The Construction of Property : Norms, Institutions, Challenges 9781107274112, 9781107035386

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THE CONSTRUCTION OF PROPERTY

The Construction of Property identifies the structural and institutional foundations of property, and explains how these features can accommodate various normative agendas. Offering rich and cutting-edge analysis, the book studies the spectrum of property regimes including private, common, and public property as well as innovative forms of property hybrids such as US-style residential community associations, the British Private Finance Initiative, the Israeli Renewing Kibbutz, community land trusts, and grassroots phenomena of property ordering in publiclyowned open spaces. It also investigates the protagonists of property beyond the individual and the state, identifying the key role that community organizations and business corporations play for both the private and public aspects of property. The book then addresses property’s greatest challenge: the move from a largely domestic legal construct into one that accommodates the increasing social and economic forces of globalization. a m n o n l e h a v i is the Atara Kaufman Professor of Real Estate at the Radzyner School of Law, and Academic Director of the Gazit-Globe Real Estate Institute, Interdisciplinary Center (IDC) Herzliya, Israel.

THE CONSTRUCTION OF PROPERTY: NORMS, INSTITUTIONS, CHALLENGES AMNON LEHAVI

cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Mexico City Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9781107035386 © Amnon Lehavi 2013 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2013 Printed and bound in the United Kingdom by the MPG Books Group A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data Lehavi, Amnon. The construction of property : norms, institutions, challenges / Amnon Lehavi. pages cm Includes bibliographical references and index. ISBN 978-1-107-03538-6 1. Property I. Title. K720.L45 2013 346.04–dc23 2012047176 ISBN 978-1-107-03538-6 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

CONTENTS

Acknowledgments Introduction

part i

page vi 1

Structural and institutional foundations

1

Property as a legal construct

2

Rules and standards: an institutional analysis of property

part ii 3

11

13

The spectrum of property regimes

95

Private-common-public: the promise of property hybrids 97

part iii

Protagonists of property: beyond individual and state 151

4

How property can create, maintain, or destroy community 153

5

The corporation as a property microcosm

6

Eminent domain, incorporated

part iv

179

214

The global challenges of property

7

Can land law go global?

8

BITs and pieces of property Bibliography Index 339

243

317

v

274

241

59

ACKNOWLEDGMENTS

This book has grown out of many years of research. My work has been constantly reinforced by colleagues, friends, and students who shared my enthusiasm with investigating and theorizing real-life phenomena of property forms and tying them together to unravel the rich yet often evasive concept of property. Bob Ellickson and Carol Rose have been a particular source of inspiration for combining originality and methodology in studying this incredible field of law. Some of the chapters have developed out of journal articles, all of which have been extensively rewritten and edited in preparing the book. These articles include: ‘The Dynamic Law of Property: Theorizing the Role of Legal Standards’ (2010) 42 Rutgers Law Journal 81; ‘Mixing Property’ (2008) 38 Seton Hall Law Review 137; ‘How Property Can Create, Maintain, or Destroy Community’ (2009) 10 Theoretical Inquiries in Law 43; ‘Eminent Domain, Inc.’ (2007) 107 Columbia Law Review 1704 (with Amir Licht); ‘The Global Law of the Land’ (2010) 81 University of Colorado Law Review 425; and ‘BITs and Pieces of Property’ (2011) 36 Yale Journal of International Law 115 (with Amir Licht). I am particularly grateful to Amir for his long-time collaboration and friendship. While I cannot thank all of those who have been instrumental in providing important comments and insights, I would like to express my gratitude to Greg Alexander, Benito Arrun˜ ada, Lisa Austin, Aharon Barak, Eric Claeys, Daniel Cole, Hanoch Dagan, Nestor Davidson, Avihay Dorfman, Lee Fennell, Nicole Garnett, Joshua Getzler, Alon Harel, Assaf Jacob, Larissa Katz, Daniel Kelly, Alon Klement, Gerald Korngold, David Lametti, Daphna Lewinsohn-Zamir, Stephen Munzer, James Penner, Katharina Pistor, Uriel Reichman, Susan Rose-Ackerman, Maribel Sáez-Lacave, Chris Serkin, Yoram Shachar, Perry Shapiro, Henry Smith, Peter Turner, Joan Youngman, vi

acknowledgments

vii

and Giorgio Zanarone. I am also thankful to my academic home, the Radzyner School of Law at the Interdisciplinary Center (IDC) Herzliya. Finally, I owe the greatest debt to my family. My parents, Aya and Rami Lehavi, my brother Avner and sister Shlomit, Shifra and Raymond Aronson, and above all, to my wife Sharon, with whom I share everything, and our wonderful daughter Lia, for their enormous love and support.

u Introduction

In 1913, American legal scholar Wesley Newcomb Hohfeld published an article entitled “Some Fundamental Legal Conceptions as Applied in Judicial Reasoning.”1 The purpose of that work, as well as of its 1917 sequel, bearing a similar name, “Fundamental Legal Conceptions as Applied in Judicial Reasoning,”2 was quite straightforward. Hohfeld sought to dispel the tendency to blend non-legal and legal conceptions. He viewed property as a striking example, a term that both lawyers and laymen use with “no definite or stable connotation,” employing it at times to indicate the physical object to which various legal rights relate, and at other times to denote the legal interest itself.3 Hohfeld thus endeavored to identify the distinct traits of legal conceptions in general, and property in particular. Hohfeld focused attention on the long-standing division between in rem and in personam relations, a taxonomy that had traditionally separated property rights from obligatory, typically contractual ones. He viewed the common conception of in rem rights as rights “against a thing,” which follows up on the literal meaning of the Latin phrase, as “intimated, crude, and fallacious,” one that only serves as a “stumblingblock to clear thinking and exact expression.”4 To illustrate this fallacy, Hohfeld defined different attributes of in personam legal interests by delineating dyads of “jural opposites” and “jural correlatives” that govern legal relations between persons. He then argued that the same sets of legal relations apply to in rem rights – save for the large, indefinite number of persons who may be bound by these

1

2

3 4

Wesley Newcomb Hohfeld, “Some Fundamental Legal Conceptions as Applied in Judicial Reasoning” (1913) 23 Yale Law Journal 16. Wesley Newcomb Hohfeld, “Fundamental Legal Conceptions as Applied in Judicial Reasoning” (1917) 26 Yale Law Journal 710. Hohfeld, “Some Fundamental Legal Conceptions,” 20–5. Hohfeld, “Fundamental Legal Conceptions,” 720–1.

1

2

introduction

interpersonal legal relations.5 The traditional dichotomy between property and personal obligations was thus largely artificial. The rest is history. Over the past one hundred years, the concept of property has been shaken and rattled by numerous theoretical schools, each trying to claim superiority in extracting a new core meaning for property or in showing rather that property is in fact an empty concept. This influx of academic debate has also been due to the enormous interest in property by various academic disciplines besides law, including philosophy, economics, sociology, political theory, and psychology, each applying its own methodological and theoretical tools to explore this issue. From legal realism to social theory and critical legal studies, economic analysis of law, new institutional economics, experimental psychology, contemporary moral theories, and up to the current school of new essentialism in legal theory, numerous attempts have been made to disintegrate or reintegrate the idea of property. The result has often been one of an increasing conceptual gap not only among different academic disciplines, but also within legal theory. This disparity points to the ever-present tension between property’s broad appeal and the difficulty to devise a conceptual common ground, one that would serve as a basis for a multidisciplinary discourse about the underlying values and ideals that the institution of property should promote. My theory of property seeks to create such a common ground. It is built on two foundational principles that are intertwined throughout the book and that explain together how the legal institution of property is constructed and developed over time. In so doing, the analysis unravels the process through which moral ideals, social values, and other extralegal insights about the proper allocation of society’s scarce resources could be transformed into a set of legal property interests that are promulgated and then enforced by society’s decision-making institutions. The first foundational principle, presented in Part I (Chapters 1–2), asserts that the legal construct of property possesses certain structural and institutional traits, but that no such inherent essence exists with respect to the substantive content of property norms. This principle thus rejects those versions of the “bundle of rights” model by which property is an inherently empty legal concept, while also challenging essentialist theories according to which property must have an inherent 5

Ibid., 718–19.

introduction

3

substantive core – typically, the right to exclude – if it is to count as property at all. Under this principle, the structural and institutional features of property do not dictate a uniform body of substantive norms or a single set of underlying values. It is up to society’s institutions to decide whether they would seek to promote values and goals such as just distribution, equality, efficiency, or autonomy through the legal institution of property. Insights from other disciplines such as philosophy, social theory, or economics could play a central role in shaping such goals. But there are certain structural and institutional mechanisms that are essential in transforming such ideals from moral and social concepts into legal ones. Chapter 1 focuses on the three structural traits of property: the in rem nature of property legal interests, the practical constraints on opting out for private ordering in property relations, and the complex public/ private interface in property. Chapter 2 articulates the unique institutional features that typify the process of property norm-making in light of its structural features. It studies the relations among different topdown institutions, particularly the legislature and the court, in establishing property’s legal framework, while also giving attention to the role that bottom-up institutions such as professional organizations could play in designing property norms. It pays particular attention to the institutional features of employing “legal standards,” initially vague legislative provisions filled with content over time by courts or bottomup bodies. The second foundational principle, developed in Parts II–IV (Chapters 3–8), suggests that in order to have a clear understanding of the legal construct of property, we must move beyond the paradigms that have led much of the analysis in current theory, typically that of an asset such as land that is privately owned by a single proprietor and governed exclusively by the laws of a national system. While not entirely dismissing the value of what I dub “the Blackacre Paradigm” as a starting point for analyzing the concept of property, I argue that such a paradigm settles for a partial, and often distorted, viewpoint of the way legal property is constructed. Pursuant to this principle, Part II (Chapter 3) studies the spectrum of property regimes, including private, common, and public property, alongside innovative forms of property hybrids. Part III (Chapters 4–6) investigates the protagonists of property beyond the individual and the state, identifying the key role that intermediate bodies such as

4

introduction

community organizations and business corporations play for both the private and public aspects of property. Part IV (Chapters 7–8) addresses property’s greatest challenge ever: moving from a largely domestic legal construct into one that accommodates the increasing social and economic forces of globalization. I argue that the study of the spectrum of property regimes, protagonists of property, and challenges of globalization not only serves to explore new frontiers in property – it is also necessary for understanding the core features of property as a legal construct. These two foundational principles are closely interrelated throughout the book. To start with, the identification of property’s structural and institutional foundations creates a general framework for analyzing property regimes, protagonists, and cross-border challenges. For example, the argument that the structure of property does not mandate a certain substantive content is illustrated in Chapters 3 and 4, in which I show that both the US-style private residential community and the Israeli Renewing Kibbutz have a quite similar structure of property interests and institutional decision-making processes, although these derive from very different ideological backgrounds. The substantive norms shaped by each one of these structurally-similar organizations are thus quite different, reflecting their diverging agendas. The structural and institutional foundations of property also frame the analysis of the globalization of property, discussed in Chapters 7 and 8. The fact that property legal interests have certain structural traits, including an in rem feature, creates a special challenge for a world typified by imperfect globalization and fragmented decision-making powers, a challenge that is qualitatively different from that of moving toward supranational contractual frameworks that apply mostly to the contracting parties and allow greater freedom in private ordering. Moreover, the heterogeneity of property protagonists across different societies also impacts the way in which bottom-up or top-down institutions, such as arbitration tribunals deciding bilateral investment disputes, could resort to legal standards to order property relations across borders. At the same time, the study of property regimes, protagonists, and global challenges is instrumental in identifying the structural and institutional features of property. For example, Chapter 5 conceptualizes the business corporation as a “property microcosm.” I show that the publicly-traded business corporation regularly has a large number of shareholders, who may be divided further into certain classes, including

introduction

5

majority shareholders, non-controlling institutional investors, and dispersed minority shareholders. Beyond this, the set of legal interests regarding the corporation’s assets may also implicate creditors, suppliers, workers, and the shareholders’ personal creditors, who otherwise do not have contractual privity among them and must therefore be governed by in rem legal powers and priorities. I argue that property theory’s general disregard for the business corporation may result from the alleged incongruence of the business corporation with the Blackacre Paradigm. Ownership in the business corporation is separated from control, at least to some extent, and it does not seem to boil down to a single substantive core of a right to exclude. But this is exactly one of the chief insights offered in this book. The structure of property does not follow a single normative blueprint. The business corporation, as a key protagonist of property, demonstrates that the set of legal powers and priorities may take other forms, while preserving property’s general structure. This point is demonstrated further in Chapter 6, which shows how the corporation could be utilized as an institutional mechanism to resolve long-standing property problems that have been traditionally viewed as requiring either pure private action or full-scale public preemption. The two foundational principles presented above point also to the ways in which much of current theory is both over-inclusive and underinclusive in conceptualizing legal property. Thus, for example, the new essentialism school, studied in Chapter 1, seeks to extract the core meaning of property by a two-stage methodological move: (a) focusing on ownership as the fundamental property right, and (b) identifying substantive incidents which are the sine qua non of ownership, and thus of property in general. This essence has been identified as the right to exclude, or rather, as the right to exclusive decision-making about the uses of the asset. However, the legal institution of property goes well beyond ownership to include other types of rights such as the lease, mortgage, lien, or servitude, and some of these rights simply do not conform to the core substantive essence that has been attributed to ownership. The essence of the mortgage or the lien is not about the right to exclude or an exclusive power to determine the uses of the asset. It lies, rather, in serving as a security for a debt. The servitude secures or limits a certain use of the asset, but does not grant exclusivity in favor of its holder. Of course, this does not undermine the role of ownership as a key legal institution, one that often allows for the creation of a solid sense of order,

6

introduction

both formally and practically, in setting up legal powers and priorities with regard to resources. Yet once we understand that ownership is always entangled in a broader set of legal powers and priorities, we also realize that it may make sense to introduce different versions of ownership, while preserving the overall structure of property. It is clear enough that ownership in land or a patent is not equal to ownership of a share in a corporation, and that ownership of a controlling share is not equal to that of a minority share. This means that the attempt to extract the core meaning of property by looking only to ownership undermines the entire set of property interests, while advocating a single substantive core of a right to exclude casts too broad a net to catch the entire field of property norm-making. The problem of over- and under-inclusiveness also typifies other current property theories, including those that have embraced a highly contextual approach to property to ensure a closer congruence with underlying values, such as the school of “property as interpersonal relations” presented in Chapter 1. While the search for context in devising property powers and priorities is appealing and often can be justified, I argue in the book that it, too, is constrained by property’s structural and institutional features, which limit the extent to which underlying values or normative goals, important as these may be, could freely float within property doctrine. My theory of property seeks to recalibrate the levels of the analysis by trying to toe the fine line between abstract principles and context, richness in the scope of inquiry and a unified theoretical framework, and structural-institutional essence versus prospective normative content. In so doing, this theory features descriptive, analytical, and normative components. On the descriptive level, the book analyzes a broad variety of real-life property regimes and configurations within the sub-national, national and supranational contexts, from grassroots forms of group order in urban neighborhoods up to international conventions on intellectual property. On the analytical level, the book extracts the structural and institutional core of property and their interplay with substantive norms, conceptualizes the variety of property regimes and protagonists of property, and identifies the key challenges involved with the cross-border legal design of property, building on methodologies from various disciplines. On the normative level, the book advocates certain substantive blueprints that could promote social goals such as efficiency or fairness better

introduction

7

than is the case under current doctrine. This is done, for example, in Chapter 3, in which I suggest validating informal patterns of local groups’ investment in publicly-owned open spaces as a new form of public-common property. Another blueprint is promoted in Chapter 6, which calls to design a special-purpose development corporation that would offer stockownership to condemnees of land taken for development as an alternative to “fair market value” compensation, promoting both efficiency and just distribution. However, pursuant to the two foundational principles of my theory of property, I do not suggest that such normative strategies define the core of property or otherwise serve as a single criterion for constructing the institution of property. These tentative blueprints merely serve as illustrations of how the structural and institutional features of property can accommodate various normative agendas, and exemplify the process by which such goals could be attained. The book runs as follows. Part I, ‘Structural and institutional foundations,’ starts with an inquiry in Chapter 1 into the extensive preoccupation of various academic disciplines with the concept of property, focusing on moral philosophy, social theory, and economics, and the substantial influence that these fields have had on contemporary legal theory, particularly the “law and society” and “law and economics” schools. Seeking to dispel the confusion that often results from this multidisciplinary study, Chapter 1 explicates on the ways in which property is transformed from a moral and social concept into a legal construct. It does so by focusing on the right/value distinction in jurisprudence as a basis for understanding the different focal points of various disciplines, and then by introducing the structural traits of property as a legal construct: the third party (in rem) applicability, constraints on opting out, and the unique private/public interface in property. It then moves to show why property structure does not impose content. In articulating how property could accommodate various normative choices, the chapter explains why property cannot be reduced only to the right of ownership or to private property, and why clarity and predictability need not be associated only with a substantive blueprint such as the right to exclude. At the same time, the chapter clarifies why contextualism in property has its limits, and suggests that an effective typology that allows for differentiation while maintaining property’s structure could be based on the types of assets that are the objects of property rights.

8

introduction

Chapter 2 completes the picture by identifying the institutional features of property, studying the unique allocation of power among society’s top-down institutions, i.e. constitution-makers, legislators, administrative agencies, and courts in designing property norms, while also considering the role played by bottom-up institutions such as professional organizations or private communities. The chapter focuses on the institutional implications of choosing among clear-cut rules and initially vague legal standards in designing statutory norms, viewing the latter as an institutional mechanism that delegates authority to courts or bottom-up institutions in creating thicker content in property norms. Studying legal standards covering both the private and public aspects of property, such as “custom,” “reasonableness,” “abuse of rights,” or “public use,” the chapter establishes how such dynamism could be made to fit the structure of property. Part II of the book, entitled ‘The spectrum of property regimes,’ studies in Chapter 3 recent developments in private, common, and public property, and observes the real-life proliferation of property hybrids. The latter include forms of Public-Private Partnerships such as the British Private Finance Initiative; private-common mixtures from residential community associations in the United States to the Israeli Renewing Kibbutz; public-common forms of local group investment in publicly-owned open spaces, and tri-layered regimes of community land trusts for affordable housing. Notwithstanding the variations among these property configurations, the chapter identifies a consolidated theoretical basis for mixed property regimes, and articulates the legal design and normative advantages that such hybrids may have over conventional “pure” property regimes. Part III, ‘Protagonists of property: beyond individual and state,’ investigates the key position that intermediate bodies such as communities or business corporations hold in property. Chapter 4 focuses on residential communities, studying the intricate relations between community and property. Offering a taxonomy of “intentional,” “planned,” and “spontaneous” communities, the chapter identifies the details of these different types of communities and assesses the role that property law could play for each one of them, providing either “tailwind,” “zero-wind,” or “headwind” for these property protagonists. Chapter 5 conceptualizes the business corporation as a “property microcosm” and identifies its significance in illuminating the structural and institutional traits of property. In their 1932 The Modern

introduction

9

Corporation & Private Property,6 Adolf Berle and Gradiner Means called for a reconsideration of the fundamentals of property law in view of the ever-increasing dominance of productive property and collective capitalism in firms. Eight decades later, I study the tension between property theory’s general disregard for the corporation and corporate theory’s gradual move from a “nexus of contracts” model to a proprietary view of the firm. The chapter argues that the separation of ownership from control, vertical hierarchy alongside horizontal arrangements, and the tradeoff between majority power and fiduciary duties in the firm can perfectly fit property jurisprudence, once we make the shift toward a structural and institutional theory of property. Chapter 6, which closes Part III, studies how the business corporation, as a multi-stakeholder legal entity, could play a key role in other property settings that have hitherto been considered to implicate either individual action or full public control. It revisits the long-standing dilemma of devising the optimal strategy for assembling lands from numerous private owners for for-profit development projects, in view of the overfragmentation of property rights on the one hand, and the fear of undercompensation and abuse of government power on the other. The chapter calls for a harnessing of the business corporation’s property features and financial mechanisms to establish a special-purpose development corporation. This corporation would acquire unified ownership in the land, granting condemnees a choice between receiving pre-project “fair market value” and pro rata shares in the corporation that could reflect the land’s post-project value. Part IV, ‘The global challenges of property,’ addresses property’s challenge in transitioning from a domestic legal institution to one that accommodates globalization. Chapter 7 focuses on land as a key source of tension between globalism and localism in property. Land law is traditionally seen as a national construct embedded in principles of territorial control and socio-political structure. But the world is currently witnessing an unprecedented volume of cross-border activities in real estate development and infrastructure projects. This chapter studies current cross-border institutions and legal instruments, such as the property clause in the European Convention for the Protection of Human Rights and Fundamental Freedoms, or investment protection provisions in supranational legal instruments. But it also points to the 6

Adolf A. Berle and Gardiner C. Means, The Modern Corporation & Private Property, revised edn. (New Jersey: Transaction Publishing, 1991 [1932]).

10

introduction

limits of such mechanisms in transforming land into a global commodity, due to problems of institutional incompleteness, normative overfragmentation, and the complex mixture of law, politics, and culture in constructing land law. Chapter 8 broadens the scope of inquiry to the entire spectrum of resources, focusing on what is probably the most prominent institutional mechanism currently employed to deal with cross-border property rights: the nearly 3,000 bilateral investment treaties across the globe. Analyzing the extent to which these mechanisms aid in facilitating crossborder economic activity, the chapter cautions, however, against an over-simplistic approach to bridging over non-parities among national property systems. The chapter points to heterogeneity as a central notion that complicates the switching of property from a locally-based institution to a universal concept. It identifies five different types of heterogeneity: (1) cultural heterogeneity among societies in their basic view of property; (2) actor heterogeneity; (3) asset heterogeneity; (4) vertical heterogeneity, i.e. fragmentation of property norms at supranational visà-vis domestic levels; and (5) horizontal heterogeneity of overlapping property norms. The notion of heterogeneity underscores the current tension between property’s structural and institutional features and the substantive content of property norms. The fact that different societies have distinctive normative agendas, historical trajectories, and cultural attributes leads to a starting point in which the contents of domestic property doctrines diverge highly from one another. National systems are not likely to simply converge over time through a bottom-up process of local reforms. The prospects of globalization thus depend not only on a general willingness on the part of countries to subject some of their sovereignty in favor of supranational norms or universally agreed-upon values. For the project of global property ordering to succeed, the process of change has to look to the structural and institutional essence of property. It must realize the ways in which the in rem applicability, constraints on opting out, and the public-private interface play a key role in identifying the types of resources and property regimes that may be more appropriate for broad applicability across borders. It must also facilitate a much more elaborate institutional coordination among bottom-up and top-down bodies on the national and supranational levels. This is a formidable challenge. Property law has its work cut out for it in the century to come.

PART I Structural and institutional foundations

1 Property as a legal construct

I.

Property at the intersection of disciplines

Very few legal concepts stir strong emotions among the general public. The same probably holds true for their impact on non-legal academic discourse. Lawyers would likely continue to quarrel passionately about concepts such as “consideration,” “vicarious liability,” or “substantive due process” in thousands of court cases and academic papers. Philosophers, psychologists, sociologists, and even political scientists or economists would be bored, however, by these concepts and their details, unless they could somehow be convinced why it matters to their fields of study. Property is different. Contrary to the British tendency for understatement, William Blackstone famously declared in his Commentaries on the Laws of England that: “There is nothing which so generally strikes the imagination, and engages the affections of mankind, as the right of property.”1 He did so in 1766, well before the 1789 French Revolution and its Declaration of the Rights of Man and of the Citizen, the American Revolution and the US Federal Constitution’s Fifth Amendment that enshrined the protection of property, socialism and its negation of private property (“property is theft” in the words of Pierre-Joseph Proudhon),2 modern capitalism, the Great Depression, the end of colonialism, globalization, and the recent world economic crisis. Property is indeed a powerful concept, employed both in public discourse and in multidisciplinary academic research. Philosophers have always talked about property. From Plato and Aristotle to Hobbes, Locke, Kant, Bentham, Hegel, and Mill, to Berlin and Rawls, philosophical discourse has offered a detailed account of 1

2

William Blackstone, Commentaries on the Laws of England, facsimile edn., 4 vols. (University of Chicago Press, 1979 [1765–9]), vol. II, p. 2. Pierre-Joseph Proudhon, What Is Property? An Inquiry into the Principle of Right and of Government (Donald R. Kelly and Bonnie G. Smith (eds.)) (Cambridge Texts in the History of Political Thought) (Cambridge University Press, 1994 [1840]).

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p r o p e r t y a s a l e g a l c o n s t r uc t

potential moral justifications for property and of property’s pivotal role in the shift from a state of nature to a legitimate civil condition. Social theorists, from Smith and Weber to Marx and Engels, also recognized from early on the essential role that the modes of control over scarce resources play in the structuring of society, power relations, markets, and production, even if their points of departure and respective conclusions shared probably nothing else. Modern sociology has also engaged extensively in the property discourse, studying the tension between property and social equality or mobility, and the way in which social and cultural orientations are intertwined with the ordering of property relations.3 Political science, the origins of which are intermingled with philosophical and social thought on this topic, has more recently taken a somewhat different path, by analyzing, as a self-standing point of inquiry, the practical dynamics among governmental entities and related stakeholders. This line of research resorts to methodologies such as game theory or empirical evidence to explain the real-life political process of evolution and change in the design of property regimes.4 Psychology has offered its own account of the nature and meaning of property, relying on biological perspectives connecting property to the individual’s innate genetic structure, as well as on social and cultural explanations. Based on these methodologies, psychological discourse has defined the concept of “psychological ownership,” which is often depicted as explicitly different from “legal ownership.”5 Economics has contributed its fair share to property literature. Following up on the works of Adam Smith and Jeremy Bentham, which grounded the need to secure private property rights in the creation of incentives for productive activity, twentieth-century economic theory has looked at how property could foster markets, control externalities, and more generally bring about the optimal use of the world’s scarce resources.6

3

4

5

6

See, e.g., Bruce G. Carruthers and Laura Ariovich, “The Sociology of Property Rights” (2005) 30 Annual Review of Sociology 23. See, e.g., Gary Libecap, Contracting for Property Rights (Political Economy of Institutions and Decisions) (Cambridge University Press, 1989); Itai Sened, The Political Institution of Private Property: Theories of Institutional Design (Cambridge University Press, 1997). Jon L. Pierce et al., “The State of Ownership: Integrating and Extending a Century of Research” (2003) 7 Review of General Psychology 84–107 at 86–91. Two seminal works along these lines are Ronald H. Coase, “The Problem of Social Cost” (1960) 3 Journal of Law and Economics 1, and Harold Demsetz, “Toward a Theory of Property Rights” (1967) 57 American Economic Review 347.

i. property at the intersection of disciplines

15

Contemporary economists have looked not only to craft general design principles, but also to resolve particular conflicts over property rights, often detaching themselves from current legal doctrine.7 Some have focused on how economic relationships, even if grounded in formal contracts, can result in quarrels over the “residual claim” to resources. They have thus identified “economic property rights” – often distinctive from “legal property rights” – as an essential feature of resource allocation and of the ability of stakeholders to extract value from different attributes of assets.8 More recently, New Institutional Economics (NIE) has looked at the ways in which institutions may facilitate, or rather hinder, an efficient use of resources. No longer simply assuming competitive markets and perfect enforcement of property rights, NIE has played a dominant role in both economic theory and actual reform projects undertaken mostly in transitional and developing economies. An enthusiastic supporter of formalizing property rights in such economies so that assets could serve as a stable source of capital and credit,9 NIE has emphasized the ways in which societal institutions should be transformed to properly absorb and enforce property rights. This should be done, for example, by securing judicial independence, fighting corruption, and correcting for other political failures.10 Contemporary legal theory has been more than receptive to crossinfluences with these and other fields of study. It would be simplistic to describe law as ever purporting to truly isolate itself from other fields of knowledge. Even in the high days of positivism, jurists such as John Austin and Hans Kelsen have relied heavily on the foundations of western philosophy. But there can be little doubt that ever since “the revolt against formalism,” advocated as of the early twentieth century by the legal realists and their followers,11 legal theory has reached out more 7 8

9

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11

Coase, “Social Cost,” 2. See, e.g., Yoram Barzel, Economic Analysis of Property Rights (Political Economy of Institutions and Decisions), 2nd edn. (Cambridge University Press, 1997), pp. 90–6; Oliver Hart and John Moore, “Property Rights and the Nature of the Firm” (1990) 48 Journal of Political Economy 1119. See Hernando De Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000), pp. 32–5 (pointing to the inefficiency of “dead capital” in developing countries). See Douglas C. North, Institutions, Institutional Change and Economic Performance (Political Economy of Institutions and Decisions) (Cambridge University Press, 1990); Oliver E. Williamson, The Economic Institutions of Capitalism (New York: The Free Press, 1985). See Morton G. White, Social Thought in America: The Revolt against Formalism, revised edn. (Boston: Beacon Press, 1957).

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extensively to other fields of study, both methodologically and ideologically. Morris Cohen’s depiction of private property as the exercising of sovereignty over other persons with the endorsement of the state can be seen as one such milestone, aimed at breaking the conventional modes of property jurisprudence, undermining the traditional private/public distinction, and exposing the underlying social and political features of this purportedly-neutral legal institution.12 From critical legal theory to hardcore law and economics, numerous legal issues have been rethought since then and relocated at the crossroads of disciplines. While the various “law and” schools have become prominent across the board, property seems to have been an ideal candidate for such interdisciplinary pursuits. For example, the two works considered by many as laying the foundations for law and economics, i.e. those of Ronald Coase13 and of Guido Calabresi and A. Douglas Melamed,14 focused on the optimal allocation of property rights and duties. The interdisciplinary study of property theory has expanded elsewhere. Mentioning just two examples, Margaret Radin’s influential work, which relies on Hegel’s moral philosophy to construct a “property and personhood” theory,15 has been further developed in substantial work on the law and psychology of property.16 The increasingly prominent theory of the social-obligation norm in property has drawn extensively on a range of economic, sociological, and psychological insights that explain how the individual is embedded in various human interrelationships and commitments.17 So far, everything seems perfect. Since everybody is interested in property, and because interdisciplinary research is in vogue, various academic disciplines have joined forces to create a richer methodological and theoretical framework for discussing the institution of property. Even if thinkers have different ideological and normative inclinations, they have nevertheless been able to establish a unified conceptual basis. 12 13 14

15

16

17

Morris R. Cohen, “Property and Sovereignty” (1927) 13 Cornell Law Quarterly 8. Coase, “Social Cost.” Guido Calabresi and A. Douglas Melamed, “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral” (1972) 85 Harvard Law Review 1089. Margaret Jane Radin, Reinterpreting Property (University of Chicago Press, 1993), pp. 36–59. See, e.g., Frederick Schauer and Barbara A. Spellman, “Artists’ Moral Rights and the Psychology of Ownership” (2009) 83 Tulane Law Review 661. Gregory S. Alexander, “The Social-Obligation Norm in American Property Law” (2009) 94 Cornell Law Review 745.

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Matters are not that simple, however. The fact that property is – but not only – a legal concept is also a source of growing confusion and, at times, of a conceptual and methodological disconnect both among and within disciplines. This is also the case within current property theory. While there is much merit in interdisciplinary research, it seems that the “law and” study of property has not brought different disciplines closer together, but has probably worked the other way around. Different legal theory schools have grown apart not only from one another, but also from actual legal doctrine. Property law seems to persistently follow a certain course, often to the growing dismay of these different academic schools. While current doctrine should definitely not be sanctified as such, I argue that it is nevertheless instrumental in illuminating the core structural and institutional features of the legal concept of property. The first two chapters of the book are devoted to identifying property’s structural and institutional foundations. In so doing, I set out to explore the tension that currently exists both among and within academic disciplines about the concept of property, and I suggest that much of it could be mitigated once we recognize the transition that property makes from a moral or social construct into a legal one. After presenting several prominent philosophical, social, and economic viewpoints on property, I demonstrate the ways in which the process of translating moral convictions or social ideals into a legal construct is governed by these structural and institutional features. Chapter 1 focuses on three structural traits of property: the in rem nature of property legal interests, the practical constraints on opting out for private ordering in property relations, and the complex public/ private interface in property. Chapter 2 articulates the unique institutional features that typify the process of property norm-making in light of its structural features. It studies the relations among different topdown institutions, particularly the legislature and the court, in establishing property’s legal framework, while also giving attention to the role that bottom-up institutions such as professional organizations could play in designing property norms. A key conclusion of both chapters is that the structural and institutional features of property do not dictate a uniform body of substantive norms or a single set of underlying values. It is up to society’s institutions to decide whether they would seek to promote values and goals such as just distribution, equality, efficiency, or autonomy through the legal institution of property. The insights from other disciplines such as philosophy, social theory, or economics could play a central role in

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shaping such goals. But there are certain structural and institutional mechanisms that are essential in transforming such ideals from moral and social concepts into legal ones. This foundational principle will guide me through the remainder of the book, as I set out to explore its cross-influences with the spectrum of property regimes in Part II, the protagonists of property beyond individual and state in Part III, and the globalization of property in Part IV.

II.

The philosophy of property

It is impossible to encompass the vast philosophical discourse on property within the scope of a few pages. Nor is it feasible to neatly delineate the different schools of philosophical thought into distinctive rubrics of property theory. At the same time, it would be fair to state that the prominent works of western philosophy, which articulate the moral basis of the allocation and validation of claims to the use and enjoyment of resources, tend to focus on certain aspects – ones that often diverge from those prevailing in legal discourse. This is not to say that one discipline is more sophisticated or subtle than the other, but only that the locus of inquiry is often different. Realizing these differences is essential to avoid making simplistic suggestions that the moral philosophy of property is designed to be a-legal, and vice versa, thereby further disconnecting these realms of analysis. It rather identifies how these spheres may accommodate one another.

A.

Morality of the civil condition

A focal point of the philosophical discourse deals with the morality of the civil condition (status civilis),18 by inquiring how morally justifiable claims to possess and use resources maintain their legitimacy, or become fully legitimate, in a world where the state takes over the role of public ordering and employs its coercive power for this purpose. Roughly speaking, moral theories that identify an individual’s right to exclusively possess and use a certain resource in a pre-existing state of events – such as John Locke’s labor theory19 or Robert Nozick’s theory of historical 18

19

Immanuel Kant, The Metaphysics of Morals (Cambridge Texts in the History of Philosophy), Mary Gregor (ed. & trans.) (Cambridge University Press, 1996 [1797]), p. 89. John Locke, Second Treatise of Government, C.B. Macpherson (ed.) (Indianapolis: Hackett Publishing Co., 1980 [1690]).

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acquisition20 – would usually require the state to enshrine and enforce such a prefixed moral basis for acquiring property rights. Following up on H.L.A. Hart’s distinction between “special rights” and “general rights,”21 Jeremy Waldron depicts these kinds of theories as promoting a special right claim: a person is viewed as possessing a certain moral justification for appropriating resources by virtue of a certain act or concrete expression of volition she has undertaken.22 While such rights may become practically more limited in the civil condition, their underlying moral character is independent of the collective act of decision-making by the state’s institutions. One could say that the public realm follows the private one. The unifying moral principle stems from a claim that a certain person can make toward other persons. The practical need to place the power of reciprocal coercion in the hands of the state in order to avoid chaos does not undermine the otherwise valid moral basis of the right to private property. Other kinds of moral theories, which advocate principles by which persons have a general right to enjoy some share of the world’s scarce resources to allow for their subsistence, development of personality, preservation of human dignity, and so forth, typically identify the civil condition as the normative setting in which the moral justification for property is created. The affirmative right to have access to some assets in the civil condition thus depends on the existence of the state, which embodies the only authentic “united general will” legitimating decisionmaking on the allocation of property. Under these kinds of theories, the state of nature is not only a practical havoc, but also a moral one. John Rawls’ A Theory of Justice is an example of such a view. His two substantive moral principles of justice in the allocation of scarce resources, to which all persons would have conceded in the original state behind the “veil of ignorance,” condition the morality of property on the existence of a notional consensus and a civil state.23 Otherwise, omnilateral authority and the promotion of 20 21

22

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Robert Nozick, Anarchy, State, and Utopia (New Jersey: Basic Books, 1977), pp. 151–68. H. L. A. Hart, “Are There any Natural Rights?” (1955) 64 The Philosophical Review 175–91 at 183–8. Jeremy Waldron, The Right to Private Property (Oxford: Clarendon Press, 1989), pp. 106–15. John Rawls, A Theory of Justice, revised edn. (Cambridge, Mass.: Belknap Press, 1999), pp. 10–15. The two principles are first, “equality in the assignment of basic rights and duties” and second, “social and economic inequalities, for example inequalities of wealth and authority, are just only if they result in compensating benefits for everyone, and in particular for the least advantaged members of society.”

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deontological values, such as equality or self-development of the person, or consequentialist ideals, would have no genuine moral basis. The state thus plays a constitutive role in deciding how to allocate and enforce rights and duties in resources in order to obtain such collective goals or values. Under these theories, therefore, the private realm follows the public one. Even the private aspects of property ordering would be viewed as some form of “public law in disguise.”24 The unification of the public and the private in identifying the underlying moral basis of property within each of these groups of theories should not be too surprising. Many philosophical theories aim at universal moral validity, and at the same time are generally not interested in the details of different legal doctrines applying this overarching moral basis. Such moral theories could live comfortably with the fact that the particular rules regulating the law of governmental taking of property would not be identical with the set of rules governing interpersonal cases of adverse possession. They certainly do not call to abolish all types of line-drawing between public and private. As mostly liberal theories, they are rather committed to preventing a state of affairs in which the individual loses her identity and ability to engage in private conduct, one that is not governed by the principles of public reason. But the underlying basis of collective decision-making regarding the allocation of property rights and duties should be morally coherent. In this sense, these theories, each one according to its own credo, share also a deterministic viewpoint about the content of property norms that will be set out and enforced in the civil condition. The general principles of rulemaking are inherently dictated by the underlying moral basis. But not all philosophical theories are oblivious to the actual dynamics and processes within the state institutions that engage in the design of property legal norms, or to the structural features that typify the legal institution of property. I touch here briefly on two such theories: Rawls’ work on Political Liberalism25 and Immanuel Kant’s discourse of the “private right” and “public right” in The Metaphysics of Morals.26 Both

24

25

26

Arthur Ripstein, Force and Freedom: Kant’s Legal and Political Philosophy (Cambridge, Mass.: Harvard University Press, 2009), pp. 86–7 (criticizing this approach to property rights within political philosophy). John Rawls, Political Liberalism, revised edn. (New York: Columbia University Press, 1996). Kant, Metaphysics of Morals.

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philosophical accounts entail features that seem more closely aligned with property jurisprudence.

B.

Rawls on property and public reason

In examining Rawls’ view of property, it is significant to observe the shift in his theory of justice from the two substantive moral principles of justice in A Theory of Justice to the political conception of justice in Political Liberalism. Two related political-procedural terms used by Rawls, “public reason” and “reasonable pluralism,” help to explain how his Political Liberalism offers an account of property that addresses issues which are also of particular concern in jurisprudence, and specifically in legal property theory. Rawls portrays public reason as the common reason of the collective body when it exercises its political and rulemaking powers. Public reason is framed to apply solely to society’s basic institutions and consists of premises and modes of deliberation that are widely accepted, or are at least available, to all citizens. Rawls focuses on society’s decisions about “constitutional essentials.” These are comprised of the general structure of political process and government, and of basic individual rights and liberties, including “the right to hold and to have the exclusive use of personal property.” Public reason is thus the distinctive process and reasoning mode of public forums with regard to these constitutional essentials, as opposed to personal and other non-public deliberations.27 Rawls also accepts the fact of society’s reasonable pluralism about religious, moral, or philosophical doctrines. This viewpoint thus looks for the mechanism by which citizens are able to explain to one another how the “principles and policies they advocate and vote for can be supported by the political values of public reason,” so that all citizens may be expected to endorse such decisions as reasonable and rational even when some may disagree on specific substantive decisions.28 Whereas Rawls insists that certain basic rights and liberties must be maintained even under a political conception of justice, it seems that the thrust of the shift in his theory lies in the assertion that foundational decisions by the state’s institutions need not be based on a specific consensus or on predetermined “objective” viewpoints. The institution of property is thus the product of an ongoing process of decision-making by society’s formal institutions. At the same time, the 27

Rawls, Political Liberalism, pp. 298, 231–40.

28

Ibid., pp. 223–7.

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fact that these institutions create property does not mean that property is void of ideas about ethics, justice, morality, or other goals and values. It rather indicates that any deontological or consequentialist considerations that stand at the basis of the property regime pass through the prism of society’s decision-making institutions employing public reason, so that these considerations are not imposed on the legal order by preemptive moral dictates.

C.

Kant on property as a public right

Kant’s theory of property relies on a strong deontological basis, stemming from his concept of the categorical imperative, by which a person as agent must always be an end in itself, one that is endowed with the inalienable capability to set purposes as the basis for his actions. Because material resources are essential means to attain the goals of the purposive agent, property rights must be structured in such manner as to allow persons the equal freedom to set purposes and to use external objects to pursue their goals.29 Kant makes a central distinction between a “private right” and a “public right.”30 The moral basis of the right to carve out certain resources for exclusive possession and use in order to achieve one’s purposes, provided this is consistent with the freedom of others, exists already in the state of nature. From a structural perspective, such a private right focuses not on the relation to the object, but on one’s entitlement to constrain others with respect to this resource. This right vis-à-vis others is established by taking possession of the object and by publicly signifying to others that the asset would serve as a means to achieve one’s purposes. While this right is not formally enforceable in the state of nature, its moral basis does not depend on positive law or on subjecting oneself to the purposes of others, be they individuals or a collective. The private right would become formally enforceable, however, and thus a public right only in the rightful condition, in which the state and its institutions take over in order to make rules and exercise coercion and enforcement powers. The existence of the state’s institutions is not merely instrumental – it plays a normative and constitutive role in ensuring that a true and legitimate united general will, an omnilateral

29 30

Ripstein, Force and Freedom, pp. 90–2. Kant, Metaphysics of Morals, pp. 89–120.

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authorization by citizens, would serve as the basis for creating laws and enforcing property rights. Kant’s theory teaches us three main lessons, which seem distinctive from other philosophical theories of property and that appear to consider more closely the types of concerns and considerations that regularly engage the challenges of property lawmaking. First, as a structural matter, property rights are typified by the ordering of relations among persons with respect to resources. The basic structure or concept of property does not change in the transfer from a private right to a public right in the civil condition. Second, from an institutional viewpoint, the role that state institutions play in the allocation and enforcement of property rights is not merely facilitative. Public legal ordering, promulgated and organized by society’s collective entities, is a necessary condition to grant a legitimate basis to the use of power and coercion, and the only way in which true omnilateral consent to the creation and enforcement of property rights could be given. Third, as a normative matter, the content of property rulemaking by the state’s institutions is not predetermined by fixed deontological principles. While the state must ensure the preservation of equal freedom to all, chiefly by its duty to support the poor,31 the details of substantive and procedural property norms can take on several forms. It is up to the public institutions to resolve the different issues pertaining both to private disputes and to the public law of property. The normative content of property is thus designed through the process of public legal reasoning. Summing up so far, the focus of philosophical discourse on the morality of the civil condition plays a central role in exposing the normative foundations of the legal institution of property. But at the same time, it tends to pay less attention to many considerations that typify the structural and institutional features of property lawmaking. Kant and Rawls, by focusing also on the institutional process of decision-making and on the complicated private-public structure of property rights, seem to be most attentive to these jurisprudential aspects, ones which will be explored in later parts of this chapter and in Chapter 2.

III. Social sciences and property: market, power, and state Similarly to the caveat issued in the previous section, the discussion of the social sciences’ concept of property does not aim to be exhaustive, or 31

See Ernest Weinrib, “Poverty and Property in Kant’s System of Rights” (2003) 78 Notre Dame Law Review 795; Ripstein, Force and Freedom, pp. 267–84.

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even to present all academic disciplines within the social sciences that have dealt directly with this theme. I focus attention here on two types of literature. First, socio-political theories that seek to link property to issues of politics, social structure, and power. Such theories question the extent to which the legal system and its decision-makers are qualitatively distinctive from other types of social institutions involved with controlling access to resources and use thereof. Second, mainstream economic theories, which set out to define and evaluate property rights by focusing on the stream of benefits or economic rents that can be extracted from the resource by stakeholders, especially by the person defined as “owner.” These two types of social sciences theories have also become extremely popular among many legal theorists: the “law and society” and “law and economics” schools, respectively. Accordingly, I analyze here various theories that rely heavily on social sciences literature or methodologies, notwithstanding the writer’s formal disciplinary affiliation.

A.

Property and society

1. Marx and Weber on property One cannot truly discuss the nexus of society and property without first juxtaposing the views of Karl Marx and Max Weber, often considered the founders of modern social thought. In The German Ideology, a critique of the Hegelian tradition, Marx and Frederick Engels engaged in their first comprehensive study of historical materialism. Defining the relation of state and law to property, they argued that “through the emancipation of private property from the community, the State has become a separate entity, beside and outside civil society; but it is nothing more than the form of organization which the bourgeois necessarily adopt both for internal and external purposes, for the mutual guarantee of their property and interest.”32 Property is thus an invention, a tool for social hierarchy in the guise of individual development. In contrast, Weber refused to explain law, including the institution of property, as simply determined by economic forces. This is not to say that Weber was oblivious to the fact that historical or economic considerations are inherently related to property – quite the contrary. But he 32

Karl Marx and Frederick Engels, The German Ideology, R. Pascal (ed.) (New York: International Publishers, 1947 [1846]), p. 59.

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viewed the influence as two-directional, and moreover, assessed the development of law as a rational process, one that leads to the development of legal institutions endowed with a rational quality and maintaining a relatively autonomous position in the development of law.33 According to Weber, this rationalism in law, which is typical of western culture, was due in large part to the growth of bureaucracy and of the legal profession. These agents have managed to create a systematic conception of rational law, the functioning of which could be rationally predicted. Predictability and security in the transformation of abstract legal concepts to specific rules by professional institutions played a key role in the development of the capitalist society. Property law is thus not only influenced by socio-economic factors, but also capable of impacting economic processes and allowing for progress in society. The binding together of the “appropriation of all physical means of production . . . as disposable property of autonomous private industrial enterprises,” the “freedom of the market,” “rational technology,” and “calculable law” is what makes capitalism possible.34 Weber’s concept of law and of the institution of property in particular thus contrasts the type of social-legal nexus suggested by Marx. Property is not only an effect, but also a cause. Moreover, it is the product of a rational process developed by professionals trained “in a learned and formally logical manner.”35

2. Property as politics The struggle between power and reason has continued to affect modern social thought about the law, and the institution of property in particular. A central role has been played in this context by the legal realists. As indicated above, Morris Cohen famously likened private property to a state-endorsed form of private sovereignty over others. Viewed this way, capitalism, with its rhetoric of free markets and free choice, is not entirely detached from feudalism, in which “ownership of the land and local political sovereignty were inseparable.”36 But unlike Marxism, Cohen believed that the “recognition of private property as a form of sovereignty is not itself an argument against it.” Nevertheless, it does require giving good justifications for property 33

34 35

36

Max Weber, General Economic History, Frank H. Knight (trans.) (Mineola, NY: Dover Publications, Inc., 2003 [1927]), p. 313. Ibid., pp. 275–8. M. D. A. Freeman, Lloyd’s Introduction to Jurisprudence, 8th edn. (London: Sweet & Maxwell, 2008), pp. 839–42. Cohen, “Property and Sovereignty,” 9.

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rights, ones that would often justify placing limits on the right of property. In so doing, Cohen and other legal realists analyzed the way in which property law is also, but not only, about power or politics, while insisting that it is also a forum of reason. Such reason poses “constraints on the choices of legal decisionmakers, and thus on the concomitant exercise of state power.”37 This careful approach may therefore counterbalance the viewpoint, which has become prevalent in much of the law and society scholarship, by which property is an inherently empty concept. Because this “disintegrative” approach has linked itself to the legal realist tradition and in particular to the work of Wesley Hohfeld,38 I briefly present it in this context, but as I argue, such a naked-politics approach is by no means a necessary conclusion of Hohfeld’s analysis.

3. The political version of the bundle of rights As I mentioned in the Introduction, Hohfeld had set out to challenge the traditional in rem/in personam dichotomy. Defining and analyzing the different attributes of in personam rights through delineation of “jural opposites” and “jural correlatives” that govern legal relationships among persons, Hohfeld argued that the same typology applies to in rem rights, save for the large, indefinite number of persons who are bound by these interpersonal legal relationships.39 But whereas Hohfeld’s enterprise was largely analytical-conceptual, one addressing the legal structure of property, the subsequently developed metaphor of the “bundle of rights” served mostly a normative purpose, especially by some legal realists and then by critical legal theorists, who sought to de-canonize the institution of property on an ideological basis. Under this account, property is not a natural right, but rather, a creature of the state and thus has no pre-fixed content. As Daniel Klein and John Robinson portray this stream of the literature, the bundle formulation tends to suggest that property depends on it being

37

38

39

Hanoch Dagan, “Legal Realism and the Taxonomy of Private Law,” in Charles Rickett and Ross Grantham (eds.), Structure and Justification in Private Law: Essays for Peter Birks (Portland, Oreg.: Hart Publishing, 2008), p. 150. See Wesley Newcomb Hohfeld, “Some Fundamental Legal Conceptions as Applied in Judicial Reasoning” (1913) 23 Yale Law Journal 16; Wesley Newcomb Hohfeld, “Fundamental Legal Conceptions as Applied in Judicial Reasoning” (1917) 26 Yale Law Journal 710. Ibid., 718–19.

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“created, defined, recognized, and validated by the state – the maker and keeper of the implied list.”40 But moreover, this normative view of the bundle of rights emphasized the use of coercive power in socio-political relations dressed in the legal concept of property rights.41 As such, property is not a neutral institution, as classical liberalism may have depicted it, but rather, the result of overt political decision-making. From a legal perspective, this means that the state could decide to re-comprise the list that makes up the bundle, or to reallocate rights and duties within it, without categorically infringing or violating any fixed right of private property.42 Thus, while criticizing the entrenchment of a political status quo that favors existing owners in the guise of inherent legal features, these writers suggest that politics could just the same redesign property to promote competing agendas, i.e. progressive or redistributive ones. To be fair, this political depiction of property has not been driven only by radical or critical agendas. As Gregory Alexander aptly shows, throughout American history, alongside the dominant depiction of “property as commodity,” by which property is intended to satisfy individual preferences mostly through market exchange while fostering social mobility, there existed also a competing view of this legal institution, one of “property as propriety.” According to this approach, as it was understood during the generation of the Founders, proper social order, one promoting the public good, was by and large a static one. Property was central to this plan of social stability, as it anchored the citizen to his rightful place in the proper social hierarchy, so that property was “more than wealth; it was authority, or at least the source of authority.”43 A political view of property has thus typified also reactionary or highly conservative agendas. This position also ties in with recent work in political science, which aims at exposing the realpolitik of developing property regimes, by focusing on political power-plays and methodologies such as game theory. Itai Sened argues that the origin of private property is not to be 40

41

42

43

Daniel B. Klein and John Robinson, “Property: A Bundle of Rights: Prologue to the Property Symposium” (2011) 8 Econ Journal Watch 193–204 at 195. See Gregory S. Alexander, Commodity & Propriety: Competing Visions of Property in American Legal Thought 1776–1970 (University of Chicago Press, 1997), pp. 350–1. See Barbara Fried, The Progressive Assault on Laissez Faire: Robert Hale and the First Law and Economics Movement (Cambridge, Mass.: Harvard University Press, 1998), pp. 71–98. Alexander, Commodity & Propriety, p. 4.

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found “in any set of moral principles or of ‘nature.’” Rather, property rights emerge as the practical outcomes of interactions between government officials who enjoy monopoly over the use of force and who control decision-making institutions, and “free agents” who challenge these institutional structures and seek to fit them to their own needs.44

4. “Disintegration of property” is not (only) about politics This immediate reduction of the bundle of rights metaphor, and consequently of property as a whole to pure politics, is highly problematic. In its original, analytical sense, the bundle of rights is about legal structure, although one could definitely dispute whether this structural framework correctly depicts the institution of property – a point which I take up in later sections of this chapter. But as a structure, the bundle of rights is not committed to a politics-only approach or to any specific prefixed ideology. Consider Thomas Grey’s “The Disintegration of Property,” viewed by many as the epitome of the bundle of rights approach to property.45 Although Grey connotes the decline of property as a central category of legal and political thought, he neither follows a nominalistic approach that undermines any systematic sense to the way in which such interpersonal legal relationships are structured, nor sees the “collapse of property” as pronouncing the ultimate victory of a socialist or redistributive ideology. Quite the contrary, the bundle of rights approach is “intrinsic to the development of a free-market economy into an industrial phase.” Modern economies seeking to better enjoy the advantages of division of labor and economies of scale do so through a series of free economic transactions, in which the state plays only its “classical liberal, neutral, facilitative role.” Actors subdivide and recombine the bundles of rights that make up their original ownership, creating by private agreements “the complex of elaborate and abstract economic institutions . . . particularly the financial institutions and the industrial corporations.” This systematic restructuring of legal relations can be seen therefore as “entirely internal to the capitalist market system.”46

44 45

46

Sened, Political Institution, p. 1. Thomas C. Grey, “The Disintegration of Property,” in J. Ronald Pennock and John W. Chapman (eds.), Property: Nomos XXII (New York University Press, 1980), p. 69. Ibid., pp. 74–6 (emphasis in original).

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According to Grey, while the traditional concept of private property as thing-ownership served as a moral justification for capitalism at the outset, capitalism as it is currently understood can be morally defended based on “its capacity to protect material well-being and its tendency to protect personal liberty.” Somewhat counter-intuitively, Marxism is undermined by the pragmatic dissolution of the category of all-ornothing ownership and the fragmentation of legal control over resources into particularized entitlements. The most striking example is the large publicly-held corporation. Beyond the separation of ownership and control and their division between shareholders and managers, other classes of stakeholders such as directors, bondholders, suppliers, government regulators, or labor unions all may have some of the legal powers that would have been concentrated in the single thing-owner under classical property theory.47 Thus, although considered and often quoted by many as the quintessential text advocating the bundle of rights approach, Grey’s analysis actually disputes much of the jurisprudential and normative assumptions that drove the political invocations of this framework. It depicts, rather, the disintegrated institution of property as largely a bottom-up phenomenon, evolving as actors in the free market seek to design new institutions that allow for a more effective control of assets to increase private gains. As such, although the classical concept of property disintegrates, the ordering of legal relations becomes even better structured, equipped to address the contemporary challenges of the industrial economy. And while the particular allocation of the bundle may change among different assets based on the most efficient mix in the particular case, the overall structure of primary economic institutions, be they financial institutions or industrial corporations, adheres to a broad scheme that is far from being arbitrary or purely political. In some respects, Grey’s work aligns itself, both conceptually and normatively, with the economic analysis of law, which I move next to consider. But for purposes of the current discussion, Grey’s analysis serves to demonstrate how the political version of the bundle of rights approach confuses values with structure. The bundle of rights theory does not derive from a predetermined single ideology. Its merits should be judged primarily by being capable of analyzing the structure of legal property. Structural theories of property should explain how 47

Ibid., pp. 78–80.

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the system of property rights work, and their normative evaluation should be based on their ability to accommodate a certain set of values or ideals that authorized decision-makers seek, or should seek, to promote. At the same time, property law is not simply an empty vessel for reflecting such extra-legal considerations, but a system that follows certain organizational structures. In Sections V–VI, in promoting my competing theory about how property entails certain structural traits, I emphasize that such structural features do not impose the underlying normative values or substantive content of property doctrines, but that these features should be adhered to in transforming moral or social ideals into sets of property legal interests. The purely political view of property simply misconceives the legal system in general and property law in particular.

B.

Property and economics

Moving to the massive investment of economic thought in property, one may be confronted at the outset with a puzzle. Though not oblivious to distributive concerns, the litmus test of mainstream economics is regularly one of identifying the optimal allocation of resources and use thereof to increase overall welfare – broadly defined to include not only standard economic gains but also other types of benefits, goals, and preferences. Property rights should facilitate the ability of stakeholders to exploit scarce resources in a way that would be most beneficial both individually and in the aggregate. But while it is natural that different minds would not think alike on how to achieve this goal and would thus suggest different recipes for optimal resource allocation, at first glance one may even identify a kind of self-contradiction in the work of prominent economists on this issue. Consider the work of Ronald Coase, probably the most prominent contemporary economist dealing with the concept of property. On the one hand, in “The Problem of Social Cost,” in discussing the standard example of a factory, the smoke from which “has harmful effects on those occupying neighboring properties,” Coase staunchly refuses to adopt conventional legal analysis as articulated in the doctrine of nuisance. Rejecting common legal principles of harm, causality, and liability, Coase argues that “we are dealing with a problem of a reciprocal nature. To avoid the harm to B would be to inflict harm to A. The real question that has to be decided is, should A be allowed to harm B or

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should B be allowed to harm A? The problem is to avoid a more serious harm.”48 This is indeed a disintegrative agenda, though one stemming not from radical or reactionary politics, but rather, from the pursuit of aggregate efficiency. It disintegrates the institution of property into a cluster of different attributes that should be allocated or reallocated, including through coercive transfers backed by court orders, so as to ensure the optimal use of resources. This cue has been picked up by law and economics scholars, many of which have advocated a systematic switch to a protection of property rights through “liability rules” – which may require a party to transfer an asset for an externally-determined payment – instead of by “property rules,” which require the consent of the right holder. Ian Ayres spins a sophisticated legal web of liability rules or “options” that could be universally employed for property disputes.49 Under such schemes, a court, which has limited knowledge about the parties’ private information but would be armed with sophisticated legal mechanisms to harness such information, could ensure that disputes over entitlements in assets are settled in a manner that is both efficient and just.50 Needless to say, this facet of the economic analysis of property destabilizes conventional property jurisprudence. Legal rights may be up for grabs, regardless of their initial allocation or issues of fault and causation, and external arbiters would be at general liberty to reallocate entitlements to ensure asset- or use-specific efficiency. But on the other hand, Coase is also considered to be one of the founders of NIE, together with fellow economists Douglas North and Oliver Williamson.51 In the context of property, NIE has stressed the need for institutional structuring that will strongly protect property rights against expropriation or other types of infringements. Building on the classical arguments by Adam Smith and Jeremy Bentham, by which secured property rights are essential to create incentives for investment and productivity, NIE has seen weak property rights as a major obstacle for economic growth. Only if property rights are clearly defined and protected can efficiency be attained by incentivizing productive activities and beneficial trade. 48 49

50

51

Coase, “Social Cost,” 2. Ian Ayres, Optional Law: The Structure of Legal Entitlements (University of Chicago Press, 2005), pp. 1–38. See Louis Kaplow and Steven Shavell, “Property Rules Versus Liability Rules: An Economic Analysis” (1996) 109 Harvard Law Review 713–90 at 724–8. North, Institutions; Williamson, Economic Institutions.

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In 2007, under the guidance of economist Hernando De Soto, the Property Rights Alliance started publishing the International Property Rights Index, which ranks countries based on a list of variables measuring the extent to which such countries arguably protect property rights. In his foreword to the 2011 edition, De Soto contends that “with each new year, the link between economic prosperity and property rights protection becomes increasingly clearer.”52 Roughly speaking, the index is created in such a manner that the stricter a certain legal regime is in protecting existing property rights, the higher the country ranks in the index. So how can one settle Coase’s disintegrative agenda of unbundling and reallocating existing property rights with NIE’s agenda of securing and protecting private property rights? Benito Arrun˜ ada suggests that the economic analysis tends to focus on property’s public aspects, so that it is concerned chiefly with the preclusion of violence and confiscation. Identifying government and politics as setting up the initial allocation of rights, which then enables free market transaction and thus a more efficient reallocation, economic analysis is bothered mostly by political failures in this initial stage of creating the infrastructure for property and markets. Under this thesis, economists are less concerned with the ongoing private aspects of property ordering and may even support upsetting existing entitlements to promote efficiency.53 In a way, this could be explained in terms of Coase’s discussion of transaction costs. In a world with no or little transaction costs, what matters is that property rights are initially well defined and secured. Subsequent market transactions will ensure that an asset will end up in the hands of the person who values it the most. But in a world of substantial transaction costs, strict enforcement of rights may be counterproductive. Extensive judicial intervention in pre-existing rights may ensure efficiency, without undermining the overall “public” structure of property. Taking this analysis further, one could therefore depict the fundamental difference between mainstream economic and legal concepts of property in that economic theory focuses on value, not on rights. Viewed in pure economic terms, property rights are merely an instrument for 52

53

Property Rights Alliance, “International Property Rights Index 2011 Report,” p. 3, available at http://americansfortaxreformfoundation.org/userfiles/ATR_2011%20INDEX_Web2.pdf. Benito Arrun˜ ada, Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries (University of Chicago Press, 2012), pp. 21–4.

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maximizing value and should not be sanctified as such when their rigid protection would lead to inefficiency. What matters for economists is how access to resources and use thereof are organized so as to increase overall productivity. In the following section, I show that conventional legal thinking about property is quite different. In the public law context, I suggest that legal systems regularly do not protect the asset’s value in itself against government-inflicted losses. Rather, they shield legally recognized rights in regard to such assets, with the question of restoring lost value coming into play mostly during the second stage of remedying the infringement. The same holds true for private disputes about property. The way that private law jurisprudence regularly works is by identifying, first, whether a legally enshrined right, as opposed to a mere economic interest, has been violated by the defendant, and if so, how it should be protected through the legal mechanism of remedies. Indeed, as I now move to show, the conceptual and institutional distinction between right and value is one of the key features of a legal system. While this is relevant for all fields of law, recognizing this feature is especially acute for property law. Because of the enormous interest of various social sciences disciplines in the concept of property, it is essential to understand why a disparity continues to exist between philosophers, social scientists, and lawyers in their understanding of this concept. Again, the purpose is not to rank different disciplines by evaluating which one offers a more sophisticated analysis of property, but rather, to unfold the process of transforming moral values and social goals into legal rights. The analysis of the right/value distinction as a general feature of law will lead to a particular structural analysis of property, in which I show how values may be translated into sets of legal powers and priorities.

IV.

The right/value distinction in law

The term “value” can generally refer to economic value, i.e. a certain quantifiably measurable stream of benefits deriving from a certain asset, or to a moral, cultural, or social value, i.e. a qualitative matter of importance to a certain person, group, or society. As the previous sections have shown, the economic analysis of property tends to focus on the overall maximization of economic value as the underlying goal of property systems, while philosophical inquiries seek to identify a certain qualitative ideal as providing a sine qua non moral

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justification for the institution of property. The system of law functions somewhat differently. While it should be attentive to such extra-legal considerations, a certain process of transformation is required, both conceptually and normatively, to turn such justifications and interests into legally enforceable ones. It is through the mechanism of constructing the sets of jural relationships, which Hohfeld has identified, that “value” consolidates into a legal construct. I focus on the concept of “right” as the product of legal design, though as Hohfeld shows, the landscape of formal legal interests is more diverse. In many respects, the right/value dialectic in jurisprudence manifests itself in the broad debate about positivism and formalism in law. Although this discourse is vast and obviously cannot be resolved or even properly presented here, it would be fair to state that mainstream jurisprudence recognizes that for a system of law to function properly, it should entail some degree of formalism, i.e. that legal interests are defined and enforced in a systematic and coherent manner, and positivism, i.e. that legal norms are crafted and designed by certain institutions that follow certain procedures so that legal rules are not simply interchangeable with currently prevailing social norms or moral credos. Within this general framework, the mechanism of rights serves as the structural and institutional buffer between social or moral values and legally binding norms. The particular operation of this mechanism and the ensuing degree of formalism and positivism is a matter of much debate, but the focus of legal systems on the definition of rights as central to the process of transformation of values into legal rules remains intact. Consider, for example, the famous debate between H.L.A. Hart and Ronald Dworkin about the nature of jurisprudence. In The Concept of Law, Hart depicts law as comprised of a coherent set of primary dutyimposing and rights-granting norms that exist alongside secondary norms – “rules of adjudication,” “rules of change,” and the “rule of recognition” – that confer powers on officials to enforce, change, or validate the primary norms.54 Much criticism has been voiced about this conceptualization of legal systems. In particular, the allegedly technical nature of Hart’s rule of recognition, which presumably looks only to the rule’s pedigree or to a determinate list of sources of law regardless of the underlying substantive justifications for legal norms, has been much debated, most notably by Ronald Dworkin.

54

H. L. A. Hart, The Concept of Law, 2nd edn. (Oxford University Press, 1994), pp. 79–99.

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Dworkin asserts that Hart ignores the essential role of principles, policies, and other standards. Policy refers to a “kind of standard that sets out a goal to be reached, generally an improvement in some economic, political, or social feature of the community,” while a principle is a more fundamental standard that has to be observed because it is a requirement of “justice or fairness or some other dimension of morality.”55 Such standards diverge from all-or-nothing rules not only in the sense that they are based on relative weight, but also in that they connect the legal norms to underlying policies and principles that form the moral basis of a certain society. In his 1994 Postscript to The Concept of Law, Hart responds by asserting that the rule of recognition need not be purely technical, so that in some systems of law, such as in the US, “the ultimate criteria of legal validity might explicitly incorporate besides pedigree, principles of justice or substantive moral values, and these may form the content of legal constitutional restraints.”56 But not all differences can be bridged over. Most notably, Dworkin’s approach is such that that society’s underlying principles leave the law gapless, so that judges must strive to construct law in the best possible moral light by applying and properly weighing existing standards. Hart, in contrast, believes that even if a system of rules is understood to include open texture provisions, some issues may remain unresolved under the current system of rules so that judges are permitted to exercise strong discretion and make new law to fill these gaps.57 But even if one adheres to Dworkin’s idea about underlying moral principles that always govern the entire legal field, this does not mean that legal rules become simply synonymous with moral or social values. Quite contrarily, it is Dworkin who has developed the idea of legal rights as “trumps” over goals and values that the community as a whole may wish to advance. As he suggests in Taking Rights Seriously, transforming a certain moral or social concept into a legal right means that the right now becomes the point of reference for evaluating human conduct, and that accordingly, it must be “a right to do something even when the majority thinks it would be wrong to do it, and even when the majority would be worse off for having it done.”58 The idea is not only one of 55

56 57 58

Ronald Dworkin, Taking Rights Seriously (Cambridge, Mass.: Harvard University Press, 1978), p. 22. Hart, Concept of Law, p. 247. For an analysis of this debate, see Freeman, Introduction to Jurisprudence, pp. 386–91. Dworkin, Taking Rights Seriously, p. 194.

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counter-majoritarianism that protects the individual from the whims of the majority, but also one of legal structure. A legal system cannot function by constantly weighing values and goals ab initio; it must be embedded in the construction and enforcement of legal molds consisting of rights, duties, and other legal entitlements. Joseph Raz views the assertions of rights as “intermediate conclusions in arguments from ultimate values to duties.” Under his interest theory of rights, a person can assert a right when an aspect of “his well-being [his interest] is a sufficient reason for holding some other person(s) to be under a duty.”59 A political society, acting through its decision-making institutions, makes morally founded choices about which interests or aspects of well-being are generally worth validating. The law would then apply to the “standards which reached a certain stage of maturation and endorsement in the process.”60 According to Raz, “the importance of intermediate steps like rights, duties, rules and the like to a common culture explains and justifies the practice of referring to them as reasons in their own right, albeit not ultimate reasons.”61 Advocating an institutional approach to law, Raz views society’s political institutions as proceeding from the deliberative stage, in which the question what is to be done “is open to argument based on all sorts of considerations,” to the executive stage, whose conclusions – i.e. the determination of rights, duties, rules, etc. – become “authoritative positivist considerations.”62 Thus, while the basis of a legal system is embedded in moral considerations, their consolidation into legal rights and duties is a constitutive process, one which does not simply fall back on underlying moral values. This insight about the intrinsic importance of rights as the object of legal order bears major implications for understanding the working of law, and property in particular. Starting with constitutional or public aspects, I argue that property law, including for that matter constitutional property clauses, does not protect the asset’s economic value in itself against government-inflicted losses. Rather, it shields those legally recognized rights in regard to the asset, with the question of restoring value coming into play mostly during the second stage, after it has been established that a certain right had been infringed. 59 60

61

Joseph Raz, The Morality of Freedom (Oxford University Press, 1986), pp. 166, 181. Joseph Raz, Ethics in the Public Domain: Essays in the Morality of Law and Politics (Oxford University Press, 1994), p. iv. Raz, Freedom, p. 181. 62 Raz, Ethics, pp. 206–7.

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Consider the US Supreme Court’s decisions in Phillips v. Washington Legal Foundation63 and later in Brown v. Legal Foundation of Washington.64 The two cases dealt with the Interest on Lawyers’ Trust Accounts (IOLTA) programs adopted in the different states. Under these programs, certain client funds held by an attorney in connection with his practice are deposited in a bank account, with the interest income generated by the funds being paid to foundations that finance legal services for low-income individuals. The court in Phillips recognized the respondents’ argument that each one of the separate client funds was too small to generate interest income in itself, such that there was no direct economic loss, but at the same time ruled: We have never held that a physical item is not “property” simply because it lacks a positive economic or market value. For example. . . we held that a property right was taken even when infringement of that right arguably increased the market value of the property at issue. Our conclusion in this regard was premised on our longstanding recognition that property is more than economic value; it also consists of “the group of rights which the so-called owner exercises in his dominion of the physical thing,” such “as the right to possess, use and dispose of it.” While the interest income at issue here may have no economically realizable value to its owner, possession, control, and disposition are nonetheless valuable rights that inhere in the property.65

In Brown, the court again held that the IOLTA programs constituted a taking, since the interest of the bank accounts’ beneficial owners was “taken for a public use when it was ultimately turned over to the Foundation.” But it ruled that no compensation was due for the taking because “compensation is measured by the owner’s pecuniary loss – which is zero” so that there was “no violation of the Just Compensation Clause of the Fifth Amendment in this case.”66 One may be left to wonder – as the dissenting opinion in Brown did67 – what point there is in recognizing an infringement of property rights as a taking but at the same time holding that no compensation is due. But puzzling and controversial as this ruling may be, it seems to reflect a persisting leitmotiv in property law, one by which rights, and not value, are the object of legal protection, whereas lost private value serves 63 64 65 66 67

Phillips v. Washington Legal Foundation, 524 US 156 (1998). Brown v. Legal Foundation of Washington, 538 US 216 (2003). Phillips v. Washington Legal Foundation, at 169–70 (emphasis in original). Brown v. Legal Foundation of Washington, at 240. Ibid., at 252 (Scalia J. dissenting).

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as a benchmark – though not the only possible measure – in designing the remedy. The private law of property seems to share this basic idea. In setting up a system of formal, enforceable rights that apply among members of society, the law determines which interests are enshrined as rights and under what circumstances these rights would be enforced in case of breach. But no such guarantee exists in regard to the actual value that the owner would enjoy. For example, while a homeowner could generally prevent certain types of disturbances that fall under the nuisance doctrine, she has no such control over other types of external effects that may have similar or bigger effect on her private value, such as larger housing market trends.68 The latter, too, are caused by the actions of different market actors and they definitely implicate value, but not legal rights. Such legal linedrawing may stem not only from practical constraints on identifying the entire range of parties that affect or are being affected by such changes, but also from a normative limitation on the types of actions that should be subjected to legal liability. What one thus legally owns is the set of rights allocated to her, not the asset’s value. Whether one looks at property from a philosopher’s or an economist’s value perspective, she may well have a different idea than the lawyer’s concept of the right to property.

V. The structure of legal property Having introduced some of the general features that typify the transformation of moral views or social goals into legal rights, I now explicate on the unique traits of property within the legal realm. The purpose of the analysis is not only to engage in an intra-legal taxonomic enterprise, but also to crystallize the distinctions between “legal property” and the concept of property as commonly viewed by other disciplines. The analysis is followed by the discussion in the next section, which demonstrates why this structure does not impose an inherent content for property’s substantive norms – a key observation that will be exemplified throughout the book.

68

Lee Anne Fennell, “Homeownership 2.0” (2008) 102 Northwestern University Law Review 1047–118 at 1049.

v. the structure of legal property

A.

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Third party applicability

The first structural trait is that of third party applicability. I use the term interchangeably with the more familiar term in rem, but in both cases I seek to capture the broad applicability that a certain set of legal powers and priorities has over broad sections of affected persons, rather than simply trying to re-establish Roman law’s direct link between “person” and “thing.” The legal interests which are typically enumerated as property rights, such as ownership, lease, mortgage, and easement, possess a qualitative trait of general applicability toward a broad class of persons in establishing the set of legal powers and priorities in regard to assets. These rights do not simply break down to bilateral legal relations among specifically defined parties. This is so although property relations may be combined with contract- or tort-based relations, such as when a landowner sues another in nuisance or when neighboring landowners sign a contract to create an easement such as a right of way. Nevertheless, structural distinctions do exist between these fields, and attempts by schools such as the economic analysis of law to fully merge property with contracts or torts fail to represent the way in which rights that are defined as “property rights” regularly function in various legal systems. In a series of influential articles, Thomas Merrill and Henry Smith argue that in rem rights are qualitatively different from in personam rights even if the property/contract borders are not always clear; different legal systems continue to embrace, implicitly or explicitly, a numerus clausus principle of property forms; property rights retain at least a basic layer of a universal right of exclusion in favor of the owner; and that these distinctive traits of positive property law can be justified as socially efficient in view of systemic information and enforcement costs.69 As the next section shows, I dispute Merrill and Smith’s normative arguments about the essential substantive content of property rights, and especially their contention that the right to exclude is the inherent core of property ownership. But I believe that they are right in asserting that as a structural matter, property differs from other types of personal obligations in the law. This is particularly so because of the way in which legal 69

See Thomas W. Merrill and Henry E. Smith, “The Property/Contract Interface” (2001) 101 Columbia Law Review 773; Thomas W. Merrill and Henry E. Smith, “Optimal Standardization in the Law of Property: The Numerus Clausus Principle” (2001) 110 Yale Law Journal 1; Thomas W. Merrill and Henry E. Smith, “The Morality of Property” (2007) 48 William and Mary Law Review 1849.

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powers and priorities regarding both specific assets and more generally categories of resources (land, chattels, intangibles, intellectual property) regularly implicate numerous parties with diverging features and types of interests. Thus, unlike contractual relations, parties affected by property legal powers and priorities may not have privity or prior explicit legal relations among them and are often “strangers” that find themselves ex post facto entangled in a clash of competing claims over an asset. Beyond the fact that such parties are usually not enumerated and identifiable to one another in advance, they often turn out to be more heterogeneous in their epistemological, cultural, and social attributes, as compared with typical contractual counterparts. As I show in Chapters 7 and 8, these differences create a challenge not only for ordering property relations within a certain state, but even more so, for any attempt to establish supranational property regimes to accommodate globalization. What this generally means, on either the national or international levels, is that for property to function well in creating, allocating, and enforcing in rem rights, it must facilitate broad-based understanding about the way in which property legal interests are structured and defined. Property rights reveal their true complexity not in the relatively distinct asset-owner versus non-owner setting, but rather, in cases in which numerous actors affected by the property regime diverge from one another in the particular set of powers and priorities they hold with respect to the resource. One can think about a piece of land that is simultaneously the object of different types of property rights: the land is owned by someone, leased by another, mortgaged in favor of a third, and subjected to a servitude or easement (e.g. right of way) in favor of a fourth party. Likewise, property reveals its complex nature in scenarios of a good faith purchaser of voidable or void title; conflicting transactions; and other types of “legal triangles” where, due to the wrongdoing of an intermediary “villain,” parties that are not in contractual privity find themselves asserting simultaneous claims to the asset, and property law is required to prioritize the claims. A different setting demonstrating this structural feature of property is that of the business corporation, which I identify as a “property microcosm” and analyze in detail in Chapter 5. As I show, the publicly traded business corporation regularly has a large number of shareholders, who may be further divided into certain classes, including majority shareholders, non-controlling institutional investors, and dispersed minority

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shareholders. But beyond this, the set of legal powers and priorities regarding the corporation’s assets may also implicate creditors, suppliers, or workers, and moreover, the personal creditors of each one of the shareholders. The lack of privity among many of these stakeholders means that the corporation cannot be based merely on a contractual model, but must engage in ordering in rem legal powers and priorities. Bankruptcy and similar scenarios also vividly exemplify the distinctiveness of property rights. In such settings, rights recognized as holding property traits (typically, secured interests) have a categorical preference over contractual or obligatory rights, with a further internal ranking occurring within each one of the different categories. In all of these settings, the legal institution of property is typified by ranking different legal interests relating to the relevant asset and determining the ways in which superior rights will be validated vis-à-vis inferior rights or claims.

B.

Constraints on opting out

A second qualitative difference between property and other fields that regulate legal relations among persons concerns the parties’ ability to opt out for private ordering. In contracts, for example, parties who are displeased with the general law of contract can relatively easily opt out of this regime by resorting to private ordering mechanisms. These private mechanisms may deviate from general law’s default rules regarding the content of the parties’ contractual obligations, procedure, evidence, or forum for dispute resolution. Contract law traditionally includes few restrictions on the power of the parties to do so. Property is different. To the extent that the law sets up certain requirements for a party to qualify as a good faith purchaser or to register a mortgage so that it would have a binding effect on third parties, legal actors are much more constrained in their ability to privately circumvent such norms. This is in fact one of the underlying reasons for the numerus clausus principle, according to which only limited types of property rights are recognized as such by the legal system.70 This structural principle thus practically prevents parties from exercising their nearly unbound transactional freedom to shape their legal relationships, if they wish their rights to have a binding effect on third parties as well. 70

See Merrill and Smith, “Numerus Clausus;” Bram Akkermans, The Principle of Numerus Clausus in European Property Law (Cambridge, Mass.: Intersentia, 2008).

