Academic journal article Defense Counsel Journal

Is the Economic Loss Rule in Peril? Courts, Negligence and the Economic Loss Wolves: The Economic Loss Rule Has Withstood the Test of Time, and Departures from It Fail to Understand Adjudication Problems in the Non-Personal Injury Context

Academic journal article Defense Counsel Journal

Is the Economic Loss Rule in Peril? Courts, Negligence and the Economic Loss Wolves: The Economic Loss Rule Has Withstood the Test of Time, and Departures from It Fail to Understand Adjudication Problems in the Non-Personal Injury Context

Article excerpt

CONSIDER these incidents:

* A subcontractor working for a telephone company negligently disrupts the flow of water to a community. Residents must boil their water, and local businesses lose income as they are forced to close or curtail their operations temporarily. (1)

* A shipping company packages chemicals improperly, resulting in contamination and delays at a manufacturing plant. (2)

* A car catches fire because of a defect in its construction. The passengers escape, and only the car itself is damaged. (3)

* A manufacturer of paving stones used in walkways is disappointed to discover that its product is mined because of defective cement used in its production. (4)

In each of these situations, the negligence of one party has caused pecuniary loss to others, and the damages are foreseeable. Yet traditional principles of tort law do not require any of the negligent actors to compensate the parties injured because tort law does not recognize a duty to take care to prevent economic loss. This traditional "no duty" principle is commonly referred to as the economic loss rule.

Courts and commentators have observed that the economic loss rule may paint claims for pecuniary loss with "too broad a brush." As one commentator put it, the economic loss problem "is multiform rather than unitary in character." (5) However, a more discerning standard has proved elusive. Courts have been unable to develop a workable alternative to the rule because the rules they have fashioned rely too much on traditional negligence principles.

The argument is four part: (1) economic loss poses unique difficulties in tort; (2) the difficulties are interdependent so that a change in the magnitude of one affects the others; (3) interdependent problems are poorly suited to adjudication using negligence principles; and (4) the major departures from the rule of economic loss fail because the alternative rules rely on negligence principles.

ECONOMIC LOSS POSES UNIQUE DIFFICULTIES

Injury occasioned by economic loss differs from physical injury in important respects. First, the laws of physics limit the extent of damage to persons or property; economic loss has no internal limitations. (6)

Second, society generally condemns conduct that causes physical injury; economic loss is acceptable in a variety of situations. (7) These differences in the character of economic loss create two concerns for the tort system: (1) the specter of widespread liability and economic loss and (2) the possibility of institutional failure.

A. Widespread Liability and Loss

1. Limits on Liability

The economic loss doctrine provides a clear and predictable limit to liability. (8) English courts first perceived the need for a liability-limiting rule in the 19th century in Cattle v. Stockton Waterworks Co. (9) A farmer hired a contractor to build a tunnel beneath a public road that cut across his land. Work was interrupted when pipes running beneath the road flooded the excavation. The contractor, Cattle, was unable to complete the project and sued the owner of the pipes for his loss on the contract.

The court concluded that the pipes had been negligently maintained but refused to allow Cattle to recover his lost profits. It reasoned:

      In the present case the objection is technical
   and against the merits, and we should be
   glad to avoid giving it effect. But if we did
   so, we should establish an authority for saying
   that, in such a case as that of Fletcher v.
   Rylands [where a mine flooded during construction
   of an adjacent reservoir] the defendant
   would be liable, not only to an action
   by the owner of the drowned mine, and by
   such of his workmen as had their tools or
   clothes destroyed, but also to an action by
   every workman and person employed in the
   mine, who in consequence of its stoppage
   made less wages than he would otherwise
   have done. … 
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