In Search of the Cheapest Cost Avoider: Another View of the Economic Loss Rule

38 Pages Posted: 25 Oct 2018 Last revised: 1 Nov 2018

Date Written: August 15, 2017

Abstract

The economic loss rule in tort engages two fundamental theoretical questions: (1) which interests should tort law protect; and, more pointedly, (2) how should we think about claims that arise along the boundary line between tort and contract?

This Article advances two claims that aim to clarify this controversial, often misunderstood, doctrine. First, it is imperative to distinguish what I will term the “stranger paradigm” from the “consensual paradigm.” The specter of the economic loss rule is raised in different categories of cases: products liability, contracting party, third party, and stranger. It should not be surprising that the economic loss rule plays out differently and has different ramifications across these categories. As an initial cut, classifying such categories of cases as either “stranger” or “consensual” (and treating them accordingly) helps clarify doctrinal confusion. More specifically, holding firm to such a distinction should prevent conventional rationales for the economic loss rule developed in stranger cases — such as the floodgates or limitless liability rationale — from being imported vel non into two-party contracting cases that comprise the bulk of commercial torts. It would also expose the flaw in courts’ holdings that the economic loss rule applies full stop in the products liability realm, yet has no application in two-party contracting cases, thus failing to recognize the common thread connecting these cases, both of which fit on a continuum within the consensual paradigm.

Second, and more ambitiously, I depart from conventional justifications and develop a unifying theoretical justification for the economic loss rule based on cheapest cost avoider principles that does apply across the categories of cases — albeit with less determinacy in the stranger paradigm than the consensual one. This framework also provides a way to resolve third-party cases, which straddle the stranger/consensual dividing line. That the cheapest cost avoider rationale can be applied across case categories and paradigms lends further weight to its promise as a unifying theoretical justification for the economic loss rule in tort.

Keywords: economic loss rule, cheapest cost avoider, stranger; consensual

JEL Classification: K13, K41

Suggested Citation

Sharkey, Catherine M., In Search of the Cheapest Cost Avoider: Another View of the Economic Loss Rule (August 15, 2017). University of Cincinnati Law Review, Vol. 85, 2018; NYU Law and Economics Research Paper No. 18-36. Available at SSRN: https://ssrn.com/abstract=3259643

Catherine M. Sharkey (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
212-998-6729 (Phone)

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