Eduardo Mayora Alvarado
Francisco Marroquin University

Civil Law, Common Law, and the Market 

The Philadelphia Society National Meeting
New Orleans, April 26, 2003

Introduction 

There is now wide agreement that the nature of the legal system functioning in any particular society relates importantly to the operation of the market.   However the consensus on the reasons why this is so is not equally spread. I think in part this is due to the different criteria that can be used to judge a good from a bad legal system.  Friedrich Hayek and Bruno Leoni used the criteria whether individual liberty and an extended and prosperous order can flourish and from this perspective they offered very enlightening thoughts. On this occasion I will try to synthesize their views, specifically concerning two of their landmark works: Law, Legislation and Liberty, by Hayek, and Freedom and the Law, by Leoni.  

In their writings I have found a number of interesting points in common, which I will try to highlight as well as those, also interesting aspects, in which they do not seem to agree.  The basic differences that I have found, very closely relate, in my opinion, to the basic differences between the two fundamental legal systems of the west:  the Common Law and the Civil Law. 

Towards the end I have ventured to make a few suggestions, which are mere variations of their ideas, regarding the practicability of certain basic institutional arrangements. 

THE CONCEPT OF “LAW” 

No one would seriously suggest these days that a legal order can operate on the basis of “the rule of arbitrary will" rather than “the rule of Law ”.  Therefore, the correct understanding of the concept of "Law" is crucial.  If “Law” were defined in terms of a set of rules enacted by the decision of the majority of a legislative body, regardless of the content, nature and structure of those rules, the end product would probably be something similar to “the rule of arbitrary will”.  

According to Hayek, even where the concept of “Law” would be extended to a set of rules enacted by a legitimately elected majority under more general principles contained in the Constitution, it is still possible to arrive at a situation close to “the rule of arbitrary will”. [1] 

This would be so because Constitutional rules are, per se, where judicial review exists, the object of interpretation.  Sometimes, by means of interpretation, legislation contrary to the Constitution will be upheld and some other times (probably fewer), legislation that may have reasonably been consistent with the constitutional text will be repudiated.  It is interesting to note that both things may occur as a result of good faith analysis by the competent tribunal, and not necessarily because of particular political or ideological views or interests.   

Additionally, Hayek observes that individual rights cannot be stated in an absolute manner in any Constitution or bill of rights.[2]  Generally, it is necessary to leave room for legal exceptions and qualifications and in practice such is the case in most constitutions I know.[3]  It is often in the legislative development of such exceptions that clearly stated individual rights may, and do become, severely curtailed.  Therefore, the fact that a reasonably framed Constitution would establish certain substantive limits regarding the legislative process is not enough to prevent deviations from the general principles, which protection is intended. 

Some attention should perhaps be paid to procedural constraints at the constitutional level.[4]   This is, for example, that the Constitution may provide for a two thirds majority for the enactment of legislation that directly relates to such things as property rights, freedom of contract, freedom of speech, etcetera.  No question that such constraints are valuable tools to protect individual rights but the risks related to the interpretative process remain the same and, obviously, even two thirds of a legitimately elected legislature may eventually promulgate legislation contrary to constitutional provisions. 

The difference, thus, between “the rule of arbitrary will” and “the rule of law” directly depends on the concept of "Law" that one is prepared to accept.  Neither Hayek nor Leoni believed that the concept of “Law” is a matter of majority will but rather a process of discovery –not invention—of the rules of conduct that govern the relations among individuals.[5] They both noticed that the discovery of the “Law” is a continuous and evolutionary process and that although the rules that become articulated as a result of this process may sometimes be wrong, it is a mistake to try to correct them other than through the same process of discovery through which they were eventually articulated in the first place.[6]  

PRIVATE LAW AND PUBLIC LAW 

            In order to understand what is meant by the discovery process, a further distinction is necessary.[7]  This is the distinction between “the rules of just conduct” and “the rules of organization” or the distinction between Private Law and Public Law, between Law proper and legislation.[8] 

Law proper comprises those rules applied to the solution of disputes between private parties or a private party and the State, where the State is not acting in the exercise of its “ius imperium” but only in its capacity as an ordinary legal entity or person.   Public Law or legislation in turn refers to the organization of government and the different public agencies, and the determination of the rights and obligations between the citizens and the State, as such.  This distinction is relevant because the nature of each type of rules relates to a different intellectual process for their articulation.   

