Torts - Cases, Principles, and Institutions Fifth Edition, 2016a

Witt & Tani, TCPI 2. Intentional Harms
How does this matter for torts? Typically the Coase theorem is stated in the form of
entitlements and assets. But as the case of the baker and the confectioner suggests, the point holds
for liabilities and risks, too. Rational parties in settings of low transaction costs will trade
liabilities and risks just as they trade entitlements and assets. Only now they will tend to allocate
those liabilities and risks not to a highest value user, but to a lowest cost bearer.
Now we can begin to see the implications of Coase’s ideas about entitlements and
transaction costs for risks like those present in Vincent v. Lake Erie Transportation. Under what
conditions will dock owners bear those risks, even if Vincent remains the background common
law rule? The Coase Theorem seems to indicate that we should expect mooring contracts to
allocate the costs of storm damage to the lowest-cost bearer (an inverse to the highest value user
above). This only stands to reason, since the real price of any such contract is the price net of the
cost of the risks. If the cost of the risks can be reduced, the parties to the contract can split the
gains between them: shipowners can pay reduced net prices while dockowners receive higher net
prices. It’s a win-win! Mooring contracts should allocate risks to shipowners when they are in a
better position to bear those risks at minimum costs, and to dockowners when the situation is
reversed. Shipowners and dockowners would be foolish to do otherwise. They would simply be
leaving money on the table, or in the water, as the case may be.
6. The economic view of Vincent (II): what difference do legal rules make? The Coase
Theorem does not assert that legal rules make no difference. The Theorem purports to identify
what kinds of difference, under conditions of low or zero transaction costs, legal rules will and
will not make. Even if the initial allocation of an entitlement or a risk makes no difference for its
ultimate allocation, the initial allocation does have a distributional or wealth effect. Entitlement
allocations have a positive wealth effect on the initial holder because such allocations endow the
holder of the entitlement with either the entitlement or the value received for selling it to some
other higher value holder. Risk allocations have a negative wealth effect in the same way. By
hypothesis, the initial allocatee will be willing to pay a cheaper cost bearer to bear the risk. Either
way, however, the initial allocatee is worse off.
To see this in a real life setting, consider the Ploof case as an example. By allocating the
entitlement, or privilege, to boat owners, the court made the Ploof family that much better off and
the defendants that much worse off. The law mattered!
In contractual settings, however, there is a wrinkle. The privilege in Ploof settings exists
for all boaters moving forward, whether or not dock owners agree. That is the pro-boater wealth
effect of the initial entitlement. The Vincent case is different. Viewed after the fact, the decision
of the Minnesota Supreme Court benefitted a particular dockowner at the expense of a particular
shipowner. But prospectively, the rule allocating the privilege as between shipowners and
dockowners looking to enter into consensual docking agreements—as they will in Vincent v. Lake
Erie-like settings—is a different kind of animal. The key difference is that there is no entitlement
for the law to allocate here unless the parties agree to a docking arrangement. Rather than
allocating an initial entitlement as in Ploof, the Vincent rule is better thought of as setting a default
rule or a contract presumption in the event the parties’ agree to have a relationship. Moving
forward, the allocation of this risk is subject to rearrangement by the parties if they see fit to alter
the presumptive or default term of the mooring contract, since either one of them can refuse to
consent to the deal in question. In future Vincent v. Lake Erie situations, the privilege to lash and
re-lash can only come about if both parties agree to bring it into existence by virtue of entering
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