Pure Economic Loss

New Horizons in Comparative Law

Vernon Valentine Palmer, Mauro Bussani

• Publisher: Routledge-Cavendish
• Year: 2008
• ISBN:
  9781135972943
• Edition: 1
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

Pure economic loss is one of the most-discussed problems in the fields of tort and contract. How do we understand the various differences and similarities between these systems and what is the extent to which there is a common-core of agreement on this question?

This book takes a comparative approach to the subject, exploring the principles, policies and rules governing tortious liability for pure economic loss in a number of countries and legal systems across the world. The countries covered are USA, Canada, Japan, Israel, South Africa, Japan, Romania, Croatia, Denmark and Poland, with the contributors taking a comparative fact-based approach through the use of hypothetical problems to analyze and then summarize the individual country's tort approach. Using a fact-based questionnaire, a tested taxonomy, and a sophisticated comparative law methodology, the authors convincingly demonstrate that there are liberal, pragmatic and conservative regimes throughout the world. The recoverability of pure economic loss poses a generic question for these legal systems - it is not just a civil law versus common law issue. It will be of interest to students and academics studying tort law and comparative law in the different countries covered.

Part 1
The concept in context

Chapter 1
The present study

Mauro Bussani and Vernon Valentine Palmer

1 Introduction

The present study is presented to the reader as a continuation of and expansion on our earlier work on pure economic loss in Europe.¹ We now wish to take the subject beyond Western Europe, extending it to a variety of countries in the Far East, North America, Africa, and some recently admitted members of the European Union. Our previous work covered thirteen European systems in considerable detail. These were France, Belgium, Italy, Spain, Greece, England, Scotland, The Netherlands, Austria, Germany, Portugal, Sweden and Finland. We wish to begin the present study by briefly summarizing the principal findings of that earlier study.

What we uncovered in Pure Economic Loss in Europe was, firstly, an interesting liability spectrum. Western Europe could be divided into three groups that we denominated the Liberal, Pragmatic, and Conservative regimes. The various countries under investigation fit somewhere within this tripartite division, but interestingly the ordering turned out to have nothing to do with common law vs. civil law. That distinction was simply not relevant. Civil law countries were distributed in each and every part of the spectrum. The civil law itself seemed divided over the question of pure economic loss and did not follow a common approach – certainly no ‘civil law’ approach.

Our work also revealed that there was no common method of reasoning, or of deciding, these cases. In certain countries, the compensation issue was decided by very flexible causal reasoning that frequently permitted recovery (a characteristic of liberal regimes such as France). Other countries, however, were using a very rigid causal approach, a kind of causal determinism that efficiently blocked recovery, as in Sweden and Finland. In other systems the outcomes generally depended upon use of a ‘duty of care’ device as a preliminary means of considering the policy question in the fact complex (characteristic of England). In yet other jurisdictions, results were based on a numerus clausus conception of ‘absolute rights’ that generally negated this type of recovery in tort (a characteristic of conservative regimes like Germany and Austria).

Despite the absence of a common methodological approach, however, the substantive results were not incoherent. At a substantive level, Europe was deeply split over the outcomes that should occur when pure economic loss is due to negligence. Here it was apparent that metalegal factors, such as philosophic values, historical conservatism and ‘floodgates’ fears, were driving these divisions. At the same time, however, it was apparent that a ‘limited’ common core of protection on certain questions throughout Europe did exist. There appears to be basic agreement on recoverability whenever the loss falls into the category of ‘consequential loss’ (where the economic loss is a result of physical damage), intentionally caused loss, loss stemming from negligently performed professional services, and ‘transferred loss’ (economic loss transferred to a third party by contract or by operation of law). Thus amid this diversity of regimes, traditions and reasoning patterns, there is still a significant degree of convergence. We believe that the contours of this selective protection provide us with a starting point for further reflection and comparative work.

The present work, as its title indicates, looks beyond Europe and takes into consideration a completely different set of countries. What should we expect to find in other horizons and hemispheres? Are attitudes and patterns in Japan and the United States comparable to those in Europe? Is the ‘limited common core’ found in Europe the basic matrix of protection to be found in other parts of our global economy, say in Canada and the Commonwealth? What of ‘mixed jurisdictions’ like Quebec, South Africa and Israel? Are they proceeding down a middle path, perhaps reflecting their double parentage? Where, if at all, do Croatia and Poland, as recently admitted members of the European Union, fit into the European tableau? There are obviously many new questions to explore, indeed as many questions as there are new horizons in comparative law.

We begin by considering the concept in context.

a) Defining pure economic loss

The subject may seem at first glance somewhat technical, yet pure economic loss is one of the most discussed topics of comparative tort law scholarship. Fascination with this frontier notion has produced a wealth of literature.² It stands at the cutting edge of many questions: How far can tort liability expand without imposing excessive burdens upon individual activity (or, as some may wish, to what extent should tort rules be compatible with the market orientation of the legal system³)? How should the tort law of the twenty-first century approach this issue? As a matter of policy, should the recovery of pure economic loss principally be the domain of the law of contract? To these and others we add our own modest question: What are the principles, policies and rules governing tortious liability for pure economic loss in comparative law?

