The Evolution of a Legal Rule

Anthony Niblett,Richard A Posner,Andrei Shleifer

doi:10.1086/652908

Abstract

Efficient legal rules are central to efficient resource allocation in a market economy. But the question whether the common law actually converges to efficiency in commercial areas has remained empirically untested. We create a data set of 461 state court appellate decisions involving the economic loss rule in construction disputes and trace the evolution of this law from 1970 to 2005. We find that the law did not converge to any stable resting point and evolved differently in different states. Legal evolution is influenced by plaintiffs’ choice of which legal claims to make, the relative economic power of the parties, and nonbinding federal precedent.

Highlights

We investigate the evolution of a particular common law rule pertaining to the construction industry, as developed by state appellate courts in the United States over the last three and a half decades
Over the 35 years covered by our study, the economic loss rule” (ELR) has evolved in a way that cannot be described as convergence to efficiency
Had we written this paper ten years ago, we would have found the law converging to ELR with generally recognized exceptions, but the law moved away from that rule afterward with no changes in the economic environment to explain the movement

Summary

INTRODUCTION

We investigate the evolution of a particular common law rule pertaining to the construction industry, as developed by state appellate courts in the United States over the last three and a half decades. If the law converges to efficiency, over time courts should be refusing to make exceptions to the ELR other than the generally recognized ones. In studying the evolution of the ELR in construction disputes, we first consider both the bright-line ELR (strict view) and the ELR with generally recognized exceptions (middle view) as candidates for the efficient rule, and ask whether the law achieves or moves toward either of them. Under the middle view of efficiency, courts should apply only generally recognized exceptions to defeat invocation of the ELR. The courts in Colorado have consistently held that builders owe property owners a tort duty independent of the ELR. Some courts recognize an exception for cases in which the plaintiff has no contractual remedy, or confine the ELR to commercial but not to residential property owners. The use of idiosyncratic (ELR with generally exceptions should be declining recognized exceptions) over time

Brief Summary of the Data

BEHIND THE PATTERNS

ELR and the Contractual Relationship between Parties

Relative Economic Power of the Parties

Findings

CONCLUSION