Jump to content
Objectivism Online Forum

Bankruptcy

Rate this topic


stellavision

Recommended Posts

Is there any place for declaration of bankruptcy under a proper system of government? To me I don't understand why anyone should be able to cancel his debts (even at the cost of a very large black mark on one's credit rating) without the consent of his creditors. If someone has gotten himself into bad financial straits, isn't it his responsibility to get himself out? And shouldn't any reduced repayment plan require the voluntary consent of the creditor?

Link to comment
Share on other sites

  • Replies 59
  • Created
  • Last Reply

Top Posters In This Topic

How do you propose that personal bankruptcy be handled? What kind of consent could the creditors give? (Especially considering that there could be a number of them, and a single customer is usually not worth extended legal action on any one creditors part.)

Link to comment
Share on other sites

I have to disagree with DavidOdden. Again, I defer to the legal scholars (or philosophical experts) out there for a better formulation of the reasons, but bankruptcy laws must be allowed. No person has omniscience with regard to the future course of his life. He cannot be held responsible beyond a certain point if he finds himself unable to pay his debt.

Imagine a person whose business fails. He borrowed to establish it, researched the markets, and conducted all manner of full, rational due diligence before starting it. But an unexpected technological innovation from a competitor, or the death of a key employee or, perhaps, theft from a dishonest employee, causes him to shut down his business. This happens all the time. No businessman can foresee every possible contingency when he starts his business. Is he to have no discharge from his debts?

Actually, the corporate legal structure codifies bankruptcy in a way where the business assets can be liquidated to pay off the debts, but any unpaid debts are extinguished with the business. The owner's personal assets are protected. This is already codified into law, and is the codification of voluntarily agreed on terms between the lender and the owner of the corporation.

However, the same mechanism must exist for personal debts, for similar reasons. No one can foresee all the contingencies of life, even if he buys the best insurance protection. How about a business started with personal funds, and the business collapses? Or, how about someone who, through injury, can no longer work? If people were held to debts forever, their failure in paying their debt would become a permanent weight around their neck, one they may never be able to escape from.

I am not sure of the exact legal principle here, but it seems similar to force majeure. Force majeure is an event that is so extraordinary that a contract cannnot be fulfilled. If someone cannot fulfill his contract because of extraordinary events such as lightning strikes, war, etc., the law acknowledges his inability to fulfill his contract and holds him under no obligation to do so.

Bankruptcy is not an easy thing. It carries with it shame and a long black mark on one's credit records. That black mark will make it very difficult for the bankrupt to borrow again.

If there were no bankruptcy provision in the law, I suspect that banks would begin offering it voluntarily as a condition on their loan contracts. The reason is simple. I doubt many people would want to borrow if it meant permanent, lifetime liability, regardless of one's personal circumstances.

Although bankruptcy most likely would be offered as a part of any standard debt contract, it also seems that a legal mechanism for bankruptcy must exist, even if it is not part of a contract. An analogous area of law is employment law. Can someone voluntarily make themselves a slave? Certainly not. Can someone voluntarily take on a debt that can never be discharged for the rest of the borrower's life, even if the borrower's circumstances prevent him from repaying it? It doesn't seem right for the same reason.

Link to comment
Share on other sites

Yeah, GB beat me to it, and I may not undrstand David's claims correctly.

Bankrupcy laws are part of civil law as opposed to criminal law. Criminal bankrupcy would fall under fraud wouldn't it? As such, bankrupcy laws deal with appropriate redress of creditors claims, and they recognize the reality that a debtor cannot or is impaired in his ability to pay the claim.

I'm not a legal expert, and I know very little about personal bankrupcy, but I know a bit about corporate bankrupcy law, and it strikes me as perfectly rational. Chapter 11 essentially restructures a corporation, usually displacing the current owners (stockholder) with the creditors. You can think of it as creditors foreclosing and taking ownership of the company in exchange for their claims.

