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.

• Author: London, Daniel

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.

1. 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. (10) In more modern times, courts have been equally apprehensive about allowing recovery for indeterminate liability. (11) In 2001, the New York Court of Appeals denied recovery to a group of businesses that lost profits because of a building collapse, stating:

      As is readily apparent, an indeterminate group in the affected areas may have provable financial losses directly traceable to the two construction-related collapses, with no satisfactory way geographically to distinguish among those who have suffered purely economic losses.... In such circumstances, limiting the scope of defendants' duty to those who have, as a result of these events, suffered personal injury or property damage--as historically courts have done--affords a principled basis for reasonably apportioning liability. (12) 2. Fairness

      The fairness concern stems from the notion that punishment should be proportionate to the moral repugnance of the act. This concern appears at first susceptible to a simple argument, as recounted by the Second Circuit in Kinsman Transit Co. v. City of Buffalo, "if the result is out of all proportion to the defendant's fault, it can be no less out of proportion to the plaintiff's entire innocence." (13) The unlimited extent of liability in economic loss renders this apparent tautology false.

      In Kinsman, the Second Circuit purported to apply traditional standards of foreseeability and proximate cause to deny shipping concerns recovery for profits lost when a barge collapsed a bridge, blocking traffic on the Buffalo River. However, a famous footnote in the opinion concedes that the adjudication of economic loss problems requires something more than traditional principles:

      A driver who negligently caused [an accident in the Brooklyn Battery Tunnel during rush hour] would certainly be held accountable to those physically injured in the crash. But we doubt that damages would be recoverable against the driver in favor of truckers or contract carriers who suffered provable losses because of the delay or to the wage earner who was forced to "check in" an hour late. And yet it was surely foreseeable that among the many who would be delayed would be truckers and wage earners. (14) The enduring insight of Kinsman is that individual injuries, although fair when considered in isolation, can quickly become unfair in the aggregate. Because economic loss lacks an internally limiting principle, the specter of widespread loss is particularly daunting.

   3. Deterrence

      The deterrence concern is related to the proportionality concern expressed by the fairness concept. Courts and commentators posit that the magnitude of potential liability in economic loss cases would have a chilling effect on socially beneficial conduct. (15) This risk is particularly acute when the substantive rule (in this case "fairness" or "negligence") is ambiguous. As one commentator has observed, "as the amount of potential liability increases, an actor must attach greater significance to the risk that the substantive legal rule will be applied erroneously or that he mistakenly will cross the line from no liability to liability." (16)

      The Brooklyn Battery Tunnel, which connects southwestern Brooklyn to the Wall Street area of Manhattan, provides a helpful illustration. A rule that required stranded drivers to compensate delayed drivers for their economic loss certainly would encourages drivers to keep their cars in working order. At the same time, that rule would discourage a large number of potential drivers from using the tunnel, either because the cost of satisfying the standard of care is too high or (more likely) because the risk of negligence would be too great. The economic loss rule resolves the over-deterrence concern by insulating negligent actors from all liability for economic loss. Because widespread loss has the potential to devastate tortfeasors and deter socially beneficial conduct, it is particularly important to place liability where it belongs. Because all economic loss is not "bad" economic loss, the...