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In addition, while it is theoretically possible for parties to opt out of the legal regime entirely by regulating their relationships solely by informal norms – as Robert Ellickson has famously shown in his study on Order without Law71 – such informal property ordering would be essentially restricted to small-scale, close-knit groups and would not fit property relations involving remote parties. This does not mean, however, that bottom-up institutions, such as professional organizations or residential community associations, entirely lack the capability to design and enforce property norms. In later parts of the book, I demonstrate how such different types of interim institutions, located between the individual and the state, are able to promulgate sets of legal powers and priorities regarding assets, which apply not only to internal stakeholders in these organizations, but also to “outsiders.” At the same time, for such an institution’s rulemaking to enjoy a sufficient degree of validity toward various types of stakeholders, its work must rely on both an initial authorization by the state’s institutions and ex post enforcement of its rulemaking, if necessary, by the courts. Such state support for these bottom-up forms of property ordering entails a much more dramatic make-or-break effect than is typically the case with private contracting. This is the point that I take up, for example, in my discussion of various kinds of community rulemaking in Chapters 3 and 4. The decision by state institutions whether to provide such support, which I dub “property tailwind” in Chapter 4, should rely on complex normative considerations evaluating the effect on both insiders and outsiders. In the case of business corporations, analyzed in Chapter 5, the decision of top-down lawmaking whether to include certain mandatory rules that cannot be legally sidestepped through private ordering in the corporation should take into account the implications for both parties that are otherwise tied by contract – such as majority versus minority shareholders – and parties that are not directly linked to one another, such as different types of creditors. But regardless of the content of such normative considerations, the initial need for such “tailwind” derives from the structural trait of property which would otherwise constrain opting out.

71

Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge, Mass.: Harvard University Press, 1990).

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Another way in which bottom-up institutions could have a substantial impact on property norms, despite this structural trait, is through the institutional mechanism of legal standards, which I explore in detail in Chapter 2. When a legislature enacts an initially vague provision such as “good faith” or “trade usage,” the filling of this standard with content over time could be done by other top-down institutions such as courts, or by deferring to the thicker content created over time by relevant bottomup institutions such as professional organizations. Chapter 2 studies the conditions under which such type of institutional delegation to bottomup bodies could be made. But it is clear that the effectiveness of such norms is governed at the outset by the structural trait of property, which otherwise burdens the ability to opt out for private ordering.

C.

The public/private interface

Another distinctive structural facet of legal property concerns the complex public/private interface. The challenge faced by legal systems in designing property regimes is one of simultaneously delineating the borders of impermissible government intervention with property rights, while at the same time defining the scope and nature of property rights vis-à-vis the entire spectrum of third parties. The interface between the private and public realms is extremely intricate and defies clear demarcation, and there is no a priori justification to argue that the law of governmental intervention should aspire for harmony with the law governing property relations among private parties. But nevertheless, it would be safe to conclude that the law of eminent domain and regulatory interventions does bear upon the way in which different actors broadly understand property powers and priorities in the private realm, and vice versa. While the task of drawing the lines between public-constitutional legal norms and those controlling private conduct is familiar in many other fields of law, property does seem to introduce a special challenge. The very use of the same term, “property,” in the private law field that orders legal relations among persons in regard to assets, and in the publicconstitutional realm, is not merely a matter of historical accident or conceptual confusion. While the general, mostly liberal arguments in favor of differentiating between government conduct and private conduct may apply for property, any attempt to hermetically separate the two realms of property law would be both impractical and normatively awkward. The result is one of constant tension between public and

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private. While different legal systems may reach different results in attempting to draw the lines between public and private, the normative debate is not free of constraints and is implicated by how the structure of property rights encompasses both realms. Thus, for example, the public and legal outrage over the US Supreme Court’s Kelo v. City of New London decision,72 regarding the constitutionality of exercising the power of eminent domain to facilitate “economic development” in lands that ended up in the hands of private entrepreneurs, was vividly expressed in Justice O’Connor’s assertion in her dissent that “[n]othing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”73 Justice O’Connor seems to have expressed a deeper concern by which the overbroad construction of “public use” to facilitate a condemn-andtransfer practice for economic development was not only a matter of governmental abuse, but one that may also undermine the fundamental understanding of what it means to be a property owner, including vis-àvis other persons.74 If government can take land only to pass it on to another private party who is said to make better use of the land, does this not necessarily reflect on the level of protection regularly awarded to owners against invasion by others? And if we do not favor such assimilation, how do we design property doctrines to decrease the friction between public and private, when such borderline cases are bound to emerge? Indeed, in a number of cases, the US Supreme Court made crossreferences between the public law and private law of property without necessarily being committed to an overall public-private integrative agenda. This was done, for example, in takings cases, in which the court considered the power to exclude as “one of the most treasured strands in an owner’s bundle of property rights”75 – referring as it did to the private common law jurisprudence, thereby allegedly equating a taking to a private encroachment.

72 73 74 75

Kelo v. City of New London, 545 US 469 (2005). Ibid., at 503 (O’Connor J. dissenting). Ibid., at 505; see also Merrill and Smith, “Morality,” 1879–84. Loretto v. Teleprompter Manhattan CATV Corp., 458 US 419 at 436 n. 12 (1982) (referring to Pruneyard Shopping Ctr. v. Robins, 447 US 74 (1980), which discussed the private property rights of a shopping mall that banned the handing out of anti-war pamphlets).

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At the same time, the Supreme Court has shunned a complete osmosis of the public and private in property, especially in the aftermath of the seminal Shelley v. Kraemer case.76 By refusing to further apply, let alone to extend the holding in Shelley to other settings of private disputes, the court has refrained from embracing a full-scale integrative platform for the law of property.77 The result is one of constant tension between public and private in property, a dilemma which is regularly addressed by legal systems around the world.78 In other cases, the complex interplay between public and private is manifested in ways that do not boil down to the paradigmatic question of whether constitutional rights or duties should apply to interactions among private persons. At times, the public component of property may derive from the fact that multiple stakeholders are involved with the set of powers and priorities to certain assets. As I show in Chapter 5, Adolf Berle and Gardiner Means have famously argued that the publiclytraded business corporation is a form of “collective capitalism,” and drew normative conclusions about the role of the corporation as a quasipublic entity in implementing a social agenda of redistribution.79 Even if one is not taken by Berle and Means’ normative agenda, it is important to observe the way in which the structure of property legal interests in the publicly-traded corporation challenges the paradigms of individual “private” ownership. In the opposite direction, just about any case of a government-owned asset also implicates structural aspects combining “public” and “private” – an issue I discuss in Chapter 3.

VI.

Why property structure does not impose content

Do the structural features of property dictate a specific content for property norms? In other words, is there an essentialist substantive nature to property, one without which property would truly become an 76

77

78

79

Shelley v. Kraemer, 334 US 1 (1948) (viewing state judicial decrees upholding racial restrictive covenants as constituting “state action,” and invalidating them under the Fourteenth Amendment’s Equal Protection Clause). See Mark D. Rosen, “Was Shelley v. Kraemer Incorrectly Decided? Some New Answers” (2007) 95 California Law Review 451–512 at 458–70. See Gregory S. Alexander, The Global Debate over Constitutional Property (University of Chicago Press, 2006), pp. 188–91; Aurelia Colombi Ciacchi et al. (eds.), Fundamental Rights and Private Law in the European Union, 2 vols. (Cambridge University Press, 2010), vol. II, pp. 279–321. Adolf A. Berle and Gardiner C. Means, The Modern Corporation & Private Property, revised edn. (New Jersey: Transaction Publishing, 1991 [1932]).

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empty legal concept? The answer that has been given to these queries by a group of prominent contemporary scholars, which I refer to here as holding a “new essentialist” approach, has been largely a positive one, though diverging in details and types of arguments. What I set out to do in this final section is, first, to briefly present how new essentialists promote the idea of an inherent substantive core of property. I then offer my competing thesis, by which the structural essence of property does not impose a fixed content. At the same time, I argue that the structure of property does place certain limits on the mechanisms of designing property norms, without constraining the types of values that could initially guide such norms.

A.

The rise of new essentialism

The contemporary scholars who most prominently tie the structure of property to a core normative content are Thomas Merrill and Henry Smith. The chief rationale for such a link lies in principles of efficient legal design, aimed at economizing on the legal system’s information costs. As a structural matter, Merrill and Smith identify two chief strategies for delineating property rights: “exclusion” and “governance.” In the exclusion strategy, “decisions about resource use are delegated to an owner who, as gatekeeper, is responsible for deciding on and monitoring specific activities with respect to the resource.” Exclusion thus uses simple, clear-cut property norms by using rough on/off signals such as territorial boundaries.80 This means that property rights are not broken down to long lists of discrete rights and privileges; “instead, the rights of property owners are ‘lumpy.’”81 In contrast, under the governance strategy, property norms would pick out uses and users in more detail, that is, at a higher level of precision. The advantage of starting out with exclusion as the baseline conception of property is that “it permits us to protect a wide range of interests in use, without requiring outsiders like officials or judges to know much about those uses.” By delegating the gatekeeper’s right to exclude to the owner, the owner can select among these uses “without the law having to spell out all potential use-rights or interests at all.” The switch from the 80

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Henry E. Smith, “Exclusion versus Governance: Two Strategies for Delineating Property Rights” (2002) 31 Journal of Legal Studies S453–87 at S454–5. Thomas W. Merrill and Henry E. Smith, Property (The Oxford Introductions to U.S. Law) (Oxford University Press, 2010), pp. 6–7.

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core strategy of exclusion to a more fine-grained governance strategy is reserved only to “selected situations of major resource conflicts” such as easements, nuisances, or zoning.82 According to Merrill and Smith, the right to exclude as the core of property also has an underlying normative justification in that it is embedded in a fundamental moral perspective, which is typical at least of the American populace and its legal system.83 But the two co-authors diverge slightly on whether exclusion is indeed a value in itself or merely an instrumentality. Merrill, as a self-proclaimed essentialist, views the right to exclude as the normative foundation stone of ownership, especially in legal relations between owner and “strangers,” arguing that the “right to exclude is a necessary condition of identifying something like property.”84 While other incidents or sticks of property rights often exist, these can be “added or subtracted as social conditions dictate without the bundle losing its identification of property” – but this is not so with regard to the right to exclude, the sine qua non of property. Smith, however, views the right to exclude as a “means to an end, and the ends in property relate to people’s interest in using things.” Exclusion “is not a value at all: it is a rough first cut – and only that – at serving the purposes of property.”85 The right to exclude is thus a matter of legal architecture, a strategy that serves as a shortcut over a more complete set of legal relations. But it nevertheless entails an inherent substantive content, dictated by property’s structure. Other essentialist variations have been promoted in current literature. James Penner focuses on the right to exclude as stemming from the core normative principle of the owner’s right to use.86 Larissa Katz identifies the exclusive position of the owner not in the right to exclude, but rather, in the right to “set the agenda” for the resource, so that “ownership, like sovereignty, relies on a notional hierarchy, in which the owner’s authority to set the agenda is supreme, if not absolute, in relation to other individuals.”87

82 84 85

86 87

Ibid. 83 Merrill and Smith, “Morality of Property,” 1853–8. Thomas W. Merrill, “The Property Prism” (2011) 8 Econ Journal Watch 247–54 at 248–9. Henry E. Smith, “Property as the Law of Things” (2012) 125 Harvard Law Review 1691–726 at 1704–5. J. E. Penner, The Idea of Property in Law (Oxford University Press, 1997), pp. 68–74. Larissa Katz, “Exclusion and Exclusivity in Property Law” (2008) 58 University of Toronto Law Journal 275–315 at 278.

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Eric Claeys defines property as “a right securing an interest in determining exclusivity of use of an asset external to the owner’s person,” viewing the right to exclude as a consequence of the right of exclusive use determination.88 Adam Mossoff refers to property rights as “integrated rights of possession, use, enjoyment, and disposal, which implies a logical corollary that such rights are secured formally by making them exclusive against others” but that do not always come down to a clear-cut right to exclude.89 For Claeys or Mossoff, what truly matters is the beneficial use of assets, while effectively coordinating use interests or liberty interests of different owners. Property schemes thus may be premised in basic design principles that do not necessarily boil down to straightforward exclusion, but rather, focus on governance schemes, such as in the case of riparian water rights.90 It should also be noted that some of the new essentialists are not antagonistic to the bundle of rights concept, but interpret it differently. Richard Epstein attributes the genesis of the bundle of rights approach to Roman law ideas of “incidents” of ownership, including rights of use, fruits, and abuse.91 He identifies Tony Honore´’s modern analysis of the “incidents of ownership”92 as practically synonymous with the bundle of rights. For Epstein, the bundle simply explicates on the various inherent attributes of ownership. Others, such as Smith, have been more persistent in rejecting the bundle of rights idea, even as a purely analytical concept, arguing that it misconceives the basic structure of property as a holistic, even if modular, legal construct.93 Despite the variations, all of these writers share some essentialist view of property. Property is not an empty concept; it has an inherent substantive core. As such, and although variations may exist among different types of resources in the implementation of such core principles, these theories seek to be comprehensive. Their underlying normative 88

89

90

91

92

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Eric R. Claeys, “Bundle-of-Sticks Notions in Legal and Economic Scholarship” (2011) 8 Econ Journal Watch 205–14 at 208. Adam Mossoff, “The False Promise of the Right to Exclude” (2011) 8 Econ Journal Watch 255–64 at 262. See, respectively, Eric R. Claeys, “Exclusion and Private Law Theory: A Comment on Property as the Law of Things” (2012) 125 Harvard Law Review Forum 133–50 at 140–2; Mossoff, “False Promise,” 258–62. Richard A. Epstein, “Bundle-of-Rights Theory as a Bulwark against Statist Conceptions of Private Property” (2011) 8 Econ Journal Watch 223. Tony Honore´, Making Law Bind: Essays Legal and Philosophical (Oxford University Press, 1987), pp. 161–84. Henry E. Smith, “Not Just a Bundle of Rights” (2011) 8 Econ Journal Watch 279.

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basis should serve to explain the reintegrated concept of property across the plethora of resources that are the object of rights.

B.

Property structure accommodates normative choice

In the following paragraphs, I set out to explain why the structure of property does not dictate content in the clear-cut manner that Merrill and Smith or other new essentialists suggest, so that property is capable of accommodating various kinds of normative choices or substantive policies as the basis for property doctrines. At the same time, once these fundamental normative choices have been made, the structure of property would then constrain the level of value pluralism or contextualism that could exist on an ongoing basis for a certain property ordering. These limits are essential if property is to maintain its broad applicability and other structural traits discussed above, while more generally preserving the right/value distinction in law.

1. Property is not only about ownership The new essentialism school has been trying to extract the core meaning of property by a two-stage methodological move: (a) focusing on the right of ownership as the paradigm of property rights, and (b) identifying substantive incidents which are the sine qua non of ownership, and hence of property in general. Accordingly, the essence has been identified as the right to exclude, or rather, as the right to exclusive decisionmaking about the use of the asset. But the legal institution of property goes well beyond ownership to include other types of rights such as the lease, mortgage, lien, or servitude, and some of these rights simply do not conform to the core substantive essence that has been attributed to ownership. It would be uncontroversial to state that the core essence of the mortgage or the servitude is not about the right to exclude or even about the exclusive right to determine the uses to which the asset would be put. The mortgage or lien is aimed at serving as a security for a debt, while the servitude seeks to secure or prevent a certain use, but definitely not to claim exclusivity in decision-making. To the extent that a theory is tested in its capability to explain the modes of operation of the object it seeks to portray – in this case, the institution of property – then reducing property to the right to exclude simply comes short. In contrast, I argue that my structural analysis of property, alongside the institutional aspect that will be portrayed in

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Chapter 2, does a better job in locating the common denominator of property rights and in distinguishing them from other rights. Ownership is obviously a key legal institution, but it does not stand alone, and once we understand that ownership is always entangled in a broader set of legal powers and priorities, this opens the path for a more comprehensive analysis of the institution of property.

2. Property regimes go beyond private title Another way in which the analysis of the core essence of property has been unsatisfactory stems from its focus on private ownership. Obviously, the analysis of private ownership and of private property in general holds a key spot in the study of the legal institution of property. But property’s reach extends beyond private title to include many other types of property regimes, including common property, public property, and numerous types of property hybrids. This oversight carries substantial implications not only analytically, but also normatively. As I show in my discussion of hybrid property regimes in Chapter 3, communities in Chapter 4, and the business corporation in Chapter 5, such regimes may be based on different normative grounds and thus opt for the set of property powers and priorities that would best facilitate their agendas. This means that the overall analysis of property cannot boil down to a single clear-cut normative principle such as the right to exclude. This is so not only with respect to the internal governance of the regime, but also with respect to “outsiders.” These various regimes are not simply “governance on the inside, private property on the outside,” because the sets of legal powers and priorities may diverge also with respect to external stakeholders. Publicly-owned property is a clear example of a property regime in which the rights and duties of owners and other stakeholders are governed also by a parallel set of norms premised in administrative and constitutional law. But the challenges to a single substantive blueprint emerge also from intermediate property regimes that implicate collective entities such as communities or corporations. As I demonstrate in Chapter 4, common interest communities may have more exclusionary powers vis-à-vis outsiders as compared with homeowners in conventional neighborhoods because of various formal and informal screening mechanisms they employ, but these powers could also be subjected to judicial intervention that would not regularly apply to individual homeowners. Somewhat similarly, as Chapter 5 shows, the legal status of external stakeholders in a corporation, such as creditors, suppliers, or

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employees, may often be different to that of their counterparts in a single-proprietor business, with further distinctions existing among publicly-traded business corporations and closely-held ones. As a matter of both structure and normative choice, the Blackacre Paradigm does not capture the full scope of property.

3. Clarity is not synonymous with exclusion Merrill and Smith’s exclusion strategy assumes that hard-edged, ruletype norms will be designed for the core of ownership, in which the owner prevails over others and takes decisions “without having to justify it to third parties, including courts and other officials.” In contrast, standard-like norms, typical of the governance strategy, will be tailored to peripheral cases or to ones concerning high stakes for specific uses.94 But consider, for example, a rent-control statute. Although such pieces of legislation have been a source of a fierce normative debate, they are nevertheless a persistent legal phenomenon throughout legal systems. A rent-control statute, which restricts a landlord from evicting a tenant unless a certain legislative specific scenario occurs, or that limits the landlord from raising the rent at more than a fixed percentage per year, redistributes several sticks between the landlord and the tenant, e.g. the right of decision-making and the right to income from the asset. But to the extent that such a division is articulated upfront in a statute, it may still keep intact a rule-like delineation of the property rights and duties among the relevant parties. This means that clarity is not necessarily synonymous with clear-cut exclusion in favor of the person defined as the owner. More broadly, it means that the structure of property, which includes the capacity to design sets of legal powers and priorities that would have broad applicability and are well understood by the various stakeholders could implement normative agendas that are not all made of the same cloth. In Chapter 2, I make a similar argument with respect to the institutional features of legal standards. I argue that the delegation of authority to courts or to bottom-up institutions of filling initially vague norms with thicker content over time is not pre-committed to a certain normative agenda, e.g. one of weakening the rights of the person defined as owner. Just as upfront clarity is not merely a tool for exclusion, dynamism need not necessarily result in undermining ownership. 94

Merrill and Smith, “Morality,” 1890–4.

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4. Ownership could be a relative right Nothing said so far should be deemed to undermine the key role that the right of ownership plays in the construction of property. Defining a person as “owner” of an asset regularly allows for the creation of a solid sense of order, both formally and practically, in setting up the legal powers and priorities to resources. Honore´’s depiction of the incidents of property, such as the right of possession, the right to alienate the asset, or the right to enjoy income from the resource, is definitely characteristic of the way ownership is typically constructed for various resources in different legal systems. But ownership does not always have the same content, even in describing its basic features, as Merrill and Smith or other new essentialists have suggested. Consider the example of the business corporation. Even if we define the shareholders as owners of the corporation, it is clear enough, as a purely descriptive matter, that ownership of a corporation is not equal to ownership of land or of a patent. As I show in Chapter 5, it makes little sense in the context of ownership of the corporation to focus on the right to exclude as the sine qua non of ownership. This is so also with respect to the alternative substantive core, that of exclusive power to make decisions. In the business corporation control is not only separated, at least to some extent, from formal ownership of the assets or the corporation’s shares, but it is also divided among several persons and institutions, such as the general assembly of shareholders, board of directors, audit committees, and senior management. This does not undermine the order and hierarchy that exist with respect to decisionmaking in the corporation, and these features can be conceptualized as setting up a property structure of powers and priorities that bind third parties. But this proprietary model of decision-making in the firm simply does not follow from a single, fixed core of ownership. Moreover, ownership of a controlling share is not equal to that of a minority share: this is so with respect to the power of decision-making, the priorities with regard to residual income or revenue, or the right to enjoy the “control premium” upon selling the share. But it may still make sense to use the term “ownership” as a relative term, one that is helpful in defining legal powers and priorities regarding the corporation’s assets, without sticking to an all-or-nothing approach. 5. The limits of value pluralism The analysis so far suggests that different values and normative inclinations can be comfortably accommodated in the construction of property. But

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once the shift has been made from the moral or social realm to the legal one, the structure of property then limits the extent to which such underlying values or normative goals could freely float within property doctrine. In this respect, while competing theories to new essentialism have been appealing in objecting to the over-rigidity that may result from embracing a substantive essentialist approach, the same theories must also come to terms with constraints imposed by the structure of legal property. I touch here on one such stream of scholarship, which seeks to construct a spectrum of different property norms based on the type of interpersonal relations involving the parties. This “property as interpersonal relations” literature has a few versions. Margaret Radin, for example, promoting her property and personhood theory, makes the case that a tenant who had lived long enough and in good behavior in a house so that her personhood has become embedded in the home should be granted special rights, such as a permanent tenure, vis-à-vis the landowner.95 Joseph Singer constructs a more general theory of property and social relations, by which “the social context in which the conflict arose is crucial to understanding both what occurred and what the appropriate response of the legal systems should be.”96 This means that social situations involving trust or long-term dependency, such as between employer-employee, landlord-tenant, friends, or neighbors, should involve property norms which are different to those governing socially distant parties. Hanoch Dagan offers a more nuanced approach, one of constructing a relatively limited number of “property institutions” that seek to generalize typical kinds of personal relations. He argues that “value-pluralist jurisprudence recognizes a broad menu of incommensurable human alternatives, but acknowledges a minimal core of moral truths.” In the case of property, these values or truths come down to autonomy, personhood, utility, labor, community, and distributive justice. He thus suggests dividing property into a “set of institutions – property institutions – bearing family resemblances,” with each such institution entailing a specific composition of entitlements determined by the unique balance of property values characterizing it.97 Thus, whereas arm’s-length 95 96

97

Radin, Reinterpreting Property, pp. 57–9. Joseph William Singer, Entitlement: The Paradoxes of Property (New Haven, Conn.: Yale University Press, 2000), pp. 134–9. Hanoch Dagan, Property: Values and Institutions (Oxford University Press, 2011), pp. xxiv–xxv, 42.

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transactions in the market may focus on individual autonomy, institutions such as marital property would be built around more communitarian or egalitarian values. But while marital property is indeed the object of property doctrines that differ from general property law and may also implicate third parties,98 it is questionable to what extent property rights could be constructed more generally along a spectrum of “interpersonal relations.” The determination as to whether some sort of special relationships have emerged between the parties so as to justify a distinctive property norm may be difficult to make even on the bilateral level. It may require courts to make ad hoc contextual findings that would often involve subjective viewpoints and a complicated set of facts. But even if the bilateral aspect could be reasonably resolved by the legal system, as is somewhat the case with relational contracts, the potential impact on third parties may be much more burdensome as a matter of legal design. Consider the following scenario. Jane owns Blackacre. To purchase it, she had resorted to a loan from a commercial bank, one secured by a mortgage. Jane then leases the house to Richard, who lives there in good behavior for many years. At some stage, Jane wishes to terminate the lease and sell the house in the market. This is because she has a hard time financing the mortgage payments and the bank is about to start foreclosure procedures. Richard refuses to leave, arguing that his personality had become invested in the house and that he is dependent on his relations with Jane. If Richard cannot be evicted and Jane becomes insolvent, the house would be put in the market for a foreclosure sale, but being evaluated as occupied for the life of Richard, the sale price would fall short of the amount of debt secured by the mortgage. Even if we are normatively favorable to Richard’s position vis-à-vis Jane and believe that it should be formally validated through landlordtenant law, as Radin and Singer believe, how should property law be comprehensively redesigned to consider third parties, here the bank? Could it be done in a manner that is value-sensitive but at the same time allows for a sufficient level of predictability, stability, and guidance to distant third parties? Assuming no privity of contract or special interpersonal relations between a party such as Richard and one like the bank, how effectively can such a property spectrum be constructed? 98

See Carolyn J. Frantz and Hanoch Dagan, “Properties of Marriage” (2004) 104 Columbia Law Review 75.

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I emphasize that the argument here is not normative, but structural. As a matter of legal design, a property system could be made to conform to what Gregory Alexander has dubbed the “social-obligation norm in property.”99 If we are favorable to such a normative viewpoint, by which property owners have an obligation to others in the community so as to allow all persons to enjoy certain capabilities required for human flourishing, I trust that property law could be redesigned in a comprehensive manner so that doctrines in both the public and private law of property would work to attain such underlying values. It is so because Alexander’s theory of interpersonal relations is structured in broad and general terms, ones implicating a person’s “in rem duties” toward other members of the community. This is exactly what allows the lawmaker to redesign and reallocate the property set of powers and priorities in various resources to promote the underlying goal of social responsibility, implicating also distant parties that are not necessarily tied by contract. Even if they are not happy about it, property owners and other stakeholders could quite clearly understand the systematic implications of such a comprehensive normative viewpoint. In contrast, a contextual “property as interpersonal relations” spectrum might be often haphazard.

6. Resource typology as an effective benchmark Bearing in mind the structural traits of property law, which require a sufficient amount of stability, predictability, and guidance to large heterogeneous crowds, a legal system should carefully consider which types of typology in property could nevertheless allow for pluralism. One such type of delineation, which I view as allowing for normative plurality without undermining the structure of property, concerns the types of resources that are the objects of property rights, such as land, chattels, financial instruments, intellectual products, the environment, or the human body. All of these resources are part of the legal and nonlegal property discourse, but it is safe to say that few would argue that the property ordering of these different resources should follow the exact same normative blueprint. Indeed, such differentiation among various resources persists as a matter of doctrine in legal systems. Here I refer not only to obvious borderline cases such as property in one’s body or body parts, or to innovative property schemes involving tradable emission permits. It is clear enough that the legal ordering of 99

Alexander, “Social-Obligation.”

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property rights in such resources follows distinctive normative concerns, ones which cannot be cut and pasted from, say, land law. But a resourcebased typology exists also among “classical” resources and could be sustained as a structural matter. For example, although there is controversy about the land/intellectual property interface, I suggest that the basic boundaries of “fair use” in copyrighted materials need not adhere to the laws governing encroachments to land. I, for one, believe that this is the case as a normative matter, because considerations of autonomy, personhood, utility, and the balance between private benefits and the public interest play differently in these two types of resources. But even if someone were to disagree with me normatively, such a differentiation is sustainable as a structural matter. The average norm recipient could well live with the fact that the rules governing copyright are not identical to those of land. There is little risk that incorporating a fair use provision in copyright law would utterly confuse people about the property features of land. This taxonomy will guide me throughout the book in analyzing the way different property regimes are structured. Thus, for example, I argue in Chapters 7 and 8 that some resources would be more prone than others to the globalization of property. Intellectual property or financial instruments may better fit supranational property ordering than would be the case with land. The globalization of law need not necessarily be an all-or-nothing endeavor, covering all resources. The resource-based taxonomy of property could be effectively pursued in this respect as well.

7. Structure and values: the China example As the previous subsections demonstrated, the structure of property does not impose content, so that each society may make its own normative choices in designing the institution of property. Consider the Property Rights Law of the People’s Republic of China enacted in 2007, after years of stormy debates.100 The statute was explicitly influenced in its crafting by civil law codes, mostly those of Germany 100

Property Rights Law of the People’s Republic of China, promulgated by the National People’s Congress, March 16, 2007, effective October 1, 2007, 2007 Standing Committee National People’s Congress Gazette 291. An unofficial English version is available at www.lehmanlaw.com/resource-centre/laws-and-regulations/general/prop erty-rights-law-of-the-peoples-republic-of-china.html.

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and Japan.101 But this is far from indicating that China simply turned its back on its ideological, cultural, and legal past. The adoption of “western” structural and institutional concepts, such as the numerus clausus principle or the creation of a conclusive land registry system, has not dictated a particular substantive outcome. Thus, for example, alongside the protection of individual property rights in Article 4, by which such rights “shall not be infringed by any institute or individuals,” the statute simultaneously protects state and collective property rights. It maintains a division of labor between these categories of ownership so as to implement “the socialist market economy, ensuring equal legal status and right for development of all market players.” Accordingly, Articles 47 and 58 reiterate the principle already embedded in China’s constitution by which all lands in China “are owned by the State, that is, by the whole people,” with some lands owned by collectives, so that any individual rights in land are basically only usufructuary ones. The underlying assumption is that equal protection does not mean an equal role for private and state ownership, thereby maintaining the longstanding dominant role of public property in Chinese society. Thus, the new Chinese property law seems to conform well to the structural features of property regimes and to the goals that such a structure may serve, e.g. clarity, universality, comprehensiveness, stability, and prospectivity.102 But few would argue that the substantive provisions and the underlying normative viewpoints of the Chinese property system closely resemble the American, British, German, or Russian ones, for that matter. In articulating the structural features of property law, this chapter has also sought to identify the lingering differences among and within disciplines about the concept of property. However, the resulting conclusion is not one of alienation, but rather, one of a disciplined accommodation. It makes perfect sense for each academic discipline to take direct interest in property and to offer its own building blocks for the institution of property. As a matter of both content and methodology, the institution of property does not inherently favor moral philosophy over 101

102

See Mo Zhang, “From Public to Private: The Newly Enacted Chinese Property Law and the Protection of Property Rights in China” (2008) 5 Berkeley Business Law Journal 317–63 at 321. Merrill and Smith, “Numerus Clausus,” 60–6.

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economic utilitarianism or a property-as-politics approach, and vice versa. The ideological and policy-oriented features of a property system are up for grabs, and each society may choose its distinctive normative blueprint for constructing property. Each such set of moral or social ideals could in principle be translated into a set of legal interests regarding different assets. But unlike the normative point of genesis, the process of transformation to legal property is not free of constraints. It is probably here that the current conceptual and methodological disconnect plays out most dominantly. For a system of legal property to function properly, certain structural patterns must be followed to avoid chaos. Recognizing these features is essential for understanding the benefits of having different disciplines engage with one another about the substantive tenets of property, while at the same time mitigating much of current frustration over the prospect for change. Property is not a predetermined normative institution, but philosophers, social scientists, and lawyers must better understand how to construct it.

2 Rules and standards: an institutional analysis of property

I. Institutions and dynamism in property Chapter 1 established that property as a legal construct possesses structural traits of in rem applicability, constraints on opting out for private ordering, and a complex interplay of public and private. In this chapter, I show how these structural features carry substantial implications for collective decision-making institutions entrusted with the role of designing property law. As I suggested in the first chapter, in view of such structural features, property law must facilitate broad-based understanding about the legal regime and ensure a sufficient level of stability and security in the delineation of property rights. Thomas Merrill and Henry Smith link these requirements to the numerus clausus principle as a key ingredient for establishing a standard list of rights, one that can be disseminated and understood by the general public with clarity and relatively low information costs.1 What are the institutional consequences of these structural traits? Which types of collective decision-making institutions would be best positioned to design property doctrines over time? Merrill and Smith argue that the legislature is typically in a superior position to do so, and tie this to what they deem to be the general advantages of legislation over case law in securing clarity, universality, comprehensiveness, stability, prospectivity, and implicit compensation.2 Property is thus a field of law that should be developed chiefly by legislatures, so that future rule changes would not undermine its essential structural traits. 1

2

Thomas W. Merrill and Henry E. Smith, “Optimal Standardization in the Law of Property: The Numerus Clausus Principle” (2001) 110 Yale Law Journal 1. Ibid., 60–6.

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While I agree that legislation plays a key role in designing property law and especially in making “dramatic” changes to it, I argue that the role of courts in norm-making is far from being negligible and that the inevitable need for dynamism in designing property over time may often be met by courts. Moreover, one should also not rule out the ability of bottom-up institutions such as professional associations or common interest communities to enact property norms or to create thicker content in norms that have been initially designed by top-down institutions. Here too, at least in some instances, the need to address dynamism may be properly met by such institutions without undermining the structural features of property law. What are the particular grounds for dynamism in property, ones which make property law inherently “incomplete” by nature and in constant need of change or update? How are these grounds different from other areas of law, and what does it mean for norm-making institutions? I address these questions in this chapter, focusing on the institutional implications of employing legal standards as a mechanism for developing property over time while preserving its structure. Starting with the grounds for such dynamism, I argue that incompleteness derives from the fact that even the most careful design of property norms cannot anticipate and regulate in advance all potential frictions that may arise with respect to the delineation of property rights, such as from overlapping private uses affecting a certain resource. Consider conflicting uses in neighboring lands and whether such externalities would be permitted or amount to a wrongful nuisance; or a certain use of a copyrighted work made by a non-owner and whether this would count as a “fair use” or as an infringement. It is practically impossible for legislation to neatly delineate all possible scenarios in advance. Dynamism in property may also be the result of broad-based changes outside of the current framework of law. This may be due to a change in societal ideologies, tastes, and values, or to technological, economic, and institutional innovations. Harold Demsetz famously depicted and theorized the emergence of private property among a Native American tribe following the fur trade with the Europeans.3 This study has served as a linchpin for voluminous writing on the ways in which property regimes

3

Harold Demsetz, “Toward a Theory of Property Rights” (1967) 57 American Economic Review 347.

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transform in the face of incomplete allocation of unforeseen uses.4 These dilemmas are ever present: in the current age of digital media, satellite technology, or new energy resources, property regimes must always be reconsidered and re-evaluated. How can property law deal with such dynamism or incompleteness? One strategy would be to replace current doctrine by writing a new law from scratch, or nearly so, when times so require. If this is the strategy chosen, then Merrill and Smith’s argument about the superiority of legislation as the conduit for change in property stands firm. But there is yet another strategy that has proven to be very dominant, one that also carries substantial institutional implications for the design of property law over time. This is one of initially designing some legal norms as relatively open-ended “standards” rather than as clear-cut “rules.”5 Legal standards are prevalent throughout the law, including in property doctrine, although they are under-theorized among property scholars. For example, “reasonableness” and “abnormality” are prevalent in nuisance doctrine; the “abuse of rights” standard limits the exercise of otherwise valid property rights; the “fair use” list of legislative standards distinguishes permissible uses from infringement of copyrighted materials; and the “public use” standard in the US Constitution’s Fifth Amendment sets the borders of legitimate takings. I suggest that a legal standard should be analyzed chiefly as an institutional mechanism. A standard promulgated in a constitution or a statute is a provision that delegates the giving of fuller norm-content to bottomup institutions or to top-down public bodies in a dynamic process, but it does not require that the legal norm remains vague all the way to a casespecific inquiry. Such type of institutional delegation for filling standards with content over time is not free of constraints. It has to be made to bodies that are effectively capable of producing and disseminating collective norms. For example, the “public use” norm can be viewed as a standard that delegates power to courts to fill it with content through interpretation, with courts expected in turn to design top-down guidelines that go beyond the 4

5

See, e.g., Terry L. Anderson and Peter J. Hill, ‘The Evolution of Property Rights,’ in T. L. Anderson and F. S. McChesney (eds.), Property Rights: Cooperation, Conflict, and the Law (Princeton University Press, 2003), p. 118; Douglas W. Allen, “The Rhino’s Horn: Incomplete Property Rights and the Optimal Value of an Asset” (2002) 31 Journal of Legal Studies 339. See Louis Kaplow, “Rules versus Standards: An Economic Analysis” (1993) 42 Duke Law Journal 557–629 at 559–62.

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specific dispute. Conversely, the ability to delegate such powers to bottom-up institutions, such as prominent merchant organizations or common interest communities, by referring in the primary legal norm to standards such as “trade usage” or “custom,” depends on various institutional capabilities that would prevent the reduction of property into ad hoc jurisprudence. The institutional aspects of legal standards are also strongly intertwined with the complex interplay of public and private in property. The ways in which legal standards are created and later delegated for further content-giving often cut across conventional public/private distinctions, raising similar institutional and structural dilemmas in standards as diverse as “abuse of rights,” “good faith,” or “public use.” Building on these insights, the chapter sets the ground for identifying the terms under which legal standards and respective norm-making institutions may work well in balancing between dynamism and stability. This analysis is employed throughout the book. One such example is discussed in Chapter 8, which looks at the capability of arbitration tribunals to give content to the “fair and equitable treatment” standard in bilateral investment treaties designed to protect foreign investors, and the way in which such a standard could foster supranational ordering of property. As is the case with the structure of property, I argue that the choice of institutions to design property norms does not dictate the substantive content of such norms. For example, we see standards playing a prominent role in different legal systems that regulate the issue of nuisance. But the way in which courts would fill these initially vague provisions with content may differ greatly among legal systems. An underlying “live and let live”6 approach to the law of nuisance may yield very different results from a jurisprudential approach that promotes ideals such as social responsibility.7 The structure of such a property norm or the institution entrusted with designing it could implement either initial normative choice. The strategy of employing legal standards is far from being a progressive plot in the guise of legal design or institutional choice.

6

7

For the classic manifestation of the “live and let live” approach to nuisance, see the English case Bamford v. Turnley (1862) 122 ER 27 at 32–3. Gregory S. Alexander, “The Social-Obligation Norm in American Property Law” (2009) 94 Cornell Law Review 745–820 at 779–82.

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II. Framing legal standards in the form/substance debate A.

The new formalism

New empirical studies and fresh theoretical insights have reinvigorated one of the most classic themes in jurisprudence: form versus substance. Traditionally, formalism has been supported either by positivistauthoritative approaches such as those of John Austin or Hans Kelsen,8 or by various types of abstract “a priori reasoning” such as ones by Jeremy Bentham9 or John Stuart Mill.10 In contrast, legal realism’s “rebellion” has focused on contextualism, pragmatism, and empiricism. As Karl Llewellyn notes in describing the shifts between the “Formal Style” and the “Grand Style” in the history of the common law, the Grand Style can be typified by a judicial resort to a “situation sense” analysis. Under the latter approach, in designing a judicial rule or principle for different situation types, judges seek to engage in a “true understanding” and “right evaluation” of the actual facts before them.11 The realist critique has been closely associated with binding together law and real life – including in its discussion of politics and power – up to the point that its own adversaries viewed it as reducing law to mere nominalism and cynicism.12

8

9

10

11

12

See, respectively, John Austin, The Province of Jurisprudence Determined, Wilfrid E. Rumble (ed.) (Cambridge University Press, 1995 [1832]), p.18 (‘the matter of jurisprudence is positive law: simply and strictly so called; or law set by political superiors to political inferiors’); Hans Kelsen, ‘The Function of a Constitution,’ I. Steward (trans.), in R. Tur and W. Twining (eds.), Essays on Kelsen (Oxford: Clarendon Press, 1986), p. 113 (‘the validity of the lower individual norm is grounded by the validity of the higher, general norm. And the judge, in fact, so grounds his judgment that it conforms to a valid general norm that authorizes him’). See Jeremy Bentham, An Introduction to the Principles of Morals and Legislation, J. H. Burns and H. L. A. Hart (eds.) (University of London Press, 1970) (promoting utilitarianism as a guiding feature of legal design). For a depiction of Mill’s formal logic and reliance on an abstract “economic man” as a form of a priori reasoning, see M. D. A. Freeman, Lloyd’s Introduction to Jurisprudence, 8th edn. (London: Sweet & Maxwell, 2008), pp. 985–6. Karl N. Llewellyn, The Common Law Tradition: Deciding Appeals (Boston: Little, Brown & Co., 1960), pp. 268–74. For a balanced discussion, see Frederick Schauer’s introduction to the recently discovered work of Karl Llewellyn on the theory of rules: Karl Llewellyn, The Theory of Rules, Frederick Schauer (ed.) (University of Chicago Press, 2011), pp. 1–27 (analyzing Llewellyn’s discussion of the difference between “paper rules” and “real rules” actually applied by judges, and admitting that Llewellyn can be considered “at best a fainthearted enthusiast for rules” in the rules/standards sense).

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Contemporary jurisprudence seems to reorient much of the formsubstance discourse. In Form and Substance in Anglo-American Law, Patrick Atiyah and Robert Summers offer a comparative account of what they consider to be the “substantive” American legal system visà-vis the more “formal” English one. They map out the different facets of form and substance in legal reasoning, identify first-order and second-order justifications for each method, and ground these legal differences in institutional, cultural, and historical considerations.13 Notwithstanding potential controversies over such a depiction of these two legal systems, the Atiyah–Summers analysis can be seen as representing a shift from traditional scholarship in the discourse about form versus substance, in that it both illuminates the pragmatic facets of formalism and reframes the debate within a broader based institutional analysis. Thus, in presenting pro-formalism second-order considerations, such as the need for finality in decision-making, systematic cost effectiveness, minimizing the overall risk of error, making value judgments about the appropriate persons to make decisions, promoting security and peace, and enhancing certainty and predictability in the legal system, the Atiyha–Summers analysis levels formalism to a realm that up until then has been occupied by the anti-formalist critique. It incorporates pragmatism and empiricism into the heart of the new formalist argument.

B.

Rules versus standards in legal theory

A major focus of the new formalism literature lies in making the case for designing legal norms as “rules.” Rules are typically understood as legal provisions that are hard-edged and exhaustive, meaning not only that they are initially phrased in more concrete clear-cut terms, but also that the dispute resolution would focus on a more limited set of authoritative or evidentiary materials, e.g. through strict reliance on the statute or contract in question. The analysis does not consecrate rules as inherently superior, but rather, makes their potential advantages contingent on the empirical or systemic tradeoff of costs and benefits for decision-makers and norm-recipients. 13

P. S. Atiyah and Robert S. Summers, Form and Substance in Anglo-American Law: A Comparative Study of Legal Reasoning, Legal Theory, and Legal Institutions (Oxford: Clarendon Press, 1987), pp. 1–41.

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This functionalist viewpoint has led scholars to try to identify the different parameters that may tip the scales in favor of rules or standards in various settings. Some writers have focused on the calculus for public decision-makers by examining political economy considerations and the institutional capacities of legislatures versus courts,14 and by evaluating factors such as information costs or the frequency and probability that a dispute will arise.15 As Louis Kaplow argues, rules are more costly to enact than standards because rules involve extensive, up-front and elaborate determinations of the law’s content, whereas vague standards create higher costs during the implementation and enforcement stages: parties and their legal advisers take pains to predict potential outcomes, and courts must engage in a more detailed ex post inquiry to decide the law in specific disputes.16 Other commentators, working mainly in contract theory, have looked to the rules/standards tradeoff that parties to transactions make as “private legal decision-makers.” Under this viewpoint, parties decide whether to take the costly action of writing an as-complete-as-possible contract, in the sense that they invest time and effort in trying to foresee the contingencies of different states of the world that may occur during the contract implementation. Their choice hinges on balancing such front-end costs against the anticipated back-end costs of resolving disputes about incomplete contract terms.17 The latter costs include those of considering additional interpretative materials, systemic uncertainty, the moral hazard that may undermine performance incentives, and the risk of judicial error in weighing various ex post factors.18 Lisa Bernstein demonstrates why different private merchant industries opt for rule-type contracting and strict enforcement.19 In the cotton 14

15

16 17

18

19

See Duncan Kennedy, “Form and Substance in Private Law Adjudication” (1976) 89 Harvard Law Review 1685. See, respectively, Alan Schwartz and Robert E. Scott, “The Political Economy of Private Legislatures” (1995) 143 University of Pennsylvania Law Review 595; Louis Kaplow, “A Model of the Optimal Complexity of Legal Rules” (1995) 11 Journal of Law, Economics, and Organization 150. Kaplow, “Rules versus Standards,” 579–86. Robert E. Scott and George G. Triantis, “Incomplete Contracts and the Theory of Contract Design” (2005) 56 Case Western Reserve Law Review 187–202 at 189–91. Avery Wiener Katz, “The Economics of Form and Substance in Contract Interpretation” (2004) 104 Columbia Law Review 496–538 at 525–6. Lisa Bernstein, “Private Commercial Law in the Cotton Industry: Creating Cooperation through Rules, Norms, and Institutions” (2001) 99 Michigan Law Review 1724; Lisa Bernstein, “Opting out of the Legal System: Extralegal Contractual Relations in the Diamond Industry” (1992) 21 Journal of Legal Studies 115.

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industry, merchants and mills rely neither on the Uniform Commercial Code (UCC) nor on court adjudication. Rather, members adhere to industry trade norms, a comprehensive set of bright line contract rules that cover the different stages of the contract formation, implementation, and enforcement, and rely on certain industry-specific definitions of terms. For the most part, these trade rules avoid standard-like terms such as “reasonable” and “seasonable.” Similarly, notions of “good faith” or “fairness” do not seem to explicitly affect outcomes. The quite rare open disputes are resolved by arbitrators, industry experts who use a relatively formalistic approach that gives little weight to the specific context of the contract. Compensation is based only on market difference damages plus a trivial penalty, and excludes consequential damages or other remedies that would have required the aggrieved party to disclose firm-specific information. Together with the complementary use of non-legal mechanisms such as reputation, the trade rules’ formalities provide a social and institutional framework that constrains opportunism and promotes long-term commercial cooperation in what is otherwise an industry typified by volatile prices, rapid transactional velocity, and slim profit margins.20 These findings thus allegedly undermine one of anti-formalism’s main contentions, according to which strict rules violate the normative decree to turn to a “situation sense” analysis of legal transactions, by appealing, inter alia, to grassroots custom and practice.21 The case for rules on such grounds is, however, not unequivocal. Avery Katz concludes, for example, that large and experienced traders do prefer formalistic rules, given their ability to amortize the fixed cost of detailed negotiations, their better access to non-legal enforcement, and their greater wariness of biased tribunals and juries; but the same does not hold true for small and infrequent traders, who may favor legal standards or otherwise incomplete contracts.22 Robert Scott and George Triantis present yet other settings in which standards may prove effective for contracting parties. First, they note that the rules/standards choice is almost never guided by a binary approach. Most commercial contracts include a mix of vague and precise terms, aiming at an optimal tradeoff between front-end and back-end 20 21

22

Bernstein, “Private Commercial Law,” 1739–45, 1762–4. See David Charny, “The New Formalism” (1999) 66 University of Chicago Law Review 842–59 at 843–4. Katz, “Form and Substance,” 536–8.

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costs. Second, given the adversarial process of dispute resolution, courts do not directly observe the materialization of contingencies or the performance of obligations. Courts rely instead on “proxies” – selected qualitative or quantitative measures that aid them in establishing the factual basis of the dispute – such as using data on activities of comparable firms to determine whether a defendant franchisee used “best efforts” to promote and maintain a high sales volume. Scott and Triantis then explore how parties choose the rules/standards mix to optimize the selection of proxies over two dimensions: when is the proxy made and who makes the choice? Parties can constrain the space from which courts may draw proxies during litigation, by crafting the level of the term’s precision: the vaguer the term, the broader the space. Using a mixed strategy such as combining a “best efforts” or “good faith” standard with precise provisions serves the dual purpose of limiting the space of court proxy selection only to contingencies that are similar enough in kind, whereas the broad standard communicates the underlying goals and helps the court to interpret the precise terms in light of the general purpose.23 Summing up so far, the study of rules and standards is enjoying considerable attention as a prominent subset of the reinvigorated form-substance debate. The expansion of the traditionally abstract quandary to pragmatic, functional, and empirical realms has helped to identify the complexity of rules and standards as a continuum of design options rather than a binary a priori determination. The contractsfocused literature has also aided in illuminating the institutional facets of the rule/standard dilemma, such that the design and implementation of rules and standards involve not only legislatures, administrators, and judges, but also private legal ordering.

III.

Incompleteness and legal standards in property

Incompleteness of contracts is thus a central theme among lawyers and economists working in contract law.24 In contrast, this term is nearly an alien concept in property jurisprudence. Of course, this is not to say that 23

24

Robert E. Scott and George G. Triantis, “Anticipating Litigation in Contract Design” (2006) 115 Yale Law Journal 814–79 at 836–7, 850–1. See, e.g., Oliver Hart, “Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships” (2003) 113 The Economic Journal 69. Legal works were cited in the previous section.

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public or private decision-makers do not realize the difficulty of devising a hermetically sealed legal regime of property rights. These issues arise either ex ante, e.g. when a legislator has to decide how to design a property regime in resources such as land, intellectual property, or the electromagnetic spectrum; or ex post, when parties find themselves asserting competing claims to the same asset. But although property law deals regularly with uncertainty and conflict, it is not regularly conceived by theorists as an “incomplete” field. This prevailing conception may be due not only to the legacy of Blackstone’s absolutistic concept of property, or to the traditional civil law metaphor of the unified “box of ownership.”25 Even though it was practically always clear that property rights are never absolute, so that the interests of an owner should at times accommodate or even yield to the interests of others,26 property was analyzed as offering a complete legal ordering. The bundle of rights concept, although viewed as disintegrative, is not necessarily antagonistic to this viewpoint. It is true that Llewellyn’s “situation sense” analysis, discussed above, views the judicial inquiry as instrumental to filling property norms with content ex post. But such an approach is not self-binding for the bundle of rights concept as a whole. Consider again the example of the rent-control statute discussed in Chapter 1. As mentioned, a rent-control statute redistributes several sticks between the landlord and the tenant – such as the right of decisionmaking and the right to receive income from the asset – sticks that would have belonged to the owner under “conventional” ownership. But even though rent-control statutes have such a redistributive agenda, to the extent that such a division of sticks is articulated upfront in a statute, it may still keep intact a “complete” and clear delineation of the property rights and duties between the relevant parties. For example, a statute which provides that the rent cannot be raised at more than two percent a year for a given tenant offers a clear-cut complete ordering about the division of the rights to income and related decision-making among the parties. This means that the case for complete ordering is not necessarily dictated by a particular agenda.

25

26

See John Henry Merryman, “Ownership and Estate” (1974) 48 Tulane Law Review 916–45 at 927. See Carol M. Rose, “Canons of Property Talk, or, Blackstone’s Anxiety” (1998) 108 Yale Law Journal 601–32 at 603–6.

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But regardless of one’s normative stance, as a functional matter property cannot always conform to tidiness or completeness. To better account for this incompleteness, while acknowledging the potential price tag that such a standard-like strategy entails for the structure of legal property – most prominently, decreased legal certainty – this section now sets out to offer a tentative, non-exhaustive taxonomy of incompleteness in property law.

A.

Incomplete delineation of private, overlapping uses

As mentioned, the allocation of rights and duties pertaining to a certain resource cannot always be carved out in advance in a neat manner, and transaction costs may often hinder an ex post private consensual ordering when a specific dispute arises. One facet of this type of incompleteness is illuminated in Yoram Barzel’s work, which extends contractual incompleteness to the control and management of resources. According to Barzel, a resource consists of multiple attributes, not all of which are necessarily captured by contract, and are thus left in the “public domain.” The party who is able to capture these attributes in view of such imperfect delineation may be viewed as the “residual claimant,” or as holding the “economic property rights” to these attributes.27 But property incompleteness deriving from private overlapping uses goes well beyond the contractual ordering of resources, and in fact shows its quintessential in rem nature when the parties in conflict have no prior consensual baseline whatsoever. Probably the most typical setting is that governed by the law of nuisance. Though often slanted as “so amorphous and protean so as to make impossible a description of the area which it covers”28 the vagueness of nuisance law is not simply a result of historical evolution,29 or of contemporary legislative incompetence or neglect. In a world that has so many potential cross-border interactions and influences, it is practically impossible to meet the challenge of defining when an “invasion of another’s interest in the private use and enjoyment of

27

28

29

Yoram Barzel, Economic Analysis of Property Rights (Political Economy of Institutions and Decisions), 2nd edn. (Cambridge University Press, 1997), pp. 90–6. See Warren A. Seavey, “Nuisance: Contributory Negligence and other Mysteries” (1952) 64 Harvard Law Review 984. See William L. Prosser, “Private Action for Public Nuisance” (1966) 52 Virginia Law Review 997–1027 at 999.

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land”30 amounts to an infringement of property rights by using only upfront clear-cut norms. The confusion and inconsistency typifying AngloAmerican law need not, of course, be praised, but it does attest to the fact that private, overlapping uses cannot be governed only by rules. US copyright law, and its fair use doctrine, is another case in point. Protecting creative works by granting the creator monopolistic-like property rights over the use of the resource facilitates a mechanism for internalizing the benefits of innovation.31 But this instrumental justification does not stand alone. Since the end of innovation is the promotion of knowledge in current and future society, copyright is intrinsically limited. Ownership is not perpetual, but time-limited; law excludes certain types of information and knowledge from counting as protected works; and it limits the exclusionary nature of the right during its term, chiefly by the doctrine of “fair use.”32 The legislative design of fair use in the Federal Copyright Act can be viewed as combining both rules and standards, but seems to be dominated by the latter. The Act does enumerate a non-exhaustive list of types of uses, e.g. use by reproduction, and some purposes of use by nonowners – e.g. criticism, comment, news, teaching, or research – that may qualify as a fair use. But the determination of whether the use made of a work in a particular case is indeed “fair” rests on the consideration of four factors: (1) purpose and character of the use (e.g. commercial or non-profit educational); (2) nature of the copyrighted work; (3) amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) effect of the use on the potential market for the copyrighted work or on its value.33 The US Congress has not provided further guidelines for filling these factors with content, in the implicit expectation that a common law method would crystallize the fair use doctrine over time.34 This has not happened to date. Several legislative attempts and scholarly calls to somewhat crystallize the fair use doctrine have not materialized. But the disappointing result to date of content-giving to the doctrine does 30 31

32

33 34

Restatement (Second) of Torts § 822 (1979). See Peter S. Menell and Suzanne Scotchmer, “Intellectual Property Law,” in A. Mitchell Polinsky and Steven Shavell (eds.), Handbook of Law and Economics, 2 vols. (Amsterdam: North-Holland, 2007), vol. II, pp. 1476–8. Gideon Parchomovsky and Kevin A. Goldman, “Fair Use Harbors” (2007) 93 Virginia Law Review 1483–532 at 1494. Federal Copyright Act of 1976, 17 USCA § 107. See Campbell v. Acuff-Rose Music, 510 US 569 at 596 (1994) (Kennedy J. concurring).

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not indicate that the initial strategy of opting for standard-like norms was necessarily a mistake. Any attempt for a hermetically sealed set of rules to exhaustively tackle the multiple contingencies that typify the dynamic world of creative works would likely have become obsolete from the outset. The relative failure so far to give fuller content to the fair use standards by top-down institutions or by bottom-up organizations illustrates, rather, the severity of the incompleteness embedded in the Act’s agenda. In a related setting, an oft-made criticism of the Digital Millennium Copyright Act (DMCA)35 concerns an alleged faulty rule/standard legal design. Aimed at prohibiting circumvention of technological protection measures, the DMCA does create certain up-front “safe harbors,” but those can hardly address the systemic problems of incompleteness. For example, when an internet search engine is barred from copying certain copyright-protected texts or images for the purpose of indexing, it is in effect prevented from engaging in any sort of copying in the Web, including of non-protected content, thus granting a certain plaintiff overbroad protection and power of veto that goes well beyond its own proprietary content.36 The lack of a “fair access” legal standard, equivalent to the “fair use” standard in other settings of copyright, creates a suboptimal regime that inadequately addresses the issue of incompleteness.37

B.

Incomplete allocation of future uses

The above discussion dealt with types of simultaneous uses that can generally be foreseen by a legislator or another public decision-maker in crafting the legal regime, even if some contingencies may challenge the doctrine and require dynamic adjustments. In contrast, the design of property faces an inherently different task in addressing categorically unforeseen types of uses, resulting from fundamental social, economic, or technological changes. Antonio Nicita et al. define this problem as one of “yet un-attributed jural relations over newly discovered uses.” They argue that this issue 35 36

37

Pub. L. No. 105–304, 112 Stat. 2860 (1998) (codified in scattered sections of 17 USC). Mark A. Lemley and Philip J. Weiser, “Should Property or Liability Rules Govern Information?” (2007) 85 Texas Law Review 783–842 at 793–6, 800–3. See Christopher Sprigman, “Reform(aliz)ing Copyright” (2004) 57 Stanford Law Review 485–568 at 525–7.

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poses a true challenge when the new use creates externalities on others, and call to refrain from a sweeping attribution of the rights over such uses to the owner as holder of “residual control rights over the asset.”38 A contemporary type of such incompleteness concerns the challenges posed to intellectual property, and copyright in particular, in view of major technological changes over the past few decades. One example is private home-taping in the era of the digital music revolution.39 Although piracy and copyright infringement are in no way a new theme, the issue of downloading, storing, and playing digital files containing copyright-protected contents could not simply build up on previous legislative provisions or otherwise be sorted out through bottom-up norms among copyright holders, manufacturers of digital music devices, and consumers. In the analogical recording era case of Sony Corp. of America v. Universal City Studios,40 the US Supreme Court rejected a contributory infringement suit against Sony as manufacturer of the Betamax videocassette recorder (VCR), reasoning that the VCR was capable of substantial non-infringing uses. Following this, and especially in view of the digital technology revolution as of the late 1980s, Congress had set out to enact the 1992 Audio Home Recording Act (AHRA).41 The AHRA aims at balancing the protection of interests of copyright holders with the prevention of an excessive chilling effect on the development of new technology. It does so by mandating technological safeguards against reproduction of first-generation copies of copyrighted material; compensating copyright holders for lost revenues due to hometaping through the payment of royalties collected in sales of digital audio recording devices and media; and granting immunity to both manufacturers who follow AHRA and to consumers who engage in home-taping. But the rapid advance of technology and the incompleteness of rights allocation are continuing to challenge this field. In the 1999 Recording Industry Association of America (RIAA) v. Diamond Multimedia Systems, Inc. case,42 the Ninth Circuit rejected a copyright infringement 38

39

40 41 42

Antonio Nicita et al., “Towards a Theory of Incomplete Property Rights” (2007), p. 11, available at http://ssrn.com/abstract=1067466. See, e.g., Zachary Williams, “Hometaping in the Twenty-First Century: Updating the Audio Home Recording Act to Address Emerging Technologies” (2008) 36 AIPLA Quarterly Journal 77. 464 US 417 (1984). Audio Home Recording Act of 1992, 17 USC §§ 1001–1010 (2000). 180 F. 3d 1072 (1999).

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claim against the manufacturer of Rio PMP 300, an early version MP3 digital music player, for failing to meet the requirements of AHRA. The court reasoned that the term “digital audio recording device” does not apply to the Rio, because “it can only make copies from a computer hard drive.”43 In view of legislative exemption in AHRA to a personal computer, “whose recording function is designed and marketed primarily for the recording of data and computer programs,” the court held that the Rio cannot qualify as a “digital audio recording device.” However, since in effect the computer and the internet nowadays play a major role in the recording and playback of music, the effectiveness of AHRA has been diminished, bringing about more uncertainty and renewed calls for a comprehensive reform. New uses should not necessarily result in the weakening of a previously broad protection of ownership. For example, while the adaptation of the ad coelum rule for subterranean oil and gas fields involved stateenforced “unitization” schemes to resolve problems of overfragmentation, it maintained the rights of surface owners to receive the income from these resources.44 The main lesson is rather different. The process of crystallizing incompleteness is often of a different nature when future, unforeseen uses materialize. This type of incompleteness may require a reconsideration of the fundamentals of property law, and thus may be generally less appropriate for a strategy that relies on a preexisting legal standard whose content is filled by other institutions. Rather, it may require the legislator itself to promulgate entirely new rules.

C.

Incomplete rights and regulation

Incompleteness in the delineation of property is not restricted to interpersonal relations. Some of its most challenging facets arise in the context of public law, with significant implications for the choice between standards and rules in the design of the legal regime. Consider what is often ill-reputed as the “muddiest” topic in property law: the regulatory takings doctrine. Probably no other doctrine seems to embrace such a multiplicity of legal standards. According to the three-prong test 43 44

Ibid., at 1081. See, generally, Gary Libecap and James Smith, “The Self-Enforcing Provisions of Oil and Gas Operating Agreements: Theory and Evidence” (1999) 15 Journal of Law, Economics, and Organization 526.

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developed in Penn Central Transportation Co. v. City of New York, in deciding whether an adversely affecting regulatory measure amounts to a taking, the court looks at: (1) “the economic impact of the regulation on the claimant”; (2) the extent of interference with “distinct investment-backed expectations;” and (3) “the character of the governmental action.”45 The enormous volume of debate over this doctrine, and the consequent frustration with its ad hoc nature and the inability of courts to introduce more certainty and predictability into it, have tended to focus on the paradigmatic considerations of physical takings law, i.e. whether the regulation imposes an “unfair” burden of the owner; what effect an uncompensated regulation has on economic investment incentives; and whether the regulation implicates a majoritarian bias against the owner. The problem of regulatory takings can also, however, be conceptualized as one of incompleteness of property rights, in a way that may also shed light on the type of norms (rule-like or standard-like) that may govern it, and on the ability of public decision-makers to provide thicker content and future-looking guidance to parties. To illustrate the difference that incompleteness makes for government regulation of property, consider that in the case of land, one can discern quite a consistent categorical difference in the judicial approach to present uses vis-à-vis future uses. With respect to the regulation of existing uses, the “vested rights” doctrine examines the extent to which the implementation of a project is sufficiently far along, and if that is the case, it shields the owner against a subsequently enacted regulation as if the existing use were already intact.46 Under the closely related doctrine of amortization, if the government wishes to eliminate a pre-existing use that does not conform to a new zoning scheme, without having to pay compensation, it must allow the affected owner to continue her use for long enough to amortize her investment – a relatively clear-cut norm. In contrast, when a regulation frustrates a future use, e.g. when a rezoning scheme is denied due to considerations of growth control, environmental concerns, or historic preservation, or when a moratorium prohibits new developments in an entire area for a certain period,47 the court follows the much vaguer Penn Central three-prong test. 45 46

47

438 US 104 at 124–25 (1978). See, generally, Vicki L. Been and Robert C. Ellickson, Land Use Controls: Cases and Materials, 3rd edn. (New York: Aspen Publishers, 2005), pp. 202–9. See Tahoe-Sierra Preservation Council v. Tahoe Regional Planning Agency, 535 US 302 (2002).

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This distinction has been criticized, and when issues of fairness, investment incentives, or politics are studied in isolation, it may indeed seem somewhat arbitrary.48 But there is at least one sense that may explain why courts find it easier to govern existing uses by relatively clear-cut norms, whereas the legal regime regarding regulation of future uses seems so chaotic. This is so because existing uses are ones that have already been allocated, whereas future uses feature a genuine problem of incompleteness. It is thus no wonder that courts are unable to clearly answer what seems to be a pretty straightforward question: what kind of legal right, if any, would a person have to develop her privately owned land? If we avoid extreme positions, according to which land development is either a purely government-granted prerogative or, rather, an inherent stick of ownership, then it is obvious that incompleteness plays a prominent role in the dilemma faced by public decision-makers. It dictates the limits on setting up a clear criterion for numerous contingencies that may arise for future resource uses, and sheds light on the tendency to defer to a later stage the crystallization of the governing norms. It should be emphasized that the use of standards does not translate automatically to weaker protection of private property rights, and vice versa. Thus, for example, the right of indemnification to landowners in German planning law is governed chiefly by a standard: “breach of faith.” Nevertheless, this regime grants landowners a broad right to compensation for adverse regulation, going way beyond US doctrine.49 This is yet another example of my general contention that the institutional features of property do not dictate its substantive content, just as is the case with property’s structural traits.

D.

Incompleteness and eminent domain

Incompleteness and the use of standards may also illuminate another high-profile theme in the public realm of property: the content of the

48

49

Christopher Serkin argues that existing uses are not worthy of stronger protection, and calls to apply to existing uses the general tests of substantive due process or the regulatory takings doctrine. Christopher Serkin, “Existing Uses and the Limits of Land Use Regulation” (2009) 84 New York University Law Review 1222. See Gerd Schmidt-Eichstaedt, “The Law on Liability for Reduced Property Values Caused by Planning Decisions in the Federal Republic of Germany” (2007) 6 Washington University Global Studies Law Review 75–102 at 85–6.

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Fifth Amendment’s “public use” provision as a constitutional limit on the exercise of the power of eminent domain. The judicial interpretation of the public use requirement is a hotly contentious issue. The public use test serves not only as the chief substantive restraint on what is typically considered the most aggressive government intervention with private property; it also signifies more broadly the scope of individual liberty from collective coercion, especially in view of property’s unique position in American popular discourse as the “guardian of every other right.”50 Thus, the public outrage and state-level legislative backlash following Kelo v. City of New London,51 which validated the use of eminent domain for “economic development,” seems to have reinvigorated the debate over other core themes in American society, including civil liberties and federalism. Beyond the debate over the current content of this norm, the jurisprudential and institutional nature of the public use legal standard clearly demonstrates the issue of incompleteness in the allocation and reallocation of property. The slanting of the public use norm as prone to inherent abuse, or as one that is simply “useless,”52 overlooks the genuine legal design dilemma that a federal/state constitution drafter or legislator faces in delineating the future contours of property. The fact that the Fifth Amendment does not specify in advance what types of uses would qualify as “public,” but rather, delegates it to later stage administrative decisions supervised by judicial review and interpretation of the norm, is not necessarily oriented at a certain substantive result. A rule-like public use provision could have elaborated a non-exhaustive long list of uses, just as a judicial interpretation of a textually open-ended norm may not necessarily be committed to broad deference to government. That said, what exactly is the type of incompleteness that the public use norm tries to deal with? How is the legal standard filled with content to identify those ends that qualify as public uses and that may require government coercion to implement them? Consider the fact that even proponents of strong private property rights generally agree that the use of eminent domain, as a way to circumvent hold-outs or other types of monopolistic behavior, is less 50

51 52

James W. Ely Jr., The Guardian of Every Other Right: A Constitutional History of Property Rights, 2nd edn. (Oxford University Press, 1998), p. 26. 545 US 469 (2005). See Abraham Bell and Gideon Parchomovsky, “The Uselessness of Public Use” (2006) 106 Columbia Law Review 1412.

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problematic when the good or service for which the power of eminent domain is employed possesses the economic traits of a public good, or otherwise requires strong public intervention in its provision.53 Yet, even if one is driven by a strict approach, formerly unknown uses may develop due to new technologies, public demand, or other exogenous changes. In 1791, the drafters of the US Bill of Rights may have thought about taking private property for uses such as roads, navigable water routes, or military bases. But with the rapid development of technologies during the nineteenth and twentieth centuries came new public uses and consequently the occasional need to non-consensually reallocate property rights in lands. One may consider railroads, dams, infrastructures, and other types of public utilities.54 It should be noted, however, that the constitutional public use provision could be complemented by certain hard-edged norms, enacted through a constitutional amendment or a specific statute. This was the case with the post-Kelo backlash, which brought a number of state governments to amend their constitutions or to enact statutes to specifically limit the use of eminent domain for private economic development.55 However, this strategy still leaves a central role to the public use standard as a mechanism which is filled with court-made content. Therefore, incompleteness implicates both the private and public aspects of property and their complicated interplay. The employment of legal standards, which are filled with content over time, may thus serve as a sensible strategy to address the dynamic aspects of delineating property rights and duties. At the same time, legal standards in a way entrench legal uncertainty, and may thus undermine the systematic requirement for sufficient predictability in property.

IV. Toward an institutional analysis of standards This section distinguishes between two broad types of institutions that regularly engage in norm-making, focusing on the role that these institutions play in property ordering. The term “bottom-up institutions” 53

54

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See Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain (Cambridge, Mass.: Harvard University Press, 1985), pp. 166–9. See, e.g., Thomas W. Merrill, “The Economics of Public Use” (1986) 72 Cornell Law Review 61–116 at 97–8. Edward J. Lopez et al., “Pass a Law, Any Law, Fast! State Legislative Responses to the Kelo Backlash” (2009) 5 Review of Law and Economics 101.

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refers to nongovernmental entities such as merchant associations or residential common interest communities, which create norms that may become formally applicable either directly by industry- or community-wide internal mechanisms, or indirectly through the adoption of such norms through “custom” or “usage” provisions in legislation. For this purpose, I discuss only norms that are formally binding, and not the numerous types of bottom-up entities that engage in setting up informal rules of conduct that are enforced extra-legally. The term “top-down institutions” refers to state institutions entrusted with the governmental authority to create binding law, chiefly constitution drafters, legislatures, administrative agencies, and courts.

A.

Bottom-up private ordering

Private ordering of property relationships may substantially diverge among different kinds of bottom-up groups and communities. Despite these differences, some generalizations may be made about the prospects and challenges of property ordering by employing legal standards. I argue that the stronger the (1) established institutional authority and (2) ongoing group homogeneity, the better the capability of the bottomup entity effectively to incorporate property standards so as to allow for a successful balance between dynamism and predictability. Consider first the lex mercatoria, developed in Middle Ages Europe as a grassroots form of private ordering connecting merchants from different territories, and aimed at enabling these traders to follow common norms and resolve disputes speedily.56 Although there are disputes about the historical origins of the lex mercatoria, it would be safe to state that during that period, a set of customary norms applying to the class of merchants evolved and was practiced in various meeting places, typically trade fairs, across the continent. These fairs also became places for conflict resolution, with merchants themselves setting up and administrating these tribunals.57 The importance of law merchant norms exceeded the contractual aspects of the transactions. In fact, the law merchant created the prominent legal and financial instruments of personal property that are 56

57

See, e.g., Leon E. Trakman, The Law Merchant: The Evolution of Commercial Law (Littleton: Fred B Rothman & Co., 1983). See John Braithwaite and Peter Drahos, Global Business Regulation (Cambridge University Press, 2000), p. 46.

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known nowadays. Although instruments such as letters of credit had existed in earlier periods, an innovation of the law merchant era was the introduction of the idea of a documentary transfer of an intangible – the right to a debt – and even more importantly, the evolution of the practice by which a trader who purchased the negotiable instrument (e.g. bill of exchange) in good faith, did so free of any prior interests in it. Besides rule-like property norms which had been accepted throughout the trade community and that later served as the basis for many civil codes and statutes in the nation-state era,58 the merchants were also aware of what we now term “incomplete” contractual and proprietary aspects of commercial relationships. Thus, the core of trade practices was the principle of “good faith.”59 The relative homogeneity of the traders’ commercial interests and social understandings allowed them to effectively handle such contingencies by consent or through the streamlined process of expert tribunals. Such cross-border efficacy of bottom-up standard-like norms gradually declined, however, with the taking over of commercial law by national courts. Nowadays, with the growing globalization of economies, questions of cross-border organizational structures and choice strategies for substantive and procedural property norms re-emerge in full force. Interestingly, research indicates that the ability of commercial parties to exploit the potential advantages of legal standards may be more effective in the crossnational realm than in some national legal systems. As Clayton Gillette argues, the United Nations (UN) Convention on Contracts for the International Sale of Goods has been able effectively to use a standard-like tactic, especially through Article 9(2), which relies heavily on identifying trade “usages” that are regularly accepted and respected by international traders.60 Such trade usages emerge either out of international mercantile associations – most notably the INCOTERMS of the International Chamber of Commerce (ICC)61 – or from unwritten practices that rely on readily verifiable events.62 58

59 60

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See, e.g., Jan H. Dalhuisen, Dalhuisen on International Commercial, Financial, and Trade Law, 2nd edn. (Oxford: Hart Publishing, 2004), pp. 471–7, 671–3. Trakman, The Law Merchant, p. 7. United Nations Convention on Contracts for the International Sales of Goods, April 11, 1980, Annex I, UN Doc. A/CONF 97/18, reprinted in 19 ILM 671 (1980), Art. 9(2). International Chamber of Commerce, INCOTERMS 2000: ICC Official Rules for the Interpretation of Trade Terms (2000). Clayton P. Gillette, “The Law Merchant in the Modern Age: Institutional Design and International Trade Usages under the CISG” (2004) 5 Chicago Journal of International Law 157–80 at 171–9.

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The effectiveness of legal standards such as “trade usage,” “reasonableness,” or “good faith” thus hinges on the level of epistemological and cultural homogeneity of the international traders’ community, and on the capacity of bottom-up institutions such as the ICC to fill initially vague norms with content, broadly disseminate information, and gain wide acceptance of such norms.63 It should be noted, however, that for such bottom-up strategy to work not only on the contractual level, but also on the proprietary one, certain features would have to be added to the overall legal regime applying to cross-border commerce. In this context, Jan Dalhuisen points to the existing gap between common law and civil law countries, by which the former have responded better to the dynamic process of international commercial innovation by recognizing flexible property mechanisms such as advance types of floating charges, repos and leases as conditional sales, trust structures, and constructive trusts.64 The task of leveling up such property mechanisms across borders cannot be shouldered only on bottom-up institutions, because such legal instruments would have to be validated, inter alia, in bankruptcy proceedings that would likely continue to be governed by national courts. But to the extent that different legal systems could become closer in their attitude toward such innovative property structures, there is better potential for employing cross-border legal standards also in property norms. Chapters 7 and 8 take further the issue of property standards, mostly in the context of bilateral investment treaties. Consider next the way in which current merchant communities, such as the American cotton industry, are able to combine hard-edged rules and procedures with effective mechanisms for handling uncertainties and unexpected contingencies. As Bernstein notes, the certainty and predictability of the crystallized rules enable parties to demonstrate flexibility, forgiveness, and willingness to renegotiate deal terms in truly exceptional events, without having to fear that such a “softer” approach would be abused by the other party – since the absolving party may always rely on the strict and swift enforcement of the clear industry-promulgated contract terms.

63

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See Avery Wiener Katz, “The Relative Costs of Incorporating Trade Usage into Domestic versus International Sales Contracts” (2004) 5 Chicago Journal of International Law 181–90 at 183–5. Dalhuisen, International Commercial Law, pp. 20–5, 222–8.

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To further facilitate the institutional infrastructure of such communities to address uncertainties and unexpected contingencies, the industry plays an ongoing active role in preserving both the personal homogeneity of members and the professional epistemological homogeneity across the industry. It does so through channels of information dissemination, group discussion, and education. Beyond instilling and constantly re-instilling the idea that commercial relationships in the industry are built on long-term cooperation and trust, the collective action organizations use these different conduits to create a “rough consensus as to the contours of acceptable behavior” not covered by current rules.65 The chief insight from the analysis of bottom-up institutions is that even when the group engages relatively frequently in updating the industry’s hard-edged property law rules to accommodate dynamism, it nevertheless acknowledges that it would have to face a considerable amount of contingencies and uncertainties that cannot be resolved in advance. In such cases, the use of standard-like norms and procedures may be advantageous. However, the success of such a strategy depends on certain features, such as established institutional authority and ongoing group homogeneity. This is especially so because the property facets of the norms apply in rem, going beyond contractual parties.

B.

Top-down content filling

Courts and other state institutions involved in the ongoing giving of content to property norms differ substantially from the working of bottom-up institutions. Yet they too face particular challenges in administrating a workable system of legal standards in property. On the one hand, courts seem to be the perfect forum for engaging in the ongoing process of filling initially vague norms with content, disseminating knowledge about it, and gaining wide acceptance and adherence through state enforcement mechanisms. Moreover, courts, as opposed to the legislature, let alone the constitution drafter, have more frequent opportunities to engage in this dynamic process and thus to systematically address problems of incompleteness. In so doing, courts constantly engage both in the private aspects of property in dealing with interpersonal disputes, and in this field’s public aspects with regard to regulation or eminent domain cases. Courts are often explicit about the 65

Bernstein, “Private Commercial Law,” 1745–59, 1771–8.

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cross-influences of these two facets of property law, and can accordingly fill legal standards with content while considering the broad spectrum of property. But these considerations also introduce certain institutional challenges that a court faces, if it wishes to successfully devise a strategy of employing property legal standards. Looking at established institutional authority and actor homogeneity as essential ingredients for the feasibility of property legal standards, there is a clear tradeoff between top-down and bottom-up institutions. While courts are exempted from constantly engaging in self-preserving their broad-based authoritative stance within the group of affected parties – as a state institution, their decision-making is binding on the parties – courts do not enjoy the luxury of addressing only defined, smaller-scale communities that tend to be more homogenous to start with. As a result, the judicial enterprise of filling standards with content faces an intricate challenge in compromising the court’s institutional ability for dynamism with the need to preserve a sufficient amount of predictability, certainty, and future-looking guidance to the general public. Beyond internal institutional constraints that state organs such as courts face in giving content to legal standards, one should also keep in mind potential external limits. The judicial enterprise of filling norms with content on a dynamic basis touches on broad questions of legitimacy, division of powers, and other considerations that act as external constraints on such institutions. Is the court restricted in the kind of values it may rely on in giving content to initially vague norms over time? Can it conduct a full-scale paradigm shift in identifying and explicating the kind of values to which the legal standard should generally adhere, based on its own evaluation of changing societal perspectives, or is the court supposed to address only lacunas or dynamic changes that the legislature could not have foreseen as a practical matter? A full-scale analysis of these external institutional constraints is outside the scope of this chapter. Accordingly, I do not delve here into the broader dilemma of “originalism” in constitutional or legislative interpretation, including the impact such an approach would have on the standard-type provisions in the Takings Clause.66 However, I do assert 66

Compare William M. Treanor, “The Original Understanding of the Takings Clause and the Political Process” (1995) 95 Columbia Law Review 782 (arguing that a plain language reading of state constitutions enacted just prior to the federal Bill of Rights indicates that these protected property only against physical confiscation and that early judicial

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that even an otherwise “originalist” interpreter would probably agree that a norm that is explicitly designed as a textually vague one, as opposed to a hard-edged provision, leaves at least some content-filling to other institutions at a later time. In fact, an originalist may embrace the choice between legal standards and rules as pointing to the intention of the constitution drafter or legislator about the way in which the norm should develop over time and the role that other institutions should play in it – so that a hard-edged rule would fix the norm’s content at the time of legislation, but the open-ended standard would not. This means that in considering the institutional legitimacy of courts in interpreting statutes and constitutions, the case for a dynamic interpretation may actually be stronger when courts engage in filling standards with content, as compared with applying and interpreting rule-like provisions. This does not grant courts absolute power to engage in dynamic jurisprudence. But legal standards, including property ones, seem to possess an institutional trait by which constitution drafters and legislatures do delegate some scope of content-filling power to courts.

V.

Property legal standards and institutional choice A.

“Custom,” “good faith,” and “trade usage”

Legal norms such as custom, trade usage, or good faith exemplify the intricate relationship between top-down and bottom-up institutions in crafting property standards. I elaborated above on the way in which bottom-up institutions may develop an industry-wide understanding of a term such as “usage.” But probably the true challenge of such norms lies in incorporating such standards by a top-down institution within its broader-based property jurisprudence. Can the court identify a bottom-up institution that engages in the ongoing collective action of filling the norm with content, disseminating it, and gaining wide acceptance to it among the relevant audience? In such a case, should the court adhere to it, or should it, rather, engage in its own interpretation of the term, or at the least scrutinize the bottom-up content to accommodate other societal goals or principles? decisions construed them in this way), with Andrew Gold, “Regulatory Takings and Original Intent: The Direct, Physical Takings Thesis ‘Goes too Far’” (1999) 49 American University Law Review 181–242 at 241 (contending that the historical record on this alleged physical/regulatory distinction is ambiguous).

