a particular historical context. Unlimited liability for partners dates back to medieval Italy, when partnerships were family based, when personal and business funds were intermingled, and when family honor required payment of debts owed to creditors, even if it meant that the whole debt would be paid by one or two partners instead of being shared proportionally among them all.

Well into the twentieth century, American judges ignored the historical circumstances in which unlimited liability became the custom and later the legal rule. Hence they repeatedly rejected contractual attempts by partners to limit their liability. Only near midcentury did state legislatures grudgingly begin enacting “close corporation” statutes for businesses that would be organized as partnerships if courts were willing to recognize the contractual nature of limited liability. These quasi-corporations have nearly nothing in common with corporations financed by outside investors and run by professional managers.

Any firm, regardless of size, can be structured as a corporation, a partnership, a limited partnership, or even one of the rarely used forms, a business trust or an unincorporated joint stock company. Despite textbook claims to the contrary, partnerships are not necessarily small scale or short-lived; they need not cease to exist when a general partner dies or withdraws. Features that are automatic or inherent in a corporation–continuity of existence, hierarchy of authority, freely transferable shares–are optional for a partnership or any other organizational form. The only exceptions arise if government restricts or forbids freedom of contract (such as the rule that forbids limited liability for general partners).

Update: Roger Pilon’s Corporations and Rights: On Treating Corporate People Justly also has some very good stuff on why limited liability does not give any special privilege to shareholders. See also my post Legitimizing the Corporation and Other Posts.

{ 73 comments }

Brent December 11, 2008 at 12:26 am

If you want to get into it, the workers comp exemption from normal liability rules requiring negligence or fault is a much clearer violation of libertarianism than is the limiting of tort actions against shareholders.

Matias Forss December 11, 2008 at 12:53 am

On the question of respondeat superior: without statutory or common law enforcement of this doctrine, most FedEx employees would probably want some kind of protection from liability as part of their contract of employment, just so they wouldn’t be enslaved for their debts if they happen to run over someone. An alternative would be a postal workers union insurance pool.

Large-scale industrial activities would need some kind of respondeat superior -rules. It just doesn’t seem right that only the pilot would be responsible for an oil tanker accident, for instance.

Brad Spangler December 11, 2008 at 2:08 am

My related blog post detailing the discussion Stephan and I had can be found here:

Dialogue of the Damned: Corporate Limited Liability (again)
http://www.bradspangler.com/blog/archives/1113

MHC December 11, 2008 at 2:32 am

Okay, Kinsella and Spangler have gotten into a debate about this, so I’m posting my thoughts.

Spooner suggests that a good way to go about determining natural law is to perform a comparative analysis and go for the common ground by eliminating all of the unique peculiarities of each system. Kinsella takes that approach here. Other’s should follow suit.

Spooner’s method is vastly superior to the blind adherence to the common law that many libertarians exhibit. Thankfully things are common around, Benson demonstrated in his great book, The Enterprise of Law, that the common law is a wholly statist endeavor. Additionally No serious student of comparative law would claim that the common law is a good or even representative legal system.

In fact, is decidedly outside of the mainstream of western law. Substantially all of our concepts, including basic things like “ownership”, “property”, and “contract” come from the Romans. Most of our doctrine comes from private medieval lawyers who wrote commentaries and glosses on Roman texts. (For more on this see Gordley, 88 Calif. L. Rev. 1815). Much of family law originated in the Cannon Law of the Catholic church, and much of mercantile law was reintroduced to Europe via the Rabbinic courts.

A serious consideration of any libertarian legal point, out to take in all of these sources and, as Spooner advocates, attempt to find a common ground.

As to this specific issue:

Respondeat superior exists only at common law. In other jurisdictions you have to prove general causation, in some causation cannot be proved as a matter of law even when the superior explicitly commanded an employee to violate someone’s rights. The legal arguments for these alternative positions are every bit as compelling as those for the common law’s pet approach (if not more so.) And Kinsella rightly rejects the unique and quirky common law rule.

As for the view of the corporation as property owned by the shareholders. This is also a traditional common law view. It is much better to view the corporation as a species of the wider genus “company” and to view each company as a nexus of contracts. This approach dramatically clarifies the situation and also allows for the analysis of the far more complicated organizational structures exhibited by modern companies.

Essentially, stock holders should not be viewed as “owners”, but as “investors”. Consequently they should not be held anymore responsible than silent partners (who are also shielded from tort liability for reasons of causation).

TokyoTom December 11, 2008 at 4:54 am

By the way, Stephan, I don’t consider myself an “anti-corporate type”, or an “anti-industrialist”, “socialist” or “left-libertarian” either.

I’m just an anti-uncontracted-for-limited-liaibility-for-torts” type. There are plenty of my type in the world of corporate lawyers, as I noted on the other thread.

