Economic Loss Flashcards
economic loss
The term is usually used to
cover losses which are ‘purely’ economic, meaning those where a claimant has suffered financial
damage that does not directly result from personal injury or damage to property – for example,
where a product bought turns out to be defective, but does not actually cause injury or damage to
other property. In cases of pure economic loss, the law of tort has been reluctant to allow a claim
and, as with psychiatric injury, which we talked about in the previous chapter, they have used the
concept of the duty of care to put restrictions on such claims.
Spartan Steel v Martin
Here the defendants had negligently cut an electric cable, causing a power cut that lasted
for 14 hours. Without electricity to heat the claimants’ furnace, the metal in the furnace solidified,
and the claimants were forced to shut their factory temporarily. They claimed damages under three
heads:l damage to the metal that was in the furnace at the time of the power cut (physical damage to
property);
l loss of the profit that would have been made on the sale of that metal (economic loss arising
from damage to property); and
l loss of profit on metal which would have been processed during the time the factory was closed
due to the power cut (pure economic loss).A majority of the Court of Appeal held that the first two claims were recoverable but the third was
not. The defendants owed the claimants a duty not to damage their property, and therefore to pay
for any loss directly arising from such damage, as well as for the damage itself, but they did not
owe them any duty with regard to loss of profit.
Anns v Merton London Borough
The case concerned economic loss arising from the claimant’s house being badly built; defective foundations had caused cracking in the walls.In Anns,
however, the House of Lords decided that the cracks in the walls could be viewed as damage to
property rather than economic loss, and therefore compensated.
Junior Books Ltd v Veitchi Co
The defendants were specialists in flooring and were sub-contractors to lay a floor in a factory which was to be used by the plaintiffs. The plaintiffs claimed that due to the negligence of the defendants, the floor was faulty and as they were specialists on the matter, they were liable for the damage caused by the cracking in the floor. As a result of this, the plaintiff brought an action claiming for the costs related to relaying the floor, for loss of profits and the cost to the factory for getting the floor replaced. There was no claim for injury to persons caused by the floor. The defendants appealed the claim of the plaintiffs.he court dismissed the appeal of the defendants. The court held that the parties were sufficiently close and therefore there was a scope of duty between them. It was found that this was not limited to a duty to avoid causing foreseeable harm to persons or property but also created a duty to avoid pure economic loss, as a result of the work that had been defected. On this basis, the plaintiff could recover the cost of repairing the floor.
Overruling of defect could be seen as damage to property;
The eventual overruling of Anns in Murphy v Brentwood District Council
Like Anns , Murphy concerned a defective building, and, as well as laying down general principles
for the way in which the law on negligence should develop, the House of Lords put a stop to the
possibility that defects in products could be seen as damage to property; it reaffirmed that they were
to be regarded as economic loss and that they could not be compensated in negligence.
Hedley Byrne v Heller (1964)
Hedley Byrne were advertising agents placing contracts on behalf of a client on credit terms. Hedley Byrne would be personally liable should the client default. To protect themselves, Hedley Byrne asked their bankers to obtain a credit reference from Heller & Partners (‘H&P’), the client’s bankers. The reference (given both orally and then in writing) was given gratis and was favourable, but also contained an exclusion clause to the effect that the information was given ‘without responsibility on the part of this Bank or its officials’. Hedley Byrne relied upon this reference and subsequently suffered financial loss when the client went into liquidation.The court found that H&P’s disclaimer was sufficient to protect them from liability and Hedley Byrne’s claim failed. However, the House of Lords ruled that damage for pure economic loss could arise in situations where the following four conditions were met:● a ‘special relationship’ between the parties;
● a voluntary assumption of responsibility by the party giving the advice;
● reliance on that advice by the party receiving it; and
● it must be reasonable for that party to have relied on the advice.
Murphy v Brentwood District Council
A council approved plans for a concrete raft upon which properties were built. The raft
moved and caused cracks in the walls of a property which was sold for £35,000 less than
it would have done had it not been defective.The House of Lords overruled Anns and held that the council was not liable in the
absence of physical injury.
The ‘special relationship’‘it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances
required, where it was reasonable for him to do that, and where the other gave the information or
advice when he knew or ought to have known that the enquirer was relying on him’.
Chaudry v Prabhaka the defendant had advised the claimant, a friend, to buy a particular second-hand car, without noticing
that it had been in an accident. It was in fact unroadworthy, and the claimant successfully sued for
negligence.
Esso Petroleum Co Ltd v Mardon (1976).
