Economic Loss Flashcards
Spartan Steel v Martin [1973] QB 27
(A) ‘Relational’ Economic Losses: (ordinarily) no recovery in English law
• Significance
o The judgment outlines that there are two types of economic loss: economic loss consequential on physical damage and ‘pure’ economic loss. Only the first in principle is recoverable. There are disagreements in how to distinguish between the two.
• Facts
o As a result of D negligently damaging a cable which provided electricity power to the plaintiff’s factory Spartan Steel, the factory was not able to operate for some time. Spartan Steel claimed that during the period of shutdown they could have made further profit from processing further ‘melts’: This was purely financial and did not result from any damage to the plaintiff’s property.
• Heads of damage:
o Claimed for physical damage to the factory’s furnace and metal: actual economic loss
o Lost profit on the damaged metal: consequential economic loss
o Lost profit on the metal that was not melted during the time the electricity was off: NO pure economic loss – potential melts have no relationship to the original damages.
• Judgment
o The majority led by Lord Denning MR held that Spartan could only recover the damages to their furnaces. They could not recover the profits lost due to the factory not being operational for 15 hours. Their main reasoning is because damage to the metal was ‘physical damage’ and the lost profits on the metal was ‘directly consequential’ upon it. The profits lost due to the blackout constituted ‘pure economic loss’.
o The majority appeared to agree that a duty of care and the damage was not too remote since it was foreseeable, HOWEVER, they declined to award damages of pure economic loss for policy reasons.
• Dissent
o Edmund-Davis LJ – he did not agree with the majority, finding that the loss was both direct and foreseeable consequence of the defendant’s negligence and should be recovered. In his view, spurious claims could be avoided either on the grounds that no duty was owed or that the damage was too remote.
Leigh and Sillivan v Aliakmon [1986] AC 785
(A) ‘Relational’ Economic Losses: (ordinarily) no recovery in English law
• Facts
o Contract for sale of goods – CIA normally in these contracts
o Concerns the carriage of goods that were damage as a consequence of bad stowage in the ship.
o The contractual situation between the buyer and the seller of the goods was that the seller would retain ownership of the goods until they were delivered. Consequently, the court held that there was no valid economic loss
• Issue
o Whether the ship owners were liable in tort to the buyers duty to an existing duty of care?
• Held
o CA
♣ Robert LJ – Suggested that this case could be treated that this could be treated as a case of ‘transferred loss’. He argued, such cases, were in a special category to which the policy arguments against recovering relational losses did not apply.
♣ The other 2 justices did not accept the argument above.
o HL
♣ Appeal dismissed that it was long established in principle that for a plaintiff to have a right to claim in negligence for loss caused to him by reason of loss or damage to property, he had to have had either the legal ownership or a possessory title to the property concerned. The buyers had none of these when the damage occurred, therefore they had no right to sue the ship owners in tort.
• Analysis point – if the buyers would have had legal ownership, or possessory title, they could have claimed losses ‘if suffered’ under the category of (consequential on physical damage).
• THE point here is the ‘concept of transferred loss’ is not accepted by the highest courts in England.
Canadian National Railway v Norsk Pacific (1992) 91 DLR 289
(A) ‘Relational’ Economic Losses: (ordinarily) no recovery in English law
• A leading SC of Canada decision on pure economic loss. The court recognized situations in which pure economic loss is compensable.
• The court held that relational economic loss falls within the category of losses that are sufficiently proximate to give rise to a duty of care.
• Facts
o A tug owned and operated by the North Pacific Steamship Co negligently struck a railway bridge owned by the Public Works of Canada (PWC).
o Canadian National Railway (CN) was one of the several railway companies which held contracts with PWC to use the bridge.
o CN was the primary user of the bridge.
o The tug owners were familiar with the area and were at all times aware that the bridge was mainly used by CN and was essential to their operations.
o During the repair period CN and other railways were forced to re-route traffic increasing operational costs and reducing capacity.
o Bridge almost used exclusively by Canadian Railway. D damaged it. Canadian RW said that as a consequence of the damage they had to send the goods through a different route – Is this consequential loss? Bridge is not owned by Canadian RW – their property was NOT damaged and because of their contract the problem was created.
o This ties with the idea of a Joint Venture.
