Redefining Legal Responsibility for Pure Economic Loss in the Innovation Economy

• Author: Moshood Abdussalam
• Position: Law Lecturer, Auckland University of Technology, New Zealand
• Pages: 33-63

33

REDEFINING LEGAL RESPONSIBILITY

FOR PURE ECONOMIC LOSS IN THE

INNOVATION ECONOMY

M A *

In the var ied web of aai rs, the law mus t abstrac t some

consequences a s relevant, not pe rhaps on ground s of pure

logic but simply for prac tical reasons .1

Abstract

is paper prop oses a new standard for determ ining legal responsib ility in the law of

negligence, b ut particularly p ure economic loss ca ses across Common wealth jurisdic tions.

e paper argues that the prevailing standards for determining pure economic loss do

not measure up to th e novel legal chall enges and promises thrown up by th e innovation

economy. is pap er argues that cou rts should alw ays commence the ir determinat ion

of legal respons ibility with co nsideration gi ven to the public co st-benef‌it implic ations

of the defendant’s act ions. It is on this b asis that cour ts should initi ate their decis ion

on whether to impo se responsibility or exclu de it. Where, however, dispute s do not raise

public intere st concerns, t hen courts sho uld determine ea ch case based on it s peculiar

justice needs.

I. Introduction: Pure Economic Loss and

the Innovation Economy

In tort law, ther e exist exclusion ary ru les that di sallow compen sation for

pure economic los s (that is, losses r esultin g from events th at have no beari ng on

damage t o persons or property). However, it is obser vable that these rules i n their

prevail ing form rema in largely u namenable t o the pecul iarit ies and dyna mics of

the innovat ion economy. For this rea son, these ru les should be recon sidered to

measure up t o the chal lenges and promi ses of the innov ation economy. Atta ining

1 Per Lord Wrig ht, in Liesbo sch Dredger v Edi son SS [1933] AC 449, 4 60 (HL).

* Law Lect urer, Auckla nd Universit y of Technology, New Zealand . I would like t o thank M ike

French and T homas Nkomo for thei r suggest ions. Tha nks to Jeremy D’ Souza and K ayne Menezes

for the resea rch assista nce provided. I woul d also like to t hank the anony mous reviewer(s) for

the correc tions.

34 [Vol 26, 2020]

this is po ssible with a revi sion of the prevaili ng fetters to compen sation by allowi ng

innovati ve entrepreneurs t o secure compen sation for pure econom ic loss. By so

doing, we wi ll be deployin g tort law as a socio -economic policy t o support in novative

entrepreneur s in our increasin gly disembodie d economic era.

Commentator s often use the ter m “innovation economy” i n dierentiation wi th

the previous ly governing ma rket order sign if‌icantly c haracter ised by the product ion

and dist ribution of good s and serv ices, in which i ncremental ad vancements in

knowledge played a c ritical , albeit indep endent, role in bri nging ab out outcomes.2

However, the innovat ion economy is a networked and d isembodied econom ic milieu

in which pat terns of va lue creation, d istribut ion and consu mption are im mensely

dependent on the spil lover eects of know ledge and infor mation resour ces.3 In

other words, kno wledge and in formation a re the pivotal driv ing forces of patterns

of socio-economic r elations in the i nnovation economy.4 Ad vancements in scienc e

and tech nology (par ticula rly informat ion science and te chnology) have broug ht

about a parad igm shift in the so cial order for creat ing, dis tributi ng and assessing

economic value.5 Hence, legal ru les, like tho se currentl y governing com pensation

for pure economic loss , founded on a distinc tion between physica l and non-physical

damage, a re unsustai nable in the innovat ion economy, which is ess entially shaped

by intan gibility.

The most problemat ic aspect of the s aid exclusiona ry rules i s that which

prohibits comp ensation for relat ional economic lo ss (that is, losses s uered by a

part y associated, for exa mple, by contract wit h a property owner whos e property is

damaged b y negligence). Concerning r elational economic loss, t he general attitude

across Commonwea lth jurisdiction s is essentia lly the sa me—that compen sation is

not to be allowe d except it where can be shown th at both the victim of t he loss and

2 See, Jonath an Haskel and Sti an Westlake Capit alism Without Capital:  e Rise of the Intangible

Economy (Princet on Universit y Press, P rinceton , 2017); and see a lso, Zhouyi ng Jin Global

Technological Ch ange: From Hard Technolog y to Soft Technology (2 nd ed, Intellec t Books, Bris tol,

2011).

3 See, Ma rk Lemley and Bret t Frishman n “Spillovers” (200 6) 100 Colum L Rev 101; and s ee also,

Anupam a Phene and Stephe n Tallma n “Knowledge Spillove rs and Al liance Form ation” (2014)

Journa l of Management St udies 1058.

4 See, David Teece “Cap turin g Value from Kno wledge Asset s: The New Economy, Ma rkets for

Know-How, and Int angible Asset s” (1998) 40 Californ ia Management Revie w 55; and see also,

Jeremy Ri in Zero Margina l Cost Society (St M artin’s Gri n, New York, 201 4).

5 Klaus Schw ab Shaping t he Futur e of the Fourt h Industr ial Revolut ion: A Guide t o Buildi ng

a Better World ( Portfolio Pe nguin, Lon don, 2018); and se e also, Jeremy R iin , The Third

Industr ial Revolut ion: How Latera l Power is Tran sforming En ergy, the Economy, and the Worl d

(St. Mar tin’s Grin , New York, 2013).