Pure economic loss

Economic loss is a term of art ^[1] which refers to financial loss and damage suffered by a person which is seen only on a balance sheet and not as physical injury to person or property. There is a fundamental distinction between pure economic loss and consequential economic loss, as pure economic loss occurs independent of any physical damage to the person or property of the victim. It has also been suggested that this tort should be called "commercial loss" as injuries to person or property can be regarded as "economic". ^[1]

Examples of pure economic loss include the following:

• Loss of income suffered by a family whose principal earner dies in an accident. The physical injury is caused to the deceased, not the family. ^[2]
• Loss of market value of a property owing to the inadequate specifications of foundations by an architect. ^{[3] [4] [5]}
• Loss of production suffered by an enterprise whose electricity supply is interrupted by a contractor excavating a public utility.

The latter case is exemplified by the English case of Spartan Steel and Alloys Ltd v Martin & Co Ltd . ^[6] Similar losses are also restricted in German law, ^[7] though not in French law beyond the normal requirements that a claimant's asserted loss must be certain and directly caused. ^[8]

Common law jurisdictions

Recovery at law for pure economic loss is restricted under some circumstances in some jurisdictions, in particular in tort in common law jurisdictions, for fear that it is potentially unlimited and could represent a "crushing liability" against which parties would find it impossible to insure. ^{[9] [10]}

Australia

In Australia, the general rule is that damages for economic loss which are not consequential upon damage to person or property are not recoverable in negligence even if the loss is foreseeable. ^{[11] : para 127  [12]} Economic loss may be recoverable in cases where the plaintiff can prove an assumption of responsibility by the defendant and known reliance on the defendant by the plaintiff, ^{[11] : para 128} or vulnerability in the sense of the inability of the plaintiff to take steps to protect itself from the risk of the loss. ^{[11] : para 130}

Cases in which the High Court has held that economic loss was recoverable include:

• Caltex Oil (Australia) Pty Ltd v The Dredge 'Willemstad' (1976), ^[13] in which Caltex was permitted to recover the economic loss it suffered when a dredge severed an oil pipeline. Caltex was not directly affected by the loss of the oil, because that risk was borne by another company, but it suffered loss in obtaining oil by another means of transport while the pipeline was repaired. The loss was recoverable because the defendants knew or should have known that Caltex would suffer it.
• Bryan v Maloney (1995), ^[14] in which the purchaser of a home was entitled to compensation from the builder for latent defects. Because compensation for the defects would have been recoverable by the landowner who originally engaged the builder, the subsequent purchaser enjoyed similar rights. (In contrast, the builders in Woolcock Street Investments Pty Ltd v CDG Pty Ltd ^[12] and Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 ^[11] owed no duty of care to the original landowner, and were therefore not liable to subsequent owners when latent defects were revealed.)
• Hill v Van Erp (1997), ^[15] in which a solicitor was liable to an intended beneficiary when a deceased testator's gift was ineffective as a result of the solicitor's negligence.
• Perre v Apand Pty Ltd (1999), ^[16] in which an agricultural company negligently introduced bacterial wilt onto a potato farm and was liable to neighbouring farmers whose crops were not affected by the disease, but could not be sold as a result of regulations prohibiting the sale of potatoes grown within a 20 km radius of an outbreak.

Canada

Justice Cardozo's indeterminacy concerns were relied on by the Supreme Court of Canada to restrict imposing liability on a corporation's auditors for negligently auditing the corporation's financial statements in Hercules Management v Ernst & Young, [1997] 2 SCR 165. ^[17] The court determined that the auditors owed investors of the company a duty of care, and that the auditors had been negligent in conducting their audit. However, La Forest J, writing for a unanimous court, declined to impose liability on the auditors for policy reasons, citing Justice Cardozo's concerns over indeterminate liability. ^[18]

England and Wales

Main article: Pure economic loss in English law

Pure economic loss was not recoverable in negligence until 1963 and the decision of the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964). Up until Hedley Byrne was decided, pure economic loss was thought to be entirely within the realm of contract law. ^[19] From that point on, in jurisdictions following the English common law, it has been possible to recover for some pure economic loss in negligence; however, because purely economic loss can usually be anticipated and allocated differently by contract, the party seeking to be compensated for such loss must demonstrate a compelling reason to change the contractual allocation through tort liability.

