Glass to Mud, Mud to Glass
A Cyclical Theory of Property Rights Regimes
Reading Length: 10 minutes
Keywords: Property Law, Political Economy, Blockchain Technology
Possession is nine tenths of the law. The last tenth is subject to property rights. But how exactly do we determine who owns what? In a country that subscribes to a ‘rule of law’, the answer is superficially simple. The law determines who owns what. Anyone, however, who has had to deal with the transfer or loss of a title to a house or car knows that property rights are never so simple.
When property is in dispute, there are broadly speaking two different appeals that can be made by the disputing parties. The first is to the system of rules and records laid down by the law. The second is to principles of justice and fairness. These two appeals circumscribe the extreme edges of how property rights can be formalized in a society.
Carol Rose, a professor law, characterizes a rigid, records-based system of law as a ‘crystal’ regime and a vague, ambiguous, principles-led system as a ‘mud’ regime.1 When determining who owns what is just a matter of examining the records, property rights are ‘crystal clear’. If, on the other hand, someone can supersede a property entitlement by making a claim of equity, then the resultant system will be ‘muddy’ because it is not easy to see who owns what except upon further examination of the particular circumstances.
Rose notes that throughout American history, property rights have tended to oscillate back and forth between crystal and muddy rules. Rather than reaching a static equilibrium in which, for example, there is a compromise between partly-muddy and partly-crystal rules, the regimes tend to swing from one extreme to the other.
Two specific examples from Rose will help to clear up the distinction and illustrate the cyclical nature of property law.
Caveat Emptor in Real Estate
Caveat emptor translates into ‘buyer beware’, and in property law it is the principle that the buyer assumes responsibility for any defects in the item they are purchasing. In real estate, the onus of disclosure was not levied upon the seller. In other words, if something was wrong with the house, such as a faulty foundation, the seller could ‘hide’ it from the buyer through omission. The buyer must inspect the property themselves to determine if it was suitable.2
This was a crystalline rule in property law. No recourse had to made to issues of fairness or justice. The buyer implicitly was understood to accept all responsibility. Over time, however, caveat emptor became muddied as states created exceptions and limitations:
One chink in this otherwise smooth wall was the doctrine of “latent defects”, which, like the exception for fraud, suggested that perhaps the buyer really can’t figure things out entirely…The doctrine began to raise a few problems of muddiness: What defects are “material”? What does the seller “know”? To what extent should the buyer “reasonably” have to inspect for herself?
A vague doctrine such as a ‘latent defect’ muddied property law because it was left for courts to decide what counts as defective, on a case-by-case basis. This trend was exacerbated by another qualification of ‘habitability’, with the exact definition of what qualifies as a house habitable left vague.
Market participants, the buyers and sellers of houses in this case, responded to the muddied property rules by injecting crystalline standards back into the private contracts negotiated between them. Warranties could once again protect buyers from a duty of disclosure, clarifying ex ante the responsibilities of both parties.
Swinging back again, courts responded by banning certain clauses in contracts, re-injecting mud into the rules.3
Muddy Mortgages
Mortgages are an ancient contract. Pledging property as collateral can be traced to the reign of King Artaxerxes of Persia in the 5th century BC.4 The Romans introduced mortgages to Britain, where it has remained a staple of the common law property regimes since. Rose cites the 15th century legal commentator Littleton:
…the name “mortgage” derived from the rule that, if the debtor “doth not pay, then the land which he puts in pledge…is gone from for ever, and so dead.”
because ‘mort-’ means dead and ‘-gage’ is a Normandization of pledge.
The rules around mortgages were brutally crystalline for millennia, however the crystal rules could cut both ways. The lender could reclaim the property the instant an interest payment is missed, however if the time and place of repayment was not specified the borrower could flee the country to prevent a technical ‘missed payment’ from occurring.5
Over time, however, the courts decided that these rules placed an undue harshness upon borrowers:
By the eighteenth and nineteenth centuries, the equity courts were regularly giving debtors as many as three or four “enlargements” of the time in which they might pay and redeem the property before the final “foreclosure”, even when the excuse was lame. One judge explained that an equity court might well grant more time even after the “final” order of “foreclosure absolute,” depending on the particular circumstances.
Of course, this dramatically muddied property rights. Once again, private properties responded by trying to add crystalline rules to their private contracts. One example Rose gives is an ‘equity of redemption’ clause in which the borrower effectively agrees to compensate the lender for any lost ‘interest’ in the case of default. This clause went all the way to the United States Supreme Court, where it was shot down.6
In another noteworthy case, a pitiable old lady in California had stopped paying her mortgage because she incorrectly believed she was being cheated. A contracted workaround allowed the lender to seize her property, and the California Supreme Court subsequently shot down the contract and ruled it inequitable.7
Rose summarizes:
With mortgages first and mortgage substitutes later, we see a back-and-forth pattern: crisp definition of entitlements, made fuzzy by accretions of judicial decisions, crisped up again by the parties’ contractual arrangements, and once again made fuzzy by the courts.
