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The Impact of Economic Theory on the Israeli Case Law on Property

Published online by Cambridge University Press:  04 July 2014

Daphna Lewinsohn-Zamir
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Abstract

The article discusses whether, and to what extent, Israeli case-law in the fields of property law and planning law is influenced by economic-efficiency considerations. The article critically examines three major areas of property law: compensation for injury to lands' development rights, remedies for unlawful building on another's property, and conflicting transactions in land. All three examples illustrate that assessing the impact of economic theory is somewhat complex. On the one hand, judges are increasingly cognizant of the economic approach to law, and some of them tend to include economic-oriented considerations in their reasoning. Judges opposed to efficiency analysis often mention this theory, even if pejoratively, in their rulings. Economic factors cannot and are not ignored. On the other hand, the judges' implementation of the economic calculus is often simplistic or even flawed. Moreover, there sometimes exists an inverse correlation between the identity of the judges most sympathetic to economic reasoning and the identity of the judges who have adopted the most efficient rule.

Type
Research Article
Information
Israel Law Review , Volume 39 , Issue 1 , Spring 2006 , pp. 5 - 38
Copyright
Copyright © Cambridge University Press and The Faculty of Law, The Hebrew University of Jerusalem 2006

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Footnotes

*

Associate Professor, Louis Marshall Chair in Environmental Law, Hebrew University of Jerusalem. I am grateful to Barak Medina, Eyal Zamir and an anonymous reader for insightful comments and suggestions.

References

1 According to economic efficiency, resources should be allocated to maximize people's preference-satisfaction, measured by their willingness to pay for them. A change or rule is efficient, if its benefits (measured by the total amount of money which prospective gainers would be willing to pay to secure its adoption) exceed its losses (measured by the total amount of money which prospective losers would demand in order to agree to its adoption). It suffices that an excess of benefits over losses exits; actual compensation of the losers is not required. This is the Kaldor-Hicks efficiency criterion, which was embraced by the economic analysis of law movement. See Posner, Richard, Economic Analysis of Law 13–16 (6th ed. 2003)Google Scholar; Feldman, Allan M., Welfare Economics and Social Choice Theory 142–144 (1980)CrossRefGoogle Scholar.

2 For this reason, some scholars have limited similar examinations to the articulated reasoning of judges. See, e.g., Englard, Izhak, Law and Economics in American Tort Cases: A Critical Assessment of the Theory's Impact on Courts, 41 U. Toronto L.J. 359, 360 (1991)CrossRefGoogle Scholar.

3 This phenomenon is not rare. On the existence of some convergence between considerations of efficiency and justice, see Barnett, Randy E., Forward: Of Chickens and Eggs—The Compatibility of Moral Rights and Consquentialist Analysis, 12 Harv. J.L. & Pub. Pol'y 611 (1989)Google Scholar; Mautner, Menachem, A Justice Perspective of Contract Law: How Contract Law Allocates Entitlements, 10 T.A. U. Stud. L. 239, 273–277 (1990) [in Hebrew]Google Scholar.

4 In a related context, scholars have argued that the explanatory power of the efficiency criterion, with regard to common law doctrines, derives from the judges' intuitive and subconscious application. See Posner, supra note 1, at 249-253; Wagner, Richard E., Common Law, Statute Law and Economic Efficiency, in The New Palgrave Dictionary of Economics and the Law 313, 314 (Newman, Peter ed., 1998)Google Scholar. For criticism of this argument, see Frank 1. Michelman, , Norms and Normativity in the Economic Theory: of Law, 62 Minn. L. Rev. 1015, 1027, 1031–1032, 1039–1041 (1978)Google Scholar; Balkin, Jack M., Too Good to be True: the Positive Economic Theory of Law, 87 Colum. L. Rev. 1447, 1476–1489 (1987)CrossRefGoogle Scholar; Wagner, id., at 314-315.

5 See Broome, John, Ethics Out of Economics 4 (1999)CrossRefGoogle Scholar; Penz, G. Peter, Consumer Sovereignty and Human Interests 10 (1986)CrossRefGoogle Scholar; Chang, Howard F., A Liberal Theory of Social Welfare: Fairness, Utility and the Pareto Principle, 110 Yale L. J. 173, 175 (2000)CrossRefGoogle Scholar: Nussbaum, Martha C., Flawed Foundations: The Philosophical Critique of (a Particular Type of) Economics, 64 U. Chi. L. Rev. 1197 (1997)CrossRefGoogle Scholar.

6 See Anderson, Elizabeth, Value in Ethics and Economics 129 (1993)Google Scholar; Griffin, James, Well-Being: Its Meaning, Measurement and Moral Importance 10 (1986)Google Scholar; Adler, Matthew C. & Posner, Eric A., Rethinking Cost-Benefit Analysis, 109 Yale L. J. 165, 191, 199 (1999)CrossRefGoogle Scholar.

7 See Arneson, Richard J., Equality and Equal Opportunity for Welfare, 56 Phil. Stud. 77, 82 (1989)CrossRefGoogle Scholar; Gibbard, Allan, Interpersonal Comparisons: Preference, Good and the Intrinsic Reward of Life, in Foundations of Social Choice Theory 165, 172 (Elster, Jon & Hylland, Aanund eds., 1986)Google Scholar; Adler & Posner, id., at 202, 243-244; Chang, supra note 5, at 194; Kaplow, Louis & Shavell, Steven, Fairness Versus Welfare, 114 Harv. L. Rev. 961, 984, 1330–1334 (2001)CrossRefGoogle Scholar; Zamir, Eyal, The Efficiency of Paternalism, 84 Va. L. Rev. 229, 235, 246–251 (1998)CrossRefGoogle Scholar.

