Efficient Third Party Liability of Auditors in Tort Law and in Contract Law

A wrong audit can cause damages to shareholders. This happens especially if outside shareholders base their investment decision on the audit and buy overpriced company shares. If such damages are recoverable under an implied contract between auditor and shareholder, the auditor is usually liable for simple negligence. In that case he has negligently violated a contractual duty to the shareholder, even though the explicit contract was between him and the corporation. If however these damages are only recoverable under tort law, simple negligence will not lead to compensation because they are pure economic losses and because most legal orders restrict or exclude liability for pure economic loss. For such damages, most legal orders grant compensation under tort law only if it is proven that the tortfeasor was willful, disloyal, reckless or grossly negligent . In most cases this excludes compensation. The economic literature on civil liability for economic loss has underlined the rationale for such restrictions. However, this literature remains silent with respect to the borderline between contract law and tort law. There is a general agreement that pure economic loss has to be compensated under contract law as the cost of this protection is internalized in the contract. If a wrong audit and a wrong and published balance sheet causes a pure financial loss to a shareholder, should this be regarded as a violation of contractual duties between the auditor and the shareholder, or just as a tort? Obviously, in most cases this question is decisive for whether the plaintiff receives compensation or not. We argue that this question should be answered in the affirmative, if the victim has an ex-ante willingness to pay for the costs associated with performing such a duty. In this article we argue that a wrong audit that causes damages to shareholders should generally be strictly regarded as a tort case. We also argue that a rule of gross negligence or of gross violation of professional standards in tort law can avoid the problems of underdeterrence as well as of overdeterrence in the compensation of pure financial loss in tort. However, we also argue that a wrong audit should lead to contractual liability, if it was made to prepare the sale of a company or parts of it from inside investors to outside investors or to prepare an initial public offering. Under this condition we argue that the economic rationale for restricting compensation for pure financial loss is not given. The paper first analyses the social value of an audit. Then several liability rules with precise and vague levels of professional care are treated with respect to their incentive effects. This leads to the proposal of a rule of gross negligence in tort law. In the last part we analyse the special conditions, under which the legal order should assume a contract with protective consequences for buyers of company shares, which leads to liability for simple negligence. The legal form of a contract with protective consequences for third parties (Vertrag mit Schutzwirkung für Dritte) is borrowed from German dogmatic scholarship, but may be interesting in this respect for an international audience as well. This article draws from the literature on pure financial losses and from the literature on precise and vague negligence norms as well as from the literature on the tort contract boundary . The article does however not discuss the problem of joint and several liability and the strategic problems involved, which have been broadly discussed in the literature. The victim of a wrong audit might have a claim against the inside investor, the management, the firm and/or the auditor. This causes strategic interactions, which influence the level of care of all actors as well as the price of auditing . These problems have been extensively dealt with in the literature and are left out here completely. The focus is exclusively on the question, under which conditions the victim should be highly protected by contract law or get a lower level of protection under tort law.

ARE INVENTORIES A BUFFER AGAINST WEAK LEGAL SYSTEMS?

Weak enforcement of contracts leads to inefficient breach of contract and to an overall increase of contract breaches for firms and individuals. Existing literature on contract enforcement has focussed on self-enforcing contracts and contracts within a relationship, family or clan. At the firm level the focus is on ownership structures and vertical integration. Here, we suggest that firms use inventory holdings as a means to counteract weak contract enforcement. We test the hypothesis that firms operating in weak legal environments have a higher ratio of inventories to net sales than firms operating in strong legal environments. We present a conceptual model and empirical evidence in support of the hypothesis using data from over three hundred firms from fourteen product groups across thirty nine countries.