• Opinion of the court
o McLachlin J used the Anns test (both limbs) to find that Norsk owed a duty of care to CN, making the loss recoverable.
o She found that CN was sufficiently close to Norsk as well as the property in question. She noted that the relationship between CN and PWC was such that the bridge could be considered a ‘joint’ or ‘common venture’ under which recovery for economic loss had been allowed in the UK.
• Dissent
o LaForest J – no duty of care arises and upheld the traditional view which excludes recovery for economic loss caused by damage to third party property.
Conarken Group Ltd v Network Rail [2011] EWCA Civ 644
(A) ‘Relational’ Economic Losses: (ordinarily) no recovery in English law
• Summary:
o The court held that Network Rail could recover from a tortfeasor who had damaged the railway infrastructure sums that it had been contractually obliged to pay to train operating companies in compensation for the disruption caused to their operating schedules as a result of the damage.
• Facts
o This was an appeal by the defendant against the award of damages to Network Rail in respect of the financial loss suffered by train operating companies (TOCs) following physical damage to the railway infrastructure.
• Issue
o Could multiple users of the rail bridge claim for damages against the defendant? Yes
o Held – those who do not own may collectively recover from damage in consequential financial loss.
• Held
o Physical damage had been caused to railway property owned by the respondent by the negligent driving on the highway of the appellant’s driver. The negligence of the driver caused the line to be closed for five days while repairs were being carried out.
o Appeal dismissed
o In the circumstances the appellants were liable for the sums claimed. It was reasonably foreseeable that, if the respondent’s apparatus was damaged, the services of the TOCs, and their value to the public, would be diminished and that arrangements would have been put in place by the franchising authority to penalise the TOCs for the diminution in their services.
o The resulting loss to the respondent was not too remote from the physical damage.
o It was not necessary to analyse the way in which the payments had been calculated so long as they represented a genuine and reasonable attempt to assess the damage caused to the TOCs by the closure of the line and the consequent disruption to services.
• Note CLJ - Negligence, remoteness and economic loss - staying on track
• Janet O’Sullivan
o If D negligently damages C’s property and a third party, X suffers financial loss as a result, the law since Cattle v Stockton Waterworks, state that in general, X has no cause of action in negligence against D. BUT
♣ If C and X have a contract permitting X to use C’s property, and X suffers financial loss if C’s property is damaged? Can C recover from D as part of the loss consequent on the physical damage to C’s property? Or is this illegitimate, given that X, would have had no direct claim for the loss in the absence of the contract? = Conarken.
Anns v Merton (NB now overruled) [1978] AC 728
(B) Economic losses caused by acquiring defective products or premises: no recovery in English law, without further damage
• Established the two-stage test to determine the existence of a duty of care. Overruled by Murphy v Brentwood.
• Facts
o The local council of Merton approved building plans of a block of Maisonettes. The council had the power to inspect the foundations and require any corrections necessary to bring the work with conformity with the bylaws, but was not under an obligation to do so.
o The block of maisonettes was finished and the builder/ owner granted a lease. Structural movements occurred resulting in cracks in the wall, sloping in the floors and other defects. The lessees sued against the builder and the council.
o The plaintiffs claimed that the damage was a consequence of the blocks having been build on inadequate foundations = negligence. They claimed negligence against the council for approving the foundations and failing to inspect them.
• Issues
o Whether the local council were under any duty of care toward owners or occupiers of houses as regards inspection during the building process?
o What period of limitation to claims?
• Held
o HL – held a duty of care existed and was not barred by a ‘limitation of actions’.
♣ Lord Wilberforce established the Anns test:
• It requires first ‘sufficient relationship of proximity based upon forseeability’
• Secondly, considerations of reasons why there should not be a duty of care.
♣ The HL found that the plaintiffs could recover from D, despite there being no contract between the parties, because the structural damage was material to property.
♣ The decision here was controversial as there was no contract and the traditional view is that property damage only applies to someone’s existing property, in this case the original property was defective.