8 See Anderson, supra note 6, at 129; Griffin, supra note 6, at 11-13; Harsanyi, John H., Morality and the Theory of Rational Behaviour, in Utalitarianism and Beyond, 39, 55–56 (Sen, Amartya & Williams, Bernard eds., 1982)Google Scholar; Sidgwick, Henry, The Method of Ethics 110–112 (1981)Google Scholar; Zamir, id., at 235.

9 For a discussion of this issue, see Lewinsohn-Zamir, Daphna, The Objectivity of Well-Being and the Objectives of Property Law, 78 N. Y. U. L. Rev. 1669, 1677–1690 (2003)Google Scholar. I have argued, inter alia, that any reasonable ideal preferences theory comes very close to an objective theory of welfare, which judges people's well-being by external standards, largely distinct from their preferences (id., at 1690-1700).

10 Negative externalities are costs that are inflicted on third parties without their consent. See Feldman, supra note 1, at ch. 5; Musgrave, Richard A. & Musgrave, Peggy B., Public Finance in Theory and Practice 49–54 (5th ed. 1989)Google Scholar.

11 For an illustration of the manipulability of the external effects on the public argument, see Kennedy, Duncan, Cost-Benefit Analysis of Entitlement Problems: A Critique, 33 Stan. L. Rev. 387, 398–400, 404–407 (1980/1981)Google Scholar. This technique disguises value judgments as neutral, apolitical calculations of efficiency.

12 See, e.g., Ian Ayres, & Talley, Eric, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 194 Yale L. J. 1027, 1030. 1035 n.30, 1039, 1042 (1995)Google Scholar; Kaplow, Louis & Shavell, Steven, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713, 734, 764 (1996)CrossRefGoogle Scholar.

13 See, e.g., Jon Elster, , Selfishness and Altruism, in Beyond Self Interest 44 (Mansbridge, Jane J. ed., 1990)Google Scholar; Etzioni, Amitai, The Moral Dimension: Toward A New Economics 51–66 (1988)Google Scholar; Jolls, Christine et al. , A Behavioral Approach to Law and Economics, 50 Stan. L. Rev. 1471 (1998)CrossRefGoogle Scholar; Kahneman, Daniel et al. , Fairness and the Assumptions of Economics, in Rational Choice: The Contrast Between Economics and Psychology 101 (Hogarth, Robin M. & Reder, Melvin W. eds., 1986)Google Scholar; Lewinsohn-Zamir, Daphna, The Choice Between Property Rules and Liability Rules Revisited: Critical Observations From Behavioral Studies, 80 Texas L. Rev. 219 (2001)Google Scholar; Lewinsohn-Zamir, Daphna, Consumer Preferences, Citizen Preferences and the Provision of Public Goods, 108 Yale L. J. 377, 396–399, 402 (1998)CrossRefGoogle Scholar; Margolis, Howard, Selfishness, Altruism and Rationality: A Theory of Social Choice 17–25 (1982)Google Scholar.

14 See Posner, supra note 1, at 32; Shavell, Steven, Foundations of Economic Analysis of Law 12–17, 20 (2004)Google Scholar.

15 See Posner, id., at 33-34; Demsetz, Harold, Toward a Theory of Properly Rights, 57 Am. Econ. Rev. 347, 350–356 (1967)Google Scholar.

16 Our discussion assumes that the institution of private property is indeed efficient, and is preferable to other regimes, such as the state of nature or a more communal arrangement. For arguments against the efficiency of private property, see Kennedy, Duncan & Michelman, Frank, Are Property and Contract Efficient?, 8 Hofstra L. Rev. 711 (1980)Google Scholar; Michelman, Frank I., Ethics, Economics and the Law of Property, in Nomos XXIV: Ethics, Economics and the Law 3 (Pennock, Ronald & Chapman, John W. eds., 1982)Google Scholar.

17 As explained in supra note 1, economic analysis of law has embraced the Kaldor-Hicks efficiency criterion, which suffices with an excess of benefits over losses and does not require actual compensation.

18 See Michelman, Frank I., Property, Utility and Fairness: Comments on the Ethical Foundations of “Just Compensation” Law, 80 Harv. L. Rev. 1165, 1214–1218 (1967)CrossRefGoogle Scholar.

19 Id., at 1214.

20 Id.

21 Id.

22 Id., at 1214-1215. Subsequent literature has claimed that full compensation of landowners would create an incentive to over-invest in land development, disregarding the risk of planning activities that may harm its value. See Kaplow, Louis, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 511, 529–532, 551–552, 602–604, 615–616 (1985/1986)Google Scholar; Blume, Lawrence & Rubinfeld, Daniel L., Compensation for Takings: An Economic Analysis, 72 Calif. L. Rev. 569, 618–619, 622–623 (1984)CrossRefGoogle Scholar. For criticism of this argument, see Lewinsohn-Zamir, Daphna, Compensation for Injuries to Land Caused by Planning Authorities: Towards a Comprehensive Theory, 46 U. Toronto L. Rev. 47, 62–69 (1996)Google Scholar.

23 19 L.S.I. 330, at 372-373 [hereinafter the Planning Law].

24 Expropriation is compensated according to other provisions of the Israeli law, such as by the Lands (Acquisition for Public Purposes) Ordinance, 1943 (PC, 1st supp., at 44).

25 This list includes “a change in the delimitation of, or the conditions of the use of land in, any zones” (sub-section 200(1)), “the determination of set-backs around and between buildings” (sub-section 200(2)); “a restriction of the number of buildings in a particular area” (sub-section 200(3)); “the regulation of the sites, size and height, and the planning of the shape and external appearance, of buildings” (sub-section 200(4)); and “a restriction on the modes of using buildings” (sub-section 200(7)). It is quite clear from the formulation of the two sections that sec. 197 is a general rule of compensation, whereas sec. 200 is an exception to the rule that is only relevant to the certain types of injuries listed in it. The case law, however, broadly interpreted the list so as to apply it to all types of injuries caused by plans, other than by expropriation (see Lewinsohn-Zamir, Daphna, Injuries to Land Caused by Planning Authorities 328–329 (1994)Google Scholar [in Hebrew]). Consequently, every type of injury is subjected to the “reasonableness” and “justice” tests (for criticism of this interpretation, see id., at 332-339).