Development Environment for Optimized Locomotion System of Planetary Rovers

This paper addresses the first steps that have been undergone to set up the development environement w.r.t optimization and to modelling and simulation of overall dynamics of the rover driving behaviour under all critical surface terrains, like soft and hard soils, slippage, bulldozing effect and digging in soft soil. Optimization is based on MOPS (Multi-Objective Prameter Synthesis), that is capable for handling several objective functions such as mass reduction, motor power reduction, increase of traction forces, rover stability guarantee, and more. The tool interferes with Matlab/Simulink and with Modelica/Dymola for dynamics model implementation. For modelling and simulation of the overall rover dynamics and terramechanical behaviour in all kind of soils we apply a Matlab based tool that takes advantage of the multibody dynamics tool Simpack. First results of very promising rover optimizations 6 wheels are presented that improve ExoMars rover type wheel suspension systems. Performance of driveability behaviour in different soils is presented as well. The next steps are discusses in order to achieve the planned overall development environment

Stasi files and GDR espionage against the west

Stasi espionage was directed against military policies and abilities, armament research and production, and western policies against the socialist countries. How successful was the Stasi espionage? Bernd Schäfer gives us an exiting insight in the Stasi espionage network

THE CORE OF PURE ECONOMIC LOSS

Should loss of earnings be compensated? The established law and economics wisdom considers pure economic loss as a transfer of wealth from the victim to a third party, whose earnings increase as a consequence of the accident. Such transfers do not amount to a social loss and, hence, should not be compensated. We revisit these arguments and show that the social loss should be calculated by taking into account that: (a) pure economic loss often involves impairment costs resulting from the fact that valuable resources cannot be temporarily used; and (b) the third-party earnings come at the cost of increased capacity. This increased capacity mitigates the expected harm and, hence, is a form of precaution. By taking into account these factors, we show that most pure economic loss cases do result in a socially relevant loss. In addition, we argue that the absence of a social loss is a necessary, but not sufficient, condition for the denial of compensation. The victim (or a third party) may have actually paid for protection against purely private losses. Thus, compensation should be awarded irrespective of whether national law treats the case under tort or contract (where compensation is undisputed). Finally, we offer considerations on the optimal design of liability rules.economic loss, financial loss, tort, damage, compensation,

Economic Impossibility in Turkish Law from the Perspective of Law and Economics

We argue that the proposed introduction of the doctrine of economic impossibility in Article 137 of the reform draft of the Turkish Code of Obligations is in line with economic considerations and facilitates business transactions. This new rule gives courts the explicit power to terminate a contract and relieve the party, which owes specific performance of its obligation without imposing any duty to pay expectation damages to the other party. We argue that a court's decision to terminate a contract under economic impossibility should be based on three tests. First, between contract formation and performance a low-probability-event occurs. Second, this event causes an excessive increase in the costs of specific performance. Third, the concept of an excessive increase should take into due consideration the other party's interest in specific performance. The reform draft includes explicitly the first two tests, but not the third test. We also show under what conditions an excessive performance difficulty should not lead to termination of the contract but rather to an adjustment of the agreed price. We argue that the rule of economic impossibility, if diligently adjudicated, saves the parties transactions costs in comparison to a rule under which the law insists on specific performance or damage payments. We also argue that a specific rule of economic impossibility leads to better and more business-oriented solutions to the underlying problems than the alternative, which is to solve such problems under the broad and unspecific cover of the "good faith" or the "Clausula Rebus Sic Stantibus" doctrine.contract law, impossibility, excessive performance difficulty, impracticability,

Lunar Rover with Multiple Science Handling Capability

A rover design study was undertaken for exploration of the Moon. Rovers that have been launched in the past carried a suite of science payload either onboard its body or on the robotic arm’s end. No rover has so far been launched and tasked with “carrying and deploying” a payload on an extraterrestrial surface. This paper describes a lunar rover designed for deploying payload as well as carrying a suite of instruments onboard for conventional science tasks. The main consideration during the rover design process was the usage of existing, in-house technology for development of some rover systems. The manipulation subsystem design was derived from the technology of Light Weight Robot, a dexterous arm originally developed for terrestrial applications. Recent efforts have led to definition of a mission architecture for exploration of the Moon with such a rover. An outline of its design, the manipulating arm technology and the design decisions that were made has been presented