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Economic Analysis of Tort Law

In tort law, accidental injuries are quite significant. Its two objectives are to make up for the losses of the victims and to put an end to dangerously damaging behavior. The economic theory of tort law emphasizes the deterrent aspect of tort law. It is based on the notion that liability for unintentional injuries ought to be shared in order to lower projected costs of accidents, including the harm suffered by victims and the cost of protective measures adopted by both injurers and victims.

Fault and Retributivism

Retributive justice is defined as a form of justice that's committed to giving evildoers corrections that are commensurate with their crimes.

There are any number of ways of landing the conditions of retributive justice. For the sake of this argument, suppose that retributivism is the view that wrongdoing deserves its punishment, or that a malefactor ought to be penalized or sanctioned for his wrongdoing. By assessing liability on defective victims equal to the costs of the detriment of their wrongdoing, we put a penalty on them, and in doing so give them their just comeuppance. No similar argument is available for the principle of strict liability. However, the retributive argument would render only part of tort law innocently defensible, If sound.

So, Tort law is a hybrid of Market and Morals.

Fault-based liability, which is the opposite of strict liability, requires the plaintiff to demonstrate that the defendant's actions were either negligent or willful.

Cost of prevention will be lower than the cost of harm.

To make a Fault is to act in an economically inefficient way. To prevent inefficiency, liability is imposed on the basis of negligence. To act wrong means to act inefficiently. Injustice is committed against a person harmed by an act so intended. Their loss is unjustified. Still, we can say that liability is imposed on the basis of negligence, not to prevent inefficiency, but to recover from unjustified losses.

Thus, we can have an economic theory about the meaning of wrongdoing or guilt and a moral theory for imposing liability on the basis of guilt so conceived. The moral theory in this example is the principle that unjust losses should be nullified. Even if an economist is correct in his analysis of error, it does not follow that he is correct in his explanation of why liability is imposed on it. or the purposes of any liability imposed thereunder. So economic analysis may be the best interpretation at fault but may not be the best of the liability.

For similar reasons, it is possible to proceed with an economic analysis of negligence liability without proceeding with an economic analysis of the meaning of negligence. Such a view might, for example, be that liability deters wrongdoing based on negligence, whereas wrongdoing may mean behavior that violates norms of fairness or reciprocity. Typically, however, in tort law economic analysis, the principle of efficiency provides both an understanding of negligence and a justification for liability on that basis.

In tort law, accidental injuries are quite significant. Its two objectives are to make up for the losses of the victims and to put an end to dangerously damaging behavior. The economic theory of tort law emphasizes the deterrent aspect of tort law. It is based on the notion that liability for unintentional injuries ought to be shared in order to lower projected costs of accidents, including the harm suffered by victims and the cost of protective measures adopted by both injurers and victims.

Evidence that demonstrates how a tortfeasor's action or inaction was a necessary prelude to the plaintiff's injury establishes cause in fact. If the plaintiff's injury would have happened "but for" the defendant's actions, the court will consider this question. If not for A, would B have happened? If the response is no, then A actually caused B. If the response is yes, then A is not actually B's cause. To put it another way, if there was no other way for the plaintiff to have been injured but for the defendant's behavior, then the defendant has committed a tort, not something else.  Plaintiff must prove that the injury was due to the tortfeasor. The defendant will be held accountable for the tort injury if they might have predicted it. A danger is not considered to be proximate if it could not have been reasonably anticipated, in which case no liability will be assessed.

Fault Liability

When someone places another person in an undue risk of harm or injury, the law considers that person to be negligent. Furthermore, failing to take the safeguards that a reasonable person would take is a question of posing an undue risk of injury.

A precaution is rational when it is cost-justified; it is reasonable when it is rational when it is rational when it is cost-justified; and it is cost-justified when the expense of the precaution is less than the anticipated injury. The latter is the cost of the predicted injury less the likelihood that it will occur.

As an example, let's say Mr. A is involved in an activity that has a benefit of $500 and an anticipated harm of $300. Stopping the activity is the only way to prevent the harm.
Mr. A would be acting irrationally if he gave up a $500 advantage to avert a $300 expense. Mr. A would prefer to sustain the damage and maintain the $200 profit from the activity rather than forgo the advantage because doing so would not be a cost-justified precaution. In contrast, if the harm is anticipated to be $500 and the benefit is $300. Now, it would be a cost-justified precaution to sacrifice the advantage in these cases.

