Law of Tort: Compensation Culture - Coursework Example

Law of Tort - Compensation Culture  Introduction   It is the mentality of the people, reflected in the culture of the society to claim damages through litigation, however trivial it is, on account of personal injury.  The intention of the law makers is to render equitable justice for all in the society.  However, the nature of the case, facts of the case, material evidence and the circumstances available collectively take its course in a case which results in too much or too little liability with reference to a particular case in general.  It is in this context, we approach the issue with regard to negligence in duty of care, and special reference to Pure Economic Loss in Torts which is characterized mainly by indeterminate scope and unlimited liability. Background The ‘negligence’ in tort laws covers wide range of civil actions.  The first step in negligence is the establishment of duty of care.   Apart from duty of care arising out of contractual obligations, individuals owe duty of care to strangers as well. An individual or group on performing any activity harm another, either physically, mentally, or economically, duty of care comes into picture. 2 Taking reasonable care to avoid acts or omissions which a person can reasonably foresee would likely to injure others is the underlying point.  When a person is not responsible for the situation that warranted any incident which resulted into injury to others the person is not liable.  This general principle was established in the land mark case of Donoghue v Stevenson.[1]   in the Englsih legal landscape.  In this case a woman succeeded in establishing that a manufacturer of ginger beer owed her a duty of care, where it had been negligently produced.  Duty of care arises almost in all situations, in all walks of life and covers all activities such as driving, consultancies of all types, operation of machines and so on.  Health and safety legislation in the UK states that the owners or operators of areas of public access are responsible for ensuring that the safety of anyone entering the area is paramount.  The principles, ‘reasonably foreseeable’ and ‘proximity’ were clearly laid out with regard to interpretations with reference to the law and precedents. The neighborhood principle established in Donoghue v Stevenson was expanded in scope in the later cases to cover various forms of duties and situations. In Home Office v Dorset Yacht Co Ltd,[2] Lord Reid observed that: "the time has come when we can and should say that it ought to apply unless there is some justification or valid explanation for its exclusion.”  3 But, the threefold test, ‘reasonably foreseeable’, ‘proximity or neighbourhood’ and ‘fair, just and reasonable to impose liability’ was firmly established in Caparo Industries Plc v Dickman[3] and it was held that it should not be the case that absolutely anyone hearing something said that was stupid and acted on it can sue. The threefold test for duty of care established in Caparo Industries Plc v Dickman states: The harm which occurred must be a reasonable foreseeable result of the defendants conduct; A sufficient relationship of proximity or neighbourhood exists between the alleged wrongdoer and the person who has suffered damage;                        It is fair, just and reasonable to impose liability.  What is fair, just and reasonable to impose liability?  What is the yardstick to be used for measurement?   It leads to interpretations in different courts in different ways.  The contention is that the assessment of the liability in these cases would be dependent upon the discretion of the judiciary for the simple reason that the terminology is so flexible and wide in its application which leads to numerous litigations and acts as a cause for compensation culture in the society.  When the scope has become very wide, vague, and sometimes irrelevant in application, the 4 people are tempted to utilize the loopholes with the help of their expert attorneys which results into too much liability to the defendant.  On account of the very same factors, this could also result into too little liability or nil liability to the defendant, and the people have no incentive to take chance in a time consuming process that involves uncertainties. Pure Economic Loss In the English Legal system there is overlapping with regard to Pure Economic Loss in Tort Laws and Contract Laws.  There is also a question in the legal circles whether Tort Laws should allow pure economic loss.  However, we should consider the fact that pure loss is inseparable from the injury caused in many cases, and this could not be separately dealt with involving hardships to the public.  Moreover, there are differences in treatment of economic loss in Contract Laws and Tort Laws, and it is beyond the scope of the present study.      Economic loss which arises directly on account of harm or injury, for example the earnings of an injured person if impaired due to loss of sight in an accident is ‘consequential economic loss.’   