26 Justice considerations may include unlawful behavior of public officials and landowners' legitimate reliance on former planning provisions. See, e.g., C.A. 210/88, Pri Ha'atetz Co. v. Local Planning and Building Commission of Kfar Saba, 46(4) P.D. 627, 655, 658-659; C.A. 3901/96, Local Planning and Building Commission, Ra'anana v. Hurwitz, 56(4) P.D. 913, 945-946 [hereinafter Hurwitz Civil Appeal]; C.A. 974/91, Amid, Construction and Building Ltd. v. Local Planning and Building Commission Zmora, 50(5) P.D. 104, 109-110.

27 The new formula was applied by some of the judges both in the initial decision of the Supreme Court (supra note 26) and in the further hearing of the case before an extended panel: F.H. 1333/02, Local Planning and Building Commission, Ra'anana v. Hurwitz, (unpublished) [hereinafter Hurwitz Further Hearing].

28 See Pri Ha'aretz, supra note 26.

29 Id., at 646-647, 659.

30 Id., at 641-644.

31 Id., at 645-646, 650-651.

32 Id., at 640, 645.

33 See C.A. 4390/90, Elishar v. Central District Planning and Building Commission, 47(3) P.D. 872, 876-880. In this case, a new plan changed the permitted type of land use, and reduced the land's value by 30%. The Supreme Court relied on the Pri Ha'aretz decision and reasoning and awarded compensation to the landowner. See also, C.A. 156/01, Moshav Neve Yamin v. The Minister of Interior, 57(5) P.D. 289,295; C.A. 842/90, Buchalter v. Local Planning and Building Commission, Rehovot, 46(5) P.D. 138, 141-142; C.A. 600/89, Gideon and Carmela Ltd. v. Local Planning and Building Commission, Netanya, 47(2) P.D. 402, 408-409.

34 See supra notes 19-22 and accompanying text.

35 As explained above (supra notes 18-19 and accompanying text), the costs consist of the sum the losers would have demanded as a condition to supporting the authority's action.

36 Compelling the authority to prove that altering the designated use of the land is efficient—by compensating the losers—gives more assurance of efficiency than the claim that a cost-benefit analysis was made, which demonstrated that efficiency gains exist. In an ideal world, a decision-maker would have taken into account all the costs of his or her action. In reality, however, there is a palpable fear that certain costs will be disregarded, unless the decision-maker is forced to internalize them. Granting compensation prevents fiscal illusion, because the compensation payments appear in the authority's budget. For discussion of the fiscal illusion problem, see Lewinsohn-Zamir, supra note 22, at 65-66.

37 See Hurwitz Civil Appeal, supra note 26.

38 See id., at 944. Justices Turkel and Zoabi have both ruled that a loss of 12% of the land's value is unreasonable. Justice Turkel adopted a very broad and unprecedented compensation rule, according to which every injury that is not de minimis, i.e., above 2-3% of the land's value, should be compensated (id., at 928-930). Such a compensation rule is obviously in contradiction to the goal of efficiency maximization. Justice Zoabi sufficed with a short statement that an injury of 12% exceeds what is reasonable, and did not address the disagreement between Justices Barak and Turkel (id., at 946).

39 On the merits, Chief Justice Barak joined the two other justices in ruling that compensation should be paid. Barak held that although the injury did not exceed what is reasonable, there are special justice considerations requiring compensation (the second compensation test of sec. 200 of the Planning Law). The landowner had bought the parcel when the former plan, permitting the erection of 5 apartments (instead of 4), was in force. She wished to immediately utilize her development rights, but the authority unlawfully denied her a planning permit, until the new, injuring plan was enacted (see Hurwitz Civil Appeal, id., at 945-946).

40 See id., at 942-943. The consideration pertaining to the extent of the injury's distribution was previously suggested in the literature. See Lewinsohn-Zamir, supra note 25, at 127-129, 468-469; Lewinsohn-Zamir, supra note 22, at 87-90, 96-98.

41 The majority view consisted of Justices Cheshin, Turkel, Dorner and Mazza (it should be noted that in the Further Hearing, Justice Turkel retracted his former view according to which any non-trivial injury should be compensated). See, e.g., Hurwitz Further Hearing, supra note 27, sections 20-24, 28-31 of Justice Chechin's decision; sections 5-9 of Justice TurkeFs opinion. Justices Or and Rivlin joined Chief Justice Barak in ruling that the injury does not exceed what is reasonable, but compensation is nevertheless required by special justice considerations (see, e.g., id., sections 15-17 of Justice Or's opinion). The minority opinion embraced the thesis, most prominently advocated by Hanoch Dagan, that property owners have a social responsibility toward their fellow community members, and thus should bear certain obligations in the latter's favor. See, e.g., id., sections 11-13 of Justice Or's decision; Dagan, Hanoch, Takings and Distributive Justice, 85 Va. L. Rev. 741 (1999)CrossRefGoogle Scholar; Dagan, Hanoch, A Distributive Analysis of Takings, 21 T.A. U. L. Rev. 491 (1998)Google Scholar [in Hebrew]; Dagan, Hanoch, Property, Social Responsibility and Distributive Justice, in Distributive Justice in Israel 97 (Mautner, Menachem ed., 2000)Google Scholar [in Hebrew].

42 In addition, S will usually be high in these cases, due to the existence of numerous, similar injuries to many people.

43 In addition, S will usually be low in such cases, because there are only a few easily identifiable individuals who need to be compensated.

