Posner on economic loss in tort: EVRA Corp v Swiss Bank

University of Chicago Law Review

Volumn 74, Issue SPEC. ISS., 2007, Pages 1813-1830

  Miles, Thomas J ^a  

^a UNIVERSITY OF CHICAGO LAW SCHOOL   (United States)

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EID: 38049014426     PISSN: 00419494     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (79)

1. The persistence of the latter principle may be partly due to the prominent position that a famous eggshell skull case, Vosburg v Putney, 80 Wis 523, 50 NW 403 (1891), occupies in legal education. Vosburg often appears as the first case in many first-year torts casebooks. See, for example, Richard A. Epstein, Cases and Materials on Torts 4 (Aspen 8th ed 2004);
2. Ward Farnsworth and Mark F. Grady, Torts: Cases and Questions 1 (Aspen 2004). See also Stoleson v United States, 708 F2d 1217, 1220-21 (7th Cir 1983) (Posner) (discussing the application of the eggshell skull rule in the "dynamite heart" case).
3. 673 F2d 951 (7th Cir 1982).
4. See, for example, Douglas Laycock, Modern American Remedies: Cases and Materials 111 (Aspen 3d ed 2002) ("The logical basis for the rule is obscure.");
5. Victor P. Goldberg, Recovery for Pure Economic Loss in Tort: Another Look at Robins Dry Dock v. Flint, 20 J Legal Stud 249, 251 (1991) (favoring a "nonunitary approach" to economic loss);
6. Gary T. Schwartz, Economic Loss in American Tort Law: The Examples of J'Aire and of Products Liability, 23 San Diego L Rev 37, 38 (1986) ("I recommend that we abandon any effort to formulate any single general theory [for the economic loss problem].").
7. 156 Eng Rep 145 (Ex 1845).
8. See, for example, Petition of Kinsman Transit Co, 338 F2d 708, 724 (2d Cir 1964) (Friendly) ("[T]he rule of Hadley v Baxendale has no place in negligence law.") (citation omitted). But see Overseas Tankship (U.K.) Ltd v Morts Dock & Engineering Co Ltd (Wagon Mound (No 1)), 1961 App Cas 388, 419 (PC 1961).
9. EVRA, 673 F2d at 957-58.
10. See, for example, Richard A. Posner, Economic Analysis of the Law (Aspen 7th ed 2007).
11. Hyman-Michaels subsequently became EVRA Corporation. See EVRA, 673 F2d at 951.
12. Id at 952-54.
13. EVRA v Swiss Bank Corp, 522 F Supp 820, 824 (N D Ill 1981).
14. Continental was also party to this litigation. Swiss Bank impleaded Continental as a third-party defendant, and Continental and Hyman-Michaels filed cross-claims each alleging the other's negligence. See EVRA, 673 F2d at 954. For simplicity of exposition, attention is given here only to the claims between Hyman-Michaels and Swiss Bank.
15. Id at 955. In Hadley, the breakage of an engine shaft necessitated the closure of a mill, and the miller hired a carrier to transport the broken engine shaft to a manufacturer who would use it as a model in constructing a new shaft. When the carrier negligently delayed delivering the shaft, the miller sought to recover for the profits lost during the period of delay. See Hadley, 156 Eng Rep at 145-46. The Hadley court denied recovery for these consequential damages because in "the great multitude" of such cases "under ordinary circumstances," a carrier would not expect that its delay would result in closure of a mill. Moreover, the miller had failed to communicate its "special circumstances" to the carrier. Id at 151.
16. But see Melvin Aron Eisenberg, The Principle of Hadley v. Baxendale, 80 Cal L Rev 563, 564-68 (1992) (describing only two versions of the holding of Hadley).
17. EVRA, 673 F2d at 955-56.
18. Id at 957.
19. Id at 958.
20. See Douglas G. Baird, Robert H. Gertner, and Randal C. Picker, Game Theory and the Law 147-50 (Harvard 1994) (explaining how the Hadley rule encourages negotiations that reveal information and lead to optimal outcomes);
21. Lucian Ayre Bebchuk and Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Haldey v. Baxendade, 7 J L Econ & Org 284, 287-92 (1991);
22. Ian Ayres and Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L J 87, 101-04 (1989) (explaining how the holding in Hadley operates as a penalty default that incentivizes information sharing).
23. Another consideration is whether the magnitude of a customer's potential loss is verifiable. In EVRA, verifiability was not an issue because the magnitude of Hyman-Michaels's loss was easily verified by comparing the value of the amount of the charter payments to the prevailing market price for charters.