In the case of pure economic loss, because of its indeterminate scope of liability, it is not possible to insure. It would open the floodgates of law suits. Pure economic loss has wider implications to deals with; for example loss of income due to disruption, loss or diminution in economic value to property on account of the physical damages occurred or financial value of 5 the loss of production due to disruption caused by an incident, say supply of gas, water or electricity.  The U.S. judge Benjamin N. Cardozo famously described it as, "liability in an indeterminate amount, for an indeterminate time, to an indeterminate class" in Ultramares v. Touche .[4]    The Supreme Court of Canada upheld that auditors did not owe individual investors a duty of care with respect to investment losses in Hercules v. Ernst & Young, and the same court unanimously said that negligence does not extend to damages for pure economic loss arising out of the conduct of pre-contractual negotiations and commercial tendering processes (Martel v. Canada 2000) – (Free Library, 2001)[5].  All the potential financial losses could not be entertained for obvious reasons.  Every action in life has consequences, and the consequences have further consequences.  No legal system could pick up the thread to the end to do justice for the all wrongs in life.  It is succinctly pointed out by The Free Library (2001)[5] “ …reason for denying recovery for pure economic loss is the policy to see economic interests as less worthy of legal protection than physical damage. In other words, there is a qualitative difference between these two categories of injury. The security of body and property has always enjoyed a higher priority in the law, than the protection of economic interests.” 6 In Ross v Caunters (1980) the Court of Appeal held that a solicitor did owe a duty of care to an identified third party who had been named as beneficiary in a will. Since the will had been negligently executed by the solicitor, the beneficiary failed to benefit from the intended legacy.  It could be noted that the principle established in Donoghue v Stevenson, ‘reasonably foreseeable’ and ‘proximity’ is stressed here.  However, the principle reasonably foreseeable is now considered in conjunction with the other ingredients to establish proximity in the recent cases. Recovering pure economic loss therefore is very complex.  The presumption of compensation culture proliferating in the society on account of Law of Torts holds no basis. There are restrictions placed on pure economic losses in various countries, and there is no uniformity on finer details.  These dissimilarities restrict the scope of liabilities in pure economic losses. Even the established principles of the earlier cases are reconsidered by the judiciary in the light of the circumstances available in the different cases to prevent taking undue advantage of the indeterminate situations. Conclusion The critical question here is, ‘Are we, the members of the society or the business establishments or industrial undertakings under threat, and facing law suits from every side in our day to day 7 activities?’ There is no clear evidence to this end, but for the occasional motivated outcries in the press.  A 2006 study published in the New England Journal of Medicine[6] concluded that claims without evidence of error "are not uncommon, but most [72%] are denied compensation. The vast majority of expenditures [54%] go toward litigation over errors and payment of them. The overhead costs of malpractice litigation are exorbitant."  We can understand from this statement that making false claims do not worth the exorbitant costs of malpractice litigation. Also, it should be noted that as in the case of vehicles, medical professionals are required to maintain professional liability insurance to offset the risk and costs of lawsuits based on medical malpractice. The compensation culture is not prevalent in the society to an alarming extent as it is perceived in some circles.  In fact people generally do not prefer this action on account of the practical difficulties with regard to efforts, time and money in claiming the compensation through the court of law. There is a fundamental a principle in the judiciary system that encourages common man to seek legal remedies from the court of law.  The benefit of doubt normally given to the common man in the judiciary system should act as a signal to the society to approach the courts for legal remedies. But, the developments over a period of time in respect of Tort laws have given an impression, that the imposition of liability might be adverse to the public interest, mainly on account of the following factors. 8 Element of discretion: It has considerably increased the discretionary powers of the judiciary in deciding the case. Interpretation: There is risk of variations in interpretations with reference to law. It should also be remembered that when the scope of application of law becomes wide, vague and complex in nature, it may also result into less than normal liability or escape from liability since the defendant may also be favorably disposed.  