Pure Economic Loss Flashcards
What is the general rule for pure economic loss?
As a general rule, if the loss is personal injury, property damage and/or consequential economic loss, it is recoverable, but if the loss is pure economic loss, it will not be recoverable.
The general rule is that no duty of care is owed in respect of pure economic loss. The case authority for this is Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27. This case illustrates the difference between physical damage, consequential economic loss and pure
economic loss.
Key case: Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB
27 The claimant manufactured steel alloys, a process requiring continuous power to maintain the temperature in the furnace. The defendant’s employee negligently damaged the cable that supplied electricity to the claimant’s factory, which required the power to be shut off for 14 hours. This meant the metal being processed at the time was ruined. The claimant was unable to sell the ruined metal and consequently suffered a loss of profit. In addition, the claimant claimed that they could have made profit from processing four further melts during the shut-down. The damaged electricity cable did not belong to the claimants.
What is pure economic loss?
Pure economic loss arises where there has been no damage to the claimant’s property or injury to their person. To define the term further it is best to give examples of situations where loss can be categorised as pure economic loss:
(a) Economic loss not flowing from damage to person or property
(b) Loss arising from damage to the property of another
(c) Defective items
What is economic loss not flowing from damage to person or property?
If the claimant has suffered no physical damage to their person or property then their loss will be pure economic loss. This might arise, for example, where the claimant has made a bad investment, missed a contractual opportunity or lost an inheritance.
What is a loss arising from damage to the property of another?
If a claimant suffers economic loss as a result of damage to property in which they have no proprietary interest, the loss will be categorised as pure economic loss.
Key case: Weller & Co v Foot & Mouth Disease Research Institute [1965] 3 All ER
560
Facts: The claimant agricultural auction house claimed for lost profits against the defendant. The defendant had negligently released the foot and mouth virus and infected local cattle, resulting in a cattle movement ban and the cancellation of local auctions.
Held: the claim was unsuccessful as it was for pure economic loss. The claimant had suffered no damage to their own property. Their losses flowed from damage to cattle owned by local farmers. If a farmer had claimed for lost profits by reason of not being able to sell an infected cow, the
claim would have succeeded as that would have been consequential economic loss (economic loss flowing from property damage).
What are defective items?
It is not possible to claim for the cost of repairing an inherently defective item which has been categorised as pure economic loss. If the claimant’s claim is that their property is not up to the standard they expected, then their claim will not generally succeed in tort. They have not suffered
physical damage, which is when something good is made bad; instead, they have always had the property subject to the defect. In such an instance, damages might be available in a contractual claim.
A key case regarding defective products being categorised as pure economic loss is Murphy v Brentwood District Council [1990] 2 All ER 908.
Facts: The claimant bought a house which subsequently developed structural defects because of inadequate foundations. The foundations had been approved by the Council. The claimant sold the house for £35,000 less than it would have fetched without the defect.
Held: the loss suffered was pure economic loss and not recoverable. The only thing suffering damage was the house itself which had always been inherently defective because of the foundations. Therefore, any cost of repairs or reduction in value to the property was pure economic loss. No physical damage had occurred to any person or other property. Thus, the
House of Lords confirmed that the cost of repairing inherently defective products was rightly classified as pure economic loss.
What are the exceptions to the general rule for pure economic loss?
(a) Pure economic loss caused by negligent statements
(b) Wills
(c) References
What constitutes pure economic loss caused by negligent statements?
Where the pure economic loss was caused by a negligent statement (also known as a negligent misstatement), the courts might find a duty of care was owed.
This is illustrated by the landmark decision of Hedley Byrne v Heller [1964] AC 465, in which the House of Lords decided that in certain circumstances concerning two party relationships there could be liability for careless statements. This case and the line of authorities following from it form a complex topic in their own right and are considered below in the section ‘Pure economic loss caused by a negligent statement’. Note that negligent statements normally result in pure economic loss. However, where the statements cause physical harm, then the usual duty of care rules apply to the question of duty.
How are wills an exception to the general rule?
In these cases, there is a relationship between the solicitor and the testator, but if there is negligence in relation to a will it is the beneficiary (not the testator) who suffers a loss. A solicitor therefore owes a duty to the beneficiary in order to achieve practical justice.
