Pure Economic Loss: New Horizons in Comparative Law (UT Austin Studies in Foreign and Transnational Law)

Pure Economic Loss

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 the 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. Vernon Valentine Palmer is the Thomas Pickles Professor of Law and the Director of the Eason-Weinmann Center of Comparative Law at Tulane University, USA. Mauro Bussani is Full Professor of Private and Comparative Law at the University of Trieste, Italy, and Regular Visiting Professor at the University of Macau Law School, SAR of the People’s Republic of China.

The University of Texas at Austin, Studies in Foreign and Transnational Law General Editors: Sir Basil Markesinis and Dr Jörg Fedtke

The UT Studies in Foreign and Transnational Law series aims to publish books covering various aspects of foreign, private, criminal, and public law as well as transnational law. This broad ambition of the series underlines the editors’ belief that in a shrinking world there is a growing need to expand our knowledge of other legal orders – national or supernational – and to publish books discussing comparative methodology and not merely describing foreign systems. Titles in the Series: The French Civil Code J.-L. Halpérin, transl. T. Weir Judicial Recourse to Foreign Law B. Markesinis and J. Fedtke International Negotiation in the Twenty-First Century A. Plantey, transl. F. Meadows Italian Private Law G. Alpa and V. Zeno-Zencovich Forthcoming titles The Protection of Privacy in Tort Law: A Comparison between English and German Law H. J. Cremer (2009) Introduction to Spanish Private Law T. Rodriquez de las Heras and J. Feliu Rey (2009)

Pure Economic Loss

New Horizons in Comparative Law

Vernon Valentine Palmer and Mauro Bussani

First published 2009 by Routledge-Cavendish 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge-Cavendish 270 Madison Ave, New York, NY 10016 Routledge-Cavendish is an imprint of the Taylor & Francis Group, an informa business This edition published in the Taylor & Francis e-Library, 2008.

“To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2008 selection and editorial matter, Vernon Valentine Palmer and Mauro Bussani; individual chapters, the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Pure economic loss : new horizons in comparative law / edited by Vernon Valentine Palmer and Mauro Bussani. p. cm. – (University of Texas at Austin studies in foreign and transnational law) 1. Torts – Economic aspects. 2. Damages – Economic aspects. I. Palmer, Vernon V. II. Bussani, Mauro. III. Title. IV. Series. K923.P87 2008 346.03–dc22 ISBN 0-203-88883-9 Master e-book ISBN

ISBN10: 0–415–77564–7 (hbk) ISBN10: 0–203–88883–9 (ebk) ISBN13: 978–0–415–77564–9 (hbk) ISBN13: 978–0–203–88883–4 (ebk)

2008018055

Contents

Preface List of Contributors

ix xi

The Questionnaire

1

PART 1

The concept in context 1 The present study 1 Introduction 7 a) Defining pure economic loss 9 b) Distinguishing consequential loss 11 c) Intentional infliction of pure economic loss 14 d) The typical instances of pure economic loss 15 e) The problem of future loss 20 f ) In search of a rationale for the exclusionary rule 22 2 The liability systems – a functional ordering 40 a) Introduction 40 b) Appearances vs. reality: From façades to operative rules 41 c) General and specific characteristics 43 d) Characteristics of liberal, pragmatic and conservative systems 43

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Contents

e) Liberal systems 46 f ) Pragmatic systems 52 g) Conservative systems 63 3 Conclusion 66 PART 2

The national contributions

69

2 Japan

71

3 Croatia

88

4 Quebec

114

5 The United States

134

6 Canada

166

7 Israel

186

8 South Africa

218

9 Poland

258

10 Denmark

282

PART 3

The results

301

11 Surveying the results

303

1 Introduction 303 2 Three comparative tables 304 a) Table I: Country by country 304 b) Table II: By type of recovery 305 c) Table III: Broadly recognized fact patterns 306

Contents

vii

3 Reassessing the differences 306 4 The value of legal certainty 308 5 General conclusions 309 a) A question beyond legal families 309 b) No common methodology 310 c) The relevance of timing 311 d) Areas of substantive agreement 312 e) A final look at the ‘limited convergence’ 315 Index

317

Preface

This book emerges from our recent collaboration with tort scholars from around the world on behalf of the International Academy of Comparative Law which held its conference in Utrecht in 2006. As General Reporters at the Conference for the subject of pure economic loss, we were in the privileged position of setting the guidelines for the national reports. This provided us with an excellent opportunity to carry our research beyond Europe into a wider world. The method that we employed will be immediately recognizable as that pioneered by Rudolf Schlesinger and further refined by Rudolfo Sacco. It is the fact-based, formant-conscious method that we used (and described at length) in our study Pure Economic Loss in Europe.1 Through the use of carefully chosen hypotheticals, together with a probing investigation into the various legal formants of rules and principles, it provides a means of acquiring reliable information across legal cultures and national boundaries. The present work is methodologically the same as before, except that we have shortened the number of hypotheticals (nine rather than twenty), focused upon a new set of countries and have placed the national contributions in self-contained chapters. We wish to express our deepest thanks to all our contributors and colleagues for the splendid cooperation that made this book possible. We would also like to thank the Italian Ministry of University and Research, the Law Department of the University of Trieste, the Tulane Law School and the Eason-Weinmann Center of Comparative Law, and the International Academy of Comparative Law under whose auspices the present work took shape. Mauro Bussani, Trieste Vernon Valentine Palmer New Orleans 2008 1

See Mauro Bussani and Vernon Valentine Palmer, Pure Economic Loss in Europe (2003), pp 163–77.

Contributors

Dr. sc. Marko Baretic, Law Faculty of the University of Zagreb, Croatia. Professor Joost Blom, Q.C., Faculty of Law, University of British Columbia, Vancouver, Canada. Professor Mauro Bussani, Professor of Private and Comparative Law, University of Trieste, Italy, and Regular Visiting Professor, University of Macau Law School, SAR of the People’s Republic of China. Dr. Tamar Gidron, Dean, Law School College of Management, Israel. Professor David Gruning, Professor of Law, Loyola University, New Orleans, La. USA. Professor Daniel Jutras, Institute of Comparative Law and Faculty of Law, McGill University, Montreal, Canada. Professor Max M. Loubser, University of Stellenbosch, South Africa. Dr. sc. Sasˇa Niksˇic, Law Faculty of the University of Zagreb, Croatia. Professor Yoshihisa Nomi, Faculty of Law, University of Tokyo, Japan. Professor Vernon Valentine Palmer, Professor of Law and Director of the Eason-Weinmann Center of Comparative Law, Tulane University, USA. Professor Tomasz Pajor, University of Lodz, Poland.

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Contributors

Dr. Kristina Siig, Assoc. Prof., University of Southern Denmark, Denmark. Dr. Boaz Shnoor, The Academic College, Ramat-Gan, Israel.

The Questionnaire

Case 1 – A cable case: The laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cut the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected black-out causes the loss of two days of production. Black has to lay off a number of workers hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay.

Case 2 – The injured key player Thomas is pivot on the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car and is unable to play for three months. In the absence of its best player, the team (until then at the top of the league standings) drops to fourth place. This results in considerable losses for the team owners. Can the AllStars recover against the car driver?

Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape of the infected animal obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; (b) the market traders who have lost their supplies; and

2

The Questionnaire

(c) the butchers who have not been able to conduct their business during this time.

Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for expenses incurred prior to the collision, and for its loss of earnings due to cancellation of the two cruises.

Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which time he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she looked after her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness.

Case 6 – Auditor’s liability Donna audits the accounts of Caterpillar, Inc. inaccurately. Paul relies on these published accounts to launch a take-over bid. This is successful, but Paul then discovers that the accounts overestimated the value of the company and that the price he paid per share was twice their actual value.

Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institute, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit, Inc. makes no further inquiry and thus does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damages. He is now suing Credit, Inc. to recover his losses.

The Questionnaire

3

Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by RAC when he was involved in a head-on collision with another automobile. The engine of the rented vehicle intruded into the passenger compartment causing severe and permanent injuries. Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. The severing of the car made it impossible to determine within a reasonable degree of certainty whether or not the vehicle had design, manufacturing and/or maintenance defects which proximately caused Nicholas’ injuries. Nicholas sues RAC for negligent spoliation of the evidence and tortious interference with a prospective civil action against Alfa Romeo.

Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having previously been employed by OMEGA and, while so employed, was a member of their occupational pension scheme. He was told by ALPHA that he was eligible to join its occupational pension scheme. As an employee, he would, unless he wished to opt out, automatically become a member of the scheme and deductions would be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based on a careless reading of the materials provided, the Broker vaunts the economic virtues and performances of OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and stay in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than she would have received from ALPHA. Mrs. Smith sues the broker.

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 1

M. Bussani and V.V. Palmer, Pure Economic Loss in Europe (2003).

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Pure Economic Loss

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.

The present study

9

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

2

3

4

The literature is overwhelmingly weighted to those countries where the concept is well-recognized by practitioners, judges and scholars. For a compendium of this literature, see the bibliographies attached to the National Contributions in Part 2. For additional references, see the comprehensive bibliography at pp 549–75 in M. Bussani and V.V. Palmer (eds.) Pure Economic Loss in Europe (2003). P. Benson, The Basis for Excluding Liability for Economic Loss in Tort Law, in D.G. Owen, The Philosophical Foundations of Tort Law (1995), pp 427, 431, the same author, articulating a well-known tòpos among tort lawyers (see e.g., G. Viney, Introduction à la responsabilité (1995) p 21 ff. E.J. Weinrib, The Disintegration of Duty, in S. Madden (ed.), Exploring Tort Law (2005), pp 143, 162) writes: ‘[T]he fact that every individual is somewhere and is making use of some external objects, with the result that he or his property is put into relation with them and is subject to being affected by conduct that affects them, is an inevitable incident of being active in the world . . . as beings who exist in space and time and who are inescapably active and purposive, persons are necessarily and always connected in manifold ways with other things which they can affect and which in turn can affect them as part of a causal sequence.’ Ibid. at 443 (emphasis and footnotes omitted). Some recommend the term ‘commercial loss,’ since all legally compensable losses are economic: Miller v United States Steel Corp. (7th Cir. 1990) 902 F.2d 573 (Richard Posner, J.) Others prefer ‘free-standing economic loss:’ E. Silverstein, ‘On Recovery in Tort for Pure Economic Loss’ (1999) 32 U. Mich. J.L. Ref. 403; or ‘stand-alone’: D.B. Dobbs, Country Report, United States, in J. Spier (ed.) The Limits of Expanding Liability: Eight Fundamental Cases in a Comparative Perspective (1998). See also the reference to ‘pecuniary loss’ or ‘pecuniary harm’ in the Restatement (Second) of Torts § 766–766C. The authors of this Report made recourse to the alternative expression ‘pure financial loss’ in the essay written with F. Parisi ‘Liability for Pure Financial Loss in Europe: An Economic Restatement’

10

Pure Economic Loss

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 (2003) 51 Am. J. Comp. L. 113; the same expression is used, e.g., by D. Campbell, Protecting Financial Interests, in D. Harris, D. Campbell, R. Halson Remedies in Contract & Tort (2005), 2nd ed., 551 f; R.A. Epstein, Rebuilding the Citadel: Privity, Causation, and Freedom of Contract, in S. Madden (ed.) Exploring Tort Law (2005) pp 228, 244 ff. 5

6

Gary Schwartz refers to ‘the general economic loss no liability doctrine’ in his essay ‘The Economic Loss Doctrine in American Tort Law: Assessing the Recent Experience.’ In Banakas (ed.) above fn. 7, at pp 103–30; see also J. Gordley, A.T. von Mehren, An Introduction to the Comparative Study of Private Law (2006), 308 f; E.J. Weinrib, The Disintegration of Duty, in S. Madden (ed.), Exploring Tort Law (2005) pp 143, 159–63, in one of the leading works on French tort law the term préjudice purement économique has been employed (Viney and Jourdain, Les conditions de la responsabilité, nos 250 ff. pp 19 ff ), but a meaning is attached to it which is different in comparison with most of the other European jurisdictions. Here it is used as an overarching term for the atteintes au seul patrimoine and the conséquences économiques des atteintes à l’intégrité physique de la personne. The préjudices purement économiques understood in this way are therein compared with the atteintes aux intérêts non exclusivement économiques, to which the different dommages moraux belong, in the De Chirico case (Cass. 4.5.1982, n. 2765, Foro it 1982, I, 2864) the Italian Corte di Cassazione developed a ‘right’ to the integrity of one’s economic assets (or patrimony), which the Corte di Cassazione has continually adhered to. See the Italian Report under Case 11 (‘A Maestro’s Mistake’), in M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, p 345. Adde M. Serio, Studi comparatistici sulla responsabilità civile (2007) pp 76–7. On the ‘factual approach,’ see the seminal research project on ‘Formation of Contracts’ which Rudolph Schlesinger directed over the years 1957–1968. This

The present study

11

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 monumental work was published in 1968 in two volumes by Oceana, New York. For Schlesinger’s later views, see ‘The Past and Future of Comparative Law’ (1995) 43 Am. J. Comp. Law 477, 479. See also M. Bussani and U. Mattei, The Common Core Approach to European Private Law (1997–1998) 3 Columbia J. Eur. L. 339 and, by the same authors, ‘Le fonds commun du droit privé Européen’ (2000) 52(1) Revue Internationale de Droit Comparé 29 ff.; M. Bussani ‘Current Trends in European Comparative Law: The Common Core Approach’ (1998) 21(4) Hastings International and Comparative Law Review 785. 7

8

9

10

These are the same reasons that account also for the choice of not referring to any pigeon-hole framework (such as the ones used, e.g., by I. Englard, The Philosophy of Tort Law (1993) 211 ff.; P. Benson, The Basis for Excluding Liability for Economic Loss in Tort Law, above fn. 4, at 427 ff.; see also H. Kötz, Economic Loss in Tort and Contract (1994) 58(3) RabelsZ 423 ff. P. Cane, Economic Loss in Tort and Contract, ibid at 429 ff. in presenting the study of the cases. Perhaps another way to describe pure economic loss is to say it does not arise as a consequence of some earlier physical loss, and it is not a court’s substituted value for physical loss. For this usage, see Prosser and Keeton on the Law of Torts, section 43, at 291 (5th edn 1984). In Sweden, where the legislator says that only victims of crimes may recover for pure economic loss, the Tort Law Act, §2, defines the notion exactly in these terms: ‘In the present act, “pure economic loss” (ren formögenhat-sskanda) means such

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Pure Economic Loss

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. economic loss as arises without connection to personal injury or property damage to anyone.’ (See M. Bussani and V.V. Palmer, Pure Economic Loss in Europe (2003) pp xxxvii, 6.) A similar definition seems to prevail in England and Germany. See Lord Denning’s statement that ‘. . . it is better to disallow economic loss altogether at any rate when it stands alone, independent of any physical damage.’ Spartan Steel & Alloys Ltd. v Martin & Co. Ltd. [1973] QB 27; [1972] 3 All ER 557. 11

12

P. Benson, above fn. 8, at p 431; E.J. Weinrib, The Disintegration of Duty, in S. Madden (ed.) Exploring Tort Law (2005) pp 143, 162. Ibid.

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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 even to systems which do not actually use it) is in principle recoverable in every legal system within this study – whether the source of the loss is intentional or negligent conduct. Ignoring for the moment, then, the divergent views toward the recoverability of ‘pure’ economic loss, here at least is an area of common ground that is worth noting. Furthermore the recoverability of economic loss, even when ‘pure’, is not regarded as doubtful when such loss stems from the infringement of statutorily protected interests,14 and those protected by antitrust, copyright and patent laws.15

13

14

15

For further details, see Editors’ comparative comments under Cases 1 (‘Cable I – The Blackout’) and 9 (‘Fire in the Projection Booth’), in M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, pp 189–91, 326–27. See Ch. von Bar, The Common European Law of Torts, Vol. II (2000), pp 30–35, 487–89. See especially the answers to Case 4 (‘Convalescing Employee’), in M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, pp 222 et seq. See Ch. von Bar, The Common European Law of Torts, Vol. II (2000), pp 54–56. The same could be said of some other fields, particularly the field of ‘business torts’. Although many legal systems handle these problems with the help of the general law of obligations (the sixth Book of the Dutch Civil Code devotes an entire chapter to unfair advertising), these subjects are not dealt with here. Since the rules in these areas largely depend on policy factors which are only partially common to our field and would deserve detailed investigation, reasons of space compelled the editors to place limits on the research. For a general survey, see von Bar,

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Pure Economic Loss

Taken in the aggregate, the above considerations lead us to say that consequential loss and ‘pure’ economic loss are not different in kind or in principle, but are distinguishable only by the circumstances in which they originate and the technical limits which may have been imposed on their recoverability.16 c) Intentional infliction of pure economic loss The exclusionary rule is associated with economic loss caused by negligent behavior, not intentional wrongdoing. Indeed the legal systems under review are not deeply split until we reach the question of liability based on negligence. Here is the Rubicon which some fear to cross and others blithely dismiss. All systems agree, however, that intentionally inflicted pure economic loss is recoverable in circumstances where the conduct in question is regarded as culpable, immoral or contrary to public policy. The significance of this point is of more practical importance than it may appear at first sight. Its range of application may be somewhat greater than the narrow, infrequent form of liability which the words ‘intentionally inflicted’ harm suggest. In some systems a broad, flexible meaning is given to the ‘intention’ element.17 Furthermore, though harder to prove than negligence, the incidence of financial fraud is not a rare occurrence. A consistent rule is therefore an important protection. Secondly, from the comparative point of view, it is interesting to observe that the shift to higher degrees of culpability tends to broaden the scope of recovery in all systems. This at least suggests that the exclusionary rule should not be conceived as a simple rule based solely on the nature of plaintiff ’s damage. In our view, the material nature of the

pp 4–200, 245–49 and, more closely related to our issue, 52–56; W. van Gerven, J. Lever, P. Larouche, Tort Law (2000), pp 208–48, 358–94. 16

17

It is of interest to note that breach of European Community law may entail liability for pure economic loss. Compensation for these losses when caused by Community institutions has been clearly set forth in ECJ, 19 May 1992, Mulder v Council, [1992] ECR I-3061. With regard to the Member States, their liability has been clearly endorsed by ECJ 5 March 1996, Brasserie du Pêcheur v Germany, R. v Secretary of State for Transport, ex parte Factortame [1996] ECR I-1029. For a comparative survey, see W. van Gerven, J. Lever, P. Larouche, Tort Law (2000) at pp 889 ff; see passim, T. Heukels and A. McDonnell (eds.) The Action for Damages in Community Law (1997); P. Craig (1997) ‘Once More Unto the Breach: The Community, the State and Damages Liability’ 113 LQR 67ff. See e.g., C. von Bar, in B. Markesinis, Gradual Convergence at p 104.

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loss is no more than one element in a complex balancing act which decides where and when limits will be imposed in tort. A crucial part of the balancing act is the state of mind of the tortfeasor. Yet, in view of the well-known liability continuum, whose sliding scale ranges from intention to negligence to strict liability,18 we deliberately did not impose on our contributors any presupposition about state of mind, or the absence thereof, for the discussion of the hypotheticals. d) The typical instances of pure economic loss Broadly speaking, pure economic loss arises out of the interdependence of economic relationships and interests in the modern world. These relationships are sometimes two-dimensional and other times three-dimensional. In this section we attempt to draw up a taxonomy of the principal ways in which pure economic loss arises within such relationships. Our list will not exhaust all the conceivable ways in which such damage may arise. Our interest lies in tracing the most recurrent and typical patterns which we refer to as the ‘standard cases’. Although we have sometimes borrowed nomenclature and other times given new names to these standard situations, we have not attempted to explain or employ all of the descriptive labels and tags that writers and judges have used. These diverse and contradictory ideas are not always compatible with the results of our own study and would serve no purpose here. With these provisos in mind, we venture to set forth four categories that seem to be functionally and relationally distinct.19 18

19

See e.g., M. Bussani, La colpa soggettiva. Modelli di valutazione della condotta nella responsabilità extracontrattuale (1991), pp 83 ff.; V. Palmer (1988), ‘A General Theory of the Inner Structure of Strict Liability: Common Law, Civil Law and Comparative Law’, 62 Tul. L. Rev. 1303; F. Werro and V.V. Palmer, The Boundaries of Strict Liability in European Tort Law, pp 3–35 (2004); P. Cendon, Il dolo nella responsabilità extracontrattuale (1975), pp 415 ff.; W.V.H. Rogers, in B.A. Koch and H. Koziol (eds.) Unification of Tort Law: Strict Liability (2002), p 101; see also H. Koziol, ‘Die Principles of European Tort Law der European Group on Tort Law’ (2004) 2 ZEuP, 239 ff. and the embracing formulation in Art 1:101 II PETL (wherein, however, the main tool used to devise the ‘sliding scale’ consists in the reversal of the burden of proof: see Art 4:201 ff. PETL). For a longer taxonomic list consisting of eight categories (in which there is considerable overlap), see W. Bishop and J. Sutton, ‘Efficiency and Justice in Tort Damages: The Shortcomings of the Pecuniary Loss Rule,’ (1986) 15 J. of Legal Studies 347, 360–61. Benson’s taxonomy consists of five situations, two of which he calls ‘exclusionary situations.’ His three other situations are called ‘nonexclusionary.’ P. Benson, supra, n 7 at pp 427–30.

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Pure Economic Loss

(i) ‘Ricochet loss’ Ricochet loss classically arises when physical damage is done to the property or person of one party and that loss in turn causes the impairment of a plaintiff ’s right. This situation is three-dimensional and certain authors call it ‘relational economic loss.’20 A direct victim sustains physical damage of some kind, while plaintiff is a secondary victim who incurs only economic harm. To illustrate, A has a contract to tow B’s ship. C’s negligent act of sinking the ship makes it impossible for A to perform his contract and thus deprives him of expected profits. A’s financial loss is the ricochet effect of C’s negligence toward B. The loss is purely economic since no direct property interest of A’s has been impaired.21 A ricochet loss can also arise from the impairment of an employment contract. For instance, B is a key employee in A’s business or sporting team. C’s negligent driving leads to B’s death or incapacity, thus causing A’s team or business to lose profits and revenues. Here B’s injury is physical, but A’s loss is purely financial. The ‘Cable Case,’22 the ‘Injured Key-Player’ case,23 the ‘Evidence Spoliation’ case (the only caveat is that here it is an employee of A which causes the damage)24 are all variations of ricochet harm. Concern about the indeterminate number and size of the claims for losses is often associated with cases falling within this category. (ii) ‘Transferred loss’ Here C causes physical damage to B’s property or person, but a contract between A and B (or the law itself ) transfers a loss that would ordinarily be B’s onto A. Thus a loss ordinarily falling on the primary victim is passed on to a secondary victim. The transfer of the

20

21

22

23

24

See this terminology and analysis in R. Bernstein, Economic Loss, 2nd edn (1998) and Bruce Feldthusen, Economic Negligence, pp 199 ff (1989). See also R. Perry, ‘Relational Economic Loss: An Integrated Economic Justification for the Exclusionary Rule’ (2004) 56 Rutgers L. Rev. 711. The example closely follows La Société Anonyme de Remorquage à Helice v Bennets [1911] 1 KB 243. See e.g., Spartan Steel and Alloys v Martin & Co. [1973] QB 27 and Case 1 of our Questionnaire (‘A Cable Case: The Laid-off Workers’). See e.g., Torino Calcio SPA v Romero, Cass. Civ., S.U. 26.1.1971, n. 174, GI, 1971, I,1, 681; and Case 2 of our Questionnaire (‘The Injured Key-Player’). See Case 8 of our Questionnaire (‘Evidence Spoliation’).

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loss, or part of it, from its ‘natural’ to an ‘accidental’ bearer differentiates this from a case of ricochet loss where the damage in question is not transferred, but is a distinct damage to the interests of the secondary victim.25 These transfers frequently result from leases, pending sales, insurance agreements and other contracts that separate property rights from rights of use or specifically reallocate risk bearing. To illustrate, A is time charterer of a ship owned by B. The day before the time charter is to go into effect and while the ship is in B’s possession, C negligently damages the ship’s propeller, thus necessitating repairs and a two-week delay, which causes A to lose all use of the ship. B suffers property damage and ordinarily, as owner, would recover for the consequential loss of the ship’s use. Here, the right of use had been transferred to A by the boat charter. So A’s loss is purely pecuniary because he has no antecedent property loss.26 A similar effect can result under a sales contract which reserves title in B (seller) while the goods are in shipment but places the risk of loss in transit upon the buyer A. If the goods (still technically owned by B)27 are damaged in transit by the carrier’s negligence, then a loss normally incurred by the owner has been transferred to A. A’s loss can be seen as purely financial since he has no direct property interest in the goods.28 The same result can be reached when the transfer occurs by operation of law. This occurs, for example, when C causes physical injury to A and A’s spouse, who is obliged by law to care for him/her, must discontinue working thereby suffering a pure economic loss.29 To give another illustration B, A’s (ordinary) employee, may be injured by the negligent driving of C and thus find himself unable to work for three months. Nevertheless statute requires that A continues to pay B’s salary, even though no work is received in return. Thus what ordinarily would have been B’s loss is statutorily transferred to A as

25

26

27

28 29

This category receives extensive consideration in C. von Bar, The Common European Law of Torts, Vol. I, pp 507–12 (1998). The illustration is based upon Robins Dry Dock v Flint (1927) 275 U.S. 303 as well as Case 4 of our Questionnaire (‘The Cancelled Cruise’). As is well known, however, the ‘owner’ of goods in shipment depends on the law applicable to the transfer of ownership, and above all on the validity and extent of the principle of transfer of possession. See von Bar, above, fn. 25, at p 509, fn 499. This illustration is based upon The Aliakmon [1985] 2 All ER 44. See Case 5 of our Questionnaire (‘The Dutiful Spouse’).

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Pure Economic Loss

a combined result of C’s negligence and the effects of the pay continuation statute.30 Transferred loss cases are liability neutral from the perspective of the tortfeasor and should avoid fears of indeterminate liability. An additional argument in favor of an award of compensation is that the tortfeasor who is clearly liable to the primary victim should not benefit from the accidental operation of rules which by pure chance exclude him from liability. According to von Bar, the concept of transferred loss is intended ‘to prevent someone appealing to rules whose purpose is not to protect that person, but to protect others.’31 (iii) Closed markets, highways and public facilities Here economic loss arises without a previous injury to anyone’s property or person. There may be physical damage, but it is to ‘unowned resources’ that lie in the public domain.32 A single negligent act may necessitate the closure of markets, highways and shipping lanes which no person owns, yet the closure inflicts economic loss directly on individuals whose livelihoods closely depend upon the use of these facilities. This category raises the greatest concern about liability to an indeterminate class in an indeterminate amount. The financial ripple effect is then at its maximum. To illustrate, C negligently spills chemicals into the river, and all traffic on the waterway is suspended for two weeks during a clean-up effort. As a result shippers must take more expensive overland routes, and marinas, boat suppliers, hotel operators, and commercial fishermen in the area suffer severe economic loss.33 A similar chain of loss may arise when C negligently allows infected cattle to escape from his premises, and the government must order all cattle and meat markets to close. As a result broad classes of plaintiffs will suffer pure economic loss, including farmers who are

30

31 32

33

The example is taken from Case 4 (‘Convalescing Employee’) in M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, p 222. The Common European Law of Torts, Vol I, pp 510–11 (1998). Victor Goldberg, ‘Recovery For Economic Loss Following the Exxon Valdez Oil Spill,’ (1994) 23 J. Legal Studies 137. This illustration resembles the facts of Case 15 (‘A Closed Motorway – The Value of Time’) in M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, p 418. See also Louisiana ex rel. Guste, v M/V Testbank (The Testbank), 752 F2d 1019 (1985).

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unable to sell their stock and butchers who are unable to obtain supplies.34 As we note below, the ‘floodgates’ argument acquires great force in such contexts. (iv) Unprofessional advice or services Those who give advice, prepare data or render services concerning financial matters often understand that the information will be furnished to a client and then relied upon by third persons with whom they have no contractual relationship. If the advice, data or services are carelessly compiled or executed, this may not necessarily breach the provider’s contract with his/her client (even if there is breach, the damage will usually be strictly financial) but the relying third party will sustain pure pecuniary loss. For instance, C, an accountant, carelessly conducts an audit of B, a publicly traded company, and vastly overstates the company’s net financial worth. Relying upon the accuracy of the audit, investor A buys shares in B at twice their actual value.35 Here A’s loss arises not as a consequence of physical damage to B, but on the basis of misplaced reliance.36 Similarly, erroneous information about a client’s solvency may lead to financial losses. A, before extending credit to B, takes the precaution of asking C (the merchant bank where B kept its account) for an assessment of B’s creditworthiness. C carelessly replies that B is ‘good for its ordinary engagements’ (when in fact B would soon go into liquidation)

34

35 36

See the facts in Case 3 of our Questionnaire (‘The Infected Animal’) and the case of Weller v Foot and Mouth Disease Research Inst. [1966] 1 QB 569. See Case 6 of our Questionnaire (‘Auditor’s Liability’). According to Tony Honoré, losses attributed to plaintiff ’s ‘reliance’ pose a causation issue which is different in kind than causation in the context of physical damage. His discussion seems pertinent to the concern of some that this category of pure economic loss opens the floodgates of liability. When a person is said to ‘rely’ on another’s statement, he or she often has two or more (typically many more) reasons or motives for reaching a decision and acting on it. The question whether A’s statement ‘caused’ B’s response is highly indeterminate. For example, a potential investor in Eldorado Mines may be influenced by a false statement in a prospectus, as well as by advice from his stockbroker, by his own review of the company books. How are we to say, among all these reasons, that the false statement in the prospectus ‘caused’ his financial loss? T. Honoré, Necessary and Sufficient Conditions in Tort Law, in D.G. Owen (ed.) Philosophical Foundation of Tort Law (1995) at pp 382–83. See also M. Coester and B. Markesinis, ‘Liability of Financial Experts in German and American Law: An Exercise in Comparative Methodology’ (2003) 51 Am. J. Comp. L. 275.

20

Pure Economic Loss

and thereby influences A to advance credit and to lose a large sum.37 Here A’s loss is purely financial, not because it ricochets off or is transferred from someone else’s physical damage, but because it arises directly from A’s reliance. Professional services for a client may cause pecuniary loss to a non-client. B, an elderly man, asks C, his lawyer, to prepare a will in which he will leave $100,000 to A. C takes no action for six months, whereupon B dies intestate and A receives nothing.38 A’s loss is purely economic. e) The problem of future loss Examples given in the preceding paragraphs would suggest that patrimonial injury may take two distinguishable forms. It may relate to the existing, as opposed to the anticipated, wealth of the victim. In the first sense, plaintiff ’s present wealth may be simply depleted by poor financial advice, or by wasting time and petrol circumnavigating a motorway that was closed due to an accident. In the second sense, plaintiff may instead lose that which s/he expected to acquire, such as the profits from productive machinery suddenly shut down, or a testamentary legacy lost because of a defectively drawn instrument, or a sport club’s reduced gate receipts due to the accidental death of its star player. Sometimes, when an expectation is destroyed in utero and proof that it would have materialized is difficult, it is called the loss of a chance.39 Between these types of wealth, it is the loss of expected wealth – 37

38

39

These facts are taken from the well-known case of Hedley Byrne & Co. v Heller & Partners Ltd. [1964] AC 465 (HL). For other instances of pecuniary harm from incorrect information, see Case 18 (‘Wrongful Job Reference’), in M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, p. 473 and Case 7 of our Questionnaire (‘Ruined Credit’). See White v Jones, [1995] 2 AC 207 (HL); Lucas v Hamm, 11 Cal. Rept. 727 (1967); Ross v Caunters [1980] Ch 297; and Case 14 (’Poor Legal Services’), in M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, p 403. For example, a commission unlawfully rejects a candidate’s application for a job or a fellowship. See e.g., Conseil d’Etat, 12.11.1965, in Rec. Lebon, 1965, 613 (‘le réquérant, évincé d’un concours auquel il se serait présenté avec des chances sérieuses de succès en raison de ses titres et travaux, a subi un préjudice’). As to the debate, see G. Viney and P. Jourdain, Les conditions de la responsabilité, 2e éd., in Traité dr. civ., sous la dir de J. Ghestin (1998) p. 71 ff.; N. Jansen, ‘The Idea of a Lost Chance’, in 19 Oxford J. Leg. St. (1999) pp 271 ff. (discussing German and English experience). See also Case 8 of our Questionnaire (‘Evidence Spoliation’).

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unrealized profits, canceled legacies – which presents the most difficult question for tort systems to deal with. The difficulty is not simply that the demand for proof is more exigent – by definition, expectancies explore a future that only might have occurred – but also the appropriateness of affording protection in tort. For when an economic expectation receives legal protection in tort (as in principle under French law) plaintiffs can be compensated to the same extent as if he or she were protected by a contract with the tortfeasor.40 In countries where an exclusionary rule of tort law exists, there may be a tendency to say that wealth expectancies should be protected in contract.41 For example, German courts are generally unable to approach the question through tort law, but at the same time, they willingly stretch contractual concepts that protect the plaintiff, even though there is no actual contract between the parties. In these circumstances it becomes difficult to tell where tort ends and contract begins. We seem to be at the frontier where functions meet and merge, for although it has been theorized that contract creates wealth whereas tort only protects that which we already have,42 the notion of pure economic loss presents a challenge to traditional views about the relationship between contract and tort law.43 40

41

42

43

See G. Viney and P. Jourdain, pp 71 ff., 195 ff.; G. Viney, Introduction à la responsabilité, 2e éd., in Traité dr. civ., sous la dir de J. Ghestin (1995) pp 360 ff. See also our comparative Comments to Case 18 (‘Wrongful Job Reference’), in M. Bussani and V.V. Palmer, pp 486–87, regarding the distinction to be made between cases in which the lost chance is to be understood as a distinct loss in itself (an autonomous loss), as distinct from the case where the concept is invoked as an equitable means of proving a loss. Note, for example, the unease in the following statement from a British judge: ‘I do not consider that damages for loss of an expectation are excluded in cases of negligence arising under the principle in Hedley Byrne, simply because the cause of action is classified as tortious. Such damages may in principle be recoverable in cases of contractual negligence; and I cannot see that, for present purposes, any relevant distinction can be drawn between the two forms of action’ Per Lord Goff of Chieveley in White v Jones, [1995] AC 207. On this subject see also J. Stapleton, ‘The Normal Expectancies Measure in Tort Damages’ (1997) 113 Law Q. Rev. 257; H. Reece, ‘Loss of Chances in the Law’ (1996) 59 MLR 188. J.A. Weir, Complex Liabilities, No 6, p 5, xi International Encyclopedia of Comparative Law (1976). A distinguished Austrian scholar has pointed out that we must not lose our way in the conceptual shadows of this borderland. ‘Liability based on tort and liability based on breach of contract usually are taken as clearly separated contrasts. But I think they are the two ends of liability based on fault and that between them there is a connecting chain of intermediate stages. This understanding is important because

22

Pure Economic Loss

f ) In search of a rationale for the exclusionary rule It will be useful to set out the fundamental arguments which are usually presented in support of an exclusionary rule. Naturally these arguments were developed by jurists in legal systems which take the position that such losses should not be generally recoverable in tort, except in defined and limited circumstances. Different theoretical approaches, as well as the experience of other countries, however, may suggest certain counterarguments, which we will also mention. (i) Foreseeability principle A common explanation of the economic loss rule relates to the element of foreseeability of the harm. It has been suggested that tort rules based on foreseeability were developed for physical damage and are not workable outside this context. The role of the economic loss rule is explained as a pragmatic development of the law: applying the traditional foreseeability test to cases of pure financial loss would lead to ruinous levels of liability.44 Two objections to the foreseeability explanation should be considered at this point: one factual, the other theoretical.45 First, the likelihood and extent of economic loss have a degree of foreseeability that does not differ qualitatively from non-economic damages in a typical tort situation. The closure of public services such as a motorway46 is clearly on point. As a matter of foresight, congestion and traffic delays and consequential economic loss are unavoidable and foreseeable consequences of a closed motorway. Yet, most legal systems exclude the recoverability of economic losses

44

45

46

one has not to sort liability in one of these two categories and, therefore, is able to avoid abruptly different treatment of rather similar cases.’ Helmut Koziol (ed.), Unification of Tort: Wrongfulness, 25 (1998). Bruce Feldthusen, Economic Negligence (2nd edn Carswell 1989). The author asserts that the ‘remoteness’ of the damage from the initial conduct of the defendant is the characteristic and endemic issue which distinguishes pure economic loss, as a practical matter, from cases involving physical damage. See F. Parisi, V.V. Palmer and M. Bussani, The Comparative Law and Economics of Pure Economic Loss, in George Mason University School of Law Working Papers Series, Working Paper 28 (June 2005), http://law.bepress.com/gmulwps/ gmule/art28. See the case study n. 15 in M. Bussani and V. Palmer (eds.), Pure Economic Loss in Europe, p. 418.

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of truckers and other professional travelers who suffered an economic prejudice from closure of the public motorway.47 The fact that pure economic loss is frequently foreseeable, however, should not mean that it is always recoverable. Foreseeability may simply be a necessary condition of liability, not its sole determinant. Second, from an efficiency standpoint, Francesco Parisi argues that the optimal level of liability could include both foreseeable and unforeseeable consequences.48 To the extent causation is satisfactorily established, efficiency may require that the tortfeasor face all the consequences of his wrongful action, such that the ex ante level of expected liability coincides with the ex ante level of expected harm. Any departure from such a criterion of liability could not adequately provide the incentive to avoid the complete harm. Both factually and theoretically, therefore, it may be an oversimplification to say that pure economic loss is unrecoverable because it is ‘unforeseeable’. Many accidents produce a chain of costly economic consequences which can be statistically estimated and causally linked to the wrongful action. As a policy matter, the foreseeability of the damage is a factual and legal question that enters the equation of liability in the ways specified by the legal system, but no a priori distinction can (or should) be made between economic and non-economic forms of that damage. (ii) Absolute versus relative rights The boundaries of compensable loss in torts have been expanding. Civilian scholars have described the domain of protected interests as having gradually expanded along the following path: (a) protection of absolute rights; (b) protection of relative rights; and (c) protection of other (legitimate) expectations.49 The recovery of economic loss confronts a dogmatic obstacle because the ‘unreified’ economic interests often relate to the parties’ unfulfillled contractual expectations or other expectations of economic significance. Several Rico47 48

49

Ibid. F. Parisi, ‘Liability for pure financial loss: Revisiting the economic foundations of a legal doctrine’ in Bussani and Palmer, at pp 89–90. See however, R. Posner, Economic Analysis of Law, pp 188–89 (2003), asserting that when a risk is unforeseeable, liability would not deter an actor from creating it. See, e.g., R.L. Rabin, The Historical Development of the Fault Principle: A Reinterpretation (1981) 15 Ga. L. Rev. 925, 927–61; G. Viney, ‘Introduction à la responsabilité’ 6 (2nd edn 1995); M. Bussani, ‘La colpa soggettiva’ 99 (1991).

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Pure Economic Loss

chet loss cases are on point. The loss to the ricochet victim derives from the defendant’s wrongful act, which prevents a third party from fulfillling the victim’s contractual expectation. Other cases may relate to the infringement of a yet unmatured economic interest. Such cases of tortious interference with contractual expectations have traditionally posed a problem in civil law systems. Economic loss derived from the breach of a non-absolute right, in fact, does not enjoy erga omnes protection, since the action can, in principle, only be brought against the breaching party, not against a third party that (negligently) interfered with the contractual interest. This argument is well-established in the Germanic legal tradition. The distinction between absolute or relative right – based upon the nature of the underlying interests protected by the legal system – has traditionally served in the German and German-influenced systems as a theoretical framework providing a default template of remedies and rules concerning the standing and scope of protection of such rights. At the same time, the distinction has created some artificial inertia in the adaptation of the legal system to new changing realities. It can be argued that this approach ultimately begs the question: what should be the desirable protection of pure economic interests?50 First, if the rationale for the exclusionary rule is that ‘relative’ rights (such as economic interests and contractual expectations) should not be protected erga omnes, the explanation would suggest that all such relative rights would remain uncompensated if violated by a third party. This explanation contradicts the fact that the exclusionary rule is associated with the negligence standard, but not cases of intentional breach.51 Furthermore, all ‘consequential’ economic losses (i.e., losses that are related to a previous loss of the victim suffered because of the infringement of an absolute right of the victim) are fully recoverable in all systems that we have studied. These elements show that the exclusionary rule is not simply the consequence of dogmatic path dependence, but a reflection of other policy concerns.

50

51

See F. Parisi, V.V. Palmer and M. Bussani, The Comparative Law and Economics of Pure Economic Loss, in George Mason University School of Law, Working Papers Series, Working Paper 28 (June 2005), http://law.bepress.com/gmulwps/ gmule/art28. All European legal systems considered in the 2003 Bussani and Palmer study permit recovery when pure financial loss is inflicted intentionally.

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(iii) The floodgates This is the most important argument. It is not only pervasive, but has also proved persuasive in many quarters. It usually links up with and reinforces the other arguments. Common law countries, mixed jurisdictions and a number of civil law countries share similar concerns about the danger of excessive liability entailed by pure economic loss claims. In this context, another frequently invoked explanation for the exclusionary rule concerns the problems of open-ended liability and derivative litigation, i.e., the extension of liability for the remote consequences of a wrongful act.52 The common premise of this argument is that in a complex economy, pure economic losses are likely to be serially linked to one another. Damage to a particular good, for example, often generates losses that affect several downstream individuals and firms who would have utilized the good as an element in their production process, and so on. In a world of economic networking, it becomes necessary to set reasonable limits to the extent to which remote economic effects of a tort should be made compensable. Open-ended liability arguments have a well-established doctrinal lineage.53 Though not always noticed, there are actually three distinct strands to the floodgates argument, and it is helpful to separate them. The first strand is the belief that to permit recovery of pure economic loss in some cases would unleash a wave of actions that 52

53

Recent literature has pointed out that the judicial applications of the economic loss rule may be an attempt to limit tort liability. Gary T. Schwartz, The Economic Loss Doctrine in American Tort Law: Assessing the Recent Experience, in Civil Liability for Pure Economic Loss (Efstathios K. Banakas (eds.) 1995) 103; Gary T. Schwartz, American Tort Law and the (Supposed) Economic Loss Rule, in Pure Economic Loss in Europe (Mauro Bussani and Vernon Palmer (eds.) 2003); see also B. Markesinis, ‘An Expanding Tort Law – The Price of a Rigid Contract Law’ (1987) 103 Law Q. Rev. 354 J. Stapleton, Duty of Care Factors: A Selection from the Judicial Menus, in The Law of Obligations: Essays in Celebration of John Fleming (P. Cane and J. Stapleton (eds.) 1998). If that were true, however, the economic loss rule is fundamentally at odds with the overall tendency to expand the scope of liability in other areas of tort law (e.g., personal injury and harm to property). Perhaps the explanation lies in the fact that expanded liability in those areas rarely yields problems of derivative and open-ended litigation. See, however, below sub ‘D’. von Jhering’s statement ‘Where would it all lead if everyone could be sued . . .!’ is indeed a famous rendition of this general concern. Jherings Jahrbücher 4, 12–13 (1861). See also N. Jansen, ‘Duties and Rights in Negligence: A Comparative and Historical Perspective on the European Law of Extracontractual Liability’ (2004) 24 Oxford J. Legal Studies 443, at 444 ff.

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Pure Economic Loss

would burden, if not overwhelm, the courts. If a defendant’s negligence necessitates the closure of trading markets or shuts down all commerce traveling on a busy motorway, there may be hundreds, perhaps thousand of persons who would be financially damaged. Assuming that a large number of these cases reach the courts, there would be administrative chaos. The justice system could not cope with the sheer numbers of claims. The second strand is the fear that widespread liability would place an excessive burden upon the defendant who, for purposes of the argument, is treated as the living proxy of human initiative and enterprise. The potentially staggering liability would be out of all proportion to the degree to which defendant was negligent. It is also said that it is manifestly impossible for the defendant to predict in advance how many relational economic loss claims he might face when, for example, he injures the property of a primary victim. Whether there is a small or large class of secondary loss sufferers depends, fortuitously, upon the number of parties with economic interests linked to the exploitation of the property.54 The danger of disproportionate consequences resulting from minor blameworthiness is of course an issue of fairness no matter what kind of damages have been caused,55 but some scholars believe that the danger is exacerbated in pure financial loss cases. Financial harm is assumed to have a greater propensity to travel far and wide. It has often been pointed out that the laws of Newton do not apply on the road to financial ruin.56 Physical damage has at least a final resting point, while patrimonial harm is not slowed down by gravity and friction.57 The harm has often been compared to the recovery of 54

55

56

57

The rationales of predictability and practicality are discussed in R. Bernstein, Economic Loss, pp 201–3 (2nd edn 1998). See, Jeremy Waldron, Moments of Carelessness and Massive Loss, in David Owen, Philosophical Foundations of Tort Law (1995) at p 387. Weir, No 14(d). This was also the view of Fleming James who stated that the ‘physical consequences of negligence usually have been limited, but the indirect economic repercussions of negligence may be far wider, indeed virtually openended.’ ‘Limitations on Liability for Economic Loss Caused by Negligence: A Pragmatic Appraisal’ (1972) 25 Vand. L. Rev. 43, 45. See, however, J. Stapleton ‘Legal Cause: Cause-in-Fact and the Scope of Liability for Consequences’ (2001) 54 Vand. L. Rev. 941, at 974: ‘The reference to the laws of physics reflects a long-standing fallacy in traditional running down cases that control of liability for consequences can be achieved by some “billiard ball” notion of the laws of physics. That is, this

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damages for nervous shock, since there too the loss can be ‘pure’ as opposed to consequential, and there too, the danger of reverberating impacts is commonly given as a reason for restrictive rules.58 The third strand of the argument maintains that pure economic loss is simply part of a broad modern trend toward greater and greater tort liability, a trend that must be kept under control. Allowing exceptions to the exclusionary rule is a slippery slope that may lead to the rule being reversed and may also encourage the development of other types of tort liability.59

reference rests upon the faulty notion that “claims for physical damage, whether to person or property, are inherently limited by the laws of physics which teach that physical forces will ultimately come to rest.” After I have run you over and broken your leg, we have “come to rest” in a crude sense. Yet if you later suffer negligent treatment at a hospital that damages your other leg, the law may well say this injury is within the appropriate scope of my liability for consequences. What is doing the work in this judgement is not some inherent limit on my liability set by the law of physics but a judgement about the appropriate scope of liability for consequences in light of, among other things, the perceived purpose underlying the recognition of the obligation in the first place.’ 58

59

The analogy, however, must not be pressed too far. Courts in emotional shock cases have been troubled by a number of rather different concerns, particularly the difficulty of defining the threshold harm (What degree of shock should be cognizable? What manifestation of the harm should be required?) and the difficulty of detecting false or fraudulent claims, in the case of pure economic loss, however, the problem of defining the threshold of the harm is minimal (the threshold of financial damage always begins at zero); the factual existence of loss is objectively demonstrable and its measurement and proof are not easy but perhaps less problematic. The threat of fraud is also of less concern because such loss is arguably free of the danger that claimants may simulate its symptoms. Accordingly economic loss is less easily feigned than the manifestations of nervous shock. We therefore suggest that the most important similarity between the two areas centers upon judicial concern about expanding liability in favor of an indeterminate number of plaintiffs, for indeterminate amounts of damages. Ch. von Bar, The Common European Law of Torts, Vol. II, pp 76–84 (2000). For a discussion in American law, see Rabin, above fn. 50, at pp 1524–25. The Tilburg Group, for example, argues that the floodgates must be kept shut in order ‘to dam crushing liability’ and to resist the general trend toward expansion of liability. Six of eight hypotheticals chosen for comparative study by this Group deal with the subject of pure economic loss. The floodgates metaphor plays a central role in their orientation. See J. Spier (ed.) The Limits of Liability (1996) and also J. Spier, The Limits of Expanding Liability (1998).

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(iv) The floodgates revisited: conjecture and geography In assessing the cumulative weight of the argument, there are in our view a number of considerations to bear in mind. To begin with, it should be remembered that the floodgates argument has never purported to be a scientific claim, nor a claim based upon comparative law research. It is not very easy to test whether the dire prophecy of the ‘nightmare scenario’ is dream or reality. Is it founded on blind conservatism, or does it have a rational basis? 60 For instance, the central assertion that physical damage is different from financial damage because it is more contained and judicially manageable seems increasingly difficult to understand 61 in view of today’s mass torts which sometimes involve innumerable physically injured victims asserting claims sometimes amounting to billions of dollars.62 These disasters range from single-event catastrophes like the Exxon Valdez oil spill and the Bhopal gas leak, to multiple-event injuries like the asbestos and DES tragedies which extend over a wide geographic area, producing literally thousands of actual claims that stretch judicial resources to their limits.63 The Exxon Valdez oil spill 60

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For example, in 1939 the eminent American torts scholar, William Prosser, cuttingly observed: ‘It is the business of the law to remedy wrongs that deserve it, even at the expense of a “flood of claims”; and it is a pitiful confession of incompetence on the part of any court of justice to deny relief upon the ground that it will give the courts too much work to do.’ ‘Intentional Infliction of Mental Suffering: A New Tort’ (1939) 37 Mich LR 874 at 877. The point is repeatedly emphasized by Herbert Bernstein, ‘Civil Liability for Economic Loss,’ (1998) 46 Am. J. Comp. Law 111, at pp 126–28 It should be noted that comparative tax law shows that damages awards for personal injuries usually go tax-free, like any other physical damage to property that is to be considered non-income-bearing. The opposite solution prevails in Western systems, however, whenever recovery is meant as restoration of taxable income. See E. Marello, The Western Approach to Taxation of Damages: The Substitution Myth, in M. Bussani (ed.), European Tort Law: Eastern and Western Perspectives (2006), 121. For a summary of the American scene, see C.H. Peterson and J. Zekoll, ‘Mass Torts,’ (1994) 42 Am. J. Comp. Law 79. For a valuable analysis of the doctrine of pure economic loss in relation to the Valdez and Amoco Cadiz oil spills, see Victor Goldberg, ‘Recovery for Economic Loss Following The Exxon Valdez Oil Spill’ (1994) 23 J. of Leg. Studies. On its facts the Exxon Valdez accident caused enormous physical damage to the environment (i.e., to things in the public domain such as shoreline, waters and wildlife). The individual litigants were directly affected as fishermen, tour operators and hotel owners. Their claims were viewed as a specie of pure economic loss. Such accidents, however, could just as well occur in places where thousands of private owners would suffer property losses and consequential

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produced more than 30,000 litigated claims.64 The outbreak of foot and mouth disease in Europe which spreads physical and/or financial loss by the same prevailing wind may prove to be a bigger disaster. These examples would suggest that the law is normally content (or not reluctant) to impose liability even though the potential plaintiff ’ class is large.65 It would sound very odd if the defendant could argue that s/he should not owe a duty because s/he would have too many victims.66 For many scholars, therefore, the justification for a norecovery rule based upon a supposed difference in ripple effect, or the sheer size of the plaintiff class is hard to reconcile with the recovery of extremely large economic losses resulting from negligence causing physical injury.67 The geographical distribution of the floodgates argument is another interesting facet of its development. While a perennial in some soils and climates, the argument has failed to take root in others. We have no clear explanation why this occurs. One might say that the theme resonates better in particular legal cultures, but what makes one culture or legal infrastructure more receptive than another? The answer is not clear. Until research is available, the question is open to speculation and to the discussion of interesting clues. For instance, litigation rates in Europe are known to be very variable, and it appears that some of the more litigious countries adhere to the no-recovery rule. Is it coincidence that both the exclusionary rule

64 65

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economic losses. The threat of an avalanche of claims, therefore, is hardly reduced by the metaphysical nature of the damage, and it is questionable that the law can construct a sensible rule based upon such a distinction. Victor Goldberg, above fn. 32, at p 1. As Professor Jane Stapleton wrote in a private communication to the authors of these pages: ‘we should not forget that modern procedural reforms, such as statutory provisions facilitating class actions, reflect society’s concern to address the barriers to justice that might otherwise face the mass of victims that can result in today’s complex society from a single piece of wrongdoing. They are a way of addressing, by lowering, the “costs of mass litigation” concern.’ The judgement in Griffiths v British Coal Corporation (January 23 1998, QBD) upheld the largest personal injury claim in British history. It produced a record settlement of £2 billion for the benefit of 100,000 ex-miners suffering from a range of chest illnesses, a sum considerably more than the government received from the privatization of the coal industry: see Jane Stapleton (2000) 120 Law Quarterly Review 506–11. See J. Stapleton, Duty of Care Factors: A Selection from the Judicial Menus, in P. Cane and J. Stapleton (eds.), The Law of Obligations: Essays in Celebration of John Fleming (1998) 59.

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and floodgates argument flourish in Germany and Austria where the rates are among the highest in Europe?68 Consider England and the US where the floodgates argument has enjoyed significant success. Should we be surprised that an historically small, close-knit coterie of judges may be sensitive to the question of administrative overload? Does institutional structure and conditioning play a role in this question? Another relevant issue may be to investigate the way in which broad arguments of this kind circulate in international channels. The ruling ideas of influential exporting legal cultures (not merely substantive law ideas, but ‘soft’ formants such as the conventional wisdom and dominant policy arguments) clearly have extra-territorial scope and impact. It does not seem accidental that in countries where English and German legal cultures have a decisive sphere of influence (e.g. English influence in Commonwealth countries and the United States; Germanic influence in Austria and Portugal), the floodgates argument has been received almost unquestioned. It is interesting that in countries where French leadership is acknowledged, one vainly searches for any trace or mention of floodgates anxiety. Yet things may not be so simple. How do we explain developments in a ‘liberal’ regime like Japan where the floodgates argument is considered rather muted and moderate, yet the Civil Code is considered German-inspired and the country’s public law and judicial organization bear a heavy American imprint? 69 As stated earlier our discussion is purely speculative. The subject merits deeper investigation.

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Does this factor explain why in neighboring Netherlands, where rates are remarkably low, there is no categorical rule against recovery, nor even – so far as an outside observer can judge – any particular fear of docket inundation? For relevant figures see Erhard Blankenburg, Civil Litigation Rates as Indicators of Legal Culture, in David Nelkin, Comparing Legal Cultures (1997) at pp 41 ff where the author discusses the thesis that differences in legal culture may account for the disparities in civil litigation rates between neighboring countries with very similar legal traditions and socio-economic conditions. For further comparisons, see B.S. Markesinis, ‘Litigation-mania in England, Germany and the USA; Are We So Very Different?’ (1990) 49 Camb. L.J. 133 Patrick Atiyah, ‘Tort Law and the Alternatives: Some Anglo-American Comparisons’ (1987) Duke L.J. 1002. Discussed below, at p 25 and see also the discussion in Chapter 2 by Prof. Yoshihisa Nomi, at p 71.

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(v) A legal and economic appraisal THE OPTIMAL SCOPE OF LIABILITY

Economic analysis may suggest a different response to each of the above three open-ended liability concerns.70 From an economic point of view, the first strand of open-ended liability arguments is both factually and theoretically accurate. The justice system would unavoidably face an increase in administrative costs as a result of the proliferation of tort claims. Tort policy should account for such administrative costs that ultimately affect the total social cost of accidents. The second strand of arguments looks theoretically debatable. According to this variation of the open-ended liability argument, the potentially staggering liability faced by tortfeasors would be disproportionate to the degree of the defendant’s negligence. The danger of harsh consequences from minor blameworthiness is, indeed, an issue of fairness no matter what kind of damages have been caused,71 and some scholars believe that the danger is far greater in pure financial loss cases. Others say this concern is misplaced.72 It is arguable, however, that to maintain efficient precaution incentives, parties should, under most circumstances, face the full range of economic consequences of their activities, no matter how severe the

70

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See F. Parisi, V.V. Palmer and M. Bussani, The Comparative Law and Economics of Pure Economic Loss, in George Mason University School of Law Working Papers Series, Working Paper 28 (June 2005), http://law.bepress.com/gmulwps/ gmule/art28. See Jeremy Waldron, Moments of Carelessness and Massive Loss, in Philosophical Foundations of Tort Law (David Owen (ed.) 1995) 387. See Stapleton, Extra-Contractual Recovery of Pure Economic Loss in Europe, in M. Bussani (ed.), European Tort Law (2006) 232, where the author underscores that ‘the economic realities of litigation ensure that, in the modern era, the typical pure economic loss claim reaching common law appellate courts involves, not a consumer, but a business, often a repeat player such as a bank, whose aim may well be wider than victory in an isolated case such as the establishment of a favorable precedent.’ For example, in the pension mis-selling case of Gorham v British Telecommunications Ltd Plc [2000] EWCA Civ 234, the defendants appealed against a decision in favour of the plaintiff, a widow, but made it clear that the defendants ‘have no intention of taking the sum awarded by the [trial judge] back from Mrs. Gorham. They contest the appeal . . . with the object of establishing that they do not owe the claimants a legal duty because so many other consumers were in her position.’ J. Stapleton, ibid at fn 29.

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harm.73 Furthermore, given the experience of the Liberal regimes, where the floodgates argument has not been a restraint and yet there have been no dire consequences, it is not clear that the argument rests upon an empirical foundation. The third strand of arguments does not appear to apply particularly to situations of pure economic loss, since they could well relate to other kind of losses, whether pecuniary, non-pecuniary, or purely economic. This view argues that the exclusionary rule should be invoked even where there is no danger of a flood of claims or disproportionate recovery. No compensation should be made for fear of establishing an exception that erodes the rule or an exception that may receive analogical extension in the future. THE THEORY OF ‘SOCIAL LOSS’

In order to further understand the economic significance of the pure economic loss rule, it may prove useful to proceed in two steps: firstly we analyze the theory called ‘social loss’ as opposed to private loss; secondly we attempt to verify how that concept can adapt itself to the design of optimal liability rules. From the perspective of law and economics, tort remedies are necessary to specify and quantify externalities. An externality is a cost imposed on a third party outside the voluntary mechanisms of the marketplace. In principle, tort liability could ensure that the entire social cost of an activity is addressed by the responsible party. In this context, the amount of ‘social’ loss is given by the sum of all private losses imposed by a given action on the various parties less the sum of all external benefits generated by such conduct. According to this criterion, liability in torts should not be exclusively linked to the private losses of the parties, but should be conceptually linked to the ‘socially relevant’ harm.74 The application of this version of 73

74

F. Parisi, V.V. Palmer and M. Bussani, The Comparative Law and Economics of Pure Economic Loss supra n 70. Applying this principle requires focusing on the tortfeasor’s expected ex ante liability, rather than on the victim’s actual compensation. This may occasionally require courts to set aside some other general principles of tort law. For example, the collateral-benefits rule, which allows the victim to recover the full value of a loss without deducting insurance payments for the same damage may be quite efficient. First, it creates efficient precaution incentives on the tortfeasor. Second, in most situations, the double payment from the insurance and the tortfeasor does not in fact amount to allowing the victim to recover double. As pointed out by Posner and

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the exclusionary rule would contribute to the minimization of the total cost of accidents. Some activities, while imposing private losses on some third parties, may create benefits for others.75 A legal system aiming at creating optimal incentives for potential tortfeasors could impose a dual system of liability: imposing positive liability for the negative externalities and recognizing negative liability for the positive externalities. From an efficiency point of view, the creation of a negative liability rule is as important a remedy as a positive liability rule in a standard tort situation. As a policy matter, several legal limitations concerning compensable harm, including some variations of the economic loss rule, might be explained as ways to confine liability to only socially relevant externalities. The issue of pure economic loss is best understood by contrasting a case of pure economic loss with a traditional situation of physical harm. Generally in cases of physical harm, the cause of action correlates with the extent of the private and social cost of the harm. Any loss suffered by an individual occasions a private cost to the victim, which in turn counts as a social cost for the community. A different logic applies in the case of pure economic loss. In the case of foregone profits or earnings, for example, there is no one-to-one relationship between the private loss of the victim and the resulting social loss. On the contrary, the private loss may exceed the social loss, and the discrepancy between the two values may be substantial. This may lead to paradoxes where a private loss yields a social gain. In pure economic loss cases, we may have situations of wrongful behaviour that occasion an economic loss for one victim but which may impose no cost, or may even generate a net benefit to society at

Landes, the insured plaintiff already paid for the insurance benefit under the form of insurance premium, rendering full liability necessary to make him whole: Richard A. Posner, Economic Analysis of Law (3rd edn 1986); William M. Landes and Richard A. Posner, The Economic Structure of Tort Law (1987). More generally, the risk of duplicate recovery should not necessarily generate over-deterrence, given the relevance of the ex ante expected liability, rather than actual ex post compensation, on individual incentives. 75

On this point, J. Arlen, Tort Damages, in B. Bouckaert and G. De Geest (eds.) (2000) 2 Encyclopedia of Law and Economics 682, 713, observes that, if an incumbent monopolistic firm loses part of its market share to a competitor selling the same product at a lower price as a result of the tortious activity of the latter, the alleged tort, while occasioning the victim’s lost profits, may actually be at the origin of a social welfare gain.

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large. Whenever wrongful behaviour creates a private loss, the magnitude of which differs from the resulting social loss, an economic analysis indicates that the victim should only be compensated for the portion of the private loss (if any) which represents a social cost.76 Where a private loss to the victim yields a net gain to society at large, the same law and economics perspective concludes that the ‘wrongful’ behaviour could actually be encouraged and economically subsidized by the legal system.77 Put differently, an ideal set of liability rules could provide both positive liability for negative externalities (i.e. losses to third parties) and negative liability for positive externalities (i.e. benefits to third parties). This dual function of liability rules would, in the abstract, consist of a combination of damage remedies paid to the victims and financial subsidies paid to the tortfeasor. If an individual occasions an unjustified transfer of wealth from one party to another and is made liable for the loss suffered by one victim, he could, by the same logic, be allowed to recover the value of the benefit from other third parties who received an unexpected benefit from his action. The important point here is that a zero net liability rule for the alleged tortfeasor does not necessarily require a rule denying compensation for those who suffered a private loss. Here lies an important element that drives the intellectual and dogmatic tension behind the economic loss rule. From an economic perspective, the legal notion of pure economic loss can function as an imperfect proxy for the economic category of socially relevant cost, which should guide the optimal design of liability rules.78 76

77 78

F. Parisi, Liability for pure financial loss: revisiting the economic foundations of a legal doctrine, in Bussani and Palmer, supra n 1 at pp 77 ff. Ibid. Very possibly it may be functioning as no more than an arrière pensée at this point. Several reasons make it difficult to advance the economic concept into the forefront of analysis. One is that the concept of social loss leaves out of the calculus the concept of ‘consumer loss’, which is a different kind of private loss that will not be erased even when plaintiff ’s private loss is offset by a third party’s private gain. Schwartz, supra at 107. A second reason is that logically speaking the concept of social loss would also apply to the ‘consequential’ economic loss of a plaintiff (not just his/her pure economic loss) to determine whether this add-on liability is recoverable. Yet extending the same analysis to consequential economic losses would disturb a well-settled exception. A third reason is that the concept of social loss calls for further micro-economic investigation into the ripple economic effects of an act on parties and third parties. Present procedural rules, including those regarding burden of proof, however, would make it very difficult to incorporate the theory

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ILLUSTRATIONS

Let us now offer some illustrations of the extent to which the notion of social loss can function as a guide to the recoverability of pure economic loss. Needless to say, the following are theoretical exercises that can be challenged under different positive and metalegal considerations, such as the size of the plaintiff class, the potential scope of the damages, public policy toward professional standards and so forth, which have varying degrees of cogency in an actual context. We will be dealing here with a few selected examples, and by no means all. Other cases could be affected by different policies. A first application of the notion of social loss can be seen in Case 3 of our Questionnaire (‘The Infected Animal’). Here the closure of the meat market causes private loss, to be sure, but not necessarily a net social loss. As we have explained elsewhere,79 in a perfectly elastic market response, the accident would occasion no socially relevant economic loss (i.e., the pure economic loss of one party would be offset by the pure economic gain of others, with no net social loss). With imperfect market elasticity, however, there could be positive social loss. A private economic loss of one party would not generate a social loss of equal magnitude, except in the purely abstract case of a perfectly inelastic market (i.e., a situation where the market cannot compensate for the production shortage and thus satisfy the excess demand). In most cases, the pure economic loss of the victims thus constitutes a gross over-estimate of the true social loss and the exclusionary rule correctly avoids excessive liability and overdeterrence. Another illustration comes from the transferred loss cases, where a tortfeasor causes physical damage to a victim’s property or person, but a contract, or the law itself, transfers the loss to a third party. From an economic point of view, the main criterion for understanding the transferred loss problem flows from the following consideration. Rational parties account for the effect of their into practice, in an adversarial system, for example, the theory could suggest that plaintiff must show that his/her loss was indeed a net social loss, i.e. to show that his private loss was not offset by the gains of others. Alternatively the theory could require defendant to show, as an affirmative defense, that despite plaintiff ’s loss, his act had caused no ‘social’ loss, since it was offset by the gains of others. Either way these are micro-economic showings that would drastically alter the scope of a normal trial. 79

See F. Parisi, V.V. Palmer and M. Bussani, The Comparative Law and Economics of Pure Economic Loss, supra n 70.

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expected liability in setting the price for their contract. The clearest example can be found in the insurance case. If insurance companies are allowed to exercise a subrogation action to obtain compensation from the original tortfeasor in all cases of transferred loss, the average net recovery from subrogation claims will be discounted from their expected liability cost. In turn, this will lower the insurance premium for all potential primary victims. The same holds in the converse case in which an exclusionary rule prevents the secondary victim from recovering the economic loss. If any other contractual relation or legal rule transfers the loss from a primary to a secondary victim, the underlying contract price would likewise reflect the expected cost of such transferred risk. For instance, in the event of a pay continuation statute, the employer discounts the risk of an injury of his workers from the expected value product of his work force. The equilibrium market wages would reflect the mandatory welfare coverage, shifting back on the workers most of the cost of such forced insurance. Identical conclusions would apply under a lease contract. Consider an exclusionary rule that states, if a third party occasions damage to the rented property, the lessee would be barred from recovering the economic loss from the lost use of the rented space. Under such rule, the lessee would discount from the rent the expected economic loss from potential accidents. In principle, equilibrium market prices would reflect the lower protection and lower expected value of the lessee’s interest, with lower rental prices. The above considerations suggest that the application of the exclusionary rule in transferred loss cases is likely to have no incentive or wealth effects. Criteria of efficiency and distributive justice are neutral to the question whether the exclusionary rule should apply to this class of cases. (vi) Human values Another argument against recovery of pure economic loss is cast in terms of philosophical values. It maintains that intangible wealth is not and should not be treated on the same level as protecting bodily integrity or even physical property. People are more important than things, and things are more important than money.80 Our legal inter80

The argument has been made in England that ‘The philosophy of the market place presumes that it is lawful to gain profit by causing others economic loss, . . . Certainly there seems to have developed an understanding that economic loss at the

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est in liberty, bodily integrity, land, possessions, reputation, wealth, privacy and dignity are all good interests, ‘but they are not equally good’. The law protects the better interests better. And so ‘a legal system which is concerned with human values (and the law is supposed to reflect the proper values of society) would be right to give greater protection to tangible property than to intangible wealth.’81 The exclusionary rule is then a reflection of the lower value ascribed to unreified wealth.82 The European Group on Tort Law, for example, has explicitly set forth a hierarchy of protected interests in European tort law, based on the principle that ‘the higher its value, the precision of its definition and its obviousness, the more extensive is its protection’. According to these authors, pure economic loss and contractual relationships rank low in the scale (i.e., below life, mental and bodily integrity, human dignity, liberty, and property rights).83 Along the same lines, the Study Group on a European Civil Code takes the view that not all of plaintiff ’s interests are ‘legally relevant’ (i.e., worthy of legal protection). Liability flows only from harm inflicted upon the victim’s body, health,84 dignity, liberty and privacy;85 and from the infringement of ownership rights or lawful possession.86 When the frustration of economic interests is at stake, compensation could only be awarded if the defendant acted with malice or with gross negligence.87

81 82

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hands of others is something we have to accept without legal redress, unless caused by some specifically outlawed conduct such as fraud or duress; . . .’ The Aliakmon [1985] 2 AER 44, at p. 73 (per Lord Goff ). Tony Weir, A Casebook on Tort (9th edn 2000) p 6. But shouldn’t one care about memories, sentiments, pains, personal well-being and all the other values that for the most part represent the only real wealth of a person and, probably, her/his closest link to the notion of ‘human values’? See Principles of European Tort Law, Art 2:102 (Protected Interests) (2005). In this case, also ricochet victims may obtain compensation for the loss sustained as a consequence of the injury suffered by the primary victim. See the Principles of European Law – Non-contractual liability for damage (PEL): Art 2:201 (Personal Injury and Consequential Loss) and Art 2:202 (Loss suffered by Third Persons as a Result of Another’s Personal Injury or Death). The text of the PEL is available at: www.sgecc.net. Art 2:203 of the PEL (Infringement of Dignity, Liberty and Privacy). Art 2:206 of the PEL (Loss upon Infringement of Property or Lawful Possession). Art 2:204 (Loss upon Communication of Incorrect Information about Another); Art 2:205 (Loss upon Breach of Confidence); Art 2:207 (Loss upon Reliance on Incorrect Advice or Information); Art 2:208 (Loss upon Unlawful Impairment of Business); Art 2:210 (Loss upon Fraudulent Misrepresentation); and Art 2:211 (Loss upon Inducement of Breach of Obligation) of the PEL.

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It is important to note that this view has a silent premise: these interests must be ranked because the law cannot simultaneously protect all interests fully. Even if one accepts, for sake of argument, that wealth is less important than other values, there would still be no justification for a rule restricting its recovery unless we had to do so in order to protect other, more meritorious, interests. Thus the philosophical point is persuasive to the extent that (1) there is indeed a finite limit to the law’s ability to protect interests, and (2) giving full protection to pure patrimonial wealth would clearly exceed that capacity and therefore impinge on other protections or the interests of third persons. The first point may be less controversial than the second. No one doubts that resources are finite: Judicial resources are not unlimited; tort liability cannot be extended indefinitely without stifling human initiative; and responsible defendants can be bankrupted by financial claims that leave claims for bodily injury unsatisfied. It may be argued, therefore, that if pure economic loss were freely protected and allowed to compete on an equal footing with other, worthier claims for limited resources, the effect might be to crowd out ‘better’ interests and leave them unsatisfied. That conclusion depends, however, on the answer to the second point, namely whether those limits would be surpassed by a presumption of recoverability. The answer to this question again seems to be conjectural since it ultimately depends to some extent upon the same unverified assumptions inherent in the floodgates rationale. It also raises the question how countries like France and Belgium, which follow a rule of presumptive recovery of economic loss, have managed to avoid what the floodgates argument predicts. Is their experience proof that the argument is a gross exaggeration of the consequences, or does their experience tend to prove that these countries are simply using hidden and indirect means of controlling those consequences?88 There is an additional question. The exclusionary rule is associated with the negligence standard. All systems in our study, however, permit recovery when pure financial loss is inflicted intentionally. Thus the exclusionary rule cannot be seen simply as an abstract ordering of interests but as a rule tied to the gradations of blame. It would be difficult to say whether the nature of the interest 88

Geneviève Viney tends to regard French law in this perspective: ‘on a privilégié l’emploi de méthodes indirectes et quasi-occultes.’ Quoted in J. Spier (ed.), The Limits of Liability (1996) 3.

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or the nature of the fault is the more important factor in the equation. Indeed we think it would be essentially misguided to assign such priorities because the rule, when it is applied and to the extent that it is a rule, is really the outcome of many other interacting factors as well.89 Only through study of these factors in their liability context will we understand why the alleged exclusionary rule operates selectively and situationally, never mechanically, and indeed leaves untouched a number of defined situations where one may even speak of a limited core of protection for pure economic loss. (vii) Legal history as a guide Some scholars assert as an historical matter that pure economic loss has traditionally been left unprotected by the law. If the assertion were generally true, it may have important normative implications for the present and the future. Professor Kötz deduces a teleological point from the study of the past: The primary purpose of the law in England and Germany, he maintains, has ‘always been’ to provide protection against personal injuries and harm to physical property. Pure economic loss seems left out of historical development, at least in those two countries.90 Another writer argues that the rules of tort, because they are products of history, are today ill-adapted to the problem of pure economic loss.91 However, whether these views do justice to the past is open to question. James Gordley, who explored the history of pure economic loss in some detail, notes that many early civilians said that a plaintiff could recover if he suffered ‘damage’ and damage meant simply a diminution of his patrimonium. They did not distinguish between loss of a physical asset and other kinds of loss. They occasionally put cases in which the plaintiff would recover what we today would regard as pure economic loss, though he cautions that they did not know or use this term and did not recognize an autonomous 89

90 91

For a nuanced attempt to use various factors in a sliding scale to explain the lesser protection given to pure economic loss, see Helmut Koziol (ed.), Unification of Tort Law: Wrongfulness (1998) 29–30. Hein Kötz, RabelsZ 428. Bruce Feldthusen, Economic Negligence (2nd edn 1989) 10–11. The author asserts that the ‘remoteness’ of the damage from the initial conduct of the defendant is the characteristic and endemic issue which distinguishes pure economic loss, as a practical matter, from cases involving physical damage.

