pure economic loss essay

Duty of Care: Pure Economic Loss Introduction

There are special duty in law restrictions for recovery in negligence where the claimant has suffered pure economic loss. The general rule is that pure economic loss is not recoverable. The most important exception to this general rule is the case of Hedley Byrne v Heller. There is also an exception flowing from White v Jones. There are two fundamentally different views as to why pure economic loss is generally not actionable in negligence . These two views broadly align with the rights view and compensation for loss/policy view.

If the claimant suffers a financial loss resulting from damage caused by the defendant's negligence, this is a consequential loss. Like a consequential psychiatric injury, this is recoverable in a claim for the personal injury or property damage itself.

What is pure economic loss?

Financial loss which does not result from damage to the person or property of the claimant caused by the defendant.

The following cases are illustrative of the pure economic loss concept.

          Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27

In this case, the defendant building contractors cut through an electrical cable leading to the claimant's metal processing plant. This cut off the plant's power for several hours, so the claimant could not process metal for that period. This loss of profit was purely financial because the cable belonged to the electricity company. This was a pure economic loss case because the loss did not flow from damage to the claimant's person or property.

One of the other results of the cable cutting is that some of the metal being processed was damaged. The loss of profit on the damaged metal was consequential economic loss and so was recoverable. Loss of earnings from personal injury and hiring a car after an accident are also examples of consequential economic loss.

          Murphy v Brentwood DC [1991] AC 398

Murphy bought a house with defective foundations so had to spend money on repairs. Murphy sought these costs from the district council which had negligently failed to inspect the foundations when the house was under construction. This was a pure economic loss case because the loss did not flow from damage to the claimant's property — to fail to stop something defective from being made is not to damage that thing.

The general no-recovery rule

The general rule in English law is that you cannot recover in negligence for pure economic loss. This general rule can be illustrated by two types of case:

pure economic loss suffered by the acquisition of defective products or premises.

pure economic loss suffered as a result of damage to a third party.

(i) Pure economic loss suffered as a result of the acquisition of defective products or premises

You cannot recover in negligence for the loss you suffer when you buy something worth less than you thought or hoped it would be. So, you cannot recover if someone's negligence caused you to think something is worth more than it turned out to be. For example, if you buy a microwave oven which simply doesn't work. There might be contractual claims against the salesperson or a contractual guarantee against the manufacturer. But, you cannot sue the manufacturer in tort on the grounds that the defect in the oven is the result of the manufacturer's negligence.

Murphy v Brentwood DC is the leading case in this area. The House of Lords made it clear that the purchaser of a house with defective foundations could not recover the loss resulting from that defect. The purchaser cannot recover the loss from either the builder or the inspecting local authority. The first person to buy would have a contractual claim against the builder almost certainly, but subsequent purchasers cannot sue in tort.

The buyer of a defective chattel will usually have a remedy against the seller in contract law. They will also benefit from implied terms in the Sale of Goods Act 1979 and the Consumer Rights Act 2015. Sale of land or real property is governed by the caveat emptor rule, so purchasers are unlikely to have a contractual claim because this liability is limited to active misrepresentations. So, there is much more pressure for a remedy in tort in the context of the defective premises than in the defective chattel context.

In Australia, Canada, and New Zealand, the courts have not followed Murphy v Brentwood DC and allowed some claims for pure economic loss in the case of premises. In England, the only remedy would be against your own insurance company or possibly a surveyor.

          Winnipeg Condominium No 36 v Bird Construction Co (1995) 121 DLR 4th 193

          Bryan v Maloney (1995) 182 CLR 609

(ii) Pure economic loss suffered as a result of damage to the person or property of a third party ('relational economic loss')

[I]n an uninterrupted line of cases since 1875, it has consistently been held that a third party cannot successfully sue in tort for the interference with his economic expectations or advantage resulting from injury to the person or property of another person...

          Murphy v Brentwood DC [1991] AC 398, 485 (Lord Oliver)

The Court of Appeal held that the claimant factory owner could not recover for the loss of profit on the metal that was not processed as a result of the power cut. This was economic loss suffered as a result of damage to a third party. This is a paradigm case of the application of the rule of no recover for relational economic loss. If the factory owner had owned the cable, they could have recovered for the loss.

There are no noteworthy exceptions to the rule in English law. Some other jurisdictions take a more flexible approach where the courts have allowed recovery for relational economic loss where there is a particularly close relationship between the claimant and the property or person damaged.

