10- Liability in Negligence for Pure Economic Loss

Question 1

What happens if C proves a negligent act/omission?

Answer 1

They’ll be able to claim damages for:

1. Any physical injury suffered,
2. Any damage to their property
3. Any consequential economic loss which arises directly from the physical damage (cost of hiring a replacement vehicle/loss of clothing/earnings)

Question 2

What will C not be able to claim?

Answer 2

For what is called ‘pure economic loss’- econ loss not caused by physical injury/damage (ex: loss of profit suffered by a business while it’s unable to operate)

Question 3

What is one exception to the pure economic loss rule?

Answer 3

A C who suffers econ loss as a result of acting on a negligent misstatement will be able to claim for the loss if they can establish a ‘special relationship’ with D who gave the advice.

Question 4

What have the courts decided when loss is caused by negligent acts?

Answer 4

Courts have made clear there is no liability for pure econ loss.
- This approach based on policy and the idea that econ loss,
which is likely to be loss of profit, is more an issue of contract
law rather than tort
- Case of Spartan Steel v Martin and Co. Ltd (1973)
- Case of Weller v Foot and Mouth Disease Research Institute (1966)

The cases show the courts draw what appear to be artificial distinctions created for policy reasons to restrict liability.

ON ONE HAND

 - The distinction has the obvious potential to create unfair anomalies in the law, as there is no doubt that the factory and the auctioneer lost money due to negligence
 - in Spartan v Steel, the failure to make an award against D's could be seen as allowing a negligent D to get away with his behaviour
 - It could also be considered morally unfair not to compensate a C who suffered loss through no fault of their own.

ON THE OTHER HAND
- Could be argued the loss of profit is really a failure to make a gain. The aim of tort law is to compensate the victim of a tort for their loss, so allowing a loss of profit goes against the point of tort law.

Question 5

What are the key cases for pure econ loss caused by negligent acts?

Answer 5

1. Spartan Steel v Martin and Co. Ltd (1973)

Facts:

• Power cables to a factory were negligently cut, causing steel melts on the production line to be destroyed.
• Damage to the melts and loss of profit on those melts could be claimed, as they were physical damage and consequential economic loss from the physical damage respectively.
• Loss of profit while the factory was out of action couldn’t be claimed as it amounted to ‘pure economic loss’.

Point of law:
- Pure economic loss, being a loss of profit while a factory is out of action, was not allowed as a matter of policy.

2. Weller v Foot and Mouth Disease Research Institute (1966)

Facts:

• Virus escaped from D’s premises which led to restrictions of the movement of animals.
• C suffered loss of income and profit as he was unable to hold his cattle auctions.

Point of law:
- Loss of income and profit was pure economic loss and not recoverable under tort law.

Question 6

In what situations can a claim for loss due to negligent misstatement occur?

Answer 6

1. Two-party-liability:
   
   • Where A gives advice/makes a statement to B and B suffers loss in relying on it.
2. Three-party-liability:
   
   • Where A makes a statement to B and B communicates it to C. C then suffers loss in relying on it.

Question 7

What are the requirements for making a claim for loss due to negligent misstatement?

Answer 7

Traditionally, a claim for econ loss due to reliance on a statement was only available in the tort of deceit, and only if D had made a fraudulent statement.

However, as a result of the Hedley Byrne v Heller and Partners (1964) case the rule was set that a claim might be made if :

 1. the statement was made negligently and
 2. there's a 'special relationship' between the parties

In this case the courts agreed that a duty could apply despite there not being a contractual relationship between the parties.

The precise meaning of what amounts to a ‘special relationship’ was never really examined in this case until Caparo v Dickman (1990).

Question 8

What did the HoL state was needed to prove a ‘special relationship’?

Answer 8

1. The possession of a special skill/expertise on the part of D. This can be having a recognised qualification but can also be when a person is representing themselves as having some special knowledge in the field in which the advice is being given.
2. Reliance by C on the advice- the real test is whether there is sufficiently proximity between the parties for there to be a reasonable reliance on the advice
3. The advice is communicated directly to C and not through third-party means such as a newspaper or radio
4. The person giving the advice knows the advice will be acted upon by C without taking any further independent advice.
5. There is no disclaimer to act as a defence.

If all these are present and C loses money, the loss can be claimed from the person giving the advice.

Question 9

Does the advice given by D have to be in a formal situation?

Answer 9

Advice will usually be given in a quasi-business situation, but was decided in Chaudhry v Prabhakar (1988) that a special relationship can exist even if the advice was given in a social situation

The courts have been restrictive in their approach and have tried to avoid opening the floodgates to too many claims.

 - The general approach is that negligent advice given in informal settings cannot be claimed for. 
 - However, the decision in that case seems to conflict with this general approach.

Question 10

What are the key cases for loss caused by negligent misstatement?

Answer 10

1. Hedley Byrne v Heller and Partners (1964)

Facts:

• C’s relied on a bank reference to give credit to a company.
• The company went into liquidation owing C’s money.
• They sued the bank for their loss

Point of law:
- A claim for negligent misstatement can be made when there is a special relationship between the parties.

2. Caparo v Dickman (1990)

Facts:

• C relied on statutory audit books to buy a company
• Later found the company to be worthless and sued for its loss

Point of law:
- A special relationship requires 5 things.

3. Chaudhry v Prabhakar (1988)

Facts:
- C relied on a friend’s advice when buying a car that turned out to be unroadworthy.

Point of law:
- Negligent misstatement can be claimed even if the advice is given in a social situation.