Negligence - Economic Loss

Question 1

Introduction

Answer 1

• have to distinguish between economic loss that arises out out of physical damage to person or property, known as consequential economic loss, and pure economic loss (doesnt flow from damage to Cl person or property). Law of tort doesnt generally recognise duty of care to avoid pure economic loss.
• Ct concerned with floodgates argument, but also about allowing liability to arise for an indeterminate class of people. Pure economic loss can spread more widely and quickly than personal or property loss.
• recovery for pure economic loss would be unwise as it would impose on Def “liability in an indeterminate amount, for an indeterminate time and to an indeterminate class”, per Cardozo CJ in Ultramares v Touche 1931
• general rule subject to exceptions where Def has assumed responsibility for protecting Cl economic interests

Question 2

General rule of non-recovery

Answer 2

• general principle that pure economic loss irrecoverable in negligence action.
  -Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd 1973 - Def neg severed electric cable that served Cl factory, Cl able to recover for damage to steel in production and loss of profit on sale of that steel, but not for loss of profit Cl would have made if power was on.
• Ct of A took this view as if was allowed to recover, floodgates would be opened and would cause various claims for economic loss in very wide variety of contents
  -Lord Denning opinion suggests different and narrow explanation - said that real reason was same reason couldnt recover against electrical co on ground of inconvenience - didnt take responsibility to protect them from it.
• sometimes difficult to say what counts as physical injury for purposes of deciding whether economic loss is consequential or pure.
  -Dryden and Others v Johnson Matthey plc 2018 - Cl exposed to platinum salts and as result developed platinum salt sensitisation, asymptomatic condition so had to change jobs and take pay cut. Lower Cts said pure economic as no physical symptoms.
• Sup Ct overturned decision and said that it was a personal injury so was consequential losses.

Question 3

General rule applied - negligence in construction of building and consequential economic loss

Answer 3

• in law building is one entity - consequence is if one part of building negligently constructed to cause damage to another part, law doesnt recognise owner of building as suffered physical damage to other parts of the building. Owner only suffered pure economic loss - cost of repair of building.
• subsequent owner rarely has contractual action against negligent builder as they didnt have contractual relationship so inequity as no redress in tort against neg builder - person in contract with builder suffered no loss as they sold it, person who suffered loss has no contractual relationship
• Anns v Merton Borough Council 1978 - H of L recategorised defects of foundations of house that caused cracks to appear in walls as “material physical damage” on basis building is “complex structure” made up of series of elements; if one part defective cost pure economic loss, if causes damage to another element will be considered property damage and cost of repair will be recoverable. - H of L found Def local auth liable for damage
  -Junior Books v Veitchi 1983 - Def used sub contractors to lay specialist floor in factory. Floor laid negligently, resulting in loss of replacement and lost profits (treated as pure economic loss). H of L allowed Cl to recover pure economic loss on basis Def had specialist skills, treated as assumed responsibility for state of floor and Cl relied on this as per Hedley Byrne & Co v Heller & Partners Ltd 1964 - BUT has been distinguished so should be used for authority on facts only, not as basis for more extensive argument.
  -D & F Estates v Church Commissioners for England 1989 - plastering in flat had been done negligently and Cl sought damages to cover costs of repairing, cost of effective repairs was treated as pure economic loss which wasn’t recoverable in tort except under principle established in Hedley Byrne or within unique proximity of Junior Brooks.
  -Duty owed by builder is restricted to not causing personal injury or damage to other property so in this case plaster couldn’t cause direct harm.
  -Murphy v Brentwood District Council 1990 - Cl purchased house in Brentwood, 10yrs later cracks appeared in walls as result of defective foundations so reduced value of house by £35k. Succeeded in first instance, but H of L found that damage caused by defective foundations was pure economic loss and generally not recoverable unless caused damage to fabric of house.
  -H of L may have moved away due to Defective Premises Act 1972 coming into force as Lord MacKay noted it was relevant to take into account.
  -Department of Environment v Thomas Bates 1990 - Cl discovered pillars in building were leasing had been built with low strength concrete 10 years after building was constructed and 7 years after living there. Done remedial works to strengthen pillars and claimed cost from Def builders. H of L held builder not liable in tort for costs of remedying defects in building to make safe and suitable for intended use where no damage and no imminent danger to personal safety and health - Cl loss was pure economic loss.