Here are a few links on law and economics to aid those who want to refer to the academic discussion in the legal profession:

Hansmann, H and Krackman, R, Towards Unlimited Shareholder Liability for Corporate Torts, 100 Yale Law J. 1879 (1991). http://www.law.yale.edu/documents/pdf/Faculty/Hansmann_Toward_Unlimited_Shareholder_Liability_for_Corporate_Torts.pdf

Hansmann, H and Krackman, R, Do the Capital Markets Compel Limited Liability?, 102 Yale L.J. 427 (1992). http://www.law.yale.edu/documents/pdf/Faculty/Hansmann_Do_the_Capital_Markets_Comple_Limited_Liability.pdf

Nina A. Mendelson, A Control-Based Approach to Shareholder Liability for Corporate Torts, 102 COLUM. L. REV. 1203, 1205-06 (2002).

Timothy P. Glynn, Beyond “Unlimiting” Shareholder Liability: Vicarious Tort Liability for Corporate Officers, 57 Vanderbilt L.Rev. 330 (2004). http://law.vanderbilt.edu/publications/vanderbilt-law-review/archive/volume-57-number-2-march-2004/download.aspx?id=2983

David Millon, Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability,
Washington & Lee Public Law Research Paper No. 03-13 (2003), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=932959

P.M.Lawrence December 11, 2008 at 6:44 am

‘Another very common criticism is that corporations receive special privileges from the state–”limited liability”. This concerns two basic issues: the limited liability of shareholders for contractual liability of the corporation; and for torts committed by employees of the corporation.’

Bluntly, that’s wrong, which makes this a straw man. Those are the two main special privileges in ordinary circumstances, deplorable to the extent that they are sustained by such intervention, but there is another, even deeper special privilege: entity status, which (short of a judge finding “failure of substratum”) gives a corporation a quasi-life of its own and allows it freedom from the inherent internal limits that other kinds of firm face – even partnerships that achieve Hessen-style limited liability or limited liability in other ways (elsewhere I describe how silent or sleeping partners can lie low, so achieving de facto limited liability). Without those limits, they gain the sort of advantage that an animal without size and lifespan limits would achieve in an ecology – they crowd out other entities, including natural persons.

Dick Fox December 11, 2008 at 7:25 am

P.M.Lawrence,

Excellent post.

A corporation is a creation of government. Because it becomes a virtual person there is very limited recourse when a corporation(sic) violates the law. If the individuals in a corporation were actually liable as Stephan implies there might not be a problem, but the primary reason people incorporate a business is to limit liability.

scineram December 11, 2008 at 8:12 am

And why the hell should they be liable?

JA December 11, 2008 at 8:20 am

A corporation is a creation of government

Flesh-and-blood people are registered with the state through birth certificates.

Hence, people are creations of the state.

Parents register with the state when they give birth to a child.

Hence, parents and families and children are creations of the state.

A man and woman who marry register with the state.

Hence, marriages are creations of the state.

But remember…Left-libertarian “logic” is anti-statist (heh!)

but the primary reason people incorporate a business is to limit liability.

Yes, liability from creditors, as mentioned a million times already. Not from torts. Do we need to re-post the wikipedia dictionary definition of “corporation” again? So what else have you got?

JA December 11, 2008 at 8:26 am

Without those limits, they gain the sort of advantage that an animal without size and lifespan limits would achieve in an ecology – they crowd out other entities, including natural persons.

Maybe because incorporation is a superior form of organization, even in a free market?

This seems to be the argument:

Libertarians: Corporations are libertarian for x, y, and z in a free market.

Socialists: Corporations are not libertarian because of x and z in today’s statist world.

Libertarians: Corporations would likely be the dominate form of firm structure in a free market because of x, y an z.

Socialists: Corporations would not exist at all because they are un-libertarian because of x and z in today’s statist world.

whittaker December 11, 2008 at 8:32 am

“And why the hell should they be liable?”

For the same reason anyone else is liable, directly or vicariously, for negligent or intentional torts.

If you’re arguing for the abolition of tort law, or just of vicarious liability in general, that would be a separate subject, having nothing to do specifically with corporations.

JA December 11, 2008 at 8:46 am

but the primary reason people incorporate a business is to limit liability.

I also would like to see a citation for this claim.

This claim completely disregards the other benefits of incorporation…Selling shares to finance, selling the business, adding new investors, allowing for shareholders to die or sell off their part of the business, etc.

Dick Fox December 11, 2008 at 8:57 am

JA,

I assume from your posts that as long as it is a creation of government it is ok. There does not need to be any tangible existence.

whittaker December 11, 2008 at 9:06 am

TokyoTom,

Many thanks for the links. I now have my homework assignment for tonight.

JA December 11, 2008 at 9:11 am

I assume from your posts that as long as it is a creation of government it is ok.

Not even close. I dispute that “corporations = government creation” simply because they are registered by the State.

The corporate form, like families and marriages, pre-exists prior to the state as a nexus of voluntary relationships.

That the State registers and regulates this voluntary organizational form is the problem with the state, not the form itself.

fundamentalist December 11, 2008 at 9:47 am

whittaker: “For the same reason anyone else is liable, directly or vicariously, for negligent or intentional torts.”

Kinsella has already established that the master is responsible for the actions of his servant, so corporations are responsible for employees. Anti-corps want the responbibility to go even further to the stockholders. But why stop there? Why not make the customers responsible too? And let’s throw in the bond holders. Then let’s add the suppliers. How about the relatives of stock and bond holders?

