Negligence: Pure Economic Loss

Question 1

What is pure economic loss, and how is it different from consequential economic loss?

Answer 1

• Definition of Pure Economic Loss: Financial loss that is not a result of personal injury or damage to the claimant’s property. It is a standalone financial loss and often involves indirect harm.
• General Rule: No duty of care is owed to prevent pure economic loss.
• Consequential Economic Loss: This is financial loss flowing directly from personal injury or property damage. Unlike pure economic loss, it is recoverable in negligence.
• Examples:
• Pure Economic Loss: A journalist negligently advises that shares in a company are a good investment, causing readers to lose money. No recovery is allowed because the loss is unconnected to injury or property damage.
• Consequential Economic Loss: A driver negligently crashes into a claimant’s property, causing physical damage and financial loss (e.g., repair costs). This loss is recoverable.

Question 2

Why is there generally no duty of care for pure economic loss in negligence?

Answer 2

• Reasons for Limitation:
  1. Avoiding Boundless Liability: Pure economic loss often lacks proximity between the parties, making the potential liability unlimited.

2. Preserving Contract Law: Allowing claims for pure economic loss in tort could undermine contractual remedies.
3. Fairness: The defendant should not be liable for unforeseeable or indirect financial consequences.

• Illustrative Example: A journalist negligently advises on shares, leading multiple readers to lose money. Allowing recovery would expose the journalist to claims from an indeterminate number of people.

Question 3

Under what circumstances is consequential economic loss recoverable?

Answer 3

• Definition: Financial loss that arises as a direct consequence of physical injury or property damage.
• Recoverability: Consequential economic loss is recoverable if it directly follows from the harm caused by the defendant’s negligence.
• Case Examples:
• Robinson v Post Office [1974]: A claimant suffered an allergic reaction following a minor injury. The costs of medical treatment and lost wages were recoverable as consequential losses.
• Spartan Steel v Martin [1973]: Financial loss caused by physical damage to the claimant’s products was recoverable.
• Example:
• A negligent driver causes property damage to a shed. The cost of repairs and temporary storage is recoverable as consequential economic loss.

Question 4

Can a claimant recover economic loss caused by acquiring defective property?

Answer 4

• General Rule: Economic loss caused by acquiring defective property is pure economic loss and not recoverable in negligence.
• Key Case: Murphy v Brentwood DC [1990]
• Facts: The claimant purchased a house with defective foundations approved by the local council. The defects caused a reduction in the house’s value, but no injury or damage to other property.
• Decision: The loss was pure economic loss, and the council owed no duty of care.
• Example: A faulty hairdryer causes no harm but does not function as intended. The cost of replacing it is pure economic loss and not recoverable in negligence.

Question 5

Are there any exceptions for recovering economic loss caused by defective property?

Answer 5

• Exception: If defective property causes personal injury or damages other property, resulting economic loss may be recoverable.
• Example 1: If a faulty hairdryer causes burns to the user, the personal injury and resulting medical costs are recoverable. However, the cost of replacing the hairdryer itself is not.
• Example 2: If a defective CD player burns a hole in a bag, the cost of replacing the bag is recoverable as consequential loss, but the CD player itself is not.

Question 6

When does economic loss resulting from damage to third-party property constitute pure economic loss?

Answer 6

• Rule: If a claimant incurs financial loss due to damage to third-party property, the loss is pure economic loss and not recoverable.
• Case Example:
• Spartan Steel v Martin [1973]:
• Facts: The defendant damaged an electricity cable owned by a third party, causing a power cut. The claimant’s factory suffered lost profits.
• Decision: The claimant could recover losses directly linked to damaged products but could not recover future lost profits caused by the power cut, as these were pure economic loss.
• Example: A negligent driver damages a suit owned by one person (Tony), causing another person (Dale) to incur costs renting a replacement. Dale’s loss is pure economic loss and not recoverable.

Question 7

Can economic loss occur without physical damage to property or injury, and is it recoverable?

Answer 7

• Rule: Pure economic loss without physical damage is not recoverable unless there is an established exception.
• Case Example:
• Weller v Foot and Mouth Disease Research Institute [1966]:
• Facts: A virus escaped, leading to the closure of cattle markets. Auctioneers lost business but suffered no physical damage.
• Decision: The auctioneers’ loss was pure economic loss and not recoverable.

The established exception to the general rule that no duty of care is owed for negligent statements causing pure economic loss is when a special relationship exists between the defendant (the maker of the statement) and the claimant (the recipient who relied on the statement).

Question 8

How do negligent statements lead to pure economic loss, and are they recoverable?