44 Michelman himself acknowledges this point, and therefore suggests that courts interfere only to correct obvious errors of the governmental authority. See Michelman, supra note 18, at 1215-1217, 1248-1253.

45 A good example is the loss caused by temporary restrictions on development, pending the preparation of new plans. Land development may be restricted or suspended due to the preparation of plans and zoning ordinances. Such restrictions allow the authority the necessary time to enact planning provisions, and prevent landowners from building during the interim period thereby frustrating the future change. Delaying or “freezing” development may cause damage to landowners. As long as these delays are temporary and reasonable in duration, no compensation should be granted. This is because the injury is relatively small and is of the type of common injuries that are an unavoidable consequence of the operation of a planning system. True, not all landowners are injured by such delays. However, it is a common phenomenon, and the losses are widely and randomly distributed throughout society. See Lewinsohn-Zamir, supra note 22, at 89-90.

46 Thus, for example, Chief Justice Barak ruled that the injury suffered in the Hurwitz case is widely and commonly distributed (Hurwitz Civil Appeal, supra note 26, at 944); whereas Justice Cheshin held that it is not (Hurwitz Further Hearing, supra note 27, section 30 of Cheshin's opinion).

47 Estimation of third parties' demoralization costs is further complicated by the possibility that they are somewhat reduced by third parties' enjoyment of the planning action itself, and by the fact that non-compensation means that more public funds will be available for other beneficial projects.

48 One may claim that there will be no (or very few) cases in which E > S > D. This is because a practice of non-compensation in instances where efficiency gains would have remained, even if compensation was paid, will cause high demoralization and inefficiency in the long run. People will be offended because the authority could have satisfied both winners and losers without rendering its act inefficient, but chose not to do so. Therefore, little efficiency gains (if any) would be lost from adopting the compensation formula E > S.

49 The Israeli Land Law, 23 L.S.I. 283.

50 That is, without being entitled to do so by law or under agreement with the owner.

51 The Land Law, supra note 49, at 286. According to subsection 21 (b), if the landowner elects to retain the fixtures, he must pay the builder “an amount equal to the amount invested by him in installing them or to the amount of their value at the time of the exercise of the option under subsection (a), whichever is less.” For a thorough discussion of section 21, see Weisman, Joshua, Law of Property: General Part 154–164 (1993)Google Scholar [in Hebrew]. Prof. Weisman draws our attention to the possibility, that a landowner wishing to retain the fixtures will often pay a price that is much lower than the two values mentioned in section 21 (b). The owner can “blackmail” the builder into agreeing to a very low sum by threatening to require the removal of the structure. This outcome is unfair with respect to good faith builders, who built on other people's land by mistake (id., at 161-164).

52 The Land Law, supra note 49, at 290. More generally, sec. 16 of the Land Law states that, “The owner of any immovable property and a person entitled to possession thereof may demand the surrender of the property from a person who has possession thereof unlawfully” (id., at 285).

53 Subsection 21(d) only states that after the fixtures have been removed, they pass to the ownership of the builder.

54 The interests of the builder are given consideration in section 23 of the Land Law, supra note 49, at 286-287. This provision grants innocent builders, in certain circumstances, a right to coerce landowners to sell them their land. Such a right exists only if the builder, at the time of construction, “honestly believed that he was the owner of the property”; if “the amount invested by him in the fixtures exceeded […] the value of the property without the fixtures”; and if “the acquisition by him of the property is not likely to cause the owner of the property such serious damage as cannot be made good by payment of the value of the property” (for a leading Israeli case implementing section 23, see C.A. 596/76, Bishor Ltd. v. Taube, 32(3) P.D. 713). However, section 23's application is explicitly limited to land that had not undergone a title settlement procedure, according to the Land (Settlement of Title) Ordinance [New Version] 1969 (2 L.S.I. [New Version] 41). Since around 96% of the lands in Israel have undergone a settlement of title procedure, it is clear that this provision will soon become a dead letter, and that section 21 will equally apply to innocent builders (see Weisman, supra note 51, at 160). Reasonable mistakes, in good faith, as to the exact borders between one's own land and neighboring land are possible even in the case of settled lands (see id., at 166-167). In addition, section 23 does not apply to the case of a good faith builder whose erected structure is not of greater value than the land without the fixture. For these reasons, Prof. Weisman justifiably criticizes the legislative provisions for excessively preferring the interests of landowners over those of innocent builders (see id., at 161, 164, 167).

55 C.A. 6339/97, Roker v. Solomon, 55(1) P.D. 199.

56 On the explicit, wider statutory discretion to refuse injunctions in tort cases (according to the Civil Wrongs Ordinance [New Version], 2 L.S.I, at 5), see Gilead, Israel, Israel, in The International Encyclopedia of Law: Tort Law, sec. 422 (2003)Google Scholar.

57 For a summary of the facts of the Roker case, see supra note 55, at 215-217.

58 See id., at 216, 217, 232-233.

59 Id., at 217-218, 248-249.

60 In addition, the court unanimously held that section 21 is applicable to the case, although it does not expressly deal with unlawful building on the common property of a condominium, but rather with unlawful building on land held in single ownership (as mentioned above, section 46 of the Land Law, supra note 49, applies section 21 only to the case of concurrent ownership). See, e.g., id., at 218, 220, 233.

61 The majority view consisted of Justices Turkel, Mazza, Cheshin and Levin. See id., at 238, 240, 241-242, 286, 287. Justice Cheshin is the most extreme in stating that the exceptions to the owner's right to remove the encroaching fixtures are “weak” and “trivial” (id., at 249). In contrast, Chief Justice Barak, and Justices Englard and Strasberg-Cohen have ruled that the courts' discretion is not restricted or limited in scope (id., at 221, 230-231, 282, 288).