Link to comment
Share on other sites

Bankruptcy law is a fascinating part of the American legal system because of its complexity. I found bankruptcy proceedings I have observed as a journalist interesting because the trustees, lawyers and judges involved would apply the law purely and in a highly analytical manner rather than based on emotion (no juries involved).

To be sure, like many other laws it's possible to apply this kind of law immorally. But it is a highly useful way in a capitalist economy to resolve debts. It is merely another form of having a third party mediate a financial conflict in an orderly manner, albiet of much higher complexity because unlike run-of-the-mill contracts or civil cases, these involve multiple creditors and obligations.

Using it to wipe away debts caused by irresponsibility is wrong, but as a way to handle troubled debtors it's essential in civil society. Otherwise a debtor has nothing to lose and would just have a bad credit record and unsatisfied lawsuit judgments. Under bankruptcy a creditor at least gets something by having hard assets liquidated, and future income and revenue for the following several years. In fact, in many cases a creditor or group of creditors can force a debtor in to bankruptcy in order to see that his finances are handled in an orderly fashion.

The past couple of posts were spot on as well about changing circumstances and risks. Both borrowers and lenders, like any other investors, assume risks, presumably in exchange for a just reward.

Link to comment
Share on other sites

To simplify matters, I don't see any need to invoke corporations vs. individuals, or individuals as ordinary citizens vs. individuals in the pursuit of a line of business. The fundamental principle is the same -- the debt remains, until the individual (person or corporation) is dead or the debt is paid. The side-issue of limiting stockholder liability is, in my opinion, a side-issue, and we don't want to get into metaphorical discussions about one corporation being forced into slavery to pay its debts to another.

I know I'm cold-hearted. But first, I'm not saying that a man must be omniscient to act morally, you just have to be responsible. That means, know that things can happen, and act to preserve your values in case of rain or employee death. Get insurance, for one thing. And this is not just a trivial one thing, this is the essential one thing. It's ordinarily expected of houses, cars and health, because these are actions that carry a risk. The reason why debt-protection isn't a well-known form of insurance is the same reason why there is no Norwegian word for health insurance, namely the government has usurped a legitimate private function, saying that you may declare an inability to pay, and then be immunized from the consequences of your actions to a large extent.

So do not borrow more than your assets, or, find a lender who is willing to take a risk and who contractually accepts the possibility of loss under certain circumstances (in other words, bankruptcy build into the contract). Okay, such and such lender may demand a 10% share of the company, so that is the price of an unsecured loan. You don't need to be able to forsee all possible contingencies, you just need to see that there may be contingencies.

I don't see why a lifelong debt is such an unmentionable burden. Remember also that if you are incapable of paying your debts, e.g. because you ran up $10 million dollars in debts based on a dream that you were going to win the lottery, your creditors do not get to directly press you into forced labor. The courts will arrange an orderly method for you to continue to exist, while your debts are slowly paid at the rate of, what $1,000 a month, depending on your salary. This is not slavery. In the worst case, if you're in debt for $10 million, you have no job and can't get one because you broke your back, and you live off of the charity of others, then the debt never gets paid. So yes, I agree that debt is serious, but it's not a death sentence.

Remember, also, that bankruptcy not only erases your voluntarily assumed obligations, it also immunizes your future wealth from being applied against your past debts. If you discover the cure for cancer sometime on the future and (rightfully) make hundreds of millions of dollars in royalties from this discovery, those poor schmoos who lent you a million or so in your pre-bankruptcy days can kiss their money goodbye, with no recourse and no means whatsoever of regaining what is rightfully theirs. If you're going to play the unbearable burden of debt card, I'm gonna play the intolerable injustice of cheaters getting away with murder card (these must be tarot cards).

