It is not uncommon for business owners to encounter a business dispute and become involved in commercial litigation at some point during the company’s lifetime. And, while some disputes are inevitable, understanding the best methods for handling disputes, limiting risk, and obtaining compensation are key to your continued growth and success.
Pure economic loss is a term used in commercial litigation to describe financial losses that are not accompanied by physical damage or injury. Rather, pure economic loss is legal compensation that commercial litigants can claim in some circumstances. So, what does pure economic loss mean for your business?
Pure economic loss refers to direct financial harm or loss suffered by an individual or business that is not
the consequence of an otherwise actionable injury to a plaintiff’s person or property. In other words,
the person claiming loss has not “lost” anything other than economic losses. This type of loss can arise in
various situations, including negligence cases, breach of contract, and misrepresentation.
Since litigants can claim pure economic loss in a variety of situations, it is important to understand different examples of pure economic loss. In more general terms, pure economic loss usually relates to circumstances where a person or business has lost profits, had their business interrupted, or lost business opportunities as a result of the defendant’s negligence.
A party may claim pure economic loss in the event of negligent misrepresentation or performance of a service. For example, suppose a business hires a software developer to develop a program for the business but fails to deliver the program on time and, as a result, the delay results in financial loss. In that case, the business may be able to claim based on the software developer’s breach of contract and failure to perform the service competently.
Alternatively, a party may claim economic loss as a result of a negligent supply of shoddy goods or structures. For example, a party may rely on a supplier’s reputation of providing high-quality materials when purchasing a large amount of building materials for development. If the materials arrive and are of inferior quality or do not meet the specifications required for the development project and the company incurs significant financial loss when replacing the faulty materials, the purchasing party may pursue a claim for pure economic loss.
When discussing economic damages in commercial litigation, the terms “pure economic loss” and “consequential economic loss” often come up. While consequential (or relational)
economic loss is often considered a type of pure economic loss; these types of damages are treated differently.
As explained above, pure economic loss refers to direct financial harm. Consequential economic loss,
on the other hand, refers to economic loss or damage that arises from the deterioration of a commercial
or professional relationship between two parties. For example, suppose a supplier breaches a contract to supply products or services to the business. In that case, the business in question may be able to sue the supplier for consequential economic loss due to losing the expected benefits of having a continued supply of products or services, such as reliable deliveries or discounts for bulk purchases, from that supplier.
Damages for pure economic loss are proven in tort law based on the principles of negligence. As a result,
a negligence analysis will be conducted to determine entitlement to damages, which includes consideration of the following:
- The plaintiff must establish that the defendant owed them a duty of care. This
requires the plaintiff to show there was a sufficiently close relationship between themselves, or the business, and the defendant such that the defendant had a legal obligation to avoid causing harm;
- The plaintiff must establish that the defendant failed to meet the standard of care that a reasonable person in similar circumstances would have met in the circumstances. Determining the standard of “reasonable care” will vary on the specific circumstances of each case;
- The plaintiff must establish a “causal link” between the defendant’s wrongful act or
breach of legal duty and the pure economic loss suffered. In other words, “but for” the
defendant’s actions, would the plaintiff have suffered the loss in question?;
- In cases involving negligent misrepresentation or performance of a service, the plaintiff must establish that they relied on the defendant’s advice or performance of a service and that
the loss suffered was foreseeable because of that reliance; and
- The plaintiff must demonstrate that they also took reasonable steps to mitigate the financial
harm they suffered due to the defendant’s wrongful actions.
While a skilled business dispute lawyer will help you navigate the process of advancing a pure economic
loss claim, keep in mind that defendants may have valid defences against a pure economic loss claim.
Contributory negligence is a common defence in negligence claims and one that defendants can use to defend themselves against a claim for pure economic loss. Contributory negligence alleges that a plaintiff contributed to a loss through their negligence or a failure to mitigate their damages. For example, if a business relies on a supplier for a very important project but does not have a backup plan, the supplier might argue that the business contributed to its loss by failing to have a backup plan in place.
Force majeure clauses often appear in contracts, which can protect a defendant in a breach of contract claim where an “unforeseeable” event results in delays or issues with a contract. If such a clause exists in your contract with the defendant, they may argue that they are not liable for the pure economic loss suffered because of an unforeseen event.
Exclusion clauses limit a defendant’s liability in a contract to a certain extent, and they can provide a defendant with a valid defence against a pure economic loss claim. For example, if a contract between a business and a supplier contains an exclusion clause limiting the supplier’s liability to the cost of goods in the event of a delivery delay, it may preclude the plaintiff from obtaining an award for pure economic loss in court.
Contact the Litigation Lawyers at Campbells LLP in Oakville for Representation in Business and Commercial Disputes
At Campbells LLP, we leverage our extensive litigation experience to provide clients with tailored and honest legal advice. Our business dispute lawyers ensure that they have a true understanding of the situation and keep our clients well-informed throughout the process. We provide clients with comprehensive advice and information to ensure they make the best strategic decisions at every stage. To learn more about how we can assist you, reach out to us online or call us at 905-828-2247.