Of course I’m being ridiculous. My point is where do you draw the line of responsibility for the actions of coroporate employees? Stopping with the stockholders is an arbitrary judgement. You need some principle that can delineate who is responsible for the actions of another. Traditionally, that line is drawn where control of the actions of the other party ends. If I don’t control the actions of another then I’m not responsible for his actions. This principle is most clearly seen with children. Parents are responsible and can be held liable for the actions of their children up to a general age of the children. After the children reach that age, the parent is no longer responsible because they no longer control the child.

J Cortez December 11, 2008 at 10:12 am

Shareholders responsible?

Why?

Unless they are officers active in the corporation’s day to day operations and have stock, there is no reason for a shareholder to be liable.

Most shareholders in IBM, Google, Starbucks, Pepsi and Toyota have no idea what the day to day operations are because they aren’t involved in any way outside of providing capital. How could someone, having not acted in and without any knowledge of, an accident/incident be held responsible?

If Corporation XYZ has a faulty factory floor, it is human resources, the factory manager and the CEO that is liable, not the shareholder.

TokyoTom December 11, 2008 at 10:15 am

Stephan, I had two earlier posts linking back to my posts on the other thread, neither of which has come through (too many links?).

Let me try once once more, without links.

My last post responded to you fully; I look forward to your further comments.

My closing comment was as follows:

“The grant of limited liability to involuntary creditors cannot be justified on libertarian grounds, and arguments I have noted regarding efficiency, moral hazards, equity, the disincentives for shareholders to closely monitor firms, the relative freedom of managers and executives to loot, and the related rise of citizen pressure groups to seek to have governments provide checks are all substantial and important.

“While there are many cases where injured persons are compensated, there are many cases where corporations have generated widespread risks and failed, leaving countless others holding the bag, while investors (and managers) may have profited and then exited without substantial loss. The limited liability grant actually encourages such behavior.

“You say that, if victims could “sue shareholders individually”, in which case “shareholders could simply purchase shareholder-liability-insurance, no biggie”. I heartily agree – a system of pro rata shareholder unlimited liability would work (as one of the law journal articles argues), as well as being more just. I appreciate the concession – so [why] haven`t] you stopped fighting this point?

Regards.

Stephan Kinsella December 11, 2008 at 10:17 am

Matias Forss:

On the question of respondeat superior: without statutory or common law enforcement of this doctrine, most FedEx employees would probably want some kind of protection from liability as part of their contract of employment, just so they wouldn’t be enslaved for their debts if they happen to run over someone.

Agreed. But this would not imply shareholder liability.

MHC
#

TokyoTom: “I’m just an anti-uncontracted-for-limited-liaibility-for-torts” type. There are plenty of my type in the world of corporate lawyers, as I noted on the other thread.”

The question is why and when shareholders should be vicariously liable for actions of employees. If you can show they should be, then their liabiltiy should not be “limited”. but until you can show this, limited liability can be viewed as the refusal to impose liabiilty where there is none.

Here are a few links on law and economics to aid those who want to refer to the academic discussion in the legal profession:

Be careful of mainstream reasoning by law professors–they almost always build their case by assuming the validity of a host of positivist and mainstream (and not libertarian) assumptions.

P.M.Lawrence:

‘Another very common criticism is that corporations receive special privileges from the state–”limited liability”. This concerns two basic issues: the limited liability of shareholders for contractual liability of the corporation; and for torts committed by employees of the corporation.’

Bluntly, that’s wrong, which makes this a straw man. Those are the two main special privileges in ordinary circumstances, deplorable to the extent that they are sustained by such intervention,

I don’t see why they’re “deplorable”. That’s question-begging.

but there is another, even deeper special privilege: entity status, which (short of a judge finding “failure of substratum”) gives a corporation a quasi-life of its own and allows it freedom from the inherent internal limits that other kinds of firm face – even partnerships that achieve Hessen-style limited liability or limited liability in other ways (elsewhere I describe how silent or sleeping partners can lie low, so achieving de facto limited liability). Without those limits, they gain the sort of advantage that an animal without size and lifespan limits would achieve in an ecology – they crowd out other entities, including natural persons.

Hessen and I are against the entity theory: see pp. 19-21 of the book that I linked/cited earlier.

BTW my view is that the primary reason people like the corporate form is limited liabilty for *contractual* debts of the company. And this is uncontroversial (or should be). If shareholders were liable only for torts, then this could be taken care of by an insurance policy, so would be no big deal.

whittaker:

“And why the hell should they be liable?”

For the same reason anyone else is liable, directly or vicariously, for negligent or intentional torts.

But under libertarianism A ought to be vicariously liable for B’s actions only if there is a good reason–A is a co-conspirator or joint actor, etc. It’s hard to find a good reason why a shareholder is vicariously liable.

If you’re arguing for the abolition of tort law, or just of vicarious liability in general, that would be a separate subject, having nothing to do specifically with corporations.

I’m arguing for a careful application of vicarious liability; and it has everything to do with the controversy over shareholder limited liability–for without vicarious liabiltiy, there is no way they’d be liable in the first place and you guys would have no basis for whining about limiting this non-existent liability.

fundamentalist:

whittaker: “For the same reason anyone else is liable, directly or vicariously, for negligent or intentional torts.”

