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Why the law of damages is more favourable to commercial interests than personal interests. On August 7 th 1994, 11 miners were killed when an explosion ripped through the BHP-owned Number 2 Mine in Moura, Central Queensland. In a bitter attack the Workers News declared that these deaths were not an unexpected accident, but a direct result of BHP s drive to boost productivity and cut costs. They form part of the disastrous death toll now escalating through industry.
This paper seeks to determine what role the law relating to damages for personal injury and death plays in allowing commercial interests to consider life and health as an exploitable resource in the pursuit of profits. The argument will be presented that the law is not neutral between commercial and personal interests, but is in fact indefensibly favourable to the commercial interests of profit, over the personal interests of life, health and happiness. Regrettably, it is often the case that arguments such as the one presented in this paper usually break down into two isolated schools of thought, economics and sociology, with each discipline ignoring the insights of the other. Economists, although bitterly divided, share at least some paradigmatic assumptions with other economists, and the same is true of sociologists. Yet as a result of what Edward de Bono termed the arrogance of logic, each discipline sets up logically impeccable arguments that are derived from within a particular framework of perception and are literally incapable of being challenged from any external framework of perception. This paper will attempt to provide a critique of the law of remedies that will transcend the particularity of specific disciplines by arguing that damages for personal injury and death are indefensibly favourable to commercial interests, both from an economic point of view and a sociological point of view.
Although the economic argument will initially be presented separately from the sociological argument, an attempt will be made to transcend de Bono s arrogance of logic by arriving at a conclusion that will bring together the insights of both economics and sociology in a singular framework. The Argument from Economics Proponents of the Law and Economics movement argue that the touchstone of legal decision-making should be the promotion of allocation efficiency in society. Although it is widely stated as a common law principle that the purpose of damages for personal injury and death is compensation, law and economics scholars would argue that compensation is in fact achieved by setting damages at the efficient level. But just what constitutes the efficient level of compensation is the source of the fiercest in-fighting amongst economists. Law and economics scholars start with the traditional definition of efficiency provided by welfare economists and purport to uncover serious flaws with that definition. In its place they impose a viciously conservative definition of efficiency that is fatally flawed and fundamentally fails to provide any effective critique of traditional welfare-economics.
Assuming (as I do in this section of the paper) that economic theory may provide us with the proper level of compensation, that proper level is provided by Welfare-economics and not the economics of Case, Posner or Kaldor-Hicks. According to welfare economics whenever there are externalities (or external costs being generated within the economy as a result of one economic agent carrying out its activities with harmful effects upon other parties) resource allocations will not be efficient. The courts are, according to this theory, justified in stepping in and imposing liability rules that require external costs to be fully compensated, so that external costs are internalized. By external costs economists are referring to a loss of utility where utility is a numeric measure of an individual s overall well-being or happiness. Thus any act leading to the emotional, physical or economic pain, suffering or loss of another individual could be described as an act involving external costs comprising the full monetary value of all utility lost. Efficiency requires the compensation of that full monetary value so that the utility loss is completely internalized.
It is a rather uncontroversial principle within modern economics, that the utility one receives by consuming a good, may be rationally measured in monetary terms by determining how much money one is willing to pay for the good. If money is merely instrumentalist that is, of itself worthless, but it becomes a means to the end of happiness through the consumption of goods and services then the amount of money one is prepared to give up in order to purchase a good would indicate that the happiness one derives from the use of that money in purchasing that good is higher, or at least as high, as the happiness the same amount of money would bring in purchasing any other good. Surely this same basic principle of measuring utility in monetary terms can equally apply to measuring the utility loss unleashed by tortfeasor's in order to determine what monetary level of compensation is needed in order to have the tortfeasor fully internalize his or her costs. The efficient level of full compensation could thus be arrived at by asking the injured plaintiff: What sum of money would you have required, prior to the accident, in order to make you indifferent between the possibilities of remaining uninjured on the one hand, or of being injured in the manner in which you were, knowing that you would also receive that particular sum of money as compensation on the other? The past and future utility loss to the plaintiff as a result of the negligence is thus offset by a sum of money providing the same level of future utility gain. The utility loss is thereby fully transferred from the plaintiff to the tortfeasor.
