In Search of the Magic Pudding

Trade Unions and the Common Law

NR Evans

At the first H R Nicholls Conference Peter Costello gave an important paper on the legal position of people who are injured by trade unions and the various remedies which are available to them. This seminal paper was published in 'Arbitration in Contempt' and remains the most authoritative and fundamental analysis to date. The legal position he describes is a complicated one because of attempts by parliaments in the United Kingdom and Australia, during this century, to rewrite the law concerning relationships between employers and employees.

While I use the word 'attempts', I should not wish to imply that these parliamentary activities have been in vain. There can be no doubt that the 1904 Conciliation and Arbitration Act in Australia, and the 1906 Trades Disputes Act in the United Kingdom, have brought about profound changes to the legal, political and social position of trade unions, and of the relationship between the individual and these institutions.

Let me consider the British situation first. You will recall that the passage of this Act in 1906, which gave immunity from tort to trade unions during the course of an industrial dispute, followed the Taff Vale judgment of the House of Lords. That judgment held that trade unions, like other incorporated bodies, had legal obligations as well as legal privileges, and that the trade union presumption of immunity from tort, no doubt a genuine presumption, was, nonetheless, quite unfounded in law.

The passage of that Bill through the House of Commons and then the House of Lords is still of vital contemporary interest. The issues debated then have not changed at all. However, I think it is fair comment to say that there is a much wider understanding of these issues today than in 1906. The Conservative majority in the House of Lords was persuaded to pass the Bill with the soothing reassurances that the trade union leaders of those times were decent people who could be entrusted with the extraordinary degree of legal privilege embodied in the Bill. That argument would not soothe, or reassure, today.

Sir Edward Carson, the Unionist leader, summarised Walton's revolutionary constitutional innovation (Sir John Walton was the Liberal Attorney-General) with the words:

    'The King can do no wrong, neither can a trade union'.

As well as immunity from tort, the Bill sanctioned unlimited picketing in the furtherance of disputes. F E Smith, later Lord Birkenhead and Lord Chancellor, in his second speech in the House of Commons, said this about such picketing:

    'We are asked to permit a hundred men to go round to the house of a man who wishes to exercise the common law right in this country to sell his labour where and when he chooses, and to 'advise' him or 'peacefully persuade' him not to work. If peaceful persuasion is the real object, why are a hundred men required to do it?

    If I were a man who was wishful to disposes of my labour as I chose, although the member for Merthyr (Keir Hardie) might not persuade me to break a contract, still, if the honourable member came with fifty other peaceful persuaders to the house where I and my wife live, I fear I should be much more likely to yield to persuasion than if the honourable gentleman came by himself. We are told that another object of these well attended deputations is that information may be given. Is it more convenient that information should be given by fifty men, than by one man? Even in this House it is recognised that, as a general principle, it is more convenient that one member should address the House at one time.

    Every honest man knows why trade unions insist on the right to a strong numerical picket. It is because they rely for their objects neither on peacefulness nor persuasion. Those whom they picket cannot be peacefully persuaded. They understand with great precision their own objects and their own interests, and they are not in the least likely to be persuaded by the representatives of trade unions, with different objects and different interests. But, though arguments may never persuade them, numbers may easily intimidate them. And it is just because argument has failed, and intimidation has succeeded, that the Labour Party insists upon its right to a picket unlimited in respect of numbers.'

Although F E Smith made that point in 1906, it wasn't until 1972 when Arthur Scargill, having developed the flying picket into a paramilitary calvary force, defeated, (and I use the word deliberately) the police at the Saltley coke depot near Birmingham, that the force of Smith's argument was convincingly demonstrated. Scargill arrived at the depot leading a column of 10,000 men, carrying the AUEW banner, and forced the police to retreat, in the manner of a defeated army, and to hand over the depot to a victorious Scargill.

The 1984 British coal miners' strike verged on insurrection. There were pitched battles between large bodies of men---the striking miners on the one hand and police on the other. There was also violence between miners and miners. Three people were killed and hundreds injured during the course of the strike.

For Scargill it was an attempt to bring down the Government. Margaret Thatcher had been elected primarily because of the winter of discontent of 1978-9, and a major part of her electoral appeal was her commitment to bringing back the unions within the rule of law. Scargill was determined to cut off any such development and his victory in the 1982 dispute with the Government had emboldened him to go for the big win in 1984.

