Key Takeaways

  • Consequential economic loss includes indirect losses like lost profits or damage to reputation resulting from defective products or services.
  • It is distinct from direct economic loss, which covers immediate expenses like repairs or replacements.
  • Pure economic loss refers to financial loss not caused by physical harm and is often unrecoverable in negligence claims.
  • Courts are cautious about recognizing claims for pure economic loss to avoid a flood of litigation.
  • Some exceptions to the pure economic loss rule exist, especially where there is a special relationship or misrepresentation.
  • Consequential losses must generally be foreseeable at the time of contract formation or tortious conduct to be recoverable.

Consequential economic loss tort is an economic loss stemming from the loss of goodwill, loss of business reputation, the failure of goods to function as stated, or any loss associated with a defective product.

The Legal Definition of Consequential Economic Loss

Legal examples of consequential economic loss include:

  • Lost profits
  • Loss of goodwill
  • Loss of business reputation

This definition arose from a 1983 case (Pee Jay's Packing Co. vs. Makfil Sys., 10 Phila. 588) in which the court observed that economic loss is the diminution of a product's value due to its inferior quality, or the fact that it doesn't work as advertised.

Direct economic loss can include damages resulting from insufficient product value, meaning that it is an out-of-pocket loss or “loss of bargain.” In other words, direct economic loss can be measured by repair and replacement costs. Consequential economic loss, by contrast, encompasses all indirect loss, including profit losses resulting from defective products.

Common Examples of Consequential Economic Loss

Consequential economic loss typically arises when a defective product or negligent service causes further financial harm beyond the initial transaction. Some common examples include:

  • A manufacturer loses a major client due to delays caused by a faulty machine.
  • A restaurant suffers lost business when a refrigeration unit fails and causes food spoilage.
  • A software bug in a retail system leads to customer dissatisfaction and loss of reputation.
  • A construction defect results in tenant evacuations and a drop in lease renewals.

These losses go beyond out-of-pocket expenses and reflect broader harm to business operations or professional standing.

Pure Economic Loss

Pure economic loss is the result of any negligent act not involving physical damages to property or a person. There are many documents available that try to define pure economic loss, but the basic idea is that it's a loss stemming from negligence. Purely economic losses are represented under the Fatal Accidents Act of 1976.

Considering several cases involving pure economic loss, the term “pure” suggests an untainted or self-representative loss apart from other losses like personal injuries. Pure economic loss does not result in physical damages to a person or their property. With this definition in mind, pure economic loss includes:

  • Loss of profit
  • Expenditures
  • Other losses of financial gain

It's important for courts to determine whether a claim is considered pure economic loss or consequential because pure economic loss is not recoverable as damages under current law.

In a personal injury claim where the defendant is accused of negligence, the claimant may sustain an economic loss due to being unable to resume work. This type of loss is not a pure economic loss because the loss is a byproduct of personal injury.

Other tort categories exist which are known as “economic torts” that help individuals and businesses recover their economic interests. For example, negligence is a common legal element applied to tort cases to achieve monetary compensation for damages or injuries incurred either mentally or physically. If you can prove someone acted negligently and caused your injury, you may be able to receive compensation for harm to your property, body, financial status, or well-being.

Four basic elements make up negligence in tort:

  • Duty of care, which is owed by the defendant
  • Breach of duty
  • Causal relationship between the damages incurred and the breach of duty
  • Damage to the claimant

The law doesn't accept a duty of care for everyone in all circumstances. In fact, a claimant can only cite pure economic loss resulting from someone's negligence if he or she can prove a duty of care.

Legal Barriers to Recovery for Pure Economic Loss

Pure economic loss claims are generally not permitted under tort law due to policy reasons. Courts often deny recovery unless the claimant can prove:

  • A special relationship existed between the parties (such as fiduciary or advisory roles).
  • The economic loss was caused by a negligent misstatement rather than conduct.
  • There was a foreseeable risk of economic loss that the defendant had a duty to guard against.

This limitation aims to prevent an unmanageable number of claims—known as the "floodgates" concern—and to ensure that liability remains within reasonable bounds. Courts fear that without these barriers, a single negligent act could lead to unlimited claims from indirectly affected parties.

Negligence and Recover of Economic Loss

Negligence, which is considered a tort, is an ever-expanding area of law. The Donoghue v. Stevenson case summed up negligence simply with: “You must take care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbor.” The term “neighbor” encompasses anyone closely involved in or affected by the act.

A purely economic loss is rare, but it can arise from negligent misstatements. By contrast, consequential economic loss stems directly from property damage or personal injury, so it's much more common.

For example, if a co-worker causes you to break your arm through negligence, putting you out of work for two weeks, the economic loss suffered from being out of work is consequential economic loss. Also, to qualify as consequential economic loss, the damage or injury must occur to you, not to someone else.

One of the most common arguments against pure economic loss is the floodgates principle, which argues that the business world would have to be overly cautious, which isn't a good thing for the economy. The principle also states that the courts can be flooded with claims due to single events. As such, there is an excessive burden of widespread liability upon the defendant, which is just one more reason pure economic loss is problematic.

Foreseeability and Remoteness in Consequential Loss Claims

For consequential economic loss to be recoverable in tort, the loss must generally have been foreseeable at the time of the defendant’s negligent act. Courts often assess:

  • Remoteness: Whether the chain of causation from the act to the loss is too indirect.
  • Foreseeability: Whether a reasonable person would expect the act to cause the type of loss suffered.
  • Mitigation: Whether the plaintiff took reasonable steps to reduce the extent of the damage.

If the loss is too remote or not reasonably foreseeable, it is unlikely to be compensable. For example, a supplier who negligently ships defective goods may not be liable for the entire collapse of a buyer's business unless it was a foreseeable consequence.

Frequently Asked Questions

  1. What is the difference between direct and consequential economic loss?
    Direct economic loss refers to immediate out-of-pocket expenses like repair or replacement costs. Consequential loss includes secondary impacts like lost profits or reputational damage.
  2. Why is pure economic loss usually not recoverable in tort?
    Courts generally bar recovery to avoid excessive liability. Exceptions exist if there's a special relationship or negligent misrepresentation.
  3. Is consequential economic loss recoverable in contract law?
    Yes, but only if it was foreseeable at the time the contract was formed. It must be a natural consequence of the breach.
  4. Can emotional distress be classified as economic loss?
    No. Emotional distress is a non-economic loss, though it may accompany economic claims in personal injury suits.
  5. How do courts assess whether economic loss is too remote?
    They consider whether the loss was a reasonably foreseeable consequence of the defendant’s actions and if the chain of causation is too indirect.

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