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Economic Torts

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Vivek Satyani, VI Semester, National Law University, Jodhpur

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I

Introduction
The ECONOMIC TORTS, as their name suggests, have as their primary function, the protection of claimant’s economic interests. They include the torts of simple conspiracy, unlawful conspiracy, inducing breach of contract, intimidation, unlawful interference with trade, deceit, and malicious falsehood. All of these are torts of intention. They also include passing off, one of the most useful of the economic torts, which though in practice normally involving deliberate harm, is in fact a tort of strict liability. Finally, the economic torts also include the tort of negligence, though applied in a narrow way.

It is usual to separate the economic torts into two categories: the general torts and the misrepresentation torts. The general economic torts comprise conspiracy, inducing breach of contract, intimidation, and unlawful interference with trade. The misrepresentation economic torts are deceit, malicious falsehood, and passing off. However, it is a mistake to make such a rigid division when attempting a proper analysis. Such a division fails to highlight the interconnections between the two categories on the one hand and the dissimilarities between individual torts within each category on the other.

Of course, the economic torts play only a residential role in the regulation of competition but it is a role that claimants seek constantly to increase. There is an obvious need to provide clarification: the problem with litigation in this area is that it tends to start and finish at the interlocutory stage, where no detailed analysis of the law is necessary. At the heart of the uncertainty surrounding these torts is the possibility of uncontrolled judicial expansion of such liability, at odds with the caution of the past. The ultimate question is how far should we move in the direction of a policy to protect against unfair competition and economic behavior?

Conspiracy
There are two sorts of conspiracy: ‘the Quinn v. Leathem type which employs only lawful means but aims at an unlawful end, and the type which employs unlawful means.’ Thus the tort can take the form of unlawful conspiracy, where the combination uses unlawful means and the form of simple conspiracy, where the ‘magic of plurality’ renders a combination to injure tortuous, despite the lack of unlawful means. Though these two torts obviously have common factors- an agreement or combination involving two or more persons intentionally to harm the claimant- their focal point is different. For this reason they must be analyzed separately. In so doing their relationship to the other economic torts will be revealed.

(A) Unlawful Conspiracy:
Its ingredients are: -
# Intention
# Agreement / Common Design
# Concerted Action
# Damage
# Unlawful Means
# Justification

The issue of Intention is controversial in the economic torts. Though they require intentional harm, it has not been established whether that concept of intention is the same for them all. So dicta can be found requiring only that the act at the heart of the unlawful conspiracy be deliberate and have the effect of injuring the claimant. The parties to a conspiracy must have a COMMON DESIGN though they need not all join at the same time. It is clear that for the conspiracy liability, it is sufficient that the parties combine to secure the doing of acts, which in the event prove to be a tort. The lack of common design in CBS Songs Ltd. v. Amstrad meant there could be no complicity liability. The requirement of a common design- means that ‘mere facilitation’ is not sufficient for liability. Agreement alone is not sufficient for liability: there must be CONCERTED ACTION, consequent on that agreement. Thus, Stuart-Smith LJ commented in Credit Lyonnais v. ECGD: ‘it is not enough that [the defendant] merely facilitates the commission of the tort unless his assistance is given in pursuance and furtherance of the common design.’ Glidewell LJ in Unilever plc v. Chefaro noted that in order to show liability emanating from a common design ‘it is necessary to show some act in furtherance of the common design, not merely an agreement’. Pumfrey J in Sandman v. Panasonic UK Ltd., having found no decision to support a doctrine of responsibility in tort from mere association with a group acting in concert, concluded there must be some evidence that the defendant was actually involved in furthering the common design, that he ‘took part’ in the unlawful act. There must be concerted action to a common end. DAMAGE is an essential element of liability in the tort of conspiracy for the tort, unlike the crime, consists not of agreement but of concert action taken pursuant to agreement. Pecuniary loss must be shown. There was a detailed consideration of this point in Lonrho v. Fayed (no. 5). So, damages are at large, i.e. not limited to a ‘precise calculation of the amount of the actual pecuniary loss actually proved. Loss of profit and the expense of investigating the conspiracy are clearly recoverable. In the light of recent dicta, it would seem that the UNLAWFUL MEANS relied on for the tort of unlawful conspiracy must, as Stuart-Smith LJ in Credit Lyonnais v. ECGD asserted, be ‘actionable’ in themselves and ‘at the suit of the plaintiff’. This was accepted as correct by Toulson J in Yukong Line Ltd. v. Rendsburg Investments Corp. (no. 2). Such a view equates this tort with the torts of inducing breach of contract and inducing breach of statutory duty, where there is a need to show that an actionable wrong (i.e. actionable by the claimant) has been induced.