The Thatcher Government did not attempt to return to the pre-1906 common law position and repeal the l906 Act. The Thatcher approach was for piecemeal reform, a series of trade union and industrial relations bills, in 1980, 1982, and 1984, with more in the pipeline. There are those who argue that a return to the common law position would have saved much economic hardship in the early years of the first Thatcher Government. Unemployment, which has been the most unhappy feature of Thatcherite Britain, has only recently begun to be wound back. The counter-argument is that what has been done has been very successful and that it would have been foolhardy to have staked everything on a single throw of the die.

Let me take up the significance of the 1906 Act. With this Act the British Parliament, including a Tory-controlled House of Lords, turned a common law Judgment of the highest legal authority in the United Kingdom upside down. It was as deliberate and provocative assertion of parliamentary supremacy over the common law as can be imagined. The consequences have been sustained, steady economic decline and, ultimately, insurrection aimed at overthrowing the Government. I do not argue that the 1906 Act is the only cause of British economic decline since World War I. I do argue that it has been a significant, perhaps the major, factor.

Having introduced the fact of British economic decline since the 1906 Act, it is appropriate now to introduce the major argument in this paper, an argument which has been developed principally in the United States in the last two decades. That argument is that the common law that evolved in Britain and the United States, particularly during the 19th century, was not only just in a moral sense but was extremely efficient in an economic sense. The economic efficiency of the common law, generally unimpeded as it was during the last century by statute law, must have been a vital factor in the unprecedented economic growth that took place in Britain, the United States, and Australia in that century.

The principal writers in this new and fertile marriage of law and economics have been Richard Posner and Richard Epstein, both primarily lawyers from the University of Chicago, but the seminal papers were written by Ronald Coase, an economist, nearly thirty years ago. In order to summarise the achievements of this new academic endeavour let me quote at length from Posner's Economic Analysis of Law (3rd edition, p.229):

'The common law is to most lawyers a collection of disparate fields, each with its own history, vocabulary, and bewildering profusion of rules and doctrines; indeed each field may itself seem a collection of only tenuously related doctrines. Yet we have seen that the law of property, of contracts and commercial law, of restitution and unjust enrichment, of criminal and family law, and of admiralty law, can all be cast in an economic form that explains the principal forms, both substantive and remedial, in these fields of judge-made law.

These doctrines form a system for inducing people to behave efficiently, not only in explicit markets but across the whole range of social interactions. In settings where the cost of voluntary transactions is low, common law doctrines create incentives for people to channel their transactions through the market. This is done by creating property rights (broadly defined) and protecting them through such remedies as injunctions, restitution, punitive damages, and criminal punishment.

In settings where the cost of allocating resources by voluntary transactions is high---where, in other words, market transactions are infeasible--- the common law prices behaviour in such a way as to mimic the market.

    'For example, the tort system allocates liability for accidents between railroad and farmer, driver and pedestrian, doctor and patient in such a way as to bring about the allocation of resources to safety that the market would bring about if the market could be made to work.

    The law of contracts does the same thing in regard to unforeseen contingencies that may make it impossible to perform a contract: It places liability on the party better able either to prevent the contingency from occurring or to minimise the disutility of its occurrence.'

It is difficult in one short quotation to demonstrate the enormity of the implications which follow from Posner's conclusions. (Posner of course is not the only figure in this intellectual enterprise. But his book is so powerful a piece of argument that I will use his name as a convenient label). The first theorem which one derives from this paradigm is that when parliaments enact statutes which supplant common law doctrines, then the extent to which those doctrines are subverted will be the extent to which the society is impoverished. So if a parliament codifies and simplifies a common law position, then little harm and some good will result. If, however, as in the 1906 UK Trades Disputes Act, the common law position is turned upside-down, then economic impoverishment is inevitable.