There has never been a universally accepted definition of ‘pure economic loss,’ nor of its many synonyms.⁴ Perhaps the simplest reason is that a number of legal systems neither recognize the legal category, nor distinguish it as an autonomous form of damage. Nevertheless where the concept is recognized, as in Germany and common law systems, it is apparently associated with a rule of no liability and there a definition is likely to be found.⁵ The contrasting approaches here, as we have mentioned, do not follow the familiar common law/civil law divide.

Our own approach is not to make any supposition in advance about the nature or definition of this notion. We have used a neutral, fact-based questionnaire to flush out the rules and responses of each national system. Therefore in framing the questionnaire we did not hesitate to mix into the facts instances of property damage, personal injury and other infringements that particular traditions may regard as absolute rights (i.e. rights opposable to the world at large – erga omnes). In this way we were attempting to clarify the grey zones that exist between recoverable and non-recoverable loss. Consistent with our factual methodology,⁶ the questionnaire alleges facts and avoids the use of what could be classified as legal artifacts such as the expression ‘pure economic loss’ itself. As there is no recognition of the term in some systems, and less than complete consensus about its meaning in others, we rigorously excluded the use of the term in the hypotheticals.⁷

b) Distinguishing consequential loss

The outcome of the research about the underlying notion of ‘pure economic loss’ can be stated as follows. What is made clear is twofold: the negative cast and the patrimonial character of that loss. In countries where the term is well recognized, its meaning is essentially explained in a negative way. It is loss without antecedent harm to plaintiff’s person or property. Here the word ‘pure’ plays a vital role, for if there is economic loss that is connected to the slightest damage to person or property of the plaintiff (provided that all other conditions of liability are met) then the latter is called consequential economic loss and the whole set of damages may be recovered without question.⁸ Consequential economic loss (sometimes also termed ‘parasitic’ loss⁹) is recoverable because it presupposes the existence of physical injuries, whereas pure economic loss hits the victim’s wallet and nothing else.¹⁰

The reader will discern from these preliminary remarks that the distinction under discussion is highly technical, perhaps even artificial. This impression is based upon two technical features of the exclusionary rule. The first feature is that ‘consequential’ economic loss only describes a relationship of cause and effect within the same patrimony (plaintiff’s). All relation of cause and effect running between patrimonies is technically excluded. Put another way, when pecuniary loss is described as ‘pure’ (rather than ‘consequential’) it is apparent that each patrimony is viewed as an interruption of causation. For instance an injury to B (say the breadwinner of the family) may have an immediate and foreseeable economic consequence upon A (his dependent child). Yet this causal impact is disregarded by the way our subject is defined. The child’s loss of support will not be called ‘consequential’ economic loss, though clearly it did arise as a ‘consequence’ of physical injury to a parent. It is apparent, then, that those legal systems which employ these labels conceive of economic loss as an isolated phenomenon, as if plaintiff’s patrimony were a separate world, cut off from all others. It is also apparent that this logic defies economic and social reality. In the real world ‘a practically unlimited range of interests are intertwined in an almost unlimited variety of ways.’¹¹ The affairs of economic actors are highly interdependent, connected to one another by a web of rights and duties that bind together contractual, proprietary and any other sort of legal interests. In these circumstances it is reasonably foreseeable that damage to any one interest may affect other interests. Indeed it has been rightly said that ‘no reverberation from the initial damage, so long as it arises through this interdependence of interests, can intelligibly be distinguished as extraordinary or unforeseeable.’¹² Yet the inevitable effect (of what we might call the exclusionary rule’s ‘atomistic’ approach to causation) is that the scope of ‘consequential’ loss is artificially narrow, and accordingly the incidence of ‘pure’ economic loss is greatly multiplied.

A second technical aspect is that, although all countries following the exclusionary rule may be in ‘acoustical’ agreement on the proposition that ‘consequential loss’ is recoverable, they actually do not agree in concrete instances how it will be applied. Consequential loss is a causal construct influenced (in its ultimate results) by policy considerations, and it is therefore unsurprising to find divergent interpretation at the national level. Some national courts have developed rules that require a more stringent connection between antecedent physical loss and the economic harm which results. Under such rules the court may conclude that plaintiff’s loss was ‘pure’ (hence unrecoverable) because there was insufficient relation to the prior physical harm sustained by plaintiff. Yet judges in other systems, employing less exigent notions, may deem the same loss ‘consequential’ and thereby permit its recovery.¹³

Despite the foregoing caveats about the artificial and technical aspects of this concept, we must not lose sight of the fact that consequential economic loss (and for the purpose of this generalization we apply this term of art...

Table of contents

• The University of Texas at Austin, Studies in Foreign and Transnational Law
• Contents
• Preface
• Contributors
• Part 1 The concept in context
• Part 2 The national contributions
• Part 3 The results
• Index