(B) Simple Conspiracy:
Here there is liability for an agreement to do acts, lawful in themselves, for the sole or predominant purpose of causing injury to the claimant and which causes injury to him. Simple conspiracy is an exception to Allen v. Flood. Lord Denning MR found simple conspiracy to be ‘a modern intervention altogether’. Simple conspiracy was established in a modern form in Mogul Steamship Co. v. Mc. Gregor and nurtured in Quinn v. Leathem.

Simple conspiracy exists but is of little practical value. It presents the opportunity for protection only in the most extreme cases of hostility and vendetta. It will rarely be useful for victims of other’s use of market power. A tort based on reviewing the interests and motivation of only the parties before the court would appear of little value in the process of market regulation.

Intimidation
Prior to 1964, the tort of intimidation was an ‘obscure, unfamiliar and peculiar cause of action’, having its root in cases involving physical violence and threats. Thus, in Garret v. Taylor it was held that a quarryman had a cause of action against the defendant who had caused the plaintiff’s customers to discontinue buying the quarried stone by threatening them with ‘mayhem’. ‘Mayhem’ was interpreted by the judges in Allen v. Flood as violence. However, the modern form of this economic tort arose ‘out of the circumstances of modern industrial relations’.

Intimidation involves the defendant using an unlawful threat to successfully compel another to obey his wishes in order to harm the claimant. Thus, there must be a deliberate threat, that threat must involve an unlawful act and be effective, there must be an intention to harm the claimant, and damage must ensue. Though the threat will most commonly be to someone other than the claimant himself, it would appear that the tort can also take the form of a two-party threat, directly between the defendant and the claimant.
# Intimidation Grips:
# Intentional Harm
# Threat
# Unlawful Act
# Damage
# Two & Three Party Liability

There must be an Intention to compel a particular course of action and the claimant ‘must be a person whom [the defendant] intended to injure’. Malice of course is not necessary. Threat  was defined by Peterson J in Hodges v. Webb as: ‘an intimidation by one to another that unless the latter does or doesn’t like’. Threats obviously involve an element of coercion: what must be present, according to Lord Denning, is an intention to compel another to obey the defendant’s wishes. Moreover, the threat must be effective, as Lord Denning noted in Morgan v. Fry. The threat must be an UNLWFUL one. It is the unlawful element that is important: the use of a threat, in itself, is neutral. Lord Denning noted that unlawful means included ‘violence, tort and breach of contract’ but did not imply that this was an exhaustive list. The concept must be the same for all the economic torts that focus on the defendant’s unlawful means if these torts are ever to achieve a rational development. The claimant must prove that the DAMAGE to him was caused by the defendant’s threat, for it is ‘the person damnified by the compliance’ who can sue in intimidation. As the facts of Rookes v. Barnard demonstrate, intimidation usually arises in a Three-Party situation. The middleman must give in to the threat in order to harm the claimant. The middleman must give in to the threat in order for harm to the claimant to result. Lord Devlin, in Rooks, accepted the Two-Party version of this tort, propounded in the then current edition of Salmond on Torts. This gave as an example of the tort of intimidation ‘a trader who has been compelled to discontinue his business by means of threats of personal violence made against him by the defendant, with that intention’.

Deceit
Deceit has a limited role as a remedy against commercial misinterpretation. A difficulty tort succeed in given ‘charges of fraud should not be lightly made or considered’, it does not provide protection against general allegations of fraud. Moreover, it is the person intentionally deceived by the defendant who alone can sue in the classic two-party form of the tort. The tort is largely overshadowed in importance by liability for negligent misstatement and by state regulation of trade misdescriptions

Deceit Includes:
# False Representation.
# Knowledge Of Falsity.
# Intention That The Claimant Should Act In Reliance.
# Reliance By Claimant: ‘Materiality’.
# Damage.