If there were no bankruptcy provision in the law, I suspect that banks would begin offering it voluntarily as a condition on their loan contracts.
Aha! Now you're on board. For example: obligatory mortgage insurance, which seems to be a universal requirement for people with too little equity in the house.
Link to comment
Share on other sites

Ultimately, Party A received from Party B a product, service, or loan that was expected to be paid for or paid back by the agreement between the parties involved. If the government steps in and says "Party A doesn't owe Party B," then A effectively stole from B with government support. If A is unable to pay in the agreed-upon time, it's the job of the government to ensure that A does pay B, and if it means converting the debt into a payment plan of sorts, then that's what will have to happen, but A still owes money to B.

Eliminating the debt as if it never happened is simply a feel-good wrapper for "theft."

Link to comment
Share on other sites

Ultimately, Party A received from Party B a product, service, or loan that was expected to be paid for or paid back by the agreement between the parties involved. If the government steps in and says "Party A doesn't owe Party B," then A effectively stole from B with government support. If A is unable to pay in the agreed-upon time, it's the job of the government to ensure that A does pay B, and if it means converting the debt into a payment plan of sorts, then that's what will have to happen, but A still owes money to B.

Eliminating the debt as if it never happened is simply a feel-good wrapper for "theft."

And so is restructuring it, which is what both you and David are doing with this payment plan sort of option. It is no more or less theft. You are just forgetting to factor the time value of money into the calculation and only counting the "repayment of principal" as the measure which is financially unsound. A debt commitment has three components to it: the cash flows, the time frame and the rate of interest. All combine to justify the original principal loaned. If you change any of these you have effectively restructured the debt and lowered the original principal that would have been loaned in the first place.

That is easy to see when you understand what creditors will settle for.

Let's say I rack up $1,000,000 in unsecured debt, with a structured annuity at 10% so that is ~$160,000/year for 10 years. In year 1 I have an accident, lose my job, and have no means of paying off this agreed to loan at this same rate, but you and David analyze my future earnings potential and determine that I can "pay off" the debt by paying $10,000 / yr until I die (maybe 50 years). If you liquidate my assets and after paying off my secured debt I have $150K in assets left, which would you take? The answer is, you would take the $150K and forgive the loan even though you lose 85 cents on the dollar loaned. Why? because your "refinancing" option is worse. Did you not just "steal" 85 cents from me? That is the reality of the position I'm in right now. The theft has already happened because my future earnings potential is already damaged. The question is how to arbitrate the damage efficiently.

Even if you factor the chance that you cure cancer 20 years from now, it still doesn't make you want to stick it out as a creditor. But the fact of the matter if there was any indication today that this was a potential, the debtor could offer it up to me as equity and I coud swap my debt for equity. Get much more than 10 years out and it doesn't matter how successful you could be. Time value of money is a very powerful thing to a creditor, and the present value of that future success is almost worthless. This is not magic, it is basic math. Do enough financial work and you'll see that 15, or even 5 cents on the dollar in the case of someone who has little chance to pay off the debt is rarely a bad thing.

That is what I meant when I said that reality of the situation demonstrates that the debtor cannot ever pay off the claim. Bankrupcy laws just recognize the reality of the situation and come up with a mechanism to reflect that without the bank coming to break your legs.

Chapter 7 (liquidation, which is what everyone thinks of as "bankrupcy") bankrupcy does not forgive all your debt. It mainly cancels only unsecured debt, which is normally the last in line at the liquidation trough, and rarely gets anything anyway. If the law simply recognizes what happens in the private market de facto, then I have no issue with it. Chapter 13 already provides for a repayment plan in cases where there is enough income potential to repay the debt.

The Chapter 7 code is not non-objective, and creditors who deal in unsecured debt must assess and price for their default risk just as all creditors must do, even in any private system. They can simply factor in the fact that bankrupcy will mean that they will get nothing and charge their interest rates accordingly. If bankrupcy was such an injustice to creditors (i.e. if they had not already priced their default risk into their interest rates) then why aren't credit card companies around the world failing? And why are they stumbling over themselves to give you more credit? The fact is they are more than happy to take on even high risk of default because the interest rates that you are willing to pay more than compensate them for their risk.

