In cases involving auto accidents, employment, emotional distress, misrepresentations, and legal and medical malpractice, California’s law of negligence has yielded huge recoveries in civil lawsuits. The main principle underlying liability for negligence is codified in 1872’s California Civil Code §1714(a), which provides that “[e]veryone is responsible, not only for the result of his or her willful acts, but also for an injury occasioned to another by his or her want of ordinary care or skill in the management of his or her property or person….” So everyone is liable to everyone they hurt with their mistakes, right? Well, not exactly….
While this statute seems to articulate a duty to avoid harming pretty much everyone– and makes no qualification as to the type of injury– the courts have imposed significant limitations on its breadth. Thus, just as the text of the First Amendment rings absolute, the courts long ago clarified that you can still get in trouble for “falsely shouting fire in a theatre and causing a panic.”
Every negligence case begins with an analysis of “duty,” i.e., whether the defendant should be deemed to have had an enforceable obligation under the law to avoid injuring the plaintiff. This is essentially a social policy question, resolved by the judge, not the jury. Car accident? No problem there. It’s plain we all have a duty to use ordinary care in driving so as not to cause injuries. Other situations can be less clear.
In the realm of commercial dealings, which are normally governed by contracts between the parties, California law features the “Economic Loss Rule.” This rule bars claims for negligence where there has been no personal injury or property damage. Why? Because the law of contracts aims to provide commercial parties with a means to assess and control their risk in doing business. As long the law of contracts is all they have to contend with, they can estimate the financial consequences of a breach with some certainty.
That goal would be significantly undermined if contracting parties faced liability in negligence for failing to perform a contract. The potential consequences would be open-ended. Thus, unless someone gets physically hurt or there is property damage, liability in negligence is barred between contracting parties. There are some exceptions– such as contracts for insurance or professional services– which allow recovery. And when parties are not in contract together, recovery can be allowed when certain circumstances are present. But generally, when there’s a contract– and the proposed duty in negligence is not somehow independent of that contract– no recovery for purely economic losses may be had.
And so when a mortgage borrower submits an application for a mortgage mod to his lender, and said lender botches the application and fails to make the mod, the borrower can’t sue in negligence. This recent ruling by the California Supreme Court, applying the Economic Loss Rule, settled a split of opinion on the issue in the various Districts of the California Court of Appeal. So while the Court’s application of the rule seems straightforward, some of the best legal minds apparently could disagree on the issue.