Junior Books v Veitchi [1982] 1 AC 520 (1988 LQR 595)
(B) Economic losses caused by acquiring defective products or premises: no recovery in English law, without further damage
• HL decision on whether or not a duty of care in tort exists between a contractor or sub-contractor and an employer.
• Facts
o Veitchi was a special nominated subcontractor employed to lay flooring at Junior Brook’s factory. The floor was defective but as there was only a contractor between Junior Brooks and the main contractor there was no relationship in contract through which Junior Brooks could sue Veitchi, the subcontractor.
o Junior Brooks argued that Veitchi owed Junior a non-contractual duty of care.
• Held
o HL – the plaintiffs could recover from the defendants, confirming Anns v Merton view of property damage.
• The decision in Anns v Merton and Junior Brooks have been heavily criticised. Firstly, the decisions open the floodgates to unlimited claims, where a defendant may have no relationship with the claimant. Secondly, allowing the claims in tort interferes and undermines with contract rights and law.
**Murphy v Brentwood [1991] 1 AC 398
(B) Economic losses caused by acquiring defective products or premises: no recovery in English law, without further damage
• Overruled Anns v Merton.
• Facts
o The Local authority failed to inspect the foundations of a building adequately, with the result that building became dangerously unstable. The claimant being unable to raise any money for repairs, had to sell the house at a considerable loss, which he sought to recover from Brentowood District Council. This action failed as the loss was identified as pure economic loss.
o The judgment was rejected in many Commonwealth jurisdictions. Such as Canada, Australia, Singapore, and New Zealand. All who preferred the two stage Anns test for proximity.
o The claim by the person who was occupying the property were such as to make the building a danger to Health and Safety, this could be equated to physical damage done to property. = Anns v Merton
o The property in this case was already defective when bought therefore, this was just economic loss as such.
• Held
o No liability in the absence of physical injury.
o The local authority is not liable in tort for negligence, where the resulting defects had not caused physical injury. The loss suffered is purely economic.
o The HL applied Donoghue v Stevenson highlighting that there is a duty on the builder of a house to take reasonable care to avoid injury and damage through defects in its construction. However, where the defect was discovered before any injury to the person or health or damage to the property, then the expenses will apply. Otherwise the claimant suffered simple economic loss.
Invercargill v Hamlin [1996] 1 AC 624 (PC: New Zealand)
(B) Economic losses caused by acquiring defective products or premises: no recovery in English law, without further damage
• Facts
o Privy Council awarded damages – the CA dismissed the Council’s appeal
♣ Held that the issue of a local authority’s liability for a building inspector’s negligence was especially unsuited to a single solution based on policy considerations where the local authority will not be held liable.
o Hamlin’s house had minor defects, such as door jamming and cracks in walls since its construction. An engineer’s report suggested that the foundations should be replaced as they ha not been built to an acceptable standard.
o Hamlin alleged that the council’s building inspector had negligently approved the foundations. The judge awarded damages to H. The judge also found that the action was not time-barred since it arose when the damage could be reasonably discovered.
** Hedley Byrne v Heller [1964] AC 465
(C) Economic losses caused by reliance on negligent statements: recoverable under Hedley Byrne – and perhaps Caparo?
• Case on pure economic loss, resulting from a negligence misstatement.
• Prior to the decision the notion that a party may owe another a duty of care for statements made in reliance had been rejected with remedies only awarded in contract law. The HL overruled the previous position, recognising liability for pure economic loss not arising from the contractual relationship, introduction the idea of ‘assumption of responsibility.’
• Facts
o Hedley Bryne was a firm of advertising agents. A customer, Easipower Ltd, put in a large order. Hedley Byrne wanted to check financial position and creditworthiness, and subsequently asked their bank, National Provincial Bank, to get a report from Easipower’s bank, Heller Partners Ltd who replied in a letter headed:
♣ ‘without responsibility on the part of this bank’ it said that Easipower was,
♣ ‘considered good for its ordinary business engagements.;
o The letter was sent for free. Easipower went into liquidation, and Hedley Bryne lost £17,000 on contractors. Hedley Byrne sued Heller Partners for negligence claiming that the information given was negligent and misleading.
o Heller Partners argued that there was no duty of care owed regarding the statements, and in any case liability was excluded.
