On certification to the Superior Court, Appellate Division, whose opinion is reported at 194 N.J. Super. 349 (1984).
For modification and affirmance -- Chief Justice Wilentz, and Justices Clifford, Handler, O'Hern, Garibaldi and Stein. For reversal -- None. The opinion of the Court was delivered by Handler, J.
[100 NJ Page 248] This appeal presents a question that has not previously been directly considered: whether a defendant's negligent conduct that interferes with a plaintiff's business resulting in purely economic losses, unaccompanied by property damage or personal injury, is compensable in tort. The appeal poses this issue in the context of the defendants' alleged negligence that caused a dangerous chemical to escape from a railway tank car, resulting in the evacuation from the surrounding area of persons whose safety and health were threatened. The plaintiff, a commercial airline, was forced to evacuate its premises and
suffered an interruption of its business operations with resultant economic losses.
Because of the posture of the case -- an appeal taken from the grant of summary judgment for the defendant railroad, subsequently reversed by the Appellate Division, 194 N.J. Super. 349 (App.Div.1984) -- we must accept plaintiff's version of the facts as alleged. The facts are straight-forward.
On July 22, 1981, a fire began in the Port Newark freight yard of defendant Consolidated Rail Corporation (Conrail) when ethylene oxide manufactured by defendant BASF Wyandotte Company (BASF) escaped from a tank car, punctured during a "coupling" operation with another rail car, and ignited. The tank car was owned by defendant Union Tank Car Company (Union Car) and was leased to defendant BASF.
The plaintiff asserted at oral argument that at least some of the defendants were aware from prior experiences that ethylene oxide is a highly volatile substance; further, that emergency response plans in case of an accident had been prepared. When the fire occurred that gave rise to this lawsuit, some of the defendants' consultants helped determine how much of the surrounding area to evacuate. The municipal authorities then evacuated the area within a one-mile radius surrounding the fire to lessen the risk to persons within the area should the burning tank car explode. The evacuation area included the adjacent North Terminal building of Newark International Airport, where plaintiff People Express Airlines' (People Express) business operations are based. Although the feared explosion never occurred, People Express employees were prohibited from using the North Terminal for twelve hours.
The plaintiff contends that it suffered business-interruption losses as a result of the evacuation. These losses consist of cancelled scheduled flights and lost reservations because employees were unable to answer the telephones to accept bookings;
also, certain fixed operating expenses allocable to the evacuation time period were incurred and paid despite the fact that plaintiff's offices were closed. No physical damage to airline property and no personal injury occurred as a result of the fire.
According to People Express' original complaint, each defendant acted negligently and these acts of negligence proximately caused the plaintiff's harm. An amended complaint alleged additional counts of nuisance and strict liability based on the defendants' undertaking an abnormally dangerous activity, as well as defective manufacture or design of the tank car, causes of action with which we are not concerned here. Defendants filed answers and cross-claims for contribution pursuant to the Joint Tortfeasors Contribution Law, N.J.S.A. 2A:53A-1 to -6.
Conrail moved for summary judgment, seeking dismissal of the complaint and cross-claims against it; the motion was opposed by plaintiff, People Express, and defendants BASF and Union Car. The trial court granted Conrail's summary judgment motion on the ground that absent property damage or personal injury economic loss was not recoverable in tort. Defendants BASF and Union Car subsequently sought summary judgment dismissing the complaint; the trial court also granted these motions based on the same reasoning.
The Appellate Division granted plaintiff's interlocutory request for leave to appeal and reversed the trial court's order granting summary judgment. The Appellate Division held that recovery of negligently caused economic losses was not automatically barred by the absence of property damage and that summary judgment was inappropriate. 194 N.J. Super. at 355-56. The cause was remanded to the trial court with instructions to determine whether the evidence could support the finding of a foreseeable risk of harm to the plaintiff. This Court granted defendant Union Car's petition for certification, in which Conrail and BASF joined, and denied People Express'
motion to dismiss the petition for certification. 99 N.J. 169, 170 (1984).