The discovery process generally takes place where the rules belong to the Private Law domain, but the same is not generally true where the rules belong to the Public Law domain.   This is to say that the several solutions that have been found over time to allocate risks and/or losses between contracting parties or in case of a tort, for example, emerged from the analysis of what could be considered a reasonable expectation, in the circumstances of the case, by each one of the parties.  Naturally, the process by which the law of contract, tort law, property law, etcetera, were developed was long and incremental.  No one could have discovered or figured out, at once, even a majority of the rules of Private Law.  On the contrary, if one observes the constitutional process of the American republic, for example, the basic structure of the Constitution was conceived as a whole.  Obviously, a cumulus of principles and previous experiences, local and foreign, illuminated the workings of the founding fathers, but the backbone of the Constitution was conceived through a rather concentrated process.  The Civil Law, of the European continent, and the English Common Law, evolved over a much extended period of time and through a decentralized process.  This is not to say that Constitutional Law has not evolved in the United States or elsewhere, but that the basic set of rules was created <rather> than discovered.   

Thus, both Hayek and Leoni observe that the nature of the abstract rules of just conduct and that of the rules of organization, is different, and this distinction is directly related to the question whether the market may or not flourish within the framework of the legal system.[9]   

If my understanding of Hayek’s and Leoni’s ideas is correct, they differ as to what would be the appropriate institutional arrangements necessary to allow for the operation of the process of discovery of the Private Law. They both agree that the “discovery process” in order to articulate the rules of Private Law should be the primary task of the courts[10], however, Hayek suggests that, in addition to the courts, another constitutional body should be established.  This would be a “sui generis” legislative body in charge of laying down the abstract rules of conduct and in charge of permanently revising them. [11] Leoni, on the other hand, favored a case-law system in the hands of the courts for the discovery, articulation and application of the rules of Private Law.  He even questioned the role of a Supreme Court of Justice that, in his opinion, could eventually engage in the legal constructivism that some legislatures practice nowadays.[12] 

HISTORICAL ASPECTS 

Their different views within this context are also interesting because they both describe in a like manner the historical background of continental European legal institutions, namely, the way in which Roman law developed until before the period of the Justinian codification, from this point to the Middle Ages, and the process that led to the French Revolution and the Napoleonic codification. [13] & [14] 

The historical phenomenon that deserves attention is that for a very considerable period of time, the Private Law became articulated as a result of, fundamentally, a discovery process. 

In Rome, the task was principally in the hands of the “Jurisconsulto”, based on the generally –not officially— recognized rules of Law, as contained and expressed in the “Jurisprudentia”.  The Justinian codification, regarding the Private Law, did not mean to invent it, but to compile the corpus that already existed. When much after, at the university of Bologna[15] the Justinian Code began being studied again and shortly after, used for the resolution of disputes, the reason that it commanded authority and prompted further elaboration, was the fact that the legal institutions and rules contained in the Code were recognized as fair, useful, and adequate regardless of any “official” recognition by the sovereign.  Evolution through the centuries from then on led to the growth of scholarly doctrine often used by the courts in order to resolve legal disputes.[16] 

The theories of popular sovereignty of the French Revolution led, afterwards, to the belief that the Law --any Law--–would be valid only if approved by the people through their representatives.  No legal rule would be valid which had not been the result of the State’s legislative action and thus, when the Napoleonic codification took place, the different codes enacted derived their authority, no longer only from the fact that they embodied long recognized and settled rules of Private Law, but from the official sanction of the State.[17] 

The question was no longer whether the Private Law was fair and sound, but whether it was officially valid.  The problem concerning the legitimacy of the Law became reduced to a “formal” question.[18] Anything passed by the legislature in a manner according with the legislative process has ever since been considered the “Law”, regardless of the nature of the rules.  

According with Hayek, the failure to establish an institutional arrangement leading to the distinction between the rules of Private Law and those of government resulted in considerable confusion as to what the object of legislation should be.   General and just rules of conduct, which had long been applied and followed by the courts, have since the emergence of the doctrine of popular sovereignty been considered as "equal” to “any” legislated rule.[19] 

A DISTINCTION BETWEEN A GOOD AND A BAD LEGAL SYSTEM 

This confusion generally results in the prevalence of rules that are only “formally” valid over the rules that, through a process of piecemeal discovery became over time the main body of the Common Law, in England, or the Civil Law, on the Continent. 

Therefore, a legal system supportive of the market order requires the subordination of the rules of organization, the Public Law, to the order that flows from the adaptation of each individual’s conduct to the general and abstract rules that have been discovered over time to conform the Private Law. 

Subordination, in this context, should be understood to mean various things.   Among them, that the rules of organization should not collide with the Private Law but rather be directed to sustain its effective enforcement by the courts.  The Public Law ought to be used to organize and establish those institutions necessary to safeguard the order that derives from the observation by the individuals interacting in society of the principles and rules of the Private Law.   