Question 4

General rule applied - defective goods and consequential economic loss

Answer 4

-Muirhead v Industrial Tank Specialities Ltd 1986 - Cl contracted 1st Def to install a tank to store lobsters, 2nd Def supplied pump and 3rd Def made pumps. Pumps failed and Cl lost stock of lobsters. 1st Def in liquidation, Cl sued 3rd Def - recovered physical damage to lobsters but not for other losses. Cl thought to be in same position as ordinary consumer of goods and had not relied sufficiently on 3rd Def to establish proximity.
-*Leigh and Sillivan Ltd v Aliakmon Shipping Co Ltd 1986 - Cl entered into contract to buy steel, bank refused to release funds for steel when it arrived in UK but arrived damaged during transit and Cl carried risk of loss due to agreed variation of normal terms of carriage. Buyer normally able to sue carrier for breach of contract when receives the bill of lading, but Cl not able to become holder of bill of lading as couldnt pay - action in neg against carrier failed as he had neither proprietary or possessor interest in steel at time it was damaged, so loss was pure economic loss.

Question 5

Negligent misstatement and assumption of responsibility of economic loss

Answer 5

• general exclusionary rule re pure economic loss, but are exceptions as Def who has assumed responsibility over Cl economic interests may be liable for having negligently caused pure economic loss - most likely advice from accountant or lawyer.
  -Derry v Peek 1889 - held liability could arise from statement causing financial loss only where statement was made fraudulently or maliciously, formed part of contract or caused intentional harm to person or reputation. No action would lie for neg statement causing pure economic loss. Rule restated by Ct of A in Cander v Crane, Christmas & Co 1951 - Lord Denning anticipated development in finding that accountants owed duty of care to their “employer or client and any 3rd person to whom they show accounts or know their employer is going to show accounts to induce to invest money or take some action on them. Not including strangers who they heard nothing about or who had no knowledge employer may show accounts to”
• attitude changed when 2 significant developments. Passing of Misrepresentation Act 1967, s2(1) provides that where person has entered into contract after misrep made by another party has suffered loss as result, representor will be liable in damages unless can prove they had reasonable grounds to believe and did believe facts represented were true. Cl doesnt have to prove owed duty of care or that Def neg - action requires contract entered into relying on rep and benefits of provision can be enjoyed only by party to contract.
  -2nd is judgment in Hedley Byrne & Co v Heller & Partners Ltd 1964 - cl advertising agents who asked their bank to obtain credit reference for one of client’s bank - ref neg stated client was good for ordinary business transactions but stated ref given “without responsibility”. H of L approved judgment of Denning in Candler and held appropriate circumstances could be duty of care for neg misstatement, but 4 conditions needed to be met:

1. had to be special relationship of trust and confidence between parties
2. party making statement must have voluntarily assumed risk
3. other must have relied on info
4. reliance must have been reasonable.

• Ct found Def not liable given disclaimer on info given.
  -Caparo Industries plc v Dickman 1990 - approved special relationship approach duty of care for neg misstatements and went on to determine that if no special relationship as in Hedley Byrne, alternative way of establishing duty of care for negligent misstatement causing pure economic loss would be to satisfy 3 stage test for duty based on criteria for foreseeability of economic loss, proximity and justice and reasonableness
  -James McNaughten Papers Group Ltd v Hicks Anderson & Co (a Firm) 1991 - Ct of A suggested following indicators of proximity between parties:
  . purpose of making statement
  . purpose of communicating statement
  . Power balance between parties
  . No of people relying on advice
  . knowledge of person giving info or advice
  . Cl’s access to other sources of info
• app used to determine that duty of care existing when employer wrote ref for former employee (Spring v Guardian Assurance 1994), when accs failed to detect frauds perpetrated on shareholders of overseas companies of a bank (BCCI v Price Waterhouse 1998), and when accs failed to detect fraud om part of senior partner of law firm such that Law Society Compensation Fund was obliged to pay comp to firm’s clients (Law Society v KPMG Peat Marwick 2000)
• special skill more likely to arise where Cl relied on care and skill of Def, where Def knew Cl was relying and where it was reasonable for Cl to rely on words or advice of Def.