24. Two prominent exceptions to the economic loss rule are consistent with this analysis. Both exceptions permit recovery for economic losses when the exchange is intended to benefit a specific third party - a circumstance that strongly suggests that one party impliedly or expressly gave notice of special circumstances and sought protection against consequential damages. First, third-party beneficiaries may recover even when their losses are purely pecuniary. See, for example, Lucas v Hamm, 15 Cal Rptr 821, 364 P2d 685, 689 (1961). Second, recipients of negligent misrepresentations from suppliers of information to be used in commercial transactions may recover for economic losses when the supplier manifests an intent to supply the sort of information for the sort of use in which the plaintiffs loss occurs. See Restatement (Second) of Torts § 552. But see Ultramares Corp v Touche, 255 NY 170, 174 NE 441, 445-47 (1931) (Cardozo) (barring suit for negligent misrepresentations against a public accountant by a party who benefited only incidentally or collaterally from the information provided by the accountant).
25. Seven years after EVRA, Posner wrote another opinion involving economic loss and in which he also emphasized "the classification of a case as a tort case or as a contract case is not decisive" to the question of recovery for economic loss. See Rardin v T&D Machine Handling, Inc, 890 F2d 24, 27 (7th Cir 1989) In Rardin, Posner recognized - through a vivid hypothetical in which a negligently repaired watch results in a missed appointment and the loss of a business - that a service provider, such as a watch repairer, would likely not agree to bear the risk of loss for the amount of consideration the customer is willing to offer. A second watch rather than the transfer of risk is likely the more cost-effective precaution. Id.
26. 312 Ill App 86, 37 NE2d 868 (1941).
27. EVRA, 673 F3d at 956.
28. Siegel, 37 NE2d at 871.
29. EVRA, 673 F2d at 959.
30. 131 Ill 575, 23 NE 583 (1890).
31. 247 Ill 84, 93 NE 134 (1910).
32. EVRA, 673 F3d at 956.
33. Lathrop, 23 NE at 583-84.
34. Providence-Washington, 247 Ill at 85-88.
35. EVRA, 522 F Supp at 833.
36. EVRA, 673 F2d at 956.
37. Id.
38. Id at 957-58.
39. The situation of EVRA, in which the plaintiff and defendant have no contract between themselves but a third party has contractual ties to both litigants, is a common fact pattern in cases involving the economic loss rule. See generally, for example, Flint v Robins Dry Dock & Repair Co, 13 F2d 3 (2d Cir 1926).
40. See UCC § 2-715(2)(a) (ALI 2005) ("Consequential damages resulting from the seller's breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by [the buyer purchasing substitutes as defined in § 2-712] or otherwise."); Restatement (Second) of Contracts § 350 (1979) (disallowing recovery for damages that could have been avoided "without undue risk, burden or humiliation").
41. 156 Eng Rep at 151 ("Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, . . . the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill.").
42. Victor P. Goldberg, Recovery for Economic Loss Following the Exxon Valdez Oil Spill, 23 J Legal Stud 1, 21 (1994).
43. EVRA, 673 F2d at 957.
44. See Restatement (Second) of Torts § 918 ("[O]ne injured by the tort of another is not entitled to recover damages for any harm that he could have avoided by the use of reasonable effort or expenditure after the commission of the tort.").
45. EVRA, 673 F2d at 958 ("If you are hurt in an automobile accident and unreasonably fail to seek medical treatment, the injurer, . . . will not be held liable for the aggravation of the injury due to your own unreasonable behavior."), citing Slater v Chicago Transit Authority, 5 Ill App 2d 181, 125 NE2d 289, 291 (1955) (stating that the duty to "exercise reasonable care to minimize the damages" is "not disputed"). See also Mount v McClellan, 91 Ill App 2d 1, 234 NE2d 329, 331 (1968) (holding that evidence of seat belt use is admissible on the question of damages).
46. See Goldberg, 23 J Legal Stud at 17-19 (cited in note 37) (analyzing ex ante and ex post incentives for mitigation in the context of the economic loss rule).
47. EVRA, 673 at 957.
48. This reframing mirrors Posner's reformulation of an abnormally dangerous activity into a joint tort in his famed Indiana Harbor opinion. See Indiana Harbor Belt Railroad Co v American Cyanamid Co, 916 F2d 1174, 1181 (7th Cir 1990) ("[T]he inappropriate use to which land is being put . . . may be, not the transportation of hazardous chemicals, but residential living."). But see generally Alan O. Sykes, Strict Liability versus Negligence in Indiana Harbor, 74 U Chi L Rev 1917 (arguing that Posner was faithful to the Restatement's framework for abnormally dangerous activities).
49. R.H. Coase, The Problem of Social Cost, 3 J L & Econ 1, 2 (1960) (describing the "reciprocal nature of the problem" of harm).
50. EVRA, 522 F Supp at 829.
51. Id at 831-32.
52. Id.
53. See, for example, 532 Madison Avenue Gourmet Foods, Inc v Finlandia Center, Inc, 96 NY2d 280, 750 NE2d 1097, 1101-03 (2001) (holding that plaintiffs could not recover for economic harms resulting from a road blockage that prevented clients from reaching the plaintiffs' businesses); Rickards v Sun Oil Co, 23 NJ Mise 89, 41 A2d 267, 269-70 (1945) (holding that the defendant, who negligently destroyed a bridge and thus prevented customers from reaching plaintiffs' businesses, was not liable for consequential economic damages).
