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Mayora – Civil Law, Common Law, and the Market

Eduardo Mayora Alvarado
Francisco Marroquin University

Civil Law, Common Law, and the Market

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


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

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

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


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

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

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

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

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

The difference, thus,
between “the rule of arbitrary
will” and “the rule of
law” directly depends on the concept of "Law" that one is prepared to accept. Neither
Hayek nor Leoni believed that the concept of “Law” is a matter of majority
will but rather a process of discovery ñnot inventionóof the rules of
conduct that govern the relations among individuals.[5]
They both noticed that the discovery of the “Law” is a continuous and
evolutionary process and that although the rules that become articulated as a
result of this process may sometimes be wrong, it is a mistake to try to correct
them other than through the same process of discovery through which they were
eventually articulated in the first place.[6]


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

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

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

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

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


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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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


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

market order may progress adequately other than on the basis of just, abstract,
and general rules of law. These
rules cannot be invented but can only be discovered. When necessary, such rules
may be explicitly articulated, so that they can be more easily followed by the
several economic agents. The rules
by which governments are organized should serve the primary purpose of
supporting this discovery process and the spontaneous order of the market that
derives from the observation of the rules of law proper.

Editorial Universidad Francisco Marroquin, Translation into Spanish
by Luis Reig Albiol, Madrid 1,982; Vol. III at 179..

Id, Vol. III at 192, 193

On the Guatemalan Constitution of 1,985 those provisions concerning the
protection of private documents and books, freedom of residency and
domicile, freedom of speech, private property rights, freedom of commerce
and instry, among others, may be limited by “law”.
Article 14 in the Argentinian Constitution states various individual
rights, to be exercised in accordance with the “law”.
In the Chilean Constituions, various sections in Chapter III,
such as those regarding right to privacy freedom of education, freedom of
speech, and freedom of association, may be limited byu “law” or, ar to
be exervised in accordance with the “law”.

William Breit & Kenneth Elzinga.
Jai Press Inc., Greenwich, Connecticut, 1,988, Vo. 6 “Public Choice
and Constitutional Economics” James D. Gwartney / Richard E. Wagner, Public
Choice and Constitutional Order,

Leoni, Bruno LA LIBERTAD Y LA LEY, Editorial Universidad Francisco
Marroquin, Madrid, 1,974, at 190Öand 237;
Derecho, LegislaciÚn y Libertad, Vol. 1 at 139.

Except that in this particular point, Professor Hayek maintains that
recourse to legislation is sometimes necessary in order to more efficiently
correct those deviations from “justice” occurred through a
jurisprudential process. See, DERECHO,
, Vol. I at 143.

Id, Vol. I, Chapters V and VI.

Id, Vol. I at 200-207

Idem 8, and LA LIBERTAD Y LA LEY, at 17-21


at 32, 33, 117, 118 and 240; DERECHO, LEGILSACION Y
Vol. I at 139Ö and 192.


at 134

Arthur Taylor Von Mehren & James Russel Gordley; THE CIVIL LAW
Edition, Little Brown and Company, Boston and Toronto, 1977 and 9


Vol. III, Chapter IV; LA LIBERTAD Y LA LEY, AT 17-19
AND 180-190

Id, At 8

Id, at 38-45

Id, at 48-52

Frederick Copelstone, A HISTORY OF PHILOSOPHY,
Image Books, 1985, vol. VI at 84-85


Id, at 188-191

Id, at 191

Id, at 195

Id, at 208-210

Id, Vol. I at


Id, at 31Id, at 31

Id, at 25

Id, at 32-33

Vol. III at 203-205

Vol. I Chapters V & VI

Constituion PolÏtica de la Rep˙blica de Guatemala, Art. 174

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