Compensation for Pure Economic Damages - Part 2

In the previous column, we discussed the concept of pure economic damage and emphasized the importance of reflecting on the scope of pre-contractual liability, the enforceability of the external effectiveness of contracts, and the practical application of objective good faith and abuse of rights.

We believe that the framework previously established also applies to Brazilian law when considering the extent to which pure economic damages deserve protection. In accordance with the principle of full compensation, we have thoroughly studied the categories of actual damages and loss of profits; however, this dichotomy makes much more sense if we move toward understanding which of these damages are truly compensable, without having to resort to the fluid distinction between direct and indirect (collateral) victims.

A good example of this gray area comes from a 2022 decision by the Superior Court of Justice, which ruled that a third-party offender is subject to the transsubjective effect of obligations, given that their conduct cannot unduly interfere with the contractual relationship and, thereby, disrupt the normal performance of the contract by the parties, under penalty of being held liable for damages resulting from their conduct. Based on this understanding, the court upheld an award of R$ 50,000 in moral damages to an athlete.

The damages must be paid by the third-party offender who sent a defamatory letter to the player’s sponsoring company, alleging criminal conduct by the sponsored athlete, in a manner that was both defamatory and vindictive. According to the Reporting Justice, Minister Bellize, “The liability of a third party, who is unrelated to the contractual relationship, stems from the fact that such a party does not function within the social framework of contractual autonomy, incorporating as a practical rationale the trust and social development inherent in the conduct of those who exercise their freedom,” he added. In other words, there is a balancing of interests that would apparently justify compensation for purely pecuniary damages. However, we have here a case of a violation of the athlete’s personality rights by the offending third party. The third party’s conduct cannot be characterized as the exercise of their freedom of expression but rather as the abusive exercise of a right.¹

Despite the omission by our legislature, nothing prevents legal doctrine from exploring possibilities for self-restraint within the very concept of the harm itself, rather than relying on elements external to it. In fact, at least from a doctrinal perspective, we have a value-based scale for protecting existential situations, ranging from the most severe (an attack on life) to simpler situations (an offense against one’s name in official records), without, however, even those at the lower end being simply disregarded a priori. Nevertheless, nothing is discussed regarding a scale of property damages, on which there would be a variable argumentative burden depending on whether the damages involve damage to property or purely pecuniary damages. Consequently, it is up to our legal doctrine to weigh objective criteria for their admissibility, just as it already does, in order to assess the defenses against unlawfulness (justifications) worthy of protection.

Specifically, Article 2:102 of the PETL (Principles of European Tort Law) states: “Protected Interests. (1) The scope of protection afforded to an interest depends on its nature; the greater its value, the greater the precision of its definition, and the more self-evident it is, the more extensive its protection. (2) Life, physical or mental integrity, human dignity, and freedom enjoy the broadest protection. (3) Broad protection is granted to property rights, including those in intangible assets.” (4) The protection of purely economic interests may have a more limited scope. In such cases, special attention must be paid to the proximity between the agent and the threatened person, or to the fact that the agent is aware that harm will be caused, even though the agent’s interests are necessarily valued lower than those of the victim.” This is a rule that assigns a hierarchy of value not only to existential interests but also to property interests, placing pure economic harm in a subordinate position.

Moreover, with regard to the “all-or-nothing principle,” as authoritative German legal doctrine itself acknowledges, it is understandable that the rigid distinction made by the BGB between absolute interests and unprotected interests finds no support in the French system (nor in ours), since there are no assets that are completely and unrestrictedly protected, just as there are no interests that enjoy absolutely no protection whatsoever; in other words, even purely economic interests deserve protection. On the other hand—and this is where the criticism arises—it seems self-evident that every system must have a hierarchy of recognized and protected interests. While this typically manifests in fundamental rights and criminal law, the same applies to any private legal order.²

Beyond the example of a car running out of fuel, which causes harm to other drivers, we can illustrate purely economic damages with other situations already discussed in comparative law scholarship. C is a player on basketball team D. A few days before the end of the championship, C is struck and injured by a vehicle, leaving him unable to play for three months. In the absence of its best player, the team that had been leading the tournament drops to 4th place. This represents a significant loss for Team D. Can the team obtain compensation from the driver? The answer would be yes if the accident had been intentional; however, since this is a case of negligence, the only viable option would be to apply the theory of external efficacy, considering the driver a third-party tortfeasor who breached the team’s contractual relationship with the player. However, even this argument would face difficulties in being upheld, as it would imply that the creditor’s interest in the debtor’s performance would always prevail over the third party’s freedom of action—the third party’s autonomy would only be restricted to safeguard absolutely protected legal positions.³