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Consider, for example, the role of custom. In both the civil law and common law traditions, custom was traditionally considered an autonomous and independent source of law, which although based on immanent principles, was formally binding in the system. The power of custom substantially weakened in both legal families with the rise of national sovereignty, exclusivity of state institutions in lawmaking, and legal positivism.67 Yet in today’s world, which often defies national borders, the potential role of custom re-emerges in the context of transnational private law. This is especially so when international instruments, such as the UN Convention on the International Sale of Goods, sanction not only usages and practices established by the parties, but also those usages which in international trade are “widely known to, and regularly observed by, parties to similar contracts of the particular trade.”68 This provision is increasingly important due to the work of supranational professional institutions such as the ICC. The potential reincorporation of custom as a binding source of law raises particular concerns in the context of property. For example, to the extent that professional norms on the various aspects of negotiable instruments or bona fide purchases gain formal status of custom, these norms’ in rem nature and limits on opting out might be more pertinent as compared with other areas of customary norms. This would not only constrain individual parties, but also limit judicial discretion in applying the custom.69 Bottom-up-created content of a custom may thus be favored due to it being closer to real-life dealings, and more dynamic in its ability for update or change. At the same time, however, legal policy must pay careful attention to the complex interplay between bottom-up and topdown institutions as to who gets to fill the standard with content. This complicated interplay may help to shed light on the intricacies of the judicial application of the UCC and especially Article 2 – which refers to “commercial standards” and “usages of trade” for interpretation and gap-filling of transactions. Criticizing the way in which courts carry on the task of making sense of these legal standards, Bernstein argues that this judicial enterprise is empirically detached from the actual rules and practices invoked among 67

68 69

See Jan H. Dalhuisen, “Custom and its Revival in Transnational Private Law” (2008) 18 Duke Journal of Comparative and International Law 339. Art. 9(1)–(2) of the Convention on the Sale of Goods. Dalhuisen, “Custom,” 348–52.

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different industries.70 Other commentators argue that the very aspiration to create a set of default standards is “wasted,” since such standards address large heterogeneous communities. What follows, goes the argument, is that courts instill interventionist ad hoc contents in Article 2, thus leading to problems of moral hazard and uncertainty among legal actors.71 These two types of criticism, assessed together, may nevertheless explain why American courts take a top-down interpretative approach to what should allegedly have been injected with bottom-up industrybased content. The UCC covers much ground, in the sense that it applies to all types of commercial dealings across all industries. Moreover, opting out of Article 2 is practically impossible even in its pure contractual aspects, let alone for proprietary aspects such as security transactions and good faith purchases. As a result, courts face an often frustrating task, but one that they cannot simply delegate, of trying to create a common ground for the vague terms included in Article 2 so as to preserve some level of collective guidance across society. A similar dilemma is faced by courts in trying to instill content in the “good faith” requirement which is spread across the UCC. Section 2–103(1)(b) originally defines “good faith,” in the case of a merchant, as “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” The latter part of this Article 2 definition, imposing a conduct of “reasonable commercial standards of fair dealing,” thus requires a merchant to act in what may be defined as “objective” good faith. This goes beyond the “subjective” good faith facet in the former part of the definition. In 2001, the UCC general Article 1 definition of good faith was expanded beyond “honesty in fact” (i.e. “subjective” good faith) to include also the objective good faith component of Article 2. This means that this broad definition of good faith now applies also to dealings involving non-merchants. The expansion of the objective facet of the good faith requirement to all types of parties led to a stormy response, with several states refusing to apply this standard.72 70

71

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See Lisa Bernstein, “The Questionable Empirical Basis of Article 2’s Incorporation Strategy: A Preliminary Study” (1999) 66 University of Chicago Law Review 710–80 at 715–17. Alan Schwartz and Robert E. Scott, “Contract Theory and the Limits of Contract Law” (2003) 113 Yale Law Journal 541–620 at 608–9, 618–19. Franklin G. Snyder, “Clouds of Mystery: Dispelling the Realist Rhetoric of the Uniform Commercial Code” (2007) 68 Ohio State Law Journal 11–56 at 40–3.

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It is clear that the incorporation of a general duty of objective good faith across the UCC eliminates the possibility of any bottom-up collective meaning that could have been theoretically developed previously, when this standard had been restricted to merchants. As the experience of other legal systems that include a general objective duty of good faith shows, the content-filling of such norm is strictly a matter of top-down judicial enterprise, which aims at creating society-wide norms. If this is the case, then it should be clear enough that the good faith standard would be top-down filled with content, especially in its proprietary aspects, since this objective standard affects not only heterogeneous contracting parties, but also entirely distant third parties. Thus, when the Restatement defines “bad faith” as violating “community standards of decency, fairness, or reasonableness,”73 it actually refers to society standards as defined by courts.

B.

“Objectionable conduct” and “reasonableness”

Common Interest Communities (CICs) and other types of “planned communities” form a different type of bottom-up institutions that engage in private ordering of property. As this subsection illustrates, alongside the promulgation of “rules,” CICs also resort to some degree of standard-type norms in regulating the community. CICs, which are booming in numbers across the US and outside of it, lead a complicated relationship with top-down institutions such as legislatures, executive bodies, and courts in ordering the community’s property relations. As Chapters 3 and 4 will show in more detail, the internal structure of CICs is designed to address collective action problems pertaining both to commonly-owned assets and to the use of privately-owned housing units. For that purpose, the CIC creates formal private ordering through the conditions, covenants, and restrictions (CC&Rs) included in the CIC’s governing documents. Such documents typically contain numerous highly-detailed, rule-like norms. This involves an entire set of provisions regulating the establishment, maintenance, and rules of use regarding the commonly-owned assets, such as streets, parks, or sport facilities. In addition, the CIC’s upfront norms may typically include interventionist, clear-cut provisions regarding the use of private housing units, such as a no pets prohibition.

73

Restatement (Second) of Contracts § 205 (1981) (emphasis added).

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These rules are designed to prevent potential spillover effects which do not conform to the community members’ idiosyncratic preferences. But not everything can be planned in advance. Even if the developer carefully designs the governing documents so that rule-like provisions not only define physical amenities and financial mechanisms, but also aim at specifying the attributes of the community’s “character,” some yet unspecified contingencies are bound to emerge over time. To resolve such potential problems of incompleteness in the delineation of property rights between the CIC as a corporate entity and its individual members, the community-based governance of collective and private properties has a built-in dynamic dimension. CIC institutions generally have powers that go beyond enforcing the terms of the original governing documents to make ongoing managerial decisions, promulgate rules, and even amend the governing documents without a need for unanimous homeowners’ consent.74 On the face of it, it seems that CICs can address incompleteness and dynamism through a rule-like strategy. If a certain clear-cut norm no longer covers all types of behaviors that the community as a group views unfavorably, the CIC can simply amend current rules or promulgate new ones. But it seems that such a tactic may have its limits, even when the CIC’s rulemaking institutions are alert to changing needs. Promulgating a new rule that restricts a certain specific behavior by a resident (for example, painting the exterior of the house in a color other than white) assumes that this type of behavior was previously permitted. In such cases, a majority-based decision can cause overt conflicts, claims against retroactivity, and organizational costs. If this is the case, CICs may consider employing standard-like norms to govern future contingencies that cannot be always defined in advance, but are nevertheless viewed as contradicting the “ambience” or “community values” of the neighborhood. Consider the 40 West 67th Street v. Pullman case.75 A cooperative housing shareholders’ meeting held that a tenant’s behavior amounted to “objectionable conduct,” which under the cooperative bylaws allows for unilateral termination of the lease. Upholding the cooperative’s decision, the court followed corporate law’s “business judgment rule” criterion, thus broadly delegating to the cooperative the power to fill the standard

74 75

Restatement (Third) of Property (Servitudes) §§ 6.4.–6.14. (2000). 790 NE 2d 1174 (2003).

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of “objectionable conduct” with content, as long as the corporation acts “in legitimate furtherance of corporate purposes.”76 How should a reviewing court treat the application of a standard-like provision that is filled with content over time by the CIC’s institutions? Is the generally lax judicial review in Pullman an efficient and fair legal policy? On the one hand, whenever a legal standard is set forth in the CIC’s governing documents, a community member is aware of the possibility that the CIC institutions would be authorized to instill some level of content in the initially-vague norm. At the same time, one cannot really anticipate if she will find herself in a minority position in the CIC, since she is unable to guess how the CIC’s institutions would develop the norm. This type of uncertainty and fear of majority abuse may be a cause for particular concern to members. These dilemmas vividly demonstrate both the internal and external institutional aspects of governing community members through private legal standards, especially with such norms having broad applicability throughout the community for both current and future members.

C.

“Normalcy” in nuisance, “abuse of rights” doctrine

The task of delineating and re-delineating property powers and priorities among neighbors is naturally not less complicated outside the realm of planned communities. The potential for instances of incompleteness, and the institutional challenges of dynamically addressing such problems in the context of in rem property rights, are vividly demonstrated in nuisance law and related doctrines. These are also present in the “abuse of rights” principle, which may undercut what is otherwise considered a clearly allocated property right. I now look at both doctrines. As mentioned above, nuisance law is often notorious for its unpredictability and ad hoc nature, although this legal instability is embedded in genuine problems of incompleteness. Across different legal systems, nuisance is dominated by standard-like norms for both the basis of liability and the remedies awarded in case of violation. In US law, private nuisance is said to apply only to invasions of another’s interest in the private use of enjoyment of land that are either “(a) intentional and unreasonable, or (b) unintentional and otherwise actionable . . . for negligent or reckless conduct, or for abnormally dangerous conditions or activities.” Public nuisance is generally defined as “an unreasonable 76

Ibid., at 1180–2.

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interference with a right common to the general public.” The choice of remedy is usually controlled by the “balance of interests.”77 I focus attention on the institutional choice issue: when legal standards are employed in nuisance law, should their content be filled by bottom-up institutions or by top-down ones? Current nuisance law is typified by the fact that the question of whether a certain act constitutes a wrong is not decided on purely generalized, alocal principles. This is vividly reflected in the US Supreme Court’s famous statement that “a nuisance may be merely a right thing in the wrong place – like a pig in the parlor instead of the barnyard.”78 The sense in which the basis of nuisance liability hinges often on contextual considerations has led scholars to call to more systematically entrench the local basis of nuisance. Robert Ellickson suggests that a landowner be held liable only if his new use is “perceived as unneighborly according to contemporary community standards.” Viewing the unneighborliness test as a “democratic and dynamic method,” Ellickson suggests that community boundaries be delineated based on metropolitan areas, and argues that switching to the “normalcy” framework would save on administrative costs and simplify the identification of nuisance cases.79 In a somewhat different institutional analysis of nuisance as defined by “community standards,” Zygmunt Plater et al. portray jury trials as ones in which the actual decision-makers on whether community standards have been met “are local citizens themselves.”80 And yet, there is only a certain sense in which nuisance legal standards can be filled with bottom-up local content. This doubt goes beyond substantive issues of potential cross-local externalities, the rights of minority residents within localities, or potential inefficiencies in sticking to a land use status quo. From an institutional perspective, it is not entirely clear to what extent local entities – groups of residents, neighborhoods, or even local governments – can engage over time in collectively defining community “normalcy” to address potential contingencies and incompleteness. Unlike planned communities, 77 78 79

80

Restatement (Second) of Torts, §§ 821B, 822, 941 (1979). Village of Euclid v. Ambler Realty Company, 272 US 365 at 388 (1926). See Restatement (Second) of Torts § 822 (1979); Robert C. Ellickson, “Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls” (1973) 40 University of Chicago Law Review 681–781 at 731–2. See Zygmunt J. B. Plater et al., Environmental Law and Policy: Nature, Law, and Society, 3rd edn. (New York: Aspen Publishers, 2004), p. 114.

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which rely on ongoing institutional mechanisms for dynamic decisionmaking, conventional neighborhoods and cities rely heavily on the topdown work of courts to collectively design legal policy and incorporate them in nuisance law. Consider next the abuse of rights doctrine, which originated in the civil law tradition, but also took root in the common law legal systems.81 This doctrine deals with somewhat different types of property relationships among neighbors. In abuse of rights cases, a party holds what is otherwise a clearly delineated property right, but something about the particular circumstances in which she exercises the right may turn the legitimate use into a legally prohibited abuse. Typical cases deal with the construction of “spite fences,” malicious diversion of water streams, opening up of a business only to annoy neighbors or drive someone else out of business,82 and other cases in which one suspects a bad motive or that the use of the right is only a leverage to impact another aspect of the parties’ relationships. Although one could argue that because of the highly contextual and localized nature of such disputes, the criteria for deciding an abuse of rights case should rest on some sort of bottom-up viewpoints, the way in which courts have filled this legal standard with content has been driven by a clearly top-down approach, characterized by moralistic, even paternalistic considerations. As Larissa Katz notes, two traditional lines in the abuse of rights jurisprudence have been (a) a “perfectionist” approach of preventing people from acting with bad or malicious intentions, and (b) a communitarian approach by which there are only certain legitimate social purposes that an owner may be allowed to further in using her private property.83 The abuse of rights doctrine is thus a legal standard 81

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See, e.g., Joseph M. Perillo, “Abuse of Rights: A Pervasive Legal Concept” (1995) 27 Pacific Law Journal 37; Michael Byers, “Abuse of Rights: An Old Principle, A New Age” (2002) 47 McGill Law Journal 389. See, e.g., Burke v. Smith, 37 NW 838 (Mich. 1888) (spite fences); Tuttle v. Buck, 119 NW 946 (Minn. 1909) (opening up of a business with an ulterior motive); for a survey of early American cases on malicious diversion of water streams, see F. B. Ames, “How Far an Act May Be a Tort Because of the Wrongful Motive of the Actor” (1905) 18 Harvard Law Review 411. See Larissa M. Katz, “A Principle of Abuse of Property Rights” (2012), available at http:// ssrn/com/abstract=1417955 (surveying these theories, but offering an alternative principle, by which the owner’s jurisdiction and reasons are limited to her ‘subjective determination of a worthwhile agenda for the object’). In many legal systems, the requirement of actual bad motive has been waived, so that the court sets up objective tests to decide whether the property owner abused her rights. See Konrad Zweigert and

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clearly typified by a top-down institutional approach, which stems from broader-based societal values on the proper relationships among different individuals, and between the individual and society.

VI. Institutional lessons of property standards Property legal standards do not lend themselves to unequivocal design principles, especially since rule-like and standard-like norms often complement each other and are not exclusive substitutes. However, several variables have proven to be recurring and dominant throughout the analysis. By way of brief summation, I point to these features and to the main lessons that these entail for the institutional features of property law. 1. Incompleteness The inability of legislation and other up-front legal mechanisms to fully allocate property rights and duties serves as a chief justification for adopting legal standards. But even when incompleteness is considered, two caveats are in order. First, not all types of incompleteness are equally adequate for using standards. Most notably, the prospect that a future exogenous change would significantly alter the basic traits of the resource or its main uses may often call for a fundamental revision of the legal regime. Such a change would often be better served by a legislative promulgation of a new rule, rather than by the content filling of a current, vaguely phrased norm. Second, the mechanism of delegating the task of filling vague norms with content must rely on the existence of viable bottom-up or top-down institutions. Such institutions must possess the capability for dynamic decision-making alongside the preservation of an adequate level of systematicity and predictability. 2. Homogeneity As far as bottom-up institutions are concerned, the level of epistemological, social, and cultural homogeneity among the audience of property norms plays a significant role in the ability to infuse further, thicker content in the legal standard over time. The existence of a broad common denominator regarding basic values, general practices, etc., decreases the costs of instilling, implementing, and enforcing new contents when a certain contingency arises, and also allows norm recipients to better know in advance how future dilemmas would be decided. Hein Kötz, An Introduction to Comparative Law, 3rd edn., Tony Weir (trans.) (New York: Oxford University Press, 1998), p. 620.

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However, homogeneity does not always point to legal standards. As shown, for example, in some merchant industries, a strategy of formal rule-like norms combined with informal standard-like practices may at times justify the greater investment in upfront rulemaking. For heterogeneous crowds, property standards can be filled with content only by top-down institutions such as courts. Such institutions not only carry the burden of deciding specific disputes. They must also create the infrastructure for a broad-based understanding of the legal standard in a way that would facilitate a sufficient common denominator among members of the general public about the basic traits of property norms. 3. Scale of effect Property rights typically affect not only up-front identifiable contractual parties, but also strangers who may find themselves entangled in a legal dispute over a specific asset. But not all property regimes have the same scope of practical effects. CICs, for example, provide property ordering that affects mainly current and future residents, and may thus employ standards that are filled with content by the community’s institutions, alongside a set of clear-cut rules. In this sense, bottom-up institutions serve as mini-legislatures, which produce norms that also have property aspects and that may be dynamically filled with content. For other settings such as merchant communities – domestic or international – the work of bottom-up institutions such as trade organizations would have to be more substantially intertwined with the work of top-down institutions such as legislatures and courts. This is so in view of the broader effects that in rem rights and the application of legal standards such as “custom” or “trade usage” would have outside of the immediate commercial community. 4. Established institutional capability For bottom-up institutions continuously to instill property order in initially vague norms, they must possess what I have termed established institutional capability. This means that the recipients of the property norms adhere to the ongoing authority of the institution not only to promulgate new rules – a process that is usually more burdensome and fragile for the institution – but also to tell the community what the already-existing legal standard “means” when a specific contingency arises. A formal bottom-up institution would usually require some sort of consistent backing from top-down mechanisms such as enabling legislation or reviewing courts, especially when the bottom-up institutions cannot

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rely on entirely voluntary self-enforcement of the standard. In the case of CICs, in which the decisions of the CIC’s institutions are established in private formal arrangements but are increasingly contested by displeased minorities, a judicial review criterion such as a “business judgment rule” applied to the CIC’s interpretation of the term “objectionable conduct” provides the private ordering institution with significant tailwind to fill such norms with content. On the other hand, when top-down institutions such as courts are concerned, the potential limits on their authority to fill vague norms with content would usually be based on external institutional constraints, as the next point discusses. 5. External constraints The mandate for bottom-up or top-down institutions to engage in ongoing content-giving to property legal standards does not hinge only on their internal institutional capabilities, but also on external considerations. For top-down institutions such as courts, otherwise familiar issues such as division of powers among different state organs play out in whether to entrust courts with instilling content in legal standards. In the private law realm of property, consideration should be given to the fact that parties cannot usually opt out of property norms, so that broad ex post powers to courts can result in excessive uncertainty among private actors. In the public law realm, sweeping interpretative powers to courts regarding standards such as “public use” or regulatory takings are especially challenging in the context of limits on constitutional interpretation. For bottom-up institutions looking to instill property ordering, issues of both extra-community externalities and intra-community minority abuse arise. These considerations are significant from a legal design policy viewpoint not only for the choice of whether to validate such sub-society configurations to start with, but also in deciding which type of institution would play the dominant role in filling property with content during the life of the community. As with other types of dilemmas addressed in this chapter, such a choice is not necessarily binary: it may divide the role among bottom-up and top-down institutions; it may allow both types of institutions to employ standards alongside rules to deal with dynamism in property. 6. Institutional choice does not impose content Finally, as with the structure of property, the institutional choice of who gets to design property norms, based on the above considerations, does not dictate the substantive outcomes of norms. The initially-vague legal standards in

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nuisance could be filled with content that promotes a strict enforcement of the plaintiff’s property rights, a progressive scheme requiring landowners to show social responsibility to others, or anything in between. Similarly, the fair use doctrine in intellectual property could be made to narrow down unauthorized encroachments, or rather, to increase the public domain. Norm-making institutions may promote different normative agendas, provided that they adhere to the structural and institutional traits of property.

PART II The spectrum of property regimes

3 Private-common-public: the promise of property hybrids

The world of property regimes is currently in the midst of a vivid debate involving constant attempts to challenge and reconfigure traditional property patterns. One reason for this is normative. While private property has been hailed as generally superior by western theorists and policy-makers throughout large parts of the modern era, recent analysis points to the potential drawbacks of a massive transition toward privatization of publicly-owned resources, as well as to the inefficiencies of over-fragmentation of rights resulting from having “too much” private property.1 Moreover, the renewed interest in common property regimes, which has revealed the potential economic and social advantages of group ownership and management of resources, further adds to the creation of a more balanced contest between the three vertices of the private-common-public property triangle. Even open-access regimes, not discussed in detail here, have become an option worth considering, such as in the case of open-source software.2 Another driving force for this property turmoil has been analytical, stemming from the observation that the nature of property depends not only on formal ownership, but also on the specific composition of the property powers and priorities with regard to assets. As Chapters 1 and 2 have shown, the structural and institutional traits require that property regimes maintain a sufficient level of predictability and coherence, but at the same time allow for some variations. As argued in the final section of Chapter 1, and demonstrated throughout this book, one such continuum 1

2

Carol M. Rose, “The Several Futures of Property: Of Cyberspace and Folk Tales, Emission Trades and Ecosystems” (1998) 83 Minnesota Law Review 129–82 at 143–4. For literature supporting at least some version of open-access regimes in the context of intellectual products such as software, see Lawrence Lessig, Free Culture: How Big Media Uses Technology and the Law to Lock Down Culture and Control Creativity (New York: Penguin Press, 2007); Yochai Benkler, The Wealth of Networks: How Social Production Transforms Markets and Freedom (New Haven, Conn.: Yale University Press, 2007).

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could be constructed based on the type of resource, so that the foundations of property doctrines referring to the land, chattels, intellectual property, the business corporation, or the environment, need not follow the exact same blueprint. This differentiation could also be relevant with respect to private property, common property, and public property. If we consider a given resource such as land, it makes sense that internal rules of governance would somewhat change among these different types of regimes, and this could also implicate third parties and “outsiders,” provided that such diversity does not undermine the overall structure of property. For example, if a legal system in a certain country were to adopt a rule by which publiclyowned land could be sold only through an open auction to increase government transparency and avoid rent-seeking, this additional requirement would not undermine the structure or otherwise create confusion with respect to private or common property in land. This chapter argues that such a careful analysis of property should also create increasing awareness and support for explicit mixed types of property regimes, whenever these may prove optimal to obtain society’s goals. Looking at the private-common-public property triangle, one can observe a real-life proliferation of property configurations that are located at interim points along the sides of the triangle and within it, thus largely departing from the traditional trichotomic division which has focused on the three vertices of property. Although a few mixed property regimes have existed historically, contemporary market and public needs and preferences seem to push more than ever before toward the constant creation of new property mixtures. However, this rapidly-growing phenomenon currently lacks a comprehensive, broad-scale analysis of mixed property regimes aimed at extracting shared theoretical principles, while also identifying the structural and institutional constraints within which such diversity could be established. This is precisely what this chapter sets out to do.

I.

The market for mixed property regimes A.

The limits of private property

In what is by now a true property classic, Harold Demsetz’ “Toward a Theory of Property Rights” offers an evolutionary analysis of human society’s shift to private property as the pressure on resources increases and technological or organizational innovations enable cost-effective delineation and protection of private property. According to Demsetz’

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normative analysis, private property creates incentives for socially desirable investment in resources by making the owner internalize both the positive and negative effects of his actions, thus unifying the private cost–benefit analysis with the respective social calculus. Even if certain human actions still defy the borders of private property, the better feasibility of a relatively small number of neighboring owners to resolve such residual externalities adds to the superiority of private property over communal property, let alone over state ownership.3 The argument for private property has not relied merely on economic instrumentality. Significantly, it has been advanced in western thought as a promoter of individual liberty, political freedom, personhood constitution, the intrinsic virtue of labor, and so forth.4 The fall of the Soviet bloc in the late 1980s has allegedly made this multifaceted argument for private property supremacy an open-and-shut case.5 However, recent years have seen the development of more modified approaches, which often criticize the tendency toward sweeping privatization of the universe of resources. Three lines of argument are of particular interest here, as they also point to the viability of other property regimes, including hybrid ones. First, the decision whether to shift to private property is often not motivated by benign entrepreneurship seeking to snatch resource productivity from the jaws of collective action tragedies, but rather, by rentcapturing facilitated through superiority in the political process. For example, the enclosure movement’s abolition of traditional communal property forms in Europe and in its colonies was designed in large part with its distributional outcomes in mind, by employing allegedly neutral property reorganization techniques aimed at benefiting the rich or politically powerful.6 Similarly, the propertization of information resources 3

4

5

6

Harold Demsetz, “Toward a Theory of Property Rights” (1967) 57 American Economic Review 347–59 at 354–9. See, respectively, James M. Buchanan, Property as the Guarantor of Liberty (Northampton: Edward Elgar Publishing, 1993), p. 59; Richard Pipes, Property and Freedom (New York: Vintage, 1999), pp. 279–81; Milton Friedman, Capitalism and Freedom (University of Chicago Press, 1962), pp. 7–21; Margaret Jane Radin, Reinterpreting Property (University of Chicago Press, 1993), pp. 36–59; Stephen R. Munzer, A Theory of Property (Cambridge University Press, 1990), pp. 254–6, 285–7. Harold Demsetz, “Toward a Theory of Property Rights II: The Competition between Private and Collective Ownership” (2002) 31 Journal of Legal Studies 65. Stuart Banner, “Transitions Between Property Regimes” (2002) 31 Journal of Legal Studies 359. This is not to say, however, that the enclosure movement had no utilitarian merits.

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of the west, while instilling open access to information resources that are prevalent in other parts of the world, such as genetic resources and traditional knowledge, has been criticized as a political and distributional enterprise not necessarily loyal to either efficiency or justice.7 Conversely, the delay in development of individual transferable quotas in US federal coastal fisheries may be explained by the multiple veto points that are provided by political institutions and exploited by interest groups to slow the pace of change, chiefly because of distributive disputes about the initial allocation of the tradable rights.8 These criticisms point to the conclusion that an actual change to private property from open-access, common, or public property regimes does not necessarily promote society’s declared goals, and conversely, that a rejection of privatization of certain resources does not necessarily indicate that such a regime is inferior to the property status quo under the relevant circumstances. Second, private property may often lead to a scenario of overfragmentation of rights, in which every one of the multiple owners has a right to exclude others from a resource such that no one has an effective privilege of use.9 This anticommons dynamics may, inter alia, deter socially desirable innovation – such as when granting patents in isolated gene fragments hampers development of integrative biomedical products10 – or otherwise prevent the pooling together of resources for efficient reorganization, for example, when landowners in a rundown urban area fail to agree on a comprehensive redevelopment scheme, a scenario that I analyze in Chapter 6. In some cases, the private property regime can be arranged to mitigate such grave consequences of sub-optimality. As Chapter 2 has shown, the standards-based law of nuisance, which requires the plaintiff to meet a certain threshold of interference and at times limits her remedy to compensation rather than injunction, thus allowing the defendant’s conflicting activity to continue, can be justified by preventing paralysis in a world of substantial transaction costs.

7

8

9

10

Anupam Chander and Madhavi Sunder, “The Romance of the Public Domain” (2004) 92 California Law Review 1331–74 at 1339–57. Katrina Miriam Wyman, “From Fur to Fish: Reconsidering the Evolution of Private Property” (2005) 80 New York University Law Review 117–240 at 124–6. Michael A. Heller, “The Tragedy of the Anticommons: Property in the Transition from Marx to Markets” (1998) 111 Harvard Law Review 621–88 at 667–79. Michael A. Heller and Rebecca S. Eisenberg, “Can Patents Deter Innovation? The Anticommons in Biomedical Research” (1998) 280 Science 698.

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But beyond such reshaping of private property, the anticommons dilemma may point to the potential advantages of other property regimes. For example, general circulation and commerce routes have historically been supplied publicly, as is still generally the case today, given the high transaction costs of organizing a private system of easements, as well as the positive synergy or network effect of opening such routes to use by the general public.11 The advantages of the publicness of such conduits, which allows for the development of private activity channeling through them, has prompted calls to extend public ownership or governance to new domains such as cyberspace. Moreover, the ability of property governance to promote socially beneficial collective action inspired an academic renaissance of common property regimes. Authors have pointed to the advantages of economies of scale and risk-spreading, enhanced self-monitoring and enforcement of appropriation and contribution through internal norms, and affirmative portioning of the collectively-owned assets from the private holdings of the stakeholders (especially in business corporations), alongside social and psychological benefits of joint ownership.12 Third, recent analysis based on accumulated experience in the United States and throughout the world points to the limits of privatization of traditionally public resources. Conventional wisdom specified that because government producers have no high-powered incentives to hold down production costs or to improve the quality of output, increasing involvement of the private sector in the production and financing of such resources would enhance efficiency, given also the stimulating effect of competition between different providers.13 Such assumptions seem to be generally valid for the market provision of private goods for which profit is the main objective.14 These may also hold true for the 11 12

13

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Robert C. Ellickson, “Property in Land” (1993) 102 Yale Law Journal 1315–400 at 1381–2. See, respectively, ibid., 1332–44; Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action (Political Economy of Institutions and Decisions) (Cambridge University Press, 1990), pp. 88–102, 185–92; Henry Hansmann and Reinier Kraakman, “The Essential Role of Organizational Law” (2000) 110 Yale Law Journal 387–440 at 393–8; Hanoch Dagan and Michael A. Heller, “The Liberal Commons” (2001) 110 Yale Law Journal 549–624 at 573–4. See, e.g., Michael J. Trebilcock and Edward M. Iacobucci, “Privatization and Accountability” (2003) 116 Harvard Law Review 1422–54 at 1426–9. See William L. Megginson and Jeffrey M. Netter, “From State to Market: A Survey of Empirical Studies on Privatization” (2001) 39 Journal of Economic Literature 321. There have, however, been notable failures. See Bernard Black et al., “Russian Privatization and Corporate Governance: What Went Wrong?” (2000) 52 Stanford Law Review 1731.

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heavily-regulated yet private provision of public utilities, or for the outsourced provision of pure or mixed public goods, whenever the government or the private end-users can effectively evaluate and monitor the quality of output.15 Nevertheless, there are prominent normative constraints on further extending the scope of reliance on private provision. These limitations have special force for goods and services that involve a complex set of objectives aimed at maximizing social welfare rather than merely profit, as is the case with education, social services, managed medical care, police, and prisons. Although in principle the government could promote these various objectives through contracts with private suppliers, this complexity often yields “contract incompleteness,” meaning that the government can neither easily spell out in a contract the determinants of quality, nor can it monitor and enforce such conditions during the service provision.16 Consequently, the private supplier, who is chiefly motivated by profit maximizing, may engage in cost-reducing quality-shading that will often go unobserved or unpunished. This is especially the case with service components such as inmate rehabilitation or promotion of educational values such as democracy and tolerance, or with the cost-reduction bias in the exercising of discretion by private suppliers regarding expensive-to-treat patients, welfare recipients with low probability of job placement, or students with special educational needs.17 In addition, for even more crystallized components that can be specifically enumerated in the contract, governments often fail to conduct adequate supervision, and may also be held up during the term of the contract to improve its provisions in favor of the private supplier.18 When the government loses its relevant institutional knowledge over

15

16

17

18

Examples for such mixed public goods are cleaning and refuse collection: Paul H. Jensen and Robin E. Stonecash, “Incentives and the Efficiency of Public Sector Outsourcing Contracts” (2005) 19 Journal of Economic Survey 767–98 at 771–2. Oliver Hart, “Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships” (2003) 113 The Economic Journal 69. See, e.g., Patrick Bayer and David E. Pozen, “The Effectiveness of Juvenile Correctional Facilities: Public Versus Private Management” (2005) 48 Journal of Law and Economics 549; John R. Lott, “An Explanation for Private Provision of Schooling: The Importance of Indoctrination” (1990) 33 Journal of Law and Economics 199. See, e.g., David M. Van Slyke, “The Mythology of Privatization in Contracting for Social Services” (2003) Public Administration Review 296.

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time, it may practically be unable to take back the reins, even if it is dissatisfied with the private provision and no viable competition otherwise disciplines the contractor.19 Moreover, an excessive delegation of governmental powers to private entities in the implementation of public programs largely undermines the ability to promote a democratic debate about primary social priorities and moral judgments, and fails adequately to reflect changes in such values over time.20 Most of these public programs are funded publicly – either fully (e.g. welfare) or partially (e.g. educational vouchers) – because they are driven by extra-market values such as vertical equity and the creation of a social safety net.21 Even services that are publicly financed because they possess the economic traits of public goods, such as preservation of public law and order through policing and imprisonment, are often intertwined with intricate moral considerations that may be inadequately addressed by either for-profit or non-profit private agents. This is not to say that the lack of high-powered incentives for profit maximization in the public sector yields satisfactory results,22 and one may indeed be skeptical as to what extent public officials and employees are driven by a sense of “mission” that motivates them toward quality enhancement.23 But this is exactly the point that is learned by growing experience: the public-private dilemma is not a dichotomous struggle in which one side universally prevails. The design of sophisticated public programs, and the identification of the proper allocation of roles in their design and implementation, is not only a highly contextual endeavor, but one that must often result in the adoption of a mixed regime that seeks to build on the comparative advantages of both types of agents and incentive structures.

19

20

21

22

23

Jonathan Walters, “Going Outside,” Governing Magazine, May 23, 2004, p. 23 (discussing the State of Texas plan to pass on to private firms the power to decide on individual eligibility for welfare). See Martha Minow, “Public and Private Partnerships: Accounting for the New Religion” (2003) 116 Harvard Law Review 1229–70 at 1246–55. Stephen H. Linder and Pauline Vaillancourt Rosenau, “Mapping the Terrain of the Public-Private Policy Partnership,” in Pauline Vaillancourt Rosenau (ed.), PublicPrivate Policy Partnerships (Cambridge, Mass.: MIT Press, 2000), pp. 1–3. See Sharon Dolovich, “State Punishment and Private Prisons” (2005) 55 Duke Law Journal 437–546 at 446–8, 508–16. See Timothy Besley and Maitreesh Ghatak, “Competition and Incentives with Motivated Agents” (2005) 95 American Economic Review 616–36 at 616–18, 628–30.

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B.

Mixed property: past experience, present potential

The empirical and theoretical evaluation of alternative property regimes, and especially the critique of a wholesale embracing of private property regimes, leads to a growing recognition of the need to craft sophisticated mixed regimes in many contexts. This poses a major challenge to legal systems, which have been very much accustomed to operating in molds that are based on the trilateral distinction between private, common, and public property. Various mixed property regimes have existed throughout history. Such was the medieval open-field system in northern Europe, in which peasants owned scattered strips of land for grain growing, but used the land collectively for grazing.24 Another instance is the common law custom doctrine, according to which residents of given localities could claim collective rights to use otherwise private lands in which group activities had customarily existed without dispute for generations.25 Colonial and early American cities were corporate-like associations that, along with their distinctive member-group status, exercised government-like functions.26 Privately-owned public utilities and common carriers, holding de facto or de jure monopolistic powers, were traditionally subjected to certain government-like duties, given their “public calling.”27 However, the multitude of mixed property regimes designed in both theory and practice over the past few decades, especially following the disillusionment with the alleged omnipotence of private property, mandates a distinctive and comprehensive analysis. The chapter sets out to identify prominent patterns of mixed resource ownership and management and to address the major difficulties in legally conceptualizing these regimes to create innovative doctrines.

24

25

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27

Henry E. Smith, “Semicommon Property Rights and Scattering in the Open Fields” (2000) 29 Journal of Legal Studies 131. Carol M. Rose, “The Comedy of Commons: Custom, Commerce, and Inherently Public Property” (1986) 53 University of Chicago Law Review 711–81 at 739–44. Gerald E. Frug, City Making: Building Communities without Building Walls (Princeton University Press, 1999), pp. 26–7, 36–45. Charles M. Haar and Daniel W. Fessler, The Wrong Side of the Tracks: A Revolutionary Rediscovery of the Common Law Tradition of Fairness in the Struggle against Inequality (New York: Simon & Schuster, 1986), pp. 199–221.

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II. Public-private property The disadvantages of pure property regimes for the provision of certain services and goods have led to the rise of public-private mixtures. Especially prominent are newly-crafted forms of Public-Private Partnerships, such as the British Private Finance Initiative (PFI) model, which have spread rapidly in many countries.28 PFI contracts, covering numerous types of public service provision, including health, education, defense, prisons, and roads, have two major features that are distinct from traditional forms of outsourcing or procurement. First, PFIs are long-term contracts that bundle design, building, finance, and operation, and are accordingly performed by a consortium of private firms, unlike the relatively short-term, taskspecific outsourcing contracts. Second, in such projects, the government usually uses a system of output specifications by which it describes the required service and some basic standards, but it leaves the consortium with wide discretion over how to deliver the service input-wise.29 The PFI contract aims at creating a long-enduring socially optimal division of rights, obligations, and liabilities among the parties. Thus, risks are to be borne by the party best placed to manage them, meaning generally that the government underwrites the continuity of public demand for the service, as well other exogenous risks such as a rise in inflation. The private consortium typically assumes endogenous risks, such as construction costs and completion timetable, technological uncertainties, and the satisfaction of output requirements. By so doing, an optimal contract should aim at properly balancing risks and incentives: it should mitigate problems of moral hazard on the part of the private contractor, but avoid allocating to it risks it cannot effectively control; otherwise the contractor would charge an overly high risk premium that would largely negate the social benefits of risk-shifting to the private sector.30 In similar fashion, the incentive structure design is built into the core rationale of bundling: exploiting synergies between the different stages of the project, by reducing transaction and coordination costs, allowing greater freedom from budget allocation and procurement regulations, 28 29

30

For Britain, see HM Treasury: “PFI, Strengthening Long Term Partnerships” (2006). John Bennett and Elisabetta Lossa, “Building and Managing Facilities for Public Services” (2006) 90 Journal of Public Economy 2143. A. M. Abdel-Aziz and A. D. Russell, “A Structure for Government Requirements in Public-Private Partnerships” (2001) 28 Canadian Journal of Civic Engineering 891.

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and by encouraging innovation in service delivery and adequate maintenance during the contract’s time period. Here, however, one must be cautious of the possible drawbacks of this type of vertical integration. One such drawback is reduced competition, because few consortia are able to assemble all the relevant input. In some instances, inter-stage bundling will not only create positive cost reducing for the private consortium, but might also increase the likelihood of unobservable or unverifiable quality-shading regarding the fluid components of the contract, in ways even more dramatic than in cases of traditional outsourcing.31 Viewed through this prism, the property structure of current PublicPrivate Partnerships may be explained through the problem of incompleteness of contracts or property regimes, which I discussed in detail in Chapter 2. Based on Yoram Barzel’s work,32 I have shown how some attributes of the contract or property arrangements may be left in the “public domain,” so that the party that is able practically to capture these attributes in view of such incompleteness may be viewed as the residual claimant, or as holding the “economic property rights” to these attributes. To the extent that the government is contractually able to ensure the required quality of the public benefit from the resource, then providing the private consortium residual control over the project seems socially desirable, for it allows the consortium to capture benefits such as cost reduction or development of a new technology created through effort or ingenuity without having to renegotiate with the government over this surplus. Conversely, when the consortium might potentially exploit this in order to substantially decrease the level of public benefit, the government should work to minimize the private party’s residual property powers.33 One possible way to do so, which follows from the almost inherent incompleteness of many such projects, would be to incorporate legal standards such as “good faith” or “best efforts” into those portions of the contract especially prone to incompleteness and thus to socially suboptimal provision. As Chapter 2 has shown, such a property redesign should address the dynamic, incomplete nature of long-term 31 32

33

Bennett and Lossa, “Building,” 4–6, 26–8. Yoram Barzel, Economic Analysis of Property Rights (Political Economy of Institutions and Decisions), 2nd edn. (Cambridge University Press, 1997), pp. 90–6. Oliver Hart et al., “The Proper Scope of Government: Theory and Application to Prisons” (1997) 112 Quarterly Journal of Economics 1127–61 at 1129–30.

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partnerships while preserving property’s overall structure. An overuse of vague standards may decrease the willingness of private parties to enter into such partnerships or may otherwise affect the contract’s pricing and risk allocation, and otherwise result in over-contextualism of contracts or property regimes. However, the substantial growth in discretion awarded to private parties in controlling access to governmental resources and benefits should be matched with normatively modest yet generally effective mechanisms. Another prominent property issue in Public-Private Partnerships concerns formal ownership of the resource at the end of the contract period. The British position for PFI contracts is that the government should take ownership of assets where the future long-term, publicsector demand is clear or where there is no realistic alternative use, as is the case with roads, schools, hospitals, prisons, and specialist information technology systems.34 This regime is also highly prevalent for such resources in the United States and Canada, where it is typically defined as a Build-Operate-Transfer (BOT) contract, and also for large infrastructure projects throughout the world.35 Conversely, the residual value of the resource at the end of the PFI contract period is considered to be best transferred to the consortium for assets which have alternative uses – such as office accommodation in areas that have private-sector demand or generic information technology systems – and for which there is no clear long-term public need.36 Obviously, post-contract governmental ownership of the resource has its price tag, since it adversely influences the consortium’s investment incentives ex ante, meaning that the government has to compensate the private party, initially by setting up a long contract term or by ensuring higher periodic revenues for the consortium. This facet of the resource’s residual value further constrains the government in evaluating the public benefit embedded in the project and in constructing the project’s specific property structure.37

34 35 36 37

HM Treasury, “Standardization of PFI Contracts” (2004), pp. 125–7. See Abdel-Aziz and Russell, “Structure.” HM Treasury, “Standardization,” pp. 125–7. See Timothy Besley and Mairteesh Ghatak, “Government versus Private Ownership of Public Goods” (2001) 116 Quarterly Journal of Economics 1343.

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Public

public resources (financing + production)

Figure 3.1

Private

traditional, task-specific outsourcing

Public-Private Partnerships + residual public rights

Public-Private heavily regulated Partnerships + private industries (monopolies/ residual private subsidized rights provision)

private resources, standard regulation

The public-private continuum

Current forms of Public-Private Partnerships may therefore be located at the central segments of the public-private continuum, as Figure 3.1 suggests.

III. Private-common property Similar to the public-private setting, various forms of mixed privatecommon regimes have emerged over the past few decades. Interestingly, the movement toward such interim regimes is made from both poles of the private-common continuum. I analyze here two prominent case studies, which vary substantially in their historical and institutional background and also diverge in the explanation of motives for the shift, as well as in their post-transition results. Nevertheless, both illustrate the potential of mixed regimes to better meet current preferences. The first case study is the rapidly-growing dominance of Common Interest Communities (CICs) at the expense of traditional residential neighborhoods. The second is the recent growth of the semi-privatized Renewing Kibbutz in Israel, alongside the “classic” Cooperative Kibbutz. This analysis carries potential implications that may aid in reframing and reassessing dilemmas regarding other forms of private-common regimes, including the ever-complicated relationships between the modern private corporation and its individual stakeholders, studied in detail in Chapter 5. Moreover, the juxtaposition of the CIC and the Renewing Kibbutz shows that while their organizational structures are quite similar, their ideological motivations, and accordingly the substance of their property norms, are very different. This demonstrates a key argument in my theory of property, according to which the structural and institutional features of property do not dictate a particular normative content.

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The CIC as residual claimant

With more than 314,000 CICs housing sixty-two million residents in the United States as of 2011, private developments governed by homeowners’ associations have come to dominate much of the residential landscape.38 The core of the community property governance lies in the conditions, covenants, and restrictions (CC&Rs) included in the CIC’s declaration, which forms a part of the community’s governing documents. These servitudes typically control and regulate commonly-owned amenities, as well as the use of privately-owned housing units. Beyond these upfront set provisions, the community-based governance of collective and private properties has a dynamic dimension. This is because the CIC’s institutions generally have power not only to enforce the terms of the declaration, but also to make managerial decisions, promulgate rules, and amend the declaration without a need for unanimous homeowners’ consent.39 The unique property structure of CICs has many facets, not all of which are analyzed here. One of these issues arousing substantial interest concerns the nature and extent of the powers and practices of CICs vis-àvis outsiders. This is especially relevant because CICs are often criticized as a “secession of the successful,” “government for the nice,” and so forth, referring to formal and informal exclusionary mechanisms employed by such private communities.40 The internal property structure of the CIC, which is the focus of the current discussion, aims at solving a host of collective action problems that neighbors typically face in residential neighborhoods. These can be divided roughly into the (1) establishment and management of common amenities, such as streets, parks, and sport facilities, and (2) control of intra-neighborhood externalities resulting from the use of privatelyowned units. The mixed nature of the CIC property regime manifests itself, therefore, in the close inter-connectivity between group-owned and privately-owned assets within the compounds of the CIC, as well as in the extensive group governance of privately-owned assets, which 38

39 40

Community Associations Institution, “Data on U.S. Associations” (2012), available at www.caionline.org/about/facts.cfm. Restatement (Third) of Property (Servitudes) §§ 6.2–6.14 (2000). See, respectively, Sheryll D. Cashin, “Privatized Communities and the ‘Secession of the Successful’: Democracy and Fairness beyond the Gate” (2001) 28 Fordham Urban Law Journal 1675; Paula A. Franzese, “Privatization and its Discontents: Common Interest Communities and the Rise of the Government for ‘The Nice’” (2005) 37 Urban Lawyer 335.

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typically goes well beyond conventional public governance of residential private properties.

1. Controlling commonly-owned assets . . . As for the commonly-owned assets, the collective action challenges which the CIC tackles through the mechanisms of built-in servitudes and group governance can be divided into two phases, which somewhat diverge in their nature. The first phase is the efficient creation of community level amenities. For some of these assets, such as inner streets, which more genuinely possess the economic traits of public goods – non-excludability and nonrivalry – the existence of reciprocal duties of contribution solves the inherent market failure that usually necessitates governmental production and financing through imposition of taxes.41 As for “club goods” such as sport facilities, which can usually be provided by the market in ordinary residential settings, the internal group provision of such amenities is a significant cost-cutting device for CIC residents.42 The second phase of collective action in this context concerns the ongoing maintenance, protection, and improvement of the commonlyowned assets. Here, the contractual contribution mechanisms, together with the association’s regulatory powers over the use of these amenities, aim at confronting the tragic dynamics of under-investment and overuse in these resources.43 The condition of group-owned assets has obvious implications for the epitome of the CIC members’ private interests: their home values. Both the assurance of ongoing, stable, and cost-saving provision of common amenities and the protection against intra-neighborhood externalities play a major role in protecting and enhancing the homeowners’ property values.44 41

42

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44

Non-excludability means that there is no feasible way to prevent people from enjoying the good even if they refuse to pay for it. Non-rivalry means that the marginal cost of an additional consumer is zero or close to it. Richard Cornes and Todd Sandler, The Theory of Externalities, Public Goods, and Club Goods, 2nd edn. (Cambridge University Press, 1996), pp. 347–51. See Lee Anne Fennell, The Unbounded Home: Property Values beyond Property Lines (New Haven, Conn.: Yale University Press, 2009), pp. 45–64. In a recent survey, 70% of CIC residents said that their CIC’s rules ‘protect and enhance’ property values. Only 2% said these rules ‘harm’ property values: Zogby International, “What Do Americans Say about their Own Community Associations?” (2009), available at www.caionline.org/info/research/Documents/national_research_2009.pdf.

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2. . . . and privately-owned ones The most unique property feature of planned residential communities is probably the extensive group governance of private property, which typically comes in addition to, and not in lieu of, the applicable public regulation, such as land use controls, nuisance law, or environmental regulations. The community provisions may include aesthetic controls of the external shape, design, and color of the housing units; limits or flat prohibitions on the possession of pets; restrictions on outside storage or display of certain items such as unused cars; or limits on other types of activities which are not regularly prohibited by law. The most recent front seems to be bans on smoking within CIC housing units.45 These restrictions are designed to combat potential adverse spillover effects which do not conform to the community members’ tastes or preferences, thus preventing individual members from exercising the effective privilege of use they would otherwise have possessed in these attributes of their resources. The creation of a mixed property regime for the use of privately-owned assets is therefore not – or at least does not purport to be – detached from the reciprocal interests in adjacent privately-owned assets or in the common assets. It is designed to leave to the private owner power over matters, the positive and negative effects of which she fully internalizes. But at the same time, it transfers to the group decision-making powers that go substantially beyond the traditional sphere of public intervention in private property. Put differently, the greater the legal latitude granted to CICs in controlling and governing private property, the more we can view the community as the residual claimant to the allegedly private assets. At least theoretically, this state of affairs aims at having a reciprocal nature, making every member of the community better off than in a no group-regulation scenario. The residual nature of group control may manifest itself also in the ability of the association to change the rules of the game during the lifetime of the project, including by promulgation of rules or amendments to the CIC’s declaration on a non-unanimous basis. For instance, in Villa De Las Palmas Homeowners Association v. Terifaj,46 the California Supreme Court upheld a majority-approved amendment to the condominium’s declaration, imposing a no pet restriction. 45

46

Vivian S. Toy, “Upper West Side Condo Votes to Ban Smoking,” New York Times, May 12, 2011, p. A1. 90 P 3d 1223 (Cal. 2004).

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In so doing, the court, viewing use restrictions as “crucial to the stable, planned environment of any shared ownership arrangement,” held that “all homeowners are bound by amendments adopted and recorded subsequent to purchase,” and that the statutory-based deferential standard according to which the covenants and restrictions in the declaration shall be enforceable “unless unreasonable” applies equally to later amendments. This approach, which is followed in many other jurisdictions,47 means that even if the original governing documents of the CIC leave gray areas allowing individual privileges of use that adversely affect the neighborhood commons, those gaps may later be narrowed by the community institutions. This is so in addition to the dynamic creation of content in standards such as “objectionable conduct” studied in Chapter 2. Such community-wide norms and regulations may be seen as granting a “property rule” protection against restricted uses in favor of the community, or more exactly, in favor of the number of residents whose aggregate votes are needed in the association’s decision-making process to abolish the restriction or to make an exception to it. This normally translates to a majority of board members when the change is made by regular rulemaking, or to a majority – simple or special – of homeowners when an amendment to the declaration is required.48 This property rule protection is, however, problematic from an efficiency viewpoint whenever the value that a certain resident attributes to the enjoined use (e.g. painting the exterior of her house pink in an allwhite-paint CIC) outweighs the harm expected to other community members. Should the resident try to collect the consent needed to overturn the restriction, she is likely to face an anticommons scenario, in view of the fact that the legal power to allow it is dispersed among various members. The resulting “one-directional stickiness in the fragmentation process” creates substantial transaction and strategic costs, which hamper consensual correction of an inefficient baseline.49 Although, as mentioned, the governance structure of the CIC does not normally require unanimous consent to allow such extraordinary use, the process of consent assembly is nevertheless complicated, given also the 47

48 49

See, e.g., Riverside Park Condominium Unit Owners Association v. Lucas, 691 NW 2d 862 (ND 2005). Restatement (Third) of Property (Servitudes) § 6.10. Francesco Parisi et al., “Duality in Property Commons and Anticommons” (2006) 25 International Review of Law and Economics 578–91 at 585–6.

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conservative bias that seems to characterize CIC members for undoing restrictions imposed on private uses. Suggested solutions to such a limited anticommons scenario, based also on a switch to a “liability rule” (i.e. court-determined monetary compensation) protection, are far from simple.50 One possible way to somewhat mitigate the tension between the need to preserve the overall efficient group-based control of private uses and the fear of case-specific inefficiencies may be based on an analogy from cases of deviations from public regulation following consent among neighbors. Specifically, whenever a resident in a CIC is able to demonstrate that her immediate neighbors do not oppose the extraordinary use, including following contractual side payments, such sub-group consent may serve as a prima facie case against the association’s insistence on applying the restriction. In such case, the burden that the restriction is not “unreasonable” or “irrational” as applied to the specific tract would be passed to the community, which should demonstrate a broader effect on the CIC to override the sub-group consent. Such an adaptation of current law may enable CICs to handle some level of heterogeneity in tastes and preferences, an issue which is liable to grow in importance as the number of CICs continues to increase up to the point of becoming the default in designing new residential neighborhoods.

B.

The Renewing Kibbutz: mixed ideology, mixed property

The Israeli Cooperative Kibbutz is often considered the quintessential example of a long-enduring form of secular intentional community maintaining a pure common property regime. Originating in 1910, the agriculture-based Kibbutzim played a major role during the formative years before and after the 1948 establishment of the State of Israel, and were viewed by Israeli leadership as realizing the ultimate Zionist ideal.51 A cooperative association, the Kibbutz is formally defined as a “settlement which is based on the ideas of collective ownership, self-work, and equal sharing in production, consumption, and education.”52 The 50

51

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See Fennell, The Unbounded Home, pp. 96–119 (offering a reciprocal option mechanism between the homeowner and the community, based on a periodic self-assessment made by the homeowner of the use’s value). See, generally, Henry Near, The Kibbutz Movement: A History, Volume 1: History and Growth 1909–1939 (Oxford: Littman Library of Jewish Civilization, 2008). Cooperative Associations Ordinances (Types of Associations), § 2(5)(a), 1995, KT 5722, 246 (Hebrew).

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communal and egalitarian nature of the Kibbutz manifested itself in all areas of life, originally implementing a socialist ideology that attributed a central distinctive quality to the collective enterprise going beyond – and often at the expense of – satisfying individual preferences and interests.53 The cooperative regime has been enforced through various mechanisms of social control, including substantial limits on entry to and exit from membership in the Kibbutz’s association,54 as well as other types of formal and informal norms. The Kibbutz movement is currently in the midst of a process of dramatic change, leading to the evolution of a new type of Kibbutz, now formally known as the “Renewing Kibbutz,” alongside the oldstyle Cooperative Kibbutz. The Renewing Kibbutz started out as a spontaneous, informal phenomenon in numerous cooperative Kibbutzim as of the 1980s in response to an on-going crisis.55 Prominent among the economic and political causes for this crisis were the sharp decline in the profitability of agriculture; internal mismanagement which brought many Kibbutzim to insolvency; loss of governmental favoritism with the rise to power of the right-wing laissezfaire-oriented Likud Party in the late 1970s; and real estate pressures following the rise in demand for land for residential and commercial developments, especially affecting Kibbutzim located at the urban fringe. But no less important were socio-ideological factors: the demise in the fundamental socialist ethos among younger generations; an internal tension due to the growing gaps in productivity among various members (especially after many turned to non-agricultural pursuits outside the Kibbutz, but had to keep passing on their salaries to the collective coffer); and the desire of many middle-aged members to bequeath assets to their children in an era of economic uncertainty. This led to substantial rates of member withdrawal and mounting pressures for change.56 53

54

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See Yonina Talmon, Family and Community in the Kibbutz (Cambridge, Mass.: Harvard University Press, 1972), pp. 207–8. Israeli courts have rarely interfered with membership decisions made by Kibbutzim, including decisions to remove members, in view of these cooperative associations’ allegedly voluntary nature and the judicially-recognized importance of maintaining social harmony and collective discipline. See, e.g., HCJ 4222/95 Palatin v. Registrar of Cooperative Associations [1998], IsrSC 52(5) 614, 620; CA 8398/00 Katz v. Kibbutz EinTzurim [2002], IsrSC 56(6) 602, 623 (Hebrew). See Public Committee on Kibbutzim, “A Report on the Kibbutzim” (2003), pp. 24–39 (Hebrew). See, generally, Eliezer Ben-Rephael, Crisis and Transformation: The Kibbutz at the Century’s End (Albany: State University of New York Press, 1997).

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As a result, numerous Kibbutzim started to carry out grassroots organizational reforms, including setting up a differential personal budget system; partial privatization of certain services such as health, education, and meals; allocation of individual shares in the Kibbutz’s productive assets; and the taking of initial steps to change the Kibbutz’s land tenure system. These spontaneous changes raised substantial difficulties not only because they were not formally approved beforehand by the Kibbutzim’s national organizations, but also because they allegedly conflicted with the formal definition of the Kibbutz in various statutes, ordinances, and agreements made with governmental and other public entities. To resolve the issue, the Israeli Cabinet appointed a public committee which was asked to review these de facto changes and to offer a new formal policy. In 2004, the Cabinet approved the committee’s recommendations, which largely validated the grassroots modes of change.57 Consequently, the applicable legislation and administrative ordinances were amended in 2006 to formally incorporate the Renewing Kibbutz as a new type of a cooperative association, alongside the Cooperative Kibbutz. As of 2010, about three-quarters of Israel’s 256 Kibbutzim generally conform to the definition of a Renewing Kibbutz.58 It is characterized by one or more of the following mixed property features, which reflect its updated mixed-type normative stance. First, the Renewing Kibbutz may allocate individual budgets to its members pursuant to the “extent of their contribution, positions, and [time-based] seniority.”59 This flexible provision, aimed at motivating individual productivity, is subject to the duty of the Kibbutz to maintain a mechanism of “reciprocal guarantee” in the allocation of funds, ensuring a minimal economic safety net for all members and providing for the needs of the elderly and the disabled.60 This mixed regime may therefore be seen as shaping rules of allocation combining a “desert” principle, which is characteristic of utilitarian-based groups alongside a “need” criterion, typical of groups with high inter-personal

57

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The Israeli Cabinet approved the recommendations in Decision no. 1736 dated March 28, 2004. Kibbutz Movement Yearbook No. 9, available at www.kibbutz.org.il/calcala/info/shna ton/120403_shnaton9.pdf (Hebrew). Cooperative Associations Ordinances (Types of Associations), § 2(5)(b)(1) (Hebrew). Cooperative Associations Ordinances (Reciprocal Guarantee in a Renewing Kibbutz), 2005, KT 6445, 190 (Hebrew).

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solidarity,61 thus maintaining the socialist ideology at midway. This compromise is, however, far from easy. Even with the modified redistributive mechanisms intact, the budget gaps can still be extremely large within a single Kibbutz, creating new causes for internal tension.62 This departure from the egalitarian principle of the Cooperative Kibbutz may therefore also have obvious implications for the communality and solidarity in the life of the Kibbutz, raising doubts about the long-term viability of such a mixed household management.63 Second, the Renewing Kibbutz is entitled to privatize its housing units. To briefly explain, the tenure system in agricultural lands in Israel is one of public leasehold. The lands, managed by Israel Lands Administration (ILA), are leased for renewable short-term periods, typically three years each, and the use is generally restricted to agriculture and accompanying housing. The Cooperative Kibbutz has traditionally entered such shortterm renewable agreements with the ILA. Because of the collective nature of the Kibbutz, the various members were purposely not a part of the lease agreement, and had no individual rights whatsoever in the land, including in the housing units provided by the Kibbutz. Any conversion of the short-term collective leases into a series of long-term individually-based ones therefore necessitates consent by the public landowner, alongside an internal restructuring in the Kibbutz. The ILA gave its initial consent for such a transition, according to which individual leases would be entered for the various housing units, whereas the rest of the Kibbutz’s area would continue to be leased collectively.64 However, this 1996 decision had little practical effect, not only because it preceded the formal redefinition of the Kibbutz, but also because it set up substantial capitalization fees (i.e. an up-front payment for the entire lease period), which proved simply too high for most Kibbutzim members. In 2005, the Cabinet approved the recommendations of yet another public committee appointed to review the issue.65 According to the new policy – implemented through 61

62

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See David Miller, Principles of Social Justice (Cambridge, Mass.: Harvard University Press, 2001), pp. 25–32. Amiram Cohen and Eli Ashkenazi, “Kibbutz Wage Gaps as High as 700 Percent,” Haaretz.com, October 25, 2004. See Eli Ashkenazi, “Kibbutzim Worried about Disabled Members,” Haaretz.com, January 15, 2006; Eli Ashkenazi, “To be or not to be Cooperative, Kibbutz Movement Wonders,” Haaretz.com, May 18, 2006. Israel Lands Council, Decision no. 751 (Feb. 27, 1996) (Hebrew). Report of the Committee for the Review of Rights in Residential Areas in Agricultural Settlements (Dec. 2005) (Hebrew).

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corresponding decisions by the ILA in 2007 – each family would be allocated one housing unit for a capitalization fee of 3.75 percent of the tract’s full market value and could make the tract fully alienable for an additional payment of 29.25 percent.66 These decisions have been upheld by the Israeli Supreme Court in June 2011.67 Thus, while the previous property interest of Kibbutzim members was one of a conditioned, revocable “permission” to occupy the housing unit, this interest has matured into an alienable, inheritable right of a long-term capitalized leasehold, and in some cases into full ownership. As far as the internal regime is concerned, the Renewing Kibbutz may allocate the housing units based on “egalitarian criterions, considering the member’s seniority.” To preserve its revised version of communitarianism and group solidarity, the Renewing Kibbutz is required to set up direct restraints on further alienation of the housing units. This means that the Renewing Kibbutz must make a provision in its by-laws for housing units to be transferred only to members in the Kibbutz’s cooperative association, or at the least, that at any given point in time, more than half of the housing units in the Kibbutz will belong to such full-fledged members.68 Moreover, in the event of such transfer, the Kibbutz itself has a right of first refusal over this housing unit. Third, the Renewing Kibbutz is entitled to allocate individual shares in the Kibbutz’s productive assets, provided that the individual members will not be able jointly to gain corporate control of any specific enterprise, meaning typically that the Kibbutz will retain more than fifty percent of the shares. The allocation of shares will be made by applying “egalitarian criterions and in equal manner, considering the member’s seniority.” The Kibbutz may also set caps on the overall holding of individual members following subsequent transfers, as well as a right of first refusal in favor of the Kibbutz in case of such transfer.69 The Renewing Kibbutz faces considerable challenges in its transition from a regime of comprehensive communitarianism and egalitarianism

66

67

68

69

Israel Lands Council, Decision no. 979 (March 27, 2007); Israel Lands Council, Decision no. 1101 (March 27, 2007) (Hebrew). HCJ 1027/04 Independent Cities Forum v. Israel Lands Council (decided June 8, 2011) (Hebrew). Cooperative Associations Ordinances (Affiliation of Housing Units in a Renewing Kibbutz), 2005, KT 6445, 195 (Hebrew). Cooperative Associations Ordinances (Affiliation of Productive Assets in a Renewing Kibbutz), 2005, KT 6445, 195 (Hebrew).

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into a structure driven by a mixed ideology and translated into a mixed property arrangement. In comparison, in CICs, group ownership and governance of private property is a mere instrumentality based on the insights that there are diverging optimal scales governing different assets and uses in a residential neighborhood, and that the value and enjoyment of private assets is largely influenced by a complicated web of neighborhood-level concerns including group composition, intra-neighborhood externalities, and other types of collective action dilemmas. In this respect, CICs have been able to reach a stable equilibrium in designing the property mix, even if at the risk of occasional rigidity. In contrast, in the Renewing Kibbutz, group control is still a constitutive intrinsic value, even in its moderate current version. The attempt to combine an incentive structure for individual productivity alongside substantial levels of egalitarianism, communality, and a core of collective ownership as a built-in constraint has yet to be attained. This is mainly because one of the linchpins of the Cooperative Kibbutz – namely, the assumption that collectivism need not necessarily come at the expense of efficiency and productivity – may have been valid for an agriculture-based society that was able to shut itself off from external pressures, but has been undermined by recent internal and external changes. Moreover, the ongoing commitment to collectivism, which applies to all aspects of life, including household management, differentiates the Renewing Kibbutz from yet other types of regimes of common property, such as traditional forms of group management of natural resources, which are largely driven by considerations of optimal scale and other instrumental benefits. Thus, while the process of change seems to abide by Demsetz’ evolutionary theory of property, it remains to be seen whether the Renewing Kibbutz will be able to contest Demsetz’ normative bias in favor of private property, and to position itself in a stable, distinctive point along the private-common continuum, delineated in Figure 3.2.

IV. Public-common property Beyond the Public-Private Partnerships discussed in Section II, the shift in the reality of public provision of goods and services takes place in many other ways, both formal and informal. These various forms have received scant academic attention, with little attempt to conceptualize them and to place them within the broader framework of property

iv. public-common property Private

private property + standard public regulation

Figure 3.2

119 Common

business corporations

Common Interest Communities

traditional common property regimes (fisheries)

Renewing Kibbutz

Cooperative Kibbutz/ religious communes

The private-common continuum

regimes. Here, I analyze mixed-in-fact property regimes, which I entitle “public commons,” following an examination of urban local public spaces, such as parks, playgrounds, and squares, the production and management of which combine elements of both “public” and “common.” Although the various “public commons” along the spectrum – which I will delineate in the context of public spaces in New York City – diverge from one another in their unique mixtures of “public” and “common” elements, they do share broader structural and normative aspects. Whereas the public spaces surveyed are formally owned by the government (usually a city), many of them are operated and maintained in contextual, complicated ways. Of specific interest are various forms of involvement by local groups of users, typically comprised of geographically adjacent residents or businesses. In some cases, the local group of users is formally organized and is a counterpart to an explicit role allocation vis-à-vis the government. In other cases, the local involvement is largely informal, yet may be persistent and highly significant in the ongoing life of the public space. This phenomenon is far from being anecdotal both in terms of its scope and of its implications. The level and nature of local involvement in many cases may determine the fate of the resource. Long-enduring cooperation among local users as well as between the group and the government is often essential to making a publicly-owned space successful, endowing significant direct benefits and positive spillovers. On the contrary, under-investment and neglect by the local users may have the opposite effect of ending up with resources that have net negative value. This mixed socio-economic reality is not, however, accompanied by an adequate legal regime that looks beyond the formal ownership of the government. Specifically, in cases involving explicit cooperation, the

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interests of the local group may be protected by contract, whereas more informal patterns of group management do not enjoy legal validation corresponding to the parties’ actual form of engagement in the resource. In such cases, the community has to rely on more general doctrines, such as the law of dedication or the public trust doctrine, which at times may underprotect the group, and at other times may over-protect it. This state of affairs stresses the need for an updated legal regime that would fully consider the current landscape of public-common mixtures and would provide the proper incentives for successful resource provision and management. Such a regime would, in appropriate cases, validate what are currently de facto types of “public commons.”

A.

The “public” in local public spaces

As discussed in the context of CICs, local public goods that do not possess pure public good traits – meaning that they are subject to problems of congestion and rising marginal costs from a given number of users, and that non-members can be effectively excluded from them – may be generally produced by private firms or institutions. This group of club goods also consists of spaces and amenities such as parks, playgrounds, squares, and sport facilities, which are regularly produced not only in planned communities, but also in ordinary urban settings. Private clubs provide sport facilities, and shopping malls typically include open spaces and play areas. However, governmentally owned public spaces still comprise a major part of such spaces in cities. New York City has over 1,700 public spaces and recreational facilities.70 Other major cities also typically own hundreds of such amenities. This is due not merely to the history of government default provision in the pre-CIC or pre-shopping mall era. Today, cities continue to establish new public spaces, even when they are subject to budgetary constraints and often subsequently fail to properly maintain them. In an era of privatization of the public realm, there still exist several grounds for maintaining a substantial public layer in such resources.

1. Positive externalities One justification for governmental provision of public spaces concerns non-use values and other types of positive externalities. Public spaces 70

New York City Department of Parks and Recreation, “Frequently Asked Questions” (2012), available at www.nycgovparks.org/sub_faqs/faq.html.

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provide direct benefits for people who visit and use them, such as enjoyment of recreational activities, improved personal health, and child skill development.71 A private supplier can internalize benefits that it provides to users by charging membership or user fees. However, successful public spaces may often entail significant advantages for residents who do not actively use them. Positive spillover effects stemming from a public space typically include an increase in adjacent real estate prices and a boost to economic and commercial activity.72 Here, the private provider has no apparent mechanism to collect on these benefits. Courts generally have been reluctant to hold a neighbor liable in restitution following a self-serving activity by a landowner that incidentally improves the neighbor’s land, even when the benefit is readily translatable to monetary gain.73 Transaction and strategic costs may also hamper the possibility of a comprehensive, contractually-based contribution by neighboring beneficiaries, leading again to the fear of sub-optimal provision when the provider’s use-based revenues are insufficient. Contrarily, a local government whose public spaces confer such derivative benefits could capture a portion of them through increased revenues from property taxes, taxes related to economic activity (such as sales taxes), or by initially imposing project-specific special assessments on neighboring properties. In a few cases, the very existence of a particular public space that is located in a unique natural surrounding or that has an outstanding aesthetic or historical value may provide additional forms of non-use values that affect much larger, dispersed communities. Put differently, such non-use benefits constitute public goods that may necessitate some type of public intervention to improve the chances for an efficient level of provision.

2. Egalitarianism A second argument in favor of governmental provision of public spaces is the promotion of equity between citizens of different socio-economic classes. Nineteenth-century-based urban parks – Frederic Law Olmsted’s Central Park being a notable example – were intended to 71

72

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See, e.g., Susan G. Solomon, American Playgrounds: Revitalizing Community Space (Hanover: University Press of New England, 2005), pp. 209–11. See Ioan Voicu and Vicki L. Been, “The Effect of Community Gardens on Neighboring Property Values” (2008) 36 Real Estate Economics 241. See, e.g., Ulmer v. Farnsworth, 15 A 65 (Me 1888).

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serve as a melting pot for different classes of people who lived in close proximity and as an arena for socializing poor immigrants into the values of the gentry.74 Somewhat differently, public spaces (playgrounds in particular) designed during the Reform Era were a form of social control aimed at developing a specific set of values in the poor and immigrant urban residents.75 Despite the decay of such indoctrination and paternalism over time, public parks seem to continue to be generally viewed as an appropriate object of “specific egalitarianism” – the provision of a baseline level of benefits that every individual should enjoy as a matter of social policy.76 Although egalitarianism could be achieved by means that avoid governmental ownership, such as by subsidies or incentives to private suppliers, empirical evidence points to very limited success. One example is New York City’s “privately owned public spaces,” amenities for the public required from a developer in return for other zoning variances, such as floor area ratio bonuses. Because these spaces must maintain an “essential nexus” that physically connects them with the particular commercial development,77 they are densely concentrated in commercial hubs, while almost non-existent in other areas. Accordingly, out of the 503 privately owned public spaces, 496 are located in Manhattan and only seven in the other four boroughs.78 This is definitely not to say that governmental provision of public spaces adequately achieves the goal of social egalitarianism. Anecdotal evidence indicates that municipal public parks are predominantly developed in white, affluent neighborhoods.79 Formal public ownership of public spaces does, however, maintain at least the possibility of public

74

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76

77

78

79

Frederic Law Olmsted, “Public Parks and the Enlargement of Towns” (1870), reprinted in Richard. T. LeGates and Frederic Stout (eds.), The City Reader, 3rd edn. (London: Routledge, 2003), pp. 306–7. Galen Cranz, The Politics of Park Design: A History of Urban Parks in America (Cambridge, Mass.: MIT Press, 1989), pp. 61–84. James Tobin, “On Limiting the Domain of Inequality” (1970) 13 Journal of Law and Economics 263–77 at 264. Nollan v. California Coastal Commission, 483 US 825 at 838 (1987) (requiring such contribution to the public to be ‘reasonably related to the public need or burden that the [project] creates’). Jerold S. Kayden et al., Privately Owned Public Space: The New York City Experience (New York: Wiley, 2000), p. 297. See, e.g., Jane E. Schukoske, “Community Development through Gardening: State and Local Policies Transforming Urban Open Space” (2000) 3 New York University Journal of Legislation and Public Policy 351–92 at 357–9.

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law accountability, including equal protection litigation, even though its success has been modest in this context.

3. Publicness and democracy A related argument in favor of governmental ownership concerns publicness and democracy. Utilization of public spaces as centers for urban public life in western culture dates back at least to the times of the Greek Agora and the Roman Forum.80 These centers served as a meeting place for citizens, in which they handled their common affairs, traded goods, enjoyed dances and games, and exchanged news and opinions. In the New World, settlements and towns were designed around a central public square.81 In the English northeast towns, the central common served governmental functions alongside public life functions (for example, providing a place to conduct militia drills as well as allowing for the citizenry to assemble), in addition to private functions, such as the grazing of cattle. Even with later changes in the conceptualization and design of public spaces during later times, these resources maintained their basic characters as forums for embedding civic-democratic functions and values.82 A legal manifestation of this broader vision of public spaces is found in the “public forum” doctrine created in the context of the US Consitution First Amendment’s Free Speech Clause. For the purpose of reviewing the constitutionality of restrictions imposed on individual and group expressive activities in various public properties, public spaces such as parks and streets are considered the most quintessential public forums that “have immemorially been held in trust for the use of the public and, time out of mind, have been used for purposes of assembly, communicating thoughts between citizens, and discussing public questions.”83 Two interrelated developments, however, seem to undermine the practical ability of governmentally owned public spaces to promote the values of publicness and democracy, but at the same time stress the inherent 80

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Lewis Mumford, The City in History: Its Origins, its Transformation, and its Prospects (San Diego: Harvest, 1961), p. 149. This was also the case with towns established by the Spaniards, in which the main plaza was used as a marketplace as well as for other purposes such as celebrations, tournaments, and bullfights: Mark Girouard, Cities and People: A Social and Architectural History (New Haven, Conn.: Yale University Press, 1985), pp. 233–6. Mumford, City in History, p. 133; Frug, City Making, pp. 60–1. Perry Education Association v. Perry Local Educators’ Association, 460 US 37 at 45 (1983).

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problems with private alternatives. On the one hand, many traditional centers and other public spaces in cities have been gradually appropriated by drug dealers, homeless people and so forth, driving away other citizens. This trend has been exacerbated by judicial prohibitions of certain types of law and order measures such as anti-loitering legislation, which is considered to unduly limit civil liberties.84 On the other hand, the “legitimate” public has found shopping malls and other privately-owned spaces as places where sociability, civility, and commerce can once again flourish in an atmosphere of safety and security. To achieve that purpose, privately owned spaces exercise different forms of formal and informal regulation on functions, activities, and admittance.85 Although courts have intervened in some cases of exclusionary regulation,86 most types of such regulation seem to remain intact. These two trends have been portrayed as creating a divide between the concepts of “community” and “public.” Whereas the latter notion entails confrontation with difference, heterogeneity, and randomness, “community” emphasizes familiarity, security, control, and a conformist identity.87 Consequently, “community” leads to the exclusion of those who simply do not “fit in.” Thus, to the extent that one views at least some degree of publicness, pluralism, and promotion of democratic debate and discourse in public forums as socially desirable, purely private spaces will usually not suffice.88 Accordingly, the true challenge in attempting to revive governmentally owned public spaces is to make them thriving and vibrant again, but without simultaneously mimicking the constraining practices of private spaces. This requires governments and groups to work together to create a new type of public space management – one that works to increase the 84

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See Chicago v. Morales, 527 US 41 at 45–46, 64 (1991) (striking down as unconstitutionally vague a city ordinance barring ‘criminal street gang members from loitering with one another or with other persons’ in public spaces). See Lynn A. Staeheli and Don Mitchell, “USA’s Destiny? Regulating Space and Creating Community in American Shopping Malls” (2006) 43 Urban Studies 977. In Pruneyard Shopping Center v. Robbins, 447 US 74 (1980), the Supreme Court denied a federal constitutional right of free speech to hand out political pamphlets in the mall’s common areas. However, the court upheld a provision of the California State Constitution protecting such activities and rejected the mall owner’s argument that this violated its First Amendment rights. Margaret Kohn, Brave New Neighborhoods: The Privatization of Public Space (New York: Routledge, 2004), pp. 191–4. See Elizabeth Blackmar, “Appropriating ‘the Commons’: The Tragedy of Property Rights Discourse,” in Setha Low and Neil Smith (eds.), The Politics of Public Space (New York: Routledge, 2006), p. 49.

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stakeholding of local groups and utilizes their special affinity for the resource, while ensuring at least a certain level of genuine publicness and broader democratic values.

B.

“Public commons” in public spaces

This subsection offers a concise description of different types of actual mixed public spaces in New York City, providing a substantive framework within which the subsections following will analyze the three main challenges that apply to all types of spaces along the public-common continuum: (1) identifying the bilateral incentives of the relevant parties, i.e. the government and local groups; (2) addressing the possible tensions between the “public” and the “common” elements and exposing informal or voluntary mechanisms that can be employed to resolve such tensions, thus preventing an explicit legal conflict; and (3) discussing why current doctrine is unsatisfying in dealing with the complexities of public commons and how it could be revised. As of 2010, New York City (NYC)’s total acreage of public open space (38,019) is the largest in the United States among high-populationdensity cities, both in absolute area and as a percentage of total city acreage (19.5).89 Over 29,000 acres are devoted to the 1,770 city-owned parks, around 220 of which are defined by the city as “large parks.” The remaining 1,550 parks are further broken down into 360 small parks (sitting areas/triangles/malls), 90 neighborhood parks, 960 playgrounds, and 40 undeveloped sites serving effectively as small parks.90 According to Partnerships for Parks, a joint program of the NYC Parks and Recreation Department and the non-profit City Parks Foundation, there are over 3,800 grassroots, community-based organizations throughout the city, of which about 2,700 are chiefly dedicated to parks. Overall, such “friends of” groups are active in over half of the city’s parks. The nature and size of these groups considerably diverge between the different parks.91 Following is a rough, non-exhaustive 89

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See Trust for Public Lands, “Acres of Parkland as Percentage of City Area FY 2010,” available at http://cloud.tpl.org/pubs/ccpe_CityParkFacts_2010.pdf. Interview with Jack T. Linn, Assistant Commissioner, and with Warner Johnston, Director of Public Affairs, City of New York Parks and Recreation Department (April 23, 2007); e-mail from Dana Rubinstein, Deputy Director, Office of Public Recreation, NYC Parks and Recreation, to author (January 10, 2006) (on file with author). Interview with Jason Schwartz, Director, and with Emily Maxwell, Acting Director, Catalyst Program, Partnerships for Parks (April 24, 2007).

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taxonomy of the various types of local group involvement in NYC’s parks, starting with more informal patterns and moving up to more fully-fledged types of public commons.

