Economic loss: Overview, definition and example
What is economic loss?
Economic loss refers to financial harm or damage suffered by a person or business, typically resulting from someone else’s actions or a breach of contract. It includes things like lost profits, reduced income, increased expenses, or the cost of fixing a problem caused by the other party. Unlike physical damage to property or personal injury, economic loss is purely financial.
Why is economic loss important?
Economic loss is important because it highlights the financial consequences of a breach of contract or negligence. For businesses, it’s often the most significant type of harm they face, as disruptions, delays, or failures can directly affect their revenue and operations.
Understanding economic loss is crucial because not all financial harm is recoverable in court. For example, some courts require a direct connection between the breach and the loss to claim damages. Additionally, economic loss without accompanying physical damage or injury may be harder to recover, especially in cases of negligence.
Understanding economic loss through an example
Imagine a manufacturer supplies defective parts to an electronics company, causing the company’s production line to stop for a week. As a result, the company loses out on $50,000 in sales. This loss of revenue is considered economic loss, as it’s purely financial and directly tied to the supplier’s failure to deliver quality parts.
In another scenario, a marketing agency breaches its contract by failing to launch an agreed-upon campaign on time. The client, a retailer, misses a seasonal sales opportunity and suffers a drop in expected profits. This lost income is also economic loss and could form the basis of a claim against the agency.
An example of an economic loss clause
Here’s how an economic loss clause might appear in a contract:
“The parties agree that liability for economic loss arising directly from a breach of this Agreement shall be limited to the actual damages sustained, excluding any indirect or consequential losses unless otherwise specified herein.”
Conclusion
Economic loss captures the financial harm caused by a breach or failure, making it a critical concept in business and legal disputes. For businesses, it’s often the most impactful type of damage, affecting operations, profits, and overall stability.
By understanding how economic loss works and how it’s treated in contracts and disputes, parties can better protect themselves and plan for potential risks. Clear contract terms regarding liability for economic loss can help avoid misunderstandings and ensure fairness in resolving disputes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.