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Uncertainty and the Pure Economic Loss Rule

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Abstract:

Although the pure economic loss rule is a venerable tort rule, it suffers from a theoretical deficit. This Article proposes a production theory of the pure economic loss rule. The rule fundamentally deals with business risk, and two conceptions are important: risk to assets essential to the production function (loss of a factor of production) and risk to outcomes (loss of production). The production theory is simply stated: tort law protects the means of production, irrespective of its status as physical property or the claimantÂ’s ownership of it (the traditional basis for the recovery of consequential economic loss in torts), but tort law does not protect against the risk to outcome. The theory sets the tort rule in the broader context of Anglo-American political economy. The principle embodied in the rule reflects economic reality. Albeit some aspects of business risk can be mitigated or hedged, financial intermediation such as insurance can never secure profit. A market economy is governed by the principle that riskless arbitrage cannot be sustained. Since exposure to business risk defines the engagement of enterprise, a rule allowing recovery for pure economic loss would distort the natural ordering of outcomes under uncertainty. Thus, the rule reflects judicial reluctance to impose corrective legal action when the occurrence of economic loss is not a failure of precaution in market transactions but instead is an ordinary condition of commerce.
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Association:
Name: The Law and Society Association
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http://www.lawandsociety.org


Citation:
URL: http://citation.allacademic.com/meta/p305598_index.html
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MLA Citation:

Rhee, Robert. "Uncertainty and the Pure Economic Loss Rule" Paper presented at the annual meeting of the The Law and Society Association, Grand Hyatt, Denver, Colorado, May 25, 2009 <Not Available>. 2014-11-29 <http://citation.allacademic.com/meta/p305598_index.html>

APA Citation:

Rhee, R. , 2009-05-25 "Uncertainty and the Pure Economic Loss Rule" Paper presented at the annual meeting of the The Law and Society Association, Grand Hyatt, Denver, Colorado <Not Available>. 2014-11-29 from http://citation.allacademic.com/meta/p305598_index.html

Publication Type: Conference Paper/Unpublished Manuscript
Review Method: Peer Reviewed
Abstract: Although the pure economic loss rule is a venerable tort rule, it suffers from a theoretical deficit. This Article proposes a production theory of the pure economic loss rule. The rule fundamentally deals with business risk, and two conceptions are important: risk to assets essential to the production function (loss of a factor of production) and risk to outcomes (loss of production). The production theory is simply stated: tort law protects the means of production, irrespective of its status as physical property or the claimantÂ’s ownership of it (the traditional basis for the recovery of consequential economic loss in torts), but tort law does not protect against the risk to outcome. The theory sets the tort rule in the broader context of Anglo-American political economy. The principle embodied in the rule reflects economic reality. Albeit some aspects of business risk can be mitigated or hedged, financial intermediation such as insurance can never secure profit. A market economy is governed by the principle that riskless arbitrage cannot be sustained. Since exposure to business risk defines the engagement of enterprise, a rule allowing recovery for pure economic loss would distort the natural ordering of outcomes under uncertainty. Thus, the rule reflects judicial reluctance to impose corrective legal action when the occurrence of economic loss is not a failure of precaution in market transactions but instead is an ordinary condition of commerce.


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