Intro.

To Business Law IBE

Unit 1. Introduction to the Law.

1. What is law and where does it come from?

Law is a system of rules and rights that govern a society with the intention of maintaining social order, upholding
justice and preventing harm to individuals and property.

Law regulates almost every aspect of our daily life.

There are several sources of law:

 The parliament (dominant source) where elected politicians make laws.

 Judges also make law through their decisions in court cases.
 Local councils and public servants also make and administer laws.
 A range of people – like the police, officers, judges – administer and enforce laws.

All these various sources of law fit together to create our legal system.

Each part of the system – the courts, the parliament and the executive (ministers and public service) – has a separate
role to play. In particular, the courts are independent of the parliament. This is one reason why judges are appointed
for life (principle of the separation of powers).

What is a legal rule?

A legal rule is a behavioural rule which contains a general binding order for all members of a community because it
has been issued by bodies especially authorized for doing so.

Characteristics:

 They regulate relations between subjects

 They (usually) refer to general cases
 They are (generally) mandatory
 In case of non-compliance, forced enforcement or sanctions may be imposed, reporting, if necessary, to
the legitimate use of force by State bodies.

Interpreting law.

Interpreting legal problems mean to learn how to find, choose and use legal authorities.

There are two legal authorities:

 Primary: legal material issued directly from branch of government. Statutes, regulations, decisions, court rules.
 Secondary: contains commentary on primary authority (and maybe also the text of the primary authority,
in full or in part). Legal encyclopaedias, treatises, law reviews.

The language of law is often arcane and full of strange terminology. In order to put theory into practice you need to
start with theory. Legal writings are notoriously difficult to read and understand and legal texts are often criticized
for being long, complex and repetitive, badly organized, unnecessarily elaborate and confusing…

Sources of interpretation.

 Literal approach. A statement of object or purpose in the act itself.

 Extrinsic approach. Interpretation through material external to the statute i.e., draft bills.

Functions of the law.

 Regulates conduct  Maintains order and provides protection

 Avoids or settles disputes  Sets up the structure of government
 Set out rights and obligations  Direct how to make laws
 Provides remedies
The basic functions of the law.

a) To provide legal certainty: to reduce uncertainty about the standards of conduct that will be enforced.
b) To facilitate planning: legal certainty enhances cooperation and coordination.
c) To maintain order and keep the peace: cooperation may be achieved by other costly mechanisms (i.e.,
physical violence).

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Classification of law.

Structure of Law

Positive Law Other Law

International Law Domestic law

A B C

Procedural Public Law Private Law Criminal

Sustantive Constitutional Contract Law Civil

Administrative Property Law

Tax Law Torts Law

Positive law: are human-made laws that oblige or specify an action.

Other law: morality, ethical, natural or social laws.

Substantive law: defines or creates rights, duties, and obligations of citizens and government. E.g., right to enter into
contracts, the rules of the road.

Procedural law: prescribes the methods of enforcing the rights and obligations of substantive law. E.g., requirements
for a lawful arrest, trial procedures.

Public law: governs the relationships between state and individuals.

i. Constitutional law: Regulates the State institutions, the procedure through which the power of the State is manifested, as well
as recognition and enforcement of subjective rights of the citizens. We can define the Constitution as the legal document that
holds the set of rule for government, usually codified as a written documents, establishes the principles of the political,
administrative and judicial entities od the State, and (usually) holds the list of fundamental rights of the people of that country.
The Constitution takes the first place on the ranking of importance of laws, it is always at the top.

Hierarchy of law

CONSTITUTION

Conventional International
Law

Ordinary Laws

Other legal instruments (e.g. regulations)

ii. Criminal law: Establishes the offences and penalties for those who commit crimes.
iii. Public international law: Refers to those laws, rules, and principles of general application that deal with the conduct of states and
international organizations among themselves, as well as the relationships between states and international organizations with
natural and legal persons. Usually found in the form of treaties, agreements, conventions or covenants.
iv. Administrative law: Governs the public administrations (national, regional and local), their internal organization and their
relationships with each other and with citizens.
v. Tax law: Governs how taxes are imposed by the government onto citizens and non-citizens.

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Private law: governs the relationships between individuals. The area of the law in which ‘private’ interest as opposed
to ‘public’ interest dominates. Concerned with resolving private disputes. Can have a significant ‘public’ impact
beyond the interest of the particular private parties involved (persons, corporations, other legal entities). Except for
criminal matters, most of the cases dealt with in European courts deal with Private Law.
i. Property Law: civil law Concerned with legally recognized rights associated with the ownership of real and personal property.
Governs that various forms of ownership and tenancy in real property and in personal property. Different from intellectual
property law.
ii. Contract Law: civil law Concerned with binding agreements between private parties, entered into voluntarily for mutual
consideration. Body of rules that relates to making and enforcing agreements.
iii. Torts Law/Law of damages: civil law Concerned with the unintentional violation of the private rights of others and the negligent
abrogation of legal responsibilities owning to others. Deals with the wrongful actions of an individual or entity, which cause injury
to another individual’s or entity’s person, property, or reputation, and which entitle the injured party to compensation.
iv. Family Law: civil law Deals with matters of significant impact on family relationships (divorce, custody, adoption...)
v. Inheritance Law: civil law Deals with the distribution of a person’s property after his or her death.
vi. Commercial Law: Governs business and commercial transactions.
vii. Private International Law: Body of rules to resolve disputes between private individuals who cross international boundaries.
Private International Law regulates relationship between Private persons (Natural or Legal) of two different States.

Legal interpretation.

Legal certainty does not mean 100% predictability. A degree of ambiguity always remains. Other times, ambiguity
may be reduced through legal interpretation. Legislatures defer to the courts the interpretation of some legal
concepts.

Traditional view of interpretation criteria:

Plain meaning Literal approach to the rule.

“In claris non fit interpretatio”: Where the rules are clear, is not need an
interpretation of the rule.

Under the literal rule, the judge is required to consider what the legislation
actually says rather than considering what it might mean. In order to achieve this
end, the judge should give words in legislation their literal meaning – that is, their
plain, ordinary, everyday meaning – even if the effect of this is to produce what
might be considered an otherwise unjust or undesirable outcome.

Contextual or asymmetric Finding the meaning in other rules.

approach
Internal coherence: Definition of the word or concert in the same legal text. Used
in many European Union acts.

External coherence: Definition of the word or concept in other legal texts – in the
same legal system –. Understand the concept using other legal texts.

Legislative history of the rule What the authors of the rules wanted it to mean.

Analysis of various materials generated in the course of creating legislation, such

as committee reports, analysis by legislative counsel, committee hearings, floor debates, and
histories of actions taken.

It appears two issues; The problem of time, many pieces of law are very old
(specially the Constitution). We need a way to adapt the content of the legal
system to the change of the society and technology (sociological approach). The
problem of finding legislative intent, taking the views of more than one person –
all congressmen or members of a legislature- and amassing them into one
general preference or judgment.

Sociological approach Socioeconomic circumstances at the time of interpreting the rule may differ from
those at the time of creating it.

It is intersected with the literal approach. Law must be interpreted according to

the evolution of the society. This can be applicable where ethical and moral is
changing. i.e., legal marriage: same-sex marriage.

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Teleological or functional Purpose to be achieved by the rule.

approach
Sometimes statutes and regulations state the purposes of its rules. In other cases,
the purpose is not established in the Act and has to be construed by judges and
courts.
Purposes of a rule are in many cases contested on normative judgments or values:

a. Efficiency (rules aim at maximizing social welfare)

b. Justice (rules aim at safeguarding fundamental rights and dignity)
c. Distribution of wealth (rules aim at transferring welfare from the most affluent to the
poorest in society)

Difference between contextual and functional approach. Contextual can be useful also looking at similar legal texts
(not the same pieces of legislation that are regulating the same specific area). Through functional we normally have
the explanation of the target of the legislation at the beginning of the piece of law.

Techniques used to avoid contradictions:

– Lex specialis derogat generali special law repels general laws.

– Lex posteriori derogat priori newer law repels older laws.

2. Legal systems.
Legal traditions.

A. National legal systems.

Each country has its own legal systems. The structure and characteristics of each legal systems are highly variable.
Some legal systems are organized on the basis of a written constitution (e.g., Spain), some have constitutional systems not resulting from a
single written constitution text (e.g., UK), some do not have an explicit constitutional framework.

B. Classification of legal systems.

It is possible to classify national legal systems into several groups, based on the existence of common characteristics,
legal concepts and traditions.

Traditional classification:

– Civil law systems (main type)

– Common law systems (main type)
– Mixed legal systems
– Customary or religious law

Elements that are taken into account to classify legal systems:

– Sources of law: What constitutes a law in each legal system (statutes, customs, judicial decisions, generally
accepted legal principles, opinions of jurists…). Civil law systems place more emphasis on statutory law (codified law,
written legislation) (decision made by judges).
– Legal concepts and terminology used (by each system) Equity or consideration (common law systems) / Judicial act or
business association (civil law systems).
– Historical development (of each national law) Civil law systems are based on Roman law / Common law systems are
based on English common law.

