#5377 - Economic Loss Theory Notes - Tort Law

• McLachlan J – Economic Loss Damages in Canada:

Economic loss damages have not been an issue in Canada, concerns of unlimited recovery and uncertainty not materialised.

There is an economic theory that says loss is inevitable result of socially valuable activities and the community taking benefit should accept burden of this, not individual Ds.

BUT arguments to this effect fail: (0) floodgates problem??, (1) C being in best position predict economic loss consequent on an accident so as to insure – but not having to compensate encourages negligence and insurance policies don’t cover lost profit, (2) Better to spread the risk (prevent bankruptcies) – but the C may suffer an equally large loss + if losses are spread between Cs and not D then we can expect more negligence, (3) Contract can allocate risks – but contracts aren’t all economically efficient, parties don’t have equal bargaining power, and fault is what is central to negligence. SO RECOVERY HAS BEEN OK.

Complex Structure.

• Lord Keith – Murphy:

When C buys property with a physical defect it cannot count as physical damage.

Loss occurs only in devaluation upon finding defect.

Opening liability up here would need all pure economic loss to be recoverable.

Only classified in ‘parts’ damages where different people built different parts of the property.

• Quill – Consumer Protection in Respect of Defective Buildings:

To say a building is just a big product doesn’t do justice to greater practical and economic significance that purchasing a building entails. Also argument overlooks that tort needn’t protect faulty products as consumer protection legislation does this already.

Simply not analogous. If a house buyer asked for these protections for latent defects the seller would simply refuse and wait for another to come along.

Combination of insurance and statutory provisions may be considered sufficient.

• La Forest J – Canadian Supreme Court:

To not allow recovery for dangerous defects provides no incentive for C to mitigate losses and tends to encourage economically inefficient behavior in waiting for something to actually get damaged.

To allow damages for this serves an important preventative function by encouraging socially responsible behavior.

There is no risk of indeterminate class of those liable too since it is restricted to current owners/possessors of the structure. No risk of indeterminate amount of liability since limited to reasonable cost of repairing the defect. The fact that the defect must constitute a real and substantial danger to inhabitants means D won’t be paying out much more to repair than would be needed to remedy damage actually done.

No risk of indeterminacy of time since only liable during useful life of the building.

• Stevens:

Property rights indivisible so you can’t have anything other than pure economic loss where a product or building is faulty. There is no damage done from which the consequential economic loss could result.

Hedley Byrne.

• Lord Reid – Hedley:

Negligent words and acts are different as reasonable man is less likely to foresee consequences of his words.

You need something more than negligent yet innocent words since once liability for words is given D is open to wide liability (distribution of message etc.). There should be an undertaking of responsibility. Where the person taking the advice reasonably trusts the giver and expects a degree of care and other knows/reasonably should know about reliance.

D has 3 options: (1) don’t advise, (2) disclaim, (3) accept risk).

• Bishop – Negligent Representation through Economists’ Eyes:

For goods tort aims to ensure that manufacturer’s costs are total social costs. He will virtually always get all of this back in the price he is paid – he will be paid the social value of the thing, what it cost him, and his profits.

In info this is not so – he will not get full social value since it is so easy to pass info on and duplicate it, maybe will later benefit from it unconnected to his benefits.

Usually social cost = social benefit or else not produced (as in goods).

A more restricted liability for negligent misrepresentation aims to make the costs for D such that it is still desirable to produce socially optimal amount of info – if we charged him full costs to all and he couldn’t get full social benefits then he might not produce info.

Thus liability should be restricted if: (1) info valuable to many, (2) producer can’t capture all of that benefit through his charges, (3) the imposition of liability for injuries to all people would make costs such to discourage production of info.

• Explains: (1) Lord Oliver’s specific concern for floodgates arguments in these cases. (2) Hedley as info was for limited audience and so couldn’t benefit wide class, so cost of liability could be offset by the gains they made. (3) Smith as C effectively paid full social price for info which was for small class of recipients (those interested in house). (4) Caparo limiting class of people who could recover to those that were closest effected (/paid).

• Stevens – Rights Based View:

Law starts with an ocean of non-liability for pure economic loss and we create islands of liability for economic loss through negligence. These are where a right for C should exist and has been contravened. The assumption of responsibility or the proximity is the creator of the rights in question.

The infliction of economic loss does not infringe any right that preexists.

This is itself based on harm principle – if you harm someone by causing loss wrongfully (undermining someone’s rights is wrongful) then you must compensate for that loss. [Need to focus in on where the right comes from in pure economic los cases!!!!!]

• Stapleton – Alternative Policy Approach:

Law currently puts the cases into 3 pockets: (1) Hedley – negligent...