          CNR v Norsk Pacific Steamship (1992) 91 DLR (4th) 289 CANADA

          Barclay v Penberthy [2012] HCA 40, 246 CLR 258 AUSTRALIA

So the pattern is that of a very clear rule against liability in English law but a more flexible approach in other jurisdictions.

The main exception to the no-recovery rule: assumption of responsibility

          Hedley Byrne v Heller [1964] AC 465

Pure economic loss is recoverable in negligence, where the defendant has assumed a relevant responsibility towards the claimant. After Hedley Byrne, the assumption was that the exception was limited to situations like Hedley Byrne itself. Those situations where a claimant had relied on a negligent misstatement by the defendant. But, then came the decision in the following case.

          Henderson v Merrett Syndicates Ltd [1995] 2 AC 465

The defendant could also be liable under Hedley Byrne for his negligent performance of a service for the claimant where there was a prior assumption of responsibility. This extension followed from an earlier reformulation of the Hedley Byrne principle by Lord Goff in Spring v Guardian Assurance.

[W]here the plaintiff entrusts the defendant with the conduct of his affairs, in general or in particular, the defendant may be held to have assumed responsibility to the plaintiff, and the plaintiff to have relied on the defendant to exercise due care and skill, in respect of such conduct.

          Spring v Guardian Assurance [1995] 2 AC 296, 318 (Lord Goff)

Apart from Lord Lowry, the House of Lords did not expressly agree with Lord Goff. But, in Henderson v Merrett Syndicates Ltd, the reformulation was unanimously accepted by the House of Lords.

This reformulation entails a different concept of reliance than the misstatement case. In the misstatement case, reliance is playing an active role because only if the claimant relies on the misstatement will the misstatement cause him a loss. In the reformulated Hedley Byrne principle, reliance plays a weaker, more passive role, meaning no more than the claimant hopes and expects the defendant to carefully manage the claimant's affairs. It is questionable whether reliance in this weaker passive meaning is a useful concept to employ in this context at all. Reliance plays a causal role in the misrepresentation; in the context of the services cases, the weaker passive concept seems to be far less useful.

A simple way to find in general terms whether there has been an assumption of responsibility is to ask whether the defendant has undertaken a task for the claimant or is managing some aspect of the claimant's affairs. This seems to be the core idea of assumption of responsibility in this context.

It's been held that the defendant can exclude liability for a task's negligent performance just as a party can exclude their liability for breach of contract. Generally speaking, you cannot just go around excluding your liability to other people in negligence; but, once in the realm of voluntarily assumed responsibilities, you can exclude your liability. Exclusion of liability of this kind will be subject to statutory regulation in the usual way under the Unfair Contract Terms Act or, if you are a consumer, under the Consumer Rights Act.

Going back to Hedley Bryne itself, a disclaimer in the credit reference that the defendant bank gave to the claimant meant that the bank was not liable for any negligence in the reference's drawing up. So the House of Lords accepted the existence of a duty of care, but the disclaimer meant that there was no liability.

The defendant must be acting in the course of his business for a duty of care to arise in this context. For example, advice which is given informally on a social occasion will not give rise to liability. There used to be an emphasis in the early case law on the idea that the Hedley Bryne principle only applies where the defendant has some special skill or knowledge. This idea has morphed into the narrower focus of whether the defendant was acting in the course of business. Esso Petroleum v Mardon is a case to cite as authority for the proposition that if the defendant was not acting in the course of business when they provide the service, there is no liability under Hedley Byrne .

          Esso Petroleum v Mardon [1976] QB 801

In Caparo , the House of Lords laid down some important remoteness type limits on the new assumed responsibility scope falling within the Hedley-Byrne principle. Don't forget the Caparo limits on Hedley-Byrne . The assumption of responsibility cases are the main and by far the most important exceptions to the no recovery for pure economic loss cases.

[T]he necessary relationship between the maker of a statement or giver of advice (the adviser) and the recipient who acts in reliance on it (the advisee) may typically be held to exist where (1) the advice is required for a purpose, whether particularly specified or generally described, which is made known ... to the adviser at the time when the advice is given, (2) the adviser knows ... that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose, (3) it is known ... that the advice so communicated is likely to be acted on by the advisee for that purpose without independent inquiry and (4) it is so acted on by the advisee to his detriment.

          Caparo Industries v Dickman [1990] 2 AC 605, 638 (Lord Oliver)

          Banca Nazionale del Lavoro v Playboy Club London [2018] UKSC 43, [2018] 1 WLR 4041

Playboy Club London were deciding whether to extend credit to a customer in their casino. The club practice was to ask for another company to get the credit reference from the customer's bank. This was so they did not have to disclose the purpose of the credit facility. So, Banca Nazionale del Lavoro provided a credit reference for one of its customers to Burlington Street Services who were acting on behalf of the Playboy Club. The court found that the bank did not owe a duty because the bank had not known that the purpose of the inquiry was to pass the information to the Playboy Club.

