Liability for Pure Financial Loss in Europe: An Economic Restatement

Abstract

consist of a combination of damage remedies paid to the victims and financial subsidies paid to the tortfeasor. For obvious pragmatic reasons, we rarely observe such combined operation of the liability system in the real world. Beyond the irony of such theoretical considerations lies an important lesson. The core notion that seems to necessitate the theoretical contradictions of the economic loss rule is the idea that the optimal scope of liability is determined by the impact of alternative liability rules on the total social cost of accidents. Activities that occasion a mere reallocation of costs and benefits, with no incremental social cost, cannot as such be considered socially harmful. If no other considerations of the parties' reliance and distributive justice enter into the policy considerations, the imposition of fult liability would be unwarranted. 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 should, 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. In case of wrongful behavior which occasions a zero sum transfer of wealth, the amount of net liability imposed on the tortfeasor should also equal zero, given the offsetting effects of positive and negative liabilities when balancing harm to victims with potential benefits to unsuspecting third parties. The important point here is to recognize that, according to several competing conceptions of justice , a zeIo net liability rule for the alleged tortfeasor does not necessarily justify a rule excluding liability altogether, denying compensation for those who suffered a private loss. Here lies one important element that drives the intellectual and dogmatic tension behind the economic loss rule. In the following section, we shall evaluate some elements of the traditional debate within the normative framework of law and economics. 3.3 In Search of Comparable Categories From an economic perspective, the legal notion of pure economic loss is quite unfit to serve as a normative criterion of adjudication. As suggested above, the legal notion of economic loss is, in fact, a very imperfect proxy for the economic category of socially relevant cost, which ideally should guide the optimal design of liabitity rules. The understanding of the relevant economic categories may in this context serve two valuable purposes: (a) as a positive criterion, to understand the many facets of the economic loss rule and to reconcile some of the apparent contradictions in the judicial implementation of such rule; and (b) as a normative criterion, to guide lawmakers and courts in the design and implementation of liability rules dealing with pure economic loss. This conten tdownloaded on Tue, I8 Dec 2012 I2 :56 :14 I r l l A l l use sub jec t o . lSTOi l I c r i i r . l l i i Ccn i l i l r i r l s 20031 AN ECONOMIC RESTATEMENT 135 Contrary to the conclusions reached by several legal commentators on this issue,so we suggest that the emergence and diffusion of the economic loss rule is more than a mere historical accident. We suggest that such exclusion of liability is in many instances appropriate and that several of the factual situations governed by the economic loss rule are correctly adjudicated. An economic analysis also reconciles some of the apparent contradictions of the judicial applications of the economic loss rule in the various legal systems considered