1. Informal user groups: McCarren Park Moms Close to the public end of this continuum, one finds informal noninstitutionalized “friends of” groups working to improve and steward “their” local park. An example is a Park Moms group involved in the Vincent V. Abate playground located within Brooklyn’s McCarren Park.92 The informal Park Moms group was initiated in 1996 by Susie Monagan, who was motivated into action when her child demanded outdoor playing space. At the time, the playground was badly neglected; most swings were missing, and the garden was weeded over. Monagan started to establish an informal network of neighbors, most of them young parents who lacked sufficient home playing space. This informal process was carried out through telephone calls, notices posted on-site, and, at a later stage, through a newsletter and an e-mail list. Because Park Moms is an informal group, it acted from the outset through the City Parks Foundation as a fiscal agent. The group’s annual “budget,” which is generally around $7,000, comes chiefly from the local city council member’s office, with smaller amounts coming from local businesses and other private donors. The group’s political clout has shown itself to be useful from early on, when in 1999 the group successfully lobbied the council member to have a sprinkler pool built next to the playground at a cost of about $600,000. Although Park Moms does not have regular meetings, and the communication is casual in nature, one can always expect a critical mass of neighbors to show up for a given project. These dynamics may also help to explain the group’s decision-making process. Although there are neither official managers nor a formal voting system, the initiator of a certain project will often gain consensus for her proposed action. Apparently, in such an informal setting, consensus seems necessary to maintain the atmosphere of goodwill contribution. Interestingly, the group did not fall apart when Monagan moved outside the city. The current core of the group consists of a small number of activists who meet every few months, with approximately 20–250 92

The information in the following paragraph is based on an interview with Susie Monagan (November 3, 2000), and a telephone interview with Katherine Naplatarski (March 1, 2006) (providing periodical updates).

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locals participating in the various activities. Although the group does not currently apply for special grants and no longer maintains a newsletter, it continues to hold regular activities throughout the year, including a spring concert series, cleanup events, tree-planting, outreach activities with local schools, and a current campaign to have an ice-skating rink installed nearby. The group continues to collaborate with other groups in McCarren Park, and is accordingly part of an informal thread created between different groups of users. Thus, although McCarren Park Moms has stuck to its informal character, and its activities are not anchored in formal agreements with the city, it continues to be a significant force in the ongoing management and improvement of the playground, to have considerable political clout, and to generally maintain harmonious relations with the city and with other user groups.

2.

Incorporated user groups: The Carl Schurz Park Association The Carl Schurz Park Association prides itself on being the “oldest community-based volunteer park association” in NYC. In the late 1960s, a small group of parents joined forces to help upgrade Carl Schurz Park, located in Manhattan’s Upper East Side. Though it had initially focused on the playground, after the city’s major fiscal crisis in the 1970s which threatened the viability of the entire city and of its open spaces in particular, the group was spurred to broaden its commitment and to take an increasingly active role in maintaining and improving the entire park. The association incorporated in 1974 as a tax-exempt nonprofit organization with volunteer directors and officers, and it enjoys pro bono legal counseling. Its first major restoration project, the replacement of cherry trees that died from a faulty drainage system, came in 1976 and was considered a precedent in the sense that the community group had financed the installation of the trees and sod and provided the drainage pipes in the city-owned park, while the Parks Department provided the labor.93 Since then, the association has grown in numbers and in its scope of action. It currently has 1,200 active dues-paying members and engages in multiple activities, including the purchase of plants and gardening supplies; the renovation of dog-runs; the provision of supplies and special programs for kids; and financial and logistic support for annual 93

Carl Schurz Park Conservancy, “History,” available at www.carlschurzparknyc.org.

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community events such as art shows, summer concerts, and holiday festivals. The association used to fund the cost of a full-time workfare supervisor and a portion of a year-round gardener’s salary, and has engaged in negotiations with the Parks Department to fund half the salary of a park enforcement officer.94 Despite playing an essential role in the maintenance and management of the park for some time, only in 2006 did the association start negotiating a memorandum of understanding with the Parks Department to formalize the relationship. Until then, it has been the informal ability of the association to navigate matters vis-à-vis the Parks Department, the police, and elected city and state officials that has led the association to a successful record of goal accomplishment, whether this was facilitated by public funding or by the association’s own funds, which come primarily from donations, member fees, government grants, and program services. The Carl Schurz Park Association therefore presents a vivid example of both the potential in ongoing grassroots coordination between the park’s local users, and of the severe governmental constraints that may often necessitate the transition to hybrid forms of management and finance in many publicly owned spaces to prevent their deterioration and dereliction.95

3.

Formal mixed management: Prospect Park Alliance and ComCom In a number of parks, NYC has entered into formal cooperation arrangements with non-profit corporations for the full or partial management, maintenance, and improvement of the publicly-owned park.96 Probably the best-known example is the Central Park Conservancy, a non-profit organization established in 1980, which has been awarded renewing management agreements to “ensure [] the continuing maintenance, public programming, and capital restoration of Central Park.”97 While 94

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E-mail from David Williams, President, Carl Schurz Park Association, to author (March 7, 2006) (on file with author). See Toni Whitt, “Civic Pride and Volunteerism Bring Allure Back to Riverside Park,” New York Times, May 18, 2006, p. B4 (telling the similar story of Upper Manhattan’s Riverside Park). Besides Central Park, Prospect Park, and Bryant Park, which are discussed separately in this and the following subsections, similar arrangements exist in Battery Park and in Randall’s and Ward’s Island Parks in Manhattan; in the Bronx River Park in the Bronx; and in the Greenbelt Park in Staten Island: e-mail from Dana Rubinstein. On April 27, 2006, the contract was renewed until 2014. See The Central Park Conservancy website, available at www.centralparknyc.org/about.

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these instances of formal partnerships between the city and non-profit organizations may be seen as just another example of Public-Private Partnerships discussed previously, the various park partnerships do seem to possess additional traits that emphasize the role of the local community both in the structure of the non-profit organization and in its relations with the park users, thus constituting a distinctive type of “public commons.” An interesting example is Prospect Park in Brooklyn.98 The park, which serves over six million visitors a year, is managed by the collaboration of the Parks Department and the Prospect Park Alliance, a nonprofit organization established in 1987. Whereas the Prospect Park Alliance’s regular operating budget is over $10 million (coming chiefly from private and government support, and the rest from fees and other user-based revenues),99 in 2005 the alliance completed an unprecedented $116 million campaign for capital improvements in the park. Prospect Park has over 5,000 volunteers, some of them individuals and groups who feel a special affinity to the park, and others who are part of organized programs of schools, religious institutions, corporations, mandated community service, etc. In addition, in 1995, the Prospect Park Alliance formed the Community Committee (informally known as ComCom), aimed at serving “as a conduit for information and feedback.” ComCom includes over eighty groups of park users and other interest holders (such as local businesses and elected officials), with representatives of about thirty to forty of these groups regularly participating in ComCom’s meetings, which are held about six times a year. These meetings are intended primarily to inform and advise the groups of future plans and projects. Besides meetings of general interest, the alliance also maintains frameworks for community dialogue regarding distinctive portions of the park. For example, the General Playground Committee meets four times a year to discuss issues pertaining to the seven playgrounds located throughout the park, with meetings between the alliance and a particular individual playground group held on an ad hoc basis. 98

99

The data in the following paragraphs is based primarily on a series of interviews I held between 2000 and 2005 with the following Prospect Park Alliance employees: Rachel Amar, Carol Anastasio, Carol-Ann Church, Danny Cunningham, Pam Fishman, and Dawn Torres; and on interviews with several group members who attended a ComCom meeting in Prospect Park on November 30, 2000. Prospect Park Alliance, “Annual Report 2010,” p. 13, available at www.prospectpark. org/media/file/AR2010.pdf.

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As for the forces driving individuals with a shared specific interest in the park to organize into a group, it should be noted that some groups, such as the Prospect Park Running Club, were already organized before the establishment of ComCom. Other user groups evolved spontaneously, usually following conflicts about their specific uses. For example, following recurring complaints about dogs digging holes causing people to trip, the park’s management handed out leaflets to dog owners and summoned them to an open meeting. The result was the establishment of FIDO, an interest group representing dog owners in the park. Although ComCom is not intended to be a forum for dispute resolution among different types of users, its structure has often proved efficient in facilitating informal dialogue among groups during conflicts, although it is the alliance which, together with the city, has the formal power of resolution over the rules of use in the park. One example of an unresolved conflict is between FIDO and the Brooklyn Bird Club, a group of birdwatchers, following the latter’s recurring complaints of dogs scaring away the birds. In other cases, however, the inter-group dialogue has facilitated efficient use arrangements in the park, as was the case with the creation of different lanes for bikers and runners. In this respect also, the ComCom framework proves to be an overall successful conduit for information and coordination both between the alliance and the groups, and among the different user groups themselves.

4. Formal sub-local structures: Bryant Park and BIDs Beyond ad hoc partnerships between governments and private non-profits, cities have been experimenting with formal sub-local structures, which combine private, public, and common elements. Of particular interest here are Business Improvement Districts (BIDs), which establish a territorial subdivision of a city in which businesses and residential property owners are subject to additional district-specific taxes reserved to funding services and improvements within the district.100 BIDs have proven to be generally efficient in both the establishment and the maintenance of amenities at the sub-local level. While a BID does have some public characteristics,101 100

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There are currently several hundred BIDs in the United States and dozens in NYC alone: Lawrence O. Houstoun Jr., Business Improvement Districts, 2nd edn. (Washington DC: Urban Land Institute, 2003), pp. 2–3. This is because the initial consent of the city is required for the BID’s establishment (in addition to that of the majority of property owners), and the city is also represented on the BID’s board of directors and maintains supervision powers over its activities:

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the members of this corporation nevertheless enjoy the benefits of smallerscale governance and improved supply-demand responsiveness.102 One BID, which has helped to revolutionize a public space from a place of dereliction and crime into a thriving, economically selfsustaining urban jewel, is the Bryant Park Restoration Corporation (BPRC). Bryant Park, located behind the New York Public Library in the heart of Manhattan, fell into decay in the 1960s due to city neglect, and became a haven for drug dealers and muggers, while keeping away others. In the late 1970s, when the Rockefeller Brothers Fund was seeking to contribute money to renovate the similarly declining Public Library building, it made mitigating the park’s problems a condition for its support. In 1980, BPRC was set up and started to promote a renovation plan for the park. After twelve years of professional and public debate over the plan, and the capital expenditure of eighteen million dollars (two-thirds coming from the city, and the rest from the private sector), the park was renovated and soon became a hub for daily leisure activities – about 5,000 local office workers using it to eat their lunch – as well as for events such as open-air concerts and night movies.103 The park’s annual budget of about five million dollars is financed chiefly by the levies imposed on the businesses located in the BID’s area, concessions from the restaurant, cafe´ and kiosks in the park, and fees for special events.104 The city donates more than $250,000 each year. The ongoing success of the park has fed the neighboring assets by dramatically driving up leasing activities and real estate prices, making the BID a “win-win” setting for its private financiers and its users. While the use of the park is regulated by BPRC, including restrictions on certain activities such as panhandling and dog running, and limiting late-night closing hours, the park is generally kept open and inviting to the wide public.

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Richard Briffault, “A Government for Our Time? Business Improvement Districts and Urban Governance” (1999) 99 Columbia Law Review 365–477 at 378. Robert C. Ellickson, “New Institutions for Old Neighborhoods” (1998) 48 Duke Law Journal 75–110 at 77–8. See Alexander Garvin et al., Urban Parks and Open Space (Washington DC: Urban Land Institute, 1997), pp. 45–54. Pranay Gupte, “Raising Private Funds to Remake a Public Park,” New York Sun, January 26, 2006, p. 15.

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5.

Publicly-authorized, conditional commons: community gardens In many cases, the very establishment of a public space is not the fruit of a pre-designated governmental act of land dedication, but the result of dynamic, largely grassroots phenomena that are typical of many cities. One prominent process is the de facto or de jure conversion of vacant or abandoned land into community places. In these scenarios, the root causes for the long-term vacancy or abandonment of properties often also point to the potential, and even the necessity, of converting the land for such purposes or other beneficial reuses. The most prominent case of conversion of vacant or abandoned lots into community spaces in the United States is that of NYC’s community gardens.105 These spaces started to evolve spontaneously in vacant or deserted city-owned lots in the mid-1970s, mainly in some of the city’s toughest and most poor neighborhoods, through the grassroots work of civic-minded and concerned individuals. Over the years, more than 600 gardens evolved on city lots, serving as models of community pride and ingenuity.106 Following their creation, the city established the Greenthumb program in 1978 to assist local gardeners with the care and security of the gardens. Yet, during that period, the gardens had no formal status as such, and their use was carried out through either shortterm licenses or without any formal permission.107 The tension between the de facto community use of the spaces and their formal public ownership erupted in the mid-1990s, when the city decided to auction hundreds of lots to developers for affordable housing projects. The first wave of auctions was avoided when two non-profit organizations purchased 112 gardens in 1999.108 Following a second wave of litigation over several hundred other lots, which involved the 105

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See, e.g., Ruth H. Landman, Creating Community in the City: Cooperatives and Community Gardens in Washington D.C. (Westport, Conn.: Bergin & Garvey, 1993); Kenneth Reich, “Los Angeles Community Garden Takes Root in South Los Angeles,” Los Angeles Times, April 20, 2002, p. B4. Malve Von Hassell, The Struggle for Eden: Community Gardens in New York City (Westport, Conn.: Bergin & Garvey, 2002) (offering a comprehensive study of community gardens in Manhattan’s Lower East Side). The then-official maps showed vacant lots where community gardens were located. Ibid., p. 18. In 1998, the city leased around 1,000 properties to 700 community groups: Schukoske, “Community Development,” 386. The city’s decision was initially unsuccessfully challenged in courts by community groups and the State of New York. See, e.g., New York City Coalition for the Preservation of Gardens v. Giuliani, 670 NYS 2d 654 (NY Sup. Ct. 1997), aff’d, 666 NYS 2d 918 (App.

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Attorney General of the State of New York, a deal was struck in 2002 between the city and the state.109 According to the agreement, beyond the 93 city-owned gardens that were already under the jurisdiction of the Parks Department and other non-development agencies and 100 gardens that were under the jurisdiction of the Department of Education, 198 of the city-owned sites that were under the jurisdiction of the Housing Department were offered to the Parks Department.110 Although the agreement denies the gardens formal parkland status, the city has declared that it has no current development plans for these gardens and that any future development plans would have to undergo review procedures according to the New York State Environmental Quality Review Act111 and the city’s land use review procedure. Additionally, any proposed development plans would require the city to seek an alternate site for the garden. Although the conflict allegedly ended in community triumph, the routine of the community gardens is laden with continuous obstacles. Two of the agreement’s conditions for the prolongation of the Greenthumb program and the protection of the gardens were the continuation of fund allocation through the federal Community Development Block Grant (CDBG) program or other external sources, and the formal registration and actual use of the various gardens.112 However, in view of the city’s continuous preparedness for the possibility of federal defunding, and as some of the gardens are no longer eligible for CDBG funds because of a rise in the neighborhood’s socio-economic status, the city has started allocating funds for the gardens, but may obviously become pressed for dollars should this trend intensify. Yet, as more responsibilities are shouldered by the commonergardeners, their ability to maintain the garden increasingly depends on

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Div. 1998). The Trust for Public Land and the New York Restoration Project acquired 112 lots for a total of $4.2 million and placed the gardens in permanent land trusts: Dan Barry, “Sudden Deal Saves Gardens Set for Auction,” New York Times, May 13, 1999, p. B1. See State v. City of New York, 713 NYS 2d 360 (App. Div. 2000) (granting a temporary restraining order). Contrarily, community groups’ suits were dismissed for lack of standing: Worley v. Giuliani, 8 Federal Appendix 131 (2d Cir. 2001); Jennifer Steinhauer, “Ending a Long Battle, New York Lets Housing and Gardens Grow,” New York Times, September 19, 2002, p. A1. Memorandum of Agreement between the State of New York and the City of New York (September 17, 2002) (on file with author). New York Environmental Conservation Law §§ 8–0101–8–0117 (McKinney 2002) (codified at NY Comp. Codes R. & Regs. tit. 6, § 617.10–617.20 (2000)). Interview with Edie Stone, Director, Greenthumb (September 15, 2004).

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Public

Common

full-scale public maintenance & mgmt.

Figure 3.3

public maintenance & mgmt. + informal user groups

public public-common city submaintenance & (non-profit) structures mgmt. + joint (BIDs); joint incorporated maintenance & maintenance & “friends of” mgmt. mgmt. groups agreement

publiclyauthorized, conditional commons

The public-common continuum (in New York City public spaces)

their organizational, economic, and political capabilities. Somewhat ironically, even though the struggle for the preservation of the gardens was carried out under the flag of “environmental justice,” there is an abundance of prosperous gardens in Manhattan and affluent areas in Brooklyn, and a lack thereof in impoverished areas such as the South Bronx, into which council members often prefer to direct budgets to affordable housing for local constituents. In sum, in the context of public spaces in NYC, the public-common spectrum can be roughly portrayed as including the following points noted in Figure 3.3.

C.

The bilateral incentives behind public commons

The evolution of the different types of “public commons” in governmentally-owned public spaces is a result of complex processes, which are often resource-specific, and that cannot be attributed to a single set of factors. Yet the gradual shift from traditional full-scale public provision, management, and financing to the various mixed models seems to reflect current forces, potentials, and constraints that drive the chief stakeholders, mostly the cities on one hand, and the local groups of residents and businesses on the other. The government’s modes of operation in publicly-owned resources, such as its public spaces, naturally combine normative policy setting with practical budgetary constraints. In NYC, during substantial periods since the 1970s, the city faced acute fiscal crises that simply caused it to withdraw from many of its responsibilities in public parks, leaving the parks to the fate of grassroots self-help activities or other private initiatives. When such patterns have existed, as portrayed above, public spaces have managed to thrive. In the other less fortunate instances, city neglect

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has perpetuated and exacerbated urban decline.113 While throughout most of this era of fiscal duress the city at least maintained the rhetoric of responsibility for public spaces, the subsequent reign of Mayor Rudy Giuliani was often characterized by idealization of overreaching privatization and even by finger-pointing at embittered residents.114 Recent years have seen a shift in priorities and budget-setting for parks, with the city acquiring almost 300 acres of new parkland since 2002 and substantially increasing both capital investments and operating budgets for parks.115 Yet the city does not seem to be simply reverting to traditional public provision. Beyond the fact that maintenance and renovation levels are still unsatisfactory at times, especially in several sites that the city has effectively given up on, current public policy explicitly emphasizes the crucial role that residents and businesses should play in turning what otherwise “would merely be open spaces” into “centerpieces of their communities.”116 Accordingly, the myriad economic and organizational models combining private capital, community activity, or outsourced management aiming at attaining sitespecific self-sufficiency are heralded as necessary ingredients in ensuring the success of government-owned public spaces, especially with respect to long-term maintenance tasks. From the viewpoint of local residents and businesses, successful public spaces are instrumental in providing use benefits alongside consequential benefits such as a rise in adjacent real estate prices and a boost to economic and commercial activity. This type of stakeholding is especially dramatic given the potential adverse flip side of neglected and derelict public spaces as harboring crime, disorder, and economic and social decline.117 These interests typically distinguish neighbors from 113

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Fred Siegel, “Reclaiming our Public Spaces” (1992) 2(2) City Journal 35. The city’s maintenance staff was cut almost in half during the late 1970s and early 1990s. Between 1994 and 2001, the Parks Department’s operating budget was cut by nearly 30%: Joanne Wasserman, “Parks Go to Seed for Lack of Green; Many Suffer from Fund Cuts, Neglect,” New York Daily News, August 13, 2001, p. 4. Joanne Wasserman, “Let Volunteers Fix Parks, Rudy Says,” New York Daily News, August 14, 2001, p. 4; see also E. S. Savas, Privatization in the City: Successes, Failures, Lessons (Washington DC: CQ Press, 2005), pp. 210–38 (describing privatization schemes in the Parks Department). Timothy Williams, “City Says Some Wretched Areas Aren’t Worth Fixing,” New York Times, July 6, 2006, p. B1. City of New York Parks and Recreation, “Biennial Report 2004–2005,” p. 13 (on file with author). See Oscar Newman, Defensible Space: Crime Prevention through Urban Design (New York: Macmillan Pub. Co., 1972), pp. 11–12.

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residents located further away from the public space, who usually use it less frequently because of travel costs or because of the availability of closer-by spaces, consequently being less influenced by the public space, except in the relatively rare cases in which the space has broader-scale non-use values. The existence of such special interests may explain the emergence of grassroots forms of cooperation and coordination in governmentally owned resources, which are often able to overcome collective action problems even when the local group of users is otherwise non-organized and has no pre-existing formal contribution or enforcement mechanisms. In many such cases, the initiators of the group activity are moved to action by the prospects of private gain, but at the same time they do not heavily discount future, uncertain benefits and are often able to employ informal monitoring techniques that ensure reciprocity and continuous effort by a sufficient amount of locals to reach a critical level of sustainable cooperation.

D.

Possible tensions between “public” and “commons”

The common-public mixture can also, however, be a source of friction when the interests of the local group of “commoners” are in tension with those of the general public or other subgroups of it. These conflicts may erupt during each one of the life-stages of the public space: its establishment, its ongoing operation, and its possible conversion or redesignation for a different public purpose. The community gardens serve as an example for such a possible tension during the establishment stage, or more exactly, in that specific instance, during the process of the formal validation and recognition of the informal vacant-lots-turned-into-public-spaces. Interestingly, as is the case in many impoverished areas in NYC, the contest over the appropriate use of the publicly owned lands – community gardens versus affordable housing – reflected not only a local/general public debate, but also an internal conflict among locals themselves. The ongoing operation of the public spaces may also entail common/ public frictions. City supervision may usually be sufficient to ensure that mixed-managed parks such as Bryant Park or Prospect Park would be generally inviting to the public at large, and would even sufficiently tolerate to a certain extent the “undesirables,” such as homeless people. However, more intimate public spaces, and especially the community gardens in which the local groups are engaged in communal recreation

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and in individual plot gardening, may experience more frequent problems of exclusionary behavior by the “commoners.” Thus, whereas Greenthumb requires community gardeners to keep the garden open to the general public “for a minimum of ten daylight hours per week between the months of May and October,”118 the gardeners solely hold the keys to the garden’s gates and employ numerous informal exclusionary practices aimed at ensuring that the garden remains firmly under the control of the local group. Common/public controversies may also arise when the governmental owner wishes to convert or re-designate the land for a new purpose that will serve the general public or a different subgroup of it, such as when a certain public space is located in the designated path of a highway, or when the government wishes to build a public building on the plot, or to sell the land to a private developer and divert the sale revenues for other budgetary purposes. While such potential conflicts may be addressed in advance in cases involving formal mixed management or responsibilitysharing agreements between the city and the local group, in instances involving more informal versions of public commons, the resolution of such conflicts is made either by political power-plays or by the judicial application of general doctrines that do not necessarily take into account the uniquely mixed characteristics of the various types of public commons.

E.

The over- and under-inclusiveness of current law

The legal regime governing issues such as the dedication of lands for public spaces, the permitted uses in these spaces, the relationship between the interests of the abutting neighbors and those of the general public inside and outside the city, and the authority of the city to convert the spaces for other purposes or to alienate the land is mostly a result of state-based common law and legislative enactments. Although diverging between the different states, some principles seem to be generally characteristic of the legal status of public spaces, and particularly parks. First, parkland is either created explicitly through overt provision, such as restrictions set out in a deed of donation or in a specific legislative enactment, or implicitly, such as through continuous use by the city of the parcel for park purposes. There is, however, a difference as to for 118

Standard ‘Parks Greenthumb Garden License’ Agreement § 8 (undated, on file with author).

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which purposes the park may be used based on the nature of the original dedication. Thus, dedication of parkland by private donors (“private dedication”) is construed strictly and generally cannot be overridden even by express legislative authority to the municipality. However, parkland that is created through purchase or condemnation of the land by the city and its dedication for park purposes (“public dedication”) is subject to a more lenient approach when the city later wishes to allow broader uses, such that a general legislative authorization for municipalities to do so will usually suffice.119 In a minority of states, New York being the most notable, the courts have developed a public trust doctrine for public parks “to the benefit of the people of the State,” which requires “the direct and specific approval of the State legislature, plainly conferred” to use publicly dedicated parks for any other purpose.120 Public dedications in such states are thus endowed with an additional layer of legal protection, requiring the city to receive specific state authorization. Second, outright alienation of land dedicated for park purposes requires direct legislative approval by the relevant state.121 The process of state legislative authorization is often lengthy and cumbersome, especially when the park has received state or federal funding. New York State, for example, is generally more willing to allow alienation when the city provides a substitute land for the transferred land. Public redesignation or alienation procedures would usually be accompanied by state or city environmental or land use review procedures.122 Third, courts are generally reluctant to recognize the special interests of adjacent residents and businesses in the public space in cases of conflict. In Reichelderfer v. Quinn,123 the US Supreme Court held that although the neighboring owners had enjoyed special benefits by the presence of the Rock Creek Park, such increase in value did not create interests constitutionally protected against diminution in value by the government, even when their properties had been previously assessed for these benefits. More broadly, state courts have emphasized that the 119 120 121

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Corpus Juris Secundum, “Municipal Corporations”, vol. 64, § 1557 (2006). Friends of Van Cortlandt Park v. City of New York, 750 NE 2d 1050, 1055 (NY 2001). Eugene McQuillin, The Law of Municipal Corporations, 3rd edn., 20 vols. (Eagan: Thomson West, 2009), vol. X § 28.38. See New York State Office of Parks and Recreation, Handbook on the Alienation and Conversion of Municipal Parks, revised edn. (Albany, New York State, 2012), pp. 13–14, 21–2. 287 US 315 (1932).

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beneficiary of the public space is the entire general public of the government, such that the subgroup of adjacent residents is not entitled to special privileges in the public space, let alone to any power of veto over the public park’s conversion or alienation.124 Current law, which has been shaped against the background of traditional governmental provision and maintenance of public spaces, seems to be both over-inclusive and under-inclusive in dealing with the preservation and regulation of public spaces. It sets out procedural and institutional barriers to deviation from the public space’s original designation. But at the same time, it fails to recognize the evolving reality in which the special affinity of neighbors, alongside more general processes of outsourcing and privatization in cities, fundamentally changes the manner in which many public spaces are regularly maintained and operated.

F.

Providing mixed solutions for public commons

As is the case with public-private and private-common property regimes, the growth of mixed public-common regimes requires that the law be readjusted in appropriate cases to create the correct incentives for the protagonists and to properly balance between the “public” and “common” elements. In principle, this revision should apply to the different life stages of public spaces or other resources that are systematically shifting in the direction of mixed property. A full-scale development of such a legal regime is outside the scope of this chapter. One suggestion that I make with respect to otherwise locally uncompensated conversions or alienations of pre-designated public spaces, and which is especially relevant to persistent yet informal models of group stewardship of public resources, is to create a substantive group remedy in favor of the local group of users according to the following principles. First, the remedy would be collective and non-pecuniary, focusing primarily on the provision of a nearby substitute facility. Second, the remedy would be based on a liability rule principle, meaning that the group would not be entitled to block the public plan until the remedy is assured. Third, such a remedy would be awarded only if the affected local group is able to demonstrate the long-lasting patterns of significant group stewardship as well as the occurrence of a substantial loss. Fourth, the costs of providing the remedy would exceed neither the 124

Corpus Juris Secundum, “Municipal Corporations,” vol. 64, § 1557.

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aggregate social costs of the loss of the public space nor the new project’s estimated surplus. Such a regime could walk the fine line between dynamism and a sufficient level of stability and control of administrative costs.

V. Tri-layered property regimes Some property configurations explicitly seek to balance private, common, and public interests as having more or less equal weight, and could thus be viewed as tri-layered property regimes. A primary example is “third sector housing,” which has been developed in the past few decades as an alternative housing strategy, which seeks to expand homeownership among lower-income households but at the same time to mitigate the increased risks that have brought a high number of such households to mortgage foreclosures and loss of their homes.125

A.

Introducing Community Land Trusts

One particularly intriguing version is that of Community Land Trusts (CLTs). As of 2010, there are over 240 CLTs, which include more than 6,000 housing units across the United States.126 CLTs, which are community-based non-profit organizations that started to form in the 1970s mainly through the initiative of local activists, have been receiving growing financial and administrative support from municipal and state officials, and as of 1992 also from the federal government, when CLTs became eligible for Home Investment Partnerships (HOME) funding and other forms of Department of Housing and Urban Development (HUD) assistance. In 2001, Fannie Mae, the then-largest US organization working with lenders to provide affordable loans for families of low and moderate income, approved a Uniform Community Land Trust Rider, which readily facilitates the establishment and expansion of CLTs.127 125

126

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John Emmeus Davis, Shared Equity Homeownership: The Changing Landscape of Resale Restricted, Owner Occupied Housing (Montclair: National Housing Institute, 2006), p. 1. John Emmeus Davis, “Origins and Evolution of the Community Land Trusts in the United States,” in John Emmeus Davis (ed.), The Community Land Trust Reader (Cambridge: Lincoln Institute of Land Policy, 2010), pp. 1–3. The information in the following paragraphs is based on conversations and correspondence with Michael Brown, Burlington Associates in Community Development, LLC; John Davis, Burlington Associates in Community Development, LLC; Allison

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The CLT is a community-based, non-profit organization that acquires land for the purpose of retaining perpetual ownership in it to facilitate affordable housing. The individual homeowner leases the land for a long period of time (typically 99 years) and becomes the owner of the building erected on the land. The lease agreement on the land divides the property bundle between the individual and the CLT both during the tenancy and upon its transfer by inheritance or resale. Thus, for example, the homeowner must occupy the land as her primary residence, may not sublease the land without the CLT’s consent, is required to receive permission for major capital improvements, and is obligated to properly maintain the building. To keep the land available for affordable housing in perpetuity, the CLT repurchases the property or monitors its direct transfer from seller to buyer when the homeowner decides to sell the housing unit. In both cases the CLT ensures the resale price is restricted to a set formula. Although there are several generic approaches to setting the price, the most prevalent mechanism in CLTs is one of appraisal-based formulas. These formulas establish the resale price of the house by adding to the original price a certain percentage (typically 25 percent) of any increase in the home’s market value. The declared goal of this resale formula is to divide the gains from market appreciation, so that the exiting homeowner receives a reasonable return on her investment, while granting future income-eligible homebuyers fair and affordable access to this housing unit.128 Since the formula establishes a value ceiling and not a floor, the homeowner is nevertheless exposed to the economic risks resulting from declining values or deterioration in the asset’s condition such that the formula-determined price may not be guaranteed. Another intriguing facet of this tri-layered property regime concerns the CLT’s board structure. The CLT is an open-membership organization for all those that live within the wider geographic area which the CLT defines as the “community.” One-third of the CLT board is comprised of representatives of the leaseholders/homeowners. Another third is elected to represent the interests of other community residents outside

128

Handler, Executive Director, Portland Community Land Trusts; and Roz Greenstein, Lincoln Institute of Land Policy. Subsection VB draws on Benito Arrun˜ ada and Amnon Lehavi, “Prime Property Institutions for a Subprime Era: Toward Innovative Models of Homeownership” (2010) 8 Berkeley Business Law Journal 1–34 at 9–22. Davis, Shared Equity Homeownership, pp. 18–23; Rosalind Greenstein and Yesim Sungu-Eryilmaz, “A National Study of Community Land Trusts” (Cambridge: Lincoln Institute Working Paper WP07YS1, 2007), p. 4.

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the CLT affordable housing units. The final third is elected by the twothirds who have already been elected, with seats often reserved for the local government’s representatives, private lenders, or other community-based organizations. This tri-layered structure is intended to mediate between the interests of the leaseholders/homeowners as individuals, their interests as a group, and the interests of other stakeholders in the broader “community.” CLTs are welcomed by local governments as a means to foster effective, long-term aid to needy families. In 2006, the City of Irvine, California, set up the Irvine Community Land Trust (ICLT), with the purpose of establishing nearly 10,000 CLT housing units by 2025.129 More broadly, in a growing number of CLTs, the entire one-third of external board members is now affiliated with and appointed by the local government. Importantly, CLTs have proven a durable affordable housing strategy even throughout the subprime crisis. Though CLTs are intended for and used by low- and moderate-income families, their foreclosure rates are reportedly consistently low at 0.52 percent in 2008, compared with the significantly higher national rate of 3.3 percent estimated by the Mortgage Bankers Association in early 2009.130 These outcomes can be attributed not only to the typically lower up-front prices of CLT housing units, but also to dynamic front- and back-end measures taken by CLTs aimed at mitigating the risks of insolvency and avoiding inadequate foreclosure procedures.

B.

The structural and institutional features of CLTs

What accounts for the reported success of CLTs? Beyond the resort to an innovative tri-layered property regime, the following features may aid in explaining how CLTs offer a new model for housing, while preserving the structural and institutional traits of property.

1. Affordability through unbundling of rights and subsidies The property product designed by CLTs is located at an intermediate point along the landownership/lease continuum. It divides the set of

129 130

Irvine Community Land Trust website, available at www.irvineclt.org/resources/news. National CLT Network, “Community Land Trusts at Lower Risk of Losing Homes to Foreclosures” (March 17, 2009), available at www.cltnetwork.org.

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property rights among the individual homeowner and the land trust in an innovative manner, rather than opting for the conventional “own all or nothing” strategy. Given that CLT homeowners purchase only the housing unit and do not acquire the land, buyers pay much less upfront for the property, typically in the 25–30 percent range. Thus, unbundling rights in land and housing creates affordability due to the significant proportion of the property value usually attributable to the land component, especially in cities and neighborhoods with high demand for real estate. In addition, buyers usually enjoy a subsidy on their purchase price, their monthly rent, or both. CLTs tend to provide greater subsidies when the land is donated to them. When the CLT has to acquire the land, some of these acquisition costs are typically passed on to consumers. This cost may be reflected in the up-front price of the housing unit, or, more typically, in the monthly lease fee that is collected by the CLT. As a matter of public policy and as part of the incentive structure for potential homeowners, subsidies offered by the CLT must be substantial enough to justify the legal and economic limits placed on CLT homeowners during and after their tenure.131 At the same time, the pairing of subsidies with the unique property structure of the CLT creates an institutional setting that makes the housing affordable for long periods of time, including upon resale.

2. Credit mediation In mediating and facilitating a loan agreement for the house vis-à-vis lenders, the CLT assists by narrowing down informational asymmetries between the parties to the loan agreement, and by better assessing ex ante the financial ability of the borrower to pay back the loan. This is typically done by requiring homeowners to undergo training and orientation to explain to them the structure of rights and duties in a CLT project as compared with conventional home buying, different options for gaining access to credit from commercial lenders, the proper ratio to be maintained between the value of the property and the amount of the debt, and so forth. As far as commercial lenders are concerned, the CLT is instrumental in clarifying the unique features of the loan for banks, including: (a) that the collateral for the CLT home purchase mortgage is the leasehold estate – the value of home improvements plus the value of the leasehold interest in the land, and (b) the favorable loan-to-value ratio in CLT leasehold mortgages (because the CLT’s write-down of the home 131

Davis, Shared Equity Homeownership, pp. 19–20.

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purchase price is regarded as equity). Thus, in making both parties to the loan transaction, the homebuyer and commercial lender, better informed about their respective rights and duties, the CLT harmonizes the parties’ expectations and facilitates a transaction whose details, including the interest rate, reflect the true prospects and risks assumed on both sides. Although the CLT is not a direct party to the loan agreement, it typically retains a privilege to step in, in case of mortgage default, to forestall the foreclosure process for a few months in order to work with the borrower to avoid foreclosure, to take over the borrower’s interests, or to remove the resale restrictions in case of foreclosure or the taking of the deed in lieu. As a result, local banks, who become engaged in repeat play vis-à-vis the CLT, are more willing to originate mortgages at lower interest rates.

3. Prevention of insolvency CLTs play a preventive or backstopping role in mortgage defaults not only during the pre-leasehold negotiation, but also throughout the tenure period. Since the leaseholders pay the CLT a monthly lease fee, and homeowners typically default on a mortgage only after failing to make other types of payments, non-compliance with the lease fee payment may serve as an alarm device warning the CLT that the homeowner is nearing default on her mortgage loan. Whereas at this stage the CLT is formally entitled to terminate the lease and evict the lessee from the land, it may work either to adjust the leasehold scheme vis-à-vis the borrower or, if this is impracticable, to purchase the home from the borrower. In the latter case, the CLT would bring the account current vis-à-vis the lender, and place a lien on the property for the amount of that payment, which is then recouped at resale. 4. Lowering costs of insolvency Finally, in the case of insolvency triggering action by the lender, the CLT may take a number of steps to prevent court foreclosure, including exercising its prerogative to take over the homeowner’s interests (which is a right of first refusal over the home). Even in cases of formal foreclosure, the CLT still owns the underlying land and thus has a strong bargaining power vis-à-vis the lender or any future buyer of the home. Given that the model CLT ground lease allows the CLT to charge market-rate rent if the eventual homeowner is not a low-income

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household, in a few real cases of foreclosures, the new homeowners voluntarily agreed to re-impose the CLT resale restrictions in exchange for being charged below-market lease fees.132 Put differently, the CLT structure alleviates the anticommons fear that may be embedded in splitting ownership between the land and the house. The CLT has leverage to repurchase the specific home in case of foreclosure, or to otherwise prevent a “checkerboard” scenario, in which a number of foreclosures in a CLT area will create a divide among CLT and non-CLT homes, a significant issue also for the ongoing collective governance of the entire CLT development. More generally, the private, common, and public elements are closely intertwined in the CLT to implement the constitutive normative goal of sharing entitlements and responsibilities in a mixed-income household community, which is driven by a mixed ideological and social vision.

VI.

Toward a unifying theory of mixed property regimes

Though the different regimes portrayed in the previous sections diverge in many respects, the systematic growth and expansion of hybrid forms of property can be generally analyzed on a consolidated basis. This section lays out the descriptive and normative underpinnings of mixed regimes with the purpose of delineating a unifying theory for these property configurations.

A.

Mixed optimal scales and production functions

In his seminal work on property in land, Robert Ellickson identifies the problem of efficient boundaries as implicating the proper choice of a property regime. Depicting activities in land as falling into the categories of small, medium, and large events, Ellickson suggests that while the regulation of small events conforms to Demsetz’ model of private property parcelization, other simultaneous uses and activities that have a broader effect may necessitate complementary external institutions such as norms of neighborliness, common law nuisance rules, and government land use rules. When a significant portion of the uses and activities is large in scale, especially when it is rationally supported by the potential 132

This was the case, for example, in a number of instances involving the Burlington Community Land Trust in Burlington, Vermont. I thank John Davis for this information.

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advantages of economies of scale and risk spreading, efficiency may require the construction of common property regimes containing internal binding institutions for cooperation and coordination.133 Later literature, which has built up on Ellickson’s insight about the complexity embedded in the simultaneousness of various activities and uses, has conceptually divided property regimes as comprising of distinct, though related, realms of rights allocation and of governance.134 This approach realizes the necessity of occasionally separating the two realms so that certain property attributes relating to specifically important activities and uses that defy formal boundaries would be regulated by substantial group or public governance, although such complexity creates high startup costs for the property system. Such an approach would seem evident for those advocating the bundle of rights model, but could also be accepted by the new essentialism school discussed in Chapter 1. I suggest that it also conforms to my theory of the structural and institutional traits of property laid out in Chapters 1 and 2. But while this framework may still be considered as keeping intact a revised yet coherent division between private, common, and public property, market forces and corresponding legal rules have been continuously challenging and shifting these boundaries. As Lee Fennell notes in the context of residential properties in metropolitan areas, there is growing recognition that the value of properties is often determined not only by the onsite attributes, but moreover by people, things, services, and conditions lying beyond what we traditionally refer to as the property’s boundaries.135 Physical externalities have been long explicitly considered and addressed in the law. Beyond this, the growing prevalence of preferred spatial associations comprising of the “right” neighbors, who provide and ensure the maintenance of the “correct” neighborhood ambience, has been a major force behind the creation and legal validation of new property institutions such as CICs that create an explicit mix both in the rights allocation and in the governance structure. In this and other contexts, collective action problems are addressed by the creation of new types of regimes located in interim points along the sides of the private-common-property triangle and inside it. More

133 134

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Ellickson, “Property in Land,” 1332–5. Carol M. Rose, “Left Brain, Right Brain and History in the New Law and Economics of Property” (2000) 79 Oregon Law Review 479–92 at 479–84. Fennell, The Unbounded Home, pp. 13–15.

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broadly, the proliferation of legal phenomena such as CICs, although often socially contestable, demonstrates the structural and institutional potential in extending the choices of property regimes to accommodate changing realities. Yet there is obviously more to efficiency-based property arrangements than the issue of boundaries and externalities. As Demsetz addressed in his sequel, “Toward a Theory of Property Rights II,”136 the decision about the preferred mechanisms for control of resources involves a host of other issues such as the ability to obtain certain societal goals through the work of markets, the incentive structure for productivity in different institutions, the nature of the personal relations between members in a given community, and the complexity level of different organizations. Whereas Demsetz still believes that these parameters point toward the private vertex, lessons learned in the United States and throughout the world – as presented in this chapter – demonstrate that the correct answer is often to be found at the interim point, and that any property equilibrium may be challenged by the occurrence of endogenous and exogenous changes that Demsetz himself had identified in his original work as necessitating a shift in property regimes.137

B.

Mixed non-utilitarian values

To say that property is not only about efficiency or utility is an axiom, not to say a cliche´. As mentioned above, proponents of private property rights have also advocated them in the name of liberty, autonomy, political freedom, etc. Similarly, the creation of publicly owned resources has not been restricted to public goods, but is often considered a tool to attain goals such as vertical equity, social integration, or preservation of human dignity. What seems to typify many of the mixed property regimes is that they are based on explicitly-mixed ideologies, combining, or more exactly compromising, desires for individualism and economic maximization with notions of equity and solidarity. The Renewing Kibbutz explicitly defines itself as located midway between individualism and collectivism, and has correspondingly created a mixed property regime. NYC currently advocates ideas of economic efficiency and self-sustainability alongside its basic commitment to publicness, openness, and democracy in the way it manages its public spaces. CLTs mediate between the desire 136

Demsetz, “Toward a Theory II,” 657–65.

137

Demsetz, “Toward a Theory,” 350.

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of the homeowner to enjoy a value gain on the property upon resale and their commitment to the community and to future homeowners who wish to enjoy the same access to affordable housing that the seller had initially enjoyed. Sometimes the implementation of such a mixed ideology ends up in resounding failure.138 This does not mean, however, that conscious societal decisions to follow a middle ideological or moral pattern could not be successfully translated to such property regimes. This again demonstrates my key conclusion in Chapters 1 and 2, by which the legal construct of property could accommodate various kinds of normative inclinations, provided these are adapted to embrace property’s structural and institutional traits.

C.

Flexibility in trial-and-error

A change in a property regime regulating a certain resource may often be a daunting task. Beyond the inherent transition costs that typify any sort of legal change, socially desirable changes in property regimes may often be delayed or blocked altogether by politically powerful actors who are anxious mainly about the distributive outcomes of the proposed change in the legal status quo. At least in some instances, a switch from a certain “pure” property regime to a mixed regime that combines substantial elements from the previous regime, rather than a wholesale switch to another pure property regime, may prove to be more feasible by mitigating the level of resistance, at least to some degree. When the mixed property regime is considered optimal regardless of the issue of possible opposition, then such a regime may enjoy the best of both worlds. This is very much the case with the Renewing Kibbutz. The Renewing Kibbutz was designed based on a model which sought to combine partial privatization and rewards for individual productivity alongside the assurance of a redistributive “safety net” for disadvantaged members and the preservation of substantial group control over life in it. This interim ideological approach also proved instrumental in alleviating the resistance of members who had good reasons to fear the change, especially the elderly generations who had founded the Cooperative Kibbutz or lived in it their entire productive adult lives, and thus had no private savings. In other instances, the choice of a mixture may be a conscious compromise, for example, when a deregulatory switch to a 138

See Natalie Mehra, “Flawed, Failed, Abandoned: 100 P3s – Canadian & International Evidence” (2005), available at www.healthcoalition.ca/ffaf.pdf.

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market regime is constrained by a “grandfathering” of rights to current stakeholders that threaten to veto the change.139 This relative advantage of mixed property regimes may also be manifested when such a regime yields unsatisfactory results, and the policymaker wishes to redesign the regime either by amending it or reverting back to the original “pure” regime. In such instances, the mixed nature of the property regime may make it easier to correct errors that are revealed following the trial. The British railway system is a case in point. This industry, which had been nationalized during the 1940s, but had been suffering chronic budgetary and infrastructure problems causing a sharp decrease in demand by consumers, underwent a swift process of privatization during the early 1990s under which track maintenance and operation were outsourced and train services to passengers were franchised to private firms, while both functions still remained heavily financed by the public. Within a few years, it became obvious that this model of privatization was failing miserably: maintenance levels were poor, as tragically revealed by a deadly accident in Hatfield in 2000; franchised train companies were unable to respond to changing needs, especially because of the rigid structure of the franchise agreements; the firms that were supplying and leasing trains and carriages to the operating companies were blamed with over-charging; and the multitude of governmental entities charged with financing and regulating the industry, with unclear division of responsibilities among them, further added to market distortions and to a major waste of public funds.140 Following these failures, the British government has taken several steps. It terminated the outsourcing railway maintenance agreements for compensation and currently provides these services in-house via Network Rail, a non-profit body financed by public funds and regulated by the Office of Rail Regulation (ORR).141 ORR has also threatened to start an antitrust inquiry against the train-leasing companies unless they agree to cut the prices charged from the publicly-subsidized train 139

140

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See Thomas W. Merrill, “Explaining Market Mechanisms” (2000) 2000 University of Illinois Law Review 275. See HM Department of Transportation, “The Future of the Rail – White Paper” (2004), pp. 10–18. For example, one firm, Carillion, was paid £17.6 million for contract termination and transfer of its assets to Network Rail, in a move aimed at saving £100 million of public funds annually: Andrew Clark, “Carillion Receives £17m Rail Payoff,” The Guardian, June 2, 2004, p. 18.

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operators.142 More broadly, the government has designed a new scheme whereby it will take charge of the railway strategy by setting the level of public expenditure and making decisions on what should be purchased, and ensuring that other governmental agencies will be given clearer mandates and will work closely with private firms to provide a renewed scheme of collaboration. These changes were made possible, both legally and politically, largely because of the fact that even under the privatization scheme, the formal property regime governing British railways was mixed and maintained sufficient public powers (alongside substantial public funding) over the industry to allow for such changes when the model proved to be flawed. Although in theory the government could have always re-publicized fully privatized resources by using its taking power, there is no doubt that this latter measure would have proven much more burdensome and costly, both financially and politically. Evidence from other countries about such reorganizations, occasionally taking even the form of wholesale re-publicization, similarly reveals the potential flexibility embedded in mixed regimes in matters facing constant changes in market or public conditions.143 While there may be cases, for example in the Public-Private Partnerships context, in which the government would neglect to take advantage of this better potential for change due to apathy, political capture by current private stakeholders, or loss of institutional knowledge that practically prevents the government from regaining public control, the formal structure of such partnerships is a significant tool that may facilitate required changes in the property equilibrium. These features of mixed property regimes thus highlight the dynamic aspects of property, presented in Chapter 2, and further demonstrate the way in which decision-making institutions – in these cases, mostly legislatures – could respond to such changes in values, preferences, or market demand by redesigning how property powers and priorities are set up for such resources. 142

143

See David Teather, “Train-leasing Banks Face Inquiry amid Claims that Public is being Ripped Off”, The Guardian, June 29, 2006, p. 27. See Natalie Alcoba, “City Eyes Takeover of Water, Sewer Operations,” The Hamilton Spectator (Ontario, Canada), August 31, 2004, p. A1 (reporting the re-publicization of water and watershed facilities in the City of Hamilton); Adrian Rollins, “La Trobe Hospital Returns to Public Control,” The Age (Melbourne, Australia), October 24, 2000, p. 4 (reporting the early termination of a twenty-year contract for the operation of a regional hospital in the Australian State of Victoria).

PART III Protagonists of property: beyond individual and state

4 How property can create, maintain, or destroy community

The interplay between property and community is often associated with the common property regime. As Chapter 3 has shown, the term common property refers to resources that are formally owned and managed collectively by members of a defined group.1 One prominent setting in which communal property is considered to play a constitutive role in the definition and understanding of “community” is that of selfperceived insular religious, ethnic, or ideological groups that rely on collective ownership and control of resources to maintain their enclave status within society. In these contexts, property in the service of community implicates broader questions of social, economic, or political autonomy. However, as this chapter argues, the interconnectivity between property and community is much more complicated and multifaceted than the specific instance of collectively owned property within highly distinctive sub-society enclaves. First, “community” is a fluid, often elusive concept. If we wish to abstain from a nihilistic view of community as simply an empty concept, it is imperative to understand the diversity among different kinds of communal relationships within society and the implications that this complexity yields for the ways in which internal and external property institutions are structured. Second, contrary to the intuitive association between communality and common property, the lives of communities necessarily involve the full range of property regimes, including private, public, common, open access, and mixtures of these forms, as well as informal modes of 1

See Elinor Ostrom, Understanding Institutional Diversity (Princeton University Press, 2005), pp. 219–54; Carol M. Rose, “The Several Futures of Property: Of Cyberspace and Folk Tales, Emission Trades and Ecosystems” (1998) 83 Minnesota Law Review 129–82 at 139.

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resource control and management. This richness is not only a matter of fact, but also has normative merit. Different types of communities, each with their own motives for incorporation, group composition, production functions, and so forth, may opt for the kind of property regime that seems most suitable for the community optimally to attain its goals, and such choices may often be very far from sweeping collective ownership. Third, property plays a very different role for various kinds of communities. The interface between the state’s law of property and the group’s internal norms and overall structure may significantly diverge between different types of communities, and accordingly, such groups may experience highly differential effects by the application of what is allegedly the same set of official property laws and policies. To illustrate the latter point, I define the potential implications of property law for sub-society communities along the following scale. “Property Tailwind” will refer to strong, active societal support for a certain type of community through the design of certain property doctrines and remedies. “Property Headwind” will reflect an opposite trend of overt hostility or conscious apathy towards the special needs of certain communities, bringing about their weakening or even outright destruction. “Property (near) Zero-wind” will stand for a middle stance, which pretty much leaves communities to their own devices, so that their fate hinges almost exclusively on their internal mechanisms for rulemaking and enforcement. The chapter proceeds by addressing the basic dilemmas in conceptualizing “community” and its status within general society, focusing attention on territorial communities in order to define three materially different types of communities: “intentional,” “planned,” and “spontaneous.” It then explains how, for each of the different types of communities, property law can play a distinctive crucial role in creating, maintaining, or destroying community.

I.

The taxonomy of community A.

What is “community”?

“Community” is a highly popular, often vulgarized term, that is constantly used just about anywhere: in street talk, social milieus, commerce, local and national politics, or ideological and theological discourse. Unsurprisingly, scholarly attempts to define and conceptualize

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“community” have often proved quite futile. A 1955 study by George Hillery found 94 different definitions of community in the scientific literature, with little common ground among them.2 This multiplicity, which is typical not only of interdisciplinary but of intra-disciplinary discourse as well, has led many to skeptically view “community” as pretty much a useless concept that may as well be abandoned altogether.3 Recent scholarship, however, has tried to reinstate some integrity into this concept, with relatively much attention devoted to geographicallyor territorially-based groups of people who share some type of common denominator beyond mere proximity.4 It seems that much of the academic ambivalence toward the very concept of community stems not only from methodological or empirical restraints, but also, at least implicitly, from the basic normative dilemma that inevitably haunts community. Intertwined with the constructive traits of community, such as the sense of belonging and intracommunity empathy, mutual commitment to shared values and norms, active collaboration in the pursuit of common goals, or attainment of a community-subjective optimal balance between social ties and individual autonomy,5 one finds the flip-side of communality: exclusion and alienation from outsiders. Even devoted communitarians admit that substantial long-lasting bonding within groups of people comes with the inevitable societal price tag that results from drawing distinctions between members and non-members, ensuring sufficient similarity among members to maintain the common ground, or limiting member turnover to allow for bonds to solidify.6 The fact that the constructive traits of community can be quite easily manipulated, at least in everyday life, to conceal animosity, xenophobia, and intolerance makes the scholarly endeavor a frustrating experience, since the ability to normatively evaluate

2

3

4

5

6

George Hillery, “Definitions of Community: Areas of Agreement” (1955) 20 Rural Sociology 111. Colin Bell and Howard Newby, Community Studies: An Introduction to the Sociology of the Local Community (New York: Praeger, 1973), p. 49. See, e.g., Monica Colombo et al., “Sense of Community and Participation in Urban Contexts” (2001) 11 Journal of Community and Applied Social Psychology 457. Amitai Etzioni, “Creating Good Communities and Good Societies” (2000) 29 Contemporary Sociology 188; John L. McKnight, “Redefining Community” (1992) 23 Social Policy 56. Etzioni, “Creating,” 189–90.

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communities is so often overshadowed by their persisting terminological obscurity. This complexity should not dictate nihilism, however. A contextual, functional analysis of different community formations – which includes the identification of the initial motives and ongoing goals of a group in forming a community and maintaining formal and informal mechanisms for collective action, and of the ways in which the community structures its institutions and employs specific exclusionary practices – can prove to be coherent and useful. The terms community and communality should therefore be understood not as having a single universal meaning that either exists or not in a certain group in a dichotomous manner, but rather, as consisting of a continuum along which many variations exist, each with its own specific types and degrees of durable common denominators and interpersonal interactions. Such a refined approach can also better guide us through a normative evaluation of the different types of communities and the consequent stance that society, including the legal system and property law in particular, should take toward these communities. The first task is therefore to replace a generally vague concept with a more nuanced, workable taxonomy of communities. Such taxonomy will obviously be far from hermetic, given potential overlapping between categories, dynamism within certain groups that may change their own locus within the taxonomy, questions of agency in self-defining the nature and future directions of the community, etc. But this typological endeavor is nevertheless essential in order to move from a largely fruitless discourse of “community within society” to a more useful normative framework.

B.

Territorial communities and general society

Notwithstanding the ever-growing importance of non-territorial communities (such as online social networks, the “academic community,” the “business community,” etc.), this chapter focuses on territorial ones. This is not only for methodological reasons, but also because territorial communities have certain intriguing features that deserve special attention but at the same time require re-conceptualization. First, physical proximity is often considered to be a central factor in both assessing and facilitating close interpersonal ties. The human ecology school, for example, views shared territory as a fundamental basis of

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human communality, resembling the symbiosis of animals and plants in the same habitat.7 Second, common territoriality provides a dynamic arena for repeat-play encounters between persons, although the resulting scenario is obviously not always a happy one. Whereas, in many cases, vicinity can indeed create over time a thickening web of meaningful ties and neighborly internal norms – an instance I will define below as “Spontaneous Communities” – proximity can also result in intra-local friction, tension, and hostility.8 Yet identifying the reasons for such make-or-break dynamics poses an exceptionally intriguing challenge. Third, the specific configuration of sub-society territorial clustering is often highly revealing in regard to broader social patterns within this society. The extent of de facto or de jure physical segregation among groups along socio-economic, ethnic, racial, or religious lines, and the potential confinement of communality to such boundaries have enormous societal implications and meanings.9 Accordingly, forms of territorial exclusion, such as in residential neighborhoods, school composition, or voting districts, often have particularly powerful practical and symbolic societal effects.10 In offering the taxonomy of territorial communities, the chapter looks at the interplay between two prominent groups of arguments for validating territorial communality. It then asks if and to what extent such arguments may apply within the suggested community typology. Briefly, the first group of arguments recognizes the inherent tension between community and society, but justifies its existence in certain circumstances. Following Ferdinand Tönnies’ famous distinction between Gemeinschaft and Gesellschaft as two qualitatively different

7

8

9

10

See generally, Amos H. Hawley, Human Ecology: A Theoretical Essay (University of Chicago Press, 1986), pp. 1–9. One can think of tragic instances such as the violent conflict between African-Americans and Jewish Ultra-Orthodox in the Brooklyn neighborhood of Crown Heights in 1991: Ari L. Goldman, “The Crown Heights Report: On the Streets; After Report, the Talk of Residents is Tense,” New York Times, July 22, 1993, p. B4. See, e.g., Yuki Kato, “Planning and Social Diversity: Residential Segregation in American New Towns” (2006) 43 Urban Studies 2285 (2006); Brian H. King, “Developing KeNgwane: Geographies of Segregation and Integration in the New South Africa” (2006) 173 Geographical Journal 13. See, e.g., Adam Weiss, “Grutter, Community, and Democracy: The Case for RaceConscious Remedies in Residential Segregation Suits” (2007) 107 Columbia Law Review 1195–233 at 1207–19.

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forms of human organization and relationships,11 commentators have recognized that forming and maintaining solid sub-society communities may often run contrary to the ethos and norms of general society and undermine its cohesiveness. Yet, this is a price that liberal societies must pay if liberalism is understood as mandating a significant level of state neutrality, tolerance, and respect for individual choices.12 Society should learn to accept, even if reluctantly, some types of de facto manifestations of individual choices about congregating. After all, a liberal society that prides itself on letting people freely choose spouses, friends, and social milieus, cannot wholly rule out the value of allowing residential grouping choices. Few would argue that such choices should be absolute – overt racial exclusion would gain little moral or legal support – but nevertheless, their legitimacy should not be stamped out altogether.13 Under some versions of this type of argument, in some instances the state should even go further and actively guarantee the viability of distinctive territorial communities. Most prominently, those who advocate the right of minority cultures to disassociate themselves from general society claim that such calls have special normative force, even from a liberal viewpoint, when the group in question (a) suffers from systematic inferiority within general society, often as the result of overt historical injustice inflicted upon it; (b) must engage in territorial separatism to exist because geographical assimilation would cause the community and its internal governance structure to collapse; and (c) is politically, socially, or financially incapable of isolating itself through mere practice, and must resort to the formal affirmative intervention of the state in order to maintain its distinctiveness.14 The second group of arguments in favor of sub-society communities sees at least some types of groupings as socially desirable because these are believed to entail wider societal gains resulting in a “win-win” scenario. In fact, this is exactly the case made for local governments or for potent states in a federal regime. This is so whether one opts for the 11

12 13

14

Ferdinand Tönnies, Community and Civil Society (Jose Harris (ed.), Jose Harris and Margaret Hollis (trans.)) (Cambridge University Press, 2001 [1887]). Tönnies originally drew this distinction to depict a historical evolution of western societies, not an alleged conflict among simultaneously-existing models in society. See, e.g., Glen O. Robinson, “Communities” (1997) 83 Virginia Law Review 269. See Larry Alexander, “Illiberalism all the Way Down: Illiberal Groups and Two Conceptions of Liberalism” (2002) 12 Journal of Contemporary Legal Issues 625. A prominent collection of works on minority cultures in liberal democracies is Will Kymlicka (ed.), The Rights of Minority Cultures (New York: Oxford University Press, 1995).

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“firm” theory of local governments – inspired by Charles Tiebout’s depiction of localities as market players each supplying a unique mixture of taxes and services to accommodate resident preferences15 – or for the “polis” theory, by which smaller-scale jurisdictions are practically the only arena where one can actively participate in public decision-making and citizenship, thus also benefiting democracy and society in general.16 Taking this point further, one may argue that what works on the local government scale, may work even better for smaller-scale territorial associations. A linchpin of Common Interest Communities – presented in Chapter 3 and conceptualized below as “Planned Communities” – is the ability of a relatively small group of persons to effectively organize and to establish mutually binding rules and collective action mechanisms for the provision of common amenities and the control of intraneighborhood externalities resulting from certain uses of the private units.17 In addition, the voluminous “social capital” literature, which ranges from social critics such as Jane Jacobs who stress the essentiality of vibrant streets and sidewalks for gathering neighbors in an intimate social fashion,18 to scholars such as Robert Putnam who have developed a theory of utilitarian and societal benefits of human networks,19 sees territorial communality as potentially supportive of society-wide gains. While each of the groups of reasoning could be and have indeed been criticized,20 this chapter seeks to identify the specific kinds of supportive arguments that may be considered relevant, at least prima facie, to the different types of territorial communities. The central point here is that since the various kinds of communities feature different sets of initial 15

16

17

18

19

20

Charles M. Tiebout, “A Pure Theory of Local Expenditures” (1956) 64 Journal of Political Economics 416. See Gerald E. Frug, City Making: Building Communities without Building Walls (Princeton University Press, 1999), pp. 19–25. Robert C. Ellickson, “New Institutions for Old Neighborhoods” (1998) 48 Duke Law Journal 75–110 at 81–2. Jane Jacobs, The Death and Life of Great American Cities, new edn. (New York: Vintage, 1989), pp. 55–7. Robert D. Putnam, Bowling Alone: The Collapse and Revival of American Community (New York: Simon & Schuster, 2000), pp. 287–349. See, e.g., Sheryll D. Cashin, “Localism, Self-Interest, and the Tyranny of the Favored Quarter: Addressing the Barriers to New Regionalism” (2000) 88 Georgetown Law Journal 1985; Richard T. Ford, “The Boundaries of Race: Political Geography in Legal Analysis” (1994) 107 Harvard Law Review 1841.

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motives, internal structure principles, and potential external effects, each type of community should rely in turn on a distinctive normative basis and be subject to discrete criticism in evaluating both the basic goal in setting up such a community and the means employed to facilitate its existence. Thus, although the following taxonomy does not purport to be a neat and clear-cut division of the entire world of territorial groupings due to issues such as overlapping, dynamism, and agency, the fact that one can nevertheless identify broad differences in the types of initial motives, goals, and socio-legal structures among the broad categories of communities has obvious implications for the differential features of normative evaluation toward them.

C.

A triptych of the territorial communities landscape

1. Intentional communities An “Intentional Community” may be defined as a group that shares a thick common denominator of ideology, values, or beliefs that are substantially distinctive from those of general society. This requires such communities to functionally and physically insulate themselves from society and to rely on an extensive set of internal norms and institutions to maintain their communality.21 Territorial Intentional Communities are not formed and maintained in a single manner. Members of religious monasteries and covenants, like the Order of Saint Benedict, assemble in a certain physical location chiefly through decisions taken by the religious organization’s higherlevel institutions (although each member joins the larger organization itself voluntarily). Also given the fact that interpersonal turnover is obviously not based on intergenerational genealogy, the composition of each local community and the norms by which its members abide are not merely the result of intra-community evolution, but derive chiefly from higher institutional decision-making.22 To the contrary, religious Intentional Communities such as the Hutterites, Amish, or Jewish Ultra-Orthodox communities are family-based, so that the location and composition of each local community is determined 21

22

Robert C. Ellickson, The Household: Informal Order Around the Hearth (New Jersey: Princeton University Press, 2008), pp. 53–9. See, generally, Timothy Wright, “The Benedictine Life: Decline, Growth, and Innovation” (2007) 7 International Journal of the Study of the Christian Church 179.

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largely by historical incident and intergenerational turnover. This does not necessarily mean that such types of local communities are subject to a lesser organizational higher-level control. Whereas local Amish communities enjoy relatively abundant autonomy within the Old Order Amish organization,23 Jewish Ultra-Orthodox community members abide by the rules of the specific faction or court to which they belong, even if their Grand Rabbi is located in one of the community’s other territorial hubs.24 Ethnic-religious communities such as the native tribes in the United States or Canada or the indigenous tribes in Australia and New Zealand are another highly complicated variation of Intentional Communities. Their insulation is not strictly a matter of internal group evolution and choice, but also the result of their identification as distinctive by others, i.e. those who became identified as representative of “general society.” Whereas practically all of these groups have been subject to overt discrimination and injustice, more recent reparatory measures in such countries still identify and formally distinguish these groups or “communities,” though this time with an allegedly more benign or affirmative purpose.25 The interplay between self-identification and external-identification of other ethnic, religious, or national-origin groups as Intentional Communities is even more intricate. In many such instances, the use of the community terminology may reflect not so much a genuine group choice, but a euphemistic conceptualization of de facto modes of segregation and stratification. Contrastingly, probably the best-known example of an enduring type of a secular, genuine ideology-based Intentional Community is that of Israeli Kibbutzim, introduced in Chapter 3. As I have described, the original credo of the Cooperative Kibbutz has been defined as a “settlement which is based on the ideas of collective ownership, self-work, and equal sharing in production, consumption, and education,” with 23

24

25

Donald B. Kraybill, The Riddle of the Amish Culture, revised edn. (Baltimore: Johns Hopkins University Press, 2001), pp. 91–110. See, e.g., Jerome R. Mintz, Hasidic People: A Place in the New World (Cambridge, Mass.: Harvard University Press, 1992), pp. 3–4. See, e.g., Jeremy Waldron, “Redressing Historic Injustice” (2002) 52 University of Toronto Law Journal 135; Kevin Gover, “An Indian Trust for the Twenty-First Century” (2006) 46 Natural Resources Journal 317; P. G. McHugh, “Aboriginal Title in New Zealand: A Retrospect and Prospect” (2004) 2 New Zealand Journal of Public and International Law 139; Kent McNeil, “The Vulnerability of Indigenous Land Rights in Australia and Canada” (2004) 42 Osgoode Hall Law Journal 271.

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communalism and egalitarianism dominating all aspects of life. The Cooperative Kibbutz has accordingly been attributing a central distinctive quality to the collective enterprise at the expense of satisfying individual preferences and interests, and employing a variety of informal and formal mechanisms to preserve its underlying mission. The Renewing Kibbutz, the emergence of which over the past few decades has also been portrayed in Chapter 3, could be conceptualized as an Intentional Community of another kind. While relaxing some of the strict features of communalism and egalitarianism that typify the Cooperative Kibbutz, the Renewing Kibbutz maintains an intrinsic, non-instrumental core of communality and solidarity, including the establishment of an economic safety net ensuring a revised version of “reciprocal guarantee” even in an era of differential incomes, or the preservation of significant social control over the identity of the Renewing Kibbutz’s members. The Renewing Kibbutz further demonstrates that institutional communality is not necessarily correlated with a strong version of common property resource management. As Chapter 3 has shown, the Renewing Kibbutz has established a private-common mixed property regime in regard to both formal rights allocation and ongoing governance of the resources. To recap, the Renewing Kibbutz distinguishes itself from the Cooperative Kibbutz in that it possesses at least one of the following traits: (a) allocation of individual budgets based on qualitative criteria such as extent of contribution, but subject to preservation of a redistributive mechanism to provide a safety net for less-well-to-do members; (b) allocation of housing units based on otherwise egalitarian criteria while considering the member’s seniority, but at the same time reinstating internal governance mechanisms regarding the identity of members and transferability of assets; (c) allocation of individual shares in the Kibbutz’s productive assets while providing that individual members will not be able to jointly gain corporate control of any specific enterprise and that caps on overall individual holdings may also be set up. This renewed type of Intentional Community facilitates a property regime that does not fall back on an all-encompassing collectivism in asset ownership and control to preserve its communalism. In the variety of Intentional Communities of the Jewish UltraOrthodox variety we find yet other mechanisms of resource control that do not necessarily boil down to pure collective entitlement. As mentioned, Ultra-Orthodox groups see it necessary to physically huddle together to preserve their unique ideological, cultural, and social fabric.

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Territorial concentration facilitates the efficient provision of services (such as a separate education system or the provision of kosher food), observance of community practices (e.g. closing inner roads to traffic on Shabbat), and most importantly, enhancement of the group’s ability to closely monitor member behavior.26 Beyond social practices of insulation, the Israeli Supreme Court has validated the establishment of neighborhoods and entire towns designated solely for the UltraOrthodox – including those erected on state land or subsidized by government – recognizing the interests of “minority communities who seek to preserve their uniqueness.”27 These organizational modes spill over into intra-community property issues. Ultra-Orthodox communities employ various measures, mostly informal, to shape their property landscape. Thus, for example, in many Ultra-Orthodox neighborhoods and towns unofficial Rabbinate selection committees condition their approval of apartment sales on the candidate’s suitability to the community’s “way of life,” based also on his affiliation with a certain faction, i.e. the specific community within the Ultra-Orthodox world. Developers who do not abide by these decisions face an informal yet extremely effective sanction: boycott.28 Similarly, “housing committees” established in Ultra-Orthodox neighborhoods and towns monitor rent market rates. Landlords who substantially raise rents without receiving the committee’s approval get blacklisted and the apartments are effectively taken out of the UltraOrthodox market.29 Property practices of Intentional Communities thus preserve a central role for the community in owning or governing assets or several attributes of them. Yet far from conforming to a single property blueprint, such practices diverge significantly in their delineation of property regimes. Even more importantly, one should be careful not to be misled into viewing Intentional Communities as completely sealed and static entities, including in property matters. Internal disputes, 26

27

28

29

See Amiram Gonen, Between City and Suburb: Urban Residential Patterns and Processes in Israel (Aldershot: Avebury, 1995), pp. 171–91. HCJ 4906/98 Am Hofshi Association for Freedom of Religion, Conscience, Education, and Culture v. Ministry of Housing [2000] IsrSC 54(2) 503 at 508–9. See Anat Georgy, “Respect for Rabbis and Preservation of Jewish Law – No Less Important than Quality of Construction,” Haaretz Real Estate Supplement, December 5, 2004, p.1 (Hebrew). Eric Mirowski, “Rabbinate Housing Committees Monitor Rent Rates in the Ultraorthodox Sector,” Haaretz, October 18, 2004, p. A7 (Hebrew).

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majority–minority tensions, and constant pressures for change exist even within the tightest and most insular of groups. Even when one can identify relatively clearly who is authorized to make decisions for the community and speak on its behalf, potential agency problems and minority disenfranchisement are bound to come up. This is so not only when a conservative majority blocks a change-seeking minority that has no exit option, but even more so when it is rather the decisionmakers who seek to introduce a change – the “renewal” of Kibbutzim and recent land tenure changes in Native American reserves being two examples. As will be shown, these complicated issues have clear implications for the stance that a liberal society should take toward such Intentional Communities, including in property law matters.

2. Planned Communities A different type of residential community that has grown rapidly in the past few decades is one of “planned communities,” typically referred to as Common Interest Communities (CICs). As Chapter 3 has shown, these private developments, chiefly residential ones, are initially designed to solve a host of collective action problems that neighbors typically face in residential neighborhoods. These issues relate both to the establishment and management of joint resources (such as inner streets, parks, and sport facilities) and to the control of intra-neighborhood externalities resulting from the use of the private housing units. To facilitate this coordination and reciprocal control, developers of planned communities construct a consent-based legal regime which purchasers must formally join by signing the conditions, covenants, and restrictions (CC&Rs) that are part of the CIC’s governing documents. Moreover, the CIC’s institutions generally not only have the power to enforce the original terms, but are also authorized to make managerial decisions, promulgate rules, and even amend the governing documents without a need for unanimous consent. That said, one may ask whether CICs can really be considered “communities,” or might their title be erroneous, not to say deceitful? In one sense, they certainly are. CICs are often criticized as a “secession of the successful,”30 referring to numerous formal and informal exclusionary mechanisms employed by

30

See Sheryll D. Cashin, “Privatized Communities and the ‘Secession of the Successful’: Democracy and Fairness beyond the Gate” (2001) 28 Fordham Urban Law Journal 1675.

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these communities. This is most vividly illustrated by “gated communities,” i.e. those that physically restrict public access to them.31 But how about the constructive elements of communality? Recalling the two types of general arguments discussed in Section IB in favor of sub-society communities, can people who reside in CICs utilize their institutional interconnectivity to form deeper manifestations of common values, empathy, and a sense of belonging, and do they? And can the possibility of creating and nourishing intra-community social capital be complemented by the existence of genuine mini-democracies in the CIC institutions? At best, the evidence for this has been mixed. On the one hand, the constant proliferation of CICs, and the general support that residents express in surveys for CIC rules and institutions, may allegedly attest to the fact that people truly “feel at home” in CICs. On the other hand, several studies have shown an increasing number of recorded disputes and conflicts between residents and CIC institutions, as well as an abundance of rule violations, especially on the part of resale purchasers who take little care in reading the governing documents.32 In addition, in contrast to the utopian “polis” perception, managerial activities are often not carried out by residents themselves, but rather, by professional management corporations.33 These practical characteristics have obvious implications for the appropriate legal approach towards CICs. Alongside the strong intragroup utilitarian justification for CICs as effective providers of club goods and collective action coordinators, as well as the pervasive market success of such developments, the very proliferation of CICs poses significant challenges for public policymakers. The fact that in many countries throughout the world, including in North America, Southeast Asia, Latin America, and the Middle East, planned communities have practically become the default for new urban developments intended for higher-status residents – and in some cases are actively encouraged and

31

32

33

See Edward J. Blakely and Mary G. Snyder, Fortress America: Gated Communities in the United States (Washington DC: Brookings Institution Press, 1997); Setha Low, Behind the Gates: Life, Security, and the Pursuit of Happiness in Fortress America (New York: Routledge, 2003). See Rowland Atkinson and Sarah Blandy, “Introduction: International Perspectives on the New Enclavism and the Rise of Gated Communities” (2005) 20 Housing Studies 177. See, e.g., Simon C. Y. Chen and Chris J. Webster, “Homeowners Associations, Collective Action and the Costs of Private Governance” (2005) 20 Housing Studies 205.

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even mandated by local governments34 – has obvious societal implications not only for those who remain outside these communities, but also for reconsidering the basis of resident consent which has been the linchpin of CIC rules and institutions.35

3. Spontaneous Communities An altogether different type of territorial community is one which I conceptualize as “Spontaneous Community.” This term refers to settings in which groups of physically-adjacent residents who live in “regular” neighborhoods – i.e. those that are not initially organized by a set of internally binding norms and institutions – are able to cooperate and coordinate over time, and in the process create a meaningful, enduring basis for localized communality. Chapter 3 has identified one such phenomenon regarding users of local public spaces in several American cities, focusing on the case study of New York City (NYC). To recap, during substantial periods since the 1970s, cities like New York faced acute fiscal crises which caused them de facto to withdraw from many of their responsibilities in public parks, leaving the parks pretty much to their own fate. In a growing number of cases, grassroots initiatives were taken by groups of previously unorganized residents who had realized the instrumental role that successful public spaces play in providing direct and indirect benefits, as well as the adverse flip-side of neglected and derelict public spaces as harboring crime, disorder, and socio-economic decline. There are currently over 3,800 grassroots community-based organizations in NYC, of which about 2,700 are chiefly dedicated to parks. Overall, such “friends of” groups are active in over half of the city’s 1,770 parks.36 As the suggested taxonomy in Chapter 3 has demonstrated, these cooperative modes take several forms. Alongside informal and non-institutionalized “friends of” groups, there is a substantial number of groups incorporated as tax-exempt non-profit organizations with volunteer directors and officers, who enlist dues-paying members and regularly undertake multiple activities. Such tasks may include the purchase of plants and gardening supplies, the renovation of portions of the 34

35 36

See, e.g., Evan McKenzie, “Constructing the Pomerium in Las Vegas: A Case Study of Emerging Trends in American Gated Communities” (2005) 20 Housing Studies 187. Atkinson and Blandy, “Introduction,” 182–4. Interview with Jason Schwartz, Director, and Ms. Emily Maxwell, Acting Director, Catalyst Program, Partnerships for Parks, in New York City (April 24, 2007).

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park, and financial and logistic support for community events such as art shows, summer concerts, and holiday festivals. In a small number of parks, the city has entered into formal cooperation agreements with nonprofit organizations for the full or partial management of the publiclyowned park. Spontaneous Communities may also sprout and operate in other areas of interest. A prominent example is the work of community-based organizations, known as Community Development Corporations (CDCs), in reviving rundown American neighborhoods. These activities include building or rehabilitating affordable housing for low-income residents as well as providing social services such as job training, youth programs, and small business assistance.37 Community Land Trusts (CLTs), also portrayed in Chapter 3, have become yet another significant phenomenon of what is largely a grassroots mode of resource control. Note, however, that such grassroots endeavors can also be a source of friction. This is especially so when the interests of the local “commoners” are in tension with those of the general public or other sub-groups within it, or when the local community exercises informal exclusionary measures vis-à-vis outsiders. Policymakers should thus keep an open eye to prevent potential adverse effects of what is otherwise a very constructive phenomenon. In this sense, agency problems, as well as more fundamental concerns over who gets to say “what the community wants” in the absence of clear hierarchal structures, are especially acute in Spontaneous Communities. The spontaneity of the community also indicates that such groups may be subject to more frequent internal changes and fluctuations. The ability of formal law to properly respond to the evolution of Spontaneous Communities, even assuming that these are viewed as socially constructive, may be particularly challenging – though definitely not pointless – when the very foundations of the targeted community may be unstable.

II. Why property matters to community A.

Of Property Tailwind, Headwind, and (near) Zero-wind

I now move to examine more closely the interconnectivity between territorial communities and formal property law. At the outset, I define 37

For the work of CDCs, see Alexander von Hoffman, House by House, Block by Block: The Rebirth of America’s Urban Neighborhoods (Oxford University Press, 2003).

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three types of influences that property law may have on societal goals or institutions, focusing attention on the creation, preservation, and enhancement of certain types of sub-society territorial communities. “Property Tailwind” will refer to strong, active societal support for a certain type of community through the design of certain property doctrines and remedies by society’s formal institutions. “Property Headwind” will reflect an opposite trend of overt hostility or conscious apathy towards the special needs of certain communities, bringing about their weakening or even outright destruction. “Property (near) Zerowind” will stand for a middle stance, which leaves communities very much to their own devices, so that their fate hinges almost exclusively on their internal insular mechanisms for rulemaking and enforcement. A number of caveats are in order here. First, the following discussion about the implications of property law does not in any way purport to be exhaustive. In this sense, not only is the taxonomy of territorial communities somewhat ambiguous, but so is the delineation of property law effects on communities. Even before going into the question whether Property Tailwind, Headwind, or Zero-wind is normatively desirable from a societal viewpoint, the question whether the community itself considers a formal property norm as having a certain impact hinges upon dilemmas that I have already addressed: Who may be said to represent the community and its collective will? Are the state property norms responding to existing community reality or also changing it? Put differently, property laws and regimes are so abundant, and the potential effects on various communities too numerous to allow for any safe generalizations. The following analysis should therefore be weighed chiefly on its ability to illuminate some prominent instances of crossinfluences between property and community, and not on its capacity to suggest a unified blueprint for shaping community-oriented property law. Second, the analysis below is not restricted to property law and policy which is explicitly and uniquely designed for certain types of communities, as is the case with the US federal legislation on Native Americans. A large part of the property-related fate of territorial communities is determined by the influence that general, allegedly-neutral legislation and other legal rules have on a certain type of community. When such general property rules are applied in specific instances of communities struggling to achieve their common goals, one may find that the same property rule is highly constructive for one type of community, destructive for another, and practically meaningless for a third. Thus, property

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laws should often be evaluated as applied to specific circumstances so as to fully understand their implications for different communities. Third, the legal system has an influence on different types of communities that obviously goes far beyond property law. Consider themes as diverse as freedom of religion and the mirror-image prohibition of state establishment of religion; imposition of civil duties such as military service, mandatory education, or the acceptance of medical treatment to which insular communities strongly object; municipal and voting districts line-drawing around such territorial communities; or the application of criminal law to offences not perceived as such within the community. These are but a handful of the major issues that create tension between the norms of distinctive communities and those of general society. Property law is by no means unique or categorically more dramatic than such other issues. It is merely the specific theme discussed in this chapter, as part of the overall analysis of property throughout this book, but it must often be studied together with other legal fields to fully comprehend law’s implications for communities. Fourth, and probably most important, nothing in the following paragraphs should be construed as unwarranted normative support for the rules and practices of “intentional” or other communities. In many cases, society, acting through its decision-making institutions, may be entirely justified in intervening with community norms, especially those perceived by society as infringing on members’ individual rights below a threshold that a liberal democracy cannot tolerate, or when the community imposes substantial externalities on other society members. It is therefore essential to keep in mind that the use of the terms Property Tailwind, Property Headwind, and Property (near) Zero-wind is not synonymous with “socially desirable,” “socially repugnant,” and “socially (practically) meaningless,” respectively. What I set out to do in the following subsection is primarily to identify the effects that a certain state property regime has, as the community itself perceives them to be, assuming we can identify its clear collective voice in the matter. But this is obviously not the end of the analysis. Just as the suggested division of territorial communities is intended chiefly to differentiate between distinctive types of internal motives, structures, and goals that characterize different sorts of territorial groupings, so the study of property law’s role is most important for laying the groundwork for a nuanced, more sophisticated normative analysis of when and how society should intervene with the practices of territorial communities.

