pure economic loss

Question 1

What is the significance of a disclaimer in relation to economic loss?

Answer 1

A disclaimer can exclude liability for economic loss if it is reasonable and fair.

Question 2

What factors were considered by the House of Lords when determining the reasonableness of the disclaimer?

Answer 2

The House of Lords considered several factors when determining the reasonableness of the disclaimer, including the parties’ bargaining power, the practical consequences, the sums of money at stake, and the ability of the parties to bear the loss involved. They also considered whether it was reasonably practicable for the claimant to obtain advice from an alternative source considering cost and time, as well as the difficulty of the task being undertaken by the defendant.

Question 3

What factors determine whether it is reasonable for the claimant to rely on the defendant’s advice?

Answer 3

The reasonableness of the claimant’s reliance on the defendant’s advice depends on several factors. One factor is the claimant’s own skill or knowledge in relation to the advice. If the claimant has relevant skill or knowledge, the courts may find it unfair, unjust, or unreasonable for the claimant to have relied on the defendant’s advice. Another factor is the general context in which the advice was given. Additionally, the courts consider whether the claimant has equal knowledge or skill as the defendant or if there is a disparity between them.

Question 4

What types of loss are recoverable in general negligence?

Answer 4

In general negligence, the types of loss that can be recovered include physical damage (property damage), consequential economic loss (loss of profit as a direct consequence of property damage), and pure economic loss (economic loss not resulting from damage to the claimant’s property or person).

Question 5

What is the definition of pure economic loss?

Answer 5

Pure economic loss can be defined as economic loss that does not flow from damage to the claimant’s person or property. It includes situations such as loss of speculative profit or loss arising from damage to another person’s property.

Question 6

What are the exceptions to the general rule that no duty of care is owed in respect of pure economic loss?

Answer 6

The exceptions to the general rule for pure economic loss include pure economic loss caused by a negligent statement, wills, and references. These exceptions arise from negligent statements and establish a duty of care in certain circumstances.

Question 7

What is the significance of the Consumer Rights Act 2015 in relation to disclaimers?

Answer 7

The Consumer Rights Act 2015 regulates disclaimers between traders and consumers. If a surveyor, for example, is classified as a trader and the buyer as a consumer, the CRA 2015 would apply. However, the practical difference between UCTA 1977 and CRA 2015 in this context is minimal.

Question 8

What is the reasonable reliance test in establishing a duty of care for pure economic loss caused by a negligent statement?

Answer 8

The reasonable reliance test has three requirements: (a) the claimant relied on the defendant’s advice, (b) it was reasonable for the claimant to rely on the defendant’s advice, and (c) the defendant knew or ought to have known that the claimant was relying on their advice.

Question 9

What are the key elements of reasonable reliance in establishing a duty of care for pure economic loss?

Answer 9

The key elements of reasonable reliance are: (1) The claimant relied on the defendant’s advice; (2) It was reasonable for the claimant to rely on the defendant’s advice; and (3) The defendant knew or ought to have known that the claimant was relying on the advice.

Question 10

What are the key elements of assumption of responsibility in establishing a duty of care for pure economic loss?

Answer 10

The key elements of assumption of responsibility are: (1) The defendant assumed responsibility to perform professional services for the claimant; and (2) There is a relationship equivalent to a contract, where there is an assumption of responsibility in circumstances that would create a contract if not for the absence of consideration.

Question 11

What is the significance of a special relationship in establishing a duty of care for pure economic loss?

Answer 11

A special relationship can exist where the party seeking information or advice was trusting the other to exercise a degree of care as the circumstances required, and where it was reasonable for the party to do so. If the defendant gave information or advice knowing or ought to have known that the enquirer was relying on them, a duty of care may be owed.

Question 12

What are the four criteria set out in Caparo Industries plc v Dickman [1990] 2 AC 605 for establishing assumption of responsibility?