However, I don't think there should be provisions to allow you to keep "a few basic" assets in place (such as a primary domicile). Liquidation is liquidation, and I think that part of the code is altruistic. That to me is unjust, but is only a small part of the bankrupcy code, and is not the primary reason for the code. Yes this is a breach of contract on the part of the debtor, but reality determines what you get back, and if the code simply reflects what happens de facto and provides for an orderly and efficient way to do so then it functions properly under its role and arbiter of contract disputes. The bankrupcy code is not about punishment of the debtor; the reality of bankrupcy will punish him enough. The code is meant to appropriately arbitrate all claims from creditors and resolve the issue.

The other aspect of the issue is that it is as much encumbent on the creditor to assess default risk of his client as it is for the client to assess it. And in fact, bankrupcy can be entered into voluntarily by the debtor, or forced by the creditor.

Link to comment
Share on other sites

Bankrupcy laws are part of civil law as opposed to criminal law. Criminal bankrupcy would fall under fraud wouldn't it? As such, bankrupcy laws deal with appropriate redress of creditors claims, and they recognize the reality that a debtor cannot or is impaired in his ability to pay the claim.

But what does that have to do with one's moral and legal obligation to fulfill his contracts? The reality is that person A borrowed money from B with the promise and obligation to pay it back on terms mutually agreed upon. Nothing can wipe this fact out of existence, including the fact that A finds himself unable to pay at some later date. One fact doesn't erase the other, it simply adds. Now we have two facts: 1) A has an obligation to repay his debt and 2) A doesn't have the money to do that. How A deals with those facts is up to him, but it is illegitimate for the government to decree that fact (1) is no longer so.

I do see a place for the law to direct how facts (1) and (2) should be dealt with, in the case that B decides to sue for breach of contract. Perhaps that involves payment schemes, property seizures, or other means. But it can't include, as is currently the case, a government-decreed permanent erasure of debt, i.e voiding of a contract. The government exists to enforce contracts, not void them.

Link to comment
Share on other sites

But what does that have to do with one's moral and legal obligation to fulfill his contracts? The reality is that person A borrowed money from B with the promise and obligation to pay it back on terms mutually agreed upon. Nothing can wipe this fact out of existence, including the fact that A finds himself unable to pay at some later date. One fact doesn't erase the other, it simply adds. Now we have two facts: 1) A has an obligation to repay his debt and 2) A doesn't have the money to do that. How A deals with those facts is up to him, but it is illegitimate for the government to decree that fact (1) is no longer so.

But neither can the government decree into existence the assets to pay off the obligations. That is completely whim based.

So the question becomes how does a rational market deal with that fact, and does the law simply reflect what de facto happens in a rational market, and ensure that that rational standard is applied even when the bank is ready to send someone to break your legs.

This is the misunderstanding. Bankrupcy is not about forgiving debt. It is not at all about decreeing that (1) is no longer so. The govt doesn't do anything (i.e. forgive debt) that a bank wouldn't do, but it assures that a bank doesn't do anything that initiation of force would outlaw. The only debt that is forgiven is the debt that 99 times out of 100 the creditor would have no rational recourse (meaning excluding all initiatoni of force options) but to forgive anyway (or where the cost of negotiating to that conclusion would have used up the assets involved). Mostly the code is about preventing creditors from squabbling amonst themselves and wasting what assets are left anyway. It lines the creditors up in an orderly line, parcels out what assets there are, and tells the last ones to the trough who wouldn't get anything anyway to just not bother.

The reason I wanted to raise the issue of corporate vs individual bankrupcy and Chapter 7 vs Chapter 11 is that that last bolded part (the "just not bother") is a small sliver of the Chapter 7 code, and this is most prevalent in individual bankrupcies, and this is what is most visible to people and what they get enraged about. When you actually study the issues invovled and look at various types of bankrupcies, you start to see that the "just not bother" part is simply what the market would end up with anyway, and as such is not an injustice. (beyond the original default in the first place) The govt does not compound the injustice here. It is not a form of regulation. It is a form of dispute settlement which is what the law is for in the first place. People see someone's personal credit card debt being forgiven, and don't see the mortgage which is not, and the car loan which is not, and then thing there's all sorts of injustice in the system. Look at a few corporate bankrupcies and you see that recovering pennies on the dollar is a fact of the bankrupcy, not a result of the courts regulation of it.