62 The majority pertaining to this issue consisted of all the judges except Justice Cheshin. See id., at 221-223, 238-243, 275-281, 287, 288. The general principle that property rights and remedies must be exercised in good faith was based on either section 14 of the Land Law, supra note 49, or on sections 39 and 61(b) of the Contracts (General Part) Law, 1973 (27 L.S.I. 117, at 123, 127). Section 14 states that “ownership and other rights in immovable property shall not by themselves justify the doing of anything that causes damage or inconvenience to another” (for analysis of section 14, see Weisman, Joshua, Law of Property: Ownership and Concurrent Ownership 49–71 (1997)Google Scholar [in Hebrew]). Section 39 holds that “an obligation or right arising out of a contract shall be fulfilled or exercised in customary manner and in good faith.” Section 61(b) enables the extension of this duty of good faith to the sphere of property law, by stating that “the provision of this Law shall, as far as appropriate and mutatis mutandis, apply also to legal acts other than contracts and to obligations not arising out of a contract.” Justice Cheshin, in contrast, based the court's very limited discretion to deny an injunction on a different source: its “inherent authority” to do justice (id., at 262-269).

63 See id., at 277.

64 The latter meaning is relevant to the builders' knowledge that their construction was unlawful and without the required permission of the other apartment owners.

65 See Roker v. Solomon, supra note 55, at 221, 230-231.

66 Id., at 230 (see also id., at 217 for an elaboration of the builders' losses).

67 See id., at 233, 243, 261.

68 Id., at 241, 246, 258-259, 281, 287. Some of the majority judges have further stated that judicial discretion should be used mainly when the damage to the property owner is insignificant or trivial. See id., at 241-242, 257-260, 286, 287.

69 Id., at 242, 281.

70 Id., at 244, 261, 280, 282, 287.

71 Id., at 245-246, 282, 286-287.

72 For the efficiency justifications for private property, see supra notes 14-17 and accompanying text.

73 An entitlement is protected by a “property rule” if no one can appropriate the entitlement without securing its owner's consent. The entitlement must be transferred through a voluntary transaction, and its price agreed to by the owner-seller. “Liability rule” protection, in contrast, enables a forced transfer of the entitlement. The coercing party need not seek the owner's permission, but only pay her the objectively determined value of the entitlement. See Calabresi, Guido & Melamed, Douglas, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089, 1092, 1105–1107 (1972)CrossRefGoogle Scholar.

74 See Shavell, supra note 14, at 18.

75 See Calabresi & Melamed, supra note 73, at 1096-1100, 1106-1110, 1118-1119, 1125-1127; Craswell, Richard, Property Rules and Liability Rules in Unconscionability and Related Doctrines, 60 U. Chi. L. Rev. 1, 8–9, 15 (1993)CrossRefGoogle Scholar; Krier, James E. & Schwab, Stewart J., Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440, 450–451 (1995)Google Scholar; Rose, Carol M., The Shadow of the Cathedral, 106 Yale L. J. 2175, 2178 (1997)CrossRefGoogle Scholar; Ulen, Thomas S., The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, 83 Mich. L. Rev. 341, 367–370 (1984)CrossRefGoogle Scholar.

76 See Merrill, Thomas W., Trespass and Nuisance, in 3 The New Palgrave Dictionary of Economics and the Law 617, 619–620 (Newman, Peter ed., 1998)Google Scholar.

77 See also Kretzmer, David, Judicial Conservatism v. Ecomonic Liberalism: Anatomy of a Nuisance Case, 13(3) Is. L.R. 298, 319–320 (1978)Google Scholar.

78 See, e.g., Epstein, Richard A., Holdouts, Externalities, and the Single Owner: One More Salute to Ronald Coase, 36 J. L. & Econ. 553, 570–571 (1993)CrossRefGoogle Scholar.

79 See Epstein, id., at 570.

80 See Merill, supra note 76, at 619.

81 See Shavell, supra note 14, at 89-91; Ayres & Talley, supra note 12, at 1032-1033; Kaplow & Shavell, supra note 12, at 717-718; Sterk, Stewart E., Neighbors in American Land Law, 87 Colum. L. Rev. 55, 71–73 (1987)CrossRefGoogle Scholar.

82 See Sterk, id., at 81-83, 85-86.

83 See Mautner, Menachem, The Eternal Triangles of the Law: Towards a Theory of Priorities in Conflicts Involving Remote Parties, 90 Mich. L. Rev. 95, 117 (1991)CrossRefGoogle Scholar (discussing a similar good faith requirement in cases of market overt). Arguably, one can subject unlawful builders to an objective standard of care (non-negligence), and not suffice with subjective good faith. This would be economically justified if unlawful builders were usually the cheapest cost-avoiders and able to take reasonable precautions to verify that they are not building on other people's land. See Mautner, id., (asserting as regards market overt situations, that purchasers of assets are unable to take meaningful precautions to discover prior conflicting claims); Merrill, supra note 76, at 622 (assuming, in the context of building encroachments, that injunctions would create efficient incentives to take proper precautions, since builders can commission a competent land survey before commencing construction). In a leading American case, the majority judges refused demolition of a building that was mistakenly erected on another person's land. They ruled that the landowner must choose between two options—purchasing the building or selling his land to the trespasser. The court stressed, however, that not only was the builder in good faith, but his mistake was a reasonable one, as well (a surveyor's error). See Somerville v. Jacobs, 170 S.E.2d 805, 807, 813 (1969). For our purposes, it suffices that the requirement of “builder in good faith” can be justified from an economic perspective, while its elimination would lead to inefficiency.

84 See Mautner, id., at 116.

85 Note, that good faith on the part of the builder is also required by section 23 of the Land Law, supra note 49, which in specified circumstances grants an unlawful builder a right to force a sale on the landowner (on this provision, see supra note 54). American courts distinguish between innocent and knowing encroachers as well. In the former case, they usually protect the landowner's entitlement only with a liability rule (by using such doctrines as “relative hardship” or “balancing the equities”). In the latter situation, courts are likely to protect the landowner's entitlement with a property rule, granting a right to force removal of the encroaching fixtures. See Sterk, supra note 81, at 80-81.