There is no statistical evidence to prove that such claims are on rise year after year. On the other hand, the entire society is paying the price for negligence, by way of insurance premium, in the case of vehicle and other accidents to the insurance industry, since the third party insurance is mandatory!  In fact the awareness among the public regarding their right for compensation should have resulted in increase of litigations on account of negligence in duty of care.              9 Bibliography                                           1. Donoghue v Stevenson [1932] AC 562  The decision of the House of Lords in this landmark case established the renaissance in the form of the tort of negligence.  Till then, in common law, damages could be claimed when the other owed the first person a duty of care and there was breach of duty which resulted into harm or injury to the first person.  The general principle of duty of care has been redefined in this case. Hitherto duty of care had been very specific based on contract, fraudulent acts, etc.  However after the decision in Donoghue v Stevenson, the contractual relationship is no more a test for liability in Tort.  In the history of Torts Laws Donoghue v Stevenson is famously referred to as "Paisley snail". 2. Home Office v Dorset Yacht Co Ltd [1970] AC 1004 The significance of this case in the evolution of Torts Law is due to the expansion of scope of negligence, liability of the government bodies in tort laws, a persons liability for the acts of third parties that he has facilitated, and liability for omissions. Lord Reid held ...”the well-known passage in Lord Atkins speech should I think be regarded as a statement of principle. It is not to be treated as if it were a statutory definition. It will require qualification in new circumstances. But I think that the time has come when we can and should say that it ought to apply unless there is some justification or valid explanation for its exclusion.” Lord Atkins’s speech refers to Donoghue v Stevenson.  3. Caparo Industries plc v Dickman [1990] 2 AC 605  The company Caparo based on the information about the soundness of the company from the audit of another company, bought up majority of its shares, and took over the Company. The report of the auditors, a group of accountants (Dickman) was intended for shareholders, not outsiders. Subsequently, Caparo found that the information was not correct, and sued the accountants for being negligent in its audit preparation. The House of Lords held that it should not be the case that absolutely anyone hearing something said that was stupid and acted on it can sue, and established the current three-fold test. The importance of this case in the history of Tort lays in the establishment of the principle that the liability would be "fair, just and reasonable", the third element. 10 4. Ultramares v. Touche 174 N.E 441, 444 (N.Y. 1931) (USA) The case is regarding negligent misstatement.  The accountants (Touche) who certified the accounts knew that the certified accounts would be used to raise money.  The complainant on the faith of the certified copy of the accounts lent money. The audit was found to be negligent.  Cardozo CJ held that the auditors owed the plaintiff no duty of care, there being no sufficiently proximate relationship, and the claim in negligence failed: "to a liability in an indeterminate amount for an indeterminate time to an indeterminate class."    This is considered as a landmark judgment, and the rule is still widely applied in cases, because the rule acts as a deterrent and check on compensation culture. 5. Pure economic loss claims (2001), The Free Library, Gale, Cengage Learning. Viewed on 21 April 2010. http://www.thefreelibrary.com/Pure+economic+loss+claims-a030158410 The paper covers various aspects of ‘Pure Economic Loss’ giving reasons for denying economic loss claims, the scope of the liability in pure economic loss, etc.  The paper analyses clearly the background information and comes out with the justifications for denying pure economic loss claims.  6.  Claims, Errors, and Compensation Payments in Medical Malpractice Litigation, New England Journal of Medicine, May 11, 2006. The journal has given other details in connection with the malpractice claims.  ‘Ninety-seven percent were associated with injury; of them, 73% got compensation. Three percent of the claims were not associated with injuries; of them, 16% got compensation. 63% were associated with errors; of them, 73% got compensation (average $521,560). Thirty-seven percent were not associated with errors; of them, 28% got compensation (average $313,205). Claims not associated with errors accounted for 13 to 16% percent of the total costs.’  We can understand from this statistics that the claims associated with injuries have been settled in favor of the claimants.  The claims not associated with injuries have also been successful.   This is in contrast to the cases where the claims without evidence of error were denied compensation.  This is a healthy trend indeed.  Read More