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Civil law systems Vs. Common law systems.

Features Civil Law Common law

Sources of Law Codification / Statutes Case-law, Precedent

Role of judges Application Creation

Selection of judges Career judges Appointed or elected judges among lawyers

Juries Not frequent (only in serious criminal Frequent (atr trial stage)
matters)

Characteristics of Inquisitorial process Adversarial process

processes

Main approach to Formalism. Deduction. Pragmatism. Induction

adjudication

Role of scholars Doctrine. Commentaries Casebooks- extracting general norms from

similar cases

Formation. Learning by Reading the codes Reading the cases

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Civil law.

Characteristics.

 We have codification, subjected to interpretation.

 Written, provided by the state.
 Ancient from the Roman law and connected to the French Revolution.
 Napoleon: first civil code enacted in Europe (this is why many countries have similar law, they were inspired
by the Napoleonic code).
 We study the content of law itself.
 Proceed from general principal to general principle.
 Sweden, France, Germany, Spain, etc.

Historical characteristics.

It is the predominant legal system in Western Europe (Continental countries). It has its origins in the codification
process occurred across Europe at the turn of the 18th century (recent period).

Families within the civil law system:

– Napoleonic; France, Belgium, Quebec, Spain,..

– Germanistic: Germany, Austria, Switzerland,...
– Scandinavian: Denmark, Finland...
– Chinese: China, but take into account socialist law

Main elements.

 Mostly written. Enacted law, custom and general principles are the primary sources of the law and they
are binding (it is obligated to follow the rules). Case law and the writings of the legal scholars are not
binding but they may have weight when primary sources are absent, unclear or incomplete.
 Codified. Codes create the civil law rather than revealing existent law.
 The law is made by the Parliament (representative of the citizen). Laws replace, rather than supplement,
previous law.
 Precedent is not necessarily binding, it depends.
 Inquisitorial system (the court is involved directly in investigating the case) rather than adversarial.
Adversarial system the role of the court is essentially to be a referee between the prosecution and the
defence. Judge is just the moderator. In the inquisitorial system you present the case written, and then
when you go in front of the judge and he asks questions, so the judge gets involved.
 Little use of juries (generally only for very serious crimes).

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Common law.

Characteristics.

 A body of law which has its origins in the customs and traditions of society and evolves through judicial
decisions.
 Law is not codified. Mostly unwritten.
 Judge made.
 Based on the knowledge of other similar cases.
 Proceeds from case to case.
 Adversarial system. There are two private parties in front of the judge who have to explain the whole case
to him, and the judge will take his decision in base of what you have presented.
 Relevant role for juries.
 USA, UK, Australia, etc.: Commonwealth countries.

Historical characteristics.

Originated in England at 1000 aprox. King Henry II elaborated on a system of actions (writs) and a system of courts of
law to protect these actions (secular tribunals), as opposed to courts of equity (Court of Chancery).

It grew up of a mix of customary rules as distinguishing from those that were merely local. A way to create a set of
common rules in order to harmonize the different local and ordinary rules. And through colonization they were spread
to the rest of the world.

The jurisdiction of the common courts limited by the writ system (a set of action).

Yearbooks and Reports: collections of common law court cases and judicial opinions recorded and organized by year:

– Yearbooks: earliest editions compiled in England from the mid-thirteenth century until 1535.
– In 1535, they were superseded by officially printed and bound editions called Reports.
– William Blackstone (1723-1780) Commentaries on the Laws of England: Systematic approach to the study
of common law.

Main elements.

Great importance is given to the decisions of judges to be followed in later cases (precedents).

Precedents ‘stare decisis’: let the decision stand (follow the decision).

– Judges are obliged to respect the precedent established by prior decisions.

– Creation of “Case Law”: emergence and slow evolution.

Precedents have been characterized as being precise and flexible.

A decision based on particular facts gives some assurance that in a subsequent identical fact situation a similar
conclusion will be reached.

Common law lawyers have become exceptionally skilful at distinguishing fact situations (in order to acquire different
decision)

The statute would not be able to include all these factual variations and possible solutions to them.

Precedent: Principle of stare decisis. Two components:

1. Binding precedent: Courts have to follow earlier decision by the same court or made by a superior court.
This has two legal effects:
a. Horizontal stare decisis: courts have to follow the decisions made by the same panel in the court,
but not always follow decisions made by other panels of the same court.
b. Vertical stare decisis: Courts have to follow the decisions made by a superior court.
2. Persuasive precedent: Courts should not overturn its own precedent unless there are strong reasons to do
so. Overturning may be suggested by precedents from lateral and inferior courts.

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Customary or religious law.

Customary law.

To constitute custom, the practices involved require something more than mere usage or habit. They need to have a
degree of legality. Customary law continues to play an important role, especially in jurisdictions with mixed legal
systems such as those in some African countries.

Religious law.

While a number of prominent religious legal traditions co-exist with state systems of law, some have actually been
adopted as state law.

3. The sources of law.

How laws arise.

1. There are various sources for our laws and there is a hierarchy of laws.
2. International law (coming from International agreement or international organizations).
3. Domestic law (enacted and judge made).

Constitution: sets out the basic rights and distribution of power (legislative, executive and judicial).

Statute law / primary legislation: Parliament and Legislatures enact statutes (or codes). This is enacted law 1 which
takes precedent over common law in common law countries.

Subordinate legislation: (local laws established by municipalities, ordinances, orders-in-council, regulations) enacted by groups to
which Parliament or a provincial legislature has delegated authority.

In civil law systems, judges cannot overturn enacted law, but courts must determine whether a law was validly
enacted, and courts must also interpret the wording of the law (words are elusive).

In common law countries, judges make decisions of law based on the facts of a given case. Lower courts are bound
by the decisions of higher courts. Stare decisis (like cases must be decided alike – so that all courts are bound by their
own previous decisions). A given decision of a given court can establish precedent, which in effect creates new case
law.

Enacted law Vs. Judge made law.

Elected officials make laws and regulations – elected officials can be removed from office.

Judges are appointed, citizens have little say in who becomes a judge, citizens cannot remove a judge from office.
Judges are needed to apply the enacted law, but why should they be allowed to “make new law”? Courts cannot
avoid an issue. A judge must issue a judgement. Politicians can avoid issues. Courts provide a counter balance to
politicians and help correct some of the deficiencies of a democratic system.

Scholarly writings.

At times academic work is used as a basis for judicial decisions. Only truly becomes law after it has been accepted by
the courts or used as the basis for enacted law. Here is there point at which scholars can play their most direct role
in influencing the law.

1 Enact laws: Promulgar, aprobar leyes

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4. The nature of a legal dispute.

Private legal disputes.

A legal dispute results when one party claims that some other party (to the dispute) has “harmed” them. Parties are
private persons, corporations (including such corporations as municipalities) or governments acting as individual legal
entities.

The damage can be physical, emotional, pecuniary2 or non-pecuniary.

The offended party that believes that it has cause of action – i.e., a valid legal claim against the party that injured it –
files a complaint.

This complaining party is referred to as the plaintiff. The party who is asserted to have cause the injury is the
defendant and must answer the complaint. The answer – a brief statement as to whether or not the defendant will
make a defense – why it believes that it did not cause the harm.

Most disputes get settled through settlement discussions, mediation or arbitration without arriving in front a judge.

If not resolved, then there are three possible outcomes at this point:

A. A judge might decide, based on the complaint and answer, that there is sufficient reason to proceed to trial.
B. A judge might decide to dismiss the compliant by summary judgment (in favour of the defendant).
C. A judge might decide to rule in favour of the plaintiff by summary judgement.

5. The foundations of a legal system.

Separation of powers.

Any democratic country is based on the principle of the separation of powers – legislative, judicial, executive –.

Power Role Composition

The Parliament makes and amends Members of the Parliament directly

Parliament
the law. elected by the citizens.

The Executive puts the law into

Executive Prime Minister and minsters.
action.

The Judiciary makes judgements The Judiciary is made up of District

Judiciary
about the law. Court and Courts of Appeal.

Hierarchy of legal sources.

Constitution

•International agreements
International Law
•EU law (directives and regulations)

National Law

Case law (courts decisions)

Doctrine (legal writings)

2 Pecuniary: monteraio

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International sources of law.

Treaties, high level agreements between countries.

The European Union (based on treaties):

– Precedence of community law

– Primary legislation (Treaties, core principles of common market)
– Secondary legislation (Regulations and Directives), case law (ECJ).

Judicial system.

District courts (first instance courts).

Courts of appeal (second instance courts).

Supreme Court (is the final instance of the general courts. A leave to appeal is required. Its decisions establish a
precedent for the lower courts.

How to approach the law and solve legal problems.

I •Issue: Define the relevant legal issue.

•Relevant law: Apply legal principles

R from cases and statutes. Explain the
law - don't just state it.