86 The condominium in the Roker case consisted of four apartments (see supra note 55, at 216). Since lawful building on the common land required the consent of all three other apartment owners, this case can be viewed as a bilateral monopoly situation. In addition, the need to get the consent of all the other owners may lead to an “assembly problem,” in which each owner has an incentive to “holdout” for a higher price. For discussion of the latter problem in the context of condominiums, see Zamir, Eyal, Free Will, Economic Efficiency, and Equality in Exchange (A Note on DiyurLaOleh v. Keren (1996) 50(4) P.D. 509), 29 Mishpatim 783, 790–796 (1998)Google Scholar [in Hebrew]; Dagan, Hanoch, Interpretation of Property Law, Condominiums, and Collective Action Problems, 20 T.A. U. L. Rev. 45, 79–91 (1996)Google Scholar [in Hebrew].

87 For these reasons, economic considerations may even support the extreme view held by some of the majority judges in the Roker case—that discretion to deny an injunction should mainly be used when the damage to the property owner is insignificant or trivial (see supra note 55, at 241-242, 257-260, 286, 287). When the landowner's loss is clearly trivial, while the builder's probable damage is substantial, courts can rest assured that the landowner's insistence on demolition is vindictive or opportunistic (i.e., intended to blackmail the builder into accepting a very low offer for the structure; see supra note 51), and therefore inefficient.

88 The outcome in the specific case is only possibly inefficient, because the parties may bargain around the court-granted injunction. Such negotiations, however, will not always be successful. This may be due not only to transaction costs or endowment effects, but also to the escalating animosity between the parties to the conflict. See Farnsworth, Ward, Do Parties to Nuisance Cases Bargain After Judgment? A Glimpse Inside the Cathedral, 66 U. Chi. L. Rev. 373 (1999)CrossRefGoogle Scholar; Jolls et al., supra note 13, at 1497-1498. In the Roker case, post-judgment negotiations did not occur, and the encroaching structures were indeed removed. In a comparable case, the plaintiffs agreed to exchange a court-issued demolition order with monetary compensation. See Zamir, Eyal, Contract For Services Law, 1974, Commentary on Laws Relating to Contracts, 678 Google Scholar n. 27 (Guido Tedeschi ed., 1994) [in Hebrew].

89 See also, Epstein, supra note 78, at 571.

90 See Roker v. Solomon, supra note 55, at 245-246, 282, 286-287.

91 See the Israeli Land Law, supra note 49, at 284.

92 A similar rule applies to conflicting transactions in movable property and rights, according to sections 12 and 13(a) of the Movable Property Law, 1971 (25 L.S.I. 175, at 177).

93 See Cooter, Robert & Ulen, Thomas, Law and Economics, 238, 241–244 (3rd ed. 2000)Google Scholar; Posner, supra note 1, at 131-132; Ulen, Thomas S., Specific Performance, in 3 The New Palgrave Dictionary of Economics and the Law 481 (Newman, Peter ed., 1998)Google Scholar.

94 True, section 9 rules in favor of the second buyer, when she has completed her transaction in good faith and for value. The efficient breach doctrine, however, would advocate a much broader rule in favor of second time buyers: It would not condition their superiority on completion of the transaction, nor on ignorance of the first contract.

95 See Farnsworth, E. Allan, Your Loss or My Gain? The Dilemma of the Disgorgement Principle in Breach of Contract, 94 Yale L. J. 1339, 1380–1382 (1985)CrossRefGoogle Scholar; DeLong, Sidney W., The Efficiency of a Disgorgement as a Remedy for Breach of Contract, 22 Ind. L. Rev. 737, 743–745 (1989)Google Scholar; Zamir, Eyal, Sales (Housing) Law, 1973, Commentary on Laws Relating to Contracts, 735–736 (Rabello, Alfredo M., Shalev, Gabriela & Zamir, Eyal eds., 2002)Google Scholar [In Hebrew]. It should be noted, that the FTP cannot prevent situations in which the seller deliberately evades responsibility for the conflicting transactions, by leaving the country or going bankrupt. In such cases, however, the economic doctrine of efficient breach is inapplicable, because it relies on the seller's ability to fully compensate the first buyer. The analysis in this Section is therefore based on the assumption that the seller can be sued and is solvent. In contrast, infra Section II.C.2. extends the examination of the FTP's efficiency to situations in which the seller cannot be reached or is insolvent, and thus one of the buyers must bear her losses from the conflicting transactions.

96 This priority is enacted in section 3 of the Contracts (Remedies for Breach of Contract) Law, 1970 (25 L.S.I. 11, at 12).

97 See F.H. 20/82, Adras Building Materials Ltd. v. Harlow & Jones G.M.B.H, 42(1) P.D. 221, 235, 237, 277-278; C.A. 3668/98, Best Buy Ltd. v. Fidias Holdings Ltd., 53(3) P.D. 180, 191; C.A. 2454/98, Lindor v. Ringel, 56(1) P.D. 225,235-236; C.A. 1285/00, Einstein Sharir v. Osi Planning, Construction & Development Ltd., 2001(1) P.M. 1638 (Justice Dar's judgment); Zamir, supra note 95, at 736. Justice Shlomo Levin bluntly expressed this understanding by saying that the right to specific performance discourages breach, is in accordance with notions of justice prevailing in Israeli society, and is contrary to the economic analysis of law. The latter, according to Justice Levin, disregards the fact that we are “dealing with human beings with moral notions and not with robots” (see Adras Building Materials Ltd. v. Harlow & Jones, id., at 237. Justice Barak cites this statement with approval, id., at 278). For a critical analysis of the leading Adras case, see Dagan, Hanoch, The Entitlement to the Profits of Breach of Contract: An Anatomy of Judicial Legislation, 20 T. A. U. L. Rev. 601 (1997)Google Scholar [in Hebrew].