Malaysia

In Malaysia, the Federal Court in Majlis Perbandaran Ampang v Steven Phoa Cheng Loon [2006] 2 AMR 563 followed the decision in Caparo Industries v Dickman [1990] UKHL 2 where it held; pure economic loss is claimable if 1) the damage was foreseeable, 2) the relationship between the parties was one of sufficient proximity, and 3) it is fair, just and reasonable to impose a duty of care on the defendant.

In the case of Tenaga Nasional Malaysia v Batu Kemas Industri Sdn Bhd & Anor Appeal [2018] 6 CLJ 683, the Federal Court has reaffirmed the position of the Caparo's three-fold test. However, the Court also stressed that the third element shall only be relevant in new and novel cases. In well-established cases such as economic loss, the third element is inapplicable and the Court must adhere to precedents.

United States

In the United States, Chief Judge Benjamin N. Cardozo of the New York Court of Appeals famously described pure economic loss as "liability in an indeterminate amount, for an indeterminate time, to an indeterminate class". ^[20] The product liability form of the rule (i.e., that there is no recovery for pure economic loss under a theory of strict product liability) can be traced back to Roger Traynor's decision in the California case Seely v. White Motor Co. (1965), which was later adopted by the Supreme Court of the United States in East River Steamship Corp v. Transamerica Delaval Inc. (1986). ^[1]

A few state supreme courts in the United States have departed from the majority rule and authorized recovery for pure economic loss through tort causes of action (usually negligence). The first was California in 1979, ^[21] followed later by New Jersey ^[22] and Alaska. ^[23] Legal scholars in the United States, such as Jacob Chabot, have also begun to question the majority rule, observing that indeterminate liability cannot truly ground the rule because of its many exceptions and concluding that departure from the rule would be desirable. ^[24]

Civil law jurisdictions

Germany

The general rule of tort liability under German law is supplied by section 823 of the Bürgerliches Gesetzbuch (BGB), which does not provide for damages for pure economic loss. ^[25] However, the courts have interpreted BGB provisions imposing liability for harms caused by actions contrary to public policy or statute to allow for pure economic loss damages. ^[25]

Contractual liability for pure economic loss is recognized in German law. As a result, German courts have often turned to a contract theory to impose liability. ^[26] Such liability may be imposed even without privity of contract. ^[26]

In addition, liability for pure economic loss may be imposed under German law in the case of special relationships, such as the relationship of a guardian to a ward, in which the guardian may be subject to liability for pure economic loss if the guardian is at fault. ^[27]

Sweden

Sweden adopted general principles of tort liability for the first time in 1972 with the adoption of the Tort Liability Act (skadeståndslagen, SKL). ^[28] Previously, liability had been largely confined to cases in which a crime had been committed. ^[28] Under the SKL, that limitation continues to apply in cases involving pure economic loss: it is available only when a crime has been committed. ^[29] However, in more recent decades, some Swedish court decisions have allowed damages for pure economic loss in exceptional circumstances even when there is no underlying crime. ^[30]