•Apply to the fact: Develop legal

A arguments by applying the law to
the facts.

•Conclusion: Arrive at a considered

C
conclusion.

When you are facing a legal issue, you need to remember:

– Laws are different from country to country, but there are certain international standards – in particular EU
Directives (although not complete harmonisation).
– Think critically – what matters is what the law says, thus consider your sources.
– Laws change over time.
– In practice, this is a risk assessment: be aware of issues, take informed decisions and sometimes ask for
help (lawyers).

Tort law is used to compensate for harm suffered as a result of breach of a duty fixed by law.

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Unit 2. The Spanish legal system.

1. Political structure.
The Spanish Constitution (1978) establishes the basic principles of the political structure.

In the Constitution, Spain is defined as a social and democratic State ruled by Law:

– Democratic: representative democracy. Sovereignty belongs to the people.

– Rule of Law: the law as the main arrangement for the polity.
– Social: Welfare State

The political form of the Spanish State is a Parliamentary Monarchy, based on parliamentary representation:

– King as the Head of State

– Within the limits established in the Constitution and by parliament, he has no executive powers.

Values: freedom, justice, equality and political pluralism.

Traditional tripartite classification of power

Executive Power Legislative Power Judiciary Power

Territorial organisation.

The State is organized territorially into municipalities, provinces and Self-governing Communities. All these bodies
enjoy self-government for the management of their respective interests.

The Self-Governing Communities can organize their own institutions, their territory and their financial activity. The
Spanish Constitution allows the Self-Governing Communities to have an executive power (Government) and a
legislative power (Parliament). The relationship between the laws between the laws of the State and the laws of the
Self-governing Communities is material, not hierarchical. However, they cannot have a judicial power, due to the
principle of unity of jurisdiction.

Material competence, the State can rule over come aspects, while, the SC can rule over another ones.

2. Formal sources.

There are formal and material sources of law.

Formal sources: origin of a norm from which it derives its force and validity, producers of a norm (who
enacts laws). It is composed by the executive, the legislative and the judiciary power.
Material sources: text or instrument in which a norm is included, result arising from the production
process of a norm (what types). E.g., Constitution, Act, Regulations…

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Executive power Legislative power Judiciary power

Concept: State branch charged It is the branch of

Concept: Branch of
with the execution and the State which has
the State in charge
enforcement of laws and the power to make
of the
policies and the administration laws. Spain has a
interpretation of
of public affairs. bicamera system
laws and the
Elements: Government and (Congress and
administration of
Public Administration Senate)
justice.
Headed by the prime minister Most democracies Composition:
(president). have bicameral Courts and
Holds the executive and systems. Tribunals (judges,
statutory power. senior judges and
The exception: senior judges of the
Controls the directions of
tricameralism: Supreme Court)
national and foreign policy, civil
and military administartion and South Africa.
There are 4
the defence of the State.
jurisdictions
Composition: the Government is Functions (it
composed of the President, •Civil Courts
represents the
Vice-President and the Spanish people): •Criminal Courts
Ministers. •Administrative
•Legislative: Courts
Appointment of President and
producing the
Ministers is formally performed •Labor Courts
main rules of the
by the king.
system.
Congress elected members cast •Budgetary: Each jurisdiction is
a vote for the candidate: 1st approval of the composed of serval
round (absolute majority), 2nd annual state circuits.
round (single majority). revenues and
Relation between the expenditures.
Government and the Parliament •Control of the It is a professional
is based on confidence (trust). Structure:
Government. judiciary. Most of
The Government is jointly Parliament is its members are
acoountable to the Congress of divided into two public servants
Deputies for its actions. chambers: divided into judge,
senior judge,
The Government may also ask •Congress of supreme court
Congress for a vote of Deputies senior judge.
confidence. •Senate
This division is
•Motion of censure: President mainly a Selection of judges:
of Government resigns before consequence of the •Free public
the King and the submitted recognition of the competitive
candidate is elected as the federal or quasi- examination
new President. federal nature of •Merit-based
• Vote of confidence: Presi. of the Spanish State. competition
Govern. resigns before the
King and a new process for
Congress: chamber •Discretionary
of popular appointment by
electing a new Presi. begins.
representation. the CGPJ
Holds a superior
Statutory Power: Besides the position over the Status: judges are
executive action developed by Senate. independent,
the Government, the Executive irremovable, liable
branch has two possibilities of Senate: chamber of to the performance
producing general norms: territorial of their duties and
representation. only subject to the
•Regulations: This is the main
instrument available to the rule of law.
Governmetn to develop its Each chamber has
policies. its own organs: They are banned
•Decree and Legislative Decree president, board, from membership
(legislative instruments): The board of of political parties
Govern. can pass these spokespeople,.. and trade unions,...
instruments that have the
same force and validity of an
act passed by the Parliament. Both chambers
work in Plenary
Sessions and in
Public Administration: The PA Commissions.
shall serve the general interest
objectively and in accordance
Election of
with the principles (efficiency,
Deputies through
hierarchy, decentralization,
voting system.
coordination, subordination to
Congress comprises
the legal system). Law defines
350 deputies. They
the status of civil servants, and
choose a party
in particular: entrey, union
rather than a
rights, incompatibilities and 2
candidate.
otehr conflicts of interest,
safeguards aimed at Election of Senators
impartiality. through voting
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The Spanish Constitutional Court.

It is not part of the Judiciary. It is the “Supreme Interpreter” (guardian) of the Constitution. It is composed of 12
members. They are formally appointed by the King and serve for nine-year term.

Main functions:

– Control of constitutionality of legal norms.

– Protection of fundamental rights.
– Disputes between State and Self-Governing Communities or among Self-Governing Communities
themselves.

Supranational Courts.

Spain is also subject to the jurisdiction of certain supranational courts pursuant to relevant international conventions
to which it is a signatory. European Court of Human Rights, Court of Justice of the European Union, International
Criminal Court.

Summary.

I. Written sources.

The hierarchy of legal norms.

Constitutional rules and principles.

European Union law (directly applicable as part of the national system once passed).

International treaties (applicable once they are officially published in Spain).

Organic laws and ordinary laws.

Decrees and Legislative Decrees.

Regulations.

II. Unwritten sources. Customs and practices.

III. Indirect sources. Case law and legal doctrine.

Sources of Law of the Spanish legal system.

Law/Formal Law. Constitution, Acts, Regulations.

Custom.

General Principles of Law.

Case Law.

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3. Material sources.
Hierarchy.

The Spanish Constitution: amendments.

Ordinary amendment:

3/5 of Congress and 3/5 of Senate.

If there is no agreement between the two chambers: absolute majority in Senate and 2/3 in Congress.

Extraordinary amendment:

Complete amendment (substitution) or partial amendments of provisions involving fundamental rights,

general principles and the Crown.

2/3 of Congress and 2/3 of Senate.

Dissolution of Parliament. New elections.

The new parliament shall ratify the amendment: 2/3 of Congress and 2/3 of Senate.

Ordinary Acts: the legislative process.

Start of the process:

1. Government: Proyecto de ley.

2. Congress and Senate: Proposición de ley.
3. Parliaments of the Self-Governing Communities.
4. Popular initiative (at least 500.000 signatures).

Ordinary laws require a single majority of the Congress and of the Senate, with the Congress adopting the final
decision.

The bills proposed by Government or the legislative proposals issued by the Senate are discussed at Congress: Plenary
Session in order to be accepted, table vetoed or have table amendments.

Legislative proposals from the Congress and from popular initiative pass directly to the next step.

The bills or the legislative proposals are then discussed by a Commission. The Commissions designates a Committee
which will prepare a brief about the text. Discussed and voted in Plenary Session.

Once the text is approved by the Congress, the bill or legislative proposal is submitted by the President to the Senate.
Again, work takes place in Plenary Sessions and in Commissions. The Senate may accept, table a veto or table
amendments.

– If the Senate rejects the text (by an absolute majority), the text goes back to Congress which can:
o Approve the bill or proposal of law by the same majority required at the Senate.
o Wait for two months and approve the text by a single majority.

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In both cases, the text is the one approved initially by Congress. Congress can preclude the
veto placed by the Senate by an absolute majority.

– If Senate introduces amendments, Congress only has to accept or reject them by a single majority.
– If Senate accepts the text without any modification, it is ready to be sanctioned by the King.

The King shall sanction the acts approved by the Parliament within the period of fifteen days, shall
promulgate them and order their publication (formal requirement).

Sanction Promulgation Publication Law in force

Vacatio legis: time period between the law’s publication and the moment when it is formally in force.

Acts: Organic Acts.

Procedure:

The approval, amendment or repealing of Organic Acts require an absolute majority of the Congress in a final vote of
the entire bill.

Subject-matter requirement:

– Fundamental rights and public liberties

– Regional Constitutions
– General Electoral System
– Other matters provided for in the Constitution (Defensor del Pueblo, Consejo de Estado, Tribunal
Constitucinal).

