Discussion on the Economics Basis for the Application of Small Claims Procedure

Abstract. Small claims procedure, as a judicial solution to increasingly more civil and economic disputes, features low cost and high efficiency. In this paper, from the perspective of the microeconomics, small claims procedure is simply analyzed using the economics analysis tools such as opportunity cost and Coase theorem, and also the economics basis for the application of small claims procedure is proposed.

Key words: Small Claims Procedure; Opportunity Cost; Coase Theorem

Introduction

The significance of small claims procedure currently lies in providing a convenient, fast, low-cost, and explicit judicial procedure of the property rights for all parties with disputes, and this provides a premise condition for the effectiveness of Coase theorem. In the design of small claims procedure, high importance is attached to the minimization of litigation cost, and thus opportunities and possibilities can be provided for the parties to claim their rights and also the requirement of Coase theorem on "transaction cost is zero or small" is realized. In addition, the object of litigation is strictly limited by small claims procedure. Specifically, it is basically limited to the small civil dispute scope with a clear relationship between rights and obligations in the civil field. In this paper, the author tries to make a simple tentative analysis on small claims procedure from the perspective of the economics.

Small Claims Procedure

Small claims procedure can be defined from broad and narrow senses. Strict distinction between the small claims procedure in a broad sense and the general summary procedure is unavailable; in the continental law system countries where the amount of the object of litigation is used as the standard for dividing the jurisdictions of local courts and superior courts, the difference between the two sides customarily only lies in the different amount of the object of litigation and the different summary. In form, the contemporary small claims procedure can be basically classified into two types: (1) through the revision of civil procedure law, a special procedure is established in summary court or summary procedure; (2) small court or tribunal different from the general first-trial procedures is established. Compared with the traditional summary procedure, the contemporary small claims procedure owns the following characteristics at least.

First, the traditional summary procedure is divided in accordance with the object of litigation or the nature and complexity of the disputes, while the applicable scope of small claims procedure is more simplified. Small claims procedure is basically confined to creditor's rights and debts disputes, and also can be applied in general tort, neighborhood disputes, concession disputes, and traffic accident dispute, is us. It is a special procedure usually established to be independent of the general civil procedure.

Second, the procedure is simple, and operates in accordance with the common sense completely. The simplicity of the procedure is manifested in every detail. For example, litigation and defense are form-oriented and even oral-oriented; the time to open a court session is very flexible; the procedure to a court session is very simple, etc.

Third, high importance is attached to mediation. In small claims, the integration of mediation with trial is generally adopted, and the accuser and the accused are allowed in the process of judgment to directly have a conversation through the way of talking, and the judge shall positively contribute to the settlement through the conversation.

Fourth, small claims procedure is with a very clear and explicit value orientation, namely low cost and high efficiency. In small claims procedure, the parties are required to limit the litigation cost at the lowest as far as possible. That is, only less cost is charged, or counsel fee and appraisal cost are unnecessary, etc. Thus, the accuser can receive a benefit so that he will not abandon his own small claim rights owing to high cost, and also the burden of the accused can be reduced. As a result, the overall lawsuit efficiency maximization can be realized.

Economics Analysis Tools Used in This Paper

The Theory of Opportunity Cost. The term "cost" can be popularly comprehended as the cost necessarily paid for the completion of certain tasks. In economics, it refers to the economic investment necessary to pay for obtaining certain benefits. However, the theory of opportunity cost shows us that the use of any scarce resources will produce an opportunity cost no matter if a cost is paid for it in realities, namely the benefit brought by the other uses sacrificed for it. Therefore, this concept broadens and deepens the comprehension of the economic resource cost consumed in certain production activities. Through the comparison on the different incomes gained by the same economic resources in the different production purpose, the economic resources will transfer from the production way of low income to the production way of high income, and otherwise a waste will be caused [1].

Coase Theorem. On the Coase theorem, the economists in the western world have provided many different expressions for it, but their essences are consistent. A relatively popular expression is shown in the following.

As long as the property rights are clear and explicit and also the transaction cost is zero or very small, the final result of market equilibrium is efficient no matter whom the property rights are given to.

Here, a factory is supposed to exist: the dust emitted from its chimney makes the drying clothes of 5 residents near it polluted, and thus the subsequently caused loss is 75 RMB each resident and the total loss of the 5 residents is 375 RMB. Also, two types of pollution control measures are supposed to be available: (1) a dust collector is installed at the factory’s chimney and its cost is 150 RMB; (2) a dryer is provided for each resident so that they do not need to dry clothes outside. The cost of the dryer is 50 RMB each resident, and the total loss of the 5 residents is 250 RMB. It is obvious that the first way only needs a low cost and thus it represents the most efficient solution, and this most efficient solution is the Pareto optimum that will be introduced in the following [2].

Economic Analysis on Small Claims Procedure

Analyzed from the perspective of the economics, contentious procedure is a tool for realizing its single value or purpose to the maximum. The economic analysis method tries to achieve the maximization of wealth or economic efficiency. Therefore, the introduction of small claims procedure is an effort for realizing the cost minimization and economic efficiency maximization in the process of litigation. This will be introduced specifically from the following three aspects.

First, small claims procedure is analyzed from the perspective of opportunity cost. As a scarce judicial resource, the startup and operation of a small claims procedure means the cost of investment and the consumption cost of resources. Therefore, the cost of lawsuit also includes direct costs and the cost of mistakes: the cost caused for a court decision is called as direct cost; a series of costs for causing the mistaken court decisions are known as the cost of mistakes. With the purpose of realizing the minimization of litigation cost, it is necessary to make the sum of direct cost and mistakes cost minimum [3] and the benefits obtained through the contentious procedure maximum.

Second, Coase theorem shows that as long as the property rights are clear and explicit and also the transaction cost is zero or very small, the final result of market equilibrium is efficient no matter whom the property rights are given to. With the purpose of making the Coase theorem play a role and achieving the best economic efficiency, several conditional factors in the following should be fulfilled. First, the clarity of the property rights has to be known. This requires the systems and procedures (mainly the legal procedure) for the clarity of the property rights are simple and effective, and also cost to the minimum. Second, the transaction cost for the parties is required to be lower to the minimum, and the equalization of the transaction costs in different transaction ways can be achieved, so that the transaction costs in all kinds of transaction ways are too high or too different and subsequently force the parties to abandon their rights or choose the transaction ways that seem to cost low but are illegal. Third, the market full of freedom shall be available, so that the transaction of the parties will not be affected by non-market factors as much as possible, and also market equilibrium can be smoothly realized.

Small claims procedure just provides a very efficient way for solving the above-mentioned disadvantages. In the small claims procedure, the litigation costs of the parties and the courts will be controlled in a smaller range, and thus the litigation efficiency is ensured to be higher than the cost of litigation. On the one hand, this makes the benefits of the parties maximized. On the other hand, this makes the nation's litigation resources fully used. As a result, the Pareto improvement is realized in general and also the transaction costs are greatly reduced.

References

[1] Hongye GAO. Western Economics (Edition 2). China Renmin University Press, 2001, page 181.

[2] Hongye GAO. Western Economics (Edition 2). China Renmin University Press, 2001, page 384.

[3] [U.S.] Michael·D·Bayles. Translated by Wenxian Zhang. The Rules of Law—Analysis on a Rule. Encyclopedia of China Publishing Press, 1996, page 23.