The single characteristic that distinguishes parties in negligence suits whose claims for economic losses have been regularly denied by American and English courts from those who have recovered economic losses is, with respect to the successful claimants, the fortuitous occurrence of physical harm or property damage, however slight. It is well-accepted that a defendant who negligently injures a plaintiff or his property may be liable for all proximately caused harm, including economic losses. See Palsgraf v. Long Island R.R., 248 N.Y. 339, 162 N.E. 99 (1928); W. Prosser & W. Keeton, The Law of Torts § 129, at 997 (5th ed. 1984) (Prosser & Keeton). Nevertheless, a virtually per se rule barring recovery for economic loss unless the negligent conduct also caused physical harm has evolved throughout this century, based, in part, on Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303, 48 S. Ct. 134, 72 L. Ed. 2d 290 (1927) and Cattle v. Stockton Waterworks Co., 10 Q.B. 453 (1875). This has occurred although neither case created a rule absolutely disallowing recovery in such circumstances.*fn1 See, e.g., Stevenson v. East Ohio Gas Co., 73 N.E. 2d 200 (Ohio Ct.App.1946) (employee who was prohibited from working at his plant, which was closed due to conflagration begun by negligent rupture of stored liquified natural gas at nearby utility, could not recover lost wages); Byrd v. English, 117 Ga. 191, 43 S.E. 419 (1903) (plaintiff who owned printing plant could not recover lost profits when defendant negligently damaged utility's electrical conduits that supplied
power to the plant); see also Restatement (Second) of Torts § 766C (1979) (positing rule of nonrecovery for purely economic losses absent physical harm). But see In re Kinsman Transit Co., 388 F.2d 821, 824 (2d Cir.1968) (after rejecting an inflexible rule of nonrecovery, court applied traditional proximate cause analysis to claim for purely economic losses).
The reasons that have been advanced to explain the divergent results for litigants seeking economic losses are varied. Some courts have viewed the general rule against recovery as necessary to limit damages to reasonably foreseeable consequences of negligent conduct. This concern in a given case is often manifested as an issue of causation and has led to the requirement of physical harm as an element of proximate cause. In this context, the physical harm requirement functions as part of the definition of the causal relationship between the defendant's negligent act and the plaintiff's economic damages; it acts as a convenient clamp on otherwise boundless liability. See Union Oil Co. v. Oppen, 501 F.2d 558, 563 (9th Cir.1974); The Federal No. 2, 21 F.2d 313 (2d Cir.1927); Byrd v. English, supra, 117 Ga. 191, 43 S.E. 419 (1903). The physical harm rule also reflects certain deep-seated concerns that underlie courts' denial of recovery for purely economic losses occasioned by a defendant's negligence. These concerns include the fear of fraudulent claims, mass litigation, and limitless liability, or liability out of proportion to the defendant's fault. See In re Kinsman Transit Co., supra, 388 F.2d at 823; Weller & Co. v. Foot & Mouth Disease Research Inst. , 1 Q.B. 569, 577; Stevenson v. East Ohio Gas Co., supra, 73 N.E. 2d at 203.
The assertion of unbounded liability is not unique to cases involving negligently caused economic loss without physical harm. Even in negligence suits in which plaintiffs have sustained physical harm, the courts have recognized that a tortfeasor is not necessarily liable for all consequences of his conduct. While a lone act can cause a finite amount of physical harm, that harm may be great and very remote in its final
consequences. A single overturned lantern may burn Chicago. Some limitation is required; that limitation is the rule that a tortfeasor is liable only for that harm that he proximately caused. Proximate or legal cause has traditionally functioned to limit liability for negligent conduct. Duty has also been narrowly defined to limit liability. Compare the majority and dissenting opinions in Palsgraf v. Long Island R.R., supra, 248 N.Y. 339, 162 N.E. 99. Thus, we proceed from the premise that principles of duty and proximate cause are instrumental in limiting the amount of litigation and extent of liability in cases in which no physical harm occurs just as they are in cases involving physical injury.