Acts: Legal norms passed by the Government.

Legislative Decree:

– It is necessary to have the Government intervention before its promulgation.

– Delegation by the Congress.
– Any matter except those that have to be regulated by Organic Acts
– Two main functions:
o Consolidation of different legal texts in a unique document.
o Production of new norms. Delegation in this case has to include an act by the Parliament
establishing the principles that have to be respected be the Government.

Decree:

– Temporary legal norm

– Extraordinary and urgent cases
– Some issues cannot be regulated through this instrument: basic institutions of the State; rights, duties and
liberties of citizens; institutional organization of the Self-Governing Communities; and the electoral system.
– It has to be confirmed within 30 days by the Parliament.

Regulations.

Norms generally made by the Executive Power.

Lower hierarchical status.

Formal source:

i. Government (State, Region, Local)

ii. Administration: Public Agencies and other Offices
iii. Other institutions: CGPJ, Congress, Senate, Constitutional Court

Types of regulation:

– Decree (Real Decreto) from the Council of Ministers.

– Order (Orden) from the Ministers or Delegate Commissions

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– Instruction (Intrucción) and Orders of Regulation (Circulars) from inferior autohorities and members of
public agencies.

Custom:

– Non-written law.
– Custom need the existence of practice and the existence of an opinion iuris (general conviction about the
obligatory character of customary rule).
– Subsidiary source of law: it’s only applicable by a judge if it is not contrary to a legal nrom (contre legem
custom) or to morals or public law.
– Whoever claims its application must prove its existence, content and scope.

General Principles of Law:

Basic rules reflecting the conviction of a community in respect to its roganization.

General principles of law permeate the legal system and they also inform other sources.

Applicable only in absence of law and custom applicable to the case.

Case Law:

In civil law systems, it does not formally constitute a source of law: Auxiliary source. Judges do not create law, they
just interpret it. As opposed to the common law systems: Precedent.

Requirements:

i. Requires a well-defined doctrine (stability)

ii. Doctrine must be fundamental to the resolution of the case.
iii. There need to be at least 2 Supreme Court Decisions in the same direction.
iv. There must be an identity between the precedent and the case the doctrine wants to be applied to.

Opinion of legal experts:

They are not a source of law. The opinions of legal experts provide interpretations and clarifications of the law.

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Unit 3. European Union: structure, institutions and material sources of the law.
1. The European Union.
The EU is an economic and political union of 27 countries. The EU operates through a system of supranational,
independent institutions and other intergovernmental negotiated decisions by the member states.

The EU is an autonomous entity with its own sovereign rights and legal order that is independent of the Member
States. Member States and their national citizens are subject to EU Law within the EU’s areas of competence.

The Primacy of the EU Law : EU Law prevails over national law if theare in conflict. Member States cannot revoke
or amend EU norms trough national law.

Member States have ceded some of their sovereign rights to the EU at the centre (Principle of Conferral). Member
States have conferred on the EU powers to act independently. In exercising these powers, the EU is able to issue
sovereign acts which have the same force as laws in individual States.

2. Historical background.
Historical context: World War II

1951. Treaty of Paris. Creates the European Coal and Steel Community (ECSC). Founding members: Belgium, France,
(West) Germany, Italy, Luxembourg and The Netherlands. Entered into force in 1952.

1957. Treaties of Rome. Creates the European Economic Community (EEC) and The European Atomic Energy
Community (EURATOM). Entered into force in 1958.

The EEC:

– Proposed the progressive reduction of customs duties and the establishment of a custom union.
– Proposed to create a single market for goods, labour, services and capital across the EEC’s Member States.
– Proposed the creation of common transport and agriculture policies, a European social fund, and established
the European Commission.

The EURATOM:

– Sought to promote collaboration between member states and a common market in the nuclear energy
sector.

The EEC and the EURATOM were given 4 main institutions: a Commission, Council of Ministers, Assembly and Court
of Justice.

1979. The European Monetary System (EMS). Arrangement between several European countries which linked their
currencies in an attempt to stabilize inflation and stop large exchange rate fluctuations between them. It approved
the prelude to the €,

1986. The Single European Act (SEA). Complete the internal market (area with no internal borders and in which there
is free movement of goods, persons, services and capital). Amends the rules governing the operation of European
institutions and expands the powers of the then European Community in a number of policy areas.

1988. The Economic and Monetary Union (EMU). The resulting report proposed that economic and monetary union
should be achieved in three discrete but evolutionary steps.

Stage 1. Complete freedom for capital transactions.

Stage 2. Establishment of the European Monetary Institute (EMI).

Stage 3. Irrevocable fixing of conversion rates.

1992. The Treaty on European Union (Maastricht Treaty). The Maastricht Treaty established the EU as a legal entity
in its own right. It established the EU by forming what are known as the three pillars of the EU:

1. The three European Communities: managed by the institutions of the EU.

2. A common foreign and security policy: work through intergovernmental cooperation.
3. Police and judicial cooperation in criminal matters: work through intergovernmental cooperation.

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1997. Treaty of Amsterdam. Purpose to reform the EU institution in preparation for the arrival of future member
countries. Creation of the European Central Bank (3rd stage of the EMU)

1999. Introduction of the euro. Monetary policy passed to the European Central Bank. It appears the Euro Zone.

2001. Treaty of Nice. The main changes that it introduces were the methods for changing the composition of the
Commission and redefining the voting system in the Council.

2007. Treaty of Lisbon. Current treaty. Its purpose was to make the EU more democratic, more efficient and better
able to address global problems, such as climate change, with one voice. Main changes: more power for the European
Parliament; change of voting procedures in the Council; citizens’ initiative; permanent president of the European
Council; new High Representative for Foreign Affairs; new EU diplomatic service. It clarifies which powers belong to
the EU, belong to the EU member countries or are shared. The goals and values of the EU are laid out in this treaty
and the EU Charter of Fundamental Rights.

Since ratification of the Treaty of Lisbon the EU is now governed by 2 treaties:

The Treaty on European Union (TEU) – that is the Maastricht Treaty as amended by the Amsterdam, Nice and Lisbon
treaties. Implemented: principles, aims and common provisions.

The Treaty on the Functioning of the EU (TFEU) – that is the Treaty of Rome as amended by all the subsequent treaties
including the Lisbon Treaty. Implemented: the Common market.

From the European Communities to the European Union.

The term “European Union” was introduced by the Maastricht Treaty. The same term is used by the most recent
Lisbon Treaty.

Before the entry into force of the TEU the EU framework was based on 3 different communities:

A. European Coal and Steel Community

B. European Atomic Energy Community
C. European Economic Community

The TEU brought these communities together.

EU Treaties.

The EU is based on the rule of law. The most important application is the principle that governmental authority is
legitimately exercised only in accordance with written, publicly disclosed laws adopted and enforced in accordance
with established procedural steps.

This means that every action taken by the EU is founded on treaties that haven been approved voluntarily
and democratically all EU member countries.

This also means that if a policy area is not cited in a treaty, the Commission cannot propose a law in that
area.

A treaty is a binding agreement between EU member countries. It sets out EU objectives, rules for EU institutions,
how decisions are made and the relationship between the EU and its member countries.

3. Brexit.
June 2016. UK citizens voted to leave the EU.

March 2017. UK formally notified to the European Council its intention to leave the EU.

31 January 2020. Brexit becomes effective.

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4. Formal sources of law.

There is no separation of powers but a representation of interests.
Power European institution
Legislative Council of the EU + Commission + Parliament
Executive Council of the EU + Commission + Member States
Judicial Court of Justice, General Court + national judges

European institutions.

European Council
27 Heads of State or Gov.,
President of the EC and President
of the Commission

European Court of Justice of the EU

Commission
27 Members Court of Justice General Court
Council of the EU
Decision making 27 Minister (1 x MS)
triangle
European Court of Auditors
Parliament
751 (705) members
European
European Agencies. Bodies set up by the EU to carry out a very specific Central
technical, scientific or management tasks.
Legal basis: regulation specifying its task. Bank

The European Parliament.

Members:

751 MEPs (Members of the European Parliament) (to be reduced to 705 because of the Brexit). The number
of MEPs for each country is roughly proportionate to its population, but this is by degressive proportionality:
no country can have fewer than 6 or more than 96 MEPs and the total number cannot exceed 751. MEPs
are grouped by political affiliation, not by nationality.

Role:

Directly elected EU body with legislative supervisory, and budgetary responsibilities.

Legislative: passing EU laws, deciding on international agreements…

Supervisory: democratic scrutiny of all EU institutions, electing President of the Commission, examining
citizen’s petitions and setting up inquiries, discussing monetary policy with the ECB.

Budgetary: establishing the EU budget, approving the EU’s long-term budget.

It is located in Strasbourg and Brussels.

The European Council.

≠ Council of the EU ≠ Council of Europe

Members:

Heads of the state or government of EU countries + President + President of the Commission + High
Representative for Foreign Affairs & Security Policy.