Answer 12

The four criteria set out in Caparo Industries plc v Dickman [1990] 2 AC 605 are: (1) The defendant must communicate the advice to the claimant or know that it will be communicated to them; (2) The defendant must know the purpose for which the claimant will use the advice; (3) The defendant must know, or reasonably believe, that the claimant will rely on the advice without independent enquiry; and (4) The claimant must have acted upon that advice to their detriment.

Question 13

What additional hurdles must be overcome when the defendant makes a statement to someone else but it reaches the claimant?

Answer 13

When the defendant makes a statement to someone else but it reaches the claimant, there are additional hurdles to overcome. These include: (1) The defendant must communicate the advice to the third-party claimant or know that it will be communicated to them; (2) The defendant must know the purpose for which the claimant will use the advice; (3) The defendant must know or reasonably believe that the claimant will rely on the advice without independent inquiry; and (4) The claimant must have acted upon the advice to their detriment, with the expectation that the defendant would protect them from that loss.

Question 14

What is the distinction made by the courts between pure economic loss caused by a negligent act and pure economic loss caused by a negligent statement?

Answer 14

The courts make a distinction between pure economic loss caused by a negligent act and pure economic loss caused by a negligent statement. Negligent acts can lead to pure economic loss, but the general rule remains that no duty of care is owed. However, negligent statements can give rise to a duty of care in certain circumstances.

Question 15

What are the three tests discussed in the Hedley Byrne case to establish a duty of care for pure economic loss caused by a negligent statement?

Answer 15

The three concepts identified in Hedley Byrne for establishing a duty of care in respect of pure economic loss caused by a negligent statement are: (1) Reasonable reliance test, which considers the claimant’s reliance on the defendant’s advice; (2) Voluntary assumption of responsibility, where the defendant assumes responsibility for the correctness of their statement; and (3) Special relationship of trust and confidence, which arises when the party seeking advice trusts the other to exercise the necessary degree of care.

Question 16

What is the general rule in relation to pure economic loss?

Answer 16

The general rule is that no duty of care is owed in respect of pure economic loss. However, there are exceptions to this rule, particularly in cases involving negligent statements.

Question 17

Lisa uses her Dad’s vacuum cleaner for her cleaning business. It explodes, injuring Lisa and breaking her client’s vase. Lisa sues the manufacturing company of the vacuum cleaner for her losses (i.e. for the cost of replacing the vacuum cleaner and vase, and for her injuries). Which of the following is correct?

Lisa may be able to recover damages for her personal injuries only.

Lisa may be able to recover damages for her personal injuries and for the cost of replacing the vacuum cleaner.

Lisa cannot sue the manufacturing company for any losses as it was not her vacuum cleaner.

Lisa may be able to recover damages for her personal injuries and for property damage to the vase.

Lisa may be able to recover damages for the cost of replacing the vacuum cleaner only.

Answer 17

Lisa may be able to recover damages for her personal injuries only.

Lisa would not be able to recover damages for the property damage to the vase as it was not her property. Her client would have to sue the manufacturing company instead. Lisa would not be able to recover damages for the cost of replacing the defective vacuum cleaner. The cost of repairing/replacing a defective item is classified as pure economic loss and is not recoverable. Lisa’s dad would have to sue the manufacturing company in the law of contract. Lisa can try and recover damages for her personal injuries. The manufacturing company could owe Lisa a duty of care not to cause her personal injury when using their product.

Question 18

Sebastian runs a restaurant. He engages Tank Specialities Ltd to supply and install a fish tank to store his lobsters in. The tank needs an electric pump to circulate the seawater for the purpose of oxygenation. Tank Specialities Ltd subcontracts the manufacture of the pumps to Motor Ltd. The pumps fail on a Monday morning when the restaurant is closed and 20 lobsters die from lack of oxygen. The lobsters cannot be used on Tuesday. Tank Specialities Ltd is insolvent. Sebastian sues Motor Ltd for the cost of replacing the pumps, for the value of the lost lobsters and for the loss of profit on the intended sale of the lost lobsters.

