4 - Negligence: Pure Economic Loss

Question 1

What is the test for establishing a duty of care in negligence claims, particularly regarding pure economic loss?

Answer 1

A defendant may owe a claimant a duty of care if there is a sufficiently proximate relationship between them.

In cases of pure economic loss, there is generally a lack of a sufficiently proximate relationship between the claimant and the defendant who may have caused this type of loss.

This lack of proximity means that the defendant’s potential liability could be boundless, to an indeterminate number of claimants.

For this reason, the courts place limits upon the duty of care in cases of pure economic loss, and as a general rule, a defendant does not owe a duty of care to a claimant not to cause pure economic loss.

Question 2

How does the nature of loss suffered by a claimant influence the existence of a duty of care in negligence claims?

Answer 2

The kind of loss can determine whether a duty of care is owed.
In cases of pure economic loss, the claimant cannot recover their loss.

For example, if a journalist negligently reports on an investment, readers cannot recover losses from their investment due to a lack of a sufficiently proximate relationship with the journalist.

Conversely, in cases of property damage, such as a householder negligently burning a neighbour’s shed, the neighbour can recover damages for consequential economic loss stemming from that physical damage.

Question 3

What constitutes pure economic loss, and how does it differ from consequential economic loss?

Answer 3

Pure economic loss refers to financial loss not linked to any physical damage.

In contrast, consequential economic loss arises consequently from physical damage to property or personal injury, allowing for recovery.

For instance, a householder, David, negligently lights a bonfire that destroys his neighbour Fred’s shed. Fred has to pay £500 for a replacement shed and £5.00 per week for three weeks to store his lawn mower while the shed is out of use. The £515 spent by Fred is not pure economic loss, as his loss was caused by the physical damage to his property. This is classified as ‘consequential economic loss,’ which is recoverable.

In contrast, losses incurred from purchasing defective items, like a faulty CD player or hairdryer, are examples of pure economic loss, which is not recoverable in negligence claims.

Question 4

In what limited situations can damages be recovered for pure economic loss?

Answer 4

Recovery for pure economic loss is permitted only in limited situations where a sufficiently close relationship between the claimant and defendant exists.

The general rule remains that, for pure economic loss, no duty of care is owed.

For example, if a claimant acquires a defective item and incurs economic loss, like a car that depreciates in value, this is classified as pure economic loss and is not recoverable in negligence.

Question 5

How does the law classify economic loss arising from defective property, using case law to illustrate?

Answer 5

Economic loss caused by acquiring a defective item, like a faulty hairdryer or CD player, is classified as pure economic loss, and no duty of care is owed.

In Murphy v Brentwood DC, the claimant’s loss from a defective house was deemed pure economic loss since the damage did not extend beyond the property itself.

This principle confirms that unless personal injury or property damage occurs due to the defect, claims for economic loss remain non-recoverable.

Question 6

What happens when a defective item causes personal injury, and how does this affect recovery for economic loss?

Answer 6

If a defective item causes personal injury, such as a hairdryer causing burns, the special rules concerning pure economic loss do not apply.

The claimant may recover for personal injury while the cost of replacing the defective item itself remains as pure economic loss, which is non-recoverable.

For instance, if a CD player burns a bag, the cost of replacing the bag results from physical damage and is therefore recoverable, whereas the cost of the player itself remains a non-recoverable pure economic loss.

Question 7

How is pure economic loss subdivided when caused by damage to the property of a third party?

Answer 7

Economic loss unconnected to physical damage to the claimant’s person or property can be further subdivided into two categories:
- Economic loss caused by damage to the property of a third party.
- Economic loss caused where there is no physical damage.

Question 8

What principle determines the recovery of economic loss in relation to the damage of a third party’s property?

Answer 8

If a defendant negligently damages the claimant’s property and causes loss, there exists a sufficiently close relationship, and the defendant owes a duty of care, allowing the claimant to recover their loss.

Conversely, if the defendant negligently damages property belonging to a third party, there is no sufficiently close relationship; thus, the defendant does not owe a duty of care, and the claimant cannot recover their loss.

Example: Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd, a power cut caused by the defendant’s negligence damaged products owned by the claimants, leading to recoverable losses. However, losses regarding future melts, caused by damage to the third-party electricity cable, are classified as pure economic loss and are not recoverable.

Question 9

How was pure economic loss dealt with in the case of Spartan Steel?

Answer 9

These findings can be applied to other examples:

The power cut caused the following losses:
- Products (known as ‘melts’) in a furnace which solidif ied;
- Loss of profit on those products;
- Loss of profits on four further melts which could have been processed during the time
the electricity was unavailable.

In Spartan Steel the claimant could not recover for the four future melts. This was pure economic loss because it was caused by damage to property belonging to a third party – the cable which belonged to the supplier – so no duty of care was owed.