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B.

Implications for territorial communities

Whereas some features of property law may simultaneously impact several types of territorial communities, I divide the analysis of potential Property Tailwind, Headwind, and Zero-wind effects along the threeprong taxonomy of territorial communities in Section I.C, and I focus my attention on the distinctive implications that property law may have for each type of community.

1. Intentional Communities As discussed, Intentional Communities are characterized by strong internal norms that have sweeping effects on the lives of community members, and by a consequent necessity for a certain level of insulation from society’s norms and institutions for such communities to survive. Unlike Planned Communities, Intentional Communities are not formed just because a certain state property structure makes it easier or economically feasible to do so. Benedictines assemble in monasteries because they share the same religious convictions that require them to segregate themselves from general society, as is the case with Jewish Ultra-Orthodox communities. Kibbutzim founders had to territorially congregate with their own kind to fulfill their vision of a cooperative, communitarian life. Thus, to the extent that society regularly refrains from meddling with the community’s institutions for member selection, regulation, or ejection – including decisions over resource control and management within the community – it can be seen as avoiding the creation of Property Headwind for such communities. If the state goes so far as to formally defer to such internal judgments when these are challenged in state institutions, by reasoning that the unique social fabric of such communities justifies an explicit “hands-off” approach, it may even be said to provide significant Tailwind for the community. For example, Israeli courts have traditionally rarely interfered with membership decisions by Cooperative Kibbutzim, including decisions to remove members, which had enormous property implications in the oldstyle Kibbutzim in which members were not entitled to pro rata allocation of collective assets upon removal. In so doing, courts relied on Kibbutzim’s allegedly voluntary nature and the importance of maintaining social harmony and collective discipline in them.38 Kibbutzim also 38

See, e.g., HCJ 4222/95 Palatin v. Registrar of Cooperative Associations [1998] IsrSC 52(5) 614 at 620; CA 8398/00 Katz v. Kibbutz Ein-Tzurim [2002] IsrSC 56(6) 602 at 623 (Hebrew).

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traditionally enjoyed strong institutional support from Israeli governments. Whereas this sweeping judicial abstention and unreserved governmental support have somewhat eroded in the past few decades, state institutions can still be viewed as providing significant Property Tailwind to Kibbutzim, for example, by formally validating the alternative format of resource control and management in Renewing Kibbutzim. Interestingly, in 2011 the Israeli legislature passed a highly controversial bill, validating a longtime practice of screening applicants to smallscale community villages through local “admission committees.”39 According to this law, which applies also to “expansions” of current Cooperative and Renewing Kibbutzim, admission committees would be entitled to reject an application based on a number of criteria, including the applicant’s “incompatibility to social life in the community,” “incongruity to the social-cultural texture of the community village,” or based on “distinctive characteristics of the community village or the admission requirements set forth in the cooperative bylaws.”40 While the public debate about this statute is focused primarily on potential discrimination against the Arab minority – especially because the law applies to the Galilee and the Negev, two parts of Israel that have a delicate demographic balance between Jews and Arabs – concerns have been raised about the potential disenfranchisement of other “undesirables,” including gay couples, single mothers, and elderly persons.41 This is although the statute formally forbids admission committees from rejecting applicants based on their race, religion, gender, family status, sexual orientation, disability, ethnicity, or political affiliation.42 Shortly after the enactment of this statute, a number of petitions have been submitted to the Supreme Court arguing that the law is unconstitutional.43 The chief point of contention has thus been whether the law properly validates genuine forms of Intentional Communities through the admission committees, or if it is simply a pretext for intolerance and blunt social exclusion exercised by members of the majority or “mainstream” society that do not form any genuine sub-society Intentional 39

40 41

42 43

Law to Amend the Cooperative Associations Ordinance (No. 8), 2011, S.H. 683 (Hebrew). It is commonly known as the ‘Admission Committees Law.’ Ibid., s. 6C. See Jack Khoury, “Concerns Remain over Defanged Admission Panel Law,” Haaretz. com, May 2, 2011. Admission Committees Law, s. 6C(3). HCJ 2311/11 Sabach v. The Knesset (petition pending).

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Community. Even if the statute is held to be constitutional following its current facial attack, it remains to be seen how much deference courts would grant on an ongoing basis to admission committees in giving content to terms such as “incompatibility to social life in the community,” i.e. where the wind would blow for these types of communities. Following the discussion in Chapter 2, such a policy choice has a clear institutional feature: will it be for the bottom-up institution of the admission committee to give thicker content to such legal standards, or would courts assume a strong top-down approach in solidifying these norms? Unlike the setting of overt legal disputes relying on adjudication of formal causes of action, a non-interventionist state approach may provide significant support for an Intentional Community when parties to property disputes do not regularly challenge decisions made by internal community institutions. In the case of Ultra-Orthodox Jews, the aforementioned Rabbinate selection committees in residential neighborhoods and cities have been highly effective largely because Ultra-Orthodox members do not challenge the decisions of such entirely informal (from a state perspective) institutions. In other cases, when formally-recognized community institutions exceed their state-mandated jurisdiction, de facto lax state enforcement may lead to similar results. Thus, for example, Rabbinate Courts in Israel have formal jurisdiction in family matters (exclusive in some issues, parallel to civil courts in others), yet they have often gone beyond these issues to discuss other types of property conflicts as well as other private law issues. Even though the Israeli Supreme Court has determined that formal Rabbinate courts are unauthorized to act in this manner, including in the guise of arbitration procedures,44 the practice of extra-state adjudication continues practically undisturbed. This is because UltraOrthodox community members have preferred to resolve much of their private adjudication before informal (again, from a state perspective) Ultra-Orthodox Rabbinate tribunals that have no formal status under state law but are accordingly not limited by issues of formal jurisdiction. Whether such tribunals can be viewed as arbitrators under the Israeli law of arbitration matters little, if the litigants do not challenge these tribunals outside the community, and the state on its part does not actively engage in scrutinizing the conduct of such tribunals. 44

HCJ 8638/03 Amir v. Rabbinate High Court in Jerusalem (decided Apr. 6, 2006) (Hebrew).

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2. Planned Communities Planned Communities are based on an entirely different dynamic. Such communities cannot be effectively established without the basic structural support of the state legal system. The contract/property legal web of Planned Communities’ governing documents relies almost entirely on its enforceability, if necessary, by state institutions. Thus, CICs, which create a system of equitable servitudes to control and regulate commonly-owned assets and the use of private housing units, as well as governing institutions that have broad decision-making powers, could simply not exist without the external support of CIC-enabling legislation, the judicial enforcement of the governing documents, and official deference to managerial and other decisions by CIC institutions.45 Unlike Intentional Communities, members of Planned Communities rely relatively little on informal norms as the chief measure for monitoring and compliance. Especially with the growth in numbers of CIC developments and of the number of residents in each, the interpersonal familiarity and thickness of social relations, which might have been typical of earlier generations of Planned Communities, has given way to a more arm’s-length formal approach which often involves extracommunity dispute resolution. As mentioned above, there is an everincreasing number of recorded disputes and conflicts between residents and CIC institutions, as well as an abundance of rule violations that necessitates adjudication outside the community institutions. So how have state institutions responded to such conflicts? Generally speaking, Planned Communities have received the blessing of American society’s formal institutions, not only facilitating their very existence but also providing significant Property Tailwind in borderline cases. A vivid example for this approach has been discussed in Chapter 3, by which the California Supreme Court in Villa De Las Palmas Homeowners Association v. Terifaj46 upheld a majority-approved amendment to a CIC’s governing documents, which imposed a restriction on pets. Viewing use restrictions as “crucial to the stable, planned environment of any shared ownership arrangement” and holding that “all homeowners are bound by amendments adopted and recorded subsequent to 45

46

In some states, the creation of CICs is governed by specific legislation on the matter. See Restatement (Third) of Property (Servitudes) § 6.3 (2000). Probably most familiar is California’s Davis-Stirling Act (codified as California Civil Code div. 2, pt. 4, tit. 6 (West 1982 & Supplement 2012)). 90 P 3d 1223 (Cal. 2004).

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purchase,”47 the court awarded CICs substantial power not only to enforce contracts, but also to design and enforce property ordering within the community. Planned Communities have also enjoyed a fair amount of state discretion in issues of member selection and exclusion. Whereas courts have intervened in overt cases of racial discrimination against those seeking to enter such communities,48 in many other instances lawmakers and courts have given sufficient leeway to Planned Communities to set up criteria for member selection – even when such rules adversely affect not only residents who fail to meet such criteria, but also implicate broader issues of public policy. In Mulligan v. Panther Valley Property Owners Association,49 a community association voted to prohibit individuals registered as Tier-3 sex offenders under Megan’s Law from residing in the community. This decision was challenged by an association member, who argued that it violates public policy by infringing the constitutional rights of Tier-3 registrants and also by de facto deflecting such persons to regular neighborhoods that have no such institutional exclusion mechanisms. While the court did not wholly disregard these arguments, it nevertheless reasoned that the question whether such provisions “make a large segment of the housing market unavailable” to such persons, or exposes those who live in the “remaining corridor to the greater risk of harm than they might otherwise have had to confront,” is largely empirical. Since, the court reasoned, the burden of proof lies with the plaintiff, who has established no such record, it finally ruled in favor of the association.50 These cases thus demonstrate a clear policy choice by legislatures and courts to normatively back such communities’ structures and practices, a choice which is by no means self-evident, especially in view of the narrowing resident choices and the respective growth of the external societal impacts of Planned Communities. In this respect, Planned Communities have been enjoying a strong Property Tailwind validating their modes of private norm-making.

3. Spontaneous Communities Spontaneous Communities, especially in urban settings, may serve an important function of creating social capital and a platform for collective action that is not necessarily followed by exclusionary practices vis-à-vis 47 49

Ibid., p. 1229. 48 See Shelley v. Kraemer, 334 US 1 (1948), analyzed in Chapter 1. 766 A 2d 1186 (N.J. Sup. Ct. App. Div. 2001). 50 Ibid., pp. 1193–4.

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“outsiders.” Yet these communities usually rely on relatively fragile modes of cooperation, and even when incorporated as non-profit organizations, they typically do not distinctively and formally hold formal property rights to resources. This, in turn, frames the way in which governments and other state institutions, including courts, treat such communities as a legally negligible phenomenon. In the relatively few instances in which such types of informal communities have asked courts to legally validate the consequences of such interpersonal group effects, courts have tended to see the communities’ role as merely sentimental, often coupling a local group’s losses resulting from governmental actions with subjective damages of non-transferable value, which in any case do not qualify for compensation under the US Constitution Fifth Amendment’s Takings Clause.51 A vivid, well-known example is the razing of the entire neighborhood of Poletown in Detroit in the early 1980s to make way for General Motors’ new car-manufacturing facility. Although the City of Detroit had taken and demolished the neighborhood’s 1,400 homes and nearly 150 businesses, the Supreme Court of Michigan refused to recognize social and cultural environments as within the purview of the state’s statute governing environmental protection, and further disregarded the enormous social, economic, and psychological costs – the magnitude of which was realized only in retrospect – in applying the constitutional strictures of “public use” and, moreover, of the “just compensation” formula.52 The Poletown case is obviously not an isolated incident of strong Property Headwind for Spontaneous Communities. During the era of the federal urban renewal programs, the power of eminent domain was used throughout the US to raze entire neighborhoods in the name of removing “blight” and to make room for middle- and upper-income housing. Yet these earlier programs proved to be a resounding failure, as they exacerbated the socio-economic problems of the former residents of what were physically rundown yet socially vibrant Spontaneous

51

52

See United States v. 564.54 Acres of Land, 441 US 506 at 516 (1979); Kimball Laundry Co. v. United States, 338 US 1 at 5 (1949). Poletown Neighborhood Council v. City of Detroit, 304 NW 2d 455 (Mich. 1981). The general principles of Poletown regarding the existence of a valid ‘public use’ for such types of takings were overturned more than twenty years later in County of Wayne v. Hathcock, 684 NW 2d 765 (Mich. 2004).

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Communities.53 And as stated, such implications resulted not only from actual condemnation, but also from the nature and scope of compensation. The payment of pre-project “fair market value” to residents in rundown areas meant that they would in effect be priced out of the redevelopments, in addition to dramatically undermining their future prospects for reviving any such type of commonality. In response to such concerns, Gideon Parchomovsky and Peter Siegelman seek to directly address the currently unaccounted-for “community” component by switching to a comprehensive resettlement remedy in cases of wholesale community clearing, and the payment of a premium above fair market value when, due to the taking of multiple properties, the remaining landowners drop below a critical point, rendering “unsustainable the provision of community amenities and disrupting community life.”54 Such a contextualization of compensation law may provide Property Tailwind for Spontaneous Communities, by making governments realize that the property whole may be greater than the sum of its parts, even in informal community settings. Another instance of a systematic gap between formal property law and the significant socio-economic reality of Spontaneous Communities concerns the discussion in Section IC about grassroots community involvement in rehabilitating, maintaining, and improving formally government-owned public amenities. As I have shown, the level and nature of local involvement may determine the fate of the resource. This state of affairs is not, however, accompanied by an adequate legal regime that looks beyond the formal government ownership. One suggestion that I make in this respect, and which has been discussed in Chapter 3 in the context of NYC public spaces, concerns otherwise-uncompensated conversions or alienations of pre-designated public spaces. Such instances may justify awarding the local community a substantive collective remedy which would be of a group non-pecuniary nature, focusing primarily on the provision of a substitute facility in which the community can keep pursuing its activities. Providing Property Tailwind for Spontaneous Communities can thus take the form not only of intensifying existing rights (e.g. contextualizing 53

54

See Bernard J. Frieden and Marshall Kaplan, The Politics of Neglect: Urban Aid from Model Cities to Revenue Sharing (Cambridge, Mass.: MIT Press, 1975), pp. 24–5; Wendell E. Pritchett, “The ‘Public Menace’ of Blight: Urban Renewal and the Private Uses of Eminent Domain” (2003) 21 Yale Law and Policy Review 1–52 at 31–47. Gideon Parchomovsky and Peter Siegelman, “Selling Mayberry: Communities and Individuals in Law and Economics” (2004) 92 California Law Review 75–146 at 133–42.

Table 4.1 Mapping the effects of formal property law on territorial communities Effect of Formal Property Law Type of Community

Property Headwind

Property (near) Zero-wind

Formally extend jurisdiction of IC institutions Affirmatively defer to IC norms and practices, even if “illiberal” Planned Community Attribute public traits to PC and apply Refrain from viewing PC as semiProvide the legal infrastructure (PC) public law principles to their rules and public institutions for setting up PC (enabling decisions Resolve disputes under private law statutes) Place the burden of “reasonableness” on doctrines Enforce covenants and defer to PC institutions decisions made by PC institutions Spontaneous Refuse to contextualize doctrines (e.g. Stick to the conventional legal Recognize unconventional Community (SC) compensation rules) when private loss frameworks in defining property and group entitlements in of rights is exacerbated by concrete, right-holders; require SC always to appropriate cases visible community losses act formally Support SC grassroots activities that minimize exclusion, alienation Intentional Community (IC)

Limit, either de facto or de jure, the Refrain de facto from intervention in jurisdiction of IC internal institutions internal IC decision-making Invalidate internal decisions that do not conform to general society norms

Property Tailwind

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the mechanisms of compensation), but also of recognizing Spontaneous Communities as bearers of distinctive, innovative property rights in appropriate circumstances. But again, as with the other types of territorial communities, the policy decision whether to provide such Property Tailwind must first and foremost rely on a normative evaluation that carefully weighs, alongside the distinctive justifications for Spontaneous Communities, issues such as the extent of exclusion employed by the group, appropriateness and transparency of its internal decision-making, or practical possibility of exit. Table 4.1 sums up the potential effects of property law on the different types of territorial communities. The conclusion of this chapter thus goes back to its point of genesis: any attempt to study the relations between property and community must be based on a more nuanced taxonomy of the different types of social configurations that currently take shelter under the vague, overinclusive term “community.” Only then can one start to genuinely understand and normatively evaluate the effects that property law might or should have on different social groupings, and employ these insights for redesigning legal doctrines that implicate these key property protagonists.

5 The corporation as a property microcosm

I.

Berle and Means on property

In 1932, at the height of the Great Depression and the outset of the New Deal, Adolf Berle and Gardiner Means published The Modern Corporation & Private Property,1 which has since been the seminal authority for analyzing the business corporation. One can hardly overstate the tremendous impact that this work has had on academic and public discourse about corporate governance, securities markets, and the broader institutional organization of market economies.2 Notwithstanding, a focal point of this work, as well as of its 1967 revised edition,3 has been a vigorous analysis of the major transformation that the corporation entails for the institution of property. The central thesis is one of a changing paradigm concerning both the general concept and specific content of private property. According to Berle and Means, while the classical institution of property and its allegedly fixed proprietas (the legal relation of the owner to the property) are not entirely obsolete, these remain relevant only to consumption property – those assets that the owner uses and manages for personal consumption or as an individual source of revenue. Although changing market forces and technological innovations also affect consumption property, such as cars or homes, the underlying rationales of individual control and “live and let live” continue to guide the ordering of property rights and duties for such assets.4 1

2

3

4

Adolf A. Berle and Gardiner C. Means, The Modern Corporation & Private Property, revised edn. (New Jersey: Transaction Publishing, 1991 [1932]). See William W. Bratton, “Berle and Means Revisited at the Turn of the Century” (2001) 26 Journal of Corporation Law 737. The work continues to be one of the most cited works in corporate governance research. See Boris Durisin and Fulbio Puzone, “Maturation of Corporate Governance Research, 1993–2007: An Assessment” (2009) 17 Corporate Governance: An International Review 266. The 1967 revised version, which included an updated preface by Adolf A. Berle, has been reprinted in the 1991 revised edition. All references in this book are to the 1991 edition. Ibid., pp. xxiv–xxviii.

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But in modern economy, the truly significant form of property is what Berle and Means term productive property, i.e. “property devoted to production, manufacture, service or commerce.” A major part of this increasingly dominant form of production is based on collective capitalism, in which numerous members of the general public each contribute a certain amount of capital, but this capital is then aggregated into a corporate entity that engages in production and concentrates the power of decision-making over corporate assets in the hands of the management. Productive property thus has two distinctive aspects: first, managerial-productive (management), and second, passive-receptive (stock and security ownership). In sharp contrast to consumption property, the proprietas for productive property should be subject to an “over-all political determination as to the kind of civilization the American state in its democratic processes has decided it wants.” The commercial corporation is not merely a technical vehicle for production; it is an essential socioeconomic institution, a modern way of organizing social and political life. As Berle and Means put it, the corporate system “bids fair to be allembracing as was the feudal system at the time.” Thus, unlike consumption property, which may focus on individual autonomy, the content of productive property must be premised in public-political deliberation and can be justified only by resorting to core societal values. These features of productive property have dramatic implications for the rights and duties of the corporate entity exercised by the corporation’s management, as well as for the traits of the passive property owned by each of the individual stock and security holders. Regarding the corporate entity, Berle and Means suggest that taxation is particularly justified because firms derive their profits not only from their own operations, but also from their market positions and “increasingly from techniques resulting from state expenditures of taxpayers’ money.” Moreover, at least for widely-held corporations – as opposed to corporations closely held by an individual or small group – the corporation should be viewed as a quasi-public entity. This means that it should be subjected to at least some rules applying to governmental entities, including those duties that derive essentially from constitutional law. Thus, while consumption property is at its core an “expression of personality, guarded from invasion,” other property “devoted to production and commerce is not.”5 5

Ibid., pp. xxiii–xxix, 10.

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The analysis of the passive property of shareholders is no less dramatic. Stockholders do not contribute effort, work, or risk to income generated. Moreover, the value of their shares traded in stock markets has practically no link to the “business operations of the companies whose shares are the subject of trading.” If this is the case, why should they be entitled to the profits of the industrial system either in dividends or in increased market values resulting from undistributed corporate gains? Why recognize any sort of property rights for shareholders beyond mere liquidity of shares? The answer is found in social grounds, which attach value to “individual life, individual development, individual solution of problems, individual choice of consumption and activity.” But the “privilege to have income and a fragment of wealth without a corresponding duty to work for it cannot be justified except on the ground that the community is better off – and not unless most members of the community share it.” To meet this goal, the law should encourage an even wider distribution of stocks, either through tax policy or some other device. Thus, “the corporate system, accompanied by reasonably enlightened tax policies and aided by continuously growing productivity, can achieve whatever redistribution the American people want.”6 One may be quite surprised by the apparently radical analysis of property in what otherwise is considered a text establishing conventional wisdom for many aspects of the business corporation (most notably, the management-shareholder agency problem). It seems clear enough why subsequent mainstream corporate theory, otherwise devoted to a free market approach, has downplayed Berle and Means’ broader analysis of property. But it remains a bit puzzling as to why property theory has not given more attention to Berle and Means’ account of how the business corporation is pivotal for the “changing content of property.” This deficit is especially remarkable given the era in which The Modern Corporation & Private Property was originally published. As Chapter 1 has shown, the 1920s and 1930s featured the ascent of legal realism, with property serving as a focal point of interest for this school. Consider again Morris Cohen’s “Property and Sovereignty,”7 analyzed in Chapter 1, in which Cohen likened private property to a state-backed form of private sovereignty over others, and argued that capitalism, with its rhetoric of free markets and individual choice, is not entirely detached 6 7

Ibid., pp. xxxvi–xxxxvi. Morris R. Cohen, “Property and Sovereignty” (1927) 13 Cornell Law Quarterly 8.

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from feudalism, in which “ownership of the land and local political sovereignty were inseparable.” Cohen believed that the “recognition of private property as a form of sovereignty is not itself an argument against it,” but that it does require giving good justifications for property rights, ones that often would justify placing limits on the right of property.8 In this and other respects, Berle and Means’ argument about the need to justify the institution of property for productive assets and to tie such burden to redistributive purposes could have offered significant tailwind for the legal realist view of property. The case of the commercial corporation could have been instrumental in arguing that private property is not a natural phenomenon detached from politics. This was not the case, however. Morris Cohen’s work focused almost primarily on land. Subsequent works, published after Berle and Means’ book, have also looked to types of assets that are usually associated with consumption property or with individual endeavors: land, chattels, copyrighted materials, etc. Interestingly, in one of the best-known articulations of property by a legal realist, Felix Cohen’s 1954 “Dialogue on Private Property,” the Socratic-style dialogue does start with commercial property. At the outset of the dialogue, when the professor asks one of the students what distinguishes the American form of government from the Soviet one, the two engage in a brief discourse about the different ways in which decisions are taken in the United States Steel Corporation vis-à-vis a heavy industry plant in the Soviet Union.9 But once the dialogue moves to a conceptual and normative analysis of private property in the United States, the discussion shifts back to various types of consumption property. Property rights in land receive their fair share, as do chattels (mules in Montana) and intellectual works (songs). Accordingly, when the dialogue examines whether private property rights boil down to a right of exclusion, the essay follows up on Morris Cohen’s account by stating that property is something to which the following label is attached: “Keep off X unless you have my permission, which I may grant or withhold. Signed: Private citizen. Endorsed: The state.”10 The critical analysis that follows focuses once again on individually-owned consumption property. Thus, while productive property has served to distinguish a capitalist system of government

8 9 10

Ibid., 9–14. Felix S. Cohen, “Dialogue on Private Property” (1954) 9 Rutgers Law Review 357. Ibid., 359–70, 374.

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from a communist one, it does not play a similar role in reconstructing the concept of private property.11 The business corporation has failed to play a pivotal role in property theory in subsequent decades as well, including in the 1960s, when Adolf Berle published a revised version of The Modern Corporation & Private Property. Charles Reich’s 1964 “The New Property,”12 regarded as a leading progressive text on property, should allegedly have relied extensively on Berle and Means’ redistributive agenda and on their critical analysis, by which the right to enjoy passive income from the quasipublic business corporation cannot rely merely on formal stockholding. The gist of Reich’s argument is that in the modern state, government distributes largesse in the form of money, benefits, services, contracts, franchises, and licenses on a “vast, imperial scale.” Reich, however, vehemently opposes what he deems to be the underlying governmental philosophy and conventional legal doctrine by which “the wealth that flows from government is held by its recipients conditionally, subject to confiscation in the interest of the paramount state.” He depicts this approach as one of “new feudalism,” in which society moves back to being status-based, with individuals holding their wealth conditionally, subject to obligations owed to the government or to the public, with such obligations increasing “at the will of the state.”13 To preserve what Reich views as the “essence” of the legal institution of property, namely, the “creation and protection of certain private rights of wealth of any kind,” and in particular the maintenance of “independence, dignity and pluralism in society by creating zones within which the majority has to yield to the owner,” Reich calls to recognize a legal right of individuals to governmental largesse. This is “most urgently needed with respect to benefits like unemployment compensation, public assistance, and old age insurance,” essential to preserve the self-sufficiency of the individual and to allow him to be a “valuable member of a family and a community.” Just like traditional property, which originated from the state but gradually developed into a system of private rights, so does the “new property” call for a change in the paradigms of property. Reich’s discussion seems like a perfect fit for Berle and Means’ property analysis of the commercial corporation. The two works depict, 11

12 13

For an exception during that period, see Francis S. Philbrick, “Changing Conceptions of Property in Law” (1938) 86 University of Pennsylvania Law Review 691. Charles A. Reich, “The New Property” (1964) 73 Harvard Law Review 733. Ibid., 736, 768–71.

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respectively, government benefits and the corporation as establishing a new political and institutional organization of society, one in which the concept of liberty and the preservation of the individual’s role should not rely merely on formal ownership, but must be re-evaluated to ensure core objectives of distribution of wealth and a new demarcation of the private and public spheres in property. However, the corporation plays only a negligible role in Reich’s analysis. He refers briefly to Berle and Means in suggesting that “multiple ownership of corporations helped to separate personality from property, and property from power,” and argues that New Deal reforms took away some of the power of large corporations in favor of government power (although corporations may still share power with government). But otherwise, Reich sees the corporation as meeting a similar fate to that of individuals in its subjection to government control, such that, for example, the “company that is heavily subsidized or dependent on government contracts is subjected to an added amount of regulation and inspection, sometimes to the point of having resident government officials in its plant.”14 Organizations, just like individuals, also need property to secure a zone protected from government power. In this respect, the corporation as an economic institution does not challenge the fundamental concepts of property. What can we make of the general approach of twentieth-century property scholars to the business corporation, before setting out to explore contemporary property theory? What accounts for their little interest in what Berle and Means identified as the new front in property law? While trying to extract the meaning of past omissions is obviously largely speculative, one possible answer is that those who wished to undermine conventional wisdom behind property, as did some of the legal realists, sought to shake the allegedly stable foundations of “classical” property such as land and chattels rather than to focus on the relatively new phenomenon of the business firm. Thus, for example, Morris Cohen’s depiction of private property as a form of sovereignty over others, one that equates the seemingly non-hierarchical institution of private property to ancient regimes of subjection and power (e.g. feudalism), obviously has more rhetorical force when it undermines private property in land or chattels. If one is convinced by these arguments for consumption theory – the safe haven of conventional wisdom in classical property theory – then surely productive property is not 14

Ibid., 756.

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entitled to deference from societal intervention. Under this account, the lack of interest in corporations is simply a matter of a more effective dedication of attention to core resources. Another reason for the general disregard for the business corporation might have stemmed from an ideological discomfort. With the business corporation being viewed throughout most of the twentieth century as the epitome of market economy and capitalism, property theorists with a critical or redistributive ideological agenda may have felt uneasy about even incorporating the business firm into the heart of property discourse. While nowadays ideas such as corporate social responsibility (CSR) have gained enough currency to contest the immediate association of the business corporation with the sole purpose of maximizing shareholders’ gains,15 the ideological flair of commercial corporations over much of the twentieth century has been such that many property theorists simply disassociated themselves from this field of inquiry. It may also have been the case that Adolf Berle’s position, following his famous scholarly exchange with E. Merrick Dodd during the 1930s, has been understood as one of supporting shareholders’ supremacy over the interests of other stakeholders in the firm.16 While this reading of Berle’s work may be considered erroneous in retrospect,17 it may further explain why progressive writers of his time further distanced themselves from Berle and Means’ work. Under this account, the lack of attention by property theorists has been one of overt ideological alienation. Neither of these traits can be said to typify contemporary property theory, especially the schools of new essentialism or new formalism, analyzed in detail in Chapters 1 and 2. As I have shown, while obviously not indifferent to normative considerations, the new wave of property theory seeks to offer an all-embracing theory that would identify core concepts of property across different types of resources and forms of property organization. It thus has no methodological or ideological 15

16

17

For the evolution and current landscape of CSR, see Archie B. Carroll, “Corporate Social Responsibility: Evolution of a Definitional Construct” (1999) 38 Business and Society 268. See Adolf A. Berle, “Corporate Powers as Powers of Trust” (1931) 44 Harvard Law Review 1049; E. Merrick Dodd Jr., “For Whom are Corporate Managers Trustees?” (1932) 45 Harvard Law Review 1145; Adolf A. Berle, “For Whom Corporate Managers are Trustees: A Note” (1932) 45 Harvard Law Review 1365. See Amir N. Licht, “The Maximands of Corporate Governance: A Theory of Values and Cognitive Styles” (2004) 29 Delaware Journal of Corporate Law 649–744 at 690–8 (arguing that Berle and Dodd differed not so much on the underlying values that corporate law should promote, but rather, on the feasibility of implementing such normative ideals in the real world).

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reason to disregard the business corporation. And yet, the corporation continues to play a negligible role in property theory. This chapter explores the puzzle. I demonstrate how corporate theory has gradually shifted from a contract-based analysis of the corporation to one that investigates the role that property rights play in the structure of the firm; but I then show that this integrative effort in corporate theory is unmatched by contemporary property theory. I argue that this tension could be attributed to certain features of the business corporation that may be viewed as undermining the newly-phrased paradigms of property theory. But this inconvenience, so I suggest, cannot release property theory from accounting for the core nature of the business corporation. The key insight developed in this chapter is that once we move away from a model of substantive essentialism to one that identifies the institutional and structural traits of property – as I am advocating throughout the book – then the business corporation becomes a much better fit for current property jurisprudence, and it could be reconceptualized as a “property microcosm.”

II. Theory of the firm: from contract to property? There are interesting parallels between the changes of orthodoxies in property theory – i.e. from the bundle of right concept to substantive essentialism – and the trajectory of corporate theory dealing with the nature of the firm. This section does not fully address the discourse within corporate theory, but focuses on the decline and re-emergence of theories of the corporation that resort to concepts of property as opposed to contractual models of the firm. While the conceptualization of property, and specifically of the term “property rights,” by corporate theorists has been quite different from the one that typifies property theorists, the discussion entails important insights for property jurisprudence. As the analysis shows, two “proprietary” features of the firm, as promoted in current corporate theory, are of special interest to property discourse. First, the “boundary” of the firm, which finds expression also – but not only – in the analysis of the corporation’s separate legal entity. Second, the structure of the allocation of powers and priorities among different stakeholders in the firm, which cannot be explained merely by explicit or implicit contractual arrangements, but rather, by organizational mechanisms, including both vertical control and rules of priority among distant parties. Taken together, these

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features may aid in reconstructing a richer framework of the in rem nature of property rights, one that is built on structural and institutional components rather than on an attempt to extract a single substantive criterion for property, such as the right to exclude. This richer analysis is instrumental in explaining why the business corporation should not be viewed as inapplicable to property theory, but rather, as a central form of property organization.

A.

“Nexus of contracts” and its discontent

In a seminal 1976 paper formulating the notion of the corporation as a nexus of contracts, Michael Jensen and William Meckling argue that although the literature of economics has been replete with reference to the “theory of the firm,” it has actually produced a theory of markets in which firms are primary actors, but it has not yet opened the “black box” of the single firm.18 The firm is thus assumed to operate with the purpose of maximizing profits or present value, but the theory has yet to explain “how the conflicting objectives of the individual participants are brought into equilibrium so as to yield this result.”19 In an attempt to open up the box and expose the inner workings of the firm, Jensen and Meckling refer first to the works of Ronald Coase who, in his 1937 classic “The Nature of the Firm,” identified the business corporation as internally controlled by authority and direction of resources rather than by market exchanges. According to Coase, the boundaries of the firm are defined by the range of exchanges that the owner-entrepreneur chooses to conduct within the organization rather than through the market, likening firms (following D. H. Robertson) to “islands of conscious power in this ocean of un-conscious cooperation.”20 Jensen and Meckling frame Coase’s analysis of the firm – discussed in more detail in Subsection B.1 below – as embedded in “property rights” (a term that Coase himself does not use). This means, according to Jensen and Meckling, that the “specification of individual rights determines how costs and rewards will be allocated among the participants in any organization.” But, they argue, because the “specification of rights is generally affected through contracting (implicit as well as explicit), individual behavior in organizations, including the behavior 18

19

Michael C. Jensen and William H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure” (1976) 3 Journal of Financial Economics 305. Ibid., 308. 20 Ronald H. Coase, “The Nature of the Firm” (1937) 4 Economica 386.

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of managers, will depend upon the nature of these contracts.”21 What is conceptualized as property is thus broken down effectively to the specific details of the numerous contracts that make up the firm. Needless to say, for property theorists, Hohfeld’s analysis immediately comes to mind. Jensen and Meckling follow the footsteps of an influential 1972 paper by Armen Alcihan and Harold Demsetz.22 Alchian and Demsetz depict the Coasean view of the firm being governed by power and authority as a “delusion.” The firm “has no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between any two people.” Since “neither the employer nor the employee is bound by any contractual obligations to continue their relationship,” the employer is continuously involved in renegotiation of contracts with its workers on terms that must be acceptable to both parties. The only difference between the firm and the market lies “in a team use of inputs and a centralized position of some party in the contractual arrangements of all other inputs. It is the centralized contractual agent in a team productive process – not some superior authoritarian directive or disciplinary power.”23 Jensen and Meckling voice sympathy for Alchian and Demsetz’ analysis, but argue that the focus on joint input production “is too narrow and therefore misleading.” This is so because “contractual relations are the essence of the firm, not only with employees but with suppliers, customers, creditors, and so on.” The private corporation, like other forms of organizations, is merely a legal fiction that serves as a nexus for contractual relationships. Viewed this way, they argue, “it makes little or no sense to try and distinguish those things that are ‘inside’ the firm. . . and those things that are ‘outside’ of it.”24 In the years that followed, the nexus of contracts approach became the new orthodoxy in analyzing the nature of the firm. Very much like the case of the bundle of rights in property theory, the nexus of contracts scholarship entails both analytical and normative aspects. The analytical approach to the nexus of contracts has sought to explain the way in which business organizations can be seen as constructed of an intertwined set of contracts. Some contracts are “real” in the sense that they are either explicitly negotiated between the different stakeholders – such 21 22

23

Jensen and Meckling, “Theory,” 310. Armen A. Alchian and Harold Demsetz, “Production, Information Costs, and Economic Organization” (1972) 62 American Economic Review 777. Ibid., 777–8 (emphasis in original). 24 Jensen and Meckling, “Theory,” 315.

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as in the articles of incorporation – or implicitly adopted but nevertheless priced by the different market actors, as is the case with the corporation management’s investment decisions that are priced by investors-shareholders through the price of the share. But real contracts have their limits. High information costs, inevitable cases of ambiguity, and other factors make it impracticable to cover every contingency in the corporate contract. Courts are required to fill the gaps and clarify the ambiguities, as is the case with other settings governed by (incomplete) contracts. The nexus of contracts approach thus views the role of corporate law as one of providing a set of default rules “available off-the-rack so that participants in corporate ventures can save the costs of contracting.”25 As Frank Easterbrook and Daniel Fischel suggest: “corporate law – and in particular the fiduciary principle enforced by courts – fills in the blanks and oversights with the terms that people would have bargained for had they anticipated the problems and been able to transact costlessly in advance.”26 This analytical framework has encountered growing skepticism in current literature. The incompleteness of real contracts has been argued to stem not only from the cost of drafting but also from the cost of enforcement, given problems of verification. It has also been suggested that corporate law provisions are not necessarily more cost-saving than the provision of standard forms of contracts by professional organizations, as is the case with commercial transactions.27 Moreover, the fact that many of the provisions in corporate law are mandatory rules (such as the ones governing insider trading and tender offers) challenges the analytical view of the corporation as merely a nexus of contracts.28 Some nexus of contracts theorists argue that these rules are not really mandatory, since they could be “easily – and legally – sidestepped, or they pose nonbinding constraints because there is no burning demand to deviate from them,”29 while others dispute this depiction of corporate law as being factually incorrect.30 25

26 27

28

29

30

Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (Cambridge, Mass.: Harvard University Press, 1991), pp. 15–22. Ibid., p. 34. John Armour and Michael J. Winchop, “The Proprietary Foundations of Corporate Law” (2007) 27 Oxford Journal of Legal Studies 429–66 at 434–5. See Melvin Eisenberg, “The Conception that the Corporation is a Nexus of Contracts, and the Dual Nature of the Firm” (1999) 24 Journal of Corporation Law 819–36 at 823–5. Roberta Romano, “Answering the Wrong Question: The Tenuous Case for Mandatory Corporate Law” (1989) 89 Columbia Law Review 1599. Eisenberg, “Conception,” 823–4.

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Probably more intriguing is the normative debate about the contractarian view of the firm and the extent to which corporate law should be mandatory and based on some sort of coercion or paternalism through top-down ordering. Stephen Bainbridge, one of the notable advocates of the nexus of contracts approach, argues that the rights of different stakeholders, including those of the firm’s shareholders, are established through bargaining, even if through off-the-rack default rules of corporate law, which such a contractarian account resting “on the presumption of validity as free market society accords voluntary contracts.”31 The practical necessity of concentrating decision-making powers in the board and senior management stems from the high costs of explicitly phrasing ex ante all contractual provisions and of ex post enforcing implicit contracts.32 Under this version, the dynamic rewriting of the corporate contract and its enforcement through internal fiat and concentrated decision-making comfortably fits in with corporate law’s role to facilitate forms of contractually-based private ordering. In contrast, Melvin Eisenberg argues that even if we understand the nexus of contracts metaphor as dealing not only with legally enforceable mutual promises, but more broadly with “reciprocal arrangements,” corporate law cannot automatically yield to the concept of the firm as strictly a matter of private ordering based on contracts. Some top-down mandatory rules may still be required. This is especially so when private ordering creates adverse third-party effects. Given the “frequent interdependence of individuals and groups who are interested in the corporation but are not parties to a given arrangement,” our evaluation of the necessity of mandatory rules in corporate law must be based on a rule-by-rule analysis, and not on sweeping deference to contract.33 Before setting out to review more broadly the re-emergence of proprietary conceptions as a response to the discontent with the pure contractarian model, it is interesting to observe the opposite direction that the nexus of contracts approach has taken in moving from the analytical to the normative realm, as compared with the transition that the bundle of rights analysis underwent when it was given a normative flavor. The normative take on the bundle of rights picture has served, at least among prominent legal realists, an ideology of de-canonizing the holistic concept of property so as to facilitate more government intervention in 31

32

Stephen M. Bainbridge, The New Corporate Governance in Theory and Practice (Oxford University Press, 2008), pp. 32–3. Ibid., pp. 38–45. 33 Eisenberg, “Conception,” 824–5.

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the content of property norms and the allocation of rights. In the normative version of the nexus of contracts literature, the opposite goal is promoted: vindication of a hands-off, free market approach. This juxtaposition evokes interesting insights about whether this taxonomic “contest” between contract and property entails any pre-dictated normative implications. I argue that it does not: in the final section of this chapter, I explain why articulating “property” structures and institutions should not impose an inherent substantive content on the business corporation.

B.

Exploring the proprietary nature of the firm

As the previous subsection has already indicated, the nexus of contracts approach has not lacked critics even during the era in which it gained dominance in conceptualizing the business firm. Very much like the case of the bundle of rights approach in property theory, critics have argued that the differences between firms and markets is not simply a matter of quantity (i.e. the scope of contractual arrangements), but rather one of quality. Even as a matter of mere positive observation, there is something about the typical organizational structure of the business firm that cannot be explained as merely either a written or unwritten contract. Somewhat similar to Smith and Merrill, whose current terminology describes the rights of property owners as “lumpy” rather than a mere cluster of interests, so Eisenberg has argued that many or most contracts in the corporation are “sticky.” This stickiness or lumpiness may be said to apply both to the boundaries of the firm and to the alignment of decision-making powers within it. As for the boundaries of the firm, the nexus of contracts theory is criticized for being intellectually incoherent “because it cannot mean either that the corporation consists of the core at which reciprocal arrangements overlap, or that the corporation consists of all reciprocal arrangements that are linked to each other or to something.”34 As for the way in which decisions or actions are regularly taken in the firm, it makes little sense to depict each one of them as a discrete form of new or renegotiated contract among all relevant parties. On both points, Coase’s view of the firm has regained currency among many scholars as more accurately portraying the business corporation. Firms emerge as complex organizations with a hierarchical decision-making 34

Ibid., 827–31.

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structure because this is sometimes viewed as a superior mechanism over market transactions. The possibility of exercising authority and directing resources through fiat is what makes the business corporation a persistent phenomenon in today’s economy. Accordingly, the boundary of the firm was defined by the firm itself when it decided which economic activities would be carried out within the organization and which would rely on market transactions. While Coase cared little for property terminology, his view and the scholarship that followed came to reincorporate “proprietary foundations” in the corporation.35

1.

Williamson and Hart on vertical integration and residual control Interestingly, the reintroduction of property concepts into the corporate theory literature has been initiated by economists. As Chapter 1 has shown, economists often have a different idea in mind than lawyers when they talk about property and many of them have not used explicit property terminology at the outset, as was the case with Coase. But it is the work of several prominent economists who were followed by corporate law scholars that came to be known and articulated as a “property rights approach” to analyzing the business corporation. One such milestone was the work of Oliver Williamson, one of the founders of New Institutional Economics. In The Economic Institutions of Capitalism, Williamson observes that unlike the contract-based concept of economic institutions, the property rights literature (which he attributes to Coase, Alchian, and Demsetz) emphasizes that “ownership matters.”36 Once the “legally sanctioned structure of property rights is respected” and “human agents discharge their jobs in accordance with instructions,” it is assumed that asset utilization will “track the purposes of its owners.” This assumption does not hold in the agency (i.e. contract-based) literature, in which “principals contract in full awareness of the hazards that contract execution by agents poses.” The question of ownership matters little, but the future holds no surprises for the parties because “all of the relevant contracting action is packed into ex ante incentive alignments.”37 Williamson is driven by a focus on a “transaction costs economics” approach, which studies different forms of economic organizations by examining the “comparative costs of planning, adapting, and monitoring 35 36

Armour and Winchop, “Proprietary Foundations.” Williamson, Economic Institutions, pp. 26–7. 37 Ibid., pp. 27–8.

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task completion under alternative governance structures.” In deciding whether to manufacture a product in-house or through market transactions, a firm must take into account not only the ex ante costs of writing up a contract, but also those involved with the execution stage. The latter costs may be substantial, especially when the product or asset in question is developed and designated for a specific use, or when the development process is subject to uncertainty, which requires “adaptive, sequential decision-making.”38 The parties may find themselves held up in a dispute about the surplus or future decisions, with no party being able easily to identify the other as breaching the contract and to verify this to a court. As a matter of institutional design, it may make sense to move to a regime of unified governance or vertical integration. This is so because “where a single ownership entity spans both sides of the transaction, a presumption of joint profit maximization is warranted.”39 Transaction cost economics thus agrees with the property rights approach that “ownership matters.” But what truly matters is not the mere legal status of ownership that relies on centralized enforcement, but the fact that unified governance within the firm is a private ordering mechanism that grants institutional support to “adaptive, sequential decision-making.” Oliver Hart and others have formalized these basic insights into an explicit “property rights approach,” arguing that “ownership is a source of power when contracts are incomplete.”40 When a contract does not specify all aspects of asset usage in every contingency, and decisions have to be taken about missing usages, it is the owner of an asset who has residual control rights over it. Ownership therefore goes beyond the right to residual income – an attribute that has been the focus of Yoram Barzel’s work on the economics of property rights41 – to apply to the right of residual control.42 This concept of ownership therefore lies at the basis of the firm and accordingly defines its borders. Assets, broadly defined, that come under the unified governance and ownership of the economic organization of the business corporation, are distinguished from those that are governed and controlled by two parties engaged in a contract. 38 40

41

42

Ibid., p. 56. 39 Ibid., pp. 56, 78. Oliver Hart, Firms, Contracts, and Financial Structure (Oxford University Press, 1995), p. 29. Yoram Barzel, Economic Analysis of Property Rights (Political Economy of Institutions and Decisions), 2nd edn. (Cambridge University Press, 1997), p. 309. Hart, Firms, p. 30.

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2. Hansmann and Kraakman on asset portioning In a notable contribution to corporate theory, Henry Hansmann and Reinier Kraakman argue that “at its essential core, organizational law is property law, not contract law.”43 This dramatic departure from the nexus of contracts theory is premised, somewhat like Williamson or Hart, not on a formalistic analysis of the corporation and other standard-form organizations, but rather, on promoting the goal of effective institutional design. While contracts naturally play a major role in the everyday dealings of the firm, contracts themselves – however carefully planned – do not suffice to provide institutional support for the range of economic activities that typify businesses. For a firm to effectively engage in contractual relations with other actors, it must have, first, a well-defined decision-making authority, and second, the ability to bond its contracts credibly, i.e. to assure other parties that it will perform its contractual obligations. Such bonding usually requires that there exist “a pool of assets that the firm’s managers can offer as satisfaction for the firm’s obligations.” In legal entities, as opposed to natural persons, these “bonding assets” are distinctive from assets owned by the firm’s managers or owners, such that the firm’s creditors have a claim on those assets that is separate from the claims of the owners’ personal creditors. Hansmann and Kraakman view this “asset partitioning” as the core defining characteristic of a legal entity, and the essential role of organizational law as one of establishing this separation. Asset partitioning thus has two components: first, designating a separated pool of assets that are associated with the firm and are distinct from the personal assets of the firm’s owners and managers. Second is assigning creditors with priorities in the distinct pools of assets that result from the formation of the legal entity. The assignment of such priorities can take two forms: (1) “affirmative” asset portioning, which assigns to the firm’s creditors a claim on the firm’s assets that is categorically prior to the claims of the personal creditors of the firm’s owners, and (2) “defensive” asset portioning, which does the opposite: granting to the owners’ personal creditors a claim on the owners’ separate personal assets that is prior to the claim of the firm’s creditors. This latter is regularly achieved, in its strongest fashion, through the limited liability corporation.

43

Henry Hansmann and Reinier Kraakman, “The Essential Role of Organizational Law” (2000) 110 Yale Law Journal 387–440 at 440.

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The essence of organizational law, according to Hansmann and Kraakman, lies in affirmative asset portioning. This portioning could not effectively be achieved only by contract or even through a standard application of the proprietary mechanism of secured transactions. This is so because given the default rules of obligations law – by which all creditors have an equal-priority claim to the entire pool of assets in the case of default – an entrepreneur would be practically unwilling and unable to credibly promise to business creditors a priority over the business assets. The entrepreneur would be unwilling to do so because the costs of obtaining such consent from past and future personal creditors would be prohibitive, and he would be unable to do so because this compliance could not be monitored or bonded: any contractual promises for priority would be valueless when the entrepreneur is insolvent and assets are distributed under bankruptcy rules. Needless to say, this problem is exacerbated when the enterprise is made up of multiple owners. To ensure their priority, business creditors would have to constantly assess and reassess the personal creditworthiness of each one of the owners.44 Establishing a categorical priority through standard security interests is also of limited value. While the law of security transactions allows for a floating lien covering both present and future assets by type, such blanket pledges usually require some sort of a description of the type of assets that would be covered under the lien. Moreover, to allow for such a blanket lien that would award priority to business creditors, the identity of the creditors would have to be spelled out in advance – such constraint being impracticable for a dynamic long-term business. It is here that the organizational law’s mechanism of establishing a separate legal entity comes into play. Permitting the firm itself to be the owner of assets provides a simple means for identifying which assets are considered business assets as opposed to personal assets. It also enables business creditors to be distinguished from personal creditors: the former are those whose dealings are with a formally organized firm rather than with the individual directly.45 And through affirmative asset portioning, which grants this discernible group of creditors (present and future) a categorical priority with regard to a discernible group of resources (present and future), that organizational law allows for what a nexus of contracts system could not have achieved.

44

Ibid., 393–4, 401–3.

45

Ibid., 408–9, 417–20.

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It thus becomes clear why the core of the business corporation as an economic organization lies in property concepts. The separate legal entity identifies the boundaries of the firm, with such boundary-setting serving an instrumental goal of allowing for an effective organization of its business activity. In one sense, the business corporation could be viewed as a notional res, an object of property rights, a conceptual carved-out piece of the world for which a distinctive set of rights and duties could be aligned. In another sense, the firm as a legal entity could be viewed as an agent, the subject of property rights, holding entitlements in various assets. While both conceptions have some force, I would suggest that the firm, with its boundaries so defined, could be seen as a “nexus of property” or “property microcosm,” a notional space within which rights and duties can be structured so as to have an in rem effect. The business corporation thus allows for the allocation of a feasible set of legal powers and priorities, one which governs not only parties that can be said to be tied by contract or a “reciprocal arrangement,” but also relations among distant parties. Those distant parties could each be tied to the firm but not directly to one another, such as with the firm’s secured creditors vis-à-vis the firm’s regular suppliers or employees. Other distant parties, such as the owners’ personal creditors, could be seen as located outside the firm. The organizational and legal structure of the business corporation thus enables the construction of a system of property powers and priorities over assets, the boundaries of which are defined by the firm’s boundaries.

3. Armour and Winchop on joint, sequential ownership A different type of focus on property in recent corporate theory is offered by John Armour and Michael Winchop.46 While Hansmann and Kraakman seek to delineate the outer bounds of the firm, mainly to distinguish between internal and external creditors, Armour and Winchop examine the property structure of legal interests held by different stakeholders within the firm. Accordingly, the concept of undivided ownership, as formulated by Williamson or Hart, seems more relevant to the firm’s boundaries. But the structure of entitlements allocated within the firm is premised in sharing schemes, which have both contractual and property elements. Distinguishing between the content and the scope of such entitlements, Armour and Winchop argue that some types of sharing schemes cannot rely 46

Armour and Winchop, “Proprietary Foundations.”

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on contracting only, but also must have an effect on third parties. This is necessary to create a more credible commitment among the firm’s coholders of entitlements not to behave opportunistically. Viewed in these terms, it becomes clear why agency or trust law, as applied to corporate law doctrines, can actually be seen as incorporating property elements. To sustain such sharing schemes, these doctrines must legally prevent attempts to sell or pledge the corporate assets through unauthorized actions.47 Obviously, putting innocent third parties at risk of losing in such contests may entail substantial costs, meaning that any such proprietary mechanisms must balance the effectiveness of shared control arrangements with the negative externalities imposed on third parties. One strategy to do so could be to apply a numerus clausus principle, which would limit the types of sharing arrangements that could be constructed within the firm, thus limiting the nearly unbounded freedom that parties would have under a pure contractual model. A second mechanism would be one of selective enforcement, by which potential conflicts between third parties and stakeholders with competing claims would be governed by context-specific rules such as the common law doctrine of apparent authority or the equitable rule of bona fide purchaser.48 Yet another technique prevalent in property doctrines is one of effective notice or publicity, often attained through a registration system that substantially lowers search costs. As Armour and Winchop show, all of these property mechanisms can be detected in corporate law doctrines, and they serve to govern not only sharing arrangements among shareholders, but also other types of legal relations among stakeholders in the firm. Thus, for example, the legal relations among shareholders and the firm’s creditors are typically based on the debt contract and governed by a contract-based sharing scheme that can be portrayed as one of “sequential sharing” – by which the shareholders retain control unless some verifiable contingency such as default on the loan occurs, whereupon the creditors take control. But these relations must also be governed by property doctrines that apply to third parties. The security interests that creditors regularly receive in the firm’s assets grant them legal priority over third parties in case of asset alienation contrary to the terms of the debt contract, or 47 48

Ibid., 442–4, 449–53. For the application of these rules in traditional property law, see Menachem Mautner, “‘The Eternal Triangles of the Law:’ Toward a Theory of Priorities in Conflicts involving Remote Parties” (1991) 90 Michigan Law Review 95.

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upon insolvency. In addition, doctrines such as “fraudulent convenience law,” otherwise known in English law as “transactions at an under-value” allow creditors to set aside against third parties certain eve-of-insolvency transactions that harm their interests. Finally, the legal relations among different creditors are also governed by what are essentially property doctrines, setting forth priorities and preferences among such distant parties in cases of conflicting claims to collateral interests in the corporation’s assets during the life of the firm or upon insolvency.49 Naturally, for the latter type of relations, reliance on a pure contractual model of the firm would be of little value, since no “reciprocal arrangements” could be said to apply to different creditors that have no contractual privity among them. It is here that a property structure seems especially essential to prioritize rights to the firm’s assets. The sharing model adds an important brick to the construction of the firm’s property microcosm, by examining the property structure of the firm’s inner workings alongside the conception of its outer boundaries.

III.

Paradigm lost: why the corporation challenges property theory

Unlike current corporate law theory that seeks to identify the proprietary nature of the firm, contemporary property theory devotes almost no attention to the business corporation. As with its twentieth-century predecessors, this stream of scholarship focuses on “classical” resources, i.e. land, chattels, and intellectual property. And while this scholarship studies various types of property organizations, from marital property to common interest communities, once again missing is the most prominent form of property organization: the business corporation. In somewhat of an exception, Smith, in his 2012 “Property as the Law of Things,” devotes one paragraph to Berle and Means, but then views corporations as simply one form of “entity property,” without elaborating on what distinguishes firms from other such entities.50 49 50

Armour and Winchop, “Proprietary Foundations,” 453–55. Smith, “Law of Things,” 1721–2. Accordingly, in Thomas W. Merrill and Henry E. Smith, Property: Principles and Policies (New York: Foundation Press, 2007), the chapter on ‘Entity Property’ encompasses 135 pages (pp. 684–829), but the overwhelming majority of them are devoted to possessory rights such as leases in land, with only three pages devoted to “corporations and partnership” (pp. 826–9).

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One could hardly suspect an ideological aversion of these writers to business corporations or to anything associated with free markets and capitalism as a potential explanation for the omission of business corporations, as could have been the case with other contemporary scholars committed rather to a progressive, realist, or critical agenda.51 For the new essentialists, the alternative explanation suggested in Section I, that of “a more effective dedication of attention,” could explain the attraction of re-conceptualizing property rights in the classics: land, chattels, intellectual property. But there may be another explanation. It could be the case that the business corporation simply does not fit in smoothly with how the core of property is depicted in the new essentialism school. The shadow of Berle and Means may still be looming over property theory.

A.

Right to exclude versus separation of ownership and control

As Chapter 1 has shown, the new essentialism school in property theory has been trying to extract the core meaning of property through a two-stage move: (a) focusing attention on the right of ownership as the paradigm of property rights, and (b) identifying substantive incidents that are the sine qua non of ownership, and hence of property in general. The substantive essence has been typically identified as the right to exclude (whether this has an intrinsic value or an instrumental one for promoting the right to use), or as the right to exclusive decision-making about the uses to which the resource would be put. It is therefore clear why the literature on the theory of the firm, starting with Berle and Means and continuing up to the current writing on its proprietary foundations, poses a challenge to the “essence” of property, and more broadly, to the paradigms upon which new essentialism is based. First is the issue of ownership. The underlying paradigm of “owner” in the new essentialism school is one of a single, natural person. One can naturally understand the appeal of opting for such a paradigm, especially when trying to promote a normative-substantive principle such as the right to exclude, relying also on moral ideas about autonomy or personality. 51

One such stream of property literature studies different versions of “property and social relations.” Probably the only contemporary author who has been committed to a progressive agenda in this respect and who has also devoted attention to business corporations is Gregory Alexander: Gregory S. Alexander, Commodity & Propriety: Competing Visions of Property in American Legal Thought 1776–1970 (University of Chicago Press, 1997), pp. 342–51 (discussing Berle and Means’ work as a realist critique that ties the business corporation to a broader social context).

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While this literature is not explicitly antagonistic to the possibility of ownership by an artificial legal entity, the working assumption is one of a monolithic body, which exercises its right to exclude vis-à-vis strangers or other external circles such as neighbors. In this respect, it does not matter – at least conceptually – that the copyright to a certain song vests with a recording company and not with a real person. The same goes for the ownership of Blackacre or any sort of chattel. As the final section of this chapter will demonstrate, viewing the business corporation through the lenses of the Blackacre Paradigm misconceives the legal relations between “owners” and “outsiders” in the firm. But even prior to that, it makes little sense to settle only for the outer bounds of the firm in examining the issue of ownership. It is the inner circles of the firm within which the question of ownership becomes even more challenging. This is especially so because current literature on corporations argues that it does make sense to speak about property rights within the firm, since the firm is not merely a nexus of contracts. One option would be to say that the owners of the firm are the shareholders. This would make life easier for the new essentialism school, because it would fit in nicely with a relatively straightforward model of co-ownership, in which an identified number of parties share pro rata the same kind of rights and duties and otherwise have an equal legal standing (though, as I soon show, this is often not the case even if we opt for the shareholders-as-owners model). While such co-ownership requires internal governance mechanisms to overcome collective action problems, this view of the firm would still clearly distinguish owners from non-owners. But there is an obvious tradeoff here. Given the way that the business corporation works both as an economic organization and as a legal institution, shareholders do not enjoy – definitely not in full – the core substantive rights that are associated with ownership. This is so both with respect to the right to exclude, which makes little sense as far as shareholders are personally concerned, and also with the slightly softer version of the right to exclusive decision-making. The separation of ownership from control in the business corporation results not only from the organizational necessity to entrust decision-making with agents (management) but also from legal principles that limit shareholders, in their personal capacity, from appropriating the assets of the firm or otherwise directly setting the agenda for such assets. It should be noted here that the question of the separation of ownership and control in the business corporation is more contextual and

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contingent than assumed by Berle and Means. There is an obvious difference between a widely-held public corporation, a closely-held corporation in which a single person or small number of persons hold most shares, and a corporation in which a person or small number of people do not reach the nominal majority threshold, but hold a substantial-enough block of shares indirectly to control the corporation by controlling the firm’s institutions, mainly the identity of the board of directors and senior management. The question as to whether Berle and Means’ model of separation is “really a myth”52 thus depends on empirical-contextual observation that offers diverging answers across and within different economies. There are certainly many firms in which some shareholders can be said to effectively control the firm – but as the next subsection shows, this poses a different sort of challenge for current property theory. That said, is there an alternative way to define “ownership” of the firm? Another strategy would be to follow Armour and Winchop’s model of shared ownership, which encompasses not only joint ownership by shareholders, but also sequential ownership by shareholders and creditors. This broader definition of ownership has a reverse tradeoff from the shareholders-as-owners model. It identifies more parties that have a practical and formal power of control over the firm’s assets as “owners” (although management is still not captured under this broader definition, but rather, is depicted as sharing with shareholders by being contractually delegated some power of control). But on the other hand, this alternative picture departs from conventional co-ownership. Owners are different not only in number, but also in class, and they certainly cannot be said to be motivated by the same goals in setting forth the “agenda” for the corporation’s assets. Such a fragmented picture of ownership is not foreign to property scholars, definitely not to Anglo-American lawyers who are versed in the estate system in land. The estate system, with its fragmentation of rights both among different types of entitlements (i.e. holders of different present possessory interests) and along the time horizon (i.e. holders of future interests) has traditionally distinguished the Anglo-American property system from the continental system with its apparently unified “box of ownership.”53 But it is due to the growing dominance of fee 52

53

Brian Cheffins and Steven Bank, “Is Berle and Means Really a Myth?” (2009) 83 Business History Review 443. John Henry Merryman, “Ownership and Estate” (1974) 48 Tulane Law Review 916–45 at 927.

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simple absolute in land that Anglo-American jurists have also started to view single ownership as the practical and legal paradigm of ownership, one that conforms to standard ownership in chattels or intellectual property. Having to go back to fragmented conceptions with a historic feudal ring to them creates an understandable aversion. But it is simply at odds with the fact that constructing complex schemes of fragmented “ownership” often proves to be an efficient way for contemporary institutional design. This is clearly demonstrated by the dominance of various types of multi-owner organizations, including business corporations or various kinds of trusts that are increasingly viewed in the literature as a form of shared ownership.54 Moving to the substantive core principles of ownership in the corporation, it seems clear enough that a straightforward “right to exclude” does not seem to be the core of the business corporation, whether one speaks of the corporation as an asset in itself, a formal owner of assets, or a property microcosm as I suggest. The same doubts arise in regard to the alternative substantive core feature of ownership, that of exclusivity of decision-making or of setting the agenda for assets. Once we look beyond the corporate entity to examine who it is within the firm that exclusively makes the decisions about assets that are formally owned by the corporation, it is clear that no single person or class of persons can be identified as such, even if some persons are otherwise identified as owners. This obviously does not point to chaos or to systemic ambiguity within the corporation. The rules guiding the corporation, made up of its private ordering contractual documents (articles of incorporation, debt convents, etc.) and corporate law’s set of rules (be they mandatory or default rules) create a clear structure of decision-making within the corporation. But this structure typically does not follow the “owner decides” paradigm that guides current property scholarship. Control is not only separated, at least to some extent, from formal ownership of assets or the corporation’s shares, but is also divided among several persons and institutions (general assembly of shareholders, board of directors, audit committees, senior management). Order and hierarchy in decision-making is thus maintained, and it can be conceptualized as setting a property structure of powers and priorities that bind third 54

See, e.g., Joshua Getzler, “Plural Ownership, Funds, and the Aggregation of Wills” (2009) 10 Theoretical Inquiries in Law 241 (analyzing the trust fund as the “most developed and interesting form of plural ownership”).

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parties, but this proprietary model of decision-making simply does not follow from the core of ownership. I definitely do not argue that the focus of contemporary property theory on ownership is entirely misplaced. “Ownership” is an institution that certainly matters in many property contexts. In many such settings, it is indeed meaningful efficiently to carve out ownership in the world to allow for efficient economic activity, attainment of social-moral values, and a general sense of order. As for substantive principles, the right to exclude of course plays a prominent role for many types of assets in various contexts. Accordingly, in many cases, the set of legally enforced powers and priorities is invested and consolidated in a single person or group of equal co-owners. But it is not the same thing as arguing that the institution of property is inherently defined by “ownership” and that the sine qua non of property is the right to exclude or the exclusive right of decision-making invested in the person identified as “owner.” As the business corporation shows, the institution of property accommodates other organizational modes and underlying contents of substantive norms, in a manner that undermines the new essentialism.

B.

Vertical authority versus horizontal governance

Another source of tension between contemporary property theory and corporate theory on the nature of the firm can be identified as one of “vertical authority” versus “horizontal governance.” As discussed in Section II, Coase, Williamson, Hart, and others have shown how the firm is governed not only by consent, but also by fiat. This is attained through a hierarchal structure and vertical integration of assets and actions. Power and decision-making thus have clear vertical components alongside horizontal axes of legal relations that otherwise exist within the firm. This verticality typifies not only the managerial strata. It can also characterize relations among shareholders. In those corporations whose shares are not widely held, but dominated by a single or small group of organized shareholders who own a majority of the shares or otherwise hold a big enough block of shares to effectively control the firm’s institutions, we speak of “dominant,” “controlling,” or “majority” shareholders. The practical and legal relations of this group of shareholders with other shareholders can be typified as vertical and not only as horizontal. I dub these respective groups “majority shareholders” and “minority shareholders” – though, as mentioned, the block held by the “majority” is often less than fifty percent of the shares.

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The verticality in the majority-minority relations has several features. As a practical matter, majority shareholders not only dominate voting in the general assembly, but also control the composition of the board by appointing the majority of board members. For some types of decisions, in order to protect against minority abuse, simple majority voting will not do. Certain types of decisions, such as mergers or division transactions, typically require special majority.55 Other actions may require that the general assembly or other corporate institutions be divided into sub-classes, so that decisions such as on transactions between the corporation and a controlling shareholder acting in a personal capacity would pass a certain threshold level of support among minority shareholders, independent directors, or other non-majority actors.56 But there is a deeper sense in which the relations among majority and minority shareholders can be typified as vertical and not as horizontal. On the one hand, controlling shareholders are legally entitled to enjoy the “control premium” upon selling the controlling block of shares to a third party. The majority shareholder’s practical power to control the corporation is not considered a corporate asset, so that she does not have to share with other shareholders the added value or “premium” she receives for the shares as reflection of the shares’ control potential.57 The legal validation of the control premium may be viewed as establishing a tiered system among the shareholders, by which one class of shareholder enjoys a better claim to the value of its property interest in the shares upon sale than do other groups of shareholders. To the extent that shareholding represents “ownership” there is some sense in which the corporate structure facilitates statuses of upper-class and lower-class shareholders. On the other hand, a majority shareholder is a fiduciary with respect not only to the corporation, but also to minority shareholders. The fiduciary obligation requires the majority shareholder to use her power to protect “the entire community of interests in the corporation” and it entails duties of loyalty, honesty, and good faith toward the minority.58 55

56 57

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See Ed Rock et al., “Significant Corporate Actions,” in Reinier R. Kraakman et al. (eds.), The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford University Press, 2004), pp. 133–7. Ibid., pp. 118–28. William Meade Fletcher, “Sale of Controlling Share – Recognition of Premium for Controlling Stock,” in Fletcher Cyclopedia of the Law of Corporations, 18 vols. (New York: Thomson Reuters, 2004–12) vol. XI, § 5805.10. Francis C. Amendola et al., “Dominant, Controlling, or Majority Shareholders,” in Corpus Juris Secundom, Corporations (New York: Thomson Reuters, 2007), vol. XVIII § 378.

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What this means is that one class of shareholders (one might say co-owners) owes certain duties to another class of shareholders (other co-owners) that are not reciprocal by nature. These duties may thus be viewed as reflecting the upper status that majority shareholders enjoy within the corporation, while subjecting them to certain legal duties that filter down the vertical structure. This concept of vertical relations among co-owners does not sit comfortably with the type of co-ownership or “limited common property” regimes that have been the focus of interest in contemporary property literature.59 As shown in Chapters 3 and 4, probably most prominent of the current forms investigated in property scholarship is the range of residential planned communities, including homeowners associations, condominiums, and cooperative housing, that have boomed across the United States and many other countries around the world over the past few decades. These various forms of co-ownership have been established with the chief purpose of validating and preserving private interests of homeowners through sophisticated governance regimes of reciprocal rights and duties among co-owners or cogovernors of the community. These forms of organization have fascinated property theorists, who explored the ways in which co-ownership or co-governance property mechanisms could be used to solve both “commons” and “anticommons” tragedies.60 On the face of it, the business corporation could have been a perfect addition to this literature in exploring the nature of co-ownership or co-governance. But it might be that the business corporation and the planned residential community are viewed as based on two different paradigms that cannot easily be squared. While the business corporation has a strong component of vertical authority and multi-class governance, the discussion of planned communities is derived from an assumption of “horizontal governance.” This means that the various co-owners or cogovernors are presumed to be of equal status, who bundle together to solve commons or anticommons problems in a reciprocal, horizontal manner. While the need to overcome collective action problems of

59

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Carol M. Rose, “The Several Futures of Property: Of Cyberspace and Folk Tales, Emission Trades and Ecosystems” (1998) 83 Minnesota Law Review 129–82 at 139. See, e.g., Lee Anne Fennell, The Unbounded Home: Property Values beyond Property Lines (New Haven, Conn.: Yale University Press, 2009); Francesco Parisi et al., “Duality in Property Commons and Anticommons” (2006) 25 International Review of Law and Economics 578.

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holdout, free riding, etc. may sometimes require the community to make collective decisions based on majority voting, the assumption here seems to be that the majority would be an ad hoc one, based on an independent consideration by each one of the co-owners or co-governors of the specific decision at hand. The majority is not predetermined or automatically formed by block voting. Accordingly, no homeowner or group of homeowners is supposed to enjoy a control premium or to be placed in a categorically superior position to other homeowners in the community. This implicit assumption may explain the deferential approach that planned residential communities enjoy when majority-based decisions are being contested before courts. Recall the Villa De Las Palmas Homeowners Association v. Terifaj case,61 analyzed in Chapters 3 and 4, in which the California Supreme Court upheld a majority-approved amendment to the condominium’s declaration, imposing a no-pet restriction. The court viewed use restrictions as “crucial to the stable, planned environment of any shared ownership arrangement,” holding that “all homeowners are bound by amendments adopted and recorded subsequent to purchase.” As I explained in those chapters, this is definitely not to say that doctrinal jurisprudence or theoretical scholarship on common property is romantic or naïve. In the context of residential community associations, a number of commentators have criticized these organizations as a “secession of the successful,” “government for the nice,” etc., but this has referred mostly to exclusionary measures employed toward outsiders, while assuming general homogeneity within the group. In other contexts, such as marital property, authors have definitely identified power disparities that exist between spousal co-owners as a matter of social practice or ill-designed law.62 But here, too, the working assumption has been that the law does not explicitly validate a “control premium” in favor of one co-owner or an otherwise vertical structure of co-ownership. In this respect, the business corporation poses a challenge. Being based on hierarchy, fiat, and vertical authority, as well as on block voting and organized majority action – even if somewhat restricted by corporate law rules – the property structure of the business corporation seems to be at odds with the paradigm of “horizontal governance” in the common property literature. While this friction 61 62

90 P 3d 1223 (Cal. 2004). See Carolyn J. Frantz and Hanoch Dagan, “Properties of Marriage” (2004) 104 Columbia Law Review 75–133 at 91–4.

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definitely could be resolved in conceptualizing the overall structure of the institution of property, such disparity also may help to explain why the business corporation has not been featured prominently in contemporary property theory.

C.

Organizational structure as status-based stratification?

The hierarchical structure of the business corporation may create uneasiness among the new essentialism school in property theory in an even broader sense. It may be viewed as undermining the liberal bedrock against which this property literature has sought to reintegrate the institution of property. If it is to be successful in making the case for the owner’s right to exclude or enjoy exclusivity in setting the agenda of the resource as the essence of property, this literature must first face the basic critique that has been voiced by the legal realists and later by critical legal theorists – by which property is far from being neutral or inherently liberal. New essentialists have thus devoted much effort to delineate the proper societal limits on the right to exclude or to set the agenda for the resource, while emphasizing the free choice and autonomy that the institution of property fosters in liberal democracies. There is something about the aforementioned analysis of the business corporation that may be deemed as threatening to throw property back to the jaws of a status-based critique, and in particular to the term that has become so pejorative in the property literature: feudalism. I have already shown how often legal structures, ordering entitlements to assets, have been condemned as covert forms of feudalism. Morris Cohen did so in his depiction of the institution of private property. Charles Reich likened government’s control of benefits and largesse to the subjection of citizens to a new form of feudalism. Berle and Means referred to feudalism in a more subtle manner, by saying that the corporate system “bids fair to be as all-embracing as was the feudal system in its system,”63 without directly attributing feudal traits to the corporation. While I generally view such equation of the corporation with a feudal system as somewhat superfluous, even for a closely-held corporation, it may be understandable why so much discussion about “vertical integration,” “hierarchy,” “fiat,” “decree,” and so forth in analyzing the property features of the business corporation is unpleasant to the ears 63

Berle and Means, Modern Corporation, pp. 8–9.

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of those who advocate the right to exclude or exclusive decision-making, while being committed to a liberal agenda. In this respect, the private corporation seems once again to undermine the paradigms that guide the theory of new essentialism in property.

IV. Property and the business corporation revisited The key to resolving the tension between the current focus of property scholarship and the concept of the firm lies in switching from a theory of substantive essentialism to the theory that identifies the inherent structural and institutional features of property, one which I am advocating throughout the book. This section analyzes the business corporation along property’s three structural traits: third party applicability, constraints on opting out for private ordering, and the public-private interplay, while also explicating on the institutional features of property norm-making. I argue that once my theory of property is embraced, then the business corporation not only fits in well with such a theory, but it could also fertilize the theoretical discussion of other assets and property organizations, including the property “classics.” Starting with property’s structural feature of third party applicability, I suggested earlier in this chapter that while one could see the corporation entity itself as res – an object of rights which is pro rata owned by shareholders – or as the subject of property rights that owns assets as a stand-alone legal entity, a more systematic way to conceptualize the corporation would be one of a property microcosm or a nexus of property. This means that the economic and legal structure of the corporation defines a set of legal powers and priorities to the corporate assets. Some of these powers and priorities are based in contractual arrangements, such as the articles of incorporation, executive employment agreements, or debt covenants. But other powers and priorities are based on top-down norms in corporate law and related legal fields such as bankruptcy or equity. These top-down norms also serve to order legal relations between stakeholders that do not otherwise have contractual privity – such as relations among different creditors, or between individual shareholders or directors and creditors. Other complementary norms apply to parties the relations of which are initially based on contract, such as among shareholders, with the need for this additional layer of norms stemming from the inherent incompleteness of contractual norms, such as the inability to spell out

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in advance all the contingencies that distinguish legitimate majority decisions from abuse of the minority shareholders. It could also be used to promote broader goals and values that intervene with the freedom of stakeholders to contract about powers and priorities, such as rules that favor employees or other vulnerable stakeholders in the event of distribution of the corporation’s assets upon dissolution. It is important to note that this additional set of legal powers and priorities to direct the corporate assets is not synonymous with the Coasean account of “fiat” and “authority” or with Williamson’s depiction of “vertical integration.” The Coase–Williamson account is instrumental in featuring one of the property foundations of the corporation: the alignment of decision-making powers down the management or production chain in view of the self-enforcing nature of unified governance. But other rules, such as those applying to apparent authority, bona fide purchase, or fraudulent convenience of the corporation’s assets, go beyond these self-enforcing mechanisms. Such rules are essential to decide competing claims between otherwise distant parties that find themselves entangled in a clash over conflicting claims to rights in the corporation’s assets. The chief legal mechanism that allows for the construction of the firm’s property microcosm is the corporation’s separate legal entity. The separate legal entity defines the boundaries of both the assets located within this socio-economic organization and those of the organization itself. It allows for the conceptual and formal carving out of assets and the setting up of a system of powers and priorities that also apply to third parties and thus have an in rem feature. The degree to which the boundaries of the property microcosm are hermetic depends on the specific design attributes of the separate legal entity. As for affirmative asset portioning, the degree of separation of the firm’s creditors from the shareholders’ personal creditors depends on the type of priority awarded to the firm’s creditors (relative or exclusive) in the firm’s assets, and on the level of protection awarded against the ability of personal creditors of a shareholder to force liquidation of corporate assets upon exhausting the shareholder’s personal assets.64 As for negative asset portioning, the degree of separation depends on whether the corporation is set up as a limited liability company, so that the firm’s creditors cannot generally make claims to shareholders’ personal assets, and on what exceptions to limited liability may be carved ex post through doctrines such as “piercing the corporate 64

Hansmann and Kraakman, “Essential Role,” 394–7.

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veil.”65 A relatively weak form of separation does not entirely undermine the in rem nature of powers and priorities, though it definitely challenges the ability to set clear boundaries of “within” and “outside” the corporation. Importantly, the business corporation as a property microcosm is both quantitatively and qualitatively distinct from the paradigmatic single-owner picture of property. This is so not only with respect to the internal governance of the corporation, but also externally, in view of the multi-layered structure of stakeholders, including multiple groups of “outsiders.” The fact that the publicly-traded corporation regularly has a large number of shareholders, whose identity constantly changes with the rapid trade in the securities markets, and that shareholders may further be divided into certain classes, including majority shareholders, non-controlling institutional investors, and dispersed minority shareholders, also implicates those who are located “outside” of the firm. Since each one of the multiple shareholders has its own set of personal creditors and other interested parties, the particular design of negative and affirmative asset portioning in the firm – e.g. whether a limited liability corporation would nevertheless allow the piercing of the firm’s veil by imposing personal liability on shareholders – distinguishes the business corporation from single-owner or even more traditional cases of co-ownership, such as in joint tenancy in land. The business corporation thus cannot simply be reduced to governance on the inside and straightforward exclusion on the outside. Yet the firm’s structure is one embedded in property relations, no less than in the case with the allegedly-paradigmatic single-owner property. The microcosm of the corporation simply calls for a more intricate design of legal powers and priorities in regard to assets. The second structural trait of property, i.e. the constraints on opting out for private ordering, also plays out significantly in the business corporation. While the corporation is definitely embedded in a thick web of contracts, it must also be governed by rules that extend the powers and priorities in the corporate assets, so that they would apply to third parties. This is where the variety of top-down legal mechanisms, from the separate legal entity and limited liability to rules about apparent authority, bona fide purchase, or fraudulent convenience, come into the picture. They are necessary to complement private ordering so as to grant a true property feature to the set of powers and priorities. 65

Gerard Hertig and Hideki Kanda, “Creditor Protection,” in Reinier R. Kraakman et al. (eds.), The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford University Press, 2004), pp. 92–4.

