International Review of Law and Economics 27 (2007) 1–7
Editorial
The law and economics of pure economic loss:
Introduction to the special issue of the International
Review of Law and Economics
1. The puzzle of pure economic losses
The notion of pure economic loss and its associated presumptive non-recovery rule in
Tort Law continue to puzzle and fascinate lawyers, lawmakers, and Courts, and also a full
array of academics in various fields: Tort Law, Comparative Law, Economics, and Law and
Economics, to name a few. And the interest is not merely conceptual or theoretical: The
American Law Institute is currently working on a Restatement of Economic Torts, of which
pure economic losses constitute an (maybe “the”) essential part. Scholarly attention on
this subject remains high, and highly contested.1 The marketplace for ideas now contains
several –general or partial-theories about pure economic loss. In the existing literature
we can encounter, at least, economic theories,2 comparative Law theories,3 legal policy
theories,4 legal-philosophical theories,5 historical theories,6 political theories,7 cognitive
theories.8
Only the notion of pure economic loss itself remains relatively uncontroversial. Borrow-
ing the words from a respected legal commentator, a pure economic loss could be defined
as a pecuniary or commercial loss that does not arise from actionable physical, emotional,
or reputational injury to person, or physical injury to property.9 The kinds of cases that
1 See, for a very recent sample of this attitude, the Symposium entitled “Dan B. Dobbs Conference on Economic
Tort Law”, the contributions to which were later published in vol. 48 of the Arizona Law Review (2006).
2 See, Backhaus (2003); Bishop (1982, 1986, 1986); Bussani, Palmer, Parisi (2003); Dari Mattiacci (2004);
Goldberg (1991, 1994); Parisi (2003); Posner (2006); Rizzo (1982).
3 See, van Boom (2004); van Dunne´ (1999).
4 See, Gergen (2006); James (1972); Rabin (1985); Stapleton (1991).
5 See, Benson (1997); Witting (2001).
6 See, Gordley (2003).
7 See, Feinman (2006); Silverstein (1999).
8 See, Bernstein (2006).
9 Dobbs (2006).
0144-8188/$ – see front matter © 2007 Elsevier Inc. All rights reserved.
doi:10.1016/j.irle.2007.04.001
2 Editorial / International Review of Law and Economics 27 (2007) 1–7
readily come to mind when one evokes the notion of pure economic loss are heterogeneous
in terms of factual circumstances, albeit surprisingly similar across legal systems. Destruc-
tion or impairment of transport, utilities or communications infrastructures (bridges, roads,
power stations and networks, telephone lines) causing business closure or disruption to
firms making use of the infrastructure; loss of profit suffered by individuals or firms who do
not own the economic resource directly harmed (employers, employees, lessees, charter-
ers, contractors); erroneous or misleading information provided to third parties (investors,
lenders, buyers, contractors) not linked contractually with the information provider, and
where reliance on the information leads to a regrettable business decision by the third
party.
It is indeed legitimate to question10 in what respects the liability for negligently killing
a valuable employee,11 or negligently injuring a worker who will collect wages from
the employer even during the disability period,12 or negligently destroying or damaging
a leased asset,13 negligently blockading access to selling space,14 negligently drafting
a will,15 or negligently certifying the financial situation of a company or a prospective
borrower,16 share essential common elements that will allow a legal system to take sen-
sible decisions concerning the imposition or denial of liability. All of them are, at least
potentially, candidates for the pure economic loss label, and as long as we do not infer
from the label that the underlying efficiency issues in all of them are the same, the label is
innocuous.
In fact, though, disagreement starts almost right after the very moment of formulating
and agreeing on the notion: the contours and scope of the non-recovery rule (or its very
nature: may be it can be conceived as merely a presumptive solution); the organizing and
normative value – or lack thereof – in the notion; the rationale – singular or plural – behind
the rule; the relationship of Contract and Tort concerning the rule; the proper solution to
the major constellation of cases falling within the notion in the different legal systems, the
existence and content of an overarching theory positively giving sense to that varied legal
material.
Considering this level of disagreement it is fair to ask oneself if Law and Economics
perspectives will be capable of bringing some marginal light upon such a scenario, when
others, even from Law and Economics itself, have not fully succeeded?
10 See, Feldthusen (1996); Go´mez and Ruiz (2004).
11 For instance, the Italian Superga and Meroni (Cass. Sez. un. 26 gennaio 1971, n. 174, in Giur. it. 1971, 1, 681)
cases.
12 For instance, the Spanish cases STS, 1a, 14.2.1980 (RJ 1980\516); STS, 1a, 14.4.1981 (RJ 1981\1539); STS,
1a, 25.6.1983 (RJ 1983\3685); STS, 2a, 13.5.1975 (RJ 1975\2083); STS, 2◦, 20.9.1982 (RJ 1982\4948); STS,
2a,13.12.1983 (RJ 1983\6522).
13 For instance, Robins Dry Dock v Flint 275 US 303 (1927), or East River SS v Transamerica 476 US 858
(1986), or Candlewood Navigation Corp. v Mitsui O. S. K. Lines Ltd. [1986] A C 1 (P. C.), among other cases.