Which of the following is correct?

Sebastian can recover damages from Motor Ltd for all three heads of loss i.e. the cost of replacing the pumps, the value of the lost lobsters and the loss of profit on the lost lobsters.

Sebastian can recover damages from Motor Ltd for the value of the lost lobsters and for the loss of profits on the intended sale of those lobsters. He cannot recover the cost of replacing the pumps.

Sebastian can only recover damages for the cost of replacing the pumps from Motor Ltd.

Sebastian cannot recover damages from Motor Ltd for any of the heads of loss claimed i.e. the value of the lobsters, the loss of profit on the lost lobsters and for the cost of replacing the pumps.

Sebastian can recover damages from Motor Ltd for the value of the lost lobsters but cannot recover damages for the loss of profit on the lost lobsters or for the cost of replacing the pumps.

Answer 18

Sebastian can recover damages from Motor Ltd for the value of the lost lobsters and for the loss of profits on the intended sale of those lobsters. He cannot recover the cost of replacing the pumps.

This is the correct answer. The cost of replacing the pumps is pure economic loss (the cost of replacing a defective product). The general rule is that there is no duty of care owed for pure economic loss and none of the exceptions to this general rule apply. The damaged lobsters will be classified as property damage and a duty of care would therefore be owed in respect of this loss. The loss of profit on the intended sale of the damaged lobsters would be consequential economic loss and a duty of care would therefore be owed in respect of this loss. Sebastian can only recover for the physical damage to the lobsters and for financial loss suffered as a consequence of that physical damage.

Question 19

An employer provides a disparaging, yet accurate reference for an ex-employee. The ex-employee cannot find a job as a result.

Which of the following is correct in relation to whether the employer owed the employee a duty of care?

The employer owed the ex-employee a duty of care to provide an accurate reference.

The employer owed the ex-employee a duty of care to provide a reference.

The employer does not owe the ex-employee a duty of care because they have only suffered pure economic loss.

The employer did not owe the ex-employee a duty of care to provide an accurate reference.

The employer owed the person requesting the reference a duty of care to provide an accurate reference, but not the ex-employee.

Answer 19

The employer owed the ex-employee a duty of care to provide an accurate reference.

This is the correct answer.
This precedent for duty of care was established in Spring v Guardian Assurance Plc & Others [1995] 2 AC 296. A referee owes a duty of care to the subject of the reference to provide an accurate reference. It appears the employer has done this.

Question 20

Whist alive, Naghina’s deceased grandmother had told her that she would inherit £50,000. However, Naghina is told by the solicitors dealing with her grandmother’s will, that the will is invalid and that her grandmother’s previous will (which left everything to Naghina’s sister) would have to be followed instead. This is because Naghina’s grandmother failed to sign the most recent will. The solicitor’s copy was filed without checking the signature was present.

Which of the following is correct?

Naghina will not be owed a duty of care by the solicitors for the consequential economic loss she has suffered because she was not their client.

Naghina will not be owed a duty of care by the solicitors as she has suffered pure economic loss which is not recoverable.

Naghina will be owed a duty of care by the solicitors for the consequential economic loss she has suffered as a direct result of the negligently filed will.

Naghina will be owed a duty of care by the solicitors for the pure economic loss she has suffered as a result of the negligently filed will.

Naghina will not be owed a duty of care by the solicitors for the pure economic loss she has suffered because she was not their client.

Answer 20

Naghina will be owed a duty of care by the solicitors for the pure economic loss she has suffered as a result of the negligently filed will.

This is the correct answer.
Although Naghina has suffered pure economic loss (economic loss not flowing from damage to person or property) and the general rule is that this is not recoverable, there are exceptions to this general rule. Naghina’s loss falls into one of these exceptions.
There is well established precedent that solicitors drawing up a will owe a duty of care to the testator’s beneficiaries who should be allowed to sue the solicitor for the loss of an intended legacy. Naghina will therefore be owed a duty of care by her deceased grandmother’s solicitors for the loss of £50,000.

