Pure Economic Loss

Question 1

1. What is Pure Economic Loss?

Answer 1

Pure economic loss is financial damage suffered as the result of the negligent act of another party which is not accompanied by any physical damage to a person or property.

Question 2

2. What is Pure Econonic Loss not consequent on?

Answer 2

Pure economic loss is not consequent on personal harm or property damage (non-consequential loss). So, loss of earnings due to a broken arm is not a pure economic loss but a consequential one.

Question 3

3. What are the Two Catergories that finacial losess can be split into?

Answer 3

1. Pecuniary (related to money) financial loss coming directly from the negligence.
2. Non – pecuniary (loss not susceptible to precise arithmetical calculation, including pain, suffering, mental distress etc.)

Question 4

4. What happened in Spartan Steel & Alloys Ltd v Martin and Co (1973)

Answer 4

• The defendant contractors negligently cut an electricity cable supplying power to the claimant’s factory, leaving it without power for 14 hours.
• The factory owners claimed damages under 3 heads:

1. The damage to the steel in the furnace at the time of the power cut, which had to be thrown away
2. The loss of profit that could have been made by selling the steel in the furnace
3. The anticipated lost profit on other steel that would have been processed during the period the factory was closed.
4. This case distinguishes the difference between pecunariy and non pecunariy losses

The Court of Appeal allowed recovery for the first two heads of damage but found the third, the anticipated profit, was not recoverable.

• The first loss was a physical loss to the property.
• The second was consequential economic loss – lost profit was directly consequent on the damaged property.
• The third was regarded as a pure economic loss – although a result of the negligence, it was not consequent on any damage to property. Hence, no duty of care arose.

Question 5

5. What is the General Rule?

Answer 5

• The General Rule is an exclusionary rule:
• A duty of care is owed only in respect of financial losses that are consequential upon the physical harm incurred by the defendant’s negligence.
• If the economic loss that is suffered is entirely ‘pure’ – the economic loss is not a result of physical infringement of property or person- then, as a general rule, there is no duty of care and damages cannot be recovered.

Question 6

6. What are the exceptions to the exclusionary rule?

Answer 6

• Hedley Byrne v. Heller (1963) - introduced the tort of ‘negligent mistreatment’ into law and set out guidelines as to how and when it would operate.
• Statement base losses and activity based losses
• Hedley Byrne was asked to buy some advertising space for a company called Easipower Ltd.
• To make sure that Easipower could pay for this service, Hedley Byrne decided to credit check the company. Their bank contacted Easipower’s bank, Heller, twice, to ask if the company was creditworthy. Both the times, it was told yes.
• During the second check, it was specifically asked if Easipower was ‘trustworthy’, in the way of business, to the extent of 100,000 GBP per annum.
• Relying on Heller’s positive responses, Hedley Byrne contracted with Easipower and bought advertising space for them for 17,000 GBP.
• Easipower later collapsed and Hedley Byrne sought to claim back 17,000 GBP from Heller on the basis that they had been negligent when preparing the statement about the creditworthiness of Easipower.
• While issuing its statements, Heller had included a disclaimer saying that each was prepared ‘without responsibility on the part of this Bank or its officials’, a clause excluding liability, should it arise.
• The House of Lords held that in view of this disclaimer, no liability could arise on facts.
• The law lords also considered what the position would be had there been no disclaimer. So, this decision is also important because of the judicial obiter dicta.
• Their Lordships found that a duty of care could arise in some situations where advice was given, even where the only harm caused was what would otherwise be regarded as ‘pure’ economic loss.

But, they said, this was limited to situations where the following four conditions were met:

Question 7

7. What are the Limited Situations?

Answer 7

1. A special (or fiduciary) relationship of trust and confidence exists between the parties; and
2. The party preparing the advice/information has voluntarily assumed the risk (express of implied)
3. There has been reliance on the advice/information by the other party
4. Such reliance was reasonable in the circumstances

Question 8

8. What happened in Anns v Merton 1978?

Answer 8

• The claimant alleged that the local authority had negligently failed to supervise the construction of a building, with the result that cracks appeared in the walls, caused by sinking foundations.
• In the House of Lords, Lord Wilberforce classified as ‘material physical damage’ (as opposed to pure economic loss) meaning that damages for the cost of repairs were recoverable.

Question 9

What happened in Junior Books Ltd. V. Veitchi Co Ltd (1983)?