Answer 8

• General Rule: There is no duty of care for pure economic loss caused by negligent statements.
• Reason: Negligent statements pose a high risk of unlimited liability due to the lack of proximity between the speaker and an indefinite number of claimants.
• Example: A journalist advises that shares in a company are a good investment, leading readers to lose money. This is pure economic loss, and no duty of care is owed.

Question 9

When can a duty of care arise for pure economic loss caused by negligent statements?

Answer 9

• Exception: If a sufficiently close and proximate relationship exists, a duty of care may arise.
• Example (Hypothetical): An accountant directly advises a client on an investment. If the advice is negligently prepared, causing financial loss, the accountant may owe a duty of care.

Question 10

What are the key principles and cases for understanding pure economic loss?

Answer 10

• Key Principles:
  1. No duty of care is owed for pure economic loss unless a specific exception applies.

2. Consequential economic loss, following personal injury or property damage, is recoverable.
3. The law avoids boundless liability by limiting claims based on proximity.
   * Key Cases:

• Murphy v Brentwood DC [1990]: Defective property.
• Spartan Steel v Martin [1973]: Third-party property damage.
• Weller v Foot and Mouth Disease Research Institute [1966]: Loss without physical damage.

Question 11

What policy reasons underlie the rules for pure economic loss?

Answer 11

*Avoiding Boundless Liability: Prevents exposure to claims from an indefinite number of claimants.

• Preserving Contract Law: Ensures that tort law does not interfere with contractual remedies.
• Fairness: Limits recovery to losses that are sufficiently proximate and foreseeable.

Question 12

Why is there generally no duty of care for negligent statements causing pure economic loss, and what is the exception?

Answer 12

The general rule is that no duty of care exists for pure economic loss caused by negligent statements because of insufficient proximity between the claimant and the defendant. If no limits were placed, liability would be boundless, potentially covering countless claimants.

Exception: A duty of care arises if there is a special relationship involving:

1. Assumption of responsibility by the defendant; and;
2. Reasonable reliance by the claimant.

This was established in Hedley Byrne v Heller & Partners Ltd [1964]. The House of Lords held that, where a special relationship exists, a duty of care for economic loss may arise, provided the claimant reasonably relied on the defendant’s statement, and the defendant assumed responsibility.

Question 13

What legal principle was established in Hedley Byrne v Heller, and how was it applied?

Answer 13

The principle established is that a duty of care for pure economic loss caused by negligent statements can exist where:

1. The defendant assumes responsibility for the advice or statement.
2. The claimant reasonably relies on it.

In Hedley Byrne:
* The defendant bank gave a negligent credit reference about a company.

• The claimant relied on the reference and extended credit to the company, suffering losses when the company went bankrupt.
• The court found that the defendant could owe a duty but escaped liability through a disclaimer (“without responsibility”).

Significance: Hedley Byrne marked a departure from the traditional rule, opening the door to claims for pure economic loss under specific conditions.

Question 14

How did Caparo Industries v Dickman refine the principles from Hedley Byrne?

Answer 14

Caparo expanded the test for proximity in cases of negligent misstatements by requiring four criteria to be satisfied:

1. The defendant knew the purpose for which the advice was required.
2. The defendant knew the advice would be communicated to the claimant or a specific group.
3. The defendant knew the claimant would likely rely on the advice without independent inquiry.
4. The advice was acted upon by the claimant to their detriment.

Application in Caparo:
* Auditors negligently prepared accounts, stating the company had made a profit when it had suffered losses.

• An investor relied on the accounts to buy shares and suffered losses.
• The court found no duty because there was insufficient proximity; the auditors did not know the advice would be used specifically for share purchases.

Question 15

Does a duty of care exist for advice given in a social or informal setting?

Answer 15

Generally, no duty of care arises in social situations. However, a duty may exist if the defendant assumes responsibility by:

1. Demonstrating greater expertise in the subject.
2. Knowing the claimant will rely on their advice.

Case Example: Chaudhry v Prabhakar [1989]
* The defendant, a friend of the claimant, advised her to buy a car, assuring her it was in good condition.

• The car was later found to be unroadworthy.
• The court found a duty of care because:
• The defendant had more knowledge about cars.
• The claimant explicitly relied on their advice.

Question 16

What is “reasonable reliance” in negligent misstatement cases, and when is it established?

Answer 16

Reasonable reliance exists if:

1. The claimant trusted the defendant’s expertise.
2. The advice was sought for a specific purpose known to the defendant.
3. The claimant acted on the advice without independent inquiry.