• Held
o The court found that the relationship between the two parties was ‘sufficiently proximate’ as to create a duty of care. It was reasonable for them to have known that the information they had given would likely have been relied upon. This would give rise to what the court said was a ‘special relationship’, in which the defendant would have to take sufficient care in giving advise to avoid negligence liability.
o Lord Morris of Borth-Y-Gest:
♣ ‘It should now be regarded as settled that if someone possessing special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise.’
o However, on the facts there was sufficient information to discharge any duty created by Heller’s actions. The were no orders for damages.
• Caparo
• Home Office Dorset Yacht Co
• Smith v Eric Bush
• White v Jones
o Are subsequent developments after Hedley Byrne v Heller.
- Smith v Eric Bush [1990] 1 AC 831
(C) Economic losses caused by reliance on negligent statements: recoverable under Hedley Byrne – and perhaps Caparo?
• The case first concerned the existence of a duty of care in tort for negligence misstatements, not made directly to someone relying on the statement. Second, it concerned the reasonableness of a term excluding liability under the the Unfair Contract Terms Act 1977 s 2(2) s 11. (an attempt to exclude liability is only valid in so far as it is reasonable)
• Facts
o A surveyor employed by a building society, Abbey National, to inspect and value a property. Eric disclaimed responsibility to the purchaser Mrs Smith who was paying a fee to the building society to have the valuation done. The building society had a similar clause in its mortgage agreement. The property valuation said no essential repairs were needed.
o The surveyor’s assessment was incorrect and unknowingly Mrs Smith relied on it and bought the house. Bricks from the Chimney collapsed through the roof smashing through the loft.
• Arguments
o Mrs Smith argued there was a duty of care in making statements and that the clause excluding liability for loss or damage to property was unreasonable under s2(2) and s13(1) of UCTA 1977.
• Judgment
o It was held that it was not unreasonable for the purchaser of a modest house to rely on the surveyors’ evaluation, as it was such common practice. Hence, the court extended Hedley Byrne liability to proximate third parties.
o Under UCTA 1977 an initial issue was the scope of the Act’s coverage under s 13 Lord Templeman said the Act regulated ‘all exclusion notices which would in common law provide a defence to an action for negligence.’ Lord Griffiths said s 13 was ‘introducing a ‘but for’ test in relation to the notice excluding liability’ so courts should decide whether a duty of care would exist but for the exclusion. Lord Jauncey said the wording of s 13 was ‘entirely appropriate to cover a disclaimer which prevents a duty coming into existence.’
♣ The lords decided that D had issued a liability waiver, this could not stand up to the test of reasonableness under s 11. That was because the purchase of a house by a private citizen like Mrs Smith was bound to be one of the most expensive in a lifetime, and it was more reasonable that a professional surveyor bears the risk of liability.
♣ The lord said that not all clauses used by surveyors would be unreasonable, for instance in big property developments.
o The surveyor had a ‘disclaimer’ saying that he will not be responsible for any negligence, however, under the UCTA such a disclaimer will only be valid IF it is reasonable. In Hedley it was seen to be reasonable because the UCTA Act was not enacted, whereas it was not reasonable in this case.
o Note in UCTA
o S 2(2) – exclusion of liability for negligence other than for death or personal injury must satisfy the requirement of reasonableness.
o SGA 1979 ss13-15 –
o S 13(1) provides that where a buyer is sold goods by description, the goods must correspond with this description.
** Caparo Industries v Dickman [1990] 2 AC 605
(C) Economic losses caused by reliance on negligent statements: recoverable under Hedley Byrne – and perhaps Caparo?
• We see this case are replacing Anns v Merton with a three stage test not a two stage test.
Spring v Guardian Assurance [1995] 2 AC 296 (Note:144 NLJ 1477)
(D) ‘Extended Hedley Byrne’: recoverable economic losses beyond statements cases
• Concerns a duty to provide accurate information when writing an employee reference.
• Contract of employment; employer preparing unfavourable reference on former employee; reference given to prospective employer; whether duty of care owed; whether negligent misstatement; whether breach of implied term of contract of employment.