Kinsella has already established that the master is responsible for the actions of his servant, so corporations are responsible for employees.

Well, my view is that a master is responsible for actions of his servant *that he directs him to do*. I think a case can be made that in some cases he is liable for negligence of the servant committed during the course of his employ, but this would be a limited doctrine (and in any event needs to be justified by a careful treatment of this issue–using the type of causal analysis Tinsley and I laid out in our Causation and Aggression paper). But this would not ensnare the shareholders, as far as I can tell.

Anti-corps want the responbibility to go even further to the stockholders. But why stop there? Why not make the customers responsible too? And let’s throw in the bond holders. Then let’s add the suppliers. How about the relatives of stock and bond holders?

Great point.

Stephan Kinsella December 11, 2008 at 10:33 am

TokyoTom:

“You say that, if victims could “sue shareholders individually”, in which case “shareholders could simply purchase shareholder-liability-insurance, no biggie”. I heartily agree – a system of pro rata shareholder unlimited liability would work (as one of the law journal articles argues), as well as being more just. I appreciate the concession – so [why] haven`t] you stopped fighting this point?

But this is damaging to your side, not mine. The anti-corporatists jump up and down about shareholder limited liability. If it’s for contracts, this concern is misguided. If it’s about torts, then the criticism groundlessly assumes shareholders should be liable for torts in the first place. You assume that without this limited liability corps could not exist. But this is wrong. Even if you imposed this liability, it could be gotten rid of with insurance. The corporation’s insurnace policy would just cover not only the company and officers, but also shareholders. Then life would go on. This shows that the concern over limited liability is a canard.

jp December 11, 2008 at 11:04 am

Kinsella: “shareholders are not necessarily investors”

?
I almost stopped reading after that comment. What are they then, consumers of shares? Just because you buy a share in the secondary market doesn’t mean you’re not investing.

Hessen: “Creditors, however, are not obligated to accept limited liability.”

In many cases they are. For instance, when the state legislates that all banks must adopt limited liability, depositors and lenders are obligated to accept LL.

see comment here: http://blog.mises.org/archives/009070.asp#comment-483017

Stephan Kinsella December 11, 2008 at 11:17 am

jp:

“Kinsella: “shareholders are not necessarily investors”

?
I almost stopped reading after that comment. What are they then, consumers of shares? Just because you buy a share in the secondary market doesn’t mean you’re not investing.”

They are holders of shares–people who have certain rights with respect to a corporation. They may have been given the share as a gift–are they inevstors then?

If they buy it from an existing shareholder sure they are investors–but the point is they never contributed money to the corporation (which is what I thought was supposed to be the significance of anti-corpos calling them “invstors”–implying they are liable for the company’s actions b/c they aided and abetted them by giving them money).

“Hessen: “Creditors, however, are not obligated to accept limited liability.”

In many cases they are. For instance, when the state legislates that all banks must adopt limited liability, depositors and lenders are obligated to accept LL.”

In many cases, a bank will require the president or major shareholder to personally guarantee a loan.

Nick Bradley December 11, 2008 at 11:40 am

I know this is about limited liability, but would large corporations even exist (or be a little more than a rarity) if it weren’t for access to centralized credit?

As Jörg Guido Hülsmann pointed out in “Deflation and Liberty”, financing must come from private savings in a non-Fractional Reserve Banking system.

Large (and even medium)-sized corporations depend on access to centralized credit for their existence, and it is unclear how their operations would be financed in a free market banking system.

Nick Bradley December 11, 2008 at 11:47 am

I know this is about limited liability, but would large corporations even exist (or be a little more than a rarity) if it weren’t for access to centralized credit?

As Jörg Guido Hülsmann pointed out in “Deflation and Liberty”, financing must come from private savings in a non-Fractional Reserve Banking system.

Large (and even medium)-sized corporations depend on access to centralized credit for their existence, and it is unclear how their operations would be financed in a free market banking system.

Nick Bradley December 11, 2008 at 11:48 am

I know this is about limited liability, but would large corporations even exist (or be a little more than a rarity) if it weren’t for access to centralized credit?

As Jörg Guido Hülsmann pointed out in “Deflation and Liberty”, financing must come from private savings in a non-Fractional Reserve Banking system.

Large (and even medium)-sized corporations depend on access to centralized credit for their existence, and it is unclear how their operations would be financed in a free market banking system.

whittaker December 11, 2008 at 12:04 pm

Mr. Kinsella,

I’m not sure whether we really disagree on substance, or just on priorities and procedure, but I feel compelled to respond to some of your points.

“libertarians who claim that limited liability for torts is a state privilege have the burden of proving that shareholders should be liable for torts committed by employees of a company the shareholder owns a share in–and to show why creditors, suppliers, employees, and other “aiders and abetters” are not liable.”

Books have been written about this sort of thing. My concern is over the exemption from the normal rules that corporations enjoy.

Let me ask you this. Suppose that, as a result of my intensive lobbying, the legislature passes a law that persons whose names begin with “Wh” are exempt from the normal rules of evidence, and that anything they say in court is to be taken at face value, with no cross-examination or contradiction allowed. Is the burden of proof now on YOU, a non-Wh person, to analyze the entire law of evidence from a libertarian viewpoint, before maintaining that my narrowly tailored exemption is unjust?