Question 21

Criteria for D to have assumed responsibility for C?

Answer 21

The case of Caparo laid down the four criteria to be satisfied for a defendant to have
assumed a responsibility towards a claimant:
*
The defendant knew the purpose for which the advice was required.
*
The defendant knew that the advice would be communicated to the claimant (either
specifically or as a member of an ascertainable class).
*
The defendant knew that the claimant was likely to act on the advice without independent
inquiry.
*
The advice was acted on by the claimant to its detrimen

Question 22

General rule on pure economic loss?

Answer 22

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 23

Exception to pure economic loss?

Answer 23

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?

Question 24

Question 1
A solicitor has been instructed by a mother and daughter for advice on potential claims
that they may have against a cosmetic surgeon. The mother received cosmetic filler
treatment to her face in preparation for the daughter’s wedding. This went wrong and
caused substantial swelling and pain to her face. As a result of the treatment the mother
was unable to work for three months. The mother is a presenter on an online shopping
channel and has lost a significant amount of income. The daughter felt that she had no
choice but to cancel the wedding because her mother would have been unable to attend.
The daughter has lost a substantial amount of money as a consequence of this.
Which of the following statements best explains whether the clients would be
compensated for their financial losses if the cosmetic surgeon’s negligence was proven
to have caused their loss?
A Neither the mother nor the daughter would receive compensation for their financial
losses because they have suffered pure economic loss.
B Both the mother and the daughter would receive compensation for their financial losses
because there is an established duty of care between doctors and patients.
C Only the mother would receive compensation for her financial losses because they are
owed a duty of care for their pure economic loss. The daughter would not be owed a
duty of care for her pure economic loss because there was not a ‘special relationship’
between her and the surgeon.
D Only the mother would receive compensation for her financial losses because there is
an established duty of care between doctors and patients. The daughter’s loss is too
remote.
E Only the mother would receive compensation for her financial losses because there
is an established duty of care between doctors and patients. The daughter would not
be owed a duty of care for her pure economic loss because there was not a ‘special
relationship’ between her and the surgeon.

Answer 24

Answer
Option E is correct.
Option A is wrong because the mother would be compensated for her financial loss as her
lost income is consequential on her personal injury, ie it is not pure economic loss. It is correct,
however, that the daughter has suffered pure economic loss (PEL) and that they would not be
compensated for this (see further below).
Option B is wrong because, while there is an established duty of care between doctors and
their patients, this would not assist the daughter as they are not a patient of the surgeon. It
is also wrong because the daughter has suffered PEL. The established duty of care is only
relevant for personal injury or property damage and not for PEL.
Option C is wrong as the mother has not suffered PEL. It is correct, however, that the daughter
would not be owed a duty of care for their pure economic loss because there was not a
‘special relationship’ between her and the surgeon. She would not satisfy the test for a
‘special relationship’ from Hedley Byrne v Heller (as expanded upon in Caparo v Dickman).
Option D is wrong because the daughter would not be owed a duty of care for their PEL.
Their claim would therefore fail at the duty of care stage and the question of remoteness is,
therefore, irrelevant.