98 Israeli courts have sometimes used the good faith principle to rule contrary to the FTP, where the first buyer was blameworthy and could have easily prevented the injury to the second buyer (for discussion of this situation, see infra Section II.C.2). On further use of the good faith principle to preclude the exercise of property rights, see supra notes 57-63 and accompanying text.

99 See section 3(4) of the Contracts (Remedies for Breach of Contract) Law (25 L.S.I. 12). When the first buyer's behavior was not blameworthy in any way, the court did not use this exception to deny the former his precedence under section 9 of the Land Law. See, e.g., F.H. 21/80, Wertheimer v. Harrari, 35(3) P.D. 253.

100 The exact division of these profits is irrelevant from an efficiency point of view. So long as sellers retain at least some of the profits, they have an economic incentive to seek superior opportunities for trade.

101 See Ulen, supra note 93, at 481-482. Another possibility is that A will sell the asset to B, if indeed B values it more than A. In such case, the profits will be divided between A and B.

102 See Shavell, supra note 14, at 378; Cooter & Ulen, supra note 93, at 244; Posner, supra note 1, at 15.

103 See Friedman, Daniel, The Efficient Breach Fallacy, 18 J. L. Stud. 1, 6–7, 24 (1989)Google Scholar. For a similar point, see Adras Building Materials Ltd. v. Harlow & Jones, supra note 97, at 278-279.

104 See Shavell, supra note 14, at 315.

105 See Shavell, supra note 14, at 87-91, 315.

106 See Ulen, supra note 93, at 482; Cooter & Ulen, supra note 93, at 244-245.

107 See Kronman, Anthony T., Specific Performance, 45 U. Chi. L. Rev. 351, 355–363 (1978)CrossRefGoogle Scholar; Shavell, supra note 14, at 378.

108 See Schwartz, Alan, The Case for Specific Performance, 89 Yale L. J. 271, 291–292 (1979)CrossRefGoogle Scholar. The fact that the agreed price for the land in A's contract is lower than the price in B's contract, does not necessarily prove that B values the land more than A. It may very well be that A was a sophisticated bargainer and did not reveal her above-market-price evaluation of the asset. This is quite probable with respect to unique goods. In addition, the possibility of including a liquidated damages clause in the contract will not always solve the measurement problem, due to the legal limitations on what appear to be supra-compensatory damages.

109 See Ulen, supra note 93, at 483.

110 See, for example, the sources cited in supra note 13. If, indeed, parties tend to share potential profits and the FTP would not induce first-in-time buyers to demand all the profits from an efficient breach, then there would still be an economic incentive for sellers to search for new, efficient transactions.

111 See supra notes 91-92 and accompanying text.

112 The Land Law, supra note 49, at 304.

113 According to section 126(a), a caution may be registered only if the person undertaking to effect a transaction has one of the following rights: ownership, lease, loan, easement, pre-emption, or mortgage.

114 A caution will not prevent, however, the completion in good faith of a transaction that does not require registration—such as a short-term lease (section 79(a) of the Land Law, supra note 49, and section 152 of the Tenants' Protection Law (Consolidated Version), 1972, 26 L.S.I. 204, at 246). See Weisman, Joshua, Irrevocable Power as Substitute for Sale of Land, 14 Mishpatim 572, 578 (1985)Google Scholar [in Hebrew]. For a different opinion, see Reichman, Uriel, Cautions—Nature, Recordation and Protection Against Conflicting Transactions, 10 T. A. U. L. Rev. 297, 333–335 (1984)Google Scholar [in Hebrew].

115 Note, this issue is different from the efficient breach issue discussed above. The efficient breach doctrine focuses on the greater efficiency of the subsequent transaction, and so may favor even second buyers who knew of the prior transaction before making their contract, or did not bother to check the registry for the existence of cautions. In contrast, the caution issue focuses on the blameworthiness of the first buyer and her (partial) responsibility for the injury to the subsequent buyer.

116 C.A. 2643/97, Ganz v. British & Colonial Co. Ltd., 57(2) P.D. 385. The case was decided by an extended panel of 7 judges.

117 Id., at 391. The court unanimously assumed that Ganz could have registered a caution. It is worthwhile to note that this assumption might be mistaken. The seller—Notorikon Co. Ltd—was not itself a property right owner of the type required by section 126(a) of the Land Law. See supra note 113.

118 Id., at 391-392.

119 On this general principle, see supra notes 61-63 and accompanying text.

120 Four of the seven judges on the panel based their ruling in favor of Kibbutz Afek on the good faith principle (supra note 116, at 409, 416, 424, 425). Justices Shlomo Levin and Rivlin preferred to base the same outcome on the doctrine of estoppel (id., at 417-418, 429-431). Justice Procaccia ruled in favor of the second buyer on different grounds, that are not relevant to our discussion (id., at 419-424).

121 Id., at 404, 406.

122 Id., at 405. Chief Justice Barak laid down a few exceptions to the above rule (id., at 406-407). Thus, for instance, if the second buyer had actual prior knowledge of the first transaction, or failed to check the registry before contracting, then the absence of a caution did not cause the legal accident (id., at 407). In such cases, the first buyer would still prevail according to section 9.

123 See C.A. 839/90, Raz Construction Co. Ltd. v. Irenstein, 45(5) P.D. 739, 745-746; C.A. 1235/90, Herbest v. Arian Electric Works Co. Ltd., 46(4) P.D. 661, 671-673; Weisman, supra note 114, at 577-578.