It is one thing to analyse the common law as Posner has done in economic terms, and to conclude that common law processes, doctrines and decisions, are economically optimal and therefore foster and generate wealth-creation at a maximum rate; it is another to demonstrate why that should be so. Posner has sought to do this and his arguments can be summarised as follows:

  • Judge-made law---the common law---is worked out by people who are appointed for life, whose reward is predominantly that of the intellectual respect of their peers. Intellectual consistency, the ability to make fine distinctions, a deep knowledge of human nature, are the qualities we find in our best judges, and although their judgments are not written in economic language, the material on which they are based is the material of economic activity.
  • In order to pursue a case through the courts, particularly one involving the appellate courts, up to the High Court or the House of Lords or the Supreme Court, requires a great deal of financial support. This usually requires that the judgment carries with it substantial economic consequences. Therefore there has been a mechanism operating which has brought common law decisions which have been economically less than optimal back into judicial review, at the highest level, at the earliest opportunity.
  • Judicial procedures, particularly at the appeal level, operate to disembody the litigants. Considerations relating to the deservingness or merit of the parties (their relative wealth or poverty, their manners and social graces, their personal qualities) are, so far as possible, suppressed. As Posner describes: 'Almost by default the judge is compelled to view the litigating parties as representatives of activities---owning land, growing tulips or orchards, walking on railways, driving cars. In these activities it is natural that the judge should consider which of these activities is more valuable in the economic sense.'

When we compare that process of law-making with the processes of passing a Bill through a parliament, we see a totally different situation. The incentive structure which bears down on politicians is as far removed from the incentive structures surrounding judges as it is possible to imagine. Getting re-elected is the primary ambition of most politicians. Securing the support of this group and then that group, whilst at the same time not offending, for example, the gold mining Industry with a new tax regime, requires dexterity, flexibility and resilience. Economic efficiency is the last consideration which is brought to bear in this process. The history of the tariff in this country should always remind us of the amazing extent to which the political processes and the participants in them are quite indifferent, if not actively hostile, to prosperity.

I have concentrated on the 1906 UK Trades Dispute Act because it was a dramatic reversal of the common law position. In Australia events took a different turn, but the consequences have been similar. The 1904 Act was the result of H B Higgins's fantastic ambition of constructing a new province for law and order, a mediaeval province based on Aristotelian notions of a just price. Three governments fell in 1904 before this Act was passed, and it got through, in the end because it offered, or purported to offer, something for everyone.

It was part of the deal in which the ALP in New South Wales, led by Billy Hughes, abandoned the traditional NSW position of free trade and joined forces with the Deakinite Liberals from Victoria who wanted protection. It purported to ban strikes and lockouts, and thus appealed to employer interests. And, of course, it rescued trade unions from the nadir of organisational strength and popular appeal into which they had fallen. As the Hancock Report points out, trade union membership prior to the 1904 Act was approximately 6 per cent of the workforce. The charismatic triumphs of the 1870s and 1880s had turned into the bitter defeats of the 1890s. The comforting arm of the state was required to rescue this movement from a further slide into total obscurity. It probably came in the nick of time.

We cannot know whether the trade unions in Australia would have obtained immunity from tort in every State as their British brothers did in 1906 if the 1904 Act had not been passed. Looking at the declining degree of popular support they enjoyed, and disentangling, if one can, the Irish issue from the trade union issue, it is arguable that without the support and umbrella of the state, trade unionism in Australia would have withered away. Only Queensland, in 1915, gave the trade unions immunity from tort. It was repealed in 1976 by the Bjelke Petersen Government.

However, immunity from tort has long been the declared aim of the trade union movement. Part of the deal that made up the Accord in February 1983 was the promise to grant trade unions immunity from tort, along with repeal of sections 45 D and E of the Trade Practices Act.

In this paper I do not wish to focus on the moral or political issues surrounding the trade unions' ambitions to retain and increase their legal privileges, but on the economic consequences of such legal privilege, in particular on immunity from tort. Posner's paradigm concerning the economic efficacy of the common law shows us that the law of tort is a very powerful instrument for economic efficiency and the promotion of prosperity. To the extent that major institutions seek and obtain either de jure or de facto immunity from tort, then prosperity and economic growth and development is correspondingly diminished.

The question arises why the trade unions, of all the various associations of modern life, should claim to be outside the rule of law, and strenuously seek to be thus placed. Churches, business corporations, the various institutions of the state such as the armed forces---none of these bodies have any difficulty with living within the rule of law. Trade unions are unique in their demands for legal immunities. Why? Further, the trade unions have succeeded to an extraordinary degree to live outside the law, despite their lack of immunity from tort which they have sought so persistently to remove. Why have they been able to live in a de facto if not de jure position of legal privilege?

When we consider the writings of Dr Breen Creighton, we gain some insight into the reasons for trade union demands for legal privilege. Writing in the 'Melbourne Herald' in early May 1987, Dr Creighton stated:

    'a combination of common law and statutory law makes it virtually impossible for any group of workers, or their unions, to take any form of effective industrial action without running foul of either the civil or criminal law or both'.