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category by that name.92 For instance, there was the dependent’s action for loss of support due to wrongful death, which clearly existed on the continent in Grotius’ time. This was in effect an action for the recovery of pure economic loss sustained by wife and children, but it was not referred to in those terms. Evidence of this kind would suggest that there never was a per se rule against compensation for pure economic harm in the civilian tradition.93 Indeed, Gordley’s account characterizes the rise of the exclusionary rule both in England and Germany as a late development of the nineteenth century94 and the peculiar outgrowth of analytical thinking. He concludes that the rule is an ‘accident’ of legal history, not a pervasive feature of it.

2 The liability systems – a functional ordering a) Introduction Whether the recovery of pure economic loss is tackled by legal systems through tort or contractual remedies is a question which depends on both the factual elements of the case on the table and the domain respectively assigned to the two remedial fields. Thus, the goals of this chapter are twofold. First we wish to provide a theor92

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See Gordley, The Rule Against Recovery in Negligence for Pure Economic Loss: An Historical Accident, in M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, at pp 26–9 and the citations to the views of Durandis, Baldus, Brunnemann, Lauterbach and Grotius. See R. Zimmermann, Law of Obligations 1024–25; Vernon Palmer, ‘The Fate of the General Clause in a Cross-Cultural Setting: The Tort Experience of Louisiana’ (2000) 46 Loyola L. Rev. 535, at p 551. Insurance practices tend also to show the late development of the rule. Development of business interruption insurance, often called ‘consequential loss insurance,’ belongs to the late nineteenth century, and even now the availability of such insurance is still rather limited. A prevalent restriction is that interruption insurance is essentially ‘follow-on’ coverage to another insured peril, such as fire. Under the wording of standard fire policies, there is no compensation for interruption unless it results from a fire. This is not really compensation for pure economic loss, however, but rather compensation for parasitic loss. See G.J.R. Hickmott, 3–4 Principles and Practice of Interruption Insurance (1982) pp 3–4; D.C. Jess, The Insurance of Commercial Risks, Law and Practice (London 1986) pp 244–51; C. Lahnstein, Pure Economic Loss and Liability Insurance, in W.H. van Boom, H. Koziol, C.A. Witting (eds.), Pure Economic Loss (2004) 162; B. Dufwa, Insurance in a European Tort Law Perspective, in M. Bussani (ed.), European Tort Law. Eastern and Western Perspectives (2006) p 133.

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etical matrix that situates the issue of pure economic loss within each liability regime and at the same time arranges these systems in some functional and explanatory way. This matrix will hopefully permit us to see how each country stands in relation to one another, what influences they have experienced, where their operational rules derive from, and possibly also, to pave the way to an appreciation of the degree to which, if any, there is a common approach to this subject. Putting the initial focus of the survey on tort law rules is nothing but a tribute paid to reality. All legal systems under review officially start with conceiving of (or simply debating) compensation for pure economic loss within the tort compound. We will try to make clear, however, how far contract law, in some systems, is able to penetrate in the tort citadel whenever the latter is unfit to meet the needs at stake. The second goal of our chapter is somewhat more practical. We wish to provide a clear framework which the reader can use to understand the country responses contained in the individual chapters in Part II. These chapters are highly condensed summaries reflecting individual national styles, particular code provisions, leading cases, and doctrinal influences, and these would be somewhat incomprehensible without a general introduction to each country’s liability regime. b) Appearances vs. reality: From façades to operative rules In modern legal systems we may at first sight observe two alternatives. There may be liability whenever a person causes damage to another; there may be liability only in certain typical situations. The former, known as the principle of neminem laedere, is the solution of the French Code Civil. The latter, enacted in the German BGB, was the solution associated with Roman law and traditional common law. In both of these systems, there was a list of actions that a plaintiff could bring against the person who had injured him: in Roman law, actions for theft, robbery, insult, and damage wrongfully done; in English law, trespass, assault, libel and so forth. Every tort system in our study may be seen as a variant of these two alternatives, and each individual tort structure is at least the beginning point for the analysis of the recoverability of pure economic loss. These imposing structures, however, are not necessarily the most reliable means of viewing liability rules or of predicting outcomes: if we were to

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depend upon them as the exclusive criteria of classification, this would not present the systems in a helpful way. As we explain below, an explanatory analysis must distinguish appearances from reality. It must take into account a wide variety of factors, traits and formants in order to arrive at the essential differences and similarities between the systems. In situating the problem of pure economic loss within a comparative perspective this introduction will cast a glance upon the liability regimes under review and compare the exterior architecture to the interior working of the legal systems. In this respect we are often called upon to distinguish between the system’s façade and its interior, viz. operational rules that lie behind or within it. What we mean by ‘the façade’ is simply the exterior wrapper, the outer appearance, or even better, the initial and dominant perception received by the observer regarding the recoverability of pure economic loss. In a codified system this perception is usually conveyed by the black-letter words the legislator has used; in an uncodified system it may be the words of judges hardened into precedents or the writings of old institutional writers. In either case the façade will be the objective set of public signals which apparently controls our issue. At first glance a given system may seem committed to a wide principle of recovery; another system may seem committed to a general rule of no recovery though a series of exceptions may be made, yet another may seem resolutely opposed to all recovery because pure financial loss is regarded as an unprotected interest. These initial perceptions, we repeat, are due to the system’s façade. In resorting to the façade metaphor, we do not wish to imply that initial perceptions are always false and misleading. Obviously that would simply overstate the case. Nor can we say that all façades are mere camouflage for hidden forms of lawmaking. On the contrary, we have found that in a few systems, the first impression given by the legislator or judge as lawgiver is also the lasting impression left by the jurisprudence and the doctrine. Even here we think the word façade is appropriate and useful to indicate a genuine or authentic impression that in fact withstands further scrutiny. Nevertheless, it is also clear that for certain systems the deeper one delves into the doctrine, the cases and the operational rules, the more one is surprised by the contradictions and contrasts between outer appearance and inner reality. What began as a general clause may be administered as a scheme of protection focused upon absolute rights – i.e., what German jurists refer to as rights to life, body, health, freedom,

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property opposable to the world at large: erga omnes.95 That, however, may not be the end of the story. For what appears to be a scheme of absolute rights may be a decoy for an expansion of contractual actions which function like tort remedies. It is for this reason that accepting façades at face value can be hazardous; they are very rarely a sufficient basis for a functional classification of these systems. c) General and specific characteristics Conscious, therefore, that façades are sometimes trompe l’œil and that interior solutions are the principal interest of our study, we have attempted to organize the material into three functional and explanatory groupings; the liberal, pragmatic and conservative regimes of tort. Before introducing these systems country by country, it will be useful to explain what we think are the distinguishing characteristics of these ‘regimes’. It is important to understand, however, that these may be subject-specific characteristics that have limited relevance outside of the context of pure economic loss. We emphasize this caveat for an obvious reason. Our purpose is not to describe the general characteristics of any of these systems: that would be worth a treatise unto itself in each case, and would have nothing to do with the precise issue we have selected. We must therefore confine our ‘characteristics’ to the subject at hand, without any pretension that they may be applied widely to other subjects not studied here. d) Characteristics of liberal, pragmatic and conservative systems Keeping in mind the particular jurisdictions covered by this study, we classify three countries as liberal regimes: Croatia, Japan and Québec. A leading characteristic of a liberal regime is the presence of a unitary general clause in the codified law which does not, at least not a priori, screen out pure economic loss. Lacking a numerus clausus of protected interests imposed by the legislator, these regimes 95

J. Gordley, The rule against recovery in negligence for pure economic loss: An historical accident, in M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, pp 47–70; Foundations of Private Law: Property, Tort, Contract, Unjust Enrichment (2006), pp 266–70.

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have no in-principle objection to allowing compensation for standalone economic harm. In principle, the recoverability of such a loss is not an antecedent abstract question but only an outcome dependent upon whether the normal elements of fault liability are satisfied. These systems are not simply liberal in appearance and approach but in their results as well. As compared to other regimes, they appear to yield the greatest number of successful actions in our hypothetical cases. A second characteristic is that liberal regimes reach solutions to questions of purely pecuniary loss almost exclusively on the basis of extracontractual liability and not by crossing over to contract principles. The liberal regimes deal with pure economic loss autonomously in tort, unlike many conservative regimes where recourse to contractual and statutory solutions is a standard means of tempering the rigidity of the law of tort. A final characteristic of this regime, but one difficult to discern and substantiate, is the possible use of surreptitious techniques to keep this liability issue under control. To the extent that judges in liberal regimes have any policy restraining recovery for pure economic loss, as some observers suspect they do,96 they do not admit or deal with it openly. It would of course be possible to carry out such a policy covertly through subtle manipulation of the ordinary requirements of the general clause (particularly the causation requirement) but judicial tendencies of this kind would be unavowed, uncertain and difficult to detect, concealed even from a fact-based method such as ours. The term pure economic loss and the debatable issues surrounding it would therefore remain generally unrecognized in the literature and jurisprudence of these countries. The pragmatic regimes of the current study embrace Canada, Israel, South Africa and the United States. Our choice of the term pragmatic relates to a shared approach to the problem and has less to do with how often a plaintiff succeeds. It is the similarity in their reasoning, their technique and their candor which prompts us to group them together. These systems are characterized by a cautious case-by-case approach which carefully studies the concrete socio-economic impli96

See e.g., Lara Khoury (2001), ‘The Liability of Auditors Beyond Their Clients: A Comparative Study,’ 46 McGill LJ 413; B. Markesinis (1983) ‘La politique jurisprudentielle et la réparation du préjudice économique en Angleterre: Une approche comparative,’ RIDC 31, 44.

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cations of granting recovery for pure economic loss.97 Results are not driven by the dictates of wide tort principle, nor by a checklist of absolute rights. The principal method of screening recoveries is through the ‘duty of care’ concept. The duty of care question is a matter of judicial policymaking that is overtly carried out by the judges. Each new situation requires an ad hoc determination that a ‘duty’ to guard against this harm should exist at all. Unless this issue is decided affirmatively, there is no reason to proceed further and consider whether the normal elements of tortious liability have been satisfied. Thus there is an abstract prior question to be answered, but unlike the approach in the conservative regimes, the question has not been prejudged by a legislator, nor in our view, by a rigid conception of absolute rights. The judges themselves are expected to make a policy choice, and they exercise this function openly and discursively. And there seems to be no flight into contract law as relief against their own decisions which refuse liability in tort. The tort scheme dominates the field. We have placed Poland and Denmark among the conservative regimes. Unlike three ‘conservative’ systems in our previous study (Germany, Austria and Portugal) Poland and Denmark do not rely upon an absolute rights checklist, either overtly set forth by the legislator or tacitly adopted by legal actors, enabling judges to screen out the merely financial losses from the recoverable ones.98 The striking characteristic of these two regimes is that they are the reverse mirror image of the causal approach in the ‘liberal’ regimes. The latter stretch causation rules to encompass as many purely economic harms as possible. Polish and Danish lawyers use the same technicalities to restrain recovery for this kind of loss as much as possible. They have developed different doctrines and technical arguments about causation that strictly control compensation for pure economic loss. Such exclusionary causation is similarly used by other countries in Europe, particularly in Scandinavia. Our previous study revealed that Sweden, Finland and Austria all resorted to the same

97

98

It is important to note that the cases proceed on the basis of the judge’s perception of the socio-economic consequences: there is no evidence of the economic effects of a finding of liability. Nor have we found any expansive application of contract principles, stretched to function as tort remedies, as in Germany, Austria and – to some extent – Portugal. See M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, at pp 150–56.

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kinds of causal manipulation to control the floodgates.99 Thus, recoverability is an exception and any remedy must be found elsewhere in the system, namely on the basis of more specific tort provisions. The apparently neutral tools of remoteness and ‘directness’ of damage become powerful tools in the hands of Polish and Danish judges to keep liability for wide-ranging economic damage within ‘reasonable’ limits. Having considered these general characteristics rather abstractly, we turn to discuss each country’s approach in greater detail. e) Liberal systems (i) Japan – liberal ‘Malgré Tout’ Japanese tort law presents a liberal façade. Article 709 of the Civil Code establishes that negligence, infringement of a legal interest and causation are the only general requirements to be met in order to attain a damages award. The original wording of the provision, which reflected the German provenance of the Code, used the expression ‘infringement of right’ instead of ‘infringement of legal interest’. But first scholars and then the courts ended by considering it too narrow a label100 and eventually persuaded the legislator, in 2005, to replace the old formula with the new. In line with a general characteristic of liberal regimes, there is also a tendency to deny or allow recovery relying on the technicalities of the cause of action rather than on overtly expressed policy arguments. The latter, however, surface in the legal reasoning with less reluctance and a greater transparency than in the other liberal regimes. For instance, recourse to policy arguments is implicit whenever the question concerns the reasonable amount of damages to be put upon the defendant (as in Case 5, for the wife’s recovery, and in Case 8 with regard to the loss of a chance of getting a favourable judicial ruling). Not surprisingly, the ostensible tool is the reference to 99

The Austrian judges repeatedly claim that the technique is necessary in order to avoid ‘a boundless, economically intolerable expansion of liability’. Bussani & Palmer, pp 206–7. 100 In the Daigaku-yu decision, November 28, 1924, which Professor Nomi believes was possibly the first case of pure economic loss in Japan, the Supreme Court of Japan gave a relaxed interpretation to the codal requirement of the infringement of a ‘legal right’ and awarded recovery.

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classical arguments about causation and fault (along with the flexible ‘foreseeability’ requirement). At other times, policy considerations surface more clearly and affect the scrutiny given to the technical elements of the cause of action. The sway of these policies is particularly clear in Case 2 (where causation ends up being established only when the key player is deemed irreplaceable), in Case 3 (with regard to the denial of the butchers’ recovery), in Case 6 (where the analysis of auditor’s liability issue appears to be ultimately driven by the concern for boundless damage claims) and in Case 7 (where recognition of causation is uncontroversial, due, at least in part, to the lack of any fear of indeterminate liability). Another general feature of Japanese tort law is the Germaninspired attention constantly paid to the possible contractual dimension. This attitude was fostered, especially in past decades, by those Japanese scholars who regarded German legal thought as a model, and supported a limited recoverability of the victim’s loss.101 Under the operative rules, however, one can easily notice how contractual remedies – which in Japan may concur with tort law remedies – are nowadays simply regarded as possible supplementary actions to protect the legal interest at stake. For example, a contractual solution can arise in Case 4, at least under the reporter’s construction of the contractual terms between the owner of the ship and the time charterer. Similarly, it may arise in Case 8 as the plaintiff claiming damages under the ‘spoliation of evidence’ circumstances, and in Case 9, as to the spouse seeking redress against the insurance broker. On the whole, Japanese results, in terms of recoverable losses, are in line with the liberalism of the façade. The same can be said as to the way local formants (doctrine, jurisprudence and legislation) have been able to overcome the influence of ‘absolute rights’ thinking. One should appreciate, indeed, that these results have been reached despite the long-standing role played by both the original wording of the key tort law provision and the prestige attached to ‘conservative’ German legal thought. This is why Japan – as far as compensation for pure economic loss is concerned – has emerged from the German shadow and may be considered a liberal regime ‘malgré tout’. 101

See the discussion by Professor Nomi under Cases 6 and 7. See also Hiroshi Oda, Japanese Law (2nd edn., 1999) p 204; Kunihiko Okubo, Compensation for pure economic loss under Japanese law, in W.H. van Boom, H. Koziol, C.A. Witting (eds.), Pure Economic Loss (2004) pp 56 ff.

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(ii) Croatia: thriving liberalism Liberalism pervades every formant of Croatian law. The main tort law rules are to be found in Arts. 1045 and 1046 of the Obligations Act (Zakon o obveznim odnosima – hereinafter: the ZOO).102 They read: Art 1045 ‘Conditions of liability: 1. One who causes damage to the other is obliged to compensate for it unless he proves that damage has originated without his fault. 2. Simple negligence shall be presumed. 3. For damage caused by a thing or activity which generates an enhanced danger, the liability shall be strict. 4. Liability shall be strict in other cases provided by law. Art 1046 “Damage”: Damage is the decrease of someone’s patrimony (regular damage), hindering of its increase (loss of profit) and infringement of a personal right (non-patrimonial damage).’ A remarkable feature of this legislative framework is that even in negligence cases defendant’s fault is presumed, thus blatantly paving the way to a pro-plaintiff interpretive scheme which is more open-ended than in other liberal regimes. Moreover, the absence of a statutory type-cast set of rights as the exclusive pillars of tort law protection plainly lead Croatian scholars and judges to assume that violation of any right or interest of the victim is sufficient for liability to be established.103 In the absence of a hierarchy of protected interests, there is no structural means of screening this kind of loss from the scope of protection. Indeed – as is stressed by our reporters – Croatian tort law ‘does not treat pure economic loss any differently from any other loss . . . even if inflicted by simple negligence of the tortfeasor.’104 Limits to compensation of pure economic loss may come in 102

On 1 January 2006 the new Obligations Act came into force in Croatia and replaced the Obligations Act of 1978 (ZOO). As our national reporter observes, however, the tort law rules of the ZOO of 2006 have not produced substantial change. 103 Croatian Law assumes unlawfulness ‘in its objective sense, meaning that the wrongful act or omission is contrary to some legal provision or any other rule which forms legal order’. See the National Report, sub 1. 104 Croatian Report, sub 1. As far as possible damages award is concerned, however, one has to keep in mind that Article 1091.1 ZOO stipulates that ‘The court may, taking into account the material position of the victim, condemn the responsible person to compensation in a lower amount than actual damage, if the damage has not been caused with intention or gross negligence and the financial capacity of the responsible person is poor and payment of the full compensation would cause his indigence’.

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Croatia, as in any other liberal regime, from subtle manipulations of the technical elements. One of the most exploited technicalities is the recourse made to the ‘adequate causation’ requirement, according to which the conduct of the defendant is deemed to be the (adequate) cause of the damage if that conduct is in general apt to cause a result such as that which happened.105 The need to meet this requirement leads Croatian judges and scholars to be very cautious about establishing the liability of the cattle raiser (Case 3) and the insurance broker (Case 9). Still in line with the general characteristics of the liberal regimes, limits on the recovery arise from the ‘certainty of damage’ requirement and its evidentiary issues. This explains the doubtful answers given by the national reporter to Case 8 (with regard to the loss of a chance of being awarded damages) and to Case 3 (concerning the loss of profits). A feature differentiating Croatian law from the sister regimes is the restrictive interpretation given to art. 1095 ZOO (‘Compensation of the damage in case of body injury or impairment of health’). Its apparent neutral wording is as follows: ‘1. In the case of bodily injury or the impairment of health, the tortfeasor is obliged to compensate the victim for the costs of medical treatment and other expenses connected therewith, as well as for lost profits due to the inability to work during the recovery period. 2. If, due to complete or partial inability to work, the injured person has suffered a loss of profit, or if, for the same reason, his needs are permanently increased or his prospects for further promotion lost or diminished, the tortfeasor is obliged to pay a certain annuity to the victim, as compensation for the damage suffered.’ Yet, the strict a contrario interpretation given by Croatian scholars and judges to this provision – whereby the primary victim alone is construed to be entitled to an action for reparation – makes any ricochet loss-bearer (such as the basketball team in Case 2 and the care-taker wife in Case 5) unable to recover. On the whole, apart from the restriction just mentioned, Croatia’s tort law façade and its operative rules are in harmony. Policy considerations remain in the background of both scholarly and judicial reasoning. Technical assessments of the elements of the cause of action are in the forefront of discussions. The general clause 105

See e.g., W. van Gerven, J. Lever and P. Larouche, Tort Law (2nd edn, 2000) p 397; H.L.A. Hart and T. Honoré, Causation in the Law (2nd edn. 1985), pp 465 ff.

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approach enables in principle every economic loss (including pure ones) to be compensated, regardless of the nature of the infringed right or interest and without any need of seeking additional support from contractual remedies. Compensation for pure economic loss therefore appears to sail smoothly across the Croatian sea. (iii) Quebec: ‘Mixed’ in a way ‘très Français’ Quebec is frequently regarded as one of the classic ‘mixed’ systems whose private law has undergone the double influence of common law and civil law parentage.106 Nevertheless, in the present context at least, its French civilian heritage is without question more dominant than the other parts of its nature. There is no a priori obstacle to the compensation of pure economic loss in Quebec. According to our contributor, Quebec civil law is clearly a ‘liberal’ regime which shares many of the key characteristics of tort systems of Belgium, Croatia, France, Greece, Japan and Spain. Its tort law rests on a unitary general clause found in Article 1457 of the Quebec Civil Code (1994). This provision reads as follows: 1. Every person has a duty to abide by the rules of conduct which lie upon him, according to the circumstances, usage or law, so as not to cause injury to another. 2. Where he is endowed with reason and fails in this duty, he is responsible for any injury he causes to another person, and is liable to reparation for the injury, whether it be bodily, moral or material in nature. 3. He is also liable, in certain cases, to reparation for injury caused to another by the act or fault of another person or by the act of things in his custody. Three further characteristics bear out its classification as a liberal regime. First, wrongdoing and unlawful behaviour are never understood or described in relational terms. In other words, the unitary general clause contains no conceptual equivalent to the restrictive, relational concept of the ‘duty of care’ which plays a decisive role in Anglo-American common law. Instead, in Quebec any failure to meet the ordinary standard of ‘reasonable behaviour in the circum106

See John Brierley and Jean-Louis Baudouin ‘Quebec’, in Vernon Valentine Palmer, Mixed Jurisdictions Worldwide: The Third Legal Family (2001) at pp 329–63.

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stances’ can be viewed as fault and would therefore qualify as wrongful. Second, there is no set of protective interests that are described or defined by a limitative list. Article 1457 does not speak of absolute rights and its reference to ‘injury’ is comprehensive (bodily, moral or material) and cannot be used to exclude pure economic loss in a categorical way. Third, and resulting from these characteristics, the notion of causation plays the most significant role in determining the overall scope of liability: ‘. . . the only conceptual tool which can be used to keep tort liability within reasonable boundaries is the requirement that the injury be a “direct and immediate” consequence of the wrongdoing.’ Noting that the importance of this requirement is matched only by its conceptual indeterminacy, the national reporter cautions that any instrumental role that causation may have as a control over liability of this kind is difficult to assess since it can be easily hidden from view: ‘Whatever constraints are imposed on the compensation of pure economic loss through the concept of causation, they normally operate beneath the surface, if at all.’ The tendency to resolve liability at the causal level is well illustrated by Case 1. The workers may be able to establish they suffered an injury due to the fault of another under Art 1457 CCQ, but there is still the question whether their loss of wages is the immediate and direct effect of the negligent act of severing the electrical line. Their injury is arguably indirect, arising by ricochet, because it resulted from another injury to a more immediate victim, the Black Factory. At the same time, the question is not that simple since it is settled in Quebec that the question should not be approached through a formal question as to ‘Who is the immediate victim?’ but must be addressed on a case-by-case basis, taking into account all circumstances. Thus if liability is to be excluded the result will be represented as a feature of the particular circumstances of the case, not as the result of formal concepts circumscribing the scope of liability. As the Quebec reporter notes, this assessment is open-ended, fact-based, and unpredictable, though he believes the plaintiff has a fair chance of success in every case. Similarly in the case of the escape of the infected animal (Case 3), the difficult question is whether a Court would find a causal link between the fault of the cattle raiser in allowing the animal to escape and the economic injuries suffered by other cattle raisers, traders and butchers when the meat market had to be closed. The reporter states that Quebec civil law provides no clear answer to this particular question, but again the standard is

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whether these losses are direct and immediate effects of the negligent act. On this causal point there is no consistent ‘analytical grid’ to apply. Some decisions focus upon the foreseeability of these outcomes, others upon the effect of intervening events that make the injury seem too remote, others might exclude this as an ‘indirect’ loss caused par ricochet. It appears that wherever the causal link is deemed tenuous (as in Cases 1, 2, 3 and 8), the reporter appears uncertain as to liability. By contrast, in Cases 5, 6, 7 and 9 he finds no obstacle to recovery. He concludes: ‘there is no way to predict what causal effect a Court would give to the decision of the authorities to close the cattle and meat market.’ Of course this focus upon causal reasoning makes clear that the floodgates argument and concerns over indeterminate liability are – in our Reporter’s words – ‘not part of the conceptual arsenal of judges in Quebec’, yet at the same time, ‘There is no way to assess what role these concerns may be playing underneath the jurisprudential surface.’ f ) Pragmatic systems (i) The United States: a flexible consensus United States tort law is usually depicted as largely common law and primarily State law.107 Most of its groundings can be found in a ‘common core’ of common law and can be on the whole regarded as roughly similar in all states. Yet, despite this shared foundation, tort law is not in fact unified and uniform across the nation. This is in large measure the result, on the one hand, of the historical development of tort law that produced an English-style judicial stratification of rights to recover damages under specific actions, each containing its own specific requirements. On the other hand, a certain amount of diversity between the states has arisen because courts always had, and still have, the power to shape the elements of the existing torts and to find out new ones.108 It would be untenably naïve, however, to think of the tort law of the fifty states as moving like adrift icebergs, in isolation one to another. Most state legislatures have been affected by similar influJ.G. Fleming, The American Tort Process (1988), 34 ff.; J.C.P. Goldberg, A.J. Sebok and B.C. Zipursky, Tort Law: Responsibility and Redress (2004) pp 12 ff., 88 ff. 108 J.G. Fleming, The American Tort Process, 32 ff. 107

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ences and pressures coming from the two opposite power groups operating nationwide: on one side the ‘defense’ lobby representing the insurance industry and corporate interests, on the other the plaintiffs’ interest groups represented by the American Trial Lawyers Association (ATLA).109 On top of this – as Professor Gruning reminds us – there are at least three main factors pushing towards a nationwide approximation of tort law rules. The first is the alreadymentioned shared reservoir of common law language, notions and technicalities. The second is the driving role and prestige of the US Supreme Court, which represents, to the extent it has decided cases of this kind, a centralizing source of uniform solutions. Uniformity has also been fostered by a third factor, the existence of the American Law Institute (ALI) and its work in restating the law. In the words of our national reporter, ‘[A]n ALI restatement is an organized series of rules, justified by comments and illustrations drawn mostly from state and federal cases. Because of the reputation enjoyed by the ALI among judges and practitioners and because restatement “black letter” rules are accompanied by thorough research, they are often used and cited. In this fashion, an ALI restatement of a rule can confirm that it is accepted by all or nearly all of the states’. But even when one or more states disagree(s) on a rule, the restatement formula is bound to frame the national legal debate, inside and outside courtrooms. The Restatement (Second) of Torts110 provides our reporter with the starting point of his analysis of US law on the recoverability of pure economic loss. Section 766C of the Restatement bars the compensation of this loss, if negligently inflicted, with wording that echoes the ruling of a famous federal case,111 and has become fairly common in the legal debate ever since. It reads: ‘One is not liable to another for pecuniary harm not deriving from physical harm to the other, if that harm results from the actor’s negligently (a) causing a third person not to perform a contract with the other, or (b) interfering with the other’s performance of his contract or making the per-

See J.G. Fleming, The American Tort Process, at 40 ff., 145 ff. The Restatement (Second) of Torts was completed in 1979. The original Restatement of Torts was published in stages: Volumes I and II in 1934, Volume III in 1938, and Volume IV in 1939. 111 Robins Dry Dock & Repair Co. v Flint (1927) 275 U.S. 303. See, e.g., Herbert Bernstein (1998) ‘Civil Liability for Pure Economic Loss under American Tort Law’, 46 Am. J. Comp. Law 111. 109 110

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formance more expensive or burdensome, or (c) interfering with the other’s acquiring a contractual relation with a third person.’ The US national reporter’s answers to our questionnaire makes clear that this no-liability rule is now extended to many other areas of the law of torts,112 so that the so-called pure economic loss rule should be understood, in general terms, as a denial of liability for the negligent infliction of any of such losses. There is no recovery indeed in the cutting of electrical cables (Case 1), nor in the cases concerning the injury to a key team player (Case 2) and the closure of cattle markets (Case 3). No compensation for pure economic loss is available to the lessee of a ship negligently damaged by a third party (Case 4), nor for the losses incurred by a wife who must abandon her employment to care for her injured husband (Case 5). This is not the entire picture though. It is not clear whether a plaintiff seeking redress for negligent spoliation of evidence (i.e. for the lost opportunity to secure a court award of damages Case 8) would recover.113 An easier path to recovery is opened when plaintiff ’s loss is due to

112

While the rule of non-liability recognized by the Restatement was largely absent from the torts textbooks relied on by law schools in the 1960s and 1970s, at the time of the Second Restatement, there was only one significant article which dealt with the issue of negligence liability and economic loss. That had been published in 1972 by Fleming James, Jr. (1972) (‘Limitations on Liability for Economic Loss Caused by Negligence: A Pragmatic Appraisal’ 25 Vand. L. Rev. 43), who had identified a ‘pragmatic’ objection to liability, an objection concerned with the prospect of a liability that would be unduly open-ended. See G. Schwartz, American Tort Law and the (supposed) economic loss rule, in M. Bussani and V.V. Palmer, above fn. 2, at pp 94, 95. 113 Compare Austin v Consolidation Coal Co. (Va. 1998) 501 S.E.2d 161 and 94 Cal.App4th 1285, 115 Cal.Rptr.2d 68 (Cal.App 3d Dist. 2002) (rejecting negligent spoliation claim) with Holmes v Amerex Rent-A-Car (D.C. 1998) 710 A.2d 846 (accepting claim) and Safeguard Management, Inc. v Pinedo, 865 So. 2d 672 (Fla. Dist. Ct. App 4th Dist. 2004) (stating that plaintiff negligently deprived of proof may benefit from a favorable presumption as a matter of evidence law). Coprich v Superior Court, 95 Cal. Rptr. 2d 884 (Ct. App 2000) makes the point that if the plaintiff wishes a third party to preserve the relevant evidence, the plaintiff should secure from the third party an agreement that it will do so and such a contractual agreement is then appropriate for judicial enforcement. See also G. Schwartz, American tort law and the (supposed) economic loss rule, at 112 ff.; J. Judge, ‘Reconsidering Spoliation: Commonsense Alternatives to the Spoliation Tort’ (2001) Wisconsin Law Review 441; B. S. Wilhoit, ‘Spoliation of Evidence: The Viability of Four Emerging Torts’ (1998) 46 UCLA Law Review 631.

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negligently performed professional services. The inaccurate Auditor in Case 6, the careless Credit Rating Institute in Case 7 and, most likely, the negligent Insurance broker in Case 9 will indeed be responsible for the pure economic losses of third persons (beyond their clients) with whom they had no contractual tie. Although there may be specific requirements that must be met in certain states that are not clearly imposed in others (for example, Mississippi and Wisconsin require that the plaintiff ’s ‘reliance’ upon the published audit was foreseeable by the defendant), still it seems fair to say that in many situations (provided indeterminate and excessive liability is excluded) plaintiffs may recover losses caused by negligent professionals. In addition to the above, it may be mentioned that in Case 5 the loss (by ricochet) of earnings by a dutiful wife who takes care of her injured spouse is recoverable to the extent of the market value of the services rendered.114 In situations like Case 4 (an example of ‘transferred loss’), courts can allow compensation whenever they find that the contract between the defendant and the plaintiff ’s co-contractor was ‘intended to affect’ the plaintiff.115 And finally, a finding that the plaintiff was ‘particularly foreseeable’116 by the defendant at the time of its negligence can lead to an award of damages in settings like Case 1 (‘A Cable Case: The Laid-off Workers’) and Case 3 (‘The Infected Animal’).

114

See the US report ad vocem. J’Aire Corp. v Gregory 598 P.2d 60 (Cal. 1979) at 63 (Defendant contractor undertook to renovate the owner’s building and plaintiff restaurant that leased space in that building. Because of delays by the contractor in completing the renovations, the plaintiff was unable to reopen the restaurant at the expected time, and therefore suffered economic loss. The court affirmed an award in negligence against the contractor). See also Venore Transportation Co. v M/V Struma 583 F.2d 708 (4th Cir. 1978) as discussed by the national reporter under Case 4. 116 People Express Airlines, Inc. v Consolidated Rail Corp. 495 A.2d 107 (N.J. 1985) at 116–18 (defendant negligently responsible for a fire, which caused the temporary evacuation of a surrounding area; because of evacuation, plaintiff, an airline with facilities within the area, suffered business losses). As to the series of cases presenting problems similar to those addressed by People Express, compare 532 Madison Avenue Gourmet Foods, Inc. v Finlandia Center, Inc., 711 N.Y.S.2d 391 (App Div. 2000) (affirming liability) with Goldberg, Weprin and Ustin, LLP v Tishman Construction Corp., 713 N.Y.S.2d 57 (App Div. 2000) (rejecting liability). See also G. Schwartz ‘American Tort law and the (Supposed) Economic Loss Rule’, at 105 ff.; J.C.P. Goldberg, A.J. Sebok & B.C. Zipursky, Tort Law: Responsibility and Redress (2004) pp 91 ff. 115

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In summary, despite the façade of no recovery presented by the Restatement of Torts, US law displays conspicuous exceptions. In addition to the recoverability of intentionally inflicted pure economic loss,117 recoveries may be allowed for specific types of ricochet losses and, above all, in the significant area of liability for negligently rendered professional services.118 These exceptions and their state-by-state variations may be taken as a clear sign that the present and future development of this subject lies within the control of judges and scholars. The variety of policies upholding the results and shaping the operative rules tend to reveal the pragmatism and candor of the decision makers.119 According to our national reporter, the policy of allocating loss upon the party best able to spread it, through insurance or otherwise, supports the operative rules discussed under Cases 2 and 4 (where plaintiffs might obtain key-man and business interruption insur117

See J.G. Fleming, The Law of Torts (8th edn, 1992), pp 684 f. Beyond the limits covered by our questionnaire are interesting issues as to the liability of professional laboratories issuing ‘false positive’ results for drug or alcohol tests of existing or potential employees; see also the liability of adoption agencies for the economic losses suffered by the adopting families because of agencies’ failure to disclose information about the physical or mental health problems of the adopted children. G. Schwartz, ‘American Tort Law and the (Supposed) Economic Loss Rule’, at 112 ff. 119 Jane Stapleton, Extra-Contractual Recovery of Pure Economic Loss in Europe, in M. Bussani (ed.), European Tort Law. Eastern and Western Perspectives (2006) p 226 stresses that ‘it becomes manifest that US courts are increasingly allowing claims for pure economic loss, a phenomenon that directly threatens the neatness of this “supposed” US rule of exclusion of liability’ (footnote omitted). Raising issues beyond the boundaries of our Questionnaire, the same author points out that ‘some US courts allow claims by the plaintiffs who have been exposed to a health risk such as asbestos and, though they are not yet sick, are claiming the financial cost of medical monitoring from the party that was negligent in exposing them to the risk. Perhaps most explosively, in the US there is increasing resort to public nuisance claims where recovery for economic loss is well settled. Relying on that theory, as early as 1991 a US federal court awarded 10,000 commercial fishermen $286.8 million in compensatory damages based on the market value of the fish they would have caught had the season not been disrupted by the oil spill from ExxonMobil following the Exxon Valdez oil spill in Alaska.’ On the latter point, see also D. S. Bardwick ‘The American Tort System’s Response to Environmental Disaster: The Exxon Valdez Oil Spill as a Case Study’ (2000) 19 Stan. EnvtL. L.J. 259, 278; D. Lebedoff ‘Cleaning Up: The Story Behind the Biggest Legal Bonanza of Our Time’ (1997); Th. Eisenberg ‘Damage Awards in Perspective: Behind the HeadlineGrabbing Awards in Exxon Valdez and Engle’ (2001) 36 Wake Forest L. Rev. 1129, 1139–48. 118

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ance). Another common policy surfacing in many cases within the questionnaire120 is the refusal to recognize liability without intelligible limits. This finds expression in traditional doctrines of remoteness, or lack of duty regarding the particular harm suffered by a particular victim. The concern for maintaining high standards of professional services supports the rulings affirming the defendants’ related liability in Cases 6, 7 and 9,121 and the undesirability of encouraging so-called ‘derivative’ litigation underlies the ‘spoliation of evidence’ results (Case 8).122 One could say, to use Gary Schwartz’s words, that: ‘[W]hat all of this makes clear is that cases involving negligence and economic loss are multifarious in terms of the issues and problems they raise. Accordingly, no single rule can even begin to determine how all such cases should be decided’.123 What is certain is that the erosion of the unitary no-recovery rule was not driven by a desire to build a proplaintiff façade, but may be attributed instead to a case-by-case approach, attentive to each state’s development and oriented by openly verbalized policy choices. (ii) Canada: Variations on an English theme The Canadian common law of torts is derived from English law and, to quote the National Report, it remained ‘practically identical’ to English law even after the abolition of Canadian appeals to the Privy Council in 1949. Marked divergences between the systems only began to arise in the 1960s and today, as Professor Blom reports, no area shows more plainly the distinction between Canadian common law and English law than the courts’ approach to pure economic loss. We shall not neglect to mention these differences of approach, yet to us, the similarities are also of great significance. In our view Canada 120

See Hypotheticals 1, 3, and 4. As our national reporters note, ‘[I]n these hypotheticals, the harm to plaintiff could be characterized as too remote from defendant’s negligent act, or defendant could be said to have no duty to parties such as the workers, the other cattle market participants, and the vessel lessee, respectively.’ 121 See also M. Bussani and V.V. Palmer (eds.), Pure Economic Loss in Europe, pp 534– 35. We referred to this policy in our Editors’ Comparative Comments to Cases 14 (‘Poor Legal Services’), at p 417, 17 (‘Auditor’s Liability’), at p 471, 20 (‘An Anonymous Telephone Call’), at p 519. 122 See also G. Schwartz, American tort law and the (supposed) economic loss rule, at p 113. 123 Ibid. at p 119.

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has simply developed well-tempered variations on the English theme and has earned its place among the pragmatic regimes. As the national reporter points out, Canadian development in the field of pure economic loss has been a series of steps that stake out categories and situations where a duty of care has been recognized. The first important step came in Rivtow Marine Ltd v Washington Iron Works [1974] when the Supreme Court, moving beyond the trail blazed in Hedley Byrne [1963], held that the charterer of a defectively manufactured log barge could recover against the manufacturer for its economic losses when it had to take the barge out of service for repairs. By 1984, in Kamloops (City) v Nielsen, the Court settled on a two-part test for the recoverability of pure economic loss. This was called the Anns/Kamloops test because it is in part derived from the approach of the English case of Anns v Merton [1978].124 While this test is no longer used in England, the Supreme Court of Canada ‘continues to place it in the forefront of pure economic loss cases and other novel duty of care cases’. The test asks two questions: (1) Is there a sufficiently close relationship between the defendant and the plaintiff so that, in the reasonable contemplation of the defendant, carelessness on its part might cause damage to plaintiff? (2) Are there any considerations which ought to negative or limit (a) the scope of the duty; (b) the class of persons to whom it is owed; or (c) the damages to which a breach of it may give rise? Under this test a positive answer to step (1) means that a prima facie duty of care is recognized, though it may be limited or excluded under step (2). A striking feature of step (2) is that judicial policy considerations are openly invoked. Here, as the national report succinctly puts it, a metalegal consideration is treated as a descriptive format. A category of presumptively irrecoverable loss, because it fails both limbs of the test, is generally referred to as ‘relational economic loss’.125 Sometimes the same concept is called ‘contractual relational economic loss’ because there is a contract between the primary victim and the secondary victim who has suffered pure economic loss. 124

The House of Lords retreated in Murphy v Brentwood DC [1991] AC 398 to the view that the tort of negligence is not primarily applicable to the compensation of pure economic loss, and that as a general rule there is no duty of care to avoid causing pure economic loss. 125 We have elsewhere pointed out that this term is more or less as a synonym for ‘ricochet loss’, the term we have preferred to use in our own standard taxonomy. See supra at p 16.

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This analytical template forms the basis of the reasoning in all the answers to the case studies. The Anns/Kamloops methodology has been the basis for isolating a set of categories or situations (and some descriptive tags to go with them) where a duty of care to avoid causing pure economic loss to another has been recognized. According to the national report, there are now six categories of pure economic loss in which a duty of care has been found. These areas are: negligent professional advice; negligent performance of a service (other than professional advice); failure to warn of a physical danger to person or property; negligent exercise of a public authority’s statutory power to regulate or administer; negligent construction or manufacture of a thing necessitating remedial expenditures to remove the defect; and finally, several narrow exceptions to presumptive non-recoverability of so-called ‘relational economic loss’.126 Outside of these categories, the test simply provides reasons to deny recoveries. For example, it was laid down by the Supreme Court in Bow Valley [1997] that ‘relational economic loss’ is presumptively irrecoverable. For this reason the report states that there would probably be no recovery in Cases 1, 2 and 4. The employees’ claim for lost wages in Case 1 is an example of ‘contractual relational economic loss’ and the problem of indeterminate liability would be considered an ‘insuperable’ obstacle. This would cause it to fail the second limb of the Anns/ Kamloops test. The claim of the All Stars (Case 2) is similarly regarded as an instance of ‘contractual relational economic loss’ and it would fail both limbs of the test. Shipwreck’s claim in Case 4 would be denied (on the assumption that Shipwreck is a time charterer, not a demise charterer) because it is seeking the recovery of relational economic loss. (iii) Israel: An inductive search According to the National Report, Israeli law recognizes in principle the duty to compensate for pure economic loss. The ‘exclusionary rule’ found in other legal systems has not been adopted – at least not openly or formally. The source of this duty to compensate is rooted in the Civil Wrongs Ordinance – both for general and particular torts – and in special tort statutes. The Reporter states: ‘As long as the 126

See e.g., Canadian National Ry. Co. v Norsk Pac. S.S. Co., [1992] 1 SCR 1021, 91 D.L.R. (4th) 289.

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liability framework is more limited and defined, and the risk of overextending liability is not great, the courts are willing to ignore the initial problematic nature of this type of loss, and to impose liability for PEL [Pure Economic Loss], sometimes without any reference to the nature of the loss.’ Difficulty may arise, however, when the basis for liability is the tort of negligence. According to the Reporter, ‘The duty of care – upon which liability is based in the tort of negligence – is worded so broadly as to enable it to be expanded or restricted according to the court’s discretion. Such discretion has been applied expansively by Israeli case law in general, and in cases of PEL in particular.’ In our view Israel’s approach to this subject is largely inductive and piecemeal. It proceeds cautiously, without resort to clear rules or guidelines, and essentially resolves the question through the ‘duty of care’ component of the tort of negligence. According to the National Reporters, the Israeli judge confronted with our factual hypotheticals would frame the result using customary terms, like the ‘foreseeability’ of the harm, but that determination would reflect a weighing of various policy alternatives. For example, in the case of factory workers who lost wages due to a severed electrical cable (Case 1), recovery is denied on the ground of no duty to ‘foresee’ the ricochet loss, but the Reporter does not fail to note various policy rationales that undoubtedly would influence the court in reaching that conclusion. Overall, the Israeli judge would likely deny relief in four cases and grant relief in three cases. As already mentioned, the judge would find that no ‘duty of care’ existed toward the factory workers (Case 1) who lost two days’ pay due to the negligent breaking of an electricity line. Similarly no ‘duty of care’ would be owed to the All Stars team (Case 2) for the economic effects of an injury to its best player. Cattle raisers, market traders and butchers (Case 3) would not recover for the escape of an infected animal which forced the closure of a meat market. There would be no ‘duty’ and no recovery for the spoliation of forensic evidence (Case 8) necessary to prove the mechanical condition of a leased automobile. On the other hand, in Case 9 (‘The Pension Scheme’) an Israeli court would probably find a duty of care and impose liability. In two other cases the Israeli judge would likely allow a claim for pure economic loss (Cases 5 and 7). Recovery in these instances is due to the presence of a specific statute governing the result rather than the general tort of negligence. Thus the dutiful wife (Case 5) who cared for her bed-ridden husband

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would recover for her economic losses pursuant to Sections 2 and 5 of the 1964 Torts Amendment Law. A business owner (Case 7) whose credit with the bank was damaged by a false and unverified report of his impending bankruptcy would recover against the credit institute under various statutes, including the Credit Data Service Law of 2002. The National Report brings to light two further characteristics about the Israeli approach. First, ‘the courts have refrained, time and again, from dealing with the issue of PEL [pure economic loss] in an organized and comprehensive manner’. The result is that, with the notable exception of cases of negligent misrepresentation, Israeli law lacks clear rules regarding pure economic loss in general and lacks specific rules for the typical cases. It is characteristic of the Israeli judge to focus ‘only on the factual situation of the specific cases without creating clear guidelines to be applied in the future on other problematic cases.’ The prevalent trend is to analyze the duty of care issue using customary liability criteria (such as the ‘foreseeability of the harm’ criterion) mostly ignoring the problematic type of loss or treating it as only one factor, usually not a dominant one, among other relevant factors which together should dictate the decision favored by the court. Policy plays an undoubted part in these determinations, but its role has not materialized into workable guidelines. No clear rules regarding a possible clash between contract law and tort law appear to exist, nor is there much academic writing furthering the development of such rules.127 The second characteristic, as already mentioned, concerns the area of negligent misrepresentation, which is a conspicuous exception to this picture. Practically in this context alone will one hear the familiar policy refrains which restrict recovery in other systems (i.e. the floodgates, overdeterrence of the tortfeasor, absence of overall social harm, the effect of liability upon insurance costs for consumers, and considerations relating to the possible clash between Contract and Tort). These policies have resulted in structured rules and tests of liability, the terms of which are special relations, reasonable reliance, and assumption of responsibility. 127

The one exception to this lack of rules is found in cases of negligent misrepresentation. As shown in Case 6, the courts decide such cases in terms of the existence of a special relationship between the parties, the reasonableness of the plaintiff ’s reliance upon the information and upon the assumption of responsibility by the defendant.

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(iv) South Africa: Cautiously pragmatic South Africa’s private law is frequently described as a ‘mixed jurisdiction’.128 Its uncodified civil law has been substantially influenced by English law. Its civil system developed as a far-flung province of the old ius commune and its delictual actions – the actio legis Aquilae and the action iniuriarum – derive from Roman Law. The ius commune legislation and the decided cases constitute the basic sources of law. Decided cases are regarded as a source of law second only to legislation, and the judges adhere to a relatively strong version of stare decisis. Generally speaking, South Africa takes a pragmatic approach to questions of pure economic loss. Before recognizing a ‘duty of care’ the courts carefully weigh circumstances and are rather conservative about the extension of delictual liability. The guiding considerations are public policy, practical convenience and ensuring a just and equitable result. In his contribution to this study Professor Loubser notes that under South African law the normal principles of delict require an act (of commission or omission), causation, damage, fault and wrongfulness. It is often the wrongfulness issue which becomes the main focus of a claim for pure economic loss. ‘Wrongfulness’ must answer the question of whether the defendant was under any duty of care to avoid causing the economic loss. This question is essentially policy based and judicially controlled. The judges are openly influenced by morality, policy and value judgements. Despite the Roman–Dutch framework and civilian terminology, the parallels with English law remain fairly close. The ‘duty of care’ or wrongfulness issue raises mostly the same or similar factual and policy questions that are examined in English cases. Professor Loubser indicates there are six factors at work within the question of wrongfulness: (a) whether a special relationship between the parties gave rise to a duty to prevent the loss; (b) whether a statutory provision gave rise to such a duty; (c) the foreseeability of the loss (considering defendant’s knowledge, actual or constructive); 128

V.V. Palmer, Two Rival Versions of Mixed Legal Systems (Wilson Memorial Lecture, Edinburgh 2007) published online at www.EJCL.org; Mixed Jurisdictions Worldwide: The Third Legal Family (2001).

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(d) the practicality of taking steps to avert the loss; (e) whether fault related to the exercise of professional skills; and (f ) the spectre of indeterminate liability. Where the loss resulted from the negligent exercise of professional skills, South African courts seem inclined to allow recovery more readily, a trend that has been observed in European legal systems generally.129 Cases 6 and 9 involving auditor and broker liability illustrate this tendency. Furthermore, the fear of indeterminate liability is treated frequently as a metalegal consideration, and courts have not hesitated to refuse recoveries where the potential scope of liability seemed to be overwhelming or open-ended. The appeal to the floodgates is thus made the chief reason to deny relief in Cases 1, 2 and 3. The fact that this argument is considered persuasive and relevant is among the reasons for classifying South Africa as a pragmatic regime. g) Conservative systems (i) Poland: a conservative in disguise Poland’s approach to this subject is proof once again that the formal shape of the civil law is no assurance of its actual approach to questions of pure economic loss. The Polish example is interesting because, as in Portugal and Austria,130 we begin with a general clause (Art 415 CC) on the pattern of Article 1382 of the French Civil Code, which seemingly offers a seamless formula permitting adaptation to new needs and efficiently eliminating the risk of gaps in delictual protection. Nevertheless, Polish jurists have developed various devices, doctrines and arguments that restrict the reach of the provision and limit recovery of pure economic loss in ways comparable to those found in other conservative regimes. It is most interesting that Poland achieves this balance without superimposing a set of ‘implied’ absolute rights on the tort general clause, as in the case of Portugal. It does not recognize the so-called contract with protective effects for third persons, as in Germany, and no hierarchy of 129

Mauro Bussani and Vernon Valentine Palmer (eds.) Pure Economic Loss in Europe, pp 534–35 (2003). 130 On Austrian and Portuguese tort law system see M. Bussani and V.V. Palmer, Pure Economic Loss in Europe, pp 152–56.

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protected interests is recognized under Art 415 CC. Every patrimonial loss, including pure economic loss, is in principle subject to compensation. The principle of full compensation found in Art 361 CC supports the same idea. Polish jurists and legislators express their conservatism in a different way. First, and most importantly, the interpretation of the tort general clause is apparently animated by a shared consciousness concerning the danger of imposing excessive liability. There is a widespread feeling that the general clause, ‘if improperly applied’, could lead to excessive broadening of tort liability. Accordingly the legislature was prompted to build a few safeguards into the code to avoid this risk. Art 361.1 CC is one of these limitations. It would narrow the scope of liability by stating that one is liable to compensate only for the ‘normal consequences’ of an act or omission. The principle of ‘normality of consequences’, which common lawyers may recognize as a legislative equivalent of the principle of remoteness of damage, serves as a tool to keep liability for wide-ranging economic damage within reasonable limits. A second limitation derives from a bold reading of Art 446 CC, which provides that if an injured person dies, then certain persons – normally those related to the deceased – are entitled to claim compensation for their own losses. Polish scholars and judges regard this provision as the exception that proves the existence of an opposite rule under the code, namely, that only the person directly injured by an act is entitled to make a claim for compensation. According to our national reporter, this means that the claims of persons injured only indirectly, namely par ricochet, may be categorically rejected, even when the damage is considered a ‘normal consequence’ of the act of the tortfeasor.131 These two tools place clamps upon the causal question. In some cases both apply and reinforce one another. Thus in the All Stars case (Case 2), relief was denied not only because the team was considered an indirect victim of the negligent act that injured its star player, but because the damages of the team were not considered a normal consequence for which the tortfeasor should be responsible. Thus it seems that to the extent that plaintiff ’s injury is deemed to be indirect under Art 446, this damage will at the same time appear to be more remote along the chain of consequences under Art 361.1. In those cases where relief of pure economic loss would be clearly denied (Cases 1, 2 and 3), one or both of these reasons was the 131

See the same conclusions under a similar provision in Croatian law, supra p 49.

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decisive ground. Even in cases where pure economic loss might be recovered (Cases 4 and 5), the Reporter suggests that the judge would need to requalify the plaintiff ’s status, not as an indirect victim (which might appear to be the case at first glance) but as the direct victim of the defendant’s act. Thus causal directness continues to set the dogmatic framework of the reasoning for both favorable and unfavorable outcomes. (ii) Denmark: A clandestine conservative Danish tort law lies primarily in the hands of judges and scholars. No general statutory rule defines applicable standards for negligence, proof, causation and remoteness of damage. Thus liability rules concerning pure economic loss depend upon the interpretative formants and invite a broad and flexible use of the technicalities of the cause of action. It is then understandable why our national contributor stresses that, when the claim is not brought before the courts under the umbrella of special statutes, such as the Marketing Act, the Company Law Act, or the Insurance Act (as to the latter, see Case 9), the recoverability of this sort of loss ends up being particularly focused on the position of both the victim and the damage along the causation chain. Two elements are invariably stressed in the judicial analysis. They are: (a) the requirement that the pure economic loss must not be too remotely connected to the defendant’s negligent conduct; and (b) the firm position reached by the jurisprudence that only the person directly affected by the tortfeasor’s negligence is protected. For instance, application of rule (a) makes the claims brought by the laid-off workers (Case 1) and by the bank client (Case 7) problematical. In the same vein, the application of rule (b) makes the outcome of cases such as the one described in Case 5 (‘The Dutiful Spouse’) rather unpredictable. The same rule straightforwardly leads Danish courts to deny relief to the All Star Team (Case 2), as well as the cattle raisers, butchers and market traders in Case 3. On the other hand, the lessee of a passenger liner (Case 4) would recover by virtue of its contractual right to use the ship, which allows judges to consider the plaintiff as directly affected by the defendant’s conduct. In Denmark, as elsewhere in recent times, the liability threshold for ill-rendered professional services has been substantially lowered. Therefore, though a conservative regime in many respects, Denmark grants recoveries fairly liberally in that particular sector. Further-

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more wherever a defendant’s conduct demonstrates heightened levels of blame, this will have a decisive effect upon liability. A finding of gross negligence, recklessness, or intention in the defendant’s conduct can convert an otherwise certain denial of liability into a full recovery of the loss, even a purely economic one. A few other points are also worth stressing. First, differently from Finland and Sweden,132 Danish tort law works without the legislative constraint – set forth in a comprehensive Tort Liability Act – whereby only victims of a crime may in principle obtain civil reparation for pure economic loss. Secondly, there is no absolute rights checklist, overt or superimposed, as in Germany, Portugal and Austria133 that would enable Danish judges to screen out this type of loss in a systematic way. The absence of these two features could bestow a liberal appearance to the liability façade. That liberalism, however, is basically illusory. Denmark deserves full membership in the club of the conservative regimes. Indeed, the overall attitude of the legal actors towards the recovery of pure economic loss is closely akin – to limit our comparison to the legal systems under review – to the Polish approach. As in Poland, Danish jurists have developed different doctrines and arguments about causal technicalities that strictly control the recovery of pure economic loss. Thus, the implementation of apparently neutral tools of remoteness and ‘directness’ of damage become in the hands of Danish judges powerful means of keeping liability for wide-ranging economic damage within reasonable limits. Rather than a change of façade, Danish courts and scholars have redecorated the interior of their tort law system: they have restricted the class of persons entitled to damages and the nature of the compensable damage.

3 Conclusion In our survey of the liability regimes, we have attempted to set out a coherent way of describing the various approaches of the legal systems to the issue of pure economic loss. What then is the answer to the question posed in the introduction to this chapter? A common theoretical matrix of pure economic loss does not exist. The ways of approaching the problem are multifarious. We find 132 133

See Bussani and Palmer Pure Economic Loss in Europe, at pp 156–58. Ibid. at pp 148–56.

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the issue absorbed within the mainstream of the general clause in the liberal regimes and, in some others, we find it driven by the fear of ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class’.134 This fear is, of course, managed through technical devices. These are, basically, the duty of care element in the pragmatic regimes and exclusionary causal determinations and/or the unlawfulness requirement in the conservative systems. Comparative analysis, however, makes clear a further point. Our classification of the systems into liberal, pragmatic and conservative regimes provides a framework that the reader may use to understand how jurists of a particular country reason their way to solutions. We have seen that the façades are frequently deceptive edifices that conceal a complex theoretical substructure. Therefore, without an in-depth factual analysis, many of the actual questions raised by the pure economic loss issue are bound to receive either no answer or a misleading one.

134

Ultramares Corporation v Touche (1931) 255 NY 170 at p 179 per Cardozo CJ.

Part 2

The national contributions

Chapter 2

Japan Professor Yoshihisa Nomi

1 Introduction to Japanese Tort Law a) Discussions of pure economic loss In Japan, the concept of ‘pure economic loss’1 is not fully recognized.2 Although it is not discussed as the concept of ‘pure economic loss’, it is discussed as a problem of negligence or scope of damages.3 If we define ‘pure economic loss’ as the economic loss of the plaintiff in a situation in which he/she has suffered neither personal injury nor damage to tangible property, then such losses can be seen in many cases. As will be discussed later, in some cases the courts deny recovery of such losses, but in others they are more generous toward plaintiffs. We are still struggling to find out why the courts treat the cases differently and whether there is justifiable reason for it. 1

2

3

In the database of legal articles written in Japan, only six discussed ‘pure economic loss’. Tokyo District Court, 27 September 2004 involved a case of a nuclear accident, in the process of producing nuclear fuel in its facility, the defendant did not follow the strict procedures required and radioactive substances leaked outside the facility. Though the radioactive substance did not actually harm the plaintiff or its property, it caused a rumor that the land owned by the plaintiff was contaminated. The plaintiff who was planning to sell its land, suffered financial losses. The defendant argued that the plaintiff ’s damages were pure economic loss and were not recoverable under Japanese law. The court dismissed the plaintiff ’s claim on the ground that there was no causal link between the defendant’s accident and the plaintiff ’s damages. For more information about liability for pure economic loss in Japan, see Yoshihisa Nomi, Protection of Economic Loss and Tort Law, One Hundred Years of Civil Code, Vol.1 (1998) pp 619–49.

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b) Basic structure of tort in negligence First, let us have a quick look at the basic structure of tort law in Japan. Article 709 of the Civil Code of Japan provides that negligence, infringement of legal interest and causation are the necessary requirements for recovery of damages in tort. Originally the Civil Code used the expression ‘infringement of right’ instead of ‘infringement of legal interest’. But the requirement of ‘infringement of right’ was considered to be too narrow to protect the affected party in many cases where the plaintiff ’s legal interest was not able to be labeled as a ‘legal right’. The leading case was the Daigaku-yu Case4 in 1924. The plaintiff was a lessee of the premises and was running a public bath named Dagaku-yu, the defendant was the landlord. The lease was terminated by the landlord and the plaintiff had to close the public bath. The law report does not explain whether the termination of the contract had legal grounds. But whether the termination was justified or not, the plaintiff had a legal interest in using the name Daugaku-yu, which was hindered by defendant’s wrongful act. The nature of the wrongful act of the defendant is not clearly explained in the law report. It only says that the defendant interfered with plaintiff ’s selling the name Daigaku-yu and had allowed the next lessee to use the name. The plaintiff claimed damages in tort for the loss of the name Daigaku-yu. The issue was whether there was any infringement of plaintiff ’s ‘legal right’. The lower court dismissed the plaintiff ’s claim, because Daigaku-yu was not the registered name of the business; it was a kind of good will which was not considered as legal right. But the Supreme Court allowed the recovery of damages reasoning that even though the plaintiff ’s interest was not a ‘legal right’, it was certainly a ‘legal interest’ and such ‘legal interest’ should be protected in tort. This case may be the first case on pure economic loss in Japan. After the Daigaku-yu case, the courts began to relax the requirement of ‘legal right’. The academics also supported this trend. The term ‘legal right’ in the context of ‘infringement of legal right’ was always loosely interpreted by the court, as compared to German law which limited the application of Article 823 BGB only in cases of an 4

Supreme Court, 28 November 1924. Daigaku-yu is the name of this public bath. The public bath was privately owned, but was open to the public. Daigaku means university, yu means bath in Japanese and this public bath was located near Kyoto University.

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‘absolute right’. These background developments led to the revision of Article 709 in 2005 and the replacement of the term ‘legal right’ with ‘legally protected interest’. It could be summarized that Japanese law did not have a general rule barring the recovery of pure economic loss. Rather Article 709 was interpreted in such a way as to allow recovery of pure economic loss. In the end, the revision of Article 709 meant that the obstacle against the recovery of pure economic loss was removed. But this does not mean that we have allowed every kind of pure economic loss to be compensated. This will become clear in answering the following hypothetical cases. Case 1 – A cable case: the laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cuts the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected black-out causes the loss of two days of production. Black has to lay off a number of workers hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay. I Operative rules The Holly roadworks company is not liable in tort, unless it had an intention to injure Black factory and their workers. II Descriptive formants Tort law in Japan would not automatically deny the possibility of tort liability in this case. But whether the requirements of tort liability are met is another matter. First, as for the requirement of ‘legal interest’, the court and the majority of academics would not deny the existence of a legal interest in this case. Black has a contract with Public Utility to be supplied with electricity and to use it for its business. By virtue of this status, the Black factory will be acknowledged to have a legal interest. Their workers’ contractual status with Black is also a legal interest. Some academics may deny their contractual status is a legal interest, but they will then face a certain difficulty if a third party intentionally cuts a cable to injure Black and his workers. Even though Holly may not be liable to Black and his workers in case of

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negligence, liability will surely be acknowledged in a case of intentional tort. It would be difficult to explain why Black and his workers have a legal interest when the Holly roadworks company has an intention to harm, but not when it acts negligently. Legal interest is an objective status of the injured party, so is not dependent on the subjective state of mind of the wrongdoer. Second, as for the requirement of negligence, the majority of academics would deny the liability of Holly for economic loss caused by negligence to Black or his workers. But if Holly had an intention to injure Black and his workers, it would be liable for the economic loss suffered by them. This consequence is elaborately explained by the so-called relational doctrine of Wagatsuma5 which is supported by many academics. According to Wagatsuma, in deciding liability, the manner of infringement on the one hand, and the nature of the infringed interest on the other, are to be relationally considered. This means that if the infringed interest can be characterized as a ‘strongly protected interest’ such as a property interest or a right in rem, the manner of infringement could be satisfied by the slightest form of culpability, that is negligence. But if the infringed interest is characterized as a ‘weakly protected interest’, the manner of infringement must entail a more serious form of culpability, that is intention (dolus). Many of the courts’ decisions also support this relational doctrine and explain the consequences of denying compensation in negligence, but allowing recovery for intentional torts.6 Third, as for the requirement of causation, Japanese law uses the concept of ‘adequate causation’.7 Foreseeability is one of the 5

6

7

Sakae Wagatsuma, Law of Obligations (1971) pp 76–81. Wagatsuma’s theory is summarized in this work, but his ideas were already expressed in many articles in the 1930s. His theory is based on the analysis of the cases and the influence of German law. See also the decision of the Supreme Court, 7 August 1922, which ruled that infringement of a contractual right by a third party will only constitute a tort when there is an intention to injure. Kagoshima District Court, 6 September 2000, was a case of infringement of the legal interest of minority shareholders. The majority shareholders and the director of the company sold the business to a third party and dissolved the company which, according to the allegation of the plaintiffs (the minority shareholders) infringed their economic interest. The court dismissed the plaintiff ’s claim, but referred to the Wagatsuma formula, summarizing it as follows: liability in tort will be determined by considering the legal interest of the plaintiff on the one hand and the manner of the infringement of the defendant on the other. On this notion the courts’ position is not clear. As to the literature, see Yoshio Hirai, Theory on the Law of Damages (1971) pp 309.

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elements to determine the existence of adequate causation. Therefore if there is no foreseeability, the courts may conclude in Case 1 that there is no legal causation between the conduct of Holly roadworks company and the damage sustained by Black or his workers. What the Holly roadworks company should foresee and how concretely it should be foreseen could be an issue. In an abstract way the Holly roadworks company can foresee that there would be many factories to which electricity is delivered by the cable. It could also foresee that if a factory cannot operate because of a black-out, some of the workers would be laid off. III Metalegal considerations The basic policy problem on this issue is not discussed much in Japan. The courts are careful not to be too generous, but are also careful not to exclude the possibility of compensation. Case 2 – The injured key-player Thomas is pivot in the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car and is unable to play for three months. In the absence of its best player, the team (until then at the top of the league standings) drops to fourth place. This results in considerable losses for the team owners. Can the AllStars recover against the car driver? I Operative rules The All-Stars cannot claim damages against the car driver. II Descriptive formants A case like this is called an ‘indirect victim’ case, and the ‘indirect victim’ cannot in general claim damages against the injurer. The precedent in point is the Supreme Court Case of 15 November 1968, Shinmeido Corp. v Kondo,8 which ruled that an ‘indirect victim’, a corporation in this case, can claim damages for economic loss caused by the injury of its employee only when the corporation can be regarded as identical to the injured person. In this case the key employee of the company was injured in a car accident and the 8

Supreme Court Case Reports, Vol.22–2, p. 2614.

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company suffered economic loss. The injured person was a pharmacist running a pharmacy with two employees, but later the business was incorporated because of tax reasons. However, the substance of the business did not change after the establishment of the corporation. The key employee was the only person who was a licensed pharmacist in the corporation and he was also the CEO of the corporation. After the injury to the pharmacist, the corporation suffered a 15% loss in turnover. The Supreme Court allowed recovery of the company’s economic loss, saying that there was adequate causation between the negligent act of the driver and the resulting damage of the corporation under the special circumstance of the case. This ruling on adequate causation, which leads to the denial of compensation of an indirect victim in general, unless there is a special circumstance to justify the claim, has been followed by the lower courts.9 According to the rule, if the Supreme Court finds adequate causation only in special circumstances where the direct victim and the indirect victim can be regarded as identical. All-Stars probably cannot receive compensation. The reason is that All-Stars are claiming compensation for economic loss, which is independent from the loss of the direct victim. The Japanese courts seem to deny these kinds of damages that exceed the damages of the direct victim. But the scope of the rule is not clear. The courts are discussing the problem in the context of adequate causation. Therefore, if the company can prove that the injured person is a key person who cannot be replaced by another, the courts might conclude that there is adequate causation between the negligence and the economic loss of the company. But so far we do not have any such case. Academics discussing this problem are influenced by the German doctrine and deny compensation to an indirect victim.

9

Osaka District Court, 28.Jan.1975, Hanrei Times 323–33. Here the injured person had a license to buy fish as market trader. He was a key employee of a small fish vendor, and because he was injured by a car accident, the company suffered economic loss. The court ruled that an indirect victim cannot generally claim compensation for his/her economic loss and denied compensation, saying that in this case the company was able to hire another person who had a license to purchase fish at the fish market. The court denied the existence of adequate causation between the negligence of the defendant and the economic damages of the company.

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III Metalegal considerations Why the company cannot claim damages for losing its pivotal player is not clear. If a tangible asset of the company was damaged, then the company surely could claim compensation for the economic loss caused by the damage to its own property. Why can we not use the same logic for the loss of a star player whom the company ‘owns’ as a kind of ‘property’? This question is not easy to answer. It is difficult, not simply because we cannot own a person as we own property. The point is that property belongs to the owner exclusively, but a player does not belong to anyone exclusively. But if we suppose the player has agreed to play exclusively for a particular team – it becomes very close to company property, so could we not discuss the problem using the logic of property? Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape of the infected animal obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; (b) the market traders who have lost their supplies; and (c) the butchers who have not been able to conduct their business during this time. I Operative rules Other cattle raisers and the market traders might be able to recover economic loss, if they can prove that it is the inevitable consequence of the defendant’s negligent conduct – in other words, that there is adequate causation between the negligent conduct and the economic loss. II Descriptive formants It is worth mentioning that other cattle raisers and the market traders in this case are not ‘indirect victims’. Rather, they are direct victims of the negligent act of the defendant. In contrast, the butchers are regarded as indirect victims. For the direct victims, the problem is only the remoteness of

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damages. As explained in my introduction, under Japanese tort law infringement of ‘legal right’ is not a requirement. It is enough if a ‘legally protected interest’ is infringed, on condition that other requirements are met. In this case other cattle raisers and market traders do have a ‘legally protected interest’. The main issue for them would therefore be the legal causation. There is one lower court case in Japan which can be discussed in relation to this case. It is the Nagoya High Court decision of 7 May 1989, in which fish merchants in Kanazawa City suffered economic loss because of an accident in the nuclear power plant owned by the defendant utility company. A very small amount of radioactive substance leaked out from the defendant’s power plant and contaminated the Tsuruga Bay.10 The fish merchants who traded at the Kanazawa fish market suffered economic loss because the consumers feared that the fish were contaminated, so they avoided buying fish traded in the market. Although the recovery of economic loss was denied to the plaintiff in the case, the court ruled that the fish merchants’ economic losses would be recoverable if there was a closer connection between the contaminated sea and the fish market. In fact the Kanazawa fish market where the plaintiffs traded was relatively remote from the contaminated bay and most of the fish which were sold in this market came from a different part of the sea. Although it is not clear from the case report, the fishermen and traders of a market closer to the contaminated area seem to have received compensation from the utility company in a settlement. As for the butchers, their damages are too remote. Adequate causation in regard with their damages would not be found. Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for expenses incurred prior to the collision, and for its loss of earnings due to the cancellation of the two cruises.

10

The radioactive substance was a very small amount. The court found that the fish were not actually contaminated. But the rumors kept consumers from buying fish and the traders at the fish market suffered economic loss.

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I Operative rules Shipwreck, the lessee of the ship, can claim compensation in tort for either the expenses uselessly incurred prior to the collision, or for loss of earnings due to cancellation of the two cruises, but not both. II Descriptive formants There is not much discussion in Japan about this kind of case. The problem is how we should think about the relation between the owner of the property and the lessee of the property. The lessee of property is entitled to recover damages s/he suffers during the period of its repair. The owner of the property is also entitled to recover damages if there is any damage to the owner. But some arrangement between the owner and that of the lessee is necessary, so that there will be no double compensation. Even though there is no case involving expenses uselessly incurred by a lessee, the following case shows that the courts allow compensation of economic loss suffered by the lessee. In Tokyo District Court, 30 October 1996,11 there was a case in which the lessee of a truck claimed compensation against the driver of a car which collided with the leased truck. The plaintiff was using this truck for a construction project. The court allowed the lessee to recover damages, which were the difference between the lease price of a new truck and the lease price of the present truck. Though it does not appear in the case report, the owner of the truck probably received compensation for the damage to his truck from the other driver or from the insurance. This might raise a question as to the relation of the compensation to the owner and that of the lessee. I will not discuss this problem in detail but, in this case, compensation would be available to both the owner and to the lessee. As for the compensation of the lessee’s loss of earnings, the following court decision allows such recovery. In the Osaka District Court, 7 July 199912 there was a case where a driver crashed his car into a carwash machine leased by the plaintiff. The lessee suffered loss of earnings during the period of repair. The court allowed recovery of the lessee’s lost earnings. According to this ruling, in our hypothetical case Shipwreck can recover its loss of earnings. But it

11 12

Traffic Accident Case Reports, Vol. 29, p 1589. Traffic Accident Case Reports, Vol. 32, p 1091.

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cannot claim compensation for expenses at the same time, as these expenses are necessary costs for the earnings. Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which time he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she looked after her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness. I Operative rules The wife can claim compensation under the general rules of tort liability provided by Article 709 of the Civil Code, to the extent that the amount of damages is reasonable. II Descriptive formants Although the solution mentioned above would be supported by the majority of academics and judicial practice, the explanation of the conclusion is not so easy. In the Tokyo District Court, Hachioji Division, 17 October 2000,13 the wife of an injured husband was a taxi driver who had to close her business while looking after her husband. The court referred only to the negligence of the driver in regard to the husband’s injury, but did not give any explanation why the driver was liable against the wife. The court seemed to think that there was a single tort with two victims. Theoretically, the tort against the husband and the tort against the wife are different. The court should have explained that there was a tort against the wife, but, as we said before, this is not easy. Foreseeability, which is a prerequisite for negligence liability, is difficult to find. One way to explain the tort against the wife that is consistent with the general rule of tort liability is to presume the existence of the foreseeability of a close family member who would suffer economic loss if another family member is injured. For example if a child is injured, it is obvious that the mother will look after her child, so if she has a job she will suffer economic loss. But in the usual tort cases,

13

Traffic Accident Case Reports, Vol. 33, p 1663.

