EconomicAnalysis of Pure Economic Loss under Chapter 5, Section 1 of the Tort Liability Act

In Finland the recovery of pure economic loss in tort law is regulated under Chapter 5, Section 1 of the Tort Liability Act. The section identifies three possible situations where pure economic loss may become recoverable; firstly, where the injury or damage has been caused by an act punishable by law; secondly, where the injury or damage is caused in the exercise of public authority; and lastly, where there are especially weighty reasons for the recovery. The recovery of pure economic loss has prompted a considerable amount of academic discussion, but the precise scope of application of the provision remains still somewhat unclear. This paper analyses the recovery of pure economic loss in tort law from an economic point of view. The main tool for analysis is an analytical framework provided by William Bishop. Bishop's analysis showed that a large divergence between private and social loss is characteristic to pure economic loss. The loss suffered by an injured party, when not resulting from an injury or property damage, is often merely private loss in a sense that there is a corresponding benefit to another person equal in amount to the loss suffered by the injured party. For example, the customers of the injured party may divert to another place of business, provided there is enough capacity available on the market to accommodate the flow of diverted customers. In such a case, the overall wealth of the society does not decrease, and the recovery of the loss would only increase the likelihood of inefficient outcomes. When analysed from an economic perspective, each of the three categories in Chapter 5, Section 1 of the Tort Liability Act require a different approach. The analysis in relation to the first category, an act punishable by law, is similar to the economic analysis of criminal law. Here, the recovery of pure economic loss is connected to activity that can be understood as coercive means of bypassing the market. The analysis in relation to the exercise of public authority, on the other hand, centres around the issues associated with providing public authorities with effective economic incentives to start with. The third category, especially weighty reasons, is more open-ended and allows for a wider range of economic considerations to be taken into account. The analysis points to the fact that the provision seems to promote economic efficiency in many respects. However, to properly accommodate for economic considerations, the recoverability of pure economic loss should be extended beyond the three categories outlined in the provision