Comparative Private Law 14 / 11 / 2011

1. Comparative Private Law14 / 11 / 2011 Prof. Dr. Ulrike Babusiaux

2. Tortious Liability for pure economic loss (Case study) • Pure economic loss • the problem covers a variety of different situations • generally accepted demarcation lines: • in contrast to damage resulting from death or injury or (as well as) damage to tangible objects • in contrast to consequential economic loss under the heading of loss indirectly resulting from death, injury or property damage Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

3. Different systems and their answers: • Germany: • - § 823 I BGB with its catalogue of protected rights does not seem to protect against loss of goodwill, market opportunities or any other economic interest (exception: eingerichteter und ausgeübter Gewerbebetrieb) • - § 823 II BGB and § 826 BGB couldcover this category of damage (e.g. breach of contract) • - gap-filling contractual remedies (Vertrag mit Schutzwirkung zugunsten Dritter = protective effect of a contract for the benefit of a third party) Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

4. The Common Law (England) • - some torts allow the recovery of pure economic loss but are generally restricted to wilful, deliberate or intentional acts, e.g. fraud, conspiracy, deceit, passing off, inducing breach of contract • - with regard to the tort of negligence, the courts show restraint to allow claims for pure economic loss (floodgate argument) Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

5. France • - there is no separate category of „pure economic loss“ • - Article 1382 C.civ. does not distinguish between protected and unprotected interests • - courts accept compensation of pure economic loss, if the interests were legitimate (intérêts légitime juridiquement protégé) and if the damage is direct and caused by the fault of the defendant Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

6. Some examples of pure economic loss: • Negligent statements that cause damage to third parties: e.g. erroneous information about investments • Relational loss (Reflexschäden, indirekte Schäden, dommage par ricochet): e.g. members of the family of the victim • Cable Cases: e.g. power cuts damage the owner of a manufacture • Participation in the breach of other parties‘ contracts Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

7. Disregarding someone else’s contract • Comparison: • Court of Appeals 1988, Rickless v. United Artists Corporation (Materials p. 167) • BGH 19 october 1993, Conspiring wife (Materials p. 178) • Cass. civ. 3e 8 July 1975, Société de copropriété …v. Servim (Materials p. 181) Please form groups to discuss the cases! Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

8. Court of Appeals Rickless v. United Artists Corp. • Facts: • The actor Peter Seller starred in a series of five Pink Panther fils. Except for one movie, he did not himself contract to provide his services but did so through «loan-out» companies, which contracted with production companies created by the producer of the Pink panther series, Blake Edwards. • After Peter Seller’s death, and without having obtained permission, another production company, also created by Blake Edwards, made a sixth Pink Panther movie using previously unreleased material left over from the earlier films. • Such use gave rise to breaches of the contracts between the «loan-out» companies and the original production companies. • The personal representatives of Peter Sellers and the «loan-out» companies sued the production company and the distributor of that film. Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

9. Held: • The court of first instance gave judgement for the plaintiffs. • The court of appeal dismissed the appeal, holding • that the defendants had breached the performer’s rights and were liable for those breaches. • that, under the terms of agreements concluded for each of the five films, the defendants were obliged to use the actor’s performances only for the film to which the agreement related. • since, the making of the sixth film constituted a breach of that negative convenant, the defendants were liable in tort for procuring such breach. Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

10. Court of Appeal • Bingham LJ: • «… could the defendants be held liable … for inducing a breach of … negative covenants? The defendants argued that they could not. I found that contention startling, and a familiar example will show why. Take the case of an employment contract containing a valid covenant against competition for 12 months after termination. The contract comes lawfully to an end. The employee has performed all the service required of him and has received all the pay to which he is entitled. The only contractual term remaining in force is the employee’s negative covenant not to compete. A third party, knowing of the covenant, induces the employee to work for him during the period of the convenant and in obvious breach of it. It is accepted that an action would lie … against the employee. But if the defendants are right, no action would lie against the third party, they contend that it would not. I can find no basis in principle for such anomalous result, which conflicts with both the law and the practice as I have long believed them to be.» Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

11. Observations: • (1) Where is the problem of pure economic loss in this case? • (2) On what legal basis does judge Bingham found(manifest) his decision against the defendants? • (3) What about contractual liability in this case? • (4) What are the restrictions against opening the floodgate of compensation for pure economic loss in this case?

12. BGH 19 October 1993: • Facts: • The plaintiff bought a house in 1973. In 1974, after marriage, he conveyed the house to his wife, and the conveyance was duly recorded in the Landregister. The couple subsequently entered into a notarised contract whereby they agreed that the wife had put up one-sixth of the value of the house and the plaintiff five-sixths and that, in case of divorce, the wife accepted the obligation to return the property to the plaintiff on payment by him of one-sixth of the value of the house. • After the plaintiff and his wife had separated in June 1979, the wife, without the knowledge of her husband, granted three liens (Grundschulden), each of DM 100’000 over the property. The liens were entered in the Landregister in August 1979. • They were later given to the bank as collateral security for a loan. The wife failed to make any repayment to the bank. • In February 1984, the divorce was pronounced and the court ordered the wife to return the property to the plaintiff. The defendant bank thereupon terminated the credit to the wife and initiated proceedings for the compulsory sale of the property by public auction (Zwangsversteigerung). Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