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foreseeability cannot be presumed. It is for the plaintiff to prove the existence of concrete foreseeability. Therefore the court’s conclusion that the wife can claim compensation for economic loss is inconsistent with the requirements of tort liability. Even though tort liability against an indirect victim can be justifiable, the scope of damages is another problem. Here, the court might limit the amount of economic loss that is recoverable. For example, if the wife is running a business which has a high turnover, it would not be reasonable for her to close the business to look after her husband: she should hire someone instead. III Metalegal considerations There seem to be some policy considerations as to why the wife’s loss of earnings should be compensated. In general terms, personal injury cases seem to be treated differently from other cases, but this is not expressly stated in court decisions or in academic writing. Economic loss of a close family member is treated differently from other types of ‘indirect injury’. For mental damages, the policy is manifest in Article 710, which provides that certain family members can claim damages for pain and suffering for losing their close family member without proving negligence against the surviving family members. This is a special rule in regard to mental damages, but the same protection can be given for economic loss. Case 6 – Auditor’s liability Donna audits the accounts of Caterpillar, Inc. inaccurately. Paul relies on these published accounts to launch a take-over bid. This is successful, but Paul then discovers that the accounts overestimated the value of the company and that the price he paid per share was twice their actual value. I Operative rules Donna could be liable in tort to Paul under the general article on tort liability in the Civil Code (Art 709), provided that Paul’s damage was foreseeable. She will be liable if she had an intention to harm Paul. Whether Donna is liable in negligence is not clear.

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II Descriptive formants There is no court case which can be regarded as a precedent for an auditor’s tort liability to a third party. As mentioned above, Article 709 of the Civil Code does not require infringement of a ‘legal right’, but simply of a ‘legally protected interest’. Therefore, there is a possibility that Donna could be liable to Paul. The key issues would be: (a) whether there is causation-in-fact between Donna’s conduct and Paul’s economic loss; (b) whether this causation can be considered adequate causation; and (c) whether Donna could have foreseen Paul’s damages (i.e., does Donna’s act constitute negligence against Paul)14. Some court decisions are influenced by German doctrine in ruling that ‘indirect injury is generally not protected in tort’.15 This does not represent the majority of the lower courts’ opinions. They would rather allow recovery of economic loss if foreseeability is proved by the plaintiff. Academic writings on auditor’s liability are also scarce. Therefore it is difficult to say what the majority of the academics would say on this case. Those who write on this topic are usually influenced by scholarly works in Germany and the United States and are therefore inclined to deny recovery of pure economic loss in such a case. In an auditor’s liability case, causation-in-fact is not a big problem because the causation between the inaccurate audit and economic loss of a third party who relied on the audit is relatively clear. Therefore the real issue is the second and the third problem of adequate causation and negligence. These two problems are difficult to distinguish. Courts tend to discuss it as a problem of adequate causation, but the academics usually discuss it as a problem of negligence. Both adequate causation and negligence are influenced by policy considerations. It is not a simple problem of foresseability. If a case like this comes before the court, the court will consider policy problems.

14

15

Foreseeability is one of the elements necessary to the existence of adequate causation, but it is also a prerequisite for liability in negligence. Nara District Court, 31 January 2001, Traffic Accident Case Report, Vol. 34. p 165, even though this is not a case of auditor’s liability.

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III Metalegal considerations Courts would consider as a policy matter whether auditor liability to third party in negligence would be too harsh for the auditor. But on the other hand, if Caterpillar, Inc. is not involved and is not responsible for Paul’s damage, then Paul cannot recover his loss. The courts in Japan would think that unfair and would try to find a solution to balance the interests between the auditor and the third party. To admit liability only when the auditor has the intention to harm could be a solution. But what does ‘intention’ mean? Does it mean that Donna knew and carried out a false audit to damage Paul? Does it simply mean that Donna knew Paul would suffer damage, but that she did not wish to injure him? Or does it mean that Donna knew her audit was incorrect, but she did not know about Paul’s take-over plan? We do not know which position the courts will take. Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institute, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit, Inc. makes no further inquiry and thus does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damage. He is now suing Credit, Inc. to recover his losses. I Operative rules Dieter can probably claim compensation against Credit Inc. under Article 709 of the Civil Code. II Descriptive formants Because it is clear that Credit Inc. was able to foresee that its conduct would injure Dieter’s interests, the court would probably allow Dieter to recover his economic loss from Credit Inc. The issue here is whether the infringed interest of the plaintiff is a ‘legally protected interest’ in the sense of Article 709 of the Civil Code. Some academics would characterize Dieter’s interest as a contractual interest and discuss the case as a case of infringement of a

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contractual interest by a third party. The general understanding among the academics on infringement of contractual interests by a third party is that it constitutes tort only when the third party had an intent to cause damage. This will lead to a denial of liability in negligence. But this does not mean that Dieter cannot recover anything from anybody in our case. The doctrine of infringement of contractual interest by a third party presupposes that the other contracting party is liable in contract. Therefore in our case, if First National Bank cancelled the loans to Dieter based on false information given by Credit Inc., First National Bank is liable in contract for breach of the agreement. Other academics might characterize Dieter’s interest as a ‘business interest’ and provide more protection to Dieter in tort. But this doctrine is still underdeveloped and it is not certain whether the courts will provide wide protection, including compensation of economic loss. Recently, there was a case in which a TV announcer referred during his program to serious contamination of vegetables in a suburb of Tokyo, a report later found to be inaccurate. The farmers claimed compensation for damage to reputation and economic loss caused by a drop in product prices and the cancellation of contracts by supermarkets. This was a good case to deal with issues about economic loss, but the legal issue before the court focused more on defamation, rather than on tort liability for economic loss.16 III Metalegal considerations In contrast to case 6, in this case the false information given by Credit Inc. targeted a particular person. Therefore even if we acknowledge the liability of Credit Inc., there is no risk of exposing the provider of the information to excessive liability. Considering this difference, it is more likely that the court would allow recovery in the present case than in case 6. Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by RAC when he was involved in a head-on collision with another 16

Supreme Court, 16 October 2003, Minshu (Law Report of Supreme Court in Civil Cases) 57–9–1075. The case was remanded to the High Court, suggesting the possibility of liability on the grounds of defamation. Later the defendant TV company settled with the farmers in the amount of 10 million yen.

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automobile. The engine of the rented vehicle intruded into the passenger compartment causing severe and permanent injuries. Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. The severing of the car made it impossible to determine within a reasonable degree of certainty whether or not the vehicle had design, manufacturing and/or maintenance defects which proximately caused Nicholas’ injuries. Nicholas sues RAC for negligent spoliation of the evidence and tortious interference with a prospective civil action against Alfa Romeo. I Operative rules Nicholas can claim compensation against the RAC for destroying the evidence necessary for him to sue Alfa Romeo, if he can prove the damages. The ground for RAC’s liability would be RAC’s breach of promise to wait sixty days. But some courts may also find RAC liable in tort. II Descriptive formants If RAC had not promised Nicholas that they would wait sixty days for his inspection, RAC would not be liable for destroying the evidence, unless it did so intentionally. But if RAC promised to wait, and breached their promise, RAC could be liable in contract or in tort. Contracts in Japan do not need consideration. Any promise, even a unilateral promise, could be a contract. Therefore, if RAC did not keep their promise and caused damages to Nicholas, he can claim damages, including economic loss, against the promisor. Of course, how much he can claim is another issue because the prospect of the civil action against Alfa Romeo is not certain. Although there is a possibility of RAC being liable in contract, the courts might feel uncomfortable about characterizing RAC’s promise as a contract because RAC did not have any intention to be bound by their words. However, in that case, the courts could use RAC’s promise as a basis for reliance by Nicholas. In other words, Nicholas had the right to rely or expect that he could use the engine as evidence in the civil action against Alfa Romeo, but his

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expectation was defeated by the negligent act of RAC. Nicholas could claim compensation in tort for damages. As for the amount of damages, the court will consider the prospect of the civil action against Alfa Romeo. Due to the probability of a successful case against Alfa Romeo, the full amount of damage will not be awarded to Nicholas as damages. If the case is not easy to prove, Nicholas might be able to claim for mental suffering. III Metalegal considerations This is not a case of an ‘indirect victim’ – Nicholas is a direct victim of RAC’s tortious conduct. Therefore courts would be more willing to allow recovery of economic loss in such a case. Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having previously been employed by OMEGA. While so employed, he was a member of their occupational pension scheme. He was told by ALPHA that he was eligible to join the ALPHA occupational pension scheme. As an employee, he would, unless he wished to opt out, automatically join the scheme and deductions will be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based upon a careless reading of the materials provided, the Broker vaunts the economic virtues and performances of OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and stay in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than she would have received from ALPHA. Mrs. Smith sues the Broker. I Operative rules Mrs. Smith can probably claim damages against the Broker under the general delictual article of the Civil Code. She also can claim damages based on contractual liability. II Descriptive formants There is no doubt that the Broker is liable in contract against Mr. Smith because he gave inaccurate advice. If Mr. Smith was alive he

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could sue for damages in contract. Even though there is no direct precedent, there is no doubt that contractual status is inherited by a legal successor. After his death, his wife can succeed to his legal status in contract with the Broker. One issue would be whether Mrs. Smith can claim damages against the Broker in tort. This is worth discussing because in some cases, tort liability is favorable for the plaintiff. For example, if Mrs. Smith did not know that Mr. Smith had sought advice from the Broker and did not know about the Broker’s advice for more than ten years, she cannot claim damages in contract because of the prescription period (ten years for contractual liability). Tort liability will allow recovery for three years from the time she found out about the tortious conduct of the defendant, or twenty years from the time the tort was committed. Putting aside these points for a moment, we must first see if the requirements for negligence liability have been met. The first problem is whether Mrs. Smith had an independent interest in the pension. It may depend on how the pension scheme is built, but usually a surviving spouse has a special interest in such a pension. Therefore Mrs. Smith’s interest in the pension is a ‘legally protected interest’, which was infringed by the Broker’s advice. A second problem is whether the Broker’s advice constitutes negligence in relation to Mrs. Smith. This also may depend on the pension scheme, but it would be fair to say that the Broker was able to see that Mrs. Smith had a legal interest in Mr. Smith’s pension and that his inaccurate information would infringe on her legal interest.

Bibliography Y. Hirai, Theory on the Law of Damages (1971). Y. Nomi, Protection of Economic Loss and Tort Law, in One Hundred Years of the Civil Code, Vol. 1, 619–49 (1998). S. Wagatsuma, Law of Obligations (1971).

Chapter 3

Croatia Dr. Marko Baretic´ and Dr. Sasˇa Niksˇic´

1 Introduction On 1 January 2006, the new Obligations Act (Zakon o obveznim odnosima (hereinafter the ZOO)1 came into force in Croatia and replaced the Obligations Act of 1978.2,3 However, compared to the ZOO of 1978, the rules of the ZOO of 2006 regarding the liability for material damage have not undergone any substantial changes. The changes have only been of a terminological nature: instead of the term ‘material damage’ the ZOO of 2006 uses the term ‘patrimonial damage’. Therefore, in elaborating the position of the Croatian law regarding the recoverability of pure economic loss under the ZOO of 2006, reference will be made to the case law and academic literature that emerged in connection with the ZOO of 1978. 1

2

3

Zakon o obveznim odnosima (Narodne novine: Official Gazette of the Republic of Croatia – hereinafter NN No. 35/05). Zakon o obveznim odnosima (Sluzˇbeni list SFRJ: Official Gazette of the Socialist Federal Republic of Yugoslavia Nos. 29/78, 39/85, 46/85, 45/89, 57/89, NN No. 53/ 91, 73/91, 3/94, 7/96, 91/96, 112/99, 88/01). The ZOO was enacted in 1978 as a federal law of the former Socialist Federative Republic of Yugoslavia (SFRJ). After the dissolution of SFRJ in 1991, the Republic of Croatia inherited numerous laws of the former SFRJ that were not contrary to the principles of its constitutional order. One of them is the ZOO, which has been slightly altered by omitting the provisions inconsistent with the market economy of the Republic of Croatia. Although enacted during the period of communism, the ZOO was considered as a very modern piece of legislation based on the Swiss Obligations Act and the French Civil Code. This is the main reason why this Act has been in force in the Republic of Croatia since the end of 2005. However, modern trends in the law of obligations, which occurred during the past 25 years, particularly the process of accession of the Republic of Croatia to the EU, have prompted the need to draft a new ZOO.

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According to Article 1046 of the ZOO, patrimonial damage is ‘the decrease of someone’s patrimony (regular damage) and preventing its increase (loss of profit)’. Although the ZOO does not provide a definition of the term ‘patrimony,’ in academic commentaries patrimony is defined as a sum of subjective patrimonial rights belonging to a certain person, irrespective of whether these subjective rights are of an absolute or relative nature (rights in rem or rights in personam).4 According to Article 1045, paragraph 1 of the ZOO, a person causing damage to another is obliged to repair it unless he/she proves that damage has originated without his/her fault. Therefore, as a matter of principle under Croatian law, every pecuniary or economic loss is considered to be damage and as such, it is recoverable. Even if the wrongful act of the tortfeasor has affected only the victim’s wealth and nothing else, the loss thus suffered by the victim will be considered as damage. Hence, in principle, the Croatian tort law system does not treat pure economic loss any differently from any other loss.5 However, this observation must not lead to the conclusion that under Croatian law, as far as pure economic loss is concerned, ‘anything goes.’ As will be explained later in detail, the Croatian tort law system imposes certain limitations which should prevent the flood of endless demands for recovery of this type of damage. Some of these limitations can be found within the general conditions of civil law liability. It is generally accepted that civil law liability arises if the following conditions are met: subjects of a legal relation (i.e. the tortfeasor and the victim), damage, wrongful act or omission, causal link between a wrongful act of the tortfeasor and a damage to the victim and unlawfulness in its objective sense, meaning that the wrongful act or omission is contrary to some legal provision or any other rule that is part of the legal order.6 If these conditions of liability are met, the tortfeasor is liable for damage regardless of what type of loss has occurred. In accordance with the full compensation principle, the victim must be placed in a situation 4 5

6

See P. Klaric´, M. Vedrisˇ, Gradansko pravo, Zagreb: NN 2006, pp 95–7. See I. Gliha, M. Baretic´ and S. Niksˇic´, Pure Economic Loss in Croatian Law, in M. Bussani (ed.) European Tort Law Eastern and Western Perspectives (2007) p 252–5. See Klaric´, Vedrisˇ, pp 583–4; B. Vizner, Komentar Zakona o obveznim (obligacionim) odnosima – knjiga druga (1978) pp 670–5; V. Gorenc, Komentar Zakona o obveznim odnosima (2005) pp 1605–11; S. Perovic´, D. Stojanovic´ (eds.) Komentar Zakona o obligacionim odnosima – knjiga prva (1980) p 482; B. Blagojevic´, V. Krulj (eds.) Komentar Zakona o obligacionim odnosima – knjiga prva (1980) p 403.

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in which he/she would have found himself/herself, had the wrongful act or omission never taken place.7 More precisely, the victim is entitled to claim both regular damage (damnum emergens) and loss of profit (lucrum cessans).8,9 Furthermore, it is important to emphasise that according to Croatian tort law, any degree of fault is sufficient to invoke liability for any type of damage. Hence, as a matter of principle, pure economic loss is recoverable even if inflicted by simple negligence on the part of the tortfeasor. However, the scope or amount of compensation may depend on the degree of the tortfeasor’s fault. As an exception from the full compensation principle, paragraph 1 of Article 1091 of the ZOO states that the court may, taking into account material position of the victim, condemn the tortfeasor to compensation in an amount lower than the actual damage if the tortfeasor had not acted with intention or gross negligence and if the financial capacity of the tortfeasor is poor and payment of the full compensation would cause his/her indigence. Furthermore, in accordance with paragraph 2 of Article 1091 of the ZOO, if the tortfeasor had caused damage by doing something that was to the benefit of the victim, the court may adjudicate reduced compensation, taking into account the prudence which the tortfeasor usually demonstrates in his/her own dealings. If, on the other hand, general conditions of liability are not met, the tortfeasor cannot be held liable for the damage sustained by the victim. In that respect, the non-existence of causation between the tortfeasor’s wrongful act and the victim’s loss will in numerous situations represent a considerable obstacle for the claimant who puts forward the claim for recovery of pure economic loss.10 The commentators and the jurisprudence in Croatia generally support the socalled theory of adequate causation according to which the cause of a certain type of damage is regarded only as that act which ordinarily, typically, or in the usual course of events, results in this kind of damage.11 Therefore, a victim who suffers pure economic loss will not 7 8 9

10 11

See Article 1090 of the ZOO. See Article 1089, paragraph 1 of the ZOO. According to Article 1089, paragraph 3 of the ZOO, loss of profit is a gain which, in the due course of events or according to certain special circumstances, can reasonably be expected and whose acquisition is hindered by virtue of the tortfeasor’s act or omission. See Gliha, Baretic´ and Niksˇic´, pp 256–64. See Klaric´, Vedrisˇ, p 595; Vizner, p 675; Gorenc, p 1608; Z. Stipkovic´, Protupravnost kao pretpostavka odgovornosti za sˇtetu (1991) p 17; I. Crnic´, Odsˇtetno pravo (2004)

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succeed with his/her claim if the court takes the position that his/her loss cannot be regarded as a typical consequence of the tortfeasor’s wrongful act. However, according to Article 1063 of the ZOO, if the damage is the result of a dangerous thing or a dangerous activity, it will be deemed that it originates from this thing or activity, unless proven otherwise. Therefore, in cases where damage originates from a dangerous thing or activity, causation may be established prima facie by a rebuttable presumption. The second factor which might preclude the victim from claiming compensation for pure economic loss can be found within some special rules of the ZOO regarding the scope of compensation. In some of its provisions, the ZOO departs from otherwise victimfriendly rules on the scope of compensation by providing more restrictive compensation rules which, as will be shown later, have an important impact on the possibility to recover pure economic loss.12 Special rules regarding the scope of compensation are foreseen for patrimonial (material) damage sustained in the case of death, bodily injury and impairment of health,13 as well as for patrimonial (material) damage sustained in the case of insult and slander.14 Finally, it must be emphasised that the liability of certain professions is governed by some special laws which provide some (often considerable) limitations to the liability of these professions. For example, the Maritime Code15 provides a special liability regime for ship operators; the Act on Obligations and Property Relations in Air Traffic16 provides a special liability regime for air carriers; and the Act on Media17 provides a special liability regime for publishers.18

p 22; See also judgements of the Supreme Court of the Republic of Croatia (Vrhovni sud Republike Hrvatske – hereinafter VSRH) Vs, Gzˇ–281/82 of 25 May 1983; Vs, Rev–1098/88 of 7 December 1988; Vs, Rev–2552/82 of 5 May 1983; Legal opinion of the Civil Law Department of the VSRH, Vs (v/93) of 28 June 1993. (I. Crnic´, Zakon o obveznim odnosima s opsezˇ nom sudskom praksom (2002) pp 146–8.) 12 13 14 15 16 17 18

See Gliha, Baretic´ and Niksˇic´, pp 264–9. See Articles 1093–97 of the ZOO. See Article 1098 of the ZOO. Pomorski zakonik (NN 181/04, 76/07). Zakon o obveznim i stvarnopravnim odnosima u zracˇ nom prometu (NN 132/98). Zakon o medijima (NN 59/04). See Gliha, Baretic´ and Niksˇic´, pp 288–93.

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Case 1 – A cable case: the laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cut the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected black-out causes the loss of two days of production. Black has to lay off a number of workers that were hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay. I Operative rules Workers claiming compensation from the Holly roadworks company would probably recover the loss of two days’ pay on the basis of the general rules on tort liability provided in Articles 1045, 1046, 1089 and 1090 of the ZOO. II Descriptive formants The loss of two days’ pay would be considered as a loss of profit (hindering the increase of the person’s patrimony) and as such, it would fall under the definition of damage provided in Article 1046 of the ZOO. According to Article 1089 of the ZOO, a victim is entitled to claim recovery for regular damage and for loss of profit. Naturally, besides damage, all other general conditions of liability must be met. In that respect, the non-existence of fault on the part of the tortfeasor may be a hindrance to a successful claim by the workers. According to Article 1045 of the ZOO, the tortfeasor’s fault is established by rebuttable presumption. Therefore, the tortfeasor is entitled to furnish evidence that, in the given circumstances, he/she did not act with intention or negligence. For example, if the tortfeasor is able to prove that according to the plans or maps of the public utility network, he/she was not supposed to come across any electricity cable while performing road works, he/she will probably be exempted from liability. On the other hand, if the tortfeasor is not able to furnish any reliable evidence, it will be deemed that his/her workers have acted with simple negligence. According to the rules on vicarious liability in Article 1061 of the ZOO, the employer is liable for the damage caused by his/her employees. The second point of dispute in the given case might be the issue of establishing a causal link between the tortfeasor’s acts and the loss sustained by the workers. Although according to the published case

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law, the courts in Croatia have not ruled on facts similar to those given in this hypothetical case, it seems plausible to conclude that between the tortfeasor’s act and the worker’s loss, relevant causation does exist. Since the majority of commentators and the jurisprudence in Croatia support the so-called theory of adequate causation, it can be said that in this hypothetical case, the loss sustained by the workers is a typical, regular consequence of the tortfeasor’s act. According to the case reports, a relevant cause of certain damage is an act which ordinarily or regularly leads to that particular sort of damage.19 Moreover, the VSRH holds to the position that causation, as a condition for civil law liability, need not necessarily exist only between the damage sustained and its immediate cause (causa proxima), but also between some remote cause (causa remota) and the damage sustained.20 More precisely, if some remote act or event has caused some other act or event, and that other act or event has in turn caused certain damage, relevant causation does exist even between the damage sustained and that remote act or event,21 provided, of course, that this remote act ordinarily or regularly results in such damage. In the given case, the immediate cause of the loss sustained by the workers was an act of the Black factory which had to lay off a number of workers because production had been halted. But the remote cause of the loss sustained by the workers was an act of the Holly roadworks company whose employees cut the cable belonging to the public utility and caused production to be halted in the Black factory, and consequently, the layoff of Black factory’s workers. Since a halt in production is an ordinary, typical or regular consequence of an interruption in the supply of electricity, it can be said that even the losses sustained are typical or regular consequences of an interruption in the supply of electricity. However, since the courts in Croatia have not ruled upon facts similar to those given in this hypothetical case, it is hard to predict whether this line of reasoning would be supported by case law. III Metalegal considerations The suggested outcome of this case is a consistent consequence of the liberal, victim-oriented Croatian civil liability system. The main 19

20 21

See the judgement of the VSRH, Vs, Gzˇ–281/82 of 25 May 1983 (Crnic´, 2002, p 147). Ibid. Vs, Rev–759/81 of 12 May 1981 (Crnic´, 2002, p 147). Blagojevic´, Krulj, pp 411–12.

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idea behind the operative liability rules of the ZOO is to protect the victim from any damage, regardless of the nature of inflicted interests (rights). Case 2 – The injured key-player Thomas is pivot on the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car and is unable to play for three months. In the absence of its best player, the team (until then at the top of the league standings) drops to fourth place. This results in considerable losses for the team owners. Can the AllStars recover against the car driver? I Operative rules In accordance with the strict interpretation of Article 1095 of the ZOO, the All-Stars would probably not be able to recover against the car driver. II Descriptive formants As mentioned earlier, the ZOO contains special provisions regarding the scope of compensation of the patrimonial damage caused by death, bodily injury and impairment of health. According to the strict interpretation of Article 1095, it seems that in case of bodily injury and impairment of health only the primary victim (i.e. the person sustaining a bodily injury or impairment of health) is entitled to claim compensation.22 However, it must be emphasised that this view has not been unanimously shared by academic commentators. Certain commentators suggest, without any further elaboration, that special provisions of the ZOO regarding the scope of compensation in the case of death, bodily injury and impairment of health do not preclude the applicability of general provisions regarding the scope of compensation.23 Moreover, the published case law reveals that 22

23

Article 1095, paragraph 1 of the ZOO states: ‘One who inflicts upon another person a bodily injury or impairs his/her health is obliged to compensate him/her for the expenses of medical treatment and other expenses connected thereto as well as for the profit lost due to inability to work during the period of healing.’ Consequently, the ZOO stipulates that if the tortfeasor inflicts bodily injury or impairment of health on another, the tortfeasor shall only be obliged to compensate ‘him/ her’, meaning the primary victim only. See Perovic´, Stojanovic´, p 579.

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even the position of the VSRH regarding the scope of compensation in the case of bodily injury or impairment of health has been quite inconsistent. Although Article 1095 of the ZOO only provides for the compensation of the primary victim’s loss, the VSRH has often awarded compensation to those indirectly damaged (secondary victims) (i.e. persons who suffered an economic loss due to the bodily injury sustained by the primary victim). In these cases compensation was awarded mostly to the close relatives of the primary victim,24 although in Vs, Rev–1985/83, the compensation for pure economic loss was awarded to the primary victim’s employer.25 However, in numerous cases adjudicated by the VSRH, but also by some appellate courts, the claims of those who suffered economic loss due to the bodily injury or impairment of health sustained by the primary victim were rejected, notwithstanding that some of the claimants were close relatives of primary victims.26 Moreover, in Vs, Rev–4044/94 of 15 May 1996,27 the VSRH took a very restrictive approach towards the recoverability of the so-called relational economic loss (ricochet loss),28 according to which indirect damage (i.e., damage sustained by the secondary victim as a consequence of someone else’s bodily

24

25

26

27 28

In the judgement Vs, Gzˇ–3333/78 of 22 May 1979, the VSRH awarded the husband compensation for lost profit incurred while nursing his injured wife, in Vs, Rev–239/ 81 of 6 May 1981, the VSRH awarded the secondary victim (wife) the expenses she incurred as a consequence of the death of her husband (primary victim) who took care of their children while he was alive (Crnic´, 2002, pp 216–17, 245). This case involved an employer from Germany who claimed compensation from a Croatian insurance company for the expenses he was obliged to pay to his employee during sick leave, according to German law. Since the employee’s disability was caused by the acts of a Croatian insurer’s client, the VSRH held that defendant (the Croatian insurer) was obliged to compensate for these expenses. See Crnic´, 2002, p 249. In the judgement Vs, Rev–2097/99 of 14 October 1999, the VSRH held that a mother did not have the right to claim the loss of profit incurred while nursing her injured child, in Vs, Rev–1180/97 of 28 February 2001, the VSRH held that a husband did not have the right to claim the loss of profit incurred while nursing his injured wife. The same conclusion was reached by the Court of Appeal in Bjelovar in the judgement Gzˇ–2333/00 of 14 December 2000 (Crnic´, 2002, pp 247, 1005). See Crnic´, 2002, p 245. Relational economic loss (ricochet loss) is defined as an economic loss suffered by a third party as a consequence of damage to someone else’s person or property. See W. H. van Boom, Pure Economic Loss: A Comparative Perspective, in W. H. van Boom, H. Koziol and C. A. Witting (eds.) Pure Economic Loss (2004) p 4; M. Bussani and V. V. Palmer, The Notion of Pure Economic Loss and its Setting, in M. Bussani and V. V. Palmer (eds.) Pure Economic Loss in Europe (2003) p 10.

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injury) is recoverable only if the law expressly provides so.29 If the case law cited is observed from a temporal perspective, it may be argued that the previously liberal position of the VSRH towards recoverability of indirect damage has recently changed. The recent position of the VSRH towards the recoverability of the relational economic loss incurred by a bodily injury and impairment of health closely resembles the wording of Article 1095 of the ZOO. Hence, the basketball team which sustained an economic loss due to the bodily injury suffered by its best player will probably not be able to recover damages against the tortfeasor. III Metalegal considerations The text of Article 1095 of the ZOO significantly departs from the overall, pro-victim orientation of the Croatian civil liability system. The Croatian legislator, obviously concerned with the possibility of an unlimited number of ricochet loss cases, decided to limit compensation to death, bodily injury or impairment of the health of the primary victim only. However, this provision did not prevent the Croatian courts from awarding compensation to secondary victims. By acting in such a way, Croatian courts have frequently invoked the general rules of extra-contractual liability, obviously ignoring the clear provision of Article 1095 of the ZOO. When the number of ricochet cases threatened to overwhelm the judicial system, Croatian courts, concerned with the ‘floodgate’ argument, started interpreting Article 1095 of the ZOO strictly according to its wording, thus preventing secondary victims from claiming compensation. Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape of the infected animal obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; 29

A similar conclusion was reached by the Court of Appeal in Zagreb in the judgement Gzˇn–20/03 of 11 November 2003. The Court of Appeal in Zagreb reasoned that the right to claim damages in the case of bodily injury or impairment of health belongs to the primary victim only. Crnic´, 2004, p 350.

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(b) the market traders who have lost their supplies; and (c) the butchers who have not been able to conduct their business during this time. I Operative rules The cattle raiser might be obliged to compensate the other cattle raisers, market traders and butchers for the losses they suffered under the general rules on extra-contractual liability, assuming that the court would find that all general conditions of liability had been met. II Descriptive formants In principle, the general rules on extra-contractual liability, especially those provided in Articles 1045, 1046 and 1089 of the ZOO, provide that any financial loss may be considered as damage, as defined in Article 1046 of the ZOO. In the given case, other cattle raisers who had not been able to sell their cattle for ten days, the market traders who had lost their supplies and the butchers who had not been able to conduct their business may claim the alleged loss of profit, and according to Article 1089, paragraph 1 of the ZOO, a victim has the right to claim for both regular damages and loss of profit. According to Article 1089, paragraph 3 of the ZOO, loss of profit is a gain which, in due course of events or according to some special circumstances, could have been reasonably expected and its acquisition had been hindered by the tortfeasor’s act or omission. Therefore, every single claimant would be obliged to prove that he/ she would have acquired some profit had the tortfeasor not allowed an infected animal to escape from his/her premises. According to established case law, to succeed with the claim for loss of profit, it is not sufficient for the claimant to furnish a proof that there was a theoretical, abstract possibility of making the profit, but he/she must prove that in the due course of events, or according to special circumstances, there was a probability of making the profit and that he/ she had the intention to acquire that profit.30 In the case at hand it is doubtful whether some of the possible claimants have actually sustained any loss of profit. For example, it might be argued that other cattle raisers who had not been able to sell their cattle for ten days 30

See the judgements Ps, Pzˇ-3095/93 of 31 December 1993; Vs, Rev–236/82 of 7 October 1982; Crnic´, 2002, p 227.

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did not sustain any loss of profit since they were able to sell the same cattle after the ten-day period. On the other hand, if during this tenday period the price of cattle decreased, the difference in price must be considered as loss of profit. However, the cattle raisers who are claiming for loss of profit would be obliged to prove that they had actually intended to sell their cattle within this period. The second point of dispute might be the issue of the causation between the acts of the cattle raiser who allowed an infected animal to escape from his/her premises and the loss sustained by the cattle raisers, market traders and butchers. According to the theory of adequate causation, the relevant causation would exist if the court could find that the losses sustained by these individuals were typical or regular consequences of the tortfeasor’s act. The existence of the relevant causation between the tortfeasor’s act and the damage sustained will be a question of fact. In that respect, reference to the published case law may be of interest. In a series of cases, the VSRH has ruled on facts similar to the ones given. All these cases concerned claims against the state for recovery of damage caused by a prisoner who managed to escape from prison. In the judgements Vs, Rev– 2203/91 of 30 December 1991, Vs, II Rev–117/82 of 6 April 1982, Vs, Rev–1812/89, Vs, Rev–2203/91, and Vs, Rev–276/91,31 the VSRH ruled that the state was responsible for the damage caused by the prisoner after he/she had escaped from prison. In the cited cases, the VSRH was of the opinion that relevant causation between the damage sustained and the acts of the state’s prisons making it possible for the prisoners to escape from prison did exist. However, in 1993, the legal opinion Vs (V/93) of the Civil Law Department of the VSRH was issued in response to the judgements cited above. In this legal opinion, the VSRH held that in cases of damage caused by the prisoner who managed to escape from prison ‘the causation should be interpreted restrictively in order to avoid expansion of the state’s liability for every criminal offence committed by a fugitive.’32 In the cited legal opinion, the VSRH held that the existence of the relevant causation between the damage caused by the prisoner and the acts of the state’s prisons had to be judged according to the merits of each particular case. It is obvious from the reasoning issued in the legal opinion cited above that the primary concern of the VSRH was not to overwhelm 31 32

Crnic´, 2002, pp 959–60. Ibid., pp 958–9.

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the state with claims for recovery of damages. Concerned with a possible flood of demands against the state, the VSRH has obviously decided ‘to close the floodgate.’ Therefore, it is quite uncertain whether the same line of reasoning would be applied in cases which do not involve the state as a defendant. Hence, as to the prospects of cattle raisers, market traders and butchers to recover from the cattle raiser who allowed an infected animal to escape from his/her premises, judging on the basis of the cases Vs, Rev–2203/91 of 30 December 1991, Vs, II Rev–117/82 of 6 April 1982, Vs, Rev–1812/89, Vs, Rev–2203/91, and Vs, Rev–276/91, the chances that the court will find that the sustained damage is proximately caused by the acts of the tortfeasor are quite substantial. However, as shown in the legal opinion Vs (V/93), the VSRH will not hesitate to use its discretionary power to interpret the causation question restrictively if policy considerations require. III Metalegal considerations Although the liberal, Croatian civil liability system is strictly based on the compensation principle, only those who have actually sustained damage and who are able to prove it are entitled to claim compensation. Therefore, the ‘certainty of damage’ requirement will often be a decisive factor in many pure economic loss cases. Furthermore, as the case law presented above reveals, the Croatian courts will exploit the causation requirement as a powerful controlling factor whenever it is required by some policy considerations, particularly the ‘floodgate’ argument. Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for its expenses incurred prior to the collision, and for its loss of earnings due to cancellation of the two cruises. I Operative rules The Shipwreck Company would recover the loss of profit from those responsible for the collision under the general rules on extracontractual liability, especially those laid down in Articles 1045, 1046

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and 1089 of the ZOO. However, this compensation will be limited to the amounts provided for in Article 391 of the Maritime Code. II Descriptive formants As already mentioned, any financial loss constitutes damage as defined in Article 1046 of the ZOO, and according to Article 1045, a person who inflicts damage on another is obliged to repair it unless he/she can prove that the damage has originated without his/her fault. According to Article 1089 of the ZOO, a victim is entitled to claim both regular damage and loss of profit. In this hypothetical case, the Shipwreck Company claims both regular damage (i.e. expenses uselessly incurred prior to the collision) and loss of profit (i.e. earnings due to cancellation of the two cruises). There is no doubt that the Shipwreck Company has sustained damage of a certain kind. In addition, there is no doubt that between the tortfeasor’s act and the sustained damage relevant causation does exist because the losses incurred by the Shipwreck Company are a direct consequence of the collision caused by the tortfeasor. The fact that the Shipwreck Company was not the owner of the passenger liner damaged in the collision should not prevent this company from claiming damages sustained as the result of the collision, because, according to Article 1046 of the ZOO, damage is defined as any decrease of someone’s patrimony and hindrance of its increase, regardless of the nature of the right violated by the wrongful act. Therefore, even a lessee who was prevented from acquiring profit by using leased property is entitled to claim compensation for the damage thus sustained. This position was confirmed by the VSRH. In the judgement Vs, Rev–2053/87 of 4 May 1988, the VSRH held that ‘the lessee who was prevented from using a leased immovable by an act of the third person is entitled to claim compensation from the tortfeasor for the damage thus sustained.’33 However, if the Shipwreck Company claims the loss of profit (i.e. earnings from two cruises), it will probably be prevented from claiming regular damages (i.e. expenses incurred prior to collision). In the judgement cited above, the VSRH ruled that the damages the plaintiff would be entitled to had to be calculated as the difference between the earnings which the plaintiff would have acquired, and the expenses that would have been incurred in the course of the 33

Crnic´, 2002, p 228.

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activities aimed at profit acquisition. Therefore, if the claimant had been compensated for the entire amount of the profit he/she would have acquired had the wrongful act of the third person not taken place, then the expenses incurred thereby would not be considered as useless. The position of the VSRH in the judgement Vs, Rev–2053/87 is completely in line with the full compensation principle, set out in Article 1090 of the ZOO. According to this principle, the victim must be placed in the situation in which he/she would have found himself/herself had a wrongful act or omission not taken place. Therefore, in the regular course of events, the profit of the Shipwreck Company would be calculated as the difference between earnings acquired from two cruises and expenses incurred in the course of the activities undertaken thereby. Therefore, the compensation which would have placed the Shipwreck Company in the situation in which it would have been, had the tortfeasor not caused a collision of the passenger liners, had to be calculated on the basis of the same ratio. Furthermore, it must be emphasised that according to the provisions of Articles 388 and 391 of the Maritime Code, extracontractual liability of the ship operator for the damages caused in the course of the ship’s exploitation is limited to the amount of at least 167,000 special drawing rights.34 However, if the ship operator has acted with intention or gross negligence, he/she will not be entitled to avail himself/herself of the limitation of liability provided in Article 391 of the Maritime Code.35 III Metalegal considerations One of the main features of the Croatian civil liability system is the full compensation principle according to which the victim has to be placed in a situation in which he/she would have found himself/ herself had the wrongful act or omission never taken place. Thus, as a matter of principle, by receiving compensation, the victim should not be placed in either a worse or in a better position than he/she would have found himself/herself had the wrongful act not occurred. 34

35

This limitation of liability applies to ships whose weight does not exceed 500 tons. If the ship’s weight exceeds 500 tons, the limit of liability of the ship operator will be increased in proportion to the tonnage of the ship; see Article 391, paragraph 1, subparagraph 2 of the Maritime Code. See Article 390 of the Maritime Code.

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In that regard, by calculating the amount of compensation, both lost profit and saved expenses should be taken into account. Quantitative limitations to the liability of some professionals, often foreseen by special legislation (e.g. the Maritime Code) but also by some international conventions, are prompted by the legislator’s desire to protect the basis of their activities. By being exposed to unlimited liability, these professionals would also be exposed to substantial financial difficulties. Bearing in mind the socio-economic impact of the activities of these professionals on everyday life, it is necessary to foresee some degree of risk allocation. Therefore, the legislator has subjected certain professionals to special liability regimes, which require the users of their services to bear a portion of the damage sustained. Imposing quantitative limitations to the liability of professionals makes the extent of their liability predictable and thus insurable. Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which time he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she looked after her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness. I Operative rules According to Article 1095 of the ZOO, a wife who lost her earnings while looking after her injured husband could probably not recover against the perpetrator of the accident in which her husband had been injured. II Descriptive formants As already mentioned,36 special provisions regarding the scope of compensation in the case of bodily injury and impairment of health, provided in Article 1095 of the ZOO, limit the scope of compensation to damage sustained only by the primary victim. Therefore, according to the strict interpretation of the cited provision, other

36

See Case 2.

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persons who have sustained some relational economic loss as a consequence of someone else’s bodily injury are not entitled to claim compensation for that loss. Although in the past the VSRH has occasionally awarded compensation even to those who had sustained relational economic loss due to someone else’s bodily injury, judging from the recent case law, when adjudicating cases of this sort, Croatian courts today strictly adhere to the wording of the provision of Article 1095 of the ZOO. Thus, in the judgement Vs, Rev-1180/97 of 28 February 2001, the VSRH held that a husband did not have the right to claim compensation for the loss of profit incurred while he was nursing his injured wife37 and such a position was reaffirmed in the judgement Vs, Rev-2097/99 of 14 October 1999 where the VSRH held that a mother did not have the right to claim compensation for the loss of earnings incurred while she was nursing her injured child.38 In the judgement Vs, Rev-4044/94 of 15 May 1996, the VSRH took a general position that indirect damage could be awarded only when expressly laid down by the law.39 The same line of reasoning was followed by some appellate courts. In the judgement Gzˇn-20/03 of 11 November 2003, the Court of Appeal in Zagreb decided that a father did not have the right to claim compensation for the loss of earnings incurred while he was nursing his injured child. Moreover, in the cited judgement, the Court of Appeal reasoned that the claimant had sustained indirect damage and that special legislative provisions regarding the scope of compensation in the case of bodily injury and impairment of health enabled compensation to be awarded only to the primary victim.40 The same position was taken by the Court of Appeal in Bjelovar, although with somewhat unexpected reasoning. In the judgement Gzˇ-2333/00 of 14 December 2000, this Court of Appeal held that a wife does not have the right to claim compensation for a loss of earnings incurred while she has been nursing her injured husband, because nursing an injured spouse constituted a moral act.41

37 38 39 40 41

Crnic´, p 1005. Ibid., p 247. Ibid., p 245. Ibid., p 350. Ibid., p 1005.

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III Metalegal considerations See Case 2 above. Case 6 – Auditor’s liability Donna audits the accounts of Caterpillar, Inc. inaccurately. Paul relies on these published accounts to launch a take-over bid. This is successful, but Paul then discovers that the accounts overestimated the value of the company and that the price he paid per share was twice their actual value. I Operative rules Paul would probably be able to recover damages against Donna on the basis of the general rules on extra-contractual liability, especially those in Articles 1045, 1046 and 1089 of the ZOO. II Descriptive formants The profession of auditing in Croatia is governed by a separate law, namely the Auditing Act (Zakon o reviziji).42 This came into force on 20 December 2005 and superseded the Auditing Act of 1992.43 Unlike the Auditing Act of 1992 which contained special provisions on the liability of the auditors,44 the Auditing Act of 2005 does not contain any special liability provisions. However, this new Auditing Act does not exclude such liability. Article 18 stipulates that an auditing company, or an independent auditor, must be insured against liability for damage caused to third parties. Therefore, it seems that the Auditing Act of 2005 does recognise the possibility of the liability of auditors towards third parties who rely on the audited accounts. However, since this Act does not contain any special liability rules, the liability of auditors is based on the general rules on extra-contractual liability. According to the general provisions on tortious liability, the plaintiff must establish the existence of a wrongful act, damage and causal link. On the other hand, since the 42 43 44

Zakon o reviziji (NN 146/05). Ibid., (NN 90/92). Article 11 of the Auditing Act of 1992 stipulated that an auditing firm that intentionally or negligently causes damage is obliged to reimburse any damages. According to the same Article, the liability of the auditing firms was limited up to a certain amount per audit.

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existence of fault constitutes a rebuttable presumption, the defendant must furnish a proof regarding his/her freedom from fault.45 There is no doubt that Paul, who because of the inaccuracy of the audited accounts paid an amount that was twice the actual value per share of Caterpillar, sustained damage and that the relevant causation between Donna’s auditing and Paul’s damage did exist. Therefore, Donna, who inaccurately audited the accounts, should be liable for the damage sustained by Paul.46 On the other hand, Donna might exculpate herself if she was able to prove that in performing the audit, she acted with due diligence – in other words, that she acted in accordance with the laws, auditing standards and code of professional ethics.47 However, in this case the issue of contributory negligence may be raised. According to Article 1092 of the ZOO, if the victim has contributed to the damage or to its scope, he/she will be entitled to compensation reduced in the proportion to his/her contribution to the damage. Consequently, Donna might argue that a person who launches a take-over bid should not rely solely on the audited accounts and that Paul, had he examined the overall financial situation of Caterpillar, Inc. with due diligence, could have realised the true value of its shares. If the court accepts this argument, Paul’s compensation may be reduced in proportion to his contribution to the damage. Judging on the basis of the published case law, so far the courts in Croatia have not ruled on facts similar to the ones described in this hypothetical case. Therefore, it is hard to predict whether the courts would accept this argument. III Metalegal considerations Although the liability of professionals is often limited in Croatian law, judging by the Auditing Act of 2005, auditors in Croatia are exposed to unlimited liability. The Auditing Act of 1993 did allow for quantitative limitations to their liability. It might be argued that this change in the liability system of auditors has been a reaction to certain international and domestic financial scandals which have taken place in this decade. The tightening of the liability system of

45

46 47

ˇ ulinovic´ Herc, Aktualna pitanja financijskog izvjesˇtavanja dionicˇ kih See E. C drusˇtva – odgovornost revizora (II.), Pravo i porezi, 2005, Vol. 3, p 43. ˇ ulinovic´ Herc, p 43. At an abstract level, the same conclusion was reached by C Ibid.

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auditors was obviously prompted by the legislator’s desire to strengthen public confidence in information issued by auditors. Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institute, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit, Inc. makes no further inquiry, so does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damage. He is now suing Credit, Inc. to recover his losses. I Operative rules Dieter would probably recover damages against Credit Inc. on the basis of the general rules on extra-contractual liability, especially those in Articles 1045, 1046 and 1089 of the ZOO. II Descriptive formants According to Article 1045 of the ZOO, one who causes damage to another is obliged to repair it, unless he/she can prove that the damage originated without his/her fault. Therefore, any person who by his/her own wrongful act causes damage to another will be obliged to compensate that damage regardless of the nature of the wrongful act. The wrongful act of the tortfeasor may represent a violation of any rights or interests of the victim. Therefore, even the tortfeasor’s unlawful interference with the contractual relationship of others represents a wrongful act. If one of the contracting parties has sustained certain damage from unlawful interference with a contractual relationship by a third party extraneous to the relationship, the contracting party will be entitled to claim compensation from the tortfeasor on the basis of the general rules on extra-contractual liability. In this hypothetical case, economic damage sustained by Dieter is caused by the unlawful interference of Credit Inc. with the contractual relationship between Dieter and First National Bank. Hence, Dieter may claim damages from Credit Inc. whose unfounded allegations prompted First National Bank to cancel Dieter’s loans. Of course, even in this case, the existence of causation

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might be in dispute. It may be doubtful whether adequate causal link exists between the acts of Credit Inc. and Dieter’s economic loss. This would be the question of fact and, according to the published case law, courts in Croatia have not ruled on facts similar to this case. However, it seems plausible to conclude that between Credit Inc.’s acts and Dieter’s damage, relevant causation does exist. III Metalegal considerations One of the main principles of the Croatian tort law system is the neminem laedere principle. According to that principle, anyone causing damage to another is obliged to recover it, regardless of the nature of inflicted interests and of the wrongful act. Any act that results in some kind of damage will be considered as a wrongful act. In that respect, even interference with the contractual relationship of others might constitute a wrongful act. Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by RAC when he was involved in a head-on collision with another automobile. The engine of the rented vehicle intruded into the passenger compartment causing severe and permanent injuries. Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. The severing of the car made it impossible to determine within a reasonable degree of certainty whether or not the vehicle had design, manufacturing and/or maintenance defects which proximately caused Nicholas’s injuries. Nicholas sues RAC for negligent spoliation of the evidence and tortious interference with a prospective civil action against Alfa Romeo. I Operative rules Nicholas would probably not succeed in the civil action against RAC for negligent spoliation of evidence and tortious interference with a prospective civil action against Alfa Romeo.

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II Descriptive formants The Croatian legal system does not provide specific remedies for negligent spoliation of evidence. Therefore, a person whose prospects in a civil action have been hindered by negligent spoliation of the evidence by a third party will have to rely on the general rules on civil law liability. One of the conditions for civil law liability is the existence of damage, and according to Article 1046 of the ZOO, patrimonial damage is a decrease of someone’s patrimony (regular damage) and hindrance of its increase (loss of profit). In this particular case, Nicholas incurred the loss of a chance of succeeding in a civil action against RAC, and under Croatian law, he could claim the loss (i.e., a pecuniary gain he would have acquired from Alfa Romeo had he succeeded with a product liability action against this manufacturer). Article 1089, paragraph 3 of the ZOO defines loss of profit as a gain which, in the usual course of events or according to specific circumstances, could have been reasonably expected and whose acquisition is hindered by the tortfeasor’s act or omission. According to Article 186, paragraph 1 of the Civil Litigation Act (Zakon o parnicˇ nom postupku),48 each party must substantiate his/her claim with the relevant facts and furnish evidence supporting these facts. Therefore, the plaintiff who claims loss of profit will have to prove that in the due course of events, or according to specific circumstances, he/she would have acquired a certain gain and that the acquisition of that gain has been hindered by the act or omission of the tortfeasor.49 In this particular case, in order to prove the existence of the loss of profit in a civil law action against RAC, Nicholas will have to prove that he would have succeeded in the civil action against Alfa Romeo. Moreover, according to the position taken in the Croatian doctrine, relevant facts must be established with certainty and not just probability.50 Since it would be very hard for Nicholas to prove that he would have succeeded with the product liability action against Alfa Romeo, especially bearing in mind that crucial evidence (i.e. severed front of the car) is missing, he would probably not be able to prove in civil proceedings against RAC that he would have acquired a certain pecuniary gain had RAC not committed the

48 49

50

Zakon o parnicˇ nom postupku (NN 53/91, 91/92, 112/99, 88/01, 117/03). See the judgement of the VSRH Vs, Rev–3813/94 of 24 November 1988 (Crnic´, 2002, p 227). See S. Triva, M. Dika, Grad-ansko parnicˇ no procesno pravo NN, 2004, p 480.

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wrongful act (i.e. spoiled possible evidence and thus interfered with a prospective civil action against Alfa Romeo). Therefore, since Nicholas may not be able to substantiate his claim with relevant facts and evidence, the court would probably dismiss his action. III Metalegal considerations One of the main principles of the Croatian civil litigation system is the rule that every litigant must substantiate his/her claim with relevant facts and furnish evidence supporting these facts. Therefore, in many civil liability cases, including those regarding pure economic loss, the outcome of the case will largely depend on the ability of the plaintiff to prove the relevant facts. Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having previously been employed by OMEGA and, while so employed, was a member of their occupational pension scheme. He was told by ALPHA that he was eligible to join the ALPHA occupational pension scheme. As an employee, he would, unless he wished to opt out, automatically become a member of the scheme and deductions would be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based upon a careless reading of the materials provided, the Broker vaunts the economic virtues and performances of OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and stay in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than that she would have received from ALPHA. Mrs. Smith sues the Broker. I Operative rules Although general provisions on extra-contractual liability, especially those provided in Articles 1045, 1046 and 1089 of the ZOO, in principle, enable Mrs. Smith to claim from the Insurance Broker the loss of profit sustained as a consequence of the Broker’s poor advice given to her husband, Mrs. Smith’s success in a civil law action against the Insurance Broker would largely depend on her ability to prove the existence of the facts which substantiate her claim.

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II Descriptive formants The amount of
100,000 that Mrs. Smith would have received had her husband joined the ALPHA occupational pension scheme instead of staying in the OMEGA Pension Fund, constituted loss of profit, as defined in Article 1089 of the ZOO. However, Mrs. Smith’s success in a civil action against the Insurance Broker would largely depend on her ability to prove two crucial facts: (1) That the Insurance Broker, had he/she read the relevant materials provided to him/ her correctly, would have realised the true value of ALPHA and OMEGA pension schemes; and (2) That the decision of her husband to opt out of the ALPHA scheme and to stay in the OPF scheme was influenced by advice given to him by the Insurance Broker. If Mrs. Smith convinced the court that the Insurance Broker’s advice to her husband was incorrect, and that her husband would have joined the ALPHA pension scheme had the Insurance Broker advised him to do so, she could probably have recovered against the Insurance Broker for the loss of profit sustained as a consequence of the Insurance Broker’s poor advice. If, on the other hand, the Insurance Broker could prove that his advice did not influence the decision of Mr. Smith regarding which occupational pension scheme to join, or that his/her advice had influenced Mr. Smith’s decision only partially, he/she would probably be excused from liability, entirely or in proportion to Mr. Smith’s contribution to the damage. III Metalegal considerations See Case 8 above.

2 Summary Judging from the legislative framework, Croatian tort law is generally permissive towards the recoverability of pure economic loss. As already mentioned, in defining the term ‘damage,’ Croatian tort law does not recognise codified categories of protected rights (interests), but instead, provides a definition of damage by way of a general clause, contained in Article 1046 of the ZOO. According to this definition, patrimonial (material) damage is a decrease of someone’s patrimony (regular damage) and hindering of its increase (loss of profit). This general clause, in conjunction with the full compensation principle, provided in Articles 1089 and 1090 of the ZOO, enables any economic loss to be compensated in principle, regardless

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of the nature of the invaded right (interest). Therefore, under Croatian tort law, even pure economic loss can be fully recovered in principle. However, this does not mean that, as far as pure economic loss is concerned, in Croatian law ‘anything goes.’ As already explained, limitations to the recoverability of pure economic loss are imposed by certain special statutory provisions. One of these is the provision of Article 1095 of the ZOO, according to which, in case of body injury or impairment of health, only consequential economic loss (i.e. the loss sustained by the primary victim) is recoverable. Those who have sustained pure economic loss as a consequence of someone else’s bodily injury or impairment of health, are not entitled to recovery. However, notwithstanding the provision of Article 1095 of the ZOO which clearly limits the scope of compensation to damage sustained by the primary victim, whenever they have felt that this was just and reasonable, the VSRH, but also some appellate courts, have awarded compensation even to secondary victims, i.e. those who have sustained some economic loss due to the bodily injury of the primary victim. When the courts felt that the number of claims for compensation of relational economic loss had increased, they interpreted the respective legislative provisions strictly on the basis of their wording, thus preventing a flood of claims by secondary victims. Further limitations to the recoverability of pure economic loss can be found among the general conditions for civil law liability. If these general conditions are not met, the victim will not succeed with his/ her claim. In that respect, causation must be emphasised as potentially the greatest obstacle for plaintiffs who claim compensation for pure economic loss. Due to the inability to establish the causal link between the tortfeasor’s wrongful act and sustained damage, plaintiffs are often precluded from recovering for pure economic loss. According to the theory of adequate causation, which is supported by jurisprudence and the majority of academic commentators in Croatia, only a certain type of act is to be regarded as the act which ordinarily, typically, or in the usual course of events, results in this type of damage. What is a typical, ordinary outcome of a certain wrongful act is always a question of fact. Therefore, in any given case, the court must establish that the damage sustained by the victim is a typical result of the tortfeasor’s act. By so doing, the courts will, as the case law suggests, decide each case on its own merits. The case law further reveals that in determining the existence of

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causation, the VSRH has frequently made use of its discretionary powers and has applied policy considerations to a considerable degree. It seems that in some cases, the VSRH used the issue of causation as a powerful tool for ‘controlling the tide.’ Whenever the VSRH felt that the pressure of claims for recovery of a certain type of economic loss was getting too high, it interpreted the issue of causation quite restrictively.51 Finally, in some cases, the plaintiff ’s claim for recovery of pure economic loss is precluded by virtue of procedural rules regarding the burden of proof. According to these rules, each party must furnish the proofs supporting his/her claim. In cases concerning loss of profit, the plaintiff will often not be able to prove with certainty that he/she would have acquired the profit, had the wrongful act of the tortfeasor not taken place. Consequently, the plaintiff will not succeed in his/her claim. Hence, in the majority of cases, recoverability of pure economic loss under the Croatian tort law is more a question of fact than of law. Recoverability of this type of loss depends to a large extent on the position of the courts regarding the existence of relevant facts. And, as case law suggests, this position may sometimes be influenced by some policy considerations, especially the so-called ‘floodgate argument.’

Bibliography Blagojevic´, B. and Krulj, V. (eds.) Komentar Zakona o obligacionim odnosima – knjiga prva, Beograd: Savremena administracija, 1980. Bussani, M., Palmer, V. V. The notion of pure economic loss and its setting, in Bussani, M. and Palmer, V. V. (eds.) Pure Economic Loss in Europe, Cambridge: Cambridge University Press, 2003. Crnic´, I. Zakon o obveznim odnosima s opsezˇnom sudskom praksom, Zagreb: Organizator, 2002. —— , Odsˇtetno pravo, Zagreb: Zgombic´ and Partneri, 2004. ˇ ulinovic´ Herc, E., Aktualna pitanja financijskog izvjesˇtavanja dionicˇ kih C drusˇtva – odgovornost revizora (II.)’, Pravo i porezi, 2005, Vol. 3. Gliha, I., Baretic´, M. and Niksˇic´, S., Pure Economic Loss in Croatian Law 51

However, it must be mentioned that the VSRH has jurisdiction in civil law cases only if the value of the disputed part of the lower court’s judgement exceeds the amount of HRK100,000 (approximately
13,500). Therefore, in numerous cases the issue of causation, as well as all other relevant issues, will be solved by lower courts, particularly appellate courts.

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in M. Bussani (ed.) European Tort Law Eastern and Western Perspectives, Berne, Brussels, Athens: Stämpfli Publishers Ltd., Sellier, Bruylant, Ant. N. Sakkoulas Publishers, 2007. Gorenc, V., Komentar Zakona o obveznim odnosima, Zagreb: RRiF, 2005. Klaric´, P. and Vedrisˇ, M., Grad-ansko pravo, Zagreb: Narodne novine, 2004. Perovic´, S. and Stojanovic´, D. (eds.) Komentar Zakona o obligacionim odnosima – knjiga prva, Kragujevac: Kulturni centar, Pravni fakultet Kragujevac, 1980. Stipkovic´, Z., Protupravnost kao pretpostavka odgovornosti za sˇtetu, Zagreb: Pravni fakultet u Zagrebu, 1991. van Boom, W. H., Pure Economic Loss: A Comparative Perspective, in van Boom, W. H., Koziol, H. and Witting, C. A. (eds.) Pure Economic Loss, Wien, New York: Springer, 2004. Vizner B., Komentar Zakona o obveznim (obligacionim) odnosima – knjiga druga. Zagreb, 1978. Triva, S. and Dika, M., Grad-ansko parnicˇ no procesno pravo, Zagreb: Narodne Novine, 2004.

Chapter 4

Quebec Professor Daniel Jutras

1 Introduction In Quebec, the regime of tort rests on a unitary general clause of liability which is found in Article 1457 of the Civil Code of Quebec (1994) (CCQ). Article 1457 reads as follows: 1457. Every person has a duty to abide by the rules of conduct which lie upon him, according to the circumstances, usage or law, so as not to cause injury to another. Where he is endowed with reason and fails in this duty, he is responsible for any injury he causes to another person, and is liable to reparation for the injury, whether it be bodily, moral or material in nature. He is also liable, in certain cases, to reparation for injury caused to another by the act or fault of another person or by the act of things in his custody. As can be seen from the open-ended text of this provision, there is no a priori obstacle to the compensation of pure economic loss in Quebec. In this respect, Quebec civil law is very much a ‘liberal’ regime of tort, within the taxonomy developed by M. Bussani and V.V. Palmer.1 It shares many of the key characteristics of regimes of tort in effect in France, Belgium, Greece, Italy and Spain. First, wrongdoing and unlawful behaviour are never understood or described in relational terms. Despite the use of the language of ‘duties’ in Article 1457 CCQ, Quebec Civil Law contains no conceptual equivalent to the restrictive, relational concept of the ‘duty 1

M. Bussani and V.V. Palmer (eds.) Pure Economic Loss in Europe (2003).

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of care’ which plays such a key role in Anglo-American common law. Any failure to meet the ordinary standard of ‘reasonable behaviour in the circumstances’ can be viewed as wrongful, and amount to a ‘fault’. Subsequent provisions of the Civil Code of Quebec establish a number of special presumptions: a rebuttable presumption of fault for harm caused by the ‘autonomous act of a thing’ (1465 CCQ); special regimes of liability for the owner of an animal and the owner of an immovable (1466 and 1467 CCQ); a rebuttable presumption of fault for harm caused by the minor under one’s authority (1459 CCQ); and a regime of vicarious liability of the principal for the wrongs of servants and agents (1463 CCQ). In this respect, Quebec Civil Law mirrors many jurisdictions that have an historical connection to French Civil Law. In addition, a special regime of liability for harm caused by a safety defect was introduced in 1994, as part of the new codification of Quebec Civil Law. Articles 1468 and 1469 CCQ were inspired by the development of manufacturers’ liability in Europe and in the United States over the second half of the twentieth century. On the other hand, Quebec civil law does not include a codified regime of liability for dangerous activities. Second, protected interests are nowhere defined or described in a limitative list. The concept of injury is understood broadly, at least within the formal text of the Code. It is not confined to interference with absolute rights. Rather, any negative outcome for the victim is a potentially compensable injury. The categories of injury (bodily, moral or material) serve to organize the set of possible injuries, but are not used to exclude any type of injury from the regime of tort. Third, as a result of the first two characteristics of the Quebec regime of tort, the notion of causation plays a key role in determining the overall scope of liability. Since there is no a priori restriction to notions of fault and injury, the only conceptual tool which can be used to keep tort liability within reasonable boundaries is the requirement that the injury be a ‘direct and immediate’ consequence of the wrongdoing. But the importance of this conceptual tool is matched only by its indeterminacy. In Quebec, causation is primarily a question of fact, or at most a mixed question of fact and law. Whatever constraints are imposed on the compensation of pure economic loss through the concept of causation, they normally operate beneath the surface, if at all. Two further characteristics of the regime of tort in Quebec civil law are worthy of mention.

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It may be useful to note that a strict rule of contractual observance has been in effect in Quebec since the introduction of the new Civil Code, so that neither party to a contract can opt for extracontractual liability where a contractual obligation has been breached (1458 CCQ). Nonetheless, the most common response to problems of pure economic loss is found in the extracontractual realm, and Quebec civil law has not expanded the domain of contract to address injury to third parties standing at the margins of the contract, except in relation to products liability. Finally, a vast number of injuries in Quebec are dealt with through social insurance schemes. In particular, work-related injuries and bodily injuries caused by motor vehicles are excluded from the operation of the general Civil Code regime of liability. All in all, the characteristics of Quebec civil law tie it to the liberal regimes identified by Bussani and Palmer. Both the approach of Quebec civil law and the solutions it offers to the problem of pure economic loss connect it to jurisdictions which find their roots in French law. Nevertheless, as I shall suggest in the conclusion, Quebec civil law is peculiar by virtue of its geographical and institutional coexistence with Canadian common law. Many judges and scholars in Quebec are aware of the limited protection given to pure economic loss in the common law. On the other hand, they have a strong tendency to assert the distinctiveness of Quebec civil law within the mixed Canadian legal environment. This cultural characteristic may have prevented the emergence of a more explicit and more careful consideration of legitimate objections to the compensation of pure economic loss. Case 1 – A cable case: the laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cut the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected black-out causes the loss of two days of production. Black has to lay off a number of workers hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay. I Operative rules The workers would possibly have a claim against Holly (under the regime of liability of employers at Art 1463 CCQ) as well as a claim

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against Holly’s employee, under the general extracontractual liability clause of Art 1457 CCQ. II Descriptive formants Extracontractual liability exists when three basic conditions are met: the defendant committed a fault (or, in this case, the defendant is responsible for a fault committed by another person under his supervision); the plaintiff sustained a material, moral or bodily injury; and the plaintiff ’s injury was the direct and immediate consequence of the defendant’s fault. Assuming the cable was cut negligently by Holly’s employee, the condition of fault is easily met. As for injury, it is not doubtful in Quebec law that the loss of production would be compensable damage for the Black factory, and liability for such injury has been imposed by the Court of Appeal of Quebec in similar circumstances.2 Furthermore, if Black had been liable to pay the workers’ salaries under the terms of a contract, this loss could also be recovered from Holly. But once it is shifted to the workers, the loss is perhaps more problematic, because it is less certain. Indeed, the workers were hired on a day-to-day basis, so it may be argued that they only lost the chance of being hired on those two days. Nevertheless, a lost opportunity is sometimes viewed as compensable harm in doctrine and jurisprudence. If there is evidence that there was no other reasonable basis upon which the workers could be denied employment on those two days, their loss would probably be deemed sufficiently certain. The question of causation is also in issue, because the workers must demonstrate that their loss is a direct and immediate consequence of the fault of the defendant (Art 1607 CCQ). The injury sustained by the workers is arguably an indirect damage (a ‘dommage par ricochet’), to the extent that it has arisen as a result of another injury to a more immediate victim, the Black factory. Over the course of the twentieth century, both the Supreme Court of Canada and the Court of Appeal of Quebec struggled with the question of whether liability can extend beyond the immediate victim,3 but the 2

3

Ferme Ré-Mi c. Joly [1974] CA 523; J.E. Construction Inc. v General Motors [1985] CA 275; Eastern Coated Papers v Syndicat des employés de métier d’Hydro-Québec, [1986] RJQ 1895 (CA). Congrégation des Petits Frères de Marie v Regent Taxi, [1929] RCS 650, La Reine v Sylvain [1965] RCS 164; Hôpital Notre-Dame de l’Espérance v Laurent [1974] CA

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approach is now pretty much settled. After the 1970s, scholars and judges explicitly recognized that the matter could not be approached through a formal definition of the scope of liability (‘Who is the immediate victim?’), and had to be addressed on a case-by-case basis, taking into account all circumstances. III Metalegal considerations The requirement that the loss be certain and a direct and immediate consequence of the fault obviously operate at the intersection of the notions of injury and causation. The dominant attitude in Quebec civil law is to define these notions broadly. Where liability is excluded, the result is represented as a feature of the particular circumstances of the case, rather than as the result of formal concepts circumscribing the scope of liability. The court’s answer to these questions is a question of mixed fact and law, and is therefore subject to limited appellate review. In assessing the strength of the causal link, and the certain or aleatory nature of the workers’ loss, it may be that judges take into account the contractual subtext. Where the third party’s injury can be tied to his failure to secure better protection from his contract with the immediate victim, the causal analysis may be stricter, and less favourable to the third party. Nevertheless, this contractual subtext is rarely addressed in explicit terms. Case 2 – The injured key-player Thomas is pivot on the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car and unable to play for three months. In the absence of its best player, the team (until then at the top of the league standings) drops to fourth place. This results in considerable losses for the team owners. Can the AllStars recover against the car driver?

543, [1987] 1 RCS 605 are all cases involving bodily injury to an immediate victim, leading to a claim for financial loss by a dependent third party. The Regent Taxi case established that the reference to injury ‘to another’ in Article 1053 of the former civil code (the Civil Code of Lower Canada) was not limited to the immediate victim. This position is no longer in doubt.

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I Operative rules The All-Stars club cannot recover from the driver of the car. All claims arising from bodily injuries caused by a motor vehicle are covered by the Automobile Insurance Act, which does not provide indemnification to the employer of the victim.4 II Descriptive formants The Automobile Insurance Act provides limited no-fault compensation to the immediate victim for all bodily injuries caused by motor vehicles. Specific categories of dependants, which do not include the employer, may also receive compensation for their loss under the Act. The Act explicitly excludes any other claim that could otherwise be brought under the ordinary Civil Code regime. If the source of Thomas’ injury was not a car accident, the AllStars might have a claim for their loss, assuming they could establish that the injury was certain, and that it was the direct and immediate consequence of the fault. That claim would be unlikely to succeed. It might be difficult to convince a Court that the decline in the performance of the team is directly or even factually attributable to the defendant’s fault. Professional sports teams are notoriously risky business ventures, and this would make it possible to argue that the injury is attributable to other causes, and that the causal connection is too speculative. Should the causal obstacles be overcome, the club’s loss most likely would be viewed as a loss of a chance (or the loss of an opportunity for profit), which would not necessarily yield compensation for every negative financial consequence of Thomas’ absence. Generally speaking, courts in Quebec have treated the loss resulting from the absence of a key participant in an economic enterprise as compensable injury in principle.5 Article 1611 of the CCQ provides that, in the assessment of damages, the wrongdoer owes compensation ‘for the amount of the loss [the victim] has sustained and the profit of which he has been deprived’. Looking at outcomes, however, one can see that courts often found that the economic decline was attributable to causes other than the fault of the defendant.

4 5

See Article 83.57 of the Automobile Insurance Act, LRQ c. A–25. See for example Elliott v Entreprises Côte-Nord [1976] CA 584.

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Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape of the infected animal obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; (b) the market traders who have lost their supplies; and (c) the butchers who have not been able to conduct their business during this time. I Operative rules There is no judicial decision addressing similar facts, although there is at present litigation in Canada regarding economic loss caused to cattle raisers by the closing of borders. This followed the discovery in Canada of a cow infected with BSE. Quebec civil law provides no clear answer to this question. II Descriptive formants The matter would most likely be argued under the general clause of Article 1457 CCQ, so that the plaintiff would have to establish the fault of the cattle raiser, an injury suffered by each of the categories of plaintiffs, and a direct and immediate connection between the fault and each injury. Although the owner of an animal is strictly liable for the injury that the animal has caused (Art 1466 CCQ), a review of the reported cases under this provision shows that this liability normally attaches to injury caused by an act of the animal. It is far from certain that the strict liability regime would be applicable to circumstances in which the harm is imputable to a condition of the animal, as opposed to a positive harmful act of the animal. Should the strict liability regime not be applicable in those circumstances, the plaintiff would have to prove that the cattle owner failed to act as a reasonable person in allowing an infected animal to escape from his premises. The more difficult question, of course, is whether a Court would find a causal link between the fait générateur (be it the act of the animal or the fault of the cattle raiser) and the injuries sustained by the three categories of plaintiffs. The standard, again, is whether these losses are direct and immediate. There is no consistent

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analytical grid in this respect. Some judgements focus on whether the injury is within the range of foreseeable outcomes. Others focus on the effect of intervening events that make the injury too remote. Others consider the sequential occurrence of a chain of injuries, and exclude the secondary or ‘indirect’ loss (dommage par ricochet). There is no way to predict what causal effect a court would give to the decision of the authorities to close the cattle and meat market.6 III Metalegal considerations The fact that catastrophic liability might arise from a minor wrongdoing has not been used as a reason to limit extracontractual liability until now. The so-called ‘floodgates’ argument and concerns over indeterminate liability are simply not part of the conceptual arsenal of judges in Quebec. There is no way to assess what role these concerns may be playing underneath the jurisprudential surface. Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for its expenses incurred prior to the collision, and for its loss of earnings due to cancellation of the two cruises. I Operative rules Shipwreck might recover for its expenses or for its loss of earnings, but this would not be decided under ordinary rules of Quebec civil law. Maritime collisions of this sort are governed by ‘federal maritime law’ in Canada, which is essentially drawn from ordinary rules of tort law in effect in Anglo-Canadian provinces. Thus the restrictive common law rules on the recovery of pure economic loss would apply here, and might prevent the compensation of these losses.

6

In one decision, the Court of Appeal of Quebec concluded that the contamination of an entire herd by a single unhealthy animal was an indirect loss. The decision rests primarily on the cattle raiser’s obligation to mitigate his loss, and finds that the failure to act to mitigate the loss is the determinant cause of the contamination of the herd. Boutin c. Paré [1959] BR 459.

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II Descriptive formants It is appropriate here to refer to the report prepared by the other Canadian reporter, and to rely on his assessment of the likelihood of success of such a claim in Canadian common law. Generally speaking, while traditional English common law would tend to view such claims unfavourably, Canadian common law has adopted a noncategorical, flexible approach to the determination of the duty of care in cases of pure economic loss. At least one Supreme Court of Canada decision would appear favourable to the plaintiff in the present case, if the lease of the ship effectively places Shipwreck in the same position as the owner would be vis-à-vis the wrongdoer.7 III Metalegal considerations The notion of a federal maritime law was developed by the Supreme Court of Canada in International Terminal Operators v Miida.8 The primary justification for the decision to place maritime collisions beyond the reach of the diverse provincial legal regimes in effect in Canada was to achieve a measure of uniformity across the nation in this domain. The fact that Quebec civil law thus became irrelevant to those disputes was, and remains, a controversial subject. Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which time he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she looked after her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness. I Operative rules The woman would probably be indemnified for her loss of earnings, but the indemnity would not normally exceed the market value of the services she provided to the immediate victim.

7

8

Cie des chemins de fer nationaux du Canada c. Norsk Pacific Steamship Co. [1992] 1 RCS 1021. ITO – International Terminal Operators Ltd c. Miida Electronics Inc. [1986] 1 RCS 752.

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II Descriptive formants Quebec civil law no longer draws a formal distinction between the immediate victim and third party victims (victimes par ricochet). Until the introduction of the Civil Code of Quebec in 1994, the list of dependants who could claim for their loss in the case of death of the immediate victim was circumscribed by Article 1056 of the Civil Code of Lower Canada.9 The scope of liability to dependants in the case of non-fatal injury to the immediate victim was a matter of debate in Quebec over the first half of the twentieth century. Nowadays, there is no categorical restriction to the list of those who are allowed to claim, whether the injury is fatal or not. Dependants, next-of-kin and any other party may be able to recover for the material or moral injury that they sustain as a result of the bodily injury of the immediate victim, if they can show that their loss is a direct and immediate consequence of the loss. The case of spouses who provide assistance to the immediate victim is not a problematic one. Of course, spouses owe each other ‘succour and assistance’ under Article 392 CCQ, but it is now well settled in Quebec that wrongdoing which makes this obligation more onerous for the victim’s spouse may give rise to compensation. As a result, the woman’s loss of earnings would fall within the domain of material injury, and would be a priori compensable. This said, the judge would take account of the fact that the immediate victim could have chosen to pay a stranger for the home care that he required. In that case, the husband would have been able to claim compensation for that injury from the perpetrator of the accident. Should the loss of earnings of the wife exceed what her husband could have obtained under that heading, it would be possible to argue that the wife’s obligation to minimise her loss requires her to return to work and to hire a stranger instead. How that argument would fare in front of a judge is difficult to predict, but Quebec judges have often respected the choices made by victims in terms of post-injury care, even where those turn out to be more costly than other reasonable care decisions. Unless there is a great discrepancy between the wife’s loss of earnings and the cost of those services provided by a stranger, judges might choose to ignore the difference.