The external costs have been internalized and the result is an efficient one. The hypothetical Justice Wright in the equally hypothetical case of Derek and Charles v Anne and Martin notes that there exists an asymmetrical distribution of risk-taking in society. Commercial interests tend to display risk-preference because of the profit-driven logic to maximise wealth, coupled with their relative ability to effectively absorb losses. Private individuals on the other hand, tend to be risk-averse. Tortfeasor's in cases of personal injury and death, are thus highly over-represented by commercial interests, and plaintiffs in such cases are highly over-represented by personal interests. Therefore, any system of compensation that compensates below the full utility replacement level expressly permits commercial activity to occur by shifting many of the costs of those activities onto unsuspecting, non-consenting members of the public.
When the courts adopt a standard of compensation below the full utility replacement level they force that non-consenting public to subsidise commercial interests at their own expense. Profit is reaped literally upon the backs of the public. Commercial interests have become, in economic parlance free loaders off personal interests. Such under-compensation is inefficient and therefore shows an economically indefensible favourites to commercial interests over personal interests. There are, however, those from the law and economics movement who would dispute the claim that full compensation, whether it is defined as utility-replacement as I have defined it, or whether it is defined otherwise, is not a necessary efficiency requirement.
Before we determine whether or not the courts grant full compensation, I intend to dismantle once-and-for-all, the notion that Kaldor-Hicks, Case or Posner might have anything of value to add to the economic analysis of liability rules. The Kaldor-Hicks argument According to the Kaldor-Hicks measure of efficiency, if changes in policy or law bring harm to unconsenting individuals, those changes will be efficient, not merely where actual compensation is paid, but wherever compensation could hypothetically have been paid. Some in the law and economics movement have attempted to apply this efficiency measure to cases of harm between individuals, in order to argue that efficiency does not require actual compensation in negligence cases. As long as the gain to the tortfeasor exceeds the plaintiff s loss, this by itself satisfies the test of efficiency. It is, however, as a matter of economic reasoning, quite an elementary observation that the Kaldor-Hicks test has no application whatsoever to cases where individuals inflict external costs upon others. This is so for the simple fact that whenever there are externalities, resource allocation can never be efficient unless the producer of those external costs actually internalise's them.
For example, let us assume that a car manufacturer negligently fails to hire quality control staff, and as a result faulty cars are produced which cause a number of minor injuries to the purchasers. It may very well be that the savings to the car manufacturer exceed the rationally valued losses to the purchasers, but despite the fact that it superficially appears that utility has been maximised in all of this, so that the result is an efficient one, that is not the case. The failure of the manufacturer to internalize the external costs of the injuries means that the cost structure of the manufacturer underestimates the true extent of the costs of production. As a result of this artificially low cost structure, there is an over-allocation of resources to the production of those cars. As a result, the costs to society of producing these extra cars exceeds their value to society. The result is a loss of social utility.
The extra resources could have been employed in a manner that would have produced a net utility gain. The presence of uninternalised externalities is thus always inefficient. It is a pure logical fallacy to assert that it is efficient to allow individuals to carry out acts of negligence with impunity wherever the gains to the negligent party exceed the losses to the victims. Clearly, in the end, there was a dis utility effect, as there were utility losses to society beyond the mere injuries to the victims. There was a misallocation of resources that resulted in a loss of utility due to the opportunity cost of utilising those resources where they would have been more highly valued. All externalities must be internalized to achieve efficiency.