Hayek proposed an “ideal Constitution” in order to attain this purpose.[20]   As I understand his writings, in addition to a bill of rights, the ideal Constitution would have to include a definition of the “Law”  proper (as opposed to legislation), those abstract rules of conduct of general and equal application to an undetermined number of future cases.[21]  The enforcement of these rules would be the primary task of the court system, but their ultimate articulation (not creation) and promulgation would be the task of the higher chamber of the legislative branch of government, to be elected in a way different than the lower chamber.[22] 

The lower chamber of the legislative branch would correspond to what representative assemblies are and do today.   This chamber would be in charge of laying down the rules of Public Law, subordinate to the rules of Private Law –to be articulated by the higher chamber.  

In case the lower chamber would pass legislation allegedly in conflict with the Private Law, a Constitutional Court would have jurisdiction to resolve the question.  In case a conflict between a piece of legislation and the Law proper would be found to exist, the court would then rule the former unconstitutional.[23]The higher chamber would not be allowed to pass “legislation” and therefore, the Constitutional Court would also have jurisdiction to decide whether the higher chamber acted “ultra vires”.    

The reason for this, again, is Hayek’s observation that, to an important degree, the fact that modern legislatures have dealt with the Law <and> legislation alike has led to the present confusion between the two.[24] 

Leoni proposed a different approach, not new to a person living in a Common Law jurisdiction, but perhaps too distant to a person living in a Civil Law jurisdiction.  

The basic idea would be to give the Judiciary the exclusive power to lay down the rules of Private Law.[25]  The reasons for this, in addition to the fact that the “discovery process” to articulate the rules of Private Law requires “real world” cases as a starting point, are that the risks of practicing constructivism through the legal process becomes significantly reduced if the law maker (actually the “law discoverer”), the judge, in this case, may only articulate a rule of Law when in presence of a “real world” case.[26] 

Leoni’s point is that recourse to legislation is only justified in extreme situations where judge-made law would, beyond doubt, be insufficient.  This I gather from his warning against “impatience” with the probably more lengthy but certainly more appropriate case-law process, and that the fact that a “case law” approach may seem insufficient in a particular situation does not necessarily prove that recourse to legislation would be an appropriate solution.[27]  

The anti-constructivist antidote, which Leoni saw in the case-law system, should not be left aside without further comment.  This is essential, I think, to judge whether a “Common Law” approach may be the only or the best solution in order that legal Institutions support the market order. Thus, to the extent that the institutional arrangement would prevent the other branches of government (the Executive and the Legislative) from promulgating the Private Law this latter would only develop from the discovery process undertaken by the courts on occasion for the resolution of concrete legal disputes.   No rules would ever be articulated irrelevant to real legal problems between concrete parties or individuals.  It is hard to figure how any deliberate planning of the legal rules could take place in such circumstances because the nature and characteristics of each case circumscribe the boundaries of the court’s decision, if it is to be a rational and reasonable one.  

In this way, also, the law making process becomes decentralized and leaves no room for central planning, since the starting point for discovery, articulation, or restatement of any rule of law would, of necessity, require that two parties with a real legal dispute come before the court to discuss it; such scenario, says Leoni, resembles the market process.[28] 

In the market process, goods and services are supplied and demanded according with the preferences and goals of the several economic agents and, in a similar way, in case-law system, legal rules and institutions would be framed as they are needed in order to resolve the claims and legal problems that the various individuals may experience from time to time. 

Therefore, in the same way that a centrally planned economy does not work adequately, neither may a centralized, legislation-based legal system work because many of the legal rules passed by the legislature are not demanded by the economic agents, in the sense that they are directed to resolve what the law-makers “think” is appropriate, but not addressed to resolve the real issues that individuals are confronted with in real life.  

DIFFERENT VIEWS:  “A CIVIL LAW APPROACH vs. A COMMON LAW APPROACH” 

Hayek believed that with a proper definition of the concept of “Law” a higher chamber different from the representative assembly and elected differently, would be capable of undertaking the discovery process of the “Law” proper.   His system basically rests on a clear distinction and separation of the “law-making” process from the “political” process, and on the subordination of the rules of organization to the rules of “Law”.  Leoni, on the other hand, proposed a decentralized law-making process based on the courts system, where recourse to legislation would only be justified if it were not used to submit minorities and to treat them as losers, or if legislation were the only means by which individuals could reach their goals (without imposing constraints on others). 

Therefore, it may be fair to say that Hayek presented a solution which structure is closer to a Civil Law system and Leoni one which structure is closer to a Common Law system, and yet, both solutions share an important number of concerns and similar conceptual foundations.  Hayek’s “Ideal Constitution” should perhaps be more appealing to those trained in the Civil Law tradition, because the changes that under his system would be necessary to introduce in countries where such legal tradition prevails, are practicable.  The law-making process would not shift from the legislative branch of Government to the judiciary and thus the institutional framework would in that respect remain unchanged. 