Explaining Cyclicality
Rose argues that the empirical record of oscillating between crystal and mud property regimes is evidence that it is unlikely one is superior to the other:
The difficulty with adopting either position is that to do so suggests that we in some way have a choice between crystal and mud, whereas the history of property law tells that us that we seem to be stuck with both. Even when we choose one (such as a hard-and-fast recording system), the choice seems to dissolve, and instead of really choosing, we seem to oscillate between them. Because this pattern recurs so often in so many areas, it is difficult to believe that it is due to abnormal foolishness or turpitude, or that it can be permanently overcome by a more thoughtful or more virtuous choice of one side or the other.
Certain scholars will argue that crystal rules are superior because they are economically efficient, while others will claim that muddy laws can protect the interests of less-powerful parties in society.8
As Rose sees it, the debate between the two is inexorable and interminable because both ‘jurisprudential modes’ have something of value:
Thus, crystal rhetoric suggests that we view friends, family, and fellow citizens from the same cool distance as those we don’t know at all; while mud rhetoric suggests that we treat even those to whom we have no real connection with the kind of engagement that we normally reserve for friends and partners. And for this reason—for the sake of the different social didactics, the different modes of conversation and interaction implicit in the the two rhetorical styles—we debate endlessly the respective merits of crystals and mud.
Blockchains - Crystal or Mud?
The advent of blockchain technology has reignited the debate between crystalline and muddy property rights. A blockchain is typically conceived as a decentralized ledger. In other words, a blockchain simply keeps track of who owns what. The technological innovation, however, is that each participant in the blockchain keeps a full record on their computer and can opt in to verify new modifications to the ledger. Ideally, then, the blockchain is fully transparent and rules-based. Furthermore, it is possible to build blockchains so that the code can be amended by a majority vote of the blockchain participants, so there is commonly a democratic component as well.
Blockchains, then, represent an extreme crystalline system of property. Adherents use the phrase ‘code is law’ to stipulate that there are no exceptions to the hard-and-fast rules of whatever may be coded into the blockchain.
A blockchain purist would therefore asset that participants have no moral redress if a nefarious actor finds an exploitable loophole in the code and makes off with ownership claims to digital assets that are non-consensually taken from other participants.9
This is still the ethos that guides the original blockchain technology, Bitcoin. Understandably, there may be market participants that object to these crystalline rules. Competitor cryptocurrencies such as Ether sprang up to address the demand for different mechanics.
In 2016 a project hosted on the Ether blockchain was hacked and $150 million of value was stolen. Naturally, some holders of Ether were aggrieved and wanted to ‘undo’ the hack, restoring the stolen funds. This, of course, runs contrary to the spirit of ‘code is law’:
To the ethereum platform, the action was valid to the extent it was able to be executed according to contract terms; to others who invested, it was a much more contentious action.10
The vote to undo the theft passed a majority threshold, but a holdout of the minority dissenters decided to ‘fork’ the blockchain, meaning that they would no longer participate in the new, ‘fixed’ Ether but would instead continue to maintain the ‘Ether Classic’ blockchain, where the theft was never undone.
The Ether Classic controversy neatly encapsulates the debating principles that surround property law. Even with advances in computing technology, it seems likely that Roses prediction of an interminable oscillation between the two will prevail.
Rose, ‘Crystals and Mud in Property Law’, 1988.
Hamilton, ‘The Ancient Maxim Caveat Emptor’, 1931. Cited by Rose in footnote 19.
Rose cites Lingsch v. Savage, 213 Cal. App. 2d 729 as an example of a court ruling that an “as is” clause in a contract “does not necessarily immunize seller from disclosure obligations”.
https://www.britannica.com/story/a-brief-history-of-the-mortgage
Rose cites ‘THE TREATISE ON THE LAWS AND CUSTOMS OF THE REALM OF ENGLAND COMMINLY CALLED GLANVILL’ 121.
Peugh v. Davis, 96 U.S. 332, 337 (1878). From footnote 45 of Rose.
MacFadden v. Walker, 5 Cal. 3d 809, 488 P.2d 1353, 97 Cal. Rptr. 537 (1971)
Rose gives a brief review of the debate on pages 592 and 593, supra.
A purist would rebuke that consent is already implicitly granted in participation of the blockchain, so a non-consensual theft would be a contradiction of terms.
https://www.coindesk.com/markets/2016/07/28/ethereums-two-ethereums-explained/