If the bank knew that the information was destined for the Playboy Club, but the club had used it for a different purpose, the court would also have found no duty of care. Say if the information had been used to invest in the customer's business rather than extending credit in the casino.

There is another exception to the general no liability for pure economic loss deriving from White v Jones .

The White v Jones exception to the no-recovery rule

          White v Jones [1995] 2 AC 207

Majority of House of Lords held that an intended beneficiary under a will was entitled to recover damages from the testator's solicitors if because of their negligence the testator's intention to benefit the claimant had not been carried into effect.

In White v Jones , the testator had an argument with his daughters and cut them out of his will. The testator then repented of this decision and decided to put them back in his will. He instructed his solicitors to make a new will including the daughters, but the solicitors negligently did not make a new will before the testator died. After the testator died, the will could not be changed, so the claimants did not get the legacy that the testator intended them to get. So, the claimants bought a claim in negligence against the solicitors and were successful in White v Jones .

The most important thing to mention about White v Jones is that it is not a Hedley Byrne case because there is no assumption of responsibility by the solicitor towards the beneficiary. The essence of assumption of responsibility is that the defendant has undertaken a task for the claimant or managed some aspect of the claimant's affairs.

Lord Goff's opinion in White v Jones is the most impressive, the rest are of varying quality. Lord Goff says that the assumption of responsibility to the testator should be held in law to extend to the intended beneficiaries. This is not helpful because it makes people think that White v Jones is a Hedley Byrne case when in a strict view of Hedley Byrne , it is not. So people think the Hedley Byrne case doesn't make sense because this concept doesn't extend to White v Jones , but it does make sense because it is separate. Lord Mustill's dissent lucidly shows how White is not a Hedley Byrne case. This is the other judgment worth reading.

The worry in White was that not having an exception to the no recovery rule would create a lacuna in the law. If the beneficiaries don't have a tort remedy, then there is no one to hold the solicitors to account. Lots of legal systems have come across this problem. English law gives a negligence claim, some provide a contractual remedy, some offer a substantive claim in contract law which is passed on to the beneficiaries.

In 1999 Parliament passed the Contracts (Rights of Third Parties) Act but it is clear that if White v Jones occurred today, the beneficiaries would not fall under the Act. So the tort remedy from White remains essential.

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Essay: Pure economic loss – when is it recoverable in tort?