Hayek proposed an “age groups” representation system[29] for the election of the members of the higher chamber that has been much debated.  It seems to me appropriate, however, to underline his rationale, namely the importance that the higher chamber be elected by a different constituency, for long periods of time, and formed by individuals whose constituency would be conscious of the specific functions and tasks they are supposed to undertake. 

From the perspective of Leoni, however, the question whether the higher chamber would not evolve into a central “legal planner” is valid.  Hayek did not disregard this possibility and therefore proposed that the Constitutional Tribunal would have jurisdiction to void such possible excesses.  It may be replied, of course, that the Constitutional Tribunal may fail in its task to interpret and properly apply the concept of “Law” as defined in the Constitution.  

The question follows whether the decentralized system that Leoni presented would be a better barrier against constructivism through the legislative process and to the detriment of market institutions.  This is probably why he questioned the roll of a Supreme Court of Justice in a case-law based system, because, in effect, to some extent, a supreme tribunal relatively unchecked could also engage in constructivism of the sort of  what is called affirmative action, for example. 

The one characteristic of a case-law based system that presents a very important advantage, not apparently present in the system proposed by Hayek, is that, ultimately, in order to articulate any rule of Law, a concrete case is required and this reduces the risk of inventing, rather than discovering the Law”.  

In other words it does seem rather difficult that, in absence of a concrete legal problem to resolve, any legislative body –Hayek’s higher chamber included— would be able to really undertake an intellectual process of discovery of the Law.  Of course, previous cases tried before the courts could be a starting point for such intellectual process but, in any case, if this were practicable in order to discover the “Law” and in order to articulate and revise it, the so called higher chamber would probably have to become a council of jurists adequately trained.  And, is this not what courts of law are? Contrarily, if the higher chamber were not to work on the basis of cases previously tried before the courts, but on the basis of hypothetical legal problems, would this not lead to the “invention”, rather than the “discovery” of the Law?  

The key question, thus, in order that the legal system may support free market institutions seems to be how to closely interrelate the articulation of the rules of Law with real life cases.  This, Hayek thought, could result from granting the higher chamber appellate jurisdiction, in a fashion similar to that of the Judicial Committee of the English House of Lords. Leoni advocated a departure from a system of legislated rules of law and a return to a genuine Common Law system that could well permeate the mentality of the jurists of the Common Law jurisdictions, where recourse to legislation has meant a significant departure from the decentralized market like structure of the Common Law.  I do not think, however, that most countries that belong to the Civil Law tradition would be prepared to even consider adopting a Common Law or case-law system, in total substitution for their existing legal institutions.    

Hayek’s Ideal Constitution does not really reflect present circumstances in Civil Law countries, but I think it would be practicable because, as a matter of general rule, in those countries where the Civil Law tradition prevails, the body of Private Law already exists in the general codes, such as the Civil and the Commercial Codes, and thus it is still possible to distinguish the abstract rules of just conduct from the rules of organization, the Public Law.  This being the case, a constitutional provision by which the courts must refuse the application of Public Law rules which would be in conflict with Private Law rules, would, I think, be practicable as well.[30]  The applicability of the Public Law would then be subordinate to the application of the law of the Constitution and to the application of the Private Law. 

Additionally, one can envision a situation where the Higher Chamber may only promulgate or revise Private Law rules on the basis of motions made by its Judicial Committee or by the superior court. The higher chamber would then undertake to modify or promulgate, in any manner, only the rule or rules, which revision was considered necessary on the basis of concrete cases.  

Some arrangement along the lines mentioned above does imply important changes from the perspective of a written law system, but it seems practicable as, in many instances at present the Supreme Court is elected by the legislature, as the Judicial committee would be, and in some other cases the Supreme Court of Justice may submit bills to the legislature, in order to pass legislation.[31] 

CONCLUSION 

After a very long legal historical process things have changed so that fundamental and widely accepted principles of “Law” have progressively lost their deserved authority and preeminence. Somehow, those in power have managed to subordinate these principles to legislation frequently promoted by special interest groups.  The future of civilization rests largely on our ability to revert this trend.   

No market order may progress adequately other than on the basis of just, abstract, and general rules of law.  These rules cannot be invented but can only be discovered. When necessary, such rules may be explicitly articulated, so that they can be more easily followed by the several economic agents.  The rules by which governments are organized should serve the primary purpose of supporting this discovery process and the spontaneous order of the market that derives from the observation of the rules of law proper.