Hypothetical internalization is never an acceptable alternative. The Case argument In Case s famous treatise The Problem of Social Cost, Case argued that wherever there are high transaction costs which prevent individuals from negotiating liability rules themselves, it should not be assumed that the best alternative is to have court-imposed liability rules which require the tortfeasor to fully compensate the plaintiff. Law and Economics scholars such as Posner, picking up where Case left off, have interpreted this to mean, that the optimal solution is to reassign the legal entitlements so as to minimise transaction costs, or else to approximate the liability decisions that would have been made on the free market. Case s central critique of welfare-economics was with its use of the concept of externalities. He rejected the notion that society involved inflictor's of harm and victims of harm.
Instead, he argued that harm was always of a reciprocal nature. This enabled him to condemn the notion of internal ising externalities as a logical impossibility, and therefore to reject it as a test of efficiency. If Case s argument fails, and the notion of externalities is a valid one, then the arguments which follow on from Case, to provide alternative measures of efficiency, must also be resigned to the dust-bin of human thought. Case rejects the notion of causation, by asking rhetorically, what is a cost of what? .
He argues that no individual can be pinpointed as the inflictor of harm, as all harm is reciprocal. Therefore any measure of causation which apportions blame to particular individuals is not an objective decision, but one of choice. I accept, as Case implies, that causation cannot simply be determined in the nature of things, and that often pinpointing one individual as the cause of harm is more an act of ethical choice than objective determinism. But Case s it takes two to tango argument merely blurs and simplifies the issue of causation. Central to his analysis is the case of Sturges v Bridgman where a doctor s surgery and a confectionary factory had been next door to each other for several years. Many years after the confectionary factory had been built, the doctor decided to build a consulting room at the end of his garden, right against the confectioner s kitchen.
It was later found that the noise and vibrations of the confectioner s machinery made it difficult for the doctor to use his consulting room. Case uses this case as an illustration of the fallacy of apportioning blame to individuals. However, not all cases are so intractable. Would we equally argue that Ford was not to blame for the deaths in Grimshaw v Ford Motor Co. , the case involving the Pinto affair? More cynical observers than I, might suggest that given the inequality of risk-taking within society, Case s argument is nothing more than an insidious attempt to wipe clean the slate of capitalist exploitation and carnage. Ultimately, however, Case s argument is nothing more than a self-defeating, circular argument.
He adopts a moral nihilism by retreating into a post-modernist relativism that denies the possibility of making moral truth-claims. To Case, causation is a moral choice, whereas free market outcomes are an objective choice. Because we cannot make a moral truth-claim, we must resort to the objective truth claims of economics. But once we realise that economic theory is itself based upon the moral foundations of utilitarianism, we must conclude that resorting to free market outcomes is itself a moral choice. Galbraith has done extensive research showing that utility increases in society are not equally distributed, and often occur alongside utility decreases for many sectors of society, particularly the poor.
Preoccupation with total utility outcomes cannot be stated to be presumptively or objectively good. By refusing to enter into moral considerations, Case invalidates his own theory. He has fallen into the post-modernist trap of denying the possibility of ethical claims through the use of his own ethical claim would thus conclude that Kaldor-Hicks, Case and Posner all fail to tarnish the welfare-economics assumptions they set out to destroy. From the perspective of economics, the level of compensation that must be granted to plaintiffs is full compensation as measured by the amount of money needed to provide full-utility replacement. This economically efficient level of compensation is however, rarely, if ever granted by the courts. The level of damages for personal injury and death typically falls so far below this standard that non-consenting members of the public are forced to subsidise the profit-making of commercial interests.
There is a vicious conservatism at play within the law of damages that acts to drastically reduce compensation payouts. In Skelton v Collins for instance, Windeyer J rejected the notion that damages were given in order to recompense for a loss of something having a money value. Instead, he argued, it is given as some consolation or solace for the distress. In that case, a 17 year old boy had suffered severe brain injury which left him unconscious.
The High Court managed to confine damages merely to the direct financial costs of the injury. In rejecting the possibility of granting damages for pain and suffering Windeyer J stated, a man whose capacity for activity, mental or physical, is impaired so that no longer can he get satisfaction and enjoyment from things has not lost a thing the value of which for him can be measured in money. Even from an economic perspective, this is a dangerous principle, harbouring highly conservative undertones. Windeyer J attempts to dress up his judgement in a cloak of enlightenment and social concern when he states that he cannot grasp the idea that a man s life is a possession of his that can be valued in money. But this argument is a sleight of hand. The real issue is that corporations are going to examine the risks to life and health they impose upon the public in monetary terms.