This example refers to Italian law, specifically the famous Meroni case decided by the Corte di Cassazione in 1974, which played a decisive role in the interpretation of the aforementioned concept of “unjust damages” arising from extracontractual civil liability (Article 2043 of the Civil Code). The story concerns Luigi Meroni and his accident in October 1967, the second tragedy in the history of the Turin team.⁴ Torino filed a lawsuit against the party responsible for the accident, alleging injury to its credit right, since it could no longer exercise the player’s “right to play.” Unlike what happened in the “Superga case,” the Court of Cassation awarded the club compensation, changing the interpretation of the law to extend the concept of “unjust damage” to any event that infringes upon an interest deemed worthy of protection by the legal system, regardless of whether it is an absolute or relative right.

Similar cases would likely have the same outcome under French law, particularly in light of the rule in Article 1.200 in the version in force since 2016, according to which “Third parties must respect the legal situation created by the contract.”⁵ The codification of a general, erga omnes duty to respect another’s contractual rights—under penalty of extracontractual liability for damages—reflects an understanding quite different from that of the legal systems of Germany and Portugal.

As previously emphasized, in the general provision of Article 186 of the Brazilian Civil Code, the expression “violating a right and causing harm to another” would lend some substance to the tort-based protection of credit, insofar as the flexibility of the legal provision does not distinguish between absolute rights and credit positions, even those of third parties.⁶

A third group of cases in which pure economic damages are controversial concerns the interruption of the supply of energy, water, communications, or other goods essential to a business, negligently caused by entities other than the respective contractual supplier (e.g., a contractor who accidentally cuts a power cable running along a public road).⁷ In the absence of a contractual relationship between the tortfeasor and the injured party, would tort liability apply?

In the United States, there would certainly be no obligation to pay damages, as the “economic loss rule” applies, which precludes compensation for pure economic losses. The rule was defined quite simply: it is a doctrine created by the courts that prohibits the extension of civil liability to cases in which a product has damaged only itself and there is no personal injury or damage to other property.⁸

In Brazilian civil law, unlawfulness is not established through specific clauses that limit civil liability. Hence, any violation of a right is—in theory and provided the other prerequisites for civil liability are met—capable of giving rise to compensable damages. For Brazilian legal scholars, as for their French counterparts, the concept of purely pecuniary damages is foreign. In Brazilian civil law, as is characteristic of this type of legal model, the limit on civil liability is determined by the issue of causation.⁹

A fourth situation—among countless possibilities—involves a person who has been injured in an accident and is unable to care for themselves. Due to the severity of the situation, his wife is forced to close her small business to care for her husband, seeking compensation from the at-fault party for the loss of profits she failed to earn during the suspension of her business activities. The peculiarity here lies in the fact that the wife is not seeking compensation related to the injured party’s health or life, but rather for the suspension of her profitable business due to caring for her spouse.¹⁰

Under Portuguese law, Article 495 of the Civil Code explicitly provides for compensation owed to certain third parties for specific financial losses they suffer in the event of another person’s death or bodily injury. This constitutes a departure from a general principle whereby the right to compensation belongs solely to the person holding the absolute right or legally protected interest that has been infringed, and not to third parties—that is, to individuals who have been harmed only mediately, indirectly, or reflexively.¹¹ In the absence of an express provision in the aforementioned statute, it is a matter of controversy whether the victim’s family members are entitled to the loss of profits they were deprived of because they had to cease the work they had previously been performing in order to care for the victim. The affirmative answer is supported by case law regarding the legal duty of assistance that exists between spouses, with the added consideration that such damages fall within the scope of the provision encouraging care and treatment, since the family’s intervention replaces that which could have been performed by a third party, the costs of which would always be attributable to the liable party.¹²

In the Brazilian Civil Code, however, none of the three provisions addressing such harmful events immediately permit a claim for pure economic damages—here defined as the loss of profits resulting from providing assistance to the victim—against the party who caused the harm to their spouse, ascendant, or descendant.¹³ However, we have no doubt that, even in the face of a legislative gap, family solidarity in emergency situations constitutes a special requirement for protection that lends what would, in principle, be a purely economic loss suffered by a third party a distinct legal character—that of a property interest deserving of legal protection.