Your (and Hessen’s) defense of limited liability seems to boil down to saying “it does no harm” or “any harm it does is minor”. IMO this is not a good enough justification for a statute, especially one that runs to thousands of pages. In Pennsylvania, the law of corporations occupies one title of the state statutes (3 volumes, approximately 2000 pages total). This does not include court cases, regulations, treatises, forms or law review articles, and is ONLY for Pennsylvania. Why does it take such massive state intervention simply to make the point that people can voluntarily form associations in any way they wish?

JA December 11, 2008 at 12:09 pm

Why does it take such massive state intervention simply to make the point that people can voluntarily form associations in any way they wish?

Why does family law? Because “families” are creations of the state?

whittaker December 11, 2008 at 12:13 pm

fundamentalist:

“You need some principle that can delineate who is responsible for the actions of another. Traditionally, that line is drawn where control of the actions of the other party ends. If I don’t control the actions of another then I’m not responsible for his actions.”

I believe that corporate personhood and limited liability encourages shareholders to *disavow* the control of management that they should rightfully have, for the purpose of gaining financial returns without the moral restraints that would normally operate on businesses. I think that these are the root causes of the irresponsible behavior of which the Naderites, et al. complain.

Mike December 11, 2008 at 12:14 pm

“If they buy it from an existing shareholder sure they are investors–but the point is they never contributed money to the corporation (which is what I thought was supposed to be the significance of anti-corpos calling them “invstors”–implying they are liable for the company’s actions b/c they aided and abetted them by giving them money).”

I think you were misreading the complaint, then. The common understanding is that “the corporation” is the shareholders. I think you’ve made a strong case that that reading is (at least somewhat) lacking, but if someone asserts that point, they would not describe an investor as “giving money to” the corporation. When you buy a pair of shoes, you don’t give money to your shoes.

whittaker December 11, 2008 at 12:16 pm

“Why does it take such massive state intervention simply to make the point that people can voluntarily form associations in any way they wish?

Why does family law? Because “families” are creations of the state?”

It doesn’t, really. I would be fine with repealing most of family law as well.

JA December 11, 2008 at 12:18 pm

I would be fine with repealing most of family law as well.

Would this repeal erase “families” from existance then?

Inquisitor December 11, 2008 at 12:19 pm

If shareholders are liable, why not customers? Creditors? Suppliers? Distributors? Unions? Etc. As Kinsella notes, they are as vital to a firm as it’s more or less passive shareholders…

whittaker December 11, 2008 at 12:32 pm

“I would be fine with repealing most of family law as well.

Would this repeal erase “families” from existance then?”

No.

fundamentalist December 11, 2008 at 1:48 pm

Whittaker: “I believe that corporate personhood and limited liability encourages shareholders to *disavow* the control of management that they should rightfully have…”

The control of management is specified in the stock purchase agreement. It’s not a matter of what should they have, but what they have agreed to in the contract. The sanctity of contract is important. Stockholders have agree to limit their control to electing board members. Lack of control means lack of ownership, too, so stockholders should not be called owners.

Whittaker: “I think that these are the root causes of the irresponsible behavior of which the Naderites, et al. complain.”

The root causes of irresponsible behavior result from the nature of mankind, not from the structure of society or of business. You can get rid of all corporations and you won’t see a diminution of irresponsible behavior at all because it has nothing to do with the corporation and everything to do with human nature.

Mike December 11, 2008 at 2:22 pm

“If shareholders are liable, why not customers? Creditors? Suppliers? Distributors? Unions? Etc. As Kinsella notes, they are as vital to a firm as it’s more or less passive shareholders…”

The difference, I think, is ownership. Stephan was right when he defined ownership as “right to control,” but wrong, I think, if he is conflating that with “ability to control.” If I own my house, I have a right to control it. I can paint it yellow, or install windows or knock it down if I want to. If you are my neighbor, you might have some (very limited) ability to control my actions, by applying social pressure, or refusing to do business with me if I paint my house a color you don’t like. But ultimately the right to make those decisions is mine and mine alone. So there’s a difference between the contractually guaranteed right to control a resource (like that of the executives or employees of the corporation) and the ability to indirectly pressure them to control resources in a certain way (like that of customers).

Of course, Stephan is right that customers may have certain contractual guarantees, but this is irrelevant. Their right of contract is independent of their status as a customer.

Mike December 11, 2008 at 2:33 pm

“The control of management is specified in the stock purchase agreement. It’s not a matter of what should they have, but what they have agreed to in the contract. The sanctity of contract is important. Stockholders have agree to limit their control to electing board members. Lack of control means lack of ownership, too, so stockholders should not be called owners. ”

But they do have some degree of control, as you yourself just admitted. Shareholders elect the board, board members appoint the CEO, and the CEO runs the company. Sure, it’s limited, far removed control, but it is contractually guaranteed control, which is clearly very different from the type of control customers or non-controlling creditors have. So, I’m not sure we should be so quick to dismiss the idea of the shareholder as owner.

Of course, there do exist companies with non-controlling shareholders. Obviously, this would be a different scenario.