13. The claim: • The plaintiff sued the bank, claiming • that his ex-wife had wished to cause him harm by issuing liens on the property which she was obliged to return in the event of a divorce. • that the defendant was aware of that fact and that it colluded with the wife to cause injury to the plaintiff. • The plaintiff relied on § 826 BGB against the defendant to seek a declaration that the compulsory sale of the property was unlawful. Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

14. BGH: • «The defendant acquired the real estate securities from the person formally holding title at the request of the owner registered in the Land Register. Unknown to the defendant when he made the acquisition, the priority notice of conveyance in favour of the plaintiff did not preclude assignment of the real estate securities already effected. (…) The defendant was not required to inquire as to whether the plaintiff’s former wife (…) incurred tortious liability to third parties by effecting and assigning liens (Grundschulden) by way of security. • Contractual claims are not amongst the rights infringement of which in itself gives rise to claims in tort. Nor does the moral order oblige an independant third party in a case of conflict to subordinate its own interests of the contracting parties. Thus, there is no claim under § 826 BGB for damages against a third party simply on the ground of his cooperation in the violation by the debtor of his creditor’s rights under the contract.» Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

15. The principle in German Law. • «In accordance with settled BGH-case-law, involvement by a third party in a breach of contract is contra bonos mores only if his interference with the contractual relations is marked by a particular lack of consideration for the person concerned. Such a lack of consideration may above all be constituted by collusion with the debtor under the contract in order to specifically frustrate the claims of the creditor concerned. The allegation of conduct contra bonos mores is well-founded only in cases of serious offences to feelings of decency, where the course of conduct of a third party is incompatible with the basic requirements of a proper view of the law.» Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

16. Observations: • (1) Where is the problem of pure economic loss in this case? • (2) On what legal basis does the BGH foundhis decision for the wife? • (3) What about contractual liability in this case? • (4) What are the restrictions against opening the floodgate of compensation for pure economic loss in this case?

17. Cass. civ. 3e, 8 July 1975 Sté de copropiété …v Servim. • On 19 June 1969 Mrs Sabatier by a unilateral promse granted the Pravat Compagny an option over certain real property that she owned; the option was exercisable until September 1969. • On 11 July 1969, Pravat assigned the benefit of that option to the plaintiff. • On 21 September 1969, Pravat assigned the (same) benefit of that option to the defendant, the Servim compagny. • On 22 September Servim learnt of the earlier assignement of the option to the plaintiff. • On 3 October 1969, Mrs Sabatier formally conveyed the property to Servim. • As a consequence of the conveyance, the plaintiff lost the benefit of that option that Pravat had assigned to him. Universität Zürich, RWI, Comparative Private Law HS 2011, Prof. Dr. iur. Ulrike Babusiaux

18. Cour de cassation: • «Having regard to Art. 1382 C.civ.: The beneficiary of a promise of sale is entitled to invoke against a person who is not a party to that promise either the fraud with which that person is associated or merely the fault of which that person was guilty in agreeing to acquire a building which it knew to be subject to the promise. • (…) It is clear from the court of appeal‘s own findings, that, after learning of the promise of sale binding Pravat to SCRI under the document of 22 September 1969, Servim was not informed by a letter from the notary dated 26 September 1969 of the difficulties that might arise owing to the existence of that promise, and that Servim itself indicated to the notary, in a letter of 3 October 1969, that it relieved him of all liability. Having thus established all the elements constituting a fault (faute), the court of appeal, in deciding as it did, applied Article 1382 C. civ. incorrectly.»

19. Observations: • (1) Where is the problem of pure economic loss in this case? • (2) On what legal basis does the Cour de cassation found his decision against the defendants? • (3) What about contractual liability in this case? • (4) Are there any restrictions against opening the floodgate of compensation for pure economic loss in this case?

20. Comparison: Liability of a third-party accomplice to a contractual breach • Common Law: induction to breach of contract (intentional); in case of negligence, there are specific rules to be complied with • German Law § 826 BGB: non consideration (contra bonos mores) of the other parties‘ contract; intentional harm of the other parties‘ contract • French Law: tortious liability for breach of contract even if the benefit is only due to a negligent behaviour French Law does not consider pure economic loss a special question, whereas the German Law and the Common Law are restrictive (reserved) about this special kind of loss.

21. II. Why should economic loss be treated differently? • The floodgate argument • Lord Denning: «there would be no end of claims» • The French example does not give this impression • insurances may cover the claims • alternative control instruments (such as causation, proof of damage, the duty of the victim to mitigate the loss etc.)

22. 2. Indeterminacy of Numbers and Amounts • Cardozo (1931): «the defendant would be exposed to a liability in an indetermined amount for an indeterminate time to an indeterminate class» • unforeseeability of the number of potential victims (a general problem in torts) • unforeseeability of the amount of loss (also a general problem in torts)

23. Policy Considerations: • deterrence: do we need liability for pure economic loss, if there is already a rational liability (sterring from another contract)? • degree of protection: Are pure economic interests less worthy than life, limb and property? • justice: Is the nature of the damage really decisive when deciding, whether the tortfeaser should be allowed to walk free or to pay? • balance of interests: Would it be the best to allow courts to decide about the compensation of pure economic loss because of the facts and the interests in question?