Example: A journalist providing investment advice over the phone to a specific reader creates a special relationship. If the journalist assures the reader their advice can be relied upon, and the reader suffers losses, reasonable reliance may be established, creating a duty of care.

Question 17

How did White v Jones extend the principle of negligent statements to professional services?

Answer 17

White v Jones extended the duty of care to cover negligent provision of professional services, even without direct reliance.

Facts:
* A solicitor failed to draft a new will before the testator’s death.

• The beneficiaries of the new will lost their inheritance.

Held: A duty of care was owed to the beneficiaries because:

• The solicitor could foresee the consequences of their negligence.
• The solicitor had assumed responsibility to act with reasonable care, even though the beneficiaries did not directly rely on the solicitor.

Question 18

How did Spring v Guardian Assurance extend the scope of liability for negligent statements?

Answer 18

This case established that a duty of care can arise when:

1. A negligent statement is made to a third party.
2. The statement causes pure economic loss to the claimant.

Facts:
* An employer gave a negligent reference for a former employee, leading to the employee being rejected for a new job.

• The court found the employer owed a duty of care because they assumed responsibility for ensuring the accuracy of the reference.

Significance: Spring extended Hedley Byrne to cases where the negligent statement is not made directly to the claimant.

Question 19

How can defendants limit their liability for negligent statements, and what are the statutory controls?

Answer 19

Defendants can rely on exclusion clauses to disclaim liability, but these must satisfy the following:

1. Reasonable steps must be taken to bring the exclusion clause to the claimant’s attention before the tort occurs.
2. The clause must be reasonable or fair, as per:
   * Unfair Contract Terms Act 1977 (UCTA) for business contracts; and

• Consumer Rights Act 2015 (CRA) for consumer transactions.

Statutory Limitations:

• Exclusion of liability for death or personal injury caused by negligence is prohibited (UCTA s 2(1); CRA s 65).
• Other exclusions must satisfy the reasonableness test under UCTA s 11 or the fairness test under CRA s 62.

Case Example: Smith v Eric S Bush
* A surveyor’s exclusion clause was found unreasonable because:
* The claimant had no alternative source of advice.
* The cost of the survey was relatively small compared to the potential loss.

Question 20

What factors determine the reasonableness of an exclusion clause under UCTA 1977?

Answer 20

In Smith v Eric S Bush, the court identified the following factors:

1. Were the parties of equal bargaining power?
2. Could the claimant have obtained the advice from an alternative source?
3. How complex or difficult was the task the defendant undertook?
4. What are the practical consequences of allowing the clause, considering:
   * The financial sums at stake.
   * The ability of the parties to bear the loss.

These factors are applied on a case-by-case basis to determine whether the exclusion clause is fair.

Question 21

How did Henderson v Merrett extend the principle of negligent statements to professional services in tort?

Answer 21

The House of Lords held that a duty of care in tort could arise even where a contractual relationship exists, provided:
1. The duty in tort is consistent with the contractual duties.
2. The defendant assumed responsibility for the service provided.

Significance: This case allows claimants to sue in tort for pure economic loss caused by negligent professional services, offering an alternative route to contractual remedies.

Question 22

What is the process for determining liability for pure economic loss in negligence?

Answer 22

1. Identify the Type of Loss
   * Pure Economic Loss: General rule is no duty of care unless an exception applies (e.g., special relationship).

• Consequential Economic Loss: Consider under normal negligence rules (e.g., physical injury or property damage leading to financial loss).

2. Determine if a Special Relationship Exists
   For negligent statements:

• Did the defendant assume responsibility to the claimant?
• Did the defendant know the purpose of the advice?
• Did the defendant know the advice would be communicated to the claimant?
• Did the defendant know the claimant would act on the advice without independent inquiry?
• Was it reasonable for the claimant to rely on the advice?
• Was the advice acted upon to the claimant’s detriment?

For negligent actions (Spring v Guardian Assurance, White v Jones, Henderson v Merrett):
* Did the defendant assume responsibility for the specific situation?

3. Breach of Duty
   * Was the defendant in breach of their duty of care?
4. Causation
   * Did the defendant’s breach cause the claimant’s damage?
5. Defences and Exclusion Clauses
   * Was there a valid exclusion notice?
   * Were reasonable steps taken to bring the notice to the claimant’s attention before the tort occurred?
   * Did the wording of the notice cover the claimant’s loss?
   * Consider statutory controls:
   * Unfair Contract Terms Act 1977 or Consumer Rights Act 2015.

Outcome:
If all steps satisfy the legal criteria, liability for pure economic loss may arise. Otherwise, no liability exists in negligence.