A fifth and final example, cited by GRAZIANO: A company instructs an advertising agency to place substantial orders on its behalf for television commercials and newspaper advertising space. Before accepting and fulfilling the order, the advertising agency asks its bank to contact the company’s bank and inquire about the company’s creditworthiness. The company’s bank states that it is a “respectably established company” that is “considered reliable for its normal business obligations.” The advertising agency relies on this assessment and places the orders with the television stations and newspapers. It is personally liable for the costs of these orders. Before paying the advertising agency for its services, the company goes into liquidation. As a result, the advertising agency loses a considerable amount of money. The advertising agency sues the company’s bank for damages, alleging that the bank acted negligently by creating a misleading impression of its client’s creditworthiness.¹⁴

As is well known, in most jurisdictions, liability for “pure” economic losses is recognized only in exceptional circumstances. However, other legal systems may hold the provider of erroneous information or advice liable to the end user of the information—who is a third party—for the “pure” economic loss suffered.¹⁵ In summary, the DCFR (Draft Common Frame of Reference) provides in Book VI, Article 2:207, “Loss Arising from Reliance on Incorrect Information or Advice”: The loss caused to a person as a result of making a decision based on a reasonable reliance on incorrect advice or information is a legally relevant harm if: (a) the advice or information is provided by a person in the course of a profession or in the course of a commercial activity; and (b) the provider knew or could reasonably have expected to know that the recipient would rely on the advice or information to make a decision of the kind made.”¹⁶

In light of the foregoing, it is clear that the rule excluding compensation for economic damages in legal systems that define the circumstances of tortious conduct may be subject to exceptions in three situations: a) economic damage resulting from a violation of an absolute right; b) purely pecuniary damages intentionally inflicted; c) selective relief for economic damages arising from simple negligence. While the first two aspects are readily understood and widely accepted, the third is achieved through circumventions such as broadening the scope of contractual liability, as KOZIOL observes, to encompass cases of culpa in contrahendo—the breach of pre-contractual duties of due diligence in negotiations that result in purely pecuniary damages. Far-reaching duties are established between the parties, and their breach is treated as a breach of contract, unlike in legal systems where liability for breach of pre-contractual negotiations is of a non-contractual nature. Another relevant example in practice is the liability of the prospectus issuer toward the recipients—who are generally not contracting parties. However, compensation is possible for purely pecuniary damages arising from errors, omissions, or false information in connection with the issuance of the document.¹⁷