• Facts
o An ex-employer who provides a reference to his former employee is under a duty of care in respect of the preparation of the reference.
• Held
o An employer who provides a reference in respect of an employee to a prospective future employer owed a duty of care to the employee in respect of the preparation of the reference and was liable in damages for economic loss suffered as a result of the negligent preparation of the reference – Hedley.
o Lord Goff, Slynn and Woolf – said that it was an implied term of the contract that reasonable care was taken in the compiling and giving of the reference, and the defendants were in breach of that implied terms
- Henderson v Merrett Syndicates Ltd [1995] 2 AC 145
(D) ‘Extended Hedley Byrne’: recoverable economic losses beyond statements cases
• It established the possibility of concurrent liability in both tort and contract.
• Where a person undertakes to perform professional or quasi-professional services for another, this commitment, where relied upon by the person on whose behalf this services are performed, may be sufficient to give rise to a duty of care, regardless of the contractual relationship between the parties.
• Issues
o The question was whether the agents could be liable to the indirect investors.
♣ The problem was that there was a contractual relationship between the head syndicate managers and its direct members, but not necessarily a contractual relationship between the head syndicate managers and the members of the sub-syndicate. This led to the question of whether a duty could arise, raising the matter of ‘assumption of responsibility.’
• Held
o 1. A duty of care was owed by managing agents
o 2. The true construction of the prescribed agency agreement the members’ agents had to agree to underwrite on behalf of the Name at Lloyd’s, and the fact that they delegated that task to the managing agents did not alter their impact promise that reasonable care and skill would be exercised in carrying out that agreement.
• Judgment
o It was held that Merrett Syndicates was liable to both types of shareholders, as there was enough foreseeability to extend pure economic loss liability to ‘un-proximate third parties’. The major significance was the allowance of claims in both contract and tort, which blurred the divide between the two.
- White v Jones [1995] 1 All ER 691 (HL)
(D) ‘Extended Hedley Byrne’: recoverable economic losses beyond statements cases
• Leading case concerning professional negligence and the conditions under which a person will be taken to have assumed responsibility for the welfare of another.
• Facts
o Two daughters of Mr White sued Mr Jones for failing to follow their father’s instructions when drawing up his will.
o Mr White and his daughters had fallen out briefly and he asked the solicitors to cut them out of the will.
o Before he died they resolved their problems. He asked Mr Jones to change the will again so that £9,000 would be given to his daughters.
o After he died, with the will unchanged, the family would not agree to have the settlement changed.
• The question was whether Mr Jones could be sued instead.
• Held
o Lord Goff held with a majority 3:2 that the daughters would be able to claim. Influenced by the idea that solicitors may escape the consequences of not doing their job properly, he said that a special relationship existed between the daughters and the solicitor and that Mr Jones had assumed responsibility towards them. This was so even though there was no contract or fiduciary relationship between them.
o This could be a gap in the law as the assumption of responsibility was taken for the father by the solicitor not the daughters.
- Williams v Natural Life Health Foods [1998] 1 WLR 830 (HL)
Subsequently: ‘voluntary assumption’ further considered
• Held that for there to be an effective assumption of responsibility, there must be some direct or indirect conveyance that a director had done so, and that a claimant had relied on the information. Otherwise only a company itself, as a separate legal person, would be liable for negligent information.
• Facts
o Mr Williams and his partner approached Natural Life Health Foods Ltd as they wanted to get a franchise for Health Food Shop in Rugby.
o Mr Williams was given a brochure with financial projections. They entered the scheme. They failed and lost money. So Mr Williams sued the company alleging that the advice they received was negligent.
o Before the suing could be completed Natural Life went into liquidations. So Mr Williams sought to hold the company’s managing director and main shareholder personally liable. This was Mr Mistlin, who in the brochure had been held out as having a lot of experience. He had made the brochure projections but had not been in any of the negotiations with Mr Williams
• The HC and the CA allowed Mr Williams’ claim.
• Held
o HL – Held that Mr Williams’ claim would fail.
o They emphasised that there had been no separate assumption of responsibility directly to Mr Williams, and no requisite reliance.
o Lord Steyn – As above.