Stephan Kinsella December 11, 2008 at 3:18 pm

Mike: “But they do have some degree of control, as you yourself just admitted. Shareholders elect the board, board members appoint the CEO, and the CEO runs the company. Sure, it’s limited, far removed control, but it is contractually guaranteed control, which is clearly very different from the type of control customers or non-controlling creditors have. So, I’m not sure we should be so quick to dismiss the idea of the shareholder as owner.

“Of course, there do exist companies with non-controlling shareholders. Obviously, this would be a different scenario.”

The problem is the anticorpos have no clear theory of causation or responsibility, so they cannot clearly explain exactly what it is about being shareholder that makes them vicariously responsible for the actions of employees. Thus they rely on the state’s classification of the shareholders as “the owners”–and on an inchoate, simplistic, implicit theory that “owners are responsible for any harm done using property they own”.

This will not do. A shareholder is someone how (a) has the right to vote for directors; and (b) a contractual right to receive dividends IF the board decides to pay them, and (c) a contractual right to receive a share of the assets of the corporation upon its liquidation. And sometimes, (d) they gave money to the corporoation by buying shares from them.

Which of these characteristics implies responsibilty for acts of employees? If it’s (a), what about non-voting shareholders–shareholders who have no right to vote (these do exist), or who choose not to? Or who voted for a director who lost? If it’s (b) or (c)–but lots of people have rights to receive money or property from the company–creditors and vendors and employees all do. What about (d)–but lots of people give money or other benefits to the corporation: customers, even employees. So is everyone in the world liable for the actions of Wal-Mart? We’re all “stakeholders” now.

Stephan Kinsella December 11, 2008 at 3:29 pm

whittaker”

“”libertarians who claim that limited liability for torts is a state privilege have the burden of proving that shareholders should be liable for torts committed by employees of a company the shareholder owns a share in–and to show why creditors, suppliers, employees, and other “aiders and abetters” are not liable.”

“Books have been written about this sort of thing.”

Are any based on a well-developed, sound, libertarian-compatible theory of causation?

“Your (and Hessen’s) defense of limited liability seems to boil down to saying “it does no harm” or “any harm it does is minor”. IMO this is not a good enough justification for a statute,”

I konw. The statute is not justified. I have been explicit about this. It is just that your criticism of “limited liability” is a *general* one that would apply to the free market too, and is therefore worng.

Stephan Kinsella December 11, 2008 at 3:29 pm

whittaker”

“”libertarians who claim that limited liability for torts is a state privilege have the burden of proving that shareholders should be liable for torts committed by employees of a company the shareholder owns a share in–and to show why creditors, suppliers, employees, and other “aiders and abetters” are not liable.”

“Books have been written about this sort of thing.”

Are any based on a well-developed, sound, libertarian-compatible theory of causation?

“Your (and Hessen’s) defense of limited liability seems to boil down to saying “it does no harm” or “any harm it does is minor”. IMO this is not a good enough justification for a statute,”

I konw. The statute is not justified. I have been explicit about this. It is just that your criticism of “limited liability” is a *general* one that would apply to the free market too, and is therefore worng.

fundamentalist December 11, 2008 at 3:41 pm

Mike: “But they do have some degree of control…Sure, it’s limited, far removed control, but it is contractually guaranteed control, which is clearly very different from the type of control customers or non-controlling creditors have.”

Exactly! Now we’re getting to some principles. Customers and non-controlling creditors have no liabilities because they have no control. Now, should the stockholders have unlimited liabilities even though they have very limited control? Or should the liability be proportional to the control? In other words, doesn’t limited control suggested limited liability?

Mike December 11, 2008 at 4:03 pm

“The problem is the anticorpos have no clear theory of causation or responsibility, so they cannot clearly explain exactly what it is about being shareholder that makes them vicariously responsible for the actions of employees. Thus they rely on the state’s classification of the shareholders as “the owners”–and on an inchoate, simplistic, implicit theory that “owners are responsible for any harm done using property they own”.”

Well, sure, lots of people make lots of silly arguments, but I didn’t make any of those arguments, so when you’re analyzing my claims, please try to stick to debating me, and not the “anticorpo” boogeyman in the other room. Owners are obviously not always responsible for what someone else does with their property, but in certain cases they are, whether they instructed them to do so or not.

“This will not do. A shareholder is someone how (a) has the right to vote for directors; and (b) a contractual right to receive dividends IF the board decides to pay them, and (c) a contractual right to receive a share of the assets of the corporation upon its liquidation. And sometimes, (d) they gave money to the corporation by buying shares from them.

Which of these characteristics implies responsibilty for acts of employees? If it’s (a), what about non-voting shareholders–shareholders who have no right to vote (these do exist), or who choose not to? Or who voted for a director who lost? If it’s (b) or (c)–but lots of people have rights to receive money or property from the company–creditors and vendors and employees all do. What about (d)–but lots of people give money or other benefits to the corporation: customers, even employees. So is everyone in the world liable for the actions of Wal-Mart? We’re all “stakeholders” now.”

I think it’s pretty clearly A. Like I said before, it’s limited control, and it’s far removed control, but it’s control nonetheless. And since it’s contractually guaranteed control, it is the control of an owner, not an outside agent.