Here the claimant had leased a petrol station on the strength of Esso’s advice that he could expect
to sell at least 200,000 gallons a year. In fact he only managed to sell 78,000 gallons in 15 months.
The Court of Appeal held that, in making the prediction, the petrol company had assumed a
responsibility to Mr Mardon, and he had relied on their experience in the petrol market; his claim
was allowed.
The ‘special relationship’ CASE
Lennon v Commissioner of Police of the Metropolis [2004] EWCA Civ 130 was concerned with negligent advice from the police commissioner. Furthermore, a police personnel officer was wrongly advised that his entitlement to housing allowance would not be affected by his taking time off work. Moreover, he left the Metropolitan Police and took three weeks’ unpaid leave before taking up his new duties. However, as a result, he lost for all time his right to monthly housing allowance.In conclusion, the claimant was entitled for damages on the basis that the police commissioner, had a special relationship with the claimant. This was in accordance with the Hedley Byrne test. Thus, he owed him a duty of care. Therefore, he vicariously liable for the economic loss suffered by the claimant as a result of the negligent advice.
Voluntary assumption of responsibility.GivING the advice without giving any such warning.
Dean v Allin & Watts (2001),An unsophisticated lender running the business of a car mechanic wanted to lend money to borrowers on the security of real property owned by an associate of the borrowers. The borrowers instructed the defendant solicitors to give effect to this transaction. He was aware that the lender was not represented. The deeds were later purported to be charged by way of deposit only, which was ineffective at law.
Held: Though a solicitor is not normally liable to third parties who were not his clients, he could acquire such duties. Here, it was fair just and reasonable to impose such a duty. He should have known that the third party was relying upon him to set an effective security in place, and was liable in negligence when he failed to do so.
Claimants not known to the defendant, Extends Hedley Byrne principle to cases where negligent misstatement is made to a third party, provided third party relies on it to detriment of claimant
The defendants arranged for a man to have a vasectomy. They informed him that it was a success and that he was now sterile and did not need to use contraception. Three years later, the man had sex with the claimant, a woman. The claimant had spoken to her own doctor about contraception and they had told her of the very remote possibility of vasectomies spontaneously reversing. The man’s vasectomy had in fact reversed. As a result, the claimant became pregnant and had a healthy baby girl. The claimant sued the defendants in negligence, claiming the economic cost of raising her daughter. The defendants applied to have the claim struck out. The Court of Appeal held in favor of the defendants. The defendants did not owe the claimant a duty of care. The action was struck out.
The effect of disclaimers
Where a defendant has issued some kind of disclaimer (as in Hedley Byrne itself), this would
appear to suggest that they are not accepting responsibility for their advice. However, the courts
have stated that merely issuing a disclaimer will not always prevent liability under Hedley Byrne.
Smith v Eric Bush [1990] (The effect of disclaimers)
Smith v Eric Bush [1990] 1 AC 831
A survey report of the claimant’s house carried out by the defendant failed to advise on some structural damage to the property which resulted in the chimney breast collapsing. There was no contractual relationship between the claimant and defendant as the mortgage company arranged the survey and the claimant made payment to the mortgage company. The contract between the claimant and the mortgage company contained a clause exempting the surveyor from liability. In considering if such a clause was reasonable under the Unfair Contract Terms Act 1977 the court took into account the fact that it was a modest house to be used as the family home and concluded that it was an unreasonable clause and therefore ineffective. The House of Lords held that it might be reasonable for a surveyor to exclude liability if the property was of higher value or to be used for investment or business purposes.
Reliance by the claimant
Reliance under Hedley Byrne requires that the claimant depended on the defendant using the
particular skill or experience required for the task which the defendant had undertaken; it is not
merely general reliance on the defendant exercising care.
Law Society v KPMG Peat Marwic
The Law Society sought a report from the defendant accountants for the purposes of making decisions about how to manage their funds, which was a regulatory function of the Law Society and a public rather than private function. The report was provided and the Law Society took action in reliance upon its contents. However, the report contained incorrect information due to the negligence of the defendant, and the Law Society suffered loss as a result. Applying the test established in Caparo Industries plc v Dickman & Ors (1990) 2 AC 605, the Court of Appeal determined that a duty of care did exist on the facts of the case. The Court further held that, given that it was fair, just, and reasonable to impose a duty of care, it did not matter that the advice of the defendants had been sought for the purpose of performing its public duty rather than a private commercial transaction. There was no reason of policy or principle why the defendants could not owe a private law duty the performance of which assisted the Law Society in carrying out a public function.