Question 6

Assumption of responsibility test applied

Answer 6

• environmental health officers held to have assumed responsibility to owner of guest house in relation to advice given about necessary alterations in Welton v North Cornwall District Council 1997
• surveyor who valued prop as instructed by employer held to have assumed responsibility to purchaser of property in own professional capacity as well as his capacity as rep of his employer in Merrett v Babb 2001
  -West Bromwich Albion FC v El-Safty 2006 - Def Dr, consultant orthopaedic surgeon owed no duty of care to FC to protect its economic interests when treated one of players. Ct of A agreed and held no responsibility by Def for West Bromwich Albion’s financial interest in ability of its employee to play football - Def previously treated other players and paid through club’s insurance but Def medical skills used to treat injured player and not protect club’s economic position.
  -Customs and Excise Commissioners v Barclays Bank 2006 - Cl obtained freezing order on assets of customer of Def bank. Bank allowed customer to withdraw large amounts of money form accounts, contrary to order, so Cls couldnt enforce judgments - Cl argued bank owed them duty to abide by order. Ct of A absence of assumption of responsibility didnt mean no duty of care - was clear foreseeability of harm and was fair and reasonable to impose duty.
• bank appealed to H of L who allowed appeal as no voluntary assumption of risk by bank as no choice but to comply with order.
• recognised 3 tests used by Ct to determine whether one party owes duty to take care to guard against another party suffering pure economic loss:
  . Whether Def assumed responsibility.
  . Caparo test
  . Incremental development of novel categories
• on facts wouldnt be fair, just and reasonable to impose duty on bank - but seems questionable whether 2nd test survives and seems likely unless case falls within assumption of liability precedent , any further extension of duty of care for economic loss will only be on incremental basis
  -Neil Martin Ltd v Revenue and Customs Commissioners 2007 - staff at tax office failed to process app for sub-contractors tax cert properly, leading to delay in issuing of cert, and economic loss suffered as result. App had been amended by revenue employee, without auth from Cl, in erroneous belief that it was for a different doc.
• first instance held not liable as couldnt be sued for breach of stat duty or owe duty of care to process app with reasonable expedition, but on appeal Ct held employee who amended without auth made more than admin error and was enough to constitute assumption of responsibility that made it fair, just and reasonable to impose duty on employee, for breach of which Commissioners vicariously liable.
• have to look at factors such as purpose which info was communicated to Cl
  -Precis plc v William Mercer 2005 - Def actuaries prepared val report for pension fund of a company and Cl, relying on report, made offer for shares in company. Def knew Cl had access to info but didnt know would be used for that purpose. Ct of A held precise limits of concept of assumption of responsibility were still in state of development and no comprehensive list of guiding principles to help Ct determine when rose, so looked at all relevant circumstances and determine whether fell within situations when assumption of responsibility had previously been held to exist or whether circumstances were closely analogous or consistent with situations in which liability had been imposed in previous cases.
• parties had no existing relationship, info was in public domain, Def didnt communicate directly with Cl and Cl hadnt informed Def why info was requested - Def couldnt be said to have assumed responsibility to Cl.
  -Sebry v Companies House and Another 2015 - Edis J said Def assumed responsibility to Cl and owed duty of care to maintain accurate records. Employee of co, had in error altered status of company to show had gone into liquidation - as result, many creditors withdrew and it actually ended in going into administration suffering significant loss in region of £9mil
  -Banca Nazionale del Lavoro SPA v Playboy Club London Ltd 2018 - Hedley Byrne can only be invoked when Def knows recipient of advice and has reasonably clear idea of purpose Cl may rely upon it. Mr B wanted to bet in Playboy casino and asked club for credit to amount of £800k, club sought credit ref from his bank for £1.6mil, but to avoid disclosing why ref sought, clubs normal practice was to arrange for associated company, Burlington Street Services Limited to ask for ref w/o disclosing for benefit of Playboy club.
• BNL provided ref “in strict confidence” and confirmed Mr B had account with them and was trustworthy up to £1.6mil in any week, ref was carelessly composed, he had no account until 2 days before when acc opened with nil balance
  -relying on ref, Playboy extended request for credit to Mr B who went on to lose close to £800k in casino, when failed to pay club sued BNL for negligence. Sup Ct held BNL assumed responsibility towards Burlington not the Club, had no dealings with club and had no knowledge they were acting for club so no duty imposed.