As for non-voting shareholders, I think I made myself pretty clear before, but I see little reason to hold them liable. Shareholders who choose not to vote, or vote for a director who lost, well, I think that’s a gray area, and I’m not sure.

So, I’m not saying that shareholders should always be liable for torts, or even that they should usually be liable. I just don’t think they should be shielded from liability when the degree to which they do have control has negative repercussions on a third party.

Yes, that control is limited. Yes, their liability is therefore limited. But it is limited by the degree of their control, not by arbitrary corporate fiat. And it is not necessarily limited to the price of their stock at a given moment. Probably in most cases it will not exceed that. Maybe in almost all cases. But if you want a 100% satisfaction guaranteed promise that you will not be held responsible for any torts at all, I think you have to cede even any at all control over your holdings. At that point, you are not an owner, but a creditor.

Mike December 11, 2008 at 4:07 pm

“But if you want a 100% satisfaction guaranteed promise that you will not be held responsible for any torts at all, I think you have to cede even any at all control over your holdings. At that point, you are not an owner, but a creditor.”

Sorry, that should have read “But if you want a 100% satisfaction guaranteed promise that you will not be held responsible for any torts at all beyond the price of your holdings…”

Stephan Kinsella December 11, 2008 at 4:19 pm

Mike:

“Owners are obviously not always responsible for what someone else does with their property, but in certain cases they are, whether they instructed them to do so or not.”

What cases should they be? What factors determine it? In Causation and Aggression, Pat Tinsley and I tried to set forth the way to approach this. What would your approach be?

“”This will not do. A shareholder is someone how (a) has the right to vote for directors; and (b) a contractual right to receive dividends IF the board decides to pay them, and (c) a contractual right to receive a share of the assets of the corporation upon its liquidation. And sometimes, (d) they gave money to the corporation by buying shares from them.

“”Which of these characteristics implies responsibilty for acts of employees? If it’s (a), what about non-voting shareholders–shareholders who have no right to vote (these do exist), or who choose not to? Or who voted for a director who lost? If it’s (b) or (c)–but lots of people have rights to receive money or property from the company–creditors and vendors and employees all do. What about (d)–but lots of people give money or other benefits to the corporation: customers, even employees. So is everyone in the world liable for the actions of Wal-Mart? We’re all “stakeholders” now.”

“I think it’s pretty clearly A. Like I said before, it’s limited control, and it’s far removed control, but it’s control nonetheless.”

So, it’s not ownership, but the right-to-vote-for-directors that gives you liability? Is it merely *having* the right, or exercising it–that is, voting? It is the status of having-the-right-to-vote, or the act of voting? If the latter, is it voting for the person who was elected (successful voting), or any voting at all? Do you have to prove a shareholder voted to hold him liable? What if a secret ballot is used?

“As for non-voting shareholders, I think I made myself pretty clear before, but I see little reason to hold them liable.”

So then we both agree: there are a class of shareholders who ought not to be held liable. We just quibble over how large this class should be. But you would agree then that when the state grants *these* shareholders limited liabilit, it’s NOT a grant of privilege?

“Shareholders who choose not to vote, or vote for a director who lost, well, I think that’s a gray area, and I’m not sure.”

Ah.

“So, I’m not saying that shareholders should always be liable for torts, or even that they should usually be liable.”

Oh. So limited liability is not always a privilege, then?

“I just don’t think they should be shielded from liability when the degree to which they do have control has negative repercussions on a third party.”

But shareholders by definition are passive and basically only vote once a year or so for directors, who themesvels don’t even run teh company–they just appoint officers. Seems to me this is a class of people who are generally not liable. Oh, maybe in some exceptional case, but as a rule–not liable. So then you agree that limited liability is not a privilege?

“if you want a 100% satisfaction guaranteed promise that you will not be held responsible for any torts at all, I think you have to cede even any at all control over your holdings. At that point, you are not an owner, but a creditor.”

I see, I see, the contours of your theory are developing before our eyes. Yet you were so opinionated before, even before you had even even this much of an embryonic theory worked out. Interesting.

Mike December 11, 2008 at 4:50 pm

“So, it’s not ownership, but the right-to-vote-for-directors that gives you liability?”

This distinction makes no sense to me. You yourself said “ownership is the right to control a resource.” The right to vote for directors is a form of the right to control the resources of the corporation. So the right to vote for directors is ownership. I feel like we just keep going in circles on this.

“It is the status of having-the-right-to-vote, or the act of voting? If the latter, is it voting for the person who was elected (successful voting), or any voting at all? Do you have to prove a shareholder voted to hold him liable? What if a secret ballot is used?”

I’m not sure. I’m leaning toward the status of having that right. I’m also not sure that shielding the decisions of controlling agents behind numerous levels of bureaucracy eliminates your responsibility for those decisions.

Let’s consider this: A group of 101 investors decides to pool their resources together and build a power plant. But, instead of forming a board and appointing a CEO, they run their company democratically, voting on every major decision (yes, I understand the irony of invoking a co-op style of management for this debate, but bear with me). For all decisions, majority rules, and policy is determined by a vote of 50%+1.

