The economic function of liability

First Trimarchi highlights that in the nineteenth century the principle gener­ally accepted by the legal systems was expressed by the phrase ‘no liability without fault’. Nevertheless, the concept of vicarious liability was accepted by the Napoleonic Code and also by the Italian Civil Code of 1865, which was based on the French framework.

In Trimarchi’s view, acceptance of the liability without fault principle between the nineteenth and twentieth centuries was of fundamental import­ance, because the period was characterized by an intense process of industrialization. Trimarchi held that industrial plants create unavoidable dan­gers despite maximum care being taken. Sometimes, a worker’s imprudence causes an injury, and the principles of fault liability are sufficient to address liability. When the injury is caused by the operation of the plant, however, principles of fault liability are insufficient. Accordingly, a rule connecting the risk to the profit assigns liability to the plant owner because he can obtain insurance, or, in modern law and economics language, internalize the costs of the injuries by raising the price of the goods he produces.

Since the concept of risk liability spread, Italian legal doctrine has at­tempted to examine it in detail. Therefore, an analysis and criticism of the relevant theories was essential before Trimarchi could build an economic analysis of risk liability. Thus, he analyses and criticizes the theories found­ing liability on pure causation, fault, profit, fairness, insurance or mobile combinations of these elements. He undertakes a careful analysis of such theories, and elaborates a model that constitutes the milestone of strict liab­ility which operates everywhere with substantial unity of foundation:

This system considers that the risk introduced into the society is part of its social cost and therefore must be borne by the entrepreneur as part of his production cost.

Thus, an enterprise’s strict liability for risk plays an economic role con­nected to the economic theory of distribution of costs and profits, an essential element in the strategic choices of an enterprise. Trimarchi suggests that the cost of running an enterprise includes not only the costs of labour, raw materials, and ordinary wear and tear of machines, but also the costs of the physical and economic injuries caused to third parties. If the legal system does not place the burden of the cost on the entrepreneur who creates the risk, a marginal sector or industry may appear profitable to the entrepre­neur, while from a social point of view these marginal sectors only survive because the cost of the risk they introduce is borne by third parties. In the language of modern law and economics, the creation of risk without liab­ility allows the entrepreneur to externalize some costs of production. On the other hand, under a negligence rule, the potential injurers may escape liability for part of the harm they cause, with a socially inefficient outcome, because it is not practicable for courts to compare benefits and costs on a case-by-case basis and check the profitability of the activity in order to ascertain whether the risk was economically justified: the standard of care is therefore determined by the courts only in general and abstract terms. In lieu of a more costly, limited and uncertain judicial assessment of social benefits and costs, the system of strict liability automatically places on the entrepreneur a socially efficient incentive to control the risk created by his production activity. The entrepreneur may adopt supplemental security meas­ures, substitute a safer method of production, or increase productivity. In extreme cases, the marginal section of the enterprise would have to evolve or be terminated. (See also Trimarchi, 1967, pp. 134-8.) As Trimarchi notes:

It is important to highlight that this discussion applies not only to particularly dangerous enterprises, but to any organized and continuous enterprise that is likely to cause injuries (both physical and economic) to third parties, no matter the size, frequency, or predictability of these injuries, because they can always be translated into cost.

This pressure, when exerted on those who have general control of the risk, may be more efficient in certain cases than the incentive created by a fault­based liability system that is exerted on those who participate in a risky activity. (Some research conducted in the United States on psychology of incidents supports such statements.)

The relationship between risk liability and the possibility of insuring against such risks thus assumes particular relevance. Although Trimarchi does not believe it appropriate to understand the theory of liability only as an ‘insu­rance’ mechanism, he deems the insurability of the risk to be very important in the design of a liability system. Thus, an entrepreneur should be liable only for injuries caused by ascertainable, calculable risks. Only then can the entrepreneur include the risks as costs and protect against liability by insu­rance or self-insurance. Accordingly, as Trimarchi notes, ‘there must be a constant (not occasional) relationship with the risk’. Furthermore, according to the author, strict liability promotes insurance and this, in the absence of a general social security system, implies the additional benefit of preventing the further social harmful repercussions of uncompensated injuries. (See Trimarchi, 1961, p. 39.)