Answer 9

• Owners of a land made a claim in relation to a factory under construction.
• The building company contracted to build the factory was instructed by the claimant to subcontract the defendant, a specialist flooring company, to lay floor designed to support heavy machinery.
• The floor was laid negligently and had to be rebuilt.
• While this was done the factory had to be closed and claimants lost profits. As the landowners had no contract with the subcontractors, they sued them in negligence.
• The House of Lords allowed the claim in negligence for the pure economic loss (cost of relaying the floor and lost profits), categorizing the claim as one where the supply of a defective product (the floor) caused economic loss.
• They found, drawing on Hedley Byrne, that Veitchi which had special skill had ‘assumed responsibility’ for the condition of the floor and the claimants had relied upon this.

Question 10

10. What happened in Murphy v. Brentwood District Council (1991)?

Answer 10

• Murphy purchased a semi-detached house in Brentwood.
• Over 10 years later, serious cracks started appearing in the walls. These were due to the defect in foundations, the design of which had been approved by the district council.
• The defect made the house structurally unsound and worth 35,000 GBP less than what Murphy had paid.
• The House of Lords held that the damage in Anns (and therefore in Murphy) should properly be considered pure economic loss and not a form of material physical damage.
• Faulty foundations cause no loss or damage, other than a financial loss, unless they are dangerous or cause further physical damage to the ‘fabric of the house’ by subsidence or collapsing walls – it is merely the cost of repairing the foundations that is at issue. This, in their view was pure economic loss for which no duty should be owed.

Question 11

11. What is a Special Relationship?

Answer 11

• In Hedley Byrne, Lord Reid envisaged that a special (or fiduciary) relationship – a relationship of trust and confidence- would arise when it was clear that:

The part seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew that the inquirer was relying on him.

Question 12

12. What happened in Esso Petroleum v Mardon (1976)? (Special Relationship)

Answer 12

• Mardon was thinking of leasing a petrol station.
• An employee of Esso, whose job it was to assess the potential output of petrol station advised Mardon that the station would sell at least 200,000 gallons of petrol per year.
• Relying on this Mardon entered the lease. But sold only 78,000 gallons in the first 15 months of trading. The advice of Esso employee was found to be negligent.
• The question was whether a duty of care could be owed to Mardon in respect of the loss he had suffered, which was purely economic.
• The Court of Appeal held that the required special relationship had been created because in making the statement, Esso’s employee had assumed a responsibility to Mardon based on his expertise in assessing the market for petrol sales and Mardon had reasonably relied on this.
• A duty of care was owed.

Question 13

13. What is a Voluntary Assumption of Risk in relation to PEC?

Answer 13

• It is a reasonable extension of the special relationship idea that where such a relationship exists, any party giving advice, without a disclaimer, can be said to have assumed the risk that the statement they make is reliable.
• If they did not want to assume the risk, they could, as in Hedley Byrne, attempt to exclude their liability

Question 14

14. What happened in Henderson v Merrits Ltd (1995)? (Voluntary Assumption 1)

Answer 14

Numerous claims were made by investors (known as ‘Names’) who, in syndicates, had unwritten insurance policies for Lloyds.

They suffered substantial losses when numerous insurance claims were made against Lloyds in the early 1990s and alleged that the agents who had set out the syndication of the Names had been negligent in doing so.

Their Lordships found that the agents had assumed responsibility for the financial affairs of the Names, despite there being no statement or advice that this was based on:

There is no problem in cases of this kind about liability for pure economic loss; for if a person assumes responsibility to another in the respect of certain services, there is no reason why he should not be liable in damages in respect of economic loss which flows from the negligent performance of those services. - (Lord Goff)

Question 15

15. What happened in Customs & Excise Commissioners v. Barclays Bank (2006)
    (Voluntary Assumption 2)

Answer 15

• The customs officers obtained ‘freezing orders’ on the bank accounts of two companies which were in debt with regards their tax payments.
• Barclays, negligently allowed some withdrawals to be made. Customs & Excise sought to recover this money by suing Barclays in negligence. The allegation was that once a freezing order had been received, a bank assumed responsibility for the loss that would be suffered if money was allowed to leave the frozen accounts.
• The House of Lords ruled that there had been no assumption of responsibility in the required sense, because it could not truly be said that the responsibility assumed was voluntary where the bank was obliged by law to accept the freezing order, therefore the claim failed.

Reasoning of House of Lords is that the voluntary assumption is not enough to establhise Pure Economic Loss on its own.