At some point, a vote comes up on safety standards. Rather than install up-to-date safety equipment, they decide to cut costs. Months later, due to this negligence, the factory explodes, taking out a dozen homes with it. The damages far exceed the capital holdings of the company.

So, who is liable? Oh, and just to further complicate matters, all ballots are secret.

Now, instead of voting on decisions directly, say the shareholders decide to vote for one person per decision. It can be one of their own or not, it doesn’t really matter. Are they less liable now? Why? What if they vote for one person to make all the decisions? They can fire him at any point, and he has to report every decision to them. They don’t officially have to approve the decision, but they can fire him before he implements it. Are they liable now? What if he doesn’t have to report his decisions? What if they vote to keep him in for a year at a time, and can’t fire him until his tenure is up. Now they’re not liable?

Now say they vote for someone to appoint the person who makes the decisions. Surely this is far removed enough. Now they can’t be held responsible.

But it’s all the same. They have the ultimate control. They have just delegated through enough channels to have plausible deniability.

Now, I understand that this is not typically how corporations work. This is an extreme example. But I still think it needs to be addressed if we are to form a coherent analysis of limited liability.

As for this:

“I see, I see, the contours of your theory are developing before our eyes. Yet you were so opinionated before, even before you had even even this much of an embryonic theory worked out. Interesting.”

Well, yeah. My theory is developing. I’m attempting to develop it through a dialogue. I’m sorry if I gave you some other impression, or if I came off as confrontational.

Mike December 11, 2008 at 5:01 pm

“Well, yeah. My theory is developing. I’m attempting to develop it through a dialogue. I’m sorry if I gave you some other impression, or if I came off as confrontational.”

Oh, and I should add: “lol, internet.”

Mike December 11, 2008 at 7:01 pm

Or, to put it a much simpler way, with control comes responsibility, I think. Generally, this would mean shareholders are not responsible for the actions of corporate management or employees since their control is highly limited, but this is by no means set in stone. Not all corporations are created equal, I’m afraid.

So if the question is “Is limited liability for torts a creation of the state?” I think the response has to be “It depends on what you mean by that.” If by “limited liability for torts” you mean “liability is limited to the degree of control,” then, no, limited liability is not a creation of the state. If it means “liability limited to ammount X for factors that were within your control,” then I think it is.

Stephan Kinsella December 11, 2008 at 7:04 pm

Mike:

“”So, it’s not ownership, but the right-to-vote-for-directors that gives you liability?”

“This distinction makes no sense to me. You yourself said “ownership is the right to control a resource.” The right to vote for directors is a form of the right to control the resources of the corporation.”

You (and the state) are the ones calling shareholders “owners’. I’m just focusing on the reality of what their status means.

“So the right to vote for directors is ownership.”

Really! So you are an owner of America, since you can vote for Prsident! Congrats! You are now responsible for what his military does, since you are the owner.

“”It is the status of having-the-right-to-vote, or the act of voting? If the latter, is it voting for the person who was elected (successful voting), or any voting at all? Do you have to prove a shareholder voted to hold him liable? What if a secret ballot is used?”

“I’m not sure. I’m leaning toward the status of having that right.”

Wow.

“Now, I understand that this is not typically how corporations work.”

Really!

stephan Kinsella December 11, 2008 at 7:12 pm

Mike:

“with control comes responsibility, I think.”

Are you sure? Is it the *exercise* of control (that is: action), or merely having the *right* to control, that has responsibility “attach” to it? Think about this carefully…

“Generally, this would mean shareholders are not responsible for the actions of corporate management or employees since their control is highly limited, but this is by no means set in stone. Not all corporations are created equal, I’m afraid.”

I am not sure you really have any clue what you are talking about. I don’t mean offense, but you sound like a college freshman with no experience in business pontificating on how they are and should be run. It’s okay to be a naif. But why naifs are determined to have vociferous opinions about matters they know little about, is a mystery.

Mike December 11, 2008 at 7:21 pm

“I am not sure you really have any clue what you are talking about. I don’t mean offense, but you sound like a college freshman with no experience in business pontificating on how they are and should be run. It’s okay to be a naif. But why naifs are determined to have vociferous opinions about matters they know little about, is a mystery.”

Okey dokey. I’m trying to engage in a discussion, you resort to insults and name calling. I’m being immature. I get it.

Mike December 11, 2008 at 7:38 pm

“Are you sure? Is it the *exercise* of control (that is: action), or merely having the *right* to control, that has responsibility “attach” to it? Think about this carefully…”

Say I build a house on the edge of a cliff. After a few years, I slack on the upkeep, and the house starts to get crummy. I want to sell the house to you, and you see an opportunity in a fixer upper, so you want to buy. Before I sell, though, I say “You know, the house is on the edge of the cliff. If you don’t fix it soon, it will crumble and fall onto the town below.” You say, “Don’t worry, it’ll be my house, and my responsibility. I’ll fix it.” We complete the sale, and I go on my way.

When it comes time to actually make the repairs, though, you get lazy, and put it off. After a few weeks, the house crumbles onto the town below, killing someone.

In this situation, you had the right to control the house, but you did not exercise it. Yet, are you not liable for the damage?

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