The Misrepresentation must be one of a past or existing fact: though that includes a statement of opinion or intention (or law) not honestly believed in. It may be expressed or implied. In Gordon v. Selico, the defendant was liable for fraudulently concealing the presence of dry rot, prior to letting the property to the plaintiff. Goulding J found the concealment amounted to a false representation that the flat did not suffer from dry rot and the defendants did not challenge this finding in the Court of Appeal. The false representation has to be made: ‘KNOWINGLY  without belief in its truth  or recklessly, careless whether it be true or false.’ At the very least there must be an indifference to the truth. The House of Lords in Derry v. Peek authoritatively discussed the state of a defendant’s mind, necessary for an action in deceit. Foreseeable reliance is not sufficient for this tort: there must be an Intention That The Claimant Should Rely On The Representation. Lord Maugham underlined this in Bradford Third Equitable BS v. Borders, noting that the plaintiff must prove that the defendant made the statement ‘with the intention that it should be acted upon by the plaintiff or by a class of persons which will include the plaintiff’. The representation must have been relied upon by the claimant: he must have been influenced by it. It need not be the sole reason for the subsequent actions as long as it ‘materially contributed to his so acting’. The claimant must prove Damage as a consequence of acting on the misrepresentation. The defendant will be liable whether he intended the harm or not. Although predominantly financial harm will be the damage alleged in this tort, physical harm (including personal injury, mental distress, and even inconvenience) is covered, as is damage to property.

The closeness of the classic version of the tort of deceit to contract liability shaped judicial attitudes to its development. The tort developed in an era where the common law courts were keen on the notion of self-reliance and laissez-faire and were hostile to attempts to undermine the sanctity of contract (which was also the reason for the slow development of liability for careless misstatements, seemingly an attack on the doctrine of consideration).

Passing Off
Though the origin of passing off are ‘doubtful’, by the nineteenth century the tort was seen as originating in the tort of deceit. However, unlike deceit, it gives the trade rival, rather than the deceived customers, the right to sue. The classic case involves a trader, innocently or otherwise, ‘passing off’ his goods as the goods of the claimant. Lord Diplock noted in Erven Warnink BV v. Townend (J.) & Sons (hull) (Advocate) that the particular setting for the development of the tort was the defendant’s improper use of trade marks or their equivalent ‘so as to produce in potential purchasers the belief that his goods were those of a rival trader’.

Ingredients:
The modern definition of the tort was considered by Lord Diplock in Warnink (Erven) BV v. Townend and Sons Ltd., the ‘Advocate’ decision. He presented his definition part of an analysis of the English law on unfair trading and certainly on the facts of the case itself sought thereby to expand the scope of the tort. For Lord Diplock five characteristics provide the essence of the tort: a misrepresentation; made by a trader in the course of trade; to his prospective customers; calculated to injure the business or goodwill of another; and which does so injure or possibly will do so. The reformulation has been followed in some leading cases, sometimes amalgated with aspects of Lord Fraser’s case-based test in Advocate, which emphasized the need for goodwill in the jurisdiction.

Misrepresentation:
The importance of misrepresentation in the tort was reaffirmed by the Privy Council in Pub Squash. They held that there must be a misrepresentation, not merely misappropriation of a trade value. So when the plaintiffs opened up the market for a ‘macho’ soft drink, they could not allege passing off against the defendants using the same idea and advertising theme. Lord Scarman also noted that any deception must be more than momentary and inconsequential. Of course, as Spalding acknowledged, the misrepresentation must relate to the claimant’s goodwill.

The Future Of Passing Off
Some might argue that a general tort of misappropriation/ unfair competition should take the place of the tort of passing off. Logically this would eliminate the claimant’s need to establish either a misrepresentation or goodwill. However, for the foreseeable future such a development is unlikely. The fear is that the balance must not be titled too far away from encouraging competition. This was noted by Jacob J in Hodgkinson & Corby Ltd. v. Wards Mobility Ltd: ‘at the heart of passing off lies deception or its likelihood  never has the tort shown even a slight tendency to stray beyond cases of deception. Were it to do so it would enter the field of honest competition, declared unlawful for some reason other than deceptiveness.

For the courts, the choice is between a tort of limited application, bounded by the certainty of the classic trinity and a wide tort, based on trade misrepresentation, without a clear public interest being served. With an extended unfair trading action the judicial role would be greater, the court having to decide whether to protect on the basis of policy considerations. The obvious danger with the later choice is that the tort could then constitute an undue constraint on the competitive process.

Negligence And Pure Economic Loss
The main concern of the economic torts is to protect the claimant’s economic interests in the sense of his existing wealth or financial expectations. Negligent interference with economic interests as such can be actionable. But to label the tort as an economic tort is rather misleading. Rather, in exceptional circumstances, it performs the functions of an economic tort. It is obviously important to consider when those circumstances arise and how the tort of negligence relates to the established economic torts.