Countervailing considerations of fairness and public policy have led courts to discard the requirement of physical harm as an element in defining proximate cause to overcome the problem of fraudulent or indefinite claims. See Portee v. Jaffee, 84 N.J. 88 (1980); Dillon v. Legg, 68 Cal. 2d 728, 69 Cal.Rptr. 72, 441 P. 2d 912 (1968) (abandoning zone of danger rule in favor of a foreseeability test to determine whether the plaintiff may recover for mental distress arising from physical harm to another). In this context, see, e.g., Portee v. Jaffee, supra, as well as in variant settings, see Merenoff v. Merenoff, 76 N.J. 535 (1978), we have subordinated the threat of potential baseless claims to the right of an aggrieved individual to pursue a just and fair claim for redress attributable to the wrongdoing of another. The asserted inability to define damages in cases arising under the cause of action for negligent infliction of emotional distress absent impact or near-impact has not hindered adjudication of those claims. Nor is there any indication that unfair awards have resulted.
The troublesome concern reflected in cases denying recovery for negligently-caused economic loss is the alleged potential for infinite liability, or liability out of all proportion to the defendant's fault. This objection is also not confined to negligently-caused economic injury. See infra at 252-253. The same objection has been asserted and, ultimately, rejected by this
Court and others in allowing recovery for other forms of negligent torts, see H. Rosenblum, Inc. v. Adler, 93 N.J. 324 (1983), and in the creation of the doctrine of strict liability for defective products, see Feldman v. Lederle Laboratories, 97 N.J. 429 (1984); Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358 (1960), and ultrahazardous activities, see State, Dep't of Envtl. Protection v. Ventron Corp., 94 N.J. 473 (1983). See also Carpenter, "Interference With Contract Relations," 41 Harv.L.Rev. 728, 742 (1928) (noting that most advances in tort law have been attended by reluctance to take the step forward). The answer to the allegation of unchecked liability is not the judicial obstruction of a fairly grounded claim for redress. Rather, it must be a more sedulous application of traditional concepts of duty and proximate causation to the facts of each case. See Soler v. Castmaster, Div. of H.P.M. Corp., 98 N.J. 137 (1984).
It is understandable that courts, fearing that if even one deserving plaintiff suffering purely economic loss were allowed to recover, all such plaintiffs could recover, have anchored their rulings to the physical harm requirement. While the rationale is understandable, it supports only a limitation on, not a denial of, liability. The physical harm requirement capriciously showers compensation along the path of physical destruction, regardless of the status or circumstances of individual claimants. Purely economic losses are borne by innocent victims, who may not be able to absorb their losses. See Comment, 88 Harv.L.Rev. 444, 449-50 (1974). In the end, the challenge is to fashion a rule that limits liability but permits adjudication of meritorious claims. The asserted inability to fix chrystalline formulae for recovery on the differing facts of future cases simply does not justify the wholesale rejection of recovery in all cases.
Further, judicial reluctance to allow recovery for purely economic losses is discordant with contemporary tort doctrine. The torts process, like the law itself, is a human institution designed to accomplish certain social objectives. One objective is to ensure that innocent victims have avenues of legal redress,
absent a contrary, overriding public policy. See Kelly v. Gwinnell, 96 N.J. 538 (1984); Evers v. Dollinger, 95 N.J. 399 (1984); Costa v. Josey, 83 N.J. 49 (1980); Berman v. Allan, 80 N.J. 421 (1979); Immer v. Risko, 56 N.J. 482 (1970); Henningsen v. Bloomfield Motors, Inc., supra, 32 N.J. 358. This reflects the overarching purpose of tort law: that wronged persons should be compensated for ...