Role:

Defines the general political direction and priorities of the European Union.

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Main functions:

Decides on the EU’s overall direction and political priorities (does not pass laws).

Deals with complex or sensitive issues than cannot be resolved at lower intergovernmental cooperation.

Set’s the EU’s common foreign & security policy.

Nominates and appoints candidates to certain high profile EU level roles.

It is located in Brussels.

The Council of the European Union.

≠ European Council (where EU leaders meet to set the broad direction of EU policy-making)

Members:

Government ministers from each EU country, according to the policy area to be discussed.

President: Each EU country holds the presidency on a 6-month rotating basis.

Role:

Voice of EU member government, adopting EU laws and coordinating EU policies.

Main decision-making body of the EU together with the European Parliament.

Government ministers from each EU country meet to discuss, amend and adopt laws, and coordinate policies.

Ministers have the authority to commit their governments to the actions agreed on in the meetings.

Main functions:

Negotiates and adopts EU laws.

Coordinates EU countries’ policies.

Develops the EU’s foreign & security policy, based on European Council guidelines.

Concludes agreements between the EU and other countries or international organizations.

Adopts the annual EU budget (together with the European Parliament).

It is located in Brussels.

European Commission.

Established in 1958.

Members:

Teams of Commissioners, 1 from each EU country. Each commissaire is encharged of a specific politic area.

1 president, 1st vice-president, 6 vice-presidents.

Role:

Promotes the genera interest of the EU by proposing and enforcing legislation as well as by implementing
policies and the EU budget.

It is located in Brussels but meets in Strasbourg when Parliament holds plenary session.

Commission’s powers:

– Legislative power: central role in the legislative process.

– “Right of initiative”: Union legislative acts may only be adopted on the basis of a Commission proposal,
except where the Treaties provide otherwise.

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– Executive power: manages the EU’s budget, and allocating funding. Enforces EU law; the Commission brings
actions against Member States when they are in breach of EU law. Represents the EU internationally, for
example, by negotiating agreements between the EU and other countries.
– Administrative power: management of programmes (administration of policies).

The Court of Justice of the EU.

Members (2 courts):

Court of Justice (ECJ): 1 judge from each country (six-year term, appointed by the government of the MS by
common accord) + 11 advocates general.

General Court: 50 judges (2 from each country).

Role:

Ensuring EU law is interpreted and applied the same in every country and ensuring countries and EU
institutions abide by EU law.

It is located in Luxembourg.

Main functions:

– Interpreting the law (preliminary rulings). The application of a EU law is under discussion, they can ask the
CJ for interpretation (clarification).
– Enforcing the law (infringement proceedings). Taken against a national government for failing to comply
with EU law.
– Annulling EU legal acts which are believed to violate Eu treaties or fundamental rights (actions for
annulment).
– Ensuring the EU takes action (actions for failure to act)
– Sanctioning EU institutions for harming interests of any person or company as a result of the action or
interaction of the EU (actions for damages).
– Appeals against decisions of the General Court.

The European Central Bank (ECB).

Members:

ECB President and Vice-President and governors of national central banks from all EU countries.

Role:

To manage the euro, keep prices stable and conduct EU economic and monetary policy.

It is located in Frankfurt.

The European Court of Auditors.

Members:

1 from each EU country (appointed by the Council of the EU).

Role:

To check EU funds are collected and used correctly and help improve EU financial management.

It is located in Luxembourg.

It does not have legal power.

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Biding: regulations, directives and decisions.

4. Material sources of law. Not binding: opinions and recommendation.

Sources of EU law: A binding act obliges to act according to it.

– Primary law: Treaties (Rome and Maastricht ones are the most important) – is the basis of the EU legal
system and it is created by the Member States –.
– Secondary law: sources of law created by the EU itself based on the treaties.
o Unilateral acts: Regulations, directives, decisions, recommendations and opinions.
o Conventions and agreements: international agreements, agreements between EU countries,…

Regulations: help to ensure uniformity of law throughout the EU. They are normative in character and
will apply generally or to group of people identifiable in the abstract.

Directly applicable to all Member States and to citizens.

Binding completely.

Member states can’t modify regulations.

Hierarchy of EU secondary legislation:

1. Legislative acts: legal acts adopted through the ordinary or the special legislative procedure.
2. Delegated acts: non-legislative acts of general application.
3. Implementing acts: generally adopted by the Commission in cases where uniform conditions
for implementing legally binding acts are needed.

Directives: Although they are binding on the MS, the choice of form and methods when transposing
them into national law is left to the national authorities.

Directly applicable to all member states but not to citizens.

The purpose of directives is to set a common aim for the MS (harmonization process).

Directive can only have vertical direct effect because they are only binding to the MS.

Decision: For all or specific member states. They effect an entity, country or legal entity. It is directly
and entirely binding only for the party the decision was directed to.

Recommendations: For all or specific member states, EU bodies or individuals. Not binding.

– Supplementary sources of law: Case law form the ECJ, general principles of EU law, international treaties.

Hierarchy of law

Primary
legislation
Charter of
Fundamental
Rights of the EU
International Agreements

General principles of EU law

Secondary legislation

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Direct effect: vertical & horizontal.

Vertical direct effect: Between individuals and MS. Individuals can invoke an EU disposition against the State
before a national court.

Horizontal direct effect: Between individuals. One individual can invoke an EU disposition against another
individual (natural or legal person) before a national court.

Treaty dispositions, regulations and Decisions can have vertical and horizontal direct effect.

Regulations vs. Directives.

Regulations Directives
Bind Everybody Member States
Extent to which they bind In their entirety Result to be achieved
Need national measures? No Must have implementing measures

Direct effect ≠Direct applicability.

Direct applicability: Measure is self-executing, i.e. needs no national implementation. E.g. treaty provisions and
regulations.

Direct effect: Rights enforceable before national courts. Directives can have direct effect.

5. The EU legislative procedure.

A. Ordinary legislative procedure.

Consist in the joint adoption by the EU Parliament and the Council of the EU of a regulation, directive or decision on
a proposal from the Commission.

Unlike the state of things in Member States with parliaments initiating legislation, only the EU Commission can
propose directives or legally binding regulations.

Origin of the proposal of the Commission: EU Commission listens to views across Europe for or against the creation
of new laws. EU citizens can also directly request new draft laws.

Procedure:

1. Draft is sent to the Council of the EU, representing the States, and the European Parliament, representing
citizens. Both act as o-legislators with symmetric procedural rights (same weight to take the final decision).
2. Before being adopted, they go through the institutional mill and discuss between them → Council of the EU
and Parliament can amend a draft according to their interests, especially if majority positions emerge.
3. If they don’t agree, they negotiate, and two possible scenarios are presented:
a. Either the two institutions find a compromise and the draft law can be adopted by MEPs after a
vote.
b. There is no agreement, and the negotiations continue. If the negotiations fail once, the clock
starts ticking to find agreement before a certain deadline.

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4. If there is agreement, the new EU law is adopted, and all Member States (MS) must then apply it. Sometimes
there are derogations. Derogation: A derogation implies that a rule does not bind a country. There are
derogations from parts of the treaties for certain countries.

If MS fail to implement, the European Commission as the guardian of the EU treaties intervenes to punish non-
implementation. And if that fails, the EU Court of Justice takes over. In the worst cases States can be ordered to pay
heavy fines.

B. Special legislative procedures.

For specific cases provided by the Treaties. It is used in order to adopt a regulation, directive or decision by the EU
Parliament with the participation of the Council, or by the latter with the participation of the EU Parliament.

The treaties do not give a precise description of special legislative procedures. Rules are therefore defined “ad hoc”
(on the basis of the relevant treaty articles).

Special legislative procedures abandon the institutional equality between EU Parliament and the Council of the EU,
existing two variants:

i. EU Parliament acts as the dominant institution, with the mere “participation” of the Council in the form of
“consent”.
ii. Inverts the relationship. Council of EU is the dominant institution, with the Parliament either participating
through its “consent”, or in the form of “consultation”.

6. EU competences.
Four general competence categories.

A. Harmonization competence.

EU is entitled to adopt measures for the approximation of national laws (which have as their object the establishment
and functioning of the internal market).

Harmonization: Process of creating common standards across the internal market.

Three constitutional limits:

1. European law must harmonize national laws: “Union legislation which leaves unchanged the different
national laws already in existence, cannot be regarded as aiming to approximate the laws of the Member
States”.
2. Simple disparity in national laws will not be enough to trigger the Union’s harmonization competence:
Disparity must give rise to obstacles in trade or appreciable distortions in competition.

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3. EU must actually contribute to the elimination of obstacles to free movement or distortions of competition.

B. Residual competence.

Article 352 TFEU - It is designed to fill the gap where no specific provisions of the Treaty confer on the EU institutions
express or implied powers to act if such powers appear nonetheless to be necessary to enable the EU to carry its
functions with a view to attaining one of the objectives laid down by the Treaty.