Mr. A's refusal to renounce the advantage would be illogical given that you would have to spend $200 on the activity and lose $200. This is the calculation a logical person would make.
If Mr. A can spare Mr. X any injury by adopting safeguards less expensive than Mr. X's anticipated injury, the former's decision will only be made when the costs and benefits are his.
It would be illogical, inconsiderate, and irrational to not take such safeguards.

Under fault liability, Mr. A would be responsible. If the rule of fault culpability applies to the injury instead of the plaintiff, the defendant will be responsible for paying its costs.
All rational people, including victims and injurers, are compelled by the fault responsibility rule, in particular, to implement only cost-effective safety measures.

Basic Analysis of Tort (economic)

  • The regulation of torts constitutes a frame of legal responsibility regulations
  • These regulations signal whilst someone is to compensate some other through the price of damages or be limited from doing sure acts through manner of injunction. Those regulations, then, imply whether or not or now no longer losses generated through human behavior can be shifted from one party to some other.
  • Tort law seeks to give remedy to all the victims.
  • In case of Negligence the victim is paid when there is a duty of care towards the plaintiff, there is breach of the duty and there is damage to the plaintiff.
  • The amount of damages is divided in Joint, Joint and Several and Several liability, amount of  damages is determined by the intensity of the damage done.

When Negligence is contributory

The rule of negligence can take many distinct forms. According to the aforementioned rule, the injured party is solely responsible for the incidents he caused if his level of precaution (x) fell below the required level (�). Contributory negligence is a popular defense in tort law, nevertheless. By establishing that the victim was at least partially responsible for the injuries, the attacker can disavow guilt under this argument. From an economics perspective, the injured party can avoid accountability by proving that the victim did not take the necessary safeguards as required by the law.

There is a legal requirement for the contributory negligence defense of the victim with caution and care. If the injured party had been negligent (x ˂ �), the The victim took effective safety measures whereas the aggressor neglected to do so. According to the law, the person who caused the accident is responsible for it and must pay the costs thereon. However, when the injured party disregards the suggested safety measures, but so Does the victim as well, that is, the victim does not take the necessary measures (xi ˂ �) then the The accident's expenditures are not the injury's responsibility. The victim is responsible for paying 100% of the costs of the mishap. The Tortfeasor alone would not bear the entire cost as the plaintiff is also having a hand in getting the injury on himself.

In case of Defamation the number (amount) of damages has to be specified.

In case of Nuisance - Injunction and abatement is the first option but Damages are also given. �A court may grant an injunction as an equitable remedy for a tort in its sole discretion. An equitable remedy is one in which the court orders the other party to uphold his end of the bargain rather than paying the party who was wronged. A court will issue an injunction when it orders someone to stop doing something or to take action that will help the injured party get their money back. Totally, Calculating the plaintiff's real loss entails determining the general damages. For instance, if the plaintiff experiences physical discomfort and loss as a result, or if their quality of life is compromised.

When a special loss is established, special damages are granted. There is no rigid formula to determine the precise sum.
The plaintiff only needs to demonstrate the loss.

  1. The actual expenses associated with a tort.
    1. These expenses consist of: a) Medical and rehabilitation costs.
    2. Lost wages as a result of the injury
    3. Pain and suffering costs
    4. Property damage
  2. The price of the precautions that are taken in an endeavor to prevent and avoid injuries.
  3. Administration and implementation fees and cost of missed opportunities.

Mr. X's utility function for the two goods of wealth and health is shown in Figure 1.

The different ways in which the two can be combined to benefit Mr. X are represented by IC0 and IC1. Higher satisfaction is represented by a higher indifference curve, or IC1. In other words, compared to any combination on the lower indifference curve, a combination at IC1 gives Mr. X a higher level of happiness . Assume Mr. X was pleased with the combination at point A on IC1 (W0, H0). Now, if Mr. Y punches Mr. X in the face and injures him, Mr. Y's injury causes Mr. X's utility to change from point A to point B. (W1, H1).