Actions on the case for negligence became common from the early nineteenth century onwards ‘no doubt spurred on at first by the increase in negligently inflicted injuries through the use of the new mechanical inventions such as the railways and later by the abolition of the forms of actions’. The importance of Donoghue v. Stevenson, was the recognition that the categories of negligence are never closed. Lord Atkin’s neighbour principle meant though this was not immediately acknowledged  that the tort was not limited to special categories of duties of care but rather became ‘a fluid principle of civil liability’.

The courts have not allowed the tort of negligence to become a mainstream economic tort. There appear to be two main policy reasons for this. Most evident is the fear of disproportionate and limitless liability, mirroring the fear raised by Cardozo J in Ultramares Corp. v. Touche of ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class’. Thus Lord Pearce noted in Hedley Byrne & Co. Ltd. v. Heller & Partners that: ‘economic protection has lagged behind protection in physical matters where there is injury to person and property. It may be that the size and the width of the range of possible claims has acted as a deterrent to extension of economic protection.’

The Hedley Byrne Principle
The true width of the Hedley Byrne principle was obscured until recently by the facts and background to the case. A case of pure economic loss, it also involved careless advice. As such, liability had to be reconciled with the decision in Derry v. Peek. At the end of the nineteenth century, Derry v. Peek put the brake on developments in equity that might have led to liability for careless misrepresentations. The decision in Derry v. Peek, according to Lord Bramwell, represented the victory of general principle over ‘the desire to effect what is or what is thought to be, justice in a particular instance.’

In the decision itself the court stressed the need for a ‘voluntary assumed responsibility’ as between the defendant and plaintiff - in what was de facto a two-party scenario - and a foreseeable and reasonable reliance by the plaintiff on the advice or information that resulted. However, it is clear from the judgments of Lords Devlin and Morris that the assumption of responsibility and reliance could also apply to negligent acts or services. This is hardly surprising, given there may be a fine line between words and acts, as is evidenced by the American case of Glanzer v. Shephard.

So Hedley Byrne accepted that there may be a duty to take care to avoid pure economic loss but in so doing made it clear that such liability would not be founded on the same basis as the duty to avoid physical harm. The key factor in the principle was the presence of a ‘voluntary assumption of responsibility’.

The Basis Of Liability
Ever since Hedley Byrne, the perceived need to set limits to liability for negligent misstatements (and now services) that cause pure economic loss, on a narrower basis than the principle of Donoghue v. Stevenson, has dominated this area of tort law. Something more than ‘mere foreseeability’ was required.

However, it is clear from cases such as Smith v. Bush and Spring v. Guardian Assurance that, in determining the imposition of liability, it is not a test of universal application. So in Smith v. Bush there was no voluntary assumption of liability, given the presence of an express disclaimer and in Spring v. Guardian Assurance the court was faced not with the two-party Hedley Byrne scenario but rather with advice about the plaintiff to a third party. Yet in both the cases, the plaintiff succeeded in negligence.

 Conclusion
As the discussion in the preceding chapters has revealed, the economic torts are indeed a ‘difficult if not to say obscure branch of the law of tort’. The economic torts are in a mess is due to the lack of coherent framework for their development.
What is the proper role for the common law in this area? For Heydon, Allen v. Flood denied the economic torts theoretical consistency and the courts a practical weapon against intolerable conduct. He argues that the law would be on a much sounder theoretical basis if defendants were liable on the basis of ‘damage caused intentionally and without justification’. Such a view finds echoes in the analyses of Fleming, Salmond, and Finnis.

The thesis of this project is that a framework for the economic torts can be constructed. It should be based on the policy that economic behaviour should only be controlled by the common law on a narrow basis. The greater the flexibility of the economic torts, the greater the incentive to litigate rather than compete, an outcome not in the public interest. Such a policy is also consistent with the wider principle of freedom of speech which may be relevant where these torts take place within peaceful protest or commercial debate. As Weir comments: ‘economic torts have something to do with liberty.’ Though there has been statutory intervention to allow peaceful protest where industrial action is involved, these torts may arise in other protest situations – such as the consumer picket or within rigorous debate over the claimant’s commercial or professional activities. The above framework provides a clear basis for liability while allowing both freedom to complete effectively and freedom of expression.

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The  author can be reached at :
viveksatyani@legalserviceindia.com

 

 

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ISBN No: 978-93-82417-01-9