It could be used for “small” amendments to the Treaties but not as a basis for adoption of provisions whose effect
would, in substance, be to amend the Treaty without following the procedure which it provides for that purpose.

It can be used in two ways:

i. With regard to a policy title in which the Union is already given a specific objective.
ii. To develop a policy area that has no specific title with the Treaties.

Two textual limitations:

i. The EU cannot use this competence in specific policy areas in which the Union is limited to merely
“complementing” national action.
ii. Article 352 TFEU cannot serve as a basis for attaining objectives pertaining to the common foreign and
security policy.

The principle of subsidiarity.

Under the principle of subsidiary, in areas which do not fall within its exclusive competence, the Union shall act only
if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either
at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action,
be better achieved at Union level (art. 5 TEU).

7. The EU charter of fundamental rights.

The Charter of Fundamental Rights of the European Union (CFR) enshrines certain political, social, and economic
rights/principles for European Union citizens and residents into EU law.

It was proclaimed in 2000 but it wasn’t recognized until the 2007 Lisbon Treaty where the Charter was converted as
a primely legislation.

Aims to codify existing fundamental rights rather than create new ones.

Codifies European rights from various sources:

 Constitutional traditions common to the Member States

 European Convention on Human Rights
 General principles of European law

Is addressed to the Union and will only exceptionally apply to the Member States.

Distinction between (hard) rights and (soft) principles:

 Rights: direct effect, can be invoked before a court (e.g., right to paid maternity leave and to parental leave
following the birth or adoption of a child),
 Principles: orienting objectives, do not give rise to direct claims for positive action by the EU institution (e.g.,
environmental protection).

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8. Substantive heart of the EU law.

Defining characteristics of the EU:

The internal market: free movement of goods.

How to create a “single” market out of “diverse” national markets? Dual strategy:

1. Negative integration: to “free” the internal market from national barriers to trade in goods.
 Prohibition of custom duties.
 Prohibition of protectionist taxation.
 Prohibition of quantitative restrictions on imports.
 Prohibition of quantitative restrictions on exports.
2. Positive integration: to adopt positive legislation to harmonize the diverse national laws. The harmonization
competence.
 Opting-up system (derogation clauses). Exceptionally a Member State is allowed to maintain
or introduce a higher national standard –even if this partly undermines the free movement of
goods-.
 Tax harmonization competence. As each Member State has a “fiscal veto”, harmonization of
taxation very difficult.

The internal market: free movement of persons.

1. Rich mixture of primary and secondary law.

2. European citizenship:
 Free movement of workers.
 Freedom of establishment
 Right to move and reside freely within the territory of the Member States.

9. Accession to the EU.

Conditions to be satisfied by the state in order to apply for membership:

1. It must be a European state.

2. It must respect the common values of the Member States and undertake to promote them.
 Human dignity  Equality
 Freedom  Rule of law
 Democracy  Respect for human rights

3. Comply with all the EU’s standards and rules.

4. Have the consent of the EU institutions and EU member states (all MS has to agree).
5. Have the consent of their citizens (as expressed through approval in their national parliament or by
referendum).

Criteria to be accepted:

1. Stable institutions that guarantee democracy, the rule of law, human rights and respect for and protection
of minorities.
2. A functioning market economy and the capacity to cope with competition and market forces in the EU.
3. The ability to take on and implement effectively the obligations of membership, including adherence to the
aims of political, economic and monetary union.

Pre-accession period.

Accession is not automatic, it depends on:

1. Adequate preparation of the applicant country.

2. EU’s capacity to integrate the new Member State.

The length of the period varies in function of the adequate preparation of the applicant country and the EU’s capacity
to integrate the new Member State.

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Two topics of discussion arises to negotiate:

1. Implementation and adoption of all EU rules (the acquis). These rules are divided into 35 different policy
fields, negotiated separately.
2. Agreements: financial and transitional.

The Treaty of Accession.

– Conditions Must be agreed in the form of an

– Date of accession accession treaty between the
– Transitions periods required candidate country and the
– Adjustments to the Treaties on which the Union is founded Member States.

Treaty is signed and ratified by all the Member States and the candidate country in accordance with their own
constitutional rules. EU Parliament gives its consent.

Once signed, the country obtain the statues of “acceding countries”, the date expected to become a full MS is set out
in the treaty.

Interim period.

Between the signature of the accession and the date expected to become a full Member State, the acceding country
benefits from special agreements:

 Kept informed of EU legislation + given the opportunity to comment on proposal.

 Hold an active observer status in all the relevant bodies, in which it has the right to speak but not to vote.

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Unit 4. Economic Theory of Property Law.

The economic analysis of law is based on three fundamental microeconomic principles:

1. Principle of rationality: Individuals are rational individuals.

2. Principle of incentives: The behaviour of individuals respond to incentives.
3. Principle of efficiency: Legal rules can be evaluated based on their efficiency.

1. Economic theory of property law.

Once we have property, we will certainly have some amount of property conflicts.

Property law as a way to solve the following problems:

1.1. The Tragedy of Commons.

The commons are defined as the elements of the environment – forests, atmosphere, rivers, fisheries or grazing land
– that are shared, used and enjoyed by all together. Any shared good tends to be overused (overfishing).

When a resource is jointly owned by a group of people, each will tend to exploit the resource, overusing it, and thus
finally destroy the resource. In other words, everyone acts as an independent, ignoring the group’s collective interests
in favour of their own. Self-interested individuals seeking to maximize its own gains.

The only way to solve the Tragedy of the Commons is through private property.

The Tragedy of the Commons exists when a common resource is spoiled or depleted.

Individuals do what is in their own best interest but fail to realize their actions have small social cost.

However, if enough people do these actions, the small costs can add up to a big (and more evident) cost.

Governing the commons – easy that tries to explain how to manage the common goods.

1.2. Externalities.

Example 1. Two neighbouring farmers.

Consider a primitive state of the world where people banded together in families, there is land and there are no
laws, police, etc.
Each farmer grows crops and steals crops from other farmers, and attempts to protect its crops from being stolen
by others.
Each has two choices: 1. Farm his own land. 2. Steal crops from his neighbour
Stealing is less efficient than planting my own crops. However, stealing your crops, you avoid the effort of planting
and watering.
Suppose that planting and watering costs 5, the crops either farmer could grow are worth 15, and stealing costs
3.
With no legal system, the game has the following payoffs:
Player 2

Farm Steal

Farm 10, 10 -5, 12

Player 1

Steal 12, -5 0,0

The Dilemma: for both farmers stealing is the only equilibrium but the optimal outcome is dominated by both
farmers farming.
So, to fix the problem, in a case where there are a lots of farmers, farmers institute some property rights and
some type of government that would punish people who steal. Setting up the system would cost something .

Externalities can lead to inefficiency. If we want the law to lead to efficient outcomes, we can try to design the law
to eliminate externalities through property law (one of the instruments to do it).

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The concept here is that anarchy is inefficient. The creation and enforceability of property rights – and a legal process
for when they are violated – is one way to solve the problem.

In terms of bargaining game we can think of:

1. The “state of nature”, or primitive society as the non-cooperative solution.

2. The threat values associated with this non-cooperative solution are the quantities of food consumption
available to each farmer in a world in which they must each grow, steal and protect: a world in which they
cannot agree on a “social contract”.
3. A social surplus, or cooperative surplus, can come from a cooperative solution in which a set of property
rights is agreed upon and a government is put in place to enforce those rights. >> No individual needs to
spend resources on stealing or protecting because it is already protected by the system.

Will there be a cooperative surplus (social surplus) from organizing a civil society?

 Only if it is more efficient to centralize fighting (enforcement of property rights).

 The society must then decide on a mechanism to share the surplus. How much each farmer will contribute
to the cost of the government and army (a system of taxes).

Overview of Property Law.

Property rights: A bundle of legal rights over resources that the owner is free to exercise and whose exercise is
protected from interference by others.

Property rights are not absolute. Any system has to answer 4 fundamental questions:

1. What things can be privately owned?

2. What can (and cannot) an owner do with his property? >> My exercise of rights may interfere with yours.
3. How are property rights established?
4. What remedies are given when property rights are violated? >> My property rights have no meaning if they
are not enforced.

The following are some examples of the types of practical problems that arise with respect to each of these 4 absic
question of property law.

1. How are ownership rights established?

Example: In the early days of the Internet, John begins using the address [Link].

As the Internet becomes better established as a commercial forum, the Coca Cola company wants to establish a
website. It realizes that John is already using its most obvious address name [Link] to provide a bulletin
board for users of illicit drugs. Can Coca Cola sue John to gain the use of the website address name?

John used the term ‘coke’ as part of a website address first, perhaps long before anyone could have realized that it
would have commercial value to Coca Cola. Coca Cola would like to extend it registered trademark ownership of the
‘symbol’ COKE to its use on the Internet. The ‘rule of first possession’ implies that the first individual to use a resource
has ownership. The ‘rule of tied ownership’ would say that the ownership of a website address name could be tied to
the ownership of the name itself (e.g. to a previous register TM).