Question 16

16. What happened in Banca Nazionale del Lavoro SPA v. Playboy Club London Ltd (2018) *(Voluntary Assumption 3)

Answer 16

• Playboy asked a company, Burlington, to obtain a credit reference from his bank for a man gambling at the club who required more funds. Burlington asked the bank about the man’s finances, without mention of Playboy.

The bank confirmed that the man held an account there and was trustworthy for up to 1.6 million GBP per week. Relying on the bank’s reference, Playboy granted the man a cheque-cashing facility of 1.25 million GBP.

• After accumulating net winnings of 427,400 GBP the man returned home to Lebanon.

His (fraudulent) cheques were returned unpaid; it transpired that the bank had opened his account two days after proving the reference. The account was closed shortly afterwards, having never held any funds.

• The Supreme Court found that Playboy had not been entitled to rely on the reference; the duty of care owed by the bank was only owed to the addressee (Burlington) and there was no assumption of responsibility to Playboy, of whom it was completely unaware.

Question 17

17. What is Reasonable Reliance?

Answer 17

Where the reliance must be reasonable in the circumnstances and the context of the situation.

Question 18

18. What happened in Caparo v Dickman? (no, not DoC reasonable reliance)

Answer 18

Caparo was considering a takeover bid of another company, Fidelity. Caparo looked at information prepared by Fidelity’s auditors. It received this because, it already held several shares in Fidelity.

This information showed that Fidelity was doing well. Relying on this, Caparo launched its takeover bid only to find later that Fidelity was almost completely worthless. Caparo sued, alleging negligence in the preparation of the audit.

The House of Lords found that no duty of care was owed in respect of the economic loss caused by Caparo’s reliance on the information provided. Because, it was not reasonable for Caparo to have relied on this information when preparing its takeover bid of Fidelity.

Company audits were an annual requirement for businesses under the Companies Act, 1985 and the information within them was provided for shareholders; not for potential investors as this would include a class of persons of an indeterminate size.

Thus, in Caparo’s capacity as a shareholder of Fidelity, the information could be relied upon, but in its capacity as a potential investor, it could not be.

In Caparo, because the reliance on the information was not reasonable, no special relationship could arise between the two companies. Lord Bridge clarified this position further, saying that there would be a difference where:

• a) The defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation
• b) knew that the advice or information would be communicated to him directly or indirectly
• c) knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation

Question 19

19. What happened in Reeman v Department of Transport (1997)?

Answer 19

Reeman v. Department of Transport (1997)

• The existence of duty of care to a fisherman was denied, when the certificate of seaworthiness that had been issued for his boat turned out to have been negligently written. The boat in fact was almost worthless.
• The Court of Appeal, following Caparo, held that such certificates were issued to enhance maritime safety, not to establish the commercial value of boats, so should not have been relied on in this way.

Question 20

20. What happened in the Law Society v. KPMG Peat Marwick (2000)? (Reasonable Reliance)

Answer 20

The claimants sued when the defendants – accountants for a firm of solicitors – failed to discover that a senior partner was siphoning off money and defrauding many of the firm’s clients.

When the fraud was discovered, more than 300 of the firm’s clients claimed compensation from the Law Society.

Trying to recover its economic loss, the Law Society sued the accountants, saying they had been negligent in preparing the firm’s annual accounts.

Relying on Caparo, the accountant contended that their duty was only to the solicitors’ firm and not to anyone else who relied on the accounts prepared for them for any other purpose.

But the Law Society argued that the duty extended as far as them, as law firms are obliged to have their accounts prepared annually for the benefit of the Law Society and it was known by the accountants involved that the society would rely on the information provided.

The Court of Appeal agreed, holding that because the accountants knew the purpose for which such accounts were prepared, and because it was foreseeable that failure to correctly prepare accounts would lead to claims being made against the fund, it was appropriate to impose a duty.

Question 21

Smith v. Eric S Bush (1990)

Answer 21

The claimant purchased a house, relying on the survey of a property prepared by the defendants.

The survey had been conducted negligently and the house was in fact worth much less than was paid for it.

As per the normal practice, the survey had been commissioned by the building society with which the claimants had taken out their mortgage.

The principal purpose of such a survey is to satisfy the building society that the value of the house being purchased is at least that of the amount of money being lent.

passThe House of Lords held that although a contract exists only between the mortgage lender and surveyor, surveyors would owe a duty of care to the buyer, as they would be aware that the buyer would rely on the information provided by them, and it would be reasonable for buyers to do so