See also

• Lost sales
• Opportunity cost

References

1. Sorenson T, Davidson M, White M. (2012). When Can A Breach of Contract Be a Tort and What Difference Does it Make?. American Bar Association CLE Seminar.
2. Baker v Bolton [1808] EWHC J92(KB) , (1808) 1 Camp 493, High Court (England and Wales).
3. Murphy v Brentwood District Council [1991] UKHL 2 , [1991] 1 AC 398, House of Lords (UK).
4. Sutherland Shire Council v Heyman [1985] HCA 41 , (1985) 157 CLR 424, at 504-5, High Court (Australia).
5. Winnipeg Condominium Corporation No.36 v. Bird Construction Co. [1995] 1 SCR 85 (Canada)
6. Spartan Steel and Alloys Ltd v Martin & Co Ltd [1972] EWCA 3 , [1973] QB 27, Court of Appeal (England and Wales).
7. van Gerven (2001), pp. 187–188.
8. van Gerven (2001), pp. 198–199.
9. Canadian National Railway Co. v. Norsk Pacific Steamship Co. [1992] 1 SCR 1021 (Canada), per McLachlin J
10. Bishop (1982).
11. Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 , (2014) 254 CLR 185, High Court (Australia).
12. Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16 at [22], (2004) 216 CLR 515, High Court (Australia).
13. Caltex Oil (Australia) Pty Ltd v The Dredge 'Willemstad' [1976] HCA 65 , (1976) 136 CLR 529, High Court (Australia).
14. Bryan v Maloney [1995] HCA 17 , (1995) 182 CLR 609, High Court (Australia).
15. Hill v Van Erp [1997] HCA 9 , (1997) 188 CLR 159, High Court (Australia).
16. Perre v Apand Pty Ltd [1999] HCA 36 , (1999) 198 CLR 180, High Court (Australia).
17. "Hercules Management v Ernst & Young". Archived from the original on November 11, 2014. Retrieved November 11, 2014.
18. "Hercules Management v Ernst & Young". Archived from the original on 2014-11-11. Retrieved 2014-11-11.
19. Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] UKHL 4 , [1964] AC 465, House of Lords (UK) "It must now be taken that Derry v Peek did not establish any universal rule that in the absence of contract an innocent but negligent misrepresentation cannot give rise to an action. It is true Lord Bramwell said (at p. 347):" To found an action for damages there must be a contract and breach, or "fraud." And for the next twenty years it was generally assumed that Derry v Peek decided that. But it was shown in this House in Nocton v Ashburton [1914] A.C. 932 that that is much too widely stated. We cannot, therefore, now accept as accurate the numerous statements to that effect in cases between 1889 and 1914, and we must now determine the extent of the exceptions to that rule."
20. Ultramares Corporation v. Touche , 174 N.E 441, 444 (N.Y. 1931).
21. J'Aire Corp. v. Gregory , 24 Cal. 3d 799, 598 P.2d 60, 157 Cal. Rptr. 407 (1979).
22. People Express Airlines, Inc. v. Consol. Rail. Corp., 495 A.2d 107, 109 (N.J. 1985).
23. Mattingly v. Sheldon Jackson Coll., 743 P.2d 356, 359–61 (Alaska 1987).
24. Chabot, Jacob (2023) Jacob Chabot, Negligently Inflicted Pure Economic Loss: An Illusion of Limitless Liability, 20 DLJ 47 (2023), Dartmouth Law Journal
25. Bussani & Palmer 2003, p. 148.
26. Bussani & Palmer 2003, p. 150.
27. § 1833 BGB.
28. Bussani & Palmer 2003, p. 156.
29. Bussani & Palmer 2003, p. 157.
30. Bussani & Palmer 2003, p. 158.

Bibliography

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• W. H. van Boom; Helmut Koziol; Christian A. Witting (2004). Pure economic loss. Springer. p. 115. ISBN   9783211005149.
• Bussani, Mauro; Palmer, Vernon (2003). Pure economic loss in Europe. Cambridge University Press. ISBN   9781139438629.
• Giliker, P. (2005). "Revisiting pure economic loss: lessons to be learnt from the Supreme Court of Canada?". Legal Studies. 25 (1): 49–71. doi:10.1111/j.1748-121X.2005.tb00270.x. S2CID   144517741.
• Lunney, M. & Oliphant, K. (2003). Tort Law: Text and Materials (2nd ed.). Oxford: Oxford University Press. pp. pp 339–423. ISBN   0-19-926055-9.
• Stapleton, J. (1991). "Duty of care and economic loss: a wider agenda". Law Quarterly Review. 107: 249.
• Stapleton, J. (2002). "Pure economic loss: lessons from case-law-focused 'middle theory'". UCLA Law Review. 50: 531.
• van Gerven, W; et al., eds. (2001). Cases, Materials and Text on National, Supranational and International Tort Law . Oxford: Hart Publishing. ISBN   1-84113-139-3.
• Weinrib, E. J. (2005) "The disintegration of duty", in Madden, M. S. Exploring Tort Law, London: Cambridge University Press, pp. 143–272 ISBN   978-0521851367