There been all sorts of work on the economics of bankruptcy and I'm pretty convinced that it is not the artifact of a regulatory government, but in fact has a basis in the market itself. In fact, the worst thing that the government can do is be inefficient, and slow in the orderly handling of bankrupcies, especially in Chapter 11. This is one aspect that kills the industries such as the airlines right now. The faster a rational process can be adjudicated, the better for all involved.

Edited by KendallJ
Link to comment
Share on other sites

But what does that have to do with one's moral and legal obligation to fulfill his contracts?

Just to clarify, the fact that someone has amoral obligation to fulfill his contract does not in any way create in reality the ability to fulfill a contract. Bankupcy is a rational mechanism to bring a contract back in line with a reality which has no near term potential to be changed, and which time value of money would say should only consider near term potential.

Everyone loses something in bankrupcy. To think that there are no external costs to the debtors that last well beyond the settlement is foolish. This, I think, is one reason why bankrupcy itself is not criminally punished. Reality punishes the debtor.

Link to comment
Share on other sites

Kendall, I've got the impression that you know quite a bit about Objectivism, which is why I'm baffled that you're using this argument about the government doing something because the result is the "de facto" result in a "free" market. Law is normative and based on ethics, not about de facto anything -- if anything, it's about being against what would happen absent government. Absent government, thieves rob a person, dispose of the property, and get away while the victim never gets his property back. That's the de facto result. What you're advocating is that the government step in and tell the victim not to bother, since he needs to recognize the "reality" of the situation. In a contract, the debtor is *forever* legally and morally responsible for repayment unless the creditor willingly forgives the debt. Perhaps it is often rational (cost-effective) on a business level to give up on somebody, forgive their debt, and move on. But this must be done voluntarily. In bankruptcy, it is the government *forcing* the creditor to forgive the debt. There is no equating the two scenarios -- in a free market, creditors and only creditors choose whether to forgive debt, while under current bankruptcy law, they are forced to do so.

There's no need to bring in issues about external costs or economics or anything else. The issue is fundamentally a moral one: can or cannot the government legitimately negate a contractual obligation. There are plenty of interesting facets about *how* the government should protect a creditor's rights by facilitating optimal repayment in a bankruptcy situation, but no question about whether those rights cease to exist because of a debtor's need.

Link to comment
Share on other sites

Spano, what about force majeure? Is that a valid concept, consistent with Objectivism? Or, how about statutory limits on employment contracts? Can someone sign a contract to make himself a lifetime slave to another person? Can someone take on a debt that can never be extinguished under any circumstances for the rest of his life?

These questions point to a more fundamental issue relating to "contract." What is a contract? Which obligations are morally enforceable, and under what circumstances? What is the context that governs the enforceability of contracts?

I can ask these questions, but I cannot readily answer them. They appear to lie in the area of the philosophy of law. Philosophy of law would bridge the philosophy of Objectivism with the law and help answer these questions.

Link to comment
Share on other sites

Spano, what about force majeure? Is that a valid concept, consistent with Objectivism? Or, how about statutory limits on employment contracts? Can someone sign a contract to make himself a lifetime slave to another person? Can someone take on a debt that can never be extinguished under any circumstances for the rest of his life?
These are good questions Galileo B. In the context of our current mixed economy, I wonder about the moral obligation of debtors who are driven out of business by government regulation and/or taxation. Also, government induced business cycles have certainly caused a great many insolvencies. Under this kind of system, not allowing bankruptcy would be a monumental injustice, in my opinion.
Link to comment
Share on other sites

In a contract, the debtor is *forever* legally and morally responsible for repayment unless the creditor willingly forgives the debt.