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But the constraints on opting out for private ordering may also be normative, not only functional. This is the role that mandatory rules, such as those governing tender offers and insider trading, play in the context of the corporation. While these rules could be justified on the basis of unequal bargaining power among parties that may otherwise be parties to contract (e.g. majority versus minority shareholders), the broader-based justification for the constraints on opting out for private ordering lies in the protection of vulnerable third parties: employees, suppliers, creditors, and even society in general. More broadly, as I have indicated in Chapter 1, property rights are not natural rights and cannot be constructed solely through private decision-making. Property regimes, and property rights that emanate from them, are the result of conscious decisions by the state’s authorized entities to designate resources as objects of property and to create a certain set of legal powers and priorities to them. The role of the state is thus not only ex post to enforce and validate sets of rights that have been created privately, but also to initially legitimate, through a process of public reasoning, organizational structures within which legal entitlements with broad third-party effects would be created. The third structural trait, namely, the unique public–private interplay, is also instrumental for understanding the property microcosm of the business corporation. This is especially so with respect to the publiclytraded business corporation, in view of the enormous number of members of the public (practically everyone) who hold a stake in corporations either as direct shareholders or indirectly through institutional investors. Even if one is not immediately taken by the normative aspect of Berle and Means’ notion of “collective capitalism,” by which property rights of shareholders in the corporation can be justified only by broad societal redistribution of wealth, it is clear enough that no other resource or nexus of property implicates such a broad membership of “insiders” (i.e. parties who formally hold a stake in the corporation’s assets). To the extent that property must be designed to consider both private law and public law aspects, even if one does not aspire for harmony among these two realms, then the business corporation may play a central role in addressing this structural trait. Finally, as for the institutional characteristics of norm-making in property, I presented in Chapter 2 the prominent role that top-down legislation and regulation play for both functional and normative reasons in constructing the property microcosm of the business corporation. But the set of norms applying to legal powers and priorities in the

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corporation also demonstrates the chief role that courts play in norm-making. Courts do so by filling initially vague legal standards with content over time so as to add a substantial layer of property norms that could not have been adequately designed by private ordering or through ex ante hard-edged rules. Thus, while detailed rules can effectively be used to govern agency problems relating to the control of the corporate assets in matters such as tender offers, it is impracticable to govern all types of complex intracorporate relations through ex ante legislation. Self-dealing or conflicted transactions in the corporation’s assets involving controlling shareholders are a quintessential example. Trying to regulate in advance all prohibitions and exemptions is liable to result in the inefficient codification of loopholes on the one hand and unnecessary rigidity on the other.66 What most legal regimes do to resolve this tension is to set up legal standards applying “fiduciary” duties and “fairness” norms through which such transactions could be governed ex post while creating thicker content for future transactions in the corporation’s assets. Most US courts adopt the “entire fairness” or “intrinsic fairness” test for evaluating self-dealing transactions by controlling shareholders, as well as the “duty of loyalty” aimed at controlling management conflicts and limiting self-interested managerial diversion of resources.67 It is only through the gradual process of filling these initially vague norms with content by judicial decisions that the various stakeholders in corporations would get a better sense of the set of powers and priorities to the corporation’s assets that forms the full-scale nexus of property. In summation, eighty years ago, Berle and Means invited readers to reconsider the fundamental traits of property law and offered a farreaching normative agenda for reconstructing this legal institution. They did so from an unconventional spot – that of the business corporation – which up to that time was seen as a locus of pure private organization embedded in the invisible hand of the market. Numerous generations of property theory scholarship have largely declined this invitation, while engaging in de-canonizing and recanonizing the classics: land, chattels, intellectual property, etc. Somehow, the business corporation has not seemed to fit well the 66

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Henry Hansmann and Reinier Kraakman, “Agency Protection and Legal Strategies,” in ibid., pp. 23–4. Hertig and Kanda, Creditor Protection, pp. 114–18, 126–7.

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paradigms of property, especially by those who advocate a new essentialist approach. But this oversight can no longer be maintained. The business corporation is simply too important a nexus or microcosm of legal powers and priorities to resources to remain outside the main gate of property theory. Once we move from attempts to extract a single normative criterion for all types of resources and property settings to an alternative concept of property that is based on identifying the structural and institutional features of property, it becomes evident that the business corporation holds a key spot in understanding what property is. The business corporation offers important insights that may be hard to come by if one only sticks to what I have termed the Blackacre Paradigm of property, especially the focus on land as the prominent object of property. One such insight concerns the preoccupation of new essentialism with the right of ownership and its attempt to extract the meaning of property through this specific type of right. Ownership is obviously a key legal institution. It often allows for the creation of a solid sense of order, both formally and practically, in setting legal powers and priorities to resources. But ownership does not stand alone, and once we understand that ownership is always entangled in a broader set of legal powers and priorities, it makes perfect sense to have different versions of ownership, even for a certain resource or within the same type of property organizations. Thus, it is clear enough that ownership in land is not equal to ownership of a share, and that ownership of a controlling share is not equal to that of a minority share: this is so with respect to the power of decision-making, the priorities with regard to residual income or revenue, and so forth. But it may still make sense to use the term “ownership” as a relative term, one that is helpful in setting forth legal powers and priorities, without sticking to an all-or-nothing approach. The same goes for the numerus clausus principle and the tension between rigidity and dynamism in property. The economic and legal organization of the corporation demonstrates that there are different ways to draw boundaries and to control their rigidity without collapsing them altogether, just as there may be different variations to order the internal set of legal powers and priorities within these boundaries. It makes sense to talk about “property” even if it deviates from the Blackacre Paradigm or does not otherwise boil down to a single normative Holy Grail.

6 Eminent domain, incorporated

I.

Prologue

In November 2009, the pharmaceutical giant Pfizer announced it would leave the City of New London, Connecticut, and move its 26-acre research division headquarters to a campus it owns in Groton, Connecticut, as a cost-saving measure. Eight years earlier, Pfizer was lured to locate in New London and spend $294 million on the 750,000 square-foot complex. This was done after the city awarded extraordinary tax breaks to Pfizer and used its power of eminent domain to evacuate the nearby 90-acre Fort Trumbull site to redevelop it as an “urban village” that would draw shoppers and tourists to the area.1 The Fort Trumbull redevelopment plan never materialized. It left behind a swathe of barren land that was cleared of dozens of homes. Not less important, it left a major mark in the history of eminent domain and the use of government coercion to promote privately owned ventures. In the aftermath of this public and legal drama, the chapter sets out to look beyond the strict dichotomy that typifies the conventional debate about consensus-versus-coercion in property, and to explore new ways in which public and private activity could be combined to resolve collective action problems pertaining to the ordering of property relations. It identifies the business corporation as a key protagonist in meeting this property challenge. It was in 2005, exactly midway through Pfizer’s tenure in New London, that the drama reached its peak when the US Supreme Court handed down its decision in Kelo v. City of New London.2 In a 5–4 holding, the court validated the use of eminent domain for purposes of “economic development” even when the confiscated lands would then be 1

2

Patrick McGeehan, “Pfizer to Leave City That Won Land-Use Case,” New York Times, Nov. 13, 2009, p. A1. 545 US 469 (2005).

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transferred to private parties that would implement the economic development project and enjoy its gains. Opponents, who came from practically all wings of the political spectrum, saw the decision as pronouncing the ultimate death of the federal Constitution’s Fifth Amendment requirement that eminent domain be restricted to property taken for “public use.” They claimed it grants governments a carte blanche for compulsory transfer of private property from ordinary citizens to politically-powerful entrepreneurs.3 Lobbying groups such as the Castle Coalition have argued that the Kelo decision has “opened the floodgates” of eminent domain abuse, spurring governments to proceed with hundreds of projects in which homes, small businesses, and other properties would be razed in favor of highprofile private developments.4 This situation would leave landowners with minimal compensation based on the pre-project “objective” land values. But this version of events is only partially correct, both in theory and in fact. In the aftermath of Kelo, many state legislatures and courts have taken steps to mitigate the potential overuse of eminent domain powers. In more than forty states, legislatures have placed new prohibitions on the use of eminent domain by prohibiting its use for private economic development, redefining more stringently the terms “public use” or “blight,” or otherwise increasing restrictions on the use of eminent domain for such private projects.5 In addition, some state courts, like those in Ohio and Oklahoma,6 have interpreted state legal limits on the use of eminent domain for private economic development more stringently than the Supreme Court’s reading of the federal Constitution in Kelo. In this sense, post-Kelo reality included a strong reaction against the floodgates of eminent domain that Kelo supposedly opened. 3

4

5

6

See, e.g., Charles E. Cohen, “Eminent Domain after Kelo v. City of New London: An Argument for Banning Economic Development Takings” (2006) 29 Harvard Journal of Law and Public Policy 491; Gideon Kanner, “Kelo v. New London: Bad Law, Bad Policy, and Bad Judgment” (2006) 38 Urban Lawyer 201. Dana Berliner, “Opening the Floodgates: Eminent Domain Abuse in the Post-Kelo World” (2006), p. 1, available at www.castlecoalition.org/pdf/publications/floodgatesreport.pdf. See Castle Coalition, “Tracking Eminent Domain Reform Legislation Since Kelo” (2008), available at www.castlecoalition.org/about/component/content/2412?task=view; Edward J. Lopez et al., “Pass a Law, Any Law, Fast! State Legislative Responses to the Kelo Backlash” (2009) 5 Review of Law and Economics 101. See, respectively, City of Norwood v. Horney, 853 NE 2d 1115 (Ohio 2006); Board of County Commissioners v. Lowery, 2006 OK 31, 136 P 3d 639 (Okla. 2006).

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The Kelo debate has been thus typified by a binary approach to the use of government coercion, one that views eminent domain either as wholly illegitimate or as an irreplaceable mechanism to promote landuse projects. As this chapter argues, such an approach may often prove unfruitful, as either one of these “pure” approaches has substantial drawbacks. On the one hand, a flat prohibition on the use of eminent domain to assemble land from numerous owners to allow large-scale, financially profitable projects is highly problematic. Development or redevelopment projects involving dozens or hundreds of landowners, each holding an exclusive entitlement to a fragment of the designated project’s area, could be impossible to implement if every affected property owner could veto the plan by refusing to sell her parcel. Unanimous consent is not a reasonable requirement for such large-scale projects in view of such “anticommons” scenarios. Cases of land assembly for development or redevelopment plans are thus rife with market failures, which may justify maintaining the land assembly process as an involuntary, non-market transaction carried out through the government’s power of eminent domain. At the same time, however, since the constitutionally mandated “just compensation” to the landowners is currently based on pre-project objective “fair market value,” the government or third parties that take part in the implementation of the project may enjoy the entire incremental increase in the value of the assembled land. This compensation regime may seem unfair due to its distributional consequences, and it could distort governmental decision-making by encouraging use of the eminent domain power even when it is socially undesirable or unnecessary. The problems with such compensation have been identified by numerous scholars.7 This chapter proposes a novel solution for “squaring the eminent domain circle” for large-scale, for-profit projects that require land assembly from private property owners, by separating the two 7

See, e.g., Lawrence Blume et al., “The Taking of Land: When Should Compensation be Paid?” (1984) 99 Quarterly Journal of Economics 71; Lee Anne Fennell, “Taking Eminent Domain Apart” (2004) Michigan State Law Review 957; William A. Fischel and Perry Shapiro, “Takings, Insurance, and Michelman: Comments on Economic Interpretation of ‘Just Compensation’ Law” (1988) 17 Journal of Legal Studies 269; Nicole Stelle Garnett, “The Neglected Political Economy of Eminent Domain” (2006) 105 Michigan Law Review 101; Thomas W. Merrill, “The Economics of Public Use” (1986) 72 Cornell Law Review 61.

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components of eminent domain: taking and just compensation. The goal of the proposal is to restore market mechanisms to the extent possible by restructuring the legal compensation regime. It develops a market-based solution for the compensation component that takes advantage of the market’s powerful price system to align the interests of landowners, public authorities, and land developers. In brief, the proposed model would offer condemnees a choice between receiving either traditional pre-project “fair market value” compensation or pro rata shares in a Special-Purpose Development Corporation (SPDC) that would acquire unified ownership of the land and the development project. This mechanism would make it more likely that compensation is closely linked to the true economic value of the land and, consequently, that land assembly projects are both more just and socially efficient. In the book’s broader context, this chapter demonstrates how the business corporation, whose key role in organizing property relations has been identified in Chapter 5, could be utilized to resolve property problems that have been conventionally associated with either individual action or wholesale public control.

II. The land assembly dilemma A.

The Kelo saga

In 2000, the then distressed City of New London approved a redevelopment plan for the 90-acre Fort Trumbull site. It was hoped that this redevelopment, adjacent to and in conjunction with the new Pfizer research facility, would help revitalize the local economy. The redevelopment plan included construction of waterfront hotels, marinas, offices, retail spaces, and other commercial buildings and spaces. The Fort Trumbull site, however, included 115 privately owned properties, as well as 32 acres of publicly owned lands. The city tasked a non-profit corporation, the New London Development Corporation (NLDC), with implementing the plan. The city delegated its eminent domain power to the NLDC to assist in this implementation. The NLDC was able to successfully negotiate the purchase of most privately owned properties in the plan’s designated area. However, it failed to reach agreement with nine property owners, who held altogether fifteen properties. Ten of these properties were occupied by the owner or a family member and the rest were held for investment. In response, the city and NLDC initiated the requisite state

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law condemnation procedures. These procedures were validated first by the Connecticut courts and later by the US Supreme Court. Following the Supreme Court’s decision in June 2005, the city and NLDC had won a legal victory but faced a public relations defeat. As a result, they sought to settle with the petitioners to make unnecessary the consummation of the eminent domain proceedings and to move forward with redevelopment. Through early June 2006, seven of the landowners settled, while two remained defiant: Susette Kelo and Pasquale Cristofero. On the night of June 5, 2006, the city council voted to proceed with eminent domain proceedings for these two remaining properties. Shortly afterwards, Kelo and Cristofero also settled.8 The settlement efforts proved costly for the city and NLDC. The last six deals alone cost them more than $2.3 million – $4.2 million above the properties’ total appraised value in 2000. In addition, the NLDC waived almost $1.2 million in fees for use and occupancy by the landowners during the post-condemnation period. Kelo accepted an offer of $442,155 for her house, more than $319,000 above its appraised value in 2000, and was permitted to stay on the land until June 15, 2007. Cristofero received $475,000 for a house previously appraised at $105,000. These deals aroused the discontent of the landowners who settled previously (and who had enjoyed substantial, but lower, premiums). One landowner noted that the city and NLDC “rewarded [those who settled last] for holding out further.”9 Despite the settlement, Susette Kelo did not show explicit signs of contentment. In the months following the settlement, Kelo toured the country, passionately describing the love and care she lavished on what used to be a run-down cottage when she bought it. She urged listeners to push for legislative reforms that would better protect private property rights against eminent domain.10 Kelo thus became a national symbol for private property advocates as well as a vivid illustration of the intricate dilemmas that haunt land assembly. The grim end of this affair, by which 8

9

10

See Ellaine Stoll, “City Votes to Proceed with Property Seizures,” Day (Connecticut), June 6, 2006, p. A1; Ted Mann, “Fort Trumbull Saga Ends on Costly Note,” Day (Connecticut), Aug. 23, 2006, p. A1. Mann, “Fort Trumbull.” These additional funds came, as did most of the $73 million expended over the project’s course up to that point, from the State Department of Economic and Community Development, which has largely underwritten New London’s redevelopment efforts. Anne Saunders, “Kelo Urges NH to Restrict Powers of Eminent Domain, Union Leader” (Manchester, New Hampshire), September 22, 2006, p. A2.

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Fort Trumbull was never redeveloped and Pfizer decided to move out at the end of 2009, has allegedly vindicated Susette Kelo, who commented: “I’m not surprised that they’re gone.”11

B.

Land assembly as an anticommons setting

Land assembly problems are far from new. The law has long dealt with land assemblage scenarios rife with potential and actual market failures. The chief problem the law has struggled with is the problem that is nowadays dubbed “anticommons.”12 As Chapter 3 has shown, the anticommons problem refers to the situation that arises when large-scale projects implicate numerous property owners, each of whom holds an exclusive entitlement to a fragment of the designated project’s area. In such a scenario, if each owner were able to effectively veto the plan unless she consented to it, such over-fragmentation of private property rights could prevent the pooling together of the land for its more efficient reorganization.

1. From quintessential public projects . . . Probably the most frequent scenario in this context concerns the establishment of roads, navigable water routes, pipelines, and other types of linear infrastructures and utilities. In such cases, the market for the purchase of land, or of a right of way in it, is particularly thin because often there may be only one feasible route. Even where alternative routes exist, once the railroad or pipeline has begun building the line, abandoning it for an alternative route might prove very costly. Accordingly, persons owning land along the designated path are tempted to hold out for a high price in excess of the land’s opportunity cost. To prevent each landowner along the path from gaining de facto monopoly power, governments often resort to using their eminent domain powers.13 Governments have also delegated these powers to private corporations that build or operate such transportation or infrastructure services.14 In the early twentieth century, this delegation was 11 12

13 14

McGeehan, “Pfizer.” Michael A. Heller, “The Tragedy of the Anticommons: Property in the Transition from Marx to Markets” (1998) 111 Harvard Law Review 621–88 at 667–79. Merrill, “Public Use,” 97–8. See Harry N. Scheiber, “Property Law, Expropriation, and Resource Allocation by the Government: the United States 1789–1910” (1973) 33 Journal of Economic History 232– 51 at 237.

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scaled back.15 However, many legislatures still authorize private corporations to use the power of eminent domain because of the public nature of their services, and courts generally defer to legislatures as to the granting of such powers.16 Moreover, even proponents of strong private property rights generally agree that the use of eminent domain is less problematic when the good or service for which the power of eminent domain is employed possesses the economic traits of a public good or otherwise mandates substantial centralized intervention for its provision. Beyond the use of eminent domain, the law has employed other methods to prevent monopolistic holdouts in anticommons settings. Examples of these other methods include the nineteenth-century judicial development of implied “prescription” or “dedication” theories which deprived private owners of the right to exclude persons from segments of roads or navigable water routes that were used by the general public and thus subject to particularly high negotiation costs.17

2. . . . to non-profit private development projects . . . Anticommons scenarios are also common in cases of large-scale development or redevelopment projects for residential, commercial, or industrial purposes. The use of eminent domain in these situations is more problematic than in the earlier public goods scenarios. The US federal urban renewal programs that ran between late 1940 and the mid-1960s used eminent domain to raze entire neighborhoods in the name of removing “blight” and to make room for middle- and upper-income housing. These programs are considered in retrospect a resounding failure. They only exacerbated the socio-economic problems of the priced-out former residents of what were physically run down, yet socially vibrant communities.18 15

16

17

18

Wendell E. Pritchett, “The ‘Public Menace’ of Blight: Urban Renewal and the Private Uses of Eminent Domain” (2003) 21 Yale Law and Policy Review 1–52 at 9–13. See, e.g., Steele v. Missouri Pacific R.R. Co., 659 P 2d 217 at 222–24 (Kan. 1983); Burlington Northern & Santa Fe Ry. Co. v. Chaulk, 631 NW 2d 131 at 137 (Neb. 2001); Cabletelevision of the Midwest, Inc. v. Gross, 639 NE 2d 1154 at 1156–57 (Ohio 1994). See Carol M. Rose, “The Comedy of Commons: Custom, Commerce, and Inherently Public Property” (1986) 53 University of Chicago Law Review 711–81 at 723–30, 762–6. For criticisms of these eminent domain-backed programs, see Bernard J. Frieden and Marshall Kaplan, The Politics of Neglect: Urban Aid from Model Cities to Revenue Sharing (Cambridge, Mass.: MIT Press, 1975), pp. 24–5; Jane Jacobs, The Death and Life of Great American Cities, new edn. (New York: Vintage, 1989), pp. 270–90.

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Current, more subtle, redevelopment programs learned from these past mistakes while still realizing the essentiality of systematic and comprehensive area-wide solutions to problems of urban decline. A report commissioned by the Environmental Protection Agency, which studied redevelopment projects in nine US states, stresses that since “no property is an island,” most successful redevelopment initiatives focus on areas in their entirety.19 Thus, even “social” redevelopment initiatives, carried out chiefly by non-profit organizations and explicitly committed to holistically helping low-income residents by building or rehabilitating affordable housing in addition to providing social services such as job training, youth programs, and small business assistance, must spread to the entire map to succeed.20 Accordingly, vacant lots or neglected buildings that remain in disrepair adversely influence the prospects of moving up the neighborhood.21 Interestingly (yet not surprisingly), one of the most celebrated cases of grassroots, community-based revival of an impoverished urban neighborhood, the Dudley Street Neighborhood Initiative (DSNI) in Boston, is also the only instance in the United States in which a community organization – DSNI – was granted the power of eminent domain. In this case, eminent domain was granted to DSNI by the city and the Boston Redevelopment Agency (BRA).22 The Triangle, a 64-acre area in the heart of the Dudley neighborhood, was home to about 2,000 people in the late 1980s and was also where most vacant land in the neighborhood was concentrated. Of the 30 acres of vacant land in the Triangle, 15 were owned by the city. The other 15 acres, comprising 181 lots, were privately owned. Of these privately owned lots, 101 were in tax title, with municipal liens placed against them, or under petition for tax foreclosure. Moreover, the public/private 19

20

21

22

International Economic Development Council, Targeted Area Redevelopment: Area-Wide Improvements for Community Revitalization (Washington DC: IEDC, 2005), pp. 3–8. See Rachel G. Bratt, “Community Development Corporations and other Nonprofit Housing Organizations: Challenges Presented by the Private Housing Market,” Working Paper WP06RB1, Lincoln Institute of Land Policy (2006) (noting successful redevelopment initiatives “are not based in a single community”), pp. 8–11. See Alan Mallach, Bringing Buildings Back: From Abandoned Properties to Community Assets 1–9 (Washington DC: National Housing Institute, 2006) (discussing characteristics, causes, and effects of abandoned properties). This was made possible by s. 121A of Massachusetts General Laws, which allows a local renewal agency to empower a charitable organization to carry out a redevelopment project and to employ the power of eminent domain for that purpose. Massachusetts General Laws ch. 121A, § 3 (2003).

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ownership map looked like a jigsaw puzzle – there was no substantial territorial consecutiveness of public property, with little “islands” of private holdings spread all over the Triangle. Although most privately owned lots were tax delinquent, their formal foreclosure one by one would have been an onerous, time-consuming process whose inefficiency might have hampered any revival efforts.23 It was then that the idea of community-based use of eminent domain was conceived. DSNI, well aware of the traumatic experience of Bostonians with previous eminent domain projects, suggested two distinguishing principles for the use of this power in order to overcome the anticommons problem. These distinguishing principles were: (1) it would be restricted to vacant lots, meaning that no homes or businesses would be displaced, and (2) eminent domain would be exercised only for land owned by persons living outside the neighborhood. This second restriction was not overly restrictive, since 81 of the 131 private owners of vacant land in the Triangle, many of whom were land speculators holding their lots in anticipation of future profit, lived outside Roxbury or Dorchester. DSNI first gained mayoral support and formal approval by the BRA, and then took three years to raise the funds for compensation (over $2 million, coming from private grants and a loan from the Ford Foundation). Only after this time did DSNI exercise its eminent domain powers through judicial decree for the privately owned, nonresident vacant lots in the Triangle. The city-owned vacant lots were received for a nominal fee of $1.24

3. . . . and for-profit ones Now consider land assembly for what are essentially for-profit development or redevelopment projects, such as the Fort Trumbull plan. While land assembly for such projects is prone to the same basic anticommons hurdles that haunt public or private non-profit ventures, these projects suffer from especial criticism. The constitutional “publicness” of such projects is fiercely debated and there is a growing gap between the federal legal regime and that of many states. Legal scholarship has largely looked unfavorably on the use of takings in such contexts.25 23

24 25

Peter Medoff and Holly Sklar, Streets of Hope: The Fall and Rise of an Urban Neighborhood (Cambridge, Mass.: South End Press, 1994), pp. 117–21. Ibid., pp. 129–47, 154–8. See, e.g., Cohen, “Eminent Domain,” 498 (arguing for a ban on takings for economic development); Ilya Somin, “Overcoming Poletown: County of Wayne v. Hathcock, Economic Development Takings, and the Future of Public Use” (2004) Michigan State

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In some cases, private entrepreneurs may overcome the anticommons problem by assembling large tracts of land through the use of secret buying agents, as in Walt Disney’s secret purchase of thousands of acres from numerous property owners in Florida and in Virginia.26 Yet such techniques are often inapplicable, and would usually be legally prohibited for governmental development or redevelopment plans. In such publicly known cases, potential holdouts are very likely. Importantly, when a designated project becomes public knowledge, the ability of the governmental entity or a private entrepreneur to move forward with contractual land assembly hinges to a large extent on the question whether, under the law of the specific jurisdiction, the power of eminent domain may be used to non-consensually take properties of landowners who refuse to sell or move out. When the project’s initiators have good reason to believe that they would be able to resort to eminent domain when push comes to shove, and to prevail against legal challenges, they typically enjoy more leverage during the negotiations – even though they may often be inclined to offer landowners above-market prices to save the delays and costs involved in actual condemnation proceedings.27 A current example is the $4.9 billion Atlantic Yards project in Brooklyn, New York. Shortly after buying the NBA’s New Jersey Nets franchise in 2004, developer Bruce Ratner announced plans to make Brooklyn the Nets’ new home, and to turn a twenty-two acre site in the heart of the borough into a mixed-use development that will include the basketball arena, thousands of rental and condo apartments, office towers, retail space, and a boutique hotel. Forest City Ratner Companies (FCRC) has won support for the project from both the state and the city of New York. This support extends to direct subsidies worth hundreds of millions of dollars, which FCRC won after

26

27

Law Review 1005–39 at 1009–16 (arguing that such a categorical ban is “the best way to control abuse of the eminent domain power for the benefit of private interests”). See Daniel B. Kelly, “The ‘Public Use’ Requirement in Eminent Domain Law: A Rationale Based on Secret Purchases and Private Influence” (2006) 92 Cornell Law Review 1–65 at 18–31 (2006). For an analysis of a transaction in which the American Electric Power Company (AEP) bought out the entire small town of Cheshire, Ohio, in 2002 to solve the problem of pollution from AEP’s coal-fired power plant, see Gideon Parchomovsky and Peter Siegelman, “Selling Mayberry: Communities and Individuals in Law and Economics” (2004) 92 California Law Review 75–146 at 78–89. Garnett, “Neglected Political Economy,” 127–30.

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committing to designate a portion of the 6,400 planned apartments to low- and moderate-income families.28 Notably, FCRC purchased land in the project’s footprint – a step that, in essence, broke ground on the project – before all the required regulatory approvals were granted (although they were finally obtained in December 2006).29 With the background support of the city and the state, and especially of the Empire State Development Corporation – the state agency holding the power of eminent domain on behalf of the state, which publicly announced its plans to use this power against unwilling property owners – FCRC has been able to privately buy out the vast majority of properties and to reach agreements with many rentstabilized tenants on temporary and permanent solutions. Yet a few dozen apartment owners, rent-stabilized tenants, and small businesses remain defiant and filed a number of lawsuits in state and federal courts arguing, inter alia, that the Empire State Development Corporation may not use eminent domain for this private development. In rhetoric that should sound familiar enough to Kelo veterans, Daniel Goldstein, the spokesman for the lobbying group Develop Don’t Destroy Brooklyn30 and the only remaining apartment owner in a building bought out by FCRC, declared that “[o]ur victory will force a reshaping of the project, while protecting owners and renters nationwide from abuses of eminent domain.”31 However, in November 2009, in a 6–1 vote, the New York Court of Appeals upheld the state agency’s use of eminent domain as meeting the constitutional requirement of condemnation for “public use,” holding that there was no room for judicial intervention with the agency’s factual findings that the area in question was “blighted.”32 The court thus refused to follow the more stringent approach that has typified other state courts in the aftermath of Kelo. Also unlike the Kelo affair, the Atlantic Yards project makes progress despite years of delay, the economic crisis, and the legal battles. The project’s cornerstone, the Barclays 28

29

30 31 32

In 2005, the city and the state agreed to commit $100 million each to help fund the project’s infrastructure. In January 2007, the city announced it would add an extra $105 million in subsidy “for extraordinary infrastructure costs relating to the mixed use development.” Eliot Brown, “Bloomberg’s Budget Doubles Subsidy for Atlantic Yards,” New York Sun, January 30, 2007, p. 3. See Nicholas Confessore, “Atlantic Yards Enters New Phase, and Faces Next Hurdle: Lawsuits,” New York Times, Dec. 22, 2006, p. B9. See the Develop Don’t Destroy Brooklyn website, available at www.dddb.net. Confessore, “Atlantic Yards.” Goldstein v. New York State Urban Development Corp., 921 NE 2d. 164 (N.Y. 2009).

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Centre sports arena, was officially inaugurated in the fall of 2012. The commercial and residential development is still lingering.33 The motives for vetoing contractual land assembly for private forprofit development or redevelopment projects may vary considerably. In some cases, these motives may be benign, at least in the eye of the beholder. Susette Kelo seems sincere in her staunch opposition to leaving her cottage, even after receiving a fat premium from the NLDC. She places an exceptionally high emotional value on her house and thus serves as a vivid illustration of the personhood building theory of private property. Property owners may experience a subjectively genuine insult to their sense of autonomy and liberty resulting from forced turnover, especially when the property is retransferred to a powerful developer.34 Even the opportunity to share directly in the profits of the ambitious Fort Trumbull plan likely would not have overcome Ms. Kelo’s emotional premium. Landowners of agricultural or natural landscape properties may object to new development on ideological or environmental grounds. One fascinating example of an antidevelopment tactic employed for that purpose concerns “green burials.” In 1996, Billy Campbell – an avid environmentalist living in Westminster, South Carolina, a small town in the foothills of the Appalachian Mountains – came up with the idea to use burials to preserve land from future development. He bought thirtythree acres along a creek and offered residents “green burials.” Joining forces with Tyler Cassity, a consultant on HBO’s Six Feet Under and the owner of celebrity cemetery Hollywood Forever, Campbell intends to bring this concept to different states, with the goal to “preserve 1-million acres over the next 30 years.” In August 2004, the partners closed on a thirty-two acre parcel beneath San Francisco’s Golden Gate Bridge. Within a month, some 500 people signed up on the waiting list.35 In other cases, however, objections to land assembly for for-profit redevelopment might be purely financial, the result of strategic holdouts by those attempting to maximize their gains. In these instances, the collective action problem might unfairly reward strategic holdouts with a substantial premium, or cause the plan to fail altogether. Naturally, it 33

34

35

See Erin Durkin, “Businesses Opposed to Bruce Ratner’s Atlantic Yards Project Dragged to Court,” New York Daily News, June 7, 2011, p. 1. See Lee Anne Fennell, “Taking Eminent Domain,” 966–7; Garnett, “Neglected Political Economy,” 109–10. See Leonora LaPeter, “A Final Preservation,” St. Petersburg Times, September 19, 2004, p. 1B.

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may be exceedingly difficult to distinguish a landowner’s opportunistic holdout behavior from regular bargaining. But the main point is that, whether the holdout is sincere or tactical, awarding a sweeping veto to each one of the landowners in the designated development area often prevents innovation, economic growth, and the realization of genuine public preferences. This effect should justify maintaining the possibility of assembling land also through the non-consensual mechanism of eminent domain. At the same time, however, it is necessary to reform the just compensation component, which currently makes land assembly often inefficient and unjust.

III. A.

The proposed mechanism: a special-purpose development corporation Uncoupling taking and just compensation

How, then, does one place the eminent domain circle in the market square? This section proposes a new approach to eminent domain that is based on a corporate finance perspective. To this end, it calls for separating the two phases of eminent domain – namely, taking and just compensation. According to the argument, the taking phase resembles a notional incorporation of a firm. This phase would remain an involuntary non-market transaction. The compensation phase, however, would be market-driven. Implemented through a special-purpose corporation whose securities would be offered to condemnees, this phase will transform landowners’ real interests in land into financial interests in a firm. Market mechanisms will be able to generate a more accurate assessment of compensation for takings and thus greatly diminish the current injustice of the legal “just compensation” regime.

B.

Reconceptualizing taking as incorporation

As discussed in Chapter 5, Ronald Coase observed in “The Nature of the Firm” that business firms are solutions devised to overcome market failures – in particular, when parties fail to reach a contractual agreement because transaction costs are too high. In Coase’s view, firms help solve this market failure by allowing for the allocation of resources by fiat rather than by agreement.36 Following Coase, Oliver Williamson 36

Ronald H. Coase, “The Nature of the Firm” (1937) 4 Economica 386–405 at 388.

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identified opportunism as a major source of transaction costs, defining opportunism as “[s]elf-interest seeking with guile, to include calculated efforts to mislead, deceive, obfuscate, and otherwise confuse.”37 As hierarchical organizations, firms could facilitate asset-specific investment that would not otherwise take place for fear of opportunistic behavior. The common thread running through this strand of economic thought is that the consolidation of assets in a single entity that is subject to hierarchical governance is key to overcoming opportunism. Firms concentrate the assets they need for their operations in separate legal entities, namely, corporations. The corporation serves in turn as a property microcosm, one in which the legal interests of different stakeholders are ordered through an elaborate set of property powers and priorities, including among otherwise distant parties. The justification for takings in economic development projects requiring land assembly lies primarily in the likelihood of market failures due to collective action problems, high transaction costs, and, in particular, opportunistic behavior. Such market failures are not unlike the failures invoked in the economic theory of the firm. Inasmuch as one may feel sympathy for Susette Kelo and the residents facing displacement in the Atlantic Yards project, one can hardly deny that their refusal to surrender their property might also stem from “self-interest seeking with guile.” The exercise of eminent domain powers thus resembles an incorporation by the government of all landowners with a view to bringing all the critical assets under hierarchical governance. The difference between regular incorporation and the notional incorporation (or an actual one under this proposal) in eminent domain cases is that the former is voluntary whereas the latter is not. Establishing a corporation for this purpose and transferring land parcels to it thus would be merely a procedural manifestation of the substantive economic reality that already takes place in eminent domain cases. The proposal is consistent with this view, and, since it parts ways with the current legal regime with regards to just compensation, it may actually draw support from both the conservative and liberal wings.

C.

The special-purpose development corporation

Let us now come to the gist of the proposal: a new mechanism, based on a special-purpose corporation, for implementing just compensation. This 37

Oliver E. Williamson, The Mechanisms of Governance (Oxford University Press, 1996), p. 378.

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subsection presents a skeletal overview of this mechanism, while the following subsection elaborates its features. Under the proposal, a public authority (typically, a municipal agency) exercising its eminent domain powers for an economic development or redevelopment project would incorporate a Special-Purpose Development Corporation (SPDC) for that project. This corporation may be set up as a subsidiary of the municipality’s regular development corporation, to which the municipality will have delegated its eminent domain powers. Next, the municipality or its designated representative would exercise the city’s eminent domain power to take the private properties and then grant certain rights in the land – say, a 99-year ground lease for $1 – to the SPDC. These rights would be the SPDC’s sole material asset. At this point, the proposal calls for a significant departure from the current state of affairs. Landowners whose land has been condemned would have their choice of two forms of compensation: (1) just compensation under current law, which is based on the pre-project fair market value; or (2) securities in the SPDC in proportion to the landowners’ contributions. From a financial point of view, the latter choice would be equivalent to granting each landowner an option to purchase SPDC securities for the equivalent of the legal just compensation amount, while at the same time granting the landowner the sum needed to cover the purchase cost (known as the “strike price”). The SPDC would emerge from this stage with several – possibly numerous – shareholders. Next, the model envisions the SPDC as either auctioning its land rights or else negotiating these land rights with the private developer who initiated the project. In many cases, this developer, through sale or auction, will remain the land rights’ buyer, but the possibility of a bidding war among several private developers would only benefit the SPDC and its shareholders. Next, the SPDC would distribute the net proceeds from the sale as dividends to its shareholders. In the final stage, the SPDC, its role finished, would dissolve.

D.

Restructuring just compensation as a financial option

Having laid out the basic scenario for the working of the SPDC, particular features of this mechanism are now elaborated, touching on several design principles, corporate governance of the SPDC, and considerations from the landowners-turned-shareholders’ perspective.

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1. General design considerations a. Market-based just compensation The first major design consideration for the proposed SPDC mechanism is the goal of setting just compensation in eminent domain cases like Kelo closer to the social welfare optimum. The SPDC will constitute a sole owner of the land necessary for the project, thereby overcoming the anticommons-type market failure. As a sole owner, the SPDC will be in a better position to negotiate at arm’s length and ensure that the ultimate price of the land will better reflect its actual value for the future project without the heavy discount associated with the anticommons problem.38 Furthermore, the SPDC, unlike dispersed landowners, will be able to hold an auction for the land rights. The proposed mechanism will thus harness the market’s powerful price system to generate better signals about the true economic value of the condemned land. Consequently, only (for-profit) development projects that truly increase social welfare will go forward, and thus only such welfareincreasing projects will be initiated in the first place with a plea to public authorities to exercise eminent domain powers. Henceforth, developers will know that they must bid a price not dampened by market failures. At the very least, developers and other potential bidders for the assembled land will know that they should bid a price close to their best assessment of the economic value of this land. Only projects whose value to developers exceeds this threshold would be initiated. The model thus suggests a significant modification to the just compensation component of eminent domain. Under current law, this compensation, notwithstanding the title “fair market value,” bears only a weak relation to market conditions. This proposal links this compensation more closely to the true market value of condemned land. As a result, the aggregate proceeds likely will be greater than the legal compensation under current doctrine. In light of the general view that current law undercompensates landowners, the proposed mechanism will be, by construction, also more just than current legal “just compensation.” 38

Not coincidentally, dispersed shareholders of a public corporation who face a hostile takeover bid may similarly benefit from legal mechanisms that reconstruct the position of a sole owner of the corporation. See, generally, Lucian Arye Bebchuk, “The Sole Owner Standard for Takeover Policy” (1988) 17 Journal of Legal Studies 197 (defending efficiency of sole owner theory and suggesting laws for its implementation and governance).

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b. Piggybacking on existing law The second major design consideration of this proposal is to rely as much as possible on existing legal infrastructure. In particular, the conceptual similarity between taking for land assembly in for-profit projects on the one hand and the concentration of critical resources in business corporations on the other hand, points to the potential of corporate law to provide well-tested tools for facilitating such an enterprise. Highly developed doctrines and rules in corporate and securities law can be utilized to mitigate the problems that currently haunt eminent domain. The most important tool, of course, is the corporation’s separate legal entity, introduced in Chapter 5. For the participants in the enterprise, incorporation engenders a separation between property interests and financial interests. Vesting property interests in the corporation overcomes transaction costs of the sort that Coase and Williamson point out. It allows for interests in the corporation (in this case, shares) to be fungible and transferable; it enables members to enjoy limited liability; and it facilitates putting the amalgamated assets under professional management. However, subjecting the amalgamated property to central management in the firm also engenders the agency problem.39 But as Chapter 5 has shown, corporate law has developed an effective set of means for mitigating this problem, upon which this proposal can piggyback. In order for landowners to actually benefit from the higher value of the entire land, it is not enough that the SPDC negotiate with potential buyers as the land’s sole owner. The land’s higher value when assembled must trickle down to its former owners. In this context, too, the proposed mechanism takes advantage of the existing infrastructure of financial markets. The SPDC shares of landowners who elected to receive them will be transferable. The SPDC likely will be a public corporation whose shares could trade on a stock market. The share price thus should reflect their true economic value as the net present value of future corporate profits. In the setting proposed for the SPDC, this net present value will be determined by the proceeds from selling the land rights minus operation costs, which would be minimized. After SPDC securities are distributed to landowners, but before the sale of the land is effectuated, the price of the securities will reflect the market’s best assessment of the land plot’s value for the planned project and will also reflect all other publicly available information. 39

Michael C. Jensen and William H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure” (1976) 3 Journal of Financial Economics 305– 60 at 309.

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The proposal bears certain similarities to securitization transactions. In such transactions, the owner (called the “originator”) of numerous yielding financial assets – e.g. mortgage-backed loans, credit card accounts, and auto loans – pools them together in a separate legal entity.40 This entity, called a Special Purpose Vehicle (SPV), may be a corporation, a trust, or other entity and is designed to be detached from the originator’s financial risk (referred to as “bankruptcy remoteness”). While similar in principle, these assets nonetheless have idiosyncratic risks. By pooling these assets together in the SPV, the originator is able to generate a stable, and thus more highly valuable, stream of proceeds, against which she can issue securities that represent a fractional interest in the SPV. The SPDC too will pool together idiosyncratic assets and its securities will represent a fractional interest in its future stream of income. Needless to say, in the aftermath of the credit crisis and the ever-present danger of “toxic” mortgage-based securities and the like, the securitization process would have to be closely monitored prior to going public. c. A hybrid regime The proposed mechanism would create a hybrid of regulatory and market-based legal regimes. The government would make the decision about the assembly of land and its use according to its judgment on the socially desirable use of the land. But the government would not impose a price, such that the allocation of land and the compensation for infringing on property rights could be market-driven. As Chapter 3 has shown, there are precedents for such hybrid regimes. For instance, modern environmental protection regulation sometimes features such a hybrid in the form of tradable emission rights. In the first stage, the government exercises its regulatory powers to impose certain performance requirements according to its judgment on the socially acceptable level of pollution. Yet the rights/duties under such a regime – e.g. emission units or “allowances” – are tradable. In the second stage, private market transactions take place. Market forces thus may lead to an optimal allocation of these rights such that social welfare may be maximized.41 40

41

See Steven L. Schwarcz, “The Alchemy of Asset Securitization” (1994) 1 Stanford Journal of Law, Business and Finance 133. See Daniel H. Cole, Pollution and Property: Comparing Ownership Institutions for Environmental Protection (Cambridge University Press, 2002), pp. 45–84; Carol M. Rose, “Common Property, Regulatory Property, and Environmental Protection: Comparing Community-Based Management to Tradable Environmental Allowances,”

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d. Special government allocation and tax aspects The present proposal entails certain advantages from a tax policy perspective. Recall the basic dilemma that is the genesis of the model: Who should enjoy – and to what extent – land value appreciation resulting in large part from the governmental act of consolidating and reorganizing fragmented rights in land?42 The proposal suggests a middle ground between avoiding too harsh an infringement of property rights and recognizing the essential role that the government plays in coordinating the collective action. The latter consideration may justify taxing the landowners for this substantial governmental “giving” in the specific context of land assembly, without implicating the more general question of taxing land use regulatory benefits. Issuing a certain additional amount of shares in the SPDC to the government (beyond shares issued in exchange for government land that would be turned over to the SPDC) may serve as a form of taxing mechanism. Allocating SPDC shares to the government (or to its development corporation) would reward it for its efforts and provide it with an immediate source of capital for funding the upfront public expenditures involved in the development project, including setting up and administering the SPDC. Accordingly, the amount of shares allocated to the government could be based on the legislature’s general evaluation of the overall public costs typically involved in laying the ground (both physically and financially) for redevelopment. As a very general rule of thumb, an allocation at a rate somewhere around five percent of the overall SPDC shares could create the proper incentives for the government, while at the same time properly and justly preserving the financial interests of the landowners-turned-shareholders. Thus, the transition from landownership in the fragmented area to shareholding in the SPDC owning the unified land will result in the initial allocation of shares to four groups of owners: (1) private landowners who wish to join the SPDC; (2) governmental entities for publicly owned lands; (3) governmental entities for the above-mentioned special allocation of shares; and (4) shares acquired by the government through payment of legal fair market value (FMV) to landowners who decide not to opt-in to the SPDC. Figure 6.1 is a hypothetical image of what this initial transition into the SPDC may therefore look like. .

42

in Elinor Ostrom et al. (eds.), The Drama of the Commons (Washington DC: National Academies Press, 2002), p. 233. For the non-linear relationship between land price and parcel size in cases of land assembly, see Peter F. Colwell and Henry J. Munneke, “Land Prices and Land Assembly in CBD” (1999) 18 Journal of Real Estate Finance and Economics 163.

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pre-project landownership

govt. land private land

eminent domain + SPDC incorporation

SPDC shareholding special govt. allocation govt. shares for public land govt. shares for land taken against FMV shares to private landowners

Figure 6.1

Turning landowners into shareholders

2. Corporate governance This subsection discusses the optimal corporate governance for the SPDC. Thus far, it has been assumed that the SPDC would be a regular corporation that would take advantage of the standard corporate form. However, the disadvantages of the standard corporate form’s flexibility call for adopting a more restricted form that is inspired by a structured finance approach. As Chapter 5 demonstrated, the fundamental premise of corporate law is that companies should be allowed, if not encouraged, to take up every risky project that their managements believe in good faith would be profitable, subject to certain mandatory rules that are instated to guard against abuse of power or inadequate dilution of the legal interests

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of various stakeholders. This broad and flexible objective may be inconsistent with the objective of condemnees, who seek to maximize the consideration for their taken land. To ensure condemnees’ participation in SPDCs, the latter must thus have a single, well-defined objective – namely, to sell the land tract for the highest price within a certain time. After this sale, they should distribute all proceeds as dividends and be wound up. While it might be possible to ground this objective in current corporate law,43 a more straightforward way would be to set this single objective and limited life span in the certificate of incorporation. The proposed finance structure approach to the SPDC is such that it will be designed from the outset as similarly as possible to an SPV in a securitization transaction. Consisting mostly of detailed documents, an SPV is run essentially from the outside by an unrelated trustee, administrator, or the like. To ensure bankruptcy remoteness, the documents establishing the SPV provide for full ownership in the assets transferred to it from the originating company (referred to as a “true sale”), a single purpose (to use all proceeds for servicing the SPV’s bonds), independence of directors from the originating company, and voting rights entrusted to a third party (to prevent changing the directors). An SPV might also have a limited life span in order to match the timing of its incoming proceeds with that of its obligations. The upshot is that SPVs take advantage of the corporate form’s separate legal entity status, but beyond this feature they are designed more as automata than as regular business firms. An SPV-like SPDC need not have much more business activity than regular SPVs have. Following the transfer of rights in land to the SPDC, its administrators could auction these rights. Or, bidding for land rights may take the form of a tender offer for the SPDC shares. Should there be only one bidder – most likely, the developer who initiated the project – the outside directors would nominate a committee to negotiate with her. There is reason to believe that these negotiations will be reasonably beneficial to SPDC shareholders because the administrators could be special service companies who will want to build up a reputation for running SPDCs efficiently and profitably, as they do with SPVs.

43

Under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A 2d 173 at 184 (Del. 1985), when the board determines that the company faces an inevitable change of control, directors have a duty to obtain the best price reasonably available for the shareholders, including by auctioning the company off. By analogy, directors of the SPDC, which has a limited life span, will have a similar duty.

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Thanks to their own stake in the SPDC’s capital, local governments, too, will have a direct financial interest in maximizing the sale price. Over time, localities might even compete for a reputation of getting their constituents high values for their rundown properties. In any event, the fact that the SPDC in this configuration will not have an actual management represents an advantage. The doctrines of corporate law notwithstanding, insiders (both managers and dominant shareholders) in corporations regularly have substantial leeway to benefit themselves in different ways as long as they follow proper procedures. Finally, for an SPV-like SPDC, winding up the company subsequent to consummating the sale and dividend distribution would be equally straightforward.

3. Landowners-turned-shareholders’ perspective Suppose a jurisdiction adopted the present proposal. From the standpoint of condemnees contemplating whether to forgo the legal compensation for SPDC shares, God is in the details: how many shares will they get; what will they do with no money and no property (especially when such property is their residence), etc.? This subsection addresses these concerns. a. The key for internal share allocation Two conceptual criteria may be used for designing the key for internal share allocation in the SPDC to former landowners: the physical area of condemned land (the “physical criterion”) and the value of condemned land (the “ad valorem criterion”). Such a key could be based solely on one criterion or on some combination of the two. According to the physical criterion, condemnees will receive SPDC shares in proportion to the ratio between their land and the total amount of land condemned for the project. In this scenario, Susette Kelo, together with ten other landowners of Parcel 4A in the Fort Trumbull Project, might have received 2.67 percent of the SPDC issued stocks for their 2.4 acre share in the ninety-acre project. According to the ad valorem criterion, condemnees will receive SPDC shares in proportion to the ratio between the pre-project economic value of their land and the total value of the entire plot for the project. Susette Kelo might have received stocks based on the $123,000 value of her contribution to the SPDC capital, if the pre-project value were to be used. The physical criterion’s main advantages are its simplicity and clarity. Using this criterion alone to calculate the amount of shares to be issued is a straightforward task. All that is needed is an objective measurement of the area of condemned land. This information is usually available well in advance, and disputes about it can be resolved quickly and inexpensively

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by hiring a surveyor. Using this criterion as a sole key can be justified further on substantive grounds. In a typical for-profit (re)development project, all pre-existing buildings and other fixtures are razed. Consequently, all that an individual condemnee contributes (unwillingly) to the project is her most basic ownership rights in land. The choice to receive SPDC shares thus may be seen as a decision to invest in the SPDC by contributing capital in kind. People who contribute more land would receive proportionately more shares and vice versa. The problem with the physical criterion is that it considers only the condemnee’s contribution but ignores her loss. In particular, this criterion ignores potentially large differences in the value of condemned parcels in light of their pre-project nature and use. Using this criterion alone therefore may undermine the goal of giving condemnees a more just compensation. While it may be possible to augment the amount of shares issued by taking into account the pre-project properties of the condemned land, such a step would deprive the physical criterion of its simplicity advantage. The advantages and disadvantages of the physical criterion key are transposed in the ad valorem key. As it is often based on an assessment of economic value in the absence of a directly comparable arm’s length transaction, the use of the ad valorem criterion is highly discretionary and therefore much more likely to be disputed. Should disputes of this kind be too numerous, the actual shareholding structure of the SPDC might remain uncertain for a long time. This is undesirable because such uncertainty likely will harm the SPDC’s market value. Separately, adopting the ad valorem criterion entails making another policy choice – namely, whether the parcel’s pre- or post-project value should be used as the basis for calculation. All things considered, the key for share allocation in the SPDC should be based on the pre-project ad valorem criterion. As noted, using the pre-project ad valorem criterion will avoid the injustice entailed by disregarding the condemnee’s loss. Since the goal of the proposal is also to increase the justice of eminent domain, one would not wish to avoid this criterion merely for reasons of administrative convenience. Using the pre-project value of the condemned land will create a seamless interface between the proposed mechanism and existing eminent domain law and practice. That is, the election decision condemnees will face will have a single economic denominator: Either they receive monetary compensation according to the pre-project value under current doctrine or they receive SPDC shares in proportion to a capital contribution of the same amount. This election is economically equivalent to a rights offering. Condemnees would receive an option to exchange their legal just compensation for SPDC shares.

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b. A public offering The SPDC mechanism’s extensive reliance on existing legal mechanisms begins with the offer to participate in this enterprise. Under established rules concerning public offerings of securities in US law, the offer to condemnees to choose between legally mandated just compensation and SPDC shares would be deemed a public offering that requires filing a registration statement under the Securities Act.44 This is because the group of offerees typically will consist of scores, if not hundreds, of landowners,45 and, in virtually all cases, these offerees will not have all the material information necessary to evaluate the securities.46 The financial scope of typical redevelopment projects – both in terms of total value and the value of particular condemned parcels – together with the lower- or middle-class status of many condemnees, indicates that an exemption under Regulation D will not be available.47 Depending on the circumstances, however, some offerings might come under the umbrella of purely intrastate offerings.48 The upshot, that SPDC shares offerings should be accompanied by filing a registration statement with the SEC, seems beneficial. Granted, this regulatory requirement will increase the transaction costs of the 44 45

46

47

48

Section 5 of the Securities Act of 1933, 15 USC § 77e (2000). Section 4(2) of the Securities Act of 1933, 15 USC § 77d(2) provides that the registration requirements in Section 5 of the Act shall not apply to transactions by an issuer not involving any public offering. Courts have sidestepped the question of what is the numerical threshold beyond which a group of offerees should be deemed “public,” leading the Securities and Exchange Commission (SEC) to promulgate a safe harbor, bright-line rule in Rule 505 of Regulation D under the Securities Act, 17 CFR § 230.505 (2007). The exemption under Rule 505 applies to offers and sales to no more than thirtyfive purchasers (rather than offerees), thus suggesting a yardstick for the definition of “public.” The exemption under Rule 505 is contingent on additional conditions, however. See SEC v. Ralston Purina Co., 346 US 119, at125 (1953) (“[T]he applicability of [§ 4(2)] should turn on whether the particular class of persons affected need the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction not involving any public offering”); Doran v. Petroleum Management Corp., 545 F 2d 893, 900 (5th Cir. 1977) (citing Ralston). To enjoy the § 4(2) exemption, one must show that “all offerees were actually furnished the information a registration statement would have provided.” Ibid. at 904. To be excluded from those investors counting towards the thirty-five person maximum, one must satisfy certain – largely financial – requirements to qualify as an “accredited investor” under Rule 501(a) of Regulation D. The exemption under Rule 147 requires that all offerees and purchasers be residents of the state in which the issuer is a resident and doing business: 17 CFR § 230.147. Rule 147 was enacted under Section 3(a)(11) of the Securities Act of 1933, 15 USC § 77c(a)(11). While the latter condition likely will hold for the SPDC, some landowners may be outof-state residents.

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SPDC mechanism – both directly, through legal and other incidental expenses, and indirectly, due to greater exposure to liability. However, an SEC filing (or a filing with state securities regulators) will furnish market professionals with the information necessary to evaluate the project and the SPDC shares. This will benefit landowners in several ways. First, landowners will be able to make informed decisions on whether to waive their legal compensation in favor of receiving SPDC shares. Second, the availability of information will facilitate the development of a market for SPDC shares – at the very least, an over-the-counter “pink sheets” market – which will increase the liquidity of these shares and, hence, their value.49 The basic principle, that offerees of securities deserve protection through full disclosure, will protect landowners from excessive takings and will facilitate trading in their SPDC securities. c. Financing One of the major advantages of the present proposal is that it does not impose an excessive financial burden on condemnees who wish to exercise their option to purchase SPDC shares. To appreciate this point, consider proposals made in the somewhat similar context of reorganization in bankruptcy under Chapter 11 of the US Bankruptcy Code.50 The basic problem in large-scale reorganizations51 is that although the firm’s (liquid) assets do not suffice to satisfy senior creditors’ claims, junior creditors and even equity-holders demand, and receive, claims against the reorganized firm, ostensibly in contrast to the absolute priority rule. A large literature, which is beyond the present chapter’s scope, debates the optimal mechanisms for corporate reorganizations. At bottom, the conflict among different classes of claimants arises from disagreement over the value of the reorganized firm – a 49

50 51

It may be desirable to promulgate special regulations on such offers with certain exemptions from full-fledged prospectuses. Intended to allow non-public corporations to implement employee stock ownership plans (ESOPs), Rule 701 under the Act, 17 CFR § 230.701, exempts from registration the offering and selling of securities to employees and consultants under compensatory benefit plans. This exemption is limited, however, to issuances over a twelve-month period of no more than $1 million, 15% of the issuer’s total assets, or 15% of the outstanding amount of the securities being offered – whichever is greatest. This ceiling ensures that Rule 701 issuances are not used for raising capital from employees. This rationale does not hold in the case of SPDCs. 11 USC §§ 1101–1174 (2000). See generally, Douglas G. Baird and Edward R. Morrison, “Serial Entrepreneurs and Small Business Bankruptcies” (2005) 105 Columbia Law Review 2310 (finding that largescale reorganizations are the exception; the vast majority of Chapter 11 cases deal with small business entrepreneurs trying to extend the lives of their businesses).

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conflict that is partly genuine, due to unavoidable uncertainty, and partly calculated, stemming from strategic behavior.52 To overcome this conflict, Lucian Bebchuk proposed an option-based scheme, under which the most junior claimants would be given an option to buy out the claims superior to theirs at a price named by the superior claimants.53 Philippe Aghion et al. commended this proposal as “ingenious,” yet pointed out that junior claimants who want to exercise their options will face liquidity constraints because they will have to raise the funds for buying out the senior claims.54 As a way around this problem Oliver Hart et al. suggested creating a market where such options could be traded.55 The SPDC mechanism resembles Bebchuk’s options approach in several respects. In both contexts there are uncertainty and conflict over the value of the entire mass of assets. Both proposals give parties an option to buy into a project based on their own evaluations of it. Further, both proposals rely on the market to price these options and thus provide reliable signals about the profitability of the options. Finally, as in Bebchuk’s proposal, even if the return on the SPDC shares (through dividends and/or market appreciation) turned out to be lower than the legal just compensation, landownersturned-shareholders will not have a basis for complaint because they voluntarily chose this form of compensation. The SPDC mechanism has an advantage over Bebchuk’s options system, however, as it does not feature the liquidity constraints that the latter entails. 52

53

54

55

See, e.g., Douglas G. Baird and Donald S. Bernstein, “Absolute Priority, Valuation Uncertainty, and the Reorganization Bargain” (2006) 115 Yale Law Journal 1930–70 at 1935 (arguing that uncertainties in valuation of reorganized corporations drive bargaining between creditor classes). This proposal arguably forces junior claimants to “put their money where their mouths are,” since a junior claimant could buy out all the claims superior to hers, on the assumption that the reorganized firm would be worth more than all these claims (on a pro rata basis). A junior claimant who did not exercise this option could not complain that she was short-changed. See Lucian Arye Bebchuk, “A New Approach to Corporate Reorganizations” (1988) 101 Harvard Law Review 775–804 at 793–4 (describing how option-based scheme would avoid both strategic and genuine disagreements over value); Lucian Arye Bebchuk, “Using Options to Divide Value in Corporate Bankruptcy” (2000) 44 European Economic Review 829–43 at 833–8 (presenting a formal version of optionbased approach). Philippe Aghion et al., “The Economics of Bankruptcy Reform” (1992) 8 Journal of Law, Economics and Organization 523. See Oliver Hart et al., “A New Bankruptcy Procedure that Uses Multiple Auctions” (1997) 41 European Economic Review 461–73 at 471–2 (describing how public auctions would allow liquidity-constrained creditors to benefit from their options).

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The option under the proposal is not to buy out other claimants, for which new funds may be needed, but rather, to choose shares instead of legal compensation. The financial source for purchasing SPDC shares will be found in the waiver of the legal compensation. Moreover, as active trading in SPDC shares may emerge, condemnees who will need to find an alternative residence or business on an expedited basis will be able to use their shares as collateral or sell some shares while keeping the rest, should they believe that their value will appreciate. The SPDC model opens a promising new route for creating the right incentives for private developers and public authorities to exercise eminent domain power only in development projects that are truly welfare enhancing. While this mechanism does not purport to ensure that all parties involved will always be completely satisfied, given also the coercive nature of the land assembly through eminent domain, it does offer a significant improvement on the issue of fairness and justice toward simple-rank landowners. But more broadly, the corporate structure – which largely solves the anticommons dilemma by denying each landowner the effective right of veto while providing her with sophisticated defenses against majority abuse – has considerable potential to solve a host of collective action problems associated with land use and development. For instance, one may think of a scenario in which neighboring landowners find themselves trapped in a deadlock over a smaller-scale self-initiative for joint improvement or redevelopment of their properties – one in which the government is not initially involved. In such a case, it is possible to conceive of a mechanism in which the neighbors could hold an internal vote and, if a certain special majority threshold passed, they would be able to turn to the local government and request that it carry on a process which would follow, mutatis mutandis, the principles of coordinated land assembly and the creation of an SPDC. Such a special majority vote would support the presumption of a “public use” which justifies governmental intervention. The corporate and securities law mechanisms elaborated in Section III would be instrumental in preventing the exploitation of such a possible mechanism as a mere pretext for majority abuse or for a forced cheap group buy-out of a disenfranchised minority landowner. In these and other ways, the business corporation, serving as a key protagonist of property, could be utilized to solve long-standing property problems.

PART IV The global challenges of property

7 Can land law go global?

I. How land crosses borders In May 2011, The Economist portrayed a recent land deal struck in Africa. In exchange for promises of 2,000 jobs and the preservation of swampland where rice was grown, the farmers of Makeni, in central Sierra Leone, reportedly signing the contract with their thumbs, granted a fifty-year lease on 40,000 hectares of land to a Swiss company to grow biofuels for Europe. Three years after the 2008 agreement, only fifty new jobs were created, the swampland is severely damaged, and the local community apparently does not otherwise enjoy any social or economic benefits from the new development.1 This is but one example of what is often depicted as a recent global wave of “land grabbing.” These large-scale transnational land transactions feature private and public investors from wealthy countries who turn to developing countries rich in arable lands to extract biofuels and other alternative sources of energy production, food crops, mineral deposits, and other reservoirs of environmental products.2 Moreover, in the aftermath of the 2007–8 boom in food prices, these wealthy import-dependent countries have become especially keen on purchasing huge amounts of land, not only for current production, but also to prepare themselves for the next wave of resource and food crises, and simply as a clever investment. Statistics are hard to compile because most of these deals are kept secret, especially since such deals are often suspected of corruption – investors have been particularly attracted to countries with weak governance, poor record of formally recognizing rural or tribal land tenure, and lack of accountability and public access to 1 2

“When Others are Grabbing Their Land,” The Economist, May 5, 2011 (online edition). Saturino M. Borras Jr. et al., “Towards a Better Understanding of Global Land Grabbing: An Editorial Introduction” (2011) 38 Journal of Peasant Studies 209.

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information.3 According to recent estimates, roughly 20 million hectares have changed hands through such deals between 2005 and 2009.4 The World Bank reported in 2011 that within less than a year, foreign investors have expressed interest in around 56 million hectares globally, over half of it (29 million hectares) in Sub-Saharan Africa.5 One such failed transaction in 2009 led to the overthrow of the government in Madagascar, after it had approved a long-term lease of 1.3 million hectares to the South Korean Daewoo Logistics Corporation for the production of maize and oil palm.6 But in other instances, host governments have been able to carry through such mass-scale agreements with foreign investors. In most cases, unlike the Makeni example, local communities are deliberately left out of the deal.7 Probably not surprisingly, these megadeals have been slanted as a form of neo-colonialism. To the extent that such terminology is indeed a fair depiction of such cross-border transactions, the identity and agenda of the alleged colonialists of the twenty-first century is very different from their predecessors. China is, by far, the country most extensively engaged in these land deals as well as in a series of major infrastructure projects, especially in Africa and Latin America.8 Other Far East leading economies as well as wealthy Arab countries have also played a key role in acquiring huge tracts of land.9 In a visit to Africa in June 2011, US Secretary of State Hillary Clinton warned Africa against Chinese “new colonialism” in the continent.10 Recent reports attest to 3

4 5 6

7

8

9 10

World Bank, “Rising Global Interest in Farmland: Can It Yield Sustainable and Equitable Benefits?” (2011), pp. xxxi–xxxiv, available at http://siteresources.worldbank.org/INTARD/Resources/ESW_Sept7_final_final.pdf. Borras et al., “Global Land Grabbing,” 209. World Bank, “Rising Global Interest,” p. xxxii. See Joachim von Braun and Ruth Meinzen-Dick, “‘Land Grabbing’ by Foreign Investors in Developing Countries: Risks and Opportunities,” International Food Policy Research Institute (IFPRI) Policy Brief 13 (2009), available at www.ifpri.org/sites/default/files/ publications/bp013all.pdf. Borras et al., “Global Land Grabbing,” 210. For a recent exceptional case, see “Rio Tinto Agrees $2Bn Land Deal with Aboriginals,” BBC News Business, June 3, 2011 (reporting a deal in Western Australia, in which the world’s second-biggest miner of iron ore signed a deal to pay the local communities almost $2 billion in exchange for access to 7,000 hectares rich with iron ore and other minerals). The Economist, “Others are Grabbing” (reporting that ‘China is by far the largest investor, buying or leasing twice as much as anyone else’). China is Africa’s biggest trading partner and buys more than one-third of its oil products from the continent. See “Trying to Pull Together,” The Economist, April 20, 2011 (online edition). Von Braun and Meinzen-Dick, “Land Grabbing,” p. 1. “Clinton Warns Against ‘New Colonialism’ in Africa,” Reuters, June 11, 2011.

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growing uneasiness of host governments with Chinese investments, work practices, and dominance in trade and infrastructure projects, including in Brazil – itself one of the “southern” countries that increasingly invest in land and natural resources overseas.11 Some writers argue that the dangers of these land deals go beyond corruption or inequality of bargaining power. Even if host governments would exercise “good governance” principles such as apt regulation, environmental sustainability, transparency, and formalization of local groups’ rights to lands, large-scale cross-border land deals could arguably still result in denying the empowerment of local farming communities through owngovernance of access to land and water, increased vulnerability to price shocks within these domestic markets, and a more general risk resulting from encouraging the commodification of land.12 It remains to be seen whether the phenomenon of cross-border mega land deals would indeed prove to be negative, or if it would also deliver on some of the promised benefits of such investments, such as supporting social infrastructure, generating employment, providing access to markets and technology to local producers, or generating higher domestic tax revenues.13 But while the future trajectory of this specific type of megadeal remains uncertain, it is already clear that the broader phenomenon of cross-border investment and ownership in land is rapidly growing, perhaps turning land into a new kind of global commodity. Foreign investment in real estate is booming,14 with traffic going not only from west to east or north to south, but also the other way around.15 At the 11

12

13 14

15

Alexei Barrionuevo, “China’s Farming Pursuits Make Brazil Uneasy,” New York Times, May 27, 2011, p. A1. See Olivier De Schutter, “How Not to Think of Land Grabbing: Three Critiques of LargeScale Investments in Farmland” (2011) 38 Journal of Peasant Studies 249. World Bank, “Rising Global Interest,” p. xxxiii. See, e.g., “FDI in Chinese Real Estate Soared,” China Chemical Reporter, July 6, 2007, p. 4; Liu Jinping, “Chinese Realty Market Needs Fortification,” China Today, October 2007, p. 11; Jason Bush, “Ukraine: What Crisis?,” Business Week, September 3, 2007, p. 50; Andrew Morse, “Tokyo Property Lures Goldman,” Wall Street Journal, August 27, 2007, p. A4; Roben Farzad and Christina Lindblad, “Extreme Investing: Inside Colombia,” Business Week, May 28, 2007, p. 50; Jason Bush, “The Russian Towers Are Coming,” Business Week, October 9, 2006, p. 60. See Steven Weisman, “A Fear of Foreign Investments,” New York Times, August 21, 2007, p. C1 (describing growing fears in the United States over multi-billion dollar foreign investments in bonds, stocks, and real estate coming from sovereign wealth funds in China, Russia, and Persian Gulf countries, and quoting American officials’ concerns that these funds are politically involved and have non-transparent investment policies).

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same time, it is also clear that such transnational economic trends must be accompanied by institutional and legal support. The question that thus follows is whether the law of property in land can also “go global.” I argue in this chapter that the road to globalization of land law is extremely challenging and probably unattainable, at least until broader geopolitical changes would take place. The chapter discusses the inherent tension between economic forces constantly pushing for international investment in real estate and the legal norms that currently apply to property rights in land in such cross-border settings. This analysis, which builds on the structural and institutional analysis of property set forth in earlier chapters of the book, will also set the stage for a broader analysis in Chapter 8 of the global challenges of property for the entire spectrum of resources.

II. Land law as a national construct Consider first the conventional concept of land law, one that continues to dominate the theoretical discourse as well as popular perceptions about it. As I demonstrate by referring to land regimes from different eras and geographical places, this social, political, and legal concept establishes land law as a national construct. This is true even though, throughout the course of history, local land systems have also often been shaped in some measure by external influences and principles. The control of land and the socio-political construction of communities and nations have traditionally gone hand in hand. For many centuries, land was considered not only the most essential source of independent economic livelihood, but moreover, a chief indicator of a person’s social and political status.16 More broadly, the way in which different societies shaped the allocation, control, and enforcement of land entitlements was tightly intertwined with their political, religious, social, and economic structure. Probably one of the most vivid illustrations of this interconnectivity is the evolution of the land tenure system in England. As Pollock and Maitland suggest in their History of English Law: “[I]n so far as feudalism is mere property law, England is of all countries the most perfectly feudalized.”17 16

17

See Carol M. Rose, “Property as the Keystone Right?” (1996) 71 Notre Dame Law Review 329–70 at 345–7. Frederick Pollock and Frederic William Maitland, The History of English Law Before the Time of Edward I, 2nd edn., 2 vols. (Cambridge University Press, 1899), vol. I, p. 235.

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Indeed, one cannot truly understand the way land law has evolved in England since the Norman Conquest without coming to terms with the socio-political developments in the country from that time onwards.18 The system of land tenure played a constitutive role in the reorganization of English society following King William’s rise to power. Societal standing was formally defined in terms of relationship to land, such that each person was explicitly made subservient to another – his landlord – and all were subservient to the king, from whom all titles in land originated. Subsequently, further socio-political changes in England directly affected the land tenure regime, and vice versa. The system, which started out as a genuinely interpersonal web of direct services and duties, gradually developed into one of sheer monetary rents received by lords from their subtenants and, respectively, of a more permanent and inheritable system of land entitlements. Interestingly, the 1290 Statute Quia Emptores – originally aimed at prohibiting further subinfeudation, which had been abused by lords to avoid feudal incidents to those above them – actually marked the end of the original regime. As a price for prohibiting subinfeudation, the greater lords had to allow free tenants to substitute a new tenant for all or part of their land without their consent. This gradually made land entitlements not only inheritable but also freely alienable. Eventually, this caused the disappearance of the intermediary lords, with most land coming directly from the Crown in return for revenues. This process both reflected and exacerbated the centralization of political power, the shifting focus from the family to the individual as the subject of law, and the constant expansion of the market economy.19 Contemporary manifestations of the direct linkage between the prevailing political, ideological, social, and economic conditions of a certain country and the legal land system are abundant. One may consider, for example, the way in which land tenure systems were transformed in East European and Central Asian countries after the collapse of the Soviet Union in 1990–1.20 Whereas all of these countries generally moved away from centralized socialist regimes to adopt some form of market economy, they nevertheless substantially diverge in their underlying 18

19

20

See Theodore F. T. Plucknett, A Concise History of the Common Law, 5th edn. (Boston: Little, Brown, 1956), pp. 506–623. Jesse Dukeminier et al., Property, 5th edn. (New York: Aspen Law & Business, 2002), pp. 198–209. See, generally, Zvi Lerman et al., Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries (Lanham: Lexington Books, 2004).

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ideological, political, social, and cultural environments. Consequently, these countries vary in their approach towards one of the chief determinants of societal restructuring: ownership and control of land. For example, the fifteen former Soviet republics had to decide how, if at all, to depart from the totalitarian principle by which the state recognized only a single form of land ownership – state ownership. Whereas most of these countries, including Russia and Ukraine, gradually recognized and validated private ownership, a few countries followed a different path, reflecting their distinctive ideological stance. Tajikistan and Uzbekistan retain full state ownership of lands in their new state constitutions. Belarus restricts private ownership to household plots of up to one hectare. Kazakhstan also originally limited private ownership to household plots, but is currently in the midst of change toward fuller privatization under its 2003 land code. Turkmenistan, on its part, recognizes private ownership but severely limits the rights of landowners to sell, exchange, or give land away as a gift – so that the owner’s set of rights is in effect quite similar to that of state tenants in the few republics that remain loyal to centralized land ownership.21 South Africa presents another prominent instance of a land regime change as a result of national restructuring. In pledging to correct the wrongs of apartheid and to create a more just and egalitarian society, South Africa has focused much attention on planning for comprehensive land reform.22 The provisional 1993 Constitution and even more so the later 1996 Constitution, alongside legislative acts and government policies, embrace particularly strong, affirmative commitments to land reform. These include not only restitution of lands, but also other measures such as transformation of the land tenure system, planned mass-scale expropriation of privately owned lands for the purpose of equitable, wide-scale redistribution, and an explicit constitutional right to have “access to adequate housing.” Section 25 of the 1996 Constitution forbids the deprivation of property “except in terms of law of general application,” “for a public purpose or in the public interest,” and “subject to compensation.” At the same time, the section states that “the public interest includes the nation’s 21

22

Zvi Lerman, “Changes in Land Tenure in the Post-Soviet Space” (2007) (on file with author), pp. 3–9. See A. J. van der Walt, “Reconciling the State’s Duties to Promote Land Reform and to Pay ‘Just and Equitable’ Compensation for Expropriation” (2006) 123 South African Law Journal 23.

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commitment to land reform, and to reforms to bring about equitable access to all South Africa’s natural resources.” Moreover, the compensation paragraph creates a multi-factor test, in which the market value is but one component, aimed at achieving “an equitable balance between the public interest and the interests of those affected.”23 While courts have only recently started to systematically deal with compensation disputes on expropriation for land reform, there is already a heated, wide-scale political and scholarly debate about the desirable extent of using expropriation for land reform, the proper compensation to be paid, and the adequateness of comparatively referring to foreign property clauses in designing South African land law.24 The strong bonds between land control, social structure, and political sovereignty were never confined, however, to strict and steady national borders. In a plethora of cases throughout history, the complexity and multilayered nature of land law reflected the numerous variations and incidents of geopolitical processes such as the evolution of nation-states out of tribal- or ethnic-based communities, imperialism, colonialism, and other types of conquests or cross-border migration of peoples, religions, and ideologies.25 Whereas such phenomena have had enormous, highly complicated influences in all areas of legal ordering, land law has often been the object of particular attention for all parties involved because of its close affinity to political power and collective or national identity. A prominent example in western history is the evolution of private Roman law during the centuries-old life of the Roman Empire. The ius civile was the body of law originally designated for the citizens of the city of Rome and extended to foreigners who were endowed with commercium (i.e. the right to participate in the processes and transactions of the ius civile).26 However, the constant expansion of the empire and the increased intercourse with aliens led to the gradual development of the ius gentium, which was considered to be of universal applicability.27 23 24

25

26

27

Constitution of the Republic of South Africa No. 108 of 1996 (as amended), § 25. Compare Jill Zimmerman, “Property on the Line: Is an Expropriation-Centered Land Reform Constitutionally Permissible?” (2005) 122 South African Law Journal 378, with van der Walt, “Reconciling.” See, e.g., Banner, “Transitions,” S365–7 (describing the design of land regimes in British colonies in Australia, New Zealand, and Fiji). Andrew Borkowski and Paul du Plessis, Textbook on Roman Law, 3rd edn. (Oxford University Press, 2005), p. 158. See W. W. Buckland, A Manual of Roman Private Law, 2nd edn. (Holmes Beach: Gaunt, 1994), pp. 28–9.

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The formal jurisprudential differences between the two systems of property law and land law in particular were significant and, even when less drastic in practical terms, reflected the basic distinction along this fundamental political dimension.28 Thus, the highest and ultimate form of ownership, dominium, was formally restricted to the ius civile, although the lesser peregrine ownership typical of the ius gentium came to be protected in time by some modified version of vindicatio (the standard proprietary remedy securing ownership right). This is not to say, of course, that such distinctions were clear-cut along the cunning history of the empire. Besides the inevitable divergence that had always practically existed between remote parts of the empire, even under the guise of a “universal” ius gentium, Roman law came to be increasingly influenced by external sources, such as ecclesiastical law, eastern (especially Greek) influences, and barbarian codes, corresponding to the intensification of the respective processes of the conversion to Christianity, the east–west division of the empire, and the fifth-century collapse of the Western Empire, whose territories came to be ruled by the various barbarian kings. But this is exactly the point made: the political control of land and its legal ordering have always been closely intertwined. The analysis so far should not be understood to mean that the design of land law in a particular territory is always an expression of sovereignty as legal idiosyncrasy or that “legal transplants” may only be the result of a forcible execution of foreign supremacy. Throughout history, crossborder influences on the design of land regimes have also been the product of voluntarily received intellectual and jurisprudential external influences. The influence of Roman law reached its peak in Western Europe well after the collapse of the Roman Western Empire.29 Justinian’s Corpus Juris Civilis, written in the sixth century, was revived and gained unprecedented respect starting in the late eleventh century, when it was taught in the first modern European university in Bologna by a group of scholars known as the Glossators and the Commentators. Jurists who studied at Bologna brought the Corpus Juris Civilis to their emerging nation-states. Thus, Roman law gained the status of the ius commune of

28 29

Borkowski and du Plessis, Roman Law, pp. 101–11. John Henry Merryman and Rogelio Perez-Perdomo, The Civil Law Tradition, 2nd edn. (Stanford University Press, 2007), pp. 7–11.

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Europe during the rise of the nation-states, and later substantially influenced the great codifications of the nineteenth century. The immigration of English land law to the American colonies and later the United States obviously cannot be told here, even in the briefest fashion.30 Yet it can be stated with confidence that the way in which English land law was transplanted, implemented, and then gradually transformed was clearly tied not only to the distinctive economic, geographical, and technological characteristics of America,31 but also to political and cultural processes and ideologies. Thus, for example, the legal principles of fee tail and primogeniture were viewed by Thomas Jefferson as wrongfully perpetuating a hereditary aristocracy. As a result, around the time of the American Revolution, Virginia abolished both mechanisms. Many other legislatures embraced this reform in the following years.32 Finally, recall the 2007 Property Rights Law of the People’s Republic of China, presented in Chapter 1. The statute was explicitly influenced in its drafting by codes of civil law countries, most prominently Germany and Japan. But the adoption of “western” structural concepts, such as the numerus clausus principle or the creation of a unified conclusive land registry system, did not dictate particular substantive outcomes. Article 4 of the statute provides protection not only to private property, but also to state and collective property with the clear purpose of maintaining a division of labor between these categories of ownership so as to implement “the socialist market economy, ensuring equal legal status and right for development of all market players,” and more specifically, preserving the dominant role of government control and public property in Chinese society. To summarize, land law is traditionally closely intertwined as both cause and effect with national identity, societal values, and sovereignty. Whereas sovereign, and especially newly independent countries, have never been isolated from external influences and principles, they have adopted ideas for their domestic land laws through the unique prism of 30

31

32

See Lawrence Friedman, A History of American Law, 3rd edn. (New York: Simon & Schuster, 2005), pp. 24–9, 167–79, 309–16. See, e.g., Uriel Reichman, “Toward a Unified Concept of Servitudes” (1982) 55 Southern California Law Review 1177–260 at 1189–90 (explaining the development of new types of servitudes in America both by the reduced fear of impeding assignability in a country that had vast resources of uncultivated land and by the existence of an efficient recording system in the United States from early on). Dukeminier et al., Property, p. 218.

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local values, ideologies, and other territorial, social, and economic factors typical of national constructs.

III.

