Consequential Economic Loss Tort: Everything You Need to Know
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.3 min read
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.
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
- 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.
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.
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