Hi Spano. Well, I can certainly be in error so don't be too baffled. This is what I would consider a fairly complex issue.

Here is my question and it pertains to this critical statement above (and to GB's reply as well since he brings up good points).

If this is how you view the concept of contract, then in fact isn't the entire legal concept of remedies in the form of damages, in the case of breach, suspect? Isn't the concept of damages, i.e. that the court can impose other terms (mostly monetary payments) in lieu of a party fulfilling their obligations a similar thing to what you describe above? If in fact, I want the defendant who is in breach to abide by the terms of the contract, and they are "forever legally and morally bound" to abide by their terms, doesn't the concept of the court prescribing damages instead of my desired terms "dictate" new terms to me?

In fact, contract has in implication that the parties intend to be legally bound. Most commercial contract specify the legal jurisdiction where disputes are to be taken. Doesn't that mean that creditor implicitly because of contract has already consented (for emphasis, voluntarily) that legal remedies are acceptable in lieu of fulfillment of contract terms? So in fact the court cannot be forcing the plaintiff to accept different terms. As long as the conditions under which certain remedies or lack thereof are known ahead of time, then the plaintiff has an objective basis under which to set his terms. How can this be the use of force? rather isn't it simply the resolution of contract dispute according to legally binding jurisdiction that was known up front?

So I would answer in short that parties have a moral obligation to abide by contract terms, but legal remedies are not an example of force being use to dictate new terms. Certainly in bankruptcy law, cancellation of debt is not a remedy for the creditor per se, but the concept is the same. The creditor has already given consent to abide by the applicable laws (e.g. Uniform Commercial Code, Bankruptcy code, etc).

So now if you want to discuss the normative aspect of legal use of forgiveness of debt I'm happy to do so, just not as an example of use of force against a creditor. As I've already said, to the extent that this rule is based upon the intent to allow the creditor to get off or to altruistically provide them with a fresh start, then I'm against it, but to the extent that it reflects an orderly way to adjudicate the issue then it seems reasonable and principled.

The other aspect of what happens absent government is that creditors get their goon squads out to enforce a contract, which is the other aspect that bankruptcy law is meant to deal with, and frankly a more fundamental aspect with regards to bankruptcy.

GB's force majeure example is a parallel as well I think.

Where the hell is Vladimir Berkov. Our resident legal expert would be helpful right now.

Edited by KendallJ
Link to comment
Share on other sites

Just to be clear with folks. I am not arguing for the specific forgiveness of debt principle as necessary, but only that I'm not terribly bent out of shape about its existence. I don't think that it is a clear violation of rights in need of significant redress.

In the same way that I argued in another thread that legal patent life was unnecessary, someone could in this thread argue that debt cancellation is also unnecessary. I wasn't too bent out of shape about the current 20 year patent life in that case, and I'm equally not too bent out of shape about the specific cancellation of unsecured debt in this case.

My bigger point is that bankruptcy law is necessary, not for the purpose of giving the debtor "a pass" but rather to allow creditors specific mechanism for redress to their claims.

As I've said, ideally, liquidation means liquidation and so leaving assets in place with the debtor I find disagreeable. In the same way, if the law simply ordered the creditors in their proper priority and submitted them to binding arbitration to find the best negotiated outcome, I think that woud be fine as well.

Link to comment
Share on other sites

In my view, a debt cannot ever morally be forgiven (except by the voluntary consent of the lender). Ask yourself, if you have pride, whether you would allow yourself to go through life without paying a debt that you owed someone. The answer should be that your pride and self-esteem would never let you get away with it. You would do everything possible to honor your debts, period -- no rationalizing it away with "it was just my sore luck, why can't I ever catch a break?" or "the bank is big and rich anyway" or "life is just too hard", etc. If you are a moral person you would work towards eventually repaying your debts simply as a matter of personal honor.