The growing effects of extra-national systems

Even the most local type of resource, land, and respectively, the law of the land, do not remain indifferent to significant cross-border processes and trends. Traditional legal concepts are being exceedingly challenged by recent geopolitical, economic, and intellectual factors that no longer allow land laws to exist in isolation, but present pressing issues of strong cross-influences, regionalism, and universalism, ones that also impact the legal ordering of property rights. I focus on three major types of developments that have already proven significant in reshaping legal institutions and concepts, and are expected to do so increasingly in the coming years: (1) supranational conventions and institutions; (2) bilateral investment treaties and other cross-border financial instruments; and (3) sub-society rights that enjoy growing acceptance around the world and further undermine the unity and exclusivity of national land law systems.

A.

Supranational conventions and institutions

International conventions and institutions are by no means a novelty, even in the field of property law. Probably most notably, ever since the 1883 Paris Convention for the Protection of Industrial Property, and the 1886 Berne Convention for the Protection of Literary and Artistic Works,33 the world of intellectual property has been constantly engaged in matters of cross-boundary institutions, norms, and procedures. Such regimes of cross-national institutions and norms protecting property rights have, however, traditionally skipped land – and not due to sheer neglect. A 1980 study of restrictions on the acquisition of land by aliens found such measures to exist in many countries, including 33

See, respectively, Paris Convention for the Protection of Industrial Property, Paris, March 20, 1883, 25 Stat. 1372, 1 Bevans 80 (see text, as amended, at www.wipo.int/ treaties/en/ip/paris/trtdocs_wo020.html); Convention between Belgium, France, Germany, Great Britain, Haiti, Italy, (Liberia), Spain, Switzerland and Tunisia for the Creation of an International Union for the Protection of Literary and Artistic Works, Berne, September 9, 1886, 168 Consolidated T.S. 185, as amended July 24, 1971 (Paris), 25 UST 1341, 828 UNTS 221 (see text, as amended, at www.wipo.int/treaties/en/ip/ berne/trtdocs_wo001.html).

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in highly industrialized, democratic nations, as well as in developing countries.34 Alongside economic and social reasons – e.g. fear of rising prices, instability, decline of agriculture, or exhaustion of land supply for public needs – security, national, and ethnic grounds for prohibiting foreign land ownership were explicit and prevalent. Such measures have enjoyed legal backing not only by domestic courts, but also by international laws. The world has since changed. Multilateral conventions and institutions now affect the sovereignty and isolation of land laws by creating certain reciprocal commitments among nations and by subjecting countries to supranational norms that implicate realms traditionally considered to be purely under local control. While the recent wave of “land grabs” is motivating some national governments, such as in Argentina or Brazil, to reinstate limits on mass purchase of land by foreigners, it is highly doubtful whether this political rhetoric would translate to legal action.35 Within the European Union (EU), the turning point was the Treaty of European Union, signed in Maastricht in 1992, and taking effect in 1994.36 Dramatically expanding the scope and nature of reciprocal obligations among the EU countries, the Maastricht Treaty prohibited all substantial restrictions on capital movements. This provision was soon interpreted by the Court of Justice of the European Union (ECJ) to apply to the acquisition of land. In the landmark Konle v. Austria case,37 the ECJ invalidated a legislative provision by which foreigners wishing to purchase land in the Tyrol region had to obtain an administrative authorization. Konle, a German citizen, was denied such authorization by the Austrian court in light of a policy limiting the purchase of second homes to preserve the Alpine environment. The ECJ ruled that restrictions on cross-border land acquisition generally amount to hindrance of free movement of capital under the Maastricht Treaty. As for the specific Austrian legislation, the court ruled that while “the aims of securing land management and environmental protection are imperative requirements in the 34

35 36 37

Western countries included Australia, Canada, France, Holland, New Zealand, Scandinavian states, West Germany, and the United States. See Joshua Weisman, “Restrictions on the Acquisition of Land by Aliens” (1980) 28 American Journal of Comparative Law 39–66 at 41–2. See Barrionuevo, “China’s Farming Pursuits.” Treaty on European Union, signed February 7, 1992, Maastricht, OJ 1992 No. C191. Case C-302/97 Konle v. Austria [2000] 2 CMLR 963.

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general interest,” national legislation based on such aims must be applied in a non-discriminatory manner. Furthermore, any such restrictions must also meet the test of proportionality. This means that such restrictions would be valid only when the regulatory aims are imperative and “cannot be pursued by measures that are less restrictive.” The Konle decision had major consequences for national land laws that impose restrictions and limits on land purchase and development not only in cross-national cases, but also in purely domestic matters. This is so because alongside the virtually absolute prohibition of discrimination on the basis of nationality, any restriction, even when applied equally to citizens and non-citizens alike, must be tested for its purpose-based justification. Thus, even superficial legitimate aims, such as restrictions on second homes to preserve nature and agriculture values, must pass the three-prong test of proportionality (an overriding reason of general interest, the suitability of the restriction to the attainment of the objective, and the adoption of the least intrusive means to attain such goal). This test, which has proven to be a major obstacle for national legislations, indirectly affects not only foreigners but also nationals – an issue of much practical importance, since, for example, the overwhelming majority of second home buyers in Britain are British.38 One should be cautious, however, not to come to the conclusion that within the EU there is already a substantially harmonized European land law. Most aspects of land law are still governed by the principle of territoriality regarding both site-based forum rules for dispute resolution and the applicability of the national site-based laws.39 In an important recent development, the EU Charter of Fundamental Rights (the Nice Charter), which recognizes a fundamental right to property, came into force on December 1, 2009, following the ratification of the EU Lisbon Treaty.40 It remains to be seen, 38 39

40

See Peter Sparkes, European Land Law (Portland, Oreg.: Hart Publishing, 2007), pp. 68–85. For a recent analysis of the currently limited scope of European property law, see Bram Akkermans, “The European Union Development of European Property Law” (2011), available at http://ssrn.com/abstract=1888294. See Treaty of Lisbon, Amending the Treaty on European Union and the Treaty Establishing the European Community, signed 13 December 2007, Lisbon, OJ 2007 No. C306 (recognizing “the rights, freedoms and principles set out in the Charter of Fundamental Rights of the European Union of 7 December 2000, as adapted at Strasbourg, on 12 December 2007, which shall have the same legal value as the Treaties”). For the adapted version of the Charter, see European Parliament Council Commission, Charter of Fundamental Rights of the European Union, OJ 2010 No. C83.

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however, whether this Charter will effect a fundamental change in the extent of “Europization” of property and land law, or whether the cross-border effects on these themes will remain limited, relying on national land law on the one hand, and piecemeal ECJ case law on the other. Much more far-reaching in scope, both geographically and thematically, is Article 1 of Protocol 1 to the European Convention for the Protection of Human Rights and Fundamental Freedoms,41 and its interpretation by the European Court of Human Rights (ECHR). As of 2011, forty-five European countries, as well as the EU as a corporate entity, have ratified the Convention’s Protocol 1. Article 1 has had an enormous impact on property law, and land law in particular, throughout Europe.42 Since under the Convention any resident may file a claim against his or her country, to date, the ECHR has heard thousands of cases dealing with Article 1 and has produced an extensive body of case law in the matter. In addition, many countries have formally internalized the First Protocol’s provisions in their own laws, such as Britain’s Human Rights Act of 1998,43 so that domestic courts also constantly engage in Article 1 analysis. The property jurisprudence of the ECHR, and in particular the question of whether the court will generally defer to domestic property law – aiming mainly at guaranteeing the “rule of law” within its jurisdiction44 – or whether it is poised to create supranational, unified concepts and doctrines, is somewhat difficult to typify, because it does not seem to follow a distinctive trend. On the one hand, the ECHR has not hesitated to intervene in domestic practices in matters concerning due process, such as outright denial or excessive delays in payment of compensation for full-scale expropriation; and, more substantially, in 41

42

43

44

Council of Europe, Convention for the Protection of Human Rights and Fundamental Freedoms as Amended by Protocol 11, Rome, November 4, 1950, ETS 5; 213 UNTS 221. The first paragraph of Article 1 of Protocol 1 of the European Convention on Human Rights reads: “Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.” The second paragraph states: “The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest. . .” Human Rights Act 1998, c. 42 (UK). See Schedule 1, pt. 2, Art. 1 for the provisions on the protection of property. See Tom Allen, “Compensation for Property under the European Convention of Human Rights” (2007) 28 Michigan Journal of International Law 287–336 at 292–4.

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generally reading into Article 1 principles of “fair balance” and “proportionality” regarding both deprivations and regulation of property.45 Thus, for example, between January 1992 and March 2003, 354 cases regarding expropriation of lands were filed against Turkey – more than 25 percent of all cases (1,357) submitted to the ECHR against Turkey during that period. Of these, 344 cases concerned the rate of compensation to adjust for inflation for the lengthy periods between the valuation of compensation and its actual payment; eight dealt with the application of a twenty-year limitation period on claims against unauthorized government seizures of land; and one case considered a de facto expropriation without compensation. The court intervened extensively, with overall damages awarded amounting to nearly 20 million Euros. Following this, Turkey, seeking to step up to ECHR standards, substantially revised its expropriation law.46 On the other hand, there have been cases in which the ECHR has been more ambiguous and cautious about intervening in domestic land law doctrines. In these cases, the court views the “fair balance” and “proportionality” requirements not as a single supranational blueprint, but as standards that must give substantial leeway to domestic rulemaking. This is especially true in areas involving complex legal, social, and political traditions. JA Pye (Oxford) Ltd v. United Kingdom is a case in point.47 The ECHR’s Grand Chamber, in a 10–7 vote, reversed its Section 4 Chamber’s ruling that the law of adverse possession of the United Kingdom violated the Convention.48 The Grand Chamber thus validated the House of Lords’ decision to grant judgment in favor of bad faith squatters who occupied privately owned and registered land.49

45

46

47

48

49

For the application of the “fair balance” and “proportionality” principles, see Lönnroth v. Sweden, 52 Eur. Ct. H.R. (ser. A) 26 (1982) (reading into Article 1 “fair balance” and “proportionality” as “inherent in the whole of the Convention” and “reflected in the structure of Article 1 (P1–1)”). These components were specifically implemented in the context of compensation for taking of property in James v. United Kingdom, 98 Eur. Ct. H.R. (ser. A) 36 (1986). Law No. 2942, approved on Nov. 4, 1983, as amended in Law No. 4650, approved on Feb. 4, 2001. See Tashin Yomralioglu et al., “Land Valuation Issues of Expropriation Application in Turkey” (2008) 1 Land Reform 80. JA Pye (Oxford) Ltd. v. United Kingdom (JA Pye II), App. No. 44302/02 (Eur. Ct. H.R. Aug. 30, 2007) (Grand Chamber). JA Pye (Oxford) Ltd. v. United Kingdom (JA Pye I), App. No. 44302/02 (Eur. Ct. H.R. Nov. 15, 2005). JA Pye II, at paras. 71–85.

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Since the possession of the land in this instance took place between 1984 and 1999, the applicable English law was the one that preceded the new regime designed by the Land Registration Act 2002.50 According to the law then in force, as set forth by the Limitation Act 1980 and Section 75 of the Land Registration Act 1925,51 upon the passage of the twelve-year limitation period, and subject to a number of other conditions included in the Limitation Act and relevant case law, the adverse possessor not only gained immunity against any action by the owner, but was also entitled to apply for registration as the new proprietor of the land. This doctrine has been traditionally grounded in discouraging people from “sleeping on their rights” and bringing stale claims, as well as ensuring that the reality of unopposed occupation of land and its legal ownership coincide.52 In November 2005, the ECHR Section 4 Chamber ruled that the case does engage Article 1, because this provision applies not only to governmental expropriation but also to national laws facilitating deprivation of possession among private persons. The Chamber further reasoned that although the English adverse possession law then in force may be deemed to serve a public interest, the interference with the registered owners’ rights was disproportionate and thus in violation of Article 1. This was especially so since, in the Chamber’s opinion, the justifications for the adverse possession, originally conceived in previous eras when most lands were unregistered, are less clear for registered lands of which the owners are readily identifiable, a change that has also found expression in the alteration – though not abolition – of the adverse possession doctrine under the new Land Registration Act 2002.53 Reversing this decision in 2007, the ECHR Grand Chamber viewed the adverse possession legislation as falling under the “control of use” of land within the meaning of the second paragraph of Article 1, and not as “deprivation of possessions” under the first paragraph. It concluded that 50 51

52

53

Land Registration Act 2002, c. 9, §§ 96–98 (England & Wales). See, respectively, Limitation Act 1980, c. 58, § 15 (England & Wales); Land Registration Act 1925, 15 & 16 Geo. 5, c. 21, § 75 (England & Wales). See generally, Mark Thompson, Modern Land Law, 4th edn. (Oxford University Press, 2009), pp. 209–47 (pointing to the security of title as a particularly important rationale for a limitation doctrine in the context of land). Whereas the Land Registration Act 2002 did not abolish the adverse possession doctrine, it did introduce certain significant changes that seem to shore up adverse possession to the changing landscape of property in registered land. On the one hand, the limitation period has been reduced from twelve to ten years, but on the other, the transfer of rights is no longer automatic. Ibid., pp. 230–9.

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the legislative provisions struck a “fair balance” between the means employed and the aim sought. The Grand Chamber pointed to the abundance, among the Convention’s member states, of “some form of mechanism for transferring title in accordance with principles similar to adverse possession in the common law systems,” without payment of compensation, and emphasized that “it is characteristic of property that different countries regulate its use and transfer in a variety of ways.” More broadly, the Grand Chamber emphasized that, especially in complex matters such as land law, the court will respect the national legislature’s judgment “as to what was in the general interest unless that judgment was manifestly without reasonable foundation.”54 The Grand Chamber’s recent ruling thus reflects a different stance toward the Convention’s unification of land laws. While subjecting all domestic rulemaking to supranational substantive principles of “fair balance” and “proportionality,” it nevertheless recognizes the complexity of land law as reflecting a unique national construct grounded in a distinctive economic, social, and cultural setting. However, it seems that the pendulum is far from having come to a halt, so one might very well expect a constant swing between deference to national rulemaking and supranational normsetting in the ECHR’s land law jurisprudence in the years to come. Such multinational institutions and conventions establishing procedural and substantive norms on property, and land in particular, are by no means restricted to Europe. For example, Article 21 of the American Convention on Human Rights provides for the protection of the right to use and enjoy property, and subjects any deprivation of property for the public utility or social interest to the payment of just compensation “according to the forms established by law.”55 As the Sawhoyamaxa case, surveyed in subsection C below will demonstrate, the InterAmerican Commission on Human Rights (a supervising body and potential petitioner) and the Inter-American Court of Human Rights have been dealing with numerous petitions filed against member states for the infringement of property rights in land.56 54 55

56

JA Pye II, at paras. 72–75. Organization of American States, American Convention on Human Rights, San Jose, Costa Rica, November 22, 1969, OAS TS No. 36, 1144 UNTS 143, Art. 21. The list of signatories currently includes twenty-four member states throughout the continent. See Inter-American Court of Human Rights, “Annual Report of the Inter-American Commission on Human Rights” (2006), ch. II(A)(6), OEA/Ser.L/V/II.127, doc. 4 rev. 1 (Mar. 3, 2007). See Jo M. Pasqualucci, “International Indigenous Land Rights: A Critique of the Jurisprudence of the Inter-American Court of Human Rights in Light of the United

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One should also take note that beyond the binding supranational manifestations of “property” in the European or other supranational conventions, there have been growing attempts by international bodies, such as the United Nations Human Rights Council, to phrase a set of universal norms regarding certain aspects of rights to land.57 These initiatives seek, inter alia, to address major humanitarian concerns over mass evictions of hundreds of thousands of people for large-scale infrastructure projects such as in India, Nigeria, Zimbabwe, or China – where, according to human rights groups, about 1.5 million people were compulsorily evicted from their homes in the Beijing area to make way for new infrastructure for the 2008 Olympic Games.58 Whereas such initiatives are not yet binding in the international arena, they do seem to add to the already substantial layer of supranational institutions and conventions that may challenge, and at times reshape, the terrain of local land laws. In sum, multinational conventions and institutions that engage in supranational oversight of property protection are increasingly encroaching on the enclave of local land laws. However, these mechanisms face a constant challenge in working to balance their overlaying standards with apt consideration for the local foundations of domestic land law and policy.

B.

Bilateral Investment Treaties

The changing landscape of foreign investment in real estate is not only quantitative, but also qualitative. In the past, foreign investors sought to acquire land mainly to facilitate a specific pre-designated project (e.g. setting up a manufacturing plant). Nowadays, persons and corporations

57

58

Nations Declaration on the Rights of Indigenous People” (2009) 27 Wisconsin International Law Journal 51. See United Nations Human Rights Council, “Report of the Special Rapporteur on Adequate Housing as a Component of the Right to an Adequate Standard of Living,” UN Doc. A/HRC/4/18 (Feb. 5, 2007), pp. 2, 10–11. The report, which identifies a normative gap in the non-recognition of the right to land in international human rights law, seeks to provide “practical and operational tools to promote, monitor, and implement the human right to adequate housing.” Annex I to the report sets out “Basic Principles and Guidelines in Development-Based Evictions and Displacement.” The Associated Press, “China Evicting 13,000 per Month in Olympic Prep: Advocacy Group”, Dec. 5, 2007. For a report on recent evictions in West Bengal, India, see International Peoples Tribunal on Eviction of Peasants and Violation of Human Rights in Singur, Nandigram and Other Areas in West Bengal, India, Jan. 21, 2007, available at www.archive.foodsov.org/html/takeaction13.htm.

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are increasingly entering foreign real estate markets as regular actors, often purchasing land for investment or real estate entrepreneurship. Moreover, as the recent wave of global “land grabs” indicates, the crossborder purchase of land may become a strategic choice not only for private entrepreneurs but even more so for governments in leading economies that are rich in financial reserves but scarce in lands. At any rate, foreign investment in land is a well-entrenched fact. The protection of cross-border property rights pertaining to real estate poses a difficult challenge. This is especially true when foreign investors are reluctant to be subjected to the risks and perils of domestic lawmaking and regulation that arise from the significant non-parities in the legal, governmental, and cultural environments. In such instances, foreign investors are often motivated not merely to ensure nondiscrimination vis-à-vis local investors. They also seek to incorporate independent, non-local standards of protection through specific agreements between the investor and the host government or intergovernmental investment treaties, and to enforce such provisions through extra-local arbitration. In this context, Bilateral Investment Treaties (BITs), alongside investment clauses in Economic Integration Agreements, have played a prominent role. As Chapter 8 will show in greater detail, BITs typically include provisions that go beyond the mere right to “national treatment.” Such protections may include the right to “fair and equitable treatment” – a concept that originally evolved in customary international law as a standard explicitly detached from the host country’s domestic law – “full protection and security,” “most favored nation” treatment, and the right of compensation for “expropriation.” The effect of BITs on domestic laws and lawmaking powers has recently become particularly significant both in scope and content due to the influx of disputes brought before international tribunals and arbitrators. Moreover, while the original demand for BITs came from western countries looking to protect investments in developing countries, with BITs being typically signed between a developed country – the exporter of capital – and a developing one, the economic and legal reality of BITs is now changing somewhat. These recent changes can be attributed, inter alia, to the fact that BITs or investment chapters in economic integration agreements are increasingly being signed between pairs of developed countries as well as between developing countries themselves. Moreover, the mounting flow of capital from countries such as Russia, China, or India into western countries and the growing use of arbitrations, in

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which developed countries find themselves also as defendants, are making these investment treaties more reciprocal. For example, the extensive litigation over the investment provisions in the North American Free Trade Agreement (NAFTA) has not only scrutinized Mexico’s domestic policies,59 but also those of the United States and Canada.60 The growing exposure of these countries to potential invalidation of their laws and regulations by cross-national treaties led NAFTA’s three trade ministers to convene in 2001 and to offer a joint interpretation to key provisions in Chapter 11.61 It has also driven the United States and Canada to issue new model BITs in 2004.62 These documents include a more closed-list definition of “investment,” limit the scope of the “minimum standard of treatment” provision to its application in customary international law, and narrow the definition of “expropriation.” Other countries, both developed and developing, have also worked to renegotiate existing BITs or to redraft key provisions in new ones in response to what they deemed to be interventionist arbitration awards. These dynamics have interesting implications for the institutional features of property, laid out in Chapter 2. BITs and other investment treaties have initially been designed to include many legal standards, including property ones such as “expropriation,” which in turn have been filled with content by arbitration tribunals. Displeased with the kind of content filling provided by these independent institutions, the 59

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See, e.g., Metalclad Corp. v. United Mexican States, ICSID (W. Bank), Case No. ARB (AF)/97/1 (Aug. 30, 2000), reviewed by United Mexican States v. Metalclad Corp. [2001] 2001 BCSC 664 (Canada) (viewing restrictive measures on claimant’s use of land for an underground landfill and a subsequent decree announcing the land to be a wildlife protected area as an “expropriation” of claimant’s property). For several prominent cases involving Canada and the United States as respondents, see United Nations Conference on Trade and Development (UNCTAD), Geneva, 2007, “Investor-State Dispute Settlement and Impact on Investment Rulemaking,” UN Doc. UNCTAD/ITE/IIA/2007/3, pp. 41–3, available at www.unctad.org/en/docs/iteiia20073_en. pdf UNCTAD. North American Free Trade Agreement, Free Trade Commission, “Notes of Interpretation of Certain Chapter 11 Provisions” (July 31, 2001), available at www. international.gc.ca/trade-agreements-accords-commerciaux/disp-diff/NAFTA-Interpr. aspx?lang=en. See, respectively, Treaty between the United States of America and the Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment, available at www.state.gov/documents/organization/38710.pdf; Agreement between Canada and [–] for the Promotion and Protection of Interests, available at www. naftaclaims.com/files/Canada_Model_BIT.pdf.

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cross-border “legislatures” of NAFTA have taken back the reins of designing the type and scope of property rights, including by switching to rule-like provisions. This recent turn of events should not be interpreted, however, as a consistent policy by countries such as the United States or Canada to scale down the scope of investment treaties vis-à-vis domestic rulemaking, or as recognition by developed countries that western values and contents of property have no claim of superiority over the ones prevailing in other countries. Thus, for example, newly drafted provisions on the requirement of “transparency” in domestic decision-making, such as Article 19 of the 2004 Canadian model BIT, have already been viewed by the UN Conference on Trade and Development as a mechanism, the principle aim of which is to “foster a more legalistic and rule-oriented administrative practice, which is in the general interest of the population of the host country.”63 The western-oriented paternalistic flavor and potential for asymmetric application of such statement seems obvious. Western countries are thus far from abandoning their aspiration to incorporate the specific contents of their property systems to the supranational realm of protection of investment and property. The intricacies of BITs, and especially the inherent tension between the pronounced inspiration of the BIT mechanism to bridge differences across legal systems and the inherent heterogeneity of the institution of property, are discussed in detail in the next chapter.

C.

Sub-society rights: national and international perspectives

The complexity of overlapping norms and institutions in regard to land rights is not just a matter of national versus supranational origin. Even within the national realm, a country’s land regime is not merely the result of general and exclusive national rulemaking. First, every country faces the dilemma of whether and to what extent decisions on land use and control should be entrusted to different levels of government. This is the case with the federal/state division of powers in federal regimes, and with local governments in all countries. Institutional solutions, as well as inter-jurisdictional legal rules, are far from easy. This is especially true when different levels of government and their respective constituents deem the power to control and regulate land as one of particular

63

United Nations Conference on Trade and Development, “Investor-State Dispute,” p. 79.

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importance. Thus, any extra-national sources of influences add to what is already a multilayered legal regime. Moreover, in many countries throughout the world, the control and use of lands implicate the relationships between state institutions and traditional local groups, such as indigenous tribes. This is often a fundamental issue in resolving questions regarding the place of traditional communities in liberal democracies such as the United States, Canada, Australia, or New Zealand,64 and with regard to recent efforts to redress historical injustices inflicted upon such groups.65 The difficulties embedded in maintaining land systems that have multilayered structures and overlapping normative orders are especially acute in societies in which tribal claims are not recognized by the state or have not yet been fully resolved and enforced. In the context of many African and other third world countries, the result is often one of land rights deadlock, in which the state, tribal communities, and other parties are able to employ only partial exclusionary measures against others, thus leading lands to a state of forced, suboptimal “open access.”66 State attempts to standardize property rights in land so that they are allegedly clearer and more straightforward (e.g. through western-type land titling) may only cause the eruption of disputes and the collapse of traditional governance systems. This ambition of legal uniformity may thus exacerbate growing societal confrontation about norm-making and enforcement mechanisms. To illustrate the unique challenges involved with overlapping, often conflicting legal norms applying to land on both the national and supranational levels, consider the following case. In 2001, the Sawhoyamaxa Indigenous Community of the Enxet People submitted a petition to the Inter-American Commission on Human Rights, alleging that the government of Paraguay violated the American Convention on Human 64

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See e.g., Rebecca Tsosie, “Land, Culture, and Community: Reflections on Native Sovereignty and Property in America” (2001) 34 Indiana Law Review 1291; Kevin Gover, “An Indian Trust for the Twenty-First Century” (2006) 46 Natural Resources Journal 317; Kent McNeil, “The Vulnerability of Indigenous Land Rights in Australia and Canada” (2004) 42 Osgoode Hall Law Journal 271. See, e.g., Stacy L. Leeds, “Borrowing from Blackacre: Expanding Tribal Land Bases Through the Creation of Future Interests and Joint Tenancies” (2004) 80 Notre Dame Law Review 827; Kristina L. McCulley, “The American Indian Probate Reform Act of 2004: The Death of Fractionation or Individual Native American Property Interests and Tribal Customs” (2006) 30 American Indian Law Review 401. Daniel Fitzpatrick, “Evolution and Chaos in Property Rights Systems: The Third World Tragedy of Contested Access” (2006) 115 Yale Law Journal 996–1049 at 1011–16.

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Rights, including the right to property.67 The tribe argued that the government had failed to complete its own initiative to recover part of the ancestral lands of the tribe of over 14,000 hectares (about 34,600 acres), even though Paraguayan law recognizes the right of indigenous peoples to preserve their way of life in their habitat and to protect the claimed lands. As a result, community members were living in inhumane conditions, resulting in a number of deaths due to lack of food and medical care.68 The government contended that, although it was committed to solving the matter, the lands in question were formally owned by private German citizens, and that the executive branch’s efforts to expropriate the land had been met with staunch resistance by the legislature in view of the provisions of the 1993 BIT between Germany and Paraguay. In March 2006, in ruling in favor of the Sawhoyamaxa tribe, the InterAmerican Court reasoned that the enforcement of bilateral commercial treaties may not allow a state to infringe its obligations under the American Convention, holding that “their enforcement should always be compatible with the American Convention.”69 As for the problem of conflicting rights in the land, the court reasoned that although it is “not a domestic judicial authority with jurisdiction to decide disputes among private parties,” it is nevertheless competent to “analyze whether the State ensured the human rights of the members of the Sawhoyamaxa Community.” In the court’s view, the government of Paraguay’s recognition of the tribe’s communal property rights to traditional lands remains “meaningless in practice if the lands have not been physically . . . surrendered because the adequate domestic measures necessary to secure effective use and enjoyment of said right . . . are lacking.” The court ordered the state to “adopt all legislative, administrative and other measures necessary to formally and physically convey to the members of the Sawhoyamaxa Community their traditional lands, within three years.”70 The Sawhoyamaxa case acutely demonstrates the implications of a multilayered land law scheme involving international, national, and subnational norms and institutions, because it includes (1) an international 67 68 69

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See Article 21 of the American Convention on Human Rights. Case of the Sawhoyamaxa Indigenous Community at 73.61–73.74 According to the court, the American Convention “is a multilateral treaty on human rights that stands in a class of its own and that generates rights for individual human beings and does not depend entirely on reciprocity among States.” Ibid. at para. 140. Ibid. at para. 248.6.

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human rights convention and respective international tribunal; (2) a BIT with its distinctive potential arbitral forum; (3) general provisions in the Paraguayan Constitution and in its national legislation about the recognition of traditional tribal rights and commitment to land restitution; (4) the standard land law of Paraguay with its land titling system and the property rights that emanate from it; and (5) tribal norms, institutions and practices of sub-society groups – all of which are tied up in the same physical asset in a highly complicated and multidirectional manner. The Sawhoyamaxa case thus illustrates the theoretical dilemmas about cross-national land law norm-making and enforcement. Although such queries may and do arise with respect to any field of law that becomes governed by both domestic and supranational norms and institutions, I argue that land poses especially difficult normative and institutional challenges in dealing with the design of overlapping spheres of law. These observations will be taken up further in Chapter 8, when I discuss the challenges that property law in its entirety faces in an era of globalization.

IV.

Land laws in a global era: breaking new ground

While the above surveyed institutional and legal mechanisms have aimed at narrowing the gaps between different domestic property systems so as to better facilitate the extensive cross-border economic activity in real estate, their success in meeting this goal has been quite limited. This section seeks to identify three reasons for this mixed result, building on the chief insights developed in earlier parts of the book about the structural and institutional features of property and the observation that property is far from adhering to a single normative blueprint, given a certain society’s underlying set of culture, values, and socio-economic features. The causality between local cultures and values and the way in which domestic property systems are developed is studied in detail in Chapter 8, but the analysis so far already attests to the challenge for bottom-up or top-down attempts to switch to a system of supranational property norms. This is especially so in view of the unique features of land, as compared with other types of resources that may be better prone for supranational ordering – a point that is also developed in Chapter 8. This section then moves to explore the oft-made conceptualization of property as a human right, and investigates whether a right to a safe possession of land should be recognized as a self-standing right in

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international law, one that could inject supranational content to land law even in the current legal setting of imperfect global ordering. I argue that such an approach should be treated with much caution, given also property’s structural and institutional traits, so that the protection of property interests through such mechanisms should be reserved only to cases in which the interest is embedded in other, broadly recognized human rights in international law.

A.

Identifying current gaps in cross-border land law

1. Institutional incompleteness Probably more than any other resource, different property rights and interests pertaining to a certain piece of land are bound up together in an exceptionally tight manner. The same physical tract of land may implicate claimants or right-holders of ownership, lease, other possessory interests, mortgage, servitudes, and so forth. It can also implicate different groups of outside stakeholders, such as neighbors negatively or positively affected by the use of the land. Given the diverse, often heterogeneous groups of stakeholders closely impacted by the legal regime, including parties that otherwise have no contractual privity among them, the basic set of legal norms establishing powers and priorities with regard to lands must be explicated and made available to the various parties through effective norm-making institutions. As explained in Chapters 1 and 2, this must be done in a way that prompts basic social understandings and, in turn, promotes sufficient stability and security. When one looks at attempts to order the set of legal powers and priorities so that these would apply to parties which are regularly based in different countries and are otherwise very diverse in their epistemological, cultural, and economic backgrounds, what emerges clearly is a problem that I dub “institutional incompleteness.” This is so because the norms applying to lands are effectively designed by a variety of norm-making institutions that have no clear division of power or normative hierarchy among them and are not otherwise coordinated regarding their substantive and procedural norms. Consider again the Inter-American Court’s statement in Sawhoyamaxa, by which it is “not a domestic judicial authority with jurisdiction to decide disputes among private parties” but that it is nevertheless competent to analyze whether Paraguay ensured the human rights of the tribe and is able to order the transfer of all lands within three years. The court’s intervention in this matter creates a dramatic upset of the Paraguayan land regime by

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effectively holding that traditional tribe interests trump formal registered rights under Paraguayan land law, and that the government of Paraguay must immediately act to validate such supremacy. Yet the court explicitly ignores, in the name of lack of jurisdiction, the major jurisprudential components that are inherently involved in such a fundamental change. It practically disregards the numerous layers of interests and categories of stakeholders that are physically inseparable from one another due to the unique traits of land, and that must be comprehensively dealt with so as effectively to rearrange the overall set of property powers and priorities. Even within a national legal system, jurisdiction is divided between different branches of government and among different types or levels of government within the same branch. But national legal systems include a clearer hierarchy of normative rules and decision-making as well as institutional mechanisms that are able to cause systematic changes and revisions in land law, chiefly by generally applicable legislation. This comprehensive institutional structure is something that is currently missing in the type of cross-national institutions discussed above. The issue here, therefore, is not simply one of “judicial activism” by supranational courts and tribunals in matters of domestic land law, but rather, one of institutional incompleteness. A property regime in land, with all its unique complexities and interconnections, cannot be sustained when each extra-national court or tribunal takes out a piece of the puzzle and rearranges it to fit its specific mandate while effectively ignoring all other consequences. Currently missing are coordinated institutional mechanisms to design supranational land laws. This is obviously not to say that such mechanisms cannot develop over time on the supranational level. The ability of the EU to harmonize, fully or partially, many fields of law, and to sustain them as such over time, stems from the fact that legal institutions within the EU are becoming more comprehensive and clearly structured, thus allowing for the fundamental restructuring of such fields.71 But the absence of such institutional completeness in many other cross-national contexts is something that must be taken into consideration in evaluating and advocating strong cross-border norms and remedies within local land law systems. It should be emphasized, however, that more complete institutions do not necessarily mean supranational harmonization of substantive laws. As the JA Pye Oxford case demonstrates, an adjudicative body such as the 71

See, e.g., Berry Elspeth and Sylvia Hargreaves, European Union Law (Oxford University Press, 2007), pp. 11–27.

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ECHR may adopt a normative policy of deference to state-level institutions in some matters of land law. Yet from an institutional perspective, such a relatively “complete” body has the capacity to better resolve the tension of overlapping property norms.

2. Structural over-fragmentation A second type of problem with the current state of affairs concerns structural over-fragmentation. This over-fragmentation results not only from the proliferation of background domestic systems, each with its particular structure and content of property norms, but also from the current legal technology of supranational instruments. While instruments such as BITs were originally intended to increase certainty and stability, these supranational norms do not necessarily translate into more uniformity across the globe. In fact, these instruments may inadvertently exacerbate differentiation not only across nations, but also within a certain local setting. A vivid example is the property provisions in BITs. Since a single country may be signatory to dozens of different BITs, and each of these BITs may include different procedural and substantive provisions regarding the protection of property rights, the result may very well be one of structural and normative over-fragmentation. The problem of over-fragmentation is especially severe in the case of land. This is so because the already complicated web of intertwined rights and interests pertaining to the same asset is further fragmented when persons seek to enjoy their lex specialis as foreign residents pursuant to BITs (the German citizens’ arguments in the Sawhoyamaxa case exemplify this). With the ever-growing phenomenon of foreign investments in real estate, which are in turn backed by provisions in BITs, no one can anticipate how many different provisions would apply to the same tract of land in a specific place at a given time. Assume that a certain country is signatory to thirty different BITs, and residents of these thirty countries become involved in the local real estate market. If the protection provisions of the BITs are interpreted by tribunals as meaning more than simply “national treatment” (i.e. awarding foreign investors the exact same legal treatment as local residents) then the property regime within the country may become further fragmented, rather than better harmonized, because of these supranational instruments. The problem of over-fragmentation is explored further in Chapter 8, which explicates on the issue of heterogeneity as a central theme in property and the future of supranational governance.

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3. No single blueprint for local reforms At this stage, one may come to wonder, if top-down supranational instruments cannot effectively lead to better harmonization of land laws, why not try to bring national land systems closer through local reforms in each one of them? Why does globalization not bring about an evolutionary process by which domestic regimes are reformed to better meet current challenges and acquired wisdom in the way predicted by Demsetz or advocated by De Soto? Indeed, through the 1990s and the first decade of the twenty-first century, during the high days of the Washington Consensus, organizations such as the World Bank or the International Monetary Fund have invested an enormous amount of human and financial resources in promoting local land reforms in developing and transitional countries, aimed at importing western structural and normative concepts to these countries while also promoting ideals of social justice and fair distribution of lands.72 The result has been mixed at best. While this outcome could be attributed to problems of corruption or specific poor legal design, one cannot overlook the way in which the choice made by countries to embrace a specific structure or a certain normative blueprint for designing property norms is strongly embedded in cultural, social, economic, and political considerations.73 Local land reforms simply do not follow a single blueprint, often for good reasons that should not be simply labeled as “failures.” The issue of land titling is a vivid example. Recent research demonstrates that there is no single blueprint for land titling, and the efficient creation of land title institutions essentially hinges on empirical observations about the particular circumstances pertaining to the relevant country.74 This is especially the case with transitional economies, in which the issues of timing and institutional choices regarding reforms in the land titling system depend crucially on the particular mix of prevailing social, political, and cultural aspects of the society at stake.75 72

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See, e.g., Klaus Deininger and Hans Binswanger, “The Evolution of the World Bank’s Land Policy” (1999) 14(2) The World Bank Research Observer 247. See, e.g., Catherina Boone, “Property and Constitutional Order: Land Tenure Reform and the Future of the African State” (2007) 106/425 African Affairs 557; João Márcio Mendes Pereira, “The World Bank’s ‘Market-Assisted’ Land Reform as a Political Issue: Evidence from Brazil (1997–2006)” (2007) 82 European Review of Latin American and Caribbean Studies 21. See Benito Arrun˜ ada and Nuno Garoupa, “The Choice of Titling System in Land” (2005) 48 Journal of Law and Economics 709–28 at 710–12. See Peter Ho and Max Spoor, “Whose Land? The Political Economy of Land Titling in Transnational Economies” (2006) 23 Land Use and Policy 580–7 at 581.

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The potential fallacy of automatically identifying a uniform and exhaustive land titling system with social order, productivity, and a sense of security may also present itself in societies in which governments are able to effectively set up and enforce land laws. As Peter Ho shows in the context of agricultural lands in China, the Chinese government’s decision to create “intentional institutional ambiguity” in the legal structure of land ownership and the registration of titles in such lands has had rather positive effects on the functionality of agricultural land for many decades.76 For example, the lack of an exact definition for “collective” or “communal” land ownership avoided a renewed stream of historic ownership claims and widespread intra-local social conflicts. Moreover, the occasional reallocation of use rights in agricultural lands, especially in times of crisis, was supported by the majority of farmers who viewed tenure in agricultural lands as a system of employment and social security, and not as a commodity. Whereas economic reality is changing in modern day China, the important institutional point made is that for property reforms to succeed, they must be adapted to socio-economic conditions and further create socially credible institutions that can create and manage changes over time. This also teaches us important lessons about what I identified as the inherent structural and institutional features of property in Chapters 1 and 2. In Chapter 1, I argued that well-functioning property systems construct legal powers and priorities that have third party applicability, impose practical constraints on opting out for private orderings, and address the complex public-private interplay. This is done with the purpose of ensuring a sufficient level of predictability and systematicity while also accommodating dynamism and change. This general structure can be implemented differently, however, across various legal systems, based on the specific features of the relevant society and the general traits of its legal system. The balance between predictability and dynamism could be positioned at different points, and predictability could also be made to serve society-specific goals. Thus, although I would very much hesitate to depict the Chinese “intentional institutional ambiguity” as a well-functioning property system, it did seem to provide security about land as a source of livelihood, even if not by formal title to specific lands. In a similar manner, the institutional composition of property normmaking may change among countries, provided there is sufficient coordination among bottom-up and top-down institutions. 76

Peter Ho, Institutions in Transition: Land Ownership, Property Rights, and Social Conflict in China (Oxford University Press, 2005), p. 12.

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Most importantly, the substantive content of land law norms would likely continue to diverge among different national systems, reflecting their respective ideological, cultural, economic, and political circumstances. While varying normative contents could be squarely settled with the inherent and structural features of property, as I have been arguing throughout the book, there is no doubt that this locally-based differentiation poses a major challenge for supranational efforts.

B.

Property in land as a human right?

There is, however, one crucial question that needs to be addressed at the close of this chapter. The problems of institutional incompleteness, structural over-fragmentation, or varying normative preferences among countries are not expected to be resolved quickly. At the same time, the reality of cross-border investments and the corresponding demand for dispute resolution jurisprudence is constantly on the rise. Thus, one should ask what basic approach should guide bodies such as the ECHR or the Inter-American Court of Human Rights when dealing with specific land law disputes, given the deficiencies in the current state of affairs. When, if at all, should the protection of property provisions in supranational conventions, treaties, and agreements trigger such bodies to intervene and to award substantial remedies that upset local land laws, even at the risk of incompleteness, fragmentation, and insufficient sensitivity to local idiosyncrasies? One guiding principle could be to evaluate the relationship of property to other objects of protection in these supranational instruments, most specifically human rights such as the right to bodily liberty and security, the right to fair criminal proceedings, freedom of expression, freedom of religion, and so forth. This requires not only comparing the respective rights, but also examining the way in which these mesh with, or rather, stand out from one another. However, one must also be cautious of the potential pitfalls of an overly broad identification of the right to property with other types of human rights, not only from an ethical or ideological viewpoint, but also from an institutional and jurisprudential perspective. For example, in “The Morality of Property,” Thomas Merrill and Henry Smith seek to equate property rights with other, non-economic human rights.77 They argue that since both types of rights are in rem in nature – meaning that 77

Thomas W. Merrill and Henry E. Smith, “The Morality of Property” (2007) 48 William and Mary Law Review 1849.

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they create corresponding obligations of non-interference on a very large and unspecified mass of duty holders – the content of the respective rights must remain correspondingly simple, and moreover, both types of rights must rely on a broad moral societal consensus about “dos and don’ts” that people will tend to respect even outside formal legal rules. Whereas Merrill and Smith restrict their thesis about the morality of property and the specific legal consequences that it should have for the American setting, they nevertheless seem to suggest an inherent similarity between the social construction and decision-making process of property rights and other types of human rights.78 This may lead one to think that the gradual universalization of human rights, such as the right to bodily liberty and security or the right to a fair trial, consequentially implicates the right of property. I submit that this is generally not the case, and that the in rem nature of property rights does not indicate that they are shaped and understood throughout the world and within legal systems in the same way as traditional human rights. Very broadly speaking, “hardcore” human rights such as the right to bodily liberty and security are counter-majoritarian rights that aim at protecting the very fundamental values of what a human being is or should be, against a potentially oppressive majority, especially in times of crisis (such as war) during which there is special reason to fear that such rights will be bluntly pushed aside.79 This explains why we tend to see at least a universal discourse about what the content of such rights should be, even if actual consensus and transition into legal rules may be hard to attain. I see property rights differently. At its core, property is a sociopolitical institution. This means, among other things, that property regimes and the property rights that emanate from them are the result of conscious decisions by the state’s authorized entities to designate resources as objects of property and to create a certain set of entitlements and obligations in them. Moreover, property has a clear allocative capacity, meaning that the institutions and rules of property determine the way in which finite resources are divided among the members of society, so that property rights are owned and exercised by individuals not only vis-à-vis government, but also against one another. Society must thus use its coercive power to construct a system of correlating 78 79

Ibid., 1852–8. See generally, John Ely, Democracy and Distrust: A Theory of Judicial Review (Cambridge, Mass.: Harvard University Press, 1980).

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rights and duties that directly implicates all members of society both in their individual capacity and in their collective one. This typically not only makes property a source of constant friction and the subject of costly implementation, but also vividly demonstrates why the construction of a property system is not merely a matter of preventing potential one-sided abuses or deprivations of entitlements that theoretically could otherwise have been enjoyed by all members of society. But clearly, even socio-political institutions such as property have their limits. Consider again the reported cases, discussed in Section III.A above, about mass evictions of hundreds of thousands of people for large-scale infrastructure projects such as in India, Nigeria, Zimbabwe, and China. The imposition of supranational norms, even if currently fragmented and institutionally incomplete, could have special normative force in land conflicts such as these which expose systematic abuse of government power, disenfranchisement of individual or groups on an ongoing non-reciprocal basis, or other situations in which the property infringement can be seen as undermining core human rights that are more broadly viewed and understood as “universal.” There are scenarios in which we could reasonably identify a certain wrong or infringement of a property right as also constituting a violation of a core human right that is otherwise familiar and widely accepted in the international community. Drawing the line between infringements of property rights that substantially implicate core human rights, and those property violations that do not, is obviously a difficult chore. But with the current state of affairs, it may be the only method to recognize the instrumental role that property rights in land may play for attaining other fundamental, internationally recognized human values that have sufficient normative force and jurisprudential acceptance to trump local decision-making. This should be done while avoiding too aggressive intervention in local land law norms that might inadvertently bring about the malfunction or even collapse of land systems.

8 BITs and pieces of property

As previous chapters have shown, the boundaries of property are constantly changing. These boundaries influence and are influenced by social, economic, and political shifts. Nowadays, in view of everintensifying foreign investments and other cross-border ventures, the institution of property may face its greatest challenge ever: the transition from a largely domestic legal construct into one that accommodates globalization. Chapter 7 introduced the intricacies involved with trying to shift locally-based land laws toward a supranational legal regime. But the challenges of globalization implicate all types of resources that are the object of cross-border economic activity, amplifying the demand for institutional and legal support for globalization. The search for such mechanisms that could foster a global property regime in an imperfectly globalized world is likely to continue to preoccupy legal scholarship in the years to come. Out of the various mechanisms that are currently at work in the supranational scene, bilateral investment treaties (BITs) seem to offer an ideal solution for the protection of foreign investors’ property rights in the broad range of assets that BITs typically count as “investment”: land, chattels, intellectual property, securities, intangibles, and so forth. BITs regularly include certain standards for the protection of foreign investment, such as “fair and equitable treatment,” and provide investors with standing in international law and direct claims vis-à-vis the host country. The alleged promise of BITs lies in reducing uncertainty and enhancing the credibility of states’ obligations to protect property rights. “Explosion” is a term often used to describe the growth trend in the number of BITs. The numbers are staggering even to people familiar with the field: no fewer than 2,676 BITs had been concluded by the end of 2008, and virtually every country has been a party to at least one 274

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agreement of this type.1 If everybody has them, then one might think that BITs must be doing something really good. As this chapter points out, however, BITs may do a lot, but their effect on securing cross-border property rights is far from clear. The main source for skepticism regarding the ability of BITs systematically to promote the protection of property rights beyond property law’s traditional boundaries lies in the argument that the notion of property is significantly more complex than first meets the eye. The gradual move to a “property discourse” to protect foreign investment under a BIT regime consequently may become complex and uncertain. This chapter breaks ranks from conventional wisdom by identifying the intricacies of BIT property protection and pointing to heterogeneity as a central feature of property. It argues that, unlike the paradigm that seems to guide the creation of BITs, once property jurisprudence is introduced into BITs, the complex features of property law follow. The chapter thus employs and further advances the analysis offered throughout the book to address property’s current challenge, i.e. becoming a supranational legal institution.

I.

The evolution of BITs A.

BITs today

In order to fully appreciate the BIT phenomenon, one should consider its current scope even before addressing the origins and the typical content of BITs. This scope is nothing short of staggering. According to the statistics available in early 2010, there were 2,676 concluded BITs by the end of 2008.2 Every country (except Monaco) is a party to at least one BIT. Many countries have dozens of BITs, and several countries have more than one hundred BITs, or close to this number; Germany leads the pack with over 130 BITs. This corpus of BITs is a living body: during the first decade of the twenty-first century, between eight and fourteen BITs 1

2

See, e.g., United Nations Conference on Trade and Development (UNCTAD), “The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries,” UN Doc. UNCTAD/DIAE/IA/2009/5 (2009), p. 2, available at http://unctad.org/en/docs/diaeia20095_en.pdf. UNCTAD, “Recent Developments in International Investment Agreements (2008–June 2009),” UN Doc. No. UNCTAD/WEB/DIAE/IA/2009/8 (2009), p. 2, available at www. unctad.org/en/docs/webdiaeia20098_en.pdf. This number accounts for new BITs (adding to the total), terminated and denounced BITs (subtracting from the total), and renegotiated BITs (replacing old BITs), as well as data adjustments in line with country reporting.

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have been renegotiated every year, such that the share of renegotiated BITs is about five percent of their total number, and it is rising steadily. Some BITs are renegotiated in order to bring them in line with the European Union framework upon accession to the Union; others, in order to update them in light of new model BITs. BITs are also denounced from time to time.3 At this scope of global coverage, countries at all levels of economic development and in every corner of the world are parties to BITs. Importantly, BITs are not limited to developed-developing country dyads. Indeed, only forty-two percent of all BITs are between a developed country and a developing one. Numerous BITs have now been concluded between pairs of developing countries – over a quarter of all BITs. China and India appear to be leading this trend of south-south integration through BITs. Another eight percent have been concluded between developing countries and countries in Southern and Eastern Europe and countries belonging to the Commonwealth of Independent Countries, i.e. countries which were part of the Soviet Union or the Soviet Bloc. Some nine percent of BITs are between developed country dyads. BITs have transformed the global legal landscape of international investment. In light of their sheer number it would be safe to assume that BITs today cover most, though not all, of the cross-country channels of international investment.4 Inasmuch as activity volume is an indicator of success, the BITs movement constitutes one of the most successful movements in the history of international law.

B.

From the beginning

The origin of BITs is commonly traced to the first BIT signed in 1959 between Germany and Pakistan.5 As the standard story goes, numerous 3 4

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UNCTAD, “Recent Developments,” pp. 2–6. Only the network of double taxation treaties (DTTs), which totaled 2,805 by the end of 2008, surpasses BITs. Ibid., p. 7. UNCTAD subsumes BITs and DTTs as international investment agreements, or IIAs. This subsection draws extensively from Peter Muchlinski, Multinational Enterprises and the Law (Oxford: Blackwell Publishers, 1995), pp. 617–20; Asha Kaushal, “Revisiting History: How the Past Matters for the Present Backlash Against the Foreign Investment Regime” (2009) 50 Harvard International Law Journal 491–534 at 499–504; Jeswald W. Salacuse and Nicholas P. Sullivan, “Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain” (2005) 46 Harvard International Law Journal 67–130 at 71–9; Kenneth J. Vandevelde, “A Brief History of

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former colonies became independent countries in the wake of World War II, and were almost invariably at a much lower level of economic development than the former colonial countries. The latter countries also happened to be European, western, or northern. Shortly thereafter, during the 1950s, a number of developing countries embarked on a series of massive expropriations of assets and enterprises that had been funded and owned by foreign investors. Iran expropriated British petroleum assets in 1951, and Libya expropriated joint Libyan–American petroleum assets in 1955. In 1956, Egypt nationalized the Anglo-Frenchowned Suez Canal, and in 1959 Cuba nationalized an array of foreign commercial assets. With ebbs and flows, nationalizations and expropriations have been a recurring theme on the scene of international investment, reaching another peak during the 1970s,6 and never truly disappearing to this day.7 BITs, according to this story line, were supposed to be the answer to these expropriations, aiming to allay foreign investors’ concerns about losing their investment without appropriate compensation. BITs therefore implemented three measures: first, a commitment of host countries to a certain standard of treatment toward foreign investment, including a crucial commitment to compensate for expropriation; second, a direct right of action for individual and corporate investors; and third, resolution of disputes by international arbitration, most often through the International Centre for Settlement of Investment Disputes (ICSID).8 This concise set of measures has had a dramatic effect on the legal regime pertaining to foreign direct investment (FDI). Together, they changed the balance of power between host countries and foreign investors in favor of the latter. This concise set has also been tremendously successful. It has been widely adopted, as noted above, and it has also proven fairly resilient. While there is a certain degree of variation among BITs in

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International Investment Agreements” (2005) 12 UC Davis Journal of International Law and Policy 157–94 at 157–76. The UN identified 875 distinct acts of governmental taking of foreign property in sixty-two countries between 1960 and 1974: Don C. Piper, “New Directions in the Protection of American-Owned Property Abroad” (1979) 4 International Trade Law Journal 315–48 at 330. For a detailed account of a very recent, and colossal, expropriation by Chad, notwithstanding the involvement of the World Bank, see Scott Pegg, “Chronicle of a Death Foretold: The Collapse of the Chad-Cameroon Pipeline Project” (2009) 108 African Affairs 311. ICSID is by far the most popular arbitration framework of choice in BITs. A distant second is the UN Commission on International Trade Law (UNCITRAL). See Rafael Leal-Arcas, “Towards the Multilateralization of International Investment Law” (2009) 10 Journal of World Investment and Trade 865–919 at 874–6.

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the exact content and language of these measures, BITs tend to be similar in their substantive content and structure – virtually every BIT is premised on these three principles.9 The more recent trend of BIT renegotiation mostly aims to rephrase their language in light of a growing body of arbitral awards rather than replace any of the three principles with ones that are substantively different.10 The history of BITs would not be complete if one considered nationalizations and expropriations merely as a series of isolated episodes in which host countries repudiated property rights of foreign investors. There was logic – indeed, an ideology – in this movement. Following on the heels of the post-colonization stage, developing and socialist countries promoted a political platform that would recognize a right to expropriate foreign assets. In two famous declaratory statements, the General Assembly of the United Nations in 1974 held that state sovereignty includes “the right to nationalization or transfer of ownership to its nationals” and, shortly thereafter, the right “to nationalize, expropriate or transfer ownership of foreign property, in which case appropriate compensation should be paid by the state adopting such measures.”11 In conjunction with the prohibition on the use of force to collect debts or protect investment entailed by the United Nations Charter, this policy pushed developed countries to seek alternative mechanisms to protect their investments – to wit, bilateral investment treaties. As Kenneth Vandevelde notes, BITs were negotiated chiefly between a developed and a developing country. The agreement was typically “drafted by the developed country and offered to the developing country for signature, with the final agreement reflecting only minor changes from the original draft. This persistent pattern added an ideological dimension to the agreements.”12

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See Lisa E. Sachs and Karl P. Sauvant, “BITs, DTTs, and FDI Flows: An Overview,” in Lisa E. Sachs and Karl P. Sauvant (eds.), The Effect of Treaties on Foreign Direct Investment (Oxford University Press, 2009), pp. xxvii–xxxvii. UNCTAD, “International Investment Rule-Making: Stocktaking, Challenges and the Way Forward,” UN Doc. UNCTAD/ITE/IIT/2007/3 (2008), p. 25, available at http:// unctad.org/en/docs/iteiit20073_en.pdf. Vandevelde, “Brief History,” 167–8 (citing Declaration on the Establishment of a New Economic Order, GA Res. 3201 (S-VI), UN GAOR, 6th Special Sess., 2229th plenary meeting, UN Doc. A/RES/3201 (S-VI) (May 1, 1974); Charter of Economic Rights and Duties of States, GA Res. 3281 (XXIX), UN GAOR, 29th Sess., 2,315th plenary meeting, UN Doc. A/RES/3281 (XXIX) (Dec. 12, 1974)). Vandevelde, “Brief History,” 170–1.

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The need for capital, which could come only from rich countries, overcame developing countries’ desire to assert independence and distance themselves from their former colonizers. Dependencia – the battle cry of Latin American countries against dependency on the north – was abandoned.13 The BITs movement subsequently broadened to include all types of country pairs, but the overriding ideology, namely, that property must be protected, has not changed and perhaps only became more ingrained. In the final stage, in the 1990s and 2000s some leading capital-exporting countries – including the United States, the United Kingdom, Canada, Germany, and Switzerland – solidified their control over the terms of engagement in international investment as they each introduced their own version of a “model BIT,” a standard document aimed at setting up the content of all the dyadic BITs to which this country would be a party.14

C.

What BITs do: theory and evidence

The question “What do BITs do?” should have a straightforward answer in light of the preceding paragraphs: facilitate international investment. A closer analysis reveals a more complex situation, however. This subsection deals briefly with three distinct issues. First, what is the mechanism that BITs implement? Second, what effect should this mechanism bring about? Third, do BITs live up to this challenge? As will be shown, only the first question has a relatively clear answer. As already noted, BITs have a fairly standard structure. By intention, they focus on international investment. They do not usually deal with other aspects of international relations, or even with international

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Dependencia refers to a quasi-Marxist political economy school of thought that was prominent mostly in Latin America in the 1960s and 1970s and held that the global capitalism of the metropolitan centers of the developed world – the North – were responsible for the depletion of resources and economic underdevelopment in the South. The logical consequence was intense, principled rejection of foreign investment by multinational corporations. See generally, Richard R. Fagen, “A Funny Thing Happened on the Way to the Market: Thoughts on Extending Dependency Ideas” (1978) 32 International Organization 287; Gabriel Palma, “Dependency: A Formal Theory of Underdevelopment or a Methodology for the Analysis of Concrete Situations of Underdevelopment?” (1978) 6 World Development. See, generally, Organization for Economic Co-operation and Development, International Investment Law: Understanding Concepts and Tracking Innovations (Paris: OECD Publishing, 2008).

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economic relations such as trade.15 According to the UN Conference on Trade and Development (UNCTAD) study: [BITs’] main provisions typically deal with the scope and definition of foreign investment . . .; admission of investments; national and mostfavored-nation treatment; fair and equitable treatment; guarantees and compensation in respect of expropriation and compensation for war and civil disturbances; guarantees of free transfer of funds and repatriation of capital and profits; subrogation on insurance claims; and disputesettlement provisions, both State-to-State and investor-to-State. . . [These] basic features of BITs, including their objectives, format and broad underlying principles, have changed little over the years.16

Model BITs enhance this uniformity of the general structure even further, notwithstanding considerable variability in the details and language of particular BITs. Scholarly theories pertaining to BITs began to appear only in the 1970s under the strong influence of the Dependencia ideology, developing countries’ hostility toward multinational corporations (MNCs), and a certain track record of nationalizations, especially in extractive industries. In 1971, the pre-eminent scholar Raymond Vernon advanced the obsolescing bargain theory (OBT). Because host countries lacked the financial resources and technological ability to locate, develop, and market their natural resources, they found it necessary to accept the terms required by foreign MNCs as a condition for developing such extractive projects. Once a bargain was struck, however, Vernon predicted that the conditions underlying the initial host government–MNC bargain would deteriorate – that is, the bargain would “obsolesce.”17 With the large capital investment now largely sunk, MNCs would be vulnerable to demands to adjust the terms of investment, to “creeping 15

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See Sachs and Sauvant, BITs, DTTs, p. xxxvii. A different category of international agreements – namely, preferential trade and investment agreements (PTIAs) and economic integration agreements – may also deal with investment. Chapter 11 of the North American Free Trade Agreement (NAFTA) thus implements an international investment regime largely similar to the regime that BITs implement. See UNCTAD, “The Role,” pp. 61–75. UNCTAD, “Bilateral Investment Treaties 1959–1999,” UN Doc. UNCTAD/ITE/IIA/2 (2000), p. 20, available at http://unctad.org/en/docs/poiteiiad2.en.pdf. Raymond Vernon, Sovereignty at Bay: The Multinational Spread of U.S. Enterprises (New York: Basic Books, 1971), pp. 47–53. See also Theodore H. Moran, Multinational Corporations and the Politics of Dependence: Copper in Chile (Princeton University Press, 1974) (providing a detailed account of Chilean nationalization of copper mining assets developed by foreign firms).

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expropriation,” and eventually to wholesale nationalization. OBT’s prediction that MNCs would renegotiate the original contract on less favorable terms or else face expropriation was backed by empirical reality during the 1970s.18 The decline of outright expropriations in the late 1970s, followed by the debt crisis of developing countries in the 1980s, and subsequently the collapse of the Soviet bloc in 1989 have pushed OBT to the margins. A new neo-liberal policy was advanced by the international financial institutions, including the World Bank and the International Monetary Fund, which focused on implementing market-oriented structural reforms within developing countries – in particular, the protection of property rights – as a condition for aid. As a corollary, the attitude toward FDI has changed from hostility to hospitality. In due course, UN institutions such as UNCTAD, which in the past exhibited suspicion toward MNCs, also changed their tone to be more MNC-favorable. The ascendancy of neo-liberalism coincides with the surge in the signing of BITs from a handful a year to several dozen a year. The structuralist view of FDI, which focuses on domestic institutional structure of host countries, thus points out that host countries have less incentive and ability to renegotiate bargains in the present era than they had in the 1970s.19 Thus, such a view would predict the growing number of BITs to which host countries have become party. It should be emphasized, however, that the structuralist approach does not negate OBT. In both views, host countries are bedeviled by their own rationality. In a standard rational expectations model, it is imperative for the host country and its leaders to act opportunistically and renege on the contract with the foreign investor. Both theories furthermore share the New Institutional Economics’ insight that institutions matter.20 That 18

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Stephen J. Kobrin, “Expropriation as an Attempt to Control Foreign Firms in LDCs: Trends from 1960 to 1979” (1984) 28 International Studies Quarterly 329. See Lorraine Eden et al., “From the Obsolescing Bargain to the Political Bargaining Model,” in Robert Grosse (ed.), International Business and Government Relations in the 21st Century (Cambridge University Press, 2005), p. 251. On the centrality of institutions as commitment mechanisms, see Douglas C. North and Barry R. Weingast, “Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England” (1989) 49 Journal of Economic History 803. On institutional commitment mechanisms in international investment, see Witold J. Henisz, “The Institutional Environment for Multinational Investment” (2000) 16 Journal of Law, Economics and Organization 334; Witold J. Henisz and Oliver E. Williamson, “Comparative Economic Organization – Within and Between Countries” (1999) 1 Business and Politics 261.

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is, in order to prevent the collapse of investment contracts, there needs to be a mechanism that will enable the host country to make a credible commitment (as opposed to a contractual undertaking, which, without more, may be inherently non-credible) not to expropriate the investment, either fully or partially. Even when wholesale expropriations have become a rarity – though definitely not extinct – policy changes and government intervention remain a significant source of political risk. Such risk could materialize from seemingly innocuous legal or regulatory measures, causing a “death of a thousand cuts.”21 In recent years, much attention has thus been paid to identifying and improving domestic institutions, including the legal and regulatory environment, institutional strength, anticorruption measures, and crime reduction – often broadly referred to as “governance” or “the rule of law.”22 UNCTAD recently stated that “policy and institutional determinants are especially important in developing countries, which are often characterized by weaker institutions and less consistent policies than developed countries.”23 BITs provide another such mechanism for dispelling the uncertainty that foreign investors face. BITs constrain the incentive to expropriate through a commitment to pay fair compensation, and they make this commitment credible by subjecting the host country to external, impartial arbitration. The latter element of surrendering sovereignty is the linchpin of the entire mechanism, as it erodes the host country’s power over the foreign investor. To cite UNCTAD again: [A]nother reason for concluding [BITs] is that home countries may have doubts about the institutional quality in the host country; that is, the quality of domestic institutions protecting property rights and resolving disputes. [BITs], by placing dispute resolution outside the domestic system of host countries, may thus substitute for poor institutional quality.24

BITs thus “may contribute to the coherence, transparency, predictability and stability of the investment frameworks of host countries.”25 21

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Jo Jakobsen, “Does Democracy Moderate the Obsolescing Bargain Mechanism? – An Empirical Analysis 1983–2001” (December 2006) 15(3) Transnational Corporations 67. See World Bank, Governance and Anti-Corruption, available at www.worldbank.org/wbi/ governance, for links to research and publications focusing on governance and anticorruption. UNCTAD, “The Role,” pp. 12–13. Ibid., pp. 16–17. See Tom Ginsburg, “International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance” (2005) 25 International Review of Law and Economics 107. UNCTAD, “The Role,” p. 25.

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Do BITs work as advertised? That is, do BITs effectively engender higher flows of FDI between country pairs that have a BIT? This is an empirical question, to which the answer appears to be affirmative, though not decisively so. Studies that have looked into this question have improved in terms of methodology such that the more recent ones deserve more attention. A series of current studies finds positive links between BITs and FDI, some of which are claimed to be causal – i.e. that having BITs actually increases FDI. Salacuse and Sullivan show that a host country that has concluded a BIT with the United States is more likely to increase its overall FDI from all Organization for Economic Cooperation and Development (OECD) countries than a country without such a BIT.26 Egger and Pfaffermayr assert that BITs exert a positive effect on outward FDI of home countries to BIT partner host countries if the treaties are actually implemented, and more weakly so for signing a treaty.27 Grosse and Trevino report that FDI inflows were positively related to a greater number of BITs that Central and Eastern European had signed, which they see as part of general institutional building.28 According to Neumayer and Spess, developing countries that sign more BITs with developed countries receive more FDI – an impact that was sometimes conditional on institutional quality (i.e. rule of law, absence of corruption, etc.).29 Büthe and Milner find a positive correlation between BITs and subsequent inward FDI into developing countries. Yet these authors emphasize that although BITs are not required for attracting FDI, the competitive dynamic “may mean that retaining the status quo of no or few BITs might become increasingly costly over time.”30 In another study examining the signaling effects of BITs, Tobin and Rose-Ackerman conclude that the number of BITs a host country signs with high-income countries has a positive effect on FDI inflows, but that the increased popularity of BITs means that each

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Salacuse and Sullivan, “Do BITs Really Work?,” 111. Peter Egger and Michael Pfaffermayr, “The Impact of Bilateral Investment Treaties on Foreign Direct Investment” (2004) 32 Journal of Comparative Economics 788. Robert Grosse and Len J. Trevino, “New Institutional Economics and FDI Location in Central and Eastern Europe” (2005) 45 Management International Review 123. Eric Neumayer and Laura Spess, “Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?” (2005) 33 World Development 1567. Tim Büthe and Helen V. Milner, “Bilateral Investment Treaties and Foreign Direct Investment: A Political Analysis,” in Sachs and Sauvant (eds.), The Effect of Treaties on Foreign Direct Investment, p. 214.

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extra BIT has a decreasing effect on inflows of FDI to the country that is party to the BITs.31 Other recent studies cast some doubt on this apparent consensus. In a re-examination of Neumayer and Spess’s study, Yackee finds that the statistical relation of BITs and FDI is weaker than those found by the former authors, holds mostly for low-risk countries in opposition to theory, and in some cases is non-significant. Yackee further shows an opposite conditional relationship with domestic institutional quality than that found by Neumayer and Spess.32 In a separate study, Yackee finds no direct correlation between investment decisions and those BITs that afford increased legal protection in their international arbitration clauses. He interprets these results to suggest that the case for formal (international) law may have been overstated and that non-contractual, informal obligations may be more important.33

II. The challenge of BITs: from “investment” to “property” The chief institutional design principles behind the development of BITs as a cross-border legal mechanism are (a) reduction of uncertainty about property rights on the part of foreign investors and (b) enhancement of credibility of states’ commitments to preserve foreign investors’ legal rights. BITs were engineered to attain both of these goals through formal treaty recognition of investors’ rights and the subjection of states’ correlative commitments to impartial international adjudication. As mentioned, BITs were originally based on envisioning certain paradigmatic economic forms of foreign investment and potential infringements of 31

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Jennifer Tobin and Susan Rose-Ackerman, “When BITs Have Some Bite: The PoliticalEconomic Environment for Bilateral Investment Treaties” (2011) 6 Review of International Organizations 1–32 at 23. Additional studies report findings in a similar vein. See Peter Egger and Valeria Merlo, “The Impact of Bilateral Investment Treaties on FDI Dynamics” (2007) 30 World Economics 1536; Kevin P. Gallagher and Melissa B. L. Birch, “Do Investment Agreements Attract Investment? Evidence from Latin America” (2006) 7 Journal of World Investment and Trade 961; Kim Sokchea, “Bilateral Investment Treaties, Political Risk and Foreign Direct Investment” (2007) 11 Asia Pacific Journal of Economics and Business 6. Jason Yackee, “Do BITs Really Work? Revisiting the Empirical Link between Investment Treaties and Foreign Direct Investment,” in Sachs and Sauvant (eds.), The Effect of Treaties on Foreign Direct Investment, p. 379. Jason Yackee, “Bilateral Investment Treaties, Credible Commitment, and the Rule of (International) Law: Do BITs Promote Foreign Direct Investment?” (2008) 42 Law and Society Review 805.

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investors’ rights by host countries. But the economic and legal paradigms have been increasingly changing. These transformations confront BITs and similar cross-border treaties with new challenges that bring into question the extent to which such instruments could fulfill their institutional role. As Chapter 7 has shown, from an economic-financial perspective, foreign investments have boomed in recent decades, with traffic going not only from west to east or north to south, but also coming in from what were once considered developing economies. The changing landscape of foreign investment is not only quantitative but also qualitative. Taking the example of real estate, whereas in the past foreign investors sought to acquire land mainly to set up a specific pre-designated project and were thus considered a relatively isolated phenomenon in the local landscape, foreign investors are increasingly entering real estate markets as regular actors, often purchasing land for investment or real estate entrepreneurship in a way that is indistinguishable from domestic actors’ investment.34 This phenomenon is even more abundant for foreign shareholding and equity participation in local businesses and firms – not only through mergers and acquisitions, but also through portfolio investments that are generally understood as falling within the definition of “investment” in BITs.35 Moreover, the recent wave of “land grabs” described in Chapter 7 positions foreign governments, acting through sovereign wealth funds, subsidiary corporations, or public-private partnerships, as direct property stakeholders in innumerable assets in other countries. Thus, for nearly all states and purposes, foreign investors – be they private or public entities – are currently part and parcel of local economies. At the same time, foreign investors still look to BITs as potentially granting them a beneficial lex specialis. Thus, whereas “national treatment” clauses are designed to put foreign investors on equal footing with domestic actors, the “fair and equitable treatment” legal standard was explicitly developed as an international norm, separate from domestic

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Jason Bush, “Ukraine: What Crisis?,” Business Week, September 3, 2007, p. 50 (reporting a 60% price increase in one year in Kiev’s real estate market following the foreign investment boom, and describing how powerful entrepreneurs quickly push forward projects in what is otherwise a bureaucracy-laden state). UNCTAD, “World Investment Report: Transnational Corporations Agricultural Production and Development,” UN Doc. UNCTAD/WIR/2009 (2009), pp. 35–6, 42– 71, available at www.unctad.org/en/docs/wir2009_en.pdf.

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laws.36 This term is vague, and tribunals constantly struggle to interpret it whenever foreign investors claim that an otherwise non-discriminatory government measure nevertheless fails to meet the “fair and equitable treatment” standard.37 Thus, the very idea behind this legal term unveils a tension between the economic globalization of local markets and the nowreverse potential legal differentiation in favor of foreign investors by allegedly granting them an additional source of protection against government regulation, one that local investors do not enjoy. Beyond this general challenge to the legal ordering of foreign investment, one can identify another prominent phenomenon in the legal context of BITs. The evolving common understanding and interpretation of key treaty terms such as “investment,” “rights,” “protection,” or “expropriation” increasingly tilt these international mechanisms towards a general “property discourse.” Investors constantly look beyond host governments’ public commitments or contractual obligations to ensure broader protection of their “property rights” through BITs. This is especially so since the term “investment” is typically defined in BITs as comprising a list of rights in assets – such assets effectively encompassing the entire range of objects of property rights: immovable, moveable, and intangible property; intellectual property; shares, stocks, futures, options, and other derivatives; licenses and permits; related property rights such as leases, mortgages, liens, and pledges; and in some cases even claims to debts.38 Investors seek to have these rights to assets protected against all types of third parties, including domestic private actors that have a conflicting claim to such assets. In so doing, foreign investors turn not only to local property doctrines in the host country but also to BITs to more broadly protect their property rights. In 36

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UNCTAD, “Investor-State Dispute Settlement and Impact on Investment Rulemaking,” UN Doc. UNCTAD/ITE/IIA/2007/3(2007), pp. 40–51, available at www.unctad.org/en/ docs/iteiia20073_en.pdf. See, e.g., LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, para. 131 (Oct. 3, 2006) (holding that “the fair and equitable standard consists of the host State’s consistent and transparent behavior, free of ambiguity that involves the obligation to grant and maintain a stable and predictable legal framework necessary to fulfill the justified expectations of the foreign investor”). For examples of “investment” definitions in recent BITs, see UNCTAD, “Investor-State Dispute Settlement,” pp. 72–4; Treaty Between the United States of America and the Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment, Article 1, available at www.state.gov/documents/organization/38710.pdf (referred to here as “US Model BIT”); Agreement Between Canada and – for the Promotion and Protection of Interests, Article 1, available at www.naftaclaims.com/ files/Canada_Model_BIT.pdf (referred to here as ‘Canada Model BIT’).

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this sense, investors may be said to aspire to be shielded by some sort of property lex specialis that would bind not only the host government but also other private actors that may have rival contentions to rights in these assets. The property rights terminology and rhetoric uttered by investors has not fallen on deaf ears among tribunals dealing with BIT disputes. In a growing number of arbitral judgments, tribunals refer to investors’ rights in the types of assets that are included in the definition of “investment” as “property rights,” and treat them as such for purposes of examining the issue of “expropriation” or other potential infringements.39 Accordingly, tribunals constantly engage in the interpretation of treaty terms such as “expropriation” and “indirect expropriation” in a way that increasingly resembles the respective takings and regulatory takings doctrines in the United States.40 Inspiration and reference in the interpretation of BITs is also drawn from the jurisprudence of the “right to property” clauses in other supranational documents such as the European Convention for the Protection of Human Rights and Fundamental Freedoms,41 or the InterAmerican Convention on Human Rights.42 Notably, the concept of proportionality, which is a keystone in the property jurisprudence of the European Court of Human Rights and the Court of Justice of the European Union, has been increasingly influencing the analysis of arbitral tribunals in deciding whether the host country has violated its BIT commitments by taking measures that adversely affect investments.43 39

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See, e.g., Southern Pacific Properties (Middle East) Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award on the Merits, paras. 160–68 (May 20, 1992), 32 ILM 933, 967–69 (1993); Plama Consortium Ltd. v. The Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, para. 128 (February 8, 2005), 44 ILM 721 at 740 (2005). See, e.g., United Mexican States v. Metalclad Corp., ICSID Case No. ARB(AF)/97/1, Judicial Review, paras. 102–112 (May 2, 2001), 5 ICSID Rep. 236 (2001) (describing “indirect expropriation” as depriving the owner of a “reasonably-to-be-expected economic benefit” thus using similar language to the “reasonable expectation” notion advanced by the US Supreme Court in Penn Central Transportation Co. v. City of New York, 438 US 104 at 125 (1978) (Brennan J.)); Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB (AF)/00/3, para. 155 (Apr. 30, 2004), 43 ILM 967, 998 (2004) (referring explicitly to the term “regulatory taking” as typifying inquiries about indirect expropriation, while holding that it is not relevant in the present case). Council of Europe, Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms, Paris, March 20, 1952, 213 UNTS 262. Organization of American States, American Convention on Human Rights, November 22, 1969, San Jose, Costa Rica, OASTS No. 36, 1144 UNTS 123. See, e.g., Tecnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, para. 122 (May 29, 2003), 43 ILM 133, 164 (2007)

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In some cases, the reference to property terminology and jurisprudence is explicit in the BIT. The 2004 US model BIT defines the determination of whether an indirect expropriation has occurred based almost verbatim on the three-prong test for regulatory takings developed by the US Supreme Court in Penn Central Transportation Co. v. City of New York.44 The US model BIT thus refers to “(i) the economic impact of the government action . . .; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (iii) the character of the government action.”45 The Canadian model BIT uses similar language.46 On the face of it, there seems to be nothing wrong with the movement of international investment jurisprudence towards a property discourse. To the extent that “constitutionalization” is gradually becoming a legitimate concept in international economic treaty law, since it allegedly reflects a credible commitment of countries to place external restraints on their sovereign powers,47 property jurisprudence seems like an ideal candidate to define the scope of protection for investments against potential infringements of BITs by signatory countries. Since nearly all countries have a property clause in their domestic constitutions, the terminology and methodology of the property discourse may allegedly aid both investors and countries in building expectations, clearing up ambiguities, and promoting goals of certainty and credibility. However, the notion of property is significantly more complex than first meets the eye. By extension, property rights and protection thereof under a BIT regime may also become complex and uncertain, thus actually undermining the original institutional design goals of BITs. These challenges include not only the need to address the unique structural traits of property law that have been presented in Chapter 1 and discussed throughout this book, namely, the (a) in rem trait of property rights, (b) impracticability of opting out of property public order, and (c) unique public–private interplay in property, as well as property’s institutional features presented in Chapter 2. Moreover, as the next section illustrates, the “propertization” of cross-border investments must also face a central notion of “heterogeneity” in property, one that

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(discussing the “proportionality” test and referring to this doctrine in a number of cases decided by the ECHR). 438 US 104 (1978). 45 US Model BIT, at Annex B § 4. Canada Model BIT, at Annex B.13(1). Peter Behrens, “Towards the Constitutionalization of International Investment Protection” (2007) 45 Archiv des Völkerrechts 153.

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makes difficult the transfer of the property discourse from locally-based jurisprudence to an overarching universal design concept that could govern the scope and content of BITs.

III. A.

The intricacies of BIT property protection

Cultural heterogeneity and the concept of property

At the heart of the BIT regime lies the concept of the property, or “investment,” which is to be protected if not by proscribing expropriation, then at least by adequate compensation. BITs define investment exceedingly capaciously. But whatever may be its type, the BITs assume that this investment – the protected property – belongs to the investor. It cannot, or should not, be taken from her. This fundamental principle hides an implicit assumption that the investor’s title in the investment assets – her ownership and entitlement – is clear and welldefined. In other words, while the investor’s title may be disputable as a normative matter, such that in certain circumstances the state may expropriate her property, her title is undisputed (perhaps even indisputable) as a positive matter, such that all societal actors know what belongs to whom. This notion of well-defined and well-protected property rights is in no way limited to BITs. In fact, it underlies the broad structural reforms promoted by international financial institutions, sometimes referred to as “governance” or “institutional quality,” which Section I referred to in the discussion of empirical evidence about BITs and FDI. This policy derives from the insight of New Institutional Economics that formalizing property rights and providing them with effective protection through formal social (i.e. legal) institutions are essential for economic development. Notwithstanding the question of the overall validity of these assumptions, at least in the BIT context this line of reasoning may run into serious difficulties. This is so because the substantive notion of “property” may be conceptualized, and protected, differently in different cultures. Property is not only a legal concept. It is also a fundamental psychological factor. Since William James, among the founding fathers of modern psychology, psychologists have discussed the notion of property and how it relates to individual personality and development. More recently, the literature refers to this concept as “psychological ownership,” as discussed in Chapter 1. The idea is “that there is a ‘psychology of

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mine and property’ that attaches itself to objects.”48 This section argues that the meaning of property extends further – from the individual level to the cultural level. The theoretical starting point is Hazel Markus and Shinobu Kitayama’s seminal article, which coined the term “construals of the self” to show that the very notion of being a person, of a self, varies considerably across cultures.49 Western cultures, they argue, referring primarily to North America and also to Western Europe, view the mature individual as an independent entity, whereas other cultures – mainly in Asia, Africa, and Southern and Eastern Europe – construe the self as interdependent. The healthy independent self is defined as one that can maintain integrity and clear boundaries across diverse social environments and can differentiate itself from significant others as part of the maturation process. In contrast, the interdependent self is characterized by a relational, interconnected self with fluid boundaries. Crucially, such fluidity and contextuality of the self does not reflect instability or immaturity.50 The major task of the interdependent self is not differentiation, but instead involves the maintenance of relationships, restraint, fulfillment of role obligations, and accounting for the thoughts, emotions, and behaviors of other people. In the currently leading theory of cross-cultural dimensions by Shalom Schwartz, this fundamental difference maps onto a dimension of autonomy versus embeddedness.51 According to Schwartz’s theory, embeddedness represents a cultural emphasis on maintenance of the status quo, propriety, and restraint of actions or inclinations that might disrupt group solidarity or the traditional order. The opposite pole of autonomy describes cultures in which the person is viewed as an autonomous, bounded entity who finds meaning in his or her own uniqueness. 48

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For a review, see Jon L. Pierce et al., “The State of Ownership: Integrating and Extending a Century of Research” (2003) 7 Review of General Psychology 84. Hazel Rose Markus and Shinobu Kitayama, “Culture and the Self: Implications for Cognition, Emotion, and Motivation” (1991) 98 Psychology Review 224. For a recent review, see Steven J. Heine, “Cultural Psychology,” in Daniel T. Gilbert, Susan T. Fiske and Gardner Lindzey (eds.), Handbook of Social Psychology, 5th edn. (Hoboken, NJ: Wiley, 2001), pp. 1423–33. See Tammy English and Serena Chen, “Culture and Self-Concept Stability: Consistency Across and Within Contexts among Asian Americans and European Americans (2007) 93 Journal of Personality and Social Psychology 478 (showing that cross-cultural differences in self-concept are consistent and stable). See Shalom H. Schwartz, “A Theory of Cultural Value Differences and Some Implications for Work” (1999) 48 Applied Psychology International Review 23.