9

Only spouses, ascendants and descendants could seek compensation for their loss. This provision was thought by many to be anomalous within a civil law tradition, and found its origin in a late nineteenth century English statute.

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III Metalegal considerations The fact that the cost of medical and personal assistance to the victim is a compensable loss does not determine who should be claiming it. In the vast majority of cases, those costs will be claimed by the immediate victim, because the calculation of the quantum of damages for massive injuries is highly routinized in personal injury legal practice, and the cost of care is a standard heading. The immediate victim has a right to be indemnified for this loss, even where the care is provided gratuitously by a third person (Art 1608 CCQ). As a result, it is rare that the financial loss consequential upon the decision to provide assistance to the victim is claimed by the care provider. In short, the wife’s loss of earnings might be compensated as a transferred loss (from the immediate victim to the care provider), but if the husband has already claimed and obtained the cost of care, it is highly unlikely that the wife’s loss of earning would be compensated as well. Case 6 – Auditor’s liability Donna audits the accounts of Caterpillar, Inc. inaccurately. Paul relies on these published accounts to launch a take-over bid. This is successful, but Paul then discovers that the accounts overestimated the value of the company and that the price he paid per share was twice their actual value. I Operative rules Assuming Donna acted negligently, or in a manner inconsistent with ordinary standards of accounting practice, there is no doubt that Paul would be able to recover for his economic loss under Article 1457 CCQ. II Descriptive formants If Paul is Donna’s client, and contracted for Donna’s services, Donna’s liability for her negligent performance of professional accounting services is easily established. If Paul is not Donna’s client, the result is the same. Donna’s failure to act in accordance with ordinary standards of accounting practice amounts to a fault under Art 1457 CCQ. Paul’s financial loss falls within the domain of material injury. Most of the recent

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decisions in this area conclude that it is not necessary for Paul to establish that Donna was aware that he might consult and rely on the inaccurate accounts.10 The scope of liability of such professionals is often determined through a consideration of the issue of causation. In a number of cases, accountants escape liability when it is argued that the inaccurate accounts were not the primary factor in the victim’s unfortunate financial decision. Similar arguments can be made when the victim failed to rely on her own knowledge and expertise to avoid the injury, or when it is shown that the accounts contained qualifications or a clear indication of their restricted purpose. III Metalegal considerations This area is perhaps the one where the two legal traditions of Canada have clashed on pure economic loss in the most visible manner. The issue of financial advisors’ liability to third parties was addressed by the Supreme Court of Canada in two elaborate decisions in 1977 and in 1997.11 In those decisions, the Supreme Court emphasized the significance of detrimental reliance as a condition of liability, and explicitly addressed concerns over indeterminate liability. In subsequent publications and cases, Quebec jurists rejected both ideas as unnecessary transplants from the common law, and expressed confidence that the notion of causation would be sufficient to control inopportune expansions of the scope of extracontractual liability.12 Furthermore, in opposition to fears of indeterminate liability, Quebec judges and scholars have emphasized the importance of protecting the public’s confidence in the sustained quality of services provided by professionals. The ability to secure an exclusive domain of professional expertise yields greater duties to the public.

10

11

12

See, for example, Caisse Populaire de Charlesbourg c. Michaud [1990] RRA 531 (Court of Appeal of Quebec). Haig v Bamford, [1977] 1 RCS 466 and Hercules Management v Ernst and Young, [1997] 2 RCS 165. Caisse Populaire de Charlesbourg c. Michaud [1990] RRA 531 (Court of Appeal of Quebec); Garnet Retallack and Sons Ltd v Hall and Henshaw Ltd [1990] RRA 303 (CA); and J.L. Baudouin and P. Deslauriers, La responsabilité civile (2003) at para 1595.

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Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institute, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit, Inc. makes no further inquiry and thus does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damages. He is now suing Credit, Inc. to recover his losses. I Operative rules Dieter might succeed in a contractual claim against First National Bank. He would also have a claim against Credit, Inc., under the general liability clause of Article 1457 CCQ. II Descriptive formants There are two distinct avenues of recourse, in this case. First, Dieter has a contractual relationship with the First National Bank. Whether or not the contract of loan contains clauses to this effect, the Bank owes Dieter an obligation to act in good faith in the performance and extinction of the contract (Article 1375 CCQ). It would be possible to argue that the Bank’s decision to cancel all of Dieter’s loans on the basis of information that it did not verify is in breach of the obligation of good faith. At the very least, the Bank should have given Dieter an opportunity to respond to the allegations before canceling the loans. As for Credit Inc., its actions can constitute wrongdoing on a number of fronts. Disseminating false information about Dieter’s credit could constitute defamation, which falls within the general liability clause of Article 1457 CCQ.13 Defamation is not an intentional tort in Quebec, and can be committed through the negligent communication of false information which interferes with Dieter’s right to his reputation, including his financial reputation as the owner of a small business. Acting on an anonymous phone call without making any further inquiries is easily characterized as negligent. Dieter’s economic damages would be compensable, provided 13

Under some circumstances, the dissemination of information that is true, but nonetheless embarrassing, can also violate the personality rights of the victim.

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he can show that they are the direct and immediate consequence of the communication of false information about his financial situation. Credit Inc. might argue that the Bank’s decision to cancel Dieter’s loans constitutes a new and independent cause which broke the chain of causation, but this argument would be unlikely to succeed if the Bank’s decision was predictable in the circumstances. Credit Inc.’s actions might also be in violation of Article 37 of the Civil Code of Quebec, which regulates the activity of establishing a file on another person. In particular, information gathered by an organization such as Credit Inc. may not be communicated to a third party without the consent of the person concerned. One might assume here that Dieter consented to such disclosure in his contract with the Bank. Nevertheless, Article 37 CCQ also provides that the person who collates information on another person in such a file may not, when using the file, invade the privacy or damage the reputation of the person concerned. Credit Inc.’s actions would thus most likely engage its liability. III Metalegal considerations In the North American market more generally, mistakes in the collation of the information have occurred, and the negative rating that results from those mistakes can have devastating financial consequences for the victim. As a result, credit rating has given rise to a significant number of liability claims, both against credit rating agencies, and against financial institutions which provide inaccurate information to those agencies, thereby affecting negatively the credit of the individual concerned. The collation and communication of personal information is now subject to a variety of codal and statutory rules, which severely constrain the activity, and establish administrative mechanisms for the individual to obtain the correction of mistakes which may remain in the files containing personal information.14 Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by RAC when he was involved in a head-on collision with another 14

See the Act respecting the protection of personal information in the private sector, LRQ. c. P–39.1. See also Articles 35–41, CCQ.

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automobile. The engine of the rented vehicle intruded into the passenger compartment causing severe and permanent injuries. Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. The severing of the car made it impossible to determine within a reasonable degree of certainty whether or not the vehicle had design, manufacturing and/or maintenance defects which proximately caused Nicholas’ injuries. Nicholas sues RAC for negligent spoliation of the evidence and tortious interference with a prospective civil action against Alfa Romeo. I Operative rules As noted above, in cases of injuries caused in a motor vehicle accident, the victim has no civil claim for compensation. The Automobile Insurance Act provides fixed indemnities which Nicholas could obtain regardless of the cause of the crash. II Descriptive formants Whether or not RAC negligently spoiled the evidence so as to make it impossible to determine the cause of the crash, Nicholas sustains no loss in relation to his bodily injuries. The Act provides compensation for bodily injuries and all consequential losses without regard to fault, and all civil claims arising therefrom are prohibited. No claim against RAC could succeed on that basis. Nevertheless, Nicholas may have sustained material injury in the crash (such as damage to his personal effects in the car). Also, Alfa Romeo and RAC’s failure to provide a safe car, if it can be established, would amount to a breach of warranty in the contract of lease. Assuming, therefore, that a successful claim could have been made if evidence of a safety defect were available, the question of an action against RAC nevertheless arises. There are no judicial decisions directly on point, so it is difficult to predict how a claim for negligent spoliation of the evidence and tortious interference with a prospective civil action would be addressed in Quebec. It is unclear that the severing of the front of the car would constitute a fault, unless there is evidence that RAC and its employee should have known that this would impede

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Nicholas’ prospective civil action. Should that be the case, Nicholas would still have to prove that he has lost something of value as a result of the spoliation of the evidence. If the result of the prospective civil action is uncertain, then Nicholas’ loss may not be compensated. III Metalegal considerations The closest basis for prediction in this case is the type of claim made against legal counsel for negligent performance of services which deprives a client of the opportunity to succeed in a prospective civil action. In those cases, courts are reluctant to compensate the plaintiff without evidence that the action was virtually certain to succeed. Claims of this sort normally require a trial within the trial to ascertain the strength of the victim’s lost opportunity to litigate. That said, the analogy may not be appropriate, because claims against one’s legal counsel proceed in contract, and rest on the lawyer’s promise of careful performance of his or her legal services. Here, RAC’s negligence cannot give rise to a contractual claim. Given the uncertainties of civil litigation, it is likely that a court would find Nicholas’ loss too uncertain to be compensated. Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having previously been employed by OMEGA and, while so employed, was a member of their occupational pension scheme. He was told by ALPHA that he was eligible to join its occupational pension scheme. As an employee, he would, unless he wished to opt out, automatically become a member of the scheme and deductions would be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based upon a careless reading of the materials provided, the Broker vaunts the economic virtues and performances of OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and stay in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than she would have received from ALPHA. Mrs. Smith sues the Broker.

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I Operative rules Mrs. Smith might have a claim against the Broker under the general liability clause of Article 1457 CCQ. II Descriptive formants There is no contract between Mrs. Smith and the Broker, although there was one between Mr. Smith and the Broker. Had the claim been brought by Mr. Smith, the Broker would most likely be held liable for the financial injury which was the consequence of the Broker’s negligent services. Financial advisors are subject to the ordinary standard of diligence. The negligent provision of financial services is therefore an obvious basis of liability in contract. The Broker would probably argue that Mr. Smith had enough expertise of his own to make an appropriate assessment of the comparative virtues of the two plans, but in the circumstances of this case, the Broker would not be fully exonerated, although a court might allocate a portion of the loss to Mr. Smith’s own faulty decision (Article 1478 CCQ). The position of the beneficiary is more complex. The pension plan is easily characterized as a contract for the benefit of a third person, and Mrs. Smith is thus contractually linked to OPF. On the other hand, it is much less certain that she is contractually linked to the Broker. It might be argued that since she is the ultimate and obvious beneficiary of the pension plan, both Mr. Smith and the Broker also treated her as the beneficiary of the Broker’s financial advice. In that case, Mrs. Smith can sue the Broker in contract, and recover for her economic loss as a foreseeable loss which was caused directly by the Broker’s negligence. Her husband’s possible fault has no impact on her claim, which is distinct and autonomous. This said, it is unlikely that a court would recognize this as a case of stipulation for the benefit of a third party, because the financial advice is not given to Mrs. Smith, but to Mr. Smith. Thus Mrs. Smith’s claim would have to be made on the basis of the general liability clause of Article 1457 CCQ. The Broker’s careless reading of the materials amounts to negligence. Mrs. Smith’s inferior position under the Omega plan also constitutes a loss. The only issue is whether the causal connection between the fault and the injury can be established to the satisfaction of the Court. If one assumes that Mrs. Smith was the named beneficiary regardless of the plan chosen by Mr. Smith, her claim could well succeed, unless the court is con-

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vinced that Mr. Smith would have opted for the Omega plan regardless of the advice provided by the Broker. Again, that is a question of fact which remains within the discretion of the trial judge. III Metalegal considerations The provision of financial advice is now subject to special statutory regimes which provide for severe oversight and compulsory insurance.15 Recent financial scandals in North America, including Quebec, combined with an explosion of the market for financial advice to produce heightened administrative and judicial scrutiny of this sector.

2 Conclusion Judging from these nine hypothetical cases, it can be concluded that there is neither formal nor categorical exclusion of pure economic loss as a compensable loss in Quebec civil law. Leaving aside the exclusion of certain types of accidents from the operation of ordinary rules of civil law (motor vehicle accidents, maritime collisions), the most likely approach to those problems is to treat the loss as compensable in principle, and to control the scope of liability through an examination of the intensity of the causal link between the fault and the injury. That said, none of the hypothetical cases can be resolved with total confidence, because this assessment of the causal connection is open-ended, fact-based, and unpredictable. The judge’s decision in this respect addresses questions of fact, and questions of mixed fact and law. It is not reviewable by an appellate court in the absence of a manifest error. The most that can be said is that in each case, there are no rules excluding this type of harm from the list of compensable injuries. The plaintiff has a fair chance of success in every case. Among the factors that increase the likelihood of a finding that causation is established, one must take account of the presence of an intention to cause harm on the part of the defendant. Legitimate detrimental reliance might also be a factor, although Quebec courts explicitly reject it as not determinative. Professionals who hold themselves out to the public as experts in the provision of certain types of 15

See for instance the Act respecting the distribution of financial products and services, RSQ c. D–9.2.

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services (accountants, lawyers, notaries, etc) are also more likely to be held liable to parties beyond their immediate clients, especially where the category of professionals holds a statutory monopoly over the provision of those services. The Canadian context is distinctive in another way: Different systems of private law operate within each of the Canadian provinces, and the Province of Quebec is the only civil law jurisdiction within the Canadian state. The civil law regime of Quebec is subject to scrutiny when appeals are brought from the Quebec Court of Appeal to the Supreme Court of Canada, where nine judges (only three of whom are from Quebec) oversee the development of law and jurisprudence across the nation. The Supreme Court therefore deals with cases from common law provinces, where pure economic loss exists as a formal conceptual category, and cases from Quebec, where by the Court’s own admission pure economic loss does not exist as a formal conceptual category.16 In such a mixed environment, it is not surprising that one might notice a tendency to resist unwise transplants and facile comparative assumptions. The jurisprudence and doctrine on cases involving pure economic loss is therefore an important terrain for the assertion of the distinctiveness of each tradition. The Supreme Court’s common law jurisprudence has perhaps become more flexible in part as a result of the interplay of civil law and common law on this issue. On the other hand, there is little sign that the Supreme Court’s civil law jurisprudence is taking into account the underlying reasons of policy and doctrine which make pure economic loss such a problematic category in the common law. In civil law doctrine and in jurisprudence generally, there is no concerted effort to examine the logic of a broad compensation of pure economic loss in relation to principles of property, or in relation to the frontier between contract and tort, or in relation to the natural consequences of a principle of privity of contract. There is no evidence of a careful consideration of the negative effects of indeterminate liability to third parties, or of the possible inefficiencies of the compensation of pure economic loss in relation to insurance. In short, local knowledge and jurisprudence within Quebec is 16

See, for example Cie des chemins de fer nationaux du Canada c. Norsk Pacific Steamship Co. [1992] 1 RCS 1021 and Spar Aerospace Ltd v American Mobile Satellite Corp. [2002] 4 RCS 205; N. Vézina, Préjudice matériel, corporel et moral: variations sur la classification tripartite du préjudice dans le nouveau droit de la responsabilité (1994) 24 Revue de Droit de l’Université de Sherbrooke, 181.

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all but silent on the issue of pure economic loss, and on the underlying concerns expressed by common lawyers on this matter. Given the mixed context of Canadian law, it is not unlikely that this outcome is at least in part caused by the desire to protect Quebec civil law from unwarranted transplants of the common law’s conceptual categories.

Bibliography Baudouin, J. L. and P. Deslauriers, La responsabilité civile (7th edition), Volume 1: Principes généraux, Volume 2: Responsabilité professionnelle, Cowansville, Editions Yvon Blais, 2007 Gaudet, S. La perte de chance: un miroir aux alouettes?, in B. Moore, Mélanges Jean Pineau, Montréal, Editions Thémis, 2003, p 269. Jutras, D. Civil Law and Pure Economic Loss: What are we missing?, (1986– 1987) 12 Canadian Business Law Journal 295. —— , ‘Le tiers trompé (à propos de l’affaire Bail Ltée), (1993) 72 Revue du Barreau Canadien 28. Perreault, C. Qui est autrui? (1966) Revue du Barreau 368. René, J. C. ‘La responsabilité professionnelle des comptables: l’état de la jurisprudence québécoise à la lumière des préoccupations de la Cour suprême du Canada’, in J. L. Baudouin and P. Deslauriers (eds.), La responsabilité civile des courtiers en valeurs mobilières et les gestionnaires de fortune: aspects nouveaux, Cowansville, Editions Yvon Blais, 1999, p 169. Rousseau, S. ‘La responsabilité civile de l’analyste financier pour la transmission d’information fausse ou trompeuse sur le marché secondaire des valeurs mobilières’ in J. L. Baudouin and P. Deslauriers (eds.), La responsabilité civile des courtiers en valeurs mobilières et les gestionnaires de fortune: aspects nouveaux, Cowansville, Editions Yvon Blais, 1999, p 35.

Chapter 5

The United States Professor David Gruning 1

1 Introduction Sometimes compensation for economic losses presents no special difficulty for American tort law. For example, this is the case when economic losses follow an intentional tort whose goal was to produce that very harm, as when the tortfeasor sought the tort victim’s economic loss through a battery or the destruction of the victim’s property. Recovery is equally certain in the more usual case when economic losses are the unintended result of an intended physical harm to the victim’s body or belongings. With more difficulty, and with some ambivalence, American law has accommodated the tort of intentional interference with contract rights when it produces economic loss.2 When the tortfeasor is merely negligent, however, compensation for purely economic losses only occurs when those losses can be characterized by courts as dependent or ‘parasitic’ on a harm or event that tort law clearly compensates. For example, a finding of negligence that causes harm to the plaintiff ’s body or property can 1

2

William L. Crowe Distinguished Professor of Law, Loyola University, New Orleans. The research assistance of my student Kim Sassine, and the financial support of the Louisiana Outside Counsel Health and Education Fund and of Loyola University are gratefully acknowledged. An earlier version of this chapter was presented to the XVII Congress of the International Academy of Comparative Law in July 2006, Utrecht, The Netherlands, and published at 54 Am. J. Comp. L. 187 (2006). The American Society of Comparative Law kindly granted permission to republish. American Law Institute, Restatement (Second) of Torts 766–766B. The comments to these sections summarize the history and limits of this intentional tort in the view of the Institute. The principal limitation is that intentional interference must also be ‘improper’ to be actionable.

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support an award of damages that are economic in character, such as future lost wages or profits, even when the primary harm gives rise to much less in damages than the economic losses it happens to trigger. On the other hand, even clearly demonstrable economic losses that cannot be characterized as dependent on physical harm to the plaintiff are generally not compensated. This result is generally known as the economic loss rule, the rule being that tort law does not compensate financial losses independent of physical harm caused by another’s negligence.3 In the next section, this chapter on negligently caused economic4 loss sketches the landscape of American tort law in general, putting the economic loss rule in context. Next it analyzes nine fact situations or hypotheticals under American law to which the economic loss rule might apply. In the fourth section, the Report discusses the policies invoked to support or to reject the application of the rule.5 3

4

5

A preliminary point should be made on terminology. A minor difficulty in reporting on pure economic loss is what to call it. Many do, of course, use that label. See, e.g., Mauro Bussani and Vernon Valentine Palmer (eds.), Pure Economic Loss in Europe (2003). Others recommend the term ‘commercial loss,’ since all legally compensable losses are economic; for such observers most human interactions are properly described in economic terms. Miller v United States Steel Corp., 902 F.2d 573 (7th Cir. 1990) (Richard Posner, J.). Still others prefer ‘free-standing economic loss,’ Eileen Silverstein (1999) ‘On Recovery in Tort for Pure Economic Loss’, 32 U. Mich. J.L. ReF. 403; ‘stand-alone,’ Dan B. Dobbs, Country Report, United States, in J. Spier (ed.), The Limits of Expanding Liability: Eight Fundamental Cases in a Comparative Perspective (1998), p 211 ‘financial loss,’ Mauro Bussani, Vernon Valentine Palmer, and Francesco Parisi (2003) ‘Liability for Pure Financial Loss in Europe: An Economic Restatement’, 51 Am. J. Comp. L. 113; and simply ‘pecuniary loss’ or ‘pecuniary harm.’ Restatement (Second) of Torts § 766–766C. This Report does not insist on any particular usage. A distinction can also be drawn between direct and indirect economic loss. Direct economic loss describes the decline in value of a thing sold due to some defect in it, which occurs in product liability cases, indirect economic loss, the broader term, refers to consequential losses such as lost profits. Some writers distinguish between cases involving ‘nonstrangers,’ where the parties encounter each other through a contract or a series of contracts, and those involving ‘strangers,’ where there is no such prior connection. This Report focuses on indirect economic losses. Currently the American Law Institute is in the process of creating a Restatement of the Law Third, including torts. The Restatement (Second) of Torts was a single project under the guidance largely of a single reporter, Professor Prosser. The current project is being conducted in several parts under the guidance of several reporters. The current project includes a restatement of Economic Torts and Related Wrongs. So far, several drafts have appeared. Restatement (Third) of Torts: Liab. for Econ. Loss § 8 (Preliminary Draft No. 1, 2005). Restatement (Third) of

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2 The background of American tort law American tort law is in theory not one, but many, as each member state may decide its own private law, including tort, as it sees fit. In fact, each state must decide its own private law – no other political actor is competent as a matter of principle to do so. It follows that one state is not bound to pay heed to the tort law of another state. In principle, therefore, each state may decide its tort law independently, and thus may decide whether to adopt, reject, or modify the economic loss rule. In practice, however, the states do not move in complete independence on this or any tort issue. There are several reasons for this. First, almost all of the states opted early in their existence to adopt the English common law, thus all begin from a shared source.6 Torts: Liab. for Physical Harm § 3, 7 (Proposed Final Draft No. 1, 2005). Restatement (Third) of Torts: Econ. Torts and Related Wrongs (Preliminary Draft No. 2, 2006). Restatement (Third) of Torts: Econ. Torts and Related Wrongs (Council Draft No. 1, 2006). Restatement (Third) of Torts: Econ. Torts and Related Wrongs (Council Draft No. 2, 2007). Restatement (Third) of Torts: Econ. Torts & Related Wrongs (Preliminary Draft No. 3, 2007). The literature examining the issues raised by the projected Restatement has already begun. For example, a substantial symposium, The Dan B. Dobbs Conference on Economic Tort Law, has been published in the Arizona Law Review, and it included contributions by participants in the project, such as its reporter, Mark Gergen, and other experts in the field. Ellen M. Bublick (2006) ‘Economic Torts: Gains in Understanding Losses’, 48 Ariz. L. Rev. 693, Dan B. Dobbs (2006) ‘An Introduction to Non-Statutory Economic Loss Claims’, 48 Ariz. L. Rev. 713, Mark P. Gergen (2006) ‘The Ambit of Negligence Liability for Pure Economic Loss’, 48 Ariz. L. Rev. 749, Anita Bernstein (2006) ‘Keep It Simple: An Explanation of the Rule of No Recovery for Pure Economic Loss’, 48 Ariz. L. Rev. 773, Jean Braucher (2006) ‘Deception, Economic Loss and Mass-Market Customers: Consumer Protection Statutes as Persuasive Authority in the Common Law of Fraud’, 48 Ariz. L. Rev. 829 (2006), Robert L. Rabin (2006) ‘Respecting Boundaries and the Economic Loss Rule in Tort’, 48 Ariz. L. Rev. 857, Helmut Koziol (2006) ‘Recovery for Economic Loss in the European Union’, 48 Ariz. L. Rev. 871, Ellen S. Pryor (2006) ‘The Economic Loss Rule and Liability Insurance’, 48 Ariz. L. Rev. 905, Ian Ayres and Gregory Klass (2006) ‘New Rules for Promissory Fraud’, 48 Ariz. L. Rev. 957, and Michael D. Green (2006) ‘Apportionment, Victim Reliance, and Fraud: A Comment’, 48 Ariz. L. Rev. 1027. Since the project is not complete, an evaluation of its effect on the American economic loss rule would be premature and impractical. 6

David Gruning (2005) ‘Vive la différence? Why No Codification of Private Law in the United States?’ 39 La revue juridique Thémis 153, 160–61. The influence of the common law was pervasive, and even the lone civil law state, Louisiana, was profoundly influenced by decisions and scholarship from the other states. See generally, Francesco Parisi, Liability for Negligence and Judicial Discretion (1992) pp 290–338.

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Because of this shared source, one could maintain that American private law, as common law, continued to transcend state boundaries. Serious discussion on this point was still evident well into the twentieth century.7 In addition, following the decision of the United States Supreme Court in Swift v Tyson in 1842,8 a federal common law was developed and administered by the federal courts. This decision was overturned in 1938,9 which rendered any federal common law vestigial after that point. Nevertheless, during the late nineteenth and early twentieth centuries, when key developments in tort law took place, the federal courts, including the Supreme Court, played an important role in articulating ‘the’ common law of tort. The existence of a common source of law is not the only unifying force at play. In addition, the institution of the United States Supreme Court can also serve to unify tort law across state lines. As a result of the overruling of Swift, since 1938 the Court has not acted in any sense as a de jure final interpreter of tort law as can the highest courts in unitary jurisdictions, such as France. Nevertheless, because of the prestige enjoyed by the Supreme Court, when it does address an issue in tort it can have a huge impact. Indeed, it has had just such an impact in the development of liability for pure economic loss. That influence has occurred particularly in admiralty cases, over which the federal courts have jurisdiction. In fact, the starting point for discussion of the economic loss rule remains the decision of the Supreme Court in Robins Dry Dock.10 The opinion by Justice Holmes, consisting of six paragraphs, is concise and characteristically dense. A vessel that had been chartered to a plaintiff was delayed in dry dock due to the fault of defendant, the repair company. Holmes offered a variety of reasons why the plaintiff could not recover: the plaintiff had no contract with the defendant; the plaintiff was not a third-party beneficiary to the contract between the defendant and the vessel owner; the plaintiff had no Because Louisiana’s private law is unique within the union, its tort law and its position on the economic loss rule may be unrepresentative of American tort law; thus, its position on pure economic loss is not analyzed here. 7

8 9 10

See, e.g., Herbert Pope (1911–1912) ‘The English Common Law in the United States’, 24 Harv. L. Rev. 7. 41 U.S. (16 Pet.) 1, 10 L.Ed. 865 (1842). Erie R.R. v Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Robins Dry Dock and Repair Co. v Flint, 275 U.S. 303 (1927). See, e.g., Herbert Bernstein (1998) ‘Civil Liability for Pure Economic Loss under American Tort Law’, 46 Am. J. Comp. Law 111.

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property interest in the vessel – and ends by asserting that for all the dry dock knew, the plaintiff did not exist. Yet the possibility that someone, whether the owner or the charterer, would lose the use of the vessel during the two-week delay must have been not only foreseeable but foreseen. Holmes himself summarized the opinion neatly in a letter to his English correspondent, Frederick Pollock: I have just finished a fairly interesting case in which a time charterer of a vessel tries to get damages from a dry dock company, for negligent delay in repairs per quod the charterer lost a fortnight of valuable time. I have no doubt that he can’t recover, but I have not yet heard from my brethren. Perhaps I should explain that there was no demise of the ship, that the owner remained in possession and put the vessel into dry dock without reference to the charter, having a right to do so by the terms of the instrument.11 The opinion now stands for the proposition that pure economic loss is generally not recoverable in tort and the case has frequently been cited in that connection by numerous state and federal courts.12 A third major reason there is not truly a distinct law of tort for each state is the existence of the American Law Institute (ALI) and its work in restating the law. An ALI restatement is an organized series of rules, justified by comments and illustrations drawn mostly from state and federal cases. Because of the reputation enjoyed by the ALI among judges and practitioners and because restatement ‘black letter’ rules are accompanied by thorough research, they are often used and cited. In this fashion, an ALI restatement of a rule can confirm that it is accepted by all or nearly all of the states. When such a degree of acceptance does not exist, the restatement makes that clear as well. Even when the several states disagree on a rule, the restatement formula can frame discussion of the problem going forward.13 Sometimes a restatement and a decision of the Supreme Court in fact work together. Thus, the basic non-liability rule of Robins Dry 11

12 13

Mark DeWolfe Howe (ed.), II Holmes-Pollock Letters: The Correspondence of Mr. Justice Holmes and Sir Frederick Pollock, 1874–1932, 208 (2nd edn 1961) (citation omitted). Westlaw’s keycite service retrieved 769 citations of the decision on August 1, 2005. This is the case for § 552 of the Restatement (Second) of Torts, which is applicable to the sixth hypothetical infra.

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Dock is now found in § 766C of the Restatement (Second) of Torts, further demonstrating that the case has had an influence outside maritime law as such. It reads: One is not liable to another for pecuniary harm not deriving from physical harm to the other, if that harm results from the actor’s negligently: (a) causing a third person not to perform a contract with the other, or (b) interfering with the other’s performance of his contract or making the performance more expensive or burdensome, or (c) interfering with the other’s acquiring a contractual relation with a third person. § 766C means that without physical harm to either the person or the property of the plaintiff – some physical impact – the plaintiff does not recover for defendant’s negligence. Thus articulated, the Restatement’s economic loss rule has often acted as the starting point for analysis of the economic loss problem since 1979, when the second torts Restatement was approved by the American Law Institute.14 With this background in mind, the Report can analyze the hypotheticals.15 Case 1 – A cable case: the laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cut the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected black-out causes the loss of two days of production. Black has to lay 14

15

The Restatement (Second) of Torts was completed in 1979. The original Restatement of Torts was published in stages. Volumes I and II in 1934, Volume III in 1938, and Volume IV in 1939. Another way in which American tort law is not truly fifty distinct regimes of civil responsibility has to do with the American system of legal education. Torts is a mandatory subject of study in the first semester of law study at the vast majority of American law schools, in the first year at almost all of them. With similar uniformity, the text typically used in such classes is an American-style casebook that samples cases from numerous states, in comparatively few classrooms is the tort law of one state taught or even emphasized, instead, the law is presented as a kind of shifting consensus on a given issue, with individual rules labeled as majority and minority when that is possible.

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off a number of workers hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay. I Operative rules The workers have no remedy against Holly, whose employee negligently cuts the cable. This is a straightforward application of section 766C(b) of the Restatement (Second) of Torts. Here, Holly is the first party who is not liable and the other, or second party, is Black. The workers are those who find, as in section 766C(b), that Black’s performance of his contracts with them has been interfered with by Holly, who will nevertheless not be liable for that interference. II Descriptive formants A case whose facts are close to the hypothetical is Byrd v English,16 which is frequently cited in this area. In that case, the plaintiff ’s printing plant was shut down due to the defendant’s negligence. Here, the plant owner could not recover lost profits stemming from the interruption of electrical power due to the defendant’s negligence. The court reasoned that to allow recovery would subject the defendant to a disproportionately large liability. If the plaintiff could recover, then the plaintiff ’s customers could do so likewise, based on interference with their contracts with the plaintiff.17 Another case in which workers’ wages were at issue is Stevenson v East Ohio Gas Co.18 There, defendant stored liquefied natural gas on 16

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117 Ga. 191, 43 S.E. 419 (Ga. 1903). But see George A. Hormel and Co. v Maez, 92 Cal. App 3d 963, 155 Cal. Rptr. 337 (1979) (drunk driver disrupts power to factory, shuts down equipment; plaintiff factory recovers property damage and wages factory paid employees who were unable to work during the shutdown). Parties in Black’s position can recover upon a showing of physical injury to Black or Black’s property. Thus, when defendant’s negligence caused a loss of power that led to the loss of a crop of mushrooms, the mushroom grower was permitted to recover because the court found some physical damage to the plaintiff ’s property to which to link the financial loss caused by the lost crop. Newlin v New England TeL. and TeL. Co., 316 Mass. 234, 54 N.E.2d 929 (1944). Newlin is the basis for Illustration 5 to 766C of the Restatement (Second) of Torts. Both this case and Byrd v English are analyzed in the influential article by Fleming James, Jr. (1972) Limitations on Liability for Economic Loss Caused by Negligence: A Pragmatic Appraisal, 25 Vand. L. Rev. 43, 46 n. 45. 73 N.E.2d 200 (Ohio Ct. App 1946).

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its premises. The gas caught fire, and explosions continued to occur for several days, causing many businesses in the vicinity to shut down, including that of the plaintiff ’s employer. The plaintiff sued for the loss of eight days’ pay. The court rejected the claim, relying on the economic loss rule. The court reasoned that to rule for the plaintiff would allow an unacceptably large number of claims against the defendant.19 Case 2 – The injured key-player Thomas is pivot on the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car and unable to play for three months. In the absence of its best player, the team (until then at the top of the league standings) drops to fourth place. This results in considerable losses for the team owners. Can the AllStars recover against the car driver? I Operative rules The team as employer does not recover for the economic losses that flow from the injury of its star player by the driver whose negligence caused his car to hit the player. An employer does not enjoy a cause of action for the loss of the services of his employee when that loss is caused by the defendant’s negligence.

19

The court also considered physical injury as a way in which such claims might be reasonably limited. To extend protection beyond those with ‘personal injuries or physical property damage . . . to every one who has suffered an economic loss’ could produce an ‘appall[ing]’ result. The class of plaintiffs would extend to those whose contracts with plaintiff ’s employer would be delayed, the utility supplying power to the company would lose its profit, the salesman selling the employer’s product would lose his commission, and so on. Among all such non-deserving claims, those for lost wages were only a ‘small fraction.’ To compensate all of them would be unthinkable. Ibid., at 203–4. Stevenson relied on Robins Dry Dock, demonstrating the influence of the Supreme Court’s maritime decisions on state tort law. Ibid., at 202, The influence was also noted by the dissent in State of Louisiana Ex re Guste v M/V Testbank, 752 F.2d 1019 (5th Cir. 1985). See also Local Joint Executive Bd., Culinary Workers Union, Local No. 226 v Stern, 651 P.2d 637 (Nev. 1982) (hotel employees cannot recover lost wages from negligent party responsible for fire).

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II Descriptive formants The driver has negligently interfered with the contract between the team and the team member. Section 766C(b) of the Restatement applies again. Physical injury to Thomas does not take a claim by Thomas’s employer out of the ambit of section 766C(b). In an earlier stage of the common law, the plaintiff would have had a stronger case. Initially, the standard labor relationship was that of master and servant, including the relationship of master and apprentice. The master, and subsequently the employer, benefited from the actio per quod servitium amisit. That is, the master was compensated for the loss of the services of an employee or servant that the defendant had caused through his negligence. Mid-twentieth century authority still maintained that the employer could bring the action.20 The employer, however, gradually lost this cause of action.21 Any recovery now by an employer must be considered either vestigial or exceptional.22 A recent application of this rule occurs in Castle v Williams, an Illinois case.23 There, defendant driver negligently injured a key employee of the plaintiff in a collision. The trial court dismissed the action, and the appellate court affirmed. That court noted the obsolete character of the employer’s action for pecuniary harm resulting from physical injury to an employee.24 A Connecticut court has also

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Prosser, for example, states that while generally there is no cause of action for negligent interference with contractual relations, negligent injury of a servant is the ‘one conspicuous exception.’ William L. Prosser, Handbook of the Law of Torts (4th edn 1971), p 938. Ronen Perry (2004) ‘Relational Economic Loss: An Integrated Economic Justification for the Exclusionary Rule’, 56 Rutgers L. Rev. 711, n. 17. Dan B. Dobbs, The Law of Torts (2000), p 1283, (‘employer’s stand-alone economic loss not actionable as an interference with the employer’s contract with her employee or otherwise’). 338 Ill.App3d 708, 788 N.E.2d 421, 273 Ill.Dec. 112 (IlL. Ct. App 4th Dist. 2003). See also, Phoenix Professional Hockey Club, Inc. v Hirmer, 502 P.2d 164 (Ariz. 1972) (defendant’s negligence renders plaintiff ’s goalkeeper unable to play; plaintiff ’s suit for payments to a substitute is dismissed). The court relied on § 316(2) of the Restatement (Second) of Agency: ‘A person who tortiously causes physical harm to an agent not a servant is not thereby liable to the principal for the harm thereby caused to him.’ The Reporter’s Note to that section provides history of the action, and the connection with workmen’s compensation legislation, which may exceptionally grant employers some remedy.

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treated the employer’s claim skeptically.25 Likewise, it seems clear that an employer may not recover for lost profits for the same reasons.26 Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape of the infected animal obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; (b) the market traders who have lost their supplies; and (c) the butchers who have not been able to conduct their business during this time. I Operative rules It seems fairly clear that none of these plaintiffs would succeed in American law, although no case on all fours has been found. II Descriptive formants The English case on which the hypothetical seems based, however, has been cited by influential American cases. The English case is 25

Lane v Jones, 2006 WL 2536578 (Conn. Super. 2006) (unpublished opinion). While the case appears to have been decided on alternative grounds, the court there noted: The essence of the [employer’s] action is to assert an independent cause of action to recover for the loss of his employee who was allegedly injured by the act of third-party tortfeasor. [The employer] alleges that he lost profits and the services of his employee due to the defendant’s negligence. While Connecticut has not directly addressed the question of whether an employer can maintain a cause of action against a third-party tortfeasor for loss of services or profits resulting from an employee’s injuries due to the tortfeasor’s negligence, courts in other jurisdictions have answered this question in the negative. See Castle v Williams, 338 Ill.App3d 708 (2003) (the employee’s injury not reasonably foreseeable because it is too remote and indirect from the negligent act); see also, Herrick v Superior Court, 188 Cal.App3d 787 (1987) (citing unending possible chain of economic consequences resulting from a negligent act, possible proliferation of fraudulent claims, remoteness of injury and public policy factors).

26

Morton v Merrillville Toyota, Inc., 562 N.E.2d 781 (Ind. App, 3d Dist., 1990).

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Weller & Co. and Another v Foot and Mouth Disease Research Institute.27 There, the defendant research institute permitted infected cattle to escape. The most influential American case citing Weller is People Express Airlines, Inc. v Consolidated Rail Corp., decided in 1984 by the Supreme Court of New Jersey.28 There the court ruled in favor of liability, and did not apply the economic loss rule, noting that the only difference between the success and failure of a claim for economic losses is the ‘fortuitous occurrence of physical harm or property damage, however slight.’29 People Express noted with apparent approval that in Weller ‘the court found a duty of care to cattle owners against the risk of allowing the spread of foot and mouth disease, but not to cattle auctioneers whose businesses were also adversely affected.’30 Since People Express is one of the cases least friendly to the economic loss rule, this is perhaps significant. The cattle hypothetical also resembles important cases ruling that remoteness – a lack of proximate cause – precludes the defendant’s liability. In Petitions of Kinsman Transit Co.,31 the negligence of defendants caused one vessel on a river to break free of its moorings, to strike and free another vessel, then to knock down a bridge, and finally to form a dam with the second vessel and the downed bridge. That dam then caused an icy flood over the river’s banks for three miles above the bridge. Naturally, all traffic on the river was blocked. One of the plaintiffs was a dealer in wheat who was unable to gain access to it and to the market because of the mess.32 Nevertheless, he

27 28

29 30

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[1966], 1 QB 569. 100 N.J. 246, 495 A.2d 107 (1984) (defendants’ negligence caused explosions on airport premises and hence cancellations of the plaintiff ’s flights and the shutting down of the plaintiff ’s reservation system). Ibid., at 109. People Express Airlines, Inc. v Consolidated Rail Corp., 194 N.J.Super. 349, 356, 476 A.2d 1256, 1260 (1984). This is the decision below affirmed by the New Jersey supreme court. Another high-water mark for recovery is J’Aire Corp. v Gregory, 598 P.2d 60 (Cal. 1979), where a lessee of space in an airport was permitted to recover economic losses caused by the airport’s contractor’s delay in completing repairs during which the lessee’s business was closed. J’Aire, while still authority in California, is even taught as an outlier. George C. Christie, James E. Meeks, Ellen S. Pryor and Joseph Sanders, Advanced Torts: Cases and Materials 176 (2004). 338 F.2d 708 (1964) (Friendly, J.) (Kinsman I), cert. denied sub nom. Continental Grain Co. v Buffalo, 380 U.S. 944, 85 S.Ct. 1026, 13 L.Ed.2d 963 (1965); and 388 F.2d 821 (2d Cir. 1968) (Kaufman, J.) (Kinsman II). Kinsman II, supra. Judge Kaufman’s opinion relied on Robins Dry Dock. Ibid., at 825.

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was unable to recover for his economic losses. Likewise, in Pruitt v Allied Chemical Corp., the defendant’s negligence caused a spill of the chemical kepone, causing economic losses to buyers and resellers of shellfish. The court applied the economic loss rule in their case, since their losses were just too ‘indirect.’33 Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for its expenses incurred prior to the collision, and for its loss of earnings due to cancellation of the two cruises. I Operative rules If the party has no more than a right to use a vessel, he will not recover. If, however, the party has a proprietary interest in the ship, he will recover. The distinction is characterized as one between a right of use and an interest in the vessel itself, a time charter and a demise charter respectively. II Descriptive formants This hypothetical tracks rather closely the result in Robins Dry Dock, and the Robins rule is comfortably applied in the maritime context. For example, in City of Joliet v Southern Towing Co,34 the defendant’s barge struck a bridge and the city alleged that it expended funds as a result to modify traffic signs and signals and to pay police

33

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Pruitt v Allied Chemical Corp., 523 F.Supp 975 (E.D. Va. 1981). While the court applied the economic loss rule to those who bought from fishermen for resale, it as much as acknowledged that the distinction between such plaintiffs and the owners of boats, tackle and bait shops, and marinas, to whom the rule was not applied, was nearly arbitrary. Ibid., at 980. The exception made for the fishermen themselves has long been followed by the courts. Later, the Fourth Circuit seems to make clear that Pruitt is not the usual result. Adams v Star Enterprise, 51 F.3d 417, 423 (4th Cir. 1995). From another angle, American courts might reach the same results in this case for a different reason than proximate cause by focusing on the nature of the losses experienced, which were purely financial in character. Alternatively, the courts could find that the defendant here owed no duty to these particular plaintiffs. 387 F.Supp2d 911 (N.D. Ill. 2005).

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to handle road traffic. After a straightforward review of recent case law, the court applied Robins Dry Dock. Because the city did not own the bridge, or have any proprietary interest in it, the court granted the defendants’ motion for summary judgement.35 35

In City of Joliet, the court stated: ‘Under Robins, physical injury to a proprietary interest is a prerequisite to recovery of economic damages in cases of unintentional maritime tort. Reserve Mooring, Inc. v. American Commercial Barge Line, LLC, 251 F.3d 1069, 1072 (5th Cir.2001), in the instant case, plaintiff argues that even though it does not own the bridge, its claims are not barred by Robins because it has a “proprietary interest” in the bridge. Plaintiff, however, does not challenge defendants’ statement of the elements required to establish a proprietary interest: (1) actual possession or control of the damaged property; (2) responsibility for repair of the damaged property; and (3) responsibility for maintenance of the damaged property. IMTT-Gretna v Robert E. Lee SS, 993 F.2d 1193, 1194 (5th Cir.1993). Plaintiff admits that it is not in possession of the bridge and does not have any responsibility for its repair. Plaintiff argues that it nonetheless has a proprietary interest in the bridge because it “provides governmental services to the bridge and is responsible for traffic regulation and control on roadways within [Joliet], including those providing access to the bridge,” and because under the Agreement it provides “maintenance of municipal streets that includes those locations.” . . . ‘[P]laintiff attempts unsuccessfully to distinguish the recent decision in Re American Milling Co., 270 F.Supp2d 1112 (E.D.Mo.2003), in which the district court rejected the City of St. Louis’s claims for reimbursement for police and ambulance services and lost tax revenue caused by a river accident that damaged the property of third parties. The American Milling court denied the city’s damage claims because, although the city was responsible for the repair and maintenance of the levee and wharf, the collision did not damage any property owned by the city. Ibid., at 1114. The court also held that “whatever costs are associated with the use of the City’s emergency personnel were incurred voluntarily, and again, under Robins Dry Dock and its progeny are not recoverable as pure economic damages lacking any physical damage to property or proprietary interest.” Ibid. To the extent that municipal response services were involved in American Milling, it is substantially similar to the instant case, and plaintiff ’s claims here fail for many of the same reasons expressed by the Missouri court. ‘Finally, plaintiff attempts in vain to avoid the preclusive effect of Robins by arguing that the Supreme Court’s holding “is really about a pragmatic limitation on the rule of foreseeability” in maritime torts, and that the damages to plaintiff caused by the collision were foreseeable. Although plaintiff does not cite to any such cases, some circuits have rejected the notion that Robins creates a bright-line rule, and have occasionally invoked more traditional tort factors such as foreseeability, proximate cause, and remoteness when analyzing damage claims by parties lacking a proprietary interest. See, e.g., Marine Navigation Sulphur Carriers, Inc. v Lone Star Industries, Inc., 638 F.2d 700

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The authority of Robins Dry Dock for the broad application of the economic loss rule has been under some pressure, however. For example, an Alaska statute provides that municipalities that must divert municipal services – plainly a form of economic loss – to clean up an oil spill are not barred by the economic loss rule from recovering such losses from those responsible for the spill. Such legislation is understood to be an attack on the economic loss rule in the maritime context, and so far it seems to be successful.36 Another example of the whittling of Robins Dry Dock has occurred in a setting closer to the original facts. In Venore Transportation Co. v M/V Struma,37 the court permitted a time charterer to recover from the defendant the consideration it had had to pay the owner while the vessel was out of service due to defendant’s negligence. The time charterer was bound by the charter party to pay for the vessel regardless, and so was not affected. Of course, this recovery is one for economic loss, yet is only sufficient to compensate plaintiff for losses suffered, not for profits lost while the vessel was out of service. Even so, the decision drew a sharp dissent that insisted even this departure from the economic loss rule should be rejected. While some erosion of the rule in the maritime context has occurred,38 it nevertheless seems clear that American courts would (4th Cir.1981); Petitions of Kinsman Transit, 388 F.2d 821 (2nd Cir.1968). The foreseeability or “Kinsman” approach, however, has been soundly rejected by several courts. See, e.g., Louisiana ex rel. Guste v M/V TESTBANK, 752 F.2d 1019 (5th Cir.1985) (en banc). The plaintiff does not explain why Kinsman should apply to the instant case, and fails entirely to address courts rejecting Kinsman or recent district court cases from the Seventh Circuit, such as Great Lakes, which have adhered to Robins. Robins therefore bars plaintiff ’s claims because the plaintiff lacks a proprietary interest in the bridge.’ Ibid., at 914–15 (footnote omitted). 36

37 38

See, e.g., Kodiak Island Borough v Exxon Corp., 991 P.2d 757 (Alaska 1999) (Ak. Stat. 46.03.822, ‘Strict Liability for Release of Hazardous Substances’). 583 F.2d 708 (4th Cir. 1978). See, e.g., Rogers Terminal & Shipping Corp. v Int’l Grain Transfer, Inc., 672 F.2d 464 (5th Cir. 1982). Here, the owner of a floating grain elevator was allowed to recover from a negligent defendant who collided with it for loss of use and lost profits for the 207 days of necessary repairs. The interesting fact is that the floating elevator itself was under a bareboat charter, and it had been assumed that under Robins Dry Dock and section 766C of the Restatement, such an arrangement would give the charterer a sufficient interest to elude the economic loss rule as well. That is the logical consequence of the opinion, and while there could be potentially two plaintiffs who might potentially recover economic losses, it would be somewhat odd to hold that the owner, even under a bareboat charter, lacked a sufficient proprietary interest to assert a claim for physical harm to property belonging to him, including economic loss.

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still apply it to this hypothetical case. Thus, there do not seem to be fundamental doubts as to the vitality of the economic loss rule in the American maritime law context.39 Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which time he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she looked after her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness. I Operative rules It seems that under American tort law, a wife cannot recover for profits she could have earned while she cared for her husband. The accepted measure of her damages is the value of the services she has rendered to her husband, not the profits she failed to earn from her business. II Descriptive formants This hypothetical adds a wrinkle to the loss of consortium action a wife may usually bring on her own behalf arising out of the injury of her husband. That action includes the loss of love, companionship, sexual life, and comfort that she derived from the relationship. Such interests belong to a wife in her – or to a husband in his – own right. They do not depend on the rights of the other spouse, nor do they derive from the other spouse’s rights in any sense. § 693 of the Restatement recognizes such rights of the uninjured spouse.40 39

40

Thomas J. Schoenbaum, Admiralty and Maritime Law § 11–12 and 14–17 (4th edn 2004). § 693. Action by One Spouse for Harm Caused by Tort Against Other Spouse (1) One who by reason of his tortious conduct is liable to one spouse for illness or other bodily harm is subject to liability to the other spouse for the resulting loss of the society and services of the first spouse, including impairment of capacity for sexual intercourse, and for reasonable expense incurred by the second spouse in providing medical treatment. (2) Unless it is not possible to do so, the action for loss of society and services is required to be joined with the action for illness or bodily harm, and recovery for loss of society and services is allowed only if the two actions are so joined.

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A case from the Rhode Island Supreme Court in 1956 illustrates this issue. There, both wife and husband were injured through the defendant’s negligence in an automobile collision. The husband sought to recover profits he had not been able to earn as a salesman while he cared for his wife. The court ruled that he could be entitled to her cost of care, a sort of reimbursement for his efforts, but not for profits he lost in his business endeavors. His recovery is measured and limited by the objective value of his services, and is not set by what it cost him to provide them.41 Presumably, the care-giving spouse is expected to use his or her business profits to pay a third person to care for the injured spouse, unless those profits are less than the value of giving care. Courts sometimes do not distinguish between loss of consortium and compensation for giving care to the injured spouse.42 Other courts do not permit recovery at all for the care-giving spouse, reasoning that the action for the cost of care is an element of damages that belongs to the injured spouse alone. To permit the wife here to allege it also would constitute an unacceptable danger of double recovery.43 Others do permit actions for recovery of compensation for care of an injured spouse, but are cautious to limit recovery to the value of the nursing services.44

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Young v Cantz, 125 A.2d 125, 183 (R.I. 1956). ‘However, the weakness in the plaintiff ’s case on this phase was that his loss of profits after the week he was laid up was not the proximate result of the accident. After that week he stayed at home more or less for the next two and one-half years to do the housework and take care of his wife. He deliberately chose to act as housemaid and nursemaid rather than as salesman, in these circumstances he cannot substitute loss of profits as the cost of such services. However, for taking care of his wife and doing the housework he was entitled to be paid what it would reasonably cost to hire such work to be done, but he failed to offer any proof of that cost.’ See, e.g., Dyer v United States, 551 F. Supp 1266 (W.D. Mich. 1982) ($1,000 to compensate both elements after discount for comparative fault). Rodriguez v Bethlehem Steel Corp., 12 Cal.3d 382, 115 Cal.Rptr. 765, 525 P.2d 669 (1974) (wife quit job to care for injured husband). Depouw v Bichette, 833 N.E.2d 744, 746 (Ohio. App 2005), citing Cincinnati Omnibus Co. v Kuhnell, 9 Ohio. Dec. Rep. 197 (1884). Depouw permitted the impaired spouse to recover in her action wages lost by the care-giving spouse, her husband. ‘Considering the small amount of time Mr. Depouw was off work and the fact that Bichette [the defendant] was responsible for Mrs. Depouw’s injuries and her need for nursing care, we cannot say that the trial court erred in permitting the jury to consider Mr. Depouw’s lost wages without limiting the award to the cost of home health care.’ Ibid., at 748.

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III Metalegal considerations This seems to be a category of pure economic loss that has not much occupied American courts. Their primary concern with the type of fact pattern seen in this hypothetical is the avoidance of double recovery. In sum, no general recovery of lost profits in this area is recognized in American tort law. Case 6 – Auditor’s liability Donna audits the accounts of Caterpillar, Inc. inaccurately. Paul relies on these published accounts to launch a take-over bid. This is successful but Paul then discovers that the accounts overestimated the value of the company and that the price he paid per share was twice their actual value. I Operative rules The rule on recovery in such a situation varies among the states, and Paul’s success will depend on which state’s law governs. We can take the rules in order of decreasing the burden on the plaintiff, which tends to parallel the path of historical development. II Descriptive formants The oldest approach, and the toughest, is to require that plaintiff be in privity with the accountant, that is, that the audit be conducted for the plaintiff under terms typically established through contract. This is usually an insurmountable barrier. The intermediate approach permits plaintiff to recover if the accountant knows that the audit is intended for the plaintiff or for a class of persons to which plaintiff belongs. Again, in this fact pattern, it seems unlikely that plaintiff can recover. The third and most plaintiff-friendly approach permits recovery if the plaintiff ’s reliance upon the published audit is reasonable and is foreseeable by the accountant. While the facts do not flesh out the possibility, it is certainly foreseeable that a party in Paul’s position would rely on the audit. The first approach was applied in Ultramares Corp. v Touche, a New York case from 1931.45 There a borrower engaged accountants 45

Ultramares Corp v Touche, 255 N.Y. 170, 174 N.E. 441 (1931) (Cardozo, J.) See Jay M. Feinman, Liability of Accountants for Negligent Auditing: Doctrine, Policy, and Ideology, 31 Fla. St. U. L. Rev. 17 (2003), for recent discussion of the issues.

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to audit the borrower’s business and they certified that the borrower enjoyed approximately $1m in available assets. But most of the surplus was fictitious receivables and inflated inventory. The plaintiff claimed to have lent to the borrower on the strength of the inaccurate audit and to have incurred losses because of it. In a memorable phrase, the court denied liability for negligence: ‘If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.’46 On the other hand, the same court granted recovery to a party in the position of the lender in Ultramares when a clear limit had been passed. In Glanzer v Shephard,47 a seller engaged the defendant to weigh beans to be sold to the plaintiff. Because the defendant weighed the beans negligently, the plaintiff overpaid. The plaintiff sued to recover the amount of the overpayment from the defendant, and succeeded. The court justified the result because, although the defendant and the plaintiff were not in privity, nevertheless the whole purpose of the defendant’s action was to induce the plaintiff to behave in a certain way. Because the defendant clearly knew this, the court noted: ‘We do not need to state the duty in terms of contract or of privity. Growing out of a contract, it has nonetheless an origin not exclusively contractual. Given the contract and the relation, the duty is imposed by law.’48 This relationship of such a defendant to such a plaintiff is sometimes described as quasi-privity.49 Here, because Paul is a hostile purchaser of Caterpillar, and certainly not in a contractual relationship with Donna the auditor, it is unlikely that the audit was in any sense prepared for him. Therefore, the economic loss rule under this privity test will block Paul’s action against Donna. The intermediate approach took several decades to develop. First, the Ultramares rule came under criticism from other courts and the

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Ibid., at 444. Glanzer v Shephard, 233 N.Y. 236, 135 N.E. 275 (1922). Ibid., at 239, 135 N.E. 275, 276. ‘The defendants, acting, not casually nor as mere servants, but in the pursuit of an independent calling weighed and certified at the order of one with the very end and aim of shaping the conduct of another. Diligence was owing, not only to him who ordered, but to him also who relied.’ Ibid., at 242, 135 N.E. 275, 277. See Bernstein, supra n. 10, at 116.

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academy in succeeding decades.50 In addition, the tort of negligent misrepresentation also made its way into American jurisprudence. As a result, the second Restatement of Torts expanded the narrow formulation of negligent misrepresentation in the original Restatement in a revised section 552. Entitled ‘Information Negligently Supplied for the Guidance of Others,’ that section provides that a professional such as an accountant who ‘supplies false information for the guidance of others in their business transactions’ may be liable for the ‘pecuniary loss caused by their justifiable reliance upon the information,’ if the accountant is negligent in ‘obtaining or communicating the information.’51 The Restatement approach thus clearly departs from the privity or quasi-privity rule. Yet because of the perhaps deliberately imprecise formula, section 552 can be interpreted liberally or narrowly.52 Even so, it seems clear that in this hypothetical, Donna in no sense ‘supplies’ any information ‘for’ Paul, who is launching a bid adverse to the position of Donna’s client. The final, most plaintiff-friendly approach is to apply the general rule that predicates liability for negligence based upon foreseeability of harm to plaintiff to the context of accountant liability. One court 50

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See, e.g., Roger Buffington (student note), A Proposed Standard of Common Law Liability for the Public Accounting Profession, 5 S. Cal, interdisc. L.J. 485, 504 (1997) § 552(1) and (2) read: (1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. (2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered:

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(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. Jay M. Feinman, Liability of Accountants for Negligent Auditing: Doctrine, Policy, and Ideology, 31 Fla. St. U. L. Rev. 17, 41–43 (2003). H. Rosenblum, Inc. v Adler., 461 A.2d 138 (N.J. 1983), superseded by statute N.J. Stat. Ann. 2A:53A–25 (West 2003), as stated in Finderne Mgmt. Co. v Barrett, 809 A.2d 857 (N.J. Super. Ct. App Div. 2002).

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adopting this approach stated: ‘Unless some policy considerations warrant otherwise, privity should not be, and is not, a salutary predicate to prevent recovery. Generally, within the outer limits fixed by the court as a matter of law, the reasonably foreseeable consequences of the negligent act define the duty and should be actionable.’53 Evidently, this third approach holds out the greatest hope for Paul. Yet even here it is difficult to see why as a matter of policy his reliance upon Donna’s audit should as a general rule be compensable. The question is at best a divided one. The first and third approaches, privity and foreseeability, clearly seem in the minority. Of the two, it would seem that the privity is likely to endure, certainly in New York, where it was confirmed fairly recently.54 The legislatures of some states have enacted legislation to remove the foreseeability approach, including some states whose courts had approved it.55 On the other hand, some states have just as clearly excluded resort to privity in such cases.56 The intermediate approach, endorsed in the second Restatement of Torts, seems to enjoy the greatest influence. The denial of liability for economic loss in the accountant context

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Credit Alliance Corp. v Arthur Andersen & Co. 483 N.E.2d 110 (N.Y. 1985). Feinman, supra, at 29. The Court of Appeals of New York endorsed the following test: (1) [T]he accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance.

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at 483 N.E.2d, 1t 118 (explicitly approving Ultramares). This is the case for New Jersey, where H. Rosenblum, Inc. v Adler was superseded by N.J. Stat. Ann. 2A:53A–25 (West 2003). E. Dickerson & Son, Inc. v Ernst & Young, 179 N.J. 500, 846 A.2d 1237 (2004). Mississippi legislation, however, forbids resort to privity. Miss. Code Ann. 11–7–20 (privity ‘shall not be’ required in negligence actions for economic loss, inter alia). Mississippi endorsed the foreseeability approach; Wisconsin has also done so. Comment, Louisiana Revised Statute section 37:91 – Removing accountability from the accounting profession. 49 Loy. L. Rev. 553 n. 70 (2003) (citing Touche Ross & Co. v Commercial Union Ins. Co., 514 So. 2d 315, 322–23 (Miss. 1987) and Citizens State Bank v Timm, Schmidt, & Co., 335 N.W.2d 361, 366 (Wis. 1983)). As the title to that student note indicates, Louisiana has adopted the privity standard legislatively.

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usually follows the fear behind Cardozo’s formula: the indeterminacy of liability. In other words, potential defendants will not and cannot know who the potential plaintiffs are who may take their statements to heart and act upon them. Policy favoring liability tends to follow the view that accountants are public professionals, and they only have private clients so they can assist them to present an accurate financial picture to the public at large. Thus, the accountant’s position is in fact partially adverse to the client’s. In that view, moreover, it is only fitting that the accounting profession as a whole should be required to carry liability insurance adequate to compensate for the losses caused by their mistakes. One recent decision applied the intermediate standard. In Hults v Allstate Septic Systems, LLP,57 the defendant advised the owner of a building on the suitability and reparability of a septic system for the building. The plaintiffs bought the building and relied on the defendant’s assessment of the system. That assessment was in error, and plaintiffs sued alleging loss in the value of the building and losses of savings and labor devoted to avoidance of foreclosure by the mortgagee. The plaintiffs sought to recover such sums from the defendant through a negligence action, who interposed the economic loss rule. The court held for the defendant. The court noted that this defendant was not engaged professionally in providing information for use by third parties. Therefore, section 552 of the Restatement Second was inapplicable. Under the law of Pennsylvania governing the decision, professionals on whose reports third parties reasonably rely may be held liable for economic losses, but the defendant here was not such a professional.58 On the other hand, a line of cases from Utah seems to be in the process of opening a breach in the economic loss rule that would accord with the third, most generous approach. Both surveyors and real estate appraisers have been held liable to third parties. Utah built first on accountant liability in Milliner v Elmer Fox & Co.,59 then added negligent misrepresentation actions against land surveyors in

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2007 WL 2253509 (M.D.Pa. 2007) (slip opinion) (federal magistrate court applying Pennsylvania law). Ibid., at 9–10, distinguishing Bilt-Rite Contractors, Inc. v The Architectural Studio, 866 A.2d 270 (Pa.2005) (architect of school building liable to successful construction bidder for excess costs caused by architect’s negligence). 529 P.2d 806 (Utah 1974) (third-party action in negligence against accountant who knew plaintiff would rely on report).

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Price-Orem Investment Co. v Rollins, Brown & Gunnell, Inc. 60 More recently, real estate appraisers have been added to the list of such professionals by West v Inter-Financial, Inc. 61 Under this line of jurisprudence, Paul’s action against Donna is not automatically cut off by either the lack of privity or the fact that Donna’s services were engaged by one whose interests are clearly adverse to Paul’s. Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institute, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit, Inc. makes no further inquiry and thus does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damage. He is now suing Credit, Inc. to recover his losses. I Operative rules The plaintiff would recover under American tort law on these facts. II Descriptive formants First, the plaintiff would show that the statement is defamatory. This is not difficult, as imputations of insolvency or of the status of a bankrupt have long been held to be defamatory.62 Liability for 60

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713 P.2d 55 (Utah 1986) (third party who reasonably relies on second party’s negligent misrepresentation may recover when second party had ‘pecuniary interest’ and ‘should have reasonably foreseen’ the reliance). 139 P.3d 1059 (Ct. App Utah 2006) (appraiser for seller who overstated house area by 18% liable to buyer for difference in value). Restatement (Second) of Torts §573. Slanderous Imputations Affecting Business, Trade, Profession or Office One who publishes a slander that ascribes to another conduct, characteristics or a condition that would adversely affect his fitness for the proper conduct of his lawful business, trade or profession, or of his public or private office, whether honorary or for profit, is subject to liability without proof of special harm. Illustration 5 is: ‘A says to B of C, a merchant, that the latter is insolvent. A is subject to liability to C without proof of special harm.’

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publishing such a statement follows if the defendant acts with a certain state of mind. Here, states differ on what state of mind plaintiff must show to recover. Section 580B of the Restatement indicates the three states of mind in the alternative: knowledge that the statement is false and that it is defamatory; reckless disregard of the statement’s falsity or defamatory character; or negligent failure to ‘ascertain’ whether the statement is false or defamatory.63 Here, Credit Inc. is surely reckless in its behavior. The next question is whether Credit Inc. enjoys any privilege to circulate information that might protect it, notwithstanding its action. The Restatement in section 595 would find such a privilege for the credit reporting agency. A conditional privilege exists if the intended recipient has a ‘sufficiently important interest’ in the information, and the publisher is under a legal duty to convey it.64 Generally, credit-reporting agencies enjoy a privilege to handle such information and do not suffer liability for errors unless false information is circulated in such a way as to remove the

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Restatement (Second) of Torts §580B. Defamation of Private Person One who publishes a false and defamatory communication concerning a private person, or concerning a public official or public figure in relation to a purely private matter not affecting his conduct, fitness or role in his public capacity, is subject to liability, if, but only if, he

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(a) knows that the statement is false and that it defames the other, (b) acts in reckless disregard of these matters, or (c) acts negligently in failing to ascertain them. Restatement (Second) of Torts §595. Protection of Interest of Recipient or a Third Person (1) An occasion makes a publication conditionally privileged if the circumstances induce a correct or reasonable belief that (a) there is information that affects a sufficiently important interest of the recipient or a third person, and (b) the recipient is one to whom the publisher is under a legal duty to publish the defamatory matter or is a person to whom its publication is otherwise within the generally accepted standards of decent conduct. (2) In determining whether a publication is within generally accepted standards of decent conduct it is an important factor that (a) the publication is made in response to a request rather than volunteered by the publisher, or (b) a family or other relationship exists between the parties.

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privilege.65 The privilege is lost if the defendant ‘abuses’ the privilege by publishing ‘false and defamatory’ claims about the plaintiff either knowingly or recklessly.66 Here it is clear that the defendant acted recklessly in communicating the substance of an anonymous 65

Restatement (Second) of Torts § 595, comment h, Credit agencies: The mere fact that a person has agreed to procure information for another, whether for or without consideration, does not of itself create a duty to communicate defamatory matter even though it is reasonably believed to be true. But a conditional privilege may be held to exist. Take the instance of a report made by a credit rating agency based upon investigation and made for the purpose of enabling a subscriber to determine the advisability of extending credit to another. The States have been in considerable disagreement concerning both the existence and the extent of a conditional privilege for a credit agency. A few states have held that there is no privilege, some have held that there is a privilege and that it is abused by negligence in making the investigation, and others have held that there is a privilege but that it is abused by reckless conduct in making the investigation. As set forth in Comment b and explained in more detail in §580B, the decision in Gertz v Robert Welch, Inc., (1974) 418 U.S. 323, imposes a constitutional requirement of proof of negligence as to falsity in all cases. Thus a state desiring to impose liability upon a credit agency on a showing of negligence can now hold that there is no privilege and accomplish that result under §580B. A state that desires to impose liability only on a showing of knowledge or reckless disregard as to falsity can hold that there is a conditional privilege and accomplish that result under §600 as it is presently worded. A state that had previously imposed strict liability and wished to continue might be able to take the position that the report of the credit agency involves a matter of ‘commercial speech’ and that a different, higher, standard than ordinary care could be imposed on the agency. (See §580B, Comment f ).

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Restatement (Second) of Torts § 600: Except as stated in § 602, one who upon an occasion giving rise to a conditional privilege publishes false and defamatory matter concerning another abuses the privilege if he (a) knows the matter to be false, or (b) acts in reckless disregard as to its truth or falsity. § 602, which is inapplicable here, deals with defamatory rumors that the defendant communicates to the recipient. § 602. Publication of Defamatory Rumor One who upon an occasion giving rise to a conditional privilege publishes a defamatory rumor or suspicion concerning another does not abuse the privilege, even if he knows or believes the rumor or suspicion to be false, if (a) he states the defamatory matter as rumor or suspicion and not as fact, and (b) the relation of the parties, the importance of the interests affected and the harm likely to be done make the publication reasonable.

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phone call to the Bank. Here, Credit Inc. relied on a single anonymous tip without doing any further investigation at all. Dieter no doubt can prove the particular losses he has suffered. Yet he may not need to. Under American tort law, when defendant states that a plaintiff ’s business is insolvent or bankrupt, the plaintiff ’s case is made easier because he does not need to prove special damages.67 Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by the RAC when he was involved in a head-on collision with another automobile. The engine of the rented vehicle intruded into the passenger compartment causing severe and permanent injuries. Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. The severing of the car made it impossible to determine within a reasonable degree of certainty whether or not the vehicle had design, manufacturing and/or maintenance defects which proximately caused Nicholas’ injuries. I Operative rules The success of the lessee’s case will depend upon which state law governs. Some states accept a cause of action for negligent spoliation of evidence; others do not. II Descriptive formants One line of cases favoring recovery for negligent spoliation of evidence may be traced to Holmes v Amerex Rent-A-Car.68 The facts there closely parallel those of the hypothetical. Holmes is a particularly helpful case, as its opinion responded to two certified questions from a federal court that sought guidance on the application of District of Columbia law.69 The questions were: 67

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Restatement (Second) of Torts § 573, supra. Dan B. Dobbs, The Law of Torts (2000) pp 1141–43. 710 A.2d 846 (D.C. Ct. App 1998). Certification of Question of Law, 113 F.3d 1285, No. 96–7182 (D.C.Cir.1997).

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Under District of Columbia law, may a plaintiff recover against a defendant who has negligently or recklessly destroyed or allowed to be destroyed evidence that would have assisted the plaintiff in pursuing a claim against a third party? If a plaintiff may proceed under such a theory, what standard of proximate cause must he meet? The court disposed of both questions in favor of the plaintiff.70 A contrary line of cases, however, exists in California. In Lueter v State of California,71 the state highway patrol was accused of negligent disposal of a defective tire part that had led to the automobile accident injuring plaintiff. The plaintiff argued on appeal that ‘negligent spoliation [of evidence] is alive and well in the Third [Appellate] District.’ The court coolly answered: ‘Our short answer is, “not any more”.’72 A survey of the case law from several states suggests that many are resisting explicit recognition of a distinct negligence action in this area. But some of those that have voiced resistance suggest that alternate routes exist to protect a plaintiff ’s interest. For example, if the defendant’s negligence deprives the plaintiff of proof, the plaintiff may benefit from a favorable presumption as a matter of evidence law.73 Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having previously been employed by OMEGA and, while so employed, was a member of their occupational pension scheme. He was told by ALPHA that he was eligible to join the ALPHA 70

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‘In response to the first certified question, we hold that negligent or reckless spoliation of evidence is an independent and actionable tort in the District of Columbia, in response to the second certified question, we hold that in order to demonstrate that the defendant’s actions proximately caused the harm alleged, the plaintiff must show, on the basis of reasonable inferences derived from both existing and spoliated evidence, that (1) the plaintiff ’s ability to prevail in the underlying lawsuit was significantly impaired due to the absence of the spoliated evidence; and (2) there had been a significant possibility of success in the underlying claim against the third party. We also set forth the required elements of this cause of action and establish an equitable system for calculating damages.’ Ibid. Cal.App4th 1285, 115 Cal.Rptr.2d 68 (Cal.App 3d Dist., 2002). Cal.App4th 1288, 115 Cal.Rptr.2d 70. See, e.g., Safeguard Management, Inc. v Pinedo, 865 So. 2d 672 (Fla. Dist. Ct. App 4th Dist. 2004) (plaintiff ’s remedy is favorable inference).

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occupational pension scheme. As an employee, he would, unless he wished to opt out, automatically join the scheme and deductions will be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based upon a careless reading of the materials provided, the Broker vaunts the economic virtues and performances of OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and remain in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than that she would have received from ALPHA. Mrs. Smith sues the Broker. I Operative rules American law on this situation is uncertain. II Descriptive formants The question might be resolved by analogy with the situation of a professional service rendered to a donor or testator who wished to give a certain pecuniary benefit to the plaintiff. The trend in the context of the unsuccessful will seems well established. Assume that the client-testator wishes to make the plaintiff his beneficiary or legatee, and the client communicates that desire to his defendant lawyer. The lawyer then drafts an instrument to carry out the client’s desire, but the instrument fails to do so due to an error on the part of the lawyer (e.g. the lawyer may omit some formality required by state legislation). In that context, the plaintiff beneficiary will be able to bring an action against the lawyer for the failure to carry out the testator’s wishes vis-à-vis the plaintiff.74 The situation of the Insurance Broker and Mrs. Smith is parallel to that of the lawyer and the beneficiary. The hypothetical employee wished to direct his pension benefits to his wife, just as the testator in 74

In Biankanja v Irving, 320 P.2d 16 (Cal. 1958), the defendant notary public (a nonlawyer) failed to draft a will properly; the defendant was held liable to the intended beneficiary under the will, who took significantly less in intestacy, in Lucas v Hamm, 364 P.2d 685 (Cal. 1961), the defendant lawyer also failed to draft a valid will, and he was under a duty to the intended beneficiaries to do so. However, he was held not to have breached the duty, as his error was to have failed to apply the California version of the Rule against Perpetuities, whose understanding surpassed the requisite duty of care. Jay M. Feinman, Economic Negligence: Liability of Professionals and Businesses to Third Parties for Economic Loss (1995) p 284, n. 17.

