Limited Liability and Libertarianism: A Thought Experiement

What follows will be a thought experiment on whether limited liability can be principally incorporated into libertarian theory or if it is antagonistic to the libertarian notions of restitution. I have read nothing regarding this matter—or at least nothing I can remember—and this is purely my own extrapolation from my understanding of libertarian theory and, therefore, may be rife with errors already addressed in libertarian literature regarding limited liability. Regardless, whether what follows is wrong, unoriginal, or unimportant, these are my own views ignorant of, and unreconciled with, contemporary libertarian theory regarding limited liability. I also have a limited understanding of the legal principles surrounding limited liability and corporations as it currently exists, but hopefully that shouldn’t hamper my foregoing analysis. Some of the terms in the post might be used inconsistently or incorrectly, but hopefully I have avoided most of these kinds of errors.

NOTE: Following the posting of this analysis, I plan to respond to my own analysis in an edit of this post after having read some conceptions of the compatibility of the limited liability principle (or any responses this post might garner). I think this is a useful exercise to test one’s freestanding knowledge of libertarian theory and the ability to extrapolate it to complex topics. If there are responses, some useful responses would be directing me to sources regarding the topic or commenting with your own freestanding thoughts of libertarian theory as applied to limited liability; I think it has the potential for a good discussion.

First, let’s begin with the basics. A group of individuals come together and agree to pool their assets together to create a corporate body, stipulating among themselves the assets they agreed to pool constitute the boundaries of their required obligation to the corporate body. Should one of the members of the body cause demonstrable harm through its business dealings to an outside individual, they further agree that this individual should not be liable for damages, resulting from lawsuit, greater than the share of assets they contributed to the corporate body. These owners may end up losing all the assets they contributed to the arrangement, but have agreed this is the extent of their liability. So far, so good; a voluntary arrangement has been formed among capable parties causing no physical invasions of another’s person or property.

But, how can this principle be applied to individuals outside of the arrangement? Indeed prima facie if someone outside this agreement is harmed by one of these individuals, the demands of restitution would suggest they are entitled to full restitution and are not bound by the limits imposed by the agreement that had formed the corporate body and established the limited liability regarding the stakeholders.

In practice, there are multiple ways in which a consumer coming into contact with the corporation might assume the obligation to honor the principle of limited liability should they ever be harmed by any of the parties to the corporate body. First, visiting a physical location owned by the corporate body might entail agreeing to be allowed to sue the corporation only to the extent of the pooled assets of the stakeholders as condition of admittance to the property. Thus, consumers would be bound to respect this agreement in any lawsuit they bring up against the corporate body given that they voluntarily assented to the limited liability. Similarly, customers of online establishments may be enticed to digitally sign an agreement stipulating limited liability of the corporate body should any of its products, the website, or its agents cause harm to the consumer in the course of its relations; access to the website would be limited to those who agree to this limited liability stipulation. Thirdly, if a corporate body delegates agents (employees) to carry out its functions—whether in a physical location owned by the corporation or owned by the consumer, i.e. traveling salesmen—it may require the signing of the arrangement detailing limited liability in order to continue doing business with its agents. Thus, the consumer dealing with agents of the corporate body would only be capable of suing for restitution to this limited extent, given the voluntary assent of the consumer to accept this principle in order to continue relations with the agent.

Now, what about cases in which no explicit or tacit agreement has been reached regarding limited liability? For the sake of example, we can use fracking to illustrate how it might work. Let’s say the agents of Frack Corp. engage in some fracking, causing the death of Farmer Joe’s cattle when they eat radioactive grass that had been contaminated by the runoff of the fracturing process. Farmer Joe has never visited the property of Frack Corp., never visited their website, and never done business with any of its agents; hence, he has never agreed to abide by the limited liability charter created by the stakeholders of Frack Corp. In this case, the requirements of restitution entail Farmer Joe can sue both the corporate body as well as the agents that engaged in the behavior causing harm to farmer Joe. Depending on the exact situation, the owners may be responsible for restitution from their own assets depending on their complicity in the harmful behavior. This would put agents in a precarious position if their employment duties could entail a significant risk of being subject to lawsuit for property violations. However, the agent could negotiate a contract with their employer requiring the owner to be responsible for restitution of the agent if they sued by a third party in the carrying out of the agent’s duties as prescribed by the corporate body—the principal. Regardless, in cases such as this, where a third party outside of the agreement is harmed by actions undertaken by the corporate body, liability greater than the value of the corporation’s assets could be spilled over to agents and or principals responsible for physical harms caused by their actions, just as in cases involving non-corporate actors who have not come to any kind of agreement.

In summary, it seems that the way corporations operate in a libertarian society would be fundamentally the same as they operate in the current system, save that corporations would likely be more explicit with consumers that doing business with them entails to agreeing to limited liability should they be harmed by the corporate body or its agents. Where it would deviate the most is that in harms caused to third parties not privy to any agreement with the corporate body regarding limited liability, corporations and the parties responsible for demonstrable harms, potentially including the owners, would be responsible for full restitution of the injured party, which would not be limited by the extent of the pooled assets of the stakeholders of the corporation.