Question 7

Must Def possess special skill?

Answer 7

-Mutual Life and Citizens Assurance Co v Evatt 1971 - Privy Council held ins co didnt owe duty of care in giving investment advice, majority held duty arose only when Def was in business of giving that type of advice or held themselves to be competent to do so.
- Ct had tendency to apply minority reasoning in Mutual Life, duty can arise when maker of statement knows recipient will reasonably rely on it
-Esso Petroleum Co v Marden 1976 - Esso made statements to Marden as to estimated throughput of a garage, Marden’s rent on garage was calculated on basis of throughput. Estimate made negligently and held Esso owed duty to take reasonable care in giving advice - as amounted to misrep, action would have arisen under MA 1967
- normally duty wont arise where statement is made on special occasion, one that would be unreasonable to expect Def to be exercising due care.
-Chaudhry v Prabhakar 1989 - Cl asked friend, who had some knowledge of cars, to find suitable one not involved in accident. Def found car and recommended it. Cl bought it, then found had been in an accident. Def found to be neg but Counsel already conceded that duty of care was owed so case cant be taken as general position that would arise.
-Burgess and Another v Lejonvarn 2018 - duty of care imposed on Def architect who assisted Burgesses with landscaping scheme, even though provided services for free and no written contract, on basis she assumed responsibility for performing professional responsibilities and Cl relied on it, but Ct found no breach of duty so claim failed.

Question 8

Must Cl have reasonably relied on Def’s advice?

Answer 8

• generally yes - reliance seen necessary as without it, no evidence that Def neg was actually cause of Cl harm - if Cl didnt rely on it, how could Def be held liable for providing it.
• party relying on advice normally should be party advice was given to, but sometimes another party can rely on it.
  -Henderson v Merrett Syndicates 1994 - group of Lloyd’s investors lost investments and sued Def underwriters for neg in placing of their investments. No advice given to Defs either directly or indirectly to Cl
• H of L approached similar to Caparo 3 stage test. Possibility of loss to Cl clearly foreseeable, and would be proximity as Def had assumed duty to provide professional or quasi-professional service and where Cl was relying on that service. Where Def allowed service to be passed to others, duty continued.
• issue of reliance connected to relevance of any disclaimer placed on advice and also proof of causal connection between neg advice and damage suffered. Hedley-Byrne failed due to disclaimer but since then Parliament passed UCTA 1977 that affects disclaimers in negligent misstatement cases re b2b contracts.
  -s2(2) UCTA 1977 means contract terms and notices that purport to exclude or restrict liability for neg only effective if satisfy reasonableness test. Arguable had no application to Hedley-Byrne cases as disclaimer didnt exclude liability but instead prevent duty of care form arising making Cl reliance unreasonable.
  -Smith v Bush 1990 - survey negligently carried out for mortgage co, Cl relied on survey when purchasing prop, contract between Cl and mortgage co contained clause exempting surveyor from liability. H of L found surveyor owed duty of care as were aware Cl would rely on info in report and reliance was reasonable.
• Lords considered s13(1) UCTA 1977 which deals with notices which exclude or restrict relevant obligation or duty and held UCTA 1977 couldnt be prevented from applying by notice which sought to prevent duty from arising. S2(2) applicable and disclaimer unreasonable.
• As Cl not business, relevant provisions would now be in CRA 2015 where s62 provides consumer not bound by term excluding or restricting liability for property damage if unfair - unfair if causes significant imbalance in right and obligations to detriment of consumer. Take into acc nature of subject matter of notice and ref to all circumstances when breach occurred.
• importance of whether acting in personal or commercial capacity made clear in Scullion v Bank of Scotland 2011 - Cl invested in buy to let prop and bank commissioned surveyors to do val, val provided info on resale value of prop and towards end set out expected rental value. Transpired actual resale and rental val significantly less, Cl resold flat at loss and sued RBS, who had by then bought surveyor’s business, for loss of respective capital but also shortfall in expected rental value. Ct of A rejected claim and said different from Smith, Smith involved ordinary household purchase but this investment - important difference as most ordinary buyers rely on surveyor’s val, was insufficient evidence to suggest that people brought prop as investors likely to rely on surveyor commissioned by bank rather than get their own - investors assumed to be more astute than ordinary purchasers so couldnt be held that surveyors ought to have investors in mind when preparing survey.
  -Steel and Another v NRAM Ltd 2018 - Steel was sol acting for co called Headway, Headway offered props as security for loan from NRAM, Steel notified NRAM that Headway would be paying whole loan and asked to release all props from security - NRAM relied on Steel’s statement and released props, but statement was mistaken as she was only paying off part of loan and funds only given sufficient for that not all.
  -NRAM’s loan team relied on stat, didnt check evidence and released all props. When Headway went into liquidation, NRAM discovered money still owing but they had no security over prop so sued Steel arguing her statement caused them loss. Sup Ct found Steel wasnt liable, fact NRAM relied on rep wasnt enough, must have also been reasonable for them to rely on it and wouldnt be case if Steel had foreseen reliance. Not satisfied as inappropriate for sol to assume responsibility towards other side. Any prudent review team would have checked accuracy of statements and not reasonable for NRAM to rely on Steel’s rep.