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the line of cases mentioned above wished to direct his assets to the beneficiary. In both cases, but for the negligence of the lawyer or of the Insurance Broker, the beneficiary and the wife would have benefited from the employee’s or the testator’s wishes.75

3 Summary: The economic loss rule in American law – policy and outlook Because the American legal system includes numerous distinct jurisdictions for private law, it is difficult to name with certainty the policies that are crucial in deciding cases of economic loss arising from negligence. Although all states generally apply the economic loss rule, they do not all do so for the same reasons of policy. In some cases, the states appear split on whether to apply the rule at all in a particular context.76 Nevertheless, several policies do emerge with some clarity.77 75

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The analogy does not work perfectly, as the Insurance Broker’s relationship with the employee Smith is unlike that of the client and the lawyer. Whereas the latter is a fully developed professional relationship, in which compensation typically is paid, the case does not define the relationship between the employee and the Insurance Broker and leaves the question of compensation completely open. That being the case, it would seem that there is no contractual relationship between the employee and the Insurance Broker from which the wife (or widow) can derive any right. On the other hand, assume there was an ongoing relationship between the employee and the Broker in which compensation had been paid. If the Broker typically gave investment advice to the employee, and was properly qualified to give such advice, very likely the hypothetical would be resolved not under state tort law, but under the web of federal legislation and regulation governing the securities markets and those who participate in them in any one of several ways. Case 8, negligent spoliation of evidence, is an example. The policy of favoring contract law over tort in commercial contexts is not discussed here because no case in this chapter dealt with the issue. It is worth mentioning that the economic loss rule will now be applied to block an attempt to move from contract to tort, as in products liability cases. East River Steamship Corp. v Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct. 2295 (1986), and Saratoga Fishing Co. v J.M. Martinac & Co., 520 U.S. 875, 117 S.Ct. 1783 (1997). Restatement of Products Liability 21. ‘[T]ort law is a superfluous and inapt tool for resolving purely commercial disputes. We have a body of law designed for such disputes. It is called contract law. Products liability law has evolved into a specialized branch of tort law for use in cases in which a defective product caused, not the usual commercial loss, but a personal injury to a consumer or bystander.’ Miller v United States Steel Corp., 902 F.2d 573, 574 (7th Cir. 1990) (Posner, J.). Some courts, however, do allow plaintiffs to exit contract for tort, in a recent Wisconsin case, the owner of a chicken farm wanted to replace manual ventilators with electric ones,

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One policy encourages putting the loss on the party best able to spread it, through insurance or otherwise, particularly when that party is in possession of information about the importance and value of the enterprise in which it is engaged and an acceptable cost of protecting it. This policy supports the result in Case 2, where the plaintiff could perhaps procure key-man insurance, and in Case 4, where the cruise line may be able to obtain business interruption insurance. In Case 6 as well, when accountants are found liable for providing a misleading audit, courts support the result by noting that accountants as a profession can purchase malpractice insurance, thus spreading the cost of victim’s losses.78 Another policy favoring exclusion of recovery for purely financial or pecuniary harm appears in the law and economics literature. This policy distinguishes two kinds of harm in tort. Some harms result in a net social loss. A physical harm to a plaintiff does not result in a corresponding pecuniary benefit to any other party and thus produces a net loss, even taking into account funds spent to care for, or rehabilitate, the plaintiff. The effect of the harm is felt beyond the parties involved. Recovery in such cases is unproblematic and is supported by the fundamental idea of corrective justice: the tortfeasor ought to suffer or pay for the loss, not the victim. Other harms, so the reasoning goes, are different because they merely shift economic activity from one place or time to another: one party’s economic loss is another’s gain. On this view, the harm of which the victim complains does not result in a net social loss at all.79 Thus, whenever a party’s current business activities are disrupted by market innovations or the entry of new competitors, that party will surely feel the disruption as a loss. For the market of producers and consumers as a whole, however, it is precisely the and he engaged the defendant electrician to install them. The defendant did so negligently, and thousands of chickens died as a result. The court found the economic loss rule inapplicable to this contract for services, because the policies from sales contracts did not translate to this context. Insurance Company of North America v Cease Electric, Inc., 688 N.W.2d 462 (Wisc. 2004). The court did so notwithstanding the fact that the real plaintiff in interest in this tort case was the chicken farmer’s insurer, who had already settled the farmer’s claim. 78 79

The same would be true of Case 9, if Broker is found liable. This view is analyzed in an often-cited law-and-economics article on economic loss. William Bishop (1982) Economic Loss in Tort, 2 Oxford J. of Leg. Studies 1. See also, Mario J. Rizzo (1982) A Theory of Economic Loss in the Law of Torts, 11 J. Legal Stud. 281, and Victor P. Goldberg (1991) Recovery for Pure Economic Loss in Tort: Another Look at Robins Dry Dock v Flint, 20 J. Legal Stud. 249.

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opposite. This policy can be offered in support of results like those in Case 2, where the decline in value of the owner’s team will very likely be made up by a relative rise in the value of the other teams in the league.80 Looking at physical injury of a team member as a risk of team ownership, this policy suggests that those in the owner’s position must look to their own resources and planning to manage such risks.81 Likewise, in Case 1, if the Black factory is shut down, another factory should be able to cover the shortfall. Furthermore, since power outages are a known risk, Black can take the precaution of installing a back-up generator. Thus, this rationale from economics can be linked with the policy mentioned above that favors putting the loss on the party best able to spread it. Sometimes, the policy in favor of the economic loss rule agrees with traditional legal policies and rules. For example, application of the economic loss rule may be much the same as recognizing the effect of a victim’s failure to mitigate damages. The spouse of a tort victim cannot enhance her recovery by responding to the harm he suffered in a way that is more costly than necessary. Thus, in Case 5, the wife who cares for her injured husband herself may not recover her lost business profits from the defendant. Here, the policy supporting the rule is an old one in the law of both tort and contract.82 Likewise, traditional policies demanding proof of damages with certainty support application of the rule in Case 8, for the line of cases that does accept it. The line is drawn between courts that rebel against the uncertainty of proving damages through a case within a case, and those courts that consider the task feasible. Finally, the traditional application of remoteness (or lack of proximate cause) or ‘no duty’ regarding the particular harm suffered by a particular victim seems to mask a different policy, namely, a refusal to recognize liability without intelligible limits. This seems to be a

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Yet in some cases, the loss of a player hurts not just one team but the entire league; fans in one sport do not necessarily switch their interest to another when a star player is removed from play. This does not explain, however, why the team owner should bear the risk of the defendant’s negligence or fault just as the owner must bear the risk of the player’s disease. Another traditional policy forbids treating a human being like a commodity, which supports the result in Case 2.

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common policy applicable to several of the hypotheticals.83 Indeed, it is the continuing concern that has accompanied the economic loss rule, and supported it, since the decision of the oldest cases such as Robins Dry Dock and Ultramares v Touche. In sum, American tort law displays many economic loss rules not merely because many states contribute to their elaboration. It also displays such rules because the problem of economic loss itself is plural and variegated. This appears to be so because the policies that support and undermine application of the economic loss rule remain in conflict. Each state appears to be at a different stage of development, both in permitting recovery for economic losses caused by the negligence of another and in deciding when to deny recovery and why. There is general agreement in American tort law that the economic loss rule makes sense and that limits on this kind of liability must be set. But there is no agreement on precisely where they should be.

Bibliography Bernstein, A. ‘Keep It Simple: An Explanation of the Rule of No Recovery for Pure Economic Loss’, 48 Ariz. L. Rev. 773 (2006). Bublick, E. M. ‘Economic Torts: Gains in Understanding Losses’, 48 Ariz. L. Rev. 693 (2006). Bussani M. and V. V. Palmer (eds.), Pure Economic Loss in Europe (2003). Braucher, J. (2006) ‘Deception, Economic Loss and Mass-Market Customers: Consumer Protection Statutes as Persuasive Authority in the Common Law of Fraud’, 48 Ariz. L. Rev. 829. Dobbs, D. B. The Law of Torts (2000). —— , (2006) ‘An Introduction to Non-Statutory Economic Loss Claims’, 48 Ariz. L. Rev. 713. Feinman, J. M. (1995) ‘Economic Negligence: Liability of Professionals and Businesses to Third Parties for Economic Loss’ (Boston) p 284, n. 17. —— , (2003) ‘Liability of Accountants for Negligent Auditing: Doctrine, Policy, and Ideology’, 31 Fla. St. U. L. Rev. 17. Gergen, M. P. (2006) ‘The Ambit of Negligence Liability for Pure Economic Loss’, 48 Ariz. L. Rev. 749.

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Cases 1, 3, and 4 are examples, as is Case 6 when the rule is applied in the accountant’s favor, in these cases, the harm to the plaintiff could be characterized as too remote from defendant’s negligent act, or the defendant could be said to have no duty to parties such as the workers, the other cattle market participants, and the vessel lessee, respectively.

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James, Jr., F. (1972) ‘Limitations on Liability for Economic Loss Caused by Negligence: A Pragmatic Appraisal’, 25 Vand. L. Rev. 43. Pryor, E. S. (2006) ‘The Economic Loss Rule and Liability Insurance’, 48 Ariz. L. Rev. 905. Rabin, R. L. (2006) ‘Respecting Boundaries and the Economic Loss Rule in Tort’, 48 Ariz. L. Rev. 857.

Chapter 6

Canada Professor Joost Blom

1 Introduction The Canadian common law of torts is derived from English law, and was practically identical to the English law even well after the abolition of Canadian appeals to the Privy Council in 1949. Divergences between the two systems of tort law began to appear in the 1960s and have steadily gained in importance. Nowhere is the distinction between Canadian common law and English law more marked today than in the courts’ approach to pure economic loss. The first step in opening up liability in negligence for pure economic loss was taken by the House of Lords in Hedley Byrne & Co. v Heller & Partners.1 A duty of care was held to exist in relation to information or advice given in the context of a ‘special relationship’ or an ‘assumption of responsibility’ – the criteria were not definitively formulated and have been much debated since – and reasonably relied upon by the plaintiff to the latter’s financial loss. Canadian courts unhesitatingly followed this lead. The Supreme Court of Canada first moved beyond the negligent misstatement area in Rivtow Marine Ltd. v Washington Iron Works,2 holding that a manufacturer’s failure to warn of a dangerous defect in a log barge entitled the charterer of the barge to recover for the financial loss attributable to having to take the barge out of service in the busy season rather than the slack season, as they could have done if properly warned. The Rivtow case used Hedley Byrne as a starting point, but did not 1 2

[1964] AC 465. [1974] SCR 1189; 40 D.L.R. (3d) 530.

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articulate clearly what the limits on recovery of pure economic loss might be. Nor did the next important case, Kamloops (City) v Nielsen.3 It held a municipality liable to a house-buyer for the cost of remedying defective foundations. The municipality had negligently failed to exercise its responsibilities as inspecting authority to prevent the house from being occupied and sold, and the court’s analysis of duty of care did not extend beyond the statutory context of that case. The court did, however, adopt a methodology first suggested by Lord Wilberforce in another defective foundations case, Anns v Merton London Borough Council.4 What has since been labeled the Anns/ Kamloops test asked two questions5: (1) Is there a sufficiently close relationship between the parties (the [defendant] and the person who has suffered the damage) so that, in the reasonable contemplation of the [defendant], carelessness on its part might cause damage to that person? If so: (2) are there any considerations which ought to negative or limit (a) the scope of the duty; and (b) the class of persons to whom it is owed; or (c) the damages to which a breach of it may give rise? A positive answer to step (1) meant there was a prima facie duty of care, which might be limited or excluded under step (2). The House of Lords itself dropped this approach to analyzing a duty of care (Murphy v Brentwood District Council),6 but the Supreme Court of Canada has continued to place it at the forefront of its analysis of pure economic loss cases (and other novel duty of care cases).7 While doing so, the court has modified over time the

3 4 5 6 7

[1984] 2 SCR 2; 10 D.L.R. (4th) 641. [1978] AC 728 at 751–52 (HL). Kamloops at 10 SCR, 641 D.L.R. [1991] 1 AC 398. The Supreme Court of Canada’s approach is analyzed by B. Feldthusen, Economic Negligence. The Recovery of Pure Economic Loss, 4th edn (2000), c. 1; G.H.L. Fridman, The Law of Torts in Canada, 2nd edn (2002) at 315–30; L. Klar, Tort Law, 3rd edn (2000) at 153–69; A.M. Linden and B. Feldthusen, Canadian Tort Law, 8th edn (2006), c. 9.

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relationship between steps (1) and (2).8 Its most recent exposition of the matter was in Cooper v Hobart.9 People who had invested funds with a mortgage broker lost their money when the broker went out of business. They sued the government of the province for negligent failure to exercise its regulatory powers over the broker. The court applied the Anns/Kamloops test and concluded the government owed no duty of care towards the investors under the circumstances. The claim failed at both stages, because (1) there was no relationship of proximity between the regulatory authority and the investors; and (2) a duty of care would render the public authority liable to indeterminate numbers of people for indeterminate losses. In explaining the two steps, the court said that step (1), whether the relationship between defendant and plaintiff was one of proximity giving rise to a prima facie duty of care, was not (as earlier cases tended to assume) merely a question of whether the economic loss was reasonably foreseeable. Rather, proximity was an assessment of all the circumstances of the relationship, including not only foreseeability of the loss but also expectations, representations, reliance, and the property or other interests involved (at para. 34). If a case falls into a category in which proximity has already been recognized by the law, no further inquiry is needed. If it does not fall into such a category, the assessment must be made. Stage (2) allows the court to take into account residual policy considerations extrinsic to the relationship between the parties, including the concern about indeterminate liability famously encapsulated by Cardozo J. in Ultramares Corp. v Touche.10 The Canadian courts’ use of the Anns/Kamloops analytical template is referred to in most of the case studies immediately below. Because this approach makes considerations of policy an explicit part of the duty of care analysis, what might otherwise be metalegal considerations often assume the role of descriptive formants in the decision-making process. The current position on pure economic loss in Canadian common law is summarized after the case studies.

8

9 10

See Louise Bélanger-Hardy, ‘Négligence et obligation de diligence: 40 ans d’évolution’ (2006) 40th Anniv. Ottawa L. Rev. 27. [2001] 3 SCR 537; 206 D.L.R. (4th) 193. 174 N.E. 441 at 444 (N.Y. 1931); See L. Klar, ‘Foreseeability, Proximity and Policy’ (2002) 25 Advocates’ Q. 360.

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Case 1 – A cable case: the laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cut the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected black-out causes the loss of two days of production. Black has to lay off a number of workers hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay. I Operative rules Black would almost certainly not have a negligence claim against Holly. Contractual relational economic loss is presumptively irrecoverable unless concerns about indeterminate liability can be overcome, which here they could not.11 II Descriptive formants Economic loss caused by physical harm to a third person or that person’s property was labeled ‘contractual relational economic loss’ by La Forest J. (diss.) in the Supreme Court of Canada in Canadian National Ry. Co. v Norsk Pac. S.S. Co. 12 and the tag, with or without the classifying adjective ‘contractual’, has stuck: D’Amato v Badger,13 Bow Valley Husky (Bermuda) Ltd. v St. John Shipbuilding Ltd 14. The last case laid down a general rule excluding liability for contractual relational economic loss, subject to specific, narrow exceptions (at para. 48). One of those exceptions, applied in Norsk, is where the damaged property is used by plaintiff in a joint venture with the owner. Others are where the plaintiff has a possessory or proprietary interest in the damaged property (which is not a true exception but makes the loss consequential economic loss), and general average claims in maritime law. Further exceptions are possible ‘where justified by policy considerations and required by justice’ (at para. 50). Today the relational economic loss caused by an interruption of services such as electricity or water almost certainly cannot be made to qualify as an exception under the Bow Valley approach. 11

12 13 14

The exclusionary rule and its exceptions are considered by Feldthusen at 216–54; Fridman at 379–83; Klar at 242–47; Linden at 441–44; Osborne at 179–87. [1992] 1 SCR 1021; 91 D.L.R. (4th) 289. [1996] 2 SCR 1071; 137 D.L.R. (4th) 129. [1997] 3 SCR 1210; 153 D.L.R. (4th) 385.

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A couple of early decisions that imposed a duty of care in respect of such loss are thus obsolete.15 Except in unusual situations, the problem of indeterminate liability – an indeterminate number of plaintiffs who suffered losses on an indeterminate scale – is insuperable.16 The financial interest of the plaintiffs in Bow Valley itself (licensees of an oil rig that was damaged by fire) was in a sense more direct than in our case, but the plaintiffs’ losses were still not recoverable because there was no logical way to confine the range of potential claimants to them. III Metalegal considerations Courts have referred not only to the indeterminacy problem, but also to the victim’s ability to manage the risk of loss by contract or insurance.17 Case 2 – The injured key-player Thomas is pivot on the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car and unable to play for three months. In the absence of its best player, the team (until then at the top of the league standings) drops to fourth place. This results in considerable losses for the team owners. Can the AllStars recover against the car driver? I Operative rules The All-Stars would not recover against the car driver for the financial loss to them caused by the loss of the services of their best player. This is another form of contractual relational economic loss (see case 1).18 15

16

17 18

MacMillan Bloedel Ltd. v Foundation Co. of Canada Ltd., [1977] 2 W.W.R. 717 (B.C.S.C.), aff ’d (11 May 1978) CA770331 (B.C.C.A.) [unrep.]; Dominion Tape of Canada Ltd. v L.R. McDonald & Sons Ltd. [1971] 3 O.R. 627 (Co. Ct.) Feldthusen at 227 agrees, as Linden at 478–81 seemingly also does. In Conestoga Meat Packers Ltd. v Fehr [unrep.] (17 Aug. 2007), Doc. No. 43676-SR, online: 2007 CanLII 34166 (Ont. S.C.J.), an economic loss claim from a power disruption was dismissed as opening the door to indeterminate liability, except possibly where the outage affects only a ‘small, discernable and foreseeable class of persons’ (para. 32). See also Feldthusen at 204–09. The exclusionary rule for relational economic loss caused by personal injury is analyzed by Feldthusen at 255–58; Klar at 253; Linden at 480–81; See also P.H. Osborne, The Law of Torts, 2nd edn (2003) at 187–88.

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II Descriptive formants In D’Amato v Badger,19 the Supreme Court of Canada rejected a claim by a company that was 50% owned by the victim of a car accident for the financial loss the company had suffered because the victim-shareholder could no longer do the work he formerly did in the company’s auto body shop business. The court held, applying the Anns/Kamloops analysis (see Introduction), that (1) there was insufficient proximity between the perpetrator of the accident and the victim’s company; and (2) to allow recovery would raise problems of indeterminacy. ‘An injury to one person obviously has a ripple effect, causing economic loss in various forms to a large number of people, both individuals and corporations. To allow recovery . . . would invite similar claims by multi-membered plaintiffs’ (para. 51). The D’Amato case is indistinguishable from our hypothetical one. The common law gave a master a tort claim for the loss of the services of a servant (the action per quod servitium amisit). This action has been abolished by statute in British Columbia20 and New Brunswick21. Its survival in the other Canadian common law jurisdictions, although seemingly assumed in Ordon Estate v Graill,22 has not been clearly affirmed since D’Amato.23 An Alberta judge held the action per quod was still viable because it did not raise the spectre of indeterminate liability, as the claim can only be made by an employer and only for the value of the injured person’s services, not for lost profits.24 III Metalegal considerations In D’Amato (at para. 51) the court stressed that employers and employees can negotiate on who bears the risk of loss and employers can insure against the risk or deal with it by other means.

19 20 21 22 23

24

[1996] 2 SCR 1071; 137 D.L.R. (4th) 129. Law and Equity Act, R.S.B.C. 1996, c. 253, s. 63. Law Reform Act, S.N.B. 1993, c. L–1.2, s. 1. [1998] 3 SCR 437; 166 D.L.R. (4th) 193 at para. 99. For the uncertain state of the action per quod, see Feldthusen at 256; Klar at 251– 53; Linden at 481; Osborne at 188. Canada (Attorney General) v Livingstone (2003) 24 C.C.L.T. (3d) 307; 2003 ABQB 1036. But the judgement was set aside on appeal so that the chambers judge could reconsider the issue of the duty of care in the light of Cooper v Hobart (see Introduction) (2004) 24 C.C.L.T. (3d) 320, 2004 ABCA 236.

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Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape of the infected animal obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; (b) the market traders who have lost their supplies; and (c) the butchers who have not been able to conduct their business during this time. I Operative rules In all likelihood, neither the other cattle raisers, nor the market traders, nor the butchers would have a claim in negligence against the cattle raiser who allowed the infected animal to escape. The problem of indeterminate liability could not be overcome.25 II Descriptive formants Had there been injury to other cattle caused by the escape, the claims here would have been non-contractual relational economic loss (see case 1).26 Canadian law would probably treat it analogously to that type of loss although on the facts there was no physical harm to a third person’s property. Like relational economic loss, the plaintiffs’ losses stem from a facility being closed down as a result of the defendant’s negligence. Applying the two-stage Anns/Kamloops analysis, as elaborated in Cooper v Hobart (see Introduction), a Canadian court would probably say that (1) there was insufficient proximity between the defendant cattle raiser and all those whose business was affected by the escape of the animal and the consequent closure of the market, and (2) in any event, to give recovery would be to open up indeterminate liability, since anyone involved in the cattle industry could potentially make a claim and no sound basis exists for distinguishing among the claimants. The English case denying liability on very similar facts, Weller v Foot and Mouth Disease Research

25

26

On non-contractual relational economic loss, see Feldthusen at 216–19; Klar at 243. Feldthusen at 216–23.

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Institute,27 was cited with apparent approval in Canadian National Ry. Co. v Norsk Pac. S.S. Co.,28 and D’Amato v Badger 29. However, it is impossible to be categorical. In Sauer v Canada (Attorney General),30 it was alleged that a single Canadian cow that became infected with ‘mad cow disease’ had contracted the disease from eating contaminated feed made by the defendant. The infection triggered import bans on Canadian beef in other countries. The court refused to strike out, as bound to fail, a claim that the feed manufacturer was liable to 100,000 Canadian commercial cattle farmers for the loss of the foreign markets.31 III Metalegal considerations This is an instance where the floodgates aspect predominates, perhaps together with a sense that there ought to be some proportion between the wrong (letting one animal escape) and the legal consequences (compensating a whole industry for the interruption of business). Leaving the risk spread among those in the industry appears fairer than shifting it all to the farmer. Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for its expenses incurred prior to the collision, and for its loss of earnings due to cancellation of the two cruises. I Operative rules If Shipwreck was a charterer by demise of the liner, it could claim its losses as being consequential on the injury to its property. If 27 28

29 30 31

[1966] 1 QB 569 (QBD). [1992] 1 SCR 1021; 91 D.L.R. (4th) 289 at 300 (La Forest J. (diss.)) and 385 (Stevenson J.). [1996] 2 SCR 1071; 137 D.L.R. (4th) 129 at para. 18. 2007 ONCA 454. Liability was said (at para. 46) not to be indeterminate because the statement of claim quantified both the size of the class and the loss of each class member. At the time of writing the manufacturer had filed an application for leave to appeal to the Supreme Court of Canada.

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Shipwreck was a time charterer, it could not claim any of its losses because they were relational economic losses. II Descriptive formants I have found no Canadian decision directly on point, but the issue of a ship charterer’s right to recover economic losses caused by damage to the ship was extensively discussed by La Forest J. (diss.) in Canadian National Ry. Co. v Norsk Pac. S.S. Co. 32. He cited the rule that a demise (or bareboat) charter makes the charterer the disponent owner of the vessel, and consequently entitles the charterer to claim for any damage to the vessel and any consequential economic loss. A time or voyage charter, by contrast, gives the charterer merely a contractual right to the use of the vessel, making its loss not property damage but relational economic loss.33 La Forest J. cited with apparent approval a Privy Council decision that a time charterer cannot claim against the person responsible for a collision for economic loss suffered by being deprived of the use of the ship.34 It is more than likely that a time charterer’s claim would today be rejected applying the general exclusionary rule for relational economic loss affirmed by the Supreme Court of Canada in Bow Valley Husky (Bermuda) Ltd. v St. John Shipbuilding Ltd.35 (see Case 1). In Bow Valley, the claims by the licensees of an offshore oil rig – analogous to time charterers – were held to be indistinguishable from the claims of others whose business depended on the functioning of the rig. The duty of care was rejected because it would lead to indeterminate liability. III Metalegal considerations Maritime law is an area in which everybody is commercially sophisticated and can live with any allocation of risk that is reasonably predictable.36 32 33 34

35 36

[1992] 1 SCR 1021, 91 D.L.R. (4th) 289 at 325–31. See Feldthusen at 236–37. See Candlewood Navigation Corp. Ltd. v Mitsui O.S.K. Lines Ltd. [1986] AC 1 (P.C.). He noted at 330 D.L.R. that the principle barred a claim for actual losses as well as for profits not earned. He also noted at 331 that some United States authorities would permit the time charterer to recover wasted hire payments, on the basis that this is a traditional item of damages that the wrongdoer would expect, but La Forest J. was uncertain whether this was a justifiable exception. [1997] 3 SCR 1210; 153 D.L.R. (4th) 385. Feldthusen at 237–39.

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Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which time he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she looked after her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness. I Operative rules The wife would probably not have a direct claim in negligence against the perpetrator, although an indirect claim for the value of her services would be possible, as would (in Ontario) a statutory claim for her loss of income. II Descriptive formants The accident victim has been held entitled to recover an amount to compensate close family members who provide personal services as a result of the injury; the victim holds the award in trust for the family member(s).37 A direct claim by the caregiver was allowed in MacIsaac v Deveaux 214 N.S.R. (2d) 129, 2003 NSSC 111. In Ontario, but not elsewhere, family members who provide nursing, housekeeping or other services to an accident victim have a statutory direct action against the wrongdoer for, inter alia, their lost income or the reasonable value of the services.38 Except by one of these routes, a direct claim by the wife for the economic loss she suffered in order to look after her husband would probably fail. Canadian courts would apply the Anns/Kamloops twostage analysis as refined in Cooper v Hobart (see Introduction). (1) It is certainly foreseeable that injury to an individual will cause

37

38

See Lang v Ballash, 72 Alta. L.R. (2d) 306 (C.A.); Feng v Graham [1988] 5 W.W.R. 137 (B.C.C.A.); Dziver v Smith (1983), 146 D.L.R. (3d) 314 (Ont. C.A.). The victim’s right to claim is discussed in Fridman at 497–98. Family Law Act, R.S.O. 1990, c. F.3, s. 61(1) and (2)(d). Section 61(1) gives a right to the ‘spouse, as defined in Part III (Support Obligations), children, grandchildren, parents, grandparents, brothers and sisters of the person’ injured or killed to recover their ‘pecuniary loss’. Section 61(2)(d) stipulates that the family member’s damages include, ‘where, as a result of the injury, the claimant provides nursing, housekeeping or other services for the person, a reasonable allowance for loss of income or the value of the services’.

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economic loss to his or her spouse, although it is debatable whether that by itself creates a relationship of proximity between the wrongdoer and the victim’s spouse. (2) If the victim’s spouse were to have a claim for the economic repercussions on her of the victim’s injury, it would be difficult to exclude claims by other close relatives, and the scale of those claims would be open-ended. This would create a concern about indeterminate liability, which was invoked in D’Amato v Badger in relation to an employer’s claim (see Case 2). A wife’s claim for lost income was dismissed on this ground in Dempsey v Dempsey 39. III Metalegal considerations The risk management argument noted under Case 2 in relation to employers and employees does not apply in relation to a family member, whose financial risk does not stem from contractual arrangements with the victim. However, this may not be enough to overcome the indeterminacy concern. The existing common law and statutory means for compensating close family members offers a largely adequate solution. Case 6 – Auditor’s liability Donna audits the accounts of Caterpillar, Inc. inaccurately. Paul relies on these published accounts to launch a take-over bid. This is successful but Paul then discovers that the accounts overestimated the value of the company and that the price he paid per share was twice its actual value. I Operative rules The auditor would clearly not be liable to Paul. The duty of care in respect of negligent misstatement has been circumscribed so as to demand that the auditor have a reasonably precise knowledge of the nature of the plaintiff ’s reliance, which the auditor here did not have.40

39 40

224 N.B.R. (2d) 224 (Q.B.). On the restrictions on the duty of care in respect of negligent misstatement, see Feldthusen at 30–80, especially 43–48; Fridman at 363–72; Klar at 210–22; Linden and Feldthusen at 449–63; Osborne at 165–71.

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II Descriptive formants In the leading Canadian decision on auditors’ liability, Hercules Managements Ltd. v Ernst & Young,41 the Supreme Court of Canada adapted the Anns/Kamloops analysis (see Introduction) to negligent misstatement as follows: (1) A prima facie duty of care will exist if the defendant can reasonably foresee that the plaintiff will rely on the defendant’s advice or information, and if that reliance is reasonable. (2) A consideration that will negative the duty of care is the prospect of indeterminate liability. Because of that concern, the court said there will be no duty of care unless the defendant knows the identity of the plaintiff, or of a limited class to which the plaintiff belongs,42 and the plaintiff has used the advice or information for the specific purpose or transaction for which the defendant gave it. In the case of the auditor of a corporation’s financial statements, the auditor is usually not liable to individual shareholders in respect of investments they made or retained from reliance on the negligently audited statements. The auditor prepares the financial statements for the shareholders as a group, not for the shareholders as individual investors, and does not know what investment decisions individual shareholders might make in reliance on the statements. Where statements are prepared or certified specifically to form part of a prospectus issued to investors, inviting them to subscribe to shares or debt instruments of the company, both the identity of the class of potential plaintiffs and the precise nature of their reliance are known. Foreseeable liability is determinate, although it may be very large. A duty of care has been held to exist in these circumstances, and investors were held entitled to recover if they could show that the financial information was material to their decision to invest: Kripps v Touche Ross & Co..43 III Metalegal considerations An investment decision is the classic instance of the deliberate acceptance of risk. Courts tend to resist efforts to shift this risk to auditors or others whose information was one of many factors that were assessable by the investor.44 41 42 43 44

[1997] 2 SCR 165; 146 D.L.R. (4th) 577. As in Haig v Bamford, [1977] 1 SCR 466; 72 D.L.R. (3d) 68. [1997] 6 WWR 421 (B.C.C.A.), leave to appeal to S.C.C. refused [1997] 3 S.C.R. xv. On the risk allocation effects of tort liability for pure economic loss, see Joost Blom, ‘Tort, Contract and the Allocation of Risk’ (2002), 17 SCLR (2d) 289.

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Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institute, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit, Inc. makes no further inquiry and thus does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damage. He is now suing Credit, Inc. to recover his losses. I Operative rules Dieter may well have a claim against Credit Inc. It does not fit into any of the established categories, but may be recognized as an incremental extension of the duty of care in respect of pure economic loss. II Descriptive formants There are two Canadian cases in which the plaintiff suffered economic loss because a third party acted in reliance on advice or information, relevant to the plaintiff, that the defendant negligently gave to that party. Young v Bella,45 involved a student whose potential career as a social worker was ruined by her professor’s negligent report to child protection authorities that she might in the past have committed child abuse. It was not treated as a negligent misstatement case; the duty of care was based on the relationship of proximity between student and university. The other, Haskett v Equifax Canada Inc.,46 was a class action on behalf of a large number of people who had been denied credit, brought against two credit reporting agencies that were alleged to have included debts on these people’s files contrary to statutory rules. The court found there was a duty of care, either by extension of the law of negligent misstatement (as in Spring v Guardian Assurance Plc.47) or as a new category of pure economic loss, based upon the application of the Anns/Kamloops test (see Introduction). 45 46

47

[2006] 1 SCR 108; 261 D.L.R. (4th) 516; 2006 SCC 3. (2003) 224 D.L.R. (4th) 419 (Ont. C.A.) leave to appeal to S.C.C. refused [2003] 3 SCR vi. [1995] 2 AC 296 (HL).

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Applying the Anns/Kamloops analysis to the present case, economic loss to Dieter as a consequence of the negligent actions of Credit Inc. was clearly foreseeable. Probably there was a relationship of proximity between Credit Inc. and Dieter, stemming from this risk and from the fact that Credit Inc. knew it was dealing with the reputation of a specific individual. A prima facie duty of care would therefore probably exist. No considerations of policy would negative or limit this duty. Indeterminate liability would not be a concern because Credit Inc. gave the information only to the First National Bank and the repercussions for Dieter would be limited to those caused by the acts of that bank. III Metalegal considerations Young v Bella (at para. 56), like the Spring case in England, rejected the argument that allowing a remedy in negligence for the harmful effects of what the defendant said to third parties will undercut the protections of the law of defamation.48 In Haskett, there was the additional complication that the information was actually true, but subject to a statutory reporting bar. Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by the RAC when he was involved in a head-on collision with another automobile. The engine of the rented vehicle intruded into the passenger compartment causing severe and permanent injuries. Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. The severing of the car made it impossible to determine within a reasonable degree of certainty whether or not the vehicle had design, manufacturing and/or maintenance defects which proximately caused Nicholas’ injuries. Nicholas sues RAC for negligent spoliation of the evidence and tortious interference with a prospective civil action against Alfa Romeo. 48

See Feldthusen at 147; Richard Macklin, ‘Making the Choice Between Merger and Concurrency Rules in Tort: A Comment on Young v Bella’ (2006) 85 Can. Bar Rev. 161.

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I Operative rules Nicholas could perhaps show that negligent spoliation of evidence is a ground for recovering pure economic loss, but must also show a substantial chance that the evidence would have enabled a successful lawsuit. II Descriptive formants Spoliation of evidence, as such, has not yet been clearly accepted as a tort in Canadian law.49 Claims for damages arising from the intentional or reckless destruction of evidence by a party to an action have mostly been allowed to proceed to trial.50 No case has yet found liability. The present situation is weaker in two respects. The claim is for negligent, rather than deliberate, spoliation, and it is made against a third party to the action in which the evidence would have been used, not against the other party to that action. Nicholas could try to invoke a new category of case for which a duty of care in respect of pure economic loss should be found using the Anns/Kamloops test as elaborated in Cooper v Hobart (see Introduction). (1) RAC could clearly foresee that dismantling the car might interfere with Nicholas’ use of the wreck as evidence, the very purpose for which RAC said they would hold the car for sixty days for his inspection. RAC’s relationship with Nicholas was one of proximity in other respects as well, because they rented him the car. A prima facie duty of care would very probably be found. (2) This would not be a case of indeterminate liability, since the nature and the scale of the risk to Nicholas’s financial interest was known to RAC. I can see no other considerations of policy that would militate against finding a duty of care. A court has refused to strike out a claim against the government, as guardian of a child, for negligently failing to secure and preserve evidence relating to a hit and run accident when he was six.51 I therefore think it is very likely, under 49

50

51

Fridman at 873–74; Richard J. Sommers and Andreas G. Seibert, ‘Intentional Destruction of Evidence: Why Procedural Remedies are Insufficient’ (1999), 78 Can. Bar Rev. 38. Spasic Estate v Imperial Tobacco Ltd. (2000) 188 D.L.R. (4th) 577 (Ont. C.A.), leave to appeal to S.C.C. refused [2001] 1 S.C.R. xii; Robb v St. Joseph’s Health Care Centre (2001), 9 C.C.L.T. (3d) 131 (Ont. C.A.), leave to appeal to S.C.C. refused [2002] 3 S.C.R. xi Kacperski v Orozco [2005 ABCA 179; contra, Endean v Canadian Red Cross Society (1998), 157 D.L.R. (4th) 465 (B.C.C.A.)]. Rivet v British Columbia 2007 BCSC 731.

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Canadian common law, that RAC could be held liable for negligently destroying evidence they knew might be relevant to the plaintiff ’s ability to prove a legal claim. Nicholas’s real problem would be proving that he had a potential claim against Alfa Romeo with a realistic prospect of success. III Metalegal considerations None other than those already mentioned under II. Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having previously been employed by OMEGA and, while so employed, was a member of their occupational pension scheme. He was told by ALPHA that he was eligible to join its occupational pension scheme. As an employee, he would, unless he wished to opt out, automatically become a member of the scheme and deductions would be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based on a careless reading of the materials provided, the broker vaunts the economic virtues and performances of OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and stay in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than she would have received from ALPHA. Mrs. Smith sues the Broker. I Operative rules If the broker’s business normally included selling pension funds, the broker would certainly be liable to Mr. Smith for advising him to choose the Omega Pension Fund, and there are strong arguments for extending liability to Mrs. Smith. II Descriptive formants If the claim were made by Mr. Smith, there would be little doubt he could recover. Expert advice concerning financial matters is a standard situation for applying a duty of care in negligent misstatement. Insurers have been held liable for negligent advice their representative gave about insurance coverage.52 Employers have been held liable 52

Fletcher v Manitoba Public Ins. Co. [1990] 3 SCR 191; 74 D.L.R. (4th) 636.

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for negligent advice given concerning pension arrangements,53 as has a trade union,54 and a stockbroker with whom pension funds were invested.55 The complication here is that the plaintiff is not the person who received and acted upon the advice, but his widow. If the facts allowed, she could claim that at the time he received the advice, Mr. Smith was acting for her as well as himself. Alternatively, using the Anns/Kamloops test (see Introduction), she could argue that there was clearly a prima facie duty of care towards her (foreseeable loss, relationship of proximity) and no risk of indeterminate liability. She could draw an analogy with the cases that have allowed a disappointed beneficiary to recover against the testator’s lawyer for negligently failing to have a valid will made.56 It is no objection that the loss arises from a decision to enter into contract A rather than contract B, and the loss being claimed is the additional financial benefit that contract B would have provided compared with contract A.57 III Metalegal considerations None other than those noted under II.

2 Summary: Pure economic loss in Canadian common law As noted in the Introduction, the Supreme Court of Canada has adopted a methodology by which pure economic loss claims are analyzed according to categories.58 The categories in which a duty of care has been found so far are as follows. 53

54

55 56

57

58

Allison v Noranda Inc. (2001) 239 N.B.R. (2d) 211, 2001 NBCA 61; Spinks v Canada [1996] 2 FC 563, 134 D.L.R. (4th) 223 (F.C.A.). Deraps v Labourer’s Pension Fund of Central & Eastern Canada (1999) 179 D.L.R. (4th) 168 (Ont. C.A.). DuChene v Merrill Lynch & Co. Canada (2003) 214 N.S.R. (2d) 250 (S.C.). Earl v Wilhelm (2000), 183 D.L.R. (4th) 45 (Sask. C.A.), leave to appeal to S.C.C. refused sub nom. Greenwood v Hickson [2000] 2 SCR ix. See Queen v Cognos Inc. [1993] 1 SCR 87; 99 D.L.R. (4th) 626 (negligent inducement to give up a secure job for an insecure one). Professor Feldthusen, on whose analysis the court has heavily relied in adopting the ‘categories’ approach, discusses the merits of such an approach in Feldthusen at 15–20. He notes that other Commonwealth jurisdictions have largely eschewed categories in favour of a single approach, albeit one that incorporates a variety of indicia for determining whether to impose a duty of care.

Canada

1. 2.

3.

4.

5.

59

60

61

62

63

64

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Negligent misstatement or negligent professional advice (see Case 6 above).59 Economic loss caused by failing to warn of a physical danger to person or property and so causing a delay in repair (see Introduction).60 Economic loss caused by the negligent exercise by a public authority of its statutory powers of regulation or decision (denying a duty of care on the facts).61 Cases where such claims have succeeded have involved the exercise of statutory powers, like building inspection,62 that relate to a specific person or item of property rather than regulation of a class of business activity. Because each statutory mandate is different, every public authority liability case is in effect a category unto itself, requiring the Anns/Kamloops analysis. Public authorities are not liable for acts based on their judgement as to policy, only for ‘operational’ decisions (Kamloops).63 Negligent performance of a service (other than by professional advisors). There will rarely be sufficient proximity to hold the defendant liable to a third party B for financial loss caused by the failure to perform (adequately or at all) a service for A.64 The only instance in which liability has been imposed, as far as I know, is that of a lawyer’s liability to a disappointed beneficiary for negligently failing to ensure the execution of a valid will on behalf of the testator (see case 9). Negligent construction or manufacture. In Winnipeg Condominium Corp. No. 36 v Bird Construction Co.,65 the Supreme Court Hercules Managements Ltd. v Ernst & Young [1997] 2 SCR 165; 146 D.L.R. (4th) 577, Feldthusen, c. 2; Fridman at 354–72; Klar at 204–35; Linden at 444–68; Osborne at 162–73. Rivtow Marine Ltd. v Washington Iron Works [1974] SCR 1189; 40 D.L.R. (3d) 530. Feldthusen at 188–90; Fridman at 377–79, 539–41; Klar at 254–56; Linden at 474. Cooper v Hobart [2001] 3 SCR 537; 206 D.L.R. (4th) 193. Feldthusen, c. 6; Fridman at 330–36; Klar at 270–72; Linden at 698–706; Osborne at 198–203. Kamloops (City) v Nielsen [1984] 2 SCR 2; 10 D.L.R. (4th) 641 (see Introduction); Ingles v Tutkaluk Construction Ltd. [2000] 1 SCR 298; 183 D.L.R. (4th) 193. See Feldthusen at 277–95; Fridman at 330–36; Klar at 272–85; Linden at 684–97; Osborne at 198–203. See, for instance, BDC Ltd. v Hofstrand Farms Ltd. [1986] 1 SCR 228; 26 D.L.R. (4th) 1 (negligent delay in delivering a package on behalf of A, causing economic loss to B); Feldthusen, c. 3; Klar at 235–42; Linden at 468–71; Osborne at 173–79. [1995] 1 SCR 85; 121 D.L.R. (4th) 193; Feldthusen, c. 4; Klar at 254–60; Linden at 471–77; Osborne at 190–95.

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of Canada reversed its earlier position (in Rivtow, see category 2) that pure economic loss attributable to remedying defects in construction of a building or manufacture of a chattel (as distinct from the delay caused by failure to warn) is irrecoverable in tort. Winnipeg Condo held that such loss is recoverable where the defect poses a substantial danger to person or property, as a logical extension of the duty not to cause physical harm. This has profound implications especially in construction law. Builders, subcontractors, suppliers and design professionals (a claim against whom may also fit under category 166) are liable to the owner (or whoever must repair) when the defect is discovered, and cannot limit their liability by contract, except as against the original owner, because the contract binds nobody but the parties to it. Later cases have found the element of dangerousness does not need to be imminent, so that structural faults are dangerous even though the risk of a failure is still well in the future67. Although the court in Winnipeg Condominium seemed to leave the question open, lower courts have generally assumed that there is no tort liability for non-dangerous defects,68 but some regard the issue as still open.69 Relational economic loss. Since Bow Valley Husky (Bermuda) Ltd. v St. John Shipbuilding Ltd.70 (see Case 1), it has been clear that contractual relational economic loss is presumptively not recoverable, subject only to narrow exceptions such as economic loss from damage to property used in a joint venture,71 and general average claims. Non-contractual relational economic loss, recovery for which is even more difficult to circumscribe, is almost certainly subject to a like presumption.

It is not likely that broad additional categories will be recognized, given the constraints imposed by the avoidance of indeterminate 66

67 68

69

70

71

Sentinel Self-Storage Corp. v Dyregrov (2003), 233 D.L.R. (4th) 18; 2003 MBCA 136. Roy v Thiessen [2005] 7 W.W.R. 199; 2005 SKCA 45. Privest Properties Ltd. v Foundation Co. of Canada Ltd. (1997), 143 D.L.R. (4th) 635 (B.C.C.A.), leave to appeal to S.C.C. refused [1997] 3 S.C.R. xiii. Sable Offshore Energy Inc. v Ameron Int’l Corp. (2007) 255 N.S.R. (2d) 164; 2007 NSCA 70. [1997] 3 SCR 1210, 153 D.L.R. (4th) 385; Feldthusen, c. 5; Fridman at 379–81; Klar at 242–53; Linden at 477–81; Osborne at 179–89. Canadian National Ry. Co. v Norsk Pac. S.S. Co. [1992] 1 SCR 1021; 91 D.L.R. (4th) 289.

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liability. Case studies 7–9 above raise instances where a restricted new category could pass the Anns/Kamloops test, supported by the fact that it would be closely related to an existing category. Similarly, Young v Bella72 (see Case 7) establishes a new narrow category in which the plaintiff suffers economic loss because a defendant who is in a relationship of proximity to the plaintiff negligently gives wrong information about the plaintiff to a third party.

Bibliography Feldthusen, B. Economic Negligence: The Recovery of Pure Economic Loss, 4th edn (Scarborough, Ont.: Carswell, 2000). Fridman, G. H. L. The Law of Torts in Canada, 2nd edn (Toronto: Carswell, 2002). Klar, L. Tort Law, 3rd edn (Toronto: Thomson Carswell, 2003). Linden, A. M. and B. Feldthusen, Canadian Tort Law, 8th edn (Markham, Ont.: Butterworths, 2006). Osborne, P. H. The Law of Torts, 2nd edn (Toronto: Irwin Law, 2003).

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[2006] 1 SCR 108; 261 D.L.R. (4th) 516, 2006 SCC 3.

Chapter 7

Israel Dr. Tamar Gidron and Dr. Boaz Shnoor

1 Introduction The Israeli approach to pure economic loss is still in its formative stage. On the one hand there are quite a few court decisions dealing with most categories of cases in which pure economic loss can occur, yet these decisions do not give us any clear rules or guidelines to advise us as to the Israeli tort law position. This chapter outlines the structure of Israeli tort law in general, stressing the issues that will be later relevant to the specific topic at hand. It presents the leading Israeli cases on pure economic loss and then goes on to analyze the current state of the law. It examines the reaction of the Israeli legal system to a variety of ‘live’ circumstances relating to some of the common categories of economic loss cases. This part was both easy and problematic to deal with, due to the unique state of the law as explained above. It was easy in that the current common trend in Israeli tort law points toward expanding liability in tort in general, and negligence in particular. It was complicated because, to date, Israeli case law is devoid of a clear, binding analysis of this important issue.

2 Tort law in Israel – an overview a) Structure The Israeli legal system is unique. It has been influenced by various legal regimes and current private law reflects this mixture: a civil law heritage, especially in contract law; common law influence, especially in tort law; and a growing body of independent Israeli law, both legislative and judge-made. Tort law is governed primarily by

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legislation, yet the courts play a vital role in interpreting the law and adapting it to changing times and social conditions. The Civil Wrongs Ordinance1 deals with the general doctrine of tort liability while setting forth a closed list of ‘civil wrongs’ (torts). The Ordinance is a newer version of the British Mandatory Civil Law Ordinance,2 which was itself a restatement of English common law rules applicable in the 1930s and 1940s.3 Despite its English origins, Israeli tort law has been developing in a different direction from English tort law. This independent development has been influenced by two key factors. First, Israeli legislation has been heavily influenced by Continental European approaches; second, Israeli jurisprudence does not consider itself bound by English precedents and has developed new concepts and doctrines. Such doctrines, which were also partly inspired by Continental law, are characterized by the strong influence of public policy considerations, which has consequently led to changes in the law.4

3 The Civil Wrongs Ordinance (CWO) The CWO contains two general torts: negligence and breach of statutory duty, in addition to a number of specific torts such as nuisance, trespass, assault, false imprisonment and interference with contract. a) Negligence The main tort in the CWO is negligence.5 It is also the main source of the internal development of Israeli tort law. Responsibility in negligence is based on a number of factors. The first is carelessness, which is decided mostly on the basis of social welfare considerations that are often expressed with reference to the 1 2 3

4

5

Civil Wrongs Ordinance, 1968, N.H 266. Civil Wrongs Ordinance, pG. Supp. I 129 (hereinafter: CWO). Gad Tedeschi, The Law of Civil Wrongs 33–44 (Aharon Barak, Mishael Cheshin & Izhak Englard eds., 1969). Gad Tedeschi and Abraham Rosenthal, Civil Wrongs Ordinance: In the Light of the History of its Preparation and Amendments (1960). Israel Gilead, International Encyclopaedia of Laws (Roger Blanpain (ed.) 2003) pp 19–28. Civil Wrongs Ordinance, § 35–36.

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famous Learned Hand formula;6 other factors include reparative and distributive justice as well as equality.7 The second element is ‘duty of care’. This notional element is meant to screen out cases in which, notwithstanding the defendant’s carelessness, imposition of liability is undesirable. Duty of care is recognized in Israel even in categories of cases where the imposition of liability raises serious policy questions, such as pure economic loss, pure emotional loss and governmental activities and omissions. However, sometimes – as in cases of consequential emotional loss – liability is subject to strict, restricting circumstantial terms.8 The third required element for liability in negligence is damage. The definition of ‘damage’ in Israeli tort law includes all types of traditional damage. Moreover, in recent years a trend has emerged recognizing less traditional types of damage – such as lost chances – mainly in cases of medical negligence where the attending physician’s proven carelessness decreased the patient’s chances of recovery, although it is not clear whether his carelessness indeed prevented such recovery.9 Compensation for breach of a plaintiff ’s autonomy is also quite new. It is granted in cases where, due to the defendant’s carelessness, the plaintiff was deprived of his right to make an informed decision with regards to his body, his property or even his legal rights.10 Causation, the fourth element, is divided into two sub-categories:

6 7

8

9

10

United States v Carroll Towing Co. 159 F. 2d 169, 173 (1947). For examples regarding negligence tests see: CA 5604/94 Hamed v State of Israel [2004] IsrSC 58(2) 498; Municipality of Haifa v Menora Mivtachim Ltd., 2906/01, Nevo, CA (May 25, 2006) sec. 46–47. CA 80/88 Elsohca v Estate of Dahan [1990] IsrSC 44(3) 397; Estate of Sahroyn v Eliyahu Insurance Company Ltd., 3662/05, Nevo, CA (Sept. 5, 2007); Levi v Shaare Zedek Medical Center, 754/05, Nevo, CA (June 5, 2007). Malol v Carmel Hospital Medical Center, 7375/02, Nevo, CA (Mar. 31, 2005); CA 231/84 Histadrut Health Maintenance Organization v Fatach [1988] IsrSC 43(3) 312; Ariel Porat and Alex Stein, Tort Liability under Uncertainty (2001), pp 116–129. CA 2781/93 Daaka v Carmel Medical Center [1999] IsrSC 53(4) 526; for an example regarding the obligation to inform and receive patient approval prior to treatment see: Weinstein v Bergman, 9817/02, Nevo, CA (June 16, 2005); for an example regarding economic autonomy see: CA 9136/02 Mister Money Inc. v Reiz [2004] IsrSc 58(3) 934; for an example regarding consumer autonomy see: CA 1338/ 97 Tnuva Food Industries Ltd. v Rabi [2003] IsrSC 57(4) 673.

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Causation in fact is generally determined by the ‘but for’ test,11 whereas legal causality is determined by the risk-related screening test. In recent years, a tendency to shift the burden of proof regarding carelessness and causality from the plaintiff to the defendant, particularly in cases of medical malpractice, has materialized in Israel. This shift is based on well-known doctrines such as res ipsa loquitor, as well as on newer doctrines, such as evidential loss. According to the Israeli version of the evidential loss doctrine, the defendant will bear the onus of proof in cases where due to the defendant’s negligence (e.g., the non-provision of information under the defendant’s responsibility12) the plaintiff stands in a worse evidential position than he would have otherwise. b) Breach of statutory duty The second general tort is breach of statutory duty,13 which requires the plaintiff to prove that the defendant violated a statute; that the statute is meant to protect the plaintiff; that the risk at issue is the type for which the statute is meant to provide protection; and that the statute does not exclude a tort remedy. In this regard, it was decided that if the statute is seen as protecting the plaintiff, a presumption that the law does not exclude the tort remedy automatically follows.14

4 Other tort legislation Israeli tort law is quite rich in legislation regulating specific human activities that contain special/nominate torts. The main tort scheme 11

12

13 14

For a discussion of proportional responsibility in cases where lack of certainty exists see: Boaz Shnoor, ‘The Theoretical Foundations of Partial Compensation’, 37 Mishpatim 177. For examples regarding evidential damage see: Elhabad Inheritance v The State of Israel, 1071/96, Nevo, CA (Feb. 6, 2006); CA 8151/98; Stanberg v Cheswick [2001] 56(1) 539; Ariel Porat and Alex Stein, ‘The Evidential Damage Doctrine: A Positive Analysis of the Law’, 21 Tel-Aviv University L. Rev. 191 (1998); Porat and Stein, supra n. 8. Civil Wrongs Ordinance §63. Mifal Hapayis v Lotonet Members Club Ltd., 610/02, Nevo, CA (July 2, 2003); CA 145/80; Vaknin v Beit Shamesh Local Council [1982] IsrSC 37(1) 113; CA 286/64 Sultan v Sultan [1984] IsrSC 38(3) 169; Communication & Religious-Jewish Education Ltd. v S.B.C Advertising, Marketing & Sales Promotion, 5792/99, Takdin, CA (May 23, 2001).

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outside the CWO deals with physical injuries caused in road accidents.15 This scheme is based on: (a) mandatory insurance coverage of drivers and owners of vehicles; (b) the absolute liability of drivers and insurance companies to compensate victims subject to compensation caps; and (c) denying victims the possibility of suing under other tort schemes; and on a statutory body, financed by funds transfers from mandatory insurance, whose role is to compensate victims of road accidents in any case where they are unable to obtain compensation from the driver’s or car owner’s insurer. This innovative and all-encompassing scheme, which took the entire area of car accidents out of the CWO, almost totally eliminates the deterrent effect of tort law in this field of human activity, instead favoring loss-spreading and administrative efficiency.16 Regarding pure economic loss, it is important to mention the Commercial Torts Law,17 which defines several torts (passing off; false description of a business, profession, asset or service; unfair obstruction of access to the business of another person etc.) that protect the economic-commercial interests between commercial parties in the course of conducting business. The law also provides a general tort of breach of trade secrets.18 In a claim filed under this law, the plaintiff is entitled to compensation up to an amount valued at
18,00019 without proof of damage. This type of compensation (also available in privacy, libel, sexual harassment, and copyright actions) is one of the important innovations to appear in Israeli tort law. However, the law refrains from introducing a general tort of unfair business competition. Thus in cases where the Commercial Torts Law falls short of providing adequate protection, resort can be made to the Unjust Enrichment Law.20 15

16

17 18 19 20

The Road Accident Victims Compensation Law, 1975, S.H. 780 (hereinafter: Compensation for Victims of Road Accidents law); Motor Vehicle Insurance Ordinance (Revised Version), 1970, N.H. 15. Daniel More ‘Compensation of Road Accident Victims for Non-Pecuniary Losses’. 6 Tel-Aviv University Law Review 397 (1978). Commercial Torts Law, 1999, S.H. 1709 (hereinafter: Commercial Torts Law). Ibid., at 6. Ibid., at 13(a). Unjust Enrichment Law, 1979, S.H. 42; CA 5768/94 A.SH.I.R v Forum Accessories & Commodities [1998] IsrSC 52(4) 289.

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In an attempt to integrate and promote Israel’s private law, a codification committee, which has been working since the mid-1970s, has published draft legislation for an Israeli Civil Codex, in which extensive changes in tort law are proposed. The structure and the leading features of tort law will nevertheless remain the same.21

5 Pure economic loss in the Israeli legal system As in most legal systems, the Israeli courts are generally willing to ignore the fundamentally problematic nature of pure economic loss when liability is based on a nominate tort (i.e. when boundaries and guidelines are well defined and the risk of over-extending liability is not great). In consequence, economic and financial loss are compensated in cases of injurious falsehood,22 in cases based on Commercial Torts Law23 and Consumer Protection Law,24 in breach of statutory duty cases which protect an economic interest25 and even in defamation cases.26 The difficulty arises when liability is based on negligence. As witnessed in other jurisdictions as well, the main tool for screening undesirable liability is by limiting recognition of a duty of care. The explicit wording of §§ 35–36 of the CWO and the interpretation of these sections by the Israeli system confer wide discretion to the courts when deciding whether a duty of care exists. Such discretion has been applied expansively by Israeli case law in negligence cases in general and in cases of PEL in particular. The most remarkable result of this expansiveness when applying the CWO, which is a 21

22 23

24

25

26

Tazkir Monetary Law (Civil Codex), available at: www.justice.gov.il/NR/rdonlyres/ F4C8889A-234F-4A90–9B5A-B30C5B1B2E2A/0/mamonot.pdf (the draft bill was presented for comment but has not been officially published). Civil Wrongs Ordinance §58. Gold Avazi Restaurant v Avazi Hatikva Neighborhood, 8981/04, Nevo, CA (Sept. 27, 2006). The Consumer Protection Law, 31(A), 1981, S.H. 1023; CA 1977/97 Brazani v Bezeq The Israel Telecommunication Corp. Ltd. [2001] IsrSC 55(4)584; CFH 5712/ 01 Brazani v Bezeq The Israel Telecommunication Corp. Ltd. [2003] IsrSC 57(6) 385. CA 53/74 Bristol-Myers Comp. v Bizim Group Ltd. [1974] IsrSC 29(1) 372, in the case of A. Golan Communication v Yitzhak, 100619/00, Nevo, CC (July 19, 2005), the court ruled that breach of a trademark should be considered a breach of statutory duty – according to Civil Wrongs Ordinance §63. The protected interest here being twofold – both social and financial/commercial. Defamation Law, 1965, 1, S.H. 240 (hereinafter: Defamation Law).

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reflection of the English law of torts, has been the total disregard by Israeli courts of the ‘exclusionary rule’ that is so well-rooted in the English system. However, this deviation from the English interpretation of the notion of duty of care in pure economic loss cases does not necessarily lead to the conclusion that the Israeli system has either adopted an agenda of over-liberalization or embraced a formal, generally affirmative attitude toward economic loss cases at large. On the contrary, the Israeli courts seem to have adopted a ‘neutral’ or a ‘caseby-case’ agenda, restricting their decisions to the circumstances of the case in question and stressing that every new case is a potential opportunity to rethink the issue. A quick overview of Israeli case law shows that, with the exception of two categories of cases, the courts have time and again refrained from dealing with the subject of pure economic loss in a methodical and comprehensive manner despite the opportunities to do so. The two exceptional categories are negligent misrepresentation and government authorities’ liability. We can therefore accurately state that to date, save in these cases, Israeli law lacks clear rules regarding liability for pure economic loss in general as well as in each of the typical pure economic situations: negligent service, defective products/structures, and consequential loss. Both the finding and the denial of a duty of care are based mainly on circumstantially pinpointed deliberations instead of on a broad theoretical balancing of the various – and sometimes contradictory – relevant considerations. Hence, the decision regarding duty of care is usually focused only on the facts of the specific cases in question, without attempting to create clear, widely-applicable guidelines to be used in the future in other problematic pure economic loss cases. A lack of academic debate on this multifaceted subject does not make the judiciary’s work easier.27 27

Tamar Gidron (1995) ‘The Duty of Care in Negligence and Economic Loss’, 42 Hapraklit 126; David Ronen (1999) ‘Pure Economic Loss – A Comparative Study’, 44 Hapraklit 504; Israel Gilead, The Limits of Tort Liability in Negligence and Pure Economic Loss, in Developments in Austrian and Israeli Private Law (Herbert Hausmaninger, Helmut Koziol, Alfredo M. Rabello and Israel Gilead (eds.), 1999) p 197; Israel Gilead, The Limits of Tort Liability in Negligence and Pure Economic Loss, in Developments in Austrian and Israeli Private Law (Herbert Hausmaninger, Helmut Koziol, Alfredo M. Rabello and Israel Gilead (eds.) 1999) p 197; Israel Gilead, Non-Consensual Liability of a Contracting Party: Contract, Negligence, Both, or In-Between? In Classification of Private Law: Bases of Liability and Remedies (Celia W. Fassberg and Israel Gilead (eds.), 2003) p 35. Tamar Gidron, ‘Between Negligence of a Bank (England) and the Negligence of a State (Israel):

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It is therefore not surprising that problematic policy considerations in pure economic loss cases do not receive clear responses from the Israeli system. The most important of these relate to the possible clash between contract law and tort law. Questions such as whether tort law can be used to supplement, improve, change or even bypass contractual agreements have not received comprehensive clarification, although the courts have had many opportunities to do so regarding these and similar questions.28 Although the Israeli legal system allows for a lawsuit on the basis of contract and tort, jointly or alternatively in principle, providing that no double compensation is granted, the courts have not dealt at all with the main implications of this multiplicity and its effect on pure economic loss cases. The most common cases demonstrating the overlap between negligence and contract are cases dealing with defective products/structures and those dealing with negligent services. Although both types of cases raise similar legal problems, Israeli courts treat each differently. While contract law usually provides an appropriate response in a manner that eliminates the need for discussing tort liability in cases of pure economic loss caused by a defective product/structure, the court usually turns to the tort of negligence, with hardly any reference to contractual elements of the case, in cases of negligent service. It appears that in defective product/structure cases, given the absence of a contract law response (in the broad interpretative sense), Israeli law avoids imposition of tort liability on manufacturers/builders towards indirect purchasers. On the other hand, in negligent service cases, it appears that the more the negligent service in question resembles a negligent intellectual misstatement, the more the court is willing to impose liability, subject to the same limiting guidelines as in misrepresentation cases.29 Pure Economic Loss in the Civil Wrongs Ordinance in Light of Recent Judgements; A Comparative Analysis and Evaluation’ (forthcoming 2008). 28

29

CA 2625/02 Nahom v Dornabom [2004] IsrSC 58(3) 385 sec. 10–14 of Chief Justice Barak’s verdict; Rabinovitch v Rozenboim, 153/04, Nevo, CA (Feb. 6, 2006); CA 790/81 American Microsystems Inc. v Elbit Computer Ltd. [1985] IsrSC 39(2) 785; CA 86/76 Amidar – National Co. for the Settlement of Immigrants in Israel Ltd. v Aharon [1978] IsrSC 30(2) 337. For cases where the court cast tortuous liability on an attorney for breach of contract with his client, see for example: Estate of Deal v Nvihi Adv., 2078/02, Nevo, CC(TA) (Sept. 16, 2007); Katz v Halas Adv., 51214/05, Nevo, CC(TA) (June 21, 2007). Bank Leumi Ltd. v Moler, 10691/04, Nevo, CA (Aug. 28, 2007); Israel Gilead (2003) ‘Non-Consensual Liability of a Contracting Party: Contract, Negligence, Both, or In-Between?’, 3 Theoretical Inq. L. 511.

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Liability for negligent misrepresentation, an issue that has been raised quite often in Israeli courts, was first presented to the Israeli Supreme Court in 1954,30 in a case where a defective water tank was planned by the plaintiff – an engineer – for the sole use of his client. The client later entered into a contract with a contractor to build the water tank; the contractor made use of the defective plans, producing a leaking tank. The client declined to pay and the contractor, who suffered economic loss, sued the engineer for negligence. Without even once referring to the wording of the CWO, the Supreme Court, in an obiter pronouncement, declared that a duty of care may exist in cases such as this one, despite the special nature of the loss and regardless of the absence of contractual relations between the plaintiff-contractor and the defendant-engineer. Yet in accord with the well-known policy considerations of Justice Cardozo in Ultramares v Touch,31 it held that restrictive rules should be adopted in order to avoid indeterminate liability for indeterminate loss toward an indeterminate number of plaintiffs.32 The Israeli court thus adopted – again following the footprints of Justice Cardozo – the famous restrictive liability rules regarding reasonable reliance by the injured party; close proximity between the parties; foreseeability of loss; and the nature and scope of loss. Since then, some of those rules have been relaxed,33 but liability is still based on special relations, reasonable reliance, assumption of responsibility and assurance that liability does not exceed the desirable level of deterrence.34 The leading cases in which negligent misrepresentation was found were those that concerned the liability of banks, lawyers and auditors.35 In light of the basically negative approach to liability in cases of defective product/structure, and in light of the limited liability in cases of negligent misstatements, the Israeli courts’ treatment of 30 31 32 33

34

35

CA 106/54 Weinstein v Kadima [1954] IsrSC 8(2) 1317. Ultramares Corp. v Touch Niven & Co. 74 A.L.R. 1139 (1931). Ibid., at 1145. The fact that the defendant is a professional is irrelevant; liability should be based on the fact that the defendant has better information or better access to it. See Amidar, supra note 27, IsrSC 30(2) 337. For an example regarding negligence of attorneys see Rabinovitch v Rozenboim Adv., 153/04, Nevo, CA (Feb. 6, 2006). For the responsibility of attorneys see CA 37/86 Levi v Sherman [1990] IsrSC 44(4) 446; for the responsibility of banks see CA 542/87 Investment & Saving Mutual Benefit Society Ltd. v Awad [1990] IsrSC 44(1) 422.

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liability in negligence for pure economic loss caused by public authorities is quite surprising. In cases where public authorities were responsible for inducing pure economic loss, whether through negligent service, negligent misrepresentation, or any other way – even in cases which fall outside well-known, strictly categorized cases, as we shall see – Israeli courts tend to impose liability on public authorities for the pure economic loss they have caused. The courts justify such liability by stressing the dominant public interest in being able to rely on information and services supplied by public authorities. In consequence, the courts have imposed liability on the state itself, on planning and zoning authorities and on municipalities that have provided negligent service or incorrect information to parties who reasonably relied on their special position and their supposed professional knowledge and experience.36 However, just like in the other pure economic loss categories that we have touched upon (excluding misrepresentation) the courts do not delve into the nature and peculiarities of the damage, and sometimes they ignore the problematic nature of the subject. This offhand approach is typical of the court treatment of other pure economic loss cases as well. In situations falling outside the well-accepted categories,37 the prevalent trend is to focus on the details of each case and to analyze the duty of care using customary liability criteria. For the most part, the courts ignore any problematic type of loss or treat it as only one – usually minor – factor among those they do consider relevant for determining the decision. Examples of this trend can be found in a case where the plaintiff unsuccessfully brought an action against a negligent driver who ran him over and caused him certain injuries that resulted in death two years later when a second driver negligently hit him (the plaintiff );38 in a case in which the plaintiffs could not receive delivery of a cargo 36

37

38

Amidar, supra n. 27 IsrSC 30(2) 337; CA 80/87 Zaleski v Rishon LeZion Local Committee for Planning and Construction [1991] 45(4) 604; CA 5610/03 Zaleski v Rishon LeZion Local Committee for Planning and Construction [1997] 51(1) 68. The most common is the categorization made by Bruce Feldthusen. See Bruce Feldthusen, Economic Negligence: The Recovery of Pure Economic Loss (4th ed, 2000). Vernon V. Palmer and Mauro Bussani, General Report: Pure Economic Loss – The Way to Recovery Ch. 2 (Utrecht: Working Paper, 2006); Tamar Gidron and Boaz Shnoor, General Report: Pure Economic Loss – The Way to Recovery (The Israeli Report) (Working Paper, 2006). CA 248/86 Estate of Chananshvili v Rotem [1991] IsrSC 45(2) 529.

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because the defendants’ negligent strike had shut down the port;39 and in a case where the plaintiff, a contractor who had to destroy and rebuild two houses due to a measurement error, sued his insurance company though the insurance policy covered only physical loss.40 On the other hand, in cases of consequential economic loss and ricochet loss, the Supreme Court has ruled more than once, again without any comprehensive discussion, that the weight of the defense arguments could dictate a trend in denial of liability.41 In light of this grey area, it would be useful to relate directly to three cases that were decided recently by the Supreme Court and thus can serve as good examples of Israel’s approach to the subject of pure economic loss. a) The case of a petrol station’s lost income In Paz v The State of Israel,42 the plaintiff was one of Israel’s largest petrol companies. One of its stations suffered reduced income due to massive repairs being performed on the highway on which it was situated. The repairs lasted almost two years instead of the intended 4–6 months. During this long period, the road that connected the station to the highway had to be closed. Although a detour was built, drivers still avoided the station. The petrol company sued the state claiming lost income. It argued that the delay in the work was caused by the negligent planning and implementation of the project. The Supreme Court first found that there was no negligence on the part of the state. Following this finding, Justice Rivlin declared in a short obiter dictum that although the purely economic nature of the damage might sometimes be considered a factor leading to a denial of liability, it is commonly accepted in Israel that the liability of public authorities is an exception to this rule.43 In effect, the ruling reflects 39 40

41

42 43

CA 593/81 Ashdod Motor Works Ltd. v Tzizik [1987] IsrSC 41(3) 169. CA 5775/02 Neve Gan Building, Development and Investment v Israel Phoenix Insurance Company (2004) IsrSC 58(2) 307. S. Ben Avraham Architects Ltd. v U. Dori Geometrical Engineering Ltd., 1077/96, Takdin, CA (Jan. 30, 2000). Yet, see the decision of the District Court in: CA(TA) 1860/90 Ma’Aleh Efrayim Printing v Ellerman Lines Plc [1994] IsrDC 55(2) 17 wherein the judge imposed liability in a case similar to the famous decision given in Leigh & Sullivan Ltd. v Aliakmon Shipping Co. Ltd., [1985] QB 350. Even here the court refrained from stepping outside the factual circumstances of the case. Paz Oil Company Ltd. v The State of Israel, 3464/05, Nevo (July 12, 2006). Ibid., sec. 7 of Judge Rivlin Judgement.

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the position of Israeli law regarding the liability of public authorities in general, not solely in cases of pure economic loss.44 b) The case of the uninsured rally motorcyclist Soon after the Paz decision, the Yerushalmy case attracted the court’s attention. Although the theoretical problems are rather similar in both, the latter posed an unusual, problematic human dilemma. The circumstances remind us of the well-known English case Erick S. Bush v Wyre Forest District Council.45 The plaintiff, an experienced motorcyclist, contracted with the defendant – a motorcycle importer – to participate in a Rally race in Egypt under the defendant’s auspices. Both the defendant and the motorcyclist, who was seriously wounded and permanently crippled during the race, failed to purchase proper insurance. The motorcyclist claimed that because of the defendant’s negligence, he had no insurance coverage for the loss he suffered. He also claimed that the defendant company owed him a duty of care either to advise him to purchase proper insurance or to do this for him. In short, he was claiming an economic loss caused by the fact that his physical loss was not insured.46 Justice Chayut’s inner struggle regarding the Yerushalmi case is apparent to anyone who reads her decision. The magnitude of the loss is evident and the financial implication of denying liability is obviously painful. The gist of the decision is that tort law in general and the tort of negligence in particular are not the proper mechanisms for achieving the goal of mandatory insurance, which is best achieved through targeted legislation. The issue of pure economic loss receives a lengthy analysis and the overall tendency is positive. However, yet again, the court limits its decision to the explicit factual situation; as presented, the arguments for and against liability make it practically impossible to extricate any coherent guidelines for future implementation in even slightly different circumstances.

44 45 46

CA(TA) 2474/86 Nazer v Canfonit Airline Rental Comp. [1994] IsrDC 54(2)441. Eric S. Bush v Wyre Forest District Council [1990] 1 AC 831 (HL). Yerushalmi v Polaris Import & Export Comp., 4493/05, CA (Mar. 7, 2007).

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c) The flowers case The most complicated of the three cases is no doubt Shatil v The State of Israel.47 Here the plaintiff was a professional flower grower. He suffered severe losses due to the fact that the water supplied by the state was too salty, thus diminishing the quantity of flowers he could grow and sell annually. This case again raises the question of the liability of public authorities, so it comes as no surprise that the court continued to apply the same logic applied in the previous examples and stated that Israeli tort law is willing and ready to favor such liability because on balance, the policy considerations tend to impose liability rather than to negate liability. As to pure economic loss, the issue remained untouched yet again. The nature of the loss in the Shatil case poses a complicated problem. It reminds us of one of the leading pure economic loss cases argued in England, the case of Spartan Steel Alloys v Martin,48 where cutting off the electricity to the plaintiff ’s factory caused three types of damages: the loss of value of the metal which was being processed at the time, the economic loss caused by lost profits from this damaged metal and the loss of production until work could be resumed in the factory. The plaintiffs were successful on the first two counts. However, as to the third count, the pure economic loss, they failed to convince Lord Denning, who refused to impose liability despite the heavy policy considerations to the contrary. The Shatil case involved the same three types of damages as in Spartan Steel. The controversial one was, of course, the third type. It is ‘pure’ economic loss as there was no allegation that the land was permanently damaged by the salty water and no indication that if watered by non-salty water, the productivity of the land would not have returned to its maximum.49 From the conservative point of view,50 with relation to the Economic Loss Rule that denies liability, the difficult issue in both Spartan Steel and Shatil is that part of the loss is physical; hence, the case is not really one of ‘pure’ economic loss. In light of this problematic ‘definition’ of the case, floodgate considerations and other 47 48 49

50

Shatil v Mekorot – Israel National Water Comp., 10078/03, CA (Mar. 19, 2007). Spartan Steel & Alloys Ltd. v Martin & Co (Contractors) Ltd. [1973] QB 27. Restatement (Third) of Torts: Liability for Economic Loss 8 (Proposed Council Draft No. 1, Oct. 2, 2006. Illustrations 9,10,11). Palmer & Bussani, supra, n. 37.