I have a hard time seeing how a just law could "forgive" a debt without the lender's consent. At most it could permit you to prepare an orderly plan for how you will repay the debts in due course and as soon as possible, as opposed to having your affairs fall into complete and perpetual disarray. A lifetime of trying to honor debt with all its attendant difficulties might will be the practical result in some cases, but that is a far cry better than a lifetime of petty rationalizations and personal dishonor, even if under cover of law.

Link to comment
Share on other sites

Just to be clear with folks. I am not arguing for the specific forgiveness of debt principle as necessary, but only that I'm not terribly bent out of shape about its existence. I don't think that it is a clear violation of rights in need of significant redress.
Similarly, I don't think that the existence of statutory means of forgiving debts is a horrid rights-violating sin. My objection is that it unnecessarily complicates and corrupts the concept of contract and obligation. When a man accepts an obligation, in exchange for a value, then he should fulfill that obligation. If a man finds that he in incapable of satisfying his obligations, that does not mean that his rights have suddenly been violated. Maybe this is the central point, which I'd like to emphasize: man does not have a "right to be free of voluntarily assumed obligations when circumstances are overwhelming". So for the state to declare that the obligation no longer exists is not an act necessitated by the proper function of government, namely to protect rights. Of course, we could reconceptualize the notion of the function of government, and say that it is supposed to protect rights, or decide whether circumstances warrant the destruction of a voluntary obligation.
Link to comment
Share on other sites

Spano, what about force majeure? Is that a valid concept, consistent with Objectivism?
I think that properly defined (and considered apart from its common use as a kind of contractual condition), that might be an applicable principle, but then it would be distinct from bankruptcy, so would not justify a specific law about debt-wiping. There should be (and is) a presumed knowledge context, so for example if you have a tall and dead tree on your property that is near to the neighbor's house, you know or should know that this is a threat to your neighbor's property. Thus if the tree falls onto his house during a windstorm, you cannot plead ignorance, saying "I had no idea that the tree could damage his house". On the other hand, there is no rational knowledge context that wold lead you to say that an asteroid will strike Earth and wipe out America's ability to grow wheat and corn. That would be sufficiently unforseeable that I can see the case for cancelling unsatisfiable obligations that arise from that kind of unforeeable event.

Invoking force majeure in New Orleans, when it comes to flooding, is just plain rotten epistemology. Whether the size of the Katrina flood was really forseeable is another matter, but floods are a long established and well-known fact about NOLA. Opinions on the topic vary, but I give credence to the idea that there was some large-scale evasion going on. The important thing about such clauses is that they are explicitly negotiated in a contract. The imposition of a non-negotiable post hoc force majeure clause should be avoided.

Link to comment
Share on other sites

If this is how you view the concept of contract, then in fact isn't the entire legal concept of remedies in the form of damages, in the case of breach, suspect? Isn't the concept of damages, i.e. that the court can impose other terms (mostly monetary payments) in lieu of a party fulfilling their obligations a similar thing to what you describe above? If in fact, I want the defendant who is in breach to abide by the terms of the contract, and they are "forever legally and morally bound" to abide by their terms, doesn't the concept of the court prescribing damages instead of my desired terms "dictate" new terms to me?

In a capitalist society, while it would be the government's position to enforce the contract, it would be the responsibility of those who sign the contract to define how the government would do so. You would have a clause in the contract saying "the govt. will enforce this contract by awarding damages if the terms are broken" or "the govt. will enforce this contract by paddling your ass really hard if the terms are broken". If you don't have such a clause, then any court action to which both sides do not agree will be a violation of rights. If you do not agree to have your contract mediated by the courts, then having your contract mediated by the courts is in fact a violation of rights. Now, in our society, it is assumed that signing a contract makes it "legally binding", but in a capitalist one, making a contract legally binding requires a clause similar to the ones above as well as some form of consent by the government (and this is where Rand's funding of government by contract would come into play). You cannot use the government as an excuse for not making explicit what you are agreeing to.

