Why Pure Economic Loss is Generally not Recoverable in Negligence

There are two fundamentally different views as to why pure economic loss is generally not actionable in negligence. These two views broadly align with the rights and loss/policy view.

(i) The rights view

Pure economic loss is not actionable in negligence because no one has a right good against the whole world to not have economic loss negligently inflicted on them. But we can acquire a right that a particular person makes good on a contractual or another undertaking that obliges them to further our economic interest. So, rights theorists are quite keen on assumption of responsibility. This view is sometimes criticised for being circular: we don't have a right because we don't have a right.

          Nolan, Rights, Damage and Loss (2017) 37 OJLS 255

One of the things Nolan tries to do in this article is to substantiate the argument of rights theorists about economic loss by showing that a right not to suffer loss is conceptually impossible.

To suffer a loss is to be worse off. First, wrongs, which are by definition the violation of a right, occur at a particular moment in time or at least start occurring at a specific moment in time. So, a violation of a right occurs at a particular point in time. Second, whether or not someone has suffered a loss due to another's conduct cannot be determined at any given moment in time. It follows that causing a purely financial loss cannot be wrong. Hence, a right not to suffer loss is conceptually impossible.

For example, imagine the defendant is a financial advisor who negligently advises the claimant to invest their entire life savings in a high-risk investment fund. It looks like the claimant has suffered loss a month later when the fund lowers in value; but, what if the fund then rebounds so that two months after, she stands to make a profit. So the target is moving. There is no single moment when you can say that the claimant is worse off due to the advisor's negligence. So if you are a rights theorist, then it simply follows from this that you cant have a right to not suffer economic loss.

This is all highly conceptual, but there are also arguments that a right not to suffer pure economic loss is undesirable. First, abstract wealth is a less important interest than health and property so less deserving of protection by tort law. Second, a general right not to have economic loss negligently inflicted on us would unduly limit others' freedom of action.

Where it gets controversial is whether our interest in tangible property is more important than our interest in intangible wealth. A legal system concerned with human values would be right to provide further protection to tangible property than intangible wealth. This can be substantiated by pointing to the familiar idea that property might have a significance for us that transcends its economic value. Moreover, some things that we own go towards making up our identity, so there are many reasons why tangible property is more important than intangible wealth. There is also the question of corporate property. But, the law of tort thinks about humans even if it does apply to companies.

The range of actions that may cause economic loss to others is so much greater than the range of actions that will cause personal injury or property damage. Choosing one shop over another causes economic loss to the other shop. A footballer scoring a goal causes economic loss to those who have bet against it.

With this argument, we see the familiar tort balance between potential claimants' security interests and potential defendants' autonomy. In pure economic loss cases, the security interest is relatively weaker. The autonomy interest is also much threatened by a right of this kind.

(ii) The policy view

This view is associated particularly with Jane Stapleton. Policy arguments have more to do with consequentialist concerns. The general no recovery rule for pure economic loss is based on policy concerns raised by pure economic loss cases.

How do we distinguish policy concerns on the policy view from normative undesirability on the rights view? The difference is that rights theorists say that their arguments about normative undesirability are good reasons as between the parties why pure economic loss should not be recovered. Adherents of the policy view typically point at the broader consequences of the decision.

The main policy argument against the recovery of economic loss is the floodgates argument. This argument is concerned with indeterminate and thus uninsurable liability. As in psychiatric injury cases, the floodgates concern is used to explain the general rule against recovery for pure economic loss.

As with nervous shock, the floodgates concern is an issue in the pure economic loss context because the economic consequences of the defendant's negligence are not limited by a physical chain of causation. Someone negligently causing an accident on a vital road chokepoint creates an endless ripple effect of economic loss — for example, causing someone to not make it to a business meeting in time and lose a contract. The concern is not necessarily about the number of potential claims but about the unpredictable amount of liability and the difficulty of insuring against this.

However, the floodgates concern does not explain why the rule against recovery for pure economic loss is a general rule. If the floodgates concern is the reason for the rule, why is purely financial loss also not recoverable when there is no floodgates concern. Yes, there is a recognised concern in relational economic loss cases like Spartan Steel. But, why does the no recovery rule also apply to pure economic loss caused by the acquisition of defective products and premises. The claim here is limited to the amount paid for the products or premises in question, there is no floodgates concern.

Thus, the rejection of the rights view and the policy view's endorsement would lead away from the general no recovery rule to a more flexible approach. This is essentially Stapleton's argument. This more flexible approach would allow a purely financial loss to be recoverable when there is no floodgates concern like the context of the defective premises. Moreover, recovery could be allowed where there is a particularly close relationship between the claimant and the defendant. The floodgates concern could then be used to limit liability rather than bar it.

English law is currently more consistent with the rights view in the pure economic loss context. Commonwealth countries like Canada and Australia have taken a more flexible approach.

          Stapleton, Duty of Care and Economic Loss: A Wider Agenda (1991) 107 LQR 249