This statement is a declaration that effective industrial action is illegal and that trade unions should be immune from the consequences of illegality. When we study Dr Creighton's very valuable chapter in The New Right's Australian Fantasy, edited by Ken Coghill, (now Speaker of the Victorian Legislative Assembly) we find that the argument put forward to justify this position is as follows:

    'The capitalist mode of production inevitably rests upon a fundamental imbalance of power between the individual unit of labour (worker) and the capitalist (employer). This imbalance is of such a nature that it is impossible for the worker to deal with the employer on anything like an equal basis when it comes to negotiating the terms upon which the worker sells his labour. Historically, the workers have sought to redress this imbalance by forming or joining trade unions which could then negotiate with employers on their behalf. This strategy was based on the assumption that the power of the collectivity (the union) was greater than the sum of its parts (the members).'

The imbalance of power argument is pivotal to the union demand for legal privilege. It is, however, a fatally flawed argument. In an economy built upon the rule of law and freedom of contract, the employer needs the employee just as much as the employee needs the job. Where distortions occur in the labour market, where there are very many applicants for one or two positions, we find that either trade unions, or governments, or arbitral tribunals, have been at work constructing barriers which make it impossible for employer and employee to reach an agreement which is profitable to both parties.

The only situation in which the classical market analysis of the employer-employee relationship needs elaboration and refinement is when either employer or employee, or both, is in a monopoly position. Bilateral monopoly is not unusual in the working relationship. In this situation both employer and employee are tied to each other by very powerful economic forces, and in this situation it is very difficult to bargain. The costs of separation, for both parties, can be very high. Time does not permit a discussion of this theoretically interesting and difficult problem today. True monopoly on the employer's side (excluding government monopoly) can only exist in situations where the employee is constrained by unusual immobility or abnormal intellectual incapacity. This is, today, rare and exceptional, and cannot provide an argument for the overwhelming power and privilege exercised by the ACTU.

But the trade unions demand (indeed it is the essence of their claim to exist) the right to organise a monopoly for employees with the right to maintain it by violence and coercion. The only monopolies on the employer side which can exist in contemporary Australia---indeed historically in the English-speaking world, the only monopolies which have existed on the employer side are those belonging to governments or guaranteed by government statute. Not surprisingly it is the trade unions which are fighting most desperately to ward off the government's hesitating attempts to de-monopolise key industries such as telecommunications.

Now let me consider the more difficult question concerning the trade unions ability in this country to live outside the law for so long. The answer in my view lies in the institutional structures built up on the foundation of the 1904 Act. These institutions, Conciliation and Arbitration Commission, State tribunals of various sorts---have, as the only reason for their existence, trade unions and their propensity to generate industrial disputes. Without trade unions, without disputes, without strikes and all the drama associated with life in the Industrial Relations Club, none of these institutions would exist. Nor would any of the prestigious appointments within these institutions.

If the fundamental legitimising principal of trade union activity is the demand for monopoly rights, and the freedom to maintain that monopoly through coercion and violence, then institutional logic requires that all members of the Industrial Relations Club should, at the very least, not seriously contest that principal. I think that is why, for many years, legal advice from firms specialising in industrial relations to people suffering great wrongs at the hands of trade unions very rarely contained any reference to the possibility of common law action. And if it did contain such reference, the client was usually steered away from the civil courts to the Arbitration Commission. The best documented case of this kind is the Gorman case of 1978, discussed in considerable detail by Hugh Morgan, in his paper in 'The Light on the Hill'.

These institutional imperatives have resulted in a sustained propaganda campaign over many years in which such crucial phrases, 'as industrial relations realities' 'powerful trade unions' occurred frequently. The way in which the major newspapers have employed industrial correspondents who have been recruited into the IR Club, and have amplified and broadcast these slogans, have helped to create an atmosphere of inevitability of trade union triumph.

But the spell has now been broken. The impoverishment caused by trade union legal immunity became too difficult to bear, and this has resulted in dramatic changes in the constraints now operating on employer organisations. No employer representative could today sign the Hancock Report, as Mr George Polites did, and survive.

Because the employers' acquiescence in the Industrial Relations Club system is necessary for its survival, I regard these changes as the beginning of the end of the Higgins era in Australian history. The sooner the better.

Why HR Nicholls?