Pure economic loss Flashcards
Types of loss in negligence
- Personal injury/property damage (i.e. physical damage). This is when the claimant’s person or property is damaged, eg a broken arm or a damaged car. Such losses do not usually pose any problems at the duty of care stage.
- Consequential economic loss. Economic loss consequent on physical damage, eg lost salary because of a broken leg.
- Pure economic loss. Economic loss that arises where there has been no damage to the claimant’s property or injury to their person.
- Psychiatric damage. When the claimant suffers psychiatric damage – the precise definition is not explored in this element.
As a general rule, if the loss is in the first two categories, it is recoverable, but if the loss lies in the third category, it will not be recoverable. There are exceptions
Definitions of 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:
(1) Economic loss not flowing from damage to person or property;
(2) Loss arising from damage to property of another;
(3) Defective items.
(1) 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.
(2) Loss arising from damage to property of another
If a claimant suffers economic loss as a result of damage to property in which they have no proprietary interest, then the loss will be categorised as pure economic loss.
Key case: Weller & Co v Foot & Mouth Disease Research Institute [1965] 3 All ER 560
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).
(3) Defective items
It is not possible to claim for the cost of repairing an inherently defective itemwhich 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.
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.
The general rule for pure economic loss
The general rule is that no duty of care is owed in respect of pure economic loss. Case authority for this is Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27 (key case). This case illustrates the difference between physical damage, consequential economic loss and pure economic loss.
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 meltsduring the shut-down. The damaged electricity cable did not belong to the claimants.
The decision in Spartan Steel
Damaged metal was physical damage (property damage) and a duty of care was owed in respect of the property damage and it was recoverable.
Loss of profit on damaged metal was consequential economic loss (loss of profit was a direct consequence of the property damage) and a duty of care was owed in respect of the consequential economic loss, and it was recoverable.
Loss of profit on the four further melts was pure economic loss (economic loss which did not result from any damage to the claimant’s property or person). This loss resulted from damage to the electricity cable which belonged to a third party. No duty of care was owed in respect of the pure economic loss, and it was not recoverable.
Note that if the claimant had owned the electricity cable, this would have been consequential economic loss and therefore recoverable.
Exceptions to the general rule for pure economic loss
The three exceptions to the general rule include the following (and stem from negligent statements):
(1) Pure economic loss caused by negligent statements
(2) Wills
(3) References
(1) Pure economic loss caused by a negligent statement
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 in their own separate element (“Pure economic loss caused by a negligent statement”).
Note that negligent statements normally result in pure economic loss. However, where the misstatements cause physical harm, then the usual duty of carerules apply to the question of duty (Perrett v Collins [1998] EWCA Civ 884).
(2) Wills
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 will-making services (Esterhuizen v Allied Dunbar Assurance plc, The Times, 10 June 1998).
(3) References
Key case: 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.
The wills and references exceptions are a form of negligent statement, but they are listed as separate exceptions as case law can be used as clear precedent for duty of care in these two areas. There would be no need to go through the Hedley Byrne tests.
Pure economic loss caused by a negligent statement - Three key concepts/tests were discussed when establishing a duty of care
(1) Reasonable Reliance
(2) Assumption of responsibility
(3) Special relationship of trust and confidence between the parties
Not all three tests have to be satisfied for a duty of care to be found. A duty can be found based on either reasonable reliance or an assumption of responsibility or some special relationship independent of these or, in some cases, a combination of these. However, these requirements overlap; they are all trying to establish a proximate relationship between the parties and to establish it is fair, just and reasonable to impose a duty.
(1) Reasonable Reliance
This test has the following requirements:
a) The claimant relied on the defendant’s advice. This is a 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. This is a question of fact. If the defendant knew the claimant was relying on their advice, then they can foresee pure economic loss if they are not careful in giving advice.
The first requirement is straight forward – factually, did the claimant rely on the defendant’s advice? However, the second requirement (that it was reasonable for the claimant to rely on the defendant’s advice) requires further consideration. Judges in subsequent cases have considered various factors when considering the reasonableness of the reliance. Let’s consider these factors now.
The factors that the courts have considered when assessing the reasonableness of the claimant’s reliance on the defendant’s advice are:
(1) Special skill or knowledge held by the defendant
(2) Special skill or knowledge held by the claimant
(3) General context in which advice is given
(4) Other relevant general factors
(2) Voluntary assumption of responsibility
(1) 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;
(2) The defendant must know the purpose for which the claimant will use this advice;
(3) The defendant must know, or reasonably believe, that the claimant will rely on this advice without independent enquiry; and
(4) The claimant must have acted upon that advice to their detriment.
(3) 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 wherethe 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.
You can see that this quote really 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.
That is the end of this short video which has discussed the three concepts identified in Hedley Byrne for establishing a duty of care in respect of pure economic loss caused by a negligent statement. Remember not all three tests have to be satisfied for a duty to be owed, and the three tests often overlap.