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This essay will explain what is meant by the term ‘pure economic loss’ and will discuss the rules applied by the courts to determine when pure economic loss, caused by negligence, is recoverable in tort. It will consider whether the restrictions currently in place for the recovery of pure economic loss are fair using decided cases to support the arguments made. Pure economic loss can be defined as a financial detriment that can be seen on a balance sheet but not physically, and which has not arisen from some physical damage or injury. There are two main ways in which pure economic loss can occur. Firstly, due to an act by the defendant, and secondly due to a statement made by the defendant. An example of pure economic loss due to an act, would be an internet company (A) trying to claim for loss of revenue because a utility company (B) cut through a power cable. In this instance the cutting through of the cable is not damage to A’s property and no injury has occurred, however the consequence of the cable being cut meant that A was not able to operate their business, and therefore lost revenue. This is a very basic scenario, but there are many examples of pure economic loss in day-to-day life. Due to the potential for an almost limitless number of claimants and amounts, the courts have taken a very strict view on when an individual or business may make a claim for pure economic loss in the tort of Negligence, with the general rule stating that no duty of care is owed by a defendant to a claimant in such cases. One instance where pure economic loss may occur is damage to a third party’s property. In this case, if property is damaged then a claim may be successful in the usual method for the value of the damage, but any additional costs incurred, such as hiring a replacement item or subsequent loss of profit would be counted as pure economic loss and not recoverable. In the case of Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27 the claimant was looking for damages to a melt that was in progress when the electricity went off, as well as loss of profits on all subsequent melts that they were unable to produce during that down time. Lord Denning held that Spartan Steel could only recover damages for the melt that was in progress at the time the electricity was cut and the resulting profit on that melt. However, they could not claim for loss of profit on the subsequent melts that they would usually have been able to produce in the time that the electricity was off as these were considered as pure economic loss. Lord Denning stated that “the question of recovering economic loss is one of policy”. In this instance, there was an insufficiently close relationship between the defendant and claimant and therefore no duty of care can be owed, and losses are not recoverable. Pure economic loss may also arise where there has been no physical damage. In the case of Weller & Co v Foot & Mouth Disease Research Institute [1986] 1 QB 569 the defendant negligently released the foot and mouth disease, and the claimant (a local cattle market) was forced to close due to the outbreak and subsequently lost revenue. In this instance the courts held that the cattle market was unable to recover this loss. As it was not caused by physical damage, it was held to be pure economic loss, and therefore no duty of care was owed by the defendant. Economic loss may also be caused when the claimant has received defective goods or property. In these cases, the general rule is that the claimant should be using the law of contract to recover damages however there are some successful cases which were bought where the claimant did not have a direct contract with the defendant. In Anns v Merton London Borough Council [1978] AC 728 the tenants of a block of flats chose to sue the council, rather than the builders whom they had a contract with, when it was discovered the property was suffering structural damage caused by subsidence. Their claim was the council had been negligent in approving the plans and/or failing to inspect the building works and that the inspector owed them a duty of care. It was held that the tenants could claim against the council, despite the lack of a contract, because the structural damage amounted to material damage to the property. A further decision in the case of Junior Books v Veitchi Co Ltd [1983] 1 AC 520 concerning the recovery of a loss of profit from a sub-contractor rather than the main builders for a defective floor that was laid in a new-build factory supported the decision in Anns. Once again, the claimant could claim damages in view of property damage. Both cases are controversial as traditionally property damage is only applicable when it relates to someone’s existing property. In both cases the property was new and it was the original that was defective. They were also key decisions in potentially opening the floodgates to unlimited claims, where a claimant need not have a relationship with the defendant. Finally, these decisions also undermined the role of contract law, blurring the lines with the law of tort. In 1991 however, the courts reviewed a claim for defective items in a landmark case for pure economic loss that was bought in similar circumstances to Anns. Murphy v Brentwood District Council [1991] 1 AC 398 concerned the purchase of a new build house, where the ceiling and water pipes cracked due a defective foundation design. The house, unrepaired, was sold for £35,000 below the market value with repairs estimated at £45,000. Murphy looked to recover damages from the Council who approved the building plans based on negligent advice from an independent contractor. In a complete contrast from the Anns case, the House of Lords found that the loss had to be considered as pure economic loss as the property was defective when it was acquired, resulting in the property having to be repaired or scrapped, either of which would lead to financial loss. As this was pure economic loss, the defendant did not owe a duty of care to the claimant and therefore no damages would be awarded. This decision therefore overruled the earlier case of Anns v Merton LBC. The decision in Junior Books v Veitchi was distinguished from Murphy v Brentwood DC since there had been a ‘special relationship’ between the defendant and the claimant. Whilst there was no contract between the two parties, the defendant had been present at meetings with the claimant and the builders to discuss the flooring requirements. Pure economic loss can also arise where no physical damage has been caused, but the loss resulted from a negligent statement rather than a negligent action. As with all claims of Negligence, for a claim to succeed a duty of care must first be established. Originally, common law took the same view on negligent statements as it did with loss caused by negligent acts and omissions, in that a claimant has no right to damages (Candler v Crane Christmas & Co [1954] 2 KB 533). The case of Hedley Byrne & Co Ltd v Heller and Partners Ltd [1964] AC 465 fundamentally changed this position, creating an exception to the general rule that pure economic loss could not be recovered in tort if caused by negligent statement. The Hedley Byrne case