The Riddle of the Good Faith Purchaser

TL;DR

This article explores how legal rules should handle disputes between stolen goods owners and good faith purchasers, focusing on deterring theft rather than just resolving the conflict.

Contribution

The article introduces auction theory innovations to address holdout risks and improve legal resolution of good faith purchase disputes.

Findings

Legal rules should prioritize deterring theft over achieving justice in good faith purchase disputes.

Registration of goods can help discourage theft by influencing ownership outcomes.

Auction theory can mitigate holdout risks by revealing private valuations of disputed goods.

Abstract

A purchaser unwittingly buys stolen goods. The owner from whom they were stolen demands their return. The purchaser refuses. How should the law resolve their dispute? This article argues that the law’s primary objective in resolving disputes between owners and good faith purchasers should not be to achieve ‘justice’ between the parties but to disincentivise theft. With some categories of goods, it is difficult to see how the legal attribution of liability can achieve this end. However, where goods are amenable to registration, the rules of good faith purchase can discourage theft by conditioning an owner’s success over a good faith purchaser on the fact of prior registration. In the absence of a register, there seems little to choose between the parties. However, because the favoured party will frequently be a monopolist, the danger of holdouts warrants employing innovations from auction theory, the effect of which is to force the parties to reveal otherwise private information about their subjective valuations of the disputed goods.