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Who Enforces the Decisions of a Private Court?

August 16th, 2008

A user on Mises.org thread inquires about the nature of polycentric order, and private courts, specifically, how can non-consensual participants be bound by the decisions of private courts:

A: If we continue the example I gave, if I deliver my part of the contract and you don’t, I can’t see how you can take me to court. If in a competitive system of courts, one court consistently gave appalling rulings it wouldn’t be in ‘business’ for much longer.

B: We’re disputing the discharge of the contract. As far as I’m concerned, you haven’t fulfilled your side of the deal; as far as you’re concerned, I haven’t. You’ve taken the matter to Acme Private Courts ltd, who’ve ruled in your favour. I’ve taken the matter to Big Dave’s Judicial Services & Legbreakings ltd, who’ve ruled in my favour.
In what way is either of us bound by the judgment of the other?

A: And if you don’t wish to be bound by the rulings of private courts then I guess you wouldn’t mind being branded an outlaw?

B: As far as I’m concerned, you’re the outlaw. I don’t recognise the authority of your court to brand me anything.
(and neither does Big Dave’s Personal Security Services ltd, to which I am a long-standing subscriber).

The question here is about what happens when both parties to an agreement believe that they’ve discharged their obligation, but the other party has not; which makes it a more complicated question than, “What happens if one party unilaterally defaults on the contract but refuses to accept a court’s judgment?” If one party defaults on an agreement, it’s unlikely that he would seek a court to validate his action, and it’s even less likely that such a court could exist in a free market.

The short answer is, that neither party is bound to accept any judgment to which they do not consent, and that contracts should be written in as clear and unambiguous a manner as is humanly possible. Transparency reduces or eliminates the opportunity for one party to claim ambiguity. I commented that,

Some of us might go so far as to suggest that even if they agree on the venue, the guilty party can’t be forcibly compelled to accept the judgment against him. The question then arises, what is the disincentive to breaking contracts, the glue that would hold together a voluntary society?

Social ostracism works to an extent, insofar as anyone who A) accepted a venue for settling the dispute, and then B) refused to abide by the judgment, would probably find it very difficult to transact business with anyone in the future, at the very least, others would stop offering credit and he’d have to pay in full, in advance, because the record of his actions indicate that his word (e.g., that he’ll pay you in 30 days) is not worth a thin dime.

Now, there is nothing in the nature of a free society that would prohibit both parties from circulating the contract publicly, or among their other business partners. In this sense, the “court of public opinion” might compel mediation. At this point in the hypothetical, both parties believe to have been wronged, surely there is some middle ground that would make them both better off, if it didn’t satisfy them fully. These parties would be willing to accept terms of mediation voluntarily, in order to save face for the future and send a message to the rest of the business world in which they operate, that “Yes, I do fulfill my agreements or make good faith efforts to resolve honest disputes.”

Another user, MaxLiberty (a frequent troll) disagrees:

This comes up a lot with people who don’t think this process through.

For those of you who think social ostracism will be sufficient to enforce contracts without other enforcement you are in fantasy land. The idea that everyone will know the extent of what everyone else’s history of contract compliance is ridiculous. A serial violator of contracts could change their name, move to a different area and whole host of other reasons why making contracts without enforcement will be very very rare.

Which, conveniently, is precisely the sort of objection I’ve come to expect from people who don’t know what they’re talking about, or who have not thought the process through. Max’s comments, and the thread was developing into more of a discussion of what happens when one of the parties is clearly and unilaterally in breach, can be summarized:

  1. Serial contract violators can abuse the system
  2. Social ostracism doesn’t work
  3. It’s not possible to know everyone else’s record

OK.

Credit and goodwill don’t flow from fucking fountains. Until and unless one has established some worthy reputation, he’ll find it difficult to obtain either. Think back to all the “great deals” you got on mortgage applications, credit cards, auto loans, etc., when you were 18 years old, had never held a steady job in your life, and had no proven income or demonstrated propensity to repay loans? Shit, you probably had to have someone co-sign on your cell phone! This is what it would be like, every single time the “serial violator” would have to start from scratch. And the more frequently he welches on contracts, the more likely it is that his reputation will precede him in the future.

He also objects that social ostracism doesn’t work. In some markets (I seem to recall stories about investment bankers, brokers, and commodities traders) welching on even a single contract can effectively end your career. If you think that the only reason, or even the principle reason, that contracts are fulfilled is because there’s a gun behind them, I object that Max is the one living in a fantasy land. Most people, most of the time, are honorable individuals with a sense of fairness and equity, they repay their debts because it is generally the right thing to do. Max need only examine the historical precedent, like the Law Merchant, which existed outside of (although, eventually co-opted by) State courts. Moreover, as Donny With an A points out, in international business, there is generally no agency capable of enforcing contracts,

One might notice that there is no world court, and in cases crossing over international boundaries, it’s often the case that no court has any legitimate jurisdiction.