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policy considerations to that effect (which will be discussed later) lose much of their efficacy. In Spartan Steel, the complex nature of the loss was raised, considered and decided. The same response should have been triggered in Shatil. However, this did not happen. Unsurprisingly, the court imposed liability on the State. Again unsurprisingly, the court missed an opportunity to dive into the depths of this issue, still debated in most legal systems, and come up with a coherent, helpful insight.51 In view of the dominant approaches in other common law-based tort systems and the unsettled position of Israeli law to date, the most appropriate way for the system to deal with pure economic loss cases in the future is to refrain from categorizing these situations and applying special rules to each category separately, thus transforming them into sub-torts of the general tort of negligence. Instead they should apply the usual, long-accepted legal considerations employed in all other cases of negligence, notwithstanding the nature of the loss, while bearing in mind that this specific loss is just one factor to be considered and weighed. This attitude can easily be adopted by Israeli courts. Israeli law grants the courts sufficient discretion to correctly balance between the need to refrain from over-deterrence, which would flood the courts and impair social efficiency on the one hand, and the need to fulfill the commonly accepted goals of tort law on the other. Justice and efficiency mean leaving the complex questions regarding pure economic loss to the court’s discretion, free of any a priori restrictions. The range of working tools granted by Israeli tort law is well suited to successfully cope theoretically and practically with whatever circumstances may be involved. Case 1 – A cable case: the laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cut the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected black-out causes the loss of two days of production. Black has to lay off a number of workers hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay. 51

Ibid.; David Gruning. Pure Economic Loss in American Tort Law: An Unstable Consensus, 54 Am. J. Comp. L. 187 (2006); Feldthusen. supra, n. 37, at 1–9.

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I Operative rules The employees who lost two days’ pay are not entitled to compensation for their loss of wages. Since the pure economic loss they suffered is a lost contractual opportunity for two days of work, they will find it very difficult to convince the court that the defendant owed them a duty of care not to cause damage to such future financial interests on the basis of the tort of negligence.52 In the absence of case law dealing with similar factual situations, one can only assume what the court’s response to such a claim would be, yet it is not difficult to predict a total denial of liability. II Descriptive formants As in all other cases of pure economic loss, the crucial issue is whether a duty of care exists between the plaintiff and the defendant in the special circumstances of the case and with respect to the specific loss in question. This issue is decided by applying the foreseeability test to the facts of the case, general private law policy considerations and specific tort law policy considerations – especially those relating to unique pure economic loss considerations.53 The Israeli system reflects a very receptive approach to questions of liability in negligence in general and particularly regarding duty of care issues. Moreover, Israel’s courts generally tend to protect workers and their economic interests more than they protect other classes of plaintiffs. However, one can assume that in the case in question, the nature of the loss will lead the court to deny liability. The court will probably state that even though the loss is technically foreseeable, the workers do not have a binding legal right to being hired and receiving wages on a certain day. Therefore, the defendant is not under a legal duty to foresee such an economic ricochet loss; hence, policy considerations will lead to a denial of his liability. Israeli case law on this issue is wanting although there is at least one hallowed District Court decision that does relate to such a ricochet loss. In Brikman v Atid,54 a small fishing boat was stuck – due to 52 53

54

Civil Wrongs Ordinance §§35–36. CA 915/91 The State of Israel v Levi [1994] IsrSC 48(3) 45, where Chief Justice Shamgar combines ‘general’ considerations with intrinsic tort law considerations, leaving the issue of PEL aside. CA(TA) 1586/63 Brickman v Atid Transport Supply Lines Ltd. [1963] IsrDC 78 76.

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the negligence of its crew – at the entrance to the Tel Aviv port in the midst of a very heavy storm that had blocked the entrance to all boats for five days. A large number of businesses suffered economic loss: other fishermen, the restaurants in the area which serve fresh seafood, tour guides who run sea cruises and many more. The total loss was huge and the effective insurance policies covered only a small fraction of that loss. The court explained that either way, the loss would be spread among as many individuals as possible: If the shipping company is held liable, the loss will be spread amongst its customers and workers; if it is exempt from liability, the loss will lie where it fell and will be spread amongst the many parties who were affected by the negligent act. Between these two options, the court preferred to let the loss lie where it fell. The businessmen who lost their expected profits were – according to the District Court – better ‘loss spreaders’. That is, the shipping company and its workers would financially collapse under the burden, while the restaurants, fishermen and other businesses could pass the loss on to their customers and insurance companies and thus would survive the damage. III Metalegal considerations The case at issue reflects pure economic ricochet loss.55 On the one hand, the court will probably consider the fear of over-deterring the tortfeasor; the doubts regarding the economic and social desirability of obtaining insurance by the tortfeasor; the absence of social loss; and the potential unlimited liability that is in itself difficult to insure, as well as the dominant negative approach of other legal systems. On the other hand, the court will nonetheless consider the need for deterrence and restorative justice. The need for appropriate protection for the workers’ strong interests will likewise play a dominant role in the decision. The Shatil decision, mentioned earlier, has no bearing on our case as it completely ignored the issue of pure economic loss although, in our opinion, at least some of the damage incurred was purely economic. It is thus quite reasonable to believe that the claim presented by the workers will be dismissed. We can even go further and speculate that even if Black had sued Holly for its lost profits, the

55

Ronen Perry, Economic Ricochets (2002); Ronen Perry, ‘Relational Economic Loss: An Integrated Economic Justification for the Exclusionary Rule’, 56 Rutgers L. Rev. 711 (2004).

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claim would also have been dismissed on the basis of similar considerations. Case 2 – The injured key-player Thomas is pivot on the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car; as a result, he is unable to play for three months. In the absence of its best player, the team (until then at the top of the league’s standings) drops to fourth place. This results in considerable losses for the team owners. Can the All-Stars recover against the car’s driver? I Operative rules The owners of the All-Star basketball team may consider suing the driver who hit Thomas for the financial losses they suffered as a result of the team’s dropping to fourth place in the league. The injured player himself can sue the driver for his physical injury under the Compensation for Victims of Road Accidents Law.56 Yet, that law applies only to physical injuries; it does not qualify as a cause of action for those who suffer pure economic ricochet loss due to the physical loss caused to another. The tort of negligence will also be of no help to the owners because Israeli case law – just like English tort law – clearly states that liability will be denied in such cases.57 II Descriptive formants The ‘exclusionary rule’ denying liability in pure economic loss cases within its scope does not have such sweeping application in Israeli case law. However, at least with respect to ricochet losses of a thirdparty plaintiff whose economic interests and contractual expectations were damaged as a result of physical injury to another person, the courts will probably deny liability of the negligent defendant.58 The only Israeli precedents that relate to this type of case portray a slightly different situation. The accidents in these cases caused the death of the injured person who was hit by the defendant’s vehicle. 56 57

58

The Road Accident Victims Compensation Law § 1. West Bromwich Albion Football Club Ltd. v El-Safty [2006] EWCA (Civ) 1299 (Eng.); Keith Stanton, Pure Economic Loss: Back to Basics in the 21st Century, 15 Tort L. Rev. 5 (2007). CA 2000/97 Lindoren v. Karnit [1999] IsrSC 55(1) 12 sec. 10.

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In this line of cases, the courts apply the explicit wording of the CWO59 – originating in the English rule – which denies a cause of action for economic damage caused by accidental death, excluding the loss suffered by those relatives of the deceased who were economically dependent on him prior to his death. The courts seem to embrace the reasoning behind this rule, not just its wording. It is therefore quite safe to assume that they will extend the denial to cases where the injured party survived as in our case. It should be noted that as the Israeli system imposes absolute liability on drivers in cases of bodily injury,60 the courts are quite reluctant to expand such liability. Even though some cracks have already been traced in the said reluctance, and emotional ricochet loss is sometimes compensated, subject to some limiting conditions,61 and despite the resemblance between some of the basic negating policy considerations in the two types of problematic damages, it is still difficult to imagine the Israeli system opening the gate and imposing liability in a case like the one in question. III Metalegal considerations The court’s decision in this case will be based on policy considerations that will focus mainly on the fear of over-deterrence that would negatively affect society at large and drivers and insurers in particular. As in other circumstances of pure economic loss, apart from considerations related to automobile accidents, there is also a fear of over-extended liability: The scope of potential plaintiffs is indeterminate and their injured contractual interests are unlimited. In cases of this type, the court would undoubtedly prefer society’s economically efficient solution of leaving the loss where it ‘falls’ rather than increasing automobile insurance costs. The balancing of opposing interests here – protecting a contractual expectation on the one hand and maintaining the reasonable cost of a socially desirable activity on the other – will likely lead to denying recognition of the driver’s duty of care, due to the unforeseeable nature of the damage.

59 60

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Civil Wrongs Ordinance §§79–80. In insurance, the third party and first party are mandatory. See: The Road Accident Victims Compensation Law § 1; Motor Vehicle Insurance Ordinance (Revised Version). CA 80/88 Elsohca v Estate of Dahan [1990] IsrSC 44(3) 397.

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Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; (b) market traders who have lost their supply of ‘goods’; and (c) butchers who have not been able to conduct their business during this time. I Operative rules The only cause of action open to the three groups of potential plaintiffs against the careless cattle owner is in negligence. Unlike the sad mishaps that led to the famous Weller case,62 as well as recent experiences Canada63 and also England where it seems that courts will face very complicated claims in the near future,64 Israeli law has not yet been obliged to deal directly with the issues raised in this case. However, it is reasonable to assume that all three claims will be dismissed. II Descriptive formants All the parties injured here suffered pure economic loss. They will all face the same problem: convincing the court that the defendant owed them a duty of care. There is, however, a slight difference between the interest that each party is trying to protect and for which he hopes to receive compensation. Although the three types of losses in this story are all technically foreseeable, the key question which the court will have to decide is whether the cattle owner should have foreseen all three, or only some of them. Again, liability will be decided based upon policy considerations. The court will also be quite free to apply those considerations according to his best judgement, without binding precedents to dictate the outcome. The focus will undoubtedly be on the ‘fair, just and reasonable’ test, which will dictate who is to bear the loss caused by the negligent cattle owner. 62 63 64

Weller & Co. v Foot & Mouth Disease Research Institute [1966] 1 QB 569. Sauer v Canada (Attorney General) [2006] 144 A.C.W.S. (3d) 1129. Duncan Gardham and Brenda Carlin, ‘How Could This Happen?’, The Daily Telegraph, Aug. 6, 2007 – Foot and mouth disease in England, where it was feared that government laboratories were the source of the virus outbreak.

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The first group of plaintiffs lost a business opportunity to make sales transactions. The other two groups suffered similar losses. They likewise lost opportunities for future transactions: the first one due to failure to supply, the second due to the lack of indispensable supplies needed for the operation of its business. The only Israeli case that may have some relevance to our example is the District Court decision of Brikmann v Atid, mentioned previously.65 Here, the exit from the Tel Aviv port to the open sea was blocked as a result of the defendant’s negligence. This caused a serious decline in income for quite a few businesses, dependent as they were on an ongoing supply of fresh fish and seafood. The suit was dismissed, the existence of a duty of care was denied and the court preferred to leave the loss where it fell rather than to shift it onto the defendants, a shift which could have led to their economic collapse. In the absence of additional precedents, and in spite of some hints from the same District Court implying a more lenient approach,66 together with some obiter dicta on less-similar issues,67 we assume that the existence of a duty of care would be denied in all three claims. III Metalegal considerations The decision in this case will be based on familiar well-used policy considerations. According to the customary classification, the case falls well within the fifth category of pure economic loss cases,68 where justifications for the exclusionary rule are most convincing. This type of case presents the best illustration of why liability should be denied: There is probably no social cost but, rather, private loss, since other market traders, cattle raisers and butchers filled the gap and provided meat; liability would also be too broad, too farreaching and too tricky, especially from an economic point of view. Continuing this same line of reasoning, the injured parties – rather than the defendant – are the ones we expect to insure themselves against risks of this kind, which are typical and foreseeable risks in the day-to-day conduct of a business. Another reason for denying liability is the fear of over-deterrence in imposing liability on the 65 66

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CA(TA) 1586/63 Brickman v Atid Transport Supply Lines Ltd. [1963] IsrDC 78 76. CA(TA) 1860/90 Ma’Aleh Efrayim Printing v Ellerman Lines Plc [1994] IsrDC 55(2) 17. See, for example S. Ben Avraham Architects Ltd. v U. Dori Geometrical Engineering Ltd., 1077/96, Takdin, CA (Jan. 30, 2000). Feldthusen, supra n. 36; Palmer and Bussani, supra, n. 37, at 22.

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defendant as well as the reluctance to impose crushing liability for such huge losses. The seemingly punitive nature of compensation and the potential injustice caused by the disparity between the level of the negligence – which could be very low, and the size of compensation – which could be huge and thus conducive to the financial collapse of the negligent party’s business – will also play a role in denying liability. Having taken all the above into account, one still cannot disregard some of the primary goals of tort law: compensation, restorative justice, deterrence and reshaping human behavior. We also have to consider who – between the two parties – was in a better position to prevent the occurrence of the loss. All in all, it is most likely that in balancing the competing interests, the plaintiffs will be unsuccessful. Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for its expenses incurred prior to the collision, and for its loss of earnings due to cancellation of the two cruises. I Operative rules The only possible cause of action for the Shipwreck Company is the tort of negligence. Assuming that Shipwreck’s lease of the ship does not give it a property interest in the ship and that the loss it suffered is therefore classified as pure economic loss caused by physical injury to a third party’s property, it is difficult to anticipate the outcome of the case. There is no binding case law on this issue and the existing decisions contain only obiter dicta, both regarding the duty of care issue and – assuming that such duty is recognized – a cause of action for lost profits. If the court recognizes the duty of care, the plaintiff ’s chances to be compensated for loss of his investment may improve. If Shipwreck’s interest in the passenger liner is a property interest, then the probable conclusion is that liability for lost expenses will be allowed. Lost profits will pose much greater difficulties under this assumption. Since the primary issue – the nature of the protected interest – is not free of doubt, and considering the Israeli Supreme Court’s tendency to expand the duty of care in negligence, it seems

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that the court will lean towards recognizing a duty of care in this case as well. II Descriptive formants As noted above, the dispute here will focus on whether the defendants should have foreseen the losses caused by their negligence. The ‘ “should have” test is decided mainly according to policy considerations including, inter alia, the nature of the loss in question – in our case pure economic loss. Two decisions on closely related issues, each of which reaching a different result, create uncertainty as to the result in the case before us. A District Court decision69 that dealt with economic loss suffered by a purchaser of goods whose bill of landing was not registered in his name, discussed this issue at length and recognized a duty of care. The court based its decision on policy considerations. It did not hesitate to deviate from similar English cases decided in the House of Lords.70 Alternatively, the Supreme Court, in an obiter dictum by Justice Englard in circumstances that are not very different, explained (without citing the District Court decision) that traditionally, no compensation is awarded for pure economic ricochet loss in the tort of negligence.71 In light of the opposing trends on one hand, and the prevalent Supreme Court tendency to expand negligence liability in general on the other, there may perhaps be some willingness to recognize the existence of a duty of care in this case although, as noted above, there is no precedent to support this evaluation. III Metalegal considerations Policy considerations will be the sole factors dictating the difficult decision in this case. On one hand, this is a pure economic ricochet loss case – assuming that the interest of the lessee of the ship is only a personal interest and does not reach the level of a property interest. On the other hand, this case is free of the contract law considerations that influenced the current tort law and were relevant in the cases discussed in Israeli case law. Therefore, the theory upon which the decision will be based is a pure tort theory. Considerations of 69 70

71

See Ma’Aleh Efraim Printing Ltd., IsrDC 55(2) at 17. Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd. [1986] 1 AC 1 (HL); Leigh & Sullivan Ltd. v Aliakmon Shipping Co. [1986] 1 AC 785 (HL). S. Ben Avraham Engineers v A. Dori, 1077/96, Nevo, CA (Jan. 30, 2000).

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flooding the system with claims and causing administrative difficulties exist to the extent that the damages are purely economic. On the other hand, if part of the damage caused to the plaintiff is physical, then the plaintiff ’s road to court is already open by virtue of his damaged property; he will probably also receive compensation for his other loss even though it is pure economic loss. Of course, there are other deterrence and insurance considerations here that each of the parties may, in principle, raise. The court will decide these according to the ‘correct, just and fair’ test. Along with these, the court must, as usual, weigh deterrence considerations, efficiency considerations, the ability to prevent the loss in the first place and the fact that the damage is a private loss that does not constitute social harm. Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she cared for her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness. I Operative rules The perpetrator will be required to pay the wife her damages pursuant to § 2 of the Law of Torts Amendment (Repair of Bodily Harm) Law, 1964. This states: If a person causes bodily injury to another, a party that provides benefits for the injury is entitled to reimbursement from the perpetrator for such benefits, up to the amount that the perpetrator would have owed the beneficiary for causing bodily injury under any law if that party had not provided benefits for the injury. This section limits the wife’s right to compensation to the amount that the husband could have been reimbursed by the perpetrator for a third party’s support of his claim against the perpetrator. Moreover, § 5 of the Law states that: ‘There is no reimbursement under this Law except for reasonable expenses, service fees and support fees.’ Thus, compensation will be limited to the amount that would

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have been offered as reasonable support from a professional. If the wife’s damages exceed the amount that the husband would have had to spend to obtain reasonable nursing services, she cannot collect that amount. II Descriptive formants There are numerous cases in which compensation of this type was granted, but in light of the explicit provisions of the law dealing with the issue, they do not contain any discussion of the basis for compensation.72 The main disputes that are likely to arise in these cases involve factual questions of whether and to what extent the benefactor’s assistance was necessary to improve the victim’s situation.73 The amount of compensation will not necessarily be affected by the actual extent of economic loss caused to the benefactor, but rather by the price of equivalent services that could have been purchased from a professional. III Metalegal considerations The wife’s loss transforms her husband’s bodily injury into pure economic loss. As long as this transformation does not affect the total amount of compensation that the perpetrator has to pay, then most of the arguments against recognizing liability for pure economic loss do not apply. Thus, there is no fear of over-deterrence; the wife’s loss obviously reflects real social damage and not just private loss, and the loss cannot be broadly spread by the plaintiff. Therefore, the benefactor’s loss in such cases is not perceived as pure economic loss, but as part of the damage that the bodily injury caused to the direct/original victim. It is therefore not subject to the restrictions placed on damages for pure economic loss. This observation is supported by cases in which the loss caused to the benefactor exceeded the expenses the beneficiary would have incurred had he been required to purchase such services from a professional. In such cases, the benefactor’s claim is likely to fail, based on justifications similar to those found in other pure economic loss cases.

72

73

For an example with very similar facts see: CA 93/73 Shoshani v Krauz [1973] IsrSC 28(1) 277, 280. The State of Israel v Tavor, 5157/91, Nevo, CA (Oct. 23, 1994).

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Case 6 – Auditor’s liability Donna has inaccurately audited the accounts of Caterpillar, Inc. Paul relies on these published audits to launch a take-over bid. This is successful, but Paul then discovers that the audit overestimated the value of the company and that the price he paid per share was twice their actual value. I Operative rules It is clear that if Donna acted intentionally, Paul will be able to sue based on the tort of fraud. It is likewise clear that if Donna acted reasonably, Paul will not be able to sue. If Donna was negligent without fraudulent intent, Paul will apparently not be able to sue her for the tort of negligence, but the legal situation on this issue is unclear.74 II Descriptive formants In the absence of decisions on pure economic loss caused by an accountant’s negligent misrepresentations, the case at hand will be decided according to the general rules concerning loss caused by professional misrepresentation. In Israel, liability in such cases is based on the existence of a special relationship between the parties, on the reasonable reliance of the plaintiff on the information, and on the assumption of responsibility by the defendant. It is not clear whether Israeli case law regards the relationship between an accountant and the public as special. Whenever the law requires publication of accounts (as in the case of public companies), the courts will probably recognize such relations as special because the accountant’s main task is to disclose accurate and reliable information to the public. However, it is doubtful whether Paul can be considered part of the public due to his expertise, and the extraordinary nature of the take-over bid. The public’s reliance on information that an accountant publishes is reasonable in light of the information gap between the knowledge that Donna can obtain about the company and the information that the public can obtain.75 Paul, however, who proposed the take-over bid, might have access to extensive information and thus his reliance on the published audits is no longer reasonable. 74 75

Compare with CA 5302/93 Bank Massad Ltd. v Levitt [1997] IsrSC 51(4) 591. CA 209/85 Kiryat Atta Municipality v Ilanco Ltd [1988] IsrSC 42(1) 190, 194–198.

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There are no indications in the case regarding the assumption of responsibility, such as Donna’s prior knowledge about the publication of the audits, Paul’s intentions, or the existence of waivers in the audits. Hence, Donna’s assumption of responsibility is doubtful. It should be noted, however, that this requirement has been somewhat relaxed in recent years. III Metalegal considerations The court will balance the need to allow investors to rely on information distributed by accountants, particularly information distributed under law, against the fear of over-deterring accountants. Since Paul’s loss is great, the inverse loss-spreading effect of liability will not be considered. However, the court will probably relate to the fact that this loss does not reflect social damage but only private loss. The court will also take into account the existence of an alternative method for large investors to gather cheap and reliable information to verify accountants’ opinions. Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institution, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit Inc. makes no further inquiry and thus does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damage. He is now suing Credit, Inc. to recover his losses. I Operative rules Dieter will be successful in his suit against Credit, Inc. based on several causes of action: The Credit Data Service Law, 2002;76 § 2 of the Commercial Torts Law; §§ 7 & 1(3) of the Defamation Law; and the Privacy Protection Law.77 It appears that the fact that Credit, Inc. spread the mistaken harmful information without verifying it will also qualify as negligence and a duty of care will be established. 76 77

Credit Data Service Law, §41 2002, S.H 1825. The Privacy Protection Law, 2(11), 1981, S.H. 1011.

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II Descriptive formants The Credit Data Service Law deals with licensing of credit-rating institutions. According to this law, credit rating institutions may gather and distribute information only from the sources listed in the law, mainly banks, public registries and official bodies. Distribution of credit data in violation of the law is a criminal offense as well as a tort. Complementing that specific law, the Commercial Torts Law sets the limits of fair commercial behavior. Section 2 states that disseminating false information about a business operation while being aware of its falseness – or while under a duty to know that the information was false when circulating it – constitutes a tort. Were we to apply this explicit tort definition to the facts of our case, we could assume that Israeli courts would declare that Credit Inc. should have checked the information it received through an anonymous telephone call, and that her failing to do so was unreasonable. Since verifying the information by a telephone call could have proved that the information was false before she circulated it, Credit Inc. will be held liable. Circulating information that is likely to harm a business can also constitute the tort of defamation,78 whereas publication of private matters (including financial information) of a person without his prior consent constitutes a breach of the Privacy Protection Law. In the case at hand, since the information was false and no reasonable steps were taken to examine it prior to its circulation, the company will not be able to build a solid defense to both torts and will thus be liable for the damages it caused. Furthermore, it can be assumed that Credit Inc.’s behavior will be deemed to constitute the tort of negligence. In Israel, information about a person’s financial condition is considered to be information that – even assuming it is correct – can only be publicized if a public interest in publishing can be identified.79 Thus, distribution of unverified harmful information regarding a person’s financial status in circumstances where people are likely to regard this information as true will be considered a negligent act.

78 79

Maleh Hasharon Ltd. v Bank Hapoalim, 25788/06, Takdin, CC(TA) (Sept. 9, 2007). CA 439/88 Registrar of Data Banks v Ventura [1994] IsrSC 48(3) 808.

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III Metalegal considerations Privacy is a core value in the Israeli legal system. Therefore, enhanced protection is given to injuries to that value. A person’s financial status is considered a private matter; therefore, its disclosure to another requires special justification.80 The fact that the injury to Dieter’s privacy took the form of pure economic loss will not have any impact on the court’s decision. The court will refer to the injury to Dieter’s dignity, not to the form it took. Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by the RAC when he was involved in a head-on collision with another automobile. The rented vehicle’s engine penetrated the dashboard, causing severe and permanent injury. Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days, awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. This act made it impossible to determine with a reasonable degree of certainty whether the vehicle had design, manufacturing and/or maintenance defects which probably caused Nicholas’s injuries. Nicholas sues RAC for negligent spoliation of the evidence and tortious interference with a prospective civil action against Alfa Romeo. I Operative rules Israel’s Compensation for Victims of Road Accidents Law states that anyone who suffers bodily injury in a road accident will be compensated for his injuries by the vehicle’s owner’s insurer, disregarding questions of fault (subject to some rare irrelevant exceptions) and will not have any other cause of action in tort. Nicholas will accordingly be compensated for his bodily injuries by RAC’s insurer, regardless of subsequent treatment of the car. If we disregard – for the sake of discussion – Compensation for Victims of Road Accidents Law, Israeli courts have not yet embraced negligent spoliation of evidence as actionable in negligence. As a result, Nicholas cannot sue RAC for obstructing his possible future 80

HCJ 6126/94 Senesh v Israeli Broadcasting Authority [1999] IsrSC 53(3) 817, 847–64.

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claim against Alfa Romeo. Nonetheless, to the extent that Nicholas will claim that RAC did not maintain the vehicle properly and that he was prevented from proving so by the severing of the vehicle, the burden of proof will shift to RAC, which will be required to prove that the vehicle was properly maintained. II Descriptive formants The Law of Compensation for Victims of Road Accidents was meant to ensure that anyone who suffers bodily injury in an automobile accident will be compensated by spreading the loss among all drivers through the mechanism of mandatory insurance. An additional purpose of the law was to reduce the administrative costs involved in verifying claims made by road accident victims. The case at hand demonstrates that the law’s special regime will greatly reduce the costs of ascertaining liability and will ensure that Nicholas receives compensation. In addition, Israeli courts have consistently refrained from recognizing the right to claim for negligent spoliation of evidence.81 The legal literature contains enthusiastic support for recognizing claims for evidential damage82 as well as opinions calling for its rejection.83 However, when a plaintiff cannot prove his case against a defendant because the defendant negligently caused evidential damage, the burden of persuasion will be shifted to the defendant.84 This shift is part of a general trend toward transferring the burden of persuasion to the party who is in a better position to shed light on the facts of the case. III Metalegal considerations The policy considerations at the root of the Law of Compensation for Victims of Road Accidents are primarily reflective of social justice. It is recognized that road accidents are part of modern life; hence, all members of society must absorb their costs and not heave them on the random victim. The willingness to shift the burden of persuasion to defendants is related to the desire to create incentives 81 82 83

84

CA 8151/98 Stanberg v Cheswick M.D. [2001] 56(1) 539. Porat & Stein, supra, n. 8 at 160–84. Israel Gilead, ‘The Evidential Damage Doctrine: Has the Burden of Proof been Met?’, 30 Mishpatim 317 (1999). CA 361/00 Dahar v Captain Yoav [2005] IsrSC 59(4) 310.

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for litigants to produce all the evidence they possess to assist the courts in reaching the correct outcome. Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having been previously employed by OMEGA and, while so employed, a member of their occupational pension scheme. He was told by ALPHA that he was eligible to join its occupational pension scheme. Unless he wished to opt out, Mr. Smith would, as an employee, automatically became a member of the scheme, and deductions would be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based on a careless reading of the materials provided, the Broker vaunts the economic virtues and performance of the OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and stay in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than she would have received from ALPHA. Mrs. Smith sues the Broker. I Operative rules One can assume, although with no absolute certainty, that Mrs. Smith will be successful when suing the insurance broker for
100,000 in damages caused by the latter’s negligence. II Descriptive formants The legal issue at the heart of Mrs. Smith’s claim is the issue of the duty of care owed by the Insurance Broker to her as an heir to the late Mr. Smith. Israeli law clearly recognizes a duty of care owed by the insurance broker toward Mr. Smith himself. However, there is still doubt as to whether that duty also extends to Mr. Smith’s heirs, the beneficiaries of his pension fund. In an important Israeli case, an estate executor who was the defendant bank’s client, managed to steal money from the estate’s bank account due to the bank’s negligence. The court imposed a duty of care on the bank toward the heirs who had suffered severe economic loss.85 The same principle applies to the case at hand. This 85

CA 8068/01 Ayalon Insurance Comp. v Ofelgar Estate [2004] IsrSC 59(2) 349.

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assumption, however, depends on the degree of resemblance between a bank’s duty of care – which the Israeli courts welcome – and the attitude which the court will adopt in cases of insurance brokers. Other relevant cases which might be considered by the courts – in the absence of clear precedents – are cases that impose a limited duty of care on attorneys with respect to the opposing party.86 It is possible to conclude from the respective decisions that in the case at hand, a duty of care will be imposed in favor of Mr. Smith’s widow. Moreover, it is safe to say that the contract between the broker and Mr. Smith would be regarded as a contract for a third-party beneficiary – Mrs. Smith. The existence of such a contract will certainly have a positive influence on the court’s willingness to rule that the broker is under a duty of care toward Mrs. Smith. III Metalegal considerations The Israeli case law where a duty of care was imposed on banks as well as attorneys, engineers and other professionals towards third parties was based on several well-known policy considerations. First, such professionals, particularly banks, possess specialized and skilled expertise and are thus better able to prevent the damage flowing from their practice than is the third party, who is subsequently damaged by their negligence. Second, banks and other professionals can and should foresee the injury to the other party; it is therefore ‘just, fair and reasonable’ to impose liability. These two policy considerations are relevant to our case as well. Third, banks are considered to be good loss spreaders. It is doubtful, however, that this consideration is relevant to our case. Fourth, in light of the banks’ central role in economic life, which has endowed them with a quasipublic status, stringency appears to be well justified. However, this consideration is not directly relevant to insurance brokers. Given the strong and seemingly justified reliance of Mr. and Mrs. Smith on the broker’s advice, the Israeli courts will probably impose liability irrespective of the fear of over-deterring insurance brokers at large as well as the private – as opposed to social – nature of Mrs. Smith’s loss.

86

CA 37/86 Levy v Sherman [1990] IsrSC 44(4) 446, 471–72.

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Bibliography Gidron, T. (1995) ‘The Duty of Care in Negligence and Economic Loss’ 42 Hapraklit 126. —— (2008) ‘Between Negligence of a Bank (England) and the Negligence of a State (Israel): Pure Economic Loss in the Civil Wrongs Ordinance in Light of Recent Judgements; A Comparative Analysis and Evaluation’ 50 Hapraklit. Gilead, I. (1999) ‘The Evidential Damage Doctrine: Has the Burden of Proof been Met?’ 30 Mishpatim 317. —— (2002) ‘Non-Consensual Liability of a Contracting Party: Contract, Negligence, Both, or In-Between?’ 3 Theoretical Inq. L. 511. More, D. (1978) ‘Compensation of Road Accident Victims for NonPecuniary Losses’ 6 Tel-Aviv University Law Review 397. Perry, R. Economic Ricochets (2002). Porat, A. and Stein, A. (1998) ‘The Evidential Damage Doctrine: A Positive Analysis of the Law’ 21 Tel-Aviv University Law Review. 191. Ronen, D. (1999) ‘Pure Economic Loss – A Comparative Study’ 44 Hapraklit 504. Shnoor, B. (2007) ‘The Theoretical Foundations of Partial Compensation’ 37 Mishpatim 177. Tedeschi, G. and Rosenthal, A., Civil Wrongs Ordinance: In the Light of the History of its Preparation and Amendments (1960). Tedeschi, G. The Law of Civil Wrongs (A. Barak, M. Cheshin and I. Englard (eds.) 1969).

Chapter 8

South Africa Professor Max M. Loubser

1 Introduction: South African law of delict In general terms a delict in South African law involves the wrongful and blameworthy causing of harm and gives rise to an obligation to pay compensation for the harm so caused. In certain cases of strict liability there is no requirement of blameworthiness or fault and the delict involves only the wrongful causing of harm. The main forms of delictual liability recognised in South African law are the wrongful causing of patrimonial or pecuniary loss (based on the delict damnum iniuria datum and the actio legis aquiliae in Roman law) and the wrongful infringement of interests of personality (based on the delict iniuria and the actio iniuriarum in Roman law). The general principles underlying these main forms of delictual liability govern the whole field of delictual liability in South African law. There is an extensive literature on the South African law of delict.1 The South African law of delict, as South African private law generally, can be described as a mixed system that developed from a civilian (Roman–Dutch) background with some measure of English law grafted on to it.2 The Roman–Dutch law heritage has remained as a living source of the South African law of delict, but English law has also exerted an

1

2

See generally Boberg PQR The Law of Delict: Vol I Aquilian Liability (1984); Van der Merwe NJ and Olivier PJJ Die onregmatige daad in die Suid-Afrikaanse reg (6th edn 1989); Burchell JM Principles of Delict (1993); Neethling J, Potgieter JM and Visser PJ Law of Delict (5th edn 2006); Van der Walt JC and Midgley JR Principles of Delict (3rd edn 2005). See generally Reinhard Zimmermann and Daniel Visser (eds.) Southern Cross: Civil Law and Common Law in South Africa (1996) p 3.

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important influence on the development of the law. The Roman– Dutch law of delict was the product of an action-based Roman law (in particular the actio legis aquiliae and the actio iniuriarum) that was generalised and shorn of its penal elements to provide general rules for compensation in respect of damage caused dolo aut culpa.3 The important difference between the South African law of delict and that of most other modern civil law systems is that the South African law for the most part continues to exist in an uncodified form as ius commune, or common law. Certain areas of the law of delict are governed by legislation, but the ius commune and decided cases constitute the basic source of law. The development of the law is shaped by judges’ reasoning ‘from case to case’, in the tradition of the English Common Law. The generalisation of the principles of liability is an important characteristic of the modern South African law of delict, distinguishing it from the English law of torts. The South African law of delict consists of a body of principles and concepts founded on historically-developed broad bases of liability. In this respect it resembles the European civilian systems of law. This generalised approach has been described as follows in Perlman v Zoutendyk.4 Roman Dutch Law approaches a new problem in the continental rather than the English way, because in general all damage caused unjustifiably (injuria) is actionable, whether caused intentionally (dolo) or by negligence (culpa). In general, therefore, the South African law of delict recognises that the causing of harm by wrongful and blameworthy (culpable) conduct gives rise to delictual liability. The general principles of delictual liability are adaptable for application to novel situations. Notwithstanding the inherent elasticity of the general principles, the courts adopt a conservative approach to the extension of delictual liability, guided by considerations of public policy, practical convenience and above all by what is considered just and equitable. The tests for wrongfulness, negligence and legal causation, in particular, have a strong policy-base. The determination of wrongfulness by application of the general criterion of reasonableness – rooted in public policy, the legal convictions of the community or boni mores – 3

4

See generally on this development F H Lawson and B S Markesinis Tortious Liability for Unintentional Harm in the Common Law and the Civil Law Vol. 1, Cambridge Studies in International and Comparative Law, (1982) pp 39–41. 1934 CPD 151.

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plays a dominant role in fixing and limiting liability, in many instances replacing the traditional focus on foreseeability of harm. The Bill of Rights in the South African Constitution5 guarantees and reinforces certain fundamental rights and obliges the courts to promote the spirit, purport and objects of the Bill of Rights6 when applying, and where necessary developing, the common law, so as to give effect to the Bill of Rights.7 The constitution provides for the infusion into the common law of ‘the values that underlie an open and democratic society based on human dignity, equality and freedom’8 and this infusion assists in giving content to and shaping the general or open-ended principles of the law of delict.

2 Liability for pure economic loss in South African law Delictual liability for pure economic loss in South African law is based on the normal principles of delict and requires an act of commission or omission, factual and legal causation, damage in the form of pure economic loss, fault (negligence or intent), and wrongfulness. The recognition of liability for pure economic loss was summarized as follows by Grosskopf JA in Lillicrap, Wassenaar & Partners v Pilkington Bros (SA) (Pty) Ltd:9 It is clear that in our law Aquilian liability has long outgrown its earlier limitation to damages arising from physical damage or personal injury. Thus, for instance, in Administrateur, Natal v Trust Bank van Afrika Bpk 1979 (3) SA 824 (A) this Court held that Aquilian liability could in principle arise from negligent misstatements which caused pure financial loss, i.e. loss which was caused without the interposition of a physical lesion or injury to a person or corporeal property. Liability for pure economic loss, where the plaintiff ’s loss is financial and there is no personal injury or damage to the plaintiff ’s property, often does not involve the infringement of a right that is 5 6 7 8 9

Constitution of the Republic of South Africa, Act 108 of 1996. s 39(2). s 8(3). s 39(1)(a). 1985 (1) SA 475 (A) at 498.

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from the outset clearly identifiable within the settled categories of rights (real, personal, personality, or intellectual property rights). The focus is therefore on the existence of a duty not to cause economic loss.

3 Wrongfulness and duty not to cause loss In earlier cases the courts sometimes referred to the concept of a ‘duty of care’ in the context of liability for pure economic loss. In later cases the phrase ‘legal duty’ has been adopted as an appropriate indication of wrongfulness, because the concept of a ‘duty of care’, derived from English law, connotes an aspect of negligence. In Knop v Johannesburg City Council,10 Botha JA remarked as follows in this regard: In the phraseology of our law the ‘policy-based or notional duty of care’ is more appropriately expressed as a ‘legal duty’, in consonance with the requirement of wrongfulness as an element of delictual liability and the underlying concept of legal reprehensibility in respect of the causing of pure economic loss. A typical instance is where incorrect information supplied by the defendant is acted upon by the plaintiff, resulting in financial loss. The question is then whether the plaintiff had a right to correct information and the defendant a duty to supply such information. If no contractual relationship between the parties existed, a right to information cannot be assumed from the outset and the assessment of wrongfulness therefore proceeds from the duty side. The focus of the enquiry is on whether factual and policy considerations indicate the existence of a legal duty to provide correct information. The negligent causing of pure economic loss is not necessarily wrongful. In Telematrix (Pty) Ltd t/a Matrix Vehicle Tracking v Advertising Standards Authority SA 11 Harms JA said the following in this regard: When dealing with the negligent causation of pure economic loss it is well to remember that the act or omission is not prima 10

11

1995 (2) SA 1 (A) 27. See also Administrateur, Natal v Trust Bank van Afrika Bpk 1979 (3) SA 824 (A), at 832H–833A. 2006 (1) SA 461 (SCA) para. 13.

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facie wrongful (‘unlawful’ is the synonym and is less of a euphemism) and that more is needed. Policy considerations must dictate that the plaintiff should be entitled to be recompensed by the defendant for the loss suffered (and not the converse as Goldstone J once implied unless it is a case of prima facie wrongfulness, such as where the loss was due to damage caused to the person or property of the plaintiff ). In other words, conduct is wrongful if public policy considerations demand that in the circumstances the plaintiff has to be compensated for the loss caused by the negligent act or omission of the defendant. It is then that it can be said that the legal convictions of society regard the conduct as wrongful, something akin to and perhaps derived from the modern Dutch test ‘in strijd . . . met hetgeen volgens ongeschreven recht in het maatschappelijk verkeer betaamt’ (contrary to what is acceptable in social relations according to unwritten law). [Footnotes omitted] In cases of pure economic loss the existence of a legal duty for purposes of wrongfulness is broadly determined according to ‘the legal convictions of the community’, ‘general reasonableness’ or boni mores.12 In the leading case of Administrateur, Natal v Trust Bank van Afrika Bpk 13 the court applied the general criterion of reasonableness to determine whether an act of misrepresentation is to be regarded as wrongful for the purposes of delictual liability. The court accepted that the criterion of reasonableness involves policy considerations and Rumpff CJ quoted the following passage from Fleming’s Law of Torts as being correct also for South African law:

12

13

In Sea Harvest Corporation (Pty) Ltd v Duncan Dock Cold Storage (Pty) Ltd 2000 (1) SA 827 (SCA) at 838 Scott JA said the following: ‘If the omission which causes the damage or harm is without fault, that is the end of the matter. If there is fault, whether in the form of dolus or culpa, the question that has to be answered is whether in all the circumstances the omission can be said to have been wrongful or, as it is sometimes stated, whether there existed a legal duty to act. (The expression “duty of care” derived from English law can be ambiguous and is less appropriate in this context. See Knop v Johannesburg City Council 1995 (2) SA 1 (A) at 27D–E.) To find the answer the Court is obliged to make what in effect is a value judgement based, inter alia, on its perceptions of the legal convictions of the community and on considerations of policy. The nature of the enquiry has been formulated in various ways.’ 1979 (3) SA 824 (A), at 833–834.

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In short, recognition of a duty of care is the outcome of a value judgement that the plaintiff ’s invaded interest is deemed worthy of legal protection against negligent interference by conduct of the kind alleged against the defendant. In the decision whether or not there is a duty, many factors interplay: the hand of history, our ideas of morals and justice, the convenience of administering the rule and our social ideas as to where the loss should fall. Hence, the incidence and extent of duties are liable to adjustment in the light of the constant shifts and changes in community attitudes. In the Administrateur, Natal case, the defendant bank acted on behalf of a person who claimed compensation from the provincial authorities for expropriation of property. Compensation was eventually paid to him via the bank, but it turned out that he was not the owner of the property concerned. The provincial authorities then claimed the amount that they paid out as damages for alleged negligent misrepresentation by the bank. The action failed, because the provincial authorities themselves had initially identified the claimant as owner of the property and the court held that the bank had no legal duty to verify the facts and that the plaintiff ’s own mistake therefore caused the loss.

4 Determination of a duty not to cause or to prevent loss Judicial reasoning in the application of the wide and evaluative criteria of ‘the legal convictions of the community’, ‘general reasonableness’ or boni mores, to determine the existence of a legal duty, is reducible to a number of often inter-related policy and factual considerations. Policy considerations indicating whether the law of delict should intervene in respect of the type of harm-causing include the social or economic consequences of imposing liability – in particular potential indeterminate liability (‘opening the floodgates’); the availability of alternative remedies; the need for accountability of public bodies or officials; and potential hampering of persons or bodies in the exercise of functions in the public interest. The following are examples: In Shell and BPSA Petroleum Refineries (Pty) Ltd v Osborne Panama SA,14 the court refused to impose liability for the 14

1980 (3) SA 653 (D).

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causing of economic loss to the charterer of an oil tanker, delayed outside the Durban harbour as a result of the negligent causing of damage to a mooring buoy in the harbour. The court was unwilling to recognize a legal duty towards the charterer as one of an indeterminate number of similarly placed potential claimants. In Lillicrap, Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd,15 the Appellate Division held that a legal duty in delict did not fit comfortably into the setting of a detailed business contract for professional services, inter alia, because recognition of an action in delict could entail the circumvention of contractual terms and could create ‘a trap for the unwary’ within the contractual relationship.16 In Steenkamp NO v The Provincial Tender Board of the Eastern Cape 17 the court refused to recognize a legal duty on the part of a tender board towards a successful tenderer, whose tender award was later set aside on account of negligence in the process of awarding the tender. The court took into account, inter alia, whether an imposition of liability for damages would be likely to have a ‘chilling effect’ on the performance of administrative or statutory functions by members of the board.18 The result is likely to be different where there is fraud in the process of awarding a tender.19 In Telematrix 15 16

17 18

19

1985 (1) SA 448 (A). See, however, Pinshaw v Nexus Securities (Pty) Ltd and another 2002 (2) SA 510 (C), where it was held that the existence of a contract between an asset management company and its client did not preclude the existence of a legal duty in delict on the part of the company’s employee towards the client; and Holtzhausen v ABSA Bank Ltd Case no 280/03, judgement delivered 17 September 2004 (SCA), where it was held that an action is maintainable in delict for a negligent misstatement causing pure pecuniary loss even if a concurrent action is available in contract. The denial of an action in delict in Lillicrap, Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd 1985 (1) SA 475 (A) was regarded as being limited to the case where the negligence alleged consists in the breach of a term of a contract, in Trustees, Two Oceans Aquarium Trust v Kantey & Templer (Pty) Ltd 2006 (3) SA 138 (SCA) it was held that public policy does not require extension of the Aquilian action to rescue plaintiff who was in a position to avoid risk of harm by contractual means but failed to do so. [2006] JOL 18364 (CC) para. 42. See also, for non-recognition of the claim of an unsuccessful tenderer, Olitzki Property Holdings v State Tender Board and Another 2001 (3) SA 1247 (SCA). Minister of Finance and others v Gore NO 2007 (1) SA 111 (SCA). The court held that negligent conduct causing pure economic loss was wrongful only if, as a matter of legal and public policy, there existed a legal duty (para. 82 at 138G–H); and that there were no considerations of public or legal policy which dictated that the state should not be liable for the provincial officials’ fraudulent conduct in the course of a public tender process.

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(Pty) Ltd t/a Matrix Vehicle Tracking v Advertising Standards Authority SA,20 it was held that the Advertising Standards Authority of SA (the ASA) did not have a legal duty for purposes of delictual liability towards an advertiser who suffered a loss because of an incorrect decision by one of the ASA organs. The relevant policy consideration is the protection of the independence of persons or bodies entrusted with an adjudicative function that serves the public interest and that imposes on them a duty to act impartially. Such persons or bodies (including the judiciary, arbitrators and other administrative tribunals) should be enabled to adjudicate fearlessly. The threat of an action for damages could unduly hamper the expeditious consideration and disposal of litigation and disputes. Although both the person harmed and damage suffered as a result of an incorrect decision are foreseeable, the negligent causing of harm is not considered wrongful. The typology of factual circumstances that indicate a duty not to cause or to prevent harm in particular situations include the following: proportionality of the risk of harm and the cost of prevention, control over a dangerous object or situation, awareness of danger, prior conduct creating danger, a relationship imposing responsibility, professional knowledge. The case of Administrateur, Transvaal v Van der Merwe 21 is illustrative of the process or reasoning involved. Liability for an omission was in issue, and the court determined the existence of a legal duty to prevent harm by means of an enquiry into the proportionality of the risk of harm and the cost of prevention. The nature of the defendant’s conduct is taken into account: harm-causing by positive conduct is generally more readily considered to be wrongful than harm-causing by omission; and the context in which the conduct occurred will be taken into account. In BOE Bank Ltd v Ries,22 for example, the Supreme Court of Appeal refused to recognise a legal duty on the part of an insurance broker towards an intended beneficiary under a life insurance policy, where the broker had failed to ensure that the policy holder sign the necessary form to nominate the beneficiary. The court took into account that the conduct of the broker did not amount to the assumption of any professional responsibility regarding the signing of the form: he 20 21 22

2006 (1) SA 461 (SCA), para. 12. 1994 (4) SA 347 (A) 361H/I–362A/B, 363C. 2002 (2) SA 39 (SCA), paras. 13–26.

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became involved in the process in passing, by doing a favour for a colleague and in effect acting as a messenger, without undertaking any professional responsibility. Although it was foreseeable that the intended beneficiary would obtain no benefit from the policy if the holder failed to sign the necessary nomination form before his death, foreseeability of loss was not in itself enough to indicate a legal duty. The nature of the defendant’s fault and state of mind (motive) is taken into account: intentional harm-causing is more readily considered to be unlawful than negligent harm-causing; and a motive to cause harm will indicate wrongfulness. The nature of the interest sought to be protected is taken into account: a duty not to cause or to prevent physical injury and damage to property is more readily recognized than a duty not to cause or to prevent pure economic loss.

5 Negligent misrepresentation Prior to the judgement in the Administrateur Natal case the law on delictual liability for economic loss caused by negligent misrepresentation was not clear. Under the influence of the English law, which only recognized liability for intentional misrepresentation,23 the Appellate Division was reluctant to recognize a legal duty in respect of financial loss caused by negligent misrepresentation,24 although such a duty was recognized in a few cases in judgements of provincial divisions of the Supreme Court.25 Liability for negligent

23 24

25

Derry v Peek (1889) 14 AC 337. See Herschel v Mrupe 1954 (3) SA 464 (A), where the Appellate Division by a majority decided not to recognize liability on the part of a car owner who, through her attorney, had supplied incorrect information on the identity of the third party insurer of her car, with the result that the victim of an accident involving the car instituted action against the wrong insurance company and incurred wasted costs. See Perlman v Zoutendyk 1934 CPD 151 328, where the court was prepared to recognize that a sworn appraiser of land could be liable to a bank that had lent money on mortgage to the owner of land on the strength of a sworn appraisement that had been given by him (it was later decided on the facts that the appraiser is not liable). See also Suid-Afrikaanse Bantoetrust v Ross en Jocobz 1977 (3) SA 184 (T), in EG Electric Co (Pty) Ltd v Franklin 1979 (2) SA 702 (E) the court recognized that a registered electrician, who on instructions of the seller of a house had supplied a certificate that the electrical wiring of the house complied with municipal regulations, owed a legal duty to the purchaser of the house who had relied on the correctness of the certificate and later had to incur costs to rectify defective wiring.

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misrepresentation where a duty to provide correct information existed is now well established. The Appellate Division recognized in 1991 that a negligent misstatement inducing a contract can give rise to a delictual claim for damages.26 The court held that the relationship of parties engaged in pre-contractual negotiations gives rise to a legal duty not to make a misstatement and the breach of such a duty can lead to delictual liability for economic loss caused by the misstatement. In Mukheiber v Raath,27 the parents of a healthy and normal child (their fourth) instituted action in delict against a gynaecologist, alleging that he had negligently misrepresented to them that the wife had been sterilised after the birth of their third child. Relying on this representation they had failed to take contraceptive measures, with the result that the fourth child was conceived and born. The parents claimed damages from the doctor for pure economic loss, in the form of confinement costs and maintenance of the child until he became self-supporting. The Supreme Court of Appeal held that the doctor had a legal duty to desist from making any representation on the matter of sterilisation until he had taken reasonable steps to ensure the accuracy of the representation. The factual and policy considerations indicating the existence of such a duty were the following: The special relationship between the doctor and the parents who consulted him; the material risk that the situation involved (i.e. the risk of the conception and birth of an unwanted child); the fact that this risk should have been obvious to the mind of the doctor; the fact that it should also have been obvious to the doctor that the parents would rely on what he told them and that the correctness of the representation was of vital importance to them and that that they could suffer serious damage if the representation was incorrect; and the fact that the representation related to technical matters concerning a surgical procedure about which the parents would necessarily be ignorant and the doctor 26

27

Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A), in this case the plaintiff had purchased a new type of herbicide spray for use in his vineyards. An agent of the seller recommended that spraying be done by helicopter and undertook to supervise the spraying operations. During the spraying operations the herbicide drifted to adjacent lands and caused extensive damage to crops. The seller was held liable in delict for negligent misstatement. The court held that negligent misstatement was a recognized cause of action in delict; and that the same principles applied where the misstatement was made in a pre-contractual context. 1999 (3) SA 1065 (SCA).

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should be knowledgeable. As far as public policy considerations are concerned the court held that the parents’ reasons for wanting the sterilisation were socio-economic and family reasons, that were socially acceptable and not contra bonos mores. The recognition of a legal duty in this case would not impose too heavy a burden on the doctor: professional people must not act negligently and should not make unsolicited misrepresentations. Through misrepresentation the doctor therefore had unlawfully caused financial loss to the parents.

6 Guarding against indeterminate liability The courts have often stated that liability for pure economic loss should be contained and not indeterminate. In Shell and BPSA Petroleum Refineries (Pty) Ltd v Osborne Panama SA 28 the defendant’s employee caused damage to a mooring buoy in Durban harbour and that in turn caused economic loss to the charterer of an oil tanker waiting outside the harbour, because of the consequent delay in discharging the cargo and additional liability for charter fees. The court held that the defendant did not owe a legal duty to the plaintiff to avert such economic loss, because it had not been shown that the defendant should have foreseen the possibility of such a loss to the charterer specifically. In the view of the court this kind of loss was foreseeable only in relation to an unascertained class of potential victims, namely the owners or charterers of all vessels intending the discharge oil at that particular mooring buoy. Only insofar as the plaintiff-charterer was a member of that unascertained class was its loss reasonably foreseeable. The court was therefore unwilling to recognize a legal duty on the part of the defendant towards one of an unknown number of potential claimants. In Franschhoekse Wynkelder (Ko-operatief ) Bpk v South African Railways and Harbours,29 the plaintiff, a wine-making co-operative, instituted an action for damages against the defendant, the South African Railways and Harbours, arising out of the spraying, by defendant, of the undergrowth alongside one of its railway lines with a weedkiller. This had contaminated the soil in vineyards of farms adjoining the railway line. The owners of these farms were members 28 29

1980 (3) SA 653 (D). 1981 (3) SA 36 (C).

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of the co-operative and in terms of its constitution the members were obliged to deliver grapes to plaintiff for the purpose of making wine. The plaintiff alleged that vines growing on the contaminated soil were destroyed or damaged and that, as a result, the plaintiff would not receive grapes from such farms, causing plaintiff damage, which was alleged to have been foreseeable. Defendant excepted to the claim on the ground, inter alia, that it was not in law liable to the plaintiff for any damage, because the defendant’s conduct was not unlawful vis-à-vis the plaintiff. The court held that it had not been alleged by plaintiff that there was any special relationship between the parties; and no circumstances or facts alleged by plaintiff allowed the conclusion that defendant had a legal duty to prevent harm to the plaintiff. There were also no considerations of public policy that justified the recognition of such a legal duty and the exception was therefore upheld.

7 Pure economic loss in a contractual setting Liability for pure economic loss often arises in a contractual setting, with a resultant concurrence of actions in contract and delict, as in some cases where services are performed negligently; or as an exclusively delictual action, as in the case of pre-contractual misrepresentation, where the defendant in the pre-contractual phase negligently or intentionally misrepresented facts, inducing the plaintiff to enter into the contract. The negligent performance of contractual duties causing pure economic loss to a person outside the contractual relationship may also give rise to a delictual action, as in cases of false information, negligent advice, defective workmanship or the ‘disappointed beneficiary’ cases. The performance of contractual obligations involving the warranting or certification of information or professional advice may entail an ancillary duty towards a person who is not party to the contract. In Perlman v Zoutendyk 30 it was held that a sworn appraiser, who contracted with A to perform an appraisement, could be liable to B, who suffered loss as a result of a negligently performed appraisement; where the appraiser knew B would rely on the appraisement in deciding whether the appraised property constituted adequate

30

1934 CPD 151.

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security for a loan which B intended to make to A; and that B would suffer loss if it proved to be inaccurate.31 In EG Electric Co (Pty) Ltd v Franklin,32 a registered electrician contracted with A to provide A with a certificate that the electrical wiring of A’s house complied with applicable regulations. The court held that the electrician could be liable to B, who purchased the house from A, if the electrician knew that the certificate was intended to be presented to B and that B would rely on it; and if the certificate was incorrect and B subsequently had to spend a considerable amount to have the defects repaired. In Pretorius v McCullum,33 it was held on exception that the loss of the beneficiaries of a will, who failed to benefit because the will was invalid, having been negligently drawn up by an attorney, who acted in terms of a mandate from the testator, was in principle wrongfully caused by the attorney. In Aucamp v University of Stellenbosch,34 it was held that the loss of relatives of an employee, who had been led to believe that he had the benefit of group insurance cover, while he did not, was wrongfully caused by the employer. A person engaged in pre-contractual negotiations with another has a legal duty not to make a misstatement; and the breach of such a duty can lead to delictual liability for the economic loss caused by a negligent misstatement.35 As far as liability for damages is concerned, the effect of finding that a legal duty not to make a misstatement existed in delict is practically the same as finding that the statement was a contractual warranty (i.e. that the person who made the statement was assuming contractual responsibility for its correctness). If there is no such contractual warranty, and therefore no remedies for breach of contract, the contractual relationship can nevertheless, for the purposes of the law of delict, entail a legal duty to furnish correct information concerning a matter arising from the contract or relating to its implementation.36 The law of delict can 31

32 33 34 35 36

The plaintiff in this case later failed on the facts, see Perlman v Zoutendyk 1934 CPD 328. 1979 (2) SA 702 (E). 2002 (2) SA 423 (C). 2002 (4) SA 544 (C). Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A). See Herschel v Mrupe 1954 (3) SA 464 (A) 490; Administrateur, Natal v Bijo 1978 (2) SA 256 (N) 261; Western Alarm System (Pty) Ltd v Coini and Co 1944 CPD 271 276; Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A) 575; and McCann v Goodall Group Operations (Pty) Ltd 1995 (2) SA 718 (C) 726.

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thus intervene in a contractual relationship to provide compensation for the financial loss suffered as a result of misinformation.37 A contractual relationship between an employer and employee may give rise to a legal duty not to cause financial loss to the other contract party, even though no breach of contract is involved. The case of Joubert v Impala Platinum Ltd 38 is an example of this type of situation. The case involved the administrative duties of an employer in respect of a master insurance policy entered into between the employer and an insurance company, providing cover for the employer’s employees. In terms of the policy the employer had a contractual duty towards the insurer to give notice of an employee’s claim as soon as possible after an accident and to transmit the claim to the insurer as soon as possible. The employer failed to transmit the claim and the employee forfeited compensation as a result. The court held that the employer was liable in delict towards the employee for negligent omission to fulfill a duty of care towards the employee. The case of Jowell v Bramwell-Jones and others 39 involved a contractual relationship between professional advisors and the trustees of a testamentary trust. A beneficiary of the trust alleged that negligent investment advice by the advisors to the trustees caused loss to the beneficiary. The trial court held that the advisors had a legal duty towards the beneficiary and were liable in delict for the loss. However, on appeal it was held that the beneficiary had not proved loss.40

8 Liability of auditors The potential liability of auditors and registered accountants to third parties (non-clients), who rely on a negligently formulated opinion, certificate, report or statement, is governed by legislation, which essentially recognizes liability on the part of an auditor or accountant towards a third party if the auditor knew or could reasonably be expected to know the third party would act on the information furnished to him or her.41 37

38 39 40 41

See in this regard Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A) 569C– D; and on the concurrence of contractual and delictual actions in respect of negligent misrepresentation, see M. M. Loubser ‘Concurrence of Contract and Delict’ Stellenbosch Law Review 1997 2 113, at 146–47. 1998 (1) SA 463 (B). 1998 (1) SA 836 (W). Jowell v Bramwell-Jones and others 2000 (3) SA 274 (SCA). Section 20(9)(b) of the Public Accountants’ and Auditors’ Act 80 of 1991.

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A potential investor or lender to a company should be entitled to rely on the company’s audited financial statements (i.e. that the statements give a correct and clear picture of the company’s financial position). In the event of incorrect or misleading statements, an investor or lender may claim delictual damages from the auditor. Section 20(9) of the Public Accountants’ and Auditors’ Act 80 of 1991 is an attempt by the legislature to define the categories of people who may claim against an auditor and the circumstances in which such a claim will succeed. Section 20(9) provides as follows: (9) Any person registered as an accountant and auditor in terms of this Act shall, in respect of any opinion expressed or certificate given or report or statement made or statement, account or document certified by him in the ordinary course of his duties – (a) incur no liability to his client or any third party, unless it is proved that such opinion was expressed or such certificate was given or such report or statement was made or such statement, account or document was certified maliciously or pursuant to a negligent performance of his duties; and (b) where it is proved that such opinion was expressed or such certificate was given or such report or statement was made or such statement, account or document was certified pursuant to a negligent performance of his duties, be liable to any third party who has relied on such opinion, certificate, report, statement, account or document, for financial loss suffered as a result of having relied thereon, only if it is proved that the auditor or person so registered – (i) knew or could in the particular circumstances reasonably have been expected to know, at the time when the negligence occurred in the performance of the duties pursuant to which such opinion was expressed or such certificate was given or such report or statement was made or such statement, account or document was certified – (aa) that such opinion, certificate, report, statement, account or document would be used by his client to induce the third party to act or refrain from acting in some way or to enter

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into the specific transaction into which the third party entered, or any other transaction of a similar nature, with the client or any other person; or (bb) that the third party would rely on such opinion, certificate, report, statement, account or document for the purpose of acting or refraining from acting in some way or of entering into the specific transaction into which the third party entered, or any other transaction of a similar nature, with the client or any other person; or (ii) in any way represented, at any time after such opinion was expressed or such certificate was given or such report or statement was made or such statement, account or document was certified, to the third party that such opinion, certificate, report, statement, account or document was correct, while at such time he knew or could in the particular circumstances reasonably have been expected to know that the third party would rely on such representation for the purpose of acting or refraining from acting in some way or of entering into the specific transaction into which the third party entered, or any other transaction of a similar nature, with the client or any other person. In terms of these provisions an auditor will not incur liability to his client or any third party in respect of a report or opinion expressed by him unless the report or opinion was given intentionally or maliciously. Section 20(9)(b) provides that if the report was made negligently, the auditor will be liable to a third party who relied on it only if it is proved that the auditor knew or could, in the particular circumstances, reasonably have been expected to know, at the time when the negligence occurred, that such opinion or report would be used by his client to induce the third party to act or refrain from acting, or that the third party would rely on such opinion or report. Arguably every auditor knows or ought reasonably to foresee that the annual financial statements of a company are widely used by investors and lenders for investment and business decisions and an auditor should reasonably be expected to know that his client or the

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third party would act as contemplated in section 20(9)(b). However, for the purposes of section 20(9)(b), the requisite knowledge or foreseeability depends on the circumstances of each case. There are two frameworks for auditing in South Africa. In terms of the Companies Act 61 of 1973 there is a duty on auditors to ensure that the presentation by the directors of a company of its financial position in the financial statements is in conformity with generally accepted accounting practice. If an auditor does not ensure compliance with such practice, this would constitute a breach of the auditor’s statutory duties and would amount to negligence. The SA Institute of Chartered Accountants (SAICA) in conjunction with the Accounting Practices Board has issued statements of Generally Accepted Accounting Practice (GAAP). A company must disclose which auditing framework has been adopted, i.e. whether in accordance with the Act or the SAICA (GAAP). An auditor’s failure to ensure the financial statements conform with GAAP is not necessarily a breach of his statutory duty in terms of the Companies Act. In the case of International Shipping Co (Pty) Ltd v Bentley,42 the court held that an auditor owed a legal duty to the creditor of a group of companies which had suffered loss in consequence of reliance on a negligent audit. Negligence was established in regard to some aspects of the financial statements. The auditor also did not comply with his statutory duties. But the court held that the ultimate loss suffered by the appellant company was too remote for legal liability on the auditor’s part to arise. In NPC Electronics Ltd v Taitz Kaplan & Co,43 the plaintiff had relied on unqualified reports by the defendant firm of accountants and auditors on the financial statements of certain companies, prior to selling and delivering goods to these companies and making additional credit facilities available to them. The companies were subsequently liquidated. There was no contractual or other relationship between the parties. The court held that the auditor in this case did not conduct a proper auditing procedure and failed to carry out its duties in terms of the Companies Act. However, the defendant did not know, and could not reasonably be expected to foresee, that the plaintiff would rely on the reports for this purpose. In the circumstances the defendant did not have a legal duty to prevent the loss of the plaintiff and there was consequently no wrongfulness. Even if 42 43

1990 (1) SA 680 (A). [1998] 1 All SA 390 (W).

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there were such a duty and wrongfulness, the plaintiff did not prove that the defendant had factually or legally caused its loss. The loss suffered by a third party reading financial statements and using them in a manner unknown to the auditors should not be the responsibility of the auditors. Imposing liability in this case would place an unreasonably onerous burden on the auditors. The duties of an auditor towards his client was extensively considered by the Supreme Court of Appeal in Thoroughbred Breeders’ Association v Price Waterhouse,44 where it was held that contributory negligence in terms of the Apportionment of Damages Act45 did not apply in the contractual relationship between auditor and client. In Axiam Holdings Ltd v Deloitte & Touche,46 it was alleged that the auditors had owed a duty to third parties to warn them that certain financial statements and their audit opinion were incorrect, alternatively to warn them that it had not conducted the audit properly and that they should not rely on the statements and the audit opinion; and that their failure in this regard was negligent and constituted a misrepresentation within the meaning of s 20(9)(b)(ii) of the Public Accountants’ and Auditors’ Act.47 The auditors raised an exception, on the basis that the allegations in the pleadings did not justify the conclusion that the auditors owed a legal duty to the third parties. Navsa JA said the following on liability of auditors for negligent misstatement: It is true that decisions by courts on whether to grant or withhold a remedy for negligent misstatement causing economic loss, are made conscious of the importance of keeping liability within reasonable bounds. It is universally accepted in common law countries that auditors ought not to bear liability simply because it might be foreseen in general terms that audit reports and financial statements are frequently used in commercial transactions involving the party for whom the audit was conducted (and audit reports completed) and third parties. In general, auditors have no duty to third parties with whom there is no relationship or where the factors set out in the Standard Chartered Bank case are absent.48 44 45 46 47 48

2001 (4) SA 551 (SCA). Act 34 of 1956. 2006 (1) SA 237 (SCA). Act 80 of 1991. Para. 18.

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The majority of the court held that the wrongfulness of the harmcausing by omission to speak could not in this case be decided on exception. The matter had to go to trial; it was premature to decide on exception whether a legal duty could be said to exist.

9 Summary of factual and policy questions determining liability for pure economic loss The reasoning of the courts when deciding whether to impose liability for pure economic loss often involves one or more of the following factual and policy questions. Did a special relationship between the parties give rise to a legal duty for the defendant to prevent economic loss to the plaintiff ?49 A relationship of trust or authority; a long-standing business relationship; or a contractual relationship can give rise to such a duty. In Bowley Steels (Pty) Ltd v Dalian Engineering (Pty) Ltd,50 it was held that a long-standing business relationship can give rise to a duty to provide information and to prevent financial loss. In this case the parties had a long-standing business relationship during which the defendant had established a favourable credit rating with the plaintiff. The defendant sold its business to a new company without informing the plaintiff and the new company continued to trade with the plaintiff under defendant’s name. The plaintiff dealt with the new company on the same favourable credit terms as with the defendant, in the bona fide belief that it was dealing with the defendant. The new company defaulted in payment and was liquidated and the plaintiff suffered losses. The court held that the defendant had a legal duty to disclose to the plaintiff the sale of its business, to enable the plaintiff to assess the commercial risk and curtail possible loss.51 Was a duty to prevent economic loss provided for or implied by a statutory provision? The existence of such a statutory duty will be determined according to the normal rules of statutory interpretation, with regard to the intention of the legislature as it appears from the wording of the statutory provision.52 For instance, a statu49

50 51 52

See Franschhoekse Wynkelder (Ko-operatief ) Bpk v South African Railways and Harbours 1981 (3) SA 36 (C); Mukheiber v Raath 1999 (3) SA 1065 (SCA) para. 28. 1996 (2) SA 393 (T). 1996 (2) SA 393 (T). See for instance Knop v Johannesburg City Council 1995 (2) SA 1 (A), where it was held that a local authority charged with the implementation of zoning provisions

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tory duty to provide the correct information could indicate that the failure to provide information or the furnishing of incorrect information is unlawful.53 The assessment of wrongfulness in the case of breach of a statutory duty is discussed in more detail below. What is the extent of the economic loss caused? Where one person furthers his own interests at the cost of harm to another, the extent of the harm will be a factor in the assessment of wrongfulness.54 What is the social or economic value or purpose of the conduct causing the economic loss? It may be reasonable to cause a measure of loss to another if this is an inevitable result of protecting one’s own substantially more valuable interests.55 This is the policy consideration underlying the recognition of necessity as a ground of justification in the law of delict. Did the defendant know or foresee that his conduct could cause the economic loss; or, even more unreasonable, did he have the motive to cause economic loss? Prior knowledge or foresight of the possibility of harm makes the causing of that harm more unreasonable. The nature of the fault that is proved or assumed (in particular did not have a duty to prevent economic loss to a person who incurred wasted costs when his application for permission to subdivide property was granted, but it then later appeared that the permission was in contravention of an existing zoning plan. See also Minister of Law and Order v Kadir 1995 (1) SA 303 (A) 319 where policemen investigated the scene of an accident caused by a package falling off a delivery vehicle, the driver of which had driven on without stopping. The policemen failed to obtain the names and addresses of possible witnesses before these people left the scene of the accident. The court held that the policemen did not have a legal duty towards the victim of the accident, who was later unable to institute a civil claim for damages against the possibly negligent and unknown driver of the vehicle. The police had a statutory duty in terms of s 5 of the Police Act 7 of 1958 to deter crimes, track down criminals and protect the public against crimes. However, Hefer JA stated at 321: ‘Viewing the matter objectively, society will take account of the fact that the function of the police relate in terms of the Act to criminal matters and were not designed for the purpose of assisting civil litigants.’ This decision is criticized by Burchell in 1995 SALJ 214–216. 53

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55

See Herschel v Mrupe 1954 (3) SA 464 (A) 490; International Shipping Co (Pty) Ltd v Bentley 1990 (1) SA 680 (A) 694. See for instance Gien v Gien where the extent of the nuisance caused to a neighbouring land owner was taken into account; and Mpongwana v Minister of Safety and Security 1999 (2) SA 794 (CPD) 803–4, where the seriousness of the plaintiff ’s injury was taken into account as one of the factors in the overall assessment of wrongfulness. See for instance Gien v Gien, where the purpose served by using a noise-emitting apparatus (i.e. to protect crops from animals and birds) was weighed up against the nuisance caused by the apparatus to a neighbour.

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intent or conscious negligence) and fault-related factors (in particular awareness of the risk of harm or motive to cause harm) may therefore be relevant to wrongfulness. Intentional causing of harm will mostly be devoid of social utility and therefore wrongful. The wrongfulness of harm-causing misrepresentation, for example, can depend on whether this occurred intentionally or negligently. In Minister of Finance and others v Gore NO,56 the court said the following in this regard: [86] . . . We do not think that it can be stated as a general rule that, in the context of delictual liability, state of mind has nothing to do with wrongfulness. Clear instances of the contrary are those cases where intent, as opposed to mere negligence, is itself an essential element of wrongfulness. These include intentional interference with contractual rights (see, e.g., Dantex Investment Holdings (Pty) Ltd v Brenner and Others NNO) and unlawful competition (see, e.g., Geary & Son (Pty) Ltd v Gove). [Footnotes omitted].57 Intentional causing of harm to others will not always be unlawful, for instance where justified criticism harms the reputation of another, or fair competition causes financial loss to a trade competitor. If all other things are equal a court might accept that there is unlawfulness only if harm was caused intentionally, because intent is more blameworthy. However, everything will depend on the circumstances and intent will not conclusively indicate unlawfulness. The passenger on the bus who knowingly offers bad investment advice to other passengers, who are complete strangers to him, probably will not be liable if his bad advice is followed, because in the area of investment advice he owes no duty towards his fellow passengers. A motive to cause harm to another in itself does not necessarily make the causing of harm unlawful, but motive may be taken into 56 57

2007 (1) SA 111 (SCA) para. 86. See also para. 87: ‘In the language of the more recent formulations of the criterion for wrongfulness: in cases of pure economic loss the question will always be whether considerations of public or legal policy dictate that delictual liability should be extended to loss resulting from the conduct at issue. Thus understood, it is hard to think of any reason why the fact that the loss was caused by dishonest (as opposed to bona fide negligent) conduct should be ignored in deciding the question. We do not say that dishonest conduct will always be wrongful for the purposes of imposing liability, but it is difficult to think of an example where it will not be so.’

