Professor Lidsky
Advanced Torts
Spring 2014
Torts for Economic Injury: The Economic Loss Rule, Breach of Fiduciary Duty, Fraudulent and Negligent Misrepresentation
1. Introduction to Torts for Economic Injury
a. Unlike personal injury, in economic tort cases the parties often know each other. (contractual relationship)
i. Accountant- client, Attorney- client, Partners in partnership
ii. Business competitors
b. Key Difference
i. Thus, people can use contracts for “private ordering” of the risks posed by the transaction.
1. Buyer can allocate some risk to seller/delivery. In return the seller will charge a higher amount. If buyer doesn’t want to be liable, he prob has to pay more for it.
ii. Claims for economic injury involve a much wider range of remedial and damages theories that do claims for PI.
1. PI puts a limit on possible damages – Prevents possible ripple effect.
The Economic Loss Rule- first question- was there property damage or personal injury?
1. Defined
a. Judicially created “No duty rule”
b. GENERAL rule with some exceptions
i. Tort law does not allow recovery for pure economic loss.
c. Differences
i. Economic loss- financial loss that can only be seen on a balance sheet.
ii. Pure economic loss- financial loss in the absence of physical injury or property damage
d. Rule
i. There is no duty to avoid negligently inflicting pure economic losses, occurring in the absence of personal injury or property damage
ii. Not a problem in getting economic losses when there is personal injury or property damage. (since the personal injury puts a cap on damages and there is not a huge ripple effect)
e. Examples
i. Car accident, in hospital for 3 months, can’t get paid
1. Economic loss recovery is fine because it is personal injury
2. Note there is no contractual privity
i. Pizza Restaurant, new oven goes out during graduation wknd
3. Can’t recover pure economic losses in tort claim
4. Reasons why:
a. No PI or property damage
b. Warranty contract should have covered, if they wanted complete warranty on oven they could have negotiated this (more money)
c. Profits are speculative
d. Could have bought business insurance
e. Oven installer’s inability to predict scope of liability
b. Note in the ship crashing into the bridge example
i. The ship owner can still recover
ii. The bridge owner can still recover
2. Claims for purely economic loss arise in 3 general scenarios
a. P and D are in contractual privity or P is in contractual privity with X that is in contractual privity with D, but seeks to circumvent limits by suing in torts.
i. Rardin
b. D’s negligent act create economic losses of potentially unlimited magnitude
i. Testbank
ii. Toxic spills, closing Lincoln tunnel
c. P sues D when defective product injures only the product itself
i. East River Steamship
ii. You buy freezer for caviar. When you put expensive caviar in it, the caviar goes bad.
1. Recover since there is property damage.
iii. Freezer is defective, tips over and kills someone.
1. Recover since there was personal injury.
3. Rationales
a. Superiority of contract- parties should be encourages to use contract law to allocate risk, allowing tort recovery will undermine incentives to contract. Parties should protect themselves in advance with contract.
b. Best cost avoider should avoid- encourage the party best situated to foresee to risk to plan for the risk and allocate though private ordering, especially where loss spreading can be achieved through first party insurance (also sometimes through contract)
i. Get insurance
c. Unlimited and Unpredictable liability- avoid imposing unpredictable and unlimited liability/liability disproportionate to fault (Testbank)
i. Person could not possibly see the ripple effect of their behavior
ii. By not allowing for pure economic loss, it is a pragmatic limitation on the doctrine of foreseeability. Otherwise a ton of forseeable Ps would bring claims
iii. Liability would be out of proportion to fault
d. Economic efficiency- risk of over deterrence. Displaces economic activity does not increase social costs of negligence – huge liability will be disproportionate
i. Will the product be made elsewhere?
e. Need for a bright line rule
i. Flood of litigation problem cured
ii. Easy application by judge during preliminary stages instead of leaving it to the jury
iii. The proximate cause element would not limit enough- this would not create case by case basis in which jury will decide
4. Some Exceptions to ELR
a. Negligent misrepresentation
b. Defamation
c. Breach of fiduciary duty
d. Nuisance
e. Unreasonable failure to settle
f. Many intentional torts
5. Rardin v. T & D Machine Handling, Inc. – R contracts with WS and buys printing press. Price included transportation. WS was responsible for damage incurred by negligence of employees, agents, or reps. WS then contracts with TD to transport. TD negligently moved and damaged the press. R had to pay to repair and lost profits. R settled with WS but still brought suit against TD. Whether R has a claim against TD?