Question 9

Are there cases where reliance not necessary?

Answer 9

-White v Jones 1995 - H of L gave negative answer. Disappointed beneficiaries claimed damages from Def solicitor for delay in preparation of deathbed Will. H of L held that by agreeing to do Will, sol had voluntarily assumed responsibility to bens to carry out prep of Will with due care and skill. Even so even though bens not aware of sols appt and had no dealings with them.
- no statement made to bens they were relying on, rather sols provided service to testator. Cases confirmed assumption of responsibility approach to determination of proximity in “will cases” for ex in Carr-Glynn v Frearsons (a Firm) 1998 sol was held to have assumed responsibility to ben of Will when sol failed to determine whether testator held her share of the house as joint tenant or tenants in common.
- limits to duty owed by sols to bens as per Cancer Research Campaign v Brown 1998 where sol failed to take steps to reduce inheritance tax re wills administering so ben received reduced amount. Sol held not to owe duty of care to ben in relation to loss as sol not assumed responsibility on issue of avoiding inheritance tax.
- Pickersgill v Riley 2004 - Def sol advised Cl in relation to taking long lease on prop that involved Cl providing g’tee for rent. G’tee indemnified by 3rd party, but 3rd party turned out to have no assets so Cl had to pay full amount. Cl argued Def owed duty to verify viability of indemnity. Privy Council held scope of duty depended on content of instructions. Def didnt assume duty of care re indemnity and no duty to go beyond Cl instructions to make investigations that werent expressly or impliedly requested. No hidden pitfall or complexity where Def should have given warning and Cl experienced businessman
- If Def assumed responsibility over Cl economic interest, not liable for harm to interests.
-South Australia Asset Management Corporation v York Montague Ltd 1996 - H of L held valuer of some prop shouldnt be responsible for all consequences of his neg, only for foreseeable consequences of info provided being wrong. True loss attributable to neg val of prop in q was difference between incorrect val and correct value of prop at time of val. Didnt include further loss Cl made because prop market had slumped, val not liable for those losses that would have incurred because of market fluctuations whether relied on prop val or not.
- Since neg statements now available under MA 1967 and common law, some Cl have benefit of both action alleging non-fraudulent misrep where remedy sought under s2(1) MA 1967 and neg misstatement under Hedley-Byrne v Heller.