Limited liability, Part 2: Is limited liability for torts a simple codification of what companies and their counterparties could agree to voluntarily?
The comments regarding on limited liability at Geoffrey Allan Plauche‘s post, “Ecofascism in the Name of Fending Off Ecofascism” – which I’ve been copying to an earlier post in relevant part – have been running long, so to improve readability thought I’d break up the comments of interest into several posts.
[Here are links to my second, third.and fourth posts.].
panika2008 September 17, 2010 at 12:24 pm
“Limited liability is as bogus as pretending all your debts are really owed by your invisible friend.”
Nah. Limited liability is just a simple juristic construct to make default what would otherwise result in a substantial growth of legal homeorrhage, namely specifying in all and every contract of the company the exact limits and conditions of liability. This is impractical, especially for small firms, so they are given the option to incorporate using the “default” set of rules. It’s a part – quite sensible at that – of our common (sense) law tradition – make good/popular practices into codex’s. If only all legislation would proceed basing on this pattern!
TokyoTom September 18, 2010 at 7:21 am
Panika, the libertarian issue is not about default rules for what could otherwise be voluntarily contracted for – namely, agreements between firms, their shareholders and their voluntary creditors or customers to limit the liability of the firm to its certain assets.
Rather, it is about whether governments should be gifting shareholders with limitations on liability vis-a-vis persons who become INVOLUNTARY creditors of the firm because of corporate actions (via managers, employees or agents) that damage them.
TT
panika2008 September 19, 2010 at 10:08 am
How can anyone become an involuntary creditor of anyone otherwise than by criminal action (extortion?) or government subsidy? I don’t quite understand what you mean.
TokyoTom September 20, 2010 at 10:40 am
Panika, “involuntary ” creditors is fancy legalese designed to distinguish (1) those who VOLUNTARILY to do business with a corporation (or other company, person or association) and to which the business owes money, and (2) those who have not contracted with the business, but have a claim because they have been INVOLUNTARILY injured by it.
Because of ability of parties to freely negotiate contracts, the parties in category (1) do not need a state grant of limited liaibility; rather, the chief effect of limited liability is to allow corporations to make profits for shareholders, lenders and managers, while passing risks on to those who made NO choice to be injured.
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