§7. I proceed to notice a special operation of contract which is important as determining a modification of ownership. When we were examining the general desirability of securing to individuals the right of exclusive use of material things, the question might have been raised: Why appropriate to individuals? Productive labour, under modern industrial conditions, is usually the labour of many co-operating. Why not allow appropriation to a group of persons? And the answer clearly is that we ought to allow this, provided the group is so organised as to be capable of corporate action,---or at least that the property rights of members of the group are definitely determined so as to avoid conflict in management and enjoyment. But our principle obviously requires that the organisation of such a group should be determined by free contract among its members,---on the ground that men in general can determine on what terms they can combine better than government can determine for them. Again, if such collective ownership is to be as useful as possible it must be allowed to carry with it the capacity of being the subject of rights arising out of contract; and, obviously, the corporate body or ``artificial person'' who possesses these rights must equally be the subject of contractual obligations, and obligations attaching to property. But a little reflection will show that obligations can only be to a limited extent transferred to such an artificial person by the real persons composing it. It is evident that such persons cannot be allowed to diminish their general responsibility for the observance of the rights of others; it would be absurd that by any compact among themselves they should be able to contract themselves out of prior legal obligations to other men; therefore, if any act is done in the name of an artificial person, by which such obligations are violated, all the persons concerned in doing or ordering the act must be held responsible as individuals.
The case is different with obligations arising out of contract: it is clearly in accordance with the individualistic principle that a group of persons should be allowed to contract on the basis of ``limited liability'', provided this is clearly understood by the other party to the contract, since the latter can always decline to enter into the contract if the security seems insufficient. In short, on the individualistic principle, the only legitimate end with which legal restraints can be imposed on the formation of corporations capable of holding property and making contracts is that of securing clear intimation of their formation to the rest of the community, and clear distinction between their acts and the acts of the individuals composing them. Some part of our actual regulation of joint-stock companies is clearly designed to realise this end, and is therefore simply individualistic; though other rules can only be interpreted as intended to protect the ordinary members of the company against the mischievous consequences of leaving too much to their directors.
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