CONSEQUENTIAL ECONOMIC LOSS

Consequential Economic Loss

Consequential Economic Loss

Q1- What is the distinction between consequential economic loss and pure economic loss in negligence?

Ans. Although the pure economic loss rule has been remarkably durable in the common law, it suffers from a theoretical deficit. The rule has not been properly framed within the broader context of Anglo-American political economy. Any theory must recognize that the rule fundamentally deals with business risk and economic organization. Two conceptions of risk are important: risk to economic assets essential to the production function (loss of a factor of production), and risk to outcomes (loss of production). This Article proposes a production theory of the pure economic loss rule, which is rooted in the neoclassical economic understanding of the relationship between uncertainty and profit. The theory is simply stated: tort law protects one's factors of production, but not outcomes. The emphasis on the loss of an economic asset departs from the requirement of loss of one's property, the traditional basis for recovery of consequential economic loss. Ownership is not and should not be the touchstone of recovery. Rather, society has a normative preference for economic production, and tort law protects an asset essential to the production function, irrespective of ownership. The pure economic loss rule is a market abstention doctrine. It reflects a bright line judicial policy against corrective legal action when economic loss represents not a market failure in precaution but instead is a necessary condition of the engagement of enterprise under Knightian uncertainty. Thus, the production theory resolves a classic, longstanding riddle of the common law—that is, why consequential economic loss is recoverable upon the loss of an asset, but pure economic loss is not upon a poor economic outcome. (Deakin, S., Johnston, A. & 2003 Pp. 78)

The fundamental relationship between contract and tort was canvassed in the classic “snail in the ginger beer bottle” case of Donoghue v Stevenson . The dissenting judges in that case argued that the purchaser was not a party to the contracts for the manufacture and sale of the goods and that if relief was to be granted to such a purchaser this would be a misapplication of sale of goods law to the field of tortious liability. The area in which the choice between proceeding in contract or in tort is perhaps most significant relates to the measure of loss recoverable. The usual method of enforcement of contractual obligations is by compensation for the losses caused by their breach. Contract distinguishes between expectation interest and reliance interest. The former is the measure of what it might take to restore the claimant to the position that he would have enjoyed had the contract been performed; the latter seeks to place the claimant in the position that he would have occupied if the contract had never been entered into and as such does not include compensation for the loss of any anticipated gain. Therefore, damages on the reliance basis represent the same test as applies in ...