54. See Richard A. Posner, Common-Law Economic Torts: An Economic and Legal Analysis, 48 Ariz L Rev 735, 737 (2006) (discussing excess capacity);
55. Goldberg, 23 J Legal Stud at 20-29 (cited in note 37) (discussing the components of these losses).
56. See Goldberg, 23 J Legal Stud at 19-20 (cited in note 37) (discussing offsetting benefits and the relevance of supply elasticity); William M. Landes and Richard A. Posner, The Economic Structure of Tort Law 251 (Harvard 1987) (explaining that pure business injuries create matching external benefits as well as external costs, and therefore do not create social harm);
57. W. Bishop, Economic Loss in Tort, 2 Oxford J Legal Stud 1, 4-7 (1982) (using examples to illustrate the propositions that "[i]n a range of cases private economic loss caused by a tortious act is not a cost to society," and "[i]n the overwhelming bulk of cases physical damage entails real social cost").
58. EVRA, 673 F2d at 958, citing United States v Carroll Towing Co, 159 F2d 169, 173 (2d Cir 1947).
59. EVRA, 522 F Supp at 829.
60. EVRA, 673 F2d at 957.
61. See, for example, Richard A. Epstein, Beyond Foreseeability: Consequential Damages in the Law of Contract, 18 J Legal Stud 105, 124 (1989) ("To call what happened in Hadley unforeseeable, or beyond the contemplation of the parties, is to make professional businessmen systematically ignorant of the commonplace.").
62. EVRA, 673 F 2d at 959.
63. See Restatement (Second) of Contracts § 351 ("Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.").
64. See, for example, Wagon Mound (No 1), 1961 AC at 389. But see In re Polemis & Furness, Withy Co, 1921 3 KB 560, 574 (CA 1921) (holding the defendant could be liable even for consequences of her negligent conduct that were not foreseeable); Kinsman Transit, 338 F2d at 723-24 (questioning the rule of Wagon Mound No 1); Restatement (Second) of Torts § 435.
65. See, for example, Grant Gilmore, The Death of Contract 58 (Ohio State 2d ed 1995) ("In the Holmesian revision [of the meaning of Hadley] foreseeability was not enough; there must have been a deliberate and conscious assumption of risk by the contract breaker.");
66. Epstein, Beyond Foreseeability at 124 ("If anything remotely like the capacious tort standards of foresight are used, then [the outcome in the Hadley] case is quite trivial - the other way") (cited in note 54).
67. See generally Saul Levmore, The Wagon Mound Cases: Foreseeability, Causation, and Mrs. Palsgraf, in Robert L. Rabin and Stephen D. Sugarman, eds, Torts Stories 129 (Foundation 2003).
68. EVRA, 673 F2d at 958.
69. Id, citing Palsgraf v Long Island R Co, 248 NY 339, 162 NE 99 (1928).
70. EVRA, at 953.
71. This model is taken from the analysis of proximate cause in "nervous injury" cases in Landes and Posner, Economic Structure at 243-46 (cited in note 50).
72. Id, citing Steven Shavell, An Analysis of Causation and the Scope of Liability in the Law of Torts, 9 J Legal Stud 463, 483 (1980).
73. Landes and Posner, Economic Structure at 244 (cited in note 50).
74. See id at 246 (cited in note 50) (describing the injury in Palsgraf as involving the less probable state of the world sN).
75. See, for example, Epstein, Beyond Foreseeability, at 133 (criticizing Posner's application of Hadley in EVRA because the "Hadley rule . . . obviate[s] the need for an in-depth examination of the plaintiff's conduct").
76. People Express Airlines, Inc v Consolidated Rail Corp, 100 NJ 246, 495 A2d 107, 112-18 (1985) (permitting recovery for the economic losses of an airline when its flights were delayed but not permitting recovery for persons delayed along a neighboring highway).
77. See, for example, Ryan v New York Central Railroad, 35 NY 210, 212-13 (1866) (limiting liability in the case of a spreading fire to the first adjacent house); Guste v M/V Testbank, 752 F2d 1019, 1021-28 (5th Cir 1985) (en banc) (permitting recovery for commercial fisherman for economic losses arising from an oil spill and denying recovery by seafood companies and marina and boat operators).
78. Laycock, Remedies at 116 (cited in note 3) (discussing the nature of the physical impact requirement).
79. The "physical impact requirement" moniker better captures the necessity of physical injuries or property damage as a prerequisite to recovery for economic losses. For a time, courts required emotional distress be to parasitic on physical harm in order to obtain recovery, but they have since shifted to other metrics of proximate causation for emotional distress. See Mitchell v Rochester R Co, 45 NE 354, 354 (NY 1896) (denying recovery for emotional distress unaccompanied by physical harm); Dillon v Legg, 69 Cal Rptr 72, 441 P2d 912, 915 (1968) (rejecting the "zone-of-danger" test). See also Landes and Posner, Economic Structure at 244-45 (cited in note 50) (speculating about the trajectory of recovery for emotional distress).