a. R had no contract with TD (couldn’t bring contract claim) and his claim is a tort claim since consequential damages are the norm in tort law.
b. R could not bring suit against WS because consequential damages are not recoverable in a breach of contract suit. (Hadley v Baxendale)
c. Posner Watch example- A brings watch to B to fix. B sends it to C. C negligently fixes it. A misses important business meeting since he is late. A sues C.
i. C (TD) could not estimate the consequences of their carelessness. They did not know the extent of liability and therefore did not know how much effort to expend on being careful.
d. Court says A can protect himself in 2 ways
i. By contract with B, against consequences of C’s negligence.
1. A can insist that B guarantee him against all unfavorable consequences. However, B would most likely refuse. This shows that liability for all negligent acts is not optimal.
ii. Other precautionary measures.
1. If he knew the meeting was so important why didn’t he leave himself a margin or error or look at another watch? Get insurance? Contract out work? Why impose liability for a harm that could have been easily prevented?
e. Plaintiff is in best position to judge how important this transaction is and how much it will cost. P is best COST AVOIDER.
f. Hadley- P owned mill and D was common carrier. They contracted -D was to take broken shaft to get repaired. D failed to do so and P had to close. P sued for profits lost. P lost since D did not know about P’s finances or how costly delay would be and how much care was needed to prevent it. P could have protected themselves by keeping a spare. Court said no recovery in contracts case. Court in Hadley says you can’t get consequential damages unless it was in mind when the contract was formed. (since the carrier would then charge more if it had to be done and might cost them a shit ton if you don’t have it on time)
i. Posner says the ELR is the same as consequential damages rule in tort.
g. Contractual type limitations on liability may make sense in many tort cases that are not contract cases only because there is no privity of contract between the parties.
h. J Posner- Difference between PI cases and Economic loss cases, whether stranger or in contractual setting.
i. PI case- you take the victim as you find them. Running over Henry Ford example (eggshell P)
ii. EL case – When victim is business, the possible difference in liability is much greater than if the victim is a person.
1. The financial magnitude of businesses vary much more that that of people. The chances of hitting someone like Henry Ford are very low.
2. Social losses from business are offset elsewhere in the system. The losses from Rardin are made up in other printing companies therefore the social losses are not as great. (Ps would hate this)
3. Tort law thinks that you should pay more if you cause personal injury as opposed to economic future loss.
6. M/V Testbank- Sea Daniel and Testbank collided in Miss river gulf. 12 tons of PCP spilled and the outlet was closed. Fishing shrimping etc. closed in area and for 400 miles for 3 weeks. 41 lawsuits were filed (shipping interests, marina, seafood enterprises, restaurants, bait shops, recreational fisherman, commercial fisherman). Defendants’ moved for summary judgment since the economic loss was not accompanied by property damage. DC granted except to fisherman stating they had special protection. AC affirmed.
a. Policy rationale
i. Businessmen who might be affected by spill can protect against this through insurance at low cost. (They are best cost avoiders)
b. Plaintiffs argue their claims are cognizable since the pollution caused a public nuisance.
i. Court disagrees since their claims are remote.
c. These are all foreseeable plaintiffs but sometimes liability must be limited by the court for policy reasons (catastrophic cost and destroy business). Denying recovery for pure economic losses is a pragmatic limitation on the doctrine of foreseeability.
d. Bright line rules are easier to apply because a judge can do it at preliminary stage (instead of jury) that makes it more efficient.
e. Concurring- has problem with Union oil. Fisherman having proprietary interest (owning) water is ambiguous.
f. Dissent- “robins is tar baby of tort law” (just stuck) they think this conflicts with conventional torts depending on foreseeability. Also think it should be decided on a case-by-case basis making the plaintiff show particular damages. (the public nuisance approach)
i. They say Robins doesn’t apply since that case stood for not allowing plaintiffs who were neither foreseeable nor proximately injured to recover. However this case is different because the plaintiffs were proximate and foreseeable.
ii. Dissent notes there are no contracts in this case but there was one in robins. Therefore it is distinguishable.
iii. Dissent would use “particular damage” requirement instead and defends case-by-case approach.
g. Note if there is any property damage to the boat, then they can recover for economic losses. But if the boat wasn’t in the area at the time and there was no property damage then they can’t recover.
i. Thus it seems arbitrary.