In other words, Mr. X's wealth has decreased from OW0 to OW1 and his health has decreased from OH0 to OH1. Mr. X's utility or satisfaction is reduced as a result of the entire episode, moving from point A to point B, which is a combination on a lower indifference curve. According to the goal of perfect compensation, Mr. Y must recompense Mr. X in a way that returns his utility to point A. As a result, the amount of damages that Mr. Y is required to compensate Mr. X for should be such that it will allow Mr. X to resume his pre-injury position of A. Mr. Y must therefore provide restitution in the amount of [W0-W1] for the loss of wealth and [H0-H1] for the loss of health.

If Mr. Y hurts Mr. X in such a way that the damage is irreparable and Mr. X's health is permanently lowered to H1, Mr. Y could make up for the harm by growing his wealth to levels higher than those before the accident, such as level W2, to make up for the loss of permanent health. Amount of compensation = [W0-W1] + [H0-H1]

The Optimal Deterrence Theory:
Tort liability is primarily seen by proponents of this strategy as a method of allocating the costs of accidents. Their main argument is that tort law should be interpreted as setting out to reduce both the total cost of accidents and the cost of preventing them. Economic analysis starts with the question of "when is it worth spending costs in order to shift costs?" because shifting costs is itself expensive. The axiomatic response is that only when doing so is itself cost justified does it make sense to spend costs in order to lower costs.

Economic tort
also known as business torts, are crimes that fall under the common law's rules of liability and are committed in the course of business transactions.� Examples include interfering with business or economic relationships and other crimes that are likely to result in pure economic loss. Conspiracy, causing a breach of contract, intimidation, and illegal interference with trade are all examples of general economic torts. The economic torts of misrepresentation include passing off, lying with malice, and deceit.

An agreement or combination involving two or further persons designedly to harm the descendant is Conspiracy.
Damage is an essential element of liability in the tort of conspiracy for the tort, unlike the crime, consists not of agreement but of action taken pursuant to agreement. Financial loss must be shown.

Includes two or more persons.
So, damages are at large, i.e. not limited to a precise computation of the quantum of the factual financial loss actually proved. Loss of profit and the expenditure of probing the conspiracy are easily recoverable.

When an individual or organization unrelated to the employer is responsible for the workplace accident, third-party liability may become an issue.
Ex - When there is both First- and Third-party insurance, the defendant is covered in both damage of his own and damage for the other one (third party) respectively. 
So that if liability arises in case of any motor accident the amount of damage made to the other person and one's own gets covered. It makes all the economic losses covered. 

Two Three Party Case And Strict/Absolute Liability

Intimidation involves the defendant using unlawful trouble to successfully impel another to observe his wishes in order to harm the descendant. Therefore, there must be a deliberate trouble, that trouble must involve an unlawful act and be effective, there must be an intention to harm the descendant, and damage must postdate. It is a two party - three party case. The descendant must prove that the Damage to him was caused by the defendant's trouble, for its 'the person damnified by compliance' who can sue in intimidation.

Deceit is also a two-party case. One sort of legal injury is when someone purposefully and consciously tricks someone else into doing something that hurts them. The claimant has the right to be placed back in the same situation that they would have been in if the deception hadn't occurred. In other words, if a claimant, for instance, was misled into thinking they were purchasing a property worth Rs. 10,000, but the defendant was aware that it was only worth Rs. 5,000, then the claimant is entitled to damages of Rs. 5,000 and may make a claim for it. In other words, the defendant is responsible for all damages that immediately result from their act.

Strict and Absolute liability are torts for which the victim has to be compensated as the damage is severe.� Even when someone did not intend for something to go wrong, there are instances where they are held accountable. In other words, certain behaviors subject a person to severe liability regardless of the situation. In torts involving strict liability, a party may be held accountable for harm done to another party regardless of whether the harm was intended.


  1. Dangerous Substances
  2. Escape
  3. Non-natural use

Even if they have no intention, people still need to compensate victims. One could assume that a potential defendant under strict liability will not have any motivation to invest in measures given that he or she will be held accountable for their actions whether or not they were negligent.