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1. STJ Panel, June 3, 2022, Reporting Justice Marco Aurelio Belizze: In his opinion, the reporting justice emphasized that, according to the theory of the complicit third party, in addition to being subject to the transsubjective effectiveness of obligations, the third party also cannot join forces with one of the parties to fail to fulfill the obligation, since, in that case, he could be considered an accomplice in the breach of that obligation. According to Bellizze, one of the scenarios in which the third party’s reprehensible conduct may give rise to liability is the so-called “unlawful interference,” in which the third party interferes in the contractual relationship through information or advice with the intent to encourage one of the parties to fail to fulfill its contractual obligations. The judge noted, however, that the mere expression of an opinion does not constitute an unlawful act, “since everyone is free to express their conviction regarding potential risks or deviations,” which, however, must not be done maliciously, exaggeratedly, or in a manner contrary to objective good faith.
2. KOZIOL, Helmut. Basic Questions of tort law from a comparative perspective. Viena: Jan Sramek Verlag, 2015. p. 730.
3. FRADA, Manuel Antonio de Castro Portugal Carneiro da. Forjar o direito. Coimbra: Almedina, 2019. p. 168- 169.
4. The first was the Superga disaster in 1949, in which all the players of “Grande Torino” lost their lives in a plane crash. The company sued the airline seeking compensation for the “right to performance,” but the Supreme Court denied the claim. The reason was that the law expressly protected Absolute Rights (which can be asserted by anyone against anyone) and not Credit Rights (which are part of Relative Rights).
5. Text introduced by Ordinance No. 2016-131 of February 10, 2016.
6. Art. 186 CC: “Anyone who, by willful act or omission, negligence, or recklessness, infringes a right and causes harm to another, even if exclusively moral, commits a tort.”
7. VICENTE, Dario Moura. Direito comparado. Obrigações. Coimbra: Almedina, 2017. v. II, p. 436. The author presents the favorable positions of the French and Italian courts, based on general clauses of non-contractual liability, in contrast to German law, given that non-contractual liability serves to protect absolute rights, which precludes the attribution of liability ex delicto for damages arising from the mere infringement of credit rights without a violation of good morals.
8. GREEN, Michael; CARDI, Jonathan. Basic questions of tort law from the perspective of the USA. Wien: Jan Sramek Verlag, 2015. p. 462.
9. BRITO, Fábio Leite de Farias. Responsabilidade civil por danos puramente patrimoniais. Anais do VII Encontro Internacional do CONPEDI/BRAGA - Portugal - Direito Civil Contemporâneo. Disponível aqui. Acesso em: 05 dez. 2022. p. 12.
10. FRADA, Manuel Antonio de Castro Portugal Carneiro da. Forjar o direito. Coimbra: Almedina, 2019. p. 173.
11. Article 495 (Compensation to Third Parties in the Event of Death or Bodily Injury): “1. In the event of an injury resulting in death, the liable party is obligated to compensate for the expenses incurred to save the injured party and all other expenses, including, without exception, funeral expenses. 2. In this case, as in all other cases of bodily injury, those who came to the aid of the injured party are entitled to compensation, as are hospitals, physicians, or other persons or entities that contributed to the victim’s treatment or care. 3. Those who could have claimed support from the injured party, or those to whom the injured party provided support in fulfillment of a natural obligation, are also entitled to compensation.”
12. FERNANDES, Gabriela Páris. Comentários ao Código Civil. Lisboa: Universidade Católica Editora, 2015. v. II, p. 345.
13. "Art. 948. In the case of homicide, compensation consists, without excluding other remedies: I—in the payment of expenses for the victim’s treatment, funeral, and the family’s mourning; II—the provision of support to the persons to whom the deceased was obligated to provide it, taking into account the victim’s probable life expectancy. Art. 949. In the case of bodily injury or other harm to health, the wrongdoer shall compensate the injured party for medical expenses and the loss of profits until the end of convalescence, in addition to any other damages that the injured party proves to have suffered. Art. 950. If the injury results in a disability that prevents the injured party from performing their trade or profession, or if their capacity to work is diminished, the compensation, in addition to medical expenses and loss of profits until the end of convalescence, shall include a pension corresponding to the value of the work for which they have become incapacitated, or to the loss of earning capacity they have suffered.”
14. GRAZIANO, Thomas Kadner. Comparative tort law: cases, materials and exercises. New York: Routledge, 2018. p. 419.
15. According to the American Law Institute, Restatement of the Law—Torts (2nd ed.), 1979, § 552: “Information negligently provided for the guidance of third parties. (1) A person who, in the course of his business, profession, or employment, or in any other transaction in which he has a pecuniary interest, provides false information for the guidance of third parties in their business transactions, is liable for pecuniary losses caused to them by their justifiable reliance on the information, if he fails to exercise reasonable care or skill in obtaining or communicating the information. [.] (2) [.] [T]he liability referred to in Subsection (1) is limited to losses suffered (a) by the person or a limited group of persons for whose benefit and guidance the person intends to provide the information or knows that the recipient intends to provide it; and (b) by a person relying on it in a transaction that he intends the information to influence or knows the recipient intends it to influence, or in a substantially similar transaction. [.]".
16. Commenting on this provision, Christian von Bar asserts that “As a general principle, there is no liability for advice, recommendations, or information. [.] The situation is different only when the recipient of the information has a special reason to rely on the accuracy of the information and the provider of the information knows or ought to know about this special situation in which the recipient of the information finds themselves. Typical cases involve creditworthiness information provided by banks and incorrect evaluations or certifications. [.]". 2. VON BAR, Christian; CLIVE, Eric (ed.). Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (DCFR), Full Edition, v. 4, 2009, p. 3345-3347.
17. KOZIOL, Helmut. Basic Questions of tort law from a comparative perspective. Viena: Jan Sramek Verlag, 2015. p. 764.