7. East River Steamship Corp. v Transamerica Delaval, Inc.- defective product in admiralty. ELR in products liability context. Shipbuilding built 4 ships in issue. Shipbuilding contracted with delaval to manufacture of turbines. When the ships were completed, title was transferred to a trust company that chartered ships to Ps. Each P operated under a bareboat charter (possessed ship for 20 y
ll contaminated the water, some onshore commercial fisherman may be able to recover through their quasi-property interest in the fish discussed in Testbank.
iv. In Florida, plaintiffs would possibly be able to recover. Possible plaintiffs include pretty much anyone who capitalizes on the visiting tourists such as fishing guides, hotels, and restaurants that are located passed the blocked road. This is in line with the Tiara Condominium Ass’n holding which the court ruled the economic loss rule only applies in products liability contexts.
v. People with personal injury and property damage can recover. Maybe breath in fumes or car directly behind spill is damaged. Other than those people, no one can recover. Otherwise it would open the floodgates to litigation. Fear of unlimited liability. Need bright line rule. Disproportionate liability.
b. “Robert, a skilled electrical engineer, was employed by ABC Contractors, Inc. Robert was killed in an automobile accident caused by a defect in an automobile manufactured by XYZ. ABC suffered substantial economic loss as a result of Robert’s death because ABC was unable to complete a building contract in a timely fashion.” Taken from the Restatement. Can ABC recover in tort from the auto manufacturer? Generally? In Florida?
i. In this products liability case, there was personal injury to Robert. Therefore he/his estate can recovery since it stems from a personal injury. However, generally, ABC will not be able to recover for the pure economic loss caused by his death. Courts have reasoned, in cases like this, the best cost avoider should be the one to avoid. Knowing how important this contract was, ABC should have purchased business insurance of hired more employees to ensure the completion of the job. Further, if claims like ABC’s were allowed, automobile manufacturers could face many lawsuits stemming from one accident, thus postulating the risk of over-deterrence. As Judge Posner explains in Rardin, holding an unknowing third party liable would be unfair since they do not know the degree of care in which to use.
ii. In Florida, ABC will not be able to recover under the same reasoning. ABC was not in contractual privity with XYZ and therefore could not sue for breach of contract. As the court in Tiara Condominium Ass’n holds, the economic loss rule applies to in the products liability context, even in the absence of privity.
iii. Product defect that causes injury. ABC is third party unforeseeable plaintiff. They are in best position to protect themselves. (cost avoider) insure through “key man” insurance. ABC is too disconnected from damage caused by product defect.
c. “ABC Rubber Company sells a conveyor belt to XYZ Automobile Company. XYZ installs the belt in its engine assembly line. A defect in the conveyor belt causes it to break, damaging the assembly line. Until the assembly belt is repaired, no engines can be assembled. Because no engines are available, the production lines for automobiles shut down as well. XYZ loses many days of production at a critical time when its best-selling new model has just appeared in the showroom. Expert witnesses testify and the trier of fact finds that as a consequence of this shutdown, XYZ not only lost the sales of the automobiles that would have been produced but for the shutdown, but also lost the crucial race to be the first in the market with its new model, thereby losing additional millions of dollars of sales to its arch rival MNO Motor Cars, which introduced its new model a week ahead of XYZ instead of a week behind it.” Can XYZ recover in tort against ABC? Generally? In Florida? Also taken from the Restatement.
i. In this problem, the defective belt caused damage to the assembly line, in turning causing the company to lose profits. Because the defective product caused property damage, XYZ will be able to recover damages generally and in Florida. In Tiara Condominium Ass’n the court explained that contract principles are more appropriate than tort principles for resolving economic loss without an accompanying physical injury or property damage. However, the present case, there was property damage and thus tort principles are appropriate for resolving the economic loss.
ii. Is damage to assembly line “other property”? Usually not. Don’t need tort law since we rely on warranty law in this type of case. Missed chance to be first is very speculative. Factory is best cost avoider. You should have back up belt or have insurance. Runs risk of disproportionate liability.