However, the claimant was owed a duty of care for damage to property which it did own, and f inancial
loss consequent on that damage. So, this covered the products in the furnace which solidified and the loss of profit on those products.

Question 10

How is economic loss defined when there is no personal injury or physical damage to the claimant’s property?

Answer 10

Economic loss can occur without any physical damage, classified as pure economic loss. For instance, if readers lose investments due to a journalist’s negligent financial advice, this represents economic loss caused by negligent statements.

Unlike cases where negligent actions caused losses, such as acquiring defective property or damaging a third party’s property, losses from negligent statements pose a risk of unlimited liability since it is unclear how many people may rely on such advice.

However, as with other forms of pure economic loss, the general rule states that no duty of care is owed, and damages cannot be recovered.

Question 11

What principle governs economic loss caused by negligent actions without any physical damage?

Answer 11

Economic loss caused by negligent actions without physical damage falls under the general rule that no duty of care exists for pure economic loss.

Example: In Weller & Co v Foot and Mouth Disease Research Institute, auctioneers lost business due to the closure of cattle markets caused by a virus outbreak. Their loss, which resulted from the forced closure rather than physical damage, was classified as pure economic loss, and thus they could not recover damages from the defendants.

Question 12

What is the general rule regarding recovery for economic loss caused by negligent statements?

Answer 12

The general rule is that no duty of care is owed for pure economic loss caused by negligent statements, leading to the conclusion that damages cannot be recovered.

An example includes a negligent journalist giving poor investment advice, where the potential for unlimited liability arises since the journalist cannot predict how many individuals will rely on their statements.

Despite the potential for unlimited liability, the overarching rule remains that no duty of care exists for pure economic loss, with few exceptions.

Question 13

Where does an exception arise to the general rule regarding duty of care for pure economic loss in negligent statements?

Answer 13

There is no duty of care for pure economic loss due to insufficiently close relationships between claimant and defendant.

An exception arises when the court identifies an especially close relationship, where the defendant has assumed responsibility toward the claimant.

Example: A journalist gives negligent financial advice; if a specific reader seeks further advice and the journalist provides it, a special relationship may form, creating a duty of care.

Question 14

How did Hedley Byrne & Co Ltd v Heller & Partners Ltd impact the law on negligent statements?

Answer 14

Prior to 1964, the rule for pure economic loss due to negligent statements mirrored that of other pure economic losses—claimants could not recover.

The case established that a duty of care exists if there is a special relationship between the claimant and defendant, allowing for liability for negligent statements leading to pure economic loss.

The court found a duty was owed but exempted the defendant due to an effective disclaimer.

Question 15

What are the two essential elements of a special relationship as established in Hedley Byrne?

Answer 15

(a) An assumption of responsibility by the defendant.
(b) Reasonable reliance by the claimant.

Question 16

What was the significance of Caparo Industries plc v Dickman in the context of negligent statements?

Answer 16

The case expanded on the criteria for establishing a special relationship necessary for a duty of care, particularly in cases of pure economic loss. The defendants were auditors whose incorrect financial statements led to the claimant suffering a loss after purchasing shares.

The House of Lords determined that no duty of care existed, as the necessary special relationship was not established.

Question 17

What are the four criteria established in Caparo Industries plc v Dickman for assuming responsibility (special relationships re pure economic loss)?

Answer 17

1. The defendant knew the purpose of the advice.
2. The defendant knew the advice would be communicated to the claimant (specifically or as part of an ascertainable class).
3. The defendant knew the claimant would likely act on the advice without independent inquiry.
4. The claimant acted on the advice to their detriment.

Question 18

How does the concept of proximity affect liability for negligent statements?

Answer 18

Proximity is key in determining whether a duty of care exists. It refers to the closeness of the relationship between the parties.

A duty is more likely to exist if the defendant knows the claimant is seeking advice for a particular purpose and intends to rely on it.

For example, in James McNaughton Papers v Hicks Anderson, no duty was found as the accountant did not know his hurriedly prepared draft accounts would be used by the takeover bidder.

Question 19

Are there situations where advice given in social settings can lead to a duty of care?

Answer 19

Generally, no duty of care is owed for advice given in a social setting, as there is no assumption of responsibility.

However, an exception exists when one party relies on the other’s expertise. For instance, in Chaudhry v Prabhakar, a duty of care was found because the defendant had superior knowledge about cars, and the claimant relied on that expertise when purchasing a vehicle.

Question 20

How has the law been extended to include third-party reliance on negligent statements?

Answer 20

The Hedley Byrne principle has been extended to cover cases where the claimant was not the direct recipient of the negligent statement.

In Spring v Guardian Assurance, the claimant’s former employer gave a negligent reference to a prospective employer, causing economic loss. The court held that a duty of care was owed despite the statement being made to a third party

Question 21

How has the duty of care in negligent statements been applied to professional services?