Key case: White v Jones [1995] 2 AC 207
Solicitors owed a duty of care to beneficiaries who should be allowed to sue the solicitor for the loss of an intended legacy. Two sisters were written out of their father’s will following an argument.
Later, the sisters made up with their father and he instructed his solicitors to redraft his will, including an inheritance of £9,000 to each daughter. The alteration to his will was not made before he died. The solicitor could foresee that if the will were not drafted before the testator died,
the intended beneficiaries would suffer a loss. The solicitor had undertaken a responsibility towards the beneficiaries.
The duty of care owed to beneficiaries extends beyond solicitors to other companies offering willmaking services (Esterhuizen v Allied Dunbar Assurance plc, The Times, 10 June 1998).
How are references an exception to the general rule?
Spring v Guardian Assurance plc & Others [1995] 2 AC 296
The defendants gave a very disparaging job reference about the claimant. The claimant was unable to gain other employment in the life assurance industry as a result of the reference and, therefore, sued the defendant for negligence. There was no doubt that a referee owed a duty of
care to the person requesting a reference (Hedley Byrne), but the House of Lords held that in addition there was a duty of care owed to the subject of the reference to provide an accurate reference. By giving a reference, the company assumed a responsibility to the claimant to exercise reasonable skill and care in the preparation of the reference. It is very difficult to get a job without a reference.
What tests did Hedley Byrne v Heller establish?
In order for the exception of pure economic loss by negligent misstatement to apply, the claimant needs to satisfy the Hedley Byrne v Heller criteria.
The Hedley Byrne v Heller criteria include the following three ‘tests’:
- Reasonable reliance;
- Assumption of responsibility; and
- Special relationship of trust and confidence between the parties.
These three ‘tests’ often overlap and a claimant need only satisfy one in order for a duty of care to be owed.
What is the reasonable reliance test?
This test has the following requirements:
(a) The claimant relied on the defendant’s advice. Question of fact.
(b) It was reasonable for the claimant to rely on the defendant’s advice.
(c) The defendant knew or ought to have known that the claimant was relying on their advice.
Question of fact.
Whether the claimant relied on the defendant’s advice is straightforward and a question of fact. Whether the defendant knew or ought to have known that the claimant was relying on their advice is also straightforward and a question of fact. Whether it was reasonable for the claimant
to rely on the defendant’s advice requires consideration of various factors. The factors that the courts have considered when assessing the reasonableness of the claimant’s reliance on the defendant’s advice are:
- Special skill or knowledge held by the defendant - The defendant needs some special expertise or knowledge in order for there to be a special relationship ie the defendant needs to be in a better position than the claimant to know the facts. There is unlikely to be a special relationship if the parties are on an equal footing.
- Special skill or knowledge held by the claimant - If the claimant has relevant skill or knowledge in relation to the advice then the courts may find that it is not fair, just or reasonable for the claimant to have relied on the defendant’s advice.
- In short, if the claimant has equal knowledge or skill to the defendant, the courts are likely to find parity between the parties and are less likely to decide that it was reasonable for the claimant to rely on the defendant’s advice. Conversely, if the claimant does not have the same knowledge or skill as the defendant, the courts are likely to find disparity between the parties and are more likely to decide that it was reasonable for the claimant to rely on the defendant’s advice.
- General context in which advice is given
Generally, no duty of care will be owed where the advice was given in a social situation because there is no assumption of responsibility. However, this is not always the case.
Key case: Chaudhry v Prabhakar and Another [1989] 1 WLR 29
In Chaudhry v Prabhakar and Another [1989] 1 WLR 29. The defendant advised his close friend (the claimant) on what second-hand car she should buy. The claimant had told the defendant that the car must not have been in an accident. The defendant was not a mechanic but was regarded by the claimant as knowing much more about cars than she did. The defendant found
her a car. He realised the bonnet had been crumpled and straightened or replaced, but he did not ask the seller if it had been in an accident and told the claimant that it was in very good condition and that he highly recommended it. He told her the seller was a friend (which he was not) and when she asked if the car had been in an accident he said that it had not and that she need not
have it examined by a mechanic. It turned out the car had been in an accident, was
unroadworthy and worthless. In an obiter comment (obiter because the defendant had admitted duty) the court indicated that they would have found a duty between the parties even though this was advice in a social setting. The defendant had more knowledge than the claimant about cars,
and he held himself out as giving considered advice; he took time over the advice and the claimant made it very clear that she was relying on his advice and that it was of great importance to her. He had assumed responsibility for the claimant.