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This distinction between an autonomous self, distinguished from other societal members by well-defined boundaries, and an embedded self, whose very societal existence is characterized by fluid, diffuse, and contextual relations with numerous others, is relevant to the legal realm. Specifically, the notion of a person as a bounded social entity goes hand in hand with well-defined property rights and legal entitlements more generally. A cultural construal of the self as diffuse and contextual respectively entails that legal entitlements, including entitlements to assets, will also be diffuse and less well-defined. If, in high-embeddedness cultures, who and what one is may depend on context, then what one owns and the features of such ownership may also depend on context. The concept of property in such cultures may be fuzzy not because it is not fully developed; on the contrary, ownership would be fuzzy because the mature self who bears claims to property is fuzzy. The point here is definitely not that some societies introduce or embrace chaos as an ideal. Quite the contrary: societies that are high on social-embeddedness may seek to design substantive property norms that promote a sense of security and belonging to the community. This could be done, inter alia, by introducing property regimes that are committed not to the single-proprietor paradigm, but rather, to common property, public property, or hybrid property regimes that have been conceptualized in Chapter 3. Moreover, the fact that the term “ownership” may be blurry does not promote a nihilistic anything-goes approach. As I have shown in Chapter 5, even in the western-type business corporation the term “ownership” may be somewhat fuzzy. But what matters is that the entire set of legal powers and priorities relating to a certain resource meets the broader structural traits of property and is able to communicate effectively the basic property norms to broad audiences, considering the epistemological, social, and cultural traits of the specific society. Most prominently, this heterogeneity translates into the content of substantive property norms, which diverges among societies and, as suggested throughout the book, is not imposed by the general structural and institutional traits of property. I obviously do not rule out the possibility that a particular society would simply have a malfunctioning property system, one in which different bottom-up and top-down institutions do not have the required level of coordination among them, or one in which we cannot speak of a systematic set of legal powers and priorities with regard to assets. Such societies obviously exist throughout the world. The point that I make here about heterogeneity is quite different. Various societies could

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Physical Property Rights Index 2009

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construct their property systems differently in a way that conforms to the basic structural and institutional features of property, even if such societies are not committed to individual autonomy or any other underlying value that may be prominent across other societies. To more closely address the relations between cultural emdeddedness versus autonomy and property rights, this chapter exploits recently available comparative data on property rights protection to conduct a rigorous analysis of this issue. In particular, as measures for property rights, it utilizes composite indices for physical property rights and intellectual property rights constructed by the Property Rights Alliance, an advocacy group inspired and led by Hernando de Soto, whose work has been briefly discussed in Chapter 1. The Appendix describes the data, presents the regressions, and discusses them more technically. This subsection summarizes the findings in a non-technical way. Figures 8.1 and 8.2 describe graphically the relations between cultural embeddedness and the 2009 indices of physical and intellectual property rights protection, respectively. The dots represent country observations and the sloping line represents the best linear relationship between each pair of variables. A clear negative association emerges,

Intellectual Property Rights Index 2009

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Relation between cultural embeddedness and intellectual property rights

indicating that the more a country’s culture emphasizes embeddedness values and de-emphasizes autonomy values, the less likely it is to protect property rights (in the way the latter are captured by the indices). The steeper slope for intellectual property rights protection in Figure 8.2 indicates that this association is stronger for this type of property. While the association shown in the figures is clearly suggestive, the scattered dots in the graph indicate that in addition to inevitable measurement errors of these concepts, other factors may also be involved in the level of property rights protection. Moreover, the relations suggested by the slopes are merely correlational. They do not indicate the direction of causality – namely, whether cultural embeddedness actually causes lower levels of protection. To address both issues a regression analysis is used, employing a previously developed basic specification by Amir Licht, Chanan Goldschmidt, and Shalom H. Schwartz.52 This 52

Amir N. Licht, Chanan Goldschmidt, and Shalom H. Schwartz, “Culture Rules: The Foundations of the Rule of Law and Other Norms of Governance” (2007) 35 Journal of Comparative Economics 659.

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specification includes one cultural orientation from each of the three cultural dimensions distinguished by Schwartz53 and two control variables – for British heritage and economic inequality. The British heritage variable captures, among other things, potential effects of having a common law system in most of the countries with such heritage – a factor that has been shown to have wide-ranging implications.54 Economic inequality is controlled to capture the effect of differences in economic power on respect or disrespect for individual property rights.55 The regression results are striking. Embeddedness again emerges as a negative explanatory variable for both physical property rights protection and intellectual property rights protection. In this setting, too, the results are more pronounced for intellectual property than for physical property. This may be the case because intellectual property is a more recent legal phenomenon, such that informal social norms (e.g. copyright piracy), which are linked to cultural orientations, exhibit greater cross-country variability in assessing the role of the individual versus society.56 Similarly to previously documented relations between cultural autonomy/embeddedness and the rule of law,57 the present regression results indicate that a country’s fundamental societal orientation toward autonomy or embeddedness causally affects the degree to which its particular institutions protect individual property.58 These findings also shed light on a related question – namely, to what extent is the observed effect stable, or, put more generally yet, how stable are cultural orientations? Culture scholars agree that cultural values and orientations respond to and, to a degree, reflect contemporary socio-economic 53

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The dimensions are autonomy vs. embeddedness, hierarchy vs. egalitarianism, and harmony vs. mastery. See Schwartz, “Cultural Value Differences.” For a survey, see Rafael La Porta et al., “The Economic Consequences of Legal Origins” (2008) 46 Journal of Economic Literature 285. The list of potentially relevant control variables for such a broad issue is especially lengthy and includes factors like economic development, societal fractionalization, religion, etc. Some of these factors raise additional problems because they may be mutually determined (endogenous) with the factors analyzed here. For a discussion and empirical analysis see Licht et al., “Culture Rules.” See Amir N. Licht, “Social Norms and the Law: Why Peoples Obey the Law” (2008) 4(3) Review of Law and Economics 715. Licht et al., “Culture Rules.” This proposition stems from the results in the two-step-least-squares regressions, which identify the influence of cultural embeddedness on property rights while isolating any (plausible) feedback effect from the level of property rights protection on cultural orientations.

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conditions, including the level of economic development, globalization, migration trends, and so forth. No culture is immune to the impact of such factors. At the same time, there is growing recognition that basic cultural stances may be highly stable.59 The present analysis shows that whatever the (expected) effect of contemporary conditions on cultural autonomy/embeddedness, this cultural dimension has a stable core that exerts a strong influence on important policy outcomes like the protection of property rights. These findings thus link property, personhood, and culture in a psychological analytical framework. They also echo an old idea in anthropology – namely, that the social implications of property and ownership differ across cultures – though they may be a universal psychological construct at the individual level, such as “psychological ownership” discussed in Chapter 1.60 To put some contextual flesh on the regression findings, consider the stark differences between North American and Northeast Asian cultures. The former (mostly in the United States) has been characterized as high on individualism or autonomy; the latter (mostly in China), as high on collectivism or embeddedness. These differences have historical roots that may go back to Aristotle and Confucius and have been linked to a variety of psychological factors, leading to the treatment of cultures as “systems of thought.”61 Markus and Kitayama thus point out that American culture emphasizes individual inalienable rights – e.g. to 59

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See, e.g., Oliver E. Williamson, “The New Institutional Economics: Taking Stock, Looking Ahead” (2000) 38 Journal of Economic Literature 595–613 at 597 (2000) (arguing that informal institutions are “pervasively linked with complementary institutions’ such that the resulting institutions ‘have a lasting grip on the way a society conducts itself”). For a review, see Floyd W. Rudmin, “Cross-Cultural Correlates of the Ownership of Private Property: A Summary of Five Studies” (2006) AnthroGlobe Journal, available at www.anthroglobe.info/docs/rudminf_ownership_000000.htm (meta-analyzing findings of earlier anthropological studies on cultures around the world; arguing that “private ownership [is found] to be a positive correlate with agricultural subsistence, social stratification, social control based on law and religion, large populations and permanent settlements, patriarchal family norms, support of the aged, especially aged men, and economic practices of trade, money, debt, metallurgy, and war”). Richard E. Nisbett et al., “Cultures and Systems of Thought: Holistic Versus Analytic Cognition” (2001) 108 Psychology Review 291. See also Alan Page Fiske et al., “The Cultural Matrix of Social Psychology,” in Gilbert, Fiske and Lindzey (eds.), Handbook of Social Psychology, 4th edn. (Oxford University Press, 1998), p. 915; Kaiping Peng et al., “Culture and Human Inference: Perspectives from Three Traditions,” in David Matsumoto (ed.), The Handbook of Culture and Psychology (Oxford University Press, 2001), p. 245. The focus in these theories is on cultural approaches to ambiguity, contradiction, and related concepts.

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“life, liberty, and the pursuit of happiness” – while the Chinese culture emphasizes group harmony, as reflected in the Confucian tradition.62 Consistent differences in conceptions of property may be observed in additional contexts. As already argued in both Chapters 1 and 7, China, in enacting its 2007 Property Rights Law of the People’s Republic of China,63 did not turn its back on its ideological and cultural heritage. Thus, alongside the protection of individual property rights in Article 4 of the statute, under which such rights “shall not be infringed by any institute or individuals,” the statute simultaneously includes the same protection for state and collective property rights – thus preserving the chief role for top-down, centralized control of resources. The concept of entrenching and defending centralized property rights, which may sound like an oxymoron to legal purists in western legal systems, reflects deeply rooted views about the relations between persons and assets in China. Traditionally, households and clans used to hold property collectively and inter-temporally.64 This concept, however, may also allude to China’s more recent township and village enterprises (TVEs). In these entities, remnants from China’s turbulent twentieth century, there are no individual property rights to speak of. Assets have been held collectively for the benefit of town and village residents and run by managers with no clear accountability. Naughton thus notes that “[t]he complexity of these arrangements has led some to describe TVE property rights as ‘fuzzy.’ In fact, the property rights were able to accommodate numerous stakeholders flexibly, adapt to an enormous range of situations, and often produce effective and entrepreneurial organizations.”65 It may be the case that in the particular institutional environment of government structure, TVEs provided security against 62

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Hazel Rose Markus and Shinobu Kitayama, “A Collective Fear of the Collective: Implications for Selves and Theories of Selves” (1994) 20 Personality and Social Psychology Bulletin 568. Property Rights Law of the People’s Republic of China, promulgated by the National People’s Congress, March 16, 2007, effective Oct. 1, 2007, 2007 Standing Committee National People’s Congress Gazette 291. An unofficial English version is available at www. lehmanlaw.com/resource-centre/laws-and-regulations/general/property-rights-law-of-thepeoples-republic-of-china.html. See Teemu Ruskola, “Conceptualizing Corporations and Kinship: Comparative Law and Development Theory in a Chinese Perspective” (2000) 52 Stanford Law Review 1599– 729 at 1616–24. Barry Naughton, The Chinese Economy: Transitions and Growth (Cambridge, Mass.: MIT Press, 2007), p. 122. See also Martin L. Weitzman and Chenggang Xu, “Chinese Township-Village Enterprises as Vaguely Defined Cooperatives” (1994) 18 Journal of Comparative Economics 121.

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expropriation by local governments. In any event, the complete fuzziness of property rights within the TVEs has not prevented them from becoming China’s major engine of growth, thus seemingly defying the link between well-defined, well-protected property rights and economic development, and, more generally, between the rule of law and development.66 Moreover, this fuzziness of legal entitlements is not limited to standard property. Even corporations, which arguably are purely legal constructs, have not been fully recognized for a long time as entities in China, while families, which do not have a legal status as such, have been.67 As Donald Clarke demonstrates, at times it is not even possible to know if a Chinese corporation exists, as Chinese courts and government agencies do not consider a statute to be necessary for the recognition of an organization’s existence.68 To recap, societies’ cultural orientations constitute their fundamental institutions. They affect shared, implicitly held beliefs on what is right, legitimate, and desirable. Cultural orientations are therefore likely to shape views about ownership and property or about what might constitute an infringement of property rights. They are also likely to shape views about what compensation in case of expropriation would be fair and equitable – a heavily value-laden concept – both in the eyes of countries party to BITs as well as in the eyes of arbitration tribunals.69 Crucially, culture affects not only personally held values and beliefs, but also more specific social institutions such that there is no clear way to avoid its impact. The fragmented structure of the BITs network and of arbitration-based dispute resolution will only exacerbate these differences.70 Finally, because cultures are widely seen as very stable 66

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See Donald C. Clarke, “Economic Development and the Rights Hypothesis: The China Problem” (2003) 51 American Journal of Comparative Law 89; Brett H. McDonnell, “Lessons from the Rise and (Possible) Fall of Chinese Township-Village Enterprises” (2004) 45 William and Mary Law Review 953; Frank K. Upham, “From Demsetz to Deng: Speculations on the Implications of Chinese Growth for Law and Development Theory” (2009) 41 New York University Journal of International Law and Politics 551. Ruskola, “Conceptualizing Corporations,” 1623–45. Donald C. Clarke, “How Do We Know When an Enterprise Exists?: Unanswerable Questions and Legal Polycentricity in China” (2005) 19 Columbia Journal of Asian Law 50. Commentators have emphasized that the “fair and equitable” standard does not entail a measure of remedy ex aequo et bono. See Leon E. Trakman, “Ex Aequo et Bono: Demystifying an Ancient Concept” (2008) 8 Chicago Journal of International Law 621. For preliminary attempts to assess the performance of BIT arbitrations, reading inconclusive results, see Susan D. Franck, “Development and Outcomes of Investment Treaty Arbitration” (2009) 50 Harvard Journal of International Law 435; Kathleen S. McArthur

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institutions, the relations that this analysis uncovers may suggest that not only BITs, but other efforts towards unification of property regimes, may face substantial hurdles.

B.

Actor heterogeneity

Another prominent and related feature, which is instrumental to the feasibility of BIT-based property protection, concerns the level of homogeneity among the actors on different sides of the border. This aspect does not refer to the overall cultural attributes of the respective societies, but more pointedly to the identity of the specific parties that are typically affected by the property norms regarding a certain kind of resource. Concisely, the main argument is that to the extent that the affected parties share an epistemological, social, and cultural common ground, there is a greater likelihood that supranational norms will have in rem validity, even if the respective domestic property systems are otherwise different from one another. This could be achieved in view of the fact that such actors are better able to identify, absorb, and act based on the potential implications of the additional layers of norms introduced by BITs. The same holds, moreover, when the parties are part of a bottomup process of creating norms, practices, and other socio-legal mechanisms that could affect the way in which BIT cross-border norms are applied. In contrast, when those affected by the property norms are made up of more heterogeneous groups, the ability of the BIT mechanism to set up a property regime that promotes certainty declines dramatically. To understand the role of the actors’ level of homogeneity, consider again the lex mercatoria, discussed in Chapter 2. This body of norms developed in Middle Ages Europe as a grassroots form of private ordering that connected merchants from different territories, aimed at enabling traders to follow common norms and resolve disputes speedily.71 The importance of the law merchant norms exceeded the contractual aspects of the transactions, by creating the prominent legal and financial instruments of personal property that are known nowadays, such as the negotiable instrument. Moreover, besides some clear property norms that had been accepted throughout the trade community, the merchants were also aware of what we nowadays term as “incomplete” contractual

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and Pablo A. Ormachea, “International Investor-State Arbitration: An Empirical Analysis of ICSID Decisions on Jurisdiction” (2009) 28 Review of Litigation 559. See, e.g., Leon E. Trakman, The Law Merchant: The Evolution of Commercial Law (Buffalo: Wm. S. Hein Publishing, 1983), pp. 7–21.

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and proprietary aspects of commercial relationships. Thus, the core of trade practices was the “good faith” principle. The relative homogeneity of traders’ commercial interests and social understandings across the continent generally allowed them to effectively handle such contingencies and ambiguities by consent or through the streamlined process of expert tribunals. As Chapter 2 showed, such cross-border conformity and efficiency gradually declined as national courts and legislatures took over commercial law. Nowadays, with the growing globalization of economies, questions of cross-border organizational structures and choice of strategies for substantive and procedural property norms re-emerge in full force, not only in BITs, but also in other contexts. The fact that merchants across borders still share substantial common ground has led to numerous calls to recognize and validate a “New Lex Mercatoria,” which would have not only contractual but also proprietary supranational effects.72 Jan Dalhuisen advocates, for example, the creation of a new integrated system among professionals, in which the contemporary needs of crossborder finance and investment would be effectively met. Arguing that practices, custom, and general legal principles have taken root among professionals across much of the globe, Dalhuisen suggests that such a new structure could work even if it is not made up of a “single coherent or closed system of rights and obligations,” but is rather committed to “legal dynamism, internationalization, and experimentation.”73 To better address the reality of markets and financial instruments, the new law merchant should, inter alia, liberally accept the proprietary status of user, enjoyment, and income rights in movable assets, and also allow for trusts, floating charges, and finance sales to more freely operate in the in rem realm. Moreover, new mechanisms for proprietary status, protection, and transfer should be designed specifically for each type of resource or product, based on the relevant trade norms and practices that apply to it. However, being aware of the fact that such innovative industry-driven property or property-like structures would also affect other kinds of third parties, and that certain realms of the law would remain domestic even in a new merchant law era, Dalhuisen calls, 72

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For the renewed interest in the lex mercatoria, see Symposium, “The Empirical and Theoretical Underpinnings of the Law Merchant” (2004) 5 Chicago Journal of International Law 1. Jan H. Dalhuisen, Dalhuisen on Transnational and Comparative Commercial, Financial, and Trade Law, 3rd edn. (Portland, Oreg.: Hart Publishing, 2007), pp. 30–3.

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for example, for a reformulation of domestic bankruptcy laws, which would recognize these new proprietary forms and interests.74 Without examining in detail the feasibility of such a new lex mercatoria, it seems clear that there are better prospects for supranational property norms where the relevant recipients of the norms are relatively homogenous. Such actors would have a genuine interest in reaching common ground not only for the contractual aspects of professional dealings, but also for shaping the broader property contours by trying to bridge potential discrepancies between BIT provisions and domestic property doctrines. Conversely, for heterogeneous parties, this chore may prove overambitious. Consider the following case, once again implicating the 1993 BIT between Germany and Paraguay introduced in Chapter 7 in the context of the Sawhoyamaxa Indigenous Community case.75 In the late 1990s, the government of Paraguay refused to apply its own land laws and to transfer title of lands in the village of Palmital to 120 landless peasant families, who for years had been occupying an estate of over 1,000 hectares (nearly 2,500 acres) that had been idle.76 The refusal to apply these agrarian reform laws and to force the landowners to sell the lands or to expropriate them was grounded in the fact that the land was owned by several German citizens and that the BIT between the two countries arguably prohibited the expropriation of rural property owned by Germans. The peasant families were forcibly evicted from the land and their leaders were imprisoned. Later, the peasants, the owners, and the government of Paraguay reached an out-of-court settlement that allowed the peasants to remain on the land. But at the same time, it seems that both on the formal (prior to settlement) and informal levels, the provisions of the BIT were far from representing common ground among the different actors affected by the property norms applying to the asset. Local land rules were simply pushed to the side to make room for a property lex specialis for the owners, without considering the 74 75

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Ibid., pp. vii, 582–6. Gesetz zu dem Vertrag vom 11. August 1993 zwischen der Bundesrepublik Deutschland und der Republik Paraguay über die Förderung und den gegenseitigen Schutz von Kapitalanlagen [Law on the Treaty of 11 August 1993 between the Federal Republic of Germany and the Republic of Paraguay on the Promotion and Reciprocal Protection of Investments], December 5, 1997, BGBl. II p. 2080 (German). See Ute Hausmann and Rolf Künnemann, “Germany’s Extraterritorial Human Rights Obligations” (2006) available at www.eed.de/fix/files/doc/eed_Germanys_extraterritorial_ human_rights_06_eng.pdf; A German Privilege, report dated November 21, 2007, available at www.german-foreign-policy.com/en/fulltext/56112.

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overall implications for the country’s land regime. The implementation of country-wide agrarian land reform regarding lands owned by German citizens was effectively blocked due to the BIT. Had the political economy considerations in such a scenario been different, so that local land law and policy prevailed (based, for example, on sincerely held values of justice and access to land that prevail in Paraguay among both residents and decision-makers), the investor probably would have ended up suing for the BIT violation. In short, given the enormous cultural, economic, and legal heterogeneity among the relevant actors involved in this dispute, and the fact that such disparity was not initially bridged by systematically revising the property system in land to accommodate both local and supranational norms, the aspiration of the BIT to promote security and stability of property rights was doomed to fail.

C.

Asset heterogeneity

One more source of potential heterogeneity, which touches to some extent on the issue of property actors, concerns the types of assets that are the object of property rights. Different types of assets substantially diverge in the ways that the corresponding property rights are constructed, allocated, and enforced. This in turn influences the ability of BITs to create property rights and duties that are distinct from domestic laws. Consider, first, the case of land. Different rights and interests in land are inherently bound up in an exceptionally tight manner. As the above example of the land in the Paraguayan village of Palmital indicates, the same tract of land may implicate numerous right holders with competing claims to the asset. These conflicts may touch not only on possession and use of land, but also on other types of interests such as easements and mortgages, as well as the interests of different circles of claimants and outside stakeholders. Following my more general conclusion in Chapter 7 about the constraints on moving to a supranational legal regime for land, this means, in the context of BITs, that even if one were to assume that it is normatively legitimate to allow legal discrimination in favor of foreign investors in some legal realms, enforcing this policy through the BIT mechanism might prove practically difficult. Matters might be somewhat different for other types of assets. On the face of it, the technical feasibility of providing in a treaty that a patent owned by a foreign citizen could not be taken through a compulsory

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license in the host country seems to involve fewer direct stakeholders, although it may still indirectly impact would-be consumers of the endproduct that could have been developed based on the protected technology.77 The business corporation poses a challenge of an altogether different scope. As Chapter 5 has shown, the interests of several stakeholder groups are closely intertwined in it. While the raison d’être of the corporation is to pool together resources from various constituencies under a unified and separate legal umbrella, the interaction among these heterogeneous interests is highly complex such that it is not easy to isolate and assess only one of them.78 This interaction, moreover, varies across national systems of corporate governance, notwithstanding a general similarity of corporations as investor-oriented entities.79 In any case, it is clear that property poses a challenge for legal differentiation, one that is different from other types of legal rights. Compare this to the feasibility of creating legal differentiation in income taxation, such that, hypothetically, a foreign resident working in the host country would pay only twenty percent in tax for the same level of gross revenue for which a local resident pays thirty percent tax. This may, of course, be very annoying to locals, but it can be done as a matter of legal engineering. Property rights in assets present a different case. This is especially so when the different interests are embedded in the same physical resource, such as land, so that preferring the rights of the foreign investor to the asset based on the BIT would necessarily come at the expense of another (local) party, who loses her control and management over the very same asset. But obviously, the issue of asset heterogeneity does not boil down only to the technical feasibility of legal discrimination. In just about every legal system, the core justifications for protecting property rights may diverge between different assets. As demonstrated throughout the book, the substantive content of the sets of legal powers and priorities for land, 77

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For the way in which the United States is demanding from its trade partners more extensive protection for intellectual property rights than is conferred by the multilateral TRIPS standards (TRIPS-plus) through signing bilateral intellectual property agreements (BIPs), see Peter Drahos, “BITs and BIPs: Bilateralism in Intellectual Property” (2001) 4 Journal of World Intellectual Property 791–808 at 794–7. For one example, see Henry T. C. Hu and Jay Lawrence Westbrook, “Abolition of the Corporate Duty to Creditors” (2007) 107 Columbia Law Review 1321–403 at 1364–5. See, e.g., Mark J. Roe, Political Determinants of Corporate Governance: Political Context, Corporate Impact (Oxford University Press, 2003); Michael Bradley et al., “The Purposes and Accountability of the Corporation in Contemporary Society: Corporate Governance at a Crossroads” (1999) 62 Law and Contemporary Problems 9.

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chattels, intellectual property, shares, or negotiable instruments may be different. This is so because a certain society’s decision-making institutions may reach different conclusions in designing the basic property norms for each of these resources, including through resource-specific normative trade-offs between individual rights and the public interest. The legal boundaries of the “fair use” doctrine in copyrighted materials in the United States do not adhere to the laws governing encroachments on private land, and this is also the case in many other legal systems. As I argued in the final section of Chapter 1, a national legal system can differentiate among different categories of resources without undermining the structural and institutional traits of property. BITs, however, are surprisingly agnostic in this respect. Consider the provisions of the 2005 BIT between Germany and China,80 two countries that are both powerful but nevertheless hold entirely different viewpoints on many issues, including in their property philosophy for land or intellectual property. The non-exclusive definition of the term “investment” in Article 1 of the BIT includes: (a) “movable and immovable property and other property rights such as mortgages and pledges;” (b) “shares, debentures, stock and any other kind of interest in companies;” (c) claims to money; (d) intellectual property rights; (e) business concessions, and so forth. The BIT provisions regarding the protection of investment apply across the board and do not make a single mention of the potential differentiation among different types of assets. Time will tell whether BIT disputes will be resolved differently based on the type of resource at stake. Taking the example of the ChinaGermany BIT, if German investors would be protected in similar terms based on the “fair and equitable treatment” clause or the “expropriation” article regardless of the type of investment they made in China, the effect of such arbitral jurisprudence on the diversity of property domestic regimes in China would go well beyond the specific disputes and might undermine the essentially different perspectives that Chinese decisionmakers hold on land, shares, chattels, or copyright. Conversely, if arbitral awards would generally defer to the different policy considerations that govern the design of domestic property doctrines for different types of 80

Gesetz zu dem Abkommen vom 1. Dezember 2003 zwischen der Bundesrepublik Deutschland und der Volksrepublik China über die Förderung und den gegenseitigen Schutz von Kapitalanlagen [Agreement between the Federal Republic of Germany and the People’s Republic of China on the Encouragement and Reciprocal Protection of Investments], August 3, 2005, BGBL II p. 732 (German).

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resources in Chinese law, the core goals of investor certainty and host government commitments may well be undermined for the group of German investors. In view of the rapid proliferation of BIT disputes, and the gradual switch toward a property discourse, these questions regarding the heterogeneity of resources – which relate to one of the key design principles of countries such as the United States or Germany, i.e. a one-size-fits-all model BIT – might come under growing pressure and cast doubts on the ability of BITs to provide a stable legal regime for investors.

D.

Legal norm heterogeneity: vertical

Property is the object of multiple layers of norms, of which BITs constitute only one layer. Thus, the boundaries of property rights, especially in land, may be blurred regardless of efforts by parties to BITs to delineate them with clarity. A BIT, or an adjudication applying it, which disconnects itself from other layers of property norms by looking to the provisions of the BIT alone might prove inefficient. Consider again the Sawhoyamaxa Indigenous Community case analyzed in Chapter 7. In holding in favor of the tribe and ordering the government of Paraguay to recover the tribe ancestral lands, formally owned by a German investor, within a period of no more than three years, the Inter-American Court of Human Rights reasoned that although it is “not a domestic judicial authority with jurisdiction to decide disputes among private parties,” it is nevertheless competent to analyze whether the state ensured the human rights of the tribe members.81 The Sawhoyamaxa case vividly demonstrates the complicated, multilayered structure of property law (in land, in this case), involving international, national, and sub-national norms and institutions. In Sawhoyamaxa, this includes (1) an international human rights convention; (2) a cross-border bilateral treaty with its distinctive arbitral forum; (3) general provisions in the Paraguayan Constitution and its national legislation; (4) the conventional land law of Paraguay; and (5) tribal norms. All of these property layers, while very different from one another in their substantive content, are tied up in the same physical asset in an extremely complicated manner.

81

Sawhoyamaxa Indigenous Community v. Paraguay, 2006 Inter-American Court of Human Rights (ser. C.), No. 146 (March 29, 2006), para. 136.

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The Sawhoyamaxa case thus illustrates the pitfall of isolating one layer of norms, which is within the mandate of the adjudicative tribunal or is otherwise considered as particularly prominent, while effectively ignoring the vertical complexity of property. As suggested in Chapter 7, there is an inherent tension in the Inter-American Court’s statement in Sawhoyamaxa that it is “not a domestic judicial authority with jurisdiction to decide disputes among private parties” but that it is nevertheless competent to order the transfer of all lands within three years.82 In this case, the BIT claim was on the losing side, but the jurisprudential difficulty would be the same if the BIT were to trump other property layers. More generally, the court’s intervention in this matter creates a dramatic upset of the Paraguayan land regime by effectively holding that traditional tribe interests supersede formal registered rights under Paraguayan land law. Yet the court explicitly ignores, in the name of lack of jurisdiction, the major jurisprudential components that are inherently involved in such a fundamental change. It practically disregards the numerous layers of interests and categories of stakeholders that are physically inseparable from one another due to the unique traits of land – and that must be comprehensively dealt with so as to effectively rearrange the overall set of property powers and priorities in land.

E.

Legal norm heterogeneity: horizontal

Yet another type of potential heterogeneity that may result from the structure of supranational instruments such as BITs is one that can be labeled “horizontal” heterogeneity of legal norms. While BITs were originally intended to increase certainty and stability, extra-national rules and decisions do not necessarily mean more uniformity in the law. In fact, BITs may exacerbate unwarranted differentiation. As I have shown in Chapter 7, since a single country is typically a signatory to dozens of different BITs, and each of these BITs may include different procedural and substantive provisions about the protection of investments and property rights in relation thereto, the result may be one of over-fragmentation of the property regime. Consider a hypothetical scenario in which a piece of land is located in country A. The land is owned by a citizen of country B; the tenant leasing the land for commercial purposes is a citizen of country C; the landowner’s mortgagor is a financial institution registered in country D; the 82

Ibid. at para. 215.

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tenant’s secured creditor for purchased machinery items that are fixed to the ground is a resident of country E; an easement holder on the land is a resident of country F. A conflict arises when a resident of country G claims that he is the true owner of the land but his rights had been taken away from him by a series of fraudulent deeds until the land ended up in the hands of the current landowner. Such conflicting property claims are a highly complicated matter in a regular domestic dispute. But when each one of the stakeholders in such a scenario would argue that his rights deserve distinctive (i.e. stronger) protection based on the provisions of the BIT between his country and country A, the host country, the problem of horizontal over-fragmentation might become prohibitive. A recent case decided by the ECJ illustrates the problem of fragmentation in the BIT context. Although it is essentially a “vertical” conflict, since it deals with the relationships between EU treaty provisions and a series of BITs signed between individual EU members and third countries, it attests to the fact that the BIT system is highly fragmented and thus legally fragile horizontally as well. In March 2009, the ECJ ruled in favor of the Commission of the European Communities in an action against Sweden,83 with a practically identical case being decided on the same date against Austria.84 Concisely, Sweden is a signatory to seventeen different BITs with nonEU members. Each of these BITs contains a clause under which each party guarantees to the investors of the other party “without undue delay, the free transfer, in freely convertible currency, of payments connected with an investment.” The Commission took the view that these BITs were capable of impeding the applications of restrictions on movements of capital and on payments that the Council of the European Union might adopt as safeguard measures, and required Sweden to take steps to eliminate the incompatibilities concerning the provisions on such transfers contained in the various BITs. The Council has not yet adopted such safeguard measures, which it is authorized to take under Articles 57(2), 59, and 60(1) of the EC Treaty.85 Sweden argued that since no such safeguard measures have yet been taken, requiring it to repudiate the BIT provisions vis-à-vis the third 83 84 85

Case C-249/06, Commission of the European Communities v. Sweden [2009] 2 CMLR 49. Case C-205/06, Commission of the European Communities v. Austria [2009] 2 CMLR 50. Treaty Establishing the European Community, arts. 57(2), 69, 60(1), December 24, 2002, OJ 2002 No. C325.

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countries would not only be unnecessary, but would also create enormous legal uncertainty in other areas of members’ activity, especially since EU member states have entered altogether more than onethousand BITs with third countries containing comparable clauses on transfers. The ECJ ruled in favor of the Commission, however, reasoning that the time involved in renegotiating a BIT and the unavailability of other international mechanisms, such as suspension of the BITs, require Sweden to take immediate steps to eliminate incompatibility so as to facilitate such potential EU safeguard measures.86 Again, although this case originated in the vertical supremacy of the EU over member states’ individual BITs, it raises broader concerns as to what one may view as the illusion of certainty in BITs. The horizontal fragmentation of BITs seems particularly troubling when commitments are deemed to create, for foreign investors, property or quasi-property rights that come on top of domestic property rights. Since current research demonstrates that incoherence between BIT provisions to which a country is party with different countries is the rule rather than the exception,87 the proliferation of BITs may both undermine the ability of host countries to sustain a coherent property system and also increase uncertainty among investors. This problem is especially acute when the conflict would arise in the context of private law disputes involving multiple property claims – including BIT-based ones – to the same asset. To the extent that the BITs system would continue to operate in the current fractured manner, the phenomenon of horizontal heterogeneity would increasingly present the parties with these major institutional and jurisprudential challenges. But should the BIT system continue to operate in its current fractured manner? One might believe that notwithstanding its swollen dimensions, the BIT system may only be taking its first steps and will eventually converge toward a widely agreed-upon version. The model BIT trend mentioned above may lend support to such a belief. The evidence that property and property rights are intimately linked to national cultural emphases on autonomy versus embeddedness suggest otherwise, however. Even if the formal legal texts reach uniformity, policy-makers, courts, and other societal institutions in different countries may apply these texts in a way that is consistent with their cultural beliefs. This would be the case especially with legal standards such as “fair and 86 87

Case C-249/06, Commission v. Sweden, at paras. 39–46. UNCTAD, “International Investment Rule-Making,” pp. 56–61.

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equitable treatment.” Moreover, beyond the basic text of the BITs, countries’ formal laws, too, are linked to cultural orientations,88 such that full convergence is simply impossible. Finally, the analysis in the preceding two subsections must not be mistaken for a claim against legal pluralism. Legal pluralism, especially in international law contexts, refers to the reality in which a particular phenomenon may be subject to normative prescriptions coming from several sources, some of which may be formal and some informal (e.g. social norms or customary law).89 One can readily observe that legal pluralism may introduce complexity and a fair degree of ambiguity to the overall normative regime pertaining to such phenomena. Prominent commentators in fact welcome this situation, or at least maintain that it is unavoidable in a global legal environment and therefore should be accommodated.90 Legal pluralism has also been invoked in connection with BITs to suggest that normative pressure from sources other than BITs may prevent the original bargain from obsolescing.91 However, even if one agrees with these observations in favor of legal pluralism, the bilateral-consensual mechanism of BITs still fails to achieve the objective of dispelling uncertainty for the reasons elaborated above. Where does the analysis of the tension between the aspiration of BITs to provide security and stability to foreign investors and the inevitable complexity embedded in the concept of property lead in terms of policy implications for cross-border investment protection? One rather straightforward answer advanced in the literature has been that since fragmentation poses a problem, the international law on crossborder investment should aspire for more harmony. Several scholars have thus called for developing a multilateral agreement on investment (MAI), which could also build on the considerable experience of the 88

89

90

91

See Amir N. Licht, Chanan Goldschmidt and Shalom H. Schwartz, “Culture, Law, and Corporate Governance” (2005) 25 International Review of Law and Economics 229 (linking investor rights to cultural harmony in the Schwartz model); Jordan I. Siegel, Amir N. Licht and Shalom H. Schwartz, “Egalitarianism and International Investment” (2011) 102 Journal of Financial Investment 621 (linking laws granting rights to the sick, elderly, and unemployed to cultural egalitarianism). For general discussions, see Paul Schiff Berman, Global Legal Pluralism: A Jurisprudence of Law beyond Borders (Cambridge University Press, 2012); William W. Burke-White, “International Legal Pluralism” (2004) 25 Michigan Journal of International Law 963. See Andreas Fischer-Lescano and Gunther Teubner, “Regime-Collisions: The Vain Search for Legal Unity in the Fragmentation of Global Law” (2004) Michigan Journal of International Law 999. Yackee, “Credible Commitment,” 810–12.

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World Trade Organization (WTO) in the context of transnational trade law.92 Others, troubled by the alleged inconsistency among different awards handed down by ad hoc tribunals working under the auspices of ICSID and other venues, have called for promoting a more harmonious interpretation of treaty provisions across different BITs.93 Some writers have advocated an institutional reorganization of cross-border dispute resolution, such as by creating “an independent, permanent appellate body with the authority to review awards rendered under a variety of investment treaties.”94 Although fragmentation indeed poses a challenge to international investment, it cannot be readily solved by crafting harmonization mechanisms that would at the same time disregard the root causes for the various facets of heterogeneity identified in this chapter. Drafting an MAI on investment or setting up an appellate tribunal would not solve the jurisprudential problem posed by BIT-based property rights that form but one layer in an entire array of property rights and duties pertaining to a given asset located in a given host country. In this respect, one can learn a few lessons from the recent ECHR’s decision in the JA Pye case, discussed in Chapter 7, in which the court realized that convention-based intervention in the context of domestic adverse possession law would have a dramatic impact on the fundamentals of English private law. Recognizing the complexity of private law areas such as land law was thus not only a matter of conventional judicial deference, but a broader-based institutional and jurisprudential inquiry into the complicated relationship between overlapping layers of legal ordering and the complex construction of property systems.95 The court thus seems to have realized that imposing a certain supranational 92

93

94

95

For such views advocating the switch to a multilateral agreement, see Leal-Arcas, “Multilateralization;” Stephan W. Schill, “Multilateralizing Investment Treaties through Most-Favored-Nation Clauses” (2009) 27 Berkeley Journal of International Law 496. See Anne van Aaken, “Fragmentation of International Law: The Case of International Investment Law” (2006) Finnish Yearbook of International Law 9. However, other authors have been less concerned with the practical effects of such incoherence in tribunal awards. See, e.g., Steven R. Ratner, “Regulatory Takings in Institutional Context: Beyond the Fear of Fragmented International Law” (2008) 102 American Journal of International Law 475. See Susan D. Franck, “The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions” (2005) 73 Fordham Law Review 1521. JA Pye (Oxford) Ltd. v. United Kingdom (JA Pye II), App. No. 44302/02 ECHR (August 30, 2007) (Grand Chamber).

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content to a specific provision in the English adverse possession law, without regard to the broader implications that this would have on English land law, would be running the risk of undermining land law’s overall structure. Moreover, to the extent that the definition of “investment” in international treaties continues to be practically all-inclusive, a mechanical harmonization would only exacerbate the problem by which entirely different types of resources, whose domestic legal ordering may be based on fundamentally distinctive normative and institutional underpinnings, would be subjected to a universal set of rules. Imposing a onesize-fits-all property jurisprudence to illuminate the meaning of “fair and equitable treatment” or of “expropriation” for land, intellectual property, chattels, or shares would create prohibitive constraints on each one of the host countries, be it “northern” or “southern.” More generally, there may be an underappreciated virtue to the dyadic nature of investment treaties, which goes beyond the conventional evolutional explanation of high negotiation costs for a multilateral treaty.96 It may very well be that since foreign investments, and the set of rules applying to them, integrate into otherwise domestic property systems, a bilateral treaty may create an opportunity for both countries to engage in a dialogue that recognizes and addresses potential cultural, social, and political heterogeneities between the two societies and their respective legal systems. The inability of model BITs drafted by prominent western countries ex ante to clear away ambiguities and uncertainties that would arise ex post during the ongoing implementation of the BIT – the explosion of formal investor-state disputes attesting to this latter fact – may therefore lead to a recognition of the limits of crossborder property protection.97 With this in mind, how should the property jurisprudence of international investment proceed from here? One possible venue would be to move to a functional, category-based approach of defining the legal 96

97

See, e.g., Ryan J. Bubb and Susan Rose-Ackerman, “BITs and Bargains: Strategic Aspects of Bilateral and Multilateral Regulation of Foreign Investment” (2007) 27 International Review of Law and Economics 291–311 at 293–7, 307–9. Until April 1998 only fourteen cases had been brought before ICSID. Since the late 1990s, however, the number of cases has increased dramatically. In 2011, a record number of 46 new arbitration cases were filed, bringing the total number of known treaty-based investment cases to 450: UNCTAD, “Recent Developments in InvestorState Development,” No. 1, April 2012, available at http://unctad.org/en/Publications Library/webdiaeia2012d10_en.pdf.

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rights and duties of foreign investors and signatory states based on the level and scope of heterogeneity versus homogeneity in the different attributes of property systems. Thus, for example, to the extent that a certain resource is typified by having a large and indefinite number of heterogeneous actors that are closely affected by any change or intervention in the property regime, the interpretation of terms such as “fair and equitable treatment” as well as the more general aspirations toward a cross-BIT congruence should be more modest. In such cases, the foreign investment should be generally governed by the rules of the host country’s property system, differentiating the foreign investor only when she herself has been singled out by the host country, such as in being deprived of “national treatment” or of due process of law in a case of an investment-specific regulation. Conversely, property systems that are susceptible to harmonization due to long-standing cross-border similarities among affected actors regarding norms and practices of resource control may be more appropriate for efforts toward multilateralism, cross-BIT interpretation of treaty terms, and unified jurisdictional dispute resolution. Land law may represent the former type of cases. Negotiable instruments and certain intangibles may lean toward the latter. Corporate governance and intellectual property rights may occupy a middle ground. But this is just a rough call. The endeavor of delineating the full spectrum of supranational property governance along the heterogeneityhomogeneity scale would have to be left for another day.

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Appendix: culture and property rights protection This appendix conducts a short-form empirical analysis of the relations between culture and property rights protection. It takes advantage of recently available data on property rights protection to extend the analysis by Amir Licht, Chanan Goldschmidt, and Shalom Schwartz of culture and social norms of governance, namely, the rule of law, non-corruption, and democratic accountability.98 This appendix describes the new data on the dependent variable and briefly overviews the cultural independent variable. Readers who are interested in a fuller exposition of the theory and analytical framework are referred to the study by Licht et al. The property rights data comes from the International Property Rights Index (IPRI) 2009 Report.99 The IPRI is produced by the Property Rights Alliance. The IPRI is a long-term project that seeks to improve property rights systems around the world by showing the relationship between a strong property rights system and a country’s economic well-being. The IPRI is a cross-country, comparative, composite index comprising three sub-indices, each of which is also composite. These sub-indices cover the following subjects: legal and political environment (LP), physical property rights (PPR), and intellectual property rights (IPR). The current analysis focuses on the latter two indices. The PPR combines data on protection of physical property rights, registering property, and access to loans; the IPR combines data on protection of intellectual property rights, patent protection, and copyright piracy. The methodology of composite indices is widely used in economics.100 In the present context, one might be concerned that the policy inclination of the Property Rights Alliance would bias the index and, consequently, the results. Such concern is unfounded for two reasons. First, a good deal of the data subsumed in these indices consists of objective facts. For instance, in the physical property rights index, one of the items is the number of days required to register property in a country. In the IPR, one of the items is the scope of membership in intellectual property treaties. Second, since this analysis seeks to examine the link between property rights protection and 98

99

100

Licht et al., “Culture Rules.” To use a metaphor from intellectual property terminology, the present analysis resembles a patent of addition in that it makes an innovative progress but one that depends on the “parent” patent. Property Rights Alliance, “International Property Rights Index (IPRI) 2009 Report, available at http://americansfortaxreformfoundation.org/userfiles/2009_IPRI.pdf. For a detailed discussion, see Daniel Kaufmann et al., “Measuring Governance Using CrossCountry Perceptions Data”, in Susan Rose-Ackerman (ed.), International Handbook on the Economics of Corruption (Cheltenham: Edward Elgar Publishing, 2006), p. 52.

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Table 8.1 Regressions of property rights protection on culture and other factors (1)

(2)

(3)

(4)

Dependent variable

PPR

PPR

IPR

IPR

Regression method

OLS

2SLS

OLS

2SLS

Embeddedness

−0.45*** (−3.22) −0.15 (−0.94) −0.01 (−0.07) 0.34* (1.99) −0.29** (−2.20) 8.86*** 41 0.55

−1.03** (−2.50) −0.03 (−0.16) −0.19 (−0.70) 0.33 (1.64) −0.07 (−0.33) 6.51*** 35 0.51

−0.58*** (−6.39) −0.24** (−2.22) −0.09 (−0.62) 0.30* (2.72) −0.31*** (−3.53) 29.91*** 41 0.81

−0.91*** (−3.31) −0.15 (−0.99) −0.17 (−0.94) 0.33** (2.44) −0.18 (−1.32) 16.60*** 35 0.74

Hierarchy Harmony British heritage Economic inequality F-statistic Observations R-squared

Dependent variables: PPR = physical property rights; IPR = intellectual property rights. Standardized beta coefficients are presented. The t-statistics are shown in parentheses. ***, **, * significant at 1%, 5%, and 10%, respectively.

culture, which is a normative social institution, that the indices may reflect a certain policy is actually an advantage. The primary explanatory variable is countries’ cultural orientations as operationalized by Schwartz in particular, on the dimension of embeddedness versus autonomy. Similar data is also used for orientations on the other two dimensions in the Schwartz model, namely, hierarchy (vs. egalitarianism) and harmony (vs. mastery). Orientation scores are the average importance of the value items that represent each orientation, using a sample of 15,000 respondents in over fifty countries. Crucially, the analyses are at the country (culture) level, not the individual level – individuals are unaware of the societal average value emphases.101 The 101

See Schwartz, “Cultural Value Differences;” Shalom H. Schwartz, “Mapping and Interpreting Cultural Differences around the World,” in Henk Vinken, Joseph Soeters and Peter Ester (eds.), Comparing Cultures: Dimensions of Culture in a

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Table 8.2 List of sample countries with culture and property rights data Argentina Australia Austria Bolivia Brazil Bulgaria Canada Chile China Cyprus Czech Republic Denmark Estonia Finland France Germany

Greece Hong Kong Hungary India Indonesia Ireland Israel Italy Japan Macedonia Malaysia Mexico Nepal Netherlands New Zealand Norway

Philippines Poland Portugal Russia Singapore Slovakia Slovenia Spain Sweden Switzerland Taiwan Turkey United Kingdom United States Venezuela Zimbabwe

basic specification is based on Licht et al.’s article, which includes one cultural orientation from each of the three Schwartz dimensions and two control variables – for British heritage and economic inequality. Possible influence of British heritage is controlled for by coding if the country had been under British rule as a colony, mandate area, etc. Economic inequality as measured by the gini coefficient is also controlled for. The instrumental variable for embeddedness in the 2-Step-Least-Squares (2SLS) regressions is the grammatical rule on pronoun drop license in the country’s official or main language.102 Table 8.1 presents the regressions. The results are striking. Embeddedness exhibits a strong, negative coefficient as an explanatory variable for both physical property rights protection and intellectual property rights protection. This result holds fully in the 2SLS regressions, indicating that the relation of cultural embeddedness to property rights protection is causal – i.e. that a country’s fundamental societal

102

Comparative Perspectives (Leiden: Brill, 2004), p 43; Shalom H. Schwartz, “A Theory of Cultural Value Orientations: Explication and Applications” (2006) 5 Comparative Sociology 137. The cultural scores used here are available in Licht et al., “Culture Rules,” 684–85, Table A.3. See Licht et al., “Culture Rules,” for further details.

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orientation toward autonomy or embeddeness affects the degree to which its particular institutions protect property rights (as the latter is operationalized by the IPRI). Interestingly, the results are more pronounced for intellectual property than for physical property. This may be the case because intellectual property is a relatively more recent legal phenomenon, such that informal social norms (e.g. regarding copyright piracy), which are linked to cultural orientations, exhibit greater crosscountry variability. That the R-squared values are higher for intellectual property than for physical property is consistent with this idea.

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INDEX

abnormality 61 absolute property rights 68 abuse of rights 61, 62, 88–91 actor heterogeneity 298–301 ad coelum rule 73 adverse possession 256–8 affirmative asset portioning 194, 195 affordability of housing through unbundling of rights and subsidies 142–3 agency 167, 192, 197 Aghion, Philippe 239 Alchian, Armen 188, 192 Alexander, Gregory 27, 55 aliens: restrictions on ownership of property 252 ambiguity 189, 202 American Convention on Human Rights 258, 263, 287 amortization 74 appropriation of property see expropriation of property arbitration 62, 66 Aristotle 295 Armour, John 196–8, 201 Arrun˜ ada, Benito 32 asset heterogeneity 301–4 asset portioning 194–6, 209 Atiyah, Patrick 64 Atlantic Yards project 223–5 Audio Home Recording Act (AHRA; 1992) 72 Austin, John 15, 63 Austria 253, 306 autonomy 290, 292, 295 Ayres, Ian 31

Bainbridge, Stephen 190, 283 bankruptcy/insolvency 41 eve-of-insolvency transaction 198 lowering costs of 144–5 prevention of 144 reorganization in 238 Barzel, Yoram 69, 106, 193 Bebchuk, Lucian 239 Belarus 248 Bentham, Jeremy 14, 31, 63 Berle, Adolf 9, 45, 179–81, 182, 183, 185, 198, 201, 207, 212 Berne Convention for the Protection of Literary and Artistic Works (1886) 252 Bernstein, Lisa 65, 80 best efforts 67, 106 bilateral incentives behind public commons 10, 134–6 bilateral investment treaties (BITs) 259–62, 268, 274–5, 308–11 challenge of BITs: from investment to property 284–9 evolution beginnings 276–9 functions of BITs 279–84 present situation 275–6 property protection and actor heterogeneity 298–301 asset heterogeneity 301–4 cultural heterogeneity and concept of property 289–98 horizontal legal norm heterogeneity 305–8 vertical legal norm heterogeneity 304–5

339

340

index

Blackstone, William 13, 68 bonding assets 194 Boston: Dudley Street Neighbourhood Initiative (DSNI) 221–2 bottom-up institutions 77 bottom-up private ordering 78–81 boundaries of the firm 186, 187, 191 Brazil 245 breach of faith 75 Bryant Park 130–1 Build-Operate-Transfer (BOT) contracts 107 bundle of rights concept 2, 48, 68, 186, 191 ‘disintegration of property’ and 28–30 political version of 26–8 business corporations see corporations Business Improvement Districts (BIDs) 130–1 Büthe, Tim 283 Calabresi, Guido 16 Canada 262, 288 capitalism 25, 185 Carl Schurz Park Association 127–8 Castle Coalition 215 categorical imperative 22 chaos 202 China 56–7, 244, 251, 259, 270, 276, 296–7, 303 Claeys, Eric 48 clarity: not synonymous with exclusion 51 Clarke, Donald 297 Clinton, Hillary 244 club goods 120 Coase, Ronald 16, 30, 31, 32, 187, 191, 192, 203, 209, 226, 230 coercion 190 Cohen, Felix 182 Cohen, Morris 16, 25, 181, 182, 184, 207 collectivism 295 ComCom 130 commodity, property as 27 Common Interest Communities (CICs) 86–8, 108, 118, 146, 159, 163, 164–6, 173

as residual claimant 109–10 controlling commonly-owned assets 110 controlling privately-owned assets 111–13 common property regimes 3, 8, 97, 98, 99, 153 land assembly as anticommons setting 219–26 for-profit private development projects 222–6 non-profit private development projects 220 public projects 219–20 limited common property 205 private-common property mixed regime 108 Renewing Kibbutz 108, 114–18, 147, 148, 162, 171 see also Common Interest Communities (CICs) public-common property mixed regime 118–20 bilateral incentives behind public commons 134–6 over- and under-inclusiveness of current law 137–9 possible tensions between ‘public’ and ‘commons’ 136–7 providing mixed solutions for public commons 139–40 public commons in public spaces 125–34 ‘public’ in local public spaces 120–5 community 4, 8, 153–4, 178 definitions 154–6 territorial communities 156–60 intentional communities 160–4, 169, 170–2 planned communities 86–8, 159, 163, 164–6, 173–4 see also Common Interest Communities (CICs) Property Headwind/Tailwind/ (Near) Zero-wind 167–9 spontaneous communities 157, 166–7, 174–8

index Community Development Block Grant (CDBG) 133 Community Development Corporations (CDCs) 167 Community Gardens 132–4 Community Land Trusts (CLTs) 140–2, 147, 167 structural and institutional features 142 affordability through unbundling of rights and subsidies 142–3 credit mediation 143–4 lowering costs of insolvency 144–5 prevention of insolvency 144 compensation, eminent domain and 216, 228–40 corporate governance 233–5 general design considerations 229–32 hybrid regime 231 landowners-turned-shareholders’ perspective 235–40 market-based just compensation 229 piggybacking on existing law 230–1 special government allocation and tax aspects 232 conditional sales 80 confiscation of property see expropriation of property Confucius 295 consent 203 eminent domain and 216 constitutions 288 South Africa 248–9 United States 61, 76–7, 123, 175, 215 consumption property 179, 180, 182 content-filling, top-down 81–3 contracts 41, 65, 208, 210 Build-Operate-Transfer (BOT) 107 incompleteness and see incompleteness Private Finance Initiative (PFI) 105, 107 theory of the firm: from contract to property 186–7 Armour and Winchop on joint, sequential ownership 196–8 exploring proprietary nature of the firm 191–8

341

Hansmann and Kraakman on asset portioning 194–6 ‘nexus of contracts’ and its discontent 187–91 Williamson and Hart on vertical integration and residual control 192–3 control right to exclude versus separation of ownership and control 199–203 vertical authority versus horizontal governance 203–7 why property structure does not impose control 45 China example 56–7 clarity not synonymous with exclusion 51 limits of value pluralism 52–5 ownership could be relative right 52 property is not only about ownership 49–50 property regimes go beyond private title 50–1 property structure accommodates normative choice 49–57 resource typology as effective benchmark 55–6 rise of new essentialism 46–9 Cooperative Kibbutz 113–14, 116, 148, 161, 170 copyright 70–1, 200 new technology and 72–3 Copyright Act 70 corporate social responsibility (CSR) 185 corporations 4, 5, 8, 9, 40, 179–86, 208–13, 302 challenging property theory 198–9 organizational structure as statusbased stratification 207–8 right to exclude versus separation of ownership and control 199–203 vertical authority versus horizontal governance 203–7 ownership 52 shareholders 4, 181, 197, 203–5, 208, 210, 211, 212

342

index

corporations (cont.) stakeholders 186, 210 theory of the firm: from contract to property 186–7 Armour and Winchop on joint, sequential ownership 196–8 exploring proprietary nature of the firm 191–8 Hansmann and Kraakman on asset portioning 194–6 ‘nexus of contracts’ and its discontent 187–91 Williamson and Hart on vertical integration and residual control 192–3 see also Special Purpose Development Corporations (SPDC) corruption 243 credit mediation 143–4 critical legal theory 2, 26, 185 Cuba 277 culture cultural heterogeneity and concept of property 289–98 property rights protection and 314–15 custom 62, 83–6, 104 Dagan, Hanoch 53 Dalhuisen, Jan 80, 299 De Soto, Hernando 32, 269, 292, 293 debt crisis 281 defensive asset portioning 194 delegation 61, 103 democracy, public spaces and 123–5 Demsetz, Harold 60, 98, 145, 147, 188, 192, 269 dependency theory 280 Detroit 175 Digital Millennium Copyright Act (DMCA) 71 discretion 107 discrimination 302 ‘disintegration of property’ 28–30 division of labour 28 Dodd, E. Merrick 185 Dudley Street Neighbourhood Initiative (DSNI) 221–2

Dworkin, Ronald 34, 35 dynamism: institutions and dynamism in property 59–62 Easterbrook, Frank 189 economic property rights 69 economics law and economics 2, 7, 16, 24, 31 property in 14–15, 24, 30–3 right/value distinction 32, 33–8 egalitarianism, public spaces and 121–3 Egger, Peter 283 Egypt 277 Eisenberg, Melvin 190, 191 Ellickson, Robert 42, 145, 146 embeddedness 290, 292, 294, 295 eminent domain 44, 214–17 compensation 216, 228–40 corporate governance 233–5 general design considerations 229–32 hybrid regime 231 landowners-turned-shareholders’ perspective 235–40 market-based just compensation 229 piggybacking on existing law 230–1 special government allocation and tax aspects 232 incompleteness and 75–7 land assembly 216 for-profit private development projects 222–6 Kelo case 214–16, 217–19, 225, 235 land assembly as anticommons setting 219–26 non-profit private development projects 220 public projects 219–20 proposed mechanism reconceptualizing taking as incorporation 226–7 restructuring just compensation as a financial option 228–40 Special-Purpose Development Corporation (SPDC) 217, 227–40 uncoupling taking and just compensation 226

index empirical evidence 14 enforcement, selective 197 Engels, Friedrich 24 entity property 198 Environmental Protection Agency 221 Epstein, Richard 48 essentialism 186, 208 new essentialism 2, 5, 46–9, 185, 199, 200, 207, 213 estate system 201 ethnic-religious communities 161 European Convention on Human Rights 9, 255–8, 287 European Union 253–5, 267, 276, 306 eve-of-insolvency transaction 198 exclusion 46, 47, 49, 50, 182, 207 clarity not synonymous with exclusion 51 right to exclude versus separation of ownership and control 199–203 expropriation of property 256, 277, 286, 303 see also eminent domain externalities, public spaces and 120–1 fairness 66, 212, 303 bilateral investment treaties (BITs) and 285 fair access 71 fair use 56, 60, 61, 70–1, 303 federalism 262 fee simple absolute 202 Fennell, Lee 146 feudalism 25, 183, 184, 207, 246 firms see corporations Fischel, Daniel 189 floating charges 80 food crises 243 foreigners: restrictions on ownership of property 252 Forest City Ratner Companies (FCRC) 223–5 formalism 15 new formalism 63–4, 185 form/substance debate new formalism 63–4, 185 rules versus standards in legal theory 64–7

343

fragmentation bilateral investment treaties (BITs) and 306, 308 structural over-fragmentation 268 fraudulent convenience law 198 functionalism 65 future uses, incomplete allocation of 71–3 game theory 14 gas fields 73 general rights 19 Germany 275, 276, 303 Gillette, Clayton 79 Giuliani, Rudy 135 globalization 4, 9, 79, 245–52, 265–6, 274, 286, 299 current gaps in cross-border land law institutional incompleteness 266–8 no single blueprint for local reform 269–71 structural over-fragmentation 268 growing effects of extra-national systems 252 bilateral investment treaties see bilateral investment treaties (BITs) sub-society rights 262–5 supranational conventions and institutions 252–9 land law as national construct 9, 245–52 property in land as human right 271–3 Goldschmidt, Chanan 292, 293, 312 good faith 62, 66, 67, 79, 80, 83–6, 106, 299 governance 46, 282, 289 good governance principles 245 Special Purpose Development Corporations (SPDC) 233–5 unified 193 vertical authority versus horizontal governance 203–7 green burials 225 Grey, Thomas 28, 29 Grosse, Robert 283

344

index

Hansmann, Henry 194–6 Hart, H. L. A. 19, 34, 35 Hart, Oliver 193, 194, 196, 203, 239 Hegel, Georg Friedrich 16 hierarchies 227 Hillery, George 155 Ho, Peter 270 Hohfeld, Wesley Newcomb 1, 26, 188 Honore´, Tony 48 horizontal governance 203–7 horizontal legal norm heterogeneity 305–8 housing 140, 220–2 see also Community Land Trusts (CLTs) human ecology 156 human rights American Convention on Human Rights 258, 263, 287 European Convention on Human Rights 9, 255–8, 287 property in land as human right 271–3 United Nations Human Rights Council 259 hybrid regimes see mixed (hybrid) property regimes in rem and in personam relations 1, 39 incentives: bilateral incentives behind public commons 134–6 incidents of ownership 48 incompleteness 60, 61, 91, 102, 106, 193, 298 institutional incompleteness 266–8 legal standards in property and 67–9 incomplete allocation of future uses 71–3 incomplete delineation of private overlapping uses 69–71 incomplete rights and regulation 73–5 incompleteness and eminent domain 75–7 INCOTERMS 79 independence 290 India 276 indigenous peoples 263–5, 266, 300, 304–5

individualism 295 informal ordering 42 informal user groups: McCarren Park Moms 126–7 information costs 189 propertization of information resources 99 innovation 70 insolvency see bankruptcy/insolvency institutions 3, 4, 8 capacity 92–3 dynamism in property and 59–62 institutional incompleteness 266–8 institutional lessons of property standards 91 established institutional capacity 92–3 external constraints 93 homogeneity 91 incompleteness 91 institutional choice does not impose consent 93 scale of effect 92 legal standards and institutional choice ‘custom,’ ‘good faith’ and ‘trade usage’ 83–6 ‘normalcy’ in nuisance, ‘abuse of rights’ doctrine 88–91 ‘objectionable conduct’ and ‘reasonableness’ 86–8 New Institutional Economics (NIE) 2, 15, 31, 192, 289 towards an institutional analysis of standards 77–8 bottom-up private ordering 78–81 top-down content-filling 81–3 intellectual property rights 56, 252, 292 copyright 70–1, 200 new technology and 72–3 patents 301 intentional communities 160–4, 169, 170–2 interdependence 290 interdisciplinarity study of property 16, 17 Interest on Lawyers’ Trust Accounts (IOLTA) 37

index International Centre for Settlement of Investment Disputes (ICSID) 277, 309 International Commerce Commission (ICC) 79 International Monetary Fund 269, 281 International Property Rights Index 32, 312 internationalization see globalization interpersonal relations, property as 6, 53, 55 investment bilateral investment treaties see bilateral investment treaties (BITs) multilateral agreement on investment (MAI) 308 Iran 277 Israel 163, 164–6 Cooperative Kibbutz 113–14, 116, 148, 161, 170 Jewish Ultra-Orthodox communities 172 minorities 171 Renewing Kibbutz 108, 114–18, 147, 148, 162, 171 James, William 289 Jefferson, Thomas 251 Jensen, Michael 187, 188 Jewish Ultra-Orthodox communities 160, 162–3, 170, 172 joint ownership 196–8, 205 judicial activism 267 justice 19 Kant, Immanuel 20, 22–3 Kaplow, Louis 65 Katz, Avery 66 Katz, Larissa 47, 90 Kazakhstan 248 Kelsen, Hans 15, 63 kibbutz movement Cooperative Kibbutz 113–14, 116, 148, 161, 170 Renewing Kibbutz 108, 114–18, 147, 148, 162, 171 Kitayama, Shinobu 290, 295

345

Klein, Daniel 26 Kraakman, Reinier 194–6 land assembly 216 as anticommons setting 219–26 for-profit private development projects 222–6 non-profit private development projects 220 public projects 219–20 Kelo case 214–16, 217–19, 225, 235 land grabbing 243–6, 253, 260, 285 land law 265–6 current gaps in cross-border land law institutional incompleteness 266–8 no single blueprint for local reform 269–71 structural over-fragmentation 268 growing effects of extra-national systems 252 bilateral investment treaties see bilateral investment treaties (BITs) sub-society rights 262–5 supranational conventions and institutions 252–9 national construct, as 9, 245–52 property in land as human right 271–3 law 29 land law see land law law and economics 2, 7, 16, 24, 31 law and society 7, 24 law merchant see lex mercatoria right/value distinction in 32, 33–8 leases 80 legal norm heterogeneity horizontal 305–8 vertical 304–5 legal pluralism 308 legal property, structure of see structure of legal property legal realism 2, 63, 181 legal standards 3, 8, 43, 61, 62 framing legal standard in form/ substance debate new formalism 63–4

346

index

legal standards (cont.) rules versus standards in legal theory 64–7 incompleteness and 67–9 incomplete allocation of future uses 71–3 incomplete delineation of private overlapping uses 69–71 incomplete rights and regulation 73–5 incompleteness and eminent domain 75–7 institutional choice and ‘custom,’ ‘good faith,’ and ‘trade usage’ 83–6 ‘normalcy’ in nuisance, ‘abuse of rights’ doctrine 88–91 ‘objectionable conduct’ and ‘reasonableness’ 86–8 institutional lessons 91 established institutional capacity 92–3 external constraints 93 homogeneity 91 incompleteness 91 institutional choice does not impose consent 93 scale of effect 92 towards an institutional analysis 77–8 bottom-up private ordering 78–81 top-down content-filling 81–3 legal theory property in 15–16, 17 rules versus standards in legal theory 64–7 legislation 59, 61 lex mercatoria 78, 298 New Lex Mercatoria 299–300 liability rules 31, 113 liberalism 27, 158 neo-liberalism 281 Libya 277 Licht, Amir 292, 293, 312, 313 lien 5, 49 Llewellyn, Karl 63, 68 local government 159 Locke, John 18

McCarren Park Moms 126–7 Madagascar 244 Maitland, Frederic William 246 marital property 54, 206 Markus, Hazel 290, 295 Marx, Karl 24–5 Marxism 25, 29 Means, Gardiner 9, 45, 179–81, 182, 183, 185, 198, 201, 207, 212 measures for property rights 292 Meckling, William 187, 188 Melamed, A. Douglas 16 Merrill, Thomas 39, 46, 47, 51, 59, 61, 191, 271, 272 Mill, John Stuart 63 Milner, Helen V. 283 minorities 158, 171 ethnic-religious communities 161 mixed (hybrid) property regimes 3, 8, 98 market for limits of private property 98–103 past experience and present potential 104 private-common property 108 Renewing Kibbutz 108, 114–18, 147, 148, 162, 171 see also Common Interest Communities (CICs) public-common property 118–20 bilateral incentives behind public commons 134–6 over- and under-inclusiveness of current law 137–9 possible tensions between ‘public’ and ‘commons’ 136–7 providing mixed solutions for public commons 139–40 public commons in public spaces 125–34 ‘public’ in local public spaces 120–5 public-private property 105–8, 150 toward a unifying theory 145 flexibility in trial-and-error 148–50 mixed non-utilitarian values 147–8 mixed optimal scales and production functions 145–7

index tri-layered property regimes 140 see also Community Land Trusts (CLTs) morality of the civil condition 18–21 mortgages 5, 49 Community Land Trusts (CLTs) and credit mediation 143–4 lowering costs of insolvency 144–5 prevention of insolvency 144 Mossoff, Adam 48 multilateral agreement on investment (MAI) 308 nation states: land law as national construct 9, 245–52 national treatment 285 neo-colonialism 244 neo-liberalism 281 Neumayer, Eric 283, 284 New Deal 184 new essentialism 2, 5, 46–9, 185, 199, 200, 207, 213 new formalism 63–4, 185 New Institutional Economics (NIE) 2, 15, 31, 192, 289 New London Development Corporation (NLDC) 217–18 New Property 183 New York 147 Atlantic Yards project 223–5 bilateral incentives behind public commons 134–6 possible tensions between ‘public’ and ‘commons’ 136–7 public spaces in 119, 120–5, 166, 176 democracy and 123–5 egalitarianism and 121–3 formal mixed management: Prospect Park Alliance and ComCom 128–30 formal sub-local structures: Bryant Park and BIDs 130–1 incorporated user groups: Carl Schurz Park Association 127–8 informal user groups: McCarren Park Moms 126–7 over- and under-inclusiveness of current law 137–9

347

positive externalities 120–1 public commons in 125–34 publicly-authorized, conditional commons: Community Gardens 132–4 ‘nexus of contracts’ and its discontent 187–91 Nicita, Antonio 71 normative choice, property strutcture accommodating 49–57 China example 56–7 clarity not synonymous with exclusion 51 limits of value pluralism 52–5 ownership could be relative right 52 property is not only about ownership 49–50 property regimes go beyond private title 50–1 resource typology as effective benchmark 55–6 North, Douglas 31 North American Free Trade Agreement (NAFTA) 261 Nozick, Robert 18 nuisance 38, 61, 62, 69, 100 ‘normalcy’ 88–91 numerus clausus principle 59, 197, 213 objectionable conduct 86–8 obligations law 195 obsolescing bargain theory (OBT) 280, 281 oil fields 73 Olmsted, Fredric Law 121 open-access regimes 97, 263 opportunism 226 opting out, constraints on 41–3 ordering 210 bottom-up private ordering 78–81 informal 42 Organization for Economic Cooperation and Development (OECD) 283 originalism 82 over-fragmentation 268 overlapping uses, incomplete delineation of 69–71

348

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ownership 5, 201, 203, 291 incidents of 48 joint and sequential ownership 196–8 property is not only about ownership 49–50 property regimes go beyond private title 50–1 psychological 14, 289 relative right, as 52 restrictions on ownership of property by aliens 252 right to exclude versus separation of ownership and control 199–203 Roman law 250 Pakistan 276 Paraguay 263, 266, 300, 301, 304–5 Parchomovsky, Gideon 176 Paris Convention for the Protection of Industrial Property (1883) 252 Park Moms 126–7 passive property 181 patents 301 paternalism 190 Penner, James 47 Pfaffermayr, Michael 283 Pfizer 214 philosophy, property in 13, 18 Kant on property as public right 22–3 morality of the civil condition 18–21 Rawls on property and public reason 21–2 piracy and intellectual property rights 72 planned communities 86–8, 159, 163, 164–6, 173–4 see also Common Interest Communities (CICs) Plater, Zygmunt 89 pluralism legal pluralism 308 limits of value pluralism 52–5 policies 35 polis theory 159 political science, property in 14 politics ‘disintegration of property’ not (only) about politics 28–30

political version of bundle of rights 26–8 property as 25–6 Pollock, Frederick 246 positivism 15 Private Finance Initiative (PFI) 105, 107 private property 3, 8, 97, 98, 147 Common Interest Communities (CICs) and 111–13 emergence of 60 expropriation see expropriation of property limits 98–103 private-common property mixed regime 108 public-private property mixed regime 105–8, 150 sovereignty and 181, 184 privatization 97, 101, 149 productive property 180, 184 Property Headwind 167–9 Property Rights Alliance 32, 292, 312 property rules 112 Property Tailwind 167–9 Property (Near) Zero-wind 167–9 proportionality principle 287 proprietary nature of the firm 191–8 Prospect Park Alliance 128–30 Proudhon, Pierre-Joseph 13 proxies 67 psychology 2 property in 14, 289 psychological ownership 14, 289 public forum doctrine 123 public goods 110, 120 public rights, Kant on property as 22–3 public spaces 119, 120–5, 166, 176 democracy and 123–5 egalitarianism and 121–3 over- and under-inclusiveness of current law 137–9 positive externalities 120–1 providing mixed solutions for public commons 139–40 public commons in 125–34 formal mixed management: Prospect Park Alliance and ComCom 128–30

index formal sub-local structures: Bryant Park and BIDs 130–1 incorporated user groups: Carl Schurz Park Association 127–8 informal user groups: McCarren Park Moms 126–7 publicly-authorized, conditional commons: Community Gardens 132–4 public trust doctrine 138 public use 61, 62, 71, 76–7 publicly-owned property 3, 8, 50, 97, 98 privatization 97, 101, 149 public utilities 102–3 public-common property mixed regime 118–20 ‘public’ in local public spaces 120–5 public-private property mixed regime 105–8, 150 totalitarianism and 248 see also eminent domain public/private interface 43–5 Putnam, Robert 159 Radin, Margaret 16, 53 Rawls, John 19, 20, 21–2, 23 Raz, Joseph 36 realism 2, 63, 181 reason: Rawls on property and public reason 21–2 reasonableness 61, 80, 86–8 reciprocal arrangements 190, 196, 198 recognition, rule of 34, 35 regulation, incomplete rights and 73–5 regulatory takings doctrine 73–4 Reich, Charles 183–4, 207 religion 169 religious communities 160–1 Jewish Ultra-Orthodox communities 160, 162–3, 170, 172 Renewing Kibbutz 108, 114–18, 147, 148, 162, 171 rent control 51, 68 repos 80 reputation 66 residual claimants 69

349

Common Interest Communities (CICs) as 109–10 controlling commonly-owned assets 110 controlling privately-owned assets 111–13 residual control 192–3 resources 69 crises 243 resource typology as effective benchmark 55–6 rights 147, 186, 211 abuse of rights 61, 62, 88–91 affordability of housing through unbundling of rights and subsidies 142–3 bundle of rights concept 48, 68 ‘disintegration of property’ and 28–30 political version of 26–8 general rights 19 human rights see human rights incomplete rights and regulation 73–5 Kant on property as public right 22–3 measures for property rights 292 overfragmentation of 100 ownership as relative right 52 right/value distinction 32, 33–8 special rights 19 tradable rights 100 vested rights doctrine 74 risk-spreading 101 Robinson, D. H. 187 Robinson, John 26 Roman law 39, 48, 249–51 Rose-Ackerman, Susan 283 rule of law 282, 294 rules versus standards in legal theory 64–7 Russia 248 safe harbours 71 Salacuse, Jeswald W. 283 scale economies 28, 101 Schwartz, Shalom 290, 292, 293, 312, 312 Scott, Robert 66, 67 securitization transactions 231 selective enforcement 197

350

index

separation of ownership and control 199–203 sequential ownership 196–8 servitude 49 sex offenders 174 shareholders 4, 181, 197, 203–5, 208, 210, 211, 212 Special Purpose Development Corporations (SPDC) 233–5 financing 238–40 key for internal share allocation 235–6 public offering 237–8 Siegelman, Peter 176 Sierra Leone 243 Singer, Joseph 53 situation sense analysis 63, 68 Smith, Adam 14, 31 Smith, Henry 39, 46, 47, 48, 51, 59, 61, 191, 198, 271, 272 social capital 159 social cost 30 social obligation theory 16, 55 social sciences, property and 23–4 ‘disintegration of property’ not (only) about politics 28–30 Marx and Weber on property 24–5 political version of bundle of rights 26–8 property as politics 25–6 see also economics social theory, property in 2, 14 sociology, property in 14 South Africa 248–9 sovereignty, property as 181, 184 Soviet Union 247 Special Purpose Development Corporations (SPDC) 217, 227–8 corporate governance 233–5 general design considerations 229–32 hybrid regime 231 market-based just compensation 229 piggybacking on existing law 230–1 special government allocation and tax aspects 232 landowners-turned-shareholders’ perspective 233–5

financing 238–40 key for internal share allocation 235–6 public offering 237–8 Special Purpose Vehicles (SPVs) 231, 234 special rights 19 Spess, Laura 283, 284 spillovers, public spaces and 120–1 spontaneous communities 157, 166–7, 174–8 squatting (adverse possession) 256–8 stakeholders 186, 210, 266 standards 35 legal see legal standards status-based stratification 207–8 strategic costs 121 stratification, status-based 207–8 structural over-fragmentation 268 structuralism 29 structure of legal property 3, 4, 7, 38, 57–8, 288 constraints on opting out 41–3 public/private interface 43–5 third party applicability 39–41 why property structure does not impose control 45 China example 56–7 clarity not synonymous with exclusion 51 limits of value pluralism 52–5 ownership could be relative right 52 property is not only about ownership 49–50 property regimes go beyond private title 50–1 property strutcture accommodates normative choice 49–57 resource typology as effective benchmark 55–6 rise of new essentialism 46–9 Sullivan, Nicholas P. 283 Summers, Robert 64 Sweden 306 Tajikistan 248 taxation 180, 302

index Special Purpose Development Corporations (SPDC) 232 technology, intellectual property rights and 72–3 territorial communities 156–60 intentional communities 160–4, 169, 170–2 planned communities 86–8, 159, 163, 164–6, 173–4 see also Common Interest Communities (CICs) Property Headwind/Tailwind/ (Near) Zero-wind 167–9 spontaneous communities 157, 166–7, 174–8 third parties 197, 208 third party applicability structure of legal property 39–41 third-sector housing 140 see also Community Land Trusts (CLTs) Tiebout, Charles 159 title 269 property regimes go beyond private title 50–1 Tobin, Jennifer 283 Tönnies, Ferdinand 157 top-down institutions 3, 78, 190, 211 top-down content-filling 81–3 totalitarianism 248 tradable rights 100 trade usage 62, 80, 83–6 transaction costs 32, 101, 121, 192, 193, 230 Trevino, Len J. 283 Triantis, George 66, 67 tri-layered property regimes 140 see also Community Land Trusts (CLTs) trusts 80, 197 Turkey 256 Turkmenistan 248 Ukraine 248 under-value transactions 198 unified governance 193 Uniform Commercial Code (UCC) 66, 84, 85

351

United Kingdom adverse possession 256–8 feudalism 246 land law 247 Private Finance Initiative (PFI) 105, 107 railways 149–50 United Nations 278 Charter 278 Conference on Trade and Development (UNCTAD) 280, 281, 282 Convention on Contracts for the International Sale of Goods 79 Human Rights Council 259 United States Steel Corporation 182 use fair use 56, 60, 61, 70–1, 303 incomplete allocation of future uses 71–3 incomplete delineation of private overlapping uses 69–71 public use 61, 62, 71, 76–7 user groups Carl Schurz Park Association 127–8 McCarren Park Moms 126–7 Uzbekistan 248 values limits of value pluralism 52–5 right/value distinction 32, 33–8 Vandevelde, Kenneth 278 Vernon, Raymond 280 vertical authority 203–7 vertical integration 192–3 vertical legal norm heterogeneity 304–5 vested rights doctrine 74 Waldron, Jeremy 19 Washington Consensus 269 Weber, Max 24–5 Williamson, Oliver 31, 192, 194, 196, 203, 209, 226, 230 Winchop, Michael 196–8, 201 World Bank 269, 281 World Trade Organization (WTO) 308 Yackee, Jason 284