Question 25

Question 2
A client has consulted a solicitor about problems they are having with a new computerised
record system. The client provides employers with security checks on prospective new
employees. It does this using the computerised record system to search for information
about credit records, county court judgments, and criminal convictions.
The record system was purchased from a retail company specialising in the supply of
computer systems comprising both hardware and software. The client has encountered
a fault in the computer hardware. The client did initially complain to the retail company.
However, they have received no reply and it seems that this company may have ceased
trading.
The hardware was manufactured by another large and reputable company. This company
has accepted that there is a fault in the hardware. It has offered to supply the replacement
parts at a discount.
The client has asked for advice on whether they should accept this offer, or whether, in fact,
they could sue the manufacturer for the full cost of a new system.
Which of the following statements best explains whether the client should accept the
offer by the manufacturer rather than suing the manufacturer for the full cost of a new
system?
A Yes, because, while the manufacturer has admitted liability, the client should avoid
incurring unnecessary legal costs.
B Yes, because the client has suffered pure economic loss and the manufacturer does not
owe them a duty of care. If they sue the manufacturer their claim is bound to fail.
C No, because the manufacturer owes the client an established duty of care and it has
admitted that it is in breach of that duty.
D No, because the client can sue the manufacturer in contract for the full cost of a
replacement system.
E No, because a duty of care is owed as there is a ‘special relationship’ between the
client and th the manufacturer, and the manufacturer has admitted that it is in breach of
that duty.

Answer 25

Answer
Option B is correct – this is an example of economic loss caused by acquiring a defective
item of property. The client’s loss is categorised as pure economic loss and is caught by the
general rule that there is no duty of care owed for this type of loss. As there is no exception
that would apply, the client should accept the offer that has been made by the manufacturer.
Option A is wrong because, while it is generally correct that any unnecessary legal costs
should be avoided, this is not the reason why the offer should be accepted as the client’s
claim is bound to fail in any event. The manufacturer may have admitted that it was at fault,
but it will not be liable because a duty of care is not owed to the client.
Option C is wrong because the manufacturer’s duty of care only encompasses physical
damage, personal injury and any consequential economic loss. It does not apply to pure
economic loss.
Option D is wrong because the client’s contract is with the retail company and not the
manufacturer. The client does not, therefore, have a claim against the manufacturer in
contract.
Option E is wrong because there is nothing on the facts to suggest that a special relationship
involving an assumption of responsibility by the manufacturer to the client would apply.

Question 26

Question 3
A solicitor is instructed by a client who wishes to bring a claim in negligence for substantial
losses arising from an investment they have made in buy- to- let properties. The client had
asked a friend, who is an estate agent, to advise on suitable purchases. The client had no
knowledge of the risks involved in buying properties for letting and had made it clear that
they would be relying on their friend’s skill and judgment. The client’s friend recommended
buying two houses near to a university with the stated aim that the houses would convert
into separate lettings for multiple occupation by students. The client bought the houses on
the basis of the friend’s recommendation. The client later discovered that the houses were
unsuitable for multiple occupation and has suffered a substantial loss of income from the
houses as a result. The client now wishes to recoup these losses from their friend.
Which of the following statements best explains whether the client is owed a duty of
care by their former friend?
A No, because there can never be a duty of care in respect of negligent advice given in
a social situation.
B No, because the client has suffered pure economic loss.
C Yes, because the former friend had assumed a responsibility to the client and it was
reasonable for the client to rely on the former friend for advice.
D Yes, because the former friend had assumed a responsibility to the client and the
former friend did not exclude their liability by way of a disclaimer.
E Yes, because it was reasonable for the client to rely on the former friend for advice and
the former friend did not exclude their liability by way of a disclaimer.

Answer 26

Answer
Option C is correct as it correctly states the two parts of the test for a duty of care to be owed
for negligent statements.
Option A is wrong because, while it is generally true that there is no duty of care in respect of
advice given in a social situation, there are exceptions (as per Chaudhry v Prabhakar [1989] 1
WLR 29).
Option B is wrong because, while it is true that there is generally no duty of care for pure
economic loss, there are exceptions – in particular for negligent statements (as per Hedley
Byrne v Heller & Partners Ltd [1964] AC 465).
Option D is wrong as, while an assumption of responsibility is one element of when a
‘special relationship’ may give rise to a duty of care for negligent statements, it must also
be reasonable for the claimant to rely on the defendant for advice. Also, the fact that there
may or may not have been a disclaimer of liability is not relevant to whether a duty of care
was owed.
Option E is wrong for similar reasons to option D, the difference being that there must also be
an assumption of responsibility by the defendant to the claimant.