14 For instance, Rickards v Sun Oil Co. N. J. Msc. 89, 41 A. 2d 267 (1945), or People Express Airlines, Inc. v
Consolidated Rail Corp. 495 A. 2d 107 (NJ 1985), or the Spanish case of STS, 1a, 26.7.2001 (RJ 2001\8429), or
the French case Cass. Civ. 2e, 28 Avril 1965, among many others.
15 For instance, White v Jones [1995] 2 AC 207.
16 For instance, Ultramares Corp. V Touche, 174 N. E. 441 (N. Y. 1931); Credit Alliance Corp. v Arthur Andersen
& Co., 483 N. E. 2d 110 (N. Y. 1985).
Editorial / International Review of Law and Economics 27 (2007) 1–7 3
2. The Conference
As is apparent from the references above, it was not the lack of economic analyses con-
cerning the legal conundrum around pure economic losses, what lies behind the initiative
of the European Association of Law and Economics, the International Review of Law and
Economics, and Universitat Pompeu Fabra in Barcelona, to jointly co-organize an Interna-
tional Conference on the Law and Economics of Pure Economic Loss. We are indeed very
grateful to the three institutions for making the Conference, and this Special Issue, possible.
Our goal was precisely to shed some light on the role of such theoretical, factual or
institutional detail that had been, to some extent, overlooked, and how additional intellectual
effort along those lines was worth exploring. The unifying theme and aim of the Conference
was to present how the overarching theories and rationales were in need of refinement, and
how the broad area captured by the notion of economic loss could be further illuminated
by enhanced attention to the specific issues raised by more detailed analyses of the tools
of Tort Law, and to the specific circumstances of the most important cases falling within
the application of the non-recovery rule. It is not that we think that theory, most notably
economic theory, cannot contribute to explaining the actual outcomes in legal systems in
connection with losses occurring without – or relatively detached from – a primary personal
or property loss, nor that theory cannot guide legal policy and legal practice in this area.
Quite the contrary, we consider that both the explanatory and the normative appeal of legal-
economic approaches, building on the existing contributions, would benefit much from more
detailed or adaptive perspectives. We thought before the Conference, and we still think, that
the analysis of the general consistency of the economic loss concept, and the associated
exclusionary rule, and their descriptive, guiding, and normative values have already received
a fair amount of attention, and the same happens with the major overarching theories, both
economically oriented and not. If the reader will allow it, we thought that the time for a
second generation literature building upon the first was already ripe.
The Conference took place at Universitat Pompeu Fabra, Barcelona, on 7–8 April 2005.
The sample of contributions collected in this Special Issue, we believe, aptly reflects the
above-mentioned goal, and also fairly represents the range of papers presented to it. The
underlying thread giving a substantial degree of unity to this set of papers is the unveiling of
the relevance of a given dimension, yet unexplored, or insufficiently explored in the existing
literature. The papers are very diverse in terms of their approach, their tone, their emphasis
on theory or on application, and the tools deployed to illuminate the central issue. But they
share a common goal of de-emphasizing the interest in revising the overarching theories,
and, at the same time, of making salient, and analyzing, the overlooked dimensions that
pervade the area – or a fraction thereof – covered by the pure economic loss notion: market
structure; the specifics of the negligence rule, or of liability of information provided to
investors in capital markets; the role of knowledge by the injurer, and so forth.
3. The specific papers
The first paper, by Giuseppe Dari-Mattiacci, and Hans-Bernd Scha¨fer, “The Core of
Pure Economic Loss”, points at several omitted components in the dominant Law and Eco-
4 Editorial / International Review of Law and Economics 27 (2007) 1–7
nomics reconstruction of the pure economic loss notion and the accompanying exclusionary
rule. They underline the fundamental commonality between destruction of a valuable and
productive economic resource, and its impairment, thus essentially leading to a differ-
ent understanding of the harm to infrastructure and similar kinds of cases. In such cases,
moreover, the issue of added or spare capacity, already noted as relevant in previous
economic analyses of the problem, had not been properly viewed as a form of costly
precaution, which should be included in the social cost minimization program by the –
ideal – social planner. In the area of negligent provision of information leading to adverse
business decision, the role of what the parties would have contracted upon, had they had
the chance to do so (a sort of majoritarian default, to use the Contract jargon) should be
prominent, regardless of the legal characterization of the case as in Contract, in Tort, or
in-between (as in some European legal systems). All in all, those overlooked dimensions
downplay the appeal of the non-recovery rule for pure economic losses, according to the
authors.