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account by the court, together with other circumstances, in the assessment of unlawfulness. For instance, where a land owner exercises his rights of ownership in a manner calculated to cause extensive harm to a neighbour, with little benefit to himself, his motive to harm may influence the court to decide that the harm was caused unlawfully.58 In the area of unlawful competition a motive to harm rather than to compete will also be taken into account to determine unlawfulness.59 The existence of knowledge, foresight or motive is not conclusive in determining wrongfulness and will be taken into account together with other factors.60 58

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60

See Gien v Gien 179 (2) SA 1113 (T) 1121 (causing excessive noise to deter animals and birds from causing damage to crops); Kirsh v Pincus 1927 TPD 199 (planting deciduous trees along a boundary so that falling leaves will cause harm to a neighbour. See Bress Designs (Pry) Ltd v GY Lounge Suite Manufacturers (Pty) Ltd 1991 (2) SA 455 (W). See for instance Coronation Brick (Pty) Ltd v Strachan Construction Co (Pty) Ltd 1982 (4) SA 371 (D) 386–7, where knowledge of the existence of an underground cable was taken into account in deciding whether economic loss was unlawfully caused by cutting the cable; Shell and BPSA Petroleum Refineries (Pty) Ltd v Osborne Panama SA 1980 (3) SA 653 (D) 659, where damage to a mooring buoy in Durban harbour caused economic loss to the charterer of an oil tanker because of the consequent delay in off-loading the cargo, but liability was not imposed because it had not been shown that the defendant did foresee or should have foreseen the possibility of loss (on account of delay and liability for demurrage) to the charterer specifically, this kind of loss being foreseeable only in relation to an unascertained class of potential victims, namely the owners or charterers of all vessels intending the discharge oil at that particular mooring buoy; and only insofar as the plaintiffcharterer was a member of that unascertained class was its loss reasonably foreseeable; Arthur E Abrahams and Gross v Cohen 1991 (2) SA 301 (C) 311, where the professional administrators of a deceased’s estate were held to have unlawfully caused loss to the beneficiaries of an insurance policy that was an asset in the estate, by failing to collect the proceeds of the policy timeously, while knowing who the beneficiaries were and that they would suffer loss as a result of delay; Indac Electronics (Pty) Ltd v Volkskas Bank Ltd 1992 (1) SA 783 (A) 799, where the liability of a collecting bank to the true owner of a cheque was in issue; and the court held that there is a need for protection of the true owner of a cheque that was incorrectly collected and credited; particularly because the true owner relies on the collecting banker to look at the named payee on the face of the cheque before collecting and crediting the proceeds to an account; and the collecting banker undertaking this responsibility in the course of his professional services is or should be aware that the failure to take reasonable care may result in loss to the true owner of the cheque, in respect of the role of motive to cause harm, see also Mukheiber v Raath 1999 (3) SA 1065 (SCA) para. 28

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Was the conduct causing the economic loss fraudulent or dishonest? Where one person furthers his own interests at the cost of harm to another, the existence of fraud or dishonesty makes the causing of harm more unreasonable.61 What practical measures could be taken to avert the economic loss? The courts have regard to the probable success, the relative ease, and the expense of practical steps that the defendant could have taken to avert the loss.62 The ability or lack of ability of the plaintiff to protect himself against the economic loss is also taken into account.63 Was the economic loss caused in the course of rendering professional services and was there a failure of professional competence or skill? Where the defendant renders professional services and professes to possess special skills, special or exclusive knowledge or professional competence, the courts will more readily accept that it is unreasonable to cause economic loss to a person depending on the defendant’s professional competence or relying on the correctness of information furnished in a professional capacity.64 61

62

63

64

See Schultz v Butt 1986 (3) SA 667 (A), where the respondent’s dishonesty in not only copying a design, but also registering it in his own name, was taken into account by the court in its finding that he had acted unlawfully towards the applicant. See for instance Coronation Brick (Pty) Ltd v Strachan Construction Co (Pty) Ltd 1982 (4) SA 371 (D) 384, where the court took into account that a contractor who knew of the existence of an underground cable could have taken steps to prevent the cutting of the cable; and Arthur E Abrahams and Gross v Cohen 1991 (2) SA 301 (C) 311, where the professional administrators of a deceased’s estate could easily have taken steps timeously to collect the proceeds of an insurance policy that was an asset in the estate, thereby preventing loss to the beneficiaries. See Indac Electronics (Pty) Ltd v Volkskas Bank Ltd 1992 (1) SA 783 (A) 799, where the liability of a collecting bank towards the true owner of a cheque was in issue and where the court took note of the ability of the bank to protect itself against liability by obtaining insurance cover. See Indac Electronics (Pty) Ltd v Volkskas Bank Ltd 1992 (1) SA 783 (A) 799, where it was held that a collecting banker undertakes a professional responsibility towards the true owner of a cheque to collect and credit the proceeds of the cheque for the benefit of the payee; and see further EG Electric Co (Pty) Ltd v Franklin 1979 (2) SA 702 (E) where the court recognized that a registered electrician, who on instructions of the seller of a house had supplied a certificate that the electrical wiring of the house complied with municipal regulations, owed a legal duty to the purchaser of the house who had relied on the correctness of the certificate and later had to incur costs to rectify defective wiring. See also Herschel v Mrupe 1954 (3) SA 464 (A) 472; Currie Motors (Pretoria) (Pty) Ltd v Motor Union Ins Co Ltd 1961 (3) SA 872 (T) 876–7; Siman and Co (Pty) Ltd v Barclays National Bank Ltd 1984 (2)

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Was the economic loss caused by a person holding a public office, such as that of notary, sworn appraiser or auditor? Such a person has ‘a kind of patent of credibility and efficiency conferred upon him by public authority’ and members of the public are ‘invited and entitled to repose confidence and trust in the acts of such persons performed in their respective capacities’.65 What are the legal, social and economic implications of imposing liability for the infringement? Are other public policy considerations relevant to the case? The courts shy away from imposing liability, for instance, where neither the economic loss nor the number of persons affected are finite and the recognition of liability raises the spectre of indeterminate liability to an indeterminate class of persons.66 Not all economic interests are protected by the law of delict. To determine whether an unlawful infringement of a protected interest occurred, the courts focus on the existence of a legal duty not to cause economic loss and this involves a value judgement based on factual and policy considerations as set out above. Case 1 – A cable case: the laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cut the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected SA 888 (A) 913; Lillicrap, Wassenaar and Partners v Pilkington Brothers (SA) (Pty) Ltd 1985 (1) SA 448 (A) 509; Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A) 575; Standard Chartered Bank of Canada v Nedperm Bank Ltd 1994 (4) SA 747 (A) 770; McCann v Goodall Group Operations (Pty) Ltd 1995 (2) SA 718 (C) 726 727; Jowell v Bramwell-Jones 1998 (1) SA 836 (W) 882; Mukheiber v Raath. 1999 (3) SA 1065 (SCA) para. 28. 65

66

Herschel v Mrupe 1954 (3) SA 464 (A) 488; Perlman v Zoutendyk 1934 CPD 151 328. See Shell and BP SA Petroleum Refineries (Pty) Ltd v Osborne Panama SA 1980 (3) SA 653 (D) 659–60; Franschhoekse Wynkelder (Ko-operatief ) Bpk v South African Railways and Harbours 1981 (3) SA 36 (C); and Mpongwana v Minister of Safety and Security 1999 (2) SA 794 (CPD) 802–3, where the plaintiff based her claim for damages on the failure of the police to protect her from injury resulting from an attack on a taxi in which she was traveling, at a time when a volatile and violent relationship between two rival taxi organizations existed. The court referred to policy considerations such as the implications of holding policemen liable for damages arising from instances of dereliction of duty; and the time, expense and diversion of police manpower involved in defending numerous claims for damages based on alleged police dereliction of duty. See further Mukheiber v Raath 1999 (3) SA 1065 (SCA) para. 28.

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black-out causes the loss of two days of production. Black has to lay off a number of workers hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay. I Operative rules The workers will almost certainly not succeed with their claim for lost pay, on the basis that Holly and their employees did not owe a legal duty to the day-to-day workers of Black factory (i.e. their loss of pay was not wrongfully caused) and also on the basis that the loss of pay of the day-to-day workers of Black factory was not reasonably foreseeable to Holly and their employees (i.e. their loss of pay was not negligently caused). II Descriptive formants This is an example of a ‘cable case’. The leading South African case in this regard is Coronation Brick (Pty) Ltd v Strachan Construction Co (Pty) Ltd,67 where the plaintiff sued a civil engineering contractor in delict for negligently cutting electrical cables which resulted in the power supply to the plaintiff ’s brick works being cut off, resulting in loss of production and financial loss by the plaintiff. The defendant excepted to the plaintiff ’s particulars of claim as disclosing no cause of action, in that the claim was founded on delict and was one for pure financial or economic loss; no contractual nexus between the parties had been alleged; the defendant was not the owner of the electrical cables; and accordingly no duty of care rested upon the defendant or its employees towards the plaintiff. The plaintiff gave notice of its intention to amend its particulars of claim, to state that the defendant knew or ought to have known that the cables were used to supply electricity, inter alia, to the plaintiff ’s works, that, if the cables were cut, the effect would be to interrupt the supply of electricity to the plaintiff ’s works and that the plaintiff would suffer a loss of income. The court held that wrongfulness had been alleged (i.e. that it had been alleged by implication that defendant had breached a legal duty owed by it to the plaintiff ) and that the defendant’s alleged conduct did incite moral indignation and offended against the legal convictions of the community. This finding was based on the allegation (introduced by amendment of the 67

1982 (4) SA 371 (D) 386–7.

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pleadings) that the defendant’s driver had been duly warned about the electrical cable; and that the defendant therefore knew that the plaintiff would suffer loss in event of the power the supply being cut. Essentially the allegation of prior knowledge or foresight of the possibility of harm made the causing of harm unreasonable and wrongful, as indicated by the following excerpts from the judgement: ‘I believe that the attitude of the community to defendant’s alleged conduct would be “but for heaven’s sake, you knew precisely where the cables were; you knew that if they were cut plaintiff would suffer a substantial loss of income, surely there was a legal duty on you to take measures to avert the loss” ’; and ‘(I)t seems to me that there is a difference in principle between a situation in which loss is foreseeable in the sense that it will be suffered by all members of an unascertained class of potential victims, and a situation in which loss to a particular victim of an unascertained class is foreseen.’ The facts as set out in Case 1 disclose no specific knowledge of the probable loss of pay by the temporary workers, nor any other facts indicative of a legal duty towards the workers III Metalegal considerations The metalegal considerations relevant here are the ‘spectre of liability in an indeterminable amount for an indeterminable time to an indeterminate class’ (Coronation Brick case); the ‘floodgates argument’ (i.e. the potentially far-reaching economic implications of allowing the action to succeed) – is the situation ‘fraught with an overwhelming potential liability’ (Coronation Brick case). Case 2 – The injured key-player Thomas is pivot on the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car and unable to play for three months. In the absence of its best player, the team (until then at the top of the league standings) drops to fourth place. This results in considerable losses for the team owners. Can the AllStars recover against the car driver? I Operative rules The All-Stars will almost certainly not succeed with their claim for losses resulting from the team dropping in league standings, on the basis, as decided in Union Government v Ocean Accident & Guarantee

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Corporation Ltd,68 that South African law does not allow an action for recovery of pure economic loss to an employer whose employee has been injured by the fault of a third party and who has in consequence been deprived of the employee’s services. The action will not be allowed: (1) because the car driver did not owe a legal duty to the Thomas’s employer, the All-Stars (i.e. their loss was not wrongfully caused); (2) the loss of the All-Stars was not reasonably foreseeable to the car driver (i.e. the loss of the All-Stars was not negligently caused); and (3) the loss of the All-Stars was too remote. II Descriptive formants In assessing the existence of a legal duty not to cause economic loss (wrongfulness); the reasonable foreseeability of harm (negligence); and the existence of a reasonably close connection between the conduct causing the harm and the eventual loss (remoteness), the courts deal with the concept of reasonableness from various perspectives: with hindsight to determine wrongfulness; with foresight from the perspective of the reasonable person in the position of the car driver, to determine negligence; and with a general perspective on what can be regarded as fair and just, having regard to foreseeability; other intervening causative factors; and separation in time and space between the conduct and the harm, to determine remoteness.69 All these elements of liability leave room for policy considerations and a value judgement. The judgement in the leading case of Union Government v Ocean Accident & Guarantee Corporation Ltd 70 was expressly based on the absence of precedent and the ‘floodgates’ consideration. III Metalegal considerations The ‘floodgates’ consideration applies in this case. In the leading Union Government judgement, Schreiner JA held71 that South African law takes a conservative view on the subject of expansion of the Aquilian remedy beyond what the authorities have recognised in the past72 and formulated the ‘floodgates’ consideration as follows: 68 69 70 71 72

1956 1 SA 577 (A). See S v Mokgethi 1990 (1) SA 32 32 (A) 40–41. 1956 1 SA 577 (A) 586. At pp 585–86. See also Herschel v Mrupe 1954 (3) SA 464 (AD).

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In the case of road accidents there is no difficulty in seeing a duty of care to other users of the road who are near enough to be physically injured. When one goes further, however, difficulties may arise in applying the test whether a reasonable person would have foreseen harm to the person injured and would have guarded against it. Once one goes beyond physical proximity and considers the possibilities that may arise out of the relationships, contractual or other, between the physically injured person and other persons who may suffer indirectly, though materially, through his incapacitation, one is immediately met with the prospects of an unmanageable situation. It is easy to imagine the absurdities that would arise if all persons contractually linked to the injured person could sue the careless injurer for the loss suffered by them. The case was put to us of the injured building contractor who in consequence of his injury has to discontinue his contract, so that his employees and the building owner and the architect and his sub-contractors and their employees are all put to some loss. Insurance companies would also be a wide class of plaintiffs who could bring actions when persons insured by them were negligently injured or, presumably, killed, if the extension of liability contended for were recognised. In fact it would be a rare accident that did not give occasion for a crop of actions at the suit of persons who had made contracts with the injured party. Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape of the infected animal obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; (b) the market traders who have lost their supplies; and (c) the butchers who during this time have not been able to conduct their business.

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I Operative rules In all three cases the action will probably not succeed. The spreading of the infection to other animals would probably allow the owners of the infected animals to recover damages. In Ehlers NO en andere v Graphorn NO en andere; Graphorn en ‘n ander v KZN Natuurbewaringsraad,73 it was held that a reasonable man in the position of the owner or seller of diseased animals at an auction would have realised the possibility that other animals belonging to the purchaser could be infected by the disease and that the resulting damage was not remote. However, actions based on economic harm suffered by other stakeholders in the particular industry will probably fail, because (1) the cattle raiser did not owe a legal duty not to cause economic harm to others stakeholders in the particular industry (i.e. their loss was not wrongfully caused) and (2) the losses of the other stakeholders were not reasonably foreseeable to the cattle raiser (i.e. the losses were not negligently caused) and (3) the losses were too remote. II Descriptive formants In assessing the existence of a legal duty not to cause economic loss (wrongfulness); the reasonable foreseeability of harm (negligence); and the existence of a reasonably close connection between the conduct causing the harm and the eventual loss (remoteness), the courts deal with the concept of reasonableness from various perspectives: with hindsight to determine wrongfulness; with foresight from the perspective of the reasonable person in the position of the car driver, to determine negligence; and with a general perspective on what can be regarded as fair and just, having regard to foreseeability; other intervening causative factors; and separation in time and space between the conduct and the harm, to determine remoteness.74 All these elements of liability leave room for policy considerations and a value judgement. The case of Franschhoekse Wynkelder (Ko-operatief ) Bpk v South African Railways and Harbours 75 is indicative of considerations likely to be taken into account in this case. The plaintiff, a winemaking co-operative, instituted an action for damages against the defendant, arising out of the spraying of herbicide alongside one of 73 74 75

[2005] JOL 13952 (SCA). See S v Mokgethi 1990 (1) SA 32 32 (A) 40–1. 1981 (3) SA 36 (C).

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its railway lines. This had contaminated the soil in vineyards of farms adjoining the railway line. The owners of these farms were members of the co-operative and in terms of its constitution the members were obliged to deliver grapes to the plaintiff for the purpose of making wine. The plaintiff alleged that vines growing on the contaminated soil were destroyed or damaged and that, as a result, the plaintiff would not receive grapes from such farms, causing the plaintiff damage, which was alleged to have been foreseeable. The defendant excepted to the claim on the ground, inter alia, that it was not in law liable to the plaintiff for any damage, because defendant’s conduct was not wrongful vis-à-vis the plaintiff. The court held that it had not been alleged by the plaintiff that there was any special relationship between the parties; and no circumstances or facts alleged by the plaintiff allowed the conclusion that defendant had a legal duty to prevent harm to the plaintiff. There were also no considerations of public policy that justified the recognition of such a legal duty and the exception was therefore upheld. III Metalegal considerations The ‘floodgates’ consideration applies in this case, as set out under Case 2. Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for its expenses incurred prior to the collision, and for its loss of earnings due to cancellation of the two cruises. I Operative rules Shipwreck (plaintiff ) will probably succeed with its claim for wasted expenses and loss of earnings. It is assumed that Shipwreck as charterer of the ship was in possession of the ship. As such it was at risk to suffer wasted costs and loss of income as a result of physical damage negligently caused to the ship. The negligent causing of damage to the ship will be regarded as wrongful and negligent not only to the owner of the ship, but also to the charterer.

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II Descriptive formants The loss in this case is of an economic nature (wasted expenses and loss of earnings), but it arises from the physical damage to the ship. Damage to property caused by positive conduct is regarded as prima facie wrongful in South African law. Such damage is regarded as an infringement of the rights not only of the owner of property, but also of other parties who are in possession and who suffer loss as a result of the physical damage to the property, including an installment purchaser in possession and at risk;76 the purchaser of immovable property in possession and at risk;77 or a borrower in possession and at risk.78 The negligent causing of property damage is regarded as per se wrongful towards the owner or other interested party in possession and at risk; and the loss of the owner or such interested party will be regarded as reasonably foreseeable. Loss of profit is recoverable if specifically proved – not on a speculative basis.79 Loss of profit for property damage is recoverable where the property was used to generate income.80 Damages could include the cost of hiring a substitute.81 This case is distinguishable from Shell and BP SA Petroleum Refineries (Pty) Ltd v Osborne Panama SA,82 where the defendant’s employee caused damage to a mooring buoy in Durban harbour; and that in turn caused economic loss to the charterer of an oil tanker waiting outside the harbour, because of the consequent delay in discharging the cargo and additional liability for charter fees. The court held that the defendant did not owe a legal duty to the plaintiff to avert such economic loss, because it had not been shown that the defendant should have foreseen the possibility of such a loss to the charterer specifically. In the view of the court this kind of loss was foreseeable only in relation to an unascertained class of potential victims, namely the owners or charterers of all vessels intending to discharge oil at that particular mooring buoy. Only insofar as the 76 77 78 79

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Lean v Van der Mescht 1972 (2) SA 100 (O). Smit v Saipem 1974 (4) 918 (A). Spolander v Ward 1940 CPD 24. Omega African Plastics v Swisstool Manufacturers 1978 (3) SA 465 (A); Transnet Ltd v Sechaba Photoscan (Pty) Ltd 2005(1) SA 277 (SCA). Shrog v Valentine 1949 (3) SA 1228 (T) 1236; Lanco Engineering CC v Aris Box Manufacturers (Pty) Ltd 1993 (4) SA 378 (D). Smit v Abrahams 1994 (4) SA 1 (A). 1980 (3) SA 653 (D).

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plaintiff-charterer was a member of that unascertained class was its loss reasonably foreseeable. The court was therefore unwilling to recognize a legal duty on the part of the defendant towards one of an unknown number of potential claimants. III Metalegal considerations This case illustrates the difference in approach and also the tenuous conceptual divide between property damage and pure economic loss. Not only repair costs but other economic losses resulting from property damage are recoverable, provided the class of plaintiff is determinable and finite (owners or other interested persons in possession or at risk). It is not so much the nature of the loss that is at issue, but the spectre of a multiplicity of claims, as illustrated by the Shell and BP SA Petroleum Refineries case. In this case the loss of the charterers was regarded as pure economic loss, because the property damage was not to the ships, but to a mooring buoy used by the ships. The causing of damage was not regarded as either wrongful or negligent vis-à-vis the charterers, because it had ‘not been shown that the defendant should have foreseen the possibility of loss (on account of delay and liability for demurrage) to the second plaintiff specifically.’83 In this regard Howard J stated: ‘In the light of the evidence this kind of loss was only contemplated in relation to an unascertained class of potential victims, namely the owners or charterers of vessels intending to discharge oil at the SBM, and it is only because the second plaintiff is a member of that class that its loss was reasonably foreseeable. From the defendant’s point of view the class was unascertained because its membership depended on variables such as how many ships had joined or were committed to joining the queue and how long the SBM would be out of commission as a result of the collision.’ Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which time he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she looked after her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness. 83

At 659G–H.

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I Operative rules The wife’s claim could succeed on the basis of her duty to support her husband if he loses the ability to support himself (and her). She could either provide the support herself, or hire care at the market rate. The husband’s claim for damages will include the cost of care. If it were possible for him to recover the reasonable cost of care immediately, the wife could nevertheless decide to give up her business to provide the care herself, so that the recovered reasonable cost of care could be used towards the couple’s maintenance. In such a case she could not recover the difference between the recovered reasonable cost of care and the (higher) earnings which she could have had from her business, because that was her choice. If it were not possible for the husband to recover the cost of care immediately (the realistic scenario), the wife has the duty to provide interim care, either by caring for her husband herself, or by hiring care at the market rate and carrying on with her business. In such a case the reasonable cost of care could be recovered by the husband eventually, or, alternatively, the wife could claim the reasonable cost of care on the basis of her duty to support her husband when he became incapacitated. II Descriptive formants South African law recognizes the right to recover damages suffered as a result of the injury of another, based on the duty of support. Damages can be recovered for new or increased costs of providing support, if there is a duty to provide such support, deriving from the common law (family law) or legislation. Examples are the increased duties of support of parents or a spouse, in the event of the negligent causing of injury to a child or to the other spouse. III Metalegal considerations Pure economic loss suffered as a result of the injury of another is recoverable, but only if such loss arises from a legally recognized duty of support. The employer cannot recover economic loss suffered as a result of injury to his employee, as seen in Case 2 above. The law of delict therefore affords a higher level of protection to the duty of support in terms of family law than it does to the duty to continue payments or benefits to an employee in terms of the law of contract.

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Case 6 – Auditor’s liability Donna audits the accounts of Caterpillar, Inc. inaccurately. Paul relies on these published accounts to launch a take-over bid. This is successful but Paul then discovers that the accounts overestimated the value of the company and that the price he paid per share was twice their actual value. I Operative rules As a matter of general principle Paul could recover damages from Donna for his overpayment. This would depend entirely on whether Donna was negligent in producing the inaccurate statements and on whether Donna knew, or could in the particular circumstances reasonably have been expected to know, that Paul would rely on the statements for pitching his bid. II Descriptive formants The potential liability of auditors and registered accountants to third parties (non-clients), who rely on a negligently formulated opinion, certificate, report or statement, is discussed in Part B above. This kind of liability in South Africa is governed by legislation. Section 20(9) of the Public Accountants’ and Auditors’ Act 80 of 1991 sets out the circumstances in which such a claim will succeed. In terms of s 20(9)(b), an auditor who prepared an opinion or report negligently will be liable to a third party who relied on the statements only if it is proved that the auditor knew or could, in the particular circumstances, reasonably have been expected to know, at the time when the negligence occurred, that such opinion or report would be used by his client to induce the third party to act or refrain from acting, or that the third party would rely on such opinion or report. Arguably every auditor knows or ought reasonably to foresee that the annual financial statements of a company are widely used by investors and lenders for investment and business decisions and an auditor should reasonably be expected to know that his client or the third party would act as contemplated in section 20(9)(b). However, for the purposes of section 20(9)(b), the requisite knowledge or foreseeability depends on the circumstances of each case. In the case of International Shipping Co (Pty) Ltd v Bentley,84 the 84

1990 (1) SA 680 (A).

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court held that an auditor owed a legal duty to the creditor of a group of companies which had suffered loss in consequence of reliance on a negligent audit, but that the ultimate loss suffered by the appellant company was too remote for legal liability on the auditor’s part to arise.85 III Metalegal considerations The cases illustrate that South African courts adopt a generally conservative approach to the liability of auditors towards third parties relying on audited financial statements. There are important policy considerations in favour of allowing a third party who relied on negligently audited statements and suffered loss as a result to recover damages. Auditors hold themselves out to be experts in reporting on financial statements and know or should know that third parties rely on such statements. Negligent auditing is likely to have a detrimental effect on the economy as a whole and on the auditing profession. On the other hand the courts guard against placing too onerous a burden on auditors. The spectre of liability in an indeterminate amount for an indeterminate time to an indeterminate class looms large in respect of auditors’ liability, particularly as far as liability for investment decisions is concerned. Auditors’ reports are not generally intended to be used by investors or shareholders at large as investment advice. Different considerations will apply where the third party informed the auditor before the audit of the purposes for which he will be relying on the audited financial statements. Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institute, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit, Inc. makes no further inquiry and thus does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damages. He is now suing Credit, Inc. to recover his losses. 85

See also Electronics Ltd v Taitz Kaplan & Co [1998]1 All SA 390(W); and for an extensive discussion of the duties of an auditor towards his client, see Thoroughbred Breeders’ Assoc v Price Waterhouse 2001 (4) SA 551 (SCA).

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I Operative rules Dieter is likely to succeed with his claim. Credit Inc. wrongfully caused Dieter’s loss, having a duty in the circumstances not to cause Dieter economic loss by misrepresentation (Credit Inc. held themselves out as professionals in credit rating; they knew the information was important and that the consequences of inaccurate information were potentially harmful; and presumably they had some kind of professional relationship with the bank and knew the bank would rely and act on the information). Credit Inc. also negligently caused Dieter’s loss (Credit Inc. could reasonably foresee that Dieter would suffer loss if the information was incorrect and failed to take reasonable steps to verify the information). II Descriptive formants The question is whether factual and policy considerations indicate the existence of a legal duty for Credit Inc. towards Dieter to supply correct information to First National Bank so as not to cause Dieter economic loss. In the leading case of Administrateur, Natal v Trust Bank van Afrika Bpk 86 the court applied the general criterion of reasonableness to determine whether an act of misrepresentation is to be regarded as wrongful for the purposes of delictual liability. The court accepted that the criterion of reasonableness involves policy considerations and that recognition of a legal duty is the outcome of a value judgement that the plaintiff ’s invaded interest is deemed worthy of legal protection against negligent interference. Relevant factors in assessing a duty not to cause economic loss by misrepresentation are discussed in Part B above. These factors include knowledge of potential harm; practicable measures to avert the damage; professional knowledge and competence; knowledge that the person receiving the information would rely and act on it; and a special relationship between the giver of information on the one hand and the receiver or person likely to be affected by it on the other.

86

1979 (3) SA 824 (A), at 833–34.

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III Metalegal considerations The courts are conservative when called upon to impose liability for pure economic loss caused by a negligent misrepresentation. The economic effects of incorrect information can be widespread and the ‘floodgates’ spectre looms large. Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by the RAC when he was involved in a head-on collision with another automobile. The engine of the rented vehicle intruded into the passenger compartment causing severe and permanent injuries. Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. The severing of the car made it impossible to determine within a reasonable degree of certainty whether or not the vehicle had design, manufacturing and/or maintenance defects which proximately caused Nicholas’ injuries. Nicholas sues RAC for negligent spoliation of the evidence and tortious interference with a prospective civil action against Alfa Romeo. I Operative rules Nicholas cannot succeed if it is impossible to determine within a reasonable degree of certainty whether or not the vehicle had a defect which proximately caused Nicholas’ injuries and which could have been the basis of a successful claim against Alfa Romeo. In South African law wrongfulness and negligence are attributes of a causal relationship (i.e. the question is not whether RAC’s act of spoliation was in itself wrongful or negligent, but whether the spoliation wrongfully or negligently caused loss by depriving Nicholas of the benefits of a successful civil action against Alfa Romeo). If such causation cannot be proved, Nicholas cannot succeed against RAC. II Descriptive formants Were it possible to prove that, but for RAC’s spoliation, Nicholas would have been successful with a claim against Alfa Romeo, the

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issue would have been the existence of a legal duty on the part of RAC to keep the wreck intact so as to prevent the loss to Nicholas of the benefits of a successful civil action against Alfa Romeo. Nicholas would have succeeded in proving such a duty on the basis of RAC’s knowledge of potential loss; the practicable measures available to them to avert the loss by keeping the wreck intact; and the professional knowledge and competence that RAC presumably professed to exercise on behalf of clients. Outside a professional-client relationship a duty to prevent the loss of the benefits of a successful civil action may be difficult to prove. In Minister of Law and Order v Kadir,87 the existence of a legal duty to prevent loss of the benefits of a successful civil action was at issue. Policemen investigated the scene of an accident caused by a package falling off a delivery vehicle. The driver of the vehicle had driven on without stopping. The policemen failed to obtain the names and addresses of possible witnesses before these people left the scene of the accident. The court held that the policemen did not have a legal duty towards the victim of the accident, who was later unable to institute a civil claim for damages against the possibly negligent and unknown driver of the vehicle. The police have a statutory duty to deter crimes, to track down criminals, and to protect the public against crimes. However, as stated by Hefer JA:88 ‘Viewing the matter objectively, society will take account of the fact that that the function of the police relate in terms of the Act to criminal matters and were not designed for the purpose of assisting civil litigants.’ III Metalegal considerations The courts are generally reluctant to impose liability for pure economic loss caused by an omission, requiring clear indications of a duty to act positively to prevent the loss.89 Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having previously been employed by OMEGA and, while so employed, was a member of their occupational pension scheme. He

87 88 89

1995 (1) SA 303 (A) 319. At 321. See BOE Bank Ltd v Ries 2002 (3) SA 39 (SCA).

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was told by ALPHA that he was eligible to join its occupational pension scheme. As an employee, he would, unless he wished to opt out, automatically become a member of the scheme and deductions would be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based on a careless reading of the materials provided, the Broker vaunts the economic virtues and performances of OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and stay in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than she would have received from ALPHA. Mrs. Smith sues the Broker. I Operative rules Mrs. Smith is likely to succeed, on the basis that the Broker had a duty not only to Mr. Smith, but also to his wife, who would suffer the consequences of negligent advice concerning his pension. II Descriptive formants Professionals have a legal duty towards third parties in circumstances where the professional knows that the third party will suffer economic loss as a result of negligent advice to the client. Relevant cases are discussed in Part B above. Examples are negligent advice to trustees of a trust, with the result that beneficiaries of the trust suffer loss; and negligence in attending to the drafting or execution of a will, by a professional person acting on instructions of the testator, with the result that intended beneficiaries eventually do not inherit. Case 9 fits into the pattern of these cases. In EG Electric Co (Pty) Ltd v Franklin 90 the court recognized that a registered electrician, who on instructions of the seller of a house had supplied a certificate that the electrical wiring of the house complied with municipal regulations, owed a legal duty to the purchaser of the house who had relied on the correctness of the certificate and later had to incur costs to rectify defective wiring. The case of Jowell v Bramwell-Jones and others 91 involved a contractual relationship between professional advisors and the trustees of a testamentary trust. A beneficiary of the trust alleged that negligent investment 90 91

1979 (2) SA 702 (E). 2000 (3) SA 274 (SCA).

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advice by the advisors to the trustees caused loss to the beneficiary. The trial court held that the advisors had a legal duty towards the beneficiary and were liable in delict for the loss. However, on appeal it was held that the beneficiary had not proved loss. In Aucamp v Universiteit van Stellenbosch 92 it was held that an employer owes a duty towards the dependants of an employee who did not benefit from a group life assurance scheme, because the employer failed to advise the employee properly about membership of the scheme. III Metalegal considerations The South African courts readily impose liability for pure economic loss on persons who profess to have professional knowledge and competence where negligence in giving advice or performing some other task for a client involves a known risk to a known third party.

Bibliography Boberg, P.Q.R. The Law of Delict: Vol. I Aquilian Liability Cape Town: Juta & Co, Ltd. 1984. Burchell, J. Principles of Delict, Cape Town: Juta & Co., Ltd 1993. Burchell, J. The odyssey of pure economic loss, in Developing Delict – Essays in Honour of Robert Feenstra, first published as Acta Juridica 2000, T. J. Scott and Daniel Visser (eds.), Cape Town: Juta Ltd., 2000. Loubser, M. M. ‘Concurrence of Contract and Delict’ Stellenbosch Law Review 1997 2 113. —— Principles and policy in unlawful competition: An Aquilian mask? In Developing Delict – Essays in Honour of Robert Feenstra, p 99. First published as Acta Juridica 2000, TJ Scott and Daniel Visser (eds.), Cape Town: Juta Ltd., 2000. Neethling, J., Potgieter, J. M. and Visser, P. J. Law of Delict, LexisNexis Butterworths, Durban, 5th edn, 2006. Van der Merwe, N. J. and Olivier, P. J. J. Die onregmatige daad in die SuidAfrikaanse reg Pretoria: J. P. Van der Walt en Seun (Pty) Ltd 6th edn, 1989. Van der Walt, J. C. and Midgley, J. R. Principles of Delict, LexisNexis Butterworths, Durban, 3rd edn, 2005. Zimmermann, R. and Visser, D. (eds.) Southern Cross: Civil Law and Common Law in South Africa, Cape Town: Juta & Co, Ltd., 1996.

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2002 (4) SA 544 (C).

Chapter 9

Poland Tomasz Pajor

1 Introduction Pure economic loss (i.e., an exclusively financial damage arising extracontractually without any previous harm to the person or property of the plaintiff ) is not distinguished as a separate notion in Polish legal writing. If it is referred to by the scholars, which usually happens in a comparative law context, pure economic loss is discussed as a specific problem appearing in certain foreign private-law systems.1 Obviously this does not mean that particular issues related to the notion of pure economic loss are not considered and resolved within the framework of Polish law. In principle, these issues primarily concern uncertainties regarding the delimitation of boundaries of delictual liability in its personal aspect as well as its relation to contractual liability. Presenting these issues in greater detail requires defining the normative background against which they arise. Polish private law recognizes two liability régimes as sources for the redress of damages. Where the damage results from violation of a previously existing obligation, Articles 471 et seq. of the Civil Code (hereafter CC) apply, establishing the régime referred to as ‘contractual’.2 Where the creation of an obligation to redress damage 1

2

B. Lewaszkiewicz-Petrykowska, ‘La responsabilité pour les dommages purement économiques’, in Rapport polonais présentés au XVème Congrès international de droit comparé, Lódz´ 1998, p 45 et seq.; Idem, ‘Zasada pełnego odszkodowania (mity i rzeczywistos´c´)’ [The principle of full compensation for damage (myths and reality)], in Rozprawy prawnicze. Ksie˛ ga pamia˛ tkowa Profesora Maksymiliana Pazdana [Legal Essays in Honour of Professor M. Pazdan], (2005) pp 1074–5. One must note that the term is too limited, since liability based on Article 471 and subseq. cover also breaches of a relationship of obligation arising ex lege.

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arises statutorily from the very fact of causing damage in particular circumstances, such instances make up a régime of liability for unlawful acts, known as ‘delictual’ liability (Articles 415 et seq. CC). In such instances the liability is not dependent on the previous existence of a contractual relationship between the injurer and the victim. Both régimes differ in their normative framework on numerous essential issues, such as the premises and scope of liability, burden of proof, and statutory limitation period. Those differences are reduced by common provisions on the attribution of damages and the means of redressing damage (Articles 361–363 CC), as well as the possibility of concurrence of both régimes of liability (Article 443 of the CC). Contractual liability for damage incurred from the breach of an obligation is based on the presumption that the causes for the breach burden the debtor (Article 471 of the CC). Except where provided otherwise by statute or legal act, the debtor is liable for his/her own actions under the principle of fault (Article 472 CC) and for the actions of persons helping him/her in performance – under the principle of risk (Article 474 CC). Within the delictual régime liability can be based on the principle of fault, risk, or equity. Equity is a source of liability only in exceptional instances clearly provided for in a statute (e.g. Articles 428, 431 § 2 CC). The principle of risk is no longer of an extraordinary nature. Due to its broad and still expanding scope of application it is normally perceived as a principle of delictual liability equivalent to the principle of fault.3 The principle of fault maintains its fundamental relevance not only because of its historical precedence, but also because fault is expressed in the general clause of liability (Article 415 CC), which is modeled on the pattern of Article 1382 of the French CC. This regulation is supplemented by Article 430 CC providing for vicarious liability of employer for the behaviour of a subordinate (i.e. a person under supervision and control). For almost 70 years, the regulation referred to above has met with the approbation of the legal scholars and courts.4 Article 415 CC 3

4

See Z. Radwan´ ski, A. Olejniczak, Zobowia˛ zania – cze˛ s´c´ ogólna, [Obligations – general part], 6th edn. (2005) p 83. Nearly identical regulation already existed under the Code of Obligations of 1933 (in Articles 134 and 145). These provisions remained in force until 1 January 1965 when the present Civil Code of 1964 came into force.

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encompasses a flexible formula which allows for the new situations and efficiently eliminates the risk of legal lacunae in delictual protection. At the same time, the wide scope of the provision allows for the avoidance of disputes, that are frequently pointless regarding the qualification of particular instances of damage. Such disputes are characteristic for legal systems unfamiliar with the general clause of liability under the principle of fault (e.g. German law, common law). On the other hand, the general wording of Article 415 CC is susceptible, if improperly applied, to an excessive broadening of liability. To avoid this risk, the legislator has attempted to determine more precisely the circumstances which have to be met so that the obligation to redress damage, provided for in the aforementioned provision, will arise. Thus diligent interpretation seems to be necessary. Apart from that, certain limitations on liability, deriving from other provisions of the Code, should also be taken into account. The premises for liability under Article 415 CC encompass damage, behaviour, and the causal link between them. The Civil Code does not contain a statutory definition of damage. It is accepted in legal writings that damage consists of injury to legally protected values and interests. There is no hierarchy of legally protected interests. As a result, in principle every instance of material damage is subject to compensation, including pure economic loss. This is derived from the principle of full compensation expressed in Article 361 § 2 CC. This provision provides that redress of damage covers two situations: (a) the losses incurred by the injured person; and (b) the benefits which that person could have obtained had he/ she not suffered the damage. It is assumed that the second situation, lucrum cessans, also encompasses a loss of opportunity only if the realization thereof was highly probable.5 It should be highlighted that the aforementioned principle has various exceptions. For example, damage consisting of loss of benefits gained in an illegal or dishonest manner (lucrum illicitum vel inhonestum) is not subject to redress. Furthermore, immaterial damage may only be redressed by pecuniary means where it is provided in a statute (Article 445, 448 CC). 5

See A. Szpunar, Odszkodowanie za szkode˛ maja˛ tkowa˛ . Szkoda na mieniu i osobie [Compensation for material damage. Damage to property or person], 1998, pp 46–7; see also, judgement of the Supreme Court of 16 November 1962 (Pan´ stwo i Prawo 1964, Issue 7, p 165, with commentary by W. Siedlecki), where the Court recognized the liability of a solicitor in a case where his negligence led to a default judgement that became binding.

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Fault as the premise of liability under Article 415 CC is defined in the majority of legal treatises as a negative assessment of the behaviour of the person causing the damage.6 This personal deficiency can be raised only against a perpetrator to whom the fault can be ascribed, having regard for his/her age (Article 426 CC) and mental or physical condition (Article 425 CC), provided that his/her behaviour was unlawful and that he/she was acting in an intentional or negligent manner. The unlawfulness of a perpetrator’s behaviour is of particular relevance for the delimitation of contractual and delictual liability. Speaking in broad terms, a perpetrator can be held liable under Article 415 CC where he/she violated common duties incumbent on him/her independently of the existence of any contractual relationship (delictual unlawfulness). Where such a violation of duties was simultaneously a breach of contractual obligations binding upon the perpetrator (contractual unlawfulness), a concurrence of liability and effects defined in Article 443 CC may occur (the choice of claims is up to the injured party). The third and the last premise of liability pursuant to Article 415 CC is the existence of a causal link between the behaviour of the perpetrator and the damage. This element is defined in greater detail in Article 361 § 1 CC: ‘A person obliged to render compensation is liable only for the normal consequences of the act or omission from which the damage resulted.’ It is worth noting that the criterion regarding the normal character of consequences, stated in the provision, is a useful instrument in the selection of damages eligible for redress and it allows for keeping the liability within reasonable limits. From that point of view it constitutes an important supplement (and, simultaneously, a limitation) to the general clause of Article 415 CC. As it was already mentioned, defining the boundaries of the discussed liability is done not only through interpretation of the terms of Article 415 CC. Other regulations also ought to be taken into account, in particular – Article 446 CC. According to this provision if, as a result of bodily harm or causing a disturbance to health, the injured person dies, certain individuals normally related to the deceased are entitled to claim compensation for their own losses. The majority of legal scholarship and the case law perceive this norm as an exception that proves the rule that only the person directly injured 6

See e.g., W. Czachórski, Zobowia˛ zania. Zarys wykładu [Obligations. An outline of lecture] (9th edn, 2004) pp 210–11.

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(i.e. the one whom the action (or event) resulting in liability has been directed against, is entitled to claim compensation).7 It is to be understood essentially as the exclusion of claims of persons injured indirectly only, par ricochet, even where their damage has a normal causal link with the delictual event. Still another limitation to the scope of liability is advocated by the proponents of the theory of relative unlawfulness.8 They assume that liability only covers those people, values, and interests whose protection was the purpose of the norm infringed. However, this theory does not have a statutory basis in Polish law and is not generally approved.9 Its application poses a number of difficulties, since it requires establishing what aims are served by the norm infringed, which is frequently vague. As a result, the risk arises of limiting the scope of compensatory protection by arbitrary interpretation. For these reasons the determination of the purpose of the norm infringed should not be treated as an autonomous criterion for defining the limits of liability. However, such criterion can be applied as a subsidiary aid when establishing whether a normal causal link exists between the infringement and the damage. 7

8

9

See: A. Szpunar, Wynagrodzenie szkody wynikłej wskutek s´ mierci osoby bliskiej [Redress of the damage caused by death of a related person] (2000) pp 58–61; Z. Radwan´ ski, A. Olejniczak, p 245; Z. Masłowski, in Kodeks Cywilny. Komentarz [Civil Code. Commentary], Vol. 2, Zobowia˛ zania [Obligations], (1972) pp 1110, 1095; in this way: the judgements of the Supreme Court of 28 December 1972, OSPiKA 1974, item 7; of 13 October 1987, OSNC 1989, item 142 with approving comments from R. Kasprzyk, OSPiKA 1989, item 146 and critical from L. Stecki, Nowe Prawo 1990, No. 4–6, pp 225 et seq. More recently M. Safjan published his critical comment on that rule: ‘Problematyka tzw. bezprawnos´ ci wzgle˛dnej oraz zwia˛ zku przyczynowego na tle odpowiedzialnos´ ci za niezgodne z prawem akty normatywne’ [Problems of so-called relative unlawfulness and causality in cases of the liability for normative acts which are incompatible with law], in Rozprawy prawnicze. Ksie˛ ga pamia˛ tkowa Profesora Maksymiliana Pazdana [Legal essays . . .] (2005) pp 1327–9; critically also B. Lackoron´ ski (2007) ‘Orzecznictwo dotycza˛ ce odpowiedzialnos´ ci za tzw. szkody pos´ rednie’ [Case law concerning the liability for the so called indirect damages], Przegla˛ d Sa˛ dowy, Issue 9, pp 35 et seq. See: A. Szpunar, comments on the judgement of the Supreme Court of 3rd March 1958, OSPiKA 1959, item 197; Odpowiedzialnos´c´ Skarbu Pan´ stwa za funkcjonariuszy [Liability of the State Treasury for state functionaries] (1985) pp 136–8; R. Kasprzyk, ‘Bezprawnos´ c´ wzgle˛dna’ [The relative unlawfulness], Studia Prawnicze, Vol. 3, p 149 et seq. Critically on that concept: T. Pajor, ‘L’influence du Code civil français sur d’autres législations – Le droit de la responsabilité’, in Le Code civil et l’Europe – influences et modernité, Strasbourg 2004, pp 36–7; extensively and critically on the issue: M. Safjan, p 1321 et seq.

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Case 1 – A cable case: the laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cut the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected black-out causes the loss of two days of production. Black has to lay off a number of workers hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay. I Operative rules The basis of the claims of the Black factory itself, as well as its employees, against the roadworks company could be Article 430 CC. It seems very likely though that neither the factory nor its employees will obtain compensation from Holly, since their losses result from the injury incurred by the electric power station/public utility and consequently, they are only indirectly injured persons. II Descriptive formants If one assumes that the employee of Holly operated the excavator without due diligence, the company shall then be liable under Article 430 CC for damage caused by the fault of its subordinate (employee) while performing the acts entrusted to him/her. This provision establishes liability based on the principle of risk. The company is liable regardless of its own lack of fault and cannot invoke any exonerating circumstances. Its liability is exclusive because the employee who causes damage to a third party by unintentional fault is not liable to such party (Article 120 of the Labour Code in the light of interpretation well established in the case law). The liability of Holly under Article 430 CC would arise in favor of the public utility only, since the faulty behaviour of the perpetrator was directed against it. The damage of the Black factory resulted from the electric power station being unable to perform its obligation, in accordance with its contract, to supply electricity. As an indirectly injured contractor, the Black factory has no delictual claim against Holly.10 The contractual claim of the Black factory against the electric power station is also not likely to be successful, since the latter would 10

See the writing and case law cited in footnote 7.

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exonerate itself by proving that it was not the cause of nonperformance. The workers employed by the Black factory on the basis of day-today contracts have even less cover under delictual protection. Leaving aside the issue of the admissibility of such employment under Polish labor law, one should stress that such employees could only be considered third in line among those injured by the negligence of Holly’s employee. The direct cause of their damage was the decision taken by the Black factory not to employ them during the black-out. Since that decision was probably not inevitable (employees could be entrusted with other tasks) one may ask whether the normal causal link was not interrupted in relation to the discussed delictual event (damaging the cable). One may also ask whether those employed on a daily basis must not take into consideration possible interruptions of employment. III Metalegal considerations As it appears from the above, neither the Black factory nor its employees could expect compensatory protection under Polish law. Such a result does not raise essential objections since the rules determining it are well substantiated. It is emphasized in the legal literature that the attribution of delictual claims to all those injured, including those indirectly injured (par ricochet), would amount to an excessive broadening of the scope of liability, of which the considered case is a good example. Even minor negligence while performing road works would burden the entrepreneur with a potentially major risk of liability, the scope of which could not possibly be estimated or limited in advance. Therefore covering it by insurance would be either impossible or very costly. This would lead to a considerable restriction on the pursuit of useful economic activity. In these circumstances, it would undoubtedly be a better solution, from the point of view of the supplier, to leave the risk of an accidental black-out to the consumers, who are in a position to reduce it relatively easily by assuring an alternative source of supply or by insurance, or they may decide to bear it as a typical – and normally marginal – risk of day-to-day operation.

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Case 2 – The injured key-player Thomas is pivot on the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car and unable to play for three months. In the absence of its best player, the team (until then at the top of the league standings) drops to fourth place. This results in considerable losses for the team owners. Can the AllStars recover against the car driver? I Operative rules The team owners cannot, as indirectly injured parties, recover losses incurred as a result of the player’s absence during the championship, even though it is a consequence of the bodily harm suffered by such player as a result of the car accident. II Descriptive formants In instances involving personal injury, the legal position of persons indirectly damaged is regulated by Article 446 CC. This provision determines who, and under what conditions, such persons are entitled to recover for their own losses resulting from the death of the directly injured person. Only those persons related to the deceased and those who incurred the costs of medical treatment and funeral expenses are enumerated in the above-mentioned provision. Those having rights towards the deceased under a contractual relationship are not so entitled. Since the enumeration contained in Article 446 CC is a closed one, the sports team owners are not in a position to claim their own damages due to the player’s injury. The person liable for the car accident in delict is, both on grounds of fault (Article 415 CC) or risk (Article 436 CC), obliged to redress the damage of the person whose legal interests were directly injured by such accident. He/she is not answerable towards those persons whose losses are only a consequence of the injury suffered by the directly injured person. However, even if Polish law admitted a claim by someone indirectly damaged, it appears highly doubtful whether the sports team owners would be able to prove the existence of a normal causal link between the absence of their best player, the drop in the team’s performance in the championship, and the financial losses resulting therefrom. It seems hardly possible to prove that the absence of a given player in the championship, even the best one, always increases the possibility of a drop in the rankings. An increase in the prob-

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ability of occurrence of a particular consequence is treated in the Polish legal scholarship as a principal criterion for the existence of a normal causal link within the meaning of Article 361 § 1 CC.11 Furthermore, the claim of the team owners would concern lost benefits (lucrum cessans), as to which it is stressed that they are to be recovered only where the probability of gaining them is sufficiently high (i.e. bordering on certainty).12 The nature of sports events is such that one may do nothing more than evaluate the loss of a chance to achieve (maintain) first place in the championship. What is at stake here is the loss of a chance in sports, which cannot be assumed to be bordering upon certainty.13 Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape of the infected animal obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; (b) the market traders who have lost their supplies; and (c) the butchers who have not been able to conduct their business during this time. I Operative rules It appears that none of the persons named above is, under Polish law, entitled to claim recovery of the damages incurred by them against 11

12

13

See A. Koch, Zwia˛ zek przyczynowy jako podstawa odpowiedzialnos´ci odszkodowawczej w prawie cywilnym [Causal link as a basis of liability for damage in civil law], 1975, p 135 et seq. See: W. Czachórski, pp 102–3. For example, the judgement of the Supreme Court of 3 October 1979 (OSN 1980, item 184) states: ‘Although assessing the damage of lost benefits is of a hypothetical nature, nevertheless such damage must be proved by the injured person with such sufficient probability, that, in the light of life experience, it is possible to assume that such a loss of benefits actually took place.’ Part of the Polish legal scholarship assumes, that – by contrast to the lucrum cessans – loss of a chance (possible loss) is not eligible for recovery – see, W. Czachórski, p 103. More favourably to the injured person, although under the condition of high level of probability, see A. Szpunar, Odszkodowanie . . . [Compensation . . .], pp 46–7 and the case law cited therein.

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the raiser of the infected animal. His negligent conduct was not directed against the legal interests of any of them, and the damages described do not fall within the normal consequences of this type of negligence. II Descriptive formants If the liability of the negligent cattle raiser was well founded, it would be based solely on Article 415 CC, whereas the application of Article 431 CC would be excluded. The latter provision states that a person raising or employing an animal is liable for the damage caused by the latter under the principle of fault in supervision. However, the present case does not concern the damage caused ‘by the animal’, but rather the negligent behaviour of the raiser who is obliged under law to undertake specific safety measures in cases where there is suspicion of a contagious disease.14 If one assumes that the raiser was negligent in the performance of his duties, meaning that the premise of fault of Article 415 CC is met, doubts arise as to another premise of liability – the existence of a normal causal link within the meaning of Article 361 § 1 CC between the faulty behaviour and the pure economic losses incurred by other raisers, market traders and butchers. Their claims should be dismissed as unfounded since negligence in supervising an infected animal does not cause, in the normal course of events, damages of this type (the probability of this sort of harm is not increased every single time as a consequence of this type of carelessness). However, the assessment would be different in this respect if the case concerned the damage resulting from infecting other animals. The defendant might also claim that the causal link was interrupted by the action of local authorities, who decided to temporarily close the market. The plaintiff ’s losses, however, undoubtedly belong to the normal consequences of such a decision, and the decision itself, probably taken after considering a number of various circumstances, may in certain instances be considered a normal consequence of this kind of negligence of the defendant. 14

That being the case the Law of 11th March 2004 on the protection of animals and combating contagious diseases in animals (O.J. No. 69, item 625) imposes a number of duties on the keeper of an animal, including the duty to ‘leave the animal on the spot where it stays and not to lead other animals near it’ (Article 42, para. 1(2) of the Law).

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Furthermore, one should note that the plaintiffs bear the burden of establishing that they incurred pure economic losses and the evidence could be difficult to produce in these circumstances. If the interruption in the functioning of the market was relatively short, the loss of benefits from trading would also probably be temporary and small-scale and thus could be compensated for by natural intensification of income following the removal of the obstacle. III Metalegal considerations As can be noticed, refusal to recognize the claims of the injured persons in the present case is based on an interpretation of the notion of normal causal link in the light of Article 361 CC. As with any other vague legal term, the notion of normal consequences is open to different interpretations and does not provide for full predictability in court rulings. However, in light of the discussed circumstances of this case, the results of giving a directly opposite interpretation would be unacceptable. The application of rules on civil liability must not lead to burdening a perpetrator who commits incidental negligence with responsibility for various perturbations in the economic life of the whole region. And after all – why just the region? In another situation it could be the whole country – there are virtually no clear limitations and this at least proves the indispensability of introducing reasonable limitations in the scope of liability provided for in the general clause of Article 415 CC. One of the instruments serving that aim is the notion of normal consequences under Article 361 CC. Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for its expenses incurred prior to the collision, and for its loss of earnings due to cancellation of the two cruises. I Operative rules Probably the Shipwreck Company would obtain, from the person liable for collision of the liner, compensation for benefits lost as a consequence of cancellation of the two cruises. Nonetheless, the

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liability of such person does not cover the previously incurred expenses which turned out to be useless. II Descriptive formants The loss of benefits from cruises planned in the near future constitutes the lucrum cessans and is – in principle – eligible for recovery, since the probability of gaining benefits was very likely because the cruises were booked. It is more problematic though, whether the lessee of the damaged liner can claim the recovery of damages or whether it should rather be the owner. The latter is obviously directly injured by the event, whereas the rights of the lessee in relation to the object of lease are mainly effective against the other party to the contract (i.e. the lessor (normally the owner)). One can draw the conclusion that the lessee should claim his/her damage from the lessor (owner), and the owner in turn from the person liable for collision of the liner. This line of reasoning, however, raises two essential obstacles. Firstly, the lessee may not be compensated by the lessor, where the latter exonerates himself/herself by proving that he/she is not liable for the collision, either contractually or on any other grounds. Secondly, the lessor (owner) can be confronted with an objection, by the person liable for the collision, that the compensation sought concerns damage not incurred by him/her, since it was the lessee who organized cruises and not the lessor. The perpetrator of damage would thus avoid liability when the rights to claim damages are split between different persons. In these circumstances one should assume that the liability for collision of the liner also covers damages incurred by its lessee. In fact the delictual event, being directed against a certain thing (a liner) not only infringes on the absolute rights to such thing, like ownership rights, but also upon relative rights, with which persons entitled to use the thing under a contract are equipped. It also infringes the dependent possession of the liner exercised by the lessee.15 Thus, the lessee of the liner can be considered directly injured and can claim damages incurred as a result of the collision, provided the premises of liability, defined by law, are met. In any case such liability cannot 15

Although under Polish law possession is not considered a subjective right, but merely an actual control over a thing, nonetheless such actual control has erga omnes protection of law in certain circumstances that may be invoked by a possessor even against an owner of the thing (see Article 344 CC).

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be excluded by the simple objection that the plaintiff is not an owner of the liner when in fact he/she exploits it under a contract with the permission of the owner, and claims recovery of damage that could also be incurred by the owner. The assessment must be different as regards Shipwreck’s claims to recover previously incurred expenses that proved useless. Contrary to first impression, this is not a question of lack of a causal link with the collision. Article 361 § 1 CC states that (normal) effects of the act or omission from which the damage resulted are subject to recovery, and expenses incurred previously, prior to such act, do not seem to fit such a definition. Nonetheless the causal link can be understood more broadly if the law so provides. It is sufficient that the event resulting in liability alters the economic utility of the expense previously incurred. In such circumstances one may assume that the expense turned into a damage as a result of the event. The Civil Code introduces liability for this kind of damage on a number of occasions (e.g. in Articles 103 § 3 CC, 387 § 2 CC, 390 § 1 CC, second sentence of 566 § 1 CC). It is referred to as liability arising from protection of the reliance interest or (following the German pattern) a liability falling within the negative contractual interest. Damages of such kind are eligible for recovery where the specific provision so provides. It is for this reason that an injured person, claiming damages under general principles, cannot, in the absence of statutory entitlement, claim recovery for damage resulting from lost confidence. Finally, claiming simultaneous recovery of different types of damages would frequently be unacceptable from an economic point of view. The injured person cannot demand the recovery of expenses incurred for achieving an expected income (investment) and, at the same time, expect to receive the full income itself, since that would be more favorable than the case where the damage had not occurred. Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which time he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she looked after her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness.

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I Operative rules It is unquestionable that the person entitled to claim the redress for bodily harm or disturbance of health is the husband, as he has been injured. He can also claim expenses, within the limits of justified needs, incurred by other persons in relation to his illness (e.g. family members, acquaintances etc.). The wife could only seek recovery of costs of her husband’s medical treatment, incurred by her, in the event of his death (Article 446 § 1 CC). That being the case, the court could award her an adequate indemnity, provided she had suffered a considerable deterioration in her living standards (Article 446 § 3 CC). II Descriptive formants Pursuant to Article 444 § 1 CC, in case of bodily harm or disturbance of health, the redress of the damage covers all costs. Thus the injured husband can claim compensation from the wrongdoer for necessary care during the time of his illness. The provision also provides that upon the demand of the injured person, the party liable shall pay [in advance] a necessary sum to cover the cost of treatment, and if the injured person becomes permanently disabled, he shall advance a sum necessary to cover the costs of training for another occupation. As a consequence, the damage can be regarded as arising even before the need to make expenditures related to the illness, and not when such a cost is actually incurred. This means that covering the costs of treatment and care by members of the family of the injured person does not deprive the latter of the possibility to claim the damage as his or her own. It is of no relevance whether the family member providing treatment is altruistically motivated or is statutorily obliged to mutual help as a result of the marital relationship.16 However, the claim of the injured person should remain within the limits of reasonable need, in the present case probably not exceeding the costs of professional nursing treatment pending recovery from illness. Therefore the amount of revenue lost by the wife due to closing her shop is of no importance.17 16

17

See Article 23 of the Family and Custody Code; see also the judgement of the Supreme Court of 4 March 1969, OSNCP 1969, item 229. See a nearly identical case decided by the Supreme Court of 4 October 1973, OSNCP 1974, item 147.

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Under Polish law, a spouse cannot claim compensation for his/her own pain and suffering arising from the accident and illness of a spouse. Case 6 – Auditor’s liability Donna audits the accounts of Caterpillar, Inc. inaccurately. Paul relies on these published accounts to launch a take-over bid. This is successful, but Paul then discovers that the accounts overestimated the value of the company and that the price he paid per share was twice their actual value. I Operative rules Donna can be held liable in tort if, in drafting an inaccurate opinion, she violated an obligation binding upon her, regardless of the fact that she had no contractual relationship with Paul. Should such a violation happen to exist, Donna’s liability could be reduced to the level of Paul’s contributory negligence. II Descriptive formants If Donna audited the accounts of Caterpillar, Inc. in the performance of an employment relationship with the company, she can be held liable only to the company for undue performance of her duties as an employee. If the company provided Paul with an inaccurate opinion while negotiating the take-over bid, it could be liable to Paul under Articles 416 or 430 CC (culpa in contrahendo). If the circumstances of the case prove that Donna and the company concluded a contract for the benefit of Paul as a third party (Article 393 CC), Donna could be held liable to the latter on the grounds of such contract. In the light of the description of the case presented hereinabove, it appears that Donna made her audit of the books of the company as a professional auditor. Persons acting in this profession have a statutory duty to draft opinions conforming to facts and violation of the duty is subject to criminal sanction, even if committed unintentionally.18 In these circumstances it can be concluded that Donna violated the professional duty binding upon her under statute and 18

See Article 78 of the Law of 29 September 1994 on accountancy (unified text in O.J. of 2002, No. 76, item 694).

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independent from any contractual relation.19 It can be assumed that the professional negligence of Donna was also directed against the potential acquirer of the company, especially taking into account the foreseeable (and in certain instances – statutorily required) publication of the opinion. Thus the delictual claim of Paul would be well founded.20 Paul must prove the existence of a normal causal link between the damage incurred by him and the professional negligence of Donna. This may not be easy, since an acquirer of a company is often driven by different motives and it may turn out that he would have taken a decision regardless of the content of the auditor’s opinion. In any case the court should take into consideration that Paul substantially contributed towards the damage if he took an important economic decision based exclusively on Donna’s opinion, without exploring the financial condition of the company according to other accessible sources of information. Pursuant to Article 362 CC the obligation to redress the damage should be reduced proportionately to the level of fault of both parties. Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institute, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit, Inc. makes no further inquiry and thus does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damage. He is now suing Credit, Inc. to recover his losses.

19

20

See B. Lewaszkiewicz-Petrykowska, Nowe tendencje w zakresie cywilnej odpowiedzialnos´ ci zawodowej [New currents in the field of the civil liability of professionals] in Rozprawy z polskiego i europejskiego prawa prywatnego. Ksie˛ ga pamia˛ tkowa ofiarowana Profesorowi Józefowi Ska˛ pskiemu [Essays on Polish and European Private Law offered to Professor J. Ska˛ pski] (1994) pp 186, 188–9. The delictual liability of the professional auditor is approved by the judgement of the Supreme Court of the 1 December 2006 – with approving comments from A. Machura (2007) Doradztwo Podatkowe Issue 4, p 37 et seq. and critical from J. Jastrze˛bski (2007) Glosa, Issue 2, pp 45 et seq.

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I Operative rules Dieter’s claim against Credit Inc. for economic damage should be admitted on the grounds of Article 430 CC (Article 120 of the Labour Code). A contractual claim against the bank might also possibly be well founded. II Descriptive formants Credit Inc., as a professional economic operator, should not have relied solely on an anonymous telephone call. It should have inquired whether the information on the immediate bankruptcy of the enterprise operated by Dieter was true, before it forwarded it to the bank. Undoubtedly the institute’s staff committed negligence, perhaps even gross negligence, and in transmitting false information about Dieter they infringed upon his good reputation, which is a personal interest, protected erga omnes (see Articles 23–24 CC). There exists a causal link between Dieter’s damage and the gross negligence of the institute’s staff, since the reaction of a bank to information about a client’s immediate bankruptcy remains within the limits of normal consequences (Article 361 § 1 CC). Thus, the premises are satisfied, in accordance with Article 430 CC (Article 120 of the Labour Code), for the Institute’s liability for the damage inflicted by the fault of its subordinates (employees). Notwithstanding, the liability of the bank to Dieter as a party to the loan contract could also be considered. Indeed the bank had probably no reason not to believe in information forwarded by a professional institute (assuming the former was unaware of the way in which it was learned). It did not have to undertake an inquiry on its own. However, it seems that before the cancellation of loans it was obligated to give notice to the client and enable him to provide an explanation. If it did not do so, it would be liable for non-observance of the duty of co-operation in contractual relations, on the grounds of Article 471 in conjunction with Article 354 § 2 CC. Both the institute and the bank would be liable in solidum for Dieter’s damage. Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by RAC when he was involved in a head-on collision with another automobile. The engine of the rented vehicle intruded into the passenger compartment causing severe and permanent injuries.

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Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. The severing of the car made it impossible to determine within a reasonable degree of certainty whether or not the vehicle had design, manufacturing and/or maintenance defects which proximately caused Nicholas’ injuries. Nicholas sues RAC for negligent spoliation of the evidence and tortious interference with a prospective civil action against Alfa Romeo. I Operative rules Nicholas has a claim in tort against RAC for redress of the damage resulting from the fault of the defendant (Article 415 or 416 CC). II Descriptive formants Where a thing leased is destroyed due to circumstances for which the lessor is not liable, he/she is not obliged to restore it to its former state (Article 662 § 3 CC). In this situation the car rental contract came to an end.21 However, since the contract was binding upon the parties for a certain period, such circumstance must be taken into account while establishing the general duty of co-operation binding upon them.22 Therefore it must be concluded that RAC should have enabled its former client to inspect the wreck in order to establish the influence of the technical condition of the vehicle and its possible defects on the car crash. That duty was not questioned by RAC, as shown by the information forwarded to Nicholas that he had sixty days to inspect the car. It ought to be noted that this information created, on the part of Nicholas, a state of legitimate reliance as regards the possibility of inspection and the time he had at his disposal to do it. The fact that RAC allowed violation of that duty amounts to a delictual fault sometimes referred to as culpa post factum perfectum. 21 22

See Article 495 CC. Extensively on this issue, see T. Pajor (1983) ‘Zakres stosowania odpowiedzialnos´ ci kontraktowej w razie wyrza˛ dzenia szkody przed zawarciem lub po wykonaniu umowy’ [The scope of application of the contractual liability in case of causing damage before formation or after performance of a contract], Studia PrawnoEkonomiczne, Vol. XXXI, p 49 et seq.

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Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having previously been employed by OMEGA and, while so employed, was a member of their occupational pension scheme. He was told by ALPHA that he was eligible to join its occupational pension scheme. As an employee, he would, unless he wished to opt out, automatically become a member of the scheme and deductions would be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based on a careless reading of the materials provided, the Broker vaunts the economic virtues and performances of OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and stay in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than she would have received from ALPHA. Mrs. Smith sues the Broker. I Operative rules The effects of the claim of Mrs. Smith against the Broker cannot be foreseen with absolute certainty. It appears, though, that her claim under Article 415 CC should be considered well founded. II Descriptive formants The Broker can be contractually liable for negligence committed while providing advice, yet the contract was between him and Mr. Smith. Nonetheless it is Mrs. Smith who is damaged, claiming recovery of her own losses. Basing her claim on contractual grounds would require her to prove that the contract of Mr. Smith with the Broker was entered into for the benefit of the wife as the third party, who thus acquired her own claim for performance (Article 393 CC). Such evidence cannot be produced because Mr. Smith requested the Broker for advice for himself and not for his wife. It should be stressed that Polish law does not allow a contract for a third party only with protective effects, therefore it is not possible to extend contractual compensatory protection to those people related in this way to the party to the contract.23 Mrs. Smith can only raise a claim in tort under Article 415 CC. 23

German law permits that, by accepting the construction of Vertrag mit Schutzwirkung für Dritte (§ 311 III 1, 241 II BGB).

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In raising this claim the plaintiff must prove that the defendant, acting intentionally or negligently, violated a general duty binding upon him/her extra-contractually. In the present case it appears that such evidence could be produced, since the duties of the Broker are regulated by statute and therefore bind those acting in this profession regardless of the contract.24 Thus it can be supposed that in providing Mr. Smith with poor advice, the Broker violated both his contractual and statutory duties. By reason of the specific object of his advice, the Broker must have been aware that its content was likely to have an essential influence, not only on the interests of Mr. Smith, but also on the members of his family. Therefore it can be admitted that negligence in providing advice was directed also against Mrs. Smith. As for the establishment of the causal link, it seems undisputed that the damage claimed by her remains within the normal consequences of such negligence and, at the same time, that it does not result from the damage incurred by any other person. This means that Mrs. Smith can be considered to be a person directly injured by the professional negligence of the Broker, which substantiates his liability to her pursuant to Article 415 CC.25

2 Summary As appears from the above, Polish law does not impose an unlimited compensatory obligation. One can notice the tendency to maintain an equilibrium between the protection of the injured person and the freedom of individuals, in particular as regards the pursuit of economic or professional activities.26 While enacting and applying the law on civil liability, the legislator and courts employ different mechanisms which keep the compensation within reasonable limits. The notion of a normal causal link, based on the objective probability of the consequences triggered by the injuring event (Article 24

25

26

The legal status of brokers is regulated in Article 20 et seq. of the Law of 22 May 2003 on insurance brokerage (O.J. No. 124, item 1154). On the issue of professional liability, see the article by B. Lewaszkiewicz-Petrykowska cited in fn 19. One should note that notaries are held delictually liable towards their clients and third persons. See the judgement of the Supreme Court of 12 June 2002, OSNC 2003, item 124, with approving comments from M. Kolasin´ ski (2004) Przegla˛ d Sa˛ dowy, Issue 2, p 144 et seq. Articles 20 and 22 of the Constitution protect the freedom of establishment as one of the fundamental principles of the Polish legal and economic system.

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361 § 1CC), is particularly relevant here. This instrument of selection allows the risk of liability to be reduced, especially in cases of an ‘avalanche’ of claims, where, in certain circumstances, singular and minor negligence results in an unlimited number of injurious consequences which are likely to overload the perpetrator (see Case 3). This instrument does not always turn out to be sufficient (see Cases 1, 2, 4 and 5), particularly where pure economic loss occurs in circumstances where the causal link is more difficult to track down and control (e.g. when it is not associated with a physical infringement of the legal interests of the injured person). Therefore the risk of immoderate extension of liability emerges when economic damages are suffered by subsequent persons as a result of initial damage to the person directly injured by the delictual event. Reduction of that risk is supported by the principle according to which only the person whom the delictual event was directed against can raise the delictual claim. The majority of the legal writing and case law recognizes this principle, usually deriving it from Article 446 CC. It should be observed, though, that it derives equally, if not above all, from certain general assumptions signified by the distinction of two régimes of civil liability. Rejection of the principle would not only lead to the imposition of a huge and, most frequently, an unforeseeable burden on the person delictually liable, but it would also provide for an extension of delictual protection to interests which are contractual by their nature, rooted in the fact that the directly injured person remained in contractual relations with other people. It should be clear that the protection of these kinds of interests and expectations, based on the binding contract, is assumed to be subject to contractual liability and only exceptionally can be realized within the framework of delictual liability. It ought to be noted that the principle referred to above is not of an absolute character and has certain exceptions. As was already discussed, an exception may arise from a statute (Article 446 CC). Moreover, a person who suffers pure economic loss as a result of damage caused by a delict incurred by another subject may, in certain circumstances, be considered to be directly injured (i.e. the person against whom the delictual event (behaviour) was directed). Such direction of the event can be a consequence of various circumstances. It may result from the intentional conduct of the perpetrator (i.e. he/she wants to cause it or accepts its occurrence). This

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kind of delictual interference in contractual relations often constitutes an act of illicit competition27 and provides grounds for liability even in the absence of a normal causal link. Directing the delictual event on a certain person or persons can also result from factual circumstances other than the mental processes of the perpetrator (e.g. it may result from a given person’s dependent possession of a thing that is damaged or destroyed in a delictual event (see Case 4)) or a given person’s actual proximity to such an event (e.g. certain nervous shock cases).28 The instances whereby a pure economic loss occurs are not limited to circumstances in which the delictual interference with contractual (or other relative) relations of the injured person takes place. Another group of cases relates to an opposite type of interference: the existence of a contract influences the content and form of delictual duties. For example, Case 8 concerns the violation of a general duty of cooperation with a party whose contractual relation has already come to an end. If the car rental contract had not existed, the aforementioned duty of cooperation would not have materialized as it did in favour of the lessee. Similarly in Case 9, if the contract with the Broker had not been formed, the duty owed to the wife of the creditor would not have materialized. In Case 6, the delictual liability of the auditor to the acquirer of the company is related to her improper execution of her contractual duties. In all these cases the recognition of liability for pure economic loss constitutes a derivation of delictual consequences from the existence of a contractual relationship. Delimitation of the boundaries of these consequences requires, above all, an analysis of the duties violated by the perpetrator. If they are of a general nature, independent from the contract, and their violation is associated with an awareness on the part of the perpetrator that it is likely to cause damage to a certain person or persons, the liability can turn out to be substantiated. Applying the aforementioned instruments of causal selection and the selection of persons entitled to claim redress for damage

27

28

See Article 12 of the Law of 12 April 1993 on combating illicit competition (unified text in O.J. 2003, No 153, item 1503). See the judgement of the Supreme Court of 25th April 1961 (OSPiKA 1962, item 200). The Court recognized in this decision compensation for damage to health as a result of nervous shock experienced by a schoolgirl who witnessed a car accident in which her two friends accompanying her home from school were killed.

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ex delicto, one can attempt to achieve coherent solutions and strike a proper balance between different relevant interests, while establishing liability for pure economic loss.

Bibliography Czachórski, W. Zobowia˛ zania. Zarys wykładu [Obligations. An outline of lecture], 9th edn, Warszawa 2004. Kasprzyk, R. Bezprawnos´c´ wzgle˛ dna [‘The relative unlawfulness’], Studia Prawnicze, Vol. 3, 149. Koch, A. Zwia˛ zek przyczynowy jako podstawa odpowiedzialnos´ci odszkodowawczej w prawie cywilnym [Causal link as a basis of liability for damage in civil law], Warszawa 1975. Lackoron´ ski, B. Orzecznictwo dotycza˛ ce odpowiedzialnos´ci za tzw. Szkody pos´rednie [‘Case law concerning the liability for the so-called indirect damages’], Przegla˛ d Sa˛ dowy, 2007, Issue 9, 35. Lewaszkiewicz-Petrykowska, B. Nowe tendencje w zakresie cywilnej odpowiedzialnos´ ci zawodowej [New currents in the field of the civil liability of professionals], in Rozprawy z polskiego i europejskiego prawa prywatnego. Ksie˛ga pamia˛ tkowa ofiarowana Profesorowi Józefowi Ska˛ pskiemu [Essays on Polish and European Private Law to Professor J. Ska˛ pski], Kraków 1994, 186. —— La responsabilité pour les dommages purement économiques, in Rapport polonais présentés au XVème Congrès international de droit comparé, Łódz´ 1998, 45. —— Zasada pełnego odszkodowania (mity i rzeczywistos´c´) [The principle of full compensation for damage (myths and reality)] in Rozprawy prawnicze. Ksie˛ ga pamia˛ tkowa Profesora Maksymiliana Pazdana [Legal Essays in Honour of Professor M. Pazdan], Kraków 2005, 1074. Masłowski, Z. Kodeks Cywilny. Komentarz [Civil Code. Commentary], Vol. 2, Zobowia˛ zania [Obligations], Warszawa 1972, 1110. Pajor, T. Zakres stosowania odpowiedzialnos´ci kontraktowej w razie wyrza˛ dzenia szkody przed zawarciem lub po wykonaniu umowy [‘The scope of application of the contractual liability in case of causing damage before formation or after performance of a contract’], Studia PrawnoEkonomiczne, Vol. XXXI, 1983, 49. —— L’influence du Code civil français sur d’autres législations – Le droit de la responsabilité, in Le Code civil et l’Europe – influences et modernité, Strasbourg 2004, 36. Radwan´ ski, Z. A. Olejniczak, Zobowia˛ zania – cze˛ s´c´ ogólna [Obligations – general part], 6th edn, Warszawa 2005. Safjan, M. Rozprawy prawnicze. Ksie˛ga pamia˛ tkowa Profesora Maksymiliana Pazdana [Legal essays in honour of Professor M. Pazdan], Kraków 2005, 1327.

