Legal Definitions - economic-harm rule

The economic-harm rule, also known as the economic-loss rule, is a legal principle that generally prevents a party from recovering damages for purely financial losses in a tort claim (such as negligence) if those losses are not accompanied by physical injury to a person or damage to other property. This rule aims to maintain a distinction between contract law, which governs agreements and expectations between parties, and tort law, which addresses duties imposed by law to prevent harm.

In essence, if a defect or negligent act only causes financial detriment—like lost profits, repair costs for the defective item itself, or diminished value—without causing physical harm to individuals or other property, the injured party typically cannot sue in tort. Instead, they must usually pursue their claim under contract law, if a contract exists between the parties, or under specific statutory provisions.

Here are some examples illustrating the economic-harm rule:

• Defective Manufacturing Component: A car manufacturer purchases a batch of specialized engine components from a supplier. Due to a manufacturing defect, these components frequently fail prematurely, requiring the car manufacturer to recall thousands of vehicles and replace the faulty parts. This recall results in significant financial losses for the car manufacturer, including the cost of new parts, labor for repairs, and damage to its brand reputation. However, the faulty components did not cause any accidents, physical injuries to drivers, or damage to other parts of the vehicles beyond the components themselves.

  How it illustrates the rule: The car manufacturer's losses are purely economic—costs associated with replacing the defective parts and lost profits/reputation. Since there was no physical injury to people or damage to other property, the economic-harm rule would likely prevent the car manufacturer from suing the component supplier in tort (e.g., for negligence). Their recourse would typically be under the terms of their supply contract.

• Flawed Software Implementation: A small business hires a consulting firm to implement a new inventory management software system. The consulting firm negligently installs and configures the software, leading to frequent system crashes and inaccurate inventory counts. As a result, the business experiences significant operational disruptions, misses sales opportunities, and incurs extra labor costs to manually track inventory, leading to substantial financial losses. No physical property was damaged, and no one was physically harmed by the software malfunction.

  How it illustrates the rule: The business's losses are entirely economic—lost sales, increased operational costs, and lost profits. Because the consulting firm's negligence did not cause physical injury or damage to other property, the economic-harm rule would generally prevent the business from suing the consulting firm in tort. The business would instead need to rely on the terms of their service contract with the consulting firm to seek remedies for the breach of agreement.

• Construction Defect in a Building: A property developer constructs a new apartment complex. Years later, it is discovered that the concrete used in the building's foundation was improperly mixed, making it weaker than required by code. This defect necessitates extensive and costly structural repairs to the foundation to prevent future collapse, and residents must be temporarily relocated, causing the developer to lose rental income. No part of the building has actually collapsed, no one has been injured, and no other property (like adjacent buildings or personal belongings) has been damaged.

  How it illustrates the rule: The developer's losses are purely economic—the cost of repairing the defective foundation itself and the lost rental income. Since the defect only damaged the building itself (the "product" supplied by the builder) and did not cause physical injury to people or damage to other property, the economic-harm rule would likely prevent the developer from suing the concrete supplier or the original builder in tort. The developer's claim would typically be governed by the construction contracts and warranties.