3A - Pure economic loss: an economic analysis

Summary

Introduction

In trying to provide understanding of the concept of pure economic loss from an economic point of view we take the legal concept of pure economic loss for granted but, given the diversity of the issue involved and how it is being dealt with, we are also seeking to establish basic economic considerations which allow us to integrate the salient economic considerations into the discussion of the legal case material.

When parties enter into a contract, or when, without a contract, market participants interfere with each other and losses are inflicted, liability will ensue. Economically, the phenomenon is explained in terms of externalities. In principle, externalities are to be internalized so as to make sure that the true costs of any particular activity are borne by whoever undertook the activity and was therefore responsible for it. It is the purpose of the rule of law to establish appropriate forms of liability which, with a minimum of transaction costs, ascribe liability in tort to the tortfeasor.

However, from a dynamic point of view, not every external effect is to be discouraged. When a new technology is discovered, the owners of the old technology or the machinery which embodies the old technology suffer a purely financial loss which is not to be compensated for, as such compensation would stand in the way of economic progress. Hence, the category of pure economic loss has an important economic meaning. The pure economic loss is the loss imposed in the course of dynamic market activities which is not to be compensated.