But business continues, and goods and capital routinely cross borders.

I characterize Max’s third objection as a straw-man. If you can’t know everybody’s record, then don’t do business with them. You do business with people you know and trust, or on other occasions with people for whom your friends have vouched. Social credit goes a long way, it doesn’t just work to ostracize, but to validate as well. But moreover, screening services could be provided by the market, it may be similar to what credit-rating bureaus and insurance companies use to measure risk in the present system. They take what is known about you, from your public transactions and from information that you voluntarily provide (and you would voluntarily provide some level of information because it would be beneficial to establish goodwill) and act as a sort of clearing-house or rating agency for risk. Banks or insurance companies could certainly handle some of these tasks with little difficulty or objection from among their customers.

In this sort of environment, it may even be possible to insure oneself against breaches of contract. I’d have to think more about the specific perils against which one would want to be insured, and whether or not the frequency and severity of these are legitimately insurable (I believe they are) and also whether the propensity for moral hazard is too great (I believe it’s not). But that’s topic for another day.

Comments

3 Comments

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  • KipEsquire says on: August 16, 2008 at 9:57 am

     

    contracts should be written in as clear and unambiguous a manner as is humanly possible

    But that is of course not costless. We can either spend all our time drafting contracts, or we can actually go out and do stuff.

    (An analogy: If you spend all your time blogging about your snowboarding adventures, then you end up with no snowboarding adventures to blog about.)

    This is exactly what I try, with woefully little success, to explain to harder-core libertarians and an-caps about “government in the marriage business.” It’s very cute to say “just replicate it through contracts,” but contracts are expensive, and time-consuming. A uniform, easy and cheap system that gets 95% of couples 95% of what they want seems like a pretty good idea to me, and to dismiss it outright, regardless of the economic implications, merely because the government is involved is, quite frankly, silly.

    (A related issue is the adhesion contract and the EULA/TOS. It’s totally myopic to damn such terms of sale — voluntary sale, incidentally — without acknowledging that they make the product vastly cheaper to produce. How much would a cruise ticket or piece of complex software cost if each contract with each customer had to be separately negotiated?

  • Francois Tremblay says on: August 17, 2008 at 11:27 am

     

    “For those of you who think social ostracism will be sufficient to enforce contracts without other enforcement you are in fantasy land.”

    The Law Merchant.

    Point, set, match to Franc.

  • John Petrie says on: August 18, 2008 at 9:44 am

     

    In this argument, which is a common one for non-libertarians to have with libertarians, it is demanded that the libertarian explain how criminals and delinquents would be dealt with in a free society if they violated agreements or harmed people/property and simply refused to accept their punishment as ruled by an an-cap court.

    David and thousands of others have defended the hypothetical libertarian world quite nicely. I just wanted to remind you of some irredeemable shortcomings of courts in our own State-dominated world. As usual, the very nightmarish scenarios Statists ascribe to their imagined, hypothetical, straw-man libertarian world already plague the Statist world. In our society, if you have a dispute with the State, you have to take your case to a State court and you have to accept its ruling! There is no possibility of 3rd-party arbitration, which would be beneficial in that case (a scenario only permitted by anarcho-capitalism).

    The government is wrong all the time and it refuses to accept punishment or right its wrongs! It is so certain most of the time that the State court will rule in favor of the State that we don’t even consider suing it for its transgressions. The courts are owned and run by the State! Of course they’re usually going to rule in the State’s favor! History has shown this to be true. We read about it almost every day.

    I think Anthony de Jasay expressed this dilemma nicely in his magnum opus, The State:

    “In conflict with his own kind, he would have the faculty of appeal, of recourse to a superior instance. Freedom from conflict of like with like, however, puts him in potential conflict with the higher instance. In opting for the latter, the possibility of recourse is given up. The state cannot be seriously expected to arbitrate conflicts to which it is an interested party, nor can we invoke its help in our quarrels with it. This is why accepting private interference, no matter how much it resembles “Darwinist sweepstakes,” is a risk of a different order from that of accepting state interference. The prudential argument against putting public in place of private constraints is not that one hurts more than the other. It is the somewhat indirect but no less powerful one that doing so makes the state unfit to perform the one service for civil society which no other body can render&#8212that of being the instance of appeal.”

    In other words, the very act of making the State the final legal authority makes it unfit to be a final legal authority.

    I know pointing out that the State is worse is not the most rigorous or satisfying argument in favor of libertarianism, but it’s always true and it’s just so easy!

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