As much as Windeyer J claims to be upholding the sanctity and priceless ness of human life, the effect of his decision is to cheapen it. It leads directly to a lowering of the costs of risk-taking, which will increase the risk-preference of commercial interests. Windeyer J has turned human life into an inexpensive and abundant resource, there for the taking. Chillingly, this failure to force the tortfeasor to internalize the costs of his negligence comprising the rationalized value of all future well-being and happiness that has been lost, leads to a level of exploitation of human life and health so high, that even an economist would term inefficient. In Benham v Gambling, an infant was rendered unconscious after an accident, and remained in that state until his death. The House of Lords assessed full damages at 200.
The vicious conservatism of this judgement comes to light when Viscount Simon LC says; The main reason, I think, why the appropriate figure of damages should be reduced in the case of a very young child is that there is necessarily so much uncertainty about the child s future that no confident estimate of prospective happiness can be made. This argument is a complete non-sequitur. There is no logical connection between uncertainty and the need to reduce damages. There would be just as much a logical connection between uncertainty and the need to increase damages. In fact, given that the uncertainty was caused by the tortfeasor, logic may even compel the tortfeasor to harbour the burden of the uncertainty. The Lord Chancellor s statement appears little more than a blatant attempt to transfer the burdens of the injury to the plaintiff.
A similar attempt is clear in the case of Sharman v Evans where a 20 year old woman who was earning $ 70 a week as a secretary was completely incapacitated. In an approach forcefully attacked by the dissenting Murphy J, the Court assessed damages for lost future earning capacity upon the assumption that the woman s wage would not have increased in real terms over her working life. This, despite the fact that the woman had only just begun her career. It is clear that the law of damages is replete with doctrines and practices that act to keep compensation payouts well below the full utility replacement level. From an economic perspective this is highly inefficient. we live in a society where the law of damages allows commercial interests to free-load off the public.
The Argument from Sociology and from beyond the arrogance of logic Even a principle of full compensation may still act only to legitimate and maintain the corporate use of life and health as a resource in the pursuit of profits. Although the compensation principle may make commercial interests less risk-preferential, ultimately those interests may still inflict considerable risks of harm whenever it is to their economic advantage to do so. By merely requiring the internalization of all external costs, the courts do nothing to equality risk-taking throughout society. If commercial interests are still highly risk-preferential, even after a full compensation principle is imposed, then the law of damages will still only maintain those particular risk preferences, without attempting to reallocate them in order that those who continue to suffer the burdens of risk are no longer denied the opportunity to control the risks that hang over their lives. If a full compensation principle still maintains high commercial risk-preference, then that compensation principle has still effectively granted a right to commercial interests to compulsorily acquire human life and health, as long as they are prepared to pay the full market price for those goods. The fundamental limitation of the compensation principle besides its simplistic assumption of the ability to value the monetary value of one s life and health is the fact that it allows commercial interests to act as they wish without any underlying system of moral restraint.
Kaye argues that Adam Smith understood human beings as essentially societal in character. Smith clearly understood that for its continuance, the human community depends on a social system. The invisible hand was an important mechanism which enabled the ongoing interaction between community and the social system, between moral sentiments and economics. Smith understood that the two things together constituted a total system of how human societies work, and that they would balance and control each other for the continuing good of individuals and society. If commercial interests construe their place in society in narrow legalistic and economic terms, despite conservative rhetoric, they will fail to create the sort of human society envisaged by Smith.
A free market mentality based on only one part of Adam smith s philosophy will not produce the ethical behaviour necessary for the dynamic development of human society and the social system. Hirsch states: the principle of self-interest is incomplete as a social organising principle. It operates effectively only in tandem with some supporting social principle. This fundamental characteristic of economic liberalism, which was largely taken for granted by Adam Smith and John Stuart Mill in their different ways, has been lost sight of by its modern protagonists The attempt has been made to erect an increasingly explicit social organisation without a supporting social morality.