concerned an advertising firm (Hedley Byrne) who extended a line of credit to a third party, based on a reference provided by the third party’s bank (Heller). The credit reference was negligently misrepresentative, although not out of malice. The third party went out of business owing money to Hedley Byrne, who sought to recover the loss from Heller based on the misstatement supplied by them – stating that ‘but for’ the positive credit reference, they would not have extended a line of credit, and would not have lost money when they were unable to pay their debts. In the initial hearings, the lower courts found in favour of Heller and Partners, relying on the common law position that pure economic loss was unrecoverable as Heller did not owe Hedley Byrne a duty of care. However, when the case was referred to the House of Lords, they decreed that a duty of care was owed. Ultimately though, no losses were recoverable as Heller had an effective disclaimer of liability. The decision by the House of Lords in this case created the Hedley Byrne rule which has changed the way that negligent misstatements are now dealt with by the courts. The rule stated that a duty of care is owed if there is a special relationship between the claimant and defendant. The special relationship is defined as someone having a special skill, undertakes to apply that skill for the benefit of someone else, who relies on that skill; or a person who holds themselves out as possessing such a skill in circumstances where it is foreseeable that others would rely upon it. Further to the relationship test, there are three elements to the duty which can only be satisfied if the claimant can show that they were relying on the defendant’s skill and judgement, and; the defendant knew, or ought to have known, that the claimant was relying on their skill and judgement, and; it was reasonable in the circumstances for the claimant to rely upon it. If a claimant can prove the existence of a special relationship, and the satisfy the test of duty, then they are able to establish that they were owed a duty of care by the defendant. Of course, this is only the first step in any claim for Negligence. The claimant would still have to go on to prove that there was a breach of the duty, that there was causation and that the loss was one too remote before being successful in recovering any economic loss. This was a huge shift in the legal landscape, and finally gave those who had lost out financially due to misstatement a way in which they could look to make a claim and recover some of their losses. After 1964, the Hedley Byrne rule continued to be applied in various cases, including; Cornish v Midland Bank PLC [1985] 3 ALL ER 513, where a bank clerk negligently offered advised a client with regards to the implications of signing a second mortgage, leaving the claimant with very little money post-divorce. Chaudhry v Prabhakar [1989] 1 WLR 29, in which a friend, who claimed to be knowledgeable about cars, recommended a vehicle stating it had not been in any accidents, despite it having obvious damage and the defendant not making any enquiries about how it came to be in that state. The claimants care was found to be unroadworthy due to damage caused in a previous accident. Welton v North Cornwall District Council [1997] 1 WLR 570, where a guest house was subject to extensive refurbishment on the advice of an environmental health officer who negligently stated that should the work not be completed, the guest house would be shut down. These cases all illustrated that normal people could now take action against councils and financial establishments who, by making negligent statements, had left them worse off. In Cornish and Welton, the claimants were looking to recover from institutions that had given them false information in the course of business. In Chaudhry however, there was some discussion that as the advice was not sought, or given, in a business context it contradicted the obiter dicta comments made in Hedley Byrne, but by finding in favour of the claimant, the courts created a new precedent that allowed similar claims to succeed. In all cases a special relationship was established, which led to a duty of care being owed by the defendant to the claimant. In 1990 the case of Caparo Industries v Dickman [1990] 2 AC 605 further refined the Hedley Byrne rule, by restating the criteria required to establish a duty of care, and by providing a four stage test the proximity element. Caparo stated that there should be a foreseeability of damage, a proximity of relationship and that it should be just and reasonable to impose a duty. To establish proximity, all four elements must be met: • The advisor knew the purpose for which the advice was required • The adviser knew that the advice would be communicated to the advisee, either specifically or as a member of an ascertainable class • The adviser knew that the advisee was likely to act on the advice without further independent inquiry • The advice was acted on by the advisee to his detriment Two subsequent similar cases involving takeovers used this new definition, and resulted in two different outcomes. The case of James McNaughton v Hicks Anderson [1991] 2 QB 295 found the defendant did not owe a duty of care as they were not aware that their hastily drawn up and inaccurate accounts would be passed onto a potential bidder for a takeover. Conversely, the case of Morgan Crucible v Hill Samuel [1991] CH 295 found in favour of the claimant, stating that as their name and the nature of the transaction was known to the defendant, a duty of care was owed. There have been further cases where the rules have been extended as the Hedley Byrne/Caparo tests have not been met. These include the former employer / former employee relationship (Spring v Guardian Assurance plc [1994] 3 WLR 354) and the solicitor / potential beneficiaries’ relationship (White v Jones [1995] 2 WLR 187). These extensions have gone past the original scope of negligent statements to include the negligent provision of services, principally creating two tests to establish a special relationship – Hedley Byrne/Caparo in relation to negligent statements, or the assumption of responsibility when looking at the provision of services. As with all claims in tort, there is always the option of a defence, and in pure economic loss cases, the most common defence is that of a disclaimer. In recent decades, statutory limitations on defendants attempting to exclude liability for negligence now exist within the Unfair Contract Terms Act 1977 which requires any exclusion for liability of pure economic loss to meet the reasonableness test (s.11) and the Consumer Rights Act 2015 (s.62). It is fair to say that the development of case law has led to the creation of avenues for claims which, prior to 1964, would have been completely unrecoverable, as well as protection against unfair disclaimers purporting to absolve defendants of any liability. This should be viewed as an acceptable compromise which provides recourse for those who have suffered negligence through statement or provision of service, without leaving the wider public open to unlimited and potentially spurious claims.

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