Link to comment
Share on other sites

Spano, what about force majeure? Is that a valid concept, consistent with Objectivism? Or, how about statutory limits on employment contracts? Can someone sign a contract to make himself a lifetime slave to another person? Can someone take on a debt that can never be extinguished under any circumstances for the rest of his life?

No, no, yes, and yes. In the case of force majeure, why should one side of the contract be held responsible for the failure of the other, regardless of the reason? Signing a contract does not require you to be omniscient, but it does require you to fulfill the terms of the contract. If you're afraid of the remote (metaphysical) possibility that a comet hits the earth, why not put a clause in your contract saying "the terms of this contract will be considered void in the case of force majeure" (hell, in AS they started putting "transportation permitting" into their contracts, didn't they?)? In the case of signing a contract making himself a lifetime worker(slave implies lack of consent), why should the government be able to determine the sorts of agreements rational men can get into? I personally would not sign such a contract, but why should you be allowed to stop another from doing so? All of these limits and legal loopholes are simply ways of trying to evade the fact that you are responsible for your actions and cannot make someone else pay for your failures, regardless of the cause.

Link to comment
Share on other sites

Hi Spano. Well, I can certainly be in error so don't be too baffled. This is what I would consider a fairly complex issue.

In fact, contract has in implication that the parties intend to be legally bound. Most commercial contract specify the legal jurisdiction where disputes are to be taken. Doesn't that mean that creditor implicitly because of contract has already consented (for emphasis, voluntarily) that legal remedies are acceptable in lieu of fulfillment of contract terms? So in fact the court cannot be forcing the plaintiff to accept different terms.

I agree that this is a complex issue, which is why I suggested asking the fundamental moral question about contractual obligations before getting into the various aspects of what proper bankruptcy law would look like.

As far as an intent to be legally bound, this doesn't seem quite right. I think it's the same sort of mistake that is made with respect to zoning, where people say that the government owes them zoning protection because when they moved in they did so with the "intent" that the neighbors wouldn't do such and such with their land. Or that the slave holders built their plantations with the assumption that the government would continue to uphold their "right" to slave labor. Or that taxation is fine and good as long as people know ahead of time that they're going to be taxed and plan accordlingly. But those aren't valid functions of government, and neither is negating contracts. It makes no difference that going into a contract agreement, the creditor knows his money *might* be forever lost by government decree later on. It's still wrong, even if the creditor was aware of the risk he would be wronged.

Link to comment
Share on other sites

Similarly, I don't think that the existence of statutory means of forgiving debts is a horrid rights-violating sin. My objection is that it unnecessarily complicates and corrupts the concept of contract and obligation. When a man accepts an obligation, in exchange for a value, then he should fulfill that obligation. If a man finds that he in incapable of satisfying his obligations, that does not mean that his rights have suddenly been violated. Maybe this is the central point, which I'd like to emphasize: man does not have a "right to be free of voluntarily assumed obligations when circumstances are overwhelming". So for the state to declare that the obligation no longer exists is not an act necessitated by the proper function of government, namely to protect rights. Of course, we could reconceptualize the notion of the function of government, and say that it is supposed to protect rights, or decide whether circumstances warrant the destruction of a voluntary obligation.

David, thanks. This is the fundamental argument for, and you have hit the nail on the head (as Spano has done in his most recent post). So let me ask a few questions following up on my line of thinking with Spano.

1. How do you qualify "circumstances are overwhelming" with your discussion of force majeure?

2. If courts can't properly decide circumstances where obligations change, then what gives them the proper right to assign damages in lieu of fulfillment of obligations?

3. If you have an answer that justifies courts actions in #2, then by what standard does a court decide what damage is equivalent to the unfulfilled obligation? I am thinking here of "reliance measure" or "restitution" damages, which are awarded when "expectation measures" are not possible? Both of these are essentially damages that do not keep the breached party economically whole. Are these measures also measures that corrupt the concept of contract and obligation?

My view of the cancellation of unsecured debt is that these essentially take the role of these secondary sorts of damage measures, and parrallel the best restitution available given the actual reality.

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...