In a much more recent case, Lejonvarn v Burgess [2017] EWCA Civ 254, the Court of Appeal found a duty of care to exercise reasonable skill and care owing between friends for professional services provided free of charge, on the basis of assumption of responsibility.
- Other relevant general factors
Finally, the court will consider any other relevant general factors. This might include the nature of the advice, the potential risk to the claimant, and the availability and practicality of a second opinion.
What constitutes assumption of responsibility?
The second concept used to establish a duty of care in Hedley Byrne was the voluntary assumption of responsibility by the defendant for the correctness of their statement. This was explained as applying to relationships which are ‘equivalent to contract,’ that is, where there is an
assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract. To determine this the courts may look at some of the factors already discussed under reasonable reliance, for example did the defendant hold themselves out as
having the relevant expertise, were the consequences serious if the advice was incorrect and did the defendant know that the claimant was relying on the advice.
When it comes to establishing exactly what is required as evidence of an ‘assumption of
responsibility’, the courts have generally been quite vague. However, in Caparo Industries plc. v Dickman and others [1990] 2 AC 605 although this was a third-party case, the House of Lords did set out four criteria to be satisfied for a defendant to have assumed responsibility towards a
claimant. These are:
(a) The defendant must communicate the advice to the claimant (as an identifiable individual or as a member of an identifiable class) or know that it will be communicated to them;
(b) The defendant must know the purpose for which the claimant will use this advice;
(c) The defendant must know, or reasonably believe, that the claimant will rely on this advice without independent enquiry; and
(d) The claimant must have acted upon that advice to their detriment.
What constitutes a special relationship of trust and confidence?
The third and final test is whether there is a special relationship of trust and confidence between the parties. In Hedley Byrne it was said a special relationship would arise where the party seeking advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for them to do that, and where the other gave the advice when they knew or ought to have known that the enquirer was relying on them. This illustrates how the three tests overlap and, in reality, the courts will find a special relationship where there has been reasonable reliance by the claimant and/or an assumption of responsibility by the defendant.
How do disclaimers impact pure economic loss?
In some cases the defendant may have taken positive steps against assuming responsibility for their words. If this is the case, then the validity of such steps (the disclaimer) must be considered.
For example, in Hedley Byrne the words ‘without responsibility’ were used in the statement made by the defendant. The House of Lords felt that the defendant could not be said to be assuming responsibility when at the same time as giving the advice, they were making it clear that they did not accept responsibility.
However, Hedley Byrne pre-dated the enactment of the Unfair Contract Terms Act 1977 (UCTA 1977) and the Consumer Rights Act 2015 (CRA 2015). The case of Smith v Eric S. Bush [1989] 2 WLR 790 made it clear that any attempt to rely on a disclaimer of responsibility in the course of business will be subject to UCTA 1977.
Smith v Eric S. Bush [1989] 2 WLR 790
The defendant surveyor (who provided a survey to the claimant’s lender) owed the claimant a duty for the pure economic loss caused by the negligent survey because: (1) she was a first-time buyer (and so did not know she ought to get an independent structural survey); and (2) was purchasing a house of modest value. The defendant should have known that the claimant would
rely on their survey and this reliance was reasonable. It was foreseeable to the defendant that if they provided incorrect advice, the claimant would suffer a loss.
The survey included a disclaimer. However, under s 2(2) of UCTA 1977 the disclaimer was invalid as it was unreasonable. The House of Lords listed factors which should be taken into account when deciding if a disclaimer is reasonable:
(a) Were the parties of equal bargaining power?
(b) Would it have been reasonably practicable to obtain advice from an alternative source considering cost and time?
(c) How difficult was the task being undertaken by the defendant?
(d) What are the practical consequences, taking into account the sums of money at stake and the ability of the parties to bear the loss involved, particularly in light of insurance?
Held: Applying the facts, the disclaimer was unreasonable. The parties were not of equal bargaining power. It was not reasonably practicable for the claimant to obtain an independent structural survey as these are expensive and she was purchasing a house of modest value. The
claimant was a person of modest means making the most expensive investment of her life. The defendant was in a better position to bear the financial loss.