Let's say that Mr. A is strictly accountable for the $500 in costs that he assessed Mr. X. Furthermore, by taking steps costing $300, Mr. A may be able to reduce the likelihood that he will charge Mr. B for these expenses.

Potential defendants have an incentive to take cost-justified measures even under the strict liability system. They won't take any precautions that are not cost-justified, it should be said. Mr. A would rather pay the cost of harm than spend $550 on a precaution that would reduce the likelihood that he would get an injury with an expected cost of $500. So, much like with fault liability, potential defendants are motivated to take all cost-justified precautions under a strict liability system.

Absolute Liability
Absolute Liability= (Strict Liability- Exceptions)
Simply put, the rule of absolute liability is the strict liability rule with the exceptions removed. The rule of absolute liability states that if someone is engaging in an activity that is inherently dangerous or hazardous and someone is harmed as a result of an accident that happened while performing that inherently dangerous or hazardous activity, the person engaging in that activity will be held absolutely liable.�

The victims mostly come from weaker groups who cannot afford to engage in protracted legal battles to recoup damages in court unless they are employed by the undertakings, compensation. Frequently, the project lacks sufficient funds to fulfill the duties of paying the victims.

Analysis Of Select Case
In the case of Pushpabai Purshottam v. Ranjit Ginning & Pressing Co, the deceased was a passenger in a car being driven by the management of the respondent business when it was involved in an accident that caused his death. The dependents of the deceased filed a claim, and the tribunal granted damages. However, the High Court overturned the decision on appeal on the grounds that the respondent corporation was not responsible for the accident.

However, the Supreme Court decision overturned the High Court's ruling and held that it was obvious that the accident had happened as a result of the manager's negligence while he was operating the car in the course of his employment. As a result, the respondent company was liable for his negligent actions. They requested a compensation of one lakh rupees. Regarding the compensation due, the Tribunal set general damages at Rs. 31,209.15 and special damages at Rs. 2,000 for burial and post-funeral costs.�

The issue of absolute liability has been raised in the M.C. Mehta v. Union of India case. The rule that was established as a result of this case was that any business that deals with any
type of hazardous or intrinsically dangerous material that, if it causes any kind of injury, would be completely responsible for compensating all those impacted by it.

In Delhi, an oil gas leak occurred in December 1985 in one of Shriram Foods and Fertilizers Industries' units, and as a result, several individuals were killed by the deadly fumes and other people suffered serious injuries. A PIL was filed in the Indian courts as a result of this incident. Compensation has to be given to each aggrieved person, keeping in mind the humongous scale of the companies.�

"There exists an absolute and non-delegable duty on the part of an enterprise which is engaged in the hazardous or inherently dangerous industry which has a potential threat to the health and safety of the persons working in the factory and residing in the surrounding areas and the towards community, to ensure that no harm results to any one on account of hazardous or inherently dangerous nature of activity which it has undertaken."�

Ryland vs Fletcher: defendant and plaintiff both had properties close by. The defendant, a mill owner, employed independent workers to build a water reservoir on his property. The contractors discovered passages beneath the reservoir while they were working, but they decided to disregard the issue because it was only partially filled with Earth and Marl. When the reservoir reached capacity, water broke through these shafts, flooding the plaintiff's mine property and inflicting significant damage. The plaintiff then brought a lawsuit against the defendant to recoup his lost profits.

The formulation of legal rules is influenced by the economic study of tort liability, which would encourage people to maximize social benefits net of social costs to lower the maximizing the advantages while minimizing the economic costs of tort liability. In terms of tort law's economy to absorb externalities brought on by high transaction costs, the model uses liability. The Example of One tool that can be utilized for this is optimal precaution. The financial analysis allocating the precise expenses of tort can be facilitated by strict liability, no liability, and fault liability. Responsibility and the amounts of compensation at stake.

The three negligence standards of contributory, comparative, and basic negligence might help identify who exactly bears responsibility because occasionally even the injured person may be accountable for his own negligence through his own conduct. Tort law has a very important role in people's life and its economic aspect has brought much needed deterrence and grounding to following the laws. The remedy has to be decided from case to case depending on the type of tort and the liability of the defendant has to be shown in some cases and some are actionable per se.

Written By: Somitra Vardhan Dubey, BALLB from DNLU

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