Quid iuris? >> There is legal and economic answer (which is more efficient?)

2. What can be privately owned?

Example: Seajets Ferry Services has been operating a ferry service between the mainland and a Resort Island each
summer for the past 25 years. This year it finds that the Happy Seaways rental Company is renting jet boats, jet-ski
and water ski craft for use in the water Passage, which is a public waterway. The resulting proliferation of recreational
craft has disrupted the ferry service, making it much more risky, resulting in fewer trips per day, delays and lower
profits. The Seajets Ferry Service sues the Happy Seaways Rental Company for lost profits.

Does the “rule of first possession” apply? Seajets Ferry Services was there first, but it operates in a public waterway.

Happy Seaways rental Company will likely argue that anyone, including its customers, should be allowed use of the
waterway.

Should someone own the right to use the public waterway? >> Can we transform a common good into a private good?

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3. What may owners do with their property?

Example: Hidden Glen Golf and Country Club was built in 1930, in what was then a countryside area on the borders
of the city.

Over the years, the city grew and now the club finds that the land it occupies is much more expensive as a housing
subdivision than as a golf course. Local residents are upset. The course is a natural ‘green area’ and increases the
value of their property. The residents successfully argue that City Council should pass a motion banning the
subdivision of the property. The Golf Club sues the City demanding that it be allowed to proceed or be fully
compensated.

This is a dispute between the private golf club and the government.

1. What is a private individual or group allowed to do with their property?

2. Can a government place any restriction it finds convenient on private property use simply because it is
politically expedient?

4. What are the remedies for the violation of property rights?

Example: The Jefferson have owned their house for over 30 years. About 20 years ago they built a stone fence across
their back yard. Their backyard neighbours, the Bradford, moved in about 10 years ago.

Recently the Bradford noticed that the Jefferson’ stone fence extended about 15 centimetres onto their property.
The Bradford’ complain to the Jefferson. The Jefferson agreed to either pay annual rental fees for the land or to simply
buy the 15 centimetres of land from the Bradford.

The Bradford points out that this is trespass and sue the Jefferson to have them move the stone fence. >> Infrigement
of property rights.

1. This situation has existed for 10 years; why even consider it a trespass (violation)?
2. If it is trespass, should the court force the Bradford to move their fence or simply make some financial
compensations?

How would a European courts rule in all the above cases?

In these cases, Economists are interested in what economic theory suggests would be appropriate answers to these
questions. We need to find the balance between economic aspects and legal ones.

2. The legal concept of property.

Property: ‘bundle of rights’ that describe what an individual may and may not do with the things they own (material
or immaterial): ‘the extent to which they may possess, use, transform, transfer or exclude others from their property’.

There are two fundamental legal rights that are essential to any notion of ownership:

1. The owner is free to exercise the rights over his/her property. No law forbids or requires the owner to
exercise the rights.
2. Others are forbidden from interfering with the owner’s exercise of her rights. >> If someone enters in your
property you have rules to make him out.
For instance, the Forestry Company can cut down the trees they own or leave them standing. It is their decision. Therefore, environmentalists
have no right to interfere in the harvesting of the trees if the Forestry Company decides to cut them down.

 Ownership is at times described as a ‘zone of privacy’ or as having ‘liberty over things’.

 The concept of property, as a ‘bundle of rights’, is very general. >> It is consistent with the exclusion and
inclusion of many rights and obligations (maybe you are obliged to keep trees // or if building is protected
because it is old and cultural value state can oblige you to keep it).

This “bundle of rights” might change over time.

Consider the owner of an apartment building on the seafront in Costa Brava:

What ‘bundle of rights’ does she What ‘bundle of rights’ did she create How have these rights evolved over
possess with respect to her building? for herself when she first built the time and how has this affected the
building in 1965? value of what she owns?

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Consider e.g. rent controls, zoning by-laws, sign posting by-laws, parking by-laws, fire regulations, etc.

A system of law which granted property rights, enforced by a government can be the answers to all these questions.

Individuals have to agree on a “social contract”, such a “social contract” is said to take the individuals from a “state
of nature” to a “civil society”.

Now that we have seen why we need property rights, we have another question. How do we design property law to
achieve efficient outcomes? How should property rights be allocated to achieve efficiency?

If property rights are necessary in order to pass from the state of nature to society, how do we desing them in order
to achieve an efficient outcome?

Coase answered that it doesn’t matter, but under certain conditions.

The Coase Theorem.

In the absence of transaction costs, if property rights are well-defined and tradable, voluntary negotiations will
lead to efficiency.

It doesn’t matter how rights are allocated initially because if they are allocated inefficiently at first, they can always
be sold/traded so the allocation will end up efficient anyway.

Initial allocation does matter for distribution and if there are transaction costs, may matter for efficiency too. >> But
we are thinking about ideal economic conditions (without externalities).

In a world where trading between people is free and without any obstacles, the law is neither desirable nor
necessary. People can negotiate with each other and find an agreement on the use of assets and resources >> so in
many situations it is not necessary to have rules imposed by the state.

Private negotiation can determine:

 which goods and resources can be an object of property,

 what are the things that the owner may or may not do
 who can restrict the right of an owner
Example. You have a car worth €3,000 to you, €4,000 to me. Obviously, efficient for me to own it but we don’t need the law to give m e the
car.

1. If I start out owning the car (4000): no reason for you (3000) 2. If you start out owning the car (3000): clear incentive for me
to buy it, I end up with it >> efficient (4000) to buy it, I end up with it >> efficient

Regardless of who owns the car at first, we get to the efficient outcome.

The key: lack of transaction costs (tax).

Efficiency doesn’t care about distribution – how much money each end up with – just who ends with the good traded
at the end. // And that doesn’t depend on who starts with it.

The conditions for this to hold:

 Property rights have to be well-defined – it must be clear on who has what rights to start with, so we know
the starting point for negotiations –.
 And tradable – we need to be legitimated to sell/transfer/reallocate rights if we want –.
 And there cannot be transaction costs – it cannot be difficult or costly for us to buy/sell the right –.

Coase Theorem

In the absence of transaction costs, if property rights are well-defined and tradable, voluntary negotiation will
lead to efficiency.
Coase’s example:

1. English common law: "closed range" or “fencing-in” (or “farmer’s rights”) Ranchers have responsibility to control their cattle //
rancher must pay for any damage done by his herd.
2. Much of the US at various times: “open-range” or “fencing-out” (or “rancher’s rights) Rancher can let his cattle roam free // Not
liable for damage they do to farmer’s crops (unless farmer had a good fence and they broke through anyway).

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They both decide the size of the fence, internalizing only the private costs but not the costs imposed on the farmer >> so the farmer has
incentive to make it large but other has not.

If it’s cheaper for the farmer to protect his crops than for the rancher to control his herd

 Under open range law, that’s what he’ll do

 Under closed range law, rancher can pay farmer to build fence

If smaller herd is more efficient, farmer can pay rancher to keep fewer cattle

Coase: Whatever is the efficient combination of cattle, crops, fences, etc. the rancher and farmer will negotiate to that efficient outcome,
regardless of which law is in place as long as the rights are well-defined and tradable and there are no transaction costs.

Irrespective of the open range there is always a solution that will lead to efficiency >> it does not matter what law is imposed, the efficient
solution will happen automatically.

3. What can be privately owned?

PRIVATE GOODS PUBLIC GOODS

Rivalrous: one’s consumption precludes another. Non-rivalrous: one person’s use does not preclude the
use of the same good by another person.
Excludable: technologically possible to prevent
consumption (i.e. it is relatively cheap to enforce Non-excludable: it is quite expensive to enforce
property rights over private goods). property rights over public goods.

Public ownership of private goods: deregulation (private versus public transaction costs) – privatization and
deregulation.

1. Governments at times retain ownership over what are essentially private goods (virgin forest, mineral
rights).
2. Governments also create property rights and then distribute these rights (trucking licenses, airline licenses,
taxi cab permits,…)

Privatization of Public Goods.

At times ‘public transaction costs’ can exceed whatever ‘private transaction costs’ might arise if the goods were simply
treated as private goods.

In such cases there is an economic argument for selling off the ‘public’ good to private owners and allowing it to
become private property.

Deregulation.

The more artificial property rights could be completely eliminated, and the market opened up to competition.
Example: Deregulation of Airlines (remove government restrictions on air fares and open up routes throughout the Continent to competition
among national airlines).

Public Vs. Private goods.

When private goods are owned publicly, they tend to be overused/overexploited.

When public goods are privately owned, they tend to be underprovided/undersupplied. >> If you can freely copy my
song book, then there would be little reward for writing a book, therefore I might choose not to invest in this activity.

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Efficiency suggests:

 Private goods should be privately owned, and

 Public goods should be publicly provided/regulated.