I would argue that a compensation principle provides the economic half of the social whole. Yet by itself, it does not guarantee an adequate level of constraint to ensure that personal interests are not freely plundered by commercial interests in their quest for profits. The moral-half of the social whole could be provided by an extensive use of exemplary damages in order to further reallocate risk-preference so as to achieve a greater risk equality between commercial and personal interests. At present, exemplary damages are restricted to instances where the defendant s conduct amounts to conscious wrongdoing in contumelious disregard of another s rights. If exemplary damages are to have a wide-ranging reallocation effect on risk-preferences, and thereby complement economic decision making with non-economic restraint, then the availability of exemplary damages must be widened. Furthermore, at present the courts only pay lip-service to exemplary damages, without ever actually granting a total level of damages that exceeds the full utility-replacement compensatory level.
For instance, in Mid alco Pty Ltd v Rabenalt, a man was awarded damages against his former employer for exposing home to large levels of asbestos, which lead to the man s contraction of malignant mesothelioma. Compensatory damages were set at $ 426 000 and exemplary damages were set at $ 250 000. It is highly unlikely however, that if the economic definition of compensation as set out in this paper were applied, the plaintiff would receive such a small sum for compensatory damages. It is highly unlikely that even the total sum of damages awarded in this case would constitute full compensation. Would the plaintiff genuinely have been indifferent to the prospect of living longer without the money, or having a shorter life with $ 676 000? There has, however been extensive criticism of the use of exemplary damages.
Tilbury argues that given the unlimited size of exemplary damages, it acts as a potential threat to personal freedom. This argument has merit, however, the threats to personal freedom that are involved in the prospect of allowing punishment without the usual criminal protections must be balanced against the threats to personal freedom that are involved in the prospect of allowing commercial interests to continue engaging in high risk activities without constraint. In addition Feldthusen argues that deterrence ought to play no part in the law of exemplary damages. He argues that economic deterrence is inconsistent with the philosophical basis of tort. This argument is a highly formalistic one based on the demarcation between different branches of the law. Assuming that that demarcation is successful, then the argument is a merits one.
Yet what if the criminal law completely fails to bring effective restraint to the profit-driven exploits and risk-taking of commercial interests? What if the criminal law privileges commercial interests by pathologising deviance's from commercial values whilst normal ising attachments to those values? Is the law of remedies to maintain that privileging of commercial interests by upholding the legal demarcation between criminal law and tort, and refusing to look beyond what is formally maintained as the law of remedies? I would argue that the judiciary should not abrogate its moral responsibilities under the guise of formalism, a system of belief that is itself said to be a moral and political choice. Conclusion It is economists and corporate decision makers who employ rationalist calculations to determine what level of safety and precautions are economically viable. We must descend into the molasses of their rational logic and impose, through the courts, our own valuation of life and health to ensure that it is at a sufficiently high level that commercial interests never perceive it to be economically viable to exploit human life and health as a resource in the pursuit of profits.
A full compensation principle, derived from welfare economics may achieve this, but that is far from certain. What is needed therefore, is an holistic approach which maintains the economic system of full compensation, balanced with the moral restraint of exemplary damages which will come into play whenever the economic valuations are incapable of ensuring the equalisation of risk-taking throughout society. In the contemporary law of damages, neither of these vital elements are present. On the one hand, economic valuations have been replaced by the law and economics school of thought which imposes a fundamentally flawed view of efficiency and compensation.
And on the other hand, exemplary damages have never really been employed by the courts because total damages fall so far below the full compensation level in the first place that even when one adds in exemplary damages, the end result is still not even compensatory. It is precisely the failure to establish the system of damages set out in this essay that explains why the law of remedies in relation to damages for personal injury and death has been more favourable to commercial interests than personal interests. 322
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