Tort, Contract and the Allocation of Risk

Tort and contract, although both descended from a common ancestor in the forms of action at common law, are generally regarded as distinct species of civil liability. A tort is an act or omission that is marked by fault - either intention or negligence. There are also a few strict liability torts - where fault is not required - but they are rare. The damage for which tort provides a remedy is usually physical - either personal injury or property damages - albeit with consequential financial losses included. Pure economic loss remains an exception. Contract is not fault-based. Liability rests on a finding that the defendant bound itself to an obligation, and that the obligation has been broken. The typical damage in contract is usually purely financial, and physical damage in contract is the exception. Because of their different starting points, the two sorts of claims appeal to different parts of our sense of justice and have different dynamics. Tort plaintiffs are calling upon the law to redress a wrong inflicted on them, whereas contract plaintiffs seek to hold defendants to their promises. Of course, there are contract cases whose overtones are more like tort, and vice versa. The author looks at the way tort law has developed in relation to contractual situations, particularly pure economic loss claims in tort, which generally stem from contractual arrangements that have gone wrong. Both tort and contract function as devices for allocating risk. Tort does so after the risk has materialized; contract, within certain limits, allows the parties to do so in advance. The interrelationship between these two means of risk allocation is one of the themes of the paper.