If transaction costs

Transaction costs low >> Facilitate voluntary trade Private goods – low transaction costs

Private ownership facilitates trade

Transaction costs high >> Allocate right efficiently Public goods – high transaction costs

Public provision/regulation required to get efficient

amount

Transaction costs: anything that makes it difficult or expensive for two or more parties to achieve a mutually
beneficial trade.

Three categories:

A. Search costs: difficulty in finding a trading partner

B. Bargaining costs: difficulty in reaching an agreement
C. Enforcement costs: difficulty in enforcing the agreement afterwards

4. What can an owner do?

For efficiency: principle of maximum liberty.

Owners can do whatever they like with their property provided that doesn’t interfere with others’ property or rights.

That is, you can do anything you like so long as it doesn’t impose an externality (nuisance) on anyone else. >> It makes
me better off without making others worse off (if not this goes to a case of tort law).

Limitation to maximum liberty: inalienability.

Inalienability is the notion that you cannot sell, give or have taken away (in general part with) something by any legal
means.
Body organs, blood, sex are all inalienable by sale.

Voting rights are inalienable by sale or gift.

Human rights are inalienable by any means.

It is now legal, in some jurisdictions, to ‘buy’ sperm or eggs or to ‘rent’ uterus

Is there an economic rationale for laws of inalienability? No, morality/ethical reasons.

The public use of private property: takings (expropriations) and regulation.

The state has considerable authority to:

 take ownership of private property, with compensation (say to build a road – or a hospital)
 to regulate the use of private property generally without compensation (say zoning or re-zoning of land
use)

Takings (expropriation) >> Compensation: the state is generally required to pay compensation, at market rates, for
any private property that it takes – this should remove the incentive for the state to use expropriations as a tax.

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5. How are property rights established?

Fugitive property: property that moves around and has no specific boundaries >> Natural gas, savage animals.

Principle of Nobody owns fugitive property until someone possesses it.

First Possession
This rule implies “first in time, first in right”.

1. A very old principle used in the assignment of property rights to tangible property
(unpossessed land, water or other natural resources).

2. In modern times more commonly used in the assignment of property rights to intangible
property (inventions, scientific discoveries, computer software, internet addresses, brand
names, etc.) >> WEBSITES // PATENTS

3. It encourages an inefficient amount of ‘possession’ - individuals take possession of property

not only because it is productive to take possession but also because they are hoping to sell
the property at some future date. >> This happens with patents and blocking competitors.

Tied ownership Ownership of fugitive property tied to something else; so ownership already determined
before resource is extracted (example of land with natural resources). Owner B would own
some of the gas, since under his land.

Principle of accession – a new thing is owned by the owner of the proximate or prominent
property (son of a goat…)

1. Under these rules the ownership of fugitive property is tied to the ownership of settled
property (the owner of the land is also the owner of wild animals on it).

2. Encourages efficient use of the resource (avoid inefficient attempts to establish ownership
through possession).

6. What remedies are given?

A. Property rule / Injunctive relief.

Violation of my right is punished as a crime.

(Injunction: court order clarifying a right and specifically prohibiting any future violation)

But the right is negotiable (I can choose to sell / give up my right).

B. Liability rule / Damages.

Violations of my entitlement are compensated.

Damages – payment to victim to compensate for damage done.

C. Inalienability.

Violations punished as a crime.

Unlike property rule, the entitlement cannot be sold.

INJUNCTIONS DAMAGES

Cheaper to administer >> No need for court to calculate Must assess monetary value of the damage that has
the amount of harm done. been done (sometimes objective); for instance
calculating the value of a life.

But damages are generally more efficient when

bargaining is impossible (i.e. high transaction costs).

Injunctions and property rules are forward-looking – Damages are backward-looking – they compensate for
they specifically forbid future harms from occurring. harm already done.

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Low transaction costs >> Injunctive relief. High transaction costs >> Damages.

Either rule will lead to efficient allocation (Coase) but If bargaining is impossible, damages are the most
injunction are cheaper to implement (court doesn’t efficient outcomes.
have to asses level of harm).
Polluter can choose to pollute and pay when that’s more
efficient that preventing the damage.

So, what does an efficient property law system look like?

What thing can be privately owned?

Private goods are privately owned, public goods are publicly provided.

What can owners do with their property?

Maximum liberty.

How are property rights established?

Trade-off between first possession and tied ownership.

What remedies are given?

Injunctions when transaction costs are low; damages when transaction costs are high.

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Unit 5. Economic Theory of Contracts.

1. Promises.

We make promises every day. Some promises the law will enforce but many promises the law will not enforce (a contract is an
enforceable promise).

2. Transactions.

2.1. Timing of transactions.

Some transactions happen all at once (instant transaction): I hand you a check for €5,000, you hand me the keys of your car. There might be search
and bargaining costs but no enforcement costs.

But some don’t: Neighbours pay the factory to pollute less going forward. We need to be sure that factory respects the agreement. But, what if technology
changes and factory wants to start polluting more again?

2.2. Lots of transactions don’t take place all at once.

2.3. Lots of transactions are not enforceable.

 Children promise their mother that she will be able to live with them when she grows old – unenforceable. Such a promise
is generally not enforceable since nothing was given in exchange for the promise.
 You promise a friend that she can share your apartment in exchange for her paying your tuition – enforceable.
 Vacation package – promises based on deceit are unenforceable. This involves a “false representation of the reality” and
the courts are likely to award money damages as compensation for the failure to provide vacation.

3. Contracts.

3.1. Definition.

A contract is a promise which is legally binding. Contracts are used to enable trade when transactions are not concluded immediately.

Any agreement, written or oral, can be a legal contract – one person/company agreeing to provide or supply another with goods or
services or property (real or intangible).

There are three key concepts of forming a contract:

1. Offer 2. Acceptance 3. Counter-offer (same functions as on original offer)

When an offer is responded by an acceptance without any changes to the offer, the contract is concluded.

3.2. Elements.

Basic elements of a contract.

Offeror Offeree

Shows the intent to accept the offer.

Shows the intent to enter into a contract.
Communicates intent to accept by proper means.
Makes a clear offer.
States acceptance that “mirrors” the terms of the
Communicates the offer to the offeree.
offer.

The offeror gives the offeree an offer and that one responds with an acceptance.

3.3. The principle of freedom of contract.

Parties may freely establish legal arrangements within their discretion, so long as the purpose or object does not violate the nature
of the legal relationship, a statute, or principles of social coexistence.

People can create new type of contract if these contracts are not against the law.

3.4. Bargain Theory of Contracts – a legal theory –.

A contract is an enforceable promise. A promise should be enforced if it was given as part of a bargain, otherwise it should not.

Bargains were taken to have three elements:

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 Offer
 Acceptance
 Consideration (anything of value promised to another when making a contract; it is they key aspect of bargaining).

Elements of the Theory.

 Promisor: person who gives a promise

 Promisee: person who receives it

In a bargain both sides must give up something: reciprocal inventive.

Consideration is what the promisee gives to the promisor, in exchange for the promise. >> Under the bargain theory, a contract
becomes enforceable once consideration is given.

Bargain theory: a promise is enforceable if consideration is given otherwise it is not enforceable.

Previous examples.

 Children promise their mother that she will be able to live with them when she grows old – unenforceable. No consideration
– no enforceable contract.
 You promise a friend that she can share your apartment in exchange for her paying your tuition – enforceable. Consideration
was given – enforceable contract.
 Vacation package – promises based on deceit are unenforceable. Offer, acceptance and consideration are all present, but
there was deceit (false representation of the reality) – no true offer and acceptance.

A contract in practice.

Contract law: give us a way to make a promise legally binding which allows us to have a cooperative solution.

Contract law give us one way to change this game into one that has a cooperative solution. Suppose we can sign a contract, under
which I am punished if I run off with all the money.

Purpose of contract law is to enable people to cooperate by converting games with non-cooperative solutions into games with
cooperative solutions.
Example. Suppose I have an opportunity to make a valuable investment, but there’s no way for you to be sure, once I’ve doubled your money, that I’ll choose to
give you back your share.

The remedy.

Under bargain theory the promisee is entitled to the ‘benefit’ which would have been obtained if the promise had been fulfilled.

Expectation damages (ED) – remedy under bargain theory for violation of promise = sum of money –.

 ED are the amount of benefit the promisee could reasonably expect from performance of the promise.
 ED are the difference between expected value if promise had been fulfilled and what was actually received.

An award of expectation damages protects the damaged party’s interest in realizing the value of the expectation that was created by
the promise of the other party.

3.5. Efficiency in contracts.

In general, efficiency requires enforcing a promise if both the promisor and the promise wanted it to be enforceable when it was
made.

The first purpose of contract law is to enable people to cooperate by converting games with non-cooperative solutions into games with cooperative
solutions or, enable people to convert games with inefficient equilibria into games with efficient equilibria.

To sum up:

Contract: legally binding promise which allows for transactions that does not occur “all at once”.

Which promises should we enforce?

 Bargain theory: enforce promises made as part of a bargain. Elements: offer, acceptance, consideration.
 Efficiency: promises that both parties want it to be enforceable.