The second paper, by Urs Schweizer, “Tortious Acts Affecting Markets”, squarely
addresses the salience of two elements: the liability rule in force (strict liability versus negli-
gence, the latter in both the standard, and the Grady-Kahan, causation-including, versions),
on the one side, and the structure of the market affected by the destruction or impairment
produced by the injurer. The author shows how market structure is decisive for the rela-
tionship of private loss of the victim seeking compensation (by hypothesis, the firm loosing
business from the initial harm) and social loss. Both under monopoly, and under perfect
competition with rising marginal costs of production (if marginal cost were constant, all
losses would be zero), the social loss exceeds the private loss, thus seriously questioning the
social desirability of the non-recovery rule of pure economic losses. And under the more
realistic setting of imperfect market competition, it is shown that social loss is positive,
although under some conditions it can be proven to be lower than the private loss to the
firm losing business. The absolute exclusionary rule would not be optimal in this plausible
setting. In fact, under a negligence rule in which the optimal standard of care were chosen
by Courts, a full recovery rule of private losses would induce optimal behavior by potential
injurers, though it would lead to overprecaution if the liability rule in place were strict
liability. The paper, finally goes on to analyze the effects of negligence rules on discrete
decisions of entry into a market, and continuous decisions of capacity, and shows how the
decisions would be suboptimal in both cases.
In the third paper, by Francesco Parisi, Vernon Palmer, and Mauro Bussani, “The Com-
parative Law and Economics of Pure Economic Loss”, the authors claim that if one looks
in detail at the relevant decisions rendered by the Courts in the different European jurisdic-
tions, the use of implicit economic reasoning, and the search for efficiency in the outcomes,
concerning the – pragmatically feasible – incentives for precaution of the parties involved, is
much more important than previously thought. They review the main legal rationales behind
the notion of pure economic loss and the associated non-recovery rule (foreseeability, the
pre-eminence of absolute rights over relative rights, administrative costs and open-ended
litigation) and, independently of their intrinsic merit, they argue how the behavior of Euro-
pean Courts cannot be explained by reference to those “legal” theories. They then trace
the pursuit of efficient incentives in several of the major typical cases of pure economic
losses. Thus they contrast the restrictive attitude of European Courts in “Loss of a Star” –
Editorial / International Review of Law and Economics 27 (2007) 1–7 5
performer, employee, player, – cases with the more liberal trend towards compensation of
losses in “Cable Cases”. Or how in cases of “Transferred Losses” the use of the exclusionary
rule is mainly to prevent imposing double liability on the injurer, thus generating over pre-
caution. Or in the “Misleading Information” cases, how the distinguishing feature between
the cases in which liability is affirmed, and those in which it is denied, lies mainly in the
ability of the client of professional services to internalize the full benefit of the information
or services acquired. If non-paying (explicitly or implicitly) third parties can rely on the
information produced by the professional and claim compensation in case of the informa-
tion being negligently provided, there would be an externality giving rise to an efficiency
loss associated with sub-optimal demand for professional services which imply advice or
information available to third parties.
The fourth paper, by Susanne Kalss, “Recent Developments in the Liability for Prospec-
tus and Other Capital Market Information”, focuses on one of the most relevant, in theory
and in practice, areas of pure economic losses, that of flawed financial information caus-
ing losses to investors who make erroneous investment decisions based on it. The author
examines in depth the recent developments at the EU level, and at a sample of important
European jurisdictions (Austria, Germany, Switzerland, the UK), showing how different
legal doctrines in Tort, in Contract, or in the gray area in-between can serve functionally
identical purposes to provide compensation and furnish incentives for the different players
in capital markets. Moreover, it is emphasized how liability in this area cannot be analyzed
in isolation as a matter of damages caused (pure economic versus other losses), or even of
the number of harmed individuals, but one has to bring into the picture other elements that
significantly affect the behavior of market participants. One is regulation by Public Bodies
or Agencies, which directly influence the standards of behavior, and even (particularly in
the UK) the right to sue for damages. In short, the issue of liability for misleading informa-
tion in capital markets cannot be fully grasped without due attention to the global picture
of enforcement, both from public and from private sources, of the informational duties in
capital markets.
The last paper, by Juan-Jose´ Ganuza, and Fernando Gomez, “Should We Trust the Gate-
keepers? Auditors’ and Lawyers’ Liability for Client’s Misconduct” also concentrates on
the area of economic losses that take place – at least, most commonly – in capital markets.
The authors address the liability of gatekeepers (such as auditors or corporate lawyers) as
an instrument to reduce the losses to investors caused primarily by the illegal behavior of
the firms who are the clients of the professional gatekeepers. Cases such as Enron or World-
com would readily come to mind when thinking about the setting. In most legal systems,
gate-keeping duties and liabilities are often imposed based on the condition of observation
of misbehavior by the corporate clients.
But making liability conditional on scienter is subject to complex informational effects.
The authors argue that the most plausible informational scenario in one in which gate-
keepers’ information concerning the observation of the underlying behavior of the firm is
verifiable by Courts, but is hideable by gatekeepers. Under this assumption, the policies
adopted by Courts of trust or distrust towards gatekeepers’ statements on having observed,
do not change the levels of control adopted by gatekeepers. Thus, building standards and
imposing liabilities on gate-keeping based on observation do not improve efficient incentives
for auditors and lawyers.
6 Editorial / International Review of Law and Economics 27 (2007) 1–7
The policy recommendation would be that the attention of Courts and regulators should
focus on the definition of relevant substantive standards of control, which could be imple-
mented through negligence rules or regulatory sanctions.
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