Pure Economic Loss
ECTIL would like to achieve two goals with this project. First, we wanted to present an overview of the various legal systems with regard to their position on 'pure economic loss' (is it a specific issue?, and if so: how is it dealt with?). Second, we aimed at analyzing the arguments and legal reasoning put forward to restrict or exclude claims for pure economic loss altogether. The analysis had to be threefold: a comparative legal analysis, a law and economics analysis and an analysis from the insurance practice angle. Furthermore, some specific topics have been dealt with in more detailed contributions (e.g. prospectus liability, auditor's liability).
'Pure economic loss' and the possible approaches
Although there is no common definition of 'pure economic loss', it is generally understood to deal with matters of tortious liability for loss that is neither consequential upon death and personal injury of the claiming victim nor upon the infringement of the victim's property. But other than that, the various topics that are dealt with under the heading of 'pure economic loss' seem to have little in common. The concept of 'pure economic loss' covers very dissimilar subjects such as liability for negligent statements (on which the plaintiff reasonably relied), ricochet damage to third parties in case of personal injury, and liability for inducing (or profiting from) breach of contract. 'Pure economic loss' covers a wide variety of legal problems that are not dealt with in a homogenous way in the various legal systems.
Nevertheless, the following main categories seem to fit under the umbrella of 'pure economic loss':
Pure economic loss related to damage to objects or persons
- A factory that suffers a production halt due to a power cut is said to suffer pure economic loss if the power cut does not result in physical damage to the factory's machinery. The damage to the power cable is of course of a physical nature, but this damage is - generally speaking - not suffered by the factory but by the owner (the Power Company). Can the factory claim for the loss of profits even if its machinery is not damaged?
- Inflicting death or injury will result in financial loss to the primary victim, but it will also cause relational losses, e.g., the victim's family members may suffer loss of income, an employer suffers loss of turnover, money lenders will suffer loss on instalments et cetera. Can all or some of these 'third party victims' claim from the liable party?
'Pure' pure economic loss by reliance
- An investor that relies upon the certified balance sheet of a company suffers pure economic loss if his investment in the company turns out to be a bad investment. Can he claim from the negligent accountant that audited the accounts (assuming that this negligence in fact caused the reliance and the bad investment)?
- A buyer of a house relies upon a survey report, which turns out to be negligently drafted. Should there really be a difference in liability of the surveyor dependent on whether there was a contract between the buyer and the surveyor or not (e.g. because the report was commissioned by the seller)?
How do the legal systems respond?
The European legal systems seem to respond to the problem of 'pure economic loss' in very different ways. There seem to be three possible responses:
- Claims for pure economic loss are barred altogether in tort law (i.e. the exclusionary rule),
- Claims for pure economic loss are dealt with as any other claim (notably any claim for death, personal injury or damage to physical objects), or
- Claims for pure economic loss are allowed in principle, but in practice the thresholds do turn out to be higher than in case of death, personal injury or damage to physical objects (e.g. the threshold of causation seems to be higher).
Any combination of responses is possible, and, admittedly, there are other approaches as well. For example, where strict application of the exclusionary rule in tort leads to a clearly unsatisfactory outcome, some legal systems tend to broaden the scope of contract law to reach reasonable results. And sometimes there are specific statutory provisions (e.g. on auditor's liability, prospectus liability) that fill the gap left by the exclusionary rule.