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Szpunar, A. Comments on the judgement of the Supreme Court of 3rd March 1958, OSPiKA 1959, item 197. —— Odpowiedzialnos´c´ Skarbu Pan´ stwa za funkcjonariuszy [Liability of the State Treasury for state functionaries], Warszawa 1985. —— Odszkodowanie za szkode˛ maja˛ tkowa˛ . Szkoda na mieniu i osobie [Compensation for material damage. Damage to property or person], Bydgoszcz 1998. —— Wynagrodzenie szkody wyniklej wskutek s´mierci osoby bliskiej [Redress of the damage caused by death of a related person], Bydgoszcz 2000.

Chapter 10

Denmark Dr. Kristina Maria Siig

1 Introduction Under Danish Law, the issue of pure economic loss is governed by the same rules and in the same way as a loss resulting from physical damage to property or personal injury. Thus, to be successful, a claimant must prove that he has suffered a loss, that the loss is caused by the act or omission of the potential tortfeasor, that there is a viable basis for liability, be it negligence, strict liability or otherwise, and that the loss is not too remote to be relevant. Whether these conditions are satisfied depends on case law – ultimately on precedents from the Danish Supreme Court. It follows that the main source of law within this area is quite inaccessible. Other regulations exist. The Liability in Tort Act governs special areas, mainly the calculation of compensation for personal injury, special rules regarding the liability of minors and handicapped persons, rules on multiple tortfeasors and rules regarding the interaction between the Law of Tort and the Law of Insurance. However generally applicable standards for negligence, proof, causation and remoteness are not defined in black letter rules or statute. Further, the principle of stare decisis is somewhat watered down in Danish Law. Nothing bars the Supreme Court from changing its view on an issue (e.g. for policy reasons) even if the facts are the same as in previous cases where a different conclusion was reached and the same view of stare decisis is – at least de facto – adopted also by the Courts of Appeal. The answers to the questionnaire may, to a large extent, only be given by stating degrees of probability.

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2 Frequently occurring obstacles to claims for pure economic loss Taken as a whole, a claimant wishing to pursue a claim for pure economic loss will have to counter two main defenses: that there is no relevant loss or that the claim is too remote to be recoverable under Danish law. As regards the proof of loss one must consider if the loss would have occurred anyway. If that is the case the claimant is not any worse off and he will have no claim under tort law rules. This is often a problem in recovering for (alleged) bad advice. However, the major obstacle to claims for pure economic loss is the defense that the damage is too remote to be relevant. Firstly, the claimant must counter the normal remoteness defense – that the damage itself is not too remote. On top of that a further argument of remoteness exists which is particularly problematic in pure economic loss situations. As a general rule, Danish law of both tort and contract only allows the directly affected party to claim compensation or damages.1 Insofar as the claim for pure economic loss is a follow-on effect of what started as a question of physical injury or damage to property, the starting point is that a claim is not allowed. There are exceptions to this principle (e.g. in cases where clear negligence is shown to exist or where it is clear to the prospective tortfeasor that third parties may be affected by his actions or omissions) but in general, a special basis for an indirect claim must be shown to exist. Thus, not only must the damage in itself not be too remote, it must also have occurred to a person or entity which is not too remotely connected to the tortfeasor’s actions or omissions.

3 Claims for pure economic loss in special areas The bulk of the cases on pure economic loss under Danish law fall into special areas, such as professional liability for financial or legal advice or auditing,2 losses for transgressions of the Marketing 1 2

Iversen et al. (2000), pp 82f. For example, the selling of inconvertible bonds as a basis for financing the purchase of private homes without proper information regarding the risks involved was considered negligent and led to quite a few cases in the late ’90s (see e.g., U 1997.1337 H, U 1997.1582 Ø, U 1998.1012 Ø, U 1999.1640 V and U 2000.1721 H). For the liability of professional advisors in general see Langsted (2004), HallingOvergaard (2003), Langsted et al. (2001) and Christensen (1981).

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Act,3 or losses under Company Law rules.4 In other areas of law, case law is sparse and disparate. Even the special rules offer no exhaustive regulation. Instead, they tend to refer to or necessitate the use of general criteria, thus adding to the unpredictability of this area of Danish tort law. Case 1 – A cable case: the laid-off workers While maneuvering his mechanical excavator, an employee of the Holly roadworks company cut the cable belonging to the public utility which delivers electricity to the Black factory. The unexpected black-out causes the loss of two days of production. Black has to lay off a number of workers hired on a day-to-day basis. These workers are now claiming compensation from the Holly roadworks company for the loss of two days’ pay. I Operative rules The day-to-day workers at the Black factory might – depending on the level of negligence committed by Holly – be allowed a claim against them based on the ruling of the Danish Supreme Court published in U 2004.2389 H, as well as a ruling from the lower ranking Court of Appeal, published in FED 2000.878 V. However, another precedent, U 1953.1028 H, speaks against it, and the outcome is not totally clear. II Descriptive formants As a starting point, only the person suffering a direct loss may claim compensation from a potential tortfeasor. However, in certain cases – such as this one concerning cut utility cables – the courts have allowed a party who is only indirectly affected by the damage to be compensated as well. In U 2004.2389 H, compensation was allowed 3

4

See e.g., U 1975.633 SHD, U 1975.910 SHD, U 1985.300 SHD, U 1985.389 H, U 1986.513/1 H, U 1998.445 H, U 2000.212 SHD, U 2000.506 H, U 2004.1085 H, U 2004.2600 SHD, U 2005.2162 H, U 2006.2709 H and latest U 2007.1254 H. A particular area being the so-called ‘company stripping cases’, (see e.g., U 1997.364 H, U 1998.1119 H, U 1999.1185 H, U 2000.365/2 H, U 2000.1332 H, U 2000.1926 H, U 2000.2003 H, U 2001.634/2 H, U 2001.1730 H, U 2002.116 H, U 2002.361/2 H, U 2002.742/2 H, U 2003.1519 H, U 2003.2018 Ø, U 2004.86 H, U 2005.2079 H, U 2005.2397 H, U 2006.145 H) and Hansen/Sørensen in [2003] EBLR 3, p 8ff.

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in a situation where the contractors A and B had cut cables supplying C with electricity. The cutting of the cable took place when A and B were working on a neighbouring plot; thus C’s claim was a claim in tort. The Court of Appeal allowed C’s claim, on the basis that the damage was caused by A and B, that C’s loss was not too remote to be relevant, and the employees of A and B had been negligent. The Supreme Court upheld the ruling, but changed the reasoning. The Supreme Court found that even if the general rules of tort law did not allow compensation to anyone other than the directly injured party, compensation would in this case be allowed due to the substantial negligence by the employees of A and B. The Supreme Court did not state that the negligence had been gross; however, the wording applied by the Court suggests that the negligence at least had been very close to ‘gross’. The outcome of the case was previously indicated by the Court of Appeal in FED 2000.878 V, where the enterprise C was allowed compensation from the demolishing company A after A had cut the public utility line. In particular, C was allowed a claim for wages paid in vain.5 Thus, in the hypothetical case, if the cutting of the cable has taken place under circumstances which amount to clear negligence, the workers of the Black factory might be allowed a claim in tort as against Holly roadworks company. It ought to be inconsequential whether or not a claim for loss of earnings is put forward by a ‘would-be’ employee who has not been paid or by an employer who has paid out wages in vain. However, it should be noted that there is no case law as yet that has exactly allowed such a claim and that the Court might be restrictive in the application of the above precedents. Also, the workers of the Black factory will have to prove that they would in fact have been employed for the relevant period of time, which might be difficult to prove depending on the circumstances. Finally, the Danish Supreme Court, in a considerably older judgement, U 1953.1028 H, held that a cab driver could not recover his loss of earnings from a drunk driver, who smashed into a cab belonging to the cab driver’s employer. The Supreme Court overruled the findings of the Court of Appeal, which had found in favour of the cab driver, and stated very categorically that a claim from an employee could not be the basis for a direct claim against the tortfeasor who had caused damage to property belonging to the

5

See further Edlund (2006), p 179.

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employer. Still it should be noted that in Danish law the Supreme Court may at any time depart from old precedents, and therefore the ruling from 1953 might not be followed should the situation arise today. III Metalegal considerations The reasoning for the general rule that only the party who is directly affected by an action or omission may direct a claim for compensation towards the person responsible, is a variety of the discussion of remoteness. In these cases there will generally be a proven loss, a line of causation and a possibility for a potential tortfeasor to foresee the loss as a potential outcome of his actions or omissions, meaning that the claim would otherwise tend to be allowed. However, for policy reasons (mainly the ‘flood gate’ argument)6 the claims are cut off as too remote even if the losses are – in layman’s terms – within the foreseeable. This writer’s view is that the claim should be allowed in this particular case if the Court finds that the employee of Holly roadworks company has acted with ‘clear negligence’, thus applying the rulings from 2000 and 2004 and disregarding the older ruling from 1953. Case 2 – The injured key-player Thomas is pivot on the All-Stars basketball team. A few days before the end of the championship, Thomas is hit by a car and unable to play for three months. In the absence of its best player, the team (until then at the top of the league standings) drops to fourth place. This results in considerable losses for the team owners. Can the AllStars recover against the car driver? I Operative rules Danish courts would in all likelihood not allow All-Stars to direct a claim in tort against the driver of the car. II Descriptive formants The starting point given above, that a person who suffers an indirect loss due to another’s act or omission is not protected by Danish tort law, applies to this hypothetical case as well. More importantly, 6

See Andersen/Lookofsky (2005) p 426.

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however, it is a question of meeting the burden of proof for causation. To prove that the owners of the All-Stars have indeed suffered a loss, the All-Stars must prove that they would have won the league had Thomas played. To Danish understanding, such a future hypothesis cannot be proven. (The All-Stars could have lost their head of steam; the other teams could have wised up to their tactics etc.). Therefore, there will be no proven relevant loss caused by the driver of the car, and the claim will be dismissed. III Metalegal considerations When a link of causation between the damage and the tortfeasor’s act or omission cannot be proven, Danish law considers that there is no interest worthy of protection by tort law rules. Case 3 – The infected animal A cattle raiser allowed an infected animal to escape from his premises. The escape of the infected animal obliged the authorities to close the cattle and meat market for ten days. The cattle raiser is being sued by: (a) other cattle raisers who have not been able to sell their cattle for ten days; (b) the market traders who have lost their supplies; and (c) the butchers who have not been able to conduct their business during this time. I Operative rules In all probability, any claim from the cattle raisers, the market traders or the butchers against the owner of the escaped cattle would be disallowed by the Danish courts. II Descriptive formants As in Case 1 above, the outcome of these disputes hinges on the unwillingness of the Danish courts to allow a claim against a claimant who is only indirectly affected by the act or omission of the tortfeasor. As in the case mentioned above, U 2004.2389 H, a direct claim might be allowed if the negligence committed by the tortfeasor is flagrant (or even more so if the act or omission must be seen as

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amounting to gross negligence, recklessness or intent). In the hypothetical case, however, this is not indicated and therefore the Danish courts must be expected to adhere to the starting point and disallow these indirect claims. It should also be noted that under public law rules the State will in many cases hold the cattle raisers harmless.7 III Metalegal considerations See the remarks under Case 1. Case 4 – The cancelled cruise A collision prevented a passenger liner from sailing for a month. The Shipwreck Company, which had leased the ship, was forced to cancel two cruises in the Caribbean. Shipwreck sued those responsible for the collision, claiming compensation for its expenses incurred prior to the collision, and for its loss of earnings due to cancellation of the two cruises. I Operative rules The Danish courts would quite possibly accept a claim in tort by Shipwreck against ‘the other ship’. (The claim against the ship charterer will be a claim in contract and is thus not dealt with here). However, Danish courts would reject the claim for expenses incurred prior to the collision. II Descriptive formants Danish courts have in certain cases allowed a party who has a contractual right to the use of the damaged item a right to compensation as against a tortfeasor, who causes damage to the said item. This was accepted by the Maritime and Commercial Court in U 1960.932 SHD. In this case, a ship caused damage to a bridge making it necessary for a private railway to divert its passengers. Considering that the private railway had a contractual right to use the rails over the bridge, the railway was allowed a claim for extra operating costs as against the ship owners. However, if no contractual right to the use of the item exists, no claim will be allowed, unless the claim can be 7

See the Livestock Act, s 56. The provision does not apply to market traders or butchers.

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based on special rules of e.g., property law. As a consequence, in U 1940.117 V, the Danish Court of Appeal disallowed a claim against the owners of a ship causing damage to (it seems) the same bridge as the one damaged in U 1960.932 SHD. The claimant was the owner of another ship, the M/S ‘Advance’, which could not pass under the bridge during the time when the bridge was being repaired and suffered a loss of earnings as a consequence. However, as the owners of the M/S ‘Advance’ had no independent right to sail under the bridge, in property, contract or otherwise, the claim was disallowed. Regarding which damages may be claimed, expenses uselessly incurred – or the reliance interest – cannot be claimed at the same time as the expectation interest.8 Thus, the claimant must choose between the expenses and the lost earnings. Assuming that the Shipwreck Company was making a profit, it would be advisable to opt for the lost earnings. In that case the expenses may not be claimed as they would have been incurred anyway. Thus, as far as the expenses are concerned, the owners of the Shipwreck Company have not suffered any loss as long as they are compensated for the loss of earnings. III Metalegal considerations Contrary to Cases 1–3, in this case the claim is not considered an indirect claim. The claim is considered a direct one because the Shipwreck Company has a legal interest in the cruise ship. As far as which damages may be recovered, Danish tort law seeks to redress the situation. Expenses that would have been borne had a contract been carried out will also have to be borne if the profit expected from the contract is recovered. Case 5 – The dutiful spouse A man was seriously injured and confined to bed for two months, during which time he was entirely unable to look after himself. His wife, who owns and runs a small shop, was forced to close her business while she looked after her husband. She is now suing the perpetrator of the accident for loss of earnings during the period of her enforced idleness.

8

See Iversen (2000), pp 659ff with further doctrinal references.

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I Operative rules The injured party’s wife would most probably not be allowed a claim in tort as against the tortfeasor, as such a claim, as a general proposition, is not recoverable under the Danish Liability in Tort Act sec. 1, para. 2. However, it may be noted that she would instead be compensated to a degree by state-provided social services and that hospitalisation costs or costs of being taken care of at home in the Danish system would be borne by the state. II Descriptive formants The case law is reluctant to allow a claim such as the one suggested in Case 5. The Liability in Tort Act sec. 1 states that a tortfeasor, who is liable for personal injury, will have to pay compensation for lost earnings, healing expenses and ‘other loss’ as well as compensation for pain and suffering. The question is, whether taking care of a spouse is ‘other loss’ as stated in the paragraph. As a starting point, only the directly injured party may claim under sec. 1 of the Liability in Tort Act. However, parents have been allowed to claim for transport costs and earnings lost when caring for an injured child, see FED 1995.1020 Ø and U 2001.28 H. So far, spouses have not been allowed the same claim. Thus, in U 2002.2407 H the Danish Supreme Court disallowed the claim for lost earnings from a husband who had taken care of his wife, after she became disabled when a Caesarean section went horribly wrong. III Metalegal considerations In U 2002.2407 H the Supreme Court was divided 3:2. Thus, it is not beyond the probable that another case might swing in favor of the claimant. Most particularly so as the three judges voting against the claimant noted that it had – in their view – not been proven that the presence of the husband during the wife’s rehabilitation had been necessary for her recovery. If in another case this is proven, one could imagine that the claim would be allowed. Case 6 – Auditor’s liability Donna audits the accounts of Caterpillar, Inc. inaccurately. Paul relies on these published accounts to launch a take-over bid. This is successful, but Paul then discovers that the accounts overestimated

Denmark

291

the value of the company and that the price he paid per share was twice its actual value. I Operative rules Paul could, depending on the facts, be successful in directing a claim against Donna. However, Paul would probably have to suffer a reduction in his claim. II Descriptive formants Generally, professionals are under a stringent code of conduct, so there is not much leeway before an inaccuracy in auditing an account amounts to negligence. Given in the hypothetical case that the inaccuracy meant the company had a value twice its real one, Donna would be considered to have been negligent (setting aside situations where Donna may have been presented with false documents). It may be noted that Paul’s chance of success will generally increase with the level of negligence on Donna’s part. The difference in value between Donna’s assessment and the correct one is so blatant that a relevant loss must be assumed to have occurred. However, had the error been less manifest, Paul might have failed on this point (see the Danish Supreme Court in U 2005.3238 H, where compensation was refused even if several errors were proven, as it could not be shown that the errors had affected the purchase price). When auditing accounts, particularly those that are to be published, the auditor must always assume that a third party will rely on them. (See the ruling of the Supreme Court published in U 1982.565 H.) Thus, if the accounts had been used as a basis, for example, of extending a credit or offering a loan, Donna would most probably have been considered liable for a proven loss. However, in this case Paul launches a full take-over bid. In such cases, two further obstacles to liability present themselves. Firstly, Paul must prove causation, in this case meaning that he would not have launched the takeover bid had he known the real value of the company; or at least that he would only have bid at a considerably lower price. Secondly, Paul would have to counter a (partial) defence based on contributory negligence or acceptance of risk. Launching a full take-over bid one would generally assume that Paul would have made his own investigations (a due diligence investigation) as to the company and its value. It seems that he has not done so, which would quite possibly

292

Pure Economic Loss

be regarded as knowingly running a risk, resulting in a reduction of Paul’s claim against Donna (a caveat emptor line of thought, although that term is normally reserved for the Law of Obligations). III Metalegal considerations Under Danish law, persons who in their professional capacity supply information to the public under circumstances which imply that members of the public will rely on the information in relation to financial transactions, purchase/sales, etc. might be found liable for errors in such materials. However, the possible extent of liability depends very much on the facts of the given case – there is no general rule. Case 7 – Ruined credit Dieter, the owner of a small business, has a long-standing agreement with First National Bank. One day, Credit, Inc., a credit rating institute, receives an anonymous phone call to say that Dieter’s business is about to go bankrupt. Credit, Inc. makes no further inquiry and thus does not learn that the allegation is totally unfounded. Instead, Credit, Inc. calls First National Bank and reports the information. First National Bank immediately cancels all of Dieter’s loans. As a result, Dieter suffers economic damage. He is now suing Credit, Inc. to recover his losses. I Operative rules Credit Inc. might possibly be considered liable for Dieter’s loss, however the outcome is unclear. II Descriptive formants As stated under Case 6, Credit Inc. – a professional credit rating institute – is subject to the rules on professional liability. Thus, even slight errors by Credit Inc. may be seen as negligence and provide a basis for liability. Reacting to anonymous telephone calls in the way described in the hypothetical case would most certainly be regarded as negligent under Danish law. However, in this case, Dieter’s loss depends not only on the negligence of Credit Inc. but also on the reaction of First National Bank, who immediately cancels Dieter’s loans. Given that this also takes place without prior inquiries (that

Denmark

293

could easily be made as Dieter is a long-term customer), First National Bank has also acted in a negligent way. Dieter’s loss would not have occurred had both these causes not been present, and therefore Dieter’s claim against Credit Inc. will have to be considered under the rules on contributory causes as well as under the rules on remoteness. Given the nature of Credit Inc.’s trade (to provide credit information to members of the financial sector) and Credit Inc.’s actions in this case (on its own initiative providing First National Bank with the unfounded information) it is not impossible that Danish courts would find that Dieter’s economic damages should be compensated by Credit Inc. Or, in other words, that the economic damages are not too remote to be relevant. This leaves the issue of causation. Generally, if two or more causes of the same injury are present, the tortfeasors will be jointly and severally liable towards the injured party for the full extent of the damage. The dispute between the tortfeasors is then a question of recourse. However, in considering contributory causes which are interdependent, where the damage only occurred due to both causes (and would not have occurred had only one of the causes presented itself ), Danish case law is unclear. The very sparse rulings (two quite old cases) have either acquitted both defendants or found them liable pro rata,9 and a firm conclusion to the above case cannot be predicted with any certainty. III Metalegal considerations Literature argues10 – in this writer’s view correctly – that one should deem the tortfeasors jointly and severally liable (with the possibility of subsequent recourse) in these cases. This writer finds that such a point of view is not only apt, but also the most likely result to occur in future cases.

9

10

U 1927.217 SHD and U 1955.724 SHD respectively. Both cases regard maritime law and particularly the latter case must be considered irrelevant to the general discussion as it applies the rules on pro rata liability for damage to property in collision analogously, which seems to have gone unnoticed to the writers so far applying the case (see e.g., Eyben/Isager (2007), p 283 for further references). Eyben/Isager (2007), p 283.

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Pure Economic Loss

Case 8 – Evidence spoliation Nicholas was driving an Alfa Romeo GT automobile rented to him by RAC when he was involved in a head-on collision with another automobile. The engine of the rented vehicle intruded into the passenger compartment causing severe and permanent injuries. Following the collision, RAC took possession of the wrecked automobile and informed Nicholas that the car would be held for sixty days awaiting his inspection. Prior to that time, however, an RAC employee severed the front of the car and removed the engine. The severing of the car made it impossible to determine within a reasonable degree of certainty whether or not the vehicle had design, manufacturing and/or maintenance defects which proximately caused Nicholas’ injuries. Nicholas sues RAC for negligent spoliation of the evidence and tortious interference with a prospective civil action against Alfa Romeo. I Operative rules Nicholas would not be allowed a claim as against the employee of the RAC – being in tort or otherwise, as a relevant loss cannot be proven. II Descriptive formants In this case, RAC has given a promise to Nicholas, with whom they are in a contractual relationship regarding the lease of the car, to hold the car for sixty days for inspection. In Danish law the breach of such a promise is dealt with under the law of contracts. Be that as it may, both a claim in tort and a claim in contract would meet an insuperable obstacle, namely that Nicholas, to be successful in a claim as against the RAC, must prove that the Courts would have awarded him a claim for product liability against Alfa Romeo had the car not been severed. As in Case 2, such a potential future outcome can – to the Danish legal mind – never be proven. Thus, in severing the car, the employee of the RAC has not only destroyed evidence in Nicholas’ dispute with Alfa Romeo; the employee has – for all practical purposes – also destroyed the possibility of directing a claim against the RAC. To add insult to injury, if Nicholas’ lawyers find another sort of proof in the Alfa Romeo case (other accidents of the same nature etc.) and thus win that case, Nicholas would not

Denmark

295

have suffered any loss, and a claim against the RAC would fail on that ground. Finally, Danish law has no special rules that allow claims for ‘negligent interference with evidence’ or ‘tortious obstruction of a prospective civil action’, and therefore Nicholas’ prospective claim is not protected by Danish law. III Metalegal considerations Situations in which a loss is a more or less likely result of someone’s actions or omissions are not as such protected by Danish tort law. Only in cases where the extent of the loss can be established (more or less precisely) will a claim be allowed under tort law rules. Case 9 – The pension scheme Mr. Smith became an employee of ALPHA, as an account manager, having previously been employed by OMEGA and, while so employed, was a member of their occupational pension scheme. He was told by ALPHA that he was eligible to join its occupational pension scheme. As an employee, he would, unless he wished to opt out, automatically become a member of the scheme and deductions would be taken from his first salary payment. Before making up his mind, Mr. Smith contacted an Insurance Broker. Based on a careless reading of the materials provided, the Broker vaunts the economic virtues and performances of OMEGA Pension Fund (‘OPF’) and suggests that Mr. Smith should opt out of the ALPHA scheme and stay in the OPF scheme, which he did. On Mr. Smith’s death, Mrs. Smith, his widow, finds out that payments from OPF are
100,000 less than she would have received from ALPHA. Mrs. Smith sues the Broker. I Operative rules Given that the factual preconditions are to be understood as stated below under Level II, Mr. Smith’s widow would in all probability be successful in directing a claim against the Insurance Broker. It should be noted that Mrs. Smith’s claim against the Insurance Broker will be considered a claim in contract.

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Pure Economic Loss

II Descriptive formants As in Cases 6 and 7, supra, the answer to this case hinges on the rules of professional liability. Thus, the Insurance Broker should give wellfounded advice based on a proper reading of the given materials. According to the case, the Insurance Broker bases his advice on a ‘careless reading’ of the materials, making it quite easy to argue that a liability based on negligence has presented itself. In any case, had a proper reading at the time shown a diligent Insurance Broker that it would be preferable to opt for the ALPHA scheme, the Insurance Broker has certainly acted negligently and would thus as a starting point be liable for his client’s loss. In this case, the client’s wife – being the co-beneficiary of the insurance, presumably – will be in the same position as her husband towards the Broker. Thus, the problem raised in many of the above cases, namely that the injured party is only indirectly affected by the tortfeasor’s act or omission, will not occur. See Insurance Act, sec. 102, para. 1, 2nd sentence.11 However, this only applies if it is clear at the time of the rendering of the advice that Mr. Smith would suffer a loss (e.g. because he would not have the benefits of payments by his employer (which would be the case in Denmark, where an occupational pension scheme for that reason is almost always to be preferred over a private one)). See in this connection the ruling of the Danish Supreme Court in U 1991.903 H. If, on the other hand, the difference in the outcome of the schemes is due, for example, to the developments in the stock market that could not be foreseen at the time, the Insurance Broker’s duty is only to inform of the risks involved. In case he did this before vaunting the merits of the OPF, Mrs. Smith will not be able to direct a claim against him. III Metalegal considerations Unless a guarantee has been given, failed expectations in connection with a pension or other investment scheme are not protected by Danish law. What is protected is the advice given by the professional 11

It follows from the general principles of insurance law that once the insured party under a life insurance has died, any beneficiary by him becomes a direct party to the insurance contract. This is also presumed in the Insurance Contract Act 102: ‘The insured may both at the time of taking out the insurance and later designate a third party as a beneficiary, in that case, the insurance amount is payable directly to the third party.’ (Writer’s translation.)

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regarding the investment. The professional party’s liability insurance is not to act as a free back-up for failed investments.

4 Summary As stated in the introduction, in theory tortious liability for pure economic loss is governed by the general rules of tort law. However, in practice claims for pure economic loss may be hard to pursue, as the case law has been quite restrictive. Some of the basic requirements for a successful claim in tort (loss, basis of liability, causation and remoteness) are particularly problematic in situations where pure economic loss may occur. Other cases are quite straightforward and the fact that the loss is solely monetary provides no special concern. Thus, cases regarding professional liability (e.g. against financial advisors or the board of directors of a company) are quite frequent under Danish law. On a final note, therefore, this report will review the four basic requirements for tortious liability with the aim of pinpointing the special features of the pure economic loss in that context. a) Cutting off claims for pure economic loss Certain potential claims for pure economic loss are cut off simply by the way in which a loss is calculated under Danish tort law rules. Thus, as seen in Case 4, the claimant must choose between the expectation interest and the reliance interest. Other claims are cut off by the requirement that an economic loss will have to have materialised itself before a claim may be made. It is not enough that the claimant finds himself in a worse situation than he was in before the prospective tortfeasor’s act or omission. See Case 2 and Case 8. b) Basis for liability As a starting point, the basis for liability for claims for pure economic loss is no different from the basis for liability for other losses. It should be noted, though, that clear negligence on the part of the tortfeasor is a positive reason to allow (e.g. indirect) claims that would otherwise have been cut off. See U 2004.2389 H, discussed above in Case 1.

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Pure Economic Loss

c) Causation Generally, the requirement of causation does not offer special problems to claims for pure economic loss. The remoteness requirement, however, is generally more problematic. It should be noted, however, that the courts are quite strict on the requirement that the claimant must prove the loss would not have happened either way and that hypothetical assessments of future events are as a rule rejected as proof by the Danish courts (as in Case 2 and Case 4). d) Remoteness as regards the loss All claimants under tort law must initially prove that the loss incurred by them is not too remote to be taken into account. Thus, even if a line of causation may – strictly speaking – be established, the courts will cut off a claim if the line of causation gets too ‘thin’. The test applied by the courts will, in the difficult cases, sometimes be a test of who is more apt to absorb the risk of the event. Since the courts are free in evaluating the evidence before them and since (in principle) any type of evidence is allowed before the court, it is not possible to provide firm guidelines. Still, it should be noted that the test applied by the court is an objective one and not concerned with what a particular tortfeasor could or could not foresee. e) Remoteness as regards the person suffering the loss – indirect claims One of the major obstacles to a claim for pure economic loss under Danish law is that indirect claims (for both personal injury and damage to property) are disallowed unless there is some indication to the contrary. Thus, the starting point in Cases 1–6 must be that the claims cannot be successful. The indications accepted by Danish courts include in particular: (a) clear negligence (see Case 1 for further comment). These cases include many indirect claims arising out of building and excavation contracts; (b) that it must be clear to the tortfeasor that third parties will base financial transactions etc. on the information provided by him or her (see Case 6). These cases include many claims against financial advisors and auditors; or

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(c) that there is a certain connection between the damaged item and the claimant (see Case 4). These cases are, however, rather singular. Further, it is indicated above regarding Case 5 that necessity may provide a basis for an indirect claim in connection with another person’s physical injury. It should be noted that the list is not exhaustive and that the courts may at any time accept or reject a criterion.

Bibliography Andersen/Lookofsky (2005); Lærebog i obligationsret I – ydelsen, beføjelser, 2nd edn, Copenhagen 2005. Christensen (1981); Mogens Christensen, Revisors skriftlige erklæringer, Copenhagen 1981. Edlund (2006) Hans Henrik Edlund, Direkte krav i de sidste års retspraksis, U 2006B.173 ff. Eyben/Isager (2007); Bo von Eyben, Helle Isager, Lærebog i erstatningsret, 6th edn Copenhagen 2007. Gomard/Wad (1986); Bernhard Gomard, Ditlev Wad, Erstatning og godtgørelse efter erstatningsansvarsloven og voldsofferloven, Copenhagen 1986. Halling-Overgaard (2003); Søren Halling-Overgaard, Revisors erstatningsog disciplinæransvar, 2nd. edn, Copenhagen 2003. Iversen (2000); Torsten Iversen, Erstatningsberegning i kontraktsforhold, Copenhagen 2000. Iversen et al. (2000); Bent Iversen, Jørgen Nørgaard, Lars Lindencrone Petersen & Morten Wegener, Danish Business Law, 2nd edn, Copenhagen 2000. Langsted (2004); Lars Bo Langsted, Rådgivning I, Det professionelle erstatningsansvar, Copenhagen 2004. Langsted et al. (2001); Lars Bo Langsted, Paul Krüger Andersen, Mogens Christensen, Revisoransvar, 5th edn, Copenhagen 2001. Møller/Wiisbye (2002); Jens Møller, Michael S. Wiisbye, Erstatningsansvarsloven med kommentarer, 6th edn, Copenhagen 2002.

Part 3

The results

Chapter 11

Surveying the results Mauro Bussani and Vernon Valentine Palmer

1 Introduction Our task is now to summarize and compare the results contained in the national reports. In order to give the reader a helpful overview, we have arranged the results in a series of charts, and at the end of the section we discuss a number of findings and make comparative comments based upon them. Chart I organizes the answers country by country, and we have continued to use the Liberal, Pragmatic and Conservative regimes as our ordering principle. Chart II compares two theories of relief, delictual and contractual, and shows the extent to which legal systems make recourse to contractual ideas as an alternative to tort. Here the countries are simply arranged by the degree to which they rely on these two grounds instead of the single ground of tort. Chart III breaks down the results for a number of widely-recognized paradigm cases (fitted to our taxonomy),1 and once again the results are organized in terms of the Liberal, Pragmatic and Conservative regimes. In compiling these results, we consciously followed a conservative way of interpreting the results. We placed the responses into one of three categories: Yes, No, and Problematical. A ‘yes’ means that compensation for pure economic loss would be granted. (However, we also distinguished between an affirmative grant of recovery in delict and recovery in contract or on some other basis.) We consciously sought to minimize the dangers of our own editorial perspective in interpreting the results. Even so, it is difficult to eliminate all chance of misclassification on our part. Naturally we will submit our compilation to the country reporters for verification, but the 1

See supra pp 15–20.

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reader will appreciate that measuring degrees of certainty and uncertainty is a somewhat hazardous enterprise on which reasonable minds may differ.

2 Three comparative tables 2 a) Table I: Country by country

Yes (delict) Yes (contract) Yes (statute) No Problematical

Yes (delict)

Yes (contract) Yes (statute) No Problematical

2

Canada

Croatia

Denmark

Israel

7, 8, 9

1, 3, 4, 6, 7, 9

4, 6

5, 9

9 9

7

2, 3, 8

1, 2, 3, 8

1, 5, 7

4, 6

5 (Ontario only) 1, 2, 3, 5, 2, 5, 8 6 4 Japan

Poland

Quebec

South Africa

USA

3 (C.R. & M.T.), 4, 5, 6, 7, 8, 9 8, 9

4, 6, 8, 9

1, 5, 6, 7, 9

4, 5, 7, 9

5, 6, 7, 9

1, 3 (B.) 2

7 7 1, 2, 3, 5

2, 8 3, 4

6 1, 2, 3, 8

1, 2, 3 4, 8

In the tables Case numbers can be read as follows: Case 1: ‘A Cable Case: The Laidoff Workers’; Case 2: ‘The Injured Key-Player’; Case 3: ‘The Infected Animal’; Case 4: ‘The Cancelled Cruise’; Case 5: ‘The Dutiful Spouse’; Case 6: ‘Auditor’s Liability’; Case 7: ‘A Ruined Credit’; Case 8: ‘Spoliation of Evidence’; Case 9: ‘The Pension Scheme’. As to Japan, C.R. means cattle raisers, M.T. market traders and B. butchers, in Case 3 (‘The Infected Animal’).

Surveying the results

305

b) Table II: By type of recovery The following chart arranges the protection of pure economic loss along a contract/delict spectrum. It tabulates the recoveries of pure economic loss (the ‘Yes’ responses) in the conceptual language used by each system. The ½ sign refers to cases where the recovery can be attained either both in tort and contract, or both in contract and by statute. Canada Recoveries by: Contract Statute or other ground Delict

Recoveries by: Contract Statute or other ground Delict

Croatia

Denmark

Israel

– – 1 – (Ontario only 3 6

½ ½

–

2

2

Japan

Poland

Quebec

South Africa

1½

½ ½

–

– 1

6½

4

5

4

USA

4

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Pure Economic Loss

c) Table III: Broadly recognized fact patterns

Ricochet loss Cable case Injured KeyPlayer Evidence spoliation Transferred loss The dutiful spouse Professional services The pension scheme A ruined credit

Auditor’s liability Closure of the public markets The infected animal

Liberal regimes (Croatia, Japan, Quebec)

Pragmatic regimes (Canada, Israel, South Africa, USA)

Conservative regimes (Poland, Denmark)

2–Yes (Japan: No)

4–No

2–No (Japan: Problematical) 2–No (Japan: Yes)

4–No

Poland: No; Denmark: Problematical 2–No

2–No (Canada: Yes; USA: Problematical)

Poland: Yes; Denmark: No

2–Yes (Croatia: No)

3–Yes (Canada:No)

Poland: No; Denmark: Yes

3–Yes

4–Yes

2–Yes

3–Yes

4–Yes

3–Yes

2–Yes (Canada: No; Israel: Problematical)

Poland. Yes; Denmark: Problematical 2–Yes

2–Yes (Quebec: 4–No Problematical)

2–No

3 Reassessing the differences The above comparisons bring to light a number of insights. The first is that the recoverability of pure economic loss cannot be approached in terms of some distinctive trait or characteristic of the ‘legal families’ of the world. The question is simply not a civil law versus common law issue. It is evident to us that common law countries, mixed jurisdictions and some civil law countries share similar

Surveying the results

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concerns about the danger of excessive liability entailed by this form of damage. The issue is the subject of thriving debate, case law development and doctrinal writings within each tradition, though not necessarily within every system.3 The approach of the conservative civilian regimes and the common law as well simply contrasts with the liberalism of certain civilian countries where the protection of economic loss is widespread and its controversial nature is barely recognized. Croatia allows delictual recovery six times, Israel only two times. Japan grants recovery in seven cases, as compared to three in Canada. If any split is to be recognized amidst the legal systems under review, it would appear, in our view, to lie between those countries which a priori treat pure economic loss as any other loss (the ‘liberal’ regimes), and those which a priori place it outside of the protected rights and interests. The latter are in turn divided between those which deal with compensation of our loss through an open discussion of policy issues (the ‘pragmatic’ regimes) and those which prefer keeping it under control by recourse to the technicalities of causation (the ‘conservative’ regimes). These divergent patterns are seen most clearly in some of the more famous cases of pure economic loss. As Table III indicates, the results concerning the Cable case are nearly evenly divided. Two liberal regimes would allow recovery of the loss, but all conservative regimes (save Denmark) and pragmatic regimes would deny it. In the Case of The dutiful spouse, a reverse split occurs, 6 yes, 3 no. In the Injured Key-player type of case, the split widens to 8 no 0 yes, and 1 problematical. Once again we would emphasize that these results do not correspond to an alleged common law/civil law divide. They are better described as a political divide over the appropriate areas or situations where this interest should receive selective protection. The picture is of course not simply one of divergence. In some selective areas the results point to a consensus. Widespread agreement exists with respect to certain paradigm cases. In both The pension scheme and The ruined credit cases there is virtual unanimity in favor of the plaintiff ’s recovery of his/her financial loss. In the case of the The 3

Thus we respectfully disagree with Professor Van Dunné’s assertion that this issue reflects a ‘civil law-common law split’ or a ‘true Continental Divide’ (J. van Dunné, Liability for Pure Economic Loss: Rule or Exception? A Comparatist’s View of the Civil Law-Common Law Split on Compensation of Non-physical Damage in Tort Law, 4 European Review of Private Law 1999, 397, 399). If we look at the results shown in Table I, this conclusion is hardly tenable.

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Pure Economic Loss

infected animal, the consensus takes the opposite tack: all the pragmatic and conservative regimes oppose relief, while two liberal systems would permit it and a third (Quebec) regards it as problematical. These selective areas of consensus confound claims of a polarization of legal systems along the common law/civil law lines. A realistic map of pure economic loss law must be more detailed and nuanced than some have supposed.

4 The value of legal certainty A second point of interest in the above charts concerns the degree of legal certainty in the answers. For example, the Croatian and Polish systems reported no problematical case, Denmark allowed for three, U.S.A., Quebec and Israeli produced two, while Canada and Japan yielded one each. We therefore think it is not possible to attribute greater predictability and certainty (less indeterminacy) about pure economic loss to one type of regime rather than another. Poland and Denmark, for example, are quite different in this respect though both are conservative regimes. As interesting as the question is, we do not think this evidence leads to any valid generalization. The reasons for those patterns can be manifold. They may stem from a variety of accidental factors, including the cautiousness of the reporter or the evolutionary stage of the question in a particular country or the variable interplay of legal formants tackling the issue within the same system.4 Of course one could question whether legal certainty of the above kind is a real asset – not only for loss bearers in our societies,5 but 4

5

For instance, to say in a given case that the solution is not problematic in Croatia or France perhaps places no stress upon the existence of covert means by which the juges du fond may render an adverse or surprising judgement. A different observer might have chosen to underscore the problematical side instead of giving an affirmative answer ‘in principle.’ Further, the jurisprudence and/or a strand of doctrine in one jurisdiction may point to opposite outcomes (competing formants) or the precise hypothetical situation may not have been previously treated with as much clarity as in another jurisdiction. One could question the influence that some social and economic factors may have on the flowering of this issue in recent years. C. von Bar underlines the fact ‘that the wealth of modern men consists more and more of “pure economic interests” ’ and that ‘in our modern economy there always exists the possibility of re-acquisition, with the result that the distinction between ownership (meaning the interest in preserving individual tangible objects) and money (representing the possibility of acquiring ownership) has lost some of its importance’. (emphasis added) Liability

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also in relation to the perennial need of any legal system to continue to develop new solutions that fulfill the demands of law-users. These questions, however, involve the eternal debate about the proper balance between flexibility and predictability in the law6 (as well as between uniformity and diversity of the law, in a supra-national context7) and might well be seen as a research issue far beyond the boundaries of our present study.

5 General conclusions a) A question beyond legal families The question of the recoverability of pure economic loss is a generic question for all legal systems. As we pointed out earlier, it is not just a civil law versus common law issue. Civil law countries are found amongst the liberal, pragmatic and conservative regimes, and thus to the extent that Western landscape is divided, the civil law countries are themselves divided, not from the common law, but along with the common law. An important question is how to understand the various differences and similarities between these systems, and whether there is any common core of agreement on this question, but this will have little to do with the ‘legal families’ in which they happen to be placed.

for Information and Opinions Causing Pure Economic Loss to Third Parties: A Comparison of English and German Case Law, in B. Markesinis, The Gradual Convergence, pp 99, 108 (1994) 6

7

It would not be possible to mention the great number of reference works on this subject. See, however, as to the different legal traditions, R v Ihering, Der Zweck im Recht, (Leipzig 1877); A. Hägerström, Das Prinzip der Wissenschaft. Eine logischerkenntnistheoretische Untersuchung. I. Die Realität (Uppsala, 1908); F. Gény, Méthode d’interprétation et sources en droit privé positif (2nd edn 1919); R. Pound, The Spirit of the Common Law (1921). See R. Sacco, La diversité des droits, in Mélanges en l’honneur de C.A. Cannata, Bâle, 1999, 411 s.; A.T. von Mehren, The U.S. Legal System: Between the Common Law and Civil Law Traditions, 40 Centro di studi e ricerche di diritto comparato e straniero. Saggi e conferenze, (2000); M. Bussani, The Contract Law Codification Process in Europe: Policies, Targets and Time Dimensions, in S. Grundmann and J. Stuyck (eds.), An Academic Green Paper on European Contract Law (The Hague, 2002), p 176.

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Pure Economic Loss

b) No common methodology Clearly it is more difficult to find a common set of principles or a common set of methods when we limit our horizons to the field of tort alone. Comparisons focused solely upon tort rules and structures have a tendency to highlight the structural and technical diversities, rather than commonalities between these systems. Anyone who collects general impressions through the monocle of tort will of course notice that liberal regimes permit recovery more frequently than conservative regimes (e.g. Japan 7, Croatia 6, compared to Denmark 3 and Poland 4 times). Methodologically speaking, the tort scene strikes us as diverse and unsettled. Our research reveals that four principal methodologies dominate the comparative landscape, and though some countries resort to more than one of these methods (thus adding to the complexity), generally each has one characteristic means of dealing with the issue of pure economic loss.8 Thus the compensation issue may be left to (1) flexible causal determinations (the characteristic method found in the Liberal Regimes) (2) preliminary judicial screening using a ‘duty of care’ analysis (the approach particularly prominent in all the pragmatic regimes), (3) recourse (in Croatia and Poland) to causation techniques aiming to exclude ‘third party loss’.9 Perhaps a simpler way to summarize all this methodological diversity is to remember the initial point of departure. The liberal regimes rely upon general clauses and start from an inclusive position, the conservative regimes rely upon different technicalities and start from an exclusionary position. The first group allows recovery in principle, the second denies it on principle. One grants recoveries through tort actions, the other must deny relief in tort if it cannot find an exception. In this same vein we have already seen that formal structures and legal jargon are sometimes façades which hide a deeper reality and no great reliance should be placed upon them. Polish and Quebecois law may appear to have radically opposed starting points, but 8

9

These four methods are discussed under the Editors’ Comparative Comments to Case 2 (‘Cable II – Factory Shutdown’), in M. Bussani and V.V. Palmer (eds.), Pure Economic Loss in Europe (2003), pp 205–7. Outside the range of legal systems here under review, a fourth way to handle the issue is to be found in the recourse to a scheme of absolute rights that, by deliberate omission, leaves this interest unprotected (e.g. the approach of Germany and Portugal): See M. Bussani and V.V. Palmer (eds.), Pure Economic Loss in Europe (2003), pp 148–56.

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in both countries the practice of the courts seems to adopt a more intermediate position. All in all, it is fair to conclude that there is no methodological consistency that can be suggested by this research. c) The relevance of timing Any general assessment of common tendencies in legal systems must take into account the factor of time. The attentive reader will have noticed that national attitudes toward pure economic loss are not always stable. Indeed some recent developments should serve as a warning that we could be describing a ‘provisional’ picture in which some positions are still evolving and changing. As the Canadian report reminds us, ‘Divergences between [Canadian and English] tort law began to appear in the 1960s and have steadily gained in importance. Nowhere is the distinction between Canadian common law and English law more marked today than in the courts’ approach to pure economic loss.’ Likewise, as we learned from our prior study, in the past forty years Italy in effect changed its stripes from a system of ‘protected interests’ to a general clause system.10 Within that same period England and Scotland admitted as many as five exceptions to the rule of no recovery. If we take an even longer view we may note that France abandoned in the twentieth century a more restrictive attitude than had been current throughout the previous century (based on an unlawfulness conception) to match more closely its codistic liberal façade.11 Moving along an opposite path, Austrian history shows a departure from the liberal façade of the ABGB in the second half of the nineteenth century and since then, its legal system has been accepting bodily German doctrinal thought on pure economic loss together with the usual justifications for its control.12 Our point is simply that legal positions have not stood still and some have abruptly changed and may change again. Old, and even current, snapshots of the law, therefore, may be of limited utility in determining the existence or non-existence of a reliable picture.

10

11

12

See G. Alpa, La responsabilità civile (1999), 168 ff.; C. Castronovo, La nuova responsabilità civile (3rd edn 2006), 45 ff. This historical turnabout is discussed in M. Bussani and V.V. Palmer (eds.), Pure Economic Loss in Europe (2003), Part One, Chapter V, n. 5 (i). Ibid., Part One, Chapter V, n. 6 (ii). See the discussion of Austria’s ‘massive interior transplant.’

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d) Areas of substantive agreement Having concluded that methodological consensus does not exist, we now consider to what extent there is any substantive agreement on pure economic loss. Whether there is a core of principles governing pure economic loss, however, could depend to a large extent upon our instinctual reformulation of the question by our national traditions and cultures. Yet comparative law, if it teaches anything, teaches us to resist this. Culture and tradition have summary ways of telling us to which field this question belongs (tort versus contract) and thus may project a prejudice about its proper resolution and the coherence or incoherence of national solutions. To those who believe that pure economic loss is the natural preserve of tort, there may be little consensus. But to those who would say that it is the natural preserve of contract, we think there will appear to be even less. Our comparative and fact-based approach to the question makes us skeptical of these labels. The issue is situated at the frontier of the law of obligations where there is both tort and contract, or where tort behaves like contract and contract behaves like tort. We believe that the issue cannot be discussed except in factual terms. This discussion requires us to weigh in the balance the depth of agreement on three subjects: (a) consequential economic loss; (b) intentionally caused economic loss; and (c) the selective protection of negligently caused economic loss. In the aggregate these elements will permit us to see the contours of a ‘limited convergence’ on pure economic loss. (a) Consequential loss. We have already highlighted that if economic loss is connected to the slightest damage to person or property of the plaintiff the whole may be recuperated without question – provided that all the other requirements for the action to be successful are met.13 This ‘parasitic’ loss is recoverable because it 13

Of course courts theoretically have a range of analytical devices at their disposal to exonerate the defendant from liability for consequential economic loss (e.g. the act was not a breach of duty, the damage was too remote, or the plaintiff had voluntarily assumed the risk). But what is worth noting is the attitudinal change that comes over the judge once the economic loss is causally connected to plaintiff ’s own physical harm. The importance the legal systems place on physical security from careless acts is so well recognised and accepted that courts rarely feel the need to justify or explain.

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presupposes the existence of physical harm to the victim, whereas pure economic loss strikes the victim’s wallet and nothing else. Consequential loss of this kind is protected in every system within this study and can be seen as one area of substantive agreement, but this generalization must be qualified in two senses. Firstly, we are really saying that consequential loss can be unobjectionably recovered both in those countries that recognize such distinctions and in those countries that do not. The common result, therefore, is entirely distinct from the diverse reasoning which produces it. Secondly, while consequential economic loss is protected in principle in those countries that have an exclusionary rule, still the scope attributed to this causal notion varies significantly within those countries and produces some non-uniform applications.14 (b) Intentional harm. Here is an additional building block to the common core. All systems agree that intentionally inflicted pure economic loss is recoverable in circumstances where the conduct in question is regarded as culpable, immoral or contrary to public policy. To be sure, in this kind of case it may not always be easy for the plaintiff to satisfy the burden of proof (though this may be reduced somewhat by the broad meaning given in some systems to the ‘intention’ element), but it is significant from the comparative point of view that the shift to higher degree of culpability is sufficient reason to impose liability in all systems. (c) Key areas of selective protection. Earlier we noted several important areas of substantive divergence where no common position appears to exist, but we also pointed out, as an alternative perspective, that pure economic loss could also be seen as selectively protected. To see the subject as selectively protected is to acknowledge that there exist pockets of ‘privileged’ loss types in the conservative and pragmatic countries where compensation is awarded. When these isolated recoveries are joined to the corresponding awards in the more liberal countries, a kind of ‘limited convergence’ for negligently caused economic loss stands in relief. Admittedly this type of ‘limited convergence’ may seem like an artificial construct that focuses upon results alone to the exclusion of the differentiating methods and theor14

For full details, see the analysis of these variations in Editors’ Comparative Comments to Case 1 (‘Cable I – The Blackout’), in M. Bussani and V.V. Palmer (eds.), Pure Economic Loss in Europe (2003), pp 189–91.

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ies by which those results were reached. Yet, as stated earlier, it is in keeping with the nature of our fact-based inquiry to look behind cultural-linguistic obstacles in order to compare national solutions. In penetrating to this level, we have uncovered two areas where substantive consensus exists. The first is when plaintiff ’s loss is due to negligently performed professional services. There is widespread agreement that the Auditor in Case 6, the Credit Rating Institute in Case 7, and the Insurance Broker in Case 9, will be responsible for the economic losses of some persons (beyond their clients) with whom they had no contractual tie. Although there may be specific requirements that must be met in some systems that others do not clearly impose (e.g. emphasis upon showing the ‘reliance’ of the third party) still it seems fair to say that in many situations (provided indeterminate and excessive liability is excluded) plaintiffs may recover losses caused by negligent professionals regardless of the general features and traditions of a given tort law system. This seems to reflect the collective view that a high standard of professional services can and ought to be maintained.15 A second area of agreement exists in the area of compensation for ‘transferred’ economic loss.16 This agreement undoubtedly arises because jurists in both liberal and conservative countries have recognized that transferred loss is liability neutral from a tortfeasor perspective and whatever difficulties it poses are more of a technical nature than of policy or equity. Thus in the case of the Canceled Cruise (Case 4), the ship’s lessee essentially claims the loss of profits that might have equally been lost by the ship’s owner had he or she seen fit to operate the boat in the cruise business instead of leasing it for that purpose. No legal system denies compensation in principle and four countries, including both conservative regimes which, as we know, do not generally protect pure economic loss in tort, would protect the economic interest of the ship’s lessee in these circumstances. A majority of the countries would also compensate the

15

16

We referred to this policy in our Editors’ Comparative Comments to Cases 14 (‘Poor Legal Services’), 17 (‘Auditor’s Liability’) and 20 (‘An Anonymous Telephone Call’), in M. Bussani and V.V. Palmer (eds.), Pure Economic Loss in Europe (2003), pp 417, 471, 519. The reader will recall that we have previously defined and classified ‘transferred loss’ in our taxonomy of standard cases.

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Dutiful Spouse (Case 5) for the reasonable value of the care she rendered to her injured husband. Since all countries in this study agree that a husband who receives physical injuries may seek compensation not only for his injuries but for the reasonable cost of health care services, it is clear that the wife’s claim can be seen as the transferred loss of the husband. Five countries, including one conservative regime, would protect the economic claims of the wife in these circumstances. These results suggest to us that perhaps all cases of transferred loss form part of a ‘limited convergence.’ e) A final look at ‘limited convergence’ When we step back from the tableau of conclusions presented above, we think that the general contours of agreement and disagreement may be discerned. On the one hand, it is clear that the legal systems under review are particularly divided over methodology, theories of relief, and causes of action. There is no methodological consensus, for the systems retain their distinctive façades and their characteristic ways of controlling or regulating the issue. Further, and now approaching the question at a more substantive level, legal systems are also split over the outcomes that should occur in a number of loss situations. Here it is apparent that metalegal factors, such as the floodgates, philosophical values and historical conservatism, drive the outcomes. On the other hand, we have attempted to show that a ‘limited’ convergence deserves to be recognized at the substantive level. As just seen, jurisdictions at issue basically agree to the recoverability of consequential loss, intentionally caused loss, and losses due to negligent professional services, transferred losses, and perhaps in other circumstances where the risk of indeterminate liability is under control. These are the contours of selective protection. While financial interests are not as comprehensively protected as other interests, there is indeed a considerable frame of protection. Across façades, regimes and traditions, pure economic loss is recoverable whenever the latter is a direct consequence of the infringement of a right or of an interest that the legal system means to protect. If we judge by developments of the past forty years, this frame has been increasing and is likely to continue to grow.

Index

adoption agencies 56 advice. See reliance on professional advice alcohol tests, employees 56 animals Canada 172 comparative law 307 Croatia 96–99 Israel 204–206 Poland 266–268 Quebec 115, 120–121 South Africa 245–247 antitrust law 13 architects 154 auditor’s liability Canada 176–177 comparative law 314 Croatia 104–106 Denmark 290–292 Israel 210–211 Japan 81–83 Poland 272–276 Quebec 124–125 South Africa 234–236, 251–252 U.S. 150–155 Austria 7, 20–21, 30, 45–46, 63, 192, 311 Belgium 7, 38, 50, 114 brokers’ liability Canada 181–182 comparative law 307 Croatia 49, 109–110 Denmark 295–297

Israel 215–216 Japan 86–87 Poland 276–277 Quebec 129–131 South Africa 255–257 U.S. 55, 159–161 building defects Canada 183 Denmark 298 U.S. 55, 154 cables Canada 169–170 comparative law 307 Croatia 92–94 Denmark 284–286 Israel 60, 199–202 Japan 73–75 Poland 263–264 Quebec 116–118 ricochet loss 16, 60 South Africa 241–243 U.S. 54–55, 139–141 Canada Anns/Kamloops methodology 58–59, 167–168, 171, 172–173, 177, 178, 180, 182, 183 case 1, 169–170 case 2, 170–171 case 3, 172–173 case 4, 173–174 case 5, 175–176 case 6, 176–177

318

Index

Canada – Cont. case 7, 178–179 case 8, 179–181 case 9, 181–182 causation 168 contract and tort 58 maritime law 169 relational economic loss 58 case studies metalegal formant 8 methodology 10–11 operative rules 41–43 purpose 43 questionnaire 1–3, 10–11 causation consequential loss 12–13 conservative regimes 46, 310 Croatia 49, 90, 93, 98, 99, 100, 110, 111 Denmark 65, 283, 286, 287, 296–297, 298–299 Israel 188–189 Japan 46, 72, 74–76, 82–83 liberal regimes 7–8, 43–44 Quebec 51, 115, 117, 125, 127, 131 South Africa 62, 219, 220, 221, 254 chances. See lost opportunities civil or common law regimes, irrelevance 7, 9, 309 codification Europe. See Europe Israel 191 collateral benefits 32–33 commercial loss 135 common core absence 8, 309 approach 10 consequential loss 8, 11–14, 312–313 intentional harm 8, 14–15, 313 questionnaire 1–3 selective protected areas 8, 39, 307–308, 313–315 substantive common core 313–315 transferred losses 16–18 common or civil law regimes, irrelevance 7, 9, 309

comparative law. See also common core certainty levels 308–309 charts 303–306 common core approach 10 façades 41–43, 311, 315 floodgates argument 8, 17, 25–27, 315 general and specific characteristics 43–46 no common theoretical matrix 66 time variations 311 types of regime 43–46 competition. See unfair competition consequential economic loss Canada 184 common core 8, 312–313 conservative regimes 45–46, 63–66 Croatia 110 generally 11–14, 312–313 Israel 196 Quebec 128 recoverability 24, 315 vs. pure economic loss 27 contract contractual or tortuous liability comparative law 303–305 generally 41 Germany 43, 47 Israel 193 Japan 46–47 Poland 258–259, 261–262, 263–264, 265–266, 278–279 Quebec 116 South Africa 221, 229–231 interference. See interference with contractual relations pre-contractual liability Poland 272 South Africa 226–228 U.S. 53–54, 139 privity. See privity of contract third parties Denmark 291 generally 24, 310, 314 Germany 23–24 Israel 203, 215–216 Japan 83, 84

Index Poland 265–266, 276–277 Quebec 123 South Africa 231–236, 251–252, 255–257 U.S. 55, 137–138 contributory negligence Croatia 105 Poland 272 South Africa 235 copyright 13, 190 Croatia as a liberal regime 48–50 Auditing Act 103–106 case 1, 92–94 case 2, 94–96 case 3, 96–99 case 4, 99–102 case 5, 102–104 case 6, 104–106 case 7, 106–107 case 8, 107–109 case 9, 109–110 causation 49, 90–91, 92–96, 98–99, 102–103 certainty of damage 49 Civil litigation act art. 186, 108 Maritime Code art. 388, 101 art. 390, 101 art. 391, 101 neminem laedere 107 patrimonial damage 88–90, 97 professional liability 91 ZOO 1978, 48, 88 ZOO 2006 art. 1045, 48, 89, 92, 97, 99, 100, 104, 106, 109 art. 1046, 48, 89, 92, 97, 99, 100, 104, 106, 108, 109, 110 art. 1061, 92 art. 1089, 90, 92, 97, 100, 104, 106, 108, 109, 110 art. 1090, 90, 92, 101, 110 art. 1091, 48, 90 art. 1092, 105 art. 1093, 91 art. 1094, 91

319

art. 1095, 49, 91, 94, 95, 96, 102, 103, 111 art. 1096, 91 art. 1097, 91 art. 1098, 91 cruise, cancellation of Canada 173–174 comparative law 314 Croatia 99–102 Denmark 288–289 Israel 206–208 Japan 78–80 Quebec 121–122 South Africa 268–270 U.S. 145–148, 162 culpa in contrahendo Poland 272 South Africa 226–228 defamation Canada 179 Israel 191, 211–212 Japan 84 Quebec 126 U.S. 156–157 Denmark absolute rights checklist, absence 66 case 1, 284–286 case 2, 286–287 case 3, 287–288 case 4, 288–289 case 5, 289–290 case 6, 290–292 case 7, 292–293 case 8, 294–295 case 9, 295–297 Company Law Act 65, 284 contract and tort 283 floodgate argument 286 Insurance Contract Act 65, 296 Liability in Tort Act 282 Livestock Act 288 Marketing Act 65 professional services 65–66, 292–293 remoteness 65–66, 282–283, 293 derivative litigation 25 descriptive formants 58

320

Index

distributive justice 36, 188 drug tests, employees 56 dutiful spouse Canada 175–176 comparative law 17, 307 Croatia 102–104 Denmark 65, 289–290 Israel 208–209 Japan 80–81 Poland 270–272 Quebec 122–124 South Africa 249–250 U.S. 54, 148–149 duty of care Canada 58–59, 166–168, 177–182 Israel 59–61, 187–189, 192–196, 200–201, 204–206, 206–207, 215–216 Quebec 114–115, 122 South Africa 62–63, 221–223, 242–243, 244 U.S. 50 screening mechanism 7, 44–46, 67 economics approach 31–36 private and social loss 32–36 employment actio per quod servitium amisit 142 drug/alcohol tests 56 employers’ liability Croatia 92 Poland 259 Quebec 115 South Africa 257 England 7, 8, 12, 30, 36, 39, 40, 58, 179, 198, 204, 311 equity generally 314 Poland 259 erga omnes rights generally 10, 24, 43 Poland 269, 274 Europe breach of European Community law 14 codification 37 European Group on Tort Law 15, 27, 37

Principles of European Law 37 Principles of European Tort Law 15 Study Group on a European civil Code 37 new members 8 evidence. See spoliation of evidence exclusionary rules 11–14, 22–30, 45–46 Canada 173–174 floodgates argument 25–27 historical perspective 39–40 Israel 191–192, 202–203 scale of human values 36–39 U.S. 136–139 expected value 36 externalities 32–36 Exxon Valdez oil spill 28–29, 56 façades 41–43, 311, 315 fairness, floodgates 25–26, 30 financial loss 135 Finland 7, 8, 41, 45, 66 floodgates argument Austria 45–46 Belgium 38 Canada 173 Finland 45–46 France 38 generally 8, 17, 25–30, 315 Israel 61 Quebec 52, 121 South Africa 63, 223, 243, 244, 253 Sweden 45–46 foot and mouth disease Canada 172–173 generally 29 Israel 204 U.S. 143–144 foreseeability Canada 168 generally 22–23 Israel 60–61, 194 Japan 46–47, 75, 80–81, 82 Quebec 52 South Africa 62, 226, 231–233, 243, 246–247, 251–252 United States 146

Index France 7, 8, 38, 50, 114, 137, 308, 311 Civil Code art. 1382, 63, 259 fraud 14, 27 Israel 210 South Africa 228–229 free-standing economic loss 135 Germany 7, 8, 10, 12, 30, 39–40, 45, 63, 66, 82, 95, 310 Civil Code § 311, 276 § 241, 276 § 823, 72–73 Greece 7, 50, 114 historical perspective 39–40 insurance automobile insurance 79, 119, 131, 190, 202, 203, 214 business interruption insurance 40, 56–57, 162 compulsory insurance 36, 119, 131, 190, 197, 214 maritime insurance 201 professional indemnity 154, 162 social insurance schemes 116, 190 subrogation claims 36 transferred losses 16–17 intangible wealth 36–38 intentional wrongdoing Canada 180 common core 8, 14–15, 38, 313 Israel 210 Japan 73–74 or negligence 24 South Africa 219, 226, 229, 233, 237 U.S. 56, 134 interference with contractual relations Croatia 106–107 generally 23–24 Germany 74 Israel 187 Japan 83–84 Poland 265–266, 279

321

Quebec 116 South Africa 238 U.S. 53–54, 134, 139, 139, 140 Israel breach of statutory duty 189 case 1, 199–202 case 2, 202–203 case 3, 204–206 case 4, 206–208 case 5, 208–209 case 6, 210–211 case 7, 211–213 case 8, 213–215 case 9, 215–216 causation 188–189 Civil Wrongs Ordinance § 35, 187–188, 191, 200 § 36, 187–188, 191, 200 § 58, 191 § 63, 189, 191 § 79, 203 § 80, 203 Commercial Torts Law 190–191, 211 Consumer Protection Law 1981, 191 contract and tort 61, 193 Credit Data Service Law 2002, 61 Defamation Law 191, 211 duty of care 59–61, 188, 215–216 foreseeability 60–61, 204–205 Learned Hand formula 187–188 Privacy Protection Law 211–212 road accidents 190 Road Accidents Victims Compensation Law 190, 202–203, 213 Torts Amendment Law 61, 208 Unjust Enrichment Law 190 Italy 7, 114, 311 Japan absolute rights 46, 74 as a liberal regime 46–47 case 1, 73–75 case 2, 75–77 case 3, 77–78 case 4, 78–80 case 5, 80–81

322

Index

Japan – Cont. case 6, 81–83 case 7, 83–84 case 8, 84–86 case 9, 86–87 causation 76, 82 Civil Code art. 709, 46, 72, 73, 80, 81, 82, 83 art. 710, 81 contract and tort 46, 83–84, 86–87 German influence 46–47 mental damages 81 protected interests 47, 72–73, 73–74, 77–78, 82, 87 joint and several liability 293 Key player Canada 170–171 comparative law 304, 306, 307 Croatia 94–96 Denmark 286–287 Israel 202–203 Japan 47, 75–77 Poland 265–266 Quebec 118–119 South Africa 243–245 U.S. 141–143 leases, transferred losses 17 lex Aquilia 218, 219 liability open-ended liability 25–30 optimum scope 31–32 liberal regimes characteristics 7, 43–44, 46–52 chart 306 flexible causal determinations 7, 45–46, 47 generally 43–44 limitation period Poland 259 litigation rates 29 lost opportunities Canada 180 Croatia 49, 99, 109 generally 20–21 Israel 188, 205 Japan 46

Poland 266 Quebec 51, 117, 129, 131 U.S. 54 maritime law Canada 169, 174 Croatia 91, 100–102 Denmark 288, 293 Quebec 121–122 U.S. 139, 141, 145–148 market dynamics 32–34 metalegal formants 8 methodology case studies 10–11 questionnaire 1–3 mixed jurisdictions 8, 25, 50, 62, 115, 132–133, 218, 306–307 negligence, tort of Canada 166–168 England 58 Israel, 61, 194–195, 210–211, 193 200, 202, 206–208 U.S. 53, 138–139, 150–154, 159, 161–164 negligent misrepresentation Israel 54–55, 172, 174–175 South Africa 222, 226–228, 253 U.S. 152, 154–155 negligent spoliation of evidence. See spoliation of evidence neighbours 237, 239 neminem laedere 41, 107 nervous shock 27, 279 Netherlands 7, 13, 30, 222 nightmare scenarios 28 nuisance private nuisance 187, 237 public nuisance 56 operative rules 41–43 parasitic loss. See consequential economic loss passing off 190 patents 13 philosophical values 8, 36–39 Poland case 1, 241–243

Index case 2, 243–245 case 3, 245–247 case 4, 247–249 case 5, 249–250 case 6, 251–252 case 7, 252–254 case 8, 254–255 case 9, 255–257 Civil Code art. 23, 274 art. 24, 274 art. 103, 270 art. 344, 269 art. 354, 274 art. 361, 64, 259, 260, 261, 266, 267, 268, 270, 274, 278 art. 362, 259, 273 art. 363, 259 art. 387, 270 art. 390, 270 art. 393, 272, 276 art. 415, 63–64, 259–260, 261, 265, 266, 268, 275, 276–277 art. 416, 272, 275 art. 425, 261 art. 426, 261 art. 428, 259 art. 430, 259, 263, 272, 274 art. 431, 259 art. 436, 265 art. 443, 259, 261 art. 444, 271 art. 445, 260 art. 446, 64, 261, 265, 271, 278 art. 448, 260 art. 471, 258, 259, 274 art. 472, 259 art. 474, 259 art. 495, 275 art. 566, 270 art. 662, 275 Constitution art. 20, 277 art. 22, 277 contract and tort 63–64, 272–273, 274, 276–277, 279–280 culpa in contrahendo 274 Family and Custody Code 271 French influence 63, 259–260

323

good reputation 274 Labour Code art. 120, 263, 274 Law of 12 April 1993 on combating illicit competition 279 Law of 29 September 1994 on accountancy 272 Law of 22 May 2003 on insurance brokerage 277 nervous shock 279 Portugal 7, 30, 45, 63, 66, 310 possession as a legal interest 36–37 transfer 17 Poland 269 South Africa 249 pragmatic regimes characteristics 44–45, 52–63 chart 306 generally 44–45, 52–63 private nuisance. See nuisance privity of contract 150–151 product liability Croatia 294–295 Denmark 294 Israel 191–193 Quebec 115, 128 professional advice. See reliance on professional advice professional services Canada 182–185 charts 306 common core 8, 315 Croatia 102, 105–106 Denmark 291–292, 296–297 indemnity insurance 296 Israel 215–216 Poland 272–273 Quebec 131–132 South Africa 240, 256–257 U.S. 56–57 property damage 10, 11, 16–18, 25–27, 28, 35, 36–37, 39, 43, 59 Canada 59, 168, 169, 172, 174, 183, 184 Croatia 95 Denmark 282, 283, 285, 293, 298

324

Index

property damage – Cont. Israel 188, 206–208 Japan 71, 74, 77, 79 Poland 258 Quebec 132 South Africa 220, 221, 222, 223, 226, 248–249 U.S. 134, 137–141, 144, 146, 148 proximity Canada 168, 171, 172, 177, 178–179, 182 Israel 194 proximate cause 144–145, 163–164 United States 144–145, 159, 163–164 public bodies 223 public nuisance. See nuisance public policy 14, 35, 62, 143, 187, 219, 222, 224, 228–229, 241, 247, 313 pure economic loss codification of European tort law 37 no common theoretical matrix 40–41, 66 definition 8–11 private and social loss 32–34 exclusionary rule. See exclusionary rules present vs. future loss 20–21 social cost 32–34 vs. consequential economic loss 11–14 Quebec Act respecting the protection of personal information in the private sector 127 as a liberal regime 50–52, 114–116, 131–133 Automobile Insurance Act 119 case 1, 116–118 case 2, 118–119 case 3, 120–121 case 4, 121–122 case 5, 122–124 case 6, 124–125 case 7, 126–127

case 8, 127–129 case 9, 129–131 causation 51, 115, 117–118, 119 contract and tort 115–116, 117–118 Civil Code art. 35, 127 art. 36, 127 art. 37, 127 art. 38, 127 art. 39, 127 art. 40, 127 art. 41, 127 art. 392, 123 art. 1375, 126 art. 1457, 50–51, 114, 117, 120, 124, 126, 130 art. 1458, 116 art. 1459, 115 art. 1463, 115 art. 1466, 115, 120 art. 1467, 115 art. 1468, 115 art. 1469, 115 art. 1478, 130 art. 1607, 117 art. 1608, 124 art. 1611, 119 federal maritime law 121, 122 social insurance schemes 116 questionnaire 1–3 rating agencies Canada 178–179 comparative law 304, 306, 307 Croatia 106–107 Denmark 292–293 Israel 211–213 Japan 83–84 Poland 273–274 Quebec 126–127 South Africa 252–254 U.S. 152–158 relational economic loss. See ricochet losses reliance on professional advice Canada 59, 166, 177, 178–179, 183–185 Croatia 110

Index Denmark 283, 297 generally 19–20 Israel 216 Japan 86–87 Poland 276–277 Quebec 130–131 South Africa 229–236 remoteness of damage 22–23, 28, 45–46 Denmark 65–66, 283, 286, 293, 297, 298 Japan 78 Poland 64–65 South Africa 244, 246 U.S. 57, 144, 146–147, 163–164 ricochet losses Croatia 95–96 generally 16–17, 24 Israel 60, 196, 200–201, 202–203, 207 Poland 64, 262, 264 Quebec 51, 117–118, 121, 123 U.S. 55–56 rights absolute and relative Denmark 45, 269–270 generally 7, 10, 23–24, 43–46 Japan 47, 83–84 Poland 63–64 Quebec 51, 115 in personam 89 in rem 74, 89 Roman law 41, 62, 218–219 scale of human values 36–39 Scotland 7, 311 slander 91, 155 South Africa actio iniuriarum 62, 218–219 actio legis Aquiliae 62, 218 Apportionment of Damage Act 235 case 1, 241–243 case 2, 243–245 case 3, 245–247 case 4, 247–249 case 5, 249–250 case 6, 251–252 case 7, 252–254

325

case 8, 254–255 case 9, 255–257 Companies Act 234 Constitution s 39, 220 s 8, 220 contract and tort 229–231 duty of care 45–46, 221–223, 236–237, 310–311 floodgates argument 221–223, 244–245 intention 238–240 Public Accountants’ and Auditors’ Act 231–232, 234, 251 Spain 7, 50, 115 spoliation of evidence Canada 179–181 Croatia 107–109 Denmark 274–275 Israel 213–215 Japan 84–86 Poland 247–248 Quebec 127–129 ricochet loss 16 South Africa 254–255 U.S. 158–159 spouse, see dutiful spouse spouses, mutual assistance Denmark 290 Quebec 123–124 strict liability continuum 15 Croatia 48 Denmark 282 Quebec 120–121 South Africa 218 subrogation. See insurance Sweden 7, 8, 11, 45, 66 Tort Law Act, § 2, 11 tax 28 Tilburg Group. See European Group on Tort Law tortious liability. See contract transfer of title 16–18 transferred losses charts 306 common core 312–315

326

Index

transferred losses – Cont. generally 16–18, 35–36 Quebec 124 trespass 41, 187 unfair competition Israel 190 Poland 279 South Africa 238–239 United States American Law Institute 53, 134–135, 138–139 American Trial Lawyers Association 52–53 as a pragmatic system 52–57 case 1, 139–141 case 2, 141–143 case 3, 143–145 case 4, 145–148 case 5, 148–150 case 6, 150–155 case 7, 155–158

case 8, 158–159 case 9, 159–161 exclusionary rule 53–55, 134–135 Restatement (Second) of Agency 142 Restatement (Second) of Torts section 552, 138, 152, 154 section 573, 155, 158 section 580, 156–157 section 595, 156–157 section 600, 157 section 602, 157 section 693, 148 section 766, 9, 53, 134–135, 139, 140, 142, 147 Restatement (Third) of Torts 135–136, 198 Vertrag mit Schutzwirkung für Dritte 276 vicarious liability. See employers’ liability