124 Prior to the Ganz case, the Supreme Court deviated from the outcome dictated by section 9 only in the very unique circumstances of the Raz case (id., at 746-748). In this case, a landowner undertook to transfer her title in the land. The buyer did not register a caution or complete the transaction for over six years. The seller died and her successor—oblivious of the existence of the previous undertaking with respect to the land—entered into a conflicting transaction with another buyer. The second transaction was not completed either. The court ruled that specific performance of the first buyer's contract would be unjust under the circumstances. The court stressed, however, that this ruling is not based on the interests of the second buyer, but on the interests of the seller-heir: If the first buyer would have notified the successor of its existence, he would not have entered into a conflicting transaction. Enforcement of the first contract would compel the successor to breach the second contract and consequently pay damages to the second buyer, and this would be unjust towards the successor (the court implicitly assumed that the scope of liability of the seller for the inevitable breach of the first contract, would be much lower due to the first buyer's responsibility for the breach).

125 See Ganz v. Brithish & Colonial Co. Ltd., supra note 116, at 413-414, 416.

126 Id., at 414.

127 Id., at 415-416. There was no unequivocal majority in the Ganz case for either of the opposing views. Justices Levin and Englard embraced Chief Justice Barak's view that, in principle, there is an obligation to register a caution (id., at 418, 424). Justices Mazza and Rivlin adopted an intermediate view, closer to that of Justice Strasberg-Cohen. According to this view, non-registration of a caution, in itself, does not constitute blameworthy behavior. However, it may be a relevant consideration, among others, in deciding whether the right under section 9 is exercised in good faith (id., at 425-426, 429, 432). Justice Procaccia has not ruled on this issue (see supra note 120). It should be noted, however, that Chief Justice Barak's view was favored and adopted in subsequent cases. See, e.g., C.A. 1217/03, Hana v. Chazan, 58(1) P.D. 224; C.A. 9245/99, Weinberg v. Arian (not published).

128 See, e.g., Kronman, supra note 107, at 381.

129 See Mautner, Menachem, Risk Creators and Those Exposed to Risks: The Defense Based on Another's Appearance in the New Civil Legislation, 16 Mishpatim 92, 155–156, 164 (1986)Google Scholar [in Hebrew]; Deutch, Miguel, The Burden of Registering a Warning Note—The Ganz Ruling and Its Effects, 47 Hapraklit 181, 188 (2003)Google Scholar [in Hebrew].

130 See supra notes 112-113 and accompanying text.

131 As of March 2004, the fixed fee for caution registration was 132 New Israeli Shekels, which are roughly equivalent to $30.

132 See supra note 116, at 405. This efficiency justification for an obligation to register a caution was advocated by legal scholars as well. See Reichman, supra note 114, at 335-339; Mautner, Menachem, Conflicting Transactions and the Negligence of the First Buyer who Fails to Register a Caution, 40 Hapraklit 521, 524–529 (1992)Google Scholar [in Hebrew]; Mautner, supra note 129, at 155-157, 163-167; Deutch, supra note 129, at 188-190.

133 Arguably, there may be a direct correlation between the time that has elapsed since the formation of the contract and the magnitude of a party's reliance on it. Consequently, it may reasonably be assumed that when both buyers have not completed their transactions, the first buyer's losses (if the asset is given to the subsequent purchaser) are greater than the second's. See Mautner, supra note 132, at 523-524; Zamir, supra note 95, at 736-737.

134 True, Chief Justice Barak mentioned a few exceptions to the rule that non-registration of a caution may preclude the exercise of section 9's priority rule (supra note 116, at 406-407). However, these exceptions do not include the case that the first buyer's losses are much greater than those of the second.

135 Legal scholars advocating equal concern for both goals include Cohen, Nili, A Minor's Contract to Acquire an Interest in Land, as Against the Vendor's Creditor, 41 Hapraklit 161, 185–189 (1993)Google Scholar [in Hebrew]; Dagan, Hanoch, Property Law: Takings Law and Competition Law— Towards a New Property Discourse, in Yearbook on Israeli Law 1996–1997, 673, 729–731 (Rozen-Zvi, Ariel ed., 1997)Google Scholar [in Hebrew].

136 See supra notes 91 -92 and accompanying text.

137 As explained above (supra notes 112-114 and accompanying text), the registration of a caution will usually preclude the existence of subsequent purchasers that completed their transaction in good faith.

138 See Mautner, supra note 132, at 524.

139 See Cohen, supra note 135, at 188. In addition, the requirement of section 9 that the second party completed its transaction while still in good faith ensures that she will not unnecessarily increase her losses after discovery of the first transaction, in order to tilt the economic scales in her favor.

140 See supra notes 113-114 and accompanying text.

141 See section 132(a) of the Land Law, supra note 49, at 305.

142 Even if the contract grants the seller's attorney an irrevocable power to remove the caution once the contract is justifiably rescinded, the buyer may contest the existence of a relevant precondition in court by claiming, for example, that she did not breach the contract. Section 132(a)(2) of the Land Law, supra note 49, provides that before striking out a caution, the registrar must notify the interested parties and give them reasonable time to apply to the court.

143 I am grateful to Prof. Joshua Weisman for the argument pertaining to the seller's interests.

144 Chief Justice Barak does not rule on this issue and it has yet to be conclusively decided by the Israeli courts. In the Ganz case, Chief Justice Barak suffices with briefly stating that assuming such a stipulation is valid, we should not view non-registration of a caution as bad faith behavior on behalf of the buyer. In the case of C.A. 449/85, The Attorney General v. Gad Construction Co. Ltd., 43(1) P.D. 183, former Chief Justice Shamgar held that it may be legitimate for a contractor to reasonably restrict the registration of a caution (id., at 196-197). None of these judgments tackled the possible argument that the buyer's right according to section 126(a) of the Land Law, supra note 49, is a mandatory, nonwaivable right. Arguably, since an important goal of a caution is to protect the interests of third parties, the contracting parties should not be allowed to exclude the possibility of registering a caution.