Answer 21

The duty of care has been extended beyond negligent statements to the negligent provision of services.

In White v Jones, a solicitor’s negligence in drafting a will caused economic loss to a beneficiary. The court found that the solicitor had assumed responsibility, even though the beneficiary had not directly relied on the solicitor.

Similarly, Henderson v Merrett Syndicates extended the duty to cases where professional services are provided negligently, even if a contract exists between the parties. However, the duty in tort must be consistent with the duty in contract.

Question 22

What additional elements must be considered when a duty of care is owed for pure economic loss in a negligence claim?

Answer 22

Once it is established that a duty of care is owed not to cause pure economic loss, the following elements must also be considered:

• Breach of duty: The claimant must prove the defendant failed to meet the standard of care expected.
• Causation of damage: The claimant must show the loss would not have occurred but for the defendant’s negligence.
• Defences: Possible defences, such as exclusion of liability, must also be considered.

Question 23

What are the two key requirements for a defendant to rely on an exclusion notice as a defence in a negligence claim?

Answer 23

For a defendant to rely on an exclusion notice:
1. Reasonable steps must have been taken to bring the exclusion notice to the claimant’s attention before the tort was committed.
2. The wording of the notice must cover the loss suffered by the claimant.

Question 24

How do UCTA 1977 and CRA 2015 limit a defendant’s ability to exclude liability in negligence claims?

Answer 24

Both Acts restrict the ability of a defendant to exclude liability:

UCTA 1977 applies to negligence claims involving a common law duty to take reasonable care (s 1(1)(b)). It governs exclusions for negligent acts or omissions (s 2), except for consumer contracts or notices.

CRA 2015 applies if the defendant is a trader and the claimant is a consumer.

Key limitations:
- Exclusions for death or personal injury due to negligence are prohibited (s 2(1) UCTA; s 65(1) CRA).
- Exclusions for other losses can only be valid if they meet the standards of reasonableness under UCTA or fairness under CRA.

Question 25

What factors determine whether an exclusion notice is reasonable under UCTA 1977 or fair under CRA 2015?

Answer 25

Reasonableness under UCTA 1977 (s 11) and fairness under CRA 2015 (s 62) involve assessing all the circumstances of the case. Factors include:
- Were the parties of equal bargaining power?
- Could the claimant have obtained advice from an alternative source?
- How difficult was the task for which liability was excluded?
- What are the practical consequences, including the sums of money at stake and the parties’ ability to bear the loss, especially in light of insurance?

Example: In Smith v Eric S Bush and Harris v Wyre Forest District Council, the House of Lords considered these factors. Despite exclusion notices stating no responsibility was accepted for the valuation, the exclusions were found unreasonable due to the unequal bargaining power and the practical implications for the claimants.

Question 26

What is the definition of “reasonableness” under UCTA 1977 when determining pure economic loss?

Answer 26

Under s 11(3) of UCTA 1977, reasonableness is determined by whether it is fair and reasonable to allow reliance on the exclusion notice, considering all the circumstances at the time when liability would have arisen.

Question 27

How does fairness under CRA 2015 differ from reasonableness under UCTA 1977?

Answer 27

While both require an assessment of all circumstances, fairness under CRA 2015 (s 62) also involves:
Consideration of good faith and whether there is a significant imbalance in the parties’ rights and obligations to the detriment of the consumer.

Question 28

Provide a summary on whether a duty of care is owed for pure economic loss?

Answer 28

There are no special rules on whether a duty of care is owed for consequential economic loss.

If the defendant owes a duty of care not to cause the claimant physical injury or property damage, then the defendant also owes a duty not to cause the consequential economic
loss which follows from that injury or damage.

As a general rule, a defendant does not owe any duty of care to a claimant not to cause pure economic loss.

The types of loss that are classified as pure economic loss and are not recoverable are:
- Economic loss caused by acquiring a defective item of property
- Economic loss unconnected to personal injury to the claimant or physical damage to the claimant’s property
- Economic loss caused by damage to the property of a third party
- Economic loss where there is no physical damage: actions
- Economic loss where there is no physical damage: statements

Question 29

Provide a summary on negligent statements, and special relationships which give rise to a duty of care. - INCLUDE SUMMARY FLOWCHART.

Answer 29

In the case of negligent statements, an exception to the general rule arises in cases where the court is able to find that there is, in fact, a special relationship between the defendant and the claimant.

This special relationship may be found using the following criteria:
- Did the defendant assume a responsibility towards the claimant?
- Did the defendant know the purpose for which the advice was required?
- Did the defendant know that the advice would be communicated to the claimant, (either specifically or as a member of an ascertainable class)?
- Did the defendant know that the claimant was likely to act on the advice without independent inquiry?
- Was the advice acted on